SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT INTRODUCTION Main Concepts

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT INTRODUCTION

Main Concepts Real assets Financial assets Role of financial markets Agency problem Corporate governance Financial intermediaries Investment company Investment banker Pass-through security Securitization Primitive security Derivative security Money market instruments Bond market instruments

Types of stock and bond market indices Underwriting Seasoned issue Private placement Short sale Long position Short position Primary market Secondary market Third market Fourth market Insider trading Unit investment trust Managed investment companies Hedge funds Mutual funds International funds Index funds Exchange-traded funds

Real assets Financial assets Land, Claims buildings, equipment such as securities to the income generated by real assets

Role of financial markets Agency problem Risk Managers, allocation Consumption timing Separation of ownership and management who are hired as agents of the shareholders, may pursue their own interest instead.

Corporate governance Financial intermediaries Banks Investment companies Insurance companies Credit unions

Investment company Investment banker Pool Advise together and manage the money of many investors i. e. mutual funds the issuing firm on the prices it can charge for the securities issued, market conditions, and appropriate interest rates. i. e. Goldman Sachs

Pass-through security Securitization Backed i. e. by homogenous asset pools (i. e. mortgages) The purchaser receives all interest and principal payments. Mortgages are treated like other securities in financial markets.

Primitive security Derivative security Offers Yields returns based only on the status of the issuer ◦ Bond-interest payments: depend on the solvency of the issuing body. ◦ Dividend payments: depend on firm’s financial position. return that depend on additional factors pertaining to the prices of other assets (i. e. underlying asset).

Money market Maturity: Money market instruments less than one year Short-term fixed income market Treasury bill Certificate of deposit Commercial paper Bankers’ acceptances Eurodollars Repos and reverses

Bond market Long-term market Bond market instruments fixed income Treasury notes and bonds International bonds Municipal bonds Corporate bonds Mortgage-backed securities

Types of stock and bond market indices Underwriting Price-weighted The index Value-weighted index Equally-weighted index role of investment bankers in the IPO process. Seasoned Issue: all issues after IPO

Private placement Short sale Opposite Allows of public offering Selling shares directly to to a small group of institutional or wealthy investors to profit from a decline in a security’s price. The investor borrows a share of stock from a broker and sells it. The short-seller must purchase a share of the same stock in the market to replace the share that was borrowed (covering the short position).

Long position Short position Purchase Sell

Primary market Secondary market Where the new issue takes place. trading of alreadyissued securities takes place.

Third market Fourth market Trading Direct of exchangelisted securities on the over-the-counter market trading between investors in exchangelisted securities without benefit of a broker OTC No membership requirements for trading No listing requirements for securities

Insider trading Unit investment trust Private Pools information held by officers, directors, or major stockholders that has not yet been given to the public. of money invested in a portfolio that is fixed for the life of the fund.

Managed investment companies Hedge funds Bo. D Are of the fund (elected by shareholders) hires a management company to manage the portfolio Closed-end ◦ Do not issue shares ◦ Liquidation: shares are sold to other investors Opened-end ◦ Issue shares ◦ Liquidation: shares are sold back to the fund not registered as mutual funds and not subject to regulatory authority Open to only wealthy or institutional investors Like mutual funds allow private investors to pool assets to be invested by a fund manager

Mutual funds International funds Open-end Invest investment companies in securities worldwide

Index funds Exchange-traded funds Tries Allow to match the performance of a broad market index Buys shares in securities included in a particular index in proportion to each security’s representation in that index investors to trade index portfolios just as they do shares of stock