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I : I ntroduction

1: I ntroduction to Financial Markets


Chapter 1: I ntroduction to Financial Markets
Dow Jones Industrial Average
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Financial markets, such as bond and stock
markets, are crucial in our economy.
These markets channel funds from savers to
investors, thereby promoting economic
efficiency.
Market activity affects personal wealth, the
behavior of business firms, and economy as a
whole

Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Well functioning financial markets, such as
the bond market, stock market, and foreign
exchange market, are key factors in
producing high economic growth.

Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Debt markets, or bond markets, allow
governments, corporations, and individuals to
borrow to finance activities.
In this market, borrowers issue a security,
called a bond, that promises the timely
payment of interest and principal over some
specific time horizon.
The interest rate is the cost of borrowing.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
There are many different types of market
interest rates, including mortgage rates, car
loan rates, credit card rates, etc.
The level of these rates are important.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
The stock market is the market where
common stock (or just stock), representing
ownership in a company, are traded.
Companies initially sell stock (in the primary
market) to raise money. But after that, the
stock is traded among investors (secondary
market).
Of all the active markets, the stock market
receives the most attention from the media,
probably because it is the place where
people get rich (and poor) quickly.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
The next slide shows the level of the Dow
Jones Industrial Average over the last 55
years. Note how volatile stock prices have
been, especially over the last five years.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Companies, not just individuals, also watch
the market. Although corporations dont
typically invest in the market, they often
seek additional funding in equity markets
after going public. The success of these
seasoned-equity offerings (SEOs) is very
dependent on the current price of the
companys stock.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
The foreign exchange market is where
international currencies trade and exchange
rates are set.
Although most people know little about this
market, it has a daily volume around
$1 trillion!
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
The next slide shows how the U.S. dollar
has fluctuated in price against a basket of
foreign currencies.
When the dollar strengthens, foreign
purchase of domestic goods falls, and US
manufacturers experience a decreased
demand for their goods.
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Chapter 1: I ntroduction to Financial Markets
Why Study Financial Markets?
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Markets
Exist to bring buyers and sellers together
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Markets
Primary market


Secondary market
FI NANCI AL MARKETS
FI NANCI AL MARKETS
Chapter 1: I ntroduction to Financial Markets
Circular Flow
Chapter 1: I ntroduction to Financial Markets
Returns Mechanism
Normal Return
Abnormal Return
The
beginning
of a
bubble
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Efficient Markets Hypothesis
Weak Form
.
Semistrong Form
.
Strong Form
.
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Technical Analysis
Double Bottom (shaped like a W)
[A] Breakout #1
[B] Breakout #2
[C] New Trend
http://business.illinois.edu/finance_dev/Lesson21.asp
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Fundamental Analysis
Earnings Per Share (EPS)


Price/Earnings Ratio (P/E)
g Outstandin Shares
Income Net
EPS
EPS
Price Stock
P/E
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Fundamental Analysis
Current Ratio


Quick Ratio
s Liabilitie Current Total
Assets Current Total
CR
s Liabilitie Current Total
Receivable Accounts s Securitie e Marketabl & Cash
QR

availability of
working capital
liquidity
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Fundamental Analysis
Return on Assets (RoA)


Return on Equity (RoE)


Gross Profit Margin on Sales
Equity rs Shareholde
Income Net
RoE
Assets Total
Income Net
RoA
Sales
Sold Goods of Cost - Sales
Margin
Gross

efficient use of
factors of
production
profitability
efficient use of
assets
Chapter 1: I ntroduction to Financial Markets
Practice Questions
Chapter 1: I ntroduction to Financial Markets Oltheten & Waspi 2012
Q&P 1-1:
I use my computer and Internet link to chart the movement of all 30 Dow
Jones Industrial stocks. I buy and sell according to my analysis of these price
movements. If I can generate consistent abnormal returns in this manner then
this is a failure of
Charles is a member of the Board of Directors of the Royal Bank. If he can
generate consistent abnormal returns in trading Royal Bank shares then this is
a failure of
Varya checks out all the Value Line publications and buys everything that
Value Line recommends. If she can generate consistent abnormal returns then
this is a failure of
I watch Wall Street Week every week. Then when it's over I throw a dart at
the Wall Street Journal. I buy whatever the dart hits. If I can generate
consistent abnormal returns in this manner then this is a failure of
John Q. Investor analyses the quarterly earnings statements of some fifty
obscure small-cap stocks. He then buys according to the earnings pattern
disclosed. If he can generate consistent abnormal returns in this manner then
this is a failure of