Equity Market: An Introduction – Prof. Dr AP Faure pdf

Equity Market: An Introduction – Prof. Dr AP Faure

EQUITY MARKET: AN INTRODUCTION

Context & Essence

1.1    Learning outcomes

After studying this text the learner should / should be able to:

1. Understand the slot the equity market occupies in the financial system.
2. Be acquainted with the general terminology of the equity market.
3. Dissect the equity market definition into its elements.
4. Appreciate the statutory backdrop to equities and the equity market.
5. Know of the existence of equity derivative instruments.

1.2    Introduction

The purpose of this text is to provide an overview of the equity market and its role in the financial system. We start with a brief introduction to the financial system, and then contrast the equity market with the money and debt markets.

A definition of the equity market is presented and dissected into its elements.

 The statutory backdrop to equities and the equity market is presented in brief and the equity derivatives are merely mentioned for the sake of completeness.

The following are the sections:

• The financial system in brief.
• The money and bond markets in a nutshell.
• Essence of the equity market.
• Statutory backdrop to shares and share market.
• Equity derivatives.
• Summary.

1.3    The financial system in brief

As seen in Figure 1, the financial system is essentially concerned with borrowing and lending. Lending occurs either directly to borrowers (e.g. equities held by an individual) or indirectly via financial intermediaries (e.g. an individual holds units and the unit trust holds as assets the liabilities of the ultimate borrowers). Although this is the main function, there are many related others as reflected in the following definition of the financial system:

The financial system is a set of arrangements/conventions embracing the lending and borrowing of funds by non-financial economic units and the intermediation of this function by financial intermediaries in order to facilitate the transfer of funds, to create additional money when required, and to create markets in debt and equity instruments (and their derivatives) so that the price and allocation of funds are determined efficiently.