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CLASSIFICATIONS OF THE FINANCIAL MARKETS (PRIMARY AND SECONDARY MARKETS…
CLASSIFICATIONS OF THE FINANCIAL
MARKETS
PRIMARY AND SECONDARY MARKETS
financial market in which new issues of a security, such as a bond or a stock, are sold to initial buyers by the corporation or government agency borrowing the funds
important financial institution that assists in the initial sale of securities in the primary market is the investment bank
functions (secondary)
they determine the price of the security that the issuing firm sells in the primary market
they make it easier to sell these
financial instruments to raise cash;
that is, they make the financial
instruments more liquid
MONEY AND CAPITAL MARKETS
The money market is a financial market in which only
short-term debt instruments are traded
money market securities are usually more widely traded than longer-term securities and so tend to be more liquid; in addition, short term securities have smaller fluctuations in prices than long-term securities, making them safer investments
The capital market is the market in which longer-term
debt and equity instruments are traded
capital market securities, such as stocks and long-term bonds, are often held by financial intermediaries such as insurance companies and pension funds, which have little uncertainty about the amount of funds they will have available in the future
DEBT AND EQUITY MARKETS
disadvantage
debt is that an equity holder is a residual
claimant; that is, the corporation must pay all its debt holders before it pays its equity holders
methods
to issue a debt instrument,
such as a bond or a mortgage
to issuing equities, such as
common stock, which are
claims to share in the net
income
advantage
equity holders benefit directly from any
increases in the corporation’s profitability
or asset value because equities confer
ownership rights on the equity holders
EXCHANGE AND OVER-COUNTER MARKETS
ways
to have an over-the- counter (OTC) market, in which dealers at different locations have an inventory of securities and stand ready to buy and sell securities “over the counter” to anyone who comes to them and is willing to accept their prices
to organize exchanges, where buyers and sellers of securities (or their agents or brokers) meet in one central location to conduct trades