Structure of Financial Markets

It helps to define financial markets along a variety of dimensions (not necessarily mutually exclusive).

Debt Markets:

Short-Term (maturity < 1 year)

Long-Term (maturity > 10 year)

Intermediate term (maturity in-between)

Represented $41 trillion at the end of 2007.

Equity Markets:

Pay dividends, in theory forever

Represents an ownership claim in the firm

Total value of all U.S. equity was $18 trillion at the end of 2005.

Primary Market:

New security issues sold to initial buyers

Typically involves an investment bank who underwrites the offering

Secondary Market:

Securities previously issued are bought
and sold

Examples include the NYSE and Nasdaq

Involves both brokers and dealers.

Even though firms don’t get any money, per se, from the secondary market, it serves two important functions:

  • Provide liquidity, making it easy to buy and sell the securities of the companies
  • Establish a price for the securities.

Secondary markets are further classified as follows:

Exchanges:

Trades conducted in central locations.
(e.g., New York Stock Exchange, CBT).

Over-the-Counter Markets:

Dealers at different locations buy and sell.

Best example is the market for Treasury securities.

Classifications of Financial Markets:

We can also further classify markets by the maturity of the securities:

Money Market:

Short-Term (maturity < 1 year).

Capital Market:

Long-Term (maturity > 1 year) plus equities.