The Dow Jones Industrial Average is off 18 points in active trading. Regulators close a Honk Kong bank after it loses $ 500 m on derivatives trading. Following the Bank of England’s decision to lower its base rate, monthly mortgage payments are set to fall.
All of these commonplace events are examples of financial markets at work.
That markets exercise enormous influence over modern life comes as no news. But although people around the world speak glibly of “wall street”, “ the bond market”, and “the currency market”, the meaning they attached to these time worm phrases are often vague and usually out of date This course pack explains the purposes different global financial markets serve and clarifies the way they work.
It cannot tell you whether your investment portfolio is likely to rise or to fall in value.
But it may help you understand how its value is determined, and how the different securities in it are created and traded.
Financial markets have been around ever since mankind settled down to growing crops and trading them with others.
After the bad harvest, those early farmers would have needed to obtain seed for the next season’s planting, and perhaps to get food to see their families through.
Both of these transactions would have required them to obtain credit from others with seed or food to spare. After a good harvest, the farmers would have had to decide whether to trade away their surplus immediately or to store it, a choice that any 20th century commodities trader would find familiar.
The amount of fish those early farmers could obtain for a basket of cassava would have varied day by day, depending upon the catch, the harvest and the weather; in short, their exchange rates were volatile.
The independent decisions of all of those farmers constituted a basic financial market, and that market fulfilled many of the same purposes as financial markets do today.