CFA Fundamentals 1

  1. Financial Services Industry
    Offers a range of products and services to savers & spenders and helps channel funds between them.
  2. Assets
    Items that have value and include real assets & financial assets
  3. Real Assets
    Physical assets such as land, buildings, machinery, cattle, and gold

    Company's 'Factors of Production' (physical capital)
  4. Financial Assets
    Claims on real or other financial assets (share of stock is claim on company's assets & earnings)
  5. Debt Security
    Loans that lenders make to borrowers
  6. Equity Security
    Stocks. Represent ownership of company. Company has no obligation to repay the amount paid for the shares nor to pay dividends to shareholder.
  7. Savers
    Providers of capital
  8. Spenders
    Users of Capital
  9. Direct Finance
    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)
  10. Indirect Finance
    Finance through Financial Intermediaries. Intermediaries (i.e. banks) act as middleman between savers and spenders (i.e. deposits to loans)
  11. Financial Intermediaries
    Match savers to borrowers and monitor borrowers behavior and financial health.
  12. Banks, Depository Institutions (Indirect Finance)
    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).
  13. Co-operative / Mutual Bank
    Member owned & sometimes member run. Specialize in mortgages and loans to their members.
  14. Bank Responsibility
    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.
  15. Insurance Company
    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
  16. Property & Casualty Insurers
    Cover assets such as homes, cars, and businesses
  17. Legal Liability & Life Insurers
    Pay out a sum of money upon death or serious injury of the person insured
  18. Types of Insurance Issues (3)
    • 1. Fraud
    • 2. Moral Hazard
    • 3. Adverse Selection
  19. Insurance Fraud
    Occurs when people deliberately cause or falsely report losses to collect insurance settlements
  20. Moral Hazard
    Occurs when people are less careful about avoiding losses once they have purchased insurance.
  21. Adverse Selection
    Occurs when only those who are most at risk buy insurance, causing insured losses to be greater than average losses
  22. Goal of Economic System
    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?
  23. Capitalism
    Economic system that promotes private ownership as the means of production & markets as the means of allocating scarce resources.
  24. Investment Industry (2)
    • 1. Helps investors collect, analyse data about economies & information about individuals, companies & governments
    • 2. Provides liquidity
  25. 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
  26. Mortgage-Backed Securities
    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
  27. Risk
    Effect of uncertain future events on an organization
  28. Laws vs Regulations
    Laws are passed by a legislative body (Congress)

    Regulations are created by agencies (SEC)
  29. Laws & Regulations, meant to (3):
    • 1. Prevent fraud
    • 2. Promote investment industry participants
    • 3. Promote integrity, transparency, fairness in financial markets
  30. Stock Exchanges
    Organised & regulated financial markets that allow buyers and sellers to trade securities with each other
  31. Investment banks (merchant banks)
    Financial intermediaries that have expertise in assisting companies and governments raise capital. They help companies organize equity & dept issuance.
  32. Investment Bank Analysts
    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
  33. Institutional 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
  34. Pension Plans
    Hold and manage invesment assets for the benefit of future & already retired people (beneficiaries)
  35. Endowment Funds
    Long-term funds of not-for-profit institutions (universities, colleges, museums, theaters, opera, hospitals, clinics)
  36. Foundations
    Grant making institutions funded by financial gifts & by the investment income that they produce.
  37. Sovereign Wealth Funds
    Investment of government surpluses. Surpluses come by collecting taxes in excess of spending needs, selling natural resources, financing the trade of goods & services
  38. Brokers
    Facilitate trading.

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

    Act as Principals - Use their own accounts and their own capital to trade with buyers and sellers (proprietary trading)
  40. Dealers
    'Make Markets' by acting as buyers when investors want to sell and as sellers when investors want to buy.
  41. Facilitate Trading
    Provide liquidity and help reduce transaction costs

    • 1. Brokers
    • 2. Dealers
    • 3. Clearing Houses
    • 4. Settlement Agents
  42. Clearing Houses & Settlement Agents
    Confirm & settle trades after they have been agreed on.
  43. Buy-side Analysts
    Employed by institutional investors to review potential investments. Work for the organization buying the securities.
  44. Investment Industry Changes - Internal (2)
    • 1. Competition - innovative offerings, pricing, performance
    • 2. Technology - decreased trading costs, increased trading capacity. Innovation in offerings (robo)
  45. Investment Industry Changes - External (2)
    • 1. Globalization
    • 2. Regulation
  46. Financial Services Industry
    Efficiently matches those who need money with those who want to invest, minimizing costs and putting money at its most productive uses.
  47. Participants - Investment Industry
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  48. Participants - Investment Industry 2
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Card Set
CFA Fundamentals 1
CFA Fundamentals 1