EC223 Chapter 2: EC223 Chapter 2 Notes.docx
Document Summary
Function of financial markets: financial markets channel funds from the households, firms and governments with a surplus to those who have a shortage of funds, direct finance, borrowers borrow funds directly from lenders in financial markets by selling them securities (financial instruments, securities are assets for the person who purchases them but liabilities for the individual/ firm that issues them, without financial markets it is hard to transfer funds from a person who has no investment opportunities to one who has them; financial markets are thus essential to promoting economic efficiency, financial markets set up correctly improve the economic welfare of everyone in the society. Also includes voting rights: disadvantage of owning equity vs. debt is that an equity holder is a residual claimant; meaning the business must pay off all debt holders before it pays its equity holders, primary and secondary markets, primary market: financial market in which new issues of a security are sold as an ipo.
