Chapter 2: Financial Markets and Institutions
Avg Vol
(3m) the average daily volume for the past 3 months
Commercial Banks
- Bank of America, SunTrust, Citibank, Chase Bank, & Wells Fargo are all examples. They are the one stop shopping experience for financial services much like a department store like Macy's or Dillard's. Historically, they are the major checkable depository agencies within the country, although credit unions today have infringed somewhat on this territory.
Dutch Auction
- Google's stock was sold in a different approach with regard to its IPO. Investors were allowed to place bids on what they'd pay on a per share basis. Then, shares were sold to those who had bid the highest, and then to everyone else in a top down approach until all of the shares were sold. Google's IPO price turned out to be $85 per share.
Credit Unions
- Owned by their members, CUs are often the cheapest source of funds available to borrowers.
Hedge Funds
- Similar to mutual funds and ETFs. However, unlike ETFs and mutual funds, hedge funds are not registered with the SEC. They are essentially large pools of money for wealthy investors to participate in. Minimum investments to participate in such a fund often exceed $1 million. Hedge Funds are marketed to institutional investors and to individual investors with high net worths.
Investment Banks
- help corporations (1) design securities, (2) buy securities from the corporations, (3) and resell these securities to savers.
Primary Markets
- markets in which companies raise new capital.
Secondary Markets
- markets in which existing securities, those that are already outstanding, are traded.
Futures Markets
- markets in which the participants agree today to buy or sell an asset at some future date. Commodities are traded in futures markets and can serve as a Hedge for the purchasing company. What does this mean?
Public Markets
- markets where there are standardized contracts, the contracts are always the same so that market participants will always know what to expect.
Private Markets
- markets where transactions are conducted directly between two parties. Bank loans are an example.
Change
% change from previous price
primary market
The first time that securities are sold, they are sold in the...
mortgage backed securities
The hard lessons from 2008 stemmed from the exorbitant losses that were experienced by investors (both intuitional & individual) who had purchased...
thinly traded
When a stock is ___________________, because it may be a new company, small company, or struggling company, there are few buy and sell orders. The companies, as a result, are not listed on one of the major exchanges.
Bull and Bear markets
When the Economy contracts stock market is called...
securities
When the housing market collapsed, the value of these __________ plummeted, destroying the balance sheets of many financial institutions.
HOT ISSUE
When the public really wants to buy an IPO b/c it's a ______________, investment banks often favor selling to large institutional investors, leaving the small individual investors stuck out in the cold not being able to buy the new IPO shares
financial institutions
With the exception of Hedge Funds and Private Equity Funds, _____________________________ are regulated to ensure the safety of these institutions and to protect investors.
Technological innovation
along with the globalization of banking and international trade, has led to deregulation in many markets, increasing competition throughout the world.
Market stock volume
amount of stocks being traded
Indirect Transfers through Investment Banks
an investment bank underwrites (i.e. - serves as the middleman) and facilitates the issuance of the securities. The company sells its stocks or bonds to the underwriter, which then sells these same securities to the savers.
Derivatives
any investment whose value is dependent on some other investment. For example, mortgage backed securities, stock options, call & put options and mutual funds.
Stock prices
are determined in the financial markets.
Physical Asset Markets
are for products such as gold, wheat, autos, real estate, computers and machinery. the market of those tangible assets which can liquidate for the payment of the debts which are unpaid
Pension Funds
are retirement plans funded by corporations or government agencies for their workers.
Broker
doesn't personally get involved in a transaction, a middle man helps negotiate a transaction between a buyer and seller for a commission
capital
many companies go public to bring in new ____________ and to give their founders the opportunity to cash out some of their shares.
Market Cap
market capitalization = # of shares outstanding x current price
Spot Markets
markets in which assets are bought on the spot. Payment and immediate delivery
Exchange Traded Funds
similar to mutual funds but instead of being offered for sale through a mutual fund company, they are offered for sale by the actual stock exchanges themselves. Are traded in the secondary market Examples include Spiders (S&P 500), Diamonds (Dow) and Cubes (Nasdaq).
Penny stocks
stock with price below 5 dollars ex:
Round lot
stocks in 100 increments
Penny stocks
stocks only traded in the electronic market
Money Markets
term, highly liquid debt securities.
Direct Transfers
the business sells its stocks or bonds directly to the savers. No financial institutions are used.
Prev Close
the closing price on the previous day
2008
the leading financial institutions in our country were in financial trouble.
Volume
the number of shares that were traded that day
Open
the opening price today
Bid
the price that investors are bidding to buy at
Ask
the price that investors are selling at
Day's Range
the range of prices for that day
52 wk Range
the range of prices for the last 52 weeks
reason for saving
they expect to earn a return on their investment.
The U.S. Government
through its Troubled Asset Relief Program (TARP), allocated $700 Billion to purchase or insure the troubled assets of many of the surviving institutions.
Trade Time
time of last trade
commercial banking
used to be simple... A bank would only loan out the funds that it had received from depositors. A bank held the loan until it matured. The downside to this was that the banks had limited funding to make new loans as well as the fact that most of their loans were made to businesses and individuals in their local market. This meant that if the local economy struggled, the bank would be hurt. Bank can spread risks
Bear
vicious, lose a lot, contracting economy, very volatile
NASDAQ(National Association of Securities Dealers & Automated Quotations)
The computerized network used by the brokers and dealers is known as the...
BID ASK SPREAD
The difference between the bid and the ask is called the _______________________ and represents the dealer's mark-up.
Indirect Transfers through a Financial Intermediary
- a financial intermediary, such as a bank, mutual fund company, pension fund, or insurance company, sells its investment to the savers. With the capital from the savers in hand, the intermediary then purchases the stocks or bonds of the business who need capital.
Mutual Funds
- accept money from savers through the sale of their own company's securities. Then, with the money from the savers, they use these funds to buy stocks, long term bonds, or short-term debt instruments issued by business and government units.
Private Equity Companies
- similar to hedge funds, however, instead of buying stock in a company, private equity firms actually buy the entire firm and then manage it. Such companies as Albertson's, Hertz, and Clear Channel Communications (the parent company of XL106.7 & WJRR 104.1) have been purchased by private equity firms in recent years.
Underwriters
- since investment banks guarantee to help a firm raise capital, they are called underwriters.
Life Insurance Companies
- take savings in the form of annual premiums and invest this capital into stocks, bonds, real estate and mortgages and to make payouts to their policy holders' beneficiaries when there is a death of one of their customers.
commercial banks
9 of the top investment banks in the world are also listed as...
investors
Waiting for the recession to subside, many __________ either put their money into banks or purchased U.S. Treasury Securities.
housing prices
Because the economy was buoyed by the mistaken belief that ___________________________________ would never fall, many people viewed these securities as solid investments. The high credit ratings from such firms as Moody's and Standard & Poor's only exacerbated the future problem.
National Association of Securities Dealers (NASD)
Brokers and dealers who participate in the OTC market are members of a self-regulatory body known as __________ which licenses brokers and oversees trading.
can
Companies ________ go public without raising additional capital. Ford Motor Company did this. When Henry Ford died, he left a large block of stock to the Ford Foundation. When the foundation sold the stock to raise funds for charitable purposes, Ford became a publicly traded company, even though there was no additional capital that was raised.
money
Companies need ______________(i.e. - to raise capital) in order to grow and they go to the financial markets and institutions in order to be matched with the savings from households, firms and governments.
market makers
Dealers buy and sell stocks from individual investors from their company's own account. The dealers are thus called __________________ b/c they make a market for investors when one otherwise might not exist.
speculative
Derivatives can also be used for ____________ purposes. For example, you could purpose oil futures today that are to be delivered in 6 months. You do not wish to take possession of the actual oil. Instead, you are banking that the price per barrel will rise in the future and as your contract date nears, you'll be able to sell your oil futures contract for more than you paid for it.
reduce
Derivatives can be used to ____________ risk. For example, a delivery company like FedEx can purchase Oil Futures, a contract that allows them to purchase oil at a set price effectively allowing the company to lock in their operating costs with regard to oil. If the price of oil rises in the future, FedEx is not hurt b/c they will have already locked in their costs. This example illustrates how a company can use derivative securities (a futures contract in this example) to HEDGE away their risk.
illiquid
During the time, the financial markets became ____________ The flow of capital dried up, even for individuals and companies with the highest credit rating.
fall
Economy is contracting the number of IPO's...
financial system
If the economy does not have a well-functioning ___________________________, it will be difficult for it to reach its full potential.
derivatives
Increased use of _________________ throughout the world. Caution: this can be dangerous when individuals and firms are purchasing investments that they do not fully understand.
Capital Markets
Intermediate and long term debt and stocks.
listing requirements
The NASDAQ has grown through the years and has become an organized securities market that has its own
Financial Services Corporations
Large conglomerates that combine many different financial institutions within one company. For example, Citigroup owns Citibank (commercial bank), Smith Barney (investment bank and securities brokerage), insurance companies, and leasing companies.
demanders
The _________________________ for capital must pay this return on investment.
2 types of stock markets
Physical Exchanges (NYSE), Electronic Dealer-Based Markets (Nasdaq, OTC, and ECN markets)
stock market
The most active secondary market and most important one to financial managers is...
intermediaries
The presence of the ____________________________ greatly increase the efficiency of money flowing through the economy.
securitizing
To address these concerns, the financial system came up with the idea of ____________________ the loans. Here's how the process works: o An investment bank creates a company that buys a large # of loans from banks from around the country. o The investment bank then creates and sells a security that is backed by the loan payments. o Such investments began to surface in the 1970s. o Advantages to the banks: Banks no longer have to hold their own loans. Banks can generate larger revenues annually b/c they can create new loans quicker. o Mortgage backed securities: Traded in the open market
OTC
To provide liquidity in such instances, the _________ market is a collection of brokers and dealers connected electronically by telephones and computers, that provides for trading in the unlisted securities.
Financial Asset Markets
bank deposits, loans, CD's, Stocks, bonds, and derivative securities.
Prime market
biggest companies in the world, low risk, best investment
Dealer/market maker/specialist
can act like a broker, buys other shares from investment accounts so market keeps moving if one side cannot be found even if there is a loss at the time, someone who has a business in buying and selling securities
Savers and Demanders
can be households, companies or governments
A strong financial system
capital flowing freely throughout the economy, a necessary ingredient for a growing and prosperous economy.
Bull
charges and runs, expanding economy
Market volatility
frequency (often) and magnitude (severe, wide) of price movements, more often=higher
Subprime market
greater risk of default, more volatile, thinly traded
Mortgage broker
help them get a loan by contacting other companies, get a mortgage from a third party
stock broker
helps facilitate a trade between buyers and sellers of stock and charge a commission
The Capital Allocation Process
how does capital flow from savers to demanders of capital
Standardization
increases the efficiency of the market because all traders know what to expect when it comes to what is being bought and sold.
Odd lot
increments of stock bought for less than 100
S & P
indicates direction of the economy, shows what is going to happen in future (6 months)
Thinly traded stock
no market/buyers/sellers
NYSE
only place that has a physical floor-based trading model
P/E
price earnings ratio = current price divided by EPS
Last Trade
price of last trade
Dealers
quote the price that they will pay (BID price) for a stock and the price at which they will sell (ASK price) their shares at.
Stock price falls
you win in a short sale
Physical Location Stock Exchanges
• The NYSE limits the number of people/companies that are allowed to trade on its floor. • Trading licenses are auctioned to member organizations and cost about $50,000 per year. • The trading platform is an "auction" market where "open outcry" between buyers and sellers determines each security's price.