Chapter-2 - 6/2/2010 1 Financial Markets and Institutions...

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Unformatted text preview: 6/2/2010 1 Financial Markets and Institutions Chapter 2 T he Capital Allocation Process Financial Markets Financial Institutions Stock Markets and Returns Stock Market Efficiency 2-1 The Capital Allocation Process In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. Suppliers of capital individuals and institutions with excess funds. These groups are saving money and looking for a rate of return on their investment. Demanders or users of capital individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow. 2-2 How is capital transferred between savers and borrowers? Direct transfers Investment banking house Financial intermediaries 2-3 6/2/2010 2 Capital Formation and Transfers Direct Transfer : (Fig 2-1) Business provides Financial Security directly to Investor/Saver in exchange for Cash Indirect Transfer using Investment Bankers (IB) : Firm gets money from and transfers securities to IB. Investor/Saver gives money to IB and gets Firms Securities. IB gets paid by both sides. Indirect Transfers using a Financial Intermediary : Mutual Funds, Hedge Funds 2-4 What is a market? A market is a venue where goods and services are exchanged. A financial market is a place where individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds. 2-5 Types of Financial Markets Physical assets vs. Financial assets Spot vs. Futures Money vs. Capital Table 2 1 is important summary of major market Table 2-1 is important summary of major market instruments, participants and characteristics Primary vs. Secondary Public vs. Private 2-6 6/2/2010...
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Chapter-2 - 6/2/2010 1 Financial Markets and Institutions...

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