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1、Financial Markets and Institutions,The Capital Allocation ProcessFinancial MarketsFinancial InstitutionsStock Markets and ReturnsStock Market Efficiency,Chapter 2,2-1,The Capital Allocation Process,In a well-functioning economy, capital flows efficiently from those who supply capital to those who de
2、mand it.Suppliers of capital: individuals and institutions with “excess funds.” These groups are saving money and looking for a rate of return on their investment.Demanders or users of capital: individuals and institutions who need to raise funds to finance their investment opportunities. These grou
3、ps are willing to pay a rate of return on the capital they borrow.,2-2,How is capital transferred between savers and borrowers?,2-3,Direct transfersInvestment banksFinancial intermediaries,What is a market?,A market is a venue where goods and services are exchanged.A financial market is a place wher
4、e individuals and organizations wanting to borrow funds are brought together with those having a surplus of funds.,2-4,Types of Financial Markets,Physical assets vs. Financial assetsSpot vs. FuturesMoney vs. CapitalPrimary vs. SecondaryPublic vs. Private,2-5,The Importance of Financial Markets,Well-
5、functioning financial markets facilitate the flow of capital from investors to the users of capital.Markets provide savers with returns on their money saved/invested, which provide them money in the future.Markets provide users of capital with the necessary funds to finance their investment projects
6、.Well-functioning markets promote economic growth.Economies with well-developed markets perform better than economies with poorly-functioning markets.,2-6,What are derivatives? How can they be used to reduce or increase risk?,A derivative securitys value is “derived” from the price of another securi
7、ty (e.g., options and futures). Can be used to “hedge” or reduce risk. For example, an importer, whose profit falls when the dollar loses value, could purchase currency futures that do well when the dollar weakens. Also, speculators can use derivatives to bet on the direction of future stock prices,
8、 interest rates, exchange rates, and commodity prices. In many cases, these transactions produce high returns if you guess right, but large losses if you guess wrong. Here, derivatives can increase risk.,2-7,Types of Financial Institutions,Investment banksCommercial banksFinancial services corporati
9、onsCredit unionsPension fundsLife insurance companiesMutual fundsExchange traded fundsHedge fundsPrivate equity companies,2-8,Physical Location Stock Exchanges vs. Electronic Dealer-Based Markets,2-9,Auction market vs. Dealer market (Exchanges vs. OTC)NYSE vs. NasdaqDifferences are narrowing,Stock M
10、arket Transactions,Apple Computer decides to issue additional stock with the assistance of its investment banker. An investor purchases some of the newly issued shares. Is this a primary market transaction or a secondary market transaction? Since new shares of stock are being issued, this is a prima
11、ry market transaction. What if instead an investor buys existing shares of Apple stock in the open market. Is this a primary or secondary market transaction?Since no new shares are created, this is a secondary market transaction.,2-10,What is an IPO?,An initial public offering (IPO) occurs when a co
12、mpany issues stock in the public market for the first time.“Going public” enables a companys owners to raise capital from a wide variety of outside investors. Once issued, the stock trades in the secondary market. Public companies are subject to additional regulations and reporting requirements.,2-1
13、1,S&P 500 Index, Total Returns: Dividend Yield + Capital Gain or Loss, 1968-2010,2-12,Where can you find a stock quote, and what does one look like?,Stock quotes can be found in a variety of print sources (The Wall Street Journal or the local newspaper) and online sources (Yahoo!Finance, CNNMoney, o
14、r MSN MoneyCentral).,2-13,Source: GlaxoSmithKline (GSK), .,Stock Quote for GlaxoSmithKline, July 11, 2011,What is meant by stock market efficiency?,Securities are normally in equilibrium and are “fairly priced.” Investors cannot “beat the market” except through good luck or better information.Effici
15、ency continuum,2-14,Implications of Market Efficiency,You hear in the news that a medical research company received FDA approval for one of its products. If the market is highly efficient, can you expect to take advantage of this information by purchasing the stock?No. If the market is efficient, th
16、is information will already have been incorporated into the companys stock price. So, its probably too late for her to “capitalize” on the information.,2-15,Implications of Market Efficiency,A small investor has been reading about a “hot” IPO that is scheduled to go public later this week. She wants
17、 to buy as many shares as she can get her hands on, and is planning on buying a lot of shares the first day once the stock begins trading. Would you advise her to do this?Probably not. The long-run track record of hot IPOs is not that great, unless you are able to get in on the ground floor and receive an allocation of shares before the stock begins trading. It is usually hard for small investors to receive shares of hot IPOs before the stock begins trading.,
