lecture 2: financial markets and institutions financial management

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Lecture 2: Financial Markets and Institutions Financial Management

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Page 1: Lecture 2: Financial Markets and Institutions Financial Management

Lecture 2: Financial Markets and Institutions

Financial Management

Page 2: Lecture 2: Financial Markets and Institutions Financial Management

An overview of the capital allocation process

• Raise capital in Financial Markets• Capital Market• Transferring capital can be done in three ways– Business <-----------------------------------> Savers– Business <--- Investment Banking-----> Savers– Business <--- Financial Intermediary--> Savers

Page 3: Lecture 2: Financial Markets and Institutions Financial Management

Financial Markets

• If people and organizations need money they may raise capital in Financial Markets

• Types of markets:– Spot Markets– Futures Markets– Money Markets– Capital Markets– Primary Markets

– Secondary Markets– Private markets– Public Markets

Page 4: Lecture 2: Financial Markets and Institutions Financial Management

Derivative

• Derivative– Any Financial assets whose value is derived from

the value of some “underlying” assets• Hedging Operation– Reducing risk by hedge or limit the value or

purchasing other underlying assets (derivative markets) when the others markets fall

Page 5: Lecture 2: Financial Markets and Institutions Financial Management

Financial Institutions

• Direct funds transfer among individuals and small business where financial markets and institutions are less developed.

• So, many companies rely on financial institution and markets to raise their capital– Investment Banking– Commercial Bank– Financial Services operation– Mutual funds

Page 6: Lecture 2: Financial Markets and Institutions Financial Management

Financial Institutions (Cont’)

• Physical Location Exchanges– Formal organizations having tangible physical

locations that conduct auction markets in designated (listed) securities

• The over-the-counter Market– A large collection of brokers and dealers,

connected electronically by telephones and computers, that provides for trading in unlisted securities

Page 7: Lecture 2: Financial Markets and Institutions Financial Management

Financial Institutions (Cont’)

• Dealer market– Include all facilities that are needed to conduct

security transaction not conducted on the physical location changes

Page 8: Lecture 2: Financial Markets and Institutions Financial Management

The Market for common stock

• Closely Held Corporation– A corporation that is owned by a few individuals

who are typically associated with the firm’s management (not actively traded)

• Public Owned Corporation– A corporation that is owned by a relatively large

number of individuals who are not actively involved in its management

Page 9: Lecture 2: Financial Markets and Institutions Financial Management

Types of Stock Market Transactions

1. Trading in the outstanding shares of established, publicly owned companies (secondary market)

2. Additional Shares sold by established, publicly owned companies (primary market)

3. Initial Public Offering (IPO) market- E.g. Google (2004) sold $85/ share and by

September (2005) stock was selling $305

Page 10: Lecture 2: Financial Markets and Institutions Financial Management

Types of Stock Market Transactions (cont’)

• Going Public– The act of selling stock to the public at large by a

closely held corporation or its principal stockholders

• IPO Market– The market for stocks of companies that are in

process of going public

Page 11: Lecture 2: Financial Markets and Institutions Financial Management

Stock Market Efficiency

Market in which the prices of securities fully reflect all known information quickly and on average accurately (Jones 1996).

Page 12: Lecture 2: Financial Markets and Institutions Financial Management

The form of stock market efficiency

1. Weak form efficient market – a condition in a market where the security prices reflect all trade-related information, such as historical security price movements and volume of securities trades.

2. Semi strong form efficient market – a condition in a market where security prices fully reflect all public information. Such as Financial Report

3. Strong form efficient market – a condition in a market where security prices fully reflect all information, including.

Page 13: Lecture 2: Financial Markets and Institutions Financial Management

Assignment

• Find out any Stock Market reporting and analyze their performance based on historical data (4 or 5 years at least) it would be contained capital gain or loss and elaborate based on your reason (please also provide graph)

Page 14: Lecture 2: Financial Markets and Institutions Financial Management

Many Thanks…….