Finance and Financial Markets Flashcards
What is a financial security/asset?
Legal documents giving the owner/buyer the right to a financial benefit - the seller has the obligation to make sure they pay the financial benefit in accordance to the terms of the contract
Give examples of financial securities
- bonds
- shares in common stock
- options
- futures
What is an index?
Weighted average of the prices of key companies traded on an organised market
sum(i=1 to n) wi*pi
wi is weight attributed to company i
pi is price of shares of company i
How is weight of a company in an index determined?
market capitalisation = price of company * number of shares outstanding
Outline distinguishing features of fixed income securities
- fixed return (or interest) at specific points in time
- fixed time to maturity
- have to pay the principal upfront
Give features of common stock (ordinary shares)
- investors buy shares of a corporations stock
- could get annual dividend
- allowed to vote at general meetings
- investors receive residual amount after everything else is paid
Why is common stock generally preferred?
Easy to buy and sell
What is the primary market for?
For new issues of shares, like IPOs
How are profits from shares taxed?
If you make a profit, you pay capital gains tax (40% of proceeds), if you make a loss you pay nothing
Are transaction costs for selling financial instruments higher or lower than other goods, and why?
Much lower, as it promotes liquidity in the market
What is a competitive market?
Many competing buyers and sellers, so no single buyer/seller can influence the price
What is a perfect market?
Perfect competition among buyers and sellers, no transaction costs, no information difference
What are the CAPM and WACC used for?
Help investors calculate the required rate of return (market rate of return) on their investments
What does the CAPM assume?
Stock market is an efficient market
What is an efficient market?
The price quoted is reflective of all information available in the market now
