Securities Markets

Functions of securities markets cont risk management

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liquidate) their investment and new investors willing to buy. Functions of Securities Markets (cont.) Risk Management : Securities Markets permit investors to minimize risk by diversifying and hedging their investments. By purchasing a basket of securities with different risks, an investor can create a “diversified portfolio” whose overall risk is lower than that of its components. Primary Markets Sales of securities to investors by issuers (companies) seeking to raise capital for their business (aka issuer transactions) Issuers can raise capital by selling their securities in public markets or in negotiated private placements. Secondary Markets Securities trading of already issued securities does not raise capital for an issuer. The Secondary Market provides liquidity to investors by enabling investors to liquidate their investments by selling to other investors in privately negotiated transactions or in public trading markets (such as a stock exchange or computerized trading by securities firms). EXAMPLES Apple Computer decides to issue additional stock with the assistance of its investment banker. An investor purchases some of the newly issued shares. Is this a primary or secondary market transaction?
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What if instead an investor buys existing shares of Apple stock in the open market (i.e. purchases them on a stock exchange). Is this a primary or secondary market transaction? Role of Information in the Markets: Efficient Markets An efficient capital market is a market that is efficient in incorporating information. We are talking about an “informationally efficient” market. This means that the market quickly and correctly adjusts to new information. In an informationally efficient market, the prices of securities observed at any time are based on “correct” valuation of all information available at that time. Therefore, in an efficient market, prices immediately and fully reflect available information.
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