Name 3 ways capital is transferred between savers and borrowers.
1. Direct transfers
2. Indirect transfers through investment bankers
3. Indirect transfers through a financial intermediary
Direct transfers
DT of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. (usually used by small firms and little capital is raised by direct transfers)
Indirect transfers through investment bankers
Transfers go through an investment bank (ex: Morgan Stanley), which underwrites the issue. An underwriter facilitates the issuance of securities. Company sells its stocks or bonds to the investment bank, which then sells the same securities to savers. Bus
Indirect transfers through a financial intermediary
Transfer can be made through a financial intermediary such as a bank, insurance company, or a mutual fund. The intermediary obtains funds from savers in exchange for its securities. The intermediary uses this money to buy and hold businesses' securities,
Why are efficient capital markets necessary for economic growth?
Economic development is highly correlated with the level and efficiency of financial markets and institutions. Economies can reach its full potential if it has access to a well-functioning financial system that earn high rates of returns on their savings.
Classifications of financial markets
1. Physical asset markets vs financial asset markets
2. Spot markets vs future markets
3. Money markets vs capital markets
4. Primary markets vs secondary markets
5. Private markets vs public markets
Physical asset markets vs financial asset markets
-Physical asset markets (tangible or real asset markets) are for products such as wheat, autos, real estate, computers, and machinery.
-Financial asset markets- deal with stocks, bonds, notes, and mortgages. Also with derivative securities whose values ar
Spot markets vs future markets
-Spot Markets- the markets in which assets are bough or sold for "on-the-spot" delivery.
-Future Markets- the markets in which participants agree today to buy or sell and asset at some future date. (ex: farmer enters into a future k in which he agrees tod
Money markets vs capital markets
-Money Markets- the financial markets in which funds are borrowed or loaned for short periods (less than one year) (ex: NY, London, & Tokyo money markets)
-Capital Markets- the financial markets in which funds are borrowed or loaned for short periods (les
Primary markets vs secondary markets
-Primary Markets- Markets in which corporations raise capital by issuing new securities (ex: if GE were to sell a new issue of common stock to raise capital, a primary market transaction would take place)
-Secondary Markets- Markets in which securities an
Private markets vs public markets
-Private Markets- markets in which transactions are worked directly between two parties (ex: banks loans and private debt placements with insurance companies)
-Public Markets- markets in which standardized contracts are traded on organized exchanges (ex:
Derivative
Any financial asset whose value is derived from the value of some other "underlying" asset. (ex: An option to buy IBM stock is a derivative, as is a k to buy Japanese yen 6 months from now. The value of the IBM option depends on the price of the IBM's sto
Why are financial markets essential for a healthy economy and economic growth?
A healthy economy is dependent on efficient funds transfers from people who are net savers to firms and individuals who need capital. Without efficient transfers, the economy could not function such as no electricity, raising capital, etc. The level of em
Major categories of financial institutions
-investment banks**
-commericial banks*
-financial services corporations**
-credit unions
-pension funds
-life insurance companies
-mutual funds**
-exchange traded funds
-hedge funds
-private equity companies
Investment banks
An organization that underwriters and distributes new investment securities and helps businesses obtain financing. (ex: Morgan Stanley and Goldman Sachs)
Commercial banks
The traditional department store of finance serving a variety of savers and borrowers. (Bank of America, Wells Fargo, JPMorgan Chase)
What's the difference between a commercial bank and an investment bank?
Investment banks are to help companies raise capital by making corporations attractive to investors, then buy securities from the corporation, and resell them to savers. Whereas commercial banks serve a variety of savers and borrowers.
Financial Services Corporations
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Mutual Funds
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
Money Market Funds
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
What's an important distinction between actively managed funds and indexed funds?
Actively managed funds try to outperform the overall markets, whereas indexed funds are designed to simply replicate the performance of a specific market index.
List the major types of financial institutions and briefly describe the primary function of each.
Investment banks, commercial banks, financial services corporations, and mutual funds
What are some important differences between mutual funds, Exchange Traded Funds, and hedge funds? How are they similar?
ETFs are similar to regular mutual funds and are often operated by mutual fund companies. Hedge funds are also similar to mutual funds because they accept money from savers and use the funds to buy various securities, but there are some important differen
Physical locations exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities
What are the differences between the physical location exchanges and the NASDAG stock market?
Physical locations exchanges include the NYSE and several regional stock exchanges and electronic dealer-base markets include the NASDAQ, the less formal over-the-counter market.
What is the bid-ask spread?
The difference between bid and ask prices, represents the dealer's markup, or profit.
Closely held corporation
A corporation that is owned by a few individuals who are typically associated with the firm's management. (privately owned)
Publicly Owned Corporation
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.
What are the 3 categories to classify stock market transactions?
1. Outstanding shared of established publicly owned companies that are traded: the secondary market
2. Additional shares sold by established publicly owned companies: primary market
3. Initial public offerings made by privately held firms: the IPO markets
Differentiate between primary and secondary markets
Example of secondary market- if the owner of a 100 shares sells his stock, the trade is said to have occurred in the secondary market. Example of primary market- if Allied Food decides to sell an additional 1 mill shares to raise new equity capital, this
Going public
The act of selling a stock to the public at large by a closely held corporation or its principle stockholders
What is an IPO?
The market for stocks of companies that are in process of going public.
What is a Dutch auction, and what company used this procedure for its IPO?
Rather than having the offer price set by its investment bankers, Google conducted a Dutch auction, where ind investors places bids for shares directly. In a Dutch auction, the actual transaction price is set at the highest price that causes all of the of
Would you expect a portfolio that consisted of the NYSE stocks to be more or less risky than a portfolio of NASDAQ stocks?
Less risky than NASDAQ stocks because they tend to be more speculative and risks by changing rapidly than those listed on the NYSE.
market price
current price of stock
intrinsic valur
price at which the stock would sell if all investors had all knowable information about a stock
equilibrium price
price that balances buy and sell orders at any given time
What does it mean for a market to be "efficient"?
A market in which prices are close to intrinsic values and stocks seem to be in equilibrium.
Is the market for all stocks equally efficient? Explain.
...
Why is it good for the economy that markets be efficient?
Investors can buy and sell stocks and be confident that they are getting good prices when markets are efficient. Whereas, when they're inefficient, investors may be afraid to invest and may save their money, which will lead to a poor allocation of capital
Is it possible that the market for individual stocks could be highly efficient but the market for whole companies could be less efficient? Explain
Markets are more efficient for individual stocks than for entire companies, so for investors with enough capital, it does make sense to seek out badly managed companies that can be acquired and approved.
What is behavioral finance? What are the implications of behavioral finance for market efficiency?
Rather than assuming that investors are rational, behavioral finance theorists borrow insights from psychology to better understand how irrational behavior can be sustained over time.
-it's often difficult or risky for traders to take advantage of misplac
Name 3 ways capital is transferred between savers and borrowers.
1. Direct transfers
2. Indirect transfers through investment bankers
3. Indirect transfers through a financial intermediary
Direct transfers
DT of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. (usually used by small firms and little capital is raised by direct transfers)
Indirect transfers through investment bankers
Transfers go through an investment bank (ex: Morgan Stanley), which underwrites the issue. An underwriter facilitates the issuance of securities. Company sells its stocks or bonds to the investment bank, which then sells the same securities to savers. Bus
Indirect transfers through a financial intermediary
Transfer can be made through a financial intermediary such as a bank, insurance company, or a mutual fund. The intermediary obtains funds from savers in exchange for its securities. The intermediary uses this money to buy and hold businesses' securities,
Why are efficient capital markets necessary for economic growth?
Economic development is highly correlated with the level and efficiency of financial markets and institutions. Economies can reach its full potential if it has access to a well-functioning financial system that earn high rates of returns on their savings.
Classifications of financial markets
1. Physical asset markets vs financial asset markets
2. Spot markets vs future markets
3. Money markets vs capital markets
4. Primary markets vs secondary markets
5. Private markets vs public markets
Physical asset markets vs financial asset markets
-Physical asset markets (tangible or real asset markets) are for products such as wheat, autos, real estate, computers, and machinery.
-Financial asset markets- deal with stocks, bonds, notes, and mortgages. Also with derivative securities whose values ar
Spot markets vs future markets
-Spot Markets- the markets in which assets are bough or sold for "on-the-spot" delivery.
-Future Markets- the markets in which participants agree today to buy or sell and asset at some future date. (ex: farmer enters into a future k in which he agrees tod
Money markets vs capital markets
-Money Markets- the financial markets in which funds are borrowed or loaned for short periods (less than one year) (ex: NY, London, & Tokyo money markets)
-Capital Markets- the financial markets in which funds are borrowed or loaned for short periods (les
Primary markets vs secondary markets
-Primary Markets- Markets in which corporations raise capital by issuing new securities (ex: if GE were to sell a new issue of common stock to raise capital, a primary market transaction would take place)
-Secondary Markets- Markets in which securities an
Private markets vs public markets
-Private Markets- markets in which transactions are worked directly between two parties (ex: banks loans and private debt placements with insurance companies)
-Public Markets- markets in which standardized contracts are traded on organized exchanges (ex:
Derivative
Any financial asset whose value is derived from the value of some other "underlying" asset. (ex: An option to buy IBM stock is a derivative, as is a k to buy Japanese yen 6 months from now. The value of the IBM option depends on the price of the IBM's sto
Why are financial markets essential for a healthy economy and economic growth?
A healthy economy is dependent on efficient funds transfers from people who are net savers to firms and individuals who need capital. Without efficient transfers, the economy could not function such as no electricity, raising capital, etc. The level of em
Major categories of financial institutions
-investment banks**
-commericial banks*
-financial services corporations**
-credit unions
-pension funds
-life insurance companies
-mutual funds**
-exchange traded funds
-hedge funds
-private equity companies
Investment banks
An organization that underwriters and distributes new investment securities and helps businesses obtain financing. (ex: Morgan Stanley and Goldman Sachs)
Commercial banks
The traditional department store of finance serving a variety of savers and borrowers. (Bank of America, Wells Fargo, JPMorgan Chase)
What's the difference between a commercial bank and an investment bank?
Investment banks are to help companies raise capital by making corporations attractive to investors, then buy securities from the corporation, and resell them to savers. Whereas commercial banks serve a variety of savers and borrowers.
Financial Services Corporations
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.
Mutual Funds
Organizations that pool investor funds to purchase financial instruments and thus reduce risks through diversification.
Money Market Funds
Mutual funds that invest in short-term, low-risk securities and allow investors to write checks against their accounts.
What's an important distinction between actively managed funds and indexed funds?
Actively managed funds try to outperform the overall markets, whereas indexed funds are designed to simply replicate the performance of a specific market index.
List the major types of financial institutions and briefly describe the primary function of each.
Investment banks, commercial banks, financial services corporations, and mutual funds
What are some important differences between mutual funds, Exchange Traded Funds, and hedge funds? How are they similar?
ETFs are similar to regular mutual funds and are often operated by mutual fund companies. Hedge funds are also similar to mutual funds because they accept money from savers and use the funds to buy various securities, but there are some important differen
Physical locations exchanges
Formal organizations having tangible physical locations that conduct auction markets in designated ("listed") securities
What are the differences between the physical location exchanges and the NASDAG stock market?
Physical locations exchanges include the NYSE and several regional stock exchanges and electronic dealer-base markets include the NASDAQ, the less formal over-the-counter market.
What is the bid-ask spread?
The difference between bid and ask prices, represents the dealer's markup, or profit.
Closely held corporation
A corporation that is owned by a few individuals who are typically associated with the firm's management. (privately owned)
Publicly Owned Corporation
A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm's management.
What are the 3 categories to classify stock market transactions?
1. Outstanding shared of established publicly owned companies that are traded: the secondary market
2. Additional shares sold by established publicly owned companies: primary market
3. Initial public offerings made by privately held firms: the IPO markets
Differentiate between primary and secondary markets
Example of secondary market- if the owner of a 100 shares sells his stock, the trade is said to have occurred in the secondary market. Example of primary market- if Allied Food decides to sell an additional 1 mill shares to raise new equity capital, this
Going public
The act of selling a stock to the public at large by a closely held corporation or its principle stockholders
What is an IPO?
The market for stocks of companies that are in process of going public.
What is a Dutch auction, and what company used this procedure for its IPO?
Rather than having the offer price set by its investment bankers, Google conducted a Dutch auction, where ind investors places bids for shares directly. In a Dutch auction, the actual transaction price is set at the highest price that causes all of the of
Would you expect a portfolio that consisted of the NYSE stocks to be more or less risky than a portfolio of NASDAQ stocks?
Less risky than NASDAQ stocks because they tend to be more speculative and risks by changing rapidly than those listed on the NYSE.
market price
current price of stock
intrinsic valur
price at which the stock would sell if all investors had all knowable information about a stock
equilibrium price
price that balances buy and sell orders at any given time
What does it mean for a market to be "efficient"?
A market in which prices are close to intrinsic values and stocks seem to be in equilibrium.
Is the market for all stocks equally efficient? Explain.
...
Why is it good for the economy that markets be efficient?
Investors can buy and sell stocks and be confident that they are getting good prices when markets are efficient. Whereas, when they're inefficient, investors may be afraid to invest and may save their money, which will lead to a poor allocation of capital
Is it possible that the market for individual stocks could be highly efficient but the market for whole companies could be less efficient? Explain
Markets are more efficient for individual stocks than for entire companies, so for investors with enough capital, it does make sense to seek out badly managed companies that can be acquired and approved.
What is behavioral finance? What are the implications of behavioral finance for market efficiency?
Rather than assuming that investors are rational, behavioral finance theorists borrow insights from psychology to better understand how irrational behavior can be sustained over time.
-it's often difficult or risky for traders to take advantage of misplac