Financial Markets - Financial Markets ECON 3381 A. Hales...

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Unformatted text preview: Financial Markets ECON 3381 A. Hales Financial Markets A collection of people and firms that buy and sell securities or currencies Security: Claim on some future flow of income, such as a stock or a bond Bond: security that promises predetermined payments at certain points in time. At maturity, the bond pays its face value. Before that, the owner may receive coupon payments. Stocks: security that represents ownership shares in a corporation Services provided by Financial Markets First, securities markets channel funds from savers to investors with productive uses for these funds. Savers are people who accumulate wealth by spending less than they earn. Investors are people who expand the productive capacity of businesses. Second, financial markets help people and firms share risk. Therefore, we need financial markets even if investors could finance their Participants in Securities Markets Individuals Securities Firms: company whose primary purpose is to hold securities, trade them or help others trade them; includes: Mutual funds: A financial institution that holds a diversified set of securities and sells shares to savers Hedge funds: variant of a mutual fund that raises money from wealthy people and institutions and is largely unregulated, allowing it to make risky bets on asset prices. Brokers and dealers: Help securities markets Primary Markets Primary markets: financial markets in which firms and governments issue new securities Public company: firm that issues securities that are traded in financial markets. Initial Public Offering (IPO): sale of stock when a firm becomes public IPOs are usually underwritten by investment banks. The IPO is announced in a formal document called a prospectus, which describes the stock being offered, its price, and detailed Secondary Markets Secondary markets: financial markets in which existing securities are traded After securities are issued in primary markets, their buyers often resell them in secondary markets. Then the securities are traded repeatedly among institutions and individuals. Financial institutions can buy securities directly from other institutions. Individuals can buy bonds directly from the government Trading in Secondary Markets Exchanges: a physical location where brokers and dealers meet to trade securities Ex. New York Stock Exchange (NYSE) Over-the-counter (OTC) market: secondary securities market with no physical location Dealer market: OTC market in which all trades are made with dealers...
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Financial Markets - Financial Markets ECON 3381 A. Hales...

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