Capital Flow Analysis. Basic Tutorial

Investor education in basic capital flow analysis: Use of Federal Reserve Flow of Funds Accounts

Tutorial Index

Tutorial: Elementary Capital Flow Analysis Basic Tutorial in Capital Flow Analysis

The ten lessons in this module provide an introduction to the basics of Capital Flow Analysis.

Reading time for this module is from one to two hours.

For a thorough understanding, follow the links and read books on the lists.

To check your progress, take self-quizzes on each page.

Tutorial: Lessons in Capital Flow Analysis

1: A Two-Player Securities Market

Capital Flow Analysis uses Federal Reserve flow of funds accounts to explain supply and demand in securities markets.

The simplest model of a market would have one security and two players: an issuer and an investor.

1,400 words. 1 page. 6 to 9 minutes.

2: The Motivation Axiom

To explain security price trends, flow tables must be read with reference to security prices.

When buying sectors are more motivated than selling sectors , securities prices will rise.

1,300 words. 1 page. 5 to 9 minutes.

3: The Multi-Player Market

The two-player market, with only an issuer and an investor, does not represent the real world.

Prices are determined not only between investors and issuers, but also between different kinds of investors.

1,200 words. 1 page. 5 to 8 minutes.

4: Knowing What Questions to Ask

When we know why groups of investors and issuers buy and sell securities, we begin to understand the market.

If we can predict how long these reasons might persist, we have a basis for anticipating security price trends.

1,400 words. 1 page. 6 to 9 minutes.

5: Reasonable Price

Capital flows must be judged in the light of price trends and levels.

By noting price levels, we judge the degree to which buyers or sellers seem to be behaving as rational investors or issuers.

1,600 words. 1 page. 6 to 11 minutes.

6: The Irrationality Axiom

Market players have reasons for buying and selling investment assets, but these reasons are not always ‘economically rational’ and change from time to time.

The idea that investors and issuers are not always rational is fundamental to Capital Flow Analysis.

1,400 words. 1 page. 6 to 9 minutes.

7: The Non-Efficient Market

The Efficient Market Hypothesis is anathema to fundamental analysts and the principles of Capital Flow Analysis.

This lesson puts forth some arguments against the hypothesis the market price approximates intrinsic value.

1,800 words. 1 page. 7 to 12 minutes.

8: Finding Other Motivation

There are many reasons why people buy and sell securities.

The Irrationality Axiom states that these reasons are not always related to the intrinsic value of the securities or the investor's own self-interest.

2,300 words. 1 page. 9 to 15 minutes.

9: Presumed Dominance

Motivation drives investment markets, but the motivation of corporate or government issuers is usually stronger than the motivation of investors.

Issuers have advantages over investors that position them in the center of market.

1,300 words. 1 page. 5 to 9 minutes.

10: History & Sociology

To make sense of long-term trends, it is necessary to place the market in context of changes in social movements, demographics, culture, and history.

Here are ten themes that will be important in understanding capital markets in the new century.

1,700 words. 1 page. 7 to 11 minutes.

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