I: Introduction

1: Introduction to Financial Markets

Dow Jones Industrial Average

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Circular Flow
CAPITAL
LABOR

HOUSEHOLDS

CONSUMPTI
ON

Chapter 1: Introduction to Financial Markets

FINANCIAL
MARKETS
LABOR MARKETS

GOVERNM
ENT

GOODS
MARKETS

FACTORS
OF
PRODUCTI
ON

FIRMS

PRODUCTI
ON

Oltheten & Waspi 2012

Markets
Exist to bring buyers and sellers
together

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Markets
Labor markets

.February 3 & 4
2pm 6pm
ARC

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Markets
Primary market

Secondary market

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Circular Flow

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Financial Markets
Facilitate optimal allocation of
.
.

through .

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Returns Mechanism
Normal Return
.

Abnormal Return
.
.

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Returns Mechanism
Normal Return

Chapter 1: Introduction to Financial Markets

The
beginnin
g of a
bubble

Abnormal Return

Oltheten & Waspi 2012

Efficient Markets Hypothesis

Weak Form
.

Semistrong Form
.

Strong Form
.

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Technical Analysis
Double Bottom (shaped like a W)
[A] Breakout #1
[B] Breakout #2
[C] New Trend

http://business.illinois.edu/finance_dev/Lesson21.asp
Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Fundamental Analysis
Earnings Per Share (EPS)
Net Income
EPS
Shares Outstanding

Price/Earnings Ratio (P/E)

Stock Price
P/E
EPS

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Fundamental Analysis
Current Ratio
Total Current Assets
CR
Total Current Liabilities

Quick Ratio

availability
of working
capital

liquidity

Cash & Marketable Securities Accounts Receivable

QR
Total Current Liabilities

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Fundamental Analysis
Return on Assets (RoA)
Net Income
RoA
Total Assets

Return on Equity (RoE)

Net Income
RoE
Shareholde rs Equity

efficient use
of assets

profitability

Gross Profit Margin on Sales

MarginGross

efficient use of
factors of
production

Sales - Cost of Goods Sold

Sales

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Practice Questions

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

Q&P 1-1:

I use my computer and Internet link to chart the movement of

all 30 Dow Jones Industrial stocks. I buy and sell according to
my analysis of these price movements. If I can generate
consistent abnormal returns in this manner then this is a
failure of
Charles is a member of the Board of Directors of the Royal
Bank. If he can generate consistent abnormal returns in
trading Royal Bank shares then this is a failure of
Varya checks out all the Value Line publications and buys
everything that Value Line recommends. If she can generate
consistent abnormal returns then this is a failure of
I watch Wall Street Week every week. Then when it's over I
throw a dart at the Wall Street Journal. I buy whatever the dart
hits. If I can generate consistent abnormal returns in this
manner then this is a failure of
John Q. Investor analyses the quarterly earnings statements of
some fifty obscure small-cap stocks. He then buys according to
the earnings pattern disclosed. If he can generate consistent

Chapter 1: Introduction to Financial Markets

Oltheten & Waspi 2012

1: Financial Markets in the Economy