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An Overview of the Financial World How to Allocate Resources to Maximize Profits

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An overview of the financial world

How to allocate resources to maximize profits

Price of money: interest rate

What determines the interest rate?
Fundamental interest rate =/= benchmark interest rate (federal state)

“The money is cheap. The capital is expensive.” What does it mean?

The interest rate is high/low.

Determined by risk

Some investment profits is risky  higher returns

Financial World

  • Sell-side: sell financial securities (stocks, bonds, alternatives)
  • Bond: low-risk-low-return financial security, fixed income
  • Stock (equity): Ownership of sth, relatively-high-risk-high-return financial security
  • Alternatives (structured products vs. standard products (bond, stock etc.), financial engineering, portfolio): get a CAIA
  • Hedge fund
  • Private equity
  • Futures
  • Options
  • Commodities
  • REITs (Real Estate Investment Trusts)
  • FX
  • FICC: Fixed income instruments, currencies, and commodities

  • Investment banks (broker-dealer)
  • 3 divisions: investment banking, sales and trading, research

  • Stock (equity): share of stock represents fractional ownership of an asset e.g. oils, forest, in proportion to the total number of shares

IPO (Initial Public Offering): Initial (First time); Public (over 200 people); Offering (sale)

Pros of being a listed company: earn more cash, promote image (been through the whole process of due diligence in order to be listed on a famous exchange e.g. SEHK (Stock Exchange HK) ) etc.

(Blank cheque companies cannot be legally listed.)

  • Due diligence (by investment bank): check the real ownership (investigation of a business or person prior to signing a contract, or an act with a certain standard of care)

  • Investment banking: create securities and sell (primary market)
  • Trading/ market maker: create liquidity (secondary market) (easiness of buying and selling things in the secondary market (without affecting the assets’ price) e.g. Bottled water has a higher liquidity than houses in Mata.
  • Secondary market: traders, salesperson of financial securities (call and receive calls from investors)
  • Analyst: stock research and make rating
  • Bulge bracket (world’s most systemically important multinational investment banks and financial institutions; facilitates most global capital movement): Bank of America (Merrill Lynch), Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and UBS.

Bulge bracket > boutique

  • Boutique: Jefferies (American multinational investment bank), Rothschild (world’s largest independent financial advisory groups), Lazard (world’s leading financial advisory and asset management) etc.

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  • Buy-side:

Broker: Middlemen; individual persons who arrange transaction between a buyer and a seller

Dealer: buyer

Mutual fund (an investment programme funded by shareholders that trades in diversified holdings and is professionally managed, restricted): Vanguard, State Street

Largest in the world: Ant Finance

Pension fund

Insurance firm

Index fund: Low-risk-low-return but still riskier than bonds; normal return is the return you get from index fund

ETF (exchange-traded fund): MSCI

Hedge fund (an offshore investment fund, typically formed as a private limited partnership, that engages in speculation using credit or borrowed capital; cannot sell the product to ordinary investors, but high networks people (hnw); searching for abnormal return):

Renaissance, GSAM, Bridgewater, Paulson & Co, AQR

Proprietary trading firms: Jane Street

Quant trading firms: Two Sigma, Tower Research, SAC (Point72)

Trading strategic: momentum, mean reversion…

Trading assets: equities, FICC, MBS…

IPOs are targeted to the public but private equity/ hedge fund are not (lowest commitment:$10 million)

Private equity (capital that is not listed on a public exchange. Within 200 people. Buy shares from the promising company): Blackstone

VC

LBO: KKR

MBO

Distressed Debt

Retail Traders

A private investment in public equity (PIPE) is a private investment firm's, a mutual fund's or another qualified investors' purchase of stock in a company at a discount to the current market value (CMV) per share for the purpose of raising capital.

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