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    Financial Markets and The Investment Banking Process

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    Sajjad Ahmed Shaikh
    Financial markets are systems that allow individuals and institutions to exchange savings and borrowing. There are three main ways funds can be transferred: directly, through investment bankers, or through financial intermediaries like banks. Markets aim for both economic and informational efficiency. The financial system includes money markets for short term instruments, capital markets for long term, as well as debt, equity, and derivatives markets. Investment bankers help companies issue new securities and facilitate their sale to investors. The SEC regulates securities markets to protect investors and prevent fraud.

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    Financial Markets and The Investment Banking Process

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    Sajjad Ahmed Shaikh
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    Financial markets are systems that allow individuals and institutions to exchange savings and borrowing. There are three main ways funds can be transferred: directly, through investment bankers, or through financial intermediaries like banks. Markets aim for both economic and informational efficiency. The financial system includes money markets for short term instruments, capital markets for long term, as well as debt, equity, and derivatives markets. Investment bankers help companies issue new securities and facilitate their sale to investors. The SEC regulates securities markets to protect investors and prevent fraud.

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    Financial markets are systems that allow individuals and institutions to exchange savings and borrowing. There are three main ways funds can be transferred: directly, through investment bankers, or through financial intermediaries like banks. Markets aim for both economic and informational efficiency. The financial system includes money markets for short term instruments, capital markets for long term, as well as debt, equity, and derivatives markets. Investment bankers help companies issue new securities and facilitate their sale to investors. The SEC regulates securities markets to protect investors and prevent fraud.

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    44 views36 pages

    Financial Markets and The Investment Banking Process

    Uploaded by

    Sajjad Ahmed Shaikh
    Financial markets are systems that allow individuals and institutions to exchange savings and borrowing. There are three main ways funds can be transferred: directly, through investment bankers, or through financial intermediaries like banks. Markets aim for both economic and informational efficiency. The financial system includes money markets for short term instruments, capital markets for long term, as well as debt, equity, and derivatives markets. Investment bankers help companies issue new securities and facilitate their sale to investors. The SEC regulates securities markets to protect investors and prevent fraud.

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    You are on page 1of 36

    Financial Markets and the Investment Banking Process

    Chapter 3
    Requests for permission to make copies of any part of the work should be mailed to: Thomson/South-Western 5191 Natorp Blvd. Mason, OH 45040

    Financial Markets
    A system comprised of individuals and institutions, instruments, and procedures that bring together borrowers and savers.

    Flow of Funds
    Provides the ability to transfer income through time Borrowing sacrifices future income to increase current income. Saving, or investing, sacrifices current income in exchange for greater expected income in the future.

    Flow of Funds
    1. Direct Transfer
    business sells its stock directly to investors

    Flow of Funds
    2. Indirect Transfer through Investment Bankers
    investment banker acts as middleman and facilitates issuance of securities by reselling the securities to savers

    Flow of Funds
    3. Indirect Transfer through financial intermediary
    bank or mutual fund obtains funds from savers and uses the money to lend or purchase securities

    Market Efficiency
    Economic Efficiency
    Funds are allocated to their optimal use at the lowest cost Transactions costs associated with buying and selling

    Market Efficiency

    Information Efficiency
    Prices of investments reflect existing information and adjust quickly when new information enters the market Three categories

    Informational Efficiency
    1. Weak-form efficiency
    all information contained in past price movements is fully reflected in current market prices information about recent or past price trends is of no use when searching for abnormal returns

    Informational Efficiency
    2. Semistrong-form efficiency
    current market prices reflect all publicly available information financial analysis is of no use for finding mispriced securities insiders can profit on their own companys stock

    Informational Efficiency
    3. Strong-form efficiency
    current market prices reflect all pertinent information, whether publicly available or privately held even insiders cannot earn abnormal returns

    Types of Financial Markets


    Money Markets
    instruments traded mature in one year or less

    Capital Markets
    includes instruments with maturities greater than one year

    Types of Financial Markets


    Debt Markets
    treasury, corporate, mortgage-backed, money market, municipal, etc...

    Equity Markets
    stock markets

    Equity Markets
    Primary
    corporations raise funds by issuing new securities

    Secondary
    securities are traded among investors after they have been issued

    Derivatives Markets
    Options, futures and swaps are securities whose value is determined, or derived directly from other assets
    These can be used to manage risk or to speculate

    Types of Stock Market Transactions


    1. Secondary market
    trading existing stocks

    2. Primary market
    existing firm issues additional shares

    3. Initial Public Offering (IPO)


    privately held company offers stock to the public for the first time called going public

    The Physical Stock Exchanges


    Physical exchanges
    New York Stock Exchange (NYSE) American Stock Exchange (AMEX) Chicago Stock Exchange (CHX) Philadelphia Stock Exchange (PHLX)

    NYSE Members
    1. Commission brokers
    2. Independent brokers 3. Competitive traders 4. Specialists

    Listing Requirements
    Quantitative and qualitative characteristics a firm must possess to be listed on an exchange
    Vary by exchange Number of shareholders, number of public shares, market value of public shares, pre-tax income, etc...

    Organized Investment Networks The Over-the-Counter Market (OTC)


    Collection of brokers and dealers connected electronically
    Provides for trading in securities not listed on the organized exchanges

    Over-the-Counter Market (OTC)


    1. Dealers hold inventory and make a market
    2. Brokers act as agents in bringing together dealers with investors 3. Electronic network provides communications link

    NASD
    Many of the dealers and brokers of the OTC are members of the National Association of Securities Dealers (NASD), which licenses and oversees trading practices.

    NASDAQ
    The computerized trading network used by NASD is the NASD Automated Quotation System (NASDAQ) and is a sophisticated market of its own, separate from the OTC.

    Electronic Communications Networks (ECN)


    Electronic systems that transfer information about securities transactions to facilitate the execution of orders
    Automatically matches buy and sell orders for a large number of transactions

    Investment Banker
    Organization that underwrites and distributes new issues of securities
    Helps businesses and other entities obtain needed financing

    Investment Banking Process


    1. Help corporations design securities with the features that are most attractive to investors given existing market conditions. 2. Buy these securities from the corporations. 3. Then resell the securities to investors (savers).

    Raising Capital: Stage I Decisions


    1. Dollars to be raised
    2. Type of securities used 3. Competitive bid or negotiated deal 4. Selection of an investment banker

    Raising Capital: Stage II Decisions


    1. Reevaluating the initial decisions
    2. Best efforts or underwritten issues 3. Issuance (flotation) costs 4. Setting the offering price

    Selling Procedures
    Registration statement
    filed with the SEC

    Prospectus
    summarizes a new security issue and the issuing company

    Underwriting syndicate
    group of investment banking firms to distribute the new issue

    Shelf Registration
    Securities registered with the SEC for sale at a later date

    Maintenance of the Secondary Market


    To facilitate orderly market for the new security, the investment banker maintains a market for the security following its issue.

    Regulation of Securities Markets


    Securities and Exchange Commission (SEC)
    U.S. government agency regulates the issuance and trading of stocks and bonds to ensure investors receive fair financial disclosures to discourage fraud and misleading stock manipulation

    SEC Regulation
    1. Jurisdiction over interstate offerings of new securities to the general public in amounts of $1.5 million or more
    2. Regulates national securities exchanges, and listed companies must file annual reports

    SEC Regulation
    3. Control stock trades by corporate insiders
    4. Prohibit manipulation of securities prices by pools or wash sales

    International Financial Markets


    Increasingly global markets
    Greatest growth in emerging markets of the Pacific Rim U. S. exchanges still dominate worldwide trading activity

    End of Chapter 3

    Financial Markets and the Investment Banking Process

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