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
FINANCIAL MARKETS
FACTORS OF
PRODUCTION
LABOR MARKETS
GOVERNMENT
CONSUMPTION
FIRMS
PRODUCTION
GOODS MARKETS
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
Markets
 Exist to bring buyers and sellers together
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
Markets
 Labor markets
.February 1 & 2
2pm – 6pm
ARC
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
Markets
 Primary market
FINANCIAL MARKETS
 Secondary market
FINANCIAL MARKETS
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
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through .
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
Returns Mechanism
 Normal Return
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 Abnormal Return
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 .
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
The
beginning
of a
bubble
Returns Mechanism
 Normal Return
Chapter 1: Introduction to Financial Markets
 Abnormal Return
© Oltheten & Waspi 2012
Efficient Markets Hypothesis
 Weak Form
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 Semistrong Form
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 Strong Form
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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
availability of
working capital
Total Current Assets
CR 
Total Current Liabilities
 Quick Ratio
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
efficient use of
assets
 Return on Equity (RoE)
Net Income
RoE 
Shareholders Equity
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:
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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 abnormal returns in this manner then
this is a failure of
Chapter 1: Introduction to Financial Markets
© Oltheten & Waspi 2012
1: Financial Markets in the Economy