INTRODUCTION Ive chosen the book entitled How the Markets Really Work?

written by Joel Kurtzman ( journalist and editor at New York Times, editor at Harvard Business Review and founder editor at Strategy and Business) and published at Curtea Veche publishing house (Bucharest,2006) because Ive wanted to learn more about the basics of financial market through an experienced economist eyes. Being written in an original style with many useful examples was another reason for me to read it. It is structured in nine proportional chapters that deal with various financial instruments in order to explain the magic of market. CHAPTER 1- WHAT THE HECK ARE PRICES, ANYWAY? Chapter 1 focuses both on the mechanism and importance of financial market. Some of the basic steps related to this market are: assures the capital needed for investments and establishes the prices and distributes the degree of risk between the economic agents involved. Known as the commonplace where participants confront their ideas and money, the market has a real face and a virtual one too. If u want to play you must pay first is the motto used to describe best the mechanism of market according to the author. Starting with the 90s the trend of saving money in bank accounts was replaced by the idea of investing money in mutual funds. The statistics show that in the last 20 years the total amount of money has increased from 2 to 20 billion dollars. The relation between money and prices is very-well shown in Kennedys famous quotation: All the stalled boats can be lifted by an ascending wave. Goldman Sachs, Solomon Brothers, Merrill Lynch are few of the authorized guarantors, in the trade and issuance of securities, that grant credits to companies in need. HOW PRICES ARE SET?

It is a process that gathers both visible and invisible factors that are permanently changing. According to Joel Kurtzman the main factor is the cost (e.g. the rent, the electric power, the equipments) of producing commodities. Every economic agent tries to maximize his profit and minimize the risk. Through the market producers are able o sell their products and though competition low-quality commodities are eliminated from the market. In his book Joel Kurtzman affirms: As Buddhas smile or as the sand-shapes left by the wind, the prices can be misleading or as the Greek philosopher Heraclit said: You cant step twice in the same place - prices are changing all the time. This brings the author to the question: How much a financial instrument measures? It depends on the moment you put the question. The price is determined as a mixture of factors like: supply, demand, inflation, revenue etc.

CHAPTER 2- WHAT IS VOLATILITY? Defined as an aggregated movement of prices over a period of time, its increase is highly related to the up trend of computers and internet users in investments and brokerage offices. Nowadays, almost all international financial markets became more volatile and the rate of volatility has obviously increased. Once did the technology developed so do the brokerage services. As they begin to be more and more informed about the market context the brokers try to react as soon as possible, instead of chewing the events. This situation is known as the loop of regeneration. This evolution took place mostly because of Reuters press agency flexibility at innovation. A famous economist on Wall Street sustained that: You cant come up against the general belief of the market, even if the market is mistaken. What the author suggests is that the absolute truth of information provided by the market is not what counts, what matters is peoples reaction. The chapter also focuses on the Nobel Prizes won by some great economists like: Harry Markowitz (a mathematical model to create a portfolio for showing the degree of risk), Fisher Black and Myrom Scholes (estimative methods of obtaining the price of a stock in a future trade), Merton Miller and many others. In the first decades of the 20th century the trade of securities was very difficult because the Telecommunication System was at beginning. Nowadays thanks to CNBC, CNNfn, Bloomberg TV, Reuters etc the news are delivered with the speed of light. But this progress was also encouraged by famous names like: General Electric, Microsoft, Intel, Berkshire Hathaway and Home Depot. The electrical neural system shown that, in time, the critical moments in economy are starting to diminish and if the sudden changes had the shape of U (before rising again, the lowest points stay in depression for a while) nowadays they have the shape of V (before rising again, the lowest points stay in depression for a short period of time). CHAPTER 3- THE SECRET LIFE OF MONEY From the authors perspective money represent a collective idea that people use, contribute and transmit but they do not own it, not individually. For a better understanding Joel Kurtzman gives a social-cultural example. He says that if Martha Stewart cooks and decorates her house for Thanks Giving Day that does not mean she owns the national festival. Martha is using this festival just as the rest of us. The same story goes with the money. The value of money increases as people tend to trust in their power and start using them more frequently. MONEY AS A BELIEF

This section highlights the fact that money are impartial, just as the amber is used for making perfumes- a odorless substance poured ,by producers, into the ingredients to maintain their beautiful smell FORMER MONEY

Until 15 august 1971 the dollar was measured in standardized gold units (1$=35 ounces of gold). For every dollar created Fed (Federal Reserve System) was forced to verify if there was enough gold. After 1971 Nixon decided to give up this system and established that the value of dollar will be set on the free market. CHAPTER 4-THE BASICS OF FREE MARKET Before the free market ever existed economic stagnation was the key word. That is why economic growth is an innovation for human history, a revelation that brings prosperity too. Hernando de Soto-economist, philosopher, social activist-sustains that the capital is a mystery. Its ability of changing the world and the way in which we distribute the products makes it a mystery. Moreover, the organization of human efforts is fortified by the proper use of capital, which makes it a mystery once again. But these doesnt stop here, as converting the commodities into assets, through property power, the capital requires discipline. THE MARKETS ARE NOT ENOUGH

To be functional the Global Monetary System needs many markets and infrastructural institutions: central banks, commercial banks, investment institutions, stock exchanges. It takes time to create a free market economy and you could only succeed by trying and mistaken. You are not allowed to neglect that the process must end in real time. CHAPTER 5-HOW SHOULD WE CONSIDER THE STOCKS? WHO SAYS ITS A RATIONAL MARKET?

Joel Kurtzman underlines the fact that over a period of time many economic agents won tremendous sums of money by investing in securities according to their feelings. Its the luck that helps us won on short term, but for our own good, on long term, the author urges us to resort to a brokerage service. A statistic concept shows that in mathematical terms over a period of time the best specialists (it doesnt matter the domain) end up in mediocrity. The conclusion is that no matter how resilient an investor is he will face both success and failure. SHORT TERM VS. LONG TERM

Many famous investors prefer long run investments. Being patient will finally reward you somehow. The investment is profitable even if the economic agent bought the securities in 1972 or 2000 as the economic growth and the market evolution are obvious.

On short term the dealers are able to earn money by selling the stocks when their prices drop and buy them back when they rise again. Theoretically a dealer can buy and sell the securities as many times as he can in just one day and in the end he can obtain an impressive profit. CHAPTER 6-THE DIFFERENCE BETWEEN VALUE AND PRICE This chapter underlines the causes of the 1929 and 1987 crash. After the First World Wide War, Germany (who lost the war) was forced to pay impressive damages to its enemies .Although John Maynard Keynes was just a teenager those days, he realized that a standstill German economy will cause a crisis in Europe too, because the damaged countries will tend to become more dependent on the money provided by Germany. So Germany became poorer and poorer and couldnt pay its debts anymore and this is how the crash started in October 1929. In 1987 the crash was the result of an irrational, sudden and violent congruity of people bad expectation. Unfortunately there were more pessimistic than optimistic economic agents, but this didnt entail negative effects as few persons lost their jobs and the one that withdrawn their money from financial market found themselves with great losses. CHAPTER 7- THE DISAPPEARANCE OF BUSINESS CYCLE? In 90s some economists implemented a new trend in which they sustain that the economy will become cycle less. According to them the new technologies introduced on the market will assure the economic growth forever. Furthermore the prices will remain firm, the productivity, the wedges, and the profits will boost. In comparison to their ideas Joel Kurtzman comes with perceptibly arguments to sustain the opposite. Chaos, wars, economic defects these are the events that best describe the beginning of this millennium. Even if the economy is a gigantic complex field, in which the distribution points are represented by markets, it isnt actually a robot. Being created by humans the markets cant hide the weak points of our race. The author affirms: Every hill has its valley, and every day is fallowed by night. He also adds that in general references the global economy is quickly raising and it will continue to rise as long as we are free to fallow our own interest. CHAPTER 8-HOW CAN A MARKET BE INFLUENCED BY PIECES OF INFORMATION? The market is represented by a price adjustment and a risk distribution mechanism. This is the place where prices are established by trading commodities. So, it is impossible for the market to function properly without the correct information. It is like making business without understanding the meaning of it. There are different pieces of information that are necessary for the well function of a market , among them we can find: internal information about company X, information about the other companies that get into direct touch with company X etc. It is vital for a company to estimate the incomes, the selling, the cost of distribution, the cost of marketing implementation, the cost of rent etc so it can be profitable.

CHAPTER 9-THE MARKET AS A COPILOT Unmistakable the markets daily transform our lives. This means that every thing that has a value must have a price. Joel Kurtzman presents the case of the brilliant British rocker, David Bowie, which converted his musical potential in a bond issuance. Estimated at about 55 million $, the bonds brought their owners a 7.9% interest rate for a period of 10 years. David Bowie invested a part of his profit in other businesses. But the important thing is that he transformed an static asset (a book of songs) into a dynamic one (bonds). This also shows the evolution of market and the creativity of this field.

PERSONAL OPINION

In my opinion the book deals with a nowadays problem: the understanding of financial market which is vital for a healthy economic growth. I think that one of the strongest points achieved by Joel Kurtzman is the structure of the book: first he listed the financial instruments involved, secondly he described each of them by using examples too and in the end the author presented the advantages and disadvantages of these financial instruments correlated with the market context. What I think is the fact that being written in an impersonal style makes it accessible and enjoyable too. But I didnt actually like his ironic attitude regarding the primitive system used by Russia or the Evil Empire as he calls it in comparison to the mesmerizing American system, which of course is the best in his opinion (and he is probably right). But what I wanted to say is that weve got to give Russia a chance in this process of changing because is not that simple to give up an entire financial system and implement a completely new and different one in such an impressive surface of land. I think it takes time to destroy the roots of communism and to change the mentality of Russians over night. CONCLUSION The purpose of the book is to explain both the mechanism and magic of the market by using examples on the global financial markets and by exposing the success of great brokers. After reading the book we can conclude that over half of the American citizens prefer securities or private pension investments than appealing to a banks services. General information about the functionality of a stock exchange or a bank and the secret of brokers are others subjects which the author deals with. Joel Kurtzman also teaches us how to extend our profits by distributing the degree of risk among stock exchange players. The author gives the reader the opportunity to estimate the best alternative of acquiring a safe income by explaining the difference between the financial instruments, by exposing the advantages and disadvantages of them, and the reason of choosing an alternative in correlation with market circumstances.

BIBLIOGRAPHY HOW THE MARKETS REALLY WORK?- Joel Kurtzman, editura Curtea Veche, Bucuresti, 2006

ACADEMIA DE STUDII ECONOMICE DIN BUCURESTI

Book review - How the Markets Really Work?

Joel Kurtzman

Student: Radu Dragos-Georgian

MPI - 1st Year