Financial Markets 130

Corporate Finance PowerPoint presentation. In this presentation, we will discuss financial markets Get ready, it’s time to take your chance with corporate finance, financial markets, financial markets help to provide indicators for maximizing shareholder value. So when we’re thinking about financial markets, we’re thinking about markets. In general, we’re thinking about purchasing and selling things, a place where people purchase and sell items, that means there’s competition, there’s different people competing within a market, that will typically lead to better information about the value of the items being sold.

So typically, competition will be good in terms of providing more information about the value of items, financial markets can help report ethical or unethical behavior that may influence the value of the company. So when we have a market, especially if we have some regulations within the market, so that the information that’s being provided is somewhat standardized, it’s more likely that you will find problems than if you were not having a market. If there’s more restrictions, less people that would be then involved, usually unethical behavior, oftentimes, when you’re thinking about a market or an exchange, or some type of negotiation, what’s going to be underlying negotiations, it’s usually trust, right, there’s got to be some form of trust.



And therefore unethical behavior is usually the result of information, an unbalance of information, oftentimes, an intentional unbalance of information with regards to the value of financial statements, often presenting information that is untrue about or at least not or not complete, about the valuation of the financial statements. The market then is going to, since you have more people looking at the information is going to basically weed out that more likely or is more likely to weed that out. And the market also has a desire for standardization, they have the desire for more information to be out there. And then that leads in some financial markets to regulation. So we see that we have regulations related to the standardization of financial statements. And the more there’s a standardized set of financial statements, the more information that’s even within the markets, so that people can depend on the on the information they’re seeing, understand it and be able to compare and contrast it with other information. And as we have those standards out there, then it’s more likely that a market will pick up on any kind of deception within the numbers that will be there more likely to pick up those problems. Parts of the financial markets include domestic and international markets, corporate and government markets, money and capital markets. money markets, money markets are short term securities that have a life less than or equal to one year.



So less than or equal to one year securities include commercial paper sold by corporations to finance daily operations, and certificates of deposits with maturities of less than 12 months that are sold by banks. Then we have capital markets, capital markets, securities that have a life greater than one year securities and include this would be the common stock, the preferred stock, the government and corporate bonds, capital allocation, primary markets, we have the primary market, then we’ll have the secondary market down here in green primary market, corporations may use financial markets to raise funds, sale of securities that are made through a new issue is called the initial public offering IPO. So the primary market, then we’re thinking about the corporation that is issuing the stock. So remember, the stockholders are the owners of the corporation. So at some point in time, then the corporation itself is going to be issuing the stock, issuing the stock, then to investors, who will then be paying the company directly. And that’s basically like the capital investment of the owners into the company. So for example, if you were a sole proprietor, then you might put money into your own business, that would be you putting money into the business so that you can generate revenue on it in the future. How does that work with a company with a corporation, the stocks are then sold to the owners, the owners will then put money into the corporation as the initial investment, if the corporation is is issuing the stock, then we have the initial public offering.



Now then we have the secondary market, which is really when you think about these large markets, that’s where most of pretty much all the trading is happening. So like the vast majority of trades are on the secondary market. So in other words, once this once the corporations have issued the stocks, now the stocks are out in the market now because the beauty of the stocks is that they’re all the same in units just like dollars, so they’ve got unit values that are the same and therefore they’re more easily valued and they’re more easily treated. So once they’re on the market, then they can be traded on the on the secondary market amongst traders. So investing Buying and selling securities. So if you were to buy and sell securities on the market, you would most likely not be buying from the company not buying from the initial public offering, although you can look into that you would most likely be buying from other people right on the secondary market of the ownership. So the ownership then will be changing hands, if you’re talking about a large publicly traded stock, it could be trading hands then on the market, and that would be the secondary market, the prices of securities will continually change based on the market.



So notice when when you issue the stock, it’s not like the corporation is going to basically set the price for all time, right? Once the corporation issues the stock, the corporation is going to issue the stock for whatever, you know, whatever they can, when they issue the stock, and they receive the initial offering for it. But once the stock is out there, then the people that are trading the stocks are valuing the stock, the market is then trading in valuing the stock. So now, the value of the stock is completely dependent on the market. So the financial data that’s going to be given by the by the company are is the primary data on which the market will be valuing the stock. But the value of the stock is simply just like anything, the value of anything really dependent on what people will pay for it in a free market. So the value of the stock is dependent on the desire of people to have that stock. And that’s going to be the valuation of the market, once again, that valuation will be dependent on the information those people know how to those people have any information about the company will generally that’s going to be from the financial statements. So financial managers are given feedback about the company’s performance.



So notice, when you think when your management of the company, your goal is to maximize the value of the company, maximize the value to the shareholder maximize the wealth to the shareholder, whoever that shareholder is, even if they’re trading the stocks and whatnot, you want and how are you going to do that, what you’re trying to maximize the value, the the value, the perceived value of the company, which hopefully reflects actual value of the company, because the valuation of the company itself is going to be like the value of anything, what the perceived market value is of the company, and that will be determined by the market. So the bottom line information that the financial management’s going to get the end, the end information is actually coming from the market people looking at the at them, and they’re reporting, including the financial statements, and determining based on that the valuation of the company.



So the performance of the actual financial statements themselves, the main Performance Document, being the income statement, is going to be a primary tool on which management will kind of Judge themselves and judge their performance. But the ultimate Judge of performance on management is, you know, what are your stocks trading for what does the market think about about the company, and that’s going to be reflected typically in the changes in in the stock price. So and you can’t read too much into that, obviously, management needs to consider, you know, inflation, or increases or decreases in perceptions and whatnot, and think about the long term goal as opposed to the short term goal. But that feedback from the market is important for for management’s in assessing their performance. So return and risk, investors will choose risk levels that are in alignment with their objectives attempting to maximize return for a given risk level. So when you think about this, from a from an investment perspective, you always, you’re always measuring the risk versus return.



So typically, if there’s a if there’s a higher possibility of a higher return, that typically is in alignment, or goes along with a higher risk that will be involved. And that and that may just be inherent in some types of companies. And that’s something that the market will take into consideration when they’re valuing stocks. So companies that are generating high priced securities, are able to raise new funds in money or capital markets at lower costs than their competitors. So note that if the company is perceived at a higher value by the market, and remember the market is the only thing that that’s the end result that really values anything a market, how much could you trade something for how much is it valued for on the market? How much could you get for it, if the value of the stocks are higher than if the company needs to generate capital, then then they can do so more easily than obviously a company that that valuation is less. So companies will generally be penalized for not performing competitively. And this hopefully kind of seems obvious, obvious, you have a market that’s the point of the market.



So the market is supposed to drive, drive the performance upward, be through competition. So now that you have the market, looking and valuing the stock, you have the information that needs to be transparent, so people can actually have the information on which they can value the stock Then the companies that perform better and therefore have a higher perceived value will do well and the companies that perform worse will do less well.


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