Assets
items that have value and include real and financial assets
Real Assets / Physical Capital
physical assets, such as land, buildings, machinery, cattle and gold
Financial Assets
claims on real or possibly other financial, assets
Securities
financial assets that can be traded. Two largest categories = debt and equity securities
Equity Securities
stocks, shares of stock or shares
Financial markets
places where buyers and sellers trade securities
Direct Finance
Financial markets where savers and spenders can buy and sell securities
Indirect Finance
Financial intermediaries channel funds from savers to spenders (many savers don't have time/expertise to ID and select individuals or monitor financial health/behavior of borrowers)
Financial Institutions
types of financial intermediaries. Role is to collect money from savers and to invest in financial assets (two major institutions = banks and insurance companies)
Banks
collect deposits from savers and transform them into loans to borrowers, indirectly connecting savers with borrowers. saver has no direct claim on borrower but rather has a claim on the bank through its deposit. The bank has a claim on the borrower throug
Retail Banks
banking products and services to individuals and small businesses (checking and savings accounts, debit/credit cards and mortgage and personal loans
Commercial Banks
provide wide range of products and services to companies and other financial institutions
Co-operative and Mutual Banks
financial institutions that their members own and sometimes run. They may specialize in providing mortgages and loans to members. Sometimes they offer wider range of services similar to commercial banks
Insurance Companies
financial intermediaries that help individuals and companies offset the risks they face. To protect against potential loss, individuals/companies buy insurance contracts/policies that provide payments in the event that losses occur. They pay insurance com
Property and Casualty Insurers
cover assets such as homes, cars and businesses
Legal, Liability and Life Insurers
pay out sum of money upon death or serious injury of the person insured
Fraud
people deliberately cause or falsely report loses to collect insurances settlements
Moral Hazard
people are less careful about avoiding loses once they have purchased insurance
Adverse Selection
when only those who are most at risk buy insurance, causing insured losses to be greater than average losses
Investment Industry
Subset of financial services industry- comprises all participants that are instrumental in helping savers invest their money and spenders raise capital in financial markets. Contributes to efficient allocation of resources in economy. Major participants:
Three questions on allocation of resources
1. which goods and services shoud be produced? 2. how should the goods and services be produced? 3. who should receive the goods and services that are produced
Capitalism
economic system that promotes private ownership as means of production and markets as means of allocating scarce resources (no central authority/gov directing economic activity) This is only a theory - in reality gov's play role in all economic systems
Liquidity
The ease of buying or selling an asset without affecting its price
Laws and Regulations
- Prevent fraud
-protect investment industry participants, in particular investors
-promote and maintain the integrity, transparency and fairness of financial markets
Insider trading
Trading based on non-public information that could affect a security's price (forbidden in most jurisdictions)
Investment Banks / Merchant Banks
financial intermediaries that have expertise in assisting companies and governments raise capital
-help companies organize equity/debt issuances
-specialists in matching investors with companies/gov seeking capital
-helps company/gov determine price at wh
Sell-side Analysts
Work for organization selling securities, collects and analyzes information about a company and its competitors and prepares detailed report that can be shared with potential investors
Institutional Investors
Typically organizations that invest either for themselves to advance their mission or on behalf of others (investment firms and financial institutions- banks and insurance companies)
Individual Investors (two categories)
Retail investors - have lowest amount of investable assets (tend to receive standardized services)
high-net-worth - have higher amounts of investable assets (often receive tailored services specific to needs)
Institutional Investors that invest to advance their mission (4 types)
1. Pension plans
2. Endowment funds
3. Foundations
4. Sovereign wealth funds
Pension Plans
hold and manage investment assets for benefit of future and already retired people, called beneficiaries
Endowments Funds
long-term funds of not-for-profit institutions (ex. universities, colleges, schools, museums, theaters, hospitals, clinics)
Foundations
grant-making institutions funded by financial gifts by the investment income that they produce
Sovereign Wealth Funds
typically invests a government's surpluses. Gov may accumulate surpluses by collecting taxes in excess of current spending needs, by selling natural resources, or by financing the trade of good and services. These surpluses are usually invested. Some gov
Brokers and Dealers
trading service providers, help provide liquidity and reduce transaction costs
Brokers - agents, they don't trade directly with investors but help buyers and sellers find and trade with each other
Dealers- principals, they use their own accounts and their
Clearing houses and settlement agents
confirm and settle trades after they have been agreed on
Buy-side analysts
work for organization buying the securities, review potential investments
Key Forces in Investment Industry (internal and external)
Internal - competition and technology
External - globalization and regulation