Share How You Would Describe The Overall Purpose And Mechani ✓ Solved

Share how you would describe the overall purpose and mechanics of both primary and secondary markets

As a new economist invited to speak to a freshman finance course, I would begin by explaining the fundamental roles of primary and secondary markets in the financial system. Primary markets serve as platforms where new securities are issued and sold directly by companies or governments to investors for the first time. This process allows entities to raise capital to fund expansion, research, or other initiatives (Mishkin & Eakins, 2018). The mechanics involve initial public offerings (IPOs) and other issuance methods, where the pricing and allocation of securities are determined through underwriting and market mechanisms. Conversely, the secondary market provides a venue for investors to buy and sell previously issued securities among themselves, facilitating liquidity and enabling investors to easily liquidate or adjust their portfolios (Fabozzi & Modigliani, 2019). The mechanics involve stock exchanges and over-the-counter (OTC) markets where supply and demand dynamically establish prices. The overall purpose of these markets is to facilitate capital allocation efficiently, promote liquidity, and foster economic growth (Brealey et al., 2021). Understanding these mechanisms helps in gauging how market activity influences company performance and investor confidence.

How the performance of your company is influenced by the activity of the markets you described

The performance of a company is significantly affected by market activity in both primary and secondary markets. In the primary market, the company's stock price and valuation are influenced by investor demand during IPOs or new issues, which reflect market sentiment and perceived growth prospects (Damodaran, 2015). A successful IPO can provide the capital needed for expansion, but market perceptions during issuance can also impact future stock performance. In the secondary market, ongoing trading activity influences the company’s stock price, which impacts investor confidence, ability to raise future capital, and overall reputation. High trading volumes and rising prices typically signify investor optimism, encouraging further investment and supporting the company's strategic initiatives. Conversely, declining prices or low liquidity may signal underlying concerns or market skepticism, potentially leading to higher borrowing costs or reduced access to capital (Gibson, 2019). Thus, market activity acts as a barometer of how investors view the company's prospects, directly affecting its financial health and strategic options.

What additional information I might include based on a classmate's approach

If a classmate emphasizes the role of macroeconomic factors influencing market activity, I would elaborate on how broad economic indicators, such as interest rates, inflation, and GDP growth, can affect both primary and secondary markets. For instance, rising interest rates may make borrowing more expensive, reducing corporate issuance in primary markets and dampening secondary market activity due to decreased demand (Bernanke, 2020). If another classmate focuses on technological innovations like electronic trading platforms, I would add insights into how these advancements increase market efficiency, reduce transaction costs, and enable faster price discovery, thereby amplifying the impact of market activity on company performance (Hendershott et al., 2011). Incorporating these perspectives would enrich the lecture by highlighting the interconnectedness of macroeconomic conditions and technological developments with market dynamics and corporate outcomes.

References

• Brealey, R. A., Meyers, S. C., & Allen, F. (2021). Principles of Corporate Finance. McGraw-Hill Education.
• Damodaran, A. (2015). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley Finance.
• Fabozzi, F. J., & Modigliani, F. (2019). Foundations of Financial Markets and Institutions. Pearson.
• Gibson, C. H. (2019). Financial Markets, Institutions, and Money. Cengage Learning.
• Hendershott, T., Jones, C. M., & Menkveld, A. J. (2011). Does Algorithmic Trading Improve Liquidity? The Journal of Finance, 66(1), 1-33.
• Mishkin, F. S., & Eakins, S. G. (2018). Financial Markets and Institutions. Pearson.
• Bernanke, B. S. (2020). The Impact of Monetary Policy on Financial Markets. Journal of Economic Perspectives, 34(4), 33-56.
• Additional credible sources relevant to market operations and economic influences.