Financial Markets (Session Two)


Session Two

An Investor is a person who invests in any different type of markets, for example equities, commodities derivatives, currencies, real estate; as this term is connected with the individual who is looking for profit from a certain investment. Types of investors' can be classified on certain criterion which is known by risk (the possibility of suffering damage or loss).

Risk is calculated by dividing the standard deviation over the historical average returns.

Risk = Standard Deviation /Average Returns

Speculators:

Are type of investors' who take higher than average risks, seeking for abnormal profits, as they are mainly concerned about speculating which might be the futuristic prices of a certain asset e.g. currency or a commodity; mainly they are involved in buying and selling future and option contracts in the short term, as they represent almost 70% if investors'; which might be known by "Risk Seekers".

Hedgers:

Are types of investors' who tries to avoid or cancel any risks that can be accompanied with certain investment, they try to take positions that might prevent them from any potential losses, these types of investors' are widely found in markets that are full of uncertainties and high volatility. There are many types of hedging positions like natural hedges, hedging credit risk, hedging currency risk, hedging equity and equity futures. Which are also known by “Risk Neutrals”.

Arbitragers:

Are types of investors' who buy securities in one market then immediately resell it in another market in order to profit from prices divergence, as this type of dealing is only suggested only for well experienced investors' as any delay in transactions could result of huge losses; the effect of these transaction would result in adjusting price differences between markets.

Financial Markets:

Types of Financial Markets:

Factor Market: it is the types of markets that include all features of production for example land, labor, capital.

Product Market: is the market that includes all distributing products like food, goods and services.

Primary Market:type of market that only sells the newly issued securities.

Secondary Market:it’s a market where buyers buy from the seller rather than getting it from issuing company.

Over the Counter Market (OTC) it’s a type of market that trades occur via phone or a network instead of a physical trading. Those types of markets are found for companies that do not meet the exchange listing requirements. Inside the OTC market there are:

  • Market makers: it’s a type of firm that takes in a certain type and number of shares in order to ease the trading in this security, each market maker displays buy and sell quotations for a certain number of shares, when the order is set the market maker instantly sells from his inventory, as this transaction takes only a small amount of time; for example NASDAQ is considered to be a market maker. The market maker profits from the spread, which is the difference between the prices for buying and the prices at which they are willing to sell at.
  • Ask prices: is the price the seller is willing to take for a certain type of security and besides the ask prices there will be the amount of securities the market maker is willing to sell; which are also known by the Bears.
  • Bid prices: the prices the buyer is willing to take, which is the opposite of the ask prices, the bulls in the markets are known by the bidders.

Money Market:is a type of market instruments that mature in less than one year as they are very liquid, the instruments involved in this market have fixed income and low risk for example treasury bills and commercial papers.

Capital Market: it’s a market of trading more risky instruments with a longer maturity date, as this market consists of the primary and the secondary markets.

Bond Market: the place where the issuance and the trading of the debt securities occur”, as most bond market instruments are traded in the OTC market.

Stock Market:is the market in which shares are traded through exchange floor or over-the-counter, which is known by another name equity market, this market helps investors' to have a partial ownership in a certain company, and some gains or dividends based on the company's performance.

A stock is defined as share of ownership in a certain company, and the more stocks you obtain the bigger your share in the company, which is confirmed by a certain piece of paper called a certificate. The managers of a company are supposed to increase the value of those investments to increase the confidence of investors' in the company to raise its share price.

There are two types of stocks, preferred and common stocks. A common stock are type of shares that are released to public were anybody can acquire; a preferred stocks are another type of stocks that are sold to certain people, not publicly available. The difference between both types of stocks is that preferred stocks have the priority in taking distributed dividends and in the liquidation of the company.

Functions of Financial Markets

Borrowing and lending:financial markets provides money to investors', by giving out certain amount of money but with certain interests which is known by cost of borrowing.

Price determination:sets or defines fixed or volatile prices for each type of instrument in the market.

Information collection and analysisprovides information for market participants to value or estimate prices of a certain instrument

Risk sharingfinancial markets eliminate a type of risk known by systematic risk, by diversifying investments.

Liquidity: markets provide sufficient amount of buyers and sellers helping any investors' to directly convert instruments into cash.

Efficiency: markets reflecting all the publicly available information on a certain instrument.

Major Market Participants

Broker:a broker's job is to locate a buyer to the seller, as they involve in assets transformation.

Dealer: smoothes the process of matching the buyer with the seller.

Investment banks:contributes in selling the newly issued securities.

Financial intermediaries: They are foundations that act as mediator between investors and firms.

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