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Financial Markets- Gent > Chapter 1- A general overview > Flashcards

Chapter 1- A general overview Flashcards

1
Q

What is financial markets?

A

Financial markets facilitate the exchange of financial securities, commodities, currencies and other tradable items

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2
Q

Relationship between lenders and borrowers

A
  • Lenders
  • Financial intermediaries
  • Financial markets
  • Borrowers
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3
Q

Lenders

A
  • individuals
  • companies
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4
Q

Financial intermediaries

A
  • banks
  • insurance companies
  • pension funds
  • mutual funds
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5
Q

Financial markets

A
  • interbank
  • stock exchange
  • money market
  • bond market
  • foreign exchange
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6
Q

Borrowers

A
  • individuals
  • companies
  • central government
  • municipalities
  • public corporations
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7
Q

Financial intermediaries vs financial markets

A

Big differences in size and scale of operations

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8
Q

What is a bank?

A

A financial institution licensed as a receiver of deposit

In most countries, banks are regulated by the national government and/or central bank

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9
Q

In general, there are two types of banks

A
  • commercial/retail banks
  • investment banks
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10
Q

Examples of investment banking expertise

A
  • mergers & acquisitions
  • equity underwriting
  • private placements
  • valuation & fairness opinions
  • corporate restructuring
  • management buyouts
  • cross-border transactions
  • structured finance
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11
Q

Retail Banking

A
  • the street banks we are all familiar with
  • take deposits from individuals, provide saving facilities and pay interest on these accounts
  • also lend money to individuals in form of loans and overdrafts (charge interest on the money they lend)
  • also provide a range of other financial services
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12
Q

Commercial Banking

A
  • provide banking services to businesses –> from small companies to corporate banking directed at large corporations
  • help raise finance to expand their businesses and to maintain their cashflow by lending them money
  • provide a large range of other financial services (leasing, straight loans,…)
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13
Q

Investment Banks

A
  • distribute and guarantee the sale (=underwrite) of share and bond issues
  • trade securities on the financial markets and advise corporations on capital market activities such as mergers and acquisitions
  • are extremely specialized banks

Examples:
- Merrill Lynch
- Goldman Sachs

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14
Q

Central Banking

A
  • not a traditional bank

“The lender of last resort”
- is responsible for providing its economy with funds when commercial banks can’t cove a supply shortage

  • prevent the country’s banking system from failing
  • acts as a regulatory authority of a country’s monetary policy and is the sole provider and printer of notes and coins in circulation
  • time has proved that the central bank can best function in these capacities by remaining independent from government fiscal policy and therefore uninfluenced by the political concerns of any regime
  • should also be completely divested of any commercial banking interests
  • each country has a central bank that sets its own goals
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15
Q

The primary goal for central banks

A

Provide their countries´currencies with price stability and controlling inflation

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16
Q

Primary functions of banks

A

1- Accepting deposits
2- Granting loans

The difference in interest rate is an important source of income

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17
Q

Institutional investors

A
  • insurance companies
  • pension funds
  • mutual funds
18
Q

Insurance companies

A
  • offers insurance policies to the public, either by selling directly to individuals or companies
  • can specialize in one type of insurance, such as life insurance, or car insurance or offer multiple types of insurance
  • provides coverage in the form of compensation resulting from loss, damages, injury, treatment or hardship in exchange for fee payments
19
Q

Pension funds

A
  • a fund established by an employer to facilitate and organize the investment of employees´retirement funds contributed by the employer and employees
  • a common asset pool meant to generate stable growth over the long term, and provide pensions for employees when they reach the end of their working years and commence retirement
  • control relatively large amounts of money and represent the largest institutional investors in many nations
  • Advantage (in comparison with insurance)- can hold money until you turn 65, they know exactly (almost, it depends) when u will take out your money
20
Q

Mutual funds

A
  • an investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in many different securities such as stocks, bonds, money market instruments and similar assets
  • managed by specialists who invest the fund´s capital and attempt to produce capital gains and income for the fund´s investors
  • a mutual fund´s portfolio is structured and maintained to match the investment objectives stated in its prospectus
  • focus on global “blue chips”
21
Q

What is a prospectus?

A

A formal legal document that provides details about an investment offering for sale to the public. It should contain the facts that an investor needs to make a good investment decision.

22
Q

Advantages of mutual funds

A
  • gives small investors access to professionally managed, diversified portfolios of equities, bonds and other securities which would be quite difficult (if not impossible) to create with a small amount of capital
  • each shareholders participates proportionally in the gain or loss of the fund
  • mutual fund units, or shares, are issued and can typically be purchased or sold as needed at the fund´s current net asset value (NAV) per share
23
Q

Disadvantages of mutual funds

A
  • high expense ratios and sales charges (fees and commissions)
  • management abuses
  • tax inefficiency
  • poor trade execution (prices are only visible once a day- NAV)
24
Q

When demand meets supply in the market..

A

a price for “capital is born”

25
Q

The most important functions:

A
  • borrowing and lending
  • risk sharing
  • price determination
  • information aggregation and coordination
  • liquidity
  • efficiency
26
Q

Borrowing and lending

A

permit the transfer of funds (purchasing power) from one agent to another for either investment or consumption purposes

27
Q

Risk sharing

A

allow a transfer of risk from those who are willing to invest to those who provide funds for those investments

28
Q

Price determination

A

Prices are set both for newly issued financial assets and for the existing stock of financial assets

29
Q

Information aggregation and coordination

A

act as collectors and aggregators of information about financial asset values and the flow of funds from lenders to borrowers

30
Q

Liquidity

A

provide the holders of financial assets with a chance to resell or liquidate these assets

31
Q

Efficiency

A

reduce transaction costs and informations costs

32
Q

Classification of financial markets by:

A

Nature of claim: Debt market, stock market, forex market

Maturity: Money market, capital market

Market: Primary market, secondary market

Time of delivery: Cash or spot market, futures market

33
Q

The debt market

A

It is where fixed income securities of various types are issued and traded

  • a predictable stream of payments by way of interest and repayment of principal at the maturity of the instrument

Example: Bonds, treasury bills

34
Q

The stock market

A
  • the market in which shares are issued and traded
  • one of the most vital areas of market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance
35
Q

Why invest in shares (equity securities)?

A
  • possible positive change of the stock price

+

  • dividend payments (not sure)
36
Q

Primary market

A
  • market in which new capital is raised
  • the first issue
37
Q

Secondary market

A
  • where existing securities are traded
38
Q

Short vs long term

A

Money market–> ST finance < 1 year
- to cover liquidity problems

Capital market –> LT finance > 1 year

Buying shares, loans > 1 year

39
Q

Forex market- regulations (normal markets)

A

Normal (reglementet) markets:
- strong reglementation (Mifid, Basel,…)
- open access
- very heavy and frequent trending
- falls under financial supervision
- transparent prices

Example: Stock exchanges (NYSE, Nasdaq,…)

40
Q

Forex market- regulations (OTC)

A

Over-the-counter market:
- less reglementation
- almost no financial supervision
- prices not publicly known (negotiation)

Example: The inter banking market

Financial Markets- Gent (7 decks)

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