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Money, Banking and Financial Markets > Securities Markets > Flashcards

Securities Markets Flashcards

1
Q

definition of “Asset allocation”

A
  • decisions by individuals or institutions about what assets to hold
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2
Q

Major Institutions in Securities markets

A
  1. Security Firms:
  • Mutual Funds
  • Hedge Funds
  • Brokers
  • Dealers
  1. Others Financial institutions
  • Pension Funds
  • Insurence companies
  • Commercial banks
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3
Q

Participants in securities markets

A
  1. Individuals Owners
  2. Security Securities
  3. Others Financial Intitutions
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4
Q

what is a Securities firm?

A
  • Company whose primary purpose is to hold securities, trade them, or help others trade them; includes mutual funds, hedge funds, brokers and dealers, and investment banks
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5
Q

what is a “Mutual fund”?

A
  • financial institution that holds a diversified set of securities and sells shares to savers
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6
Q

what is a Hedge fund?

A
  • variant of a mutual fund that raises money from wealthy people and institutions and is largely unregulated, allowing it to make risky bets on asset prices
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7
Q

what is levarage in financial terms?

A
  • borrowing money to purchase assets
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8
Q

Differences between Mutual Funds and Hedge Funds ?

A
  1. Mutual funds aren’t allowed to use leverage to buy securities because of the risk of large losses
  2. trading derivative securities (Hedge Funds)
  3. Hedge funds are largely unregulated, because the government assumes that the funds’ rich customers can look out for themselves
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9
Q

Definition of a Broker

A
  • firm that buys and sells securities for others
  • two types of brokers:
    1. A full-service broker

advisors who help clients choose which securities to buy.

2.A discount broker

provides less advice, or none at all; customers must choose securities on their own

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10
Q

Definition of Dealer in financial terms:

A
  • firm that buys and sells certain securities for itself, making a market in the securities
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11
Q

what is a Investment bank ?

A
  • Financial institution that serves as:
  • an underwriter (Core function)
  • advicer of companies on mergers and acquisitions (M&A) (Core function)
  • buy and sell securities (like hedge funds).
  • several functions in securities markets.
  • practice financial engineering
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12
Q

what is an Underwriter in the financial world ?

A
  • financial institution that helps companies issue new securities
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13
Q

what is Financial Engineering ?

A
  • The development and marketing of new types of securities.

Such as Junk bonds and securities backed by home-mortgage loans

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14
Q

Others types of Financial insitutions

A

Pension Funds

Insurance Companies

Commercial Banks

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15
Q

definition of Pension Funds :

A
  • Employers, both private firms and governments, establish pension funds to provide income to retired workers.
  • Pension funds use this money to purchase securities, and earnings from the securities provide retirement benefits.
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16
Q

Definition of Insurance Companies:

A
  • These companies sell life insurance and insure property, such as houses and cars.
  • Purchasers of insurance pay premiums, which the companies use to buy securities.
  • Earnings from the securities pay for insurance claims.
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17
Q

Definitions of Commercial Banks:

A
  • In contrast to investment banks, commercial banks are institutions that accept deposits and make loans.
  • Their primary assets are those loans, However, commer- cial banks also own securities, mainly government bonds.
  • Banks hold bonds for liquidity: they can sell the bonds easily if they need cash.
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18
Q

What is the “Primary markets” of stock and bonds ?

A
  • Financial markets in which firms and governments issue new securities
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19
Q

what is the “Secondary markets” of stock and bonds?

A
  • financial markets in which existing securities are traded
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20
Q

What is a Public company ?

A
  • firm that issues securities that are traded in financial markets
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21
Q

what is the meaning of Initial public offering (IPO) ?

A
  • sale of stock when a firm becomes public
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22
Q

what the venture capital firms do ?

A
  • finance new companies in return for ownership shares
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23
Q

Describe the process of Issuing Securities:

A

a private company ——-> public company

  • Initial public offering (IPO)
  • Typically, The firm hire an invesment bank that start the IPO (The lead investment bank)
  • The first bank enlist other investment banks to form a syndicate.
  • The syndicate members purchase the company’s stock and resell it to financial institutions such as mutual funds ( not to individual savers) (5 to 10 percent more)
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24
Q

what is a prospectus ? (IPO)

A
  • A formal document that describes the stock being offered and the price.
  • Provides detailed information on the company, including financial statements and biographies of managers.
  • The company’s investment banks help prepare the prospectus.
  • The company’s investment banks market the stock by sending their representatives around the country on road shows
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25
Q

Why can’t firms cut out investment banks and sell securities directly to the final purchasers?

A
  • Investment banks reduce the asymmetric information problem of adverse selection.
  • Investment banks convince other institutions of the securities’ value by putting their own reputations on the line.
  • Because reputation is so important, underwriting is a concentrated industry dominated by a small number of institutions
  • Only unusual well-known and successful company don’t need the help from investment banks.
  • The only issuer of securities has never hired an investment bank: the U.S. government (governments)
26
Q

Explain the Role of Brokers:

A
  • to buy stocks or corporate bonds, individuals need assistance from brokers.
  • If you want to buy securities, the first step is to establish an account with a broker
  • You can place a market order through your broker
  • the brokers serve as connection between the buyer and the stock
27
Q

Meaning of The Exchange:

A
  • physical location where brokers and dealers meet to trade securities
28
Q

who is an “Specialist”? (exchange market)

A
  • broker–dealer who manages the trading of a certain stock on an exchange
29
Q

Definition of “Over-the-counter (OTC) market”:

A
  • secondary securities market with no physical location
30
Q

Definition of “Dealer market”:

A
  • OTC market in which all trades are made with dealers
  • The largest dealer market for stocks is the NASDAQ network.
  • Most corporate and government bonds are traded on dealer markets.
31
Q

what is “Bid–ask spread”?

A
  • gap between the prices at which a dealer buys and sells a security
  • Dealers make profits from
32
Q

what is “Electronic communications network (ECN)”?

A
  • OTC market in which financial institutions trade securities with one another directly, rather than through dealers.
  • The electronic system automatically matches buyers and sellers who submit the same price.
  • Traders pay a small fee for each transaction.
33
Q

Definition of Stock market index:

A
  • an average of prices for a group of stocks
  • The Dow Jones is the oldest and most famous stock index.
  • The Standard & Poor’s (S&P) 500 index is better for capturing the movements of the whole market.
  • The Wilshire 5000 index is even broader.
  • The NASDAQ index covers all the companies that are traded in that market and is influenced strongly by the prices of tech stocks.
34
Q

What the Capital structure ussually contain ?

A
  • A mix of stocks and bonds that a firm issues
35
Q

what is the claim of Modigliani–Miller theorem (MM theorem)?

A
  • proposition that a firm’s capital structure doesn’t matter
  • assuming that firms operate for the benefit of their stockholders
  • they should choose the type that minimizes the costs to current stockholders.
  • All this according to Modigliani and Miller
36
Q

Why Capital structure matter ?

A
  1. Taxes (tax benefits from bonds )???
  2. Bankruptcy (reduce bankruptcy risk by issuing stocks rather than bonds)
  3. Adverse Selection
37
Q

Return of Wealth formula (stocks and bonds)

A

Return of Wealth = s (return of stocks) + (1-s).(return on bonds)

  • the letter “s” to denote the fraction of wealth you put in stocks
  • A rise in the fraction “s” raises this measure of risk.
38
Q

What role do bank accounts play in asset allocation?

A
  • bank accounts are similar to bonds
  • Bank accounts produce lower average earnings than stocks, but they are safe.
  • In reality, bank accounts and bonds are not exactly the same. Bonds pay somewhat higher interest rates than bank accounts do but are less liquid.
39
Q

what is a high risk averse buyer ?

A
  • A buyer that worry a lot about the worst-case scenarios and find it painful to lose money
40
Q

Correlation between age and assets allocation ?

A
  • It is recomend to change your asset allocation as you age.
  • You should start by holding mostly stock and then shift gradually toward bonds.
41
Q

what the Efficient markets hypothesis (EMH) indicate ?

A
  • the price of every stock equals the value of the stock, so no stock is a better buy than any other
42
Q

Definition of Undervalued asset:

A
  • asset with a price below the present value of the income it is expected to produce
43
Q

Definition of Random walk:

A
  • the movements of a variable whose changes are unpredictable
44
Q

what is an Actively managed fund?

A
  • Mutual fund that picks stocks based on analysts’ research.
  • Analysts for mutual funds and brokers buy and sell stocks frequently based on the analysts’ recommendations.
  • Analysts for mutual funds and brokers think that they can do what the EMH says is impossible: identify undervalued stocks
45
Q

what is an index fund?

A
  • mutual fund that buys all the stocks in a broad market index
  • An index fund doesn’t hire analysts to study companies—someone just looks up which stocks are in the index.
  • If you believe the EMH, you should prefer index funds.
46
Q

Can anyone beat the market ?

A
  • Some economists interpret the EMH as an absolute law: anyone who tries to beat a stock market index is wasting his time.
  • Other economists think that beating the market is difficult but not impossible, because exceptions to market efficiency exist.
47
Q

who are the market beaters?

A
  1. Fast Traders
  2. Behaviorists
  3. “geniuses”
48
Q

what the Fast Traders (market beaters) do ?

A
  • To beat the market they relies on speed
  • The EMH assumes that stock prices respond instantly to news. In reality, price adjustment takes a little time.
  • Much of the work is done by powerful computers rather than by humans.
49
Q

what is Behavioral finance ?

A
  • Field that uses ideas from psychology to study how deviations from rational behavior affect asset prices
  • stock prices depend on expectations about companies’ future earnings and dividends.
  • Behaviorists argue that forecasters regularly make certain kinds of mistakes, leading to over or undervaluation of stocks. (They use this opportunity)
50
Q

Definition of Derivatives:

A
  • securities with payoffs tied to the prices of other assets.
  • Common types of derivatives include futures, options, and credit default swaps.
  • Some savers and financial institutions use derivatives to reduce risk.
  • Others use derivatives to make risky bets on asset prices.
51
Q

Definition of Futures contract:

A
  • agreement to trade an asset for a certain price at a future point in time
52
Q

when a “Margin” is use? (Derivatives)

A
  • When a trade occurs, both buyer and seller must post deposits with the futures exchange.
  • This deposits that are called margins
53
Q

what is an “option”?(Derivatives)

A
  • the right to trade a security at a certain price any time before an expiration date
54
Q

what is a “call option”?(derivatives)

A
  • An option to buy a security
  • Called the strike price
  • The option holder can make this purchase at any point before the option’s expiration date, which is set in the contract.
  • If he buys the security,he is said to exercise the option.
55
Q

what is a “Put option”?(derivatives)

A
  • an option to sell a security
  • Like a call option, it specifies a strike price and an expira- tion date.(Other side of the contract).
56
Q

Definition of Credit default swap (CDS):

A
  • derivative with payouts triggered by defaults on certain debt securities
  • credit default swaps are not traded on exchanges
  • CDSs are traded by many financial insti- tutions, including commercial banks, investment banks, and insurance companies.
57
Q

Definition of Hedging:

A
  • Reducing risk by purchasing an asset that is likely to produce a high return if another of one’s assets produces low or negative returns
  • It produces money when someone fail. (Betting agains)
58
Q

Hedging with Futures:

A
  • Like commodities futures, financial futures can reduce risk.The owners of securities experience gains and losses when security prices change.To hedge, security holders make derivatives trades that produce profits if they suffer losses elsewhere.(reduction of loses)
  • Other institutions(Mutual funds) hedge by buying futures rather than selling them. It can lock in a price of an bonds or price (lock pricing)
59
Q

Hedging with Options:

A
  • Security holders can also reduce risk by trading options.
  • One hedging strategy is a protective put, which means a purchase of put options on securities you own. It protects against big losses on the securities.
60
Q

Definition of Speculation:

A
  • using financial markets to make bets on asset prices

Money, Banking and Financial Markets (14 decks)

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