Se utiliza para indicar al receptor del Advice la razón específica de la emisión del mensaje.

61 POS. Data a (2+26) LLVAR Datos de Lower inflation. Inflation rates around the world
have fallen sharply since the 1980s. Inflation erodes the value of financial assets and
increases the value of physical assets, such as houses and machines, which will cost far
more to replace than they are worth today. When inflation is high, as was the case in the
United States, Canada and much of Europe during the 1970s and throughout Latin America
in the 1980s, firms avoid raising longterm capital because investors require a high return on
investment, knowing that price increases will render much of that return illusory. In a
low-inflation environment, however, financial-market investors require less of an inflation
premium, as general increases in prices will not devalue their assets and the prices of many
physical assets are stable Lower inflation. Inflation rates around the world have fallen
sharply since the 1980s. Inflation erodes the value of financial assets and increases the
value of physical assets, such as houses and machines, which will cost far more to replace
than they are worth today. When inflation is high, as was the case in the United States,
Canada and much of Europe during the 1970s and throughout Latin America in the 1980s,
firms avoid raising longterm capital because investors require a high return on investment,
knowing that price increases will render much of that return illusory. In a low-inflation
environment, however, financial-market investors require less of an inflation premium, as
general increases in prices will not devalue their assets and the prices of many physical
assets are stable or even falling. Pensions. A significant change in pension policies is under
way in many countries. Since the 1930s, and even longer in some countries, governments
have operated pay-as-you-go schemes to provide income to the elderly. These schemes,
such as the old age pension in the UK and the social security programme in the United
States, tax current workers to pay current pensioners and therefore involve no saving or
investment. Changes in demography and working patterns have made pay-as-you-go
schemes increasingly costly to support, as there are fewer young workers relative to the
number of pensioners. This has stimulated interest in pre-funded individual pensions,
whereby each worker has an account in which money must be saved, and therefore
invested, until retirement. Although these personal investment accounts have to some extent
supplanted firms’ private pension plans, they have also led to a huge increase in financial
assets in countries where private pension schemes were previously uncommon. Stock and
bond market performance. Many countries’ stock and bond markets performed well during
most of the 1990s. The rapid increase in financial wealth feeds on itself: investors whose
portfolios have appreciated are willing to reinvest some of their profits in the financial
markets. And the appreciation in the value of their financial assets gives investors the
collateral to borrow additional money, which can then be invested. 6 GUIDE TO FINANCIAL
MARKETS Risk management. Innovation has generated many new financial products, such
as derivatives and asset-backed securities, whose basic purpose is to redistribute risk. This
has led to enormous growth in the use of financial markets for riskmanagement purposes. To
an extent unimaginable a few years ago, firms and investors are able to choose which risks
they wish to bear and use financial instruments to shed the risks they do not want, or,
alternatively, to take on additional risks in the expectation of earning higher returns. The risk
that the euro will trade above $1.40 during the next six months, or that the interest rate on
long-term US Treasury bonds will rise to 6%, is now priced precisely in the markets, and
financial instruments to protect against these contingencies are readily available. The
risk-management revolution has thus resulted in an enormous expansion of financial-market
activity. The investors The driving force behind financial markets is the desire of investors to
earn a return on their assets. This return has two distinct components: Yield is the income
the investor receives while owning an investment. Capital gains are increases in the value of
the investment itself, and are often not available to the owner until the investment is sold.
Investors’ preferences vary as to which type of return they prefer, and these preferences, in
turn, will affect their investment decisions. Some financial-market products are deliberately
designed to offer only capital gains and no yield, or vice versa, to satisfy these preferences.
Investors can be divided broadly into two categories: Individuals. Collectively, individuals
own a small proportion of financial assets. Most households in the wealthier countries own
some financial assets, often in the form of retirement savings or of shares in the employer of
a household member. Most such holdings, however, are quite small, and their composition
varies greatly from one country to another. In 2000, equities accounted for nearly half of
households’ financial assets in France, but only about 8% in Japan. The great majority of
individual investment is 7 WHY MARKETS MATTER controlled by a comparatively small
number of wealthy households. Nonetheless, individual investing has become increasingly
popular. In the United States, bank certificates of deposit accounted for more than 10% of
households’ financial assets in 1989 but only 3.1% in 2001, as families shifted their money
into securities. Institutional investors. Insurance companies and other institutional investors
(see below) are responsible for most of the trading in financial markets. The assets of
institutional investors based in the 30 member countries of the oecd totalled about $35 trillion
in 2001. They grew almost 12% per year between 1990 and 1999, then declined in 2000 and
2001. The size of institutional investors varies greatly from country to country, depending on
the development of collective investment vehicles. Investment practices vary considerably as
well. In 2001, for example, US institutional investors kept 44% of their assets in the form of
shares and 35% in bonds, whereas British institutional investors held 65% of assets in
shares. In Japan, 56% of institutional investors’ assets were bonds, despite extremely low
interest rates, and only 16% were shares. Mutual funds The fastest-growing institutional
investors are investment companies, which combine the investments of a number of
individuals with the aim of achieving particular financial goals in an efficient way. Mutual
funds and unit trusts are investment companies that typically accept an unlimited number of
individual investments. The fund declares the strategy it will pursue, and as additional money
is invested the fund managers purchase financial instruments appropriate to that strategy.
Investment trusts, some of which are known in the United States as closed-end funds, issue
a limited number of shares to investors at the time they are established and use the
proceeds to purchase financial instruments in accordance with their strategy. In some cases,
the trust acquires securities at its inception and never sells them; in other cases, the fund
changes its portfolio from time to time. Investors wishing to enter or leave the unit trust must
buy or sell the trust’s shares from stockbrokers. Hedge funds A third type of investment
company, a hedge fund, can accept invest8 GUIDE TO FINANCIAL MARKETS ments from
only a small number of wealthy individuals or big institutions. In return it is freed from most
types of regulation meant to protect consumers. Hedge funds are able to employ extremely
aggressive investment strategies, such as using borrowed money to increase the amount
invested and focusing investment on one or another type of asset rather than diversifying. If
successful, such strategies can lead to very large returns; if unsuccessful, they can result in
sizeable losses and the closure of the fund. All investment companies earn a profit by
charging investors a fee for their services. Some, notably hedge funds, may also take a
portion of any gain in the value of the fund. Hedge funds have come under particular
criticism because their fee structures may give managers an undesirable incentive to take
large risks with investors’ money, as fund managers may share in their fund’s gains but not
its losses. Insurance companies Insurance companies are the most important type of
institutional investor, owning one-third of all the financial assets owned by institutions. In the
past, most of these holdings were needed to back life insurance policies. In recent years, a
growing share of insurers’ business has 9 WHY MARKETS MATTER Table 1.4 Financial
assets of institutional investors (% of GDP) 1990 1996 1999 2001 Australia 49.3 92.3 125.8
129.7 Canada 58.1 93.2 111.5 115.8 France 54.8 86.6 124.2 131.8 Germany 36.5 50.6 76.9
81.0 Italy 13.4 39.0 99.5 94.0 Japan 81.7 88.4 98.9 94.7 Mexico 8.8 4.6 8.3 11.7
Netherlands 133.4 167.5 212.7 190.9 Sweden 85.7 115.8 167.9 153.5 Switzerland 119 164.2
116.9 232.7 Turkey 0.6 1.7 3.4 4.4 UK 114.5 172.0 227.7 190.9 US 123.8 162.9 207.8 191.0
Source: OECD consisted of annuities, which guarantee policy holders a sum of money each
year as long as they live, rather than merely paying their heirs upon death. The growth of
pre-funded individual pensions has benefited insurance companies, because on retirement
many workers use the money in their accounts to purchase annuities. Pension funds
Pension funds aggregate the retirement savings of a large number of workers. Typically,
pension funds are sponsored by an employer, a group of employers or a labour union. Unlike
individual pension accounts, pension funds do not give individuals control over how their
savings are invested, but they do typically offer a guaranteed benefit once the individual
reaches retirement age. Pension-fund assets total about $10 trillion worldwide. Three
countries, the United States, the UK and Japan, account for the oor even falling. Pensions. A
significant change in pension policies is under way in many countries. Since the 1930s, and
even longer in some countries, governments have operated pay-as-you-go schemes to
provide income to the elderly. These schemes, such as the old age pension in the UK and
the social security programme in the United States, tax current workers to pay current
pensioners and therefore involve no saving or investment. Changes in demography and
working patterns have made pay-as-you-go schemes increasingly costly to support, as there
are fewer young workers relative to the number of pensioners. This has stimulated interest in
pre-funded individual pensions, whereby each worker has an account in which money must
be saved, and therefore invested, until retirement. Although these personal investment
accounts have to some extent supplanted firms’ private pension plans, they have also led to
a huge increase in financial assets in countries where private pension schemes were
previously uncommon. Stock and bond market performance. Many countries’ stock and
bond markets performed well during most of the 1990s. The rapid increase in financial
wealth feeds on itself: investors whose portfolios have appreciated are willing to reinvest
some of their profits in the financial markets. And the appreciation in the value of their
financial assets gives investors the collateral to borrow additional money, which can then be
invested. 6 GUIDE TO FINANCIAL MARKETS Risk management. Innovation has generated
many new financial products, such as derivatives and asset-backed securities, whose basic
purpose is to redistribute risk. This has led to enormous growth in the use of financial
markets for riskmanagement purposes. To an extent unimaginable a few years ago, firms
and investors are able to choose which risks they wish to bear and use financial instruments
to shed the risks they do not want, or, alternatively, to take on additional risks in the
expectation of earning higher returns. The risk that the euro will trade above $1.40 during the
next six months, or that the interest rate on long-term US Treasury bonds will rise to 6%, is
now priced precisely in the markets, and financial instruments to protect against these
contingencies are readily available. The risk-management revolution has thus resulted in an
enormous expansion of financial-market activity. The investors The driving force behind
financial markets is the desire of investors to earn a return on their assets. This return has
two distinct components: Yield is the income the investor receives while owning an
investment. Capital gains are increases in the value of the investment itself, and are often
not available to the owner until the investment is sold. Investors’ preferences vary as to
which type of return they prefer, and these preferences, in turn, will affect their investment
decisions. Some financial-market products are deliberately designed to offer only capital
gains and no yield, or vice versa, to satisfy these preferences. Investors can be divided
broadly into two categories: Individuals. Collectively, individuals own a small proportion of
financial assets. Most households in the wealthier countries own some financial assets, often
in the form of retirement savings or of shares in the employer of a household member. Most
such holdings, however, are quite small, and their composition varies greatly from one
country to another. In 2000, equities accounted for nearly half of households’ financial assets
in France, but only about 8% in Japan. The great majority of individual investment is 7 WHY
MARKETS MATTER controlled by a comparatively small number of wealthy households.
Nonetheless, individual investing has become increasingly popular. In the United States,
bank certificates of deposit accounted for more than 10% of households’ financial assets in
1989 but only 3.1% in 2001, as families shifted their money into securities. Institutional
investors. Insurance companies and other institutional investors (see below) are responsible
for most of the trading in financial markets. The assets of institutional investors based in the
30 member countries of the oecd totalled about $35 trillion in 2001. They grew almost 12%
per year between 1990 and 1999, then declined in 2000 and 2001. The size of institutional
investors varies greatly from country to country, depending on the development of collective
investment vehicles. Investment practices vary considerably as well. In 2001, for example,
US institutional investors kept 44% of their assets in the form of shares and 35% in bonds,
whereas British institutional investors held 65% of assets in shares. In Japan, 56% of
institutional investors’ assets were bonds, despite extremely low interest rates, and only 16%
were shares. Mutual funds The fastest-growing institutional investors are investment
companies, which combine the investments of a number of individuals with the aim of
achieving particular financial goals in an efficient way. Mutual funds and unit trusts are
investment companies that typically accept an unlimited number of individual investments.
The fund declares the strategy it will pursue, and as additional money is invested the fund
managers purchase financial instruments appropriate to that strategy. Investment trusts,
some of which are known in the United States as closed-end funds, issue a limited number
of shares to investors at the time they are established and use the proceeds to purchase
financial instruments in accordance with their strategy. In some cases, the trust acquires
securities at its inception and never sells them; in other cases, the fund changes its portfolio
from time to time. Investors wishing to enter or leave the unit trust must buy or sell the trust’s
shares from stockbrokers. Hedge funds A third type of investment company, a hedge fund,
can accept invest8 GUIDE TO FINANCIAL MARKETS ments from only a small number of
wealthy individuals or big institutions. In return it is freed from most types of regulation meant
to protect consumers. Hedge funds are able to employ extremely aggressive investment
strategies, such as using borrowed money to increase the amount invested and focusing
investment on one or another type of asset rather than diversifying. If successful, such
strategies can lead to very large returns; if unsuccessful, they can result in sizeable losses
and the closure of the fund. All investment companies earn a profit by charging investors a
fee for their services. Some, notably hedge funds, may also take a portion of any gain in the
value of the fund. Hedge funds have come under particular criticism because their fee
structures may give managers an undesirable incentive to take large risks with investors’
money, as fund managers may share in their fund’s gains but not its losses. Insurance
companies Insurance companies are the most important type of institutional investor, ownin
Lower inflation. Inflation rates around the world have fallen sharply since the 1980s. Inflation
erodes the value of financial assets and increases the value of physical assets, such as
houses and machines, which will cost far more to replace than they are worth today. When
inflation is high, as was the case in the United States, Canada and much of Europe during
the 1970s and throughout Latin America in the 1980s, firms avoid raising longterm capital
because investors require a high return on investment, knowing that price increases will
render much of that return illusory. In a low-inflation environment, however, financial-market
investors require less of an inflation premium, as general increases in prices will not devalue
their assets and the prices of many physical assets are stable or even falling. Pensions. A
significant change in pension policies is under way in many countries. Since the 1930s, and
even longer in some countries, governments have operated pay-as-you-go schemes to
provide income to the elderly. These schemes, such as the old age pension in the UK and
the social security programme in the United States, tax current workers to pay current
pensioners and therefore involve no saving or investment. Changes in demography and
working patterns have made pay-as-you-go schemes increasingly costly to support, as there
are fewer young workers relative to the number of pensioners. This has stimulated interest in
pre-funded individual pensions, whereby each worker has an account in which money must
be saved, and therefore invested, until retirement. Although these personal investment
accounts have to some extent supplanted firms’ private pension plans, they have also led to
a huge increase in financial assets in countries where private pension schemes were
previously uncommon. Stock and bond market performance. Many countries’ stock and
bond markets performed well during most of the 1990s. The rapid increase in financial
wealth feeds on itself: investors whose portfolios have appreciated are willing to reinvest
some of their profits in the fin Lower inflation. Inflation rates around the world have fallen
sharply since the 1980s. Inflation erodes the value of financial assets and increases the
value of physical assets, such as houses and machines, which will cost far more to replace
than they are worth today. When inflation is high, as was the case in the United States,
Canada and much of Europe during the 1970s and throughout Latin America in the 1980s,
firms avoid raising longterm capital because investors require a high return on investment,
knowing that price increases will render much of that return illusory. In a low-inflation
environment, however, financial-market investors require less of an inflation premium, as
general increases in prices will not devalue their assets and the prices of many physical
assets are stable or even falling. Pensions. A significant change in pension policies is under
way in many countries. Since the 1930s, and even longer in some countries, governments
have operated pay-as-you-go schemes to provide income to the elderly. These schemes,
such as the old age pension in the UK and the social security programme in the United
States, tax current workers to pay current pensioners and therefore involve no saving or
investment. Changes in demography and working patterns have made pay-as-you-go
schemes increasingly costly to support, as there are fewer young workers relative to the
number of pensioners. This has stimulated interest in pre-funded individual pensions,
whereby each worker has an account in which money must be saved, and therefore
invested, until retirement. Although these personal investment accounts have to some extent
supplanted firms’ private pension plans, they have also led to a huge increase in financial
assets in countries where private pension schemes were previously uncommon. Stock and
bond market performance. Many countries’ stock and bond markets performed well during
most of the 1990s. The rapid increase in financial wealth feeds on itself: investors whose
portfolios have appreciated are willing to reinvest some of their profits in the financial
markets. And the appreciation in the value of their financial assets gives investors the
collateral to borrow additional money, which can then be invested. 6 GUIDE TO FINANCIAL
MARKETS Risk management. Innovation has generated many new financial products, such
as derivatives and asset-backed securities, whose basic purpose is to redistribute risk. This
has led to enormous growth in the use of financial markets for riskmanagement purposes. To
an extent unimaginable a few years ago, firms and investors are able to choose which risks
they wish to bear and use financial instruments to shed the risks they do not want, or,
alternatively, to take on additional risks in the expectation of earning higher returns. The risk
that the euro will trade above $1.40 during the next six months, or that the interest rate on
long-term US Treasury bonds will rise to 6%, is now priced precisely in the markets, and
financial instruments to protect against these contingencies are readily available. The
risk-management revolution has thus resulted in an enormous expansion of financial-market
activity. The investors The driving force behind financial markets is the desire of investors to
earn a return on their assets. This return has two distinct components: Yield is the income
the investor receives while owning an investment. Capital gains are increases in the value of
the investment itself, and are often not available to the owner until the investment is sold.
Investors’ preferences vary as to which type of return they prefer, and these preferences, in
turn, will affect their investment decisions. Some financial-market products are deliberately
designed to offer only capital gains and no yield, or vice versa, to satisfy these preferences.
Investors can be divided broadly into two categories: Individuals. Collectively, individuals
own a small proportion of financial assets. Most households in the wealthier countries own
some financial assets, often in the form of retirement savings or of shares in the employer of
a household member. Most such holdings, however, are quite small, and their composition
varies greatly from one country to another. In 2000, equities accounted for nearly half of
households’ financial assets in France, but only about 8% in Japan. The great majority of
individual investment is 7 WHY MARKETS MATTER controlled by a comparatively small
number of wealthy households. Nonetheless, individual investing has become increasingly
popular. In the United States, bank certificates of deposit accounted for more than 10% of
households’ financial assets in 1989 but only 3.1% in 2001, as families shifted their money
into securities. Institutional investors. Insurance companies and other institutional investors
(see below) are responsible for most of the trading in financial markets. The assets of
institutional investors based in the 30 member countries of the oecd totalled about $35 trillion
in 2001. They grew almost 12% per year between 1990 and 1999, then declined in 2000 and
2001. The size of institutional investors varies greatly from country to country, depending on
the development of collective investment vehicles. Investment practices vary considerably as
well. In 2001, for example, US institutional investors kept 44% of their assets in the form of
shares and 35% in bonds, whereas British institutional investors held 65% of assets in
shares. In Japan, 56% of institutional investors’ assets were bonds, despite extremely low
interest rates, and only 16% were shares. Mutual funds The fastest-growing institutional
investors are investment companies, which combine the investments of a number of
individuals with the aim of achieving particular financial goals in an efficient way. Mutual
funds and unit trusts are investment companies that typically accept an unlimited number of
individual investments. The fund declares the strategy it will pursue, and as additional money
is invested the fund managers purchase financial instruments appropriate to that strategy.
Investment trusts, some of which are known in the United States as closed-end funds, issue
a limited number of shares to investors at the time they are established and use the
proceeds to purchase financial instruments in accordance with their strategy. In some cases,
the trust acquires securities at its inception and never sells them; in other cases, the fund
changes its portfolio from time to time. Investors wishing to enter or leave the unit trust must
buy or sell the trust’s shares from stockbrokers. Hedge funds A third type of investment
company, a hedge fund, can accept invest8 GUIDE TO FINANCIAL MARKETS ments from
only a small number of wealthy individuals or big institutions. In return it is freed from most
types of regulation meant to protect consumers. Hedge funds are able to employ extremely
aggressive investment strategies, such as using borrowed money to increase the amount
invested and focusing investment on one or another type of asset rather than diversifying. If
successful, such strategies can lead to very large returns; if unsuccessful, they can result in
sizeable losses and the closure of the fund. All investment companies earn a profit by
charging investors a fee for their services. Some, notably hedge funds, may also take a
portion of any gain in the value of the fund. Hedge funds have come under particular
criticism because their fee structures may give managers an undesirable incentive to take
large risks with investors’ money, as fund managers may share in their fund’s gains but not
its losses. Insurance companies Insurance companies are the most important type of
institutional investor, owning one-third of all the financial assets owned by institutions. In the
past, most of these holdings were needed to back life insurance policies. In recent years, a
growing share of insurers’ business has 9 WHY MARKETS MATTER Table 1.4 Financial
assets of institutional investors (% of GDP) 1990 1996 1999 2001 Australia 49.3 92.3 125.8
129.7 Canada 58.1 93.2 111.5 115.8 France 54.8 86.6 124.2 131.8 Germany 36.5 50.6 76.9
81.0 Italy 13.4 39.0 99.5 94.0 Japan 81.7 88.4 98.9 94.7 Mexico 8.8 4.6 8.3 11.7
Netherlands 133.4 167.5 212.7 190.9 Sweden 85.7 115.8 167.9 153.5 Switzerland 119 164.2
116.9 232.7 Turkey 0.6 1.7 3.4 4.4 UK 114.5 172.0 227.7 190.9 US 123.8 162.9 207.8 191.0
Source: OECD consisted of annuities, which guarantee policy holders a sum of money each
year as long as they live, rather than merely paying their heirs upon death. The growth of
pre-funded individual pensions has benefited insurance companies, because on retirement
many workers use the money in their accounts to purchase annuities. Pension funds
Pension funds aggregate the retirement savings of a large number of workers. Typically,
pension funds are sponsored by an employer, a group of employers or a labour union. Unlike
individual pension accounts, pension funds do not give individuals control over how their
savings are invested, but they do typically offer a guaranteed benefit once the individual
reaches retirement age. Pension-fund assets total about $10 trillion worldwide. Three
countries, the United States, the UK and Japan, account for the oancial markets. And the
appreciation in the value of their financial assets gives investors the collateral to borrow
additional money, which can then be invested. 6 GUIDE TO FINANCIAL MARKETS Risk
management. Innovation has generated many new financial products, such as derivatives
and asset-backed securities, whose basic purpose is to redistribute risk. This has led to
enormous growth in the use of financial markets for riskmanagement purposes. To an extent
unimaginable a few years ago, firms and investors are able to choose which risks they wish
to bear and use financial instruments to shed the risks they do not want, or, alternatively, to
take on additional risks in the expectation of earning higher returns. The risk that the euro
will trade above $1.40 during the next six months, or that the interest rate on long-term US
Treasury bonds will rise to 6%, is now priced precisely in the markets, and financial
instruments to protect against these contingencies are readily available. The
risk-management revolution has thus resulted in an enormous expansion of financial-market
activity. The investors The driving force behind financial markets is the desire of investors to
earn a return on their assets. This return has two distinct components: Yield is the income
the investor receives while owning an investment. Capital gains are increases in the value of
the investment itself, and are often not available to the owner until the investment is sold.
Investors’ preferences vary as to which type of return they prefer, and these preferences, in
turn, will affect their investment decisions. Some financial-market products are deliberately
designed to offer only capital gains and no yield, or vice versa, to satisfy these preferences.
Investors can be divided broadly into two categories: Individuals. Collectively, individuals
own a small proportion of financial assets. Most households in the wealthier countries own
some financial assets, often in the form of retirement savings or of shares in the employer of
a household member. Most such holdings, however, are quite small, and their composition
varies greatly from one country to another. In 2000, equities accounted for nearly half of
households’ financial assets in France, but only about 8% in Japan. The great majority of
individual investment is 7 WHY MARKETS MATTER controlled by a comparatively small
number of wealthy households. Nonetheless, individual investing has become increasingly
popular. In the United States, bank certificates of deposit accounted for more than 10% of
households’ financial assets in 1989 but only 3.1% in 2001, as families shifted their money
into securities. Institutional investors. Insurance companies and other institutional investors
(see below) are responsible for most of the trading in financial markets. The assets of
institutional investors based in the 30 member countries of the oecd totalled about $35 trillion
in 2001. They grew almost 12% per year between 1990 and 1999, then declined in 2000 and
2001. The size of institutional investors varies greatly from country to country, depending on
the development of collective investment vehicles. Investment practices vary considerably as
well. In 2001, for example, US institutional investors kept 44% of their assets in the form of
shares and 35% in bonds, whereas British institutional investors held 65% of assets in
shares. In Japan, 56% of institutional investors’ assets were bonds, despite extremely low
interest rates, and only 16% were shares. Mutual funds The fastest-growing institutional
investors are investment companies, which combine the investments of a number of
individuals with the aim of achieving particular financial goals in an efficient way. Mutual
funds and unit trusts are investment companies that typically accept an unlimited number of
individual investments. The fund declares the strategy it will pursue, and as additional money
is invested the fund managers purchase financial instruments appropriate to that strategy.
Investment trusts, some of which are known in the United States as closed-end funds, issue
a limited number of shares to investors at the time they are established and use the
proceeds to purchase financial instruments in accordance with their strategy. In some cases,
the trust acquires securities at its inception and never sells them; in other cases, the fund
changes its portfolio from time to time. Investors wishing to enter or leave the unit trust must
buy or sell the trust’s shares from stockbrokers. Hedge funds A third type of investment
company, a hedge fund, can accept invest8 GUIDE TO FINANCIAL MARKETS ments from
only a small number of wealthy individuals or big institutions. In return it is freed from most
types of regulation meant to protect consumers. Hedge funds are able to employ extremely
aggressive investment strategies, such as using borrowed money to increase the amount
invested and focusing investment on one or another type of asset rather than diversifying. If
successful, such strategies can lead to very large returns; if unsuccessful, they can result in
sizeable losses and the closure of the fund. All investment companies earn a profit by
charging investors a fee for their services. Some, notably hedge funds, may also take a
portion of any gain in the value of the fund. Hedge funds have come under particular
criticism because their fee structures may give managers an undesirable incentive to take
large risks with investors’ money, as fund managers may share in their fund’s gains but not
its losses. Insurance companies Insurance companies are the most important type of
institutional investor, owning one-third of all the financial assets owned by institutions. In the
past, most of these holdings were needed to back life insurance policies. In recent years, a
growing share of insurers’ business has 9 WHY MARKETS MATTER Table 1.4 Financial
assets of institutional investors (% of GDP) 1990 1996 1999 2001 Australia 49.3 92.3 125.8
129.7 Canada 58.1 93.2 111.5 115.8 France 54.8 86.6 124.2 131.8 Germany 36.5 50.6 76.9
81.0 Italy 13.4 39.0 99.5 94.0 Japan 81.7 88.4 98.9 94.7 Mexico 8.8 4.6 8.3 11.7
Netherlands 133.4 167.5 212.7 190.9 Sweden 85.7 115.8 167.9 153.5 Switzerland 119 164.2
116.9 232.7 Turkey 0.6 1.7 3.4 4.4 UK 114.5 172.0 227.7 190.9 US 123.8 162.9 207.8 191.0
Source: OECD consisted of annuities, which guarantee policy holders a sum of money each
year as long as they live, rather than merely paying their heirs upon death. The growth of
pre-funded individual pensions has benefited insurance companies, because on retirement
many workers use the money in their accounts to purchase annuities. Pension funds
Pension funds aggregate the retirement savings of a large number of workers. Typically,
pension funds are sponsored by an employer, a group of employers or a labour union. Unlike
individual pension accounts, pension funds do not give individuals control over how their
savings are invested, but they do typically offer a guaranteed benefit once the individual
reaches retirement age. Pension-fund assets total about $10 trillion worldwide. Three
countries, the United States, the UK and Japan, account for the og one-third of all the
financial assets owned by institutions. In the past, most of these holdings were needed to
back life insurance policies. In recent years, a growing share of insurers’ business has 9
WHY MARKETS MATTER Table 1.4 Financial assets of institutional investors (% of GDP)
1990 1996 1999 2001 Australia 49.3 92.3 125.8 129.7 Canada 58.1 93.2 111.5 115.8 France
54.8 86.6 124.2 131.8 Germany 36.5 50.6 76.9 81.0 Italy 13.4 39.0 99.5 94.0 Japan 81.7
88.4 98.9 94.7 Mexico 8.8 4.6 8.3 11.7 Netherlands 133.4 167.5 2 Lower inflation. Inflation
rates around the world have fallen sharply since the 1980s. Inflation erodes the value of
financial assets and increases the value of physical assets, such as houses and machines,
which will cost far more to replace than they are worth today. When inflation is high, as was
the case in the United States, Canada and much of Europe during the 1970s and throughout
Latin America in the 1980s, firms avoid raising longterm capital because investors require a
high return on investment, knowing that price increases will render much of that return
illusory. In a low-inflation environment, however, financial-market investors require less of an
inflation premium, as general increases in prices will not devalue their assets and the prices
of many physical assets are stable or even falling. Pensions. A significant change in pension
policies is under way in many countries. Since the 1930s, and even longer in some
countries, governments have operated pay-as-you-go schemes to provide income to the
elderly. These schemes, such as the old age pension in the UK and the social security
programme in the United States, tax current workers to pay current pensioners and therefore
involve no saving or investment. Changes in demography and working patterns have made
pay-as-you-go schemes increasingly costly to support, as there are fewer young workers
relative to the number of pensioners. This has stimulated interest in pre-funded individual
pensions, whereby each worker has an account in which money must be saved, and
therefore invested, until retirement. Although these personal investment accounts have to
some extent supplanted firms’ private pension plans, they have also led to a huge increase
in financial assets in countries where private pension schemes were previously uncommon.
Stock and bond market performance. Many countries’ stock and bond markets performed
well during most of the 1990s. The rapid increase in financial wealth feeds on itself: investors
whose portfolios have appreciated are willing to reinvest some of their profits in the financial
markets. And the appreciation in the value of their financial assets gives investors the
collateral to borrow additional money, which can then be invested. 6 GUIDE TO FINANCIAL
MARKETS Risk management. Innovation has generated many new financial products, such
as derivatives and asset-backed securities, whose basic purpose is to redistribute risk. This
has led to enormous growth in the use of financial markets for riskmanagement purposes. To
an extent unimaginable a few years ago, firms and investors are able to choose which risks
they wish to bear and use financial instruments to shed the risks they do not want, or,
alternatively, to take on additional risks in the expectation of earning higher returns. The risk
that the euro will trade above $1.40 during the next six months, or that the interest rate on
long-term US Treasury bonds will rise to 6%, is now priced precisely in the markets, and
financial instruments to protect against these contingencies are readily available. The
risk-management revolution has thus resulted in an enormous expansion of financial-market
activity. The investors The driving force behind financial markets is the desire of investors to
earn a return on their assets. This return has two distinct components: Yield is the income
the investor receives while owning an investment. Capital gains are increases in the value of
the investment itself, and are often not available to the owner until the investment is sold.
Investors’ preferences vary as to which type of return they prefer, and these preferences, in
turn, will affect their investment decisions. Some financial-market products are deliberately
designed to offer only capital gains and no yield, or vice versa, to satisfy these preferences.
Investors can be divided broadly into two categories: Individuals. Collectively, individuals
own a small proportion of financial assets. Most households in the wealthier countries own
some financial assets, often in the form of retirement savings or of shares in the employer of
a household member. Most such holdings, however, are quite small, and their composition
varies greatly from one country to another. In 2000, equities accounted for nearly half of
households’ financial assets in France, but only about 8% in Japan. The great majority of
individual investment is 7 WHY MARKETS MATTER controlled by a comparatively small
number of wealthy households. Nonetheless, individual investing has become increasingly
popular. In the United States, bank certificates of deposit accounted for more than 10% of
households’ financial assets in 1989 but only 3.1% in 2001, as families shifted their money
into securities. Institutional investors. Insurance companies and other institutional investors
(see below) are responsible for most of the trading in financial markets. The assets of
institutional investors based in the 30 member countries of the oecd totalled about $35 trillion
in 2001. They grew almost 12% per year between 1990 and 1999, then declined in 2000 and
2001. The size of institutional investors varies greatly from country to country, depending on
the development of collective investment vehicles. Investment practices vary considerably as
well. In 2001, for example, US institutional investors kept 44% of their assets in the form of
shares and 35% in bonds, whereas British institutional investors held 65% of assets in
shares. In Japan, 56% of institutional investors’ assets were bonds, despite extremely low
interest rates, and only 16% were shares. Mutual funds The fastest-growing institutional
investors are investment companies, which combine the investments of a number of
individuals with the aim of achieving particular financial goals in an efficient way. Mutual
funds and unit trusts are investment companies that typically accept an unlimited number of
individual investments. The fund declares the strategy it will pursue, and as additional money
is invested the fund managers purchase financial instruments appropriate to that strategy.
Investment trusts, some of which are known in the United States as closed-end funds, issue
a limited number of shares to investors at the time they are established and use the
proceeds to purchase financial instruments in accordance with their strategy. In some cases,
the trust acquires securities at its inception and never sells them; in other cases, the fund
changes its portfolio from time to time. Investors wishing to enter or leave the unit trust must
buy or sell the trust’s shares from stockbrokers. Hedge funds A third type of investment
company, a hedge fund, can accept invest8 GUIDE TO FINANCIAL MARKETS ments from
only a small number of wealthy individuals or big institutions. In return it is freed from most
types of regulation meant to protect consumers. Hedge funds are able to employ extremely
aggressive investment strategies, such as using borrowed money to increase the amount
invested and focusing investment on one or another type of asset rather than diversifying. If
successful, such strategies can lead to very large returns; if unsuccessful, they can result in
sizeable losses and the closure of the fund. All investment companies earn a profit by
charging investors a fee for their services. Some, notably hedge funds, may also take a
portion of any gain in the value of the fund. Hedge funds have come under particular
criticism because their fee structures may give managers an undesirable incentive to take
large risks with investors’ money, as fund managers may share in their fund’s gains but not
its losses. Insurance companies Insurance companies are the most important type of
institutional investor, owning one-third of all the financial assets owned by institutions. In the
past, most of these holdings were needed to back life insurance policies. In recent years, a
growing share of insurers’ business has 9 WHY MARKETS MATTER Table 1.4 Financial
assets of institutional investors (% of GDP) 1990 1996 1999 2001 Australia 49.3 92.3 125.8
129.7 Canada 58.1 93.2 111.5 115.8 France 54.8 86.6 124.2 131.8 Germany 36.5 50.6 76.9
81.0 Italy 13.4 39.0 99.5 94.0 Japan 81.7 88.4 98.9 94.7 Mexico 8.8 4.6 8.3 11.7
Netherlands 133.4 167.5 212.7 190.9 Sweden 85.7 115.8 167.9 153.5 Switzerland 119 164.2
116.9 232.7 Turkey 0.6 1.7 3.4 4.4 UK 114.5 172.0 227.7 190.9 US 123.8 162.9 207.8 191.0
Source: OECD consisted of annuities, which guarantee policy holders a sum of money each
year as long as they live, rather than merely paying their heirs upon death. The growth of
pre-funded individual pensions has benefited insurance companies, because on retirement
many workers use the money in their accounts to purchase annuities. Pension funds
Pension funds aggregate the retirement savings of a large number of workers. Typically,
pension funds are sponsored by an employer, a group of employers or a labour union. Unlike
individual pension accounts, pension funds do not give individuals control over how their
savings are invested, but they do typically offer a guaranteed benefit once the individual
reaches retirement age. Pension-fund assets total about $10 trillion worldwide. Three
countries, the United States, the UK and Japan, account for the o12.7 190.9 Sweden 85.7
115.8 167.9 153.5 Switzerland 119 164.2 116.9 232.7 Turkey 0.6 1.7 3.4 4.4 UK 114.5 172.0
227.7 190.9 US 123.8 162.9 207.8 191.0 Source: OECD consisted of annuities, which
guarantee policy holders a sum of money each year as long as they live, rather than merely
paying their heirs upon death. The growth of pre-funded individual pensions has benefited
insurance companies, because on retirement many workers use the money in their accounts
to purchase annuities. Pension funds Pension funds aggregate the retirement savings of a
large number of workers. Typically, pension funds are sponsored by an employer, a group of
employers or a labour union. Unlike individual pension accounts, pension funds do not give
individuals control over how their savings are invested, but they do typically offer a
guaranteed benefit once the individual reaches retirement age. Pension-fund assets total
about $10 trillion worldwide. Three countries, the United States, the UK and Japan, account
for the o