Week 1 Flashcards
What is investing?
Investing is the commitment of resources for some thing, in the expectation of a positive outcome. Typically in financial terms we commit our savings/time for products and services or equity and bonds, with the hopes of receiving money.
What are the two main reasons to invest?
- to protect the purchasing power of money from inflation.
2. To grow wealth.
What is a primary market and secondary market with regards to shares?
A primary market is where the shares are initially offered in an initial public offering (IPO). In the secondary market securities that are no longer IPOs are exchanged.
What are bull and bear markets? Can stocks be bullish or bearish?
Bull markets are characterised by increasing stock prices and optimism, Bear markets are characterised by decreasing stock prices and pessimism. Note that individual stocks can also be bullish or bearish.
Who are the main participants in a market?
Business firms (net borrowers), households (net savers), governments (can be both borrowers and savers), financial intermediaries (connectors of borrowers and lenders).
What does it mean to say markets are efficient? What do active investing and passive investing rely on?
It means the price of every stock will be correct and factor in all available information. Active investing relies on this being false, and finding undervalued stocks. Passive investing relies on this being true.
What is a hedge fund? Mutual fund? And ETF?
A hedge fund is a managed fund that is not subject to regulations, they are typically very aggressive and very risky, but can offer higher returns, mutual funds instead are regulated, making them safer but still offer good returns. ETFs are exchange traded funds, they are like mutual funds, but shares in the fund can be sold on the exchange.
How do individual investors typically balance returns?
Risks and returns are based on where they are in life. Older people will typically use safer, income investments. Younger people will typically take on more risk for higher returns.
What forms do professional investors typically come in?
Operators of mutual funds, pension funds, or bank operations (the money comes to banks via deposits and is invested via loans).
What are investors constrained by?
Liquidity, investment horizon (short term can be more risky), unique needs of the individual), and regulations (particularly for institutional investors, such as mutual funds being unable to hold more than 5% of the stock of any publicly traded company).
What is the prudent investor rule?
If a fund manger is manging a fund they must treat the money like it is their own money.
What securities were responsible for the 2008 financial crisis?
Mortgage backed securities, the bundling of mortgages into large pools that could be traded.
What are the primary financial assets and how does this relate to the investment process?
The primary financial assets are: Equity, derivatives, and fixed income (money markets and bond markets). In the investment process we must first select our asset allocation (which of these we want and how much) and then must pick the securities we want within those assets.
