SECURITY ANALYSIS AND SECURITY ANALYSIS AND PORTFOLIO MANAGEMENTPORTFOLIO MANAGEMENT

INTRODUCTION

Main ConceptsMain ConceptsReal assetsFinancial assetsRole of financial

marketsAgency problemCorporate

governanceFinancial

intermediariesInvestment companyInvestment banker

Pass-through security

SecuritizationPrimitive securityDerivative securityMoney marketMoney market

instrumentsBond marketBond market

instruments

Types of stock and bond market indices

UnderwritingSeasoned issuePrivate placementShort saleLong positionShort positionPrimary marketSecondary marketThird marketFourth market

Insider tradingUnit investment

trustManaged

investment companies

Hedge fundsMutual fundsInternational

fundsIndex fundsExchange-traded

funds

Real assets Financial assets

Land, buildings, equipment

Claims such as securities to the income generated by real assets

Role of financial markets Agency problem

Risk allocationConsumption timingSeparation of

ownership and management

Managers, who are hired as agents of the shareholders, may pursue their own interest instead.

Corporate governance Financial intermediaries

Banks Investment

companies Insurance companiesCredit unions

Investment company Investment banker

Pool together and manage the money of many investors

i.e. mutual funds

Advise the issuing firm on the prices it can charge for the securities issued, market conditions, and appropriate interest rates.

i.e. Goldman Sachs

Pass-through security Securitization

Backed by homogenous asset pools (i.e. mortgages)

The purchaser receives all interest and principal payments.

i.e. Mortgages are treated like other securities in financial markets.

Primitive security Derivative security

Offers returns based only on the status of the issuer◦ Bond-interest payments:

depend on the solvency of the issuing body.

◦ Dividend payments: depend on firm’s financial position.

Yields return that depend on additional factors pertaining to the prices of other assets (i.e. underlying asset).

Money market Money market instruments

Maturity: less than one year

Short-term fixed income market

Treasury billCertificate of depositCommercial paperBankers’ acceptancesEurodollarsRepos and reverses

Bond market Bond market instruments

Long-term fixed income market

Treasury notes and bonds

International bondsMunicipal bondsCorporate bondsMortgage-backed

securities

Seasoned Issue:all issues after IPO

Types of stock and bond market indices

Underwriting

Price-weighted indexValue-weighted indexEqually-weighted

index

The role of investment bankers in the IPO process.

Private placement Short sale

Opposite of public offering

Selling shares directly to to a small group of institutional or wealthy investors.

Allows investors to profit from a decline in a security’s price.

The investor borrows a share of stock from a broker and sells it.

The short-seller must purchase a share of the same stock in the market to replace the share that was borrowed (covering the short position).

Long position Short position

Purchase Sell

Primary market Secondary market

Where the new issue takes place.

Where trading of already-issued securities takes place.

OTCNo membership requirements for trading

No listing requirements for securities

Third market Fourth market

Trading of exchange-listed securities on the over-the-counter market

Direct trading between investors in exchange-listed securities without benefit of a broker

Insider trading Unit investment trust

Private information held by officers, directors, or major stockholders that has not yet been given to the public.

Pools of money invested in a portfolio that is fixed for the life of the fund.

Managed investment companies

Hedge funds

BoD of the fund (elected by shareholders) hires a management company to manage the portfolio

Closed-end◦ Do not issue shares◦ Liquidation: shares are

sold to other investors Opened-end

◦ Issue shares◦ Liquidation: shares are

sold back to the fund

Are not registered as mutual funds and not subject to regulatory authority

Open to only wealthy or institutional investors

Like mutual funds allow private investors to pool assets to be invested by a fund manager

Mutual funds International funds

Open-end investment companies

Invest in securities worldwide

Index funds Exchange-traded funds

Tries to match the performance of a broad market index

Buys shares in securities included in a particular index in proportion to each security’s representation in that index

Allow investors to trade index portfolios just as they do shares of stock