Introduction to financial markets
Everything is about risk and expected return
Some definitions:
stocks A stock, also known as a share or equity, represents ownership in a
corporation. When you own stock in a company, you own a portion of
that company and are entitled to a proportional share of its assets and
earnings. There is no real maturity date and you can buy these on the
stock market. A stock is a share but a share isn’t a stock, but the terms
are interchangeably
bonds Bonds are debt securities issued by governments, municipalities,
corporations, and other entities to raise capital. When you buy a bond,
you're essentially lending money to the issuer in exchange for periodic
interest payments and the return of the bond's face value (principal) at
maturity.
portfolio portfolio refers to a collection of financial assets such as stocks, bonds,
mutual funds, exchange-traded funds, cash equivalents, and other
investments (crypto commofities) owned by an individual, institution,
or entity. The purpose of creating a portfolio is to diversify
investments and spread risk across different asset classes, industries,
and geographic regions.
Opinion: pros and cons would u be agaisnt or not should he be our minister?
Financial system
The actors
The actors: who is playing in this game?
There are two big groups: the haves and havenots
haves havenots
- Posses capital and can lend it - Have more needs than money
out (lenders) and they will have to raise
capital (borrowers)
This course is about identifiyng who the haves and hav nots are and study the
mechanisme of getting money from the haves to the havenots
We are not going to look at individuals, but we will look at it from a
macroperspective.
• Example: we are globalising all the families together and call them the
households
1
, If these big entities want to do things they will need money, but money is
being spread unevenly over all these parties. Some people have acces and
can start to invest while other people have a shorter budget, but want to
realise dreams as well.
Who are the haves and havenots over these global entities?
1. Corporates/ companies:
Havenots
How u found a firm? Starts with money from someone else. Shareholders give
money in exchange for a equity (=aandeel).
They start borrowing money in order to do all kind of activities and os they
work with other people’s money.
they attrack money from markets to do their obligations
Its a legal personality, not tengible they borrow quit a lot
2. The government
havenots: government dept
they have to be financed, where does the money come from?
3. Housholds: have
The money is with the families
The owners of financial wealth
4. Rest of the world from belgiums eyes: have nots
We are not a closed economy because we have people that are investing
abroad and the other way around
On a net basis we are investing abroad
5. Financial industry:
The bank = a go-between: the bank takes people’s savings money and
grands it to someone else who needs some mortgage (=hypotheek)loan
takes ur deposit loans and lends it to someone with credits
The more wealth the more dept: no investments without dept
On a net basis: The net wealth is 0: what comes in goes out.
• Net wealth: all the possensions and depths you have and we take the
total asses minus the liabilities(= schulden)
• = ACTIVA-PASSIVA
The whole idea of finance is to put the money which the haves have in acces into
productive use. The haves can give the money straight to this non-haves or they do it
whit some kind of go-between (like the bank)
2
,The main actor: Households
Example: When a single household owns a house of 100 (activa) but at the same
time has a remaining mortgage debt of 80 then the net wealth equals 20
Net welath = assets (activa) – liabilities (passiva)
How do we look at their wealth? The houshold balance sheets (accounting) gives an
overview of the assets and the liabilities of a single household
real assets are tengible
assets: things you can grab
Financial assets :
intengible
Stocks are participations
in a company
Bonds are a kind of loan
Mutual funds = the
portfoilo you buy of all kind
of stocks and bonds
There is a good reason
for that: diversification
Diversification = a risk
management strategy that
creates a mix of various investments within a portfolio.
Most families are only able to buy a house thanks to the bank: mortgage loan
because ethe bank wants its money back otherwise the bank will take over
your home and sell in on the market
Consumer loans to buy a car for exemple
Kinds of assets:
An asset is a possession that has value in an exchange transaction.
Tangible assets or real assets derive value from their physical
character and the utility they generate.
Intangible assets derive value from a legal claim to some future
benefit. (something you will receive in the future)
Financial assets are intangible assets that represent a claim to
future cash (if the claim has to do something with cash)
• A House will not give u an income accept if you rent it out
3
, Real versus Financial Assets:
The economic environmment is different over different countries
It is not evenly spread
The US
• The first thing = financial assets and the second one are the real assets
• In general adults have more financial assets than real assets in avarage
India: Financial assets are a lot less than the real assets
China: somewhere in between
Belgium: financial asstes are bit smaller than the real ones (almost 50/50)
The way how people store wealth is different around the world.
Its important to realise where the wealth is in a country
Asset classes
Devide the assets to subcategories with their own special characteristics
Traditional asset classes
Stocks, bonds and cash instruments
• Cash instruments like your savings account for example
These days people are buying much more than just stocks and bonds. They are
invetsing in a lot of different things
Alternative assets
Real estate = financialised : you can buy the real estate itself or a certificate
that represents a whole portfolio of real estates (=vastgoed). In that way you
buy a financial asset of which the cashflows, the claims , the cash that you will
get comes from the rent that these buildings are delivering.
People are trading commodities (=grondstoffen). This is extremly dangerous
because there is a lot of financial risk. Look at the volatility ( =wisselvaligheid)
of the energy prices.
People try to invest in private equity (= eigen vermogen / privaat vermogen).
Invest in small start-ups like the company of your sister.
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 lobkegoossens. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.34. You're not tied to anything after your purchase.