CHAPTER THREE THE MARKETPLACE Practical Investment Management Robert A Strong
THE MARKETPLACE CHAPTER THREE Practical Investment Management Robert A. Strong
The role of the Capital Markets An exchange serves three principal functions. ◆ Economic Function Continuous Pricing Function Fair Pricing Function Strong C3-The Marketplace 3-2
3 - 2 Strong C3 – The Marketplace An exchange serves three principal functions. The Role of the Capital Markets Continuous Pricing Function Fair Pricing Function Economic Function
Economic Function Capital markets facilitate the flow of capital from savers to borrowers Capital Savers Borrowers Capital Market Strong C3-The Marketplace 3-3
3 - 3 Strong C3 – The Marketplace Capital markets facilitate the flow of capital from savers to borrowers. Capital Savers Borrowers Capital Market Economic Function
Economic Function: An Example Mortgage Bank Banks offer home mortgages so that home Home Buyer buyers who are short of cash can borrow money Home to buy houses Ownership Home seller Strong C3-The Marketplace 3-4
3 - 4 Strong C3 – The Marketplace Bank Banks offer home mortgages so that home buyers who are short of cash can borrow money to buy houses. $ $ Mortgage Home Seller Home Buyer Home Ownership Economic Function: An Example
Economic Function: An Example Mortgage Bank Facilitated by government agencies such as the federal national Govt aaaa Mortgage Association, banks Agency sell the mortgages to investors with surplus cash s/Mortgage- backed securities Investors Strong C3-The Marketplace 3-5
3 - 5 Strong C3 – The Marketplace $ $ Mortgage Mortgagebacked securities Bank Investors Gov’t Agency Facilitated by government agencies such as the Federal National Mortgage Association, banks sell the mortgages to investors with surplus cash. Economic Function: An Example
Economic Function The primary market is the"new securities market where securities are sold to the public for the first time The secondary market is the"used securities market, where previously issued securities are traded among security holders Strong C3-The Marketplace 3-6
3 - 6 Strong C3 – The Marketplace The primary market is the “new securities” market where securities are sold to the public for the first time. The secondary market is the “used securities” market, where previously issued securities are traded among security holders. Economic Function
Economic Function Dollar Holdings Investor Group billions of Total Household sector 6,579 38.70% State/local governments 115 0.68 Rest of world 1,712 10.07 Bank trusts/estates 315 185 Life insurance companies 938 5.52 Other insurance companies 179 1.05 Private pension funds 1999 11.76 State/local retirement funds 1937 11.39 Mutual funds 3.226 18.98 Total $17,000 100.00 Strong C3-The Marketplace 3-7
3 - 7 Strong C3 – The Marketplace Dollar Holdings Investor Group (billions) % of Total Household sector $6,579 38.70% State/local governments 115 0.68 Rest of world 1,712 10.07 Bank trusts/estates 315 1.85 Life insurance companies 938 5.52 Other insurance companies 179 1.05 Private pension funds 1,999 11.76 State/local retirement funds 1,937 11.39 Mutual funds 3,226 18.98 Total $17,000 100.00 Economic Function
Continuous Pricing Function Capital markets enable market participants to get accurate, up-to-date price information Strong C3-The Marketplace 3-8
3 - 8 Strong C3 – The Marketplace Capital markets enable market participants to get accurate, up-to-date price information. Continuous Pricing Function
Fair Pricing Function Capital markets remove the fear that people have of buying or selling at a rip-off price The greater the number of participants and the more formal the marketplace, the “ fairer' the price. Strong C3-The Marketplace 3-9
3 - 9 Strong C3 – The Marketplace Capital markets remove the fear that people have of buying or selling at a rip-off price. The greater the number of participants and the more formal the marketplace, the “fairer” the price. Fair Pricing Function
The role of the Capital Markets Functions of the Capital Markets ° Fair price function .Continuous pricing function Economic function Strong C3-The Marketplace 3-10
3 - 10 Strong C3 – The Marketplace Functions of the Capital Markets •Fair price function •Continuous pricing function •Economic function The Role of the Capital Markets