AEM1200_1010ToPost - AEM220, Introduction to Business...

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Unformatted text preview: AEM220, Introduction to Business Management. AEM220, Friday 10/10 Securities Markets Bond and Capital Market Valuing Stocks Tips on Investing Types of Investments Types Traditional Stocks/Bonds Government Securities Certificates of Deposit Money Market or Mutual Funds Real Estate High-Risk Stock on Margin Commodities Junk Bonds Derivatives Why do companies take loans? Why Supply side The normal transacting of business is made much easier by credit; The Banks are institutions that agglomerate small quantities of money that Banks we want to have access to and obtain a profit from lending (liquid we allocation) as opposed to investing (illiquid allocation) it; (illiquid Different investors have different appetite for risk. Demand side Short term loans allow to even out variability; Long term loans allow to leverage capital... That is, if you can take a Long leverage ... loan, and the proceeds of your long term investment are greater than the principal and interest on the loan, you basically have made more money on the same capital investment!!! money Bond Market Bond Coupon Rate/Interest Rate Principal Maturity Date Types - Unsecured/Debenture - Secured Sinking fund Callable Convertible Capital Markets Capital Main activities Primary Markets (IPOs) Secondary Markets Common vs. Preferred Underwriting Specialists who assist in the issue and sale of new Specialists securities. securities. Investment banks Types of Investors Types Institutional investors Large organizations – such as pension funds, mutual funds, Large insurance companies, and banks – that invest their own funds or the funds of others. funds Organizations that buy stocks and bonds and then sell shares in Organizations those securities to the public. those Individuals or companies that invest in new businesses in exchange Individuals for partial ownership of those businesses. A form of private equity. form Purchasing other firms or taking big stakes in them (and often taking Purchasing public firms private by purchasing most of their publicly traded shares) in order to reshape their businesses, and then sell these holdings for a profit. Private pools of capital that can invest, long or short, in whatever Private they please. they Mutual funds Venture capital Private equity Hedge funds Hedge Valuing Stocks Valuing Returns Growth Risk Price/Earnings Ratio The Capital Assets Pricing Model r = Rf + beta x ( Km - Rf ) where Rf r is the expected return rate on a security; Rf is the rate of a "risk-free" investment, i.e. cash; Km is the return rate of the appropriate asset class; Km Beta is the volatility of the security relative to the asset class. Beta Hedging Hedging The purchase or sale of a derivative The security in order to reduce or eliminate risk associated with undesirable price changes of another security. changes Derivatives Derivatives Forward contract The purchase or sale of an item or service at a specified price for The delivery at a future date . delivery Financial contracts between two parties that allow the buyer, then owner, Financial of the option the right but not the obligation to buy/sell an agreed quantity right of a particular commodity or financial instrument from the seller of the commodity financial option at a certain time for a certain price. "Selling" in this context is not supplying something that the seller owns, but it means granting the buyer this right, against a fee. buyer Agreement in which both parties exchange a strip of future interest Agreement payments; one party paying fixed interest payments, and one party paying floating interest payments, on some notional value. The value of notional the swap is the net present value of all future interest payments. the Credit default swaps - $62 trillion mid 2008!!! Call and put options Swap Is it worthwhile to invest in the stock market? market? Rate of return S&P 500 1994-2001: 16%/year Rate of return managed mutual funds: 5%/year Well run stock markets are efficient; Therefore, they cannot be outguessed; Therefore, it is best to hold a portfolio of indexed funds. Short-term information and expectations; “Ponzi” mechanisms; Self-reinforcing information flows. “A Random Walk Through Wall Street” “Irrational Exuberance” Investment Strategies Investment Valuing Stocks Returns Growth Risk 7-11% historical returns Weighted portfolios Do not follow speculative bubbles Long-term horizon Diversified investments Be contrarian! Take-Aways Take-Aways The capital and securities markets are efficient The ways to aggregate the supply and demand of finance; finance; The main measures for investment valuation are The returns, growth, and risk; returns, In the absence of insider information, it is best to In invest for the long term, diversify, and shun quick movements into the “flavor of the month”. quick ...
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This note was uploaded on 11/12/2009 for the course AEM 1200 at Cornell University (Engineering School).

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