1.6 Financial Markets and the Corporation

What does Figure 1.2 show?

How money moves between a corporation and the financial markets — cash coming in, being used, and going back out.

What happens first in the cash‑flow cycle?

The firm issues securities (stocks or bonds) to raise cash from investors.

After raising cash, what does the firm do?

It invests the money in current assets (like inventory) and fixed assets (like buildings and equipment).

What do these assets generate?

Cash flow from operations — money earned by selling goods or services.

Who receives part of the firm’s cash flow first?

The government (taxes) and other stakeholders such as employees or suppliers.

What happens to the remaining cash flow?

Some is reinvested back into the firm to grow and improve operations.

Where does the rest of the cash go?

It’s paid to investors as interest (for debt holders) and dividends (for shareholders).

What role do financial markets play in corporate finance?

They make it easier for corporations to raise money and transfer ownership quickly.

What kinds of securities are traded in financial markets?

Debt (bonds, loans) and equity (stocks).

What’s the overall flow of cash shown in Figure 1.2?

Investors → Firm → Assets → Operations → Taxes/Reinvestment → Investors.

What are the two main types of financial markets?

Primary markets and secondary markets.

What happens in the primary market?

Securities are sold for the first time by corporations or governments to raise money.

What happens in the secondary market?

Investors buy and sell existing securities after the original sale.

Who issues equities?

Only corporations.

Who issues debt securities?

Both corporations and governments.

In a primary market transaction, who is the seller?

The corporation — it raises money for itself.

What are the two types of primary market transactions?

Public offerings and private placements.

What is a public offering?

Selling securities to the general public.

What is a private placement?

A negotiated sale to a specific buyer, usually a large financial institution.

Who regulates public offerings?

The Securities and Exchange Commission (SEC).

Why do companies sometimes prefer private placements?

They avoid SEC registration costs and underwriter fees.

What are underwriters?

Investment banks that help sell securities to the public.

Why are secondary markets important?

They make investors more willing to buy new securities because they can resell them later.

What is a secondary market transaction?

One owner or creditor selling an existing security to another.

Does the corporation receive money in a secondary market transaction?

No. Only investors trade with each other; the corporation is not involved.

What do secondary markets allow investors to do?

Transfer ownership of corporate securities.

Why are secondary markets critical for corporations?

Investors are more willing to buy new securities in the primary market if they know they can resell them later.

What is market capitalization?

The total value of all a country’s or company’s outstanding shares.

What are the two types of secondary markets?

Dealer markets and auction markets.

What do dealers do?

Dealers buy and sell for themselves, at their own risk.

What do brokers/agents do?

They match buyers and sellers but do not own the securities being traded.

What is the dealer market for stocks and long‑term debt called?

The over‑the‑counter (OTC) market.

Why is it called “over the counter”?

Historically, securities were literally traded at counters in offices.

How are OTC markets structured today?

Dealers are electronically connected, with no central physical location.

What is the first major difference in auction markets?

Auction markets have a physical location (e.g., Wall Street).

What is the second major difference in auction markets?

The main purpose is to match buyers and sellers directly; dealers play a limited role.

Who does most of the buying and selling in dealer markets?

The dealer.

Who does most of the buying and selling in auction markets?

Buyers and sellers, matched directly.

Where do most large U.S. companies trade their equity shares?

On organized auction markets, mainly the NYSE.

What is the largest auction market in the U.S.?

The New York Stock Exchange (NYSE).

What is Nasdaq?

An electronic OTC market created in 1971 by NASD.

• NASD Automated Quotation system.

What types of companies usually trade on Nasdaq?

Smaller, less actively traded companies (with some big exceptions like Microsoft and Intel).

Which market has a higher total value: NYSE or Nasdaq?

The NYSE — its total market value is much larger.

Why does global trading “never stop”?

Because financial markets operate in different time zones, so trading moves around the world.

What does it mean when a stock is “listed”?

It meets the requirements to trade on an organized exchange.

What kinds of requirements must companies meet to be listed?

Minimums for assets, earnings, number of shareholders, and market value.

Why do companies want to be listed on major exchanges?

Listing increases visibility, credibility, and access to investors.