Financial Management I

2204

Market•A market is the means through

which buyers and sellers are brought together to aid in the transfer of goods and services.

Market•A market need not have a physical location.

•The market does not necessarily own the goods and services involved. Those who establish and administer the market need only provide a cheap, smooth transfer of goods and services .

•A market can deal in any variety of goods and services.

Characteristics of a good Market•Availability of information

•Liquidity

•Low transaction cost or internal efficiency

•External / informational Efficiency

Financial Market

A mechanism through which deficit units meet surplus units

SaversFinancial Markets

Borrowers

Financial Market•A financial market is the mechanics through

which buyers and sellers are brought together to facilitate the exchange of financial assets.

•Financial assets are often known as securities or financial investments.

•Thus, Financial markets which exist in order to bring together buyers and sellers of securities.

Importance of financial markets

Flow of funds- Across units- Across time

Capital formation process

• Direct transfer• Indirect transfer through an investment banker• Indirect transfer through a financial intermediary

Investment Bank•An investment bank is a financial institution

that assists individuals, corporations and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of securities.

•An investment bank may also assist companies involved in mergers and acquisitions, and provide services such as trading of securities , foreign exchange and equity securities.

Direct transfer:

Bonds or stocks

Fund

Indirect transfer

2. Indirect transfer through an investment banker –

3. Indirect transfer through a financial intermediary–

Securities

Fund

Securities

Fund

Securities

Fund

Securities

Fund

Types of Financial Markets

a. Capital markets

b. Money markets

a. Equity marketsb. Debt markets

a. Primary marketsb. Secondary

marketsc. OTC marketsd. Block share

markets

a. Physical assets b. Financial

assets

a. Spot marketsb. Future

markets

Physical assets vs. financial assets

•Physical asset markets are for tangible or real assets with physical existence

•Financial asset markets are for intangible financial instruments with contractual provisions

Types of Financial Markets

a. Capital markets

b. Money markets

a. Equity marketsb. Debt markets

a. Primary marketsb. Secondary

marketsc. OTC marketsd. Block share

markets

a. Physical assets b. Financial

assets

a. Spot marketsb. Future

markets

Capital market vs. money market

• Capital market instruments have longer maturity

• Money market instruments have shorter maturity

Capital Market

•Capital markets involve financial assets that have life spans of greater than one year.

•It is the market from which long term capital raised for the setting up and sustained growth of business organizations.

Money Market

•Money markets involve financial assets that have life spans of one year or less.

•It is the market of short term borrowing instruments.

Instruments:

Money Market Capital Market

1. Treasury Bills2. Commercial paper3. Consumer credit loans

(short term)

1. Common stock2. Preferred stock3. Bonds4. Leases5. Mortgages

a. Primary marketsb. Secondary marketsc. OTC marketsd. Block share markets

Primary Market

•It is market where new issues are sold by corporations to acquire new capital via the sale of common stock, preferred stocks or bonds.

•The sale take place through an investment banker.

Primary Market

•In which corporations raise new capital

Initial Public Offering (IPO) – GO PUBLIC Seasoned Offering

•Unseasoned new issue market/ IPO•An unseasoned new issue shares involves

the initial offering for a security to the public.

•Seasoned New issue market•A seasoned new issue refers to the offering

of an additional amount of an already existing security.

Secondary Market

• It involves between owners after the issue has been sold to the public by the company.

•Consequently, the proceeds from the sale in the secondary market do not go to the company., as in the case with the primary offering.

• In which existing securities are traded among investors

DSE CSE

Over-the-counter market/ Third market

•OTC market is market for securities (usually unlisted) outside the control of the official stock exchange.

•Trading of securities not listed in the physical stock exchange.

•The broker-dealers are linked by a network of telephones and computer terminals through which they deal directly with one another and with customers.

Block share trading/ Fourth Market•Traders are institutions

•Fourth market refers to those institutional investors and wealthy individuals who buy and sell exchange listed stocks and other securities directly from each other.

•Fourth market is essentially a communication network among institutional investors that trade large blocks without the aid of a brokerage house.

Types of Financial Markets

a. Capital markets

b. Money markets

a. Equity marketsb. Debt markets

a. Primary marketsb. Secondary

marketsc. OTC marketsd. Block share

markets

a. Physical assets b. Financial

assets

a. Spot marketsb. Future

markets

Equity Markets vs. Debt Markets

• In equity markets, corporate stocks or ownerships are traded

• In debt markets, bonds or corporate liabilities are traded

Types of Financial Markets

a. Capital markets

b. Money markets

a. Equity marketsb. Debt markets

a. Primary marketsb. Secondary

marketsc. OTC marketsd. Block share

markets

a. Physical assets b. Financial

assets

a. Spot marketsb. Future

markets

Spot Markets vs. Future Markets

•In spot markets instruments are traded for immediate delivery of assets

•In future markets instruments are traded for future delivery of assets

Market efficiency

Informational efficiency

Weak form efficiency

Semi-strong form efficiency

Strong form efficiency