Financial Markets, Institutions, and Intermediaries - week 2]

• Corporation (company/firm/business)


  A business organised as a separate legal entity owned by stockholders (shareholders)
• Investor


  A person or institution who commits capital with the expectation of receiving financial returns
• Security


  A fungible, negotiable financial instrument that holds some type of monetary value (equity securities, debt securities, and hybrid securities etc.)
• Equity securities


  An equity security represents ownership interest held by shareholders in an entity (a company, partnership, or trust), realized in the form of shares of capital stock, which includes shares of both common and preferred stock. Equity security investor is called stockholder (shareholder)
• Debt securities


  Debt instruments that can be bought or sold between two parties and has basic terms defined, such as the amount borrowed, interest rate, and maturity and renewal date
• Bondholder


  Owner of debt securities that are typically issued by corporations and governments
• Companies face two principal financial decisions in addition to dividend decision
• Stock Market


  The "market" term can be used in a variety of different ways – it can refer physical places, virtual exchanges or groups of people that are interested in making transactions
• Primary Market


  Where a company goes public to provide funding for its operations
• Secondary Market


  Where investors can buy and sell shares of a company after the initial public offering
• Fixed-Income Market


  Where debt securities like treasury bills, bonds and commercial paper are traded
• Fixed-Income Market


  • Debt security investments are generally seen as less risky than equity investments, so they typically offer lower potential returns
  • Strategies are often far less varied in fixed-income markets than equity markets
  • Debt security investments were traditionally traded over-the-counter (OTC) instead of being centrally traded on exchanges
• Capital & Money Markets


  • Short-term vs long-term financing is a decision that the financial manager to make (how long of a time period the manager will require the funds)
  • Short term financing relates to the financial needs that arise to finance current assets – for a period of less than one year
  • Long-term financing refers to the financial needs for a period of more than 5 years
• Foreign exchange market


  An over-the-counter (OTC) global marketplace that determines the exchange rate for currencies around the world. Participants are able to buy, sell, and exchange currencies
• Financial Institutions


  Banks, insurance companies, etc.
• Financial Intermediaries


  Mutual funds, hedge funds, pension funds, etc.
• Commercial bank


  A financial institution that grants loans, accept deposits, an offer basic financial products like saving accounts and certificates of deposits (CDs) to individuals and businesses
• Commercial banks


  • The funds of commercial banks come from money deposited by the bank customers in saving accounts, checking accounts, money market accounts, and CDs
  • The basic role of a commercial bank is to provide financial services to the general public, businesses, and companies
  • Banks also ensure economic stability and sustainable growth of a country's economy
• Investment bank


  The division of a bank or financial institution that serves governments, corporations, and institutions by providing underwriting (capital raising) and mergers and acquisitions (M&A) advisory services
• Clients of investment banks

  • Governments
  • Corporations
  • Institutions
• Insurance company


  A financial institution that provides a range of insurance policies to protect individuals and businesses against the risk of financial losses in return for regular payments of premiums
• Mutual Funds


  Pools of money collected from many investors for the purpose of investing in stocks, bonds, or other securities. Mutual funds are owned by a group of investors and managed by professionals
• Advantages of a Mutual Fund

  • Professional Management
  • Investment Diversification
  • Liquidity
• Hedge fund


  An investment fund created by accredited individuals and institutional investors for the purpose of maximizing returns and reducing or eliminating risk, regardless of market climb or decline
• Functions of FM and FIs

  • In well-functioning financial markets, the information provided by financial markets is often essential to a financial manager's job
  • This information can be used to predict the commodity prices, interest rates, company values and cost of capital
• Corporation (company/firm/business)


  A business organised as a separate legal entity owned by stockholders (shareholders)
• Investor


  A person or institution who commits capital with the expectation of receiving financial returns
• Security


  A fungible, negotiable financial instrument that holds some type of monetary value (equity securities, debt securities, and hybrid securities etc.)
• Equity securities


  An equity security represents ownership interest held by shareholders in an entity (a company, partnership, or trust), realized in the form of shares of capital stock, which includes shares of both common and preferred stock. Equity security investor is called stockholder (shareholder)
• Debt securities


  Debt instruments that can be bought or sold between two parties and has basic terms defined, such as the amount borrowed, interest rate, and maturity and renewal date
• Bondholder


  Owner of debt securities that are typically issued by corporations and governments
• Principal financial decisions companies face

  • Investment decision
  • Financing decision
• Investment decision


  A financial decision which is concerned with how the firm's funds are invested in different assets
• Financing decision


  A financial decision which is concerned with the amount of finance to be raised from various long term sources of funds such as equity shares, preference shares, debentures, bank loans
• Financial environment


  Financial markets + financial institutions
• Companies have to go to financial markets and institutions for the financing they need to grow
• The financing of companies depends on the company's age, its growth rate, and the nature of its business
• Flow of savings with no FM and FIs

  1. Company

  2. Investment in real assets

  3. Investors

  4. Shareholders in closely held corporation
• Flow of savings with FM and FIs

  1. Financial Markets

  2. Stock markets

  3. Fixed-income markets

  4. Money markets

  5. Financial Institutions

  6. Banks

  7. Insurance Companies

  8. Financial Intermediaries

  9. Mutual Funds

  10. Pension Funds

  11. Investors worldwide

  12. Corporation

  13. Investment in real assets
• Financial market


  A type of marketplace where securities are issued and traded (the sale and purchase of financial assets such as bonds, stocks, foreign exchange, and derivatives)