chapter
3
Financial Systems
and How They
Operate
Lonni Steven Wilson, Medaille College
Key Chapter Objectives
• Describe what a financial market is.
• Compare the different types of financial markets
and how they affect sport.
• Understand the differences among marketable
securities such as stocks and bonds.
• Explain how a sport business can acquire needed
capital.
Types of Financial Markets
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Tangible or physical markets
Financial asset markets
Spot markets
Money markets
Mortgage markets
Primary markets
Futures markets
Capital markets
International markets
Secondary markets
Funding through Financial Markets
• Businesses are not required to use
only one market exclusively.
• Most businesses utilize several
different markets when raising capital.
• No matter what market is used, the key
to funding business growth and
facilitating movement within all financial
markets is . . . money.
Money
• Money is the means by which
commerce can occur.
• Money has no value in and of itself; it’s
just metal or paper.
• There is agreement between two
parties that it has value (i.e., value is
arbitrarily placed).
Instruments of Commerce
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Money
Credit
Checks
Marketable securities (representing
documentation of ownership or
indebtedness, such as stocks and
bonds)
Key Terms
hard assets—Assets that a company
might not be able to convert to cash
quickly but that still have significant
value (e.g., a factory building, real
estate, machinery).
liquid assets—Assets that are able to be
moved relatively quickly.
Marketable Securities
Marketable securities are instruments so
widely accepted and purchased by others
that they are very similar to cash (Brigham &
Ehrhardt, 2005). Examples include the
following:
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T-bills
T-notes
Government agency securities
Certificates of deposit
Commercial paper
The Most Liquid of Assets
Marketable securities are the most
liquid.
• Shorter maturity periods (T-bills)
• Ability to sell on a daily basis (stocks)
• Relatively risk free (certain bonds and
government securities)
Securities from Risk Free to High Risk
Refer to table 3.1 in the text.
Risk-free and lower-risk securities include the following:
• U.S. Treasury bills
• Commercial paper
Higher-risk securities include the following:
• Corporate bonds
• Common stocks
Stocks: Bear versus Bull Market
A stock certificate is a document demonstrating
ownership interest in a company.
Bear market
• A bear market is a prolonged period during which stock prices continue
to decline. Bear markets can be caused by poor economic conditions,
political collapses, rising interest rates, or a host of other factors that
foster pessimism among investors.
• A bear is an individual who believes that the stock market will drop
(typically more than 20%) and sells stocks, “goes short,” or buys a put.
Bull market
• A bull market occurs when there are prolonged market advances over
a significant time period.
• A bull is an investor who has a favorable outlook on the economy and
is willing to invest in stock, bonds, and other securities.
Key Terms
debtor—Entity issuing the bond.
creditor—Entity purchasing the bond.
Bonds
The greater a company’s financial strength, the
easier it is for the company to issue bonds.
Bonds are infrequently seen in the sport industry, but
examples do exist:
• The New York Yankees and the New Jersey Nets
merged and undertook a bond offering through
YankeeNets LLC that raised $250 million.
• Proceeds were used to help purchase the New
Jersey Devils.
Types of Financial Institutions
• Banks
• Stock exchanges
Banks
Besides providing loans and facilitating economic growth by
making money available to borrowers, banks perform
various additional services. These services include
• allowing individuals to deposit their money in a bank
account for safekeeping,
• allowing checking account holders to write checks
demanding that the bank pay another party a specific
amount,
• providing clients with cashier’s checks or certified checks
when necessary,
• providing numerous specialty savings accounts for
customers, and
• acting as general depositaries for U.S. Treasury funds.
Stock Exchanges
Stock exchanges are owned and
operated by their members.
There are three major U.S. stock
exchanges:
• New York Stock Exchange (NYSE)
• National Association of Securities
Dealers Automated Quotations
(NASDAQ)
• American Stock Exchange (AMEX)
NYSE
The premier U.S. stock exchange is the New
York Stock Exchange (NYSE).
• Private entity, founded in 1792 (3,000 companies)
• Average of 1.08 billion shares traded daily
• To be a member
– 2,000 shareholders
– market value of $100 million (minimum)
– profitable for the last three years, with earnings
of at least $6.5 million each of those years
NASDAQ
National Association of Securities Dealers
Automated Quotations (NASDAQ)
• Computerized trading system for more than 3,300
publicly traded companies
• Image exists that its companies are more cutting
edge (many start-ups, high-techs launched here)
• Primary U.S. market for trading securities in
overseas companies
• Founded in 1971
• Average of 1.76 billion shares traded daily
AMEX and Other Exchanges
American Stock Exchange (AMEX)
• 700-plus small- to midsized businesses
• Large number servicing the oil industry
Smaller regional exchanges exist in the
United States (e.g., Boston, Cincinnati,
Chicago, Pacific, Philadelphia stock
exchanges).
Specialty exchanges also exist.
Buying and Selling on Stock
Exchanges
The ask (or offer) price is the price that a seller
would like to receive for the item he or she
wishes to sell.
The bid price is the price that a potential buyer is
willing to spend to acquire the item.
Somewhere between these, a compromise is
reached (similar to eBay).
• NYSE and AMEX – auction style with a floor
• NASDAQ – buying and selling negotiated through
computers
Questions for In-Class Discussion
1. What is the difference between the NYSE and
the NASDAQ?
2. What determines value?
3. What is the difference between stocks and
bonds?
4. Should governments control banks?
5. Discuss some of your positive and negative
banking experiences, such as bouncing a check.