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FIT - Session 1, Where previously issued stocks are then traded by…

- - - - Adverse selection & moral hazard
        
        Adverse selection: situation that occurs before the transaction is established, where potential borrowers in an unstable situation that are most likely to produce a bad (adverse) outcome are the ones most likely to seek a loan
  - - - Liquidity services = Help conducting transactions easier
        
        Banks provide depositors with checking accounts that enable them to pay their bills easily
        
        Depositors can earn interest on checking & savings accounts + yet still convert them into G & S whenever necessary
  - - - => asset transformation. because risky assets are turned into safer assets for investors
- - - - Commercial Banks (BNP Paribas, Société Générale, J.P. Morgan Chase, etc.)
        
        Investment Banks (BofA Securities, HSBC, etc.)
        
        Insurance Companies (AXA, MACIF, Allianz Life, etc.)
        
        Brokerage Firms (iShares, eToro, etc.) (iShares, eToro, etc.)
  - - - Instrument that holds a monetary value & that can be traded between two or more parties
      - “Piece of paper” that entitles the owner to some CF or asset
      - A negotiable (tradable) financial instrument that is a claim on the issuer’s future income or assets (issuer => company, govrnmt, municipality, etc.
      - Why want to trade security?
        
        To solve a need
        
        Financial goods => response to a need/desire
        
        ex: Need (not always profit) = to save for my retirement
        
        ex: Product = a share of a pension fund
        
        Depending on the type of securities traded on a financial market, the market is called the equity market, debt market, derivatives market, or Foreign Exchange Market (Forex).
      - 4 types of securities:
        • Equity Securities (common or preferred stocks or shares)
        • Debt Securities (bonds, Treasury bills/notes, bank notes)
        • Derivative Securities (forwards, futures, options, swaps)
        • Currencies (US Dollar, Euro, etc.)
    - - Funds are channeled from lenders to borrowers (or savers to investors) promoting economic efficiency
      - They affect individuals (personal wealth), business firms & the entire economy
      - Well-functioning financial markets => key factors in producing high economic growth
      - Channel excess funds from lender-savers to those who have a shortage of funds
        
        Lender-Savers: Households Business firms Government Foreigners
        
        Borrower-Spenders: Business firms Government Households Foreigners
      - 2 diff ways of channeling funds from lender-savers to borrower-spenders:
        
        Direct finance
        
        Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrower’s future income or assets
        
        Indirect finance
        
        Borrowers borrow indirectly from lenders via financial intermediaries such as banks
        
        Financial intermediary => borrows funds from the lender-savers & make loans to borrower-spenders
        
        Example
        
        General Motors needs to borrow funds to pay for a new factory to manufacture electric cars. It may borrow the funds by either:
        
        Selling investors a bond => debt security that promises to make periodic payments for a specific period
        
        Selling them a stock => security that entitles the owner to a share of the company’s profits & assets
      - Critical for producing an efficient allocation of capital
        
        Allow funds to move from people who lack a productive use for their K to those who have such opportunities
      - Improves the well-being of consumers
        
        Allowing them to time their purchases better (ex: by borrowing money to buy a house)
- - - - Big exchangers exchanging in the market

Where previously issued stocks are then traded by investors

Price of a stock in the secondary market is largely determined by the forces of supply & demand

Moral hazard: situation that occurs after the transaction is established, where the borrower has incentives to engage in undesirable (immoral) activities making it more likely that (s)he will not pay back what was previously borrowed