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2007 Thomson/South-Western
Essentialsof
Chapter3
What are financial markets and what role do they play
in improving the standard of living in an economy?
Why is it important for financial markets to be
somewhat efficient?
Why are there so many different types of financial
markets?
What is an investment banking house?
What is a financial intermediary?
Flow of Funds
Three financial phases
Young adults borrow
Older working adults save
Retired adults use savings
Market Efficiency
Economic Efficiency - Funds are allocated to
their optimal use at the lowest costs
Informational Efficiency - Investment prices are
adjusted quickly to reflect current information
Weak-form - all information contained in past price
movements is reflected in current market prices
Semistrong-form - current prices reflect all publicly
available information
Strong-form current prices reflect all pertinent
information, both public and private
Stock Markets
Physical stock exchanges
NYSE, AMEX, and regional exchanges
Exchange members
Floor brokers
Specialists
Stock Markets
Over-the-Counter Markets and
DSEX, CSEX
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Benefits of Financial
Intermediaries
Reduced costs
Risk/diversification
Funds divisibility/pooling
Financial flexibility
Related services
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Chapter 3 Essentials
What are financial markets
The mechanisms by which borrowers and lenders are
brought together
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Chapter 3 Essentials
What is an investment banking house?
An organization that acts as a middleman to help firms and
governments raise funds by issuing financial instruments
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