Chapter 21: Other influences on investment markets Flashcards
Equity market supply
- Increase in number of shares, cause downward
pressure on prices - Best to issue new shares when market is buoyant
Main reasons for the Demand of an asset changing: (2)
- Investor perceptions of the characteristics of the asset alter (principally risk and expected return)
- investors opinions of the properties of the asset remain unchanged but external factors alter the demand for the asset
What factors influence the investors’ demand for an asset? (3)
- investors’ incomes
- investors’ preferences
- price of other assets (may be substitute goods)
Bond market supply
-controlled largely by the government’s fiscal deficit and
its strategy for financing the deficit.
-Decreased by redemption of bonds
-Best to issue bonds when price high and yields low, so
borrowing is effectively cheaper.
Other factors influencing DEMAND for investments
🔼 - CHANGE in liabilities (institutional cashflow)
F - Fashion (fashionable investments)
U - Political UNCERTAINTY
M - MARKETING & Investor preferences
E - EDUCATION from suppliers (eg bitcoin, investors weren’t educated)
🔼 - Change in taxes or regulation
What would increase number of shares in equity market?
- Rights Issues
- Privatisations of previously nationalised companies
- New shares by companies, moving to shareholder
structure
What would decrease supply in equity market?
- Share buy-backs
- Re-nationalisations
Inverse relationship between volumes of corporate bond and share issues?
- Bond=Debt, Share=Equity
- Company will try to raise capital in cheapest way
- If debt is cheaper than equity, bonds are preferred.
The same applies for equity and shares
Supply in Derivative Market
- Increased by technological innovation, since cheaper to reserve and price complex products
- Range of investments increase, Customers can:
> Meet objectives more closely
> Create more innovative products - Derivatives can be created and destroyed on demand, supply is theoretically limitless.
