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Chapter 8 Flashcards

1
Q

What is fund management

A

firm creates an investment fund for its clients, it enables clients to invest together, sharing any gains made or losses suffered. The investment decisions is made by the fund management firm

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2
Q

What is the foreign exchange

A

an over-the-counter (OTC) marketplace that determines the exchange rate for global currencies

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3
Q

What is insurance

A

A method of managing risk
E.g. an individual may suffer from a serious illness that needs medical attention. An insurance company may be required to pay for the treatment

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4
Q

What is financial planning

A

Providing assistance to individuals, families ,firms in organising financial affairs to achieve financial and lifestyle objectives. Within this, retirement planning is important for individuals saving for when they wont be working and will have to manage without earning a salary

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5
Q

What is estate planning

A

Contemplating how best to deal with any assets, e.g. investments or property, on dea5 and making arrangements so that these assets are distributed in accordance with the deceased wishes. Estate planning can involve paying on assets as gifts during one’s lifetime

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6
Q

What is financial tenchonlogy

A

Aka Fintech. It enables more automation particularly in the area of investment with so called “robo advisors”

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7
Q

What is a collective investment scheme

A

Clients are investing together. The funds investment will be chosen by the firm, and the client investors will share in any gains or losses generated

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8
Q

Why a fund an indirect investment

A

Because the investor invests in the fund and then the fund invests in the shares

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9
Q

What is diversification

A

Technical term for not putting all up your eggs in one basket

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10
Q

Whys diversification an advantage to a fund

A

The fund is gathering together lots of individual investments and therefore is able to invest large sums of money in a variety of different company shares
E.g. if a negative event occurs in one industry, it might be countered by positive events in other sectors

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11
Q

Using a fund rather than directly investing will result in the following benefits

A
  • money from a variety of investors is pooled into a single fund
  • this enables the fund to benefit from diversification benefits that might not be available to individual direct investors
  • fund investors are effectively able to buy portions of individual shares
  • fund is run by professional fund managers, who will be best placed to select the stronger investments
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12
Q

Average turnover of the foreign market exchange each day

A

$7.5 trillion

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13
Q

What are cryptocurrencies?

A

Virtual or electronic currencies which use encryption technology to control the amount of currency issued as well as to record ownership and payments

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14
Q

Which was the first established cryptocurrency

A

Bitcoin - created in 2009

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15
Q

How can you participate in cryptocurrency market

A

Via setting up a digital wallet. Here they can securely store their coins and tokens

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16
Q

How can a person acquire cryptocurrency (coins or tokens)

A
  • purchasing them in exchange for more traditional currencies e.g £/$
  • earning them
  • through mining (cryptomining) by solving mathematical problems to generate new cryptographic keys
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17
Q

Effect of cryptocurrencies

A

They are high risk and speculative. They can fluctuate by hundreds or thousands of dollars

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18
Q

What is an insurance premium

A

The insurance policy is provided by an insurance company in exchange for a payment

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19
Q

What’s corporate insurance

A

Insurance taken out to cover the risks faced by companies rather than individual

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20
Q

What is reinsurance

A

An insurer taking out insurance against the possibility of a claim against the policy they have insured

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21
Q

What is syndication

A

Grouping of insurers it enable them to underwrite substantial risks. By doing this they are taking a share of the risk

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22
Q

How does financial planning benefit individuals

A
  • It helps them to get the most out of their money
  • they can define their goals and objectives
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23
Q

Features of financial planning

A
  • tax planning
  • asset management
  • debt management
  • retirement planning
  • personal risk management - protecting income and capital in the even of illness and providing p for dependants on death
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24
Q

What are the two subsets of financial planning

A
  • retirement planning - planning for an individual’s retirement
  • estate planning - planning for how the assets left behind when an individual dies are distributed
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25
What is retirement planning
Putting money away to use in retirement
26
What is a pension? And what are the three potential types of pensions
Money earmarked for retirement - personal pension - state pension - employer-sponsored pension
27
What’s a personal pension
Pension provided by the individual
28
What’s a state pension
Pension provided by the state
29
What’s an employer-sponsored pension
Pension provided by the individual’s employer
30
What’s the most obvious source of raising a pension fund
Is putting mommy into a personal pension scheme
31
Who makes personal pension schemes and what happens in them?
Banks, insurance companies and fund managers. The individual puts a proportion of their monthly salary into a pension scheme. The pension scheme invests in various shares, bonds and financial asstes
32
What’s the expectation of personal pension schemes
The contributions into the scheme, plus the potential growth in the value of the investments, will provide the individual with enough money to fund a relaxed retirement. The more money invested and the earlier it’s invested, the more comfortable the retirement will be
33
What is a fully funded scheme
An employer pension scheme that’s paid completely by the firm
34
What’s a contributory scheme
Employer pension scheme that requires the employee to contribute a proportion too
35
Why might a firm provide a pension scheme?
To attract good quality staff as well as encouraging them to stay
36
What is a state scheme
Providing a pension. To their citizens in their retirement years. However these schemes are gently insufficient to fund a comfortable retirement.
37
When will the state scheme be supplemented
If anything more than a very basic level of retirement is expected
38
What is the UKs maximum state pension
£175 a week
39
The effect of people living longer on society
A longer life means more money is required, which will mean higher taxes will need to be collected from the working population to pay for the pensioners who are living longer
40
Estate planning is concerned with
Taking steps to ensure that an individuals accumulated wealth passes to their intended beneficiaries, and does so in a tax efficient way
41
What’s the first key step in estate planning
Assess the the extents of a clients assets and liabilities. The assessment of a clients liabilities should take into account any protection policies that may be in place to meet that liability. E.g. mortgage protection policy
42
After the assets and liabilities are summarised, they are considered under 3 key areas:
1. whether a power of attorney is necessary to protect the individual’s interests when they are incapable of managing their affairs 2. whom they wish to inherit their estate and whether there are any specific gifts they wish to make 3. The extent of any liability to inheritance tax or estate duties that may arise, and whether action should be taken to mitigate this
43
What is a power of attorney
Legal document that authorises someone to undertake a specific transaction or for someone to manage their affairs
44
When can an individual execute a power of attorney
When they are sound of mind and appoint someone to carry out certain activities. Once the individuals is no longer sound of mind, the attorney will make the decision on that individual’s behalf
45
How is a power of attorney appointed
It depends on whether the individual makes arrangements in advance or not, either way there are rules and legal procedures that have to be followed
46
What is a will
A legal document that says what happens to an individuals estate in the event of death. The will ensures that the assets of the estate are distributed in accordance with their wishes and uses a specialist advice to ensure that relevant laws are taken into account
47
What features does a will cover?
- what will happen to the children - who will invest money until the kids come of age - who will look after the kids
48
What happens if no will is made
The legal system will determine who inherits via a set of intestacy rules. This may distribute the estate in the way that the individual would not have intended
49
What is it called when a person dies without leaving a will
They died intestate
50
How can you determine estate tax?
Prepared a schedule of an individuals assets and liabilities
51
Various names for estate tax
-death duties - gifts tax - inheritance tax - wealth tax these may be separate taxes or combined into one
52
Are there exemptions to estate tax
Yes in most countries, allowances that can be take advantage of to mitigate the estate tax
53
Fintech (financial technology) impact
Impacts the traditional banking and wealth management industry. People across all generations are now digitally proficient and they desire constant access to tools and services, with client of financial services being no different
54
Fintechs sub areas:
- collective investments - crowdfunding - peer-to-peer funding - stock markets - distributed ledger technology (DLT)
55
Collective investments What’s an investment platform
A website or smartphone app where investments can be purchased and sold. Generally aimed at individuals, these investments could include equities and bonds, but tend to concentrate on collective investments in the forms of funds, aka fund-supermarkets
56
Fund-supermarkets can subdivided into three types:
1. Low cost, ‘no frills’ investment platforms 2. Premium platforms 3. Robo advisors
57
What are low cost ‘no frills’ investment platforms
These platforms do not provide clients with advice about which fund is best. They allow the client to make their own choice at a fee that’s likely to be significantly lower than competing premium platforms and robo advisors
58
What are premium platforms
Investment platforms provide their clients with analytical screening tools that will assist the investor in selecting the best fund, given their aims and objectives
59
What are robo advisors
Investment platforms that provide automated advice to clients that’s based on the answers to questions. The answers should clarify the investor aims and risk attitude so that the most appropriate fund is recommended
60
What is crowdfunding
Practice of funding a project or venture by raising small amounts of money from a large number of people typically using internet.
61
Types of forms that crowdfunding can take:
-seeking donations from people that believe in the cause or innovation. This form offers no possibility of investment return for the donors - debt crowdfunding, investors receive their money back with interest - equity crowdfunding, people invest in exchange for equity/shares in the venture
62
What does peer-to-peer lending consist of
Due to peer-to-peer lending borrowers can borrow at slightly lower rates of timers, while savers get improved interest rates (compared to the bank), with the peer-to-peer firm profit g by charging a fee fro arranging a transaction
63
What can the peer-to-peer firm do for clients?
Set up, access and connect investor’s and borrowers cheaply using the internet infrastructure
64
How can peer-to-peer lending be risky for investors
They have to make the final decision in terms of enters the investment opportunity and associated risks are appropriate for them
65
The effect of the electronic stock exchange system
Enabled transaction costs to be reduced and opened up the possibility of ‘high-frequency trading’ (HFT).
66
What is HFT
Where some participants automate the transaction that they want to execute by writing an algorithm that will act on pre-set indicators, signals and trends
67
Who usually uses HFT
big investment banks and other market players who combine large order volumes with rapid execution
68
How is HFT described as
Trading financial instruments via using cutting edge technology and algorithms to perform a large number of rapid trades. The algorithms enable them to place large orders, before others react
69
What’s is distributed ledger technology
DLT is the replacement of one, centralised ledger of transactions with a decentralised network of computers all holding copies of exactly the same ledger. Computer aka ‘nodes’ and any changes to the ledger mist be done by a consensus (this is done by using a consensus algorithm)
70
Are all distributed ledgers public?
They can be open and described as any park pits t and described as public It can be restricted to a select group of participants and described as private
71
What is blockchain
An example of DLT and is commonly associated with the cryptocurrency bitcoin. Bitcoin is a public system that uses blockchain DLT
72
The advantages of DLT:
- produce a trustworthy & reliable record, since consensus is required for any changes - prevent any single point of failure from creating a wider problem, because all the remaining nodes hold copies of the valid ledger - very difficult to hack because of the use of multiple nodes - remove the costs and delays caused by the need to maintain and update a single, central database
73
What are some countries exploring with DLT
the creation of digital versions of their national currency with an associated underlying distributed ledger system which will facilitate use in international trade

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