Keeping Track of Observations : continued
Explaining Flow of Funds
Keeping Track of What We Observe
The various sectors and instruments that make up the capital market are interrelated.
We start with the instrument table for the type of security whose market interests us.
From there, using the sectors listed in the left column of the instrument table, we go to sector tables of the players that make up our target market.
Finally, in order to understand the motivation of these sectors, we examine , in turn, other instruments that these players are buying or selling, going from a specific sector table back to the relevant instrument tables.
- The labels in the left columns of instrument tables refer to sectors.
- The titles in left columns of sector tables refer mainly to instruments.
The above graphic shows how we use this relationship for progressive analysis:
- Starting with an instrument table (in the upper right corner), we proceed to the relevant sector tables (in the middle).
- From these sector tables, we can then look into the relevant instrument tables (in the lower left).
From securities to players back to securities, and so on.
So as not to get lost in this maze of relationships, it is important to take notes and draw inferences at each step.
We can learn a lot about supply and demand in the capital market just by reading and thinking about flow of funds accounts.
Before proceeding, check your progress:
Self-Test
The best place to start Capital Flow Analysis of the equity market would be:
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The labels in the left column of an instrument table refer to:
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The recommended sequence for examining flow of funds tables for Capital Flow Analysis is:
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learning module : continued >
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