Financial Market

• Financial markets are structures through which funds flow. Financial markets can be distinguished along two major dimensions: (1) primary versus secondary markets and (2) money versus capital markets.
• Primary markets are markets in which users of funds (e.g., corporations) raise funds through new issues of financial instruments, such as stocks and bonds.
• Most primary market transactions in the United States are arranged through financial institutions called investment banks — for example, Morgan Stanley or Bank of America Merril Lynch — that serve as intermediaries between the issuing corporations (fund users) and investors (fund suppliers).
• For these public offerings, the investment bank provides the securities issuer (the funds user) with advice on the securities issue (such as the offer price and number of securities to issue) and attracts the initial public purchasers of the securities for the funds user.
• • Primary Markets —markets in which corporations raise funds through new issues of securities.
  • Secondary Markets —markets that trade financial instruments once they are issued.
  • Money Markets —markets that trade debt securities or instruments with maturities of less than one year.
  • Capital Markets —markets that trade debt and equity instruments with maturities of more than one year.
  • Foreign Exchange Markets —markets in which cash flows from the sale of products or assets denominated in a foreign currency are transacted.
  • Derivative Markets —markets in which derivative securities trade.
• Public offering is an offer of sale to the investing public at large.
• In a private placement, the securities issuer (user of funds) seeks to find an institutional buyer—such as a pension fund—or group of buyers (suppliers of funds) to purchase the whole issue. Privately placed securities have traditionally been among the most illiquid securities, with only the very largest financial institutions or institutional investors being able or willing to buy and hold them.
• First-time issues are usually referred to as initial public offerings (IPOs).
• Once financial instruments such as stocks are issued in primary markets, they are then traded—that is, rebought and resold—in secondary markets
• Derivative securities are financial securities whose payoffs are linked to other, previously issued [or underlying] primary securities.
• Money markets are markets that trade debt securities or instruments with maturities of one year or less.
• Capital markets are markets that trade equity (stocks) and debt (bonds) instruments with maturities of more than one year.
• Treasury bills


  Short-term obligations issued by the U.S. government
• Federal funds


  Short-term funds transferred between financial institutions usually for no more than one day
• Repurchase agreements


  Agreements involving the sale of securities by one party to another with a promise by the seller to repurchase the same securities from the buyer
• Commercial paper


  Short-term unsecured promissory notes issued by a company to raise short-term cash
• Negotiable certificate of deposit


  Bank-issued time deposit that specifies an interest rate and maturity date and is negotiable
• Banker's acceptance


  Time draft payable to a seller of goods, with payment guaranteed by a bank
• • Corporate stock —the fundamental ownership claim in a public corporation.
  • Mortgages —loans to individuals or businesses to purchase a home, land, or other real property.
  • Corporate bonds —long-term bonds issued by corporations.
  • Treasury bonds —long-term bonds issued by the U.S. Treasury.
  • State and local government bonds —long-term bonds issued by state and local governments.
  • U.S. government agencies —long-term bonds collateralized by a pool of assets and issued by agencies of the U.S. government.
  • Bank and consumer loans —loans to commercial banks and individuals.
• Derivative security markets are the markets in which derivative securities trade.
• A derivative security is a financial security (such as a futures contract, option contract, swap contract, or mortgage-backed security) whose payoff is linked to another, previously issued security such as a security traded in the capital or foreign exchange markets.
• Financial instruments are subject to regulations imposed by regulatory agencies such as the Securities and Exchange Commission (SEC)—the main regulator of securities markets since the passage of the Securities Act of 1934 — as well as the exchanges (if any) on which the instruments are traded. For example, the main emphasis of SEC regulations (as stated in the Securities Act of 1933) is on full and fair disclosure of information on securities issues to actual and potential investors
• Financial institutions perform the essential function of channeling funds from those with surplus funds (suppliers of funds) to those with shortages of funds (users of funds).
• Commercial banks are depository institutions whose major assets are loans and whose major liabilities are deposits. Commercial banks’ loans are broader in range, including consumer, commercial, and real estate loans,than are those of other depository institutions. Commercial banks’ liabilities include more non deposit sources of funds, such as subordinate notes and debentures, than do those of other depository institutions.
• Thrifts —depository institutions in the form of savings associations, savings banks, and credit unions. Thrifts generally perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans.
• Insurance companies —financial institutions that protect individuals and corporations (policyholders) from adverse events. Life insurance companies provide protection in the event of untimely death, illness, and retirement. Property casualty insurance protects against personal injury and liability due to accidents, theft, fire, and so on.
• Securities firms and investment banks —financial institutions that help firms issue securities and engage in related activities such as securities and securities trading.
• Finance companies —financial intermediaries that make loans to both individuals and businesses. Unlike depository institutions, finance companies do not accept deposits but instead rely on short- and long-term debt for funding.
• Mutual funds —financial institutions that pool financial resources of individuals and companies and invest those resources in diversified portfolios of assets.
• Hedge funds —financial institutions that pool funds from a limited number of wealthy (e.g., annual incomes of more than $200,000 or net worth exceeding $1 million) individuals and other investors (e.g., commercial banks) and invest these funds on their behalf, usually keeping a large proportion (commonly 20 percent) of any upside return and charging a fee (2%) on the amount invested.
• Pension funds —financial institutions that offer savings plans through which fund participants accumulate savings during their working years before withdrawing them during their retirement years.