 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at financial market and the corporation, how the interplay between those two components. This topic is covered in an introduction to corporate finance, or simply introduction to finance course. It's also covered on the CPA, BEC section. If you haven't connected with me on LinkedIn, please do so. YouTube is where you would need to subscribe. I have 1,500 accounting, auditing, tax, and finance lectures. Please make sure you subscribe and share the channel with other. On my YouTube, you can access other additional information and resources. Please check out my website for those resources. If you are looking for a study body, studybodypal.co can match you with a study body. It's an artificial intelligence platform, and they have users in 85 countries and 2,800 cities. So let's go ahead and take a look at the interplay between corporation and the financial market. So let's see, let's just take a look at this graph that summarizes basically the steps or what we need to know in general about this relationship. Well, let's go and look at these arrows. So the first thing is this. The firm issues securities to raise cash. This is arrow number one. What does that mean? It means the firm, what they do, the firm gives the financial market stocks. They sell them their stocks, and the financial market gives them money. So the firm issues securities to raise cash. Now, the firm invests this cash in assets. They will take this cash and they will invest the cash in assets and current assets and fixed asset and property, plant and equipment, the hire employees. Then the firm operation generate cash flow. Now you have cash. Now the cash will go back to the financial market. They have to pay the debt. They have to pay dividend to the shareholders. So then the money from the profit goes back. And remember, some of that goes also to the government. Cash is also paid to the government. So when the cash leaves the company, part of it goes to the government and part of it goes to the shareholders. Then E, reinvested cash flow are cloud back under the firm. Sometime after you paying the government and paying the shareholders, you take some cash and you cloud back. You put it back into the firm. And sometime what you do, you pay cash, whatever's left. Again, you pay debt and dividend to the shareholders. So this is the interplay between the corporation and the financial market. Basically, simply put, if you want to summarize this, simply put, the corporation gives the shareholders stocks. The shareholders and the creditors, not only the shareholders, they'll give them money. Then the company will use the money. Once they make profit, they will pay back the dividend. They pay back the interest. They pay back the debt, so on and so forth. So this is an overview of this process. Now let's talk about what's called the primary market and secondary market. What do we mean by primary market and secondary market? Because that's an important concept that you need to understand. Remember I said, corporation sells stock, sells stock to the public. Well, when the corporation, so let's just take a look at the corporation here, but just make, this is the corporation. Let me just make this a little better. So this is the corporation. And this is the market, the stock market, the financial market. So the corporation give them stocks. So the seller, the corporation sells the stock and the market gives them back money. When this happened, when the corporation goes to the market and they sell stocks, this is called primary market. The primary market means the corporation is getting the money. They're selling the stock is getting the money. And the corporation engage in two types of primary market transaction, public offering and private placement. What is a public offering? That means they go to the market and they sell their stocks or their debt. If they want to borrow money to anyone, anyone who has money is an interested and able, they will buy your stocks. This is called the public offering. Now, public offering, if there's a public offering, you have to file what's called registrant form with the SEC, Securities and Exchange Commission. You have to disclose the risk because you are trying to protect the public. If you offer a private placement, private placement, the corporation is negotiating with someone or a group specifically in the market. And that group assumed to know what they're doing. Therefore, there's no involvement of the SEC because if you are buying stocks privately from the company, well, guess what? You're gonna have to take a risk and the government is not going to protect you if it's a private placement. Now, now this is the primary market. So the primary market is when you sell the stocks directly to the public, which is good. Then we have another market that's called the secondary market. And the secondary market is very important. Why? Because I'll tell you why. Because the corporation, here's the corporation, again, they get money from the market. Here's what happened. If you are a participant in this market, if you buy the stock of this company in the primary market, well, guess what? You might be stuck with it, but you don't wanna feel you are stuck with it. There's a secondary market. Let me put the secondary market here. So once you buy stocks from this company, you can go to the secondary market and sell it to another individual or company. So you can sell your position. And the secondary market makes the primary market very attractive. So when you buy stocks in the primary market, you don't have to worry like once I buy it, that's it, I cannot sell the stock. You can go to the secondary market and sell it. So the secondary market provides a means of transferring ownership of a corporate securities. All the corporation is directly involved only in the primary transaction. So the corporation in these transactions, there's no corporation because you're selling between investors. The secondary market are still critical to large corporation. The reason is that investors are much more willing to purchase securities in the primary market when they know they can resell it. So that's why the secondary market is important. Basically, simply put, it provides liquidities. Now we have to understand the difference between what we called dealer versus auction market. This is, we're talking about stock market terminology. There are two types of secondary market. We have the auction market and the dealer market. Generally speaking, dealers buy and sell for themselves at their own risk. Think about a car dealer. This is what dealer is. The car dealer, they buy cars and they sell cars themselves and when they buy a car, when they sell the car, if they buy a car, they're taking a risk that that car may not be resold or if it's resold, they might incur a loss on it. So this is what a dealer would do. This is the dealer. In contrast to a dealer, if we are dealing with a broker and agent, those, their job is to match buyers and seller but they do not actually own the stock, the commodity spot or so. So basically they're like basically a middle person, okay? A real estate agent as an example, do not normally buy and sell houses for themselves. They're basically they connect buyers and seller. So dealer market and stocks and long-term debt are called over the counter market. So dealers, dealer market is called over the counter. That's the term we're gonna see why. Most trading in that securities take place over the counter. So when you buy debt, bonds, it's done over the counter. The expression over the counter refer to the day to the days when the securities were literally bought and sold over the counter. Today, a significant fraction of the market for stocks and almost all debt, they have no central location. Everything is done electronically on the computer. Auction market differ from dealer market in two ways. First, an auction market or exchange has a physical presence in the physical presence in the US, Wall Street. Second, and secondly, in a dealer market, most of the buying and selling is done by the dealer. Okay, the primary purpose of an auction market is to match those who wish to sell with those who wish to buy. Dealers will play a limited role here, okay? Let's see, I think we're almost done with this section. Trading and corporate stocks, what's trading? Trading means buying and selling corporate stocks. The equity shares of most large corporation in organized auction markets, so they're being sold in an auction market, mainly NYSE, the New York Stock Exchange. There's also a large over-the-counter market and that's NASDAQ. NASDAQ is an over-the-counter system, but again, it's no longer over-the-counter, it's electronically, it's electronically. And NASDAQ now in contrast to all days, now they have large names such as Google, Apple, Microsoft, Intel, those are large, heavy tech names. Tesla, Netflix, Facebook, they are traded on the NASDAQ. There are many large, I don't believe Facebook is, but I can't, I don't know, but I don't think Facebook is. There are many large and important financial market outside the US, for example, Tokyo Stock Exchange, that's another market, okay? Now anytime there's an OTC market, it's basically, it means it's open 24-7 because it has no physical location and it's done electronically. Now what is listing? Okay, what is listing stocks? Listing stocks that trade on organized exchange is said to be listed stocks. So for example, Microsoft is a listed stocks, Amazon, Google, Apple, why? Because you can buy them and sell them on an exchange, okay? The NYSC has the most stringent requirements. So if you want to be listed on an exchange, NYSC has the most stringent requirement. For example, you have to have at least $100 million in asset in your company. There are additional minimum on earning, assets and the number of shares. So you have to have certain requirement. We'll talk about listing in another chapter. So if you are a Finian students, make sure to check out the additional lectures on my website or if you're an accounting students plus the resources, it's one price. You can subscribe for everything. Good luck and stay motivated, study hard.