Question

Assume that you recently graduated with a Bachelor's degree in finance and have just reported to work as a financial investment adviser at the brokerage firm of Willox Financial & Co. Your first assignment is to explain the nature of the U.S. financial markets to Manuel Jones, a professional basketball player who recently came to the US from Mexico. Mr. Jones is a highly ranked basketball player who expects to invest substantial amounts of money through Willox Financial. He is very intelligent; therefore, he would like to understand in general terms what will happen to his money. Your supervisor has developed the following questions that you must use to explain the U.S. financial system to Mr. Jones.

Briefly describe each of the following financial institutions: investment banks, commercial banks, financial services corporations, pension funds, mutual funds, exchange-traded funds, hedge funds, and private equity companies.

What are the two leading stock markets? Describe the two (2) basic types of stock markets.

If Google decided to issue additional common stock, and Mr. Jones purchased 100 shares of this stock from Willox Financial, the underwriter, would this transaction be a primary or a secondary market transaction? Would it make a difference if Mr. Jones purchased previously outstanding Google stock in the dealer market? Explain.

What is an initial public offering (IPO)? Why is it important that Mr. Jones know about this?

What does it mean for a market to be efficient? Explain why some stock prices may be more efficient than others.

After your consultation with Mr. Jones, he wants to discuss these two (2) possible stock purchases:

a. While in the waiting room of your office, he overheard an analyst on a financial TV network say that a particular medical research company just received FDA approval for one of its products. On the basis of this “hot” information, Mr. Jones wants to buy many shares of that company’s stock. Assuming the stock market is highly efficient, what advice would you give him and why?

b. He has read a number of newspaper articles about a huge IPO being carried out by a leading technology company. He wants to purchase as many shares in the IPO as possible and would even be willing to buy the shares in the open market immediately after the issue. What advice do you have for him?

How does behavioral finance explain the real-world inconsistencies of the efficient markets hypothesis (EMH)?

Answer 1

What are the two leading stock markets? Describe the two (2) basic types of stock markets.

"The two leading stock markets are as follows:

“New York stock exchange”

“Nasdaq stock market”.

"Two types of stock are common stock and preferred stock".

1. Investment banks: "An investment bank is an intermediary which provides financial service." The investment bank specializes in a large financial transaction, which is also complex. "The key activities undertaken by investment bank includes underwriting, acting as an intermediary between securities issuer and the investing public. They also facilitate in mergers and corporate reorganizations, and act as a broker and financial advisor for large institutional clients."
   2. Commercial banks: Commercial banks are the cornerstone of business and finance in the United States. The commercial banks cater to business rather than individuals. They provide various services like accepting deposits, providing a loan to business and individuals, treasury management etc.
   3. Financial services corporations: A financial service corporation provides investment and financial services to the public with the aim of money management. The financial services sector includes banks, insurance firms, credit and payment processing companies, and retail industries. They provide services to both retail and commercial consumers.
   4. Pension funds: Pension funds are funds that pools employee pension benefits and holds them to be paid at the time of retirement of the person. The fund includes a contribution from the employee, the employer or both. These funds are invested by a fund manager conservatively.
   5. Mutual funds: A mutual fund is an investment program funded by a sum of money collected from many investors to invest in securities such as stock, bond, money market instruments, and other assets. The mutual fund is professionally managed and trades in diversified holdings.
   6. Exchange-traded funds (ETF): Exchange traded fund is a type of investment fund that is traded in the stock exchange. "ETF is marketable security that tracks a stock index, a commodity, bonds or a basket of assets". ETF are index funds which are listed and traded on the stock exchange.
   7. Hedge funds: Hedge funds are alternative investments. Hedge funds are collected from accredited investors and institutional investors. These funds are invested in a variety of assets by professional fund managers. The investment is designed to protect an investment portfolio from market uncertainty while generating positive returns in both up and down market. The investors look to maximize returns while minimizing the risks.
   8. Private equity companies: Private equity companies are investment management company which provides financial backing, and makes an investment in the private equity of a startup or operating company. They invest through a wide range of investment strategies, which include leveraged buyout, venture capital and growth capital.
   • Common stocks are shares, which represent a claim on profits (dividends) and also gives voting rights to the holder. The majority of stocks are issued as common stock.
   • Preferred stocks are shares, which are similar to bonds and will usually not come with voting rights. The preferred stocks are normally guaranteed dividend till you hold the stocks.
   • “as per guidelines can answer up to 4 questions, please resubmit the balance questions.”