Introduction to Direct Financing PDF

Preview

Summary

Summary of Lecture 2 ...

Description



Financial system --> helps us  Pmt system  Managing uncertainty  Flow of funds  Financing --> people have a surplus unit & give funding for pursuits to deficit units  Deficit units --> companies/people who NEED MORE FUNDS THAN THEY HAVE  Indirect financing --> When banks involved  How financial markets help direct financing --> surplus units giving money  How market prices behave -> volatility

WHAT IS DIRECT FINANCING  Funds for deficit units  How markets can be used to raise money for companies  Place which allows surplus units  Deficit unit (companies will issue securities)  Eg. Shares or bonds (debt or equity)  Investors can buy bonds and their money goes to deficit unit (company) and they use it for business activity  Roles of other parties  NO INTEMEDIARY BUT COMPANIES STILL ASK HELP OF INVESTMENT BANKS  Eg. Toyota may not know much about security laws. They need a contract for help from organisation called investment bank/security firms. They may charge them money to help sell the bonds to raise money Investment banks --> advice to satisfy security law Investors are SURPLUS UNITS --> fund bonds *NOTE: all financial markets EXCEPT FOR SHARE MARKETS --> are WHOLESALE 

If we buy bonds --> can't do it --> small retail investors o Before we invest, we need help of professional (fund managers)  ^ group surplus money from many investors (pool money)

MISMATCHES IN FLOW OF FUNDS  2 SIDES (deficit & surplus) 1. Deficit --> either lend money or invest 2. Deficit inverts --> companies/people who need more money than they have (eg. Money to buy house, build factory) Situation where they need funding (provided by surplus unit)  BUT BEFORE THIS ^,  Surplus & deficit units have fundamental differences --> financial market helps us overcome that   

Money in usual bank accounts --> deficit--> smaller than what they need People need money for --> house Companies --> for funding (need lots of money )...