Equity Markets, Valuation, and Analysis - H. Kent Baker

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       Jay T. Brand

      Professor of Finance, University of Louisville

       Xudong Fu

      Assistant Professor of Finance, University of Louisville

      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 ways. One way is to categorize them based on the maturity of the issues involved in transactions such as either the money market for short-term investments or the capital market for long-term investments. The money market is comprised of mainly debt securities maturing in one year or less. This category includes Treasury bills, short-term notes payable, banker's acceptances, commercial paper, and negotiable certificates of deposit. In contrast, the capital market

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