A capital market is where the suppliers of capital (typically savers or investors) get together with the demanders of capital (typically corporations and governments), to trade financial assets. The prices at which these trades take place have a direct impact on saving, investment, production, and consumption decisions in the economy.

In practice, a wide range of different institutions and procedures are used to bring buyers and sellers of different financial securities together. Broadly speaking, the major financial securities are stocks, bonds, and derivative securities like futures, forwards, and options. Rapid advances in computer technology continue to influence the nature of the markets and the securities traded. Sophisticated analytical techniques now make it possible to engineer an enormous number of derivative financial instruments, which are traded on both organized and informal exchanges around the world. While the theory developed here can be applied to any risky financial asset(s), in CAPM Tutor we focus on the stock market.

In the remainder of this chapter, we describe the nature of a stock market in topic 1.10, titled the Stock Markets and identify the world's largest stock markets. We explain the various indices that have been developed to serve as a barometer of overall market performance in topic 1.11, titled Stock Indices. We also describe the procedure by which stock prices are determined and trades conducted in topic 1.12, titled Trading Rules.

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