Overview of Market Participants 102SIS71 Bae Eun Young   1

The Role of Financial markets: Review The Role of Financial markets: 1. The interaction of buyers & sellers determine the price of the traded assets --price discovery process 2. Financial markets provide a mechanism for an investor to sell a financial asset. 3. Financial markets reduces the search & information cost

The 9 participants in financial markets: Household Governments Nonfinancial corporations Depository institutions Insurance companies’ Asset management firms Investment banks Nonprofit organization Foreign investor

Governments The U.S. federal government raise funds by issuance of securities GSE(government-sponsored enterprise): a major participant in the financial markets

Nonfinancial corporation Non financial corporation issue securities. Issue both common stock & debt obligations Corporation with excess cash to invest participate in financial markets by investing on a short term basis

Asset/Liability Management Depository institutions Commercial banks Savings and loan associations Savings bank Credit unions Object: to earn positive spread between the assets it invests in & the costs of its funds Asset/Liability Management Financial institutions buy money & sell money seeking to realize profit.

Insurance Companies Life insurance company Property & casualty insurance company Function: sell protection aganist the occurrence of future events & receive an insurance premium *Insurance company can invest proceeds

Asset Management Firms Manage funds of individuals, businesses, and state & local government Their compensation: fees linked to amount of assets & the performance of the portfolio managed

Investment Banks Investment banking firms act as brokers or dealers in the buying & selling of securities Investment banking firm can be a subsidiary of a commercial bank or an insurance company

Non profit organization Nonprofit organizations are not motivated by profit but financially supporting and actively engaging in activities that will benefit some public or private interests Qualified foundations are exempt from taxation

Foreign Investors Individuals, nonfinancial business & financial entities that are not domiciled in the Untied States Foreign central governments and supranational

The business of financial institutions Financial institutions provide services: transform financial assets into a different, and more widely preferable, type of asset, which becomes their liability.

What a financial intermediary is Financial intermediaries include: depository institution, insurance companies, pension funds, investment companies Funds by issuing financial claims & investing those funds Assets can be in the form of loans and/or securities –direct investment Transforming financial assets : diversification

Four functions of financial intermediaries A. Maturity intermediation by issuing its own financial claims B. Risk reduction via Diversification- attaining cost effective diversification in order to reduce risk by purchasing the financial assets: important benefit for financial markets

Maturity Intermediation A longer term asset A shorter term one : Commercial bank A longer term asset A shorter term one : by giving the borrower a loan for the length of time by giving the investor/depositor a financial asset for the desired investment horizon

c. Reducing the costs of contracting and information processing c. Reducing the costs of contracting and information processing : costs effectively(economics of scale) A financial market reduces the research & information costs of transaction

d. A payments mechanism Payments using checks, credit cards, debit cards & electronic transfers of funds The ability to make payments without the use of cash is critical Depository situations transform assets

The typical justification for Governmental Regulation of markets . How the government regulates financial markets Disclosure regulation Financial activity regulations Regulation of financial institutions Regulations of foreign participants

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