Roles Of Financial Market Analysis
THE ROLE OF FINANCIAL MARKETS IN A PRIVATE-PROPERTY, FREE-MARKET ECONOMY
The basic issue we addressed was how much of A a person is willing to give up now for one more unit of B now. However, many goods provide services over a period of time. Thus, we must also ask what quantity of A a person would give up now for one more unit of A to be received later. In general, the more we eat today, the less we will have to eat tomorrow.
All societies must face the same set of problems: how to allocate resources between present and future consumption, how to evaluate the goods that provide future services, how to provide an orderly flow of consumer goods between production dates (e.g., wheat between harvests), and how to encourage the growth of wealth.
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All decisions about the allocation of resources between today and tomorrow are made by either their owners or the people (specialists) they hire for the explicit purpose of making those decisions. The owners bear the risk of changes in the value of their assets. We have already discussed the importance of financial markets in encouraging corporate managers to seek the most valuable uses for resources. This article shall briefly explain a few other features of financial …show more content…
Restrictions on the right of ownership and/or contractual freedom would reduce the value of assets and leave some exchange opportunities unrealized. In either case, financial markets would fail to establish "correct" present prices, that is, the prices that reflect current expectations about future events.
The capitalization process controls the rate at which we use our resources. Consider a privately owned tree. The tree is a capital good. It takes resources to produce it, and it is expected to yield returns (increments in the value of lumber in live trees). Throughout the life of the tree, the owner can choose between keeping it alive or cutting it down and investing the proceeds from the sale of lumber elsewhere. Thus, the owner will be influenced by the relationship between the rate of growth of lumber in live trees and the average expected rate of return from investment in other
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