720760
Description
Mind Map by Shahid Musthafa, updated more than 1 year ago
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Created by Shahid Musthafa
about 10 years ago
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B:Primary and secondary markets
- Primary Market
- market that issues new securities on an
exchange. Companies, governments and other
groups obtain financing through debt or equity
based securities. Primary markets are facilitated
by underwriting groups, which consist of
investment banks that will set a beginning price
range for a given security and then oversee its
sale directly to investors.
- Also known as
"new issue
market" (NIM).
- Also known as
"new issue
market" (NIM).
- market that issues new securities on an
exchange. Companies, governments and other
groups obtain financing through debt or equity
based securities. Primary markets are facilitated
by underwriting groups, which consist of
investment banks that will set a beginning price
range for a given security and then oversee its
sale directly to investors.
- Secondary Market
- A market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The
national exchanges - such as the New York Stock Exchange and the
NASDAQ are secondary markets. Secondary markets exist for other
securities as well, such as when funds, investment banks, or entities
such as Fannie Mae purchase mortgages from issuing lenders. In any
secondary market trade, the cash proceeds go to an investor rather
than to the underlying company/entity directly.
- CHARACTERISTICS
OF SECONDARY
MARKET
- Diversification
- A risk management technique that mixes a wide variety of investments
within a portfolio. The rationale behind this technique contends that a
portfolio of different kinds of investments will, on average, yield higher
returns and pose a lower risk than any individual investment found within
the portfolio.
- Diversification strives to smooth out unsystematic risk events in a portfolio so that
the positive performance of some investments will neutralize the negative
performance of others. Therefore, the benefits of diversification will hold only if
the securities in the portfolio are not perfectly correlated.
- Diversification strives to smooth out unsystematic risk events in a portfolio so that
the positive performance of some investments will neutralize the negative
performance of others. Therefore, the benefits of diversification will hold only if
the securities in the portfolio are not perfectly correlated.
- A risk management technique that mixes a wide variety of investments
within a portfolio. The rationale behind this technique contends that a
portfolio of different kinds of investments will, on average, yield higher
returns and pose a lower risk than any individual investment found within
the portfolio.
- Risk shifting
- Deficit units, particularly companies, issue various types of security
on the financial markets to give investors a choice of the degree of
risk they take. For example company loan stocks secured on the
assets of the business offer low risk with relatively low returns,
whereas equities carry much higher risk with correspondingly higher
returns.
- Deficit units, particularly companies, issue various types of security
on the financial markets to give investors a choice of the degree of
risk they take. For example company loan stocks secured on the
assets of the business offer low risk with relatively low returns,
whereas equities carry much higher risk with correspondingly higher
returns.
- Hedging
- Financial markets offer participants the opportunity
to reduce risk through hedging, which involves
taking out counterbalancing contracts to offset
existing risks,
- e.g. if a UK exporter is awaiting payment in euros from
a French customer he is subject to the risk that the euro
may decline in value over the credit period. To hedge
this risk he could enter a counterbalancing contract and
arrange to sell the euros forward (agree to exchange
them for pounds at a fixed future date at a fixed
exchange rate). In this way he has used the foreign
exchange market to insure his future sterling receipt.
Similar hedging possibilities are available on interest
rates (see chapter 14).
- e.g. if a UK exporter is awaiting payment in euros from
a French customer he is subject to the risk that the euro
may decline in value over the credit period. To hedge
this risk he could enter a counterbalancing contract and
arrange to sell the euros forward (agree to exchange
them for pounds at a fixed future date at a fixed
exchange rate). In this way he has used the foreign
exchange market to insure his future sterling receipt.
Similar hedging possibilities are available on interest
rates (see chapter 14).
- Financial markets offer participants the opportunity
to reduce risk through hedging, which involves
taking out counterbalancing contracts to offset
existing risks,
- Arbitrage
- Arbitrage is the process of buying a security
at a low price in one market and
simultaneously selling in another market at a
higher price to make a profit.
- Although it is only the primary markets that
raise new funds for deficit units, well
developed secondary markets are required
to fulfil the above roles for lenders and
borrowers. Without these opportunities more
surplus units would be tempted to keep their
funds ‘under the bed’ rather than putting
them at the disposal of deficit units.
- However, the emergence of
disintermediation (reduction in
the use of intermediaries) and
securitisation (conversion into
marketable securities), where
companies lend and borrow
funds directly between
themselves, has provided a
further means of dealing with
cash flow surpluses and deficits.
- However, the emergence of
disintermediation (reduction in
the use of intermediaries) and
securitisation (conversion into
marketable securities), where
companies lend and borrow
funds directly between
themselves, has provided a
further means of dealing with
cash flow surpluses and deficits.
- Although it is only the primary markets that
raise new funds for deficit units, well
developed secondary markets are required
to fulfil the above roles for lenders and
borrowers. Without these opportunities more
surplus units would be tempted to keep their
funds ‘under the bed’ rather than putting
them at the disposal of deficit units.
- Arbitrage is the process of buying a security
at a low price in one market and
simultaneously selling in another market at a
higher price to make a profit.
- Diversification
- A market where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The
national exchanges - such as the New York Stock Exchange and the
NASDAQ are secondary markets. Secondary markets exist for other
securities as well, such as when funds, investment banks, or entities
such as Fannie Mae purchase mortgages from issuing lenders. In any
secondary market trade, the cash proceeds go to an investor rather
than to the underlying company/entity directly.
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