Summary
Summary Introduction to Financial Markets
- Course
- Institution
This document covers and summarizes the entire slidepack of the subject (400+ slides), as well as the video classes on Blackboard.
[Show more]
Seller
Follow
louisblondeau
Content preview
Introduction to Financial Markets: Class Notes1 Unit 1: The Financial System
1.1 Section 1: The Actors
Actors = Where is financial wealth stored? Who has money? à 2 Parties in the economy: Haves
and Havenots:
- Haves = Parties that possess money and can lend it out (banks, government, …) (net posi-
tion is positive).
- Havenots = Parties that have more needs than money and they will have to raise capital
(borrowers) (households, corporates, …) (net position is ‘in debt’).
à We consider the main actor in an economy to be Households (gezinnen) because they hold
the most money. These actors have a net wealth (= assets – liabilities), summarized in a house-
hold balance sheet:
= Government bonds
1.1.1 Assets
Asset = A possession that has value in an exchange transaction. In simple words, it’s everything a
household owns.
1.1.1.1 Types of assets
- Tangible assets/ real assets = Assets with a physical character and generate utility.
- Intangible assets = Assets that have a legal claim to some future benefit.
- Financial assets = Intangible assets that represent a claim to future cash.
1
,1.1.1.2 Different asset classes
- Traditional assets:
o Common stock = Shares from a company that trades on the stock index
o Bonds = You don’t buy shares in a company, but you purchase a share in the bond
of assets (obligaties in NL)
§ Convertible bond = Bonds that can be converted to stocks
§ Exchangeable bond
§ High yield bond = Bonds that are in the speculative grade and are often very
risky!
§ Deferred interest bond = Bonds where the payment of interest rates is de-
layed
o Cash (and cash equivalents)
- Alternative assets:
o Real estate
o Commodities = Derivatives you can invest in (Lithium, Gold, Silver, Oil, …).
o Private equity = Investments in non-listed companies (small start-ups)
o Hedge funds = Investment opportunities for the wealthy (high minimum investment
amount) = Pool of money that is used to trade a lot of different financial products.
o Venture capital = Capital that is injected in an expanding business (often high risk)
o Currencies (forex)
1.1.2 Liabilities
Liabilities = Debt someone has towards a financial institution
1.1.2.1 Mortgage loans
Mortgage loans = A loan someone takes out to buy a house/ apartment. If you can’t repay this
loan, the bank can take control over your house and sell it back to the market.
1.1.2.2 Consumer loans
Consumer loans = A loan someone takes out to buy consumer goods (furniture, a car, …).
1.1.2.3 Tax debt
Tax debt = Money that households still owe to the government.
1.1.3 Growth in net wealth
à Households can grow/ change their net wealth in various ways:
- Value changes in assets and liabilities (e.g., A house you bought in 2000 is now worth a lot
more, stocks from a company rise in market value, debt becomes smaller, …)
- Net-income from labour, capital (income from rental properties, …), or transfers
- Inheritances and gifts
à Wealth is something that dynamically changes (through time, …) and is very relative.
2
,1.1.4 Distribution of wealth and wealth inequality
à Wealth is not distributed well in the world. There is inequality between regions and within re-
gions (or countries). In the end, households in some parts of the world own lots more than others.
In general, households are the owners of all assets in the economy!
à Africa, India and Asia-Pacific are some of the regions with the smallest wealth (Bottom 10%)
à China and Latin-America have a large middle class
à Europe and North-America are some of the wealthiest regions (top 1%)
1.2 Section 2: The balance sheets of other actors
à All the other actors are (somehow) interconnected with each other, so it’s important to have a
good understanding of their respective balance sheets.
1.2.1 Corporates (companies)
Assets Liabilities
3
, à What is described in this balance sheet?
- Assets are organized in order of liquidity:
o Fixed assets (vaste activa)
o Current assets (variabele activa)
o Deposits and cash
- Liabilities can be short term or long term:
o Equity = Money that is brought in by shareholders and investors at the foundation of
the company. à This equity can be increased by profits and decreased by losses.
o Debt = Loans the company took from banks/ other financial institutions. With this
money, they can gain leverage (= the profits gained by taking the loan are higher
than the cost of the loan)
- Everything is valued at market value
à Companies use leverage to grow wealth à We look at the return on Equity (ROE), the Lever-
age Multiplier (LM) and the Return on Assets (ROA):
- Return on Equity (ROE) = The return a shareholder gets on the money they put into the
business. In an ideal scenario, this should be bigger than the ROA
o Formula (Dupont Scheme): ROE = ROA x LM
- Return on Assets (ROA) = The return a company gets on assets
- Leverage multiplier = Assets/ equity ratio
1.2.2 Financial sector – Banks
Assets Liabilities
à Core of the credit institutions = Giving credit to households, corporates, … à They use A LOT
of debt!
- Deposits = Money they get from people who save their money
- Bonds (both on asset- and liability side, because they both issue bonds and buy bonds)
- Central bank financing = Money that comes from the central bank when the bank needs it
- Interbank loans = loans between banks
- Tax debt
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller louisblondeau. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.27. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
48072 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 15 years now