Varanasi Stock：Introduction to financial market and financial securities

Overview:

Introduction of financial markets

Financial Securities

Primary and secondary markets

Trading

Margin

1 About Financial Marktes and Economy:

Capital flows: to companies with the best prospects

Consumption Timing: Use securities to store and transfer consumption

Allocation of Risk: Investors select securities consistent with taste for risk

Separation of Ownership and Management. Agency problems

1,1 The players:

Borrowers:债务人

Savers:债权人

Intermediaries: 金融中介是提供在金融市场中中介服务的个人，企业，或者机构，例如，等。金融中介通常有4个主要功能：1.设定价格和；2.提供和及时性;3.沟通和；4.保证和监控质量。

债务人是与债权人相对应的。如果甲方（可以是自然人、法人或政府等）有权要求乙方主张特定的或财产，则称甲方为债权人，称乙方为债务人。

一般情况下，债权人会基于债务人将向其偿付等价值的服务或财产的假定下而向乙方提供一定价值的财产或服务，而该假定一般是由合同支援的。比如甲方向乙方支付了货款购买乙方的产品，在乙方收到资金但尚未将产品交付甲方时，甲方为乙方的债权人，乙方为甲方的债务人

1,2 Three type of Financial Assets:

Fixed income or debt

Common stock or equity

Derivative securities

1,2,1 Fixed income:

Payments fixed or determined by a formula. E.g. mortgage loan, bank deposit.

Money market debt: short term, highly marketable, usually low credit risk

Capital market debt: long term bonds, can be safe or risky

Treasury notes and bonds{

Notes- maturities up to 10 years

Bonds- maturities from 10 to 30 years}

Semi-annual interest payments

Corporate Bonds(

Issued by private firms

Semi-annual interest payments

Subject to larger default risk than government securities

Options in corporate bonds: Callable/Convertible)

Mortgage-Backed Securities(

Proportional ownership of a mortgage pool OR a specified obligation secured by a pool

Produced by securitizing mortgages

Mortgage-backed securities are called 'pass throughts' because the cash flows produced by homeowners paying off mortgages are passed through to investors

Payments are not-so-fixed)

1,2,2 Common stock and equity

Common Stock is equity or ownership in a corporation(

Payments to stockholders are not fixed, but depend on the success of the firm. E.g. Apple common share

Residual claim

Limited Liability)

Preferred stock: Perpetuity(

Fixed dividends

Priority over common)

1,2,2,1 Stock Market Indexes - Dow Jones Industrial Average 道琼斯指数

Include 30 large blue-chip corporations

Computed since 1896

Price-weighted average

1,2,2,2 Stock Market Indexes - Standard & Poor's Indexes 标准普尔指数

S&P 500(

Boradly baseed index of 500 firms

Martet-value-weighted index)

1,2,2,3 Stock Market Indexes - NASDAQ 纳斯达克指数

1,2,2,4 Investors can base their portfolios on an index:

Buy an index mutual fund

Buy exchange traded funds(ETFs)

1,2,3 Dervaties

Value derives from prices of other securities, such as stocks and bonds

Used to transfer risk. (E.g. option to secure oil prices or dollar exchange rate)

Option: Right, but not obligation, to buy or sell

Futures Contract: Obliged to make or take delivery

2,1 How Firms Issue Securities

Primary Market:

Firms issue new securities,

Investors get new securities, firm gets funding

Secondary Market

Investors trae previously issued securities among themselves

2,2 Initial public Offering(IPO)

Road shows to publicize new offering

Book building to determine demand for the new issue

Degree of investor interest in the new offering probides valuable pricing information

2,3 Trading in secondary market

Bid Price

Bid prices are offers to buy. In dealer markets, the bid price is the price the dealer is willing to buy. Investors "sell to the bid"

Bid-Ask spread is the profit for making a market in a security

Ask Peiw

Ask prices represent offers to sell. In dealer markets, the asked price is the price at which the dealer is willling to sell. Investors pay the asked price to buy the security.

3,1 Types of orders

Market Order: Executed immediately Trader receives current market price

Price-contingent Order: Traders specify buying or selling price.

A large order may be filled at multiple prices

3,2 Trading Costs:

Brokerage Commision: fee paid to broker for making the transaction.

Explicit cost of trading

Full Service vsVaranasi Stock. Discount brokerage

Spread: Difference between the bid and asked prices

Implicit cost of trading

3,3 Shor Sales

Purpose: to profit from a decline in the price of a stock or security

Machanics:

Borrow stock through a dealer

Sell it

Closing out the position: buy the stock and return to the party from which it was borrowed

4,1 Overview of financial markets:

Financial assets{

Direct investing{

Money market instruments

Capital market instruments{

Fixed income instruments

Equity instruments}

Derivative instruments}

Indirect investing(e.g. mutual funds)}

4,2 Rates of returns versus time for major security types

4,3 Buying on Margin

Borrowing part of the total purchase price of a position using a loan from a broker

Investor contributes the remaining portion

Margin refers to the percentage or amount contributed by the investor

Your profit when the stock apprciates

4,4 Example

Initial Conditions:

Share price $100

60%　　　　　 Initial Margein

40%　　　　　 Maintenance Margin

100　　　　　 Shares Purchased

Initial Position:Lucknow Investment

Stock $10,000　　Borrowed $4,000

Equity $6,000

Maintenance Margin

Stock price falls to $70 per share

New Position:

Stock $7,000　　Borrowed　$4,000

Equity　　 $3,000

Margin% = $3,000/$7,000 = 43%

How far can the stock price fall before a margin call?

Let maintenance margin = 30%

Equity = 100P - $4000

Percentage margin = (100P - $4000)/100P

= 0,30

Solve to find:

P = 57,14

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