Chapter 3 1. What is a financial market? 2. What is the role of a financial mark

Question

Chapter 3

1. What is a financial market?

2. What is the role of a financial market?

3. Microsoft and Intel qualify to be listed on the New York Stock Exchange, but both have chosen to be traded on the NASDAQ market. Can you think of reasons the companies would choose to be traded on the NASDAQ market? (Hint: Both companies deal with products that relate to electronic or computer media.)

4. What type of companies enter the markets for initial public offerings (IPO)? Why do companies choose to go public? Why not stay private?

Explanation / Answer

1. A financial market is a market for financial products like securities, derivatives, bond, debentures, precious metals, etc. Sometimes, a stock market can also be referred to as Financial Market - market for securities.

2. Financial market acts like an exchange for the 'Investors' - who want to invest or lend their savings and 'borrowers' - who want to borrow money. Take an example of a firm which is need for money for running or expanding their business - they list their securities on Stock Market to borrow money for their needs - investors who see value in their business would want to invest or in layman's term, lend money to them.

3. NASDAQ has tradtionally been the stock for tech companies - all of the tech companies want to get listed on NASDAQ.

4. A company is usually started by a person or a group of partners who invest their personal equity (their money/cash) into the business but they can only have a limited amount of money to invest. To increase their operations or to expand their business they would need capital and to raise this capital they reach out to the public through Initial Public Offering - which is nothing but a trade between their control over the business for more business. Being private - they would be limiting their prospects and if they have some Venture capitalists who helped them start their business would want to cash out on their investment, all leading to a natural option - IPO.

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