Main Functions of the Financial System: 1) Achievementof the purposes for which people use the financial system; 2) Discovery of therates of return that equate aggregate savings with aggregate borrowings; 3)Allocation of capital to the best uses
First function: fulfill different entities’ requirements– Saving, Borrowing, Raising Equity Capital, Risk management, Exchanging Assets for Immediate Delivery, Utilizing information;
Second function: Determining Rates of Return - totalsupply of savings and the total demand of borrowings, Equilibrium interest rate,
Third function: Allocate capital to its most efficientuses
Well functioned financial market:Complete markets,Operational efficiency, Informational efficiency, Allocational efficiency
Classification of assets and markets:1) Financial Assets – Security,Currency, Contracts; 2) Real Assets: Commodity and Real Estate
Security(Fixed income vs. Equity Securities )
Fixed income securities:Bonds, Notes, Bills,Commercial paper, Certificates of deposit, Repurchase agreements andConvertible debt
Equity securities:Common stock, Preferred stock andWarrants
Classification of markets:Primary (IPO) vs. Secondary markets,Money vs. Capital markets, Traditional vs. Alternative markets
A security market index: is used torepresent theperformanceof anasset class, security market, or segment of a market. Price index - only theprices. Return index - both prices and income
Characteristics of Equity Indexes:Broad market index,Multi-market index, Multi-market index with fundamental, weighting Sector Index， Sector Index
Market Anomalies:something deviates and helps to disprove the EMH
Behavioral biases that have been identified include Loss aversion, Overconfidence, Herding, Information Cascades and Other Behavioral Biases
Private equity has the following characteristics: Less liquidity， Share price is negotiated between the firm and its investors, not determined in a market.，More limited firm financial disclosure， Lower reporting costs ， Potentially weaker corporate governance， Greater ability to focus on long-term prospects； Potentially greater return for investors once the firm goes public
Economic and industry environment will have a majorinfluence on the success of a firm and the realized rate of return on itsstock.
Structural Economic Changes:Macroeconomic factors, Technology, Demographics, Governments, Socialinfluence
Industry Life Cycle:Embryonicstage, Growth stage, Shakeout stage, Mature stage, Decline stage
Commercial Industry Classification Systems
Global Industry Classification Standard(GICS)
Russell Global Sectors(RGS)
Industry Classification Benchmark(ICB)
Governmental Industry Classification Systems
International Standard Industrial Classification of All Economic Activities(ISIC).
Statistical Classification of Economic Activities in the European community.
Australian and New Zealand Standard Industrial Classification(ANZSIC).
North American Industry Classification System(NAICS).
A company analysis should include the following elements
Firm overview, including information on operations, governance, and strengths and weaknesses.
Industry characteristics.
Product demand.
A Product costs.
Pricing environment.
a Financial ratios, with comparisons to other firms and overtime.
Projected financial statements and firm valuation.
Major categories of equity valuation models:Discounted cash flow models, Multiplier models,Asset-based models
Discounted cash flow models
DDMexpression for the intrinsic value of a share is
Price multiples based on comparables
Price to Earnings (P/E)
Price to Sales (P/S)
Price to Book Value (P/BV)
Price to Cash Flow (P/CF)
Enterprise Value to EBITDA (EV/EBITDA)
Private equity (PE):Leveraged buyouts (LBOs), Venture capital, Development capital and Distressedinvesting
Characteristics of Attractive Target Companies forLBOs
Undervalued/depressed stock price
Willing management
Inefficient companies
Strong and sustainable cash flow
Low leverage
Assets
