Chapter 2: Financial Markets
The Financial System
- Consists of financial markets and financial institutions/intermediaries
- Financial institutions: They gather small amounts of money and then (in large
amounts) loan it or invest it in shares or bonds. (i.e. banks and insurance funds)
- Financial markets – Where financial assets (securities or instruments) are traded
The Role of the Financial System
- Aim is to gather money from lenders/savers,
and channel it to borrower/spenders,
and enable firms to raise capital and manage their liquidity and risk.
- The system is funded directly (financial markets) and indirectly (financial institutions)
Classification of Financial Markets:
Primary and Secondary Markets
1. Primary Market
- In a primary market transaction, the company is the seller and the transaction raises
money for the company (e.g. public offerings)
- It is a financial market where new shares or bonds are sold by companies to
investors for the first time.
2. Secondary Market
- The secondary markets provide the means for transferring ownership of corporate
securities
- Enables owners of outstanding securities (shareholders and bondholders) to sell
them to other investors.
- Players:
Stock brokers – bring buyers and sellers together, without themselves owning
shares. Change a matchmaking fee and bear no risk.
Dealers: Buy securities in their own right and sell from their own securities
inventory. They bear a price risk.
The Financial System
- Consists of financial markets and financial institutions/intermediaries
- Financial institutions: They gather small amounts of money and then (in large
amounts) loan it or invest it in shares or bonds. (i.e. banks and insurance funds)
- Financial markets – Where financial assets (securities or instruments) are traded
The Role of the Financial System
- Aim is to gather money from lenders/savers,
and channel it to borrower/spenders,
and enable firms to raise capital and manage their liquidity and risk.
- The system is funded directly (financial markets) and indirectly (financial institutions)
Classification of Financial Markets:
Primary and Secondary Markets
1. Primary Market
- In a primary market transaction, the company is the seller and the transaction raises
money for the company (e.g. public offerings)
- It is a financial market where new shares or bonds are sold by companies to
investors for the first time.
2. Secondary Market
- The secondary markets provide the means for transferring ownership of corporate
securities
- Enables owners of outstanding securities (shareholders and bondholders) to sell
them to other investors.
- Players:
Stock brokers – bring buyers and sellers together, without themselves owning
shares. Change a matchmaking fee and bear no risk.
Dealers: Buy securities in their own right and sell from their own securities
inventory. They bear a price risk.
