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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?

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Would you have invested?

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December 1977: Arrested for bad driving

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The entire Microsoft staff.
Albuquerque, 1978

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Learning goals
Define 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


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Materials to learn from

Stephen Valdez: An Introduction to Global Financial


Markets,Macmillan Press Ltd.1997 chapter 1

Gyrgy Szkely: The Essence of Money and Banking


A Handbook for Financial Managers. KJK-Kerszv 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.

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"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?

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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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FINANCIAL MARKETS
-Money and Capital
Funds
markets
Securities -OTC, Stock- exchanges

?
Funds

LENDERS Funds BORROWERS


-HOUSEHOLDS priv.placement -COMPANIES
-Government ? -Government
-Municipalities

Deposits Loans
FINANCIAL
INSTITUTIONS
-Commercial
Funds banks,Investment banks,
Mutual funds,Leasing Funds
comp.,etc. Vallyon Andrea 2010 13
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

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

II. The general equivalents (salt, slaves etc.)


Served as a basis of comparison

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Criteria of money
Physical 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 (rtkmr)


Means of turnover (forgalmi eszkz)
Medium of payment, medium of exchange (fizetsi
eszkz) standard of deferred payment (halasztott
fizetsi eszkz)
Store of wealth (kincskpz)
World money if accepted internationally

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When did money first appear?

All equivalents are money


Karl Marx only gold
Today?
credit money system

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Think About That!:

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Era of metals

Monometallism
Bimetallism
Greshams axiom. The good money was
crowded out by the worse

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Money substitutes

Need to increase Appearance of


Growing turnover
rotation substitutes

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Money substitutes 2

Acceptability
Discounting papers
Commercial papers, trade bills
(kereskedelmi vlt)
Today e-money

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Pyramid shape
analysis company
For long term
Fundemental analysis
country
Economic variables
and the exchange rate

world economy
Q?

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Participants

bearish and bullish


traders and
speculators

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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 banks
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,


bankersacceptance
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
Banks 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 Vallyon Andrea 2010 34
Thanks for your attention!

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