Capital market.doc

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Capital market

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The capital market(securities markets) is themarketfor securities,wherecompaniesand the governmentcan raise long-term funds The capital market includes the stockmarketand the!ond market Financial regulators, such as the "# #ecurities and$%change &ommissionand the Financial #ervices 'uthorityin the ", oversee themarkets, to ensure that investors are protected against misselling The capital marketsconsist of theprimary market,where new issues are distri!uted to investors, and thesecondary market, where e%isting securities are traded

The capital market can !e contrasted with other financial marketssuch as the money

marketwhich deals in short term liuid assets, and derivatives marketswhich deals inderivative contracts

*oth the private and the pu!lic sectors provide market makersin the capital markets

Stock market

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Jump to: navigation,searchThe e%amples and perspective in this article or section may not represent a worldwideview+lease improve the article or discuss the issue on the talk page
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Theew ork #tock $%change

' stock marketis a marketfor the tradingof companystock, and derivativesof same.!oth those securitieslisted on a stock e%changeas well as those only traded privately

Contents

/hide0 1 2efinition

3 Trading

4 5arket participants 6 7istory

8 9mportance of stock markets

o 81 Function and purpose

o 83 elation of the stock market to the modern financial system

o 84 The stock market, individual investors, and financial risk

o 86 The !ehavior of the stock market

o 88 9rrational !ehavior

o 8; &onclusion

o 8< eferences:

; #tock market inde%

< 2erivative instruments

= >everaged #trategies

o =1 #hort selling

o =3 5argin !uying

? ew issuance

1@ 9nvestment strategies

11 #ee also
http://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Market_systemhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Stock_exchangehttp://toggletoc%28%29/http://en.wikipedia.org/wiki/#Definitionhttp://en.wikipedia.org/wiki/#Tradinghttp://en.wikipedia.org/wiki/#Market_participantshttp://en.wikipedia.org/wiki/#Historyhttp://en.wikipedia.org/wiki/#Importance_of_stock_marketshttp://en.wikipedia.org/wiki/#Function_and_purposehttp://en.wikipedia.org/wiki/#Relation_of_the_stock_market_to_the_modern_financial_systemhttp://en.wikipedia.org/wiki/#The_stock_market.2C_individual_investors.2C_and_financial_riskhttp://en.wikipedia.org/wiki/#The_behavior_of_the_stock_markethttp://en.wikipedia.org/wiki/#Irrational_behaviorhttp://en.wikipedia.org/wiki/#Conclusionhttp://en.wikipedia.org/wiki/#References:http://en.wikipedia.org/wiki/#Stock_market_indexhttp://en.wikipedia.org/wiki/#Derivative_instrumentshttp://en.wikipedia.org/wiki/#Leveraged_Strategieshttp://en.wikipedia.org/wiki/#Short_sellinghttp://en.wikipedia.org/wiki/#Margin_buyinghttp://en.wikipedia.org/wiki/#New_issuancehttp://en.wikipedia.org/wiki/#Investment_strategieshttp://en.wikipedia.org/wiki/#See_alsohttp://en.wikipedia.org/wiki/Image:NYSESecurity.JPGhttp://en.wikipedia.org/wiki/Image:NYSESecurity.JPGhttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Market_systemhttp://en.wikipedia.org/wiki/Tradehttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Stock_exchangehttp://toggletoc%28%29/http://en.wikipedia.org/wiki/#Definitionhttp://en.wikipedia.org/wiki/#Tradinghttp://en.wikipedia.org/wiki/#Market_participantshttp://en.wikipedia.org/wiki/#Historyhttp://en.wikipedia.org/wiki/#Importance_of_stock_marketshttp://en.wikipedia.org/wiki/#Function_and_purposehttp://en.wikipedia.org/wiki/#Relation_of_the_stock_market_to_the_modern_financial_systemhttp://en.wikipedia.org/wiki/#The_stock_market.2C_individual_investors.2C_and_financial_riskhttp://en.wikipedia.org/wiki/#The_behavior_of_the_stock_markethttp://en.wikipedia.org/wiki/#Irrational_behaviorhttp://en.wikipedia.org/wiki/#Conclusionhttp://en.wikipedia.org/wiki/#References:http://en.wikipedia.org/wiki/#Stock_market_indexhttp://en.wikipedia.org/wiki/#Derivative_instrumentshttp://en.wikipedia.org/wiki/#Leveraged_Strategieshttp://en.wikipedia.org/wiki/#Short_sellinghttp://en.wikipedia.org/wiki/#Margin_buyinghttp://en.wikipedia.org/wiki/#New_issuancehttp://en.wikipedia.org/wiki/#Investment_strategieshttp://en.wikipedia.org/wiki/#See_also


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o 111 >ists

13 $%ternal links

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Definition

Securities

Securities

*ond&ommercial paper

7y!rid security#tock

Warrant

Markets

*ond marketStock market#tock e%change

Stocks

#hare#tock

Warrant

Bonds by coupon

Fi%ed rate !ond

Floating rate noteAero coupon !ond

9nflation-inde%ed !ond

Bonds by collateral

'sset-!acked security&ollateraliBed de!t o!ligation

&ollateraliBed mortgage o!ligation
http://en.wikipedia.org/wiki/#Listshttp://en.wikipedia.org/wiki/#External_linkshttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=1http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Hybrid_securityhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Share_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/wiki/Zero_coupon_bondhttp://en.wikipedia.org/wiki/Inflation-indexed_bondhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligationhttp://en.wikipedia.org/wiki/Image:Vereinigte_Ostindische_Compagnie_%28VOC%29share.jpghttp://en.wikipedia.org/wiki/#Listshttp://en.wikipedia.org/wiki/#External_linkshttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=1http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Commercial_paperhttp://en.wikipedia.org/wiki/Hybrid_securityhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Stock_exchangehttp://en.wikipedia.org/wiki/Share_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Warrant_(finance)http://en.wikipedia.org/wiki/Fixed_rate_bondhttp://en.wikipedia.org/wiki/Floating_rate_notehttp://en.wikipedia.org/wiki/Zero_coupon_bondhttp://en.wikipedia.org/wiki/Inflation-indexed_bondhttp://en.wikipedia.org/wiki/Asset-backed_securityhttp://en.wikipedia.org/wiki/Collateralized_debt_obligationhttp://en.wikipedia.org/wiki/Collateralized_mortgage_obligation


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&redit linked note5ortgage-!acked security

"nsecured !ond

Bonds by issuer&orporate !ond

Covernment !ond5unicipal !ond#overeign !ond

'lthough common, the term Dthe stockmarketD is a somewhat a!stract concept for themechanism that ena!les the trading of company stocks 9t is also used to descri!e thetotalityof all stocks and sometimes other securities, with the e%ception of!onds,commodities, and derivatives The term is used especially to apply within one country as,for e%ample, in the phrase Ethe stock market was up todayE, or in the term Estock market

!u!!leE *onds are still traditionally traded in an informal, over-the-countermarketknown as the!ond market &ommodities are traded in commodities markets,andderivatives are traded in a variety of markets (!ut, like !onds, mostly Dover-the-counterD)The siBe of the worldwide D!ond marketD is estimated at 68 Trillion. the siBe of the DstockmarketD is estimated as a!out half that The world derivatives market has !een estimatedat a!out 4@@ Trillion/10 /30The maGor "# *anks alone are said to account for a!out1@@ Trillion

The stock market is distinct from a stock e%change, which is an entity (a corporationormutual organiBation) in the !usiness of !ringing !uyers and sellers of stocks andsecurities together For e%ample, Dthe stock marketD in the "nited #tates includes the

trading of all securities listed on the#$,the'#2'H, the'me%, as well as on themany regional e%changes, theIT&**, and +ink #heets$uropean e%amples of stocke%changes include the +aris *ourse(now part of $urone%t), the >ondon #tock $%changeand the 2eutsche *rse

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Trading

+articipants in the stock market range from small individual stock investorsto large

hedge fundtraders,who can !e !ased anywhere Their orders usually end up with aprofessional at a stock e%change, who e%ecutes the order

5ost stocks are traded on e%changes, which are places where !uyers and sellers meet anddecide on a price #ome e%changes are physical locations where transactions are carriedout on a trading floor, !y a method known as open outcry (ouDve pro!a!ly seen picturesof a trading floor, in which traders are wildly throwing their arms up, waving, yelling,and signaling to each other) This type of auction is used in stock e%changes and
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commodity e%changeswhere traders may enter "verbal"!ids and offers simultaneouslyThe other type of e%change is a virtualkind, composed of a network of computers wheretrades are made electronically via traders at computer terminals

'ctual trades are !ased on an auction marketparadigm where a potential !uyer bidsa

specific price for a stock and a potential sellerasks

a specific price for the stock (*uyingor selling at marketmeans you will accept any!id or ask price for the stock) When the!id and ask prices match, a sale takes place on a first come first serve !asis if there aremultiple !idders or askers at a given price

The purpose of a stock e%change is to facilitate the e%change of securities !etween !uyersand sellers, thus providing a marketplace(virtual or real) Just imagine how difficult itwould !e to sell shares (and what a disadvantage you would !e at with respect to the!uyer) if you had to call around trying to locate a !uyer, as when selling a house eally,a stock e%change is nothing more than a super-sophisticated farmersD market providing ameeting place for !uyers and sellers

Theew ork #tock $%changeis aphysicale%change, where much of the trading is doneface-to-face on a trading floor This is also referred to as a ElistedE e%change (!ecauseonly stocks listed with the e%change may !e traded) Irders enter !y way of !rokeragefirms that are mem!ers of the e%change and flow down to floor !rokers who go to aspecific spot on the floor where the stock trades 't this location, known as the tradingpost, there is a specific person known as the specialistwhose Go! is to match !uy ordersand sell orders +rices are determined using an auction method known as Eopen outcryE:the current !id price is the highest amount any !uyer is willing to pay and the current askprice is the lowest price at which someone is willing to sell. if there is a spread, no tradetakes place For a trade to take place, there must !e a matching !id and ask price (9f a

spread e%ists, the specialist is supposed to use his own resources of money or stock toclose the difference, after some time) Ince a trade has !een made, the details are sent!ack to the !rokerage firm, who then notifies the investor who placed the order 'lthoughthere is human contact in this process, donDt think that the #$ is still in the #tone 'ge.computers do play a huge role in the process, especially for so-called Eprogram tradingE

Theasdais a virtual(listed) e%change, where all of the trading is done !y computersThe process is similar to the a!ove, in that the seller provides an asking price and the!uyer provides a !idding price 7owever, !uyers and sellers are electronically matchedIne or more asda market makerswill always provide a !id and ask price at which theywill always purchase or sell DtheirD stock/40

The +aris *ourse, now part of $urone%tis an order-driven, electronic stock e%change 9twas automated in the late 1?=@s *efore, it consisted of an open outcrye%change#tock!rokersmet in the trading floor or the +alais *rongniart 9n 1?=;, the &'T# tradingsystemwas introduced, and the order matching process was fully automated

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http://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Auctionhttp://en.wikipedia.org/wiki/Auctionhttp://en.wikipedia.org/wiki/Marketplacehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Program_tradinghttp://en.wikipedia.org/wiki/Nasdaqhttp://en.wikipedia.org/wiki/Market_makerhttp://www.investopedia.com/ask/answers/128.asphttp://en.wikipedia.org/wiki/Paris_Boursehttp://en.wikipedia.org/wiki/Euronexthttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Stockbrokershttp://en.wikipedia.org/wiki/CATS_(trading_system)http://en.wikipedia.org/wiki/CATS_(trading_system)http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=3http://en.wikipedia.org/wiki/Commodity_exchangehttp://en.wikipedia.org/wiki/Auctionhttp://en.wikipedia.org/wiki/Marketplacehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/New_York_Stock_Exchangehttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Program_tradinghttp://en.wikipedia.org/wiki/Nasdaqhttp://en.wikipedia.org/wiki/Market_makerhttp://www.investopedia.com/ask/answers/128.asphttp://en.wikipedia.org/wiki/Paris_Boursehttp://en.wikipedia.org/wiki/Euronexthttp://en.wikipedia.org/wiki/Open_outcryhttp://en.wikipedia.org/wiki/Stockbrokershttp://en.wikipedia.org/wiki/CATS_(trading_system)http://en.wikipedia.org/wiki/CATS_(trading_system)http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=3


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Market participants

5any years ago, worldwide, !uyers and sellers were individual investors, such aswealthy !usinessmen, with long family histories (and emotional ties) to particularcorporations Iver time, markets have !ecome more EinstitutionaliBedE. !uyers and

sellers are largely institutions (eg,pension funds, insurance companies,mutual funds,hedge funds,investor groups, and!anks) The rise of the institutional investor has!rought with it some improvements in market operations (!ut not necessarily in theinterest of the small investor or even of the naKve institutions, of which there are many)Thus, the government was responsi!le for Efi%edE (and e%or!itant) fees !eing markedlyreduced for the DsmallD investor, !ut only after the large institutions had managed to !reakthe !rokersD solid front on fees (they then went to DnegotiatedD fees, !ut only for largeinstitutions)

7owever,corporate governance(at least in the West) has !een greatly affected !y the riseof institutional DownersD

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History

9n 13th centuryFrancethe courratier de changewere concerned with managing andregulating the de!ts of agricultural communities on !ehalf of the !anks *ecause thesemen also traded with de!ts, they could !e called the first!rokers

9n late 14th century*rugescommodity traders gathered inside the house of a man called

Van der Beurse, and in 14@?they institutionaliBed this until then informal meeting and!ecame the E*rugse *eurseE The idea uickly spread aroundFlandersand neigh!ouringcounties and E*eurBenE soon opened in Chentand'msterdam

9n the middle of the 14th century Lenetian!ankers !egan to trade in governmentsecurities 9n 1481the Lenetian government outlawed spreading rumors intended to lowerthe price of government funds *ankers in +isa,Lerona,Cenoaand Florencealso !egantrading in government securities during the 16th century This was only possi!le !ecausethese were independent city states not ruled !y a duke !ut a council of influential citiBens

The 2utch later startedGoint stock companies, which let shareholdersinvest in !usiness

ventures and get a share of their profits - or losses 9n 1;@3,the 2utch $ast 9ndia&ompanyissued the first shares on the 'msterdam #tock $%change 9t was the firstcompany to issue stocks and !onds

The 'msterdam #tock $%change(or 'msterdam *eurs) is also said to have !een the firststock e%change to introduce continuous trade in the early 1


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the complete collapse of the financial system or government institutions), may not !ecapa!le of !eing spread, or insured against

The smooth functioning of all these activities facilitates economic growthin that lowercosts and enterprise risks promote the production of goods and services as well as

employment 9n this way the financial system contri!utes to increased prosperity

The stock marketis one of the most important sources forcompaniesto raise money$%perience has shown that the price of sharesand other assets is an important part of thedynamics of economic growth ising share prices, for instance, tend to !e associatedwith increased !usiness investment and vice versa #hare prices also affect the wealth ofhouseholds and their consumption Therefore, central !ankstend to keep an 'rguseye onthe control and !ehavior of the stock market and, in general, on the smooth operation offinancial systemfunctions Financial sta!ility is the raison dDOtre of central !anks

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elation of t!e stock market to t!e modern financial system

The financial system in most western countries has undergone a remarka!letransformation Ine feature of this development is disintermediation' portion of thefunds involved in saving and financing flows directly to the financial markets instead of!eing routed via !anksD traditional lending and deposit operations The general pu!licDsheightened interest in investing in the stock market, either directly or through mutualfunds, has !een an important component of this process #tatisticsshow that in recentdecades shares have made up an increasingly large proportion of householdsD financialassets in many countries 9n the1?


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affect not only the individual investor or household, !ut also the economy on a largescale The following deals with some of the risks of the financial sector in general and thestock market in particular This is certainly more important now that so many newcomershave entered the stock market, or have acuired other DriskyD investments (such asDinvestmentD property, ie,real estateand collecta!les)

With each passing year, the noise level in the stock market rises. elevision

commentators, financial writers, analysts, and market strategists are allovertalking each other to get investors! attention. t the same time,

individual investors, immersed in chat rooms and message boards, are

e#changing $uestionable and often misleading tips. %et, despite all thisavailable information, investors find it increasingly difficult to profit.

&tock prices skyrocket with little reason, then plummet 'ust as $uickly, and

people who have turned to investing for their children!s education andtheir own retirement become frightened. &ometimes there appears to be no

rhyme or reason to the market, only folly.

This is a uote from the preface to a pu!lished !iography a!out the well-known and longterm value oriented stock investorWarren *uffet (1) *uffet !egan his career with only1@@ "# dollars and has over the years !uilt himself a multi!illion-dollar fortune Theuote illustrates something of what has !een going on in the stock market during the endof the 3@th centuryand the !eginning of the 31st

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T!e be!avior of t!e stock market

From e%perience we know that investors may temporarily pull financial prices away fromtheir long term trend level Iver-reactions may occurN so that e%cessive optimism(euphoria) may drive prices unduly high or e%cessive pessimism may drive prices undulylow ew theoretical and empirical arguments have !een put forward against the notionthat financial markets are efficient

'ccording to the efficient market hypothesis($57), only changes in fundamentalfactors, such as profits or dividends, ought to affect share prices (*ut this largelytheoretic academic viewpoint also predicts that little or no trading should take placeNcontrary to factN since prices are already at or near euili!rium, having priced in allpublic knowledge.) *ut the efficient-market hypothesis is sorely tested !y such events as

the stock market crash in 1?=


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5oreover, while the $57 predicts that all price movement (in the a!sence of change infundamental information) is random (ie, non-trending), many studies have shown amarked tendency for the stock market to trend over time periods of weeks or longer

Larious e%planations for large price movements have !een promulgated For instance,

some research has shown that changes in estimated risk, and the use of certain strategies,such as stop-loss limits and La limits, theoretically could cause financial markets tooverreact

Ither research has shown thatpsychological factorsmay result in e%aggerated stock pricemovements +sychological research has demonstrated that people are predisposed toDseeingD patterns, and often will perceive a pattern in what is, in fact, Gust noise(#omething like seeing familiar shapes in cloudsor ink blots) 9n the present conte%t thismeans that a succession of good news items a!out a company may lead investors tooverreact positively (unGustifia!ly driving the price up) ' period of good returns also!oosts the investorDs self-confidence, reducing his (psychological) risk threshold (4)

'nother phenomenonN also from psychologyN that works against an o!Gectiveassessment isgroup thinking 's social animals, it is not easy to stick to an opinion thatdiffers markedly from that of a maGority of the group 'n e%ample with which you may!e familiar is the reluctance to enter a restaurant that is empty. people generally prefer tohave their opinion validated !y those of others in the group

9n one paper the authors draw an analogy with gam!ling (6) 9n normal times the market!ehaves like a game of roulette. the pro!a!ilities are known and largely independent ofthe investment decisions of the different players 9n times of market stress, however, thegame !ecomes more like poker (herding !ehavior takes over) The players now must give

heavy weight to the psychology of other investors and how they are likely to reactpsychologically

We are also lia!le to succum! to !iased thinking 'n e%ample is when supporters of anational foot!all team (or a favorite stock), for instance, are overconfident a!out thechances of winning (or the stock moving up)

The stock market, as any other !usiness, is uite unforgiving of amateurs 9ne%periencedinvestors rarely get the assistance and support they need 9n the period running up to therecentasdacrash, less than 1 per cent of the analystDs recommendations had !een tosell (and even during the 3@@@ - 3@@3 crash, the average did not rise a!ove 8P) The

media amplified the general euphoria, with reports of rapidly rising share prices and thenotion that large sums of money could !e uickly earned in the so-called new economystock market ('nd later amplified the gloom which descended during the 3@@@ - 3@@3crash, so that !y summer of 3@@3, predictions of a 2IW average !elow 8@@@ were uitecommon)

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http://en.wikipedia.org/wiki/Behavioral_financehttp://en.wikipedia.org/wiki/Behavioral_financehttp://en.wikipedia.org/wiki/Nasdaqhttp://en.wikipedia.org/wiki/Nasdaqhttp://en.wikipedia.org/wiki/New_economyhttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=10http://en.wikipedia.org/wiki/Behavioral_financehttp://en.wikipedia.org/wiki/Nasdaqhttp://en.wikipedia.org/wiki/New_economyhttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=10


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Irrational be!avior

*ecause a considera!le part of the stock market is comprised of non-professionalinvestors, sometimes the market tends to react irrationally to economic news, even if thatnews has no real effect on the technical value of securities itself Therefore, the stock

market can !e swayed tremendously in either direction !y press releases, rumors andmass panic

Furthermore, the stock market is comprised up of a large amount of speculative analysts,orpencil pushers, whom have no su!stantial money or financial interest in the market,!ut make market predictions and suggestions any way Iver the short-term, stocks andother securities can !e !attered or !uoyed !y any num!er of fast market-changing events,turning the stock market in a generally dangerous and difficult to predict environment forthose people whose lack of financial investment skills and time does not permit readingthe technical signs of the market

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Conclusion

There have !een innumera!le recommendations a!out how to make the stock marketeasier and safer for the casual, non-professional investor Few, if any, are likely to proveuseful or effective 7owever, in order to minimiBe the risks of financial marketim!alances, it is important that there !e a well thought-out legislative, regulatory, andsupervisory infrastructure that functions properly, smoothly, and honestly This is a never-ending task that reuires the participation of all concerned

Today, average individuals face sometimes very difficult risk managementdecisions thatwere not reuired of previous generations *oth opportunities and risks for the individualinvestor have !een amplified many times over et the average investor still lacks therelevant knowledge $veryone cannot !e a specialist in risk management and financialtheory

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eferences#

1) 7agstrom, C (3@@1), The $ssential *uffet, John Wiley Q #ons, 9nc ew ork

3) &utler, 2 +oter!a, J Q #ummers, > (1??1), #peculative dynamics, eview of$conomic #tudies 8=, pp 83@-86;

4) Tversky, ' Q ahneman, 2 (1?


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6) #tephen 5orris and 7yun #ong #hin, I%ford eview of $conomic +olicy, vol 18, no4, 1???

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Stock market inde$

(ain article) &tock market inde#

The movements of the prices in a market or section of a market are captured in priceindices called stock market indices,of which there are many, eg, the #Q+, theFT#$andthe $urone%tindices #uch indices are usually market capitaliBation(the total marketvalue of floating capitalof the company) weighted, with the weights reflecting thecontri!ution of the stock to the inde% The constituents of the inde% are reviewedfreuently to includeRe%clude stocks in order to reflect the changing !usinessenvironment

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Derivative instruments

(ain article)*erivative +finance

Financial innovation has !rought many new financial instruments of which the pay-offsor values depend on the prices of stocks $%amples aree%change traded funds($TFs),stock inde%and stock options, euity swaps,single-stock futures, stock inde%futures, etc

These latter may !e traded on futures e%changessuch as$urone%tliffe(which are distinctfrom stock e%changesN their history traces !ack to commoditiesfutures e%changes), ortraded over-the-counter 's all of these products are only derivedfrom stocks, they aresometimes considered to !e traded in a (hypothetical) derivatives market, rather than the(hypothetical) stock market

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%everaged Strategies

#tock that a trader does not actually own may !e traded usingshort selling. margin

!uyingmay !e used to purchase stock with !orrowed funds. or, derivativesmay !e usedto control large !locks of stocks for a much smaller amount of money than would !ereuired !y outright purchase or sale

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S!ort selling
http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=13http://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Standard_%26_Poor'shttp://en.wikipedia.org/wiki/FTSEhttp://en.wikipedia.org/wiki/FTSEhttp://en.wikipedia.org/wiki/Euronexthttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/w/index.php?title=Floating_capital&action=edithttp://en.wikipedia.org/w/index.php?title=Floating_capital&action=edithttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=14http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Exchange_traded_fundshttp://en.wikipedia.org/wiki/Exchange_traded_fundshttp://en.wikipedia.org/wiki/Stock_indexhttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Equity_swaphttp://en.wikipedia.org/wiki/Equity_swaphttp://en.wikipedia.org/wiki/Single-stock_futureshttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Euronext.liffehttp://en.wikipedia.org/wiki/Euronext.liffehttp://en.wikipedia.org/wiki/Euronext.liffehttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=15http://en.wikipedia.org/wiki/Short_sellinghttp://en.wikipedia.org/wiki/Short_sellinghttp://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=16http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=13http://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Stock_market_indexhttp://en.wikipedia.org/wiki/Standard_%26_Poor'shttp://en.wikipedia.org/wiki/FTSEhttp://en.wikipedia.org/wiki/Euronexthttp://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/w/index.php?title=Floating_capital&action=edithttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=14http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Exchange_traded_fundshttp://en.wikipedia.org/wiki/Stock_indexhttp://en.wikipedia.org/wiki/Stock_optionhttp://en.wikipedia.org/wiki/Equity_swaphttp://en.wikipedia.org/wiki/Single-stock_futureshttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Euronext.liffehttp://en.wikipedia.org/wiki/Commoditieshttp://en.wikipedia.org/wiki/Futures_exchangehttp://en.wikipedia.org/wiki/Over-the-counter_(finance)http://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=15http://en.wikipedia.org/wiki/Short_sellinghttp://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Derivative_(finance)http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=16


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(ain article) &hort selling

9n short selling, the trader !orrows stock (usually from his !rokerage which holds itsclientsD shares or its own shares on account to lend to short sellers) then sells it on themarket, hoping for the price to fall The trader eventually !uys !ack the stock, making

money if the price fell in the meantime or losing money if it rose $%iting a short position!y !uying !ack the stock is called Ecovering a short positionE This strategy may also !eused !y unscrupulous traders to artificially lower the price of a stock 7ence mostmarkets either prevent short selling or place restrictions on when and how a short sale canoccur The practice of naked shortingis illegal in most (!ut not all) stock markets

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Margin buying

(ain article) margin buying

9n margin !uying, the trader !orrows money (at interest) to !uy a stock and hopes for it torise 5ost industrialiBed countries have regulations that reuire that if the !orrowing is!ased on collateral from other stocks the trader owns outright, it can !e a ma%imum of acertain percentage of those other stocksD value 9n the "nited #tates, the marginreuirements have !een 8@P for many years (that is, if you want to make a 1@@@investment, you need to put up 8@@, and there is often a maintenance margin !elow the8@@) ' margin call is made if the total value of the investorDs account cannot support theloss of the trade ("pon a decline in the value of the margined securities additional fundsmay !e reuired to maintain the accountDs euity, and with or without notice the marginedsecurity or any others within the account may !e sold !y the !rokerage to protect its loan

postion The investor is responsi!le for any shortfall following such forced sales)egulation of margin reuirements (!y the Federal eserve) was implemented after the&rash of 1?3? *efore that, speculators typically only needed to put up as little as tenpercent (or even less) of the total investment represented !y the stocks purchased Itherrules may include the prohi!ition offree-riding)putting in an order to !uy stocks withoutpaying initially (there is normally a three-day grace period for delivery of the stock), !utthen selling them (!efore the three-days are up) and using part of the proceeds to makethe original payment (assuming that the value of the stocks has not declined in theinterim)

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&ew issuance

(ain article) homson inancial league tables

Clo!al issuance of euity and euity-related instruments totaled 8@8 !illion in3@@6, a3?=P increase over the 4=? !illion raised in3@@49nitial pu!lic offerings(9+Is) !y "#
http://en.wikipedia.org/wiki/Short_sellinghttp://en.wikipedia.org/wiki/Naked_shortinghttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=17http://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Crash_of_1929http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=18http://en.wikipedia.org/wiki/Thomson_Financial_league_tableshttp://en.wikipedia.org/wiki/2004http://en.wikipedia.org/wiki/2004http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Initial_public_offeringshttp://en.wikipedia.org/wiki/Initial_public_offeringshttp://en.wikipedia.org/wiki/Short_sellinghttp://en.wikipedia.org/wiki/Naked_shortinghttp://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=17http://en.wikipedia.org/wiki/Margin_(finance)#Margin_buyinghttp://en.wikipedia.org/wiki/Federal_Reservehttp://en.wikipedia.org/wiki/Crash_of_1929http://en.wikipedia.org/w/index.php?title=Stock_market&action=edit&section=18http://en.wikipedia.org/wiki/Thomson_Financial_league_tableshttp://en.wikipedia.org/wiki/2004http://en.wikipedia.org/wiki/2003http://en.wikipedia.org/wiki/Initial_public_offerings


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Capital market.doc