Equity Markets, Valuation, and Analysis

CHAPTER 3Equity Markets and Performance

Jay T. Brand

Professor of Finance, University of Louisville

Xudong Fu

Assistant Professor of Finance, University of Louisville

INTRODUCTION

A market is a place that facilitates a transaction between two parties for the exchange of tangible goods and services. A financial market is a market for trading financial assets or investments such as stocks and bonds. In a financial market, investors trade on claims: the claims to a company's ownership or claims to an entity's debt obligations. These claims are the connections between people who want to save and invest money for the future rather than current consumption and organizations that need money.

Financial markets provide savers – potential investors and users – individuals, companies, and government entities with mechanisms for making transactions to meet specific financial needs and objectives. Savers can earn returns from the financial markets, while users turn to the financial markets to obtain needed funds. Interestingly, a person or organization can be both a fund's saver and user at the same time. An individual can, for example, simultaneously invest monthly 401(k) contributions in the stock market as a saver and use mortgage financing for a home purchase as a user. Similarly, a business firm can both borrow money as a user for long-term projects and invest retained earnings in the Treasury market or other financial markets as a saver.

Financial markets can be classified in several ...