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FM > Securities > Flashcards

Securities Flashcards

1
Q

What is SECURITIES

A

Financial Instrument/ Financial Asset that can be Traded in the Open Market

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2
Q

4 Types of Security

A

Debt+ Equity+ Derivative+ Hybrid

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3
Q

Example

A

stock, bond, options contract, shares of a mutual fund

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4
Q

Portfolio

A

Sum total of your Investments managed toward a specific Goal

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5
Q
  1. DEBT SECURITIES
A

Certificate of Deposit (CD)

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6
Q

What is BOND (Loan)

A
  • Face Value of the loan
  • Maturity Date
  • Periodic Interest Payments
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7
Q

Issuer+ Purpose

A

Governments/ Corporations when they want to Raise Money

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8
Q

Types of Bond (Domestic/ International)

A

U.S. Treasuries+ Government agency bonds+ Municipal bonds+ Corporate bonds

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9
Q

Characteristics 1 : No Ownership Rights (Unlike stocks)
2 Benefits

A
  1. Stream of Income,
  2. Offset some Volatility from owning Stocks
    ( => X benefit from the company’s Growth,
    => but less impact when the company X Doing Well)
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10
Q

Characteristics 2 : Market Value of a bond Changes over time
=> Holding bonds (Maturity) vs. Trading bonds (Secondary Market)

A

as it becomes more/ less Attractive to potential buyers
=> Worth will Fluctuate

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11
Q

Choosing Bonds (Risks)

A
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12
Q
  1. Higher-Quality (Credit Rating, more likely to be paid on time)
A

= Lower Interest Rates

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13
Q
  1. Shorter Maturities (length until full repayment)
A

= Lower Interest Rates ( Risk due to changes in interest rates, sensitivity)

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14
Q

Bond Terms

A

Coupon
- Interest Rate paid by the bond. (X change after issue)

Yield
- Measure of Interest that takes into account bond’s Fluctuating Changes in Value
- Simplest Measure: Coupon/ Current Price

Face value
- Worth when Issued
- Known as “Par” value
( Most bonds have a FV of $1,000)

Price
- Amount the bond would Currently Cost on the Secondary Market
- Factors: how Favourable its Coupon vs Similar bonds

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15
Q
  1. EQUITY SECURITIES (e.g. shares)
A
  • Part Owner (X Regular Payment)
  • Benefit from Capital Gains by Selling Stocks
  • Dividend
  • Bankruptcy: share Residual Interest after all Obligations have been paid out to Debt security holders
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16
Q

What is Stock?

A
  • Part Owner (make money if well/ lose money if X)
  • increases in Share Price/ Dividend payments ( Depending on how Established)
  • Larger companies tend to be more Stable , but less Growth
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17
Q

Types of Stocks

A

Common Stock

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18
Q

Stock Market

A

1 Exchanges where stocks are traded
2 Indexes measure Values stocks

19
Q

Short- term vs Long- term [Affect Stock Price]

A
  • Value Fluctuate based on Expectations vs Actual Performance
  • Overall performance of the Economy+ Markets affect a stock’s price
20
Q

Choosing Stocks

A
21
Q
  1. Growth+ Value
A

Growth Companies
- Expansion phase
- Growth opportunity
- As they Grow, Value of their Shares Increases

Value Companies
- Established, growing, but X rapid expansion
- Dividends

22
Q
  1. Capitalisation
A
  • Based on Total Value of Shares
  • Types: Large-, Mid-, or Small-cap
  • Large Stable, Small Potential for Growth
23
Q
  1. Sectors
A
  • Stocks within particular Sectors will tend to react in Predictable ways to Economic Conditions
  • Important to Diversify
24
Q

Stock Terms

A

Share
- A single unit of ownership in a mutual fund/ an exchange-traded fund (ETF)/ for stocks, a corporation.

25
Q
  1. DERIVATIVES
A
  • A Contract between two parties which derives its Value/price from an Underlying Asset
26
Q

Purpose: minimise Risk

A
  • Insuring against Price Movements
  • Creating favourable conditions for Speculations
  • Access to hard-to-reach assets/ markets
27
Q

4 Types of Derivatives

A
28
Q
  1. Futures
A
  • Agreement between 2 parties for the purchase+ delivery of an asset at an agreed-upon price at a future date
  • Traded on an Exchange, with the contracts already Standardised
  • In a futures transaction, the parties involved must buy/ sell the underlying asset
29
Q
  1. Forwards
A
  • X trade on an Exchange, only Retailing
  • Buyer and Seller must determine the terms+ size+ settlement process for the derivative
  • Risk for both sellers and buyers e.g. bankruptcy
30
Q
  1. Options [Hedge]
A
  • With an option, the Buyer is not required to Complete the action of Buying/ Selling
31
Q

3.1 Call

A
  • Buying the right to Purchase a specific security at a Locked-In Price in Future
  • If the Price of that security Rises you can make a Profit
    => Buying it at the Agreed Price
    => Reselling it on the open market at the Higher Market Price
32
Q

3.2 Put

A
  • Buying the right to Sell someone a specific security at a Strike Price in Future

If the Price of that security Falls, you can make a Profit => Buying it on the open market at the Lower Price
=> Exercising your Put Option at the Higher Strike Price

33
Q

3.3 Writing Options

A

Risks: other end of the transaction

34
Q

3.3.1 Uncovered

A

The riskiest options are uncovered (“naked”) calls. That’s when you don’t already own the security (or enough of the security) to sell the buyer if he or she chooses to exercise the call.

Because there’s no limit to how high a stock price can rise, there’s no limit to the amount of money you could lose writing uncovered calls. For this reason, many brokerages, like Vanguard, don’t allow you to write uncovered calls.

Puts can also be uncovered, if you don’t have enough cash in your brokerage account to buy the security at the option’s strike price, should the option buyer choose to exercise it.

In that case, the additional risk is that you’ll have to sell something else—or borrow from your broker—in order to raise cash to buy the security and close out the option.

35
Q

3.3.2 Covered

A

Even puts that are covered can have a high level of risk, because the security’s price could drop all the way to zero, leaving you stuck buying worthless investments.

For covered calls, you won’t lose cash—but you could be forced to sell the buyer a very valuable security for much less than its current worth. So there’s no limit to your opportunity loss.

36
Q
  1. Swaps
A
  • Exchange of one kind of Cash Flow with another
  • E.g. Interest Rate Swap: trader to switch to a Variable interest rate loan from a Fixed interest rate loan
37
Q
  1. HYBRID
A
  • Combines characteristics of both Debt+ Equity

Similar to bonds
- Typically promise to pay a higher Interest at a Fixed/ Floating rate until a certain time in the Future

Unlike a bond
- No.+ Timing of Interest Payments X Guaranteed.
- Can converted into Shares
- Investment can be Terminated at any time

38
Q

Purpose

A

Higher Risk, Higher Return
- Bonds => Hybrid => Equity

39
Q

Example

A

Preferred stocks
- Receive dividends Prior to the holders of common stock
- Have a FV+ pay Interest
- but traded on an Exchange

Convertible bonds
- Can be Converted into a known amount of Equity Stocks during the life of the bond/ at maturity date
(depending on the terms of the contract)

Exchange-Traded Notes
- Have a Maturity Date
- But their Value Fluctuates based on a specified Stock Index

40
Q

FUNDS

A
  • All-in-one funds give you a complete portfolio in a single fund
  • Track a benchmark index—like the S&P 500/ Actively Managed
41
Q

Mutual funds v.s. ETFs

A

Mutual funds
- Portfolio of stocks/ bonds
- Closing Prices

Exchange-traded funds
- Prade on an Exchange, with constantly shifting prices

42
Q

Differences

A
  • If you prefer lower investment minimums …
  • If you want more hands-on control over the price of your trade…
  • If you want to repeat specific transactions automatically…
  • If you’re looking for an index fund
43
Q
A

FM (4 decks)

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