When companies have surplus cash that is not needed for a short period of time, they may seek to make money from their cash surplus by lending it via short term markets called money markets. There are a few companies that have very strong cash flows. These companies tend to be lenders rather than borrowers. Such companies may decide to return cash to lenders (e.g. via a share buyback.) Alternatively, they may seek to make more money on their cash by lending it (e.g. investing in bonds and stocks.)
2. Borrowers are commonly divided into several groups. They are as follows:
2.
1. Individuals borrow money via bankers' loans for short term needs or longer term mortgages to help finance a house purchase.
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2. Companies borrow money to aid short term or long term cash flows. They also borrow to fund modernisation or future business expansion.
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3. Governments often find their spending requirements exceed their tax revenues. T o make up this difference, they need to borrow. G overnments also borrow on behalf of nationalised industries, municipalities, local authorities and other public sector bodies. G overnments borrow by issuing bonds. G
overnment debt seems to be permanent. I ndeed the debt seemingly expands rather than being paid off. One strategy used by governments to reduce the value of the debt is to influence inflation.
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4. Municipalities and local authorities may borrow in their own name as well as receiving funding from national governments.
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5. Public Corporations typically include nationalized industries. These may include the postal services, railway companies and utility companies.
Many borrowers have difficulty raising money locally. They need to borrow internationally with the aid of Foreign exchange markets.
The following table illustrates where financial markets fit in the relationship between lenders and borrowers:
Relationship between lenders and borrowers Lenders Financial Intermediaries Financial Markets Borrowers IndividualsCompanies BanksInsurance CompaniesPension FundsMutual Funds InterbankStock ExchangeMoney MarketBond MarketForeign Exchange IndividualsCompaniesCentral GovernmentMunicipalitiesPublic Corporations 2. Behavior of Securities Market
Investors may «temporarily» move financial prices away from their long term aggregate price «trends». (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets). Over-reactions may occur — so that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low.
According to the efficient market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random «noise» in the system may prevail. This largely theoretic academic viewpoint, known as «hard» EMH, also predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge. The «hard» efficient-market hypothesis is sorely tested by such events as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percent — the largest-ever one-day fall in the United States. This event demonstrated that share prices can fall dramatically even though, to this day, it is impossible to fix a generally agreed upon definite cause: a thorough search failed to detect any reasonable development that might have accounted for the crash. It seems also to be the case more generally that many price movements (beyond that which are predicted to occur «randomly») are not occasioned by new information; a study of the fifty largest one-day share price movements in the United States in the post-war period seems to confirm this (Cutler, 1991: 521).
However, a «soft» EMH has emerged which does not require that prices remain at or near equilibrium, but only that market participants not be able to systematically profit from any momentary market inefficiencies. Moreover, while EMH predicts that all price movement (in the absence of change in fundamental information) is random (i.e., non-trending), many studies have shown a marked tendency for the stock market to trend over time periods of weeks or longer. Various explanations for such large and apparently non-random price movements have been promulgated. For instance, some research has shown that changes in estimated risk, and the use of certain strategies, such as stop-loss limits and Value at Risk limits, theoretically could cause financial markets to overreact. But the best explanation seems to be that the distribution of stock market prices is non-Gaussian (in which case EMH, in any of its current forms, would not be strictly applicable) (Mandelbrot, 2006).
Other research has shown that psychological factors may result in exaggerated stock price movements (contrary to EMH which assumes such behaviors «cancel out»). Psychological research has demonstrated that people are predisposed to seeing patterns, and often will perceive a pattern in what is, in fact, just noise. In the present context this means that a succession of good news items about a company may lead investors to overreact positively (unjustifiably driving the price up). A period of good returns also boosts the investor’s self-confidence, reducing his (psychological) risk threshold (Tversky, 1974: 1124 — 1131).
A nother phenomenon — also from psychology — that works against an objective assessment is group thinking. A s social animals, it is not easy to stick to an opinion that differs markedly from that of a majority of the group. A
n example with which one may be familiar is the reluctance to enter a restaurant that is empty; people generally prefer to have their opinion validated by those of others in the group. S ome authors draw an analogy with gambling. I n normal times the market behaves like a game of roulette; the probabilities are known and largely independent of the investment decisions of the different players. I n times of market stress, however, the game becomes more like poker (herding behavior takes over).
The players now must give heavy weight to the psychology of other investors and how they are likely to react psychologically.
The stock market, as any other business, is quite unforgiving of amateurs. Inexperienced investors rarely get the assistance and support they need. In the period running up to the 1987 crash, less than 1 percent of the analyst’s recommendations had been to sell (and even during the 2000 — 2002 bear market, the average did not rise above 5%). In the run up to 2000, the media amplified the general euphoria, with reports of rapidly rising share prices and the notion that large sums of money could be quickly earned in the so-called new economy stock market.
Conclusion
In this paper we considered the main concepts of the securities market, how it functions, what tools it uses and what participants it requires to complete necessary processes.
We found out that there are two main sorts of securities: debts and equities. The first group of securities is represented by different kinds of bonds: we tried to give a detailed description of main types of them and to underline their peculiarities using examples. The second group of securities — equities — includes different kinds of stocks and shares. Just the same way as for the bonds, we had a look at types of stocks and shares and, using examples, illustrated the differences, faults and merits of each type.
At the end of this paper we paid attention to roles of the participants of the processes which take place on the securities market and how the stock market behaves. We illustrated descriptions with examples and schemes to represent information in more accessible form.
In conclusion we would like to underline that knowing the basics of securities market is important not only for the specialists in economics, but also for common people who play an important role in whole financial system regulation and often take part in processes without realizing it. Moreover, the situation on financial market has a great influence on social environment and life of a single individual. To understand what is going on in the economic sphere helps us to make forecasts for future, feel more secure and confident in personal life.
List of Books and Articles
Bodie, Zvi, Kane, Alex, Marcus, Alan J., Investments, 7th Ed., 1998.
The Business Finance Market: A Survey, Industrial Systems Research Publications, Manchester (UK), new edition, 2002.
Chancellor, Edward. «Book Entry Bonds Popular». New York Times, July 18, 1984.
Copeland, T.E., Weston, J.F.: Financial Theory and Corporate Policy, Addison-Wesley, West Sussex, 1988.
Cutler, D., Poterba, J. & Summers, L. «Speculative dynamics». Review of Economic Studies 58: 520−546, 1991.
Eason, Yla, «Final Surge in Bearer Bonds» New York Times, June 6, 1983.
Elton, E.J., Gruber, M.J., Brown, S.J., W.N. Goetzmann, Modern Portfolio Theory and Investment Analysis. John Wiley & Sons, New York, 2003.
Groz, M.M. Forbes Guide to the Markets, John Wiley & Sons, Inc., New York, 1999.
Mandelbrot, Benoit & Hudson, Richard L. The Misbehavior of Markets: A Fractal View of Financial Turbulence, annot. ed. Basic Books, 2006.
Quint, Michael. «Elements in Bearer Bond Issue». New York Times, August 14, 1984.
Shiller, Robert. Irrational Exuberance (2d ed.). Princeton University Press, 2005
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Swanson, Joseph and Marshall, Peter, Lokey, Houlihan and Norley, Lyndon, Kirkland & Ellis International LLP. A Practitioner’s Guide to Corporate Restructuring. City & Financial Publishing, 1st edition, 2008.
Tversky, A. & Kahneman, D. «Judgement under uncertainty: heuristics and biases». Science 185: 1124−1131. 1974.
Valdez, Steven, An Introduction To Global Financial Markets, Macmillan Press Ltd., 1992.
