Finance 301 1st Edition Lecture 1 Outline of Last Lecture I Syllabus and class expectations Outline of Current Lecture II Financial Market III Role of Financial Market IV Primary vs Secondary Markets V Securities Traded in Financial Markets VI Valuation of Securities VII Use of Form to Make Investment Decisions VIII International Security Transactions Current Lecture I Financial Market a Securities mutual funds treasuries stocks bills and bonds CDs mortgages b Financial asset piece of paper that gives you a claim to its asset that backs it Piece of paper that gives us a return Something that gives us a value and a return on your investment c Financial institution bank insurance company investment brokerage they transfer capital invest for us facilitate the flow of funds d Physical assets farm commodities real estate deals with land and buildings e Liquidity financial assets are more liquid f Real estate assets generally take longer to sell and transfer g Insurance markets guaranteed a certain payback with insurances not guaranteed with bonds and stocks II Role Of Financial Market a Surplus units participants who receive more money than they spend such as investors participants who receive more money than they spend such as b Deficit units participants who spend more money than they receive such as borrowers c Households surplus put money in banks bonds stocks d Corporations and Government deficit units e Securities represent a claim on the issuers i Debt securities bond These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute ii Equity securities stock iii What you owe vs what you own f Accommodating the need for corporations to borrow money By selling stocks we are taking ownership of the company and they are getting money for us to do that They have to decide how much debt vs equity that they want g Borrowing money i Get companies money they need to expand ii They have to buy good and create inventory iii Investing so investors can make a return iv Intermediaries help investors advance Example bank make things easier for bank to get money and buy investments h III Primary vs Secondary Markets a Primary Market Facilitate the issuance of IPO i Where new money or new security happens example giving you a loan or where a company issues new stock ii IPO initial public offer of stock b Secondary Market facilitate the trading of existing securities which allows for a change in the ownership i Liquidity how easy it is for a security to turn into cash without a loss in value ii Liquid investments money market investments 30 day treasury bill risk free never loose money but you don t make a lot of money either IV Securities Traded in Financial Markets a Securities can be classified as money market securities capital market securities or derivative securities b Money markets facilitate the sale of short term debt securities by deficit units to surplus units c Debt securities with a term of less than one year are generally designated to money market instruments rather than bonds d Money market securities are very liquid they have a maturity of 12 months or less things like short term treasury bills or a CD e Capital Market Securities facilitate the sale of long term securities by deficit units to surplus units i Should go for a year or more TAX REASONS transaction costs to buy or sell the stock ii Bonds 2 years or more hold them long term debt iii Mortgages investments in real estate loans iv Mortgage backed securities investment in real estate loans for 15 20 years usually v Stocks capital gains taxes different tax treatments depending on how long you hold securities vi Capital gains tax government encourages you to hold long term investments You get taxed less 15 f Derivative Securities financial contracts whose values are derived from the values of underlying assets i futurist swap contracts short term and long term securities where they have physical asset underlying them and its not always real estate ex Corn soybeans rice contract or it can be an interest rate another form of security that has an asset behind it invented for two type of people farmers and the banks they use derivatives to hedge risk ii Speculation trying to make big returns iii Risk management and hedging don t care if they loose as long as they don t loose big iv Hedge and risk banks and farmers want to avoid disaster so they take out contracts and they note going in that they may loose money futurist contract but they don t care because they are trying to avoid disaster ex if interest rates move too fast they cant pay off their liabilities V Valuation of Securities a Impact of information on valuations by investors i Estimate future cash flows by obtaining information that may influence a stock s future cash flows ii Use economic or industry information to value a security iii Use published opinions about the firm s management to value a security b Impact of Behavioral Finance on Valuation i Various conditions can affect investor psychology Behavioral finance can sometimes explain the movements of a security s price ii Price should be based on cash flows for buying iii Bond and mortgage interest getting paid iv VB CF 1 R show value c Industry information example 10 yrs ago own BP stock BP stock went down because of the oil spill the cash flow from BP is going to make less money after that oil spill value of the stock should go down d Analyst ratings cell ratings and by ratings they know more about the companies than we do e Always remember that there are two ways stocks move cash flow and behavior VI Use of form to make investment decisions a VII International Security Transaction a Foreign Exchange Market International financial transactions normally require the exchange of currencies The foreign exchange market facilitates this exchange i New york stock exchange is not the biggest exchange in the country but the biggest market in the world is FOREX foreign exchange market its an OTC market over the counter market trading of currencies foreign countries do have stock markets