Role and Structure of Securities Markets Flashcards
What is an investment?
Current commitment of money or other resources to obtain future benefits Stocks; House; Education.
what are real assets
Real Assets determine the productive capacity and net income of the economy (Land, buildings, machines, knowledge used to produce goods and services)
what are financial assets
Financial Assets are claims on real assets (equity, bonds, derivatives)
What is a portfolio?
A portfolio is a collection of assets
What is money?
Money—anything that is generally accepted in payment for goods or services or in the repayment of debts
what are the features of money
Medium of Exchange: standardized; widely accepted; divisible; easy to carry; durable Unit of Account: used to measure value Store of Value: used to save purchasing power and it is liquid
what is the purpose of financial markets
Financial markets bring together those people who have excess funds and those others who have a shortage of funds
government responsibility
Direct responsibilities • Fiscal policy/taxation. • National debt management. Devolved responsibilities • Monetary policy. • Cash/liquidity management. • Regulation (?)
The Role of Financial Markets
Reduction in transaction costs • Information Role: Capital flows to companies with best prospects • Consumption Timing: Use securities to store wealth and transfer consumption to the future
• Sarbanes-Oxley Act
Tighten the rules of corporate governance
Financial intermediaries
Brings those with countervailing needs together; the lenders and the borrowers. They pool and invest funds (Investment Companies; Banks; Insurance companies; Credit unions)
Money market
Short-term, low-risk, highly liquid debt securities, e.g. T-bills
Capital markets
• Long-term, debt markets e.g. government bonds, commercial paper. • Equity markets, e.g. shares. • Derivative markets for futures and options
Primary vs secondary markets
Primary markets are used for the issue of new stocks, bonds or other securities to the public (IPO).
• Secondary markets are where these securities are subsequently traded markets, e.g. LSE, NYSE, NASDAQ
Characteristics of secondary markets
• Broad - wide variety of different types of investors. • Deep - small adjustment of prices from previous trade. • Liquid - ease and speed with which a position can be taken, or unwound. • Efficiency.
who are Internal participants
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 the securities in which they are registered.
Broker-dealers: Can act both as agents and principals (dual-capacity trading).
what are 3 types of Financial Assets
Three types: 1. Fixed income or debt 2. Common stock or equity 3. Derivative securities
features of 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
what are Derivatives
• Value derives from prices of other securities, such as stocks and bonds • Used to transfer risk
what is Touch
the difference between bid and ask spread
Determinants of the bid-ask spread
Information asymmetry; Volatility of the asset; Liquidity of the asset; Competition; Exchange restrictions
Order types in continuous markets
• Alternative limit orders Stop, or stop-loss, order on sell side. Stop-buy order. Trailing stop order - broker generated. • Order options Expiry date or time: day orders, GTC (good-tillcancelled) orders. Single fill order.
Trading platforms on the LSE
London Stock Exchange 1) SETS - order-driven market with back-up liquidity provided by market-makers. 2) SETSqx - quote-driven market with 4 electronic auctions per day. 3) SEAQ - quote-driven platform. Which stock, which platform? SETS is the most liquid, then SETSqx, and SEAQ the least liquid.
Post-trade anonymity vs. transparency
- Post-trade anonymity Important because otherwise trading strategies can be revealed by small trades.
- Transparency Important because the credit risk is borne by the trading parties; i.e. they need to know with whom they are trading.
- Central counterparty They act as a counterparty to every trade for clearing members of the LSE.
Operational Costs
-Brokerage fees Approximately 1.5% but varies according to type of account and frequency of trade. Usually a min. charge will apply. -Dealer’s spread From 0.5% for the most liquid stocks to 15% for the least. Varies throughout the day. -Stamp Duty and other taxes 0.5% of value for purchases, zero for sales. -Settlement costs Approximately 30p per trade -Other costs (Custodian charges, exchange trading levies etc.)
