Unit 2Investing Environment

Joey Lai,ITP-Banking Academy Vietnam

Content

Financial Markets

Financial Intermediaries

Different Safe Investment Products

Financial System

A financial institution/ intermediary acts as an agent in raising money from the investors.

The markets that are used to raise funds / in which financial securities are traded

Financial Markets

Financial Institutions

London Stock Exchange

Financial Institution: HSBC

www.themegallery.com

Classification of Financial Markets

FinancialMarkets

the market for the issues and trades of short-term securities. Text

Money Market Capital Market

The market for the issues and trades of long-term securities

Stages of Financial Markets

Primary Market

Secondary Market

A market where newly issued securities are sold

A market where existing securities are traded

Investing funds in financial securities

Debt securities Equity securities

Sample of Ordinary Share

Ordinary Shares Investment

• relatively higher return• represents equity

ownership • entitles the owner to a

vote in matters

• Relatively higher risk• Residual claimant• Dividends are not

guaranteed.

Advantages Disadvantages

Shareholders Rights

• Voting Power on Major Issues that affecting the business

• Ownership in a Portion of the Company• The Right to Transfer Ownership • Right to receive dividends• The Right to Sue for Wrongful Acts• Entitle to receive financial information, annual

report

Ordinary Shares Investment

• Share prices fluctuate daily • Decrease in value• No guaranteed on

dividend payments• In case of liquidation

• Very High returnIncrease in valueCurrent income

• Highly liquid• Tax benefits on

unrealised capital gains

Debt securities

A paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract.

Sample of a bond

Features of bonds

Maturity Dates

(Expiry Dates)

Interest Payment(Coupon payment)

Principal repayment

Minimum investment(e.g. £100}

Investing in bonds

• Less volatile than investing in shares

• High yield• Stability and security• Consistent incomes• Tax benefits

• Interest rate risks• Credit risks• Call risks• Inflation risks

Benefits Risks

I nvestment Type

Capital Security

Protection from I nflation I ncome Growth Liquidity

Savings accounts

Excellent Weak Fixed, very stable, low

None Good to excellent

Money market securities (treasury bills, money market funds)

Good to excellent

Weak to average

Fixed, very stable

Generally none

Very good

Government bonds (federal, provincial, municipal)

Good to excellent

Average

Fixed, very stable

None

Good to very good

Preferred shares

Good to average

Average

Relatively fixed

Negligible

Good

Common shares

Weak to moderate

Variable

Variable

Moderate to excellent

Relatively good to very good

Corporate bonds

Good to excellent

Average

Fixed, very stable

Generally none

Good

Mutual funds

Weak to average

Variable, generally good

Variable

Moderate to excellent

Good

I ndexed term savings

Excellent

Good in the long term

Only known at maturity

Good

Weak

Debentures

Good to average

Good

Variable

Generally none

Good

I nvestment Type

Capital Security

Protection from

Inflation I ncome Growth Liquidity

Banks Savings Accounts

National Savings and Investments

Building Societies

.

A state-owned saving bank in the United Kingdom.Very safe but its rates are often low.

offer banking and related financial services especially mortgage lending for its members.

Types of UK Investment

A traditional form of financial investment where the money is saved on a regular basis and there is no capital loss as an investment risk. (Subject to inflation risk)

Credit Unions

Shares

Offer flexible and community based savings and loan products.

Shares are a popular financial investment option.

Types of UK Investment (cont’)

Collective investments

pooling of funds for a single investment fund operated by a fund manager.

Bonds

Shares

are traded on the stock market at a set interest rate. (Debt securities) Loans to a company, local authority or even the government are all bond options.

Types of UK Investment (cont’)

Collective investments

pooling of funds for a single investment fund operated by a fund manager.

www.themegallery.com

Financial Intermediaries

Friendly societies

Insurance Companies

Building Societies

Banks

Pension fund

Different Investment Products

• give you a secure and flexible way to manage your day-to-day finances.

Savings Accounts

e.g. Individual Savings Accounts (ISA), Cash Individual Savings Account (Cash ISA), Regular Savings Account, Instant Access Savings, Fixed Rate Bond etc.

Types of Investment

National savings accounts & savings scheme types

National Savings are secure investments guaranteed by the British Government.

Example: Premium Bonds, Direct ISA, Direct Saver, Income Bond, Investment Account, Fixed-Term Investment

Types of InvestmentStocks and Shares

• Are also known as equities.• do not have a fixed price but

fluctuate up and down.• returns on this investment are

dividends and / or capital gains.

Sample: preference shares, ordinary shares, IPO, blue chips

Types of InvestmentDebt Securities (Bonds/ Fixed Income Securities)

When you purchase them, you will receive interest on the bond as it is considered a loan.

Example: gilts, treasury bills, treasury notes, government bonds, corporate bonds

Types of InvestmentUnit Trusts and OEICs

Unit trusts and OEICs ("Open Ended Investment Companies") are collective or mutual funds which allow the monies contributed by a large number of investors to be "pooled" together for investment in the stock market.

Example: Closed-end funds, open- ended funds, load funds

Investing in Mutual Funds Advantages

• Professional management• Investment diversification• Liquidity• Explicit investment goals• Simple reinvestment

programs

Disadvantages

• Many funds charge hefty fees, leading to lower overall returns.

• Over time, statistics have shown that most actively managed funds tend to underperform their benchmark averages.

• Mutual funds cannot be bought or sold during regular trading hours, but instead are priced just once per day.

Types of InvestmentInsurance/ Endowment policies

An endowment policy is a savings and life assurance policy for an agreed period, the minimum term being 10 years.

Example: with profits endowment, low cost endowment, friendly society plans, low start endowment, annuities

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