Lecture 1 (Intro) Flashcards
Key players in financial market?
Firms: require capital to invest in plant and equipment (Principal borrow/lenders)
Individuals: supply capital by investing in securities issued by firms (Principal lenders/savers)
Government: Net-position differs. Gets income by setting and collecting taxes
Borrow-spenders?
Those who must borrow to finance their spending
Lender-savers?
Those who have saved and are lending funds
Direct finance?
Borrowers borrow fund directly from lenders. The lenders are selling them securities that are claims on borrowers future assets or income.
Why are financial markets important?
The markets allow capital to be allocated to where it is most needed, making everyone better off.
What can we categorize financial markets in?
Debt markets
Equity markets
Debt-markets?
An indvidual can obtain capital by issuing a debt-instrument, for example a bond or a mortgage.
Debt-instrument:
Short-term…
Long-term…
And what else?
Short term is 1 year or less.
Long term is 10 years or more.
Intermediate term is between 1 and 10 years.
Equity market?
A stock is a claim to share in the net income and the assets of business. You become a share-holder.
By owning a stock, it means that you own a proportion of the company and therefore should be a part of voting for decisions and elect its directors.
Disadvantage and advantage of being a share-holder?
Disadvantage: An equity holder is a residual claimant which means that the firm must pay all their debt holders first before paying equity holders.
Advantage: As an equity holder you own a part of the firm, so any increase of profitability will benefit the share holders.
Primary market? What does investment banks?
A financial market where new issues (nyemissioner) of a security are sold to initial buyers (första köpare)
Are not that well known to the public since the selling of securities are often behind closed doors.
Investment banks underwrite equity issues, which means that they buy issued securities and then sell them by a guaranteed price.
Secondary market?
A financial market where securities that have been previously issued can be resold (tidigare har utfärdats)
- Provide liquidity
IPO?
Initial public offerings, this is where investment banks assist.
2 ways to organise secondary market:
- Exchanges (börsen)
sells standard contracts such as shares in a company - OTC-marknad
sells tailored contracts between two parties
What are financial intermediaries and why are they important?
Finansiella mellanhänder. They stand between the buyer and seller.
They are important because:
1. they can reduce transaction cost by leveraging on economies of scale. (utnyttja stordriftsfördelar)
- Reduce risk. They create/issue assets that have risk consumers are comfortable with - use the income from these assets to buy assets with another risk profile (Asset transformation)
