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Monday, October 20, 2008

Financial markets

Lately I've been reading about financial markets in general and equity markets specifically. I'm by no means an expert, but I've certainly picked up some things. What surprised me is how "distant" some elements of these markets are from reality.

For example: stock is easy to understand - you get part of the ownership of a company which gives you certain rights (usually voting rights and part of the profits). Stock prices are (usually) correlated with the expected performance of the company. One level of abstraction away are the so called "derivatives", which derive (hence the name) their value from the underlaying stocks. On example are the so-called "futures" which are contracts for selling/buying stocks at a certain price at a certain date in the future. These seek to make a profit from the price-difference between the current price and the (expected) future price. Still comprehensible. The thing that surprised me was the fact that these contracts also have a price attached to them and are traided on exchanges.

This seems very meta-meta to me at the moment and I'm not very convinced that you can accurately gauge the value of such abstract things.


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