Week 2 - Financial markets and equities Flashcards
Proprietary traders
those who trade using the firms money NOT client funds
Brokers
those who execute deals on behalf of clients, making profit from commision only
Dealers
they buy and sell on their own account, to facilitate market liquidity
Define market makers
intermediaries whose purpose is to ensure that the market clears
they buy from sellers and sell to buyers, aiming to get a profit from the bid ask spread
examples of market makers
goldman sachs
citadel
what is consumption timing as a role of financial markets
do i save, do i consume
financial markets help control consumption patterns to help manage inflation
by increasing interest rates this encourages people to save not spend, this can help curb inflation
how do financial markets allocate risk
it allows investors to choose the riskiness of their investments (bond v stock)
without financial markets the only options are spend or save
equity market
also known as the stock market, facilitates the issuing and trading of company shares
residual claim
shareholders have a claim on the firm value only after all other parties (debtors) are paid
how are securities traded in secondary markets? types of markets…
direct search markets
brokered markets
dealer markets
auction markets
what is a market order
an order that specifies quantity but not price. they are executed ASAP at the best price possible
what is a limit order
these orders specify a price, and only if this is met is the order executed
limit order book
a record of all outstanding limit orders such as stocks
explain bid and ask
bid - quoted buy price
ask - quoted sell price
bid-ask spread - the difference between the best ask and best bid
short selling
selling something you don’t have in the hopes that you’ll profit from the decline in stock price
there is an unlimited downside potential from short selling, your losses aren’t capped at what you initially invest
present value models (equity valuation)
dividend discount model
free cash flow to equity model
what do we mean by noise
noise means that the price of a security may overreact or undereact to information
price multiples
ratio’s of a stock markets price to some measure of value per share
price/earnings ratio is an example
4 main roles of financial markets
information role
consumption timing
allocation of risk
separation of ownership and control
information role of financial markets explained
financial markets offer us information about companies through price changes etc. that would be otherwise difficult to get
how do financial markets separate ownership and control?
they enable investors to have ownership shares in a company without having to be involved in the running of it
what is limited liability
the worst possible outcome is that you loose everything you’ve invested, but nothing more than that.
you liability is limited to what you invest in a company
how does the stock market affect investment decisions?
- stock prices provide information to managers about profitable investment opportunities
- managers pressured to observe stock prices when making decisions
- lowers the cost of capital for projects
dow and gorton example
titman example
what is a short squeeze
when a short seller is forced to book insane losses when their expected price drop doesn’t happen - Game Stop Example
