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Vicentiu Covrig FIN303
The Capital Allocation Process
In a well-functioning economy, capital flows
efficiently from those who supply capital to those
who demand it.
Suppliers of capital individuals and institutions
with excess funds. These groups are saving
money and looking for a rate of return on their
investment.
Demanders or users of capital individuals and
institutions who need to raise funds to finance their
investment opportunities. These groups are willing
to pay a rate of return on the capital they borrow.
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Vicentiu Covrig FIN303
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Vicentiu Covrig FIN303
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Vicentiu Covrig FIN303
Exam type questions
Apple Computer decides to issue additional stock with
the assistance of its investment banker. An investor
purchases some of the newly issued shares. Is this a
primary market transaction or a secondary market
transaction?
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Vicentiu Covrig FIN303
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Vicentiu Covrig FIN303
Types of Financial Institutions
Commercial banks
Investment banks
Financial services corporations
Credit unions
Pension funds
Life insurance companies
Mutual funds
Hedge funds
Exchange traded funds
Private equity companies
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Vicentiu Covrig FIN303
Physical location stock exchanges vs.
Electronic dealer-based markets
Auction market vs.
Dealer market
(Exchanges vs. OTC)
NYSE (physical,
auction)vs.
Nasdaq (electronic,
dealership)
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Vicentiu Covrig FIN303
What is an IPO?
An initial public offering (IPO) is where a company issues stock
in the public market for the first time.
Going public enables a companys owners to raise capital from
a wide variety of outside investors. Once issued, the stock trades
in the secondary market.
Public companies are subject to additional regulations and
reporting requirements.
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Vicentiu Covrig FIN303
Where can you find a stock quote, and
what does one look like?
Stock quotes can be found in a variety of
print sources (The Wall Street Journal or
the local newspaper) and online sources
(Yahoo!Finance, CNNMoney, or MSN
MoneyCentral).
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Vicentiu Covrig FIN303
Exam type question
Which of the following statements is most correct?
a. While the distinctions are blurring, investment banks generally specialize in
lending money, whereas commercial banks generally help companies raise capital
from other parties.
b. Money market mutual funds usually invest their money in a well-diversified
portfolio of liquid common stocks.
c. The NYSE operates as an auction market, whereas NASDAQ is an example
of a dealer market. *
d. Statements b and c are correct.
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Vicentiu Covrig FIN303
Exam type question
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Vicentiu Covrig FIN303
What is meant by stock market
efficiency?
Securities are normally in equilibrium and are fairly
priced.
Investors cannot beat the market except through good
luck or better information.
Efficient market: a market in which the prices are close to
the intrinsic values and stocks seem in equilibrium
Intrinsic value: the price at which the stock would sell if
all investors had all knowable information bout a stock
Efficiency continuum
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Vicentiu Covrig FIN303
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Vicentiu Covrig FIN303
Learning objectives
Identify three different ways capital is transferred between savers and borrowers.
(see slide )
Why are efficient capital markets necessary?
Know the: spot and futures markets; money and capital markets primary and
secondary markets; IPO market; private and public markets; a little about
derivatives
Know the types of financial institutions
Physical location stock exchanges vs over-the counter (NYSE vs NASDAQ)
IPO process; primary vs secondary markets
Market efficiency
Questions: ST-1, 2-1 to 2-10
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