20 1 • Introduction to Finance
Figure 1.6 Financial Analyst Tasks
Internal financial analysts are important for a successful firm or organization because their work can lead to
more efficient and cost-effective use of financial and nonfinancial resources. Responsibilities include keeping
current with market conditions, developing financial models, reconciling variance between forecasts and
outcomes, and serving as a resource for management. Financial analysts fulfill their responsibilities through
the development and analysis of financial data including ratio analysis, trend analysis, in-depth discussions
with division managers, and the presentation and interpretation of information at meetings and on electronic
platforms.
External financial analysts use similar resources and tools to evaluate financial instruments as an aid to
investment companies, investment and commercial bankers, and individual investors who rely on their
published reports. Various government agencies also use financial analysts to aid in regulatory oversight and
enforcement.
A report from a 2019 BLS survey determines that financial analysts earn an average salary of $81,590, and jobs
5
are predicted to grow at a faster-than-average rate of 5% through 2029.
Business (or Management) Analyst Roles
The job description for a business analyst looks much like that for a financial analyst. However, the strong
quantitative skills required for a financial analyst are less emphasized in favor of overall strategic thinking. A
successful business analyst is able to evaluate business opportunities by using analytical thinking, industry
best practices, process development, team building and organization, and information technology. They then
communicate optimal courses of action to executive decision makers to maximize value in alignment with the
vision and goals of the firm.
Business analysts can help develop strategy and tactics to move a firm forward. They aid in identifying
challenges and solutions. Data-driven solutions help get products to market more quickly, evaluate
performance, and optimize production and product mix. The Bureau of Labor Statistics identifies the following
as typical business analyst duties:
• Gathering information about problems to be solved or procedures to be improved
• Interviewing personnel and conducting onsite observations to determine the methods, equipment, and
5 Ibid.
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1.5 • Markets and Participants 21
personnel that will be needed
• Analyzing financial data, revenues and expenditures, and employment reports, among other data
• Finding root causes for problems and proposing solutions that may include new systems, procedures, or
personnel changes
• Presenting findings to decision makers
• Conferring with managers to ensure changes work
The average salary for management analysts was $85,260 in May 2019, and the BLS projects 11% growth, or
6
about 94,000 new jobs, over the next decade.
1.5 Markets and Participants
Learning Outcomes
By the end of this section, you will be able to:
• Identify primary and secondary markets.
• Identify key market players.
Primary and Secondary Markets
Simply put, the primary market is the market for “new” securities, and the secondary market is the market
for “used” securities. Think of the primary market as equivalent to the sale of new cars and the secondary
market as equivalent to the sale of used cars. In practice, many market locales trade both new and used
securities. For example, the stock markets trade equity securities daily, and most of the trading takes place
among individual and institutional investors who own shares in publicly traded companies. Trading a share of
Amazon, Facebook, or Nike stock has little impact and no direct cash flow to the underlying firm. However, the
information provided by such transactions is valuable, as it is a costly and public real-time statement by
investors of their perceptions of firm’s value and a reflection of satisfaction and expectations.
Some, though many fewer, transactions in the equity market are for the purchase and sale of new securities.
Firms issue new shares of stock called seasoned equity offerings (SEOs) or initial public offerings (IPOs) into
the market. These are issues of new shares of stock, previously untraded, and their issuance sends cash flows
directly to the underlying firms. SEOs are new shares issued by established firms, and IPOs are new shares
issued by firms going public for the very first time. Once the initial transaction takes place, purchasers of these
new securities may trade them. However, the second and subsequent trades are secondary, not primary,
market transactions.
Extensive primary market transactions take place weekly, when the Treasury Department auctions billions of
dollars of new Treasury securities. These new securities repay maturing Treasury securities and provide for the
ongoing liquidity and long-term borrowing needs of the federal government. Again, subsequent trading of
this government debt occurs as secondary market transactions.
Key Market Players
Key market players in finance include dealers, brokers, financial intermediaries, and you and me. Each of these
players facilitates the exchange of products, information, and capital in different ways. The presence of these
players makes financial transactions, easier, faster, and safer—essentially more efficient. You and your friends
might engage in direct financial transactions, such as buying a coffee or borrowing money for a movie. These
are typically small transactions. However, for transactions that are larger or more complicated, you need
advanced financial entities with capital, expertise, and networks. The two segments of the secondary markets
are broker markets and dealer markets, as Figure 1.7 shows. The primary difference between broker and
dealer markets is the way each executes securities trades.
6 Ibid.
22 1 • Introduction to Finance
Figure 1.7 Broker and Dealer Markets
Dealers
Financial dealers own the securities that they buy or sell. When a dealer engages in a financial transaction,
they are trading from their own portfolio. Dealers do not participate in the market in the same manner as an
individual or institutional investor, who is simply trying to make their investments worth as much as possible.
Instead, dealers attempt to “make markets,” meaning they are willing and able to buy and sell at the current
bid and ask prices for a security. Rather than relying on the performance of the underlying securities to
generate wealth, dealers make money from the volume of trading and the spread between their bid price
(what they are willing to pay for a security) and their ask price (the price at which they are willing to sell a
security). By standing ready to always buy or sell, dealers increase the liquidity and efficiency of the market.
Dealers in the United States fall under the regulatory jurisdiction of the Securities and Exchange Commission
(SEC). Such regulatory oversight ensures that dealers execute orders promptly, charge reasonable prices, and
disclose any potential conflicts of interest with investors.
Brokers
Brokers act as facilitators in a market, and they bring together buyers and sellers for a transaction. Brokers
differ from dealers who buy and sell from their own portfolio of holdings. These firms and individuals
traditionally receive a commission on sales.
In the world of stockbrokers, you may work with a discount broker or a full-service broker, and the fees and
expenses are significantly different. A discount broker executes trades for clients. Brokers are required for
clients because security exchanges require membership in the exchange to accept orders. Discount brokers or
platforms such as Robinhood or E-Trade charge no or very low commissions on many of their trade
executions, but they may receive fees from the exchanges. They also do not offer investment advice.
Full-service brokers offer more services and charge higher fees and commissions than discount brokers. Full-
service brokers may offer investment advice, retirement planning, and portfolio management, as well as
execute transactions. Morgan Stanley and Bank of America Merrill Lynch are examples of full-service brokers
that serve both institutional and individual investors.
Financial Intermediaries
A financial intermediary, such as a commercial bank or a mutual fund investment company, serves as an
intermediary to enable easier and more efficient exchanges among transacting parties. For instance, a
commercial bank accepts deposits from savers and investors and creates loans for borrowers. An investment
company pools funds from investors to inexpensively purchase and manage portfolios of stocks and bonds.
These transactions differ from those of a dealer or broker. Brokers facilitate trades, and dealers stand ready to
buy or sell from their own portfolios. Financial intermediaries, however, accept money from investors and may
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