>> Like any new material,
there are a lot of new terms you'll encounter in the study of financial management.
One slightly confusing part of
finance is that there are often several terms used interchangeably.
I've already used one that hasn't been defined.
A security can be an equity security which
we call stock or debt security which we call bonds.
So stocks and bonds are securities.
Anyway, let's go through some of the terms.
Stock markets are a collection of markets and exchanges where
regular activities of buying and selling and issuing stocks and bonds occur.
This is an image of the New York Stock Exchange on Wall Street.
It is the largest stock exchange in the world.
Initial stock issuance can either be
an initial public offering which is often called an IPO or a private or direct placement.
When an IPO occurs,
both individuals and institutional investors can
buy these securities being offered to the public for the very first time.
Often these shares are sold by an investment bank,
who has already purchased them from the issuing firm.
When direct or private placement occurs,
the securities are sold directly to a limited number of investors.
These shares are not available to be sold to the general public.
There are some stock market terms to be familiar with.
These are primary market,
seasoned equity offering and
secondary market but these are not three separate types of stock markets.
They refer to the type of transactions,
not the location of the transaction.
In fact, all three of these market transactions can occur on the floor of
the New York Stock Exchange and an observer would not be able to tell one from the other.
A primary market transactions are when
new issues of securities are sold to initial buyers.
These are the IPO transactions.
The primary market is the only time a firm gets money from the sale of securities.
You see the example at the bottom of the slide.
In August, 2004, Google went public,
meaning that private company became a public company
when it sold shares of stock to the public for the first time.
This was a primary market transaction.
A seasoned equity offer is when
an already public company issues additional shares of stock for money.
So this is not the initial offering but a subsequent offering.
For example in September,
2005, Google issued additional shares of stock.
This was a seasoned equity offering transaction.
The secondary market are stock transactions between
individual buyers and sellers of previously issued stock.
The issuing company doesn't get any money from secondary market transactions.
For example, if I sell 10 shares of Google for $12,000 and someone buys them from me,
Google has no part of this transaction.
This was a secondary market transaction between me and some random buyer of Google stock.
Let's conclude with some additional terms and definitions.
Money markets and capital markets are very similar.
The duration to maturity is really the differentiating factor.
Money markets are short-term debt securities which mature in one year or less.
Some examples include treasury bills,
commercial paper and negotiable certificates of deposit.
Capital markets are for long-term securities which mature in
more than one year in the case of bonds or don't mature at all in the case of stocks.
Some examples include corporate and treasury bonds,
common stock, and negotiable notes payable.
Spot market and future markets,
allow buyers and sellers to either transact at today's cash price,
called the spot market or at whatever the price will be at some future date.
If you've ever heard of options trading that occurs in the future market.
Finally, there are two general types of stock exchanges;
organized security exchanges and over-the-counter markets.
Organized security exchanges are tangible entities
and financial instruments are traded on its physical premises.
The New York Stock Exchange and the American Stock Exchange are two examples.
The New York Stock Exchange allows face-to-face trading which is the mob
yelling at one another that you've seen on
the floor of an exchange as well as electronic trading.
Over-the-counter markets are becoming more
popular as people use and trust technology more.
These exchanges trade all financial securities,
not traded in an organized security exchange.
There is no physical location for these markets.
Transactions are done through a series of brokers.
There are some big exchanges that operates this way including
the NASDAQ which is where most well-known tech firms are listed.
Corporate bonds are also mostly traded on the OTC.