CFA Fundamentals 1

Offers a range of products and services to savers & spenders and helps channel funds between them.

Items that have value and include real assets & financial assets

Physical assets such as land, buildings, machinery, cattle, and gold

Company's 'Factors of Production' (physical capital)

Claims on real or other financial assets (share of stock is claim on company's assets & earnings)

Loans that lenders make to borrowers

Stocks. Represent ownership of company. Company has no obligation to repay the amount paid for the shares nor to pay dividends to shareholder.

Providers of capital

Users of Capital

Movement of funds through financial markets. Providers of capital have a direct claim on the users of capital (i.e. stocks, you have direct claim on assets/earnings of company)

Finance through Financial Intermediaries. Intermediaries (i.e. banks) act as middleman between savers and spenders (i.e. deposits to loans)

Match savers to borrowers and monitor borrowers behavior and financial health.

Collect deposits from savers and transform into loans for borrowers. Saver has claim on the bank through the deposit and the bank has claim on borrower through the loan (indirect).

Member owned & sometimes member run. Specialize in mortgages and loans to their members.

Banks must pay depositors and other lenders regardless if borrowers default. If they can't collect from borrowers, they must pay depositors/lenders from owner's capital.

Help individuals & companies offset risk.

Two main types are Property & Casualty Insurance & Legal Liability & Life Insurance


They connect buyers of insurance with providers of capital that are willing to bear the insured risks

Cover assets such as homes, cars, and businesses

Pay out a sum of money upon death or serious injury of the person insured

• 1. Fraud
• 2. Moral Hazard
• 3. Adverse Selection

Occurs when people deliberately cause or falsely report losses to collect insurance settlements

Occurs when people are less careful about avoiding losses once they have purchased insurance.

Occurs when only those who are most at risk buy insurance, causing insured losses to be greater than average losses

Efficient allocation of scare resources to their most productive uses

• 1. Which goods & services should be produced
• 2. How should the goods & services be produced
• 3. Who should receive goods & services that are produced?

Economic system that promotes private ownership as the means of production & markets as the means of allocating scarce resources.

• 1. Helps investors collect, analyse data about economies & information about individuals, companies & governments
• 2. Provides liquidity

Refers to the ease of buying or selling an asset without affecting its price. Highly liquid markets allow investors to complete a transaction quickly and to know they are getting a fair price

Represent a claim on the money generated by a large number of mortgages that have been grouped together (securitization). Investors receive interest paid by borrowers on the mortgages

Effect of uncertain future events on an organization

Laws are passed by a legislative body (Congress)

Regulations are created by agencies (SEC)

• 1. Prevent fraud
• 2. Promote investment industry participants
• 3. Promote integrity, transparency, fairness in financial markets

Organised & regulated financial markets that allow buyers and sellers to trade securities with each other

Financial intermediaries that have expertise in assisting companies and governments raise capital. They help companies organize equity & dept issuance.

Sell-side analysts

Work for organization selling the securities.

Collect & analyze information about the company and its competitors and prepare a detailed report that can be shared with potential investors

Organizations that invest for their own mission or on behalf of others.

• Own mission:
• 1. Pension plans
• 2. Endowment funds
• 3. Foundations
• 4. Sovereign Wealth Funds

• Behalf of others:
• 1. Investment firms
• 2. Banks, Insurance companies

Hold and manage invesment assets for the benefit of future & already retired people (beneficiaries)

Long-term funds of not-for-profit institutions (universities, colleges, museums, theaters, opera, hospitals, clinics)

Grant making institutions funded by financial gifts & by the investment income that they produce.

Investment of government surpluses. Surpluses come by collecting taxes in excess of spending needs, selling natural resources, financing the trade of goods & services

Facilitate trading.

Act as Agents - They do not trade directly with investors, they help bring together buyers with sellers.

Facilitate Trading

Act as Principals - Use their own accounts and their own capital to trade with buyers and sellers (proprietary trading)

'Make Markets' by acting as buyers when investors want to sell and as sellers when investors want to buy.

Provide liquidity and help reduce transaction costs

• 1. Brokers
• 2. Dealers
• 3. Clearing Houses
• 4. Settlement Agents

Confirm & settle trades after they have been agreed on.

Employed by institutional investors to review potential investments. Work for the organization buying the securities.

• 1. Competition - innovative offerings, pricing, performance
• 2. Technology - decreased trading costs, increased trading capacity. Innovation in offerings (robo)

• 1. Globalization
• 2. Regulation

Efficiently matches those who need money with those who want to invest, minimizing costs and putting money at its most productive uses.