Financial markets

Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt In economics a financial market is a mechanism that allows people to easily 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 efficient markets. ... Download high resolution version (480x640, 110 KB)Blockade in front of NYSE. Picture taken in April 2004. ... The bond market, also known as the debit, credit, or fixed income market, is a financial market where participants buy and sell debt securities usually in the form of bonds. ... This article does not cite any references or sources. ... A Corporate bond is a bond issued by a corporation, as the name suggests. ... A government bond is a bond issued by a national government denominated in the countrys own currency. ... In the United States, a municipal bond or muni is a bond issued by a state, city or other local government, or their agencies. ... Bond valuation is the process of determining the fair price of a bond. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...

Stock market Stock Preferred stock Common stock Stock exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... This article does not cite any references or sources. ... A preferred stock, also known as a preferred share or simply a preferred, is a share of stock carrying additional rights above and beyond those conferred by common stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ...

Foreign exchange market Retail forex The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... The Retail Forex (Retail Currency Trading or Retail Forex or Retail FX) market is a subset of the much larger Foreign exchange market. ...

Derivative market Credit derivative Hybrid security Options Futures Forwards Swaps A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Definition A hybrid security, as the name implies, is a security that combines two or more different financial instruments. ... In finance options are types of derivative contracts, including call options and put options, where the future payoffs to the buyer and seller of the contract are determined by the price of another security, such as a common stock. ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. ... This article does not cite any references or sources. ... This article or section is in need of attention from an expert on the subject. ...

Other Markets Commodity market OTC market Real estate market Spot market Chicago Board of Trade Futures market Commodity markets are markets where raw or primary products are exchanged. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... Template:The Spot Market The Spot Market or Cash Marketis a commodities or securities market in which goods are sold for cash and delivered immediately. ...

Valuation and Theories Market Valuation Financial market efficiency Financial market efficiency is an important topic in the world of Finance. ...

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation This article does not cite any references or sources. ... In economics a financial market is a mechanism that allows people to easily 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 efficient markets. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... Public finance (government finance) is the field of economics that deals with budgeting the revenues and expenditures of a public sector entity, usually government. ... “Banker” redirects here. ... Financial supervision is government supervision of financial institutions by regulators. ...

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Fundamental analysis of a business involves analyzing its income statement, financial statements and health, its management and competitive advantages, and its competitors and markets. An Income Statement, also called a Profit and Loss Statement (P&L), is a financial statement for companies that indicates how net revenue (money received from the sale of products and services before expenses are taken out, also known as the top line) is transformed into net income (the result... Historical financial statement Financial statements (or financial reports) are formal records of a business financial activities. ... Competition characterises a biochemical, ecologic, economic, political, or sporting activity whereby two or more individuals or groups strive antagonistically against one another for some reward. ... Chichicastenango, Guatemala traditional market Market stall in internally displaced persons camp in Kitgum, northern Uganda Mercado dos Lavradores, Funchal (Madeira Islands) A market is a mechanism which allows people to trade, normally governed by the theory of supply and demand. ...

The analysis is performed on historical and present data, but with the goal to make financial projections. There are several possible objectives:

• to calculate a company's credit risk,
• to make projection on its business performance,
• to evaluate its management and make internal business decisions,
• to make the company's stock valuation and predict its probable price evolution.

Credit risk is the risk of loss due to a debtors non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). ... There are several methods used to value companies and their stocks. ...

Two analytical models

When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies.

1. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security.
2. Technical analysis maintains that all information is reflected already in the stock price, so fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns.

Investors can use both these different but somewhat complementary methods for stock picking. Many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies. Profit is what is gained, after costs are accounted for. ... Technical analysis is the study of past financial market data, primarily through the use of charts, to forecast price trends and make investment decisions. ...

The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". See the discussions at efficient market hypothesis , random walk hypothesis, Capital Asset Pricing Model, Fed model Theory of Equity Valuation, and behavioral finance. In finance, the efficient market hypothesis (EMH) asserts that financial markets are informationally efficient, or that prices on traded assets, e. ... The random walk hypothesis is a financial theory, close to the efficient market hypothesis, stating that market prices evolve according to a random walk and thus cannot be predicted. ... An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. ... The Fed model is a theory of equity valuation thought to be used by the Federal Reserve that hypothesizes a relationship between long-term treasury notes and the market return of equities. ... Economics Nobel Laureate Daniel Kahneman, was an important figure in the development of behavioral finance and economics and continues to write extensively in the field. ...

Use by different portfolio styles

Investors may use fundamental analysis within different portfolio management styles. Look up portfolio in Wiktionary, the free dictionary. ... An investor profile or style defines an investors preferences in money decisions, for example: Short term trading or Long term holding (buy and hold Risk averse or risk tolerant / seeker All classes of assets or just one (stocks for example) Value or growth stocks, big cap or small cap...

• Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.
• Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Even 'bad' company's stock goes up and down, creating opportunities for profits.
• Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine"^[1]. Fundamental analysis allows you to make your own decision on value, and ignore the market.
• Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.
• Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks.
• Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).

Buy and hold is a long term investment strategy based on the concept that in the long run financial markets give a good rate of return despite periods of volatility or decline. ... In finance, a contrarian takes the view that widespread pessimism tends to lead to market rallies and that widespread optimism tends to lead to market slumps. ... Value investing is a style of investment strategy from the so-called Graham & Dodd School. ... Growth Stocks in finance, are stocks that appreciate in value and yield a high return on equity (ROE). ... Quantitative analysis has different meanings in different contexts. ...

Top-down and Bottom-up

Investors can use either a top-down or bottom-up approach.

• The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then does he narrow his search to the best business in that area.
• The bottom-up investor starts with specific businesses, regardless of their industry/region.

An economic indicator (or business indicator) is a statistic about the economy. ... For other senses of this word, see interest (disambiguation). ...

Procedures

The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Financial and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity. In finance, a financial ratio is a ratio of selected values on a enterprises financial statements. ... Thomson Financial is an arm of The Thomson Corporation, one of the worlds leading information companies, focused on providing integrated information solutions to business and professional customers. ...

The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future Discount rate as used in finance and economics is distinct from the discount rate described below; please refer to discounting and discounts. ... It has been suggested that this article or section be merged with Net present value. ...

• dividends received by the investor, along with the eventual sale price. (Gordon model)
• earnings of the company, or
• cash flows of the company.

The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model). A dividend is the distribution of profits to a companys shareholders. ... Gordon growth model is a variant of the discounted dividend model, a method for valuing a stock or business. ... In finance, cash flow refers to the amounts of cash being received and spent by a business during a defined period of time, usually tied to a specific project. ... The P/E ratio (price-to-earnings ratio) of a stock (also called its earnings multiple, or simply multiple, P/E, or PE) is used to measure how cheap or expensive its share price is. ... The time value of money is the premise that an investor prefers to receive a payment of a fixed amount of money today, rather than an equal amount in the future, all else being equal. ...

Growth estimates are incorporated into the PEG ratio but the math does not hold up to analysis.^{[neutrality disputed]} Its validity depends on the length of time you think the growth will continue. The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the companys expected future growth. ...

Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000, with the power of computers to crunch vast quantities of data, a new career has been invented. At some funds the manager's decisions have been replaced by proprietary mathematical models.^{[citation needed]}

Criticisms

• Some economists such as Burton Malkiel suggest that neither fundamental analysis nor technical analysis is useful in outperforming the markets^[2] .

Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer, most famous for his classic finance book A Random Walk Down Wall Street (now in its 8th edition, 2003). ... Technical analysis is the study of past financial market data, primarily through the use of charts, to forecast price trends and make investment decisions. ...

References

1. ^ Security Analysis
2. ^ investopedia.com. Financial Concepts: Random Walk Theory

Security Analysis, written by Benjamin Graham and David L. Dodd in 1934, is an influential book on the subject of financial analysis and fundamental analysis. ...

See also

• List of valuation topics
• Stock picking
• Security Analysis

What follows is a list of over 250 Wikipedia articles on finance topics. ... Active management (also called active investing) refers to a portfolio management strategy where the manager makes specific investments with the goal of outperforming a benchmark index. ... Security Analysis, written by Benjamin Graham and David L. Dodd in 1934, is an influential book on the subject of financial analysis and fundamental analysis. ...

External links

• Comprehensive fundamental data on all UK listed companies
• MIT Open Course Ware
• Procedures for stock picking - 4 pages
• Development of the PEND Method
• Fundamental Analysis
• Value Investing and its Advantages