Understanding Financial Markets

• Financial markets are markets where securities are traded.
• Securities are tradable financial assets like stocks or bonds.
• Investors participate in financial markets when buying or selling stocks and bonds.

Major Financial Markets

• Numerous financial markets exist, each dealing with different securities.

Stock Market

• Buying a stock signifies buying partial ownership in a company.
• Anyone buying or selling stock is participating in a stock market.
• The New York Stock Exchange is the world's largest stock market, trading trillions of dollars daily.
• The Tokyo Stock Exchange and Shanghai Stock Exchange rank among the largest stock markets outside the U.S.

Bond Market

• Buying a bond means loaning money to a government or corporation.
• In return for the loan, the bond purchaser receives interest payments.
• Bonds can be traded like stocks on a bond market.
• Bond prices are generally steadier than stock prices.
• Bond prices can be heavily affected by changes in inflation and interest rates.

Foreign Exchange Market

• The foreign exchange (forex) market allows traders to exchange different currencies.
• An example of participation includes exchanging American dollars for euros when traveling from America to France.

Money Market

• The money market deals in very low-risk, low-reward securities.
• It includes money market accounts and short-term certificates of deposit offered by banks and credit unions.
• These investments offer very low returns but are extremely safe.

Regulating Financial Markets

• The Great Recession of 2008 was partly caused by financial institutions taking excessive risks, leading to a breakdown in financial markets.
• Financial markets are subject to strict regulations because changes in them can heavily affect the entire economy.

Regulatory Organizations

• Two U.S. organizations primarily regulate financial markets.
• The Federal Reserve System regulates commercial banks.
• The Federal Reserve establishes rules such as the reserve requirement for banks.
• The Federal Reserve establishes fiscal and monetary policy for the U.S.
• The Securities and Exchange Commission (SEC) regulates the exchange of securities.

Securities and Exchange Commission (SEC)

• The SEC protects investors.
• The SEC ensures that financial markets are fair, orderly, and efficient.
• The SEC encourages the creation of capital resources.
• The SEC was created in the 1930s after the stock market collapse that triggered the Great Depression.
• Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC to rebuild investor confidence in financial markets.
• The SEC requires more open information from large companies.

Rules Established

• Public companies must be honest about their business performance and investment risks.
• Anyone selling securities to investors must treat investors fairly and prioritize investors' interests.
• The Securities and Exchange Commission punishes hundreds of violations made by companies and individuals every year.

Insider Trading

• Insider trading occurs when someone trades a security while having confidential, nonpublic knowledge about that security.

• Insider trading commonly occurs in the stock market.

• An example of insider trading is buying Coca-Cola stock before a report is released, based on confidential information from an accountant brother.

• Financial markets are a key component of modern market economies because they make it easier for people to invest in the creation of more capital resources and new businesses.

• There is a requirement for regulation because a breakdown can severely hurt everyone.

• Both the Great Depression and Great Recession were at least partially caused by dangerous practices undertaken in the financial markets.