W1- The financial world (overview) Flashcards
What are ‘ securities’
How/ why are they used by companies, Govrt and other entities?
What are “marketable securities”?
Companies, governments and other entities raise funds to finance their
activities by issuing a wide range of “securities”
These securities are:
financial claims, i.e. claims on a future stream of cash,
issued by the companies, governments or entities (to raise funds for their
medium/long-term financing needs), which can be easily bought and sold after their original issue.
“marketable securities” are securities accepted for
trading on recognised markets such as stock exchanges (our focus is on these).
How is the value of a security established?
The value of a security depends exclusively on its expected future
cash flows. < Emphasis on ‘future’. It is a forward looking concept.
(e.g. dividends/interest payments and selling price)
How do securities differ?
Securities differ with respect to:
* Future returns’ timing (periodic or at terminal date) and variability (certain or variable amount)
* Scale of the risks investors
bear (e.g. interest risk, credit
risk, inflation risk)
* Monitoring and control rights
enjoyed by investors
Name some ‘basic’ financial securities. And give a brief description of what these are
- Equities/Common stocks (ordinary shares):
give each investor a proportionate right to the residual value of the company (i.e. after creditors’ claims). May or may not pay dividends. - Bonds/Gilts:
investors enjoy a fixed return on these assets (e.g. periodic interest also known as coupon), repayment of the principal amount, and legal enforceability of their financial claims (i.e. they have
seniority/priority)
When and why are derivatives used?
- When certainty of future prices is important, investors trade on
derivatives
[Conventional markets (where investors buy and sell securities among
themselves) do not provide certainty of future prices]
What are some methods used when trading on derivates?
*Forwards and Futures enable investors to fix now the prices at which
commodities or securities are bought and sold at a future date
*Options give the right to buy or sell securities at a fixed price at a future date,
by making a very small down-payment today
What are 3 facts about the US stock market, incomparision to the world stock market?
*US stock market accounts
for 58% of total world value
(on a free-float, investible
basis), which is almost nine
times as large as Japan, its
closest rival
- The USA also has the world’s
largest bond market
*Reflects the superior
performance of the US
economy, the large volume
of IPOs, and the substantial
returns from US markets.
What are 3 facts about the UK stock market, incomparision to the world stock market?
- By 1900, the UK equity market was the largest in the world. Early in the 20th century, the US equity market overtook the UK
- Today, London is ranked as the second most important financial centre (after New York). It is the world’s banking centre
- The UK’s foreign exchange market is the biggest in the world, and Britain has the world’s #3 stock market, #3
insurance market, and the #4 largest bond market
What are the 4 benefits of organised markets.
- Markets such as Stock Exchanges SUSTAINS ECONOMIC GROWTH:
- By bringing together aggregate supply of funds and aggregate demand for
funds, they reduce transaction and search costs and build confidence, so
encouraging and supporting long-term investment.
*PROMOTES PRICE DISCOVERY:
-The market absorbs information and respond by producing a price, which is
meant to be fair and uniform
- Markets’ rules ensure that all information relevant to the determination of a
fair price is made available to all, quickly, simultaneously and at minimum cost
*PROTECTION + MONITORING
-By requiring issuers to provide regular and continuing flow of information
about anything that might affect prices
-Requesting companies to adhere to additional codes of corporate governance
-Rules to prevent price-rigging, insider dealing and market manipulation
- IMPROVES LIQUIDITY:
-Liquidity refers to the ease with which market participants can buy and sell
assets without affecting the market price
-“Liquidity is the ability to trade large assets quickly, at low cost, when you
want to trade” (Larry Harris
What are the categories we use to classify different financial markets?
- CAPITAL MARKETS: generic terms for the markets where
securities are traded – they help companies and governments to
meet their capital needs, and investors to invest their surplus capital - MONEY MARKETS is where (usually big) players adjust their
short-term liquidity surpluses and deficits - Concerned with securities with a maturity of less than one year
- CREDIT/ BOND/DEBT/ FIXED INCOME MARKETS deal in debt
securities.
What are the further categories we use to classify different financial markets?
A primary market is where new securities are issued and sold to investors for the first time
A secondary market is where securities are bought and sold among participants
What are the ‘lenders’, ‘intermediaries’, ‘markets’ and ‘borrowers’ within a market
*[Table found on lecture 1, slide 18]
What is the basis of the relationship between lender and borrower?
The relationship between lenders and borrowers is largely determined by a
permanent conflict of interest
( For example, lenders want to be able to cash in their investments at any time, while
borrowers would like to have indefinite use of lenders’ money)
*[ INCORRECT CARD (RELOOK SLIDE 19]
What types of financial products (created by different intermediaries) enable lenders and borrowers to come closer?
- Long-term savings institutions: banks, insurance companies, pension funds
- The risk spreaders: Unit and Investment trusts, Exchange-traded funds (ETFs)
- The risk takers: Private equity firms and Hedge funds
*[FINISH THIS! SLIDE 19]
Pooled investment vehicles (i.e. trusts, ETFs, Hedge funds and mutual funds:
individuals pool their money and buy shares and other assets collectively
