how to read fin an cial papers

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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?

Would you have invested?

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December 1977: Arrested for bad driving

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The entire Microsoft staff.Albuquerque, 1978

Learning goalsDefine 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 functions Vallyon Andrea 2010

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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 BankingA 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.

"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?

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.

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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

Money evolution I. Direct interchange of commodities (barter trade)

II. The general equivalents (salt, slaves etc.)– Served as a basis of comparison

Criteria of moneyPhysical 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 moneyKarl Marx – only goldToday? –credit money system

Think About That!:

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Era of metals

MonometallismBimetallismGreshams 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

AcceptabilityDiscounting papersCommercial papers, trade bills

(kereskedelmi váltó)Today –e-money

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Pyramid shape analysis

For long termFundemental analysisEconomic variables

and the exchange rate

Q?

company

country

world economy

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Participants

bearish and bullish traders and speculators

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 notes

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Thanks for your attention!