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Chapter 5

Chapter 5 Securities Markets (98% on the test)

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Louisiana State University
ECON 2035

Chapter 5Securities Markets IParticipants in Securities Markets Individuals Securities Firms company whose primary purpose it to hold securities trade them or help others trade them including mutual funds hedge funds brokers and dealers and investment banks Mutual Funds financial institutions that hold a diversified set of securities and sell shares to savers Legal restrictions on how much risk they can take cannot borrowLeverage borrowing money to purchase assetsCannot trade derivatives Hedge funds variant of a mutual fund that raises money from wealthy people and institutions and is largely unregulated allowing it to make risky bets on asset prices Can use leverage and trade in derivativesHigh level of risk Brokers and Dealers Broker firm that buys and sells securities for others licensed to buy and sell securities do bidding for client oFull service broker has an advisor who helps clients choose which securities to buy oDiscount broker provides less advice or none at all customers must choose securities on their own Dealer firm that buys and sells certain securities for itself making a market in the securities but specialize in certain security Investment Banks financial institution that serves as an underwriter and advises companies on mergers and acquisitions Underwriter financial institution that helps companies issue new securitieswith offeringMerger and acquisitions MA investment banks help companies buy other companies or merge with themoHelp companies have smooth transactions Buy and sell securities try to make money through risky bets on asset prices Industry ConsolidationOther Financial InstitutionsoPension Funds employers both private firms and gov establish funds to provide income to retired workers Use money to purchase securities and earnings from securities provide retirement benefitsoInsurance Companies sell life insurance and insurance for propertyInsurance pay premiums company uses to buy securities Earnings from securities pay for insurance claims Take insurance premiums and invest in money markets oCommercial banks institution that accept deposits and make loans Own securities gov bonds Banks hold bonds for liquidity can easily sell for cashBuy securities to hold as assets for liquidity oMore industry Consolidation mergers create conglomerates that combine diverse financial institutions securities firms and commercial banks IIStocks and Bond MarketsoPrimary markets financial markets in which firms and governments issue new securitiesVenture capital firms markets attract funds which finance new companies in return for ownership shares Private company firm with a small number of owners before venture capital firmPublic company firm that issues securities that are traded in financial markets Initial Public Offering IPO sale of stock when a firm becomes public Syndicate lead investment bank which enlists other investment banks
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