Chapter 5 - Financial Markets.pdf - 1 Overview of Financial...

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11/27/2017 1 Chapter 5: Financial Markets 1. Overview of Financial Markets A financial market is a market in which financial assets (securities) can be purchased or sold Financial markets facilitate financing and investing by households, firms, and government agencies Participants that provide funds are called surplus units e.g., households Participants that enter markets to obtain funds are deficit units e.g., the government Role of Financial Markets 1. Liquidity: Ensure owners can buy and sell financial instruments cheaply. Keeps transactions costs low. 2. Information: Pool and communication information about issuers of financial instruments. 3. Risk sharing: Provide individuals a place to buy and sell risk 2. Types of Financial Markets 1. Classified according to the characteristics of participants and securities involved: primary or secondary markets . 2. Categorize by the way they trade: centralized exchange or not. 3. Group based on the characteristics of instrument they trade: debt market, equity market and derivative market 4. Group based on term of instruments: money market and capital market
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11/27/2017 2 Primary Market vs Secondary Market A primary market is a market in which securities are bought and sold for the first time. In this market, the firm selling securities actually receives the money raised A secondary market is a market where people can buy and sell existing securities. In this market, the issuing firm does not receive any new financing. The securities are simply transferred from one investor to another 6 Securities Funds Primary Market Primary Market 7 Securities Funds Secondary Market Secondary Market Centralized Exchange vs OTC Centralized exchanges - buyers and sellers meet in a central, physical location. Over-the-counter markets (OTC) - decentralized markets of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor
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11/27/2017 3 Money Market vs Capital Market Money Market Trade short term (1 year or less) debt instruments (e.g.
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