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Transcript of Salaar - FinanceINVESTMENTS BBA SPRING Semester 2012 Lahore School of Economics Salaar farooq –...
Salaar - Finance
INVESTMENTSINVESTMENTS
BBASPRING Semester 2012
Lahore School of Economics
Salaar farooq – Assistant Professor
Salaar - Finance
Securities
Markets
Salaar - Finance
Chapter 3Indirect Investing
Summary What is Indirect Investing?
Direct Investing
Indirect Investing
What is an Investment Company?
What are Types of Investment Companies?
What are Types of Mutual Funds?
What are the mechanics of Investing Indirectly?
What is Investment Company Performance?
What are Exchange Traded Funds?
Salaar - Finance
Chapter 4Securities Markets
Learning Objectives
Why are Financial Markets Important?
What are Primary Markets?
What are Secondary Markets?
What are Types Markets?
Salaar - Finance
What is the investment environment?
There are 2 main areas:
Financial Markets & the economy
a) Consumption Timing
b) Allocation of Risk
c) Separation of ownership
Clients of the Financial System
a) Household Sector (provide money by investing)
b) Business Sector (raise money to invest)
c) Government Sector (finance expenditures by borrowing)
Salaar - Finance
What is the investment environment? Financial Markets & the Economy
Consumption Timing (High Earning vs low earning)
Financial Markets allow this to happen
Salaar - Finance
What is the investment environment?
Financial Markets & the Economy
Consumption Timing (High Earning vs low earning)
If Individuals earn more than they spend as opposed to retirees, then what can be done with the excess money?
Q: How do you shift your purchasing power from high earnings period to low earnings period?
High Earning Period: a) You can store your wealth in financial assets
Low Earning Period: b) You can sell these assets to consume
Financial Markets allow this to happen
Salaar - Finance
What is the investment environment? Financial Markets & the Economy
Allocation of Risk (High vs Low)
Financial Markets allow this to happen
Salaar - Finance
What is the investment environment? Financial Markets & the Economy
Allocation of Risk (High vs Low)
Financial Markets allow the distribution of risk according to investor preferences.
High Risk: a) Is absorbed by high risk investors seeking high returns
Low Risk:b) Investors with little risk appetite are accommodated
Financial Markets allow this to happen
Salaar - Finance
What is the investment environment? Financial Markets & the Economy
Separation of Ownership & Management
Financial Markets allow this to happen
Salaar - Finance
What is the investment environment? Financial Markets & the Economy
Separation of Ownership & Management
Financial Markets allow funds to flow from suppliers to users with ease
Result: a) Larger scale of business & growth potential.
b) Investors can participate in ownership without management.
c) Mutually beneficial for both suppliers & users
Financial Markets allow this to happen
Salaar - Finance
What are Financial Markets?
• Financial Market
• Purpose of Financial Markets
Salaar - Finance
What are Financial Markets?
• Financial Market– Mechanism to bring Buyers & Sellers together
dealing in Debt, Equity & other financial products.
• Purpose of Financial Markets– The purpose of financial markets is to
efficiently allocate flow of funds from savings to ultimate users.
Salaar - Finance
What are Financial Markets?Basic Types
– Primary Markets (underwriters)
– Secondary Markets (create liquidity)
– Dealer vs Auction markets
Salaar - Finance
What are Financial Markets?Basic Types
– Primary Markets (underwriters)•Original (initial) sale of securities – IPO’s –
raises capital– Secondary Markets (create liquidity)
•Buying & Selling of securities after initial sale has occurred – capital gains & dividends
– Dealer vs Auction markets•Dealers buy & sell for themselves•Brokers Auctions match buyers & sellers
Salaar - Finance
Flow of Funds in the Economy
INVESTMENT SECTOR
FIN
AN
CIA
LIN
TE
RM
ED
IAR
IES
SAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKET
Salaar - Finance
Flow of Funds in the Economy
FIN
AN
CIA
LIN
TE
RM
ED
IAR
IES
SAVINGS SECTORSAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKET
SAVINGSSAVINGSSECTORSECTOR
Households
Businesses
Government
INVESTMENT SECTOR
Salaar - Finance
Flow of Funds in the Economy
FIN
AN
CIA
LIN
TE
RM
ED
IAR
IES
SAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKETSECONDARY MARKET
SECONDARYSECONDARYMARKETMARKET
SecurityExchanges
OTCMarket
INVESTMENT SECTOR
Salaar - Finance
Flow of Funds in the Economy
FIN
AN
CIA
LIN
TE
RM
ED
IAR
IES
SAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKET
INVESTMENTINVESTMENTSECTORSECTOR
Businesses
Government
Households
INVESTMENT SECTORINVESTMENT SECTOR
Salaar - Finance
Flow of Funds in the Economy
FIN
AN
CIA
LF
INA
NC
IAL
INT
ER
ME
DIA
RIE
SIN
TE
RM
ED
IAR
IES
SAVINGS SECTOR
FINANCIAL BROKERS
SECONDARY MARKET
FINANCIALFINANCIALINTERMEDIARIESINTERMEDIARIES
Commercial BanksSavings Institutions
Insurance Cos.Pension Funds
Finance CompaniesMutual Funds
INVESTMENT SECTOR
Salaar - Finance
Flow of Funds in the Economy
FIN
AN
CIA
LIN
TE
RM
ED
IAR
IES
SAVINGS SECTOR
FINANCIAL BROKERSFINANCIAL BROKERS
SECONDARY MARKET
FINANCIALFINANCIALBROKERSBROKERS
Investment Bankers
Mortgage Bankers
INVESTMENT SECTOR
Salaar - Finance
Financial Markets?Primary Markets
Primary Market
Initial Public Offering (IPO)
Salaar - Finance
Financial Markets?Primary Markets
Primary Market
Market for new issues of securities (investment bankers)
Issuers receive funds (raise capital)
Buyers receive financial claims
Initial Public Offering (IPO)Process of initial sale of new securities
After initial sale, securities trade in the secondary markets
Salaar - Finance
INVESTMENT BANKERS
• Specialize in design & sale of securities
• Work with issuers to bring a new issue to market—legal, accounting, pricing, and so forth
• Involved in other matters, such as advising firms on mergers and acquisitions, or reorganizations
Salaar - Finance
INVESTMENT BANKING
• Investment bankers form a syndicate to sell the new securities--multiple investment bankers
• Investment bankers underwrite an issue, purchasing the securities from the issuer and assuming the risk of reselling them to investors profitably
• Investment bankers profit from spread between price they pay and the price they sell the issue for
Salaar - Finance
Financial Markets?Investment Banking
Performed by 2 groups:
Securities Firms
Firm specializing in the distribution of new securities to the public & also in secondary mkts as brokers & dealers
Commercial BanksAlso underwrite securities.
Salaar - Finance
Investment Banking
How they make money?
1. Commissions
2. Fees
3. Spread Income
Also from:
Money management
Mergers & Acquisitions
Trading of securities etc.
Salaar - Finance
Financial Markets?Under-writing Process
3 Main Areas:
1. Advising the issuer on terms & timing of offering
2. Buying Securities from issuer
3. Distributing the securities to public
Salaar - Finance
Financial Markets?Under-writing Process
Buying securities:
Firm Commitment:
Investment Bank agrees to buy from issuer at fixed price
Best efforts under-writing
When the IB does not buy the securities but provides expertise
Gross Spread – Discount (4-7%)
Difference b/w price paid to issuer & price received from public
Salaar - Finance
issuer
Originating investment banker
Underwriting Syndicate (group of invest bankers)
Selling group (syndicate + selected retail brokers)
INVESTORS BUYING IN PRIMARY MKT
Salaar - Finance
Financial Markets?Investment Banker
Investment Banker
Firm specializing in the sale of new securities to the public
UnderwritingProcess by which investment bankers purchase an issue of securities from a firm
and resell it to the public
PROSPECTUS: Provides info about the IPO to the customers
Salaar - Finance
Privatization?
Salaar - Finance
Privatization?
Offering securities of Govt owned companies to public…
Thereby liquidating Govt ownership
Also performed by Investment Banks
Salaar - Finance
Arbitrage?Another activity of Investment Banks
Salaar - Finance
Arbitrage?Another activity of Investment Banks
Trading discrepancies in same security at different locations…
Example…
JNJ at 51.83-.90 in NY
JNJ at 51.95-99 in LDN
Locking a profit with no risk
Salaar - Finance
Financial Markets?Global Investment Banking &
Private Placements
Global Investment Banker
Private Placements
Salaar - Finance
Financial Markets?Global Investment Banking &
Private Placements
Global Investment Banker
Firm specializing in the sale of new international securities to the public
Private PlacementsDebt securities are issued directly to financial institutions bypassing the open
market.
No SEC filing required
Investment banking fees is saved
Salaar - Finance
Financial Markets?Secondary Markets
Markets where existing securities are traded
For investments to be attractive, they must have liquidity & secondary markets provide that.
Salaar - Finance
Financial Markets? US Securities Markets for Equities
Where are these exchanges?
Equity
NYSE
AMEX
NASDAQ
ECN’S
BONDSNYSE & AMEX Bond markets
Salaar - Finance
Financial Markets? US Securities Markets for Equities
Equity
NYSE (New York Stock Exchange)
AMEX (American Stock Exchange)
NASDAQ (National Association of Securities Dealers)
ECN’S (Electronic Communications Network)
BONDSNYSE & AMEX Bond markets
Salaar - Finance
Financial Markets?US Securities Markets for Equities
Equity
NYSE – 1366 seats (1.5mil$)-2800 co’s valued 13 trillion-Dvol 1.5Bil
AMEX – 807 seats – 760 companies – 2% of ttl value – 200mil vol
NASDAQ- 3843 co’s – 1bil vol – computerized mkt network
ECN’S (Electronic Communications Network)-linked to all
OTC – Not listed but registered, 3000 co’s – dealer network linked
BONDSNYSE & AMEX Bond markets
Salaar - Finance
Financial Markets?US Securities Markets for Equities
Bid price
Offer Price
Block trades
Program trading
Salaar - Finance
Financial Markets?US Securities Markets for Equities
Bid price
Px some one will buy for
Offer PricePx someone will sell for
Block tradesTrades of 10,000 or more
Program tradingComputer generated buy & sell signals for $1 mil or more
Salaar - Finance
Financial Markets?US Securities Markets for Equities
OTC (Over the counter mkts)
ECN’s
After Hours Trading
Salaar - Finance
Financial Markets?US Securities Markets for Equities
OTC (Over the counter mkts)
Stocks not listed on an exchange but traded on closed computer networks
ECN’sComputerized trading network for large traders & brokers – computer matched orders
After Hours TradingNormal hrs: 9.30 – 1600
AHT hrs: 1600-2000
Salaar - Finance
Financial Markets?US Securities Markets for Equities
Dow Jones Industrial Average
Standard & Poor’s (S&P 500)
Nasdaq
Salaar - Finance
Financial Markets?US Securities Markets for Equities
Dow Jones Industrial Average30 Blue chip stocks – stock price weighted average
Standard & Poor’s (S&P 500)500 stock composite
Nasdaq100 Large cap companies
Salaar - Finance
• The Dow Jones Industrial Average consists of the following 30 companies:
• 3M Co. (NYSE: MMM) • ALCOA Inc. (NYSE: AA) (aluminium) • Altria Group, Inc. (NYSE: MO)
(tobacco) • AIG(NYSE: AIG) • American Express Co. (NYSE: AXP)
(credit services) • AT&T Inc. (NYSE: T) (telecoms) • Boeing Co., The (NYSE: BA)
(aerospace/defense) • Caterpillar, Inc. (NYSE: CAT) (farm &
construction equipment) • Citigroup, Inc. (NYSE: C) (money
center banks) • Coca-Cola Co. (NYSE: KO) (beverages) • E.I. du Pont de Nemours & Co. (NYSE:
DD) (chemicals) • Exxon Mobil Corp. (NYSE: XOM) (major
integrated oil & gas) • General Electric Co. (NYSE: GE)
(conglomerates, media) • General Motors Corporation (NYSE:
GM) (auto manufacturers) • Hewlett-Packard Co. (NYSE: HPQ)
(diversified computer systems) • Home Depot, Inc. (NYSE: HD) (home
improvement stores)
• Honeywell International, Inc. (NYSE: HON) (conglomerates)
• Intel Corp. (NYSE: INTC) (semiconductors)
• International Business Machines Corp. (NYSE: IBM) (diversified computer systems)
• JPMorgan Chase and Co. (NYSE: JPM) (money center banks)
• Johnson & Johnson Inc. (NYSE: JNJ) (consumer and health care products conglomerate)
• McDonald's Corp. (NYSE: MCD) (restaurant franchise)
• Merck & Co., Inc. (NYSE: MRK) (drug manufacturers)
• Microsoft Corp. (NYSE: MSFT) (software)
• Pfizer, Inc. (NYSE: PFE) (drug manufacturers)
• Procter & Gamble Co. (NYSE: PG) (consumer goods)
• United Technologies Corp. (NYSE: UTX) (conglomerates)
• Verizon Communications (NYSE: VZ) (telecoms)
• Wal-Mart Stores, Inc. (NYSE: WMT) (discount, variety stores)
• Walt Disney Co., The (NYSE: DIS) (entertainment)
Salaar - Finance
Chapter 4Securities Markets
Learning Summary
Why are Financial Markets Important?
What are Primary Markets?
What are Secondary Markets?
What are Types Markets?
Salaar - Finance
END