Essays on Financial Instruments and Markets Assignment

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The paper 'Financial Instruments and Markets' is a great example of a Finance and Accounting Assignment. A market is a place where goods and services are exchanged at a profit. It is where buying and selling take place. The two main categories of markets are the primary and secondary markets. There various types of markets which are the goods market, security market, capital market, and the money market (Bond & Brown, 2002). In the security market, securities such as shares and bonds are traded where the security holders sell a security at higher prices than the face value so as to earn profits.

Individuals buy securities when the interest rates are low and sell them when the interest rates are high (Valdez & Wood, 2003). Difference between primary and a secondary market A primary market is where securities such as bonds or shares are sold by the firm to the public for the first time. In this market, there is no reselling of the securities but individuals purchase them directly from the firm. The secondary market on the other hand is where securities are resold after the initial offer from the company (Bridwell, 2012).

It is where investors buy securities from other investors where they pay a higher price than the initial price offered by the company. Investors usually buy securities at times when the interest rates are low and sell them when the rates rise. Primary markets collect funds directly from the public where securities are offered to the public. Secondary markets obtain funds from other investors who repurchase securities from them the secondary markets (Fabozzi, 2001). The three main forms of market efficiency under the EMH Strong-form EMH The efficient market hypothesis in its strong form states that for a market to be efficient, all the essential information towards the share value should be accurate and quickly reflected the market prices.

A good example is where the prevailed market price is lower justified value through some information. Those with the knowledge of the justified value will utilize the opportunity by buying more shares (Levinson, 2006). The process will continue raising the demand, until where the price of the share is raised up to the value justified through the private information.

At this point, such buyers withdraw from the market leaving the market settling at the new equilibrium point of a higher price. This is strong- form an efficient market hypothesis (Loss, 1988) Semi-strong-form EMH In the semi-strong efficient market hypothesis, a market is said to be efficient if all the essential available information is reflected quickly to the market prices. Here, the market fast grasps the significant new information by raising the price to a higher equilibrium point that shows the changes in demand and supply contributed by the emergence of the information (Elliot & Kopp, 2000). Weak-form EMH In this form of an efficient market hypothesis, the new value of a share is derived by comparing the new information with the previous information.

Comparing the two is when a new share price is determined. Here the new share price is normally higher than the previous share price (Bond & Brown, 2002). Among the three forms of market efficiency, the strong form efficient market hypothesis will have the best superannuation at retirement. Since individuals respond quickly to the market prices on the basis of private information, the share price keeps on rising up to a point where it settles at a higher equilibrium point.

When an individual retires, he or she becomes advantaged in that he or she can sell the shares at a higher price than the initial buying price (Loss, 1988).

References

Bond, P. H., & Brown, P. K. (2002). Rating valuation: principles and practice. London: Estates Gazette.

Bridwell, N. (2012). Clifford shares. New York, N.Y.: Scholastic.

Elliott, R. J., & Kopp, P. E. (2000). Mathematics of financial markets. New York: Springer.

Fabozzi, F. J. (2001). The handbook of fixed income securities (6th ed.). New York: McGraw Hill.

Levinson, M. (2006). Guide to financial markets (4th ed.). London: Profile.

Loss, L. (1988). Fundamentals of securities regulation (2nd ed.). Boston: Little, Brown.

Valdez, S., & Wood, J. (2003). An introduction to global financial markets (4th ed.). Houndmills, Basingstoke, Hampshire: Palgrave Macmillan.

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