Textbook Notes (369,102)
Canada (162,381)
York University (12,903)
Finance (91)
FINE 2000 (79)
Chapter 2

Chapter 2 Financial Markets and Institutions.docx

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FINE 2000

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2.1 WHY FINANCE MATTERS - Money that corporations invest in real assets comes ultimately from saving by investors - Reinvesting means additional savings by existing shareholders See Figure 2.1, pg.32 Flow of Savings to Corporate Investments and Figure 2.2 Flow of Savings to a Large Public Corporation The Stock Market - Financial market: market where securities are issues and traded - First issue is called initial public offering (IPO) - Buyers of IPOs are helping to finance firm’s investment in real assets - Issuance of shares after IPO is called seasoned equity offers or follow-on offers - New issue of shares increases amount of cash held and number of shares held - Primary market: market for the sale of new securities by corporations - Secondary market: market in which already issued securities are traded among investors - Stock markets are also called equity markets - Trading shares of smaller and emerging Canadian companies is done through TSX Venture Exchange and the CNQ (Canada’s new stock exchange for emerging companies) - Nasdaq is a dealer network, providing trading with a large choice of electronically linked dealers - Trading occurs through electronic communication networks (ECNs) and alternative trading systems (ATS) Other Financial Markets - Many corporate debt securities are traded over-the-counter, so is govt debt - Some bonds make floating interest payments tied to the future level of interest rates - Fixed-income market: market for debt securities - Capital market: market for long-term financing - Money market: Market for short-term financing (less than one year) - Commercial papers are debt securities with maturities of at most one year and they are issued in the money market - Foreign Exchange Markets, Commodities markets, Markets for Options and Other Derivatives - Commodity and derivative markets are not sources of financing, but markets where the F.M. can adjust firm’s exposure to various business risk Financial Intermediaries - Financial intermediary: organization that raises money from investors and provides financing for individuals, corporations, or other organizations - 5 classes 1) Mutual funds: managed investment fund, pooling the savings of many investors and investing in a portfolio of securities - Actively managed 2) Exchange-traded fund: investment fund, traded on a stock exchange, that pools the savings of many investors and invests in a portfolio of securities, selected to replicate an established securities index - Passively managed - Both offer low-cost diversification and professional management - Management expense ratio (MER) measures the total costs of operating the fund as a percentage of average total assets 3) Hedge fund: receive money from investors and invest in a portfolio of securities, typically use alternative investment strategies such as taking both long and short positions in stocks and using arbitrage, leverage, options, futures, bonds and other financial instruments to capitalize on market conditions  a lot of risk 4) Private equity fund: investment fund focused on investing in equity of privately owned businesses 5) Pension fund: investment plan set up by an employer to provide for employees’ retirement - Defined contribution plan  percentage of employee’s monthly paycheque is contributed to fund - Contributions from all participating employees are pooled and invested in securities or mutual funds
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