Basic, lesson 1 of 4
The map of markets
Four big markets, two ways to trade in each, and the handful of buyers who show up everywhere. This is the vocabulary the rest of the track uses.
7 min, 2 checks
1Four markets
Almost everything a bank touches trades in one of four markets. Equities are ownership: a share is a slice of a company's future profits, with no promise of getting your money back. Fixed income is lending: a bond or a loan promises set payments and the return of principal, as long as the borrower stays solvent.
Currencies (FX) are the price of one country's money in another's. Commodities are physical stuff with a price: oil, natural gas, copper, wheat, gold. FX is the biggest market by daily volume; equities get the most attention; fixed income is larger than equities by the amount outstanding.
| Market | What you own | How you make money |
|---|---|---|
| Equities | A share of a company | Dividends and the price rising as profits grow |
| Fixed income | A claim on set payments | Interest, plus price gains if rates or spreads fall |
| Currencies | One currency against another | The exchange rate moving your way, plus any rate difference |
| Commodities | Usually a futures contract | The price moving your way |
Check 1
A company issues a ten year note that pays 6% a year and returns principal at maturity. Which market is that?
2Primary and secondary
Every market has two halves. The primary market is where a security is created and sold for the first time: an IPO, a new bond. Money goes to the issuer. The secondary market is where that security trades afterward between investors. Money goes from one investor to another, and the company sees none of it.
This is the cleanest way to see the bank's two halves. Investment banking (ECM, DCM, M&A) lives mostly in the primary market: helping companies raise money and do deals. Sales and trading lives in the secondary market: helping investors buy and sell what already exists.
Check 2
A pension fund buys 1 million shares of a listed company from a mutual fund on the exchange. Where does the cash go?
3Who buys
The same buyers show up across all four markets, and bankers spend their days thinking about what each one wants. Long only asset managers (mutual funds, pension managers) own most stocks and bonds and hold for years. Hedge funds trade more, use leverage, and short. Insurance companies and pensions buy long dated bonds to match long dated promises. Banks hold loans and short dated bonds. Retail investors matter more in equities than anywhere else.
Private equity firms are buyers of whole companies, and they borrow heavily to do it. Their lenders, banks and credit funds, show up in the loan and high yield markets. Keep that chain in mind: it is why credit markets decide how many buyouts get done, which is the subject of a later lesson.
- Asset managers: the anchor in IPOs and bond deals because they buy size and hold.
- Hedge funds: fast money, useful for price discovery, sometimes flip new issues.
- Insurers and pensions: long bonds, steady demand, care about ratings.
- Credit funds and CLOs: the main buyers of leveraged loans.
Terms in this lesson: Initial public offering, Leveraged buyout.
2 checks in this lesson. Sign in to keep your progress.