Knowledge of Capital Markets Flashcards
Securities Exchange Commission (SEC)
- Date, authority, goals
Date: Established by Securities Exchange Act of 1934 under Franklin D. Roosevelt
Authority: SEC has authority to propose, draft, and enact laws in furtherance of its purpose. Authority to file civil and criminal law suits against violators.
Goals: protecting investors; maintaining fair, orderly, and efficient markets; facilitating capital information
CBOE Global Markets (SRO)
owns the largest options exchange in US
creates all rules for options exchanges and can enforce them
Financial Industry Regulatory Authority (FINRA)
is an SRO accountable to the SEC
Develops and implements rules specifically for brokerage firms and their employees
All firms trading securities must be registered with FINRA
Municipal Securities Rulemaking Board (MSRB)
Establishes rules that banks and securities firms must follow when buying, selling, underwriting, or recommending municipal securities
Department of Treasury
Part of Executive branch of government, works with Fed to foster economic growth
Treasury collects taxes and initiates borrowing on behalf of the government through Treasury securities (T-bills, notes, bonds)
Uses IRS to actually collect taxes
North American Securities Administrators Association and Blue Sky Laws
association devoted to investor protection
creates “model” laws that states can use
These laws that states use are called “blue sky laws”
Federal Reserve Board (FED)
network of regional banks operating under authority of federal government
Responsible for decisions that affect stock market and economy (setting interest rates and raising money supply)
Securities Investor Protection Corporation (SIPC)
protects clients of brokers and dealers in case of financial failure
SIPC covers up to $500,000 of the equity balance, which includes up to $250,000 in cash
Federal Deposit Insurance Corporation (FDIC)
Same as SIPC, but for traditional banks
Insures a bank account up to $250,000
Member banks pay dues to fund FDIC
FDIC has $1b line of credit with US Treasury
FDIC monitors banks to ensure adequate capital, not excessive risk, fraud prevention, and rule following
Types of Investors
Institutional Investor: investors with immense amounts of capital. Ex: commercial banks, investment banks, hedge funds, insurance companies
Retail Investor: individuals investing for their future through common vehicles
Accredited Investor: investors with sufficient net worth, annual income/expertise. They do not require same level of protection. Can buy & sell unregistered securities (PE) governed by Regulation D of Securities Act of 1933
Broker-Dealers & Types of Broker Dealers
Financial institutions that affect securities transactions on behalf of individuals and entities or for their own accounts.
Broker: when affecting transactions on behalf of others
Dealer: When affecting transactions on behalf of their own account
Introducing Broker: individual or organization that solicits or accepts orders to buy or sell futures contracts, forex, commodity options, or swaps
Clearing Broker: Ensure proper settlement of transactions
Prime Broker: provide higher level, specialized services to hedge funds or other large clients
Municipal Advisors
entities that specialize in financing of local governments through bond offerings.
Required to register with SEC and pass MSRB Exam (Series 50)
Issuers and Underwriters & Types of Underwriting
Used as guidance during securities offerings
Best Efforts Underwriting: IB is only required to place as much of issuance as is possible given market conditions. Not responsible for purchasing remaining shares.
Commitment Underwriting: IB is required to buy all remaining shares of issuance.
Traders and Market Makers
Market Maker: specialists who make sure there is sufficient liquidity. Main point of contact for company and tells them who has been trading stock and what trading conditions are like.
Traders: market participants that engage in capital markets for variety of reasons for their own accounts, could be for hedging.
Custodians and Trustees
Custodians: hold onto securities for safekeeping. Ensure that the securities an investor owns are actually in investors account. Ex: Fidelity, Schwab
Trustees: Trustee manages the Trustor’s assets, has fiduciary duty
Transfer Agent
typically a commercial bank that works for corporation that maintains records of all equity and bondholders. Important for events like rights offering or dividends.
Depository Trust and Clearing Corporation (DTCC) and Options Clearing Corporation (OCC)
DTCC: Serves as a custodian and identifies proper owners of securities.
Also serves as clearing agent, makes sure all settlement procedures are honored
OCC: guarantees each side of an options contract is fulfilled
4 Types of Markets
Primary Market: This is where new securities are created (ex: IPO’s)
Secondary Markets: This is where securities are traded between investors (ex: NASDAQ). These markets establish price through competitive bidding and have requirements for firms to trade on these markets.
Third Market: OTC market. Traded through telephone and computer network rather than organized exchange. Much smaller companies. Regulated by National Association of Securities Dealers (NASD) (ex: pink sheets)
Fourth Market: electronic network utilized by institutions only. (ex: known as “dark markets”)
Monetary vs. Fiscal Policy
Monetary: concerned with the money supply and how that can effect the economy. Controlled by the Federal Reserve. Increased money supply = increased growth.
Fiscal Policy: concerned with government taxation and expenditures. Increased taxation = economic shrinking. Increased expenditures = economic growth.
Open Market Activities (Operations)
Executed by the Fed to affect money supply. FRB of NY buys and sells US Treasuries
Fed buys US treasuries to increase money supply. This transfers money from Fed to market economy.
Fed sells US treasuries to decrease money supply. This transfers money from market economy to Fed balance sheet.
Different Rates
Fed Funds Rate: rate that large banks charge each other for overnight borrowing of $1M or more. Volatile, short term interest rates.
Prime Rate: rate tha banks charge low risk customers (namely corporations) with good credit. This rate fluctuates based on money supply.
Discount Rate: rate that FRB charges to the Fed when bank is issuing short-term loans. Higher discount rate = more expensive for banks and customers to borrow.
Broker Loan Rate: rate that banks charge brokers and dealers when lending money for margin accounts (aka call loan rate or money rate)
Business Cycle
Phase 1 - Expansion: Good business conditions; strong economic indicators; stock market, housing, and unemployment are good
Phase 2 - Peak: high point of expansion phase when economic indicators tend to be on downswing. typically less investing and spending
Phase 3 - Contraction: recession, or in extreme cases, depression
Phase 4 - Trough: downtrends begin to level off and stop; sets stage for new cycle of expansion
Yield Curves
Represents interest rates for bonds of same rating with different maturities. Common yield: US 3 month Treasury vs 30 year.
Normal: upward curve between interest rates and maturity dates
Inverted Yield Curve: indicates a recession since bonds with longer maturities have lower yield rate
Economic Theories
Keynesian: Increased or steady demand leads to more economic growth. Federal government must sustain economy by spending tax money on stimulating projects.
Monetarist: Inflation and deflation are direct result of available money supply. Not enough money = prices fall. Too much money = prices rise. Federal government must regulate money supply and stay out of markets. Gradually increasing money supply keeps demand without risking inflation.
