Financial Markets and Liquidity

Study Notes

Financial markets provide liquidity, enabling assets to be bought and sold quickly and easily.
Liquidity is vital for the functioning of the financial system, ensuring participants can enter and exit positions without causing significant price fluctuations.
Financial markets facilitate the transfer of risk from one party to another through trading financial instruments like derivatives.
Risk transfer is essential for businesses and investors to protect themselves against uncertainties.

Risk management is crucial for successful investing, helping protect against potential losses while striving for returns.
Different investment strategies carry varying levels of risk and potential reward, requiring investors to consider their risk tolerance and investment goals.
Momentum trading involves capitalizing on the continuation of existing market trends, seeking stocks showing strong upward or downward trends.
Examples of momentum trading include Apple, Microsoft, Netflix, Square, and Zoom Video Communications.
Tesla's stock performance in 2020-2021 is a notable example of momentum trading.

Risk management is essential in financial markets due to the unpredictability and volatility inherent in these environments.
Market participants face various types of risks, including market risk, credit risk, liquidity risk, and operational risk.
Effective risk management strategies protect investments and enhance returns by minimizing potential losses.
Key concepts in risk management include diversification, hedging, and the use of derivatives.

Diversification involves spreading investments across various financial instruments, industries, and other categories to reduce exposure to any single asset or risk.
International regulatory bodies, such as the Financial Conduct Authority (FCA) in the UK and the European Securities and Markets Authority (ESMA), regulate financial firms and maintain market integrity.
Key regulations include the Securities Regulation Code of the Philippines, the Dodd-Frank Wall Street Reform and Consumer Protection Act (U.S.), and the Markets in Financial Instruments Directive II (MiFID II - EU).

The implementation of the LIBOR transition impacts financial products, requiring market participants to adapt their contracts and systems.
The introduction of ESG reporting requirements promotes sustainable investing and provides investors with transparent information on companies' ESG practices.
Challenges in the regulatory environment include data privacy, bias, and transparency in AI algorithms, and keeping up with evolving regulations related to AI and data usage.

Cryptocurrencies and blockchain technology have emerged as disruptive forces in the financial sector, offering new forms of digital assets and decentralized ledger systems.
Opportunities in cryptocurrency and blockchain technology include decentralization, innovation, and financial inclusion.
Challenges include regulatory uncertainty, security risks, and market volatility.

Sustainable investing opportunities include aligning portfolios with values and regulatory initiatives pushing for transparency and accountability in ESG investing.
Challenges in sustainable investing include the need for standardized ESG metrics and the risk of greenwashing.
Artificial intelligence and big data opportunities include providing deeper insights and more accurate predictions for investment strategies.
Challenges in AI and big data include ensuring data privacy, bias, and transparency in algorithms.