9.1 The role of the securities markets in providing liquidity and price transparency Flashcards
(40 cards)
Other than shares what else is traded on an exchange?
- Corporate bonds
- UK Government bonds (gilts)
- American Depositary Receipts (ADRs)
- Warrants
- A selection of other instruments
What does the trading of debt use?
The trading of debt uses systems and markets, much the same as equity. However, the debt market is a predominantly quote driven market.
How are derivatives traded?
Derivatives are heavily traded on exchanges such as ICE Futures Europe, but there is also a very large and liquid over-the-counter market.
What are real assets?
Real assets are tangible.
Give 8 examples of real assets
- Land
- Buildings
- Machines
- Knowledge that can be used to produce goods and services
- Paintings
- Antiques
- Precious metals and stones
- Classic cars
What do real assets suffer from and why?
Due to the physical nature and variability in quality of these assets, real assets often suffer from illiquidity and difficulty in pricing.
What is another name for financial assets?
Securities
Give 3 examples of financial assets.
- Shares
- Bonds
- Units in unit trusts
What do financial assets represent?
These represent a legal claim on future financial benefits. Although they do not contribute directly to the productive capacity of the economy, they are the means by which individuals hold their claims on real assets and the income generated by these real assets.
What is the most common form of equity?
Ordinary shares.
What are the 2 other names for ordinary shares?
- Common shares
- Equity
List and explain the 3 basic rights ordinary shares give shareholders.
- Right to vote in company general meetings (although non-voting ordinary shares do exist)
- Right to a dividend reflecting the profits of the underlying company. Dividends payable to ordinary shareholders will only be paid after all interest and preference dividends have been satisfied. Therefore, if a company is unprofitable, the ordinary shareholders are most likely to lose out. However, should the company generate profits, ordinary shareholders can expect a good return in order to compensate for this risk
- Right to a surplus on winding up. In the event of the winding up of a company, ordinary shareholders are entitled to a share of the remaining (i.e. surplus) assets of the company after all other liabilities have been paid
Explain preference shares.
Preference shares are less common. They offer a fixed dividend (payable before the ordinary share dividend) and no voting rights. Most preference shares allow the dividend to roll up if it is not paid out (cumulative preference shares) and some allow conversion into ordinary shares (convertible preference shares). Other forms include participating and redeemable.
What do bonds and bills have in common?
Bonds and bills are a form of debt raised by governments and companies.
What is debt?
Debt involves borrowing money with a firm commitment to repay both the capital and associated interest in the future.
Explain debt securities.
Debt securities are tradable instruments issued to investors in return for borrowed funds. These instruments typically pay a rate of interest (or coupon) on a six-monthly or annual basis. The capital amount (or principal) is repaid in full at some point in the future often referred to as the redemption date.
What type of debt security does a bond describe in terms of time?
A medium– to long-term debt security.
What is the typical maturity (i.e. repayment) of a bond?
More than one year from its original issue date.
What type of debt security is a bill in terms of time?
A bill is a short-term debt security: a security maturing in less than one year.
Define derivative products?
Derivative products ‘derive’ their value from other products – often called the underlying asset.
Give 2 examples of derivatives.
- Futures
- Options
Explain futures.
A future is an agreement (or contract) between two parties who agree to buy or sell a specific quantity of a specific asset to be delivered on a specific date in the future for an agreed price. The person agreeing to buy the asset in the future takes the long position. The person agreeing to sell the asset in the future takes the short position.
The terms and conditions of the future transaction (i.e. price, size, quality etc.) are agreed now. The price agreed for the asset, however, is paid on the agreed future delivery date.
Explain options.
An option gives the buyer the right (not the obligation) to buy (call option) or sell (put option) an underlying asset at a fixed price on, or before, a given date in the future.
Notice that the buyer has a choice whether to buy or sell: with futures, both the long and short have an obligation. Only the seller of an option has a potential obligation.
Another difference is that the buyer of an option pays a premium to the seller. There is no premium paid when buying futures.
What are Collective investment schemes?
Collective investment schemes are large pooled funds that include unit trusts and investment companies with variable capital (also called open-ended investment companies). These collective investment schemes manage large portfolios of assets on behalf of many investors. The investors receive a security called a unit in these schemes. Each unit reflects a small percentage of the assets under management by the scheme. The units will generate capital gain and income for the investors. The interests of the unit-holders are represented by the Trustee, who will be independent of the fund management group.
