MBA | BA 206 Financial Management

Chapter 2

Financial
markets and
institutions
By: Raisa Katrina Manalo
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 03
01 FINANCIAL
capital allocation INSTITUTION
SUB
TOPICS
02 04
FINANCIAL THE STOCK
MARKETS MARKET
 CAPITAL ALLOCATION
Distributing and investing a company’s financial
resources in ways that will increase its efficiency and
maximize its profits.
Capital formation process for business
Financial markets
✔ Facilitates the transfer of savings
from savers to investors

✔ Provides pricing information in the

market

✔ Provides liquidity
Physical asset financial asset
markets markets Types of
Capital markets
Money
markets markets
Primary markets secondary markets

Spot markets Future markets

private markets public markets

Physical asset Types of
markets
⮚ “tangible” or “real” asset markets
⮚ e.g. wheat, autos, real estate, computers,
markets
and machinery

financial asset
markets
⮚ “intangible”; also deal with derivative securities
whose values are derived from changes in the
prices of other assets
⮚ e.g. stocks, bonds, notes, and mortgages
 Capital markets

⮚ For intermediate or long term debt and Types of

corporate stocks (more than 1 year)
markets
Primary markets secondary markets
• between issuers & investors • exist between investors
• for new long term capital • trading of existing securities
• Initial Public Offering (IPO) • Stock Exchange

Money
markets

⮚ For short term borrowing and lending of

securities (less than 1 year of maturity)
Spot markets
Types of
⮚ Exchange of goods and money between
seller and buyer takes place in the
markets
present

Futures markets

⮚ Markets in which participants agree today to

buy and sell an asset at some future date
private markets
Types of
⮚ Transactions are negotiated directly
between two parties
markets
⮚ Specialized deals

public markets

⮚ Markets in which standardized contracts are

traded on organized exchanges
⮚ Liquid; low cost standardized trades
Financial
institutions
✔ Intermediaries between savers and
borrowers

✔ Direct the flow of funds

✔ Regulated to control the supply of

money in the market and protect
consumers
 Financial institutions

1 INVESTMENT BANKS

⮚ Underwrites and distributes new

investment securities

2 COMMERCIAL BANKS

⮚ “department stores of finance”

⮚ Serve a variety of savers and
borrowers
 Financial institutions

FINANCIAL SERVICES
3 CORPORATIONS

⮚ Offers a wide range of financial

services

4 CREDIT UNIONS

⮚ Cooperative associations
⮚ Cheapest source of funds
available to individual borrowers
 Financial institutions

5 PENSION FUNDS

⮚ Retirement plans
⮚ Invest primarily in bonds, stocks
mortgages, and real estate

LIFE INSURANCE
6
COMPANIES
⮚ Take savings in the form of annual
premiums; invest these funds; and
make payments to the beneficiaries
of the insured parties
 Financial institutions

7 MUTUAL FUNDS

⮚ Organizations that pool investor

funds to purchase financial
instruments

EXCHANGE TRADED
8 FUNDS (ETFs)

⮚ Similar to regular mutual funds

⮚ ETF shares are generally traded in the
public markets
 Financial institutions

9 HEDGE FUNDS

⮚ Unregulated
⮚ Have large minimum investments
(often exceeding $1M)
⮚ Marketed primarily to institutions
and individuals with high net worth

PRIVATE EQUITY
10 COMPANIES
⮚ Operate much like hedge funds
⮚ Private equity players buy and then
manage entire firms
Stock market
Most active secondary market

Most important to financial managers

1 - PHYSICAL LOCATION STOCK
EXCHANGES
Formal organizations having tangible
physical locations that conduct auction
markets in designated (“listed”) securities. Two basic types
2 – OVER THE COUNTER (OTC) how stocks are
MARKETAlso called the dealer markets.
Large collection of brokers and dealers,
connected electronically by telephones and
traded
computers, that provides for trading in
unlisted securities.
 Types of Outstanding shares of
established publicly owned
1
stock market
companies that are traded:
The secondary market.

transactions Additional shares sold by

established publicly owned
2 companies: The primary
Closely Held market.
Corporation
Owned by a few individuals who are typically associated
with the firm’s management

Publicly Owned Initial public offerings made

Corporation
Owned by a relatively large number of 3 by privately held firms: The
individuals who are not actively involved in the
firm’s management
IPO market.
 Stock market reporting

YAHOO
FINANCE CNBC.CO
GOOGLE M
NASDAQ
FINANCE
STOCK QUOTE
SAMPLE
 Efficiency continuum

EFFICIENT MARKET
A market in which prices are close to intrinsic values
and stocks seem to be in equilibrium.

Behavioral finance theory

Efficient Markets Hypothesis (EMH)
A healthy economy is a result of the efficient allocation
of funds from savers to firms who needs capital.

Financial markets and institutions are

essential to economic development.

A well-functioning financial system greatly

contribute to economic growth.

End
 Sources:
Brigham, E. F., & Houston, J. F. (2017). Fundamentals
of financial management. Cengage Learning.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals
of financial management. Cengage Learning.

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