10 Financial Markets

10 Financial Markets - Insuring against risk A farmer needs...

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Financial Markets
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Financial markets provide A convenient way to allocate money financial capital (money) between those who have it (savers) and those who need it (demanders). An efficient way to allocate capital between suppliers and demanders. Because, when a large number of buyers and sellers are participating, financial markets are competitive.
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Financial markets are based on four simple needs Raising capital Storing, protecting, and making profitable use of excess capital Insuring against risk Speculation
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Raising capital Financial markets allow individuals to borrow money today for an activity that we cannot otherwise afford (consumption, investment)
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Storing, protecting, and making profitable use of excess capital $1 billion dollars (not invested) in 1970 was worth about $ 226 million in 2001. Inflation erodes the real value of investments. Financial markets allocate financial capital between those who have it and those who need it. The outcome of this is value added economic output.
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Unformatted text preview: Insuring against risk A farmer needs to insure an agricultural crop against adverse price swings. An airline needs to insure against an unexpected rise in the price of jet fuel. Speculation Financial markets offer the individuals the opportunity to bet on short term price movements. Basic economics provides a basic set of rules for investing Save, invest, repeat Take risk to earn reward Diversify Invest for the long run Save, invest, repeat Financial capital is scarce and scarce resources command a price. This is why investing yields returns. Lenders earn investment returns. Borrowers pay the rent on financial capital. Take risk to earn reward Riskier investments must offer a higher expected return in order to attract financial capital. Diversify Diversification is the best way to diversify risk. Invest for the long run Long term trends are more important than short term price movements....
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10 Financial Markets - Insuring against risk A farmer needs...

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