• Role of the financial market : allocate scarce resources (capital) from savers
(suppliers) to investors (users).
• Suppliers: individuals and institutions with excess funds.
• Users or demanders: individuals and institutions who need to raise funds to finance their investment opportunities

• Financial Market: is market place for selling financial securities: stocks, bonds and derivatives.
• A security is a piece of paper that represents the investor’s rights to certain prospects or property and the conditions under which he or she may exercise those rights.
• Stock or share represents ownership right in the corporation
• Bond is a debt instrument issued by corporations who borrow money.
• Derivative: is a security that derives its value from the value of another security

• Types of Financial Markets :
• Spot vs. futures market:
• Spot Market: assets are delivered “immediately”.
• Futures markets: participants agree to today to buy or sell an asset at some future date.
• Money vs. capital markets
• Money market: short term financial assets are traded
• Capital market: long-term financial assets are traded.
• Primary vs. secondary market:
• Primary market: market where financial securities are sold for the first time.
• Secondary market: market for previously owned financial assets.

• Commercial banks
• Investment banks
• Mutual savings banks
• Credit unions
• Pension funds
• Life insurance companies
• Mutual funds

• Auction market vs. Dealer market
(Exchanges vs. OTC)
NYSE vs. NASDAQ
Differences are narrowing

• Stock market transactions
• Google decides to issue additional stock with the assistance of its investment bank. An investor purchases some of the newly issued shares. Is this a primary market transaction or a secondary market transaction?
• What if instead an investor buys existing shares of Google stock in the open market-is this a primary or secondary market transaction?

• An initial public offering (IPO) is where a company issues stock in the public market for the first time.
• “Going public” enables a company’s owners to raise capital from a wide variety of outside investors. Once issued, te stock trades in the secondary market.
• Public companies are subject to additional regulations and reporting requirements.

• Stock quotes can be found in a variety of print sources (wall street Journal or the local newspaper) and online sources
(Yhoo!Finance, CNNMoney, or MSN
Money Central).

 Securities are normally in equilibriumand are “fairly priced”.
 Investors cannot “beat the market” except through good luck or better information.
 Level of market efficiency
 Weak-form efficiency
 Semi-strong-form efficiency
 Strong-form efficiency

• Weak-form efficiency: can’t profit by looking at past trends.
• Semi-strong form: all publicly available information is reflected in stock prices.
• Strong form: all information, even inside information, is embedded in stock prices.

• Empirical studies suggest the stock market is:
– Highly efficient in the weak form.
– Reasonably efficient in the semi-strong form.
– Not efficient in the strong from. Insiders have made abnormal (and sometimes illegal) profits.