Chapte的r 2 financial markets and institutions.pptVIP

Z.Z.,JCNJU,2012. Chapter 2 Financial Markets and Institutions Main Points 1. The importance of Financial Markets and Institutions 2. The Flow of Savings to Corporations 3. Functions of Financial Markets and Intermediaries 4. Value Maximization and the Cost of Capital 1. The importance of Financial Markets and Institutions All corporations face important investment and financing decisions. They are made in a financial environment. The environments has two main segments:financial markets and financial institutions. A moden financial system offers financing in many different forms, depending on the company’s age, its growth rate, and the nature of its business. For example, Apple relied on venture capital financing in its early years and only later floated its shares in public stock markets. 2. The Flow of Savings to Corporations Flows of savings to investment in a closely held corporation Flows of savings to investment for a large, public corporation The stock market Other financial markets Financial intermediaries Financial institutions Total financing of U.S. corporations The stock Market A financial market is a market where securities are issued and traded. A security is just a traded financial asset, such as a share of stock. At some point of growth, a firm will decide to “go public” by issuing shares on an organized exchange such as the New York Exchange (NYSE); that first issue is called an initial public offering or IPO. A new issue of shares increases both the amount of cash held by the company and the number of shares held by the public. Such an issue is known as a primary issue, and it is sold in the primary market. But in addition to helping companies raise new cash, financial markets also allow investors to trade securities among themselves. The result is simply a transfer of ownership from A to B, which has no effect on the company itself. Such purchases and sales of existing securities are known as secondary transaction