Chapter 1

auction market

all transactions happen in one location

main function of financial markets

facilitate the transfer of capital from people who have extra to people who need it

3 parts of the wealth transfer process

financial instruments, markets, intermediaries

direct investment

asset that generates wealth

indirect investment

financial assets issued by government

sources of capital

retail, institutional, foreign investors

users of capital

businesses, governments

how do businesses use capital

earn/raise money

how do governments use capital

issue debt

role of investment funds

buy/sell stock through mutual fund

role of derivatives

get value from another asset and used for hedging

role of private equity

invest, made directly by businesses, funds provided through pension, endowments, wealthy people

characteristics of an efficient market

fast, cheap, liquid

primary markets

securities are sold by issuers for the first time, funds go to the issuer

secondary markets

securities previously issued are bought/sold, funds go to who sold the shares

stock exchange trends

transferred from physical locations to trading systems, speed and cost efficiency are crucial, stock exchanges around the world are joining together

cash flows depend on…

political environment, economic trends, fiscal/monetary policy, investment opportunities, labour force

examples of financial instruments

debt, equity, investment funds, derivatives, private equity

examples of financial intermediaries

banks, insurance companies, pension, investment dealers, private equity, venture capitalists

how does a stock exchange make money

Transaction fees, Initial listing fees, Fees from capital structure changes, Sale of historic data