Financial Markets: Stocks, Bonds, and Modern Finance

Stock Markets and Exchanges

Stock market: a marketplace for buying and selling shares of publicly traded companies. Major exchanges: NYSE (New York Stock Exchange, $28T market cap), NASDAQ ($25T, tech-heavy), LSE, Tokyo Stock Exchange, Shanghai Stock Exchange. IPO (Initial Public Offering): a company's first sale of stock to the public — typically underwritten by investment banks. Market cap: share price × shares outstanding. S&P 500: 500 largest US companies — widely used benchmark for the US stock market. Price-to-Earnings (P/E) ratio: share price / earnings per share — valuation metric (historical average ~15-17x for S&P 500). Efficient Market Hypothesis (Fama, Nobel 2013): stock prices reflect all available information — weak, semi-strong, and strong forms. Passive investing: index funds and ETFs (Vanguard, BlackRock iShares) outperform most active managers over the long term. Trading mechanisms: limit orders, market orders, dark pools, high-frequency trading (HFT) — microsecond execution. Market circuit breakers: halt trading during extreme volatility (7%, 13%, 20% S&P 500 drops).

Bond Markets and Fixed Income

Bonds: debt instruments — the issuer borrows money and promises to pay interest (coupon) and return principal at maturity. Government bonds: US Treasuries (risk-free benchmark), UK Gilts, German Bunds, Japanese Government Bonds (JGBs). Corporate bonds: investment grade (BBB-/Baa3 or higher) vs. high yield ("junk bonds" — higher risk, higher return). Municipal bonds: issued by state/local governments — often tax-exempt in the US. Yield curve: plots bond yields against maturity — normally upward-sloping (longer maturity = higher yield). Inverted yield curve: short-term yields exceed long-term — historically reliable recession predictor. Bond prices and yields move inversely: when rates rise, existing bond prices fall. Duration: measure of bond price sensitivity to interest rate changes. Credit ratings: Moody's, S&P, Fitch — assess default risk. Global bond market: ~$130 trillion outstanding — larger than the global stock market (~$110T). Central bank influence: QE compressed yields to near-zero (2020-2021); rate hikes normalized yields (2022-2024).

Derivatives and Risk Management

Derivatives: financial contracts whose value derives from an underlying asset (stocks, bonds, commodities, currencies, interest rates). Options: right (not obligation) to buy (call) or sell (put) at a specified price (strike) before expiration. Black-Scholes model (1973, Nobel 1997): mathematical framework for option pricing — revolutionized finance. Futures: obligation to buy/sell at a specified price on a future date — used for hedging (farmers, airlines) and speculation. Swaps: exchange of cash flows — interest rate swaps (fixed for floating), currency swaps. Credit Default Swaps (CDS): insurance against bond default — played central role in 2008 financial crisis. Notional value of derivatives: >$600 trillion — vastly exceeds global GDP, but net exposure is much smaller. Risk management: Value at Risk (VaR), stress testing, scenario analysis — required by Basel III banking regulations. Clearing houses: central counterparties (CME, LCH) reduce counterparty risk — post-2008 reform.

Modern Finance and Fintech

Modern Portfolio Theory (Markowitz, Nobel 1990): diversification reduces risk without sacrificing return — efficient frontier. Capital Asset Pricing Model (CAPM): expected return = risk-free rate + beta × market risk premium. Behavioral finance (Kahneman, Nobel 2002): systematic biases — loss aversion (losses hurt 2× more than equivalent gains), overconfidence, anchoring, herding, disposition effect. Fintech disruption: Robinhood (commission-free trading), Stripe (payments), Plaid (banking API), SoFi (digital banking). Robo-advisors: algorithm-based portfolio management — Betterment, Wealthfront, Schwab Intelligent Portfolios. Cryptocurrency: Bitcoin ($1.3T+ market cap), Ethereum ($400B+) — decentralized digital assets, blockchain technology. DeFi (Decentralized Finance): lending, borrowing, trading without intermediaries — $50B+ total value locked. Stablecoins: USD-pegged tokens (USDC, USDT) — bridge between crypto and traditional finance. CBDCs (Central Bank Digital Currencies): digital yuan (operational), digital euro (in development), FedNow (US real-time payments). ESG investing: Environmental, Social, Governance factors — $35 trillion AUM globally, but facing "greenwashing" scrutiny.

❓ Frequently Asked Questions

Stock market: a marketplace for buying and selling shares of publicly traded companies. Major exchanges: NYSE (New York Stock Exchange, $28T market cap), NASDAQ ($25T, tech-heavy), LSE, Tokyo Stock Ex...

Bonds: debt instruments — the issuer borrows money and promises to pay interest (coupon) and return principal at maturity. Government bonds: US Treasuries (risk-free benchmark), UK Gilts, German Bunds...

Derivatives: financial contracts whose value derives from an underlying asset (stocks, bonds, commodities, currencies, interest rates). Options: right (not obligation) to buy (call) or sell (put) at a...

Modern Portfolio Theory (Markowitz, Nobel 1990): diversification reduces risk without sacrificing return — efficient frontier. Capital Asset Pricing Model (CAPM): expected return = risk-free rate + be...

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