Ch2 Flashcards
direct transfers
without going through any type of financial institution,
indirect transfers
investment banks that underwrite the securities, and indirect transfers through financial
**moving assets or funds between parties or accounts through an intermediary, financial institution, brokerage firm, or other third parties **
intermediaries that create new forms of capital.
that create new forms of capital.
Primary market transaction
company or government issues new securities, like stocks or bonds, to investors for the first time. The main purpose of this transaction is for the issuer (the company or government) to raise capital
What is the primary role of the Securities and Exchange Commission (SEC)?
To ensure investor protection through mandatory company disclosures. not to offer financial assistance. This helps maintain transparency and trust in the securities market.
Which financial market involves the initial sale of stocks or bonds?
Primary Market
A tech startup, Innovatech, plans to raise $5 million for expansion. They decide to issue new shares through an Initial Public Offering (IPO) on a major stock exchange. Investors are keen to buy shares due to the company’s promising growth potential. After the IPO, the shares begin trading actively in the secondary market.
After the IPO, how does the secondary market facilitate capital allocation for Innovatech?
allows existing shareholders to sell their shares, providing liquidity and enabling price discovery, which helps attract further investment into Innovatech.
How do suppliers of capital determine the rate of return they expect from their investments?
Suppliers of capital (investors, lenders, or shareholders) determine the rate of return they expect from their investments based on several factors that reflect the risk, opportunity cost, and potential reward of the investment
What role do investment banks play in the financial markets?
provide advisory services for mergers and acquisitions, and facilitate market-making activities.
helping companies, governments, and other institutions raise money and manage financial transactions.
What is a key function of private equity funds?
Investing directly in private companies to enhance value.
to improve company performance and achieve high returns.
requires long-term commitments with illiquid investments
How do hedge funds primarily differ from mutual funds?
Hedge funds use more aggressive investment strategies
focus on various strategies to generate returns in both up and down markets,
may allow for more frequent withdrawals (though still limited)
Short-term
How do broker/dealer markets facilitate trading in financial assets?
by acting as intermediaries between buyers and sellers, providing liquidity and enabling price discovery for various financial assets.
What role do financial intermediaries play in the capital allocation process?
Financial intermediaries, such as banks, investment funds, and insurance companies, play a key role in the capital allocation process by connecting those who have money (savers) with those who need money (borrowers or investors) to raise capital. They help streamline the process and reduce transaction costs.
How does the role of long-term investors in the secondary market impact the stock price of newly issued shares during an IPO (Initial Public Offering)?
Long-term investors can help the stock price of newly issued shares during an IPO by giving confidence to other investors. When long-term investors buy and hold shares, it shows they believe in the company’s future, making others more likely to invest.
Secondary market transaction
When an investor buys existing shares k in the open market,
Stock Markets, New York Stock Exchange (NYSE) or NASDAQ, Bond Markets
provide liquidity by allowing investors to buy and sell previously issued securities
(If an investor purchases 100 shares of Tesla stock from another investor via NASDAQ)
How do primary and secondary markets differ in terms of stock transactions?
Primary markets iwhere new stocks are sold directly to investors for the first time, like during an IPO (Initial Public Offering). The company gets the money from these sales. secondary markets involve the trading of previously issued securities among inveswhere investors buy and sell stocks among themselves. The company is not involved in these transactions, and the money goes between investors. tors without the involvement of the issuing company.
Why are stock exchanges important for public stock transactions?
provide a regulated platform for public stock transactions, ensuring transparency, liquidity, and fair pricing. They facilitate the buying and selling of stocks, enabling investors to trade efficiently while adhering to legal and regulatory standards.
How do the primary and secondary markets differ in terms of capital allocation?
The primary market is where new securities (like stocks or bonds) are issued and sold for the first time, money is directly given to companies or governments when investors buy these newly issued securities.
secondary market involves the buying and selling of existing securities among themselves, which does not doesn’t involve raising new money for companies; it just helps investors trade and manage their investments.
What is the primary purpose of demanders of capital?
To obtain funds for investment purposes
Commercial banks
.
The traditional department stores of finance serving a variety of savers and borrowers
(places where people can keep their money safe and borrow money when they need it)
Credit unions
.
Cooperative associations whose members are supposed to have a common bond
Pension funds
Retirement plans funded by corporations or government** agencies for their workers and administered primarily by the trust departments
.
Actively-managed
investment funds, like mutual funds exchange-traded funds (ETFs)
professional managers make decisions about which stocks, bonds, or other assets to buy and sell to outperform the overall markets.**
Indexed funds
designed to simply replicate the performance of a specific basket of stocks like the S&P 500
(fund holds all (or a representative sample) of the stocks)
IPO
Initial Public Offering
when a private company offers its shares to the public for the first time. This process allows the company to raise money from investors by selling part of its ownership
Money markets are markets for
Short-term debt securities such as Treasury bills and commercial paper
The…operates as an auction market
NYSE
The… operates as dealer market
NASDAQ
balance sheet shows a snap shop of a firm financial statement at a..
point in time
Income statement summarize revenues and expenses in a..
period in time.
