Introduction to Finance Flashcards
Be able to explain what financial markets are, how stocks and bonds differ in risk, and who the sell-side and buy-side players are and how do they make money.
What are the financial markets?
A place where investors and borrowers are voluntarily connected to ensure the efficient allocation of capital.
Read more on financial markets here.
What is the main difference between stocks and bonds?
Bonds are loans made to corporations (or governments). Stocks, on the other hand, signify ownership of the corporation. In the event of bankruptcy, the company’s assets are liquidated, and bondholders are paid first. The remainder, if anything left, is distributed amongst shareholders. This is ONE reason why bonds are less riskier.
Who are the sell-side players and how do they make money?
- Investment Banking - they make money by advising, marketing, and underwriting securities for their clients (corporations and governments).
- Equity & Credit Research - they make money by research an industry or security (equity or debt) and sell the research to buy-side players.
- Sales & Trading - they execute trades on behalf of their clients and earn the spread between the ask-bid price.
- PE/VCs - remember they are only considered sell-side players at FactSet because their workflows are similar to investment bankers. Ultimately, they manage a portfolio and earn a management fee and performance fee for doing that.
Who are the buy-side players and how do they make money?
Mutual funds, pension funds, hedge funds, SWFs, and us (small players). The larger players (funds) make money by managing a portfolio and charging their clients management and a performance fee.
Individuals manage their own portfolio and are rewarded through the profits they made in the markets.
