Sarathguj

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Chapter 13 Introduction Learning objectives

Securities and the financial markets

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The nature of the financial markets

The money and capital markets are at the economic centre of the industrial and commercial world. Both firms and individuals rely upon the efficient operation of these markets for obtaining capital for investment purposes or money to meet their short-term financial needs. Over the last fifty years the operation of the money and capital markets has been progressively ‘globalised’ both to finance international trade but also to support multinational business and governments finance their activities. This globalisation has been facilitated by a number of political, economic and technological developments. In this chapter, we explore the financial markets with an outline of their history and their development in modern globalised economies. We devote some time to the concept of a security as a negotiable claim and the phenomenon of securitisation. We outline the structure of the financial markets and, in particular, how the money and capital markets interact. We then turn to the equity market as the primary risk market and discuss the role of information in the pricing of securities and the concept of information efficiency. Although we take a bias towards market efficiency, some anomalous evidence will also be described. Risk and return are then defined and an intuitive appreciation given of the concept of diversification and risk partitioning. The risk–return trade-off is then discussed, leading to an informal discussion of the capital asset pricing model. Finally, topics in the fixed interest market are then discussed before closing with a section on the sources of long- and short-term finance.

To understand the characteristics of a financial market security. To understand the nature of the financial markets and the different motives of traders. To understand the...