Financial markets are platforms or systems where individuals, institutions, and governments can buy and 4.

4. Futures Contracts: Futures contracts are standardized agreements to buy or sell a specific quantity
sell various financial instruments, including stocks, bonds, currencies, commodities, and derivatives. of an underlying asset at a predetermined price and date in the future. These are often used for
These markets play a crucial role in the global economy by facilitating the allocation of capital, risk hedging against price fluctuations in commodities, currencies, and financial instruments. 5.
management, and price discovery. Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges, much
Types of Financial Markets: Stock Market: Where shares of publicly-traded companies are bought and like stocks. They typically track an index, commodity, or a basket of assets and offer investors
sold. Bond Market**: Where debt securities, such as government bonds and corporate bonds, are exposure to a diversified portfolio in a single security 6. Mutual Funds: Mutual funds pool money
traded.Foreign Exchange (Forex) Market**: Where currencies are exchanged. Commodity Market**: from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. These
Where raw materials like oil, gold, and agricultural products are traded. Derivatives Market**: Where are managed by professional portfolio managers. 7. Preferred Stocks: Preferred stock is a hybrid
financial contracts derive their value from an underlying asset or index. This includes options and futures security that combines features of both stocks and bonds. Holders of preferred stock have a higher
markets. claim on the company's assets and earnings than common stockholders but typically do not have
Participants: Investors**: Individuals or institutions that buy and hold financial assets for various voting rights.8. Treasury Securities: These are debt securities issued by the U.S. Department of the
purposes, such as capital appreciation or income. Traders**: Individuals or institutions that buy and sell Treasury. They include Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-
financial assets with the goal of profiting from short-term price movements. Brokers**: Intermediaries bonds), which have different maturities and interest payment frequencies. 9. Municipal Bonds: These
who facilitate trades between buyers and sellers. Market Makers**: Entities that provide liquidity by are debt securities issued by state and local governments or their agencies. They are often used to
continuously quoting buy and sell prices for certain assets. finance public projects and offer tax advantages to investors. 10. Corporate Bonds: Debt securities
Primary Market vs. Secondary Market: Primary Market: The primary market, also known as the new issued by corporations to raise capital for various purposes. These bonds vary in terms of credit
issue market, is where newly issued securities, such as stocks, bonds, or other financial instruments, are quality, maturity, and interest rates. 11. Derivatives: Apart from options and futures, derivatives
first offered and sold to investors; Companies and governments use the primary market to raise capital include a wide range of financial instruments, such as swaps, forwards, and structured products.
by selling their securities directly to investors. It is the initial step in the process of bringing new securities These derive their value from an underlying asset and are often used for risk management and
to the market; In the primary market, issuers (companies or governments) work with investment banks speculative purposes. 12. Convertible Securities: These are bonds or preferred stocks that can be
or underwriters to facilitate the sale of securities to investors. Investors purchase these securities directly converted into a predetermined number of common shares of the issuing company. They offer
from the issuer; Transactions: The primary market involves the issuance of new securities, and the investors a combination of fixed income and potential equity upside.
transactions are between the issuer and the initial investors. Once these securities are sold in the primary The valuation of securities in the financial market is a crucial aspect of investment and trading.
market, they can be traded in the secondary market; The price of securities in the primary market is It involves determining the fair market price or value of a financial instrument such as stocks, bonds,
typically determined through methods like auctions or fixed pricing, with the issuer setting the initial options, or other assets. Accurate valuation is essential for investors, traders, and financial
offering price; Liquidity: Securities in the primary market are not readily tradable until they enter the institutions to make informed decisions regarding buying, selling, or holding securities. There are
secondary market, which may take time. Secondary Market: The secondary market, also known as the several methods and approaches to value securities, depending on the type of security and the specific
aftermarket, is where previously issued securities are bought and sold among investors after they have circumstances. Here are some common methods used for valuing securities: 1. Market Price: The
been initially issued in the primary market; The secondary market provides liquidity to investors who most straightforward way to value a security is to look at its current market price. This is the price at
wish to buy or sell existing securities. It does not provide capital directly to the issuer; Participants: The which the security is currently trading on the open market. However, market prices can fluctuate
secondary market involves various types of investors, including individual investors, institutional rapidly and may not always reflect the true underlying value of the security. 2. Intrinsic Value:
investors, and traders. These participants buy and sell securities among themselves; Transactions: In the Intrinsic value is an estimate of the true worth of a security based on its fundamental characteristics.
secondary market, securities change hands between investors, and the issuer is not directly involved in For stocks, this might involve analyzing earnings, cash flow, and other financial metrics. For bonds,
these transactions. Stock exchanges and electronic trading platforms facilitate secondary market trading; it might involve assessing the issuer's creditworthiness and the bond's coupon rate. Intrinsic value
The price of securities in the secondary market is determined by supply and demand factors, as well as aims to determine what the security is really worth, regardless of its current market price. 3. Dividend
market sentiment. Prices fluctuate based on the trading activity and perceived value of the securities; The Discount Model (DDM):DDM is a valuation method commonly used for stocks that pay dividends.
secondary market is known for its liquidity, as investors can buy or sell securities quickly, often on a It estimates the present value of future dividend payments, taking into account factors like expected
daily basis. dividend growth rates and the required rate of return. 4. Discounted Cash Flow (DCF) Analysis: DCF
securities traded in financial markets include: 1. Stocks (Equity Securities): These represent analysis is a comprehensive valuation method used for a variety of securities, including stocks and
ownership in a company. When you buy shares of a company's stock, you become a shareholder and have bonds. It involves estimating the present value of all future cash flows generated by the security,
a claim on the company's assets and earnings. Stockholders often have voting rights and may receive discounted back to their present value using a specified discount rate. 5.Comparative Valuation: This
dividends if the company pays them. 2.Bonds (Debt Securities): Bonds are debt instruments issued by method involves comparing the valuation of a security to similar securities in the market. Common
governments, corporations, or other entities to raise capital. When you buy a bond, you are essentially metrics for comparative valuation include price-to-earnings (P/E) ratios for stocks and yield-to-
lending money to the issuer in exchange for periodic interest payments (coupon) and the return of the maturity (YTM) for bonds. By comparing these ratios to those of similar securities, investors can
bond's face value at maturity. 3.Options: Options are contracts that give the holder the right (but not the gauge whether a security is overvalued or undervalued relative to its peers. 6. Technical Analysis:
obligation) to buy or sell an underlying asset (such as a stock) at a specified price (strike price) on or Technical analysis focuses on studying past price and volume patterns to predict future price
before a specific expiration date. Options can be used for hedging, speculation, or income generation. movements. It doesn't directly estimate intrinsic value but is used by traders to make short-term
trading decisions based on chart patterns, trends, and indicators.

7. Option Pricing Models: For derivative securities like options, various models such as the Black- 9. **Regulatory Compliance**: Financial institutions are subject to various regulations and oversight
Scholes model are used to estimate their fair market value based on factors like the underlying asset's to ensure their stability and protect the interests of customers and the broader financial system. They
price, volatility, time to expiration, and interest rates. 8.Credit Risk Assessment: When valuing fixed- must comply with regulations related to capital adequacy, risk management, and consumer
income securities like bonds, assessing the creditworthiness of the issuer is crucial. Credit rating protection. 10. **Stability and Crisis Management**: Central banks often work closely with financial
agencies assign credit ratings to help investors gauge the risk associated with a bond. 9.Scenario institutions to maintain financial stability and respond to financial crises. During times of crisis, these
Analysis and Sensitivity Analysis: These techniques involve evaluating how changes in various institutions may provide liquidity support to prevent systemic disruptions. 11. **Wealth
factors, such as interest rates, economic conditions, or company performance, would impact the Management**: Financial institutions offer wealth management services, helping individuals and
security's value. 10.Private Equity Valuation: Private equity investments often require more complex institutions invest their savings and assets wisely. This includes services like portfolio management,
valuation methods, such as the use of net asset value (NAV), earnings multiples, or discounted cash estate planning, and retirement planning. 12. **Foreign Exchange**: They provide foreign exchange
flows tailored to the specific characteristics of private companies. services to facilitate international trade and investment. This includes currency exchange, forward
Market efficiency is a concept in financial economics that refers to the degree to which financial contracts, and options to hedge against exchange rate fluctuations.
markets reflect all available information and quickly adjust to new information. In an efficient Interest rate movements play a crucial role in various aspects of the economy and financial markets.
market, asset prices are said to accurately reflect their intrinsic value, and it is difficult for investors Their relevance can be seen in the following ways: 1. Monetary Policy: Central banks, like the
to consistently achieve above-average returns by trading on publicly available information because Federal Reserve in the United States, use interest rates as a tool to manage the economy. Lowering
such information is already incorporated into the prices. interest rates can stimulate borrowing and spending, which can help boost economic growth during
Financial market regulations are rules and regulations put in place by government authorities, times of recession. Conversely, raising interest rates can cool down an overheating economy and
regulatory bodies, and exchanges to oversee and govern the activities within financial markets. These control inflation. 2. Consumer Borrowing**: Interest rates directly impact the cost of borrowing for
regulations aim to maintain the integrity, transparency, and stability of financial markets, protect consumers. When interest rates are low, it becomes cheaper to take out loans for various purposes,
investors, and ensure fair and efficient market operations. such as buying homes, cars, or financing education. High-interest rates can deter borrowing and slow
The global financial market refers to a vast and interconnected network of institutions, instruments, down consumer spending. 3. **Housing Market**: Interest rates have a significant influence on the
and participants involved in the buying and selling of financial assets and the allocation of capital real estate market. When rates are low, it becomes more affordable for people to buy homes, which
on a global scale. This market plays a critical role in facilitating economic growth, enabling can increase demand and drive up home prices. Conversely, rising interest rates can make
businesses to raise capital, and allowing individuals to invest and manage their wealth. homeownership less affordable and potentially lead to a slowdown in the housing market. 4.
Financial institutions play a crucial role in the functioning of financial markets. They serve as **Investment Decisions**: Investors often consider interest rates when making investment
intermediaries between savers and borrowers, facilitate the efficient allocation of capital, provide decisions. When interest rates are low, fixed-income investments like bonds may offer lower yields,
various financial services, and help maintain the stability of the financial system. Here are some key leading investors to seek higher returns in riskier assets. Conversely, higher interest rates can make
roles of financial institutions in financial markets: 1. Intermediation: Financial institutions act as bonds and other fixed-income investments more attractive, potentially affecting stock market
intermediaries between individuals, businesses, and governments who have surplus funds (savers) valuations. 5. **Currency Exchange Rates**: Interest rate differentials between countries can affect
and those who need funds (borrowers). They collect funds from savers and channel them to exchange rates. Higher interest rates in one country can attract foreign capital, leading to an
borrowers through various financial products and services. 2.Capital Allocation: They allocate funds appreciation of the country's currency. Conversely, lower interest rates can lead to a depreciation of
to the most productive and promising investment opportunities. This allocation of capital helps the currency. 6. **Corporate Financing**: Businesses often rely on borrowing to fund their
promote economic growth and development by directing resources to where they can be used most operations and expansion. Changes in interest rates can impact the cost of corporate borrowing,
effectively. 3. **Risk Management**: Financial institutions provide a range of financial products influencing investment decisions and profitability. 7. **Savings and Investments**: Individuals
and services that help individuals and businesses manage various types of financial risks. These saving for retirement or other long-term goals may see their investment returns impacted by interest
include insurance, hedging products, and derivatives that protect against adverse events like market rate movements. For example, rising interest rates can lead to higher yields on savings accounts,
volatility, natural disasters, or business losses. 4. **Liquidity Provision**: They offer liquidity to the CDs, and other fixed-income investments. 8. **Inflation Expectations**: Interest rates can reflect
financial markets. For example, commercial banks provide short-term loans and maintain deposit market expectations of future inflation. When interest rates rise, it may signal that investors expect
accounts that allow customers to access their funds easily. This liquidity is essential for the smooth higher inflation in the future. This can, in turn, influence consumer and business expectations and
functioning of financial markets. 5. **Payment Services**: Financial institutions facilitate payments behavior.9. **Stock Market**: While the relationship is complex, interest rate movements can
between individuals and businesses. This includes services like electronic funds transfers, wire impact stock prices. Lower interest rates can support higher stock valuations, as investors may seek
transfers, and payment processing, which are essential for conducting economic transactions. 6. higher returns in the stock market when fixed-income returns are low. Conversely, rising interest
**Capital Formation**: Financial institutions help businesses raise capital by underwriting securities rates can lead to lower stock valuations, especially if they are seen as a response to inflationary
(such as stocks and bonds) and assisting in initial public offerings (IPOs). This enables companies pressures. 10. **Global Economic Conditions**: Interest rate movements in one country can have
to expand their operations and create jobs. 7. Information and Research**: They conduct financial spillover effects on the global economy. For instance, changes in U.S. interest rates can impact capital
research and analysis, providing valuable information to investors and policymakers. This flows and economic conditions in other countries, particularly those with close economic ties.
information helps market participants make informed decisions and contributes to market Loanable funds is an economic concept that refers to the supply and demand for funds available in
transparency. 8. **Credit Creation**: Commercial banks, in particular, have the ability to create financial markets for borrowing and lending. It plays a crucial role in the determination of interest
credit through the fractional reserve banking system. They can lend out a portion of the deposits they rates and the allocation of capital within an economy.
receive, which expands the money supply and supports economic activity