FINANCIAL MARKETS

- System that includes individuals and institutions, instruments and procedures that bring
together borrowers and savers, no matter the location

IMPORTANCE OF FINANCIAL MARKETS

- To facilitate the flow of funds from individuals and businesses that have surplus funds to
individuals, businesses, and gov’t that have needs for funds in excess of their incomes

TYPES OF FINANCIAL MARKETS

- Based on the types of investments, maturities of investments, types of borrowers and
lenders, location of the markets and types of transaction

a) Money Markets versus Capital Markets

 Money Markets
- Short term financial instruments
- Maturities equal to one year or less when originally issued
- Includes only debt instruments bc stocks (equities) have no
specific maturities
- To provide liquidity to businesses, gov’t, etc. to meet short term
needs for cash

 Capital Markets
- long term financial instruments
- maturities greater than one year
- mortgages, corporate bonds, and gov’t bonds
- to provide opportunity to transfer cash surpluses or deficits to
future years

 Similarities
- Provides financial instruments with different maturities
- Matches our cash inflows with cash outflows

Debt Instrument – contract that specifies how and when a borrow must repay a lender
b) Debt Markets versus Equity Markets
 Debt Markets
- Loans are traded
- Based on the maturity of the instrument (money or capital market
instruments), type of debt (consumer, gov’t or corporate), and the
participant (borrowers and investors)

 Equity Markets
- Stocks are traded
- Equity = ownership
c) Primary Markets versus Secondary Markets
 Primary Markets
- “new” securities are traded
- Markets in which corporations raise new capital

 Secondary Markets
- “used” securities are traded
- Markets in which existing, previously issued securities are
traded among investors
- Corporation does not receive any funds
- One investor to another investor

d) Derivatives Markets
 Derivatives Markets
- Options, futures and swaps are traded
- The above are called “derivatives” bc their values are determined
directly from other assets
- Used to speculate about the movements of prices in the financial
markets
- Are typically employed to help manage risk
- Individuals, corporations and governments used derivatives to
hedge risk by contracting to set future prices, which offsets
exposures to uncertain prices changes in the future