Financial Times Guide to the Financial Markets

Comprehensive and clear, The Financial Times Guide to the Financial Markets is the ultimate guide to the instruments, institutions and products that make up our global financial system. Using examples and case studies, Glen Arnold covers everything you need to know to gain a thorough understanding of modern finance and how the markets work.

Introduction:

The financial markets are incredibly exciting places. Every day there is a financial event that deserves reporting to the wider community in TV news broadcasts or newspapers. While not always as dramatic as the collapse of Lehman Brothers or the slashing of interest rates to less than 1 per cent, nevertheless the daily reporting of billions raised for a company to invest in mines in South America, or of one company taking over another, builds up to a picture that tells us that the sector is vital to us all. When the markets fail to work properly we all notice how important they are. For example, take the excessive lending to home buyers in the US in 2004–07 based on poorly thought-through models of the likelihood of default. This was banking at its worst, caused by bad leadership and perverse incentives in the system, which were compounded by idiotic ideas on the distribution of risk through the financial system using complex derivatives deals.

The extent of the power of the financial markets can be amply illustrated by the fear of a bad market reaction expressed in the faces of our political leaders when they announce their economic strategies. If the markets come to believe that there is a risk that a government is pursuing a policy that will result in rising inflation or an inability of the state to finance itself many years from now, they will refuse to buy the bonds that the government is selling to cover the gap between what it raises in taxes and what it spends. To start with they might merely shun the bonds until the interest rate offered has been raised by the government, for example Spain in 2011 had to pay over 3 per cent more to borrow than Germany, despite borrowing in the same currency, the euro. If things get worse the markets will refuse to lend to the country at almost any interest rate (e.g. Greece in 2011).

So you do not need me to tell you of the power and the excitement of the financial markets, from the ups and downs of the bond markets to the mood swings of the share markets, from the frenetic pace of the hedge funds and investment bank traders to the thrills and disasters of private equity investments. What you might need me to explain is how it is that movements in financial markets flow through the system to impact on you and others. What are the mechanisms at play? What are the different types of financial instruments that people put their money into? What do all the bankers and other financial service workers do with their time?

This book is designed to answer questions such as these. This chapter starts that process by explaining in everyday terms why we need financial markets and institutions, and begins to unravel the complexity present in modern markets by looking at their roots.

Contents:

• The purpose of financial markets
• An overview of the markets and institutions
• Banking: retail and corporate
• Investment banking
• Other types of banking
• Central banking
• Pooled investment funds
• Insurance
• Money markets
• Bond markets – governments and corporates
• Bond markets – the more exotic
• Equity markets
• Raising share capital
• Futures markets
• Options and swaps
• Foreign exchange markets
• Hedge funds and private equity
• Regulation of the financial sector
• The financial crisis

Financial Times Guide to the Financial Markets By Glen Arnold pdf