Ch. 2: Financial Markets and Institutions

Financial Services Corporation

A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking.

Hedge Funds

Accept money from savers and use funds to buy various securities. Largely unregulated.

Mutual Funds

Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt instruments issued by businesses or government units. Pool investor funds to purchase financial instruments and thus reduce risks through diversification.

Capital Markets

Markets for intermediate or long-term debt and corporate stocks.

Money Market

Markets for short-term, highly liquid debt insecurities.

Spot Markets

Markets in which assets are bought or sold for "on-the-spot" delivery (literally within a few days)

Primary Markets

Markets in which corporations raise capital by issuing new securities.

Future Markets

Markets in which participants agree today to buy or sell an asset at some future date.

Secondary Markets

Markets in which securities and other financial assets are traded among investors after they have been issued by corporations. Also exist for mortgages, other types of loans, and other financial assets.

Exchange Traded Funds (ETF)

Often operated by mutual fund companies. Buy a portfolio of stocks of a certain type, i.e. S&P 500 or media companies or Chinese companies, then sell their own shares to the public.

Pension Funds

Retirement plans funded by corporations or government agencies for their workers and administered primarily by the trust departments of commercial banks or by life insurance companies. Invest primarily in bonds, stocks, mortgages, and real estate.

Financial Markets

Serve different types of customers or different parts of the country. Vary depending on the maturity of securities being traded and the types of assets used to back the securities.

Public Markets

Where standardized contracts are traded on organized exchanges.

Private Markets

Where transactions are negotiated directly between two parties.

Physical Asset Markets

a.k.a. tangible or real asset market; for products such as wheat, autos, real estate, computers, and machinery.

Financial Asset Markets

deal with stocks, bonds, notes, and mortgages; also deal with derivative securities whose values are derived from changes in the prices of other assets.

Commercial Banks

i.e. Bank of America, CitiBank, Wells Fargo, and JP Morgan Chase. The traditional department store of finance serving a variety of savers and borrowers. Historically were major institutions that handled checking accounts and through which the Federal Reserve expanded or contracted money supply. Now provide checking services and significantly influence the money supply.

Investment Banks

traditionally help companies raise capital. Help corporations design securities with features that are currently attractive to investors. Buy these securities from the corporation. and resell them to savers. a.k.a. underwriters. The 2 surviving major __ are Morgan Stanley and Goldman Sachs, though they receive Fed Res approval to become commercial bank holding companies.