Notes on Financial Market System | FIN 3113, Study notes of Finance

Download Notes on Financial Market System | FIN 3113 and more Study notes Finance in PDF only on Docsity! Chapter 2 Figure 2.2 Diagram of the Financial Market System P R I M A R Y S E C O N D A R Y 1 Savers (Investors) Borrowers Financial Intermediaries (FI) :  Commercial Banks  Thrift Institutions  Investment Companies  Pension Funds  Insurance Companies  Finance Companies Investment Bankers Securities Exchanges  Organized Exchanges  Over-the-Counter Markets Funds from SSU to DSU Primary claims from DSU to SSU: e.g. Stocks and Bonds Funds from SSU to FI Funds from FI to DSU Secondary claims Primary claims  Purpose of financial markets—transfer fund between savers and borrowers as efficiently as possible.  Primary vs. Secondary Markets  Primary Markets: Where new claims (primary claims) are issued/sold. o Direct  Direct transfers usually are done with the help of investment bankers o Indirect through Financial Intermediaries  Financial intermediaries include: commercial banks, mutual funds or investment companies, pension funds, insurance cos, finance companies  Services FI provide: diversification, expertise, liquidity, convenience, risk management.  FI issue secondary claims and buy primary claims.  Secondary Markets: This is where already existing primary claims are traded (bought and sold) o Benefits of secondary markets: liquidity, efficient pricing and information disclosure, efficient allocation of capital o Security Exchanges  Organized: NYSE, AMEX—auction market  Over the counter: NASDAQ—dealer market o Market Efficiency: Prices instantaneously reflect in an unbiased manner all relevant information about that security.  Weak form  Semistrong form  Strong form o Reading the Wall Street Journal  Calculating holding period returns: 1