2. Terminology
Finance –
commercial or government activity of
managing money, debt, credit and investment
Investment –
the current commitment of resources
in order to achieve later benefits
present commitment of money for the purpose of receiving
more money later – invest amount of money then your capital
will increase
Investor is a person or an organisation that buys shares or
pays money into a bank in order to receive a profit
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3. INVESTMENT
SPECULATION
GAMBLING
Objective
Specific
goal/objectives
Objectives, only to Based on LUCK
gain high return
Risk
Low risk
Moderate to high
risk
High risk
Period
Long term
Short term
Short term
Analysis
Fundamental
analysis
Technical analysis No analysis
or based on
herding behavior
Return
Current income
Capital Gain
(dividend, interest)
Capital Gain
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4.
Real assets are tangible things owned by persons and
businesses
Residential structures and property
Major appliances and automobiles
Office towers, factories, mines
Machinery and equipment
Financial assets are what one individual has lent to
another
Consumer credit
Loans
Mortgages
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5.
The household is the primary provider of funds to
businesses and government.
Households must accumulate financial resources throughout their
working life times to have enough savings (pension) to live on in
their retirement years
Financial intermediaries transform the nature of the
securities they issue and invest in
Banks, trust companies, credit unions, insurance firms, mutual
funds
Market intermediaries simply help make markets work
Investment dealers
Brokers
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8.
Banks and other deposit-taking institutions
Insurance companies
Pension Funds
Mutual Funds
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9.
Insurers sell policies and collect premiums from customers
based on the pricing of those policies given the probability of a
claim and the size the policy and administrative fees.
They invest the premiums so that the accumulated value in the
future will grow to meet the anticipated claims of the
policyholders.
In this way, unsupportable risks (such as the death of wage
earner or the burning down of a business) are shared among a
large number of policyholders through the insurance company.
Insurance allows households, business and government to
engage in risky activities without having to bear the entire risk
of loss themselves.
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10.
Individuals and employers make payments over the entire
working life of a person with those funds invested to grow over
time.
Ultimately, the accumulated value in the pension can be used
by the person in retirement.
Pension plans accumulate considerable sums of money, and
their managers invest those funds with long-term investment
time horizons in diversified portfolios of investments. These
investments are a major source of capital, fuelling investment
in research and development, capital equipment, resource
exploration and ultimately contributing in a substantial way to
growth in the economy.
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11.
Mutual funds give small investors access to diversified,
professionally-managed portfolios of securities.
Small investors often do not have the funds necessary
to invest directly into market-traded stocks and bonds.
This is called denomination intermediation because the
mutual fund makes investments available in smaller,
more affordable amounts of money.
Canadian indirect investment in the markets through
managed products such as mutual funds and
segregated funds has grown exponentially.
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12.
There are two major categories of financial securities:
1.
Debt Instruments
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1.
Commercial paper
Bankers’ acceptances
Treasury bills
Mortgage loans
Bonds
Debentures
Equity Instruments
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Common stock
Preferred stock
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19. Investment/Financial Instruments
Characteristics of non-marketable securities
Cannot be traded between or among investors
May be redeemable (a reverse transaction between the
borrower and the lender)
Examples:
Savings accounts
Term Deposits
Guaranteed Investment Certificates
Canada Savings Bonds
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20.
Characteristics of Marketable securities
Can be traded between or among investors after their original
issue in public markets and before they mature or expire.
Equit or debt instrument (share/stock, bond, note) that is listed
on an exchange and can be readily bought or sold. A marketable
security is a near-cash (liquid) asset and is recorded at
acquisition cost (purchase price plus incidentals, commissions,
and taxes) or market value (whichever is lower) in the account
books under current assets. Non-marketable securities include
savings bonds and restricted shares/stock.
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21. Markets can be categorized by the time to maturity:
Money Market Securities (for short-term debt
securities that are pure discount notes)
Bankers’ acceptances
Commercial Paper
Treasury Bills
Capital Market Securities (for long-term debt or
equity securities with maturities greater than 1 year)
Bonds
Debentures
Common Stock
Preferred Stock
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22.
Primary Market
Markets that involve the issue of new securities by the
borrower in return for cash from investors (Capital formation
occurs)
Secondary Market
Markets that involve buyers and sellers of existing securities.
Funds flow from buyer to seller. Seller becomes the new owner
of the security. (No capital formation occurs)
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23.
Exchanges or Auction Markets
Secondary markets that involve a bidding process that
takes place in specific location
For example TSX, NYSE, Malaysian Stock Exchange
Dealer or Over-the-counter (OTC) Markets
Secondary markets that do not have a physical location
and consist of a network of dealers who trade directly
with one another.
For example the bond market
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24.
Third Market
Trading of securities that are listed on organized
exchanges in the Over-the-counter market
Fourth Market
Trading of securities directly between investors (usually
between two large institutions) without the involvement
of brokers or dealers.
Operates through the use of privately owned automated
systems such as Instinet
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25.
Represents an important source of funds for
borrowers
Provides investors with important alternatives
as they seek to build wealth through
diversified portfolios
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26.
In this chapter you have learned about:
Financial systems in general.
Major participants in the financial system, including
the different types of financial securities and
financial markets
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