Financial Markets & Investments: Direct Finance, Ethics, Macroeconomics, Bond Investments, Appunti di Economia

Scarica Financial Markets & Investments: Direct Finance, Ethics, Macroeconomics, Bond Investments e più Appunti in PDF di Economia solo su Docsity! Chapter 1 The investment industry The financial system helps link savers who have money to invest and spenders who need money. Savers include individuals (households), companies and governments that have money to invest. Saver: colui che ha tenuto i soldi e li vuole spendere/ investire. Spender: colui che ha bisogno di soldi. Savings can be invested in a wide range of assets (investimento), and are divided in two types: - Real assets, physical assets, such as land, buildings, machinery; often referred to as physical capital. Land, buildings, gold. - Financial assets, claims on real or financial assets. For ex a share of stock that represents ownership in a company. This share gives its owner, who is called a shareholder, a claim to some of the company’s assets and earnings. Portfolio is an investor’s total holdings (partecipazione totale dentro un’azienda di cui si hanno delle azioni) of financial assets. Financial assets that can be traded are called securities. Divisi in due categorie: -debt securities: loans that lenders make to borrowers. They are also known as bonds, investors in bonds are referred to as bondholders -equity securities or stocks, or shares. Shareholder have ownership in a company. Shareholders expect to earn a return by being able to sell their sells at higher price. Direct finance Financial markets: places where buyers and sellers trade securities (financial assets). The movement of funds through financial markets is called direct finance because the providers of capital have a direct claim on the users of capital. Ex: borrow from investors. Brokers, dealers and investment bankers play important roles in direct financing. Indirect finance Providers and users of capital often rely on financial intermediaries to find each other and ti channel funds between each other. Ex: borrow from a bank. Financial institutions Financial institutions are types of financial intermediaries. Their role is to collect money from savers (investitori) and to invest in financial assets. Banks Banks collect deposits from savers and transform them into loans to borrowers, in doing so, they indirectly connect savers with borrowers. Banks are also called deposit-taking institutions because they take deposits. Banks vary whom they serve and how they are organized. Building societies (loan assosiation) specialise in financing long-term residential mortgages (mutui). Retail banks provide banking products and services to individuals and small business. These products and services include checking and savings accounts, debit and credit cards and mortgage and personal loans. Co-operative and mutual banks are financial institutions that their members own and sometimes run. They may specialise in providing mortgages and loans to their members. Insurance companies Insurance companies help individuals and companies offset the risks they face. If the insured risks materialize, the insured individual or company makes a claim to the insurance company and collects the insurance settlement. There are two main types of insurance companies: - property and casualty insurers that cover assets such as homes, cars and businesses - Legal liability and life insurers that pay out a sum of money upon death or serious injury of the person insured. Insurers are among the largest investors. They usually invest a significant portion of the premiums they received from the buyers of insurance contracts in financial markets in order to meet the cost of future claims. The investment industry The investment industry is a subset of the financial services industry. It comprises all the participants that are instrumental in helping savers invest their money and helping spenders raise capital in financial markets. Raccoglie: investment banks, exchanges, brokers, dealers, planners, analysts. The company contacts an investment bank to help it. Investment banks, also known as merchant banks, are financial intermediaries that have expertise in assisting companies and governments raise capital. Investment banks help companies organiseequity and debt issuances—that is, the sale of shares and bonds to the public. In the case of the Canadian company, the equity issuance is called an initial public offering (IPO) because it is the first time the company sells shares to the public. Institutional investors that invest to advance their missions include the following: ■ Pension plans, which hold and manage investment assets for the benefit of future and already retired people, called beneficiaries. ■ Endowment funds, which are long- term funds of not- for- profit institutions, such as universities, colleges, schools, museums, theatres, opera companies, hospitals, and clinics. ■ Foundations, which are grant- making institutions funded by financial gifts and by the investment income that they produce. ■ Sovereign wealth funds, which typically invest a government’s surpluses. Governments may accumulate surpluses by collecting taxes in excess of current spending needs, by selling natural resources, or by financing the trade of goods and services. These surpluses are usually invested. Chapter 2 Ethics and investment professionalism Introduction Ethics play an essential role in protecting financial market integrity and the functioning of the investment industry. Financial market integrity refers to financial markets that are ethical and transparent and provide investor protection. Trust in the investment industry is enhanced when workers in the industry make decisions that are ethically sound. The creation and maintenance of trust depends on the behaviour, actions, and integrity of entities participating in the financial markets. Rules are important to the effective functioning of financial markets too; however, rules are unlikely to cover every problematic situation encountered. An individual’s ability to identify, develop, and apply ethical standards when there are no clear- cut rules is, therefore, critical. In the end, trust depends on individuals choosing to comply with rules and to act ethically. Ethical standards, and some professional standards, are based on principles that support and prove desired values or behaviours. Ethics is defined as a set of moral principles, or the principles of conduct governing an individual or a group. Professional organizations, such as CFA institute, establish codes of ethics and professional standards based on fundamental ethical principles to guide practice. Ethics and rules are intertwined物ethical standards help guide the development of rules, and rules help individuals and groups. A culture of integrity based on ethical standards can be built and developed at a personal and business level by applying the following four- step process, as suggested by Meder. This process can be adapted to be relevant for anyone: 1 Set high standards and put them in writing, 2 Get adequate and ongoing training on professional and ethical standards, 3 Assess the integrity of individuals and groups you encounter, and 4 Take action when breaches of integrity and ethical standards are observed. These steps help individuals to identify, assess, and deal with ethical dilemmas. Ethical dilemmas are situations in which values, interests, and/or rules potentially conflict. Sometimes, the ethical dilemma and the appropriate ethical response seem obvious. Why ethical behaviour is important Global financial markets have grown in size and complexity over the last few decades. Such growth and increased complexity increase the likelihood of ethical dilemmas occurring. The decision and action of all the individuals in the investment industry may directly or indirectly affect client, employers and co-workers. So these individuals have a responsibility to male ethical decisions and to act appropriately. They have to be trustworthy. For example, when investors hear about insider trading (trading while in possession of information that is not publicly available and that is likely to affect the price, often referred to as material, non- public information) or misrepresented financial reports, it brings into question the integrity and fairness of financial markets and lowers public trust and investor confidence in them. Factors affected by Ethical Standards in the Investment Profession Obligations of employees in the investment industry Failure of investment professionals to meet these obligations may adversely affect clients, employers, co-workers, and even the financial system as a whole. Obligations to Clients The client relationship is critical to the functioning of the investment industry. Therefore, all individuals working in the investment industry, whether involved directly or ndirectly with clients, have an obligation to act competently and carefully when fulfilling their responsibilities. Conflict of interest. Identifying and managing conflicts of interest is a significant challenge. A conflict of interest arises when either the employee’s personal interests or the employer’s interests conflict with the interests of the client. Conflicts of interest can also arise when the employee’s and the employer’s interests conflict. Individuals working in the investment industry are expected to place the client’s interests above their own and their employer’s interests. For example: - an adviser identifies a number of products that are suitable for a client. The adviser may be tempted to recommend the product that generates the highest commission to the adviser when some of the other products would actually be better suited to the client’s investment goals. In this conflict of interest, the adviser may inappropriately make a decision based on adviser interest and not act in the client’s best interest. - Efforts to generate excessive commissions - Insider trading: attempts to benefit from material nonpublic information - Front Runnng: placing a personal order ahead of a client’s order. Before executing the client’s order, the broker executes a personal buy order in order to benefit form increasing market prices caused by the client’s large buy order. The exception to the rule that those working in the investment industry should put the interests of a client first is when this would harm the integrity of financial markets. Conflicts of interest are inevitable. They present ethical dilemmas that need to be appropriately dealt with. Depending on the circumstances, they can be dealt with in different ways, like rejecting an assignment. Obligations to Employers Obligations to employers include providing services as agreed on in an employment contract, following or executing supervisory directives as required, and maintaining professional conduct. Obligations also include loyalty, professional competence, and care. Loyalty, in the context of the employment relationship, incorporates the expectation that employees will work diligently on behalf of their employer, will place their employer’s interests above their own, and will not misappropriate company property. Misappropriation of company property, whether small or large in monetary terms, is unethical. Another aspect of loyalty is drawing attention to possible conflicts of interest to prevent loss of client trust. Employers have also to carry out responsibilities with professional competence and care. Obligations to Co-Workers Individuals in the investment industry are obliged not only to treat clients and their employer with fairness and respect but also to apply the same principles to their co-workers. They should: • Support professional development • Promote and follow ethical practices Some employees responsibilities in a company may include a supervisory role, which includes ensuring compliance with ethical, legal, professional, and organizational standards. Identifying your obligations 1 What is my role in the company and in what way do I contribute to its success? 2 To whom do I owe a duty or an obligation? 3 What potential individual and organisational conflicts of interest should I be aware of? 4 What measures do I need to take to ensure I have sufficient competence to fulfil my role? 5 What supervision can I expect? These questions are intended to identify major obligations, but they are not comprehensive. They can be adapted to identify and consider standards applicable to any employee’s work environment. Ethical standards Laws and regulations help to ensure that those working in the investment industry fulfil their obligations. They also help protect the integrity of the financial system and promote fairness and efficiency of financial markets. However, laws and regulations alone are not sufficient to protect the financial system. The need for ethical standards is apparent in situations in which vague or ambiguous legal rules provide room for unethical behaviour that could affect the integrity of the investment industry and result in a loss of clients and/or investor’s trust. To protect the financial system in these cases, ethical standards should guide the behaviour go market participants. The principles that are in codes of ethics and professional standards should help guide the behaviour of industry participant and allow them to adapt to a continuously changing investment system. Employers • Loss of reputation. Because clients associate a company’s employees with the company’s brand, illegal or unethical conduct can result in a loss of company reputation that can damage or destroy current and future client relationships. • Legal liabilities. Responsabilità legali. Individuals • Legal, professional, personal and economic consequences. For the individual, the legal, professional, personal, and economic consequences for violating ethical standards can be significant. The consequences can include expenses to defend a prosecution, fines, imprisonment, and loss of current and future employment in the investment industry. Una delle cose più importanti è che si perde la reputazione. Scenario: Imagine a mid-sized technology company, TechCorp, that has built a reputation for innovation and integrity over the years. However, in recent times, a senior manager in the company's procurement department, John, decides to engage in unethical behavior. Unethical Conduct: John, motivated by personal financial gain, starts accepting bribes from suppliers in exchange for awarding them lucrative contracts. He does so secretly and manipulates the procurement process to favor these suppliers, even though they may not offer the best products or prices. Consequences for Employers: 1. Reputation Damage: TechCorp's reputation takes a significant hit. This incident tarnishes its image in the eyes of customers, shareholders, and the public. 2. Legal Consequences: TechCorp becomes the subject of regulatory investigations and potential legal action. 3. Financial Losses: TechCorp suffers financial losses due to overpaying for products and services from the suppliers involved in the unethical conduct. 4. Employee Morale: Employees within the company may feel demoralized. 5. Loss of Talent: TechCorp may lose valuable talent, including ethical employees who do not want to be associated with an organization tainted by unethical behavior. Framework for ethical decision making Given the potential consequences of unethical behaviour, it is important that individuals use a framework to help them make ethical decisions. The four- step process identified by Alan Meder, CFA (discussed in the Introduction) represents a simple and useful framework. A more detailed framework is shown in Exhibit 5: Chapter 3 Rules are important to the investment industry. Without rules, customers could be sold unsuitable products and lose some or all of their life savings. Customers can also be harmed if a company in the investment industry misuses customer assets. Furthermore, the failure of a large company in the financial services industry, which includes the investment industry, can lead to a catastrophic chain reaction that results in the failure of many other companies, causing serious damage to the economy. Regulations are rules that set standards for conduct and that carry the force of law. They are set and enforced by government bodies and by other entities authorised by government bodies. This enforcement aspect is a critical difference of regulations with ethical principles and professional standards. More important failure to comply with regulations can harm other participants in the financial markets as well as damage trust in the investment industry and financial markets. These company rules are often called corporate policies and procedures and are intended to establish desired behaviors to ensure good business practices. - Regulation is one of the key forces driving the investment industry. - Regulation is more important because it attempts to prevent, identify, and punish investment industry behaviour that is considered undesirable. - Regulations are set and enforced by government bodies and by other entities authorised by government bodies. - It is important that all investment industry participants comply with relevant regulation Objectives of regulation Regulators act in response to a perceived need for rules. Understating the objectives of regulation makes it easier for industry participants to anticipate and comply with regulation. The broad objectives 1. Protect consumers. Consumers may mot have the skill or the information needed to determine the quality of financial products or services. Regulators seek to protect consumers from abusive and manipulative practices, such as fraud, or selling a high-risk investments. 2. Foster capital formation and economic growth. Financial markets allocate funds from the investors to the users of capital. The allocation of capital to productive uses is essential for economic growth. Regulation seek to ensure healthy financial markets in order to foster economic development and reduce risk in financial markets. 3. Support economic stability. The higher proportion of debt funding used in the financial services industry and the interconnections between financial service industry participants create a risk of systemic failure. Regulators seek to ensure that all kind of companies in the financial services industry do not engage in practices that could disrupt the economy. 4. Ensure fairness. All markets participants do not have the same information, which can lead to disadvantages and harm economic growth. Regulators attempt to deal with these asymmetries by requiring fair and full disclosure of relevant information on a timely basis and by enforcing prohibitions on insider trading. They seek to maintain fair and orderly markets in which no participant has an unfair advantage. 5. Enhance efficiency. Regulations that standardize documentation or how to transmit information can enhance economic efficiency by reducing duplication and confusion. 6. Improve society. Governments may use regulations to achieve social objectives such as increasing the availability of credit financing to a specific group, or prevent criminals from using companies in the financial services industry to transfer money from illegal operations to other, legal activities (money laundering). Regulations help prevent money laundering and detect criminal activity. The results of a regulatory failure can have a variety of consequences: • The results of a regulatory breakdown can harm customers and counterparties as well as damage trust in the financial services industry, which includes the investment industry. • Customers may lose their life savings or could be harmed if an investment firm misuses customer assets. • Furthermore, the failure of one large company in the financial services industry can lead to a catastrophic chain reaction (contagion) that results in the failure of many other companies, causing serious damage to the economy. A typical regulatory process The processes by which regulations are developed vary widely from jurisdiction to jurisdiction.The image shows steps in a typical regulatory process, from the need for regulation to its implementation and enforcement. Market transparency. Information about what other investors are willing to pay for a security, or the price they just paid, is valuable to investors because it helps them assess how much a security is worth. Disclosure triggers. A company may be exposed to various types of compulsory regulatory disclosure requirements. Stock exchanges and market regulators typically have a range of disclosures, which may be required as soon as a trigger event occurs or a threshold is reached. There may be significant disclosures designed to inform the market of potential takeover activity, directors’ dealings in shares of the company, or short positions. Sales practice rules Fees. Regulators may impose price controls to limit the commissions. Information barriers. Regulators attempt to resolve conflicts of interest by requiring firms to create barriers between investment banking and research. Suitability standards. Regulation seeks to hold those in the investment industry accountable for the advice that they give to their clients. Any advice should be suitable for the client. Restricions on self-dealing. Self-dealing creates a conflict of interest because firm’s interest may differ form those of the consumer. Regulators may impose “best execution” requirements, require disclosure of the conflict, or ban self-dealing with costumer. Trading rules Market standards. Government regulation can be used to set, for example, the stan- dard length of time between a trade and the settlement of the trade (typically three business days for equities in most global markets). Market manipulation. Regulators attempt to prevent and prosecute market manip- ulation. Market manipulation involves taking actions intended to move the price of a stock to generate a short- term profit. Insider trading. When some participants have an unfair advantage over other participants Because material non-public information flows through companies in the financial services industry about the financial condition of their clients and their trading, regulators often expect companies to have policies and procedures in place to restrict access to such information and to deter parties with access from trading on this information. Front running. Front running is the act of placing an order ahead of a customer’s order to take advantage of the price impact that the customer’s order will have. For example, if you know a customer is ordering a large quantity that is likely to drive up the price, you could take advantage of this information by buying in advance of that customer’s order. Brokerage practices. Pratiche di intermediazione. In some countries, investment managers may use arrangements in which brokerage commissions are used to pay for external research. Regulators may have regulations regarding the use of such arrangements because client transactions could be directed to gain access to research rather than being used in clients’ interests. Other types of regulation - proxy voting rules - Anti-money-laundering rules - Business continuity planning rules Company policies and procedures Companies within the investment industry, like all companies, are expected to have policies and procedures (also referred to as corporate policies and procedures) in place to ensure employees’ compliance with applicable laws and regulations. Policies are principles of action adopted by a company. Procedures are what the company must do to achieve a desired outcome. Although company policies and procedures do not have the force of law, they are extremely important for the survival of companies. Policies and procedures establish desired behaviours, including behaviours with respect to regulatory compliance. Policies and procedures also guide employees with matters outside the scope of regulation. Supervision within companies Hiring and training Continuing education Documentation Compensation plans Bonuses can affect behavior Employee behavior. Bonuses for reaching target sales levels may motivate employees to make more sales, but they can also motivate employees to break rules and engage in deception in order to make those sales. Procedures for handling violations Consequences of compliance failure Chapter 4 Economics Economics is the study of production, distribution, and consumption or the study of choices in the presence of scarce resources, and it is divided into two broad areas: microeconomics and macroeconomics. Microeconomics is the study of how individuals and companies make decisions to allocate scarce resources, which helps in understanding how individuals and companies prioritise their wants. Macroeconomics is the study of an economy as a whole. Supply refers to the quantity of a product or service sellers are willing to sell, whereas demand refers to the quantity of a product or service buyers desire to buy. The interaction of supply and demand is a driving force behind the economy and is part of the “invisible hand”1 that, over time, should lead to greater prosperity for individuals, companies, and society at large. Demand and supply Buyers demand a product, and sellers supply the product. Consumers buy products, such as cars, books, and furniture, from manufacturers and retailers, who sell them in markets. These markets can take the form of physical structures, such as supermarkets or shops, or they can be virtual, internet- based markets, such as eBay or Amazon. Properly functioning markets are essential to capitalism because the interaction of buyers and sellers determines the price and quantity of a product or service traded. Demand When economists refer to demand, they mean the desire for a product or service coupled with the ability and willingness to pay a given price for it. Consumers will demand and pay for a product as long as the perceived benefit is greater than its cost or price. The law of Demand It is logical that if the price of a product goes up, consumers will normally buy less of the product. Quantity demanded and price of a product are usually inversely related, which is known as the law of demand. Economists term this satisfaction of want as utility, utility is a measure of relative satisfaction, like pizza. According to the law of diminishing marginal utility, the marginal satisfaction derived from an additional unit of a product decreases as more of the product is consumed. Ad esempio se mangio uno slice di pizza a pancia vuota me lo gusto di più che se mangio il secondo slice a pancia già un po’ occupata. The Demand Curve As the price of pizza decreases, the quantity the individual is willing to buy increases. As illustrated in Exhibit 5, the interaction between the demand and supply curves determines the equilibrium price of a product. The equilibrium price (EP) is the price at which the quantity demanded (D) equals the quantity supplied (S). In other words, it is the point at which the demand and supply curves intersect. Se il prezzo più alto del prezzo di equilibrio porterebbe le aziende ad avere i magazzini pieni, spingendoli ad abbassare il prezzo per svuotare i magazzini. Al contrario, se il prezzo diminuisce, le aziende non avranno cosi tanto interesse a vendere ma i buyer vorranno comprare, per incontrare queste richieste, le società venderebbero fino all’esaurimento scorte per poi rialzare $. I fattori che influenzano questo equilibrio sono legate ai complements, substitute e altre robe tipo advertisements o tasse. Shifts in the supply curve sono provocati da Production Costs, Technology and Taxes. Elasticities of Demand In economics, elasticity refers to how the quantity demanded or supplied changes in response to small changes in a related factor, such as price, income, or the price of a substitute or complementary product. Price Elasticity of Demand Price elasticity of demand allows for the comparison of the responsiveness of quantity demanded with changes in prices. Ci sono due tipi: Own Price Elasticity of Demand The own price elasticity of demand is the percentage change in the quantity demanded of a product as a result of the percentage price change in that product. It is calculated as the percentage change in the quantity demanded of a product divided by the percentage change in the price of that product. Price elasticity is unit free, as are other elasticity concepts. Own price elasticity of demand is usually negative reflecting the law of demand which is demand inversamente proporzionale al prezzo. Products for which demand increases as price increases have positive own price elasticities. This result usually indicates that the product is a luxury product. For luxury products, such as expensive cars, watches, and jewellery, an increase in price may lead to an increase in quantity demanded. Uniform, non- differentiated products, such as fuel or flour, are typically products with highly negative own price elasticities of demand. Perfectly inelastic demand indicates that quantity demanded will not change at all, even in the face of large price increases or decreases. (Droghe o iPad). Cross - Price Elasticity of Demand Own price elasticity of demand shows the change in the quantity demanded of a product as a result of a price changes in that product. This is known as cross- price elasticity of demand. It is the percentage change in the quantity demanded of a product in response to a percentage change in the price of another product. A negative cross- price elasticity of demand, as in the case of coffee and cream, indicates complementary products. For complementary products, an increase in the price of one product is usually accompanied by a reduction in the quantity demanded of the other product. Conversely, a positive cross- price elasticity of demand characterises substitute products in many, but not all, cases. Own and cross- price elasticities of demand are important in understanding the demand for products. If a product is easy to substitute because similar products exist, then the own price elasticity will be large and negative—that is, demand is elastic. If a product has no immediate substitutes, such as a new drug, or if use of the product is deeply entrenched by habit, such as tobacco, demand is inelastic. Elasticity of demand helps market participants assess the effects of price changes. Investors and analysts use elasticity of demand to assess a company’s potential as an investment. Income Elasticity of Demand Income elasticity of demand is the percentage change in the quantity demanded of a product divided by the corresponding percentage change in income. It measures the effect of changes in income on quantity demanded of a product when other factors, such as the price of the product and the prices of related products, remain the same. Most products have positive income elasticities, meaning that as consumers’ income increases, they purchase a greater quantity of the product. As described in Section 2.1.3, products with positive income elasticities are called normal products. In contrast, if consumers purchase less of a product as their income increases, the income elasticity is negative and the products are called inferior products. Consumers demand fewer inferior products as their income increases and they substitute more expensive and desirable products, such as meat instead of potatoes or rice. Income elasticity of demand also enables investors to distinguish between luxuries and necessities. A luxury product usually has an income elasticity of greater than one. A necessity product may have an income elasticity of approximately zero. Demand will not change with a change in income. Luxury items may include foreign travel and a golf club membership. But what is perceived as a luxury item may change over time because income elasticities will change as a society’s income improves. So, although a smartphone may be a luxury product at a certain income level, it may become a necessity product at another. What determines the price elasticity? • Availability of close substitutes: Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others. • Necessities versus luxuries: N (L) tends to have inelastic (elastic) demands (doctor visits vs sailboats) • Time horizon: Goods to have more elastic demand over longer time horizons. How useful is price Elasticity The sign and magnitude of the own price elasticity helps a company set its pricing strategy. In setting prices, a company needs to know whether a small percentage increase in price will lead to a decrease in sales and if it does, whether it is a large or small percentage decrease in sales. • Cutting the price of a product whose own price elasticity is less than –1 tends to lead to an increase in total revenue; the decrease in price is more than offset by a greater increase in quantity. • By contrast, cutting the price of a product with inelastic demand leads to a decrease in total revenue because the percentage increase in quantity is less than the percentage decrease in price. Profit and costs of production Let’s move now our attention to a company’s production costs and how these costs influence the company’s profitability. This is important because investors and analysts need to assess a company’s potential to make profits. The cost to the company of producing an incremental or additional unit is known as the marginal cost. The amount of money a company receives for that additional unit is known as its marginal revenue. The general rule is that the marginal cost can be increased up to the point that it equals the marginal revenue. Producing to the point at which marginal revenue equals marginal cost will, in theory, maximise profit. Pricing Factors affecting pricing • Supply: does it have a unique characteristic or not? • Demand: if demand is greater than supply, competing products will benefit • Income levels and elasticity • Industry structure Industry Structure The market environment in which a company operates influences its pricing, supply, and efficiency. It may be categorized according to the degree go competition. At one extreme, where there is a high degree of competition, a market is said to be perfectly competitive. At the other extreme, where there is no competition, a market is said to be a monopoly. Most markets lie between these two extremes. 1. Perfect Competition. A perfectly competitive market consist of buyers and sellers trading a uniform product. No single buyer or seller can affect the market price by buying or selling etc. buyers in this market are said to be price takers. Market, research and development, sales promotion or advertising has no role in driving demand and setting prices. Barriers to entry are obstacles, such as licences, brand loyalty or natural resources that prevent the competitors from entering the markets. Here the barriers to entry are non-existent. 2. Pure Monopoly. Single company that produces a product for which there are no close substitutes. That means that there are also significant barriers to entry. 1. Exclusive ownership of a key resource: DeBeers controls about 80% of the world’s production of diamonds, exerting substantial influence over the market price of diamonds? 2. Government-created monopolies: patent and copyright laws are two examples of how the government creates a monopoly to serve the public interest. 3. Natural monopolies: when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms. E.g. of the distribution of water (the avg. total cost is lowest if a single firm services the entire market). 3. Monopolistic Competition. It’s a market where there are many buyers and sellers who are able to differentiate their products to buyers, but because of product differentiation, they are sold at a range of prices. No major barriers to entry. Each company may have limited monopoly because of the differentiation of its product. Inclusi ristoranti, bar hotels, clothing. Economic profit in the long-run is zero. 4. Oligopoly. Market is dominated by a small number of large companies because the barriers to entry are high. Economic profit in the long-run is positive. A cartel is a special case of oligopoly in which a group jointly controls the supply and pricing of products or services produced by the group. An example of a cartel is the Organization of the Petroleum Exporting Countries (OPEC), which sets the production and pricing of oil. (Short-run is a period when some factors of production are fixed and some are variable. Output can be increased only by increasing the application of the variable factor. In the short run, the scale of production remains constant. The long run is a period when all factors of production are variable.) Chapter 5 Macroeconomics Macroeconomics is the study of the economy as a whole. Macroeconomics considers the effects of such factors as inflation, economic growth, unemployment, interest rates, and exchange rates on economic activity. The effects of these factors on business, consumer, and government economic decisions represent an intersection of micro- and macroeconomics. Macroeconomic conditions affect the actions and behaviour of businesses, consumers, and governments. Investment professionals use macroeconomic data to forecast the earnings potential of companies and to determine which asset classes may be more attractive. An asset class is a broad grouping of similar types of investments, such as shares, bonds, real estate, and commodities. More details on these types of investments are provided in the Investment Instruments module. Gross domestic product and the business cycle “GDP” - Gross domestic product. Is the total value of all final products and services produced in a country over a period of time. GDP may also be referred to as total output. GDP per capita is equal to GDP divided by the population. This measure allows comparisons of GDP between countries or within a country over time. When GDP is adjusted for the size of population, smaller but relatively wealthy countries rise to the top of the list. Di conseguenza Norway is relatively wealthier than the average citizen of the United States. GDP can be calculated in two ways: C: Consumer spending I: Business or gross investment/spending G: Government spending (X-M): Exports minus imports (X-M): net exports Components of GDP Consumption: spending by households on goods (durable and non-durable) and services (intangible items such as hair cuts and medical care). Investment: purchases of goods that will be used in the future to produce more goods and services (such as capital equipment, inventories, and structures). Government purchases: spending on goods and services by governments including the salaries of government workers and spending on public works. Net exports: the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). GDP changes as the amount spent changes. If a change in GDP is solely the result of changes in prices with no accompanying increase in quantity of products and services purchased, then the economic production of the country has not changed. Similarly, Nominal GDP, which reflects the current market value of products and services, unadjusted for price changes, may over- or understate actual economic growth. Real GDP is nominal GDP adjusted for changes in price levels. Changes in real GDP, which reflect changes in actual physical output, are a better measure of economic growth than changes in nominal GDP. GDP deflator = Nominal GDP/Real GDP*100 Economic Growth Economic growth is measured by the percentage change in real output (usually real GDP) for a country. Real GDP measures the products and services available to the citizens of that country. Real GDP per capita is a useful measure to assess changes in wealth and living standards. GDP growth is determined by ■ growth of the labour force, which represents the increase of labour in the market; ■ productivity gains, which represent growth in output per unit of labour; and ■ availability of capital, which represents inputs other than labour necessary for production. Productivity is a function of the efficiency of a worker and also the availability of technology. More recently, computer technology has revolutionized business operations. If GDP grows at a faster rate than the population growth rate or if GDP shrinks at a lower rate than the population shrinkage rate, it will result in higher GDP per capita. Se il GDP cresce ad un ritmo più veloce della popolazione -> allora si otterrà il PIL pro capite più elevato perchè GDP/population. The Business (or Economic) Cycle Analysts and economists spend a great deal of energy trying to predict real GDP, which is affected by business cycles. Economy- wide fluctuations in economic activity are called business cycles. Although we refer to the fluctuations as cycles, they are neither smooth nor predictable. These cycles typically last a number of years. Economic activity may fluctuate in the short term though because of seasonal variations in output, but a true business cycle is a fluctuation that affects a large segment of the economy over a longer time period. There are different phases: Other changes in the Level of Prices Inflation is a key economic concern for investors. Three additional scenarios related to price level changes are deflation, stagflation, and hyperinflation. Monetary and Fiscal Policies Monetary policy refers to central bank activities that are directed toward influencing the money supply (the amount of money in circulation) and credit (the amount of money available for borrowing and at what cost or interest rate) in an economy. The ultimate goal is to influence key macroeconomic targets: ■ Output or GDP ■ Price stability ■ Employment Monetary Tools Open Market Operations involve the purchase and sale of government notes and bonds. The banks give up short-term government instruments for cash from the central bank, which puts more money in circulation. Central Bank Lending Rates An obvious expression of a central bank’s intentions is the interest rate it chargers on loans to commercial banks. This lending rate is the rate at which banks borrow directly from the central bank of the country. It is used to affect short- term interest rates as well as to indirectly influence longer- term and other commercial rates. Reserve Requirements The reserve requirement is the proportion of deposits that must be held by a bank rather than be lent to borrowers. By increasing the reserve requirement, central banks reduce access to credit in the economy because bank lending is reduced. Limitations of Monetary Policy The effectiveness of monetary policy is subject to debate. Economists who question its effectiveness cite evidence of slow growth in some economies where interest rates are very low. This result may occur because consumers and companies do not respond to lower interest rates by spending more. Instead, they may prefer to ■ add to their cash balances because they believe either that the economy will slow further and they need protective funds or that prices may drop and offer better purchase opportunities later. ■ pay down debt, in a process referred to as deleveraging. Fiscal Policy Fiscal policy involves the use of government spending and tax policies to influence the level of aggregate demand in an economy. An expansionary policy to stimulate a weak economy would reduce taxes and increase public spending. The effectiveness of these policies will vary over time and among countries depending on circumstances. Both fiscal and monetary policies have limitations: they are affected by time lags and the responses to and consequences of each may not be as expected. Chapter 6 Economics of International Trade International trade is the exchange of products, services, and capital between countries. Without international trade, consumers’ needs may not be fulfilled because people would only have access to products and services produced domestically. Imports and Exports Countries have been trading with each other for centuries, and the primary mode of international trade is imports and exports. Imports refer to products and services that are produced outside a country’s borders and then brought into the country. For example, many countries in the European Union import natural gas from Russia. Exports refer to products and services that are produced within a country’s borders and then transported to another country. For example, Japan exports consumer electronics to the rest of the world. The need for Imports and Exports Imports and exports are necessary for a variety of reasons, including the following: ■ Gain access to resources ■ Create additional demand for products and services ■ Provide greater choice to customers ■ Improve quality and/or reduce the prices of products and services A common reason for international trade is to gain access to resources for which there is no or insufficient supply domestically. International trade creates additional demand for products and services that are produced domestically. Per esempio vendere macchinari fuori Giappone con International Trade. Imported products and services may be less expensive and/or of better quality than domestically produced ones. Trends in Imports and Exports Two major trends have promoted international trade: fewer trade barriers and better transportation and communications. Trade barriers are restrictions, typically imposed by governments, on the free exchange of products and services. These restrictions can take different forms. Common trade barriers include the following: ■ Tariffs: Taxes (duties) levied on imported products and services. They allow governments not only to establish trade barriers, often to protect domestic suppliers, but also to raise revenue. ■ Quotas: Limits placed on the quantity of products that can be imported. ■Non- tariff barriers: These barriers include a range of measures, such as certification, licensing, sanctions, or embargoes, that make it more difficult and expensive for foreign producers to compete with domestic producers. countries that have a trade deficit because they import more than they export tend to have a current account deficit. Esiste un balance of trade (scambio di services and goods)/ net exports, e un current account balance: transfers between countries current account balance è inferiore, quindi net exports vince. Capital and Financial Account The current account indicates whether a country has a surplus or a deficit. ■ The capital account, which primarily reports capital transfers between domestic entities and foreign entities, such as debt forgiveness or the transfer of assets by migrants entering or leaving the country. ■ The financial account, which reflects the investments domestic entities make in foreign entities and the investments foreign entities make in domestic entities. Relationship between the Current Account and the Capital and Financial account The capital and financial flows move in the opposite direction of the goods and services flows that give rise to them. As stated earlier, the sum of the current account balance and the capital and financial account balance should in theory be equal to zero. If a country has a current account surplus, it should have a capital and financial account deficit of the same magnitude—the country is a net saver and ends up being a net lender to the rest of the world. Alternatively, if a country has a current account deficit, it should have a capital and financial account surplus of the same magnitude —the country is a net borrower from the rest of the world. Because measuring the items reported in the balance of payments is difficult, there is a need for a “plug” figure that makes the sum of all the money flows in and out of a country equal to zero. This plug figure is called errors and omissions. Current account deficits Is running a current account deficit a bad sign, and should all countries aim at maximising their current account balance? The answer to both questions is, not necessarily. First, the sum of the current account balances of all countries is, by definition, equal to zero. So, it is impossible for all countries to have a current account surplus. Second, a current account deficit must be put in context before drawing conclusions. • A developing country may run a current account deficit because it needs to import many products and services. • Alternatively, a mature economy may run a current account deficit because its consumption far exceeds its production and its ability to export. There is a long-running debate about the risk for a country of running a persistent current account deficit Some economists argue that as long as foreign entities are willing to continue holding the assets and the currency of a country with a current account deficit, then running a current account deficit does not matter. But if foreign entities become unwilling to hold these assets, they may start selling them, which will have a negative effect on the price of the assets and the value of the country’s currency (depreciation). Foreign currencies will get stronger relative to the other currency (appreciate). In response to countries selling US assets, the Federal Reserve Board (the Fed), which is the US central bank, may increase interest rates to encourage entities in other countries to invest in the United States. An increase in interest rates would increase the cost of financing for individuals, companies, and the government in the United States. The combination of lower asset prices, a weaker US dollar, and higher interest rates would likely hurt the US economy, potentially leading to a lower GDP, maybe even a recession, and higher unemployment. Foreign Exchange Rate System The rate at which one currency can be exchanged for another is called the foreign exchange rate or exchange rate, and it is expressed as the number of units of one currency it takes to convert into the other currency. International trade payments can be made in the country’s domestic currency or in a foreign currency. The prices change continuously depending on supply and demand. If a lot of people want to buy a particular currency, such as the euro, demand for the euro will increase and the price of the euro will rise. It will take more of the other currency to buy a euro. In this case, the euro is said to appreciate (get stronger) relative to other currencies. Alternatively, if a lot of people want to sell the euro, demand for the euro will decrease and the price of the euro will fall. It will take less of the other currency to buy a euro. In this case, the euro is said to depreciate (get weaker) relative to other currencies. There are three main types of exchange system: ■ Fixed rate ■ Floating rate ■Managed floating rate Currency Values Factors affecting exchange rates Major factors that influence the value of a currency include the country’s ■ Balance of payments. A current account deficit tends to lead to a depreciation of the domestic currency. ■ Level of inflation. High inflation tends to lead to a depreciation of the domestic currency. ■ Level of interest rates. Higher interest rates tend to lead to an appreciation of the domestic currency. ■ Level of government debt. High government debt tends to lead to a depreciation of the domestic currency. ■ Political and economic environment. Political instability and poor economic prospects tend to lead to a depreciation of the domestic currency. Relative Strength of Currencies The concept of purchasing power parity has long been used to explain relative currency valuations —that is, whether currencies are fairly valued relative to each other. Purchasing power parity is an economic theory based on the principle that a basket of goods in two different countries should cost the same after taking into account the exchange rate between the two countries’ currencies. Ad esempio se la macchina costa meno in Messico che in USA, sarà più conveniente andare in Messico, cambiare i dollari in pesos e comprare la macchina, facendo aumentare l’appreciation del pesos nei confronti del dollaro. Questo porterebbe anche all’incremento del Mexican retail charge. In contrasto, la domanda per le macchine in USA sarà più bassa. The fact that the same product sells for different prices presents an arbitrage opportunity—that is, an opportunity to take advantage of the price difference between the two markets. Anything that limits the free trade of goods will limit the opportunities people have to take advantage of these arbitrage opportunities and will influence currency valuations. Ci sono i tre esempi di questi tre limiti: Chapter 7 Financial Statements The company’s financial performance matters to investors because it affects the returns on their investments. Tax authorities are interested as well because they may tax the company’s profits. An investment analyst will scrutinise a company’s performance and then make recommendations to clients about whether to buy or sell the securities, such as shares of stocks and bonds, issued by that company. The primary summary of past performance is a company’s financial statements, which indicate, among other things, how successful a company has been at generating a profit to repay or reward investors. Financial statements are historical and forward- looking at the same time; they focus on past performance but also provide clues about a company’s future performance. These financial statements show the monetary value of the economic resources under the company’s control and how those resources have been used to create value. Reading a company’s financial statements can provide information on important matters such as how profitable the company is and how efficiently it manages its resources and obligations. Financial statements provide clues to the company’s future success by telling the story about its past performance. Roles of standard Setters, Auditors, and Regulators in Financial Reporting Standards for financial reporting are typically set at the national or international level by private sector accounting standard- setting bodies. One set of standards that details the “rules” of financial reporting is the International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB). As of 2013, most countries require or allow companies to produce financial reports using IFRS. In the United States, US- based publicly traded companies must report using US generally accepted accounting principles (US GAAP), but non- US- based companies may report using IFRS. There is a movement to have accounting standards converge and to create a single set, or at least a compatible set, of high- quality financial reporting standards worldwide. In countries that have not adopted IFRS, efforts to converge with or transition to IFRS are taking place. For example, a company may recognise more or less revenue—and thus show more or less profit— depending on the methods allowed by accounting standards and the company’s interpretation of these standards. Where there are alternative acceptable accounting methods, the choices of methods are reported in the notes to the financial statements. The notes accompany the statements and explain much of the information presented in the statements, as well as the accounting decisions behind the presentation. The notes are an aid to understanding the financial statements. Regulators support financial reporting standards by recognizing, adopting, and enforcing them and by implementing and enforcing rules that complement them. Before they can be published, the financial statements must first be reviewed by independent accountants called auditors. The auditor issues an opinion on their correctness and presentation, which indicates to the reader how trustworthy the statements are in reflecting the financial performance in the company. Note that an audit opinion is not a judgment on the company’s performance but on how well it accounted for its performance. Financial Statements #nota che: Assets: cosa possiede la compagnia Liabilities: cosa deve agli altri (debito/prestito) Equity: investimento degli azionisti A company is required to keep accounting records and to produce a number of financial reports, which include the following: ■ The balance sheet (also called statement of financial position or statement of financial condition) shows what the company owns (assets) and how it is financed. The financing includes what it owes others (liabilities) and shareholders’ investment (equity). ■ The income statement (also called statement of profit or loss, profit and loss statement, or statement of operations) identifies the profit or loss generated by the company during the period covered by the financial statements. ■ The cash flow statement shows the cash received and spent during the period. ■ Notes to the financial statements provide information relevant to understanding and assessing the financial statements. The Balance Sheet The balance sheet (also called statement of financial position or statement of financial condition) provides information about the company’s financial position at a specific point in time, such as the end of the fiscal year or the end of the quarter. Essentially, it shows ■ the resources the company controls (assets) ■ its obligations to lenders and other creditors, opposti di debitori (liabilities or debt), and ■ owner- supplied capital (shareholders’ equity, stockholders’ equity, or owners’ equity) The fundamental relationship underlying the balance sheet, known as the accounting equation: Total assets = Total liabilities + Total shareholders’ equity Total assets represent the resources available to the company for generating profit. Total liabilities plus shareholders’ equity indicate how those resources are financed—by creditors (liabilities) or by shareholders (equity). Assets: What the company owns Liabilities: What the company owes Equity: The owners Company’s assets are reported at historical cost Total shareholders’ equity = Total assets – Total liabilities Equity reflects the residual value of the company’s shares. This value is generally not the same as the company’s current market value, which is the value that the market believes the company is currently worth or how much investors are willing to pay to own the shares of the company. The balance sheet values are commonly known as the book values of the company’s assets, liabilities, and equity. Current asserts Current assets, which include cash; inventories (unsold units of production on hand called stocks in some parts of the world); and accounts receivable (money owed to the company by customers who purchase on credit, sometimes called debtors), are assets that are expected to be converted into cash, used up, or sold within the current operating period. Non- current assets (sometimes called fixed or long- term assets) are longer term in nature. Non- current assets include tangible assets, such as land, buildings, machinery, and equipment, and intangible assets, such as patents. These assets are used over a number of years to generate income for the company. The tangible assets are often grouped together on the balance sheet as property, plant, and equipment (PP&E). Non- current assets may also include financial assets, such as shares or bonds issued by another company. Other assets that might be included on a company’s balance sheet are long- term financial investments, intangible assets (such as patents), and goodwill. Goodwill is recognised and reported if a company purchased another company, but paid more than the fair value of the net assets (asset - liabilities) of the company is purchased. When a company purchases a long-term (non-current) asset, the purchase amount is capitalised and reported as an asset on the balance sheet. The company allocates the cost of that asset over the asset’s estimated useful life, a process called depreciation (or amortisation for intangible assets). • The amount allocated each year is called the depreciation (or amortisation) expense, and it is reported on the income statement as an expense. • Accumulated depreciation is the sum of the reported depreciation expenses for the particular asset. • Net book value is calculated as the gross value of the asset minus accumulated depreciation (or amortisation). Profit and Net Cash Flow The income statement shows a company’s profit, but profit is not the same as net cash flow—that is, how much cash the company generated during the period. Revenue is considered earned when a sales transaction is identified by certain conditions—for example, whether the products have been shipped to the customer. But the cash flow from the transaction—the cash received when the customer pays its bill—usually occurs later, a common situation when the customer buys on credit. In this case, there is initially revenue without cash. A company acquiring or producing a unique item for a customer may require payment before the sales transaction is completed and the revenue earned. In this case, there is cash without revenue. Likewise, an expense can be incurred and accounted for without being paid if a supplier extends credit, or an expense can be paid for before it is actually incurred (prepaid). Cash flow shows how much money moves in and out of your business, while profit illustrates how much money is left over after you've paid all your expenses. Statement: Cash flow is reported on the cash flow statement, and profits can be found in the income statement. The Cash Flow Statement The statement of cash flows (or cash flow statement) identifies the sources and uses of cash during a period and explains the change in the company’s cash balance reported on the balance sheet. The classification of cash flows as operating, investing, or financing is critical to show investors and others not only how much cash was generated, but also how cash was generated. Operating activities are usually recurring activities: they relate to the company’s profit- making activities and occur on an on- going basis. In contrast, investing and financing activities may not recur; the purchase of equipment or issuance of debt, for example, does not occur every year. The cash inflows and outflows of a company are classified and reported as one of three kinds of activities. I. Cash flows from operating activities reflect the cash generated from a company’s operations, its main profit- creating activity. Cash flows from operating activities typically include cash inflows received for sales and cash outflows paid for operating expenses, such as cost of sales, wages, operating overheads, and so on. II. Cash flows from investing activities are typically cash outflows related to purchases of long- term assets, such as equipment or buildings, as the company invests in its long- term resources. III. Cash flows from financing activities are cash inflows resulting from raising new capital (an increase in borrowing and/or issuance of shares) and cash outflows for payment of dividends, repayment of debt, or repurchase of shares. Links between Financial Statements Although each major financial statement—balance sheet, income statement, and cash flow statement—offers different types of financial information, they are not entirely separate. For example, the income statement is linked to the balance sheet through net income and retained earnings. The income statement is linked to the balance sheet in many ways. The revenues and expenses reported on the income statement that have not been settled in cash are reflected on the balance sheet as current assets or current liabilities. In other words, the revenues not yet collected are reflected in accounts receivable, and the expenses not yet paid are reflected in accounts payable and accrued liabilities. The balance sheet reflects financial conditions at a certain point in time, whereas the income and cash flow statements explain what happened between two points in time. Financial Statement Analysis Financial statement analysis involves the use of information provided by financial statements and also by other sources to identify critical relationships. These relationships may not be observable by reading the financial statements alone. The use of ratios allows analysts to standardise financial information and provides a context for making meaningful comparisons. In particular, investors can compare companies of different sizes as well as the performance of the same company at different points in time. Ratios (rapporti) help managers of the company or outside creditors and investors answer the following questions that are important to help determine a company’s potential future performance: ■ How liquid is the company? ■ Is the company generating enough profit from its assets? ■ How is the company financing its assets? ■ Is the company providing sufficient return for its shareholders? How liquid is the Company? In accounting, liquidity refers to a company’s ability to pay its outstanding obligationsin the short term. Two ratios commonly used in assessing a company’s liquidity. In contabilità, la liquidità si riferisce alla capacità di un'azienda di pagare le proprie obbligazioni a breve termine. Due indici comunemente utilizzati per valutare la liquidità di un’azienda sono: Liquidity ratios measure a company’s ability to meet its short term obligations. The current ratio measures the current assets available to cover one unit of current liabilities. A higher ratio indicates a higher level of liquidity; there is a greater availability of short- term resources to cover short- term obligations. The quick ratio, excludes inventories, which are the least liquid current asset. This ratio is a better indicator than the current ratio of what would happen if the company had to settle with all its creditors at short notice. A quick ratio of 1 or higher is often viewed as desirable. However, a high current or quick ratio is not necessarily indicative of a problem- free company. It may also indicate that the company is holding too much cash and not investing in other resources necessary to create more profit. Is the Company Generating Enough Profit from its Assets? A widely used ratio for measuring a company’s profitability is the net profit margin (profitto che rimane per gli azionisti). This ratio measures the percentage of revenues that is profit—that is, the percentage of revenues left for the shareholders after all expenses have been accounted for. Generally, the higher the net profit margin, the better. Another ratio used to assess profitability is return on assets (ROA). Return on assets indicates how much return, as measured by net income, is generated per monetary unit invested in total assets. Generally, the higher the return on assets, the better. The basic earning power ratio compares the profit generated from operations with the assets used to generate that income. Chapter 8 Quantitative Concepts Knowledge of quantitative (mathematically based) concepts is extremely important to understanding the world of finance and investing. Quantitative concepts play a role in financial decisions, such as saving and borrowing, and also form the foundation for valuing investment opportunities and assessing their risks. The time value of money and descriptive statistics are two important quantitative concepts. They are not directly related to each other, but we combine them in this chapter because they are key quantitative concepts used in finance and investment. The time value of money is useful in many walks of life: it helps savers to know how long it will take them to afford a certain item and how much they will have to put aside each week or month, it helps investors to assess whether an investment should provide a satisfactory return, and it helps companies to determine whether the profit from investing will exceed the cost. Time Value of Money Valuing cash flows, which occur over different periods, is an important issue in finance. You may want to know what your expected return is on an investment with specified cash flows at different points in time. These problems are known as “time value of money” problems because their solutions reflect the principle that the timing of a cash flow affects the cash flow’s value. Interest Borrowing and lending are transactions with cash flow consequences. the lender will receive money as repayment from the borrower in the form of interest. The lender will also receive back the money lent to the borrower. The money originally borrowed, which interest is calculated on, is called the principal. Interest is all about timing. The borrower pays a price for not being able to wait to have money and to compensate the lender for giving up potential current consumption or other investment opportunities; that price is interest. Interest is paid to compensate the lender for opportunity cost and risk. Opportunity cost is the value of alternative opportunities that have been given up by the lender, including lending to others, investing elsewhere, or simply spending the money. Opportunity cost can also be seen as compensation for deferring consumption. The longer the consumption is deferred, the more compensation (higher interest) the lender will demand. The risk è altrettanto importante, se so che un borrower farà piu fatica a ridarmi i soldi, e più è alto il tasso di interesse. Inoltre uno rischia pure che i soldi che riceverò in futuro abbiano meno valore in futuro -> più alto mi aspetto che l’inflazione salga e più alto sarà il tasso di interesse. From the borrower’s perspective, interest is the cost of having access to money that they would not otherwise have. An interest rate is determined by two factors: opportunity cost and risk. Simple Interest A simple interest rate is the cost to the borrower or the rate of return to the lender, per period, on the original principal (the amount borrowed). The cost or return is stated as a percentage rate of the original principal so the rates can then be compared, regardless of the amount of principal they apply to. Simple interest is not reinvested and it is always calculated on the amount of the original principal. If the interest earned is added to the original principal, the relationship between the original principal and its future value with simple interest can be described as follows: Future value = Original principal × [1 + (Simple interest rate × Number of periods)] To extend our deposit example: £100 × [1 + (0.10 × 2)] = £100 × (1.20) = £120. The value at the end of two years is £120. Compound interest Compound interest is often referred to as “interest on interest”. As opposed to simple interest, interest is assumed to be reinvested so future interest is earned on principal and reinvested interest, not just on the original principal. Io investo 100$, con 10% di interesse, dopo un anno io ottengo 10$ in più, ho 110$, ora calcolo per l’anno successivo lo stesso tasso di interesse ma ora non solo sui 100$ ma anche su quei 10 che ho guadagnato (quindi un euro in più perché 10% di 100 è 1). Compound interest is extremely powerful for savers; reinvesting the interest earned on investments is a way of growing savings Annual Percentage Rate and Effective Annual Rate Unless stated otherwise, interest rates are stated as annual rates. The rate quoted is often the annual percentage rate (APR), which is a simple interest rate that does not involve compounding. Another widely used rate is the effective annual rate (EAR). This rate involves annualising, through compounding, a rate that is paid more than once a year—usually monthly, quarterly, or semi- annually. Whenever an interest rate compounds more often than annually, the EAR is greater than the APR. More frequent compounding leads to a higher EAR. (Perchè più rate e più guadagno dato che l’interesse si applica anche sull’interesse guadagnato fino a quel momento). Present Value and Future Value Two basic time value of money problems are finding the value of a set of cash flows now (present value) and the value as of a point of time in the future (future value). Future value: se investo 100 dollari ora, quanti ne avrò in futuro? Present value: quanti soldi devo investire oggi per avere come profitto 144 dollari in futuro con un expected 20% of annual return? In poche parole il present value mi aiuta a capire quanto devo investire ora per ottenere un tot di soldi in futuro con una certa percentuale di interesse. The present value is obtained by discounting the future cash flow by the interest rate. The rate of interest in this context can be called the discount rate. Time affects the value of money because delay creates opportunity costs and risk. If you earn a return of r% for waiting one year, £1 × (1 + r%) is the future value after one year of £1 invested today. Put another way, £1 is the present value of £1 × (1 + r%) received in a year’s time. Quindi questo £1 è quello che devo investire al presente per avere un tot di ricevuti in a year’s time. Devo tornare indietro con l’equazione, come se facessi un calcolo inverso (roba scema). Today’s value is £100 and the interest rate is 10%, so the future value after two years is £100 × (1 +0.10)2 = £121. The present value—the equivalent value today —of £121 in two years, given that the annual interest rate is 10%, is £100. The appropriate interest or discount rate to use: the rate usually depend on the overall level of interest rates in the economy, the opportunity cost, and the riskiness of the investments under consideration. When comparing investments you have to consider three elements ■ the cash flows each investment will generate in the future, ■ the timing of these cash flows, ■ the risk associated with each investment, which is reflected in the discount rate. Net Present Value Investments may not have the same initial cash outflow, and outflows may occur at times other than time zero. The net present value (NPV) of an investment is the present value of future cash flows or returns minus the present value of the cost of the investment. Using NPV rather than present value to evaluate investments is especially important when the investments have different initial costs. If the NPV is zero or greater, the investment is earning at least the discount rate. An NPV of less than zero indicates that the investment should not be made. Measures of Dispersion Two data sets may have the same mean or median but completely different levels of variability, or vice versa. A description of a data set should include both a measure of central tendency, such as the mean, and a measure of dispersion. Due aziende possono avere anche lo stesso average salary ma in alcune aziende lo stesso numero è diviso per più persone e altre per meno. It’s really important for in finance because the investment risk is often measured using some measure of variability. Two common measures of dispersion of a data set are the range and the standard deviation. Range The range is the difference between the highest and lowest values in a data set. It is the easiest measure of dispersion to calculate and understand, Disadvantage: it is very sensitive to outliers. If the extreme value at the upper end of the range is excluded, the next highest value, 8.0%, is used to estimate the range, and the range is reduced significantly. Standard Deviation A commonly used measure of dispersion is the standard deviation. It measures the variability or volatility of a data set around the average value (the arithmetic mean) of that data set. The differences between the observed values of X and the mean value of X capture the variability of X. • These differences are squared and summed. • Note that because the differences are squared, what matters is the size of the difference not the sign of the difference. • The sum is then divided by the number of observations, which gives the variance. • Finally, the square root of this value is taken to get the standard deviation. The standard deviation and the variance capture the same thing—how far away from the mean the observations are. • The advantage of the standard deviation is that it is expressed in the same unit as the mean. • For example, if the mean is expressed as minutes of journey time, the standard deviation will also be expressed as minutes, whereas the variance will be expressed as minutes squared, making the standard deviation an easier measure to use and compare with the mean. Histograms Data can be shown pictorially using a histogram— a bar chart with bars that are proportional to the frequency of occurrence in each group of observations. Looking at the example, the histograms show salary of employees in Company X and Company Y. Although the range of the observations is the same in each case, the mean for each is very different. Company X’s mean is approximately $35,000, whereas Company Y’s mean is approximately $44,000. Note also that the two distributions are not symmetrical. They are different in that each is stacked toward a different end. The distribution for Company X is: Positively (right) skewed- the majority of the observations are on the left and the skew or tail is on the right. whereas the distribution for Company Y is: Negatively (left) skewed- the majority of the observations are on the right and the skew or tail is on the left. • If the distribution is skewed, the three measures of central tendency—mean, median, and mode— will differ. • For a perfectly symmetrical distribution, such as a normal distribution, the mean, median, and mode will be identical. Normal Distribution The graph of a normal distribution looks like a bell curve. The shape of the curve is symmetrical with a single central peak at the mean of the data (also the median and mode). The graph falling off evenly on either side of the mean; 50% of the distribution lies to the left of the mean, and 50% lies to the right of the mean. • The shape of a normal distribution depends on the mean and the standard deviation. • The mean of the distribution determines the location of the center of the graph, and the standard deviation determines the height and width of the curve. • When the standard deviation is large, the curve is short and wide; when the standard deviation is small, the curve is tall and narrow. The inconsistency with a normal distribution is often referred to as the distribution having fat tails, meaning the probability of observing extreme outcomes is higher than that predicted by a normal distribution that has thin tails. The observations that are more than a specified number of standard deviations from the mean may be described as lying in the tails of the distribution. Assuming that returns on a portfolio of stocks are normally distributed, the chance of the return being in the left tail more than two standard deviations from the mean (che è an extreme loss under typical circumstances) is less than 2.5%. Correlation Two variables are correlated when a change in one variable helps predict change in another variable. • Changes in the same direction: positively correlated. E.g. for traders at an investment bank, salary and age are positively correlated if salaries increase as age increases. • Changes in the opposite direction: negatively correlated. E.g. the size of a transaction and the fees expressed as a percentage of the transaction are negatively correlated if the larger the transaction, the relatively smaller the associated fees. In practice, it is unusual to find variables that are perfectly positively or perfectly negatively correlated. When there is no clear tendency for one variable to move in a particular direction (up or down) relative to changes in the other variable, then the variables are close to being uncorrelated. Correlation is measured by the correlation coefficient, which has a scale from –1 to +1. Correlation measures both the direction of the relationship between two variables (negative or positive) and the strength of that relationship (the closer to +1 or –1, the stronger the relationship). The stronger the relationship between two variables—the higher the degree of correlation—the more confidently one variable can be predicted given the other variable. • For example, there may be a high correlation between stock market index returns and expected economic growth. • If economic growth in the future is expected to be high, then returns on the stock market index are likely to be high. It is important to realize that correlation doesn’t not imply causation. Se nevica a gennaio, e c’è un maggiore ritorno in stock, significa che sono la neve ha causato questo? There may be situations in which a correlation implies some causal relationship, but the causality does not go both ways. • For example, a high correlation has been found between power production and job growth. • It may follow that the more workers there are, the more power is consumed, but it does not necessarily follow that an increase in power generation will create jobs. Correlation is important in investing because the rise or fall in value of a variable may help predict the rise or fall in value of another variable. As long as the returns on the securities do not have a correlation of +1 (that is, they are less than perfectly correlated), then the risk of the portfolio will be less than the weighted average of the risks of the securities in the portfolio because it is not likely that all the securities will perform poorly at the same time. The practice of combining securities in a portfolio to reduce risk is known as diversification. Types of Bonds Bonds, in general, can be classified by issuer type, by type of market they trade in, and by type of coupon rate. I. Issuer. Bonds issued by companies are corporate bonds and bonds issued by central governments are sovereign or government bonds. Local and regional government bodies may also issue bonds. II. Market. The primary market is where new securities are issued and sold to investors. In the secondary market, investors trade with other investors. When investors buy bonds in the secondary market, they are entitled to receive the bonds’ remaining promised payments, including coupon payments until maturity and principal at maturity. III. Coupon rates. Bonds are often categorised by their coupon rates: fixed-rate bonds, floating- rate bonds, and zero-coupon bonds. Debt securities with maturities of 1 year or less may be referred to as bills; from 1 to 10 years may be referred to as notes; longer than 10 years are referred to as bonds. Fixed-rate bonds Fixed-rate bonds, or fixed-income securities, are the main type of debt securities issued by companies and governments. A fixed-rate bond • has a finite life that ends on the bond’s maturity date, • offers a coupon rate that does not change over the life of the bond, and • has a par value that does not change. If interest rates in the market change or the issuer’s creditworthiness changes over the life of the bond, the coupon the issuer is required to pay does not change. • Fixed-rate bonds pay fixed periodic coupon payments during the life of the bond and a final par value payment at maturity. Floating-rate bonds Floating- rate bonds, sometimes referred to as variable- rate bonds or floaters, are essentially identical to fixed- rate bonds except that the coupon rate on floating- rate bonds changes over time. The coupon rate of a floating- rate bond is usually linked to a reference rate. The London Interbank Offered Rate (Libor) is a widely used reference rate. Floating rate = Reference rate + Spread Lo spread rappresenta la componente fissa del tasso di interesse di una floating rate bond ed è determinato dall’emittente dell’obbligazione. La reference rate è la parte variabile del tasso di interesse ed è legata alle condizioni di mercato ed economiche. The floating rate is calculated by making an adjustment to the reference rate to reflect the riskiness (or creditworthiness) of the issuer at the time of issue. • The floating rate is equal to the reference rate plus a percentage that depends on the borrower’s (issuer’s) creditworthiness and the bond’s features. • The percentage paid over the reference rate is called the spread and usually remains constant over the life of the bond. • But the reference rate does change over time with changes in the level of interest rates in the economy. A floating-rate bond’s coupon rate will change, or reset, at each payment date, typically every quarter. • Floating-rate coupon payments are paid in arrears- that is, at the end of period on the basis of the level of the reference rate set at the beginning of the period. • The coupon rate is set to reflect the current level of the reference rate plus the stated spread. Inflation-Linked bonds An inflation- linked bond is a particular type of floating- rate bond. Inflation- linked bonds contain a provision that adjusts the bond’s par value for inflation and thus protects the investor from inflation. Changes to the par value reduce the effect of inflation on the investor’s purchasing power from bond cash flows. For most inflation- linked bonds, the par value—not the coupon rate—of the bond is adjusted at each payment date to reflect changes in inflation (which is usually measured via a consumer price index). Poichè c’è la inflation protection, the coupon rate in questo tipo di bond è più bassa rispetto ad una fixed bond. Zero-Coupon Bond Zero-coupon bonds: do not offer periodic interest payments during the life of the bond. It offer only a single payment equal to the bond’s par value that is paid on the bond’s maturity date. Zero- coupon bonds are issued at a discount to the bond’s par value—that is, at an issue price that is lower than the par value. The difference between the issue price and the par value received at maturity represents the investment return earned by the bond- holder over the life of the zero- coupon bond, and this return is received at maturity. Many debt securities issued with maturities of one year or less are issued as zero-coupon debt securities, but it may happen sometimes that companies and governments issue this type of coupon that have maturities of longer than one year. Poiché è un pagamento che ricevo solo alla maturity date, gli investitori are reclutane di investire soldi se dura più di un anno, e per questo chiedono più soldi. Se chi ha comprato un'obbligazione zero coupon decide di venderla prima della sua scadenza, il suo prezzo potrebbe variare molto a causa dei cambiamenti nei tassi di interesse sul mercato o della modifica dello issuer’s creditworthiness.. In sostanza, il prezzo della obbligazione può essere influenzato da come cambiano le condizioni economiche e finanziarie. Quindi qualcun altro lo ricomprerà ma con le differenze di prezzo legate soprattutto ai cambiamenti nel mercato e credibilità dell’azienda. Bonds with embedded provisions Many bonds include features referred to as embedded provisions. Embedded provisions give the issuer or the bondholder the right, but not the obligation, to take certain actions. Common embedded provisions include call, put, and conversion provisions. Callable Bonds A call provision gives the issuer the right to buy back the bond issue prior to the maturity date. Bonds that contain a call provision are referred to as callable bonds. A callable bond gives the issuer with the right to buy back (retire or call) the bond from bondholders prior to the maturity date at a pre- specified price, referred to as the call price. The call price typically represents the par value of the bond plus an amount referred to as the call premium. In genere i bond issuers decidono di includere questa opzione cosicché se vendono un bond e dopo poco il tasso di interesse scende, allora lo ritirano indietro e lo rivendono con un tasso di interesse più basso. The call provision allows the company to buy back the bonds, presumably using proceeds from the issuance of new bonds at a lower interest rate. Call provision is right of the issuer and not the bondholder. The call provision is an advantage to the issuer and a disadvantage to the bondholder. Thus, a call provision generally results in a higher coupon rate to compensate the bondholder for the risk (referred to as call risk) of having the bond retired early. Call Price = Call premium + Par value For most callable bonds, the bond issuer cannot exercise the call provision until a few years after issuance. • The prespecified call price at which bonds can be bought back early may be a fixed call price regardless of the call date, but in some cases, the call price may change over time. • Under a typical call schedule, the call price tends to decline and move toward the par value over time. Putable Bonds A put provision gives the bondholder the right to sell the bond back to the issuer prior to the maturity date. Bonds that contain a put provision are called putable bonds. A putable bond gives bondholders with the right to sell (put back) their bonds to the issuer prior to the maturity date at a pre- specified price referred to as the put price. Bondholders might want to exercise this right if market interest rates rise and they can earn a higher rate by buying another bond that reflects the interest rate increase. It is important to note that, in contrast to call provisions, put provisions are a right of the bondholder and not the issuer. The inclusion of a put provision is an advantage to the bondholder and a disadvantage to the issuer. Consequently, the coupon rate on a putable bond will generally be lower than the coupon rate on a comparable bond without an embedded put provision. Convertible Bonds A conversion provision gives the bondholder the right to exchange the bond for shares of the issuing company’s stock prior to the bond’s maturity date. Bonds that contain a conversion provision are referred to as convertible bonds. A convertible bond is a hybrid security. A hybrid security has characteristics of and relationships with both equity and debt securities. offers the bondholder the right to convert the bond into a prespecified number of common shares of the issuing company at some point prior to the bond’s maturity date. Is a debt security prior to conversion, but the fact that it can be converted to common shares makes its value somewhat dependent on the price of common shares. Provides a feature that is a benefit to bondholders and typically offers a lower coupon rate. price is the bond’s yield to maturity, or yield. An investor can compare this yield to maturity with the required rate of return on the bond given its riskiness to decide whether to purchase it. Many investors use a bond’s yield to maturity to approximate the annualised return from buying the bond at the current market price and holding it until maturity. The yield to maturity can be inferred by using the current market price. It is important to understand that bond prices and bond yields to maturity are inversely related. That is, as bond prices fall, their yields to maturity increase, and as bond prices rise, their yields to maturity decrease. In modo più semplice, lo YTM rappresenta il tasso di rendimento annuo previsto da un'obbligazione se viene tenuta fino alla sua maturità, considerando sia gli interessi che i cambiamenti di prezzo nel tempo. La sua formula è più complessa rispetto a quella del current yield e considera anche il valore temporale del denaro. Lo YTM è utile per gli investitori che intendono mantenere le obbligazioni fino alla scadenza, poiché fornisce una stima più accurata del rendimento effettivo rispetto ad altre misure di rendimento. Yield Curve When investors try to determine the appropriate discount rate (yield to maturity or required rate of return) for a particular bond, they often begin by looking at the yields to maturity offered by government bonds. The term structure of interest rates, often referred to simply as the term structure, shows how interest rates on government bonds vary with maturity. The term structure is often presented in graphical form, referred to as the yield curve. The yield curve graphs the yield to maturity of government bonds (y-axis) against the maturity of these bonds (x-axis). It is important when developing a yield curve to ensure that bonds have identical features other than their maturity, such as identical coupon rates. In other words, the bonds considered should only differ in maturity. Sono grafici che ti dicono in poche parole se in questo momento dovresti comprare una short term bond o long term bond in base agli guadagni che otterresti con il tasso di interesse. Se il grafico ti dice che è preferibile una short term bond per quanto si tratta di guadagni, allora c’è qualcosa di suspiscious nell’aria. La curva è solo uno degli indicatori per capire l’andamento dell’economia. Risks of investing in debt securities Investing in debt securities is generally considered less risky than investing in equity securities, but bondholders still face a number of risks. These risks include credit risk, interest rate risk, inflation risk, liquidity risk, reinvestment risk, and call risk. Credit Risk Credit risk, sometimes referred to as default risk, is the risk of loss if the borrower, or bond issuer, fails to make full and timely payments of interest and/or principal. Debt securities represent legal obligations, but the issuer may face financial hardship and consequently not have the money available to make the promised interest and/or principal payments. In this case, bondholders may lose a substantial amount of their invested capital. It is important to note that credit risk can affect bondholders even when the company does not actually default on its payments. Se si pensa che uno non riesce a ripagare il debito, la probabilità do default will increase and the bond price will likely fall In the market. Quindi se lo volessi mai rivendere, perderei dei soldi. Credit Rating Investors may be able to assess (valutare) the credit risk of a bond by reviewing its credit rating. Bonds are classified based on credit risk as investment - grade bonds (those in the shaded area of Exhibit 3) or non- investment- grade bonds. Investment-grade bonds: Regulators often specify that certain investors, such as insurance companies and pension funds, must restrict their investments to or largely hold bonds with a high degree of creditworthiness. Non-investment-grade bonds: Commonly referred to as high-yield bonds or junk bonds. Independent credit rating agencies assess the credit quality of particular bonds and assign them ratings based on the creditworthiness of the issuer (during the ‘time of issue’ and also ‘over time’). Junk bonds. • They are called junk bonds because they are less creditworthy; they offer higher expected returns but also higher risk. • Although both individual and institutional investors tend to own investment- grade bonds, investors with a willingness to take on greater risk in exchange for higher expected returns dominate the high-yield bond market. Credit rating agencies assign a bond rating at the time of issue, but they also review the rating and may change a bond’s credit rating over time depending on the issuer’s perceived creditworthiness. • An improvement in credit rating is referred to as an upgrade, and a reduction in credit rating is referred to as a downgrade. Credit Spreads Investors commonly refer to the difference between a risky bond’s yield to maturity and the yield to maturity on a government bond with the same maturity as the risky bond’s credit spread. The credit spread tells the investor how much extra yield is being offered for investing in a bond that has a higher probability of default. Higher-risk bonds, such as junk bonds, trade at wider credit spreads because of their higher default risk. Similarly, lower-risk bonds trade at narrower credit spreads relative to high-risk bonds. Il "credit spread" è come la differenza tra i tassi di interesse di due tipi diversi di investimenti, solitamente obbligazioni. Se l'interesse su un'obbligazione di qualità più elevata è più basso rispetto a un'altra di qualità inferiore (più rischioso), la differenza tra questi due tassi è il credit spread. In parole semplici, il credit spread misura il premio che gli investitori ottengono per assumere un rischio legato al credito. Un credit spread più ampio indica che c'è una maggiore percezione di rischio nell'investimento, mentre uno più stretto suggerisce un minore rischio creditizio. US Treasuries and government bonds of some developed and emerging countries are considered very safe securities that carry minimal default risk. • Consequently, relative to these government bonds, yields on other bonds are typically higher. • The credit spread tells the investor how much extra yield is being offered for investing in a bond that has a higher probability of default. A bond perceived to have experienced an improvement in credit quality will see its price rise and its yield fall, likely resulting in a narrower credit spread relative to a comparable government bond. If a bond is perceived to have become more risky, its price will fall and its yield will rise, which will likely result in a widening of the bond’s credit spread relative to a government bond with the same maturity. Interest Rate Risk Interest rate risk is the risk that interest rates will change. Interest rate risk usually refers to the risk associated with decreases in bond prices resulting from increases in interest rates. This risk is particularly relevant to fixed- rate bonds and zero- coupon bonds. Bond prices and interest rates are inversely related. I nuovi bond emessi con tassi più alti diventano più attraenti per gli investitori rispetto a quelli emessi in precedenza con tassi più bassi. Di conseguenza, i vecchi bond devono essere ridotti di prezzo per rendere la loro resa competitiva rispetto ai nuovi, causando una diminuzione del loro valore di mercato. Fixed-rate and zero-coupon bonds face the risk that if interest rates increase, the value of the bond will decrease. For floating-rate bonds, the risk is that interest rates will decline and the bondholders will receive less coupon income. However, because coupon rates on floating-rate bonds are reset to current market interest rates at each payment date, floating-rate bonds exhibit less interest rate risk with respect to rising interest rates. But a floating-rate bond may exhibit interest rate risk in an environment of declining interest rates because bondholders receive less coupon income when the bond’s coupon rate is reset to a lower rate. Inflation Risk Nearly all debt securities expose investors to inflation risk because the promised interest payments and final principal payment from most debt securities are nominal amounts that do not change with inflation. As inflation makes goods and services more expensive over time, the purchasing power of the coupon payments and the final principal payment declines. Floating-rate bonds partially protect against inflation because the coupon rate adjusts. • They provide no protection, however, against the loss of purchasing power of the principal payment. Investors who are concerned about inflation and want protection against it may prefer to invest in inflation-linked bonds, which adjust the principal (par) value for inflation. • Because the coupon payment is based on the par value, the coupon payment also changes with inflation. One class of Shares: One class for voting rights, cash flow, and dividend rights: “One share, one vote” Multiple Classes of Shares: Class A Shares: Superior voting and/or cash flow rights (to maintain control) Class B Shares: Either lower voting rights and/or dividend rights The reason for having multiple share classes is usually that the company’s original owner wants to maintain control, as measured by voting power. In general, for large public companies in which nearly all shareholders hold very small ownership positions, the difference in voting rights is not important to shareholders. Preferred Stock Companies may also issue preferred stock (also known as preferred shares or preference shares). These shares are called preferred because owners of preferred stock will receive dividends before common shareholders. They also have a higher claim on the company’s assets compared with common shareholders if the company ceases operations. Sono i VIP. Preferred stock is typically issued with an assigned par value that, along with a stated fixed dividend rate, defines the amount of the annual dividend. Preferred shareholders usually receive a fixed dividend, although it is not a legal obligation of the company. Cumulative preferred stock requires that the company pay in full any missed dividends (dividends promised, but not paid) before paying dividends to common shareholders. Non-cumulative preferred stock does not require that missed dividends be paid before dividends are paid to common shareholders. Some companies have more than a single issue of preferred stock. Each issue usually carries its own dividend. Convertible Bonds A convertible bond is a bond issued by a company that offers the bondholder the right to convert the bond into a pre-specified number of common shares. • Although a convertible bond is actually a debt security prior to conversion, the fact that it can be converted to common shares makes its value somewhat dependent on the price of common shares. Thus, convertible bonds are known as hybrid securities. • The number of common shares that the bondholder will receive from converting the bond is known as the conversion ratio. The conversion ratio may be constant for the security’s life, or it may change over time. • Convertible bonds have a maturity date. If the bonds are not converted to common stock prior to maturity, they will be paid off like any other bond and retired at the maturity date. • Because the conversion feature is a benefit to the bondholder, a convertible bond typically offers the bondholder a lower fixed annual coupon rate than that of a comparable bond without a conversion feature (a straight bond). In general, if the conversion value is low relative to the straight bond value, the convertible bond will trade at a price close to its straight bond value. • But if the conversion value is greater than the straight bond value, the convertible bond will trade at a value closer to its conversion value. • Similar to convertible bonds, convertible preferred shares typically include a redemption option. Warrants A warrant is an equity- like security that entitles the holder to buy a pre- specified amount of common stock of the issuing company at a pre- specified per share price (called the exercise price or strike price) prior to a pre- specified expiration date. A company may issue warrants to investors to raise capital or to employees as a form of compensation. Cambia dai common shares perchè ha una scadenza. La scadenza è legata al fatto che cosi facendo le persone agiscono di più, e in più non sempre si vuole avere le proprie azioni in circolazione, soprattutto se sai che le politiche e le condizioni della tua attività non rimarranno le stesse nel corso degli anni. A company may issue warrants to investors to raise capital and typically have expiration dates several years into the future. In some cases, companies may attach warrants to a bond issue or a preferred stock issue, known as sweeteners, in an effort to make the bond or preferred stock more attractive and offer a lower coupon rate. The holders of warrants may choose to exercise the rights prior to the expiration date and will exercise the right only when the exercise price is equal to or lower than the price of a common share. Companies may also issue warrants to employees as a form of compensation, in which case they are referred to as employee stock options. • When warrants are used as employee compensation, the goal is to align the objectives of the employees with those of the shareholders. • Many companies compensate their senior management with salaries and some form of equity- based compensation, which may include employee stock options. When a warrant holder exercises the right, the company issues the pre- specified number of new shares and sells them to the warrant holder at the exercise price. Depositary Receipts A depositary receipt (global depositary receipt or GDR) is a security representing an economic interest in a foreign company that trades like a common share on a domestic stock exchange. For investors buying shares of foreign companies, the transaction costs associated with purchasing depositary receipts are significantly lower than the costs of directly purchasing the stock on a foreign country’s stock exchange. Depositary receipts are not issued by the company and do not raise capital for the company, but rather, they are issued by financial institutions. • GDRs have no maturity date, like the shares they are based on. • GDRs typically do not offer their owners any voting rights even though they essentially represent common stock ownership; the custodian financial institution typically retains the voting rights associated with the stock. In the United States, global depository receipts are known as American depositary receipts (ADRs) or American depositary shares. Risk and Return of Equity and Debt Securities There are significant risk and return differences between debt and equity securities because of differences in cash flow, voting rights, and priority of claims. Liquidity Lowest priority Middle priority Highest priority • Debt securities are the least risky because the cash flows are contractually obligated. • Preferred stock is less risky than common stock because it ranks higher than common stock with respect to the payment of dividends. •The return potential to common shareholders is higher because the share price rises if the company performs well (Residual claimants). • The return potential for both debt securities and preferred stock is limited because the cash flows (interest, dividends, and repayment of par value) do not increase if the company performs well. • The return potential to common shareholders is higher because the share price rises if the company performs well. • Relative to holders of debt securities and preferred stock, common shareholders expect a higher return but must accept greater risk. • The voting rights of common shareholders may give them some influence over the company’s business decisions and thereby somewhat reduce risk. • Debt investors thus have a higher claim on the company’s assets than equity investors do. • After the claims of debt investors have been satisfied, preferred stock investors are next in line to receive what they are due. Common shareholders are last in line and known as the residual claimants in a company. Equity investors are at least protected by limited liability, which means that higher claimants, particularly debt investors, cannot recover money from other assets belonging to the shareholders if the company’s assets are insufficient to fully cover their claims. ■ Issuing a stock dividend or conducting a stock split ■ Issuing new stock after the exercise of warrants ■ Issuing new stock to finance an acquisition ■ Creating a new company from a subsidiary in a process referred to as a spinoff Equity investors are affected by changes in the number of shares outstanding. Therefore, it is important for equity investors to understand how these changes affect the value or ownership claim of their equity investment. Initial Public Offering A private company becomes a publicly traded company through an IPO, which is the first time that it sells new shares to investors in a public market. The main difference between a private company and a publicly traded company is that the shares of a private company are available only to select investors and are not traded on a public market. Private companies become publicly traded companies for a number of reasons. • First, it gives the company more visibility, which makes it easier to raise capital to fund growth opportunities. • It also helps attract talent, raise brand awareness, and gain credibility with trading partners. • In addition, it provides greater liquidity for shareholders wanting to sell their shares or buy additional shares. • At or after the IPO, some of the original shareholders may choose to sell some of their shares. • The fact that the shares now trade in a public market makes the shares more liquid and thus easier to sell. Disadvantages to becoming a public company are • increased regulatory and disclosure requirements • the fact that IPOs are also rather expensive (their cost can be as much as 10% of the proceeds). Seasoned Equity Offering After an IPO, publicly traded companies may sell additional shares to raise more capital. The selling of new shares by a publicly traded company after an IPO is referred to as a seasoned or secondary equity offering. A seasoned equity offering typically has far lower costs associated with it compared with an IPO. A typical seasoned equity offering increases the number of shares outstanding by 5%–20%. For an existing investor who does not buy additional shares in the seasoned equity offering, the increase in shares outstanding dilutes the investor’s ownership percentage. For an existing investor who does not buy additional shares in the seasoned equity offering, the increase in shares outstanding dilutes the investor’s ownership percentage. Share Repurchases Companies may choose to return cash to shareholders by repurchasing shares rather than paying dividends. Assuming that the company’s net income is unaffected by the repurchase, the share repurchase will increase the company’s earnings per share because net income will be divided by a smaller number of shares. To buy back shares, a company can buy shares on the open market just like other investors or it can make a formal offer for repurchase directly to shareholders. Shareholders may choose to sell their shares or to remain invested in the company. For an existing investor who does not sell shares, the decrease in the number of shares outstanding effectively increases that investor’s ownership percentage. Stock Splits and Stock Dividends A stock split is when a company replaces one existing common share with a specified number of common shares. A stock dividend is a dividend in which a company distributes additional shares to its common shareholders. Stock splits and stock dividends both increase the number of shares outstanding, but they do not change any single shareholder’s proportion of ownership. When a company splits its stock or issues a stock dividend, the number of shares outstanding increases and additional shares are issued proportionally to existing shareholders based on their current ownership percentages. The overall value of the company should not change, so the price of each share should decrease. But the value of any single shareholder’s total shares should not change in value. Given that stock splits and stock dividends do not have any effect on company operations or value, why do you think companies take these actions? One explanation is that as a company does well and its assets and profits increase, the stock price is likely to increase. At some point, the stock price may get so high that shares become unaffordable to some investors and liquidity decreases. A stock split or stock dividend will have the effect of lowering a company’s stock price, making the stock more affordable to investors, and thereby improving liquidity. Companies with very low stock prices may conduct a reverse stock split to increase their stock price. • The primary reason for a reverse stock split is that a company may face the risk of having its shares delisted from a public exchange if its stock price falls below a minimum level dictated by the exchange. • A reverse stock split reduces the number of shares outstanding but does not affect a shareholder’s proportional ownership of the company. Warrants Companies that issue warrants as a form of additional or bonus compensation to employees may have to increase shares outstanding if the warrants are exercised. If an investor exercises warrants, the issuing company’s number of shares outstanding increases and all other existing shareholders of the company’s stock will see their ownership percentage decrease. Given that there may be numerous employees who exercise warrants on a recurring basis, companies that issue warrants to employees as a form of compensation will typically experience an increase in shares outstanding every year. To mitigate the dilution effect on existing shareholders, these companies may repurchase a small amount of shares each year to offset the additional shares issued when warrants are exercised. Acquisitions One company may acquire another by agreeing to buy all of its shares outstanding. All of the outstanding shares of the acquired company are redeemed for cash, for stock in the acquiring company, or for a combination of cash and stock of the acquiring company. Shareholders of the acquiring company and the target company (the company to be acquired) are typically asked to vote on a proposed acquisition. If the company being acquired is small and the acquirer has sufficient cash, there is no need to issue new shares. For larger acquisitions, the acquiring company may pay for the purchase by issuing new shares. The amount of new shares issued depends on the purchase price and the ratio of the two companies’ stock prices. An acquisition in which the company uses its stock to finance the transaction results in an increase in the acquiring company’s shares outstanding. For existing shareholders in the acquiring company, the increased shares outstanding effectively dilutes their ownership percentage. Spinoffs A company may create a new company from an existing subsidiary in a process referred to as a spinoff. Shares of the new entity are distributed to the parent company’s existing shareholders. After the spinoff, the value of the shares of the parent company initially declines as the assets of the parent company are reduced by the amount allocated to the new company. But shareholders receive the shares of the newly formed company to compensate them for the decrease in value. A company’s management may conduct a spinoff in an effort to create value for its shareholders by splitting the company into two separate businesses. The rationale behind a spinoff is that the market may assign a higher valuation to two separate but more specialised companies compared with the value assigned to these entities when they were part of the parent company. Forwards A forward contract is an agreement between two parties in which one party agrees to buy from the seller an underlying at a later date (1 month or 1 year later) for a price established at the start of the contract. Investors primarily use forward contracts to lock in the price of an underlying and to gain certainty about future financial outcomes. Example: By entering into the forward contract, the farmer knows the wheat will sell and has eliminated uncertainty about how much money will be received for the wheat. The cereal producer knows that wheat will be available and has eliminated uncertainty about how much the wheat will cost. Forward contracts transact in the over- the- counter market (the agreement is made directly between two parties, a buyer and a seller) although a dealer may help arrange the agreement. The risk that the other party to the contract will not fulfil its contractual obligations is called counterparty risk. To reduce counterparty risk, the parties to a forward contract evaluate the default risk of the other party before entering into a contract. If the risk of default is significant, the parties may not agree to a forward contract. Or one or both parties may require a performance bond. A performance bond is a guarantee, usually provided by a third party, such as an insurance company, to ensure payment in case a party fails to fulfil its contractual obligations (defaults). As an alternative to a performance bond, collateral may be requested. Collateral refers to pledged assets. That is, if one party cannot fulfil its contractual obligations, the other party can keep the collateral as compensation. No payment on the contract is required by either party prior to delivery. At expiration, forward contracts usually settle with physical delivery. At settlement, one party will lose and the other party will gain relative to the spot price at the expiration date—this price variance also serves to increase counterparty risk. Regardless of winning or losing from the transaction, the certainty is more important to both the parties relative to the future spot price. Future contracts What if the farmer could not identify a party that wanted to be on other side of the contract? A future contract è simile al forward contract nel fatto di vendere ad un determinato prezzo mesi dopo ecc..Futures contracts are standardized contracts that trade on an exchange as an intermediary between buyers and sellers. (C’è un exchange, uno scambio come intermediario tra di essi). Buyers and sellers don’t necessary knows who’s on the other side of the contract. Because the contracts are traded on exchanges, they are liquid and it is possible for a buyer or seller to close out a position by taking the opposite side. In other words, the buyer of a contract can sell the same contract and the seller of a contract can buy the same contract. The presence of an exchange as an intermediary between buyers and sellers helps reduce the counterparty risk. Counterparty risk cannot be eliminated completely, perchè ci sarà sempre una remote chance che exchange fails to fulfill its own contractual obligation. obligations. To protect itself against one of the parties defaulting, the exchange typically requires that parties to the contract deposit funds as collateral. The depositing of funds as collateral is called posting margin. The amount deposited on the day that the transaction occurs is called the initial margin. Initial margin dovrebbe essere sufficiente per proteggere the exchange against movements in underlying’s price. The greater the underlying’s price volatility, the higher the margin. Another way of reducing the counterparty risk for futures contracts is by marking to market daily. Marking to market means that profits or losses on futures contracts are settled at the end of every business day, which has the effect of resetting the contract price and cash flows to buyers and sellers. At the end of each day, the exchange establishes a settlement price based on the closing trades and determines the difference between the current settlement price and the previous day’s settlement price. If at any time the balance in an account falls below a pre- specified amount, the exchange will ask the customer to submit additional funds. If the customer does not do so, the futures position is closed. Specifying the underlying in a futures contract includes defining the quality of the asset so that the buyer and seller have little room for confusion regarding pricing and physical delivery. Certain deviations from the default quality standards are permitted with adjustments in price. Distincions between Forwards and Futures Forwards and futures differ in how they trade, the flexibility of key terms in the contract, liquidity, counterparty risk, transaction costs, timing of cash flows, and settlement. Trading and Flexibility of Terms • Forward contracts transact in the over-the-counter market and are customized according to the contracting parties’ needs. • Futures contracts trade on exchanges that typically set the standardized terms of the contracts. For hedgers that are trying to reduce or eliminate risk, standardization makes it difficult to precisely hedge a position. Liquidity • It is easier to exit a position prior to the settlement date with a futures contract than with a forward contract. So, futures are relatively liquid than forwards. • A position in a futures contract can be settled (closed) by taking an opposite position in the same contract. Counterparty Risk • Risk is high with forward contracts, but limited with futures contracts (although the risk can not be eliminated completely as remote chance of failure of exchange). • Requirements imposed by exchanges, such as margins and daily marking to market, reduce the counterparty risk associated with futures contracts. Transaction Costs • There can be significant costs to arrange a forward contract. Transaction costs usually are embedded in forward contracts. • Because futures contracts are standardised, transaction costs are relatively low. • Also, there is more transparency in the futures markets. Timing of Cash Flows • Forward contracts have no cash flows except at maturity. • Futures contracts are ‘marked to market’ daily. • It is important to note that if forward and futures contracts with identical terms are held to maturity, the final outcome is the same. • For a forward contract, the entire effect of changing prices is taken into account at maturity, whereas for a futures contract, the effect of changing prices is taken into account on an ongoing basis. Settlement • Forward contracts may settle with physical delivery or cash settlement. • Futures contracts are typically settled with cash. Option contracts What if the farmer does not want to lock in the price because the farmer thinks the price of wheat is going to increase? Similarly, the cereal producer thinks that the price of wheat is going to decrease. Option Markets may provide the solution for both parties. Options give one party (the buyer) to the contract the right to extract an action from the other party (the seller) in the future. In an option contract, the buyer of the option has the right, but not the obligation, to buy or sell the underlying. Options are termed unilateral contracts because only one party to the contract (the seller) has a future commitment that, if broken, represents a breach of contract. Unilateral contracts expose only the buyer to the risk that the seller will not fulfil the contractual agreement. The buyer of the contract will exercise the right or option if conditions are favourable or if specified conditions are met. For this reason, options are also known as contingent claims—that is, claims are dependant on future conditions. If the buyer decides to use (exercise) the option, the seller is obligated to satisfy the option buyer’s claim. If the buyer decides not to exercise the option, it expires without any action by the seller. Options may trade in the over- the- counter market, but they trade predominantly on exchanges. An option contract specifies the underlying, the size, the price to trade the underlying in the future (called the exercise price or strike price). A buyer chooses whether to exercise an option based on the underlying’s price compared with the exercise price. A buyer will exercise the option only when doing so is advantageous compared with trading in the market, which puts the seller at a disadvantage. Because of the unilateral future obligation (only the seller has an obligation), options have positive value for the buyer at the inception of the contract. The option buyer pays this value, or option premium, to the option seller at the time of the initial contract. The premium paid by the option buyer compensates the option seller for the risk taken; the option seller is the only party with a future obligation. The maximum benefit to the option seller is the premium. The option seller hopes the option will not be exercised. Chapter 12 Alternative Investments We learnt that public company may use Equity Securities and Debt Securities to raise fund. But what if An entrepreneur needs money to start a promising new business? Or what if A young company needs funds to grow but is not established well enough to seek an IPO? They are not in a position to issue debt or equitys ecurities to the public, and they may only receive limited amount of money from bank as loan. Alternative investments are an opportunity to potentially enhance returns and obtain diversification benefits. They are considered alternative because they represent an alternative to investing exclusively in “traditional” asset classes, such as debt and equity securities. • Alternative investments are an opportunity to potentially enhance returns and obtain diversification benefits. • Diversification is the practice of combining different types of assets or securities in a portfolio to reduce risk. • Portfolio is a collection of investments held by the same individual or organization. • The search for higher returns and lower risk explains why alternative investments are now an integral part of the portfolios of many investors. • Typical alternative investments are: private equity, real estate, and/or commodities. Why invest in Alternatives? Advantages of Alternative Investments Investors add alternative investments to their portfolios for two main reasons: To enhance returns To reduce risk by obtaining diversification benefits 1. To enhance returns Investments in private equity and real estate outperformed investments in equity and debt securities. • However, you should not conclude that alternative investments always offer higher returns than other asset classes. • During the global financial crisis that started in 2008, many investors suffered losses on their private equity and real estate investments. 2. To reduce risk by obtaining diversification benefits Investors diversify their portfolios by investing in assets and securities that behave differently from each other. If two assets or securities do not have a correlation of +1, then combining these two assets or securities in a portfolio provides diversification benefits and thus reduces the risk in the portfolio. • Because there is a relatively low correlation between different types of alternative investments and also between alternative investments and other asset classes, adding private equity, real estate, and commodities to portfolios helps investors reduce risk. • During periods of financial crisis, returns on different investments may become more correlated and the benefits of diversification may be reduced. Limitations of Alternative Investments Although alternative investments have the potential to enhance returns and reduce risk, they also have limitations. Typically, alternative investments are ■ Less regulated and less transparent than traditional investments. Institutional investors may view this as an opportunity to take advantage of market inefficiencies since it is less regulated. ■ Illiquid. Difficult to sell quickly. It is much easier to sell shares of a public company listed on a stock exchange than a piece of land, or a building. ■Difficult to value. Alternative investments are also difficult to value because data availability to assess how much they are worth is limited. Private Equity Private equity firms invest in private companies that are not publicly traded on a stock exchange. Although people commonly refer to private “equity”, investments include both equity and debt securities. Debt investments, however, are less common than equity investments. Le Private equity è un fondo che investe capitali non quotate in borsa al fine di acquisire una partecipazione significativa. Una volta che l’azienda verrà quotata in borsa (IPO) (perchè aumenterà di valore), la private equity allora vende le proprie azioni guadagnando un sacco de skei. Private Equity Strategies The most widely used strategies are: venture capital, growth equity, buyouts and distressed. Un’altra categoria che però è unrelated to the stage of a company’s development, is Secondaries. Venture Capital A private equity investment strategy that consists of financing the early stage of companies that have an innovative business idea. • Investment in “start-up” companies that exist merely as an idea or a business plan. • May have only a few employees, have little or no revenue, and still be developing its product or business model. • Provide capital as well as expertise advice. Considered the riskiest type of private equity investment strategy because many more companies fail than succeed • May take many years before a company becomes successful. • Most venture capital–funded companies have years of unprofitable activity before they reach the point of making money. Growth Equity A private equity investment strategy that usually focuses on financing companies with proven business models, good customer bases, and positive cash flows or profits. • These companies often have opportunities to grow by adding new production facilities or by making acquisitions, but they do not generate sufficient cash flows from their operations to support their growth plans. Some growth equity investors specialise in helping companies prepare for an initial public offering. • These investors provide additional money at a later stage of a company’s development than venture capitalists or early-stage growth equity investors. Buyouts A private equity investment strategy that consists of financing established companies that require money to restructure and facilitate a change of ownership. • Buyout transactions sometimes involve making a publicly traded company private. • Buyouts for which the financing of the transaction involves a high proportion of debt are often called leveraged buyouts (LBOs). • Buyout investors often target companies that have recently underperformed but that offer opportunities to grow revenues and margins. Distressed Investing Companies with financial troubles may be at risk of not being able to make full and timely payments of interest and/or principal. • Distressed investing focuses on purchasing the debt of troubled companies that may have defaulted or are on the brink of defaulting. • Frequently, investments are made at a significant discount to par value- that is, the amount owed to the lenders at maturity. • If the company can survive and prosper, the value of its debt will increase and the investor will realise significant value. • Distressed investing does not typically involve a cash flow to the company (meaning no cash flow for the regular operations of the business). Secondaries Another kind of strategy that does not involve cash flow to the company. • They are not based on a company’s stage of development but involve buying or selling existing private equity investments. • The life of a private equity fund is typically about 10 years, but it can be longer. • Some private equity partnerships may not be able or willing to hold on to all of their investments, which could be venture capital, growth equity, buyouts, or distressed. • So, a partnership may want to sell one or several of its investments to another private equity partnership in what is known as the secondary market. Structure and Mechanics of Private Equity Partnerships Private equity investments are usually organized in funds managed by partnerships. A private equity partnership usually includes two types of partners: If the general partner is a real estate development firm, it may also manage the real estate projects. As with private equity partnerships, the limited partners in a real estate limited partnership must pay the general partner management fees on the committed capital and carried interest on the profit made on the real estate assets. Investments in real estate limited partnerships are illiquid. Real estate equity funds typically hold investments in hundreds of commercial properties. These properties are diversified by geography, property type, and vintage year(that is, the year the purchase was made). Real estate equity funds are often open- end funds, meaning that they issue or redeem shares when investors want to buy or sell. They are made out of the real estate equity funds’ cash flows, such as the income received from rents and the sale of properties. Public Market Investments (investments through public market) Real estate investment trusts (REITs) are investments through public markets. Like other equity securities, the shares of REITs are traded on exchanges, which makes them more liquid than real estate limited partnerships and real estate equity funds. REITs are companies that mainly own, and in most cases operate, income- producing real estate. Most REITs are involved at all stages of the real estate process, from the development of land to the construction of buildings and the management of the properties. Note the difference: A REIT invests directly in income generating real estate and is traded like a stock. A real estate equity fund is a type of mutual fund that primarily focuses on investing in securities offered by real estate companies. Commodities Commodities, such as precious and base metals, energy products, and agricultural products, tend to rise in price with inflation. So, they can provide inflation protection in a portfolio. There are several ways for investors to gain exposure to commodities. They can buy ■ the physical commodity, ■ shares of natural resources or commodity- related companies, or ■ commodity derivatives. Purchase of the physical commodity. Theoretically, an investor could buy a barrel of oil or a head of cattle or a bushel of wheat. But the transportation and storage difficulties associated with purchasing a physical commodity means that it is rare for investors to gain access to commodities this way. Purchase of shares of natural resources or commodity- related companies. Investors can buy shares of companies that have a major portion of their operations in the exploration, recovery, production, and processing of commodities. For example, an investor who wants exposure to oil may buy shares in a major oil company, such as BP, Eni, ExxonMobil, Petrobras, PetroChina, Statoil, or Total. Purchase of commodity derivatives. Investors can buy derivatives in which the underlying asset is a commodity or a commodity index. Typical commodity derivatives are forwards, futures, options, and swaps. Chapter 13 Structure of the Investment Industry The investment industry helps individuals, companies, and governments save and invest money for the future. Individuals save to ensure that money will be available to cover unforeseen circumstances, to buy a house, to cover their living expenses during retirement. Companies save to invest in future projects and to pay future salaries, taxes, and other expenses. The investment industry provides many services to facilitate successful saving and investing. How the investment industry promotes successful investing The investment industry provides services to those who have money to invest—individual and institutional investors who become providers of capital. Investing involves many activities that most individual and institutional investors cannot do themselves. These activities generally require information, expertise, and systems that few individual and institutional investors have. Investors obtain assistance with these activities from investment professionals, either • directly by hiring investment professionals or • indirectly by investing in investment vehicles that the investment industry creates and oversees. Investment professionals organise their efforts to help their clients meet their financial goals. (Clients could be individuals, companies, governments) Some investing firms and professionals specialise in single service, some provide broad spectrum of services. Financial Planning Services Investment clients often need advice to set their financial goals and determine how much money they should save for future expenses. Some clients also need advice about how much money they can spend on current expenses while still preserving their capital. Financial planners help their clients understand their - Current and future financial needs - The risks they face when investing - Their ability to tolerate investments risk - Their preferences fo capital preservation versus capital growth Financial planners create savings and investment plans appropriate for their clients’ needs. The plans often require complex analyses that depend on expected rates of return and risks for various securities and assets. Future expenses are often particularly difficult to forecast. They may depend on inflation and, in the case of retirement expenses, uncertain longevity and uncertain future health care expenses. Many pension funds employ financial planners to help pension beneficiaries make better savings decisions. Various organizations require financial planning services to help them meet their investment objectives. For example, foundations and endowment funds—which are not- for- profit institutions with long- term investment objectives—sometimes hire financial planners to help them create their payout policies. Payout policies specify how much money can be taken from long- term funds to use for current spending (è una regola che aiuta l’azienda a sapere quando è il momento giusto per usare una parte di quei soldi). The payout policies depend on the assumptions the financial planners make about future expected investment returns. Assuming high future expected returns allows for higher current spending. * endowment: dotazione. I soldi che formano una dotazione provengono dalle donazioni. I soldi in dotazione vengono investiti per farli aumentare. Con la policy si decide quanti e quando ritirarli. Investment Management Services Once they have determined their financial goals, individual and institutional investors need to implement their savings and investment plans to be able to achieve these goals. They often require investment management services to do so. Investment management activities include asset allocation, investment analysis, and portfolio construction. Services for High-Net-Worth and Institutional Clients Some high- net- worth and institutional clients rely on investment professionals to take care of the entire investment process, from identifying potential investments to implementing the investments and evaluating their performance; others use the services of investment professionals selectively. Many investment professionals receive authority from their clients to trade securities and assets on their behalf. Those who have such discretionary authority are often called investment managers or asset managers. Depending on the context, these terms may refer to the individuals who make investment decisions or to the investment firms for which they work. Investment managers perform various activities for their clients: Asset allocation indicates the proportion of a portfolio that should be invested in various asset classes to help meet financial goals. Asset classes typically include cash, equity and debt securities, and alternative investments (such as private equity, real estate, and commodities). Investment analysis involves estimating the fundamental value (è quanto gli investitori ritengono che un’opportunità di investimento valga in base alla salute finanziaria. Valutano se un’azione/ obbligazione sia considerato sottovalutato o sopravvalutato) of potential investments and identifying attractive securities and assets. An investment’s fundamental value, also called intrinsic value, indicates the price that investors would pay for the investment if they had a complete understanding of the investment’s characteristics. Portfolio Construction requires investment managers to invest in the attractive securities and assets they identified through their investment analysis, taking into account the client’s requirements and appropriate asset allocation. Trading Services Brokers, dealers, clearing houses, settlement agents, custodians, and depositories provide various services that facilitate investment by helping buyers and sellers of securities and investment assets arrange trades with each other and by holding assets for clients. Brokers Brokerage services (servizi di intermediazione) are provided to clients who want to buy and sell securities; they include not only execution services (that is, processing orders on behalf of clients) but also investment advice and research. I broker sono intermediari quando si tratta di comprare o vendere azioni, perchè mi aiuta a trovare la persona giusta con cui fare scambio. Brokers are agents who arrange trades for their clients. They do not trade with their clients. Instead, they search for traders who are willing to take the other side of their clients’ orders. Brokers help their clients by reducing the cost of finding counterparties for their clients’ trades. Brokers are agents of clients and provide many different trading services. • They find sellers for their clients who want to buy and buyers for their clients who want to sell. • For highly liquid securities, the search usually involves only routing (directing) a client’s order to an exchange or to a dealer. • Exchanges arrange trades by matching buy and sell orders. • For complex trades, like real estate transactions, for which effective negotiation is essential, brokers may serve as professional negotiators. • Brokers often also ensure that their clients settle their trades. Clients pay commissions to their brokers for arranging their trades. • The commissions vary widely but typically depend on the value or quantity traded. Block brokers help investors who want to trade large blocks of securities by finding a counterparty willing to buy or sell a large number of securities. Prime brokerage refers to a bundle of services that brokers provide to some of their clients, usually investment professionals engaged in trading, by financing positions. Dealers Comprano ad un prezzo più basso e lo vendono a quello più alto. I dealers comprano dai clients e vendono al prezzo più altro. I brokers fanno trading per conto dei clienti, ma non comprano, prendono solo la commissione. Dealers make it possible for their clients to trade without having to wait to find a counterparty, contrast to brokers who only arranges. • They are ready to buy from clients who want to sell and to sell to clients who want to buy. • Dealers provide liquidity to their clients by allowing them to buy and sell when they want to trade. • Dealers make profit when the bid price (when delalers buy from clients) is lower than the ask price (they sell at this price) Dealers are often called market makers because they are willing to make a market (that is, trade on demand) in specified securities at their bid and ask prices. The distinction between broker and dealer is not always clear, as brokers also act as proprietary traders. Broker/dealers face a conflict of interest with respect to how they fill their clients’ orders. Primary dealers are dealers with which central banks trade when conducting monetary policy. • For example, central banks may sell bonds to primary dealers to decrease the money supply. • The primary dealers then sell the bonds to their clients. Clearing Houses Clearing refers to all activities that occur from the arrangement of the trade to its settlement. Settlement consists of the final exchange of cash for securities. Clearing houses arrange for the final settlement of trades. The members of a clearing house are the only traders for whom the clearing house will settle trades. Reliable settlement of all trades promotes liquidity because it reassures investors that their trades will be settled and thus allows strangers to confidently contract with each other without worrying much about settlement risk, which is the risk that counterparties will not settle their trades. Custodians and Depositories Custodians are typically banks and brokerage firms that hold money and securities for safekeeping on behalf of their clients. Thus, they play an important role in reducing the risk that securities may be lost or stolen. Security ownership records were once commonly held as actual paper certificates in secure vaults. Now, securities are almost exclusively held in book- entry form as secure computer records. Custodians may also offer other services for their clients, including trade settlement and collection of interest and dividends. The fees they charge their clients often depend on the type of services they provide to them. Depositories act not only as custodians but also as monitors. They are often regulated and their role is to help ■ prevent the loss of securities and payments through fraud, deficient oversight, or natural disaster. ■ ensure that securities cannot be pledged more than once by the same borrower as collateral for loans. ■ ensure that securities said to be purchased are actually purchased. Having reputable third- party custodians and depositories hold all assets managed by an investment manager helps prevent investment fraud, such as Ponzi schemes, which use money contributed by new investors to pay purported returns to existing investors rather than to purchase additional securities. Comparisons of Providers of Trading Services Brokers ■ Act as agents ■ Find sellers for clients who want to buy and buyers for clients who want to sell ■ Serve as professional negotiators ■ Ensure clients will settle their trades Dealers ■ Participate in their clients’ trades ■ Allow clients to trade when they want by being ready to buy when their clients want to sell and to sell when their clients want to buy ■ Provide liquidity because they are willing to trade on demand ■ Often are proprietary traders Clearing ■ Arrange for final settlement of trades Houses ■ Promote liquidity by reassuring investors that their trades will be settled Settlements ■ Arrange final exchange of cash for securities Agents Custodians ■ Hold money and securities for safekeeping on behalf of clients ■ May offer other services for clients, such as trade settlement and collection of interest and dividends Depositories ■ Act not only as custodians but also as monitors to prevent the loss of securities and fraud ■ Often are regulated Organisation of Firms in the Investment Industry In practice, a distinction is often made between buy- side and sell- side firms. When structuring their activities, many sell- side firms distinguish between the front, middle, and back office. Buy-Side and Sell-Side Firms Practitioners classify many firms in the investment industry by whether they are on the sell side or the buy side. Sell- side firms primarily provide investment products and services; they are typically investment banks, brokers, and dealers. Buy- side participants purchase these investment products and services from sell- side firms. For example, such institutional investors as pension plans, endowment funds, foundations, and sovereign wealth funds, as well as insurance companies, are all considered buy- side participants. Buy- side firms include firms that manage portfolios for clients and/or themselves. For example, many buy- side consultants help buy- side institutional investors evaluate investment performance. Buy side: imprese che acquistano titoli e comprende gestori di investimenti, fondi pensione ecc. loro investono in titoli per far crescere il denaro dei suoi investitori. Sell side: sono le imprese che vendono o negoziano titoli. Comprende bande di investimento, società di consulenza e corporations.