Economics
Financial Markets and Instruments
Financial markets are platforms where individuals and institutions trade financial securities, such as stocks, bonds, and derivatives. These markets facilitate the flow of capital between investors and borrowers, allowing for efficient allocation of resources. Financial instruments are the tradable assets that represent a claim on future cash flows or ownership rights, and they are used by investors to achieve their financial objectives.
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12 Key excerpts on "Financial Markets and Instruments"
- Sławomir Ireneusz Bukowski(Author)
- 2019(Publication Date)
- Routledge(Publisher)
In Poland, the bank-oriented system features the following: lower GDP per capita than in the higher-developed countries, relatively lower effectiveness of the legal system than in developed countries, relatively higher corruption and a medium European tendency to risk-taking – greatly differing from American and British standards (see Bukowski, 2011, p. 14).The financial market is one of the key markets in economy, connected with the market of products and services and labor markets through the supply-and-demand coupling and prices. On the one hand, financial markets are platforms where short-, medium- and long-term financial transactions take place and, on the other, mechanisms of short- and long-term capital mobilization and its allocation in order to finance investment ventures operate.Financial instruments embodying capital are traded in financial markets. A financial instrument is a contract (agreement) between two parties that governs financial interdependence between them.A financial market has its infrastructure created by a network of relationships among banks, investment fund companies, insurance societies and stock exchanges. The financial market participants include financial institutions, enterprises, households and the state. These entities provide financial capital and benefit from it at a specific price: interest.Financial markets fulfill an important role in economy. First, they provide a mechanism of capital mobilization for investment purposes, its allocation and its transfer of financial capital into production capital. Second, they determine the price of capital and enable estimations of investment risk, which is the basis of investment decision-making. Third, they strengthen the motivating role of profit in enterprises and enable the enterprise value assessment. Fourth, they assure liquidity in economy, which means that all of the needs of economic entities in terms of money are satisfied. Moreover, financial markets play an important role in the absorption of economic shock results.The financial market institutions include the legal system regulating capital turnovers, institutions of state financial supervision, financial intermediaries and financial instrument exchange markets. The system of law governing capital turnover consists of the rules of public and non-public capital turnover (financial instruments) and “rules of the game” between the turnover participants. It aims at ensuring safety to capital turnover, including the safety of financial investment projects. The distinction between a public and a non-public turnover of financial instruments is conventional. Usually, the criterion here is the number of people to whom the offer for sale of financial instruments is addressed. Public trading of financial instruments is usually subject to special supervision from the state institutions established for this purpose and to special requirements that must be met by the issuers of these instruments concerning the way of presenting economic information, financial safeguards, the way of issuance and so on.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 7 Financial Market In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one place, thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate: • The raising of capital (in the capital markets) • The transfer of risk (in the derivatives markets) • International trade (in the currency markets) – and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process. Definition In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. ____________________ WORLD TECHNOLOGIES ____________________ The term market is sometimes used for what are more strictly exchanges , organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 11 Financial Market In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis. Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one place, thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy. In finance, financial markets facilitate: • The raising of capital (in the capital markets) • The transfer of risk (in the derivatives markets) • International trade (in the currency markets) – and are used to match those who want capital to those who have it. Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends. In mathematical finance, the concept of a financial market is defined in terms of a continuous-time Brownian motion stochastic process. Definition In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. ____________________ WORLD TECHNOLOGIES ____________________ The term market is sometimes used for what are more strictly exchanges , organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange.
eBook - ePubA Primer for Financial Engineering
Financial Signal Processing and Electronic Trading
- Ali N. Akansu, Mustafa U. Torun(Authors)
- 2015(Publication Date)
- Academic Press(Publisher)
Chapter 2Financial Markets and Instruments
Abstract
We start with the definitions and descriptions of different entities in the financial markets and how they interact with each other. We introduce exchanges, electronic communication networks (ECNs), broker-dealers, market-makers, regulators, traders, and funds to better understand the financial ecosystem given that the legal framework, regulatory and compliance issues are beyond the scope of this book. In a separate section, we delve into the details of various types of financial instruments, i.e., stocks, options, futures, exchange traded funds (ETFs), currency pairs, and fixed income securities. Our goal in this chapter is not to provide the exhaustive details of these entities, instruments, and their relationships with each other. We rather aim to equip engineers with a good understanding of these concepts to navigate further in the area they choose to focus on through the references provided. We note that our primary focus is the financial markets and products offered in the United States. However, with only slight nuances, the concepts and definitions are globally applicable to any local financial market of interest.Keywords Stocks Options Futures contracts Exchange traded funds Currency pairs2.1Structure of the Markets82.2Financial Instruments122.3Summary21We start with the definitions and descriptions of different entities in the financial markets and how they interact with each other. We introduce exchanges, electronic communication networks (ECNs), broker-dealers, market-makers, regulators, traders, and funds to better understand the financial ecosystem given that the legal framework, regulatory and compliance issues are beyond the scope of this book. In a separate section, we delve into the details of various types of financial instruments, i.e., stocks, options, futures, exchange traded funds (ETFs), currency pairs, and fixed income securities. Our goal in this chapter is not to provide the exhaustive details of these entities, instruments, and their relationships with each other. We rather aim to equip engineers with a good understanding of these concepts to navigate further in the area they choose to focus on through the references provided. We note that our primary focus is the financial markets and products offered in the United States. However, with only slight nuances, the concepts and definitions are globally applicable to any local financial market of interest.
eBook - PDFIntroduction to Finance
Markets, Investments, and Financial Management
- Ronald W. Melicher, Edgar A. Norton(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
Securities markets also facilitate the transfer of securities between investors. A securities market can be a central location for the trading of financial claims, such as the New York Stock Exchange. It may also take the form of a communications network, as with the over-the-counter market, which is another means by which stocks and bonds can be traded. INTRODUCTION Institutions and Markets 2 PART 1 Institutions and Markets When people invest funds, lend or borrow money, or buy or sell shares of a company’s stock, they are participating in the financial markets. Part 2 of this book examines the role of secu- rities markets and the process of investing in bonds and stocks. INSTITUTIONS AND MARKETS FINANCIAL MANAGEMENT INVESTMENTS The third area of the field of finance is financial management. Financial management studies how a business should manage its assets, liabilities, and equity to produce a good or service. Whether or not a firm off ers a new product or expands production, or how to invest excess cash, are examples of decisions that financial managers are involved with. Financial managers are constantly working with financial institutions and watching financial market trends as they make investment and financing decisions. Part 3 discusses how financial con- cepts can help managers better manage their firms. The three areas of finance interact with, and overlap, one another. Financial institutions operate in the environment of the financial markets and work to meet the financial needs of individuals and businesses. Financial managers do analyses and make decisions based on information they obtain from the financial markets. They also work with financial institutions when they need to raise funds and when they have excess funds to invest. Participants invest- ing in the financial markets use information from financial institutions and firms to evaluate different investments in securities such as stocks, bonds, and certificates of deposit.
eBook - ePubRisk Management in Trading
Techniques to Drive Profitability of Hedge Funds and Trading Desks
- Davis Edwards(Author)
- 2014(Publication Date)
- Wiley(Publisher)
CHAPTER 2 Financial MarketsThis chapter introduces many commonly traded financial products like stocks, bonds, futures, and options. These products are broadly grouped into real assets, financial assets, and derivatives. Then, these broad product types are further broken down to describe some unique features of the individual products that make up that general category.FINANCIAL INSTRUMENTS
Traders, whether individual traders or institutional traders like hedge funds, are in the business of buying and selling special types of contracts, called financial instruments. Financial instrument is a general term that refers to any type of tradable financial contract. Another term for financial instrument is security, as in securities markets. Originally, securities referred to instruments that provided an ownership right like stocks and bonds. However, in many jurisdictions, the term security now includes financial instruments that derive their value from commodities and from other financial instruments (derivatives).The three main types of financial instruments are real assets, financial assets, and derivatives. Real assets include physical commodities (like gold, oil, corn, or cattle), real estate, and legislatively created rights (like carbon emissions rights). Financial assets are primarily composed of contracts that give an ownership interest in a company (stocks), borrowing (bonds), or currencies. Derivatives are financial contracts that derive their value from other financial instruments. For example, a derivative might be an agreement to buy a physical commodity at some point in the future (a futures contract) or a contract that gives its owner the right, but not the obligation, to purchase stock in a company (a stock option). (See Table 2.1
eBook - PDF- Aloy Soppe(Author)
- 2016(Publication Date)
- Routledge(Publisher)
Part II Economic playing field This page intentionally left blank 4 Financial markets and ethics After the former more theoretical chapters on morality, ethics and law, we now proceed more practically and descriptively with a chapter on financial markets in relation to their ethical issues. Financial markets basically fulfil an intermediary role in the economic process. Money and capital cannot be consumed physically. Their main task is to mediate between savings of individuals and institutions – as traded by banks and financial institutions in the monetary economy – on the one hand and direct investments performed by entrepreneurs in the real economy on the other. 1 In recent decades, the growth of the financial markets has exploded in both quantitative and qualitative terms. More and more complex instruments have been – and are increasingly being – developed as a result of the theoreti- cal breakthrough regarding the pricing of options under uncertainty by Black and Scholes (1972, 1973). 2 From that moment on, the pricing of all kinds of contingent claims were theoretically underpinned by applicable market variables such as interest rates and market volatility. Together with the ongoing technological develop- ment and the globalisation of the financial markets at that time, the marketability of financial assets has increased significantly and the liquidity in the market has multiplied. The convincing success of the financial sector evoked a structural misbalance with the real economic sector. The monetary economy nowadays dominates the growth of the physical economy. This chapter describes and discusses the important mechanisms in financial markets in relation to underlying morality. Introduction In strictly economic terms, the increase of liquidity indicated above theoretically benefits informational efficiency and the pricing of assets in financial markets.
eBook - ePub- Terri Duhon(Author)
- 2012(Publication Date)
- Bloomberg Press(Publisher)
CHAPTER 1
What Are Financial Markets?
This chapter will provide the financial markets foundation, terminology and context to discuss the dynamics of the trading floor. The first step is to realize that every time a financial transaction occurs between two or more parties it has ramifications in the financial markets. Parties on one side of the transaction may include individuals investing in their pensions, saving up for a rainy day or buying insurance. Most of this retail activity gets funneled through larger financial companies such as pension funds, banks, insurance companies and asset managers, which are the main investors in the financial markets. On the other side of many financial transactions are the entities that need money and raise it either by borrowing (debt markets) or by selling part of their company (equity markets). These are generally referred to as the “issuers.” Extrapolate from there and the foundation of the financial markets becomes clear. It is where people with money (investors) meet people who need money (issuers). The place where the buyers and the sellers meet or where the issuers and the investors meet is called the “financial market” and the transfer itself often occurs via a bank trading floor. In other words, the buyers and sellers don’t physically meet in order to trade; they use the trading floor instead. Throughout this discussion, the broad role of banks as intermediators will become clear. This chapter will also answer questions such as: Who needs money? What is private equity vs. public equity? Why do banks give out loans and how are they different from bonds? Why do derivatives exist?When I was a senior at MIT, I started doing interview rounds with Wall Street banks for a position in sales and trading. My first interview was conducted by an options trader from a boutique trading company. After a very brief introduction, the trader said, “Make me a market for this pencil.” I literally had no idea what he had just said. So the trader says, “OK, let’s play a game. I’m going to roll a die. Whatever number comes up, I’ll pay you that amount in dollars. If I roll a one, I’ll pay you one dollar. If I roll a two, I’ll pay you two dollars, etc. How much will you pay me to play that game?” I still couldn’t understand what he was trying to get me to say. What did it mean to pay someone to play a game? The trader said, “OK, whatever I roll, you’ll at least get a dollar, right? Will you pay me a dollar to play this game?” I immediately said, “Yes.” The trader then said, “Will you pay me two dollars to play this game?” I said “yes” again. The trader then said, “Will you pay me three dollars to play this game?” I said “yes” again. I now knew how to get to the right answer but the trader was clearly irritated and was asking rapid-fire questions so I had no time to think. He then said, “Will you pay me four dollars to play this game?” I said “yes” without thinking. The trader said, “Why?” At this point I knew I had made a mistake, but I was so frazzled and nervous that I couldn’t think of a good answer. I decided to brazen it out and said, “I feel lucky?” Needless to say, the interview was immediately over and I didn’t get the job.
eBook - PDFFinancial Market Meltdown
Everything You Need to Know to Understand and Survive the Global Credit Crisis
- Kevin Mellyn(Author)
- 2009(Publication Date)
- Praeger(Publisher)
2 t THE FINANCIAL MARKET MADE SIMPLE FINANCIAL INSTRUMENTS We have just seen how investment banks and institutional investors churn trillions of dollars through the global financial markets. They are not, of course, swapping piles of paper money. They are trading ‘‘finan- cial instruments.’’ If most of us do not understand what money is or how our bank account works, almost nobody has a clue about ‘‘finan- cial instruments.’’ The name itself is not helpful. ‘‘Financial’’ tells us it has to do with money, but what does ‘‘instrument’’ mean in this case? The word has many meanings, but broadly speaking, an instrument is the means by which something is done. A musical instrument is the means for making music; a legal instrument is a document that does something involving law, like a deed that gives you title to your house. Contracts The simplest way to think about financial instruments is that each basic type is a ‘‘contract in a box.’’ All of us know what a contract is at some level. Marriage is a contract between two consenting partners, with rights and obligations that are supported, but not created by, law and social norms. Employment is another common contract; even if 29 no formal employment contract is signed, the rights and obligations of employers and employees are pretty well understood by everyone and are governed by specific laws. That’s what contracts do—lay out the deal. Almost any social arrangement you can think of, the U.S. Constitution to your kid’s allowance, is an explicit or implicit con- tract. Contracts are the millions of deals that get done, making things happen. Although the vast majority of law and legal work revolves around contracts, the law usually only comes into play when one party to the deal feels the contract has been broken. Fortunately, most of the contracts we rely on each day happen pretty simply, so much so that we don’t think of them as contracts at all.
eBook - PDF- Nicholas L. Georgakopoulos(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
This may not be true in finance. Newcomers may lack even a basic understanding of the artificial and recent universe of finance. 4 Before the introduction of means for individuals to invest as members of a group, financial markets traded only two types of securities, stocks and bonds – namely, fractions of business ownership and slices of loans to businesses, governments, and municipalities. In the United States during the late nineteenth and early twentieth centuries, 5 financial intermediaries gradually introduced more complex instru- ments, starting with aggregations of stocks or bonds into closed-end funds, (open- ended) mutual funds, or exchange-traded funds, 6 eventually reaching derivatives: contractual arrangements the value of which depends on (i.e., derives from) one or more underlying, more basic goods such as stocks or bonds. 7 Moreover, financial markets are centralized and therefore few in number. Typically, each developed country has a single major stock market. The United States, with both the New York Stock Exchange (NYSE) and the NASDAQ Stock Market (NASDAQ), is an excep- tion. A further round of centralization has occurred with the merger of stock exchanges into even larger groups of exchanges. 4 The problem of the lack of knowledge in financial markets is not limited to unsophisticated investors. Buyers of real products know the use they derive from them because the buyers tend to use the products, read the books, or sit on the chairs that they buy. This has the stabilizing effect of limiting price increases and drops. By contrast, buyers of financial products tend merely to seek reselling them. Thus false beliefs about financial goods can be self-perpetuating and destabilizing, underscoring the need for information, as discussed at length in Chapters 9 to 11. 5 Edwin J. Perkins, WALL S TREET TO MAIN S TREET : CHARLES MERRILL AND MIDDLE -C LASS I NVES TORS 224–27 (Cambridge University Press, 1999); Jerry W.
eBook - PDF- Kevin D. Hoover(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
But that is unlikely; most savers look for a safe place to lodge their savings and one that will pro-vide them with interest or other return. As we saw in Chapter 2 (see Figure 2.3), FINANCIAL MARKETS serve to connect savers with excess purchasing power with borrowers with deficient purchasing power. Firms and individ-uals who borrow do so in order to spend. Investment and other spending using borrowed funds make up the shortfall in aggregate demand caused by savings. Once again, in a monetary economy whenever money flows in one direc-tion, something of equal value must flow in the opposite direction. When savers transfer money to financial markets, they receive in return a FINAN -CIAL INSTRUMENT – that is, a record (paper or electronic) that specifies a claim to a current or future valuable good – for example, to the repayment of a debt or to the privileges of ownership . There are a bewildering vari-ety of financial instruments, although many are familiar to us all: checking accounts, savings accounts, corporate stocks, and government bonds. (The counterflow of financial instruments is not shown in Figure 2.3, but it is there in reality nonetheless.) Again, a disruption to the flow and counterflow of savings and financial instruments is likely to disrupt the flows of real goods and services that ultimately matter for our welfare. Even in a smoothly flow-ing economy, the terms on which people and firms borrow and lend, partic-ularly the rate of interest, will affect not only how much is saved and bor-rowed, but who does the saving and the borrowing. We have isolated two aspects of the financial system: the monetary trans-actions system and financial markets. We now look at each in more detail, starting with money. The Monetary Economy For economists, “What is money?,” has long been a vexed question. There is no doubt that a dollar bill is money. But what else, if anything, counts as money? Traditionally, money has been defined by its functions: 1.
eBook - PDFFundamentals of Financial Instruments
An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives
- Sunil K. Parameswaran(Author)
- 2022(Publication Date)
- Wiley(Publisher)
10 AN INTRODUCTION TO FINANCIAL INSTITUTIONS, INSTRUMENTS, AND MARKETS equal to the total financial assets held by investors, and every liability incurred by a party must be an asset for another investor. Why do investors acquire financial assets? Financial assets are essentially sought after for three reasons. ▪ They serve as a store of value or purchasing power. ▪ They promise future returns to their owners. ▪ They are fungible, in the sense that they can be easily converted into other assets and vice versa. In addition to debt securities and equity shares, we will also focus on the following assets: ▪ Money ▪ Preferred shares ▪ Foreign exchange ▪ Derivatives ▪ Mortgages MONEY Money is a financial asset because all forms of money in use today are claims against some institution. Contrary to popular perception, money is not just the coins and currency notes handled by economic agents. For instance, one of the largest components of money supply today is the checking account balances held by depositors with commercial banks. From the banks’ standpoint, these accounts obviously represent a debt obligation. Banks have the capacity to both expand and contract the money supply in an economy. Currency notes and coins also represent a debt obligation of the central bank of the issuing country, like the Federal Reserve in the United States. In today’s electronic age, newer forms of money have emerged, such as credit, debit, and smart cards. Money performs a wide variety of important functions, thus it is sought after. In a modern economy, all financial assets are valued in terms of money and all flows of funds between lenders and borrowers occur via the medium of money. MONEY AS A UNIT OF ACCOUNT OR A STANDARD OF VALUE In the modern economy, the value of every good and service is denominated in terms of the unit of currency. Without money, the price of every good or service would have to be expressed in terms of every other good or service.
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