Investment Management WK 1

% margin

(equity value of investment)/(market value of securities)

When does a secondary public offering occur?

A secondary public offering occurs when a listed company decides to raise additional capital.

capital allocation

-allocation of capital (funds) occurs in financial markets -People invest in companies they consider will be profitable in the future. They will not invest in companies that have poor prospects.

When constructing their portfolio, investors will make decisions on:

-assets allocation and security selection

Investor's Portfolio

-contains the financial assets that they own -can increase the portfolio's size by buying more assets -they rebalance by selling some of the assets to buy new assets

Short Selling

-selling securities that you borrow from someone -typically the worker lends shares that are owned by one of their other clients so the term of the short sale period could be indefinite as seen during the GFC -the most a shared price can fall is zero -the short sale position will be subject to an initial margin, maintenance margin and margin calls; the broker requires the short-seller to deposit an initial margin with them. It will be calculated as a % of the short sale proceeds

covered short selling

-short sale of shares that have been borrowed -must be reported to ASIC who publishes information on these trades --the ASX releases a daily report on short sale activity

naked short selling

-short sale of shares that have not been borrowed

Option contracts

-the price of the designated asset is determined at the beginning of the contract -the writer of the contract receives a fee -the buyer does not have an obligation to proceed with the contract

List the 4 types of secondary public offerings.

1) a placement 2) a share purchase plan (SPP) 3) a dividend reinvestment plan (DRP) 4) a rights issue

What are the two main forms of portfolio construction?

1) top-down approach 2) bottom-up approach

a share purchase plan (SPP)

An issue of new shares are offered to existing shareholders. It is not based on the size of their current share holding.

A private company may grow to the point where the existing owners cannot financially support its requirements. To raise more capital they may decide to make an initial public offering (IPO) on the stock exchange and become a listed company. What must a company release before listing?

Before listing, a company must release a prospectus. This provides information about the company to investors. Once listed, the firm/company goes from being a private company to a publicly listed company.

consumption timing

Current earnings can be separated into consumption and savings. You can shift your consumption over the course of your lifetime by investing your savings in financial markets.

Financial assets are traded in financial markets. What are some financial markets?

Equity market (ordinary shares), fixed-income market (bonds), foreign exchange market (currencies), and derivative market (options of future contracts)

Allowable Margin

In Australia, the allowable margin ranges from 20%-60%.

Allocation of Risk

Investors bear the risk of their investments. So they will invest in securities with risk-return characteristics that suit their preferences.

Separation of Ownership and Control

Only very small companies can be owned and managed by the same person. Large companies cannot exist as owner operated firms. The ability to buy and sell financial assets in financial markets allows separation of ownership and control.

financial assets (instruments/securities

Ownership rights to a real asset or income generated by the real asset. An economy's wealth reflects the value of its real assets.

Margin Call

Request to increase the collateral (using cash or securities) held by the lender against the margin loan. This reduces the lenders risk exposure when the security price falls.

Secondary Market

This is where existing securities are traded. Trading in the secondary market does not create new securities or raise new funds for companies. Note: the secondary market is simply a means for transferring ownership.

auction market

Trading occurs through a centralized trading facility. Buyers and sellers place their orders with a broker who submits these to an order book that will match buyers and sellers. -most integrated and centralized market where all traders converge at one place (either physically or electronically) to buy or sell an asset. - allows investors to trade at fairer prices (more competition, less search costs therefore investors do not need to search for the best price to trade at)

Over-the-counter (or dealer) Market

Trading occurs via telephones, computers and electronic networks between individual dealers. Investors need trade through a dealer.

True or False: If the Australian Reserve Bank, through its monetary policy market operations, buys government securities, this will lead to an easing of interest rates.

True

True or False: Risk averse individuals will accept a lower rate of return so as to reduce their risk exposure.

True

Purchasing shares on the Australian Securities Exchange is an example of:

a secondary market transaction.

Assets Allocation

allocation of portfolio across a range of asset classes

a placement

an issue of new shares to a group of specific investors ( institutions and wealthy investors)

Margin Trading

borrowing money to finance the purchase of securities

Sellers of financial claims promise to pay back borrowed funds:

by borrowing extra funds in the future.

Financial markets play the following roles:

capital allocation, consumption timing, allocation of risk, and separation of ownership and control

Security Selection

choice of securities to hold inch asset class

investment

committing money today in the expectation of receiving future benefits

Primary Market

companies raise funds by creating and selling new securities to the public via the primary market

Top-down Approach

decide on the best asset allocation and then decide on the securities to include in each asset class

Market Orders

ex. buy 100 shares at best available price in the market

The special account that providers of payment services have at the Reserve Bank is called a/an:

exchange settlement account.

Financial Markets

involve both primary and secondary transactions.

examples of real assets

land, buildings, equipment and knowledge that can be used to produce goods and services

Price Contingent Orders

limit orders - ex. boy 100 shares at a price no greater than $2.10 AND/OR stop orders (stop-loss orders) - ex. sell 100 shares if the price falls below $2.00

Market Spread: s(t)

lowest ask price less highest bid price

What are the two main order types?

market orders and price contingent orders

Maintenance Margin

minimum allowable margin set by the lender

Bottom-up Approach

select the most attractive securities without regard to asset allocation

Bid-ask spread: m(t)

the difference between the bid price and the asked price

Liquidity in financial terms is:

the ease with which an asset can be sold at the published market price.

Bid Price: b(t)

the price a dealer is willing to pay for a security

Ask Price: a(t)

the price at which a dealer or other trader will sell a security

Transaction Costs

total costs of making the financial market transaction

Margin

value of the investment less value of the loan

a rights issue

when existing shareholder are given the right to purchase more shares in the company based on the size of their current share holding

a dividend reinvestment plan (DRP)

when existing shareholders are offered the opportunity to revisit part or all of their dividend payments back into company in return for more shares

A savings-surplus unit is an entity:

which has an income that exceeds its spending.