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Questions and Answers
Which of the following is an example of a real asset?
What do financial assets represent a claim to?
Which characteristic is associated with a good market?
In which type of market are long-term securities like stocks and bonds bought and sold?
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What is the main characteristic of money markets?
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Where do the proceeds of sales go to in a primary market?
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In a dealer market, who sets the bid and ask prices for securities?
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Which market provides liquidity to investors and determines market pricing for new issues?
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What is the responsibility of the UK Debt Management Office (DMO) in the primary capital markets?
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How do individuals invest indirectly through investment companies?
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What type of investment funds can be listed on the stock exchange?
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What are the examples of broker markets mentioned in the text?
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Which pricing feature is unique to OEICs compared to Unit Trusts?
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What distinguishes ETF pricing from that of OEICs and Unit Trusts?
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What primarily drives returns from Closed-End Funds?
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Which type of investments have potential illiquidity and may involve non-traditional methods like short-selling and leverage?
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What is a common fee structure for Hedge Funds?
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Which type of investment vehicle allows direct investment in private (non-publicly traded) companies?
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In which type of investment are returns primarily driven by alpha with higher dispersion?
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What distinguishes REITs and VCTs within Closed-End Funds?
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Study Notes
- Open-Ended Investment Companies (OEICs) are a type of investment fund that issues shares, unlike trusts which issue units.
- OEICs allow both regular and lump sum investments.
- They are managed by an Authorized Corporate Director (ACD).
- The board of directors is responsible for overseeing the duty of care.
- The depositary, usually a bank, safeguards the assets.
- Key pricing features:
- Single price for both buying and selling
- Price not based on supply and demand for shares
- OEICs can have a stand-alone or 'umbrella' structure.
- OEICs have several key differences from Unit Trusts:
- Pricing: OEICs have one price, Unit Trusts have separate bid and offer prices.
- Governance: OEICs are governed by company law, Unit Trusts by trust law.
- Purchase: OEICs purchase shares, Unit Trusts purchase units.
- Exchange Traded Funds (ETFs) are investment funds that:
- Originated from the interest in index funds due to underperformance in mutual funds.
- Index funds mirror markets but trading happens only at the end of the day based on the NAV.
- ETFs are open-ended funds:
- Shares are created/canceled based on demand fluctuations.
- They typically track market sectors, styles, regions, or entire markets.
- ETF shares are traded like regular stocks.
- ETF pricing:
- Unlike OEICs and Unit Trusts, pricing is determined by the market.
- Shares can trade at slight premiums/discounts to underlying investments.
- Prices fluctuate throughout the trading day.
- Benefits of ETFs include:
- Lower costs and potential tax advantages compared to mutual funds.
- A wide range of options, tracking almost any asset class.
- Closed-End Funds are listed companies with a fixed number of shares, and they:
- Often invest in various securities like stocks and bonds.
- Have shares that trade at a discount or premium to Net Asset Value (NAV).
- Key differences between Closed-End Funds and OEICs/Unit Trusts include:
- Fixed shares vs. open-ended growth
- Potential for discounts/premiums on shares
- Ability to use leverage for enhanced returns (with increased risk)
- Returns from Closed-End Funds are primarily driven by alpha with higher dispersion.
- REITs and VCTs are specialized types of investment vehicles within Closed-End Funds.
- Mutual Funds:
- Returns depend on the market capitalization and the growth/value orientation of the stocks they hold.
- Returns are driven by beta with lower dispersion for traditional investments.
- Traditional investments primarily consist of public stocks and bonds, making them highly liquid, correlated to markets, and having passive shareholders.
- Alternative investments include:
- Private and public market assets with potential illiquidity.
- Non-traditional methods like short-selling and leverage.
- Active shareholders that own the investments.
- Alternative investments returns are primarily driven by alpha with higher dispersion.
- Hedge Funds are pooled investment vehicles (like mutual funds) that:
- Register with the SEC but have more freedom in strategies.
- Are not suitable for all investors due to their complexity and risk.
- Have a common fee structure of 2% management fee and 20% of profits.
- Private Equity Funds:
- Allow direct investment in private (non-publicly traded) companies.
- Do not register with a regulatory body.
- Classifications include buyout funds and venture capital funds.
- Have a set-up as limited partnerships and use a 2/20 fee structure.
- Have constraints to prevent excessive compensation.
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Description
Explore the differences between real assets (such as land, buildings, and knowledge) and financial assets (like stocks and bonds) in terms of their impact on the economy and their role in producing goods and services. Learn about the characteristics of a good market and the importance of timely and accurate information in market transactions.
