The Financial Environment
The Financial Environment:
Markets, Institution and Investment Banking
Financial Markets * Refers to a conceptual “mechanism” rather than a physical location or a specific type of organization or structure * As a system that includes individuals and institution, instruments and procedures that bring together borrowers and savers, no matter the location
Importance of Financial Markets: * The primary role of financial market is to facilitate the flow of funds from individuals and business that have surplus funds to individual. Business and government that have needs for funds in excess of their incomes * The more efficient the flow of funds process is the more productive the economy is, in terms of both manufacturing and financing
Flow of Funds The financial markets allow us to consume amounts different from our current incomes by providing mechanism that help us transfer income though time
When we borrow, for example, we sacrifice future income to increase current income; when we save, or invest, we sacrifice current exchange for grater expected income in the future
Funds are transferred (flow) from those with surplus (savers) to those with needs a business (borrowers) by the three different process :
Direct transfer
Transfer through an Investment Banker
Transfer though a Financial Intermediary
Market Efficiency If the markets did not provide efficient funds transfer, the economy simply could not function as it does now
Economic Efficiency Funds are allocated to their optimal use at the lowest costs in the financial markets
Informational Efficiency The prices of investments reflect existing information and adjust quickly when new information enters the markets
Informational Efficiency typically is Classified into one of the following three categories:
Weak-form
Efficiency states that all information contained in past price movements is fully reflected in current market prices Semistrong-form Efficiency states
Markets, Institution and Investment Banking
Financial Markets * Refers to a conceptual “mechanism” rather than a physical location or a specific type of organization or structure * As a system that includes individuals and institution, instruments and procedures that bring together borrowers and savers, no matter the location
Importance of Financial Markets: * The primary role of financial market is to facilitate the flow of funds from individuals and business that have surplus funds to individual. Business and government that have needs for funds in excess of their incomes * The more efficient the flow of funds process is the more productive the economy is, in terms of both manufacturing and financing
Flow of Funds The financial markets allow us to consume amounts different from our current incomes by providing mechanism that help us transfer income though time
When we borrow, for example, we sacrifice future income to increase current income; when we save, or invest, we sacrifice current exchange for grater expected income in the future
Funds are transferred (flow) from those with surplus (savers) to those with needs a business (borrowers) by the three different process :
Direct transfer
Transfer through an Investment Banker
Transfer though a Financial Intermediary
Market Efficiency If the markets did not provide efficient funds transfer, the economy simply could not function as it does now
Economic Efficiency Funds are allocated to their optimal use at the lowest costs in the financial markets
Informational Efficiency The prices of investments reflect existing information and adjust quickly when new information enters the markets
Informational Efficiency typically is Classified into one of the following three categories:
Weak-form
Efficiency states that all information contained in past price movements is fully reflected in current market prices Semistrong-form Efficiency states