Capital Market and Capital Market Theory

The field of capital markets and capital market theory focuses on the study of financial systems, the structure of interest rates, and the pricing of risky assets.

The financial system of an economy consists mainly of three components:

Financial markets

Financial intermediaries

Financial regulators

Many important topics covered in this specialized area of finance i.e. price efficiency of financial markets, role of players in financial markets, investment behavior, structure of financial markets, best practices of regulators, measurement of risk and asset theory etc. Price efficiency of financial markets is important as it affects the investor market It has to do with whether or not they can overcome. If a market is highly cost efficient, it is extremely difficult for investors to earn higher than expected returns for the level of investment risk, that is, it is difficult for investors to beat the market. An investor adopting an investment strategy seeking to outperform the market must believe that the sector of the financial market to which the strategy is applied is not highly price efficient. Such a strategy to beat the market is called an active strategy. Financial theory tells us that if capital markets are efficient, the optimal strategy is not an active strategy, but a passive strategy that tries to match market performance.

Beating the market in finance means outperforming the market by earning the expected return on investment after adjusting for excess risk and transaction costs. To be able to quantitatively determine what is expected from an investment after adjusting for risk, it is necessary to formulate and empirically test a theory about how an asset is priced, or equivalently to determine the fair value of an asset.

The basic principle of valuation is that the value of any financial asset is the present value of expected cash flows. Thus, the valuation of a financial asset involves estimating the expected cash flows, determining the appropriate interest rate or interest rates that should be used to discount the cash flows, and also calculating the present value of the expected cash flows. That is, when valuing a stock, we often estimate future dividends and measure how uncertain these dividends are. We use the basic mathematics of finance to calculate the present value or discounted value of cash flows. In this calculation process of present value or discounted value we must use an appropriate interest rate which we will refer to as the discount rate. Capital market theory provides theories that guide investors in choosing the right interest rate or rates of interest.

Related Links

Finance - Complete information

Financial Analysis - Complete Information

Strategic Marketing - Behavioural variables

Money management skills

Introduction to marketing strategy

What is strategy?

Towards Strategic Management

Business Shaping Strategy

A balanced scorecard approach to marketing strategy

The role of marketing in marketing strategy

The Law of Success - An Introduction to the Master Mind