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Samenvatting 'Introduction to Financial Markets'
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Comprehensive and detailed summary of introduction to financial markets given by prof. Marc de Ceuster
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The actorThe economy consists out of haves and havenots.
Haves possess capital and can lend it out (Lenders)
↓funding from haves to havenots
Havenots have more needs than money and they will have to raise capital (borrowers).
Would you consider the following entities as haves or havenots on a macroeconomic level?
Government : havenots (have gov debt)
Corporates : havenots (they work w other ppls money)
Bank : in between (they borrow and lend ppls money)
→ Families/households : Haves
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The main Actor : Households
Net wealth/Equity = assets – liabilities
When a single household owns a house of 100 but at the
same time has a remaining mortgage debt of 80, its net
wealth is 20
The household balance sheet gives an overview of the
assets and the liabilities of a single household :
the way ppl store wealth is diff all over the world
Liabilities of a household
Mortgage loans
Consumer loans
Tax debt
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Asset = a possession that has value in an exchange transaction
Tangible/Real assets or derive value from their physical character + the utility they generate
Intangible assets derive value from a legal claim to some future benefit
Financial assets are intangible assets that represent a claim to future cash
Asset Classes
Traditional
Common stock
Bonds
Cash (and cash equivalents)
Alternative
Real estate
Commodities
, Private equity
Hedge funds
Venture capital
Currencies (forex)
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Growth Drivers in Net Wealth
Value changes in assets and liabilities
Example : stocks change value by making good investments
Net-income from labour, capital or transfers (i.e. pensions, social security based income)
Inheritances, gifts
______________________________ ____________________________________________________
Wealth Creation
Poor : only have expenses and no assets
Middle : buy a house from the money they save and pay off mortgage loans, then the house is theirs
Rich : generated income on its own like rent + dividends ; they collect assets that generate cash for
you
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Wealth inequality
Wealth is not equally distributed
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- households are the ultimate owners of all assets in the economy : individuals are the owners of
the corporates and they own all the assets in the economy so they are all there is
- individuals are the bearers of risk within the financial system
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, Other Actors
Corporates
This balance sheet gives an overview of the assets >< liabilities of a corporation:
liabilities of a corporate :
Equity shares : claim of shareholders
who own the company in stocks,
when there’s profit they receive a
share in dividends
><
Debt : ppl who lend money to the
company but don’t have anyth to say,
they have to be paid back
Gearing Ratio = D / E = ratio between debt and equity is important
Working with borrowed money is better ! : because the cost of the loan (interest) is lower than the
profit margin you can make ; you increase your own wealth (=leverage)
Financial assets:
HOLDING COMPANIES :
parent company PC : 100 E + 100 D = 200 A
invests it in daughter company
DC : 200 E + 200 D = 400 A
gets 200 equity + is 200 in debt bc it borrowed that from PC
invests 400 in a new company
NC : 400 E + 400 D = 800 A
(control a lot of money w a little money; using debt to raise profits = leverage)
Assets :
‘Fixed’ = long term commitment
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Leverage
Companies can be funded with
shareholder funds (equity) consisting out of the original equity + rights issues + retained
profit
debt
Leverage = when companies use debt to finance their operations (profit > interest loan)
Most companies use leverage to raise the ROE above the ROA
ROE = return on equity i.e. profit/equity : return on investement ; how much do I earn on the
money I as shareholder invested = equity
(net income / equity x 100)
ROA = return on assets i.e. profit/assets : return u get w all the money u use ; financial
performance (net income / total assets x 100)
, The Dupont scheme relates the ROE to the ROA: ROE = ROA x LM
The Leverage Multiplier (LM) = Assets/Equity ratio A / E
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Banks
liabilities of a bank :
Banks use much more leverage than companies
! they lend out money from depositors (they
have a lot of debt)
Trading book = assets which the bank has for trading
Banking book = all kinds of loans
Bond portfolio = banks want to transform deposits in sth which has a higher return; they lend the
deposited money to government bonds or lend it out and earn interest on it
Bond = a loan that u give to smn for interest, not dividends
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Mutual Fund
= a portfolio manager who gathers mutual funds ; collects
money from a number of investors who share a common
investment objective and invests in equities, bonds, ..;
Mutual funds let you pool your money with other
investors to "mutually" buy stocks, bonds, and other
investments
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Insurance Company
You pay money in exchange for insurance
coverage, then they reinvest that money for you
into other interest-generating assets.
liability:
technical provisions
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Government balance sheet :
Liability : huge gov debt
Assets : some gov buildings, hardly any
Equity = negative (they could just raise taxes to pay off their debt so no problem)
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