Introduction To Finance - Chapter 9: Basics of Securities PDF

# Introduction to Finance ## Chapter 9: Basics of Securities ### Topics - Real and financial assets - Basics of securities - Bonds - Shares ### Revision #### Financial system The financial system is that part of the whole economic system that is reliable for: - Securing the money supply and liquid...

# Introduction to Finance ## Chapter 9: Basics of Securities ### Topics - Real and financial assets - Basics of securities - Bonds - Shares ### Revision #### Financial system The financial system is that part of the whole economic system that is reliable for: - Securing the money supply and liquidity of the economy - Maintaining, regulating and operating the payment system - Allocating the savers money to borrowers - Reallocating the incomes of different economic actors in time and space. #### Functions of financial systems | Function | Subsystem of financial system | |---|---| | Securing the money supply and liquidity of the economy | Monetary system | | Maintaining, regulating and operating the payment system | Supervising system | | Allocating the savers money to borrowers. | Financial markets, financial intermediaries | | Reallocating the incomes of different economic actors in time and space | Fiscal system | #### Financial markets **Definition:** The platform of the exchange of financial instruments and money denominated in the currencies of different countries. **In other words:** Those markets where borrowers who need money/capital make contact with the savers, who have money/capital surplus. #### Primary function of financial markets A diagram showing savers giving money in exchange for financial instruments to borrowers. Savers are defined as "those economic actors who have money/capital surplus". Borrowers are defined as "those economic actors who need money/capital". Money is then paid back from borrowers to savers. **Supply:** Savers give money to borrowers in exchange for financial instruments. **Demand:** - Borrowers need money. This can be because they have liquidity problems in the short term, or they need capital for financing long term activities and investments. - Borrowers get money in exchange for financial instruments. **Supply side:** - Savers/investors have money surplus. - In a given time period they do not plan to use all the money they have, therefore they offer their money for borrowers hoping for future profits. - Savers give money in exchange for financial instruments. ### I. Real and financial assets #### Real and financial assets A diagram showing real assets on the left and financial assets on the right. Images of factory equipment, a robot and city buildings are on the left. Images of a certificate, an apple logo and a bank note are on the right. - **Real assets:** physically existing assets, serve the operation (land, property, machines, etc.). Real assets create new value with human labor and are the means of value creation, generating income. - **Financial assets:** Claims for assets or rights of assets, represent claims for income. Financial assets fund real assets and disperse risk. They divide the income created by real assets within financiers, but do not create new value (trading with securities is a zero-sum game). ### II. Basics of securities #### Financial assets and securities - **Financial assets:** Any contract when one party has a claim for cash flow, or claim for assets or rights, and the other party has a liability to provide the above mentioned cash flows, assets and rights to the other party. Examples include: debt, deposit, securities etc. - **Securities:** Securities are financial assets (a subgroup of financial assets) - **Marketable financial assets:** like shares, bonds, investment fund units, etc. #### Types of securities - **form:** paper and dematerialised - **maturity:** short, medium and long - **yield:** yield - **trade:** public (stock exchange, OTC), private - **issuer:** issuer - **rights represented by the security:** membership and ownership rights, debt securities, derivatives #### Securities - Form - **PAPER:** physically existing security - **DEMATERIALIZED:** Non-materialized. The security is an electronic sign. #### Securities - maturity - **SHORT:** less than a year (like treasury bonds) - **MEDIUM:** matures in 1-5 years. The majority of bonds. - **LONG:** maturity is longer than 5 years. Examples include: debenture bonds, investment fund unit, long term government bonds. - **SECURITIES WITHOUT MATURITY:** shares #### Securities - Yield - **FIXED YIELD:** Fixed when the security is issued (like a bond with fixed interest payment). - **CHANGING YIELDS:** The cash flows are not predictable. Examples include: - Dividend payment of stocks - Changes of market prices - Floating interest rates (LIBOR+2%) - **For investors the securities provide income but someone must create this income!** The yield of the investor (holder of the security) is a cost for the issuer! #### Securities - trade - **PUBLIC:** - Traded on public markets (stock exchange, OTC) - No limitations regarding the possible investors - Issuer has to convince the full market to buy their securities, firms become open books. - High costs. - **PRIVATE:** - Trading is limited to a special circle of potential investors. - Lesser number of investor, lesser costs. # Thank You for your Attention!