Module 1 - Shares & Stock Markets Flashcards
Investments BKM Chpt 1-3
What is an investment?
Current commitment of money or other resources to obtain future benefits. e.g. stocks, house, education.
What are real assets?
Assets that determine the productive capacity and net income of the economy. e.g. land, buildings, machines, knowledge used to produce goods and services.
What are financial assets?
Claims on real assets. e.g. equity, bonds, derivatives.
What is a portfolio?
A collection of assets.
What is money?
Anything that is generally accepted in payment for goods or services or in the repayment of debts.
Describe 3 traits of money.
Medium of exchange: standardised, widely accepted, divisible, easy to carry, durable.
Unit of account: used to measure value.
Store of value: used to save purchasing power and is liquid.
What are financial markets?
Market that bring together those who have excess funds and those who have a shortage of funds.
Who are the players in a financial market.
Lenders: those with surplus funds, household (individuals) and some institutions that act on their behalf.
Borrowers, government, firms, individuals, (also foreigners).
What are the direct and devolved responsibilities of governments?
Direct: fiscal policy/taxation; national debt management.
Devolved: monetary policy; cash/liquidity management; regulation/
What are the 5 roles of financial markets?
Reduction in transaction costs;
Information role (capital flows to companies with best prospects);
Consumption timing (use securities to store wealth & transfer consumption tom the future);
Allocation of risk (investors can select securities consistent with their tastes for risk);
Separation of ownership and management (with stability comes agency problems).
What are 5 issues in financial markets?
Corporate governance & corporate ethics;
Accounting scandals (Enron, Rite Aid, HealthSouth);
Auditors (watchdogs of the firms);
Analyst scandals (Arthur Andersen);
Sarbanes-Oxley Act (tighten the rules of corporate governance).
What are financial intermediaries?
Entities that bring those with countervailing needs together (lenders and borrowers). They pool and invest funds e.g. investment companies, banks, insurance companies, credit unions.
What is asset transformation?
The process of creating a new asset (loan) from liabilities (deposits) with different characteristics by converting small denomination, immediately available and relatively risk free bank deposits into loans–new relatively risky, large denomination asset–that are repaid following a set schedule.
Describe money markets.
Short term, low risk, highly liquid debt securities e.g. T-bills.
Describe capital markets.
Long term, debt markets e.g. government bonds, commercial paper. Equity markets, e.g. shares.
Derivative markets for future and options.
Describe primary markets.
Used for the issue of new stocks, bonds or other securities to the public (IPO).
Describe secondary markets.
Where these securities (from primary markets) are subsequently traded markets, e.g. LSE, NYSE, NASDAQ.
Describe 4 characteristics of secondary markets.
Broad (wide variety of different types of investors);
Deep (small adjustment of price from previous trade);
Liquid (ease and speed with which a position can be taken, or unwound);
Efficient.
Describe the 4 internal participants of secondary markets.
Brokers: agents, take orders from investors, submit them to the market trading mechanisms and charge commissions;
Dealers: principal traders, post bid-ask quotes by choice;
Market-makers: principal traders, obliged to trade in securities in which they are registered;
Broker-dealers: can act both as agents & principals (dual-capacity trading).
Describe 2 parts of the investment process.
Asset allocation: choice among broad asset classes;
Security selection: choice of which securities to hold within asset class. security analysis to value securities & determine investment attractiveness.
Name 3 types of financial assets.
Fixed income or debt;
Common stock or equity;
Derivative securities.
Describe fixed income.
Payments fixed or determined by a formula.
Money market debt: short term, highly marketable, usually low credit risk.
Capital market debt: long term bonds, can be safe or risky.
Describe common stock.
Equity or ownership in a corporation. Payments to stockholders not fixed, but depend on the success of the firm.
Describe derivatives.
Value derives from prices of other securities, e.g. stocks and bonds. Used to transfer risk.
Describe 4 types of markets.
Direct search (buyers & sellers seek each other)
Brokered markets (brokers search out buyers & sellers)
Dealer markets (dealers have inventories of assets from which they buy and sell)
Auction markets (traders converge at one place to trade).
Describe ‘bid’.
The price to buy the securities by a participant.
Describe ‘ask’.
The price asked for by the participant to sell the security.
Describe ‘touch’
The difference between bid and ask spread.
What determines the bid-ask spread?
Information asymmetry, volatility of the asset, liquidity of the asset, competition, exchange restrictions.
What are call (batch) markets?
Auction markets where buyers & sellers submit their orders in some manner & a process begins to match them (open outcry, written order entry).
What are continuous markets?
Non-batch markets where a transaction is allowed whenever two parties agree to trade (dealer or quote-driven markets, order-driven markets).
What happens in a quote driven system?
There are quotes, called exposure orders, & traders accepting a quote with a hit order.
What happens in an order-driven market?
The type of order that a trader submits depends on the pursued strategy. The main order types used by investors are:
At best (UK)/market (US) order;
Limit order.
Why is post-trade anonymity important?
Because otherwise trading strategies can be revealed by small trades.
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.
