how to read financial-papers

How to read financial papers

Basic financial terms, instruments and markets to

know in order to understand news

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How to read financial papers

How to get information for

the best investments?

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Would you have invested?

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December 1977: Arrested for bad driving

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The entire Microsoft staff.

Albuquerque, 1978

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Learning goals

Define Finance and the Financial System

Understand the relationship between

financial institutions and markets

Describe the role of money and capital

flow in the financial system

Define the money and its functions6

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Materials to learn from

Stephen Valdez: An Introduction to Global Financial

Markets,Macmillan Press Ltd.1997 – chapter 1

György Székely: The Essence of Money and Banking

A Handbook for Financial Managers. KJK-Kerszöv Kft. 2002. CH 1

Lawrence J. Gitman: Principles of Managerial Finance, Addison -

Wesley 10th Edition – see sharepoint: CH1:21-28old.

Sharepoint: Keown CH2 Financial Markets and Interest rates

Lecture ppt.

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Indicative aim

Link theory with the ‘real’ world.

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"In my whole life, I have known no wise people

(over a broad subject matter area) who didn't

read all the time - none, zero."-- Charlie

Munger

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Money = Happiness?

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Power of Money and Finance

"We witnessed the collapse of the financial

system,' said Mr. Soros. "There's no sign we

are anywhere near the bottom."

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Securities

Funds

FINANCIAL MARKETS

-Money and Capital

markets

-OTC, Stock- exchanges

Funds

?

LENDERS

-HOUSEHOLDS

-Government

Funds

priv.placement

?

BORROWERS

-COMPANIES

-Government

-Municipalities

Deposits

Funds

Loans

Funds

FINANCIAL

INSTITUTIONS

-Commercial

banks,Investment banks,

Mutual funds,Leasing

comp.,etc. 13Vallyon Andrea 2010

Investment decision

„All there is to investing is picking good

stocks at good times and staying with them

as long as they remain good companies„

Warren Buffett

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Money evolution

I. Direct interchange of commodities (barter trade)

II. The general equivalents (salt, slaves etc.)

– Served as a basis of comparison

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Criteria of money

Physical essentials:

– Cheap to produce

– Homogeneously equal

– Highly divisible

– Convenient to carry

– Universally acceptable

– Stability in value

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III. Functions of money

– Measure of value (értékmérő)

– Means of turnover (forgalmi eszköz)

– Medium of payment, medium of exchange (fizetési

eszköz) –standard of deferred payment (halasztott

fizetési eszköz)

– Store of wealth (kincsképző)

– World money – if accepted internationally

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When did money first appear?

All equivalents are money

Karl Marx – only gold

Today?

–credit money system

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Think About That!:

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Era of metals

Monometallism

Bimetallism

Greshams axiom. The good money was

crowded out by the worse

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Money substitutes

Growing turnover

Need to increase rotation

Appearance of

substitutes

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Money substitutes 2

Acceptability

Discounting papers

Commercial papers, trade bills

(kereskedelmi váltó)

Today –e-money

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Pyramid shape

analysis

For long term

Fundemental analysis

Economic variables

and the exchange rate

Q?

company

country

world economy

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Participants

bearish and bullish

traders and

speculators

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A VERY Bad Bear!

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Market terminologies

– Secondary and primary

– Money and bond market, domestic and international markets

– Wholesale and retail market

– Open and closed ( open offer for sale and private placing

– Claim for the interest (Bearer and registered securities)

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Money market

Short term instruments

Pure discount securities

Contracts up to 1 year

Huge volume and vigorous competition

No physical place

Essentially for professionals ( banks, fin. institutional

investors, brokerage firms, companies)

Liquidity ( fine spreads based on interest rate of lending

and borrowing)

Creditworthiness (risk and return)

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Financial instruments

Money market instruments

– Treasury bills (T-bill)

– Local authority/ public utility bills

– Certificate of deposit (CD)

– Commercial paper (CP)

– Bill of exchange

– Bankers` acceptance (BA)

– Federal agency securities (Fannie Mae)

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Financial instruments

Other possibilities

– Call money

– Interbank market

– Repurchase agreement /repo/

– - Time deposit

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Call money

– Call money

– Term: very short period of time

• Overnight(12p.m-12p.m. next day)

• 3 or 7 days notice

– Negotiable: no

– Money is lent by one bank to another

and may be called back anytime

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Money market securities

T-bills

– Domestic instruments issued by governments to raise short term finance

balancing cashflow

– Non-interest bearing and interest-bearing, sold at discount in auction

– Negotiable

– Generally 13,26,52 weeks

Certificate of deposit - CD

– Usually issued by banks, is simple the evidence of time deposit

– Negotiable not as time deposit

– Sold at discount or pay coupon

– Interest payed at maturity

– 30 days to 3 month or could be longer

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Money market securities 2

Commercial paper- CP

– Issued by large, safe and well-known

companies bypassing banks to achieve lower

borrowing rates (sometimes below the bank’s

prime rate)

– Very short term (max 270 days, most 60days

or less)

– Issued at discount

– Unsecured security

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Money market securities

Trade bill, bills of exchange,

bankers’acceptance

– Used by companies for trade purposes

– The seller draws up a bill to the buyer to pay

and asks to sign it

– Could be sold at a discount to the bank

– Bank’s signature is a guaranty ( eligible bills

in UK the Bank of England is the guarantor)

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Capital market

Instruments

– Bonds

– Government bonds

– Local authority papers

– Mortgage or other assets backed bonds

– Corporate

– Foreign

– Junk

– Shares

– Preferred

– Normal

Innovations

– Convertibles

– Variables

Investment notes34Vallyon Andrea 2010

Thanks for your attention!

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