Smith Barry & Company
U.S. Financial Markets
Client: Michelle Varga
Use the following collected data to educate your client:
A) What are the three primary ways to transfer capital between savers and borrowers? Describe each one. The three primary ways in which capital is transferred between savers and borrowers are: 1. Direct Transfers and Securities: when a business sells its stocks directly to savers, without going through any financial institution.
2. Indirect Transfers through Investment Bankers: when a business sells its stocks to an investment bank, which then underwrites the issue and sells these same securities to savers.
3. Indirect Transfers through a Financial Intermediary: when a bank (Or other form of financial intermediary such as an insurance company or mutual fund) sells its own securities to savers and uses the money it makes from the sale of its securities to purchase and hold business’ securities, while the savers hold the intermediary’s securities.
B) What is a market? Distinguish between the main types of markets. A Market: brings people and organizations wanting to borrow money together with those who have surplus funds. 1. Physical Asset Markets versus Financial Asset Markets:
a) Physical Assets Markets are also called, “Tangible,” or, “Real,” asset market because
are for products such as wheat, autos, real estate, computers, and machinery.
b) Financial Asset Markets deal with stocks, bonds, notes, mortgages, and derivative
securities. An example of a, “Pure Financial Asset,” is a share of Ford stock, while an
option to buy a Ford shares is a derivative security whose value depends on the price of
2. Spot Markets versus Future Markets:
a) Spot Markets are markets in which assets are bought and sold for, “On- the –spot,”
b) Futures Markets are markets in which participants agree today to buy or sell an asset
at some future date. Futures Markets can reduce, or hedge, the risk that both sides face. 3. Money Markets versus Capital Markets:
a) Money Markets are markets for short term (Less than one year) highly liquid debt securities. The N.Y., London, and Tokyo money markets are some of the world’s largest money markets.
b) Capital Markets are markets for intermediate (One to ten years) or long term (More than ten years) and corporate stocks. The N.Y. Stock Exchange, where the stocks of the largest U.S. corporations are traded, is a capital market. 4. Primary Markets versus Secondary Markets:
a) Primary Markets are markets in which corporations raise new capital by selling
newly issued stocks and bonds.
b) Secondary Markets are markets in which existing, already outstanding securities are
traded among investors. The N.Y. Stock Exchange is a secondary market because it
deals in outstanding, as opposed to newly issued, stocks and bonds. Secondary Markets exist for mortgages, other types of loans, and other types of financial assets. 5. Private Markets versus Public Markets:
a) Private Markets are markets in which transactions are negotiated directly between two
parties. Private market transactions are private and, therefore, may be structured in a
manner to which the two parties agree. Examples of private market transactions include
private debt placements with insurance companies and bank loans.
b) Public Markets are markets in which standardized contracts are traded on organized
exchanges. Securities that are traded in public markets, such as common stock and
corporate bonds, are held by a large number of individuals. These securities must have
standardized contractual features because public investors do not usually have the time or
expertise to negotiate unique, custom- made contracts.
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