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An overview of the financial system.docx

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Brock University
Zisimos Koustas

An overview of the financial system Function of financial markets: 1. They allow transfers of funds from persons or businesses without investment opportunities to one who has them. 2. They improve economic efficiency Classifications of financial markets 1. Debt markets: short-term (maturity < 1 year) money market Long-term (maturity > 10 years) capital market Intermediate-term (maturity 1-10 years) capital market 2. Equity markets Common stocks 1) Primary market: New security issues sold to initial buyers (such as investment banks). An investment bank guarantees a price for a corporation’s securities (under writes the securities) and then sells them to the public 2) Secondary market: securities previously issued are bought and sold in secondary markets ( i.e. NYSE) see writes brokers and dealers are crucial to a well functioning secondary market. Brokers are agents of investors who match buyers with sellers of securities. Dealers link buyers and sellers by buying and selling securities at stated prices. A corporation acquires new funds only when its securities are first sold in the primary market nonetheless; secondary markets serve two important functions:  They increase the liquidity of these instruments thus making them easier to sell in the primary market.  They determine firm receives in the primary market. The firms that buy securities in the primary market will pay the issuing corporation no more than the price that they think the secondary market will set for this security. 1) Exchange
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