Financial Markets, Instruments, and Market Makers

Introducing Financial Markets

• Primary market
• Security is initially sold for the first time
• Secondary market
• Further trading

• Conceptual distinction:
• Selling of new securities in primary market and trading of older securities in secondary market occur simultaneously.

Financial Markets

• Financial futures
• Financial forward markets
• These fulfill two basic functions:
• Reduce risk associated with future price changes
• Facilitates speculation - the buying or selling of securities in hopes of profiting from future price changes

Money Market Instruments

• U.S. Treasury Bills (T-bills)
• Short term government debt instruments
• Typical maturities of 3-12 months
• Negotiable Certificates of Deposit (CDs)
• Debt instrument sold by depository institution
• Pays annual interest payments equal to fixed % of original purchase price
• Can be resold in secondary market
• Minimum denomination of $100,000 (in practice, to trade in secondary market the minimum is $2,000,000)