Chapter 1- A general overview Flashcards
What is financial markets?
Financial markets facilitate the exchange of financial securities, commodities, currencies and other tradable items
Relationship between lenders and borrowers
- Lenders
- Financial intermediaries
- Financial markets
- Borrowers
Lenders
- individuals
- companies
Financial intermediaries
- banks
- insurance companies
- pension funds
- mutual funds
Financial markets
- interbank
- stock exchange
- money market
- bond market
- foreign exchange
Borrowers
- individuals
- companies
- central government
- municipalities
- public corporations
Financial intermediaries vs financial markets
Big differences in size and scale of operations
What is a bank?
A financial institution licensed as a receiver of deposit
In most countries, banks are regulated by the national government and/or central bank
In general, there are two types of banks
- commercial/retail banks
- investment banks
Examples of investment banking expertise
- mergers & acquisitions
- equity underwriting
- private placements
- valuation & fairness opinions
- corporate restructuring
- management buyouts
- cross-border transactions
- structured finance
Retail Banking
- the street banks we are all familiar with
- take deposits from individuals, provide saving facilities and pay interest on these accounts
- also lend money to individuals in form of loans and overdrafts (charge interest on the money they lend)
- also provide a range of other financial services
Commercial Banking
- provide banking services to businesses –> from small companies to corporate banking directed at large corporations
- help raise finance to expand their businesses and to maintain their cashflow by lending them money
- provide a large range of other financial services (leasing, straight loans,…)
Investment Banks
- distribute and guarantee the sale (=underwrite) of share and bond issues
- trade securities on the financial markets and advise corporations on capital market activities such as mergers and acquisitions
- are extremely specialized banks
Examples:
- Merrill Lynch
- Goldman Sachs
Central Banking
- not a traditional bank
“The lender of last resort”
- is responsible for providing its economy with funds when commercial banks can’t cove a supply shortage
- prevent the country’s banking system from failing
- acts as a regulatory authority of a country’s monetary policy and is the sole provider and printer of notes and coins in circulation
- time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime
- should also be completely divested of any commercial banking interests
- each country has a central bank that sets its own goals
The primary goal for central banks
Provide their countries´currencies with price stability and controlling inflation
Primary functions of banks
1- Accepting deposits
2- Granting loans
The difference in interest rate is an important source of income
Institutional investors
- insurance companies
- pension funds
- mutual funds
Insurance companies
- offers insurance policies to the public, either by selling directly to individuals or companies
- can specialize in one type of insurance, such as life insurance, or car insurance or offer multiple types of insurance
- provides coverage in the form of compensation resulting from loss, damages, injury, treatment or hardship in exchange for fee payments
Pension funds
- a fund established by an employer to facilitate and organize the investment of employees´retirement funds contributed by the employer and employees
- a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement
- control relatively large amounts of money and represent the largest institutional investors in many nations
- Advantage (in comparison with insurance)- can hold money until you turn 65, they know exactly (almost, it depends) when u will take out your money
Mutual funds
- an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in many different securities such as stocks, bonds, money market instruments and similar assets
- managed by specialists who invest the fund´s capital and attempt to produce capital gains and income for the fund´s investors
- a mutual fund´s portfolio is structured and maintained to match the investment objectives stated in its prospectus
- focus on global “blue chips”
What is a prospectus?
A formal legal document that provides details about an investment offering for sale to the public. It should contain the facts that an investor needs to make a good investment decision.
Advantages of mutual funds
- gives small investors access to professionally managed, diversified portfolios of equities, bonds and other securities which would be quite difficult (if not impossible) to create with a small amount of capital
- each shareholders participates proportionally in the gain or loss of the fund
- mutual fund units, or shares, are issued and can typically be purchased or sold as needed at the fund´s current net asset value (NAV) per share
Disadvantages of mutual funds
- high expense ratios and sales charges (fees and commissions)
- management abuses
- tax inefficiency
- poor trade execution (prices are only visible once a day- NAV)
When demand meets supply in the market..
a price for “capital is born”