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Financial Markets Theory > Lecture 1 > Flashcards

Lecture 1 Flashcards

1
Q

What is an investment?

A

Current commitment of money or other resources the obtain future benefits

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2
Q

What are some examples of investments?

A

Stocks
House
Education

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3
Q

What are real assets?

A

They determine the productive capacity and net income of the economy

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4
Q

What are some examples of real assets?

A

Land
Buildings
Machines
Knowledge used to produce goods and services

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5
Q

What are financial assets?

A

Claims on real assets

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6
Q

What are some examples of financial assets?

A

Equity
Bonds
Derivatives

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7
Q

What is a portfolio?

A

A collection of assets

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8
Q

What is money?

A

Anything that is generally accepted in payment for goods or services or in the repayment of debts

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9
Q

Tell me about medium of exchange

A

Standardised
Widely accepted
Divisible
Easy to carry
Durable

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10
Q

What is unit of account used for?

A

To measure value

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11
Q

What is store of value used for?

A

To save purchasing power and its liquid

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12
Q

Financial markets bring together…

A

Those people who have excess funds and those who have shortage of funds

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13
Q

Who are lenders?

A

Those with surplus funds
Households (individuals) and some institutions that act on their behalf

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14
Q

Who are borrowers?

A

Government
Firms
Individuals
Foreigners

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15
Q

What are the governments direct responsibilities?

A

Fiscal policy/tax
National debt management

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16
Q

What are the governments devolved responsibilities?

A

Monetary policy
Cash/liquidity management
Regulation

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17
Q

What are the roles of financial markets?

A

Reduction in transaction costs
Information role
Consumption timing
Allocation of risk
Separation of ownership and management

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18
Q

What is the information role (role of financial markets)?

A

Capital flows to companies with best prospects

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19
Q

What is consumption timing (role of financial markets)?

A

Use securities to store wealth and transfer consumption to the future

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20
Q

What is allocation of risk (role of financial markets)?

A

Investors can select securities consistent with their tastes for risk

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21
Q

What is separation of ownership and management (role of financial markets)?

A

With stability comes agency problems

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22
Q

What are the issues in financial markets?

A

Corporate government and corporate ethics
Accounting scandals
Auditors (watchdogs of the firm)
Analyst scandals
Sarbanes-Oxley act

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23
Q

What is the Sarbanes-Oxley act?

A

Tighten the rules of corporate governance

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24
Q

What are financial intermediaries?

A

Bring those with countervailing needs together
Lenders and the borrowers
Pool and invest funds

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25
What are some examples of financial intermediaries?
Investment companies Banks Insurance companies Credit unions
26
Tell me about money markets
Short term Low risk Highly liquid debt securities (e.g. treasury bills)
27
Tell me about capital markets
Long term Debit markets (e.g. government bonds, commercial paper) Equity markets (e.g. shares) Derivative markets for futures and options
28
What are primary markets?
They are used for the issue of new stocks, bonds or other securities to the public (IPO)
29
What are secondary markets?
Where securities are subsequently traded markets E.g. LSE, NYSE, NASDAQ
30
What are some characteristics of secondary markets?
Broad - wide variety of different types of investors Deep - small adjustment of prices from previous trades Liquid - ease and speed with which a position can be taken or unwound Efficiency
31
What are brokers/what do they do?
Agents Take orders from investors Submit them to the market trading mechanisms and charge commissions
32
What are dealers/what do they do?
Principal trades Post bid-ask quotes by choice
33
What are market-makers/what do they do?
Principal traders Obligated to trade in the securities in which they are registered
34
What are broker-dealers?
Can act as both agents and principals Dual-capacity trading
35
What is the investment process
Asset allocation Security selection
36
What is assets allocation (investment process)?
Choice among broad asset classes
37
What is security selection?
Choice of which securities to hold WITHIN asset class Security analysis to value securities and determine investment attractiveness
38
What are the three types of financial assets?
1. Fixed income or debt 2. Common stock or equity 3. Derivative securities
39
What is fixed income?
Payments fixed or determined by a formula
40
Tell me about money market debt
Short term Highly marketable Usually low credit risk
41
Tell me about capital market debt
Long term bonds Can be safe or risky
42
What is common stock?
Equity or ownership in a corporation; Payments to stockholders are not fixed but depend on success of firm
43
What are derivatives?
Their value derives from the price of other securities (e.g. stocks and bonds) Used to transfer risk
44
What is a direct search market?
Buyers and sellers seek each other
45
What is a brokered market?
Brokers search out buyers and sellers
46
What are dealer markets?
Dealers have inventories of assets from which they buy and sell
47
What are auction markets?
Traders converge at one place to trade
48
What is a bid?
The price bid to buy the security by a participant
49
What is the ‘ask’ (bids and asked prices)?
The price asked for by the participant to sell the security
50
What is the ‘touch’ (bids and asked prices)?
The difference between bid and ask spread
51
What are the determinants of the bid-ask spread?
Information asymmetry Volatility of the asset Liquidity of the asset Exchange restrictions
52
What are call (batch) markets?
Usually auction markets Buyers and sellers submit their orders in some manner ands process begins to match them Open outcry; written order entry
53
What are continuous markets?
Non-batch markets where a transaction is allowed whenever two parties agree to trade Dealer or quote-driven markets; order-driver markets
54
What happens in a quote driven system?
There are quotes called exposure orders Traders accepting a quote with a hit order (when trader sells at current bid price in a market)
55
What happens in an order-driven market?
The type of order that a trader submits depend on the pursued strategy Main order types are: At best (UK)/market (US) order Limit order
56
What are alternative limit orders?
Instructs broker to buy or sell only at a certain price
57
What is a trailing stop order?
Designed to protect gains Enables a trade to remain open and continue to profit as long as price is moving in investor’s favour Order closes trade if price changes direction by a specified percentage or dollar/pound/euro etc. amount
58
What are the order types in continuous markets?
Stop, or stop-loss, order on sell side Stop-buy order Trading stop order Expiry date or time Single fill order
59
What is SETS (trading platforms on the London Stock Exchange)?
Order driven market Back up liquidity provided by money makers
60
What is SETSqx (trading platforms on the London Stock Exchange)?
Quote-driven market with 4 electronic auctions per day
61
What is SEAQ (trading platforms on the London Stock Exchange)?
Quote driven platform
62
Which stock is the most liquid in the London Stock Exchange?
SETS (most) then SETSqx Then SEAQ (least)
63
Why is post-trade anonymity important?
Because otherwise trading strategies can be revealed by small trades
64
Why is transparency important?
Because the credit risk is borne by the trading parties I.e. they need to know with whom they are trading
65
What is the central counterparty?
They act as a counterparty to every trade for clearing members of the London Stock Exchange
66
What are brokerage fees?
Approx 1.5% but varies according to type of account and frequency of trade Usually a minimum charge will apply
67
What is dealer’s spread?
From 0.5% for the most liquid stock To 15% for the least Varies throughout the day
68
What are stamp duty and other taxes?
0.5% of value for purchases Zero for sales
69
What are settlement costs?
Approx 30p per trade
70
What are the operational costs?
Brokerage fees Dealers spread Stamp duty and other taxes Settlement costs Other costs (custodian charges, exchange trading levies etc.)

Financial Markets Theory (7 decks)

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