FINANCIAL MARKETS
AND
INSTITUTIONS
Lesson 2
TYPES OF FINANCIAL MARKETS and major
categories of financial institutions
Learning Outcomes:
• Identify the different types of financial markets
• Assess the importance of the financial market in business
operations.
• Identify the different categories of financial institutions
• Differentiate financial institutions from financial markets.
Types of Financial Markets
Physical asset markets
• “tangible” or “real” asset
markets that can be seen and
touched, with a very
identifiable physical presence.
• products such as land, real
estate, buildings, machinery
and equipment, plant, tools,
vehicles, gold, silver, wheat,
computers, livestock animals,
and other form of tangible
economic resources.
Types of Financial Markets
Financial asset markets
• deal with stocks, bonds, notes,
and mortgages.
• it also deals with derivative
securities whose values are
derived from changes in the prices
of other assets.
• stocks, bonds, mutual funds, cash,
checking/savings accounts, and
certificates of deposit.
Types of Financial Markets
Spot markets Futures markets
• are markets in which assets are bought • are markets in which participants agree
or sold for “on-the-spot” delivery. today to buy or sell an asset at some
future date.
Types of Financial Markets
Capital markets
Money markets
• markets for intermediate- or long-term debt and
• are the markets for short-term, highly liquid
debt securities. The New York, London, and
corporate stocks. The New York Stock Exchange,
Tokyo money markets are among the world’s where the stocks of the largest U.S. corporations
largest. are traded, is a prime example of a capital
• (debt market) short-term generally means market.
less than 1 year • (debt market) intermediate-term means 1 to 10
years, and long-term means more than 10 years.
Types of Financial Markets
Primary markets Secondary markets
• are the markets in which • are markets in which existing, already
corporations raise new capital. The outstanding securities are traded
corporation selling the newly created among investors. It also exists for
stock receives the proceeds from the mortgages, other types of loans, and
sale in a primary market transaction. other financial assets.
Types of Financial Markets
Public markets
Private markets
• are where standardized
• are where transactions are contracts are traded on
negotiated directly organized exchanges. Large
between two parties (buyer number of buyes and seller
and seller). For example hold similar securities in
bank loans, insurance, and public markets
etc.
Major categories of financial institutions
Investment banks/underwriters Commercial banks/“department stores
• traditionally help companies raise capital and act of finance”
as a facilitator to help transfer capital from savers
to businesses. • serve a variety of savers and borrowers. They also
provide checking services and significantly in
• They also help corporations design securities with influence the money supply.
features that are currently attractive to investors,
buy these securities from the corporation, and
resell them to savers.
Major categories of financial institutions
Financial services corporations Credit unions
• are cooperative associations whose members are
• are large conglomerates that combine many supposed to have a common bond, such as being
different financial institutions within a single employees of the same firm. Members’ savings are
corporation. For example, Citigroup owns loaned only to other members, generally for auto
Citibank (a commercial bank), Smith Barney (an purchases, home improvement loans, and home
investment bank and securities brokerage mortgages. Often the cheapest source of funds available
organization), insurance companies, and leasing to individual borrowers.
companies.
Major categories of financial institutions
Pension funds Life insurance companies
• are retirement plans funded by corporations or • take savings in the form of annual
government agencies for their workers and premiums; invest these funds in stocks,
administered primarily by the trust departments of bonds, real estate, and mortgages; and make
commercial banks or by life insurance companies. payments to the beneficiaries of the insured
Pension funds invest primarily in bonds, stocks, parties.
mortgages, and real estate.
Major categories of financial institutions
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.
• These organizations pool funds and
thus reduce risks by diversification.
They also achieve economies of
scale in analyzing securities,
managing portfolios, and buying
and selling securities.
Major categories of financial institutions
3 TYPES OF MUTUAL FUNDS
• Bond funds for those who prefer safety;
• Stock funds for savers who are willing to accept significant risks in
the hope of higher returns
• Money Market Funds which are used as interest-bearing checking
accounts.
Major categories of financial institutions
Exchange Traded Funds (ETFs)
• are similar to regular mutual funds and are often operated by mutual fund companies.
ETFs buy a portfolio of stocks of a certain type—for example, the S&P 500 or media
companies or Chinese companies—and then sell their own shares to the public.
• ETF shares are generally traded in the public markets, so an investor who wants to invest
in the Chinese market, for example, can buy shares in an ETF that holds stocks in that
particular market
Major categories of financial institutions
Hedge funds
• are also similar to mutual
funds because they accept
money from savers and use the
funds to buy various securities,
but there are some important
differences. Hedge funds are
largely unregulated. It
traditionally was used when an
individual was trying to hedge
risks.
Major categories of financial institutions
Private equity companies
• are organizations that operate much
like hedge funds; but rather than
buying some of the stock of a firm,
private equity players buy and then
manage entire firms. Most of the
money used to buy the target
companies is borrowed.
THANK
YOU
