The Investment Industry: A Top-Down View

Question 1

Financial Institutions

Answer 1

They are types of financial intermediaries.

Their role is to collect money from savers and to invest it in financial assets.

The two major types are banks and insurance companies.

Question 2

Moral Hazard

Answer 2

Occurs when people are less careful about avoiding losses once they have purchased insurance.

Question 3

Adverse Selection

Answer 3

Occurs when only those who are most at risk buy insurance, causing insured losses to be greater than average losses.

Question 4

Investment Industry

Answer 4

A subset of the financial services industry. It comprises all the participants that are instrumental in helping savers invest their money and helping spenders raise capital in financial markets.

Question 5

Capitalism

Answer 5

An economic system that promotes private ownership as the means of production and markets as the means of allocating scarce resources.

Question 6

Laws and regulations are

designed to

Answer 6

■ prevent fraud,
■ protect investment industry participants, in particular investors, and
■ promote and maintain the integrity, transparency, and fairness of financial markets.

Question 7

Investment Banks

Answer 7

Also known as merchant banks, are financial intermediaries that have expertise in assisting companies and governments raise capital.

They help companies organise equity and debt issuances—that is, the sale of shares and bonds to the public.

Question 8

Pension Plans

Answer 8

Hold and manage investment assets for the benefit of

future and already retired people, called beneficiaries.

Question 9

Endowment Funds

Answer 9

Long-term funds of not-for-profit institutions,

such as universities, schools, museums, theatres, and hospitals.

Question 10

Foundations

Answer 10

Grant-making institutions funded by financial gifts and

by the investment income that they produce.

Question 11

Sovereign Wealth Funds

Answer 11

They invest a government’s surpluses.

Governments may accumulate surpluses by collecting taxes in excess of current spending needs, by selling natural resources, or by financing the trade of goods
and services.

Question 12

Key Forces Driving the Investment Industry

Answer 12

1. Internal Forces:
   - Competition
   - Technology (computerisation)
2. External Forces:
   - Globalisation
   - Regulation

Question 13

Retail Investors

Answer 13

Individual investors with the least

amount of investable assets.

Question 14

High-net-worth Investors

Answer 14

Individual investors with a higher

amount of investable assets (above a certain figure).

Question 15

Institutional Investors

Answer 15

Organisations that invest to advance their mission or on behalf of their clients.

Question 16

Financial Planners

Answer 16

Professionals who help their clients understand their future financial needs and define their investment
goals.

Question 17

Asset Managers

Answer 17

Professionals who help their clients carry out investments to achieve their investment goals.

Question 18

Buy-side Analysts

Answer 18

Professionals who review potential investments.

Question 19

Data Vendors

Answer 19

Organisations that provide information resources.

Question 20

Investment Research Providers

Answer 20

Organisations that produce information reports.

Question 21

Clearing houses and settlement agents

Answer 21

Organisations that hold money and securities on behalf of their clients.