Financial market securities

Document Type:Thesis

Subject Area:Finance

Document 1

This paper is primarily concerned with the dynamics of the securities traded in the financial market and the contribution of the financial market wealth creation in USA. To do so, the paper shall analyze the bonds, stocks and currencies as part of the securities traded in the financial markets. Financial Markets and Economic Wealth Creation Financial markets play a significant role in the creation of economic wealth globally and in USA. For the financial markets to play their intended role, they have to be well developed. Underdeveloped financial markets have the potential of plunging a country into financial crisis. Lenders and borrowers get what fits their needs through the diverse financial and asset products and businesses spend less to reach consumers.

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In essence therefore, wealth creation becomes more efficient through a less costly mode of doing business. On the other hand, sufficient information is the basis of the efficiency of financial markets. Investment in wrong securities may lead to devastating losses. Some securities increase the volatility of the economy due to excessive liquidity. The pricing of stocks as traded in the New York Stocks Exchange depend on demand and supply and the demand is based on how traders perceive the profitability of the company at hand (2). Bonds Bonds are essentially loan items used by corporation to acquire large sums of loans. This is in contrast to stocks which are shares through which companies generate capital for growth. Bonds are also of various types including treasury bonds, municipal bonds and corporate bonds.

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The value of bonds is inversely proportional to the value of stocks (3). The operations of the forex market affect the value of currencies since the determinant of the value of a currency is the demand and supply of the said currency (4). Demand of the currency is also determined by economic performance and stability of the country. Trade in currencies is a 24 hours business and requires skills to predict the trend of a currency as investors buy currencies and sell them when the value is higher. Sometimes, this fails to happen and losses are incurred (4). Risk-Return Relationship The relationship between risk and returns for stock securities depends on the stock type. The low risk is explained by the fact that initial investment is guaranteed while the high return is achievable through the purchase of junk bonds (3).

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Currencies are the most volatile security. Currencies fluctuate in real time and the trade also takes place in real time (Korczak, Hernes, & Bac, 2017). This means that losses and gains are guaranteed since one may invest in a currency hoping it will appreciate in value and instead end up depreciating based on demand and supply. The risk therefore is determined by the volatility of currencies and the fact that even a slight depreciation in value may lead to overall loses. Further, an investor needs large volumes of currency to maximize returns (5). Impact of Federal Reserves’ Monetary Policy on Financial Securities The federal reserves impact the financial market by regulating interest rates. The Federal Reserve purchases collateralized debt obligations as a way of keeping the interest rates low and maintaining money supply in the economy (6).

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