"Profitable strategies for trading the financial markets

- Understanding the psychology of the market, and the psychology of self "

Kerron Boothe

Financial Management, LIGS University

FINANCE SPECIALIZATION

Supervising lecturer: Nguyen Minh

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Affidavit
By inserting a seminar paper into the Learning Management System of LIGS University, I
Kerron O’Neil Boothe - an Interactive Online PhD student, honestly declare that I have
prepared this graduate paper myself using only the literature presented in the paper. I further
confirm that I have no objection to the publication of this graduate paper/thesis abstract or
part thereof with the approval of LIGS University and with acknowledgement of my
authorship.

Word count: 6,337

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ABSTRACT
Not because a trader is profitable, does not mean there is a strategy being utilized. Being
profitable in the markets require following a discipled strategy that is proven to be profitable.

Discipline is founded on consistency and a thorough understanding of the psychology of the

markets in tandem with an understanding of self. A trader has achieved discipline in trading
when that trader has consistently followed the rules set out by and for oneself, rules that lead
to profitability.

Having knowledge of the market is an imperative to gaining that discipline. However,

knowledge of financial markets alone is no guarantee for investment or trading success, if that
were the case my Finance professor would secretly be a very rich man moonlighting as an
educator.

The rules you will ultimately design for yourself will not work in isolation, as they will be a
composite rule set (strategy if you will) then be careful in noting that breaking even a part of
or one rule in your strategy will result in failure.

Background of the Problem

The problem that the paper seeks to address is understanding and discipline. Making the right
decision seems to be an elusive goal for over 90% of traders in the market. Online records
prevail that over 90% of traders fail. And the reasons given are all based on psychology to
include overconfidence, lack of discipline, poor money management, weak strategy, poor
timing, and emotional instability. Trading the markets is a psychological game, no, a
psychological battle.
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Purpose and Goals

The primary purpose is coverage. Coverage of the course content, then using that knowledge
coverage to highlight the importance in and of understanding the market thoroughly. This
thorough understanding gives the opportunity to construct a psycho-strategic approach to
analysing fundamentals, sentiments and price action thus building around all that ones own
profitable rules for trading in the markets.

Understanding price movement is key. Knowing why events move price on the Beta or non-
beta level is paramount to success in investment or trading.

Investors are typically long-term holders of shares or bonds. Traders are typically shorter-
term holders, borrowers even as they often trad cash for difference (CFDs), coming in
flavours of long-term, day- traders, and scalpers.

Key words:

1. Budgeting
2. Corporate finance
3. Financial planning
4. Financial supervision
5. Investing
6. Market instruments
7. Market value
8. Securities
9. Trading
10. Working capital
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ABSTRACT................................................................................................................................3
Background of the Problem....................................................................................................3
Purpose and Goals...................................................................................................................3
Figures.........................................................................................................................................7
Tables..........................................................................................................................................7
LITERATURE REVIEW...........................................................................................................8
APPROACH...............................................................................................................................9
What is Corporate Finance....................................................................................................10
Finance for Business Decision-Making........................................................................11
Methods for Determining the Market Value of a Company.........................................12
Financial Planning and Budgeting................................................................................12
What is accounting?.......................................................................................................12
How Directors use and Discuss Accounting and Finance.........................................13
Finance Inside of Companies........................................................................................14
Management of the Working Capital............................................................................14
The Financial System and the Financial Market...........................................................14
Financial Risk...................................................................................................................15
Business Risks..............................................................................................................16
Market Risks.................................................................................................................16
Credit Risks...................................................................................................................16
Liquidity Risks..............................................................................................................17
Counterparty Risks........................................................................................................17
Operational risk...............................................................................................................17
Reducing Risk Through Diversification........................................................................17
Beta: The Concept..........................................................................................................18
Capital Asset Pricing Model (CAPM)............................................................................19
Risk-Free Rate..............................................................................................................20
CASES..................................................................................................................................20
Beta: Examples................................................................................................................20
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Categories of Financial Market and Segmentation.............................................................22

Financial market instruments............................................................................................23
Securities...........................................................................................................................24
Weighted-average cost of capital................................................................................24
Calculating Return on Equity, The DuPont framework..............................................25
International financial supervision........................................................................................25
CONCLUSION.........................................................................................................................26
BIBLIOGRAPHY.....................................................................................................................28
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Figures
Figure 1: Calculating Beta Risks..............................................................................................19
Figure 2: CAPM Formula.........................................................................................................20
Figure 3: Some Companies and Their Respective Beta (Stice_Earl & Stice, 2019)...............22
Figure 4: Acquisition factors foe Securities. Source: WallStreet Mojo
https://www.wallstreetmojo.com/.............................................................................................24
Figure 5:Pillars of Basel III. From Source: WallStreet Mojo
https://www.wallstreetmojo.com/.............................................................................................26

Tables
No table of figures entries found.
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LITERATURE REVIEW
In order to gain an unbiased and focused grounding in report writing as a financial
professional it is important to understand the context behind financial numbers and how
decisions are concluded based on those numbers (Williamson, 2018). Literature covered lays
emphasis on how strategic financial decisions should be made by management (Hill &
bookboon.com, 2010). Your preferred productivity tool, examples of which include Microsoft
Excel, QuickBooks, financial Resource Planning software (SAP finance, FinancialForce,
Acumatica Infor., even Archer as a risk management tool, etc) are available to turn a financial
report into a human report with the appropriate level of formality and targeting the
appropriate audience in details and confidentiality. A competent financial professional is able
to appreciate the fundamental reporting principles in finance making presentations and reports
in various forms with correct and concise financial terms (jargon). A financial audience may
be global, which introduced dynamics around local and international law. There may even be
proprietary styles that constrain how the report is written. (Faure, 2013), a Professor & Dr
writes that there are six elements of the financial system:

1. lenders & borrowers

2. financial intermediaries
3. financial markets
4. financial instruments
5. money creation and
6. price discovery

With the aid of (Nielsen & bookboon.com, 2010) a comprehensive overview of these, (and)
the most important corporate finance topics are to be detailed in this seminar paper. As part of
this PhD program and as an aspirant in working in the financial services industry, the ability
to analyse financial data identify financial opportunities or evaluate outcomes for business
decisions or investment recommendations is a coveted ability. There is a long list of topics to
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cover on the financial side of this report. The coverage of psychological topics will be lacking
as that would require too broad a focus on topics non specific to Finance.

APPROACH
The method is a discussion using sentiment analysis as the established methodology. The
paper is not a proposal of strategy as there is no such silver bullet for trading the markets. The
approach of the paper is focused on knowledge coverage. Coverage of the core themes in the
course and using those themes to formulate and discuss the seminar topic. Focused on
"profitable strategies for trading the financial markets …” This topic outlines the importance
of …” understanding the psychology of the market, and the psychology of oneself." The
method moves through an adequate breakdown of relevant topics that are imperatives to
achieving profit from market trading.

“There is no single strategy, and the only silver bullet is discipline. It can take years to find
the strategy that affords profitability in the financial market and any change to that strategy is
easily a change towards corrupting what was 'perfect', as in you do not fix what is not broken.
Changing your strategy requires proofing it. Not being disciplined about the rule set you have
set for yourself is your recipe for failure1.

The approach will cover definitions around the following themes, key words and phrases as
derived from course outline:
 Corporate finance
o short-term financing
o strategic financial and investment decisions
o financial analysis and planning
o financial risk
 Methods for determining the market value of a company
 Financial planning and budgeting
 Management of the working capital
 The financial system and the financial market
 Categories of financial market and segmentation

1
(Boothe, Certified Trader or Certified Failure. the paths to Profit are all disciplined, 2022)
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 Financial market instruments

 Securities
o primary and secondary securities market
o margin lending transactions
 International financial supervision
 The debt markets
o the market for interbank deposits, yield curve
o fair value, yield to maturity and duration of the debt instrument
o loans, credits and deposits, bonds, bills of exchange and check

What is Corporate Finance

Investopedia defines corporate finance as the subfield of finance that deals with how
corporations address funding sources, capital structuring, accounting, and investment
decisions. Corporate finance is often concerned with maximizing shareholder value through
long- and short-term financial planning and the implementation of various strategies.
Corporate finance activities range from capital investment to tax considerations. Finance is
broadly defined around a decision on purchases, determining where funding comes from to
make those purchases, and then managing those purchased resources (assets) once purchased.

Organizations make decisions about financing and how those decisions impact their
organization by focusing on:

 short-term financing
 strategic financial and investment decisions
 financial analysis and planning
 financial risk
Short-term financing means taking out a loan to make a purchase, usually with a loan term of
less than one year. Strategic financial and investment decisions mean not only managing a
company's finances but managing them with the intention to strategically succeed via
attaining the long-term goals and objectives of the organization and maximizing shareholder
value over time. Financial analysis and planning (FP&A) is a set of planning, forecasting,
budgeting, and analytical activities that support the organization’s core business objectives
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and ensure overall financial health of the organization. Financially risk will be aptly defined
in later chapters however in brief, financial risk covers a variety of risk associated with the
activity of finance(ing) as defined. Thus far in order to understand the market and in order to
chart out profit making strategies the seminar paper has focused on providing clarity of
definitions and jargons used. There is much more terms and concepts to cover and behind the
understanding of each and via the amalgamation of these concepts are we able to build up the
fundamentals and the fundamental understanding of the market, the sentiments that drive it
and the price action that ultimately rule over the decisions that may be taken. These three
things: Fundamentals, sentiments and price dictate the “psychology of the market”. Market
psychology refers to the prevailing behaviours and aggregate sentiment of market actors at
any point in time. The psychology of the market explains why markets move and when we
speak about the movement of the market, we speak of price movement.

Finance for Business Decision-Making

So, with the definition of finance provided we conclude the finance the importance of finance
to individuals, to families, to corporations, to governments, and to the markets/global
economy.

Now, finance is also about risk! As there is the ever-present possibility of losing money (or
value) in any business transaction. The paper will cover the “Big Five” risk that are faced in
finance:

1. business risks
2. market risks
3. monetary risks
4. liquidity risks
5. counterparty risks
* operational risk

As it is seen there is a 6th risk included called operational risk these will cover many things
that are not strictly financial including change and crisis. The list is known to be somewhat
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subjective and in a post pandemic period it is a perfect time for a review of its composition.
No decent seminar paper on finance should exclude a discussion of the famous capital asset
pricing model, the CAPM this will come in a later section.

Methods for Determining the Market Value of a Company

American Express, an American multinational corporation specializing in payment card
services proposed 4 methods of determining a company’s worth. These are in no order or
preference :

1. Discounted Cash Flow

2. Transaction Comparables
3. Publicly Traded Comparables and
4. Book Value
If an organization is being bought or sold, it's important that the value of the business is
properly determined. Facebook’s purchase of WhatsApp, the AOL Time Warner and Comcast
Merger and other examples to be mentioned are some of the failures (subjectively or
objectively) in financial professionals determining the value of the business. These methods
were perhaps not covered in the learning path of the ‘professionals’ involved.

If it ever necessary to make an investment choice between two companies, then there must be
a method for determining the market value of the two. The list above contains important tools
in making this decision.

Financial Planning and Budgeting

With a financial plan, an organization can track progress on a time defined (such as quarterly
or semi-annual, or annual basis). A financial plan can be used to inspire investment into your
organization. It can help said investors to understand sentiments driving the price action on
the stocks/shares of your business. A budget records income and expenses over a period
defined. The budget and financial plan work in tandem. Companies that show they have
superior cash flow will attract further investment by way of traders and investors choosing to
buy and trade in the shares of that company.
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What is accounting?
Before my MBA which I completed in Japan 2006 I used say that accounting the little sister
of Finance. Whether I still believe that is unimportant. Investopedia defines accounting also
known as accountancy as the process of recording, summarizing, and reporting financial
transactions to oversight agencies, regulators etc. Wikipedia 2022 defines it as the
measurement, processing, and communication of financial and non-financial information
about economic entities such as businesses and corporations. You don’t need to be an
accountant or finance guru in order to trade and invest. It is sufficient to know the
fundamentals as outlined in this paper and to be able to properly keep track of your own
trading history

How Directors use and Discuss Accounting and Finance

Accounting therefore, and finance are two sides of the same coin. Both relate to where
money/value comes from. Note that “Goodwill” which isn’t money per se is listed on balance
sheet as an asset. Therefore, we speak not only about money but also of ‘value’. The board of
directors impacts finance through decisions on inventory management, strategic acquisitions,
borrowing policy, and shareholder expectations. A financial director is a senior finance
professional who creates, develop, and implements the financial policies and plans of a
corporation. Finance directors understand that it's critical to know how to use accounting to
track, present and describe information or reports to various departmental interests.

Accounting and finance further track what money is used for, where money is going and who
potentially owes it to the organization. Apart from that they both track inventory and
inventory management, acquisitions, loans (who the organization owes) and if not loans then
the available line of credit available with the bank. Accounting and finance track
stocks/shares (we will speak of the difference these two terms, if any, later), also investors (as
opposed to creditors) are tracked.

An investor is an owner and must not necessarily be paid back if things fall apart. A creditor
backed by law, retains the right to be paid back.
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Directors are not allowed to use their inside knowledge of a company’s accounting and
finance to trade. Insider trading is the illegal practice of trading on the stock exchange to one's
own advantage through having access to confidential information. Insider trading can be
categorised as follows:

1. Buying securities prior to the announcement of positive news, such as unexpectedly

high quarterly earnings (a beat), or trading on the expectation of a promising merger o
2. Selling securities prior the announcement of negative news (a miss), such as a decline
in quarterly revenue (known as a miss).

Finance Inside of Companies

I call this proprietary finance and it is about finance and financial activities that are local and
or native to the organization. There may be proprietary tools and risk valuation and
calculation techniques that give a company a competitive advantage. But of course, there are
global accounting standards but there have been merger opportunities that fell apart because
valuations did not turn out anything close to similar numbers, why is that? Because things
there was a perception around value perhaps which is subjective … just one possibility.

Management of the Working Capital

Activities around the management of working capital in an organization can be listed as
follows:

 Ratify contracts and/or Statement of Work and agreements

 Employ technology to prepare and present regular revenue reports
 Time keeping and tracking work on a time basis
 Invoicing and payment tracking
 Project baseline-ing.
Management of working capital represents the relationship between a firm's short-term assets
and its short-term liabilities. And the items listed above effective help to track and report on
these assets with the aim of ensuring that a company can afford its day-to-day operational
expenses. It is about managing operational risk, isn’t it?
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The Financial System and the Financial Market

The financial system we speak of comprises of the set of institutions, such as commercial
banks, FinTechs, central banks and reserves, insurance companies, stock exchanges, and
others that permit the exchange of financial value around long-term and/ or short-term
financial decision making. Long-term decisions may include buying land, buildings, (large)
machinery as examples. Short-term financial decisions may include cash flow budgeting,
inventory management, credit decisions, and may also include deciding on operating
items, such as the appropriate number of staff and the right amount of research development
and marketing to engage in.

These are all activities that rewire money, therefore in the end considerations around where
this money comes from is to be made. Source of funding may therefore include:

 Loans
 Investor funding
 Own financing

Once financing is in place, next needed are proper management and controls. The financial
sector is perhaps, next to healthcare, the most regulated sector. Controls around the flow of
money and value is consistently being tracked and audited. This tracking and auditing is a part
of regulatory activities targeting all financial institutions banks, trust company or similar, they
are supervised, and subject to periodic examination by the state level or federal level agencies
in their respective jurisdictions to ensure the safety and soundness of the financial system and
for protecting consumer interests.

Financial Risk
Risk is uncertainty about what will happen in the future. Variability, and the possibility of a
negative outcome or a positive outcome for which there are standard risk responses: accept,
avoid, mitigate, transfer. If you or your organization is risk averse, then avoiding risk is the
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standard operating procedure. Risk tolerance however is for those who for whatever reason,
usually the reward, is willing to take on more risk than let’s say, the risk averse individual.
Risk tolerance may not be the same as risk seeking. Risk-seeking refers to an individual who
is willing to accept a much greater economic uncertainty in exchange for the potential of
higher returns/reward. In order to get anyone to accept more risk, it is usually necessary to
entice with higher expected returns/reward. Much of finance involves reducing risk,
eliminating risk or pricing risk(in).

Let us now discuss the “Big Five”

Business Risks
The first rule of business is buy low and sell high. It is also the first rule in trading and a topic
in my 2022 book “Certified Trader or Certified Loser – The paths to profit are all
disciplined,”. Effectively, without the existence of business risks profit making is not
possible. Business risk is any exposure an enterprise or business has to factor(s) that may
lower profitability, value or cause it to irreparably fail to deliver its goods or service.

Market Risks
Market risk can be defined as the risk of losses in or on off-balance sheet positions arising
from adverse movements in market prices (Wikipedia). It is alternatively defined by the
Federal reserve as the possibility that an individual or other entity will experience losses due
to factors that affect the overall performance of investments in the financial markets 2. Market
risk is the risk of losses in positions arising from movements in market prices Market risks
also referred to as systematic risk, affects the performance of the entire market simultaneously
and may ultimately be referred to a s Beta risks.

 Market risk cannot be eliminated through diversification.

 Specific risk, or unsystematic risk, involves the performance of a particular security
and can be mitigated through diversification.

2
Board of the Federal ReserveSystem. "Supervisory Policy and Guidance Topics: Market Risk Management."
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 Market risk may arise due to changes to interest rates, exchange rates, geopolitical
events, or recessions.

Credit Risks
The third kind of financial risks are credit risks. Credit is important to keeping a business
going and to help it grow. Just like with an individual credit score, if a company's perceived
corporate credit worthiness falls, or goodwill is tarnished the cost of credit for that company
will rise.

Liquidity Risks
The fourth kind of financial risks are liquidity risks. Companies don't go out of business by
issuing too many shares. They go out of business because they have no money, no credit, or
they cannot meet their debt obligations. As an entrepreneur I have experienced this first hand
during the Covid Pandemic. Access to my business cash was cut off through German
bureaucracy and that was the end of business. A crisis if you ask me. As it sank me into
depression and dark places I have never been.

Counterparty Risks
The fifth kind of financial risks are counterparty risks. Counterparty risk are experience once
you have to buy goods or services from a vendor. Or for example if you buy insurance or
sign a long-term contract or via hedging. When companies hedge their risks, they do it with a
physical or financial counterparty. An airline might hedge its jet fuel costs in an agreement
directly with a refinery. A car manufacturer might have a long-term agreement with a steel
factory. You have within your control your business but not that of your counterparty and
therein lies the risk.

Operational risk
Operational risks are about those opportunities and uncertainties a company faces in the
course of operation. Operational risk includes potential losses caused by flawed or failed
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processes, policies, systems, or events that disrupt business operations. Quality deviations,
employee errors, criminal activity such as fraud, can all trigger an operational risk.

Reducing Risk Through Diversification

Some products succeed in the market, and some don't. Some ad campaigns are successful, and
some aren't. Any step forward involves the risk that things may not go as planned (Stice_Earl
& Stice, 2019). Some risk can't be avoided. Therefore, insurance companies make a business
of accepting risks by having policy holders pay claims by charging premiums higher than
what they expect to pay out. Thee are other companies that are not insurance companies that
are in the business of dealing with risky individuals who for example have a history of not
paying their bills, think payday loans and in some cases micro credit organizations. These
companies know the risks, and they charge a very high interest rate to compensate for
assuming that risk.

Risks can be reduced by making a good business decision. Understanding the psychology of
the market, and the psychology of self is a risk management activity.

The concept of diversification assists companies and investors in managing risk. (Stice_Kay
& Stice, 2019). Diversification is just a fancy way of saying don't put all your eggs in one
basket.

Beta: The Concept

Earlier it was mentioned that Beta risks are those that are impacting everyone, the entire
market. For example, during 2008 and 2009, there was a global economic
recession. Everyone everywhere in the world was impacted. It was a Beta risk and there was
no way to avoid that risk. Beta risk cannot be eliminated through diversification and in order
to quantify this type of risk the paper must next address the Capital Asset Pricing Model, or
the CAPM.

Before jumping right into the CAPM, the paper will first examine what makes up the
measure. This legendary model starts with some simple understandings:

 Risk appetite
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 Risk reward
 Risk diversification (if possible, not for Beta)

To trade the markets, one must have a level of risk appetite. Some traders are risk
averse, therefore they must be compensated in order to get them to accept risk. Beta,
computationally, is the covariance between a company's returns and the market
returns divided by the variance in the market returns:

Figure 1: Calculating Beta Risks

I confess, I may never use this, my job description is different! If you can't eliminate Beta
risk, it needs to be priced (in). In other words, you should expect a higher return for assuming
that risk. Therefore, Beta helps you in measuring that higher expected return.

Please note, cash has a Beta of zero.

Capital Asset Pricing Model (CAPM)

According to the capital asset pricing model, the return that a person must expect in order to
get her or him to make an investment is the risk-free rate, plus an equity risk premium, which
is based on the Beta (Stice_Kay & Stice, 2019). The model provides a methodology for
quantifying risk and translating that risk into estimates of expected return on equity.
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Figure 2: CAPM Formula

Risk-Free Rate
The risk-free rate is another component of the infamous capital asset pricing model. The risk-
free rate represents the return an investor would expect from an absolutely risk-free
investment over a specific period of time. The risk-free rate is useful in helping a potential
investor compute how much return to expect for a given level of risk. It calculates for a given
level of risk, how much return over and above the risk-free rate would an investor require. It
serves as the benchmark for an expected return involving no risk. When we start to price risk
into our expected return, the premium reflected in that price is the increment over and above
the risk-free rate.

CASES
Beta: Examples
Example 1:

“Consider Ford Motor Company. If you are fearful of your job, if the economy is going
down and you are fearful of a recession than you're not going to run out and buy a new
car. So, when there is a little downturn in the economy Ford Motor sales go down
substantially.
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When the economy tightens up big construction projects grind to a halt, so Caterpillar, the big
construction equipment company, sees sales go down when the economy takes a turn for the
worse. But when the economy goes back up lots of people want to buy cars.

There's been a pent-up demand so Ford Motor sales go way up. The same is true with
construction equipment. When the economy goes up a little Caterpillar stock price goes up a
lot. That relationship is reflected in a high Beta” (Stice_Earl & Stice, 2019).

Example 2:

“Consider Bank of America. Banks, especially large banks, have started engaging in more
risky behaviour. They are selling derivatives. They are trading derivatives and collateralize
debt instruments and mortgage-backed securities, which all sound very exotic and scary. And
it is scary because what it's done is this:-

when the broad economy is doing well large banks such as Bank of America do great. When
the economy goes down these banks get killed, they get hammered. They have a large Beta
risk.

Now, let's consider companies with Beta around one. Facebook, Microsoft, and Apple all
have betas around one. This reflects the broad importance of technology in our economy. The
economic prospects of these technology companies pretty much track the economy.

When the economy is strong these companies are strong. When the economy goes down a
little bit, they go down a little bit. They have a beta of around one. What does it mean for a
company to have a beta that's quite low?

Well, McDonald's, Walmart, and Coca Cola have betas that are quite low because even when
the economy is down you need to buy clothes, you need to buy groceries, you need fast food,
and you need something to drink. When the economy goes up you don't all of a sudden decide
you need five Big Macs a day, one will probably still do. So the fluctuations of performance
of Walmart, McDonald's and Coke are almost independent of what happens in the broader
economy … Regardless of the state of the economy people still turn on their lights, they still
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have refrigerators, and they still charge their phones. A low beta means a company is not
really impacted by broader economic movements…”

All cases taken from (Stice_Kay & Stice, 2019)

Figure 3: Some Companies and Their Respective Beta (Stice_Earl & Stice, 2019)

Categories of Financial Market and Segmentation

Here we are talking about definitions around what is defined as a market.

There exists the stock market where trades of shares reflecting the ownership of publicly
traded company are bought and sold.

A stock is the actual asset in which you invest, while a share is the unit of measurement for
that asset. A stock tells you what you are investing in, and a share tells you how much of that
stock you own. A stock is evidence that a stockholder is an owner of a portion or a share of a
corporation. If you own a share of stock, you are an owner in that corporation. The
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stockholder receives the stock, typically in exchange for paying cash to the previous owner of
the shares.

A bond, on the other hand, is evidence that the bondholder is owed money by the company
that issued the bond.

In essence, a bond is an IOU. The bondholder receives the bond, typically in exchange for
paying cash to the previous owner of the bond. The Bond market offers opportunities for
companies and the government to secure money to finance a project or investment. Bonds are
effectively loans and interest paid on them are fixed. A bond is a type of security under which
the issuer owes the holder a debt and is obliged by law to repay it according to the terms of
repayment. The principal of the bond at maturity date as well as interest falls due at a
specified time.

The commodities market is where trading in the primary economic sector rather than
manufactured products sector is carried out. Trades in gold, oil, cocoa, wheat and sugar are
examples of commodities.

The derivatives market refers to the financial market for financial instruments such as futures
contracts or options. There are four kinds of participants in a derivatives market: hedgers,
speculators, arbitrageurs, and margin traders.

Financial market instruments

“Financial instruments are assets that can be traded, or they can also be seen as packages of
capital that may be traded. Most types of financial instruments provide efficient flow and
transfer of capital all throughout the world's investors. These assets can be cash, a contractual
right to deliver or receive cash or another type of financial instrument, or evidence of one's
ownership of an entity”3.

3
Investopedia
 24

Figure 4: Acquisition factors foe Securities.

Source: WallStreet Mojo https://www.wallstreetmojo.com/

Securities
Securities are fungible and tradable financial instruments used to raise capital in public and
private markets. There are primarily three types of securities:

 equity—which provides ownership rights to holders.

 debt—essentially loans repaid with periodic payments, and
 hybrids—which combine aspects of debt and equity.

Primary and secondary securities market: The primary market is where securities are created,
while the secondary market is where those securities are traded by investors. In the primary
market, companies sell new stocks and bonds to the public for the first time, such as with an
initial public offering (IPO). Secondary markets are like that of used car markets.

Margin lending transactions are transactions in which a credit institution extends credit in
connection with the purchase, sale, carrying or trading of securities. Margin lending
transactions do not include other loans that happen to be secured by securities collateral.

Weighted-average cost of capital

The Weighted-average cost of capital (WACC) computes a company's capital structure ad
determines how costly it is for the company to obtain external financing. The whole purpose
of capital structure and finding the optimal capital structure is to find the capital structure that
will give a company its lowest WACC or weighted average cost of capital.
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If cost of capital is lower, that means there are a greater number of attractive projects out
there. So the major objective of corporate finance and capital structure is to find the capital
structure that will provide the lowest weighted average cost of capital, the WACC.

Calculating Return on Equity, The DuPont framework

Return on equity is a general overall measure of how well a firm is doing. The DuPont
framework breaks return on equity down into three parts:

 profitability,
 efficiency, and
 leverage.

When it comes to return on equity, the DuPont framework is a general overall measure of a
company's performance for a given period of time, and it is the foundation for one of the most
amazing creations in accounting history.

Leverage is an indication of how much money have we borrowed to purchase assets. And
why do we purchase assets? We purchase assets in hopes of generating sales. The leverage
measure tells us, of our assets, how many were acquired with the equity that's been put into
the company.

International financial supervision

Financial Supervision refers to the ongoing oversight of financial service providers to make
sure they are following regulatory rules.
 26

Figure 5:Pillars of Basel III. From

Source: WallStreet Mojo https://www.wallstreetmojo.com/

The aim of our supervisory work is to result in a financial system that meets the needs of
consumers and the wider economy in a sustainable manner over the long term.

Common bank regulations include reserve requirements, which dictate how much money
banks must keep on hand; capital requirements, which dictate how much money banks can
lend; and liquidity requirements, which dictate how easily banks can convert their assets into
cash. Basel III for example, is an international regulatory accord that introduced a set of
reforms designed to mitigate risk within the international banking sector by requiring banks to
maintain certain leverage ratios and keep certain levels of reserve capital on hand.

CONCLUSION
We are now armed with knowledge of the markets. Unfortunately, there was little to offer in
the realm of psychology of self, that’s a whole different course. However, the understanding
of these fundamental principles is invaluable in making trading and investment decisions.
Comprehensive understanding allows investors and traders to participate in the raising money,
in the offering and reselling of stock /shares, corporate or government bonds, and allows said
investors or traders to participate in the financial achievements of the companies, sharing in
their profits through capital gains, and earned income or through dividends. Financial markets
facilitate dealings between those who need capital with those who have capital to invest.
 27

It is also important to state that the contents of this paper is not to be taken as financial advise
as there are jurisdictions and laws which prohibit and limit such advice, allowing it to only
come from licensed financial advisors.

Since the goal of the paper was full coverage of content the need for analysis is moot and
what remains is to show how understanding the information presented is important to being a
successful trader or investor.
 28

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