Contemporary Investments: Chapter 5 Chapter 5 ORGANIZATION OF THE FINANCIAL MARKETS What are the different types of financial markets? How do the primary.

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Presentation transcript:

Contemporary Investments: Chapter 5 Chapter 5 ORGANIZATION OF THE FINANCIAL MARKETS What are the different types of financial markets? How do the primary financial markets function? Why are secondary financial markets important? How are the secondary financial markets organized? How are financial markets evolving?

Contemporary Investments: Chapter 5 What is a financial market A general definition Characteristics of a good market Liquidity Sufficient information is available Trading takes place in full view of all participants

Contemporary Investments: Chapter 5 What is a financial market – Cont. Price continuity Low transactions costs Equal access to the market Price adjust quickly to new information

Contemporary Investments: Chapter 5 Classification of financial markets Primary and secondary markets Money and capital markets Debt and equity markets Organized versus over-the-counter markets Global versus regional markets

Contemporary Investments: Chapter 5 Primary financial markets Open auctions US Treasury security auctions Federal agency security auctions Mortgage backed security auctions

Contemporary Investments: Chapter 5 Figure 5.1 – Example of an IPO

Contemporary Investments: Chapter 5 Underwriting and investment banking Role of the investment banker The underwriting process Underwriting discount Competitive versus negotiated arrangements Syndication Private placements

Contemporary Investments: Chapter 5 The importance of secondary markets Liquidity Price discovery Why some securities develop better secondary markets than others Bid-ask spread as an indication of the depth of the market Trading volume Size of the issue

Contemporary Investments: Chapter 5 Secondary bond markets U.S. government securities Municipal bonds Corporate debt securities International bond markets

Contemporary Investments: Chapter 5 Domestic stock markets Distribution of trading activity NYSE – largest by dollar value of shares traded Nasdaq – largest by number of shares traded Stock market indexes

Contemporary Investments: Chapter 5 The New York Stock Exchange Listing requirements Trading practices Auction market The role of the specialist

Contemporary Investments: Chapter 5 The Nasdaq stock market Listing requirements Trading practices Electronic market Role of the market maker

Contemporary Investments: Chapter 5 Other domestic stock markets The American Stock Exchange Regional exchanges Third and fourth markets Third market Fourth market Electronic Communications Network (ECN) In house networks

Contemporary Investments: Chapter 5 International stock markets The London Stock Exchange The Tokyo Stock Exchange Emerging markets

Contemporary Investments: Chapter 5 Figure 5.2 – Growth in Trading Volume in International Stock Issues on the London Stock Exchange

Contemporary Investments: Chapter 5 Figure 5.3 – Month-to-Month Volatility in the Brazilian Stock Market Index

Contemporary Investments: Chapter 5 The future of the financial markets Growing importance of institutional investors Globalization Advances in technology Will 24 hour trading every become a reality?