Posts Tagged ‘bonds’
Wednesday, July 29th, 2009
General Business Education – What is Investment Banking?
Investment bankers work with corporations, governments, institutional investors and high-net individuals to raise capital and provide financial advice. Their main functions are: 1) Underwriting and 2) Mergers &Acquisitions advisory (M&A).
Companies need cash to grow and expand so they go to investment banks to borrow capital. Investment banks help sell securities (debt and equity) to investors to help raise this cash. These securities come in the form of stocks, bonds, or loans.
There are many specialized functions at an investment bank, ranging from private wealth management (brokers for the rich) to risk managers (who make sure the bank isn’t taking too much risk). However, investment banks are most commonly broken down into 3 areas:
1) Corporate Finance
2) Sales & Trading
3) Equity Research
(I will discuss each of these in a later post)
Investment banks are different from commercial banks because they provide M&A and other financial advice, whereas commercial banks do not. Roles of commercial banks include, but not limited to, accepting money deposits and lending capital. Investment and commercial banks used to be completely separate entities but now some firms have evolved into a “one stop shopping.”
There are dozens of specialized functions at an investment bank, ranging from private wealth management (essentially, brokers to the rich) to risk managers (those who make sure the bank isn’t taking on too much risk). At most major investment banks, the corporate finance and sales and trading functions are among the largest and most important.
Which Investment Bank is the Best?
It’s hard to say which investment bank is the best since they all have different rankings in different categories, such as M&A and underwriting. In 2006, Citigroup was tops in total debt and equity underwriting volume, but wasn’t as great as Goldman Sachs in M&A advisory. Goldman Sachs is excellent in equity underwriting and M&A advisory but it’s not as strong in debt issuance.
The larger investment banks with commercial banking arms, such as Citigroup and JPMorgan, dominate the debt markets. This is because they have larger balance sheets (from customer deposits, and others), so they are able to leverage their size to take on more underwriting risk.
If you want to check out the rankings of investment banks and how they perform in several categories, you should look at “league tables.” The most common ones are published quarterly by Thomson, which is an unbiased source, as opposed to getting rankings from the investment banks themselves. League tables are important because they show the firm’s expertise in a given area and are used for pitches made to clients, along with a page with tombstones (previous deals done by an I-bank) to convince clients to use their service.
Tags: bonds, citigroup, commercial banks, corporate finance, debt securities, equity securities, goldman sachs, investment bankers, jpmorgan, league tables, loands, mergers & acquisitions, mergers and acquisitions adivsory, research, sales & trading, stocks, thomson, underwiting, what is investment banking
Posted in General Business Education | Comments Off
Saturday, June 27th, 2009
Learn The Stock Market Lesson – Futures Trading – What are Futures?
Futures are not “direct” securities like stocks or bonds. They are examples of derivatives. Dr. Alexander Elder wrote in his second book, “Come Into My Trading Room,” that nine out of ten traders go bust in their first year. Futures offer traders some of the best rewards, but of course, with high risk to them. Like options, beginners tend to avoid futures because of its risk. Although futures might look dangerous at first, the actual danger lies within the people who trade them. As Elder states, “futures do not kill traders—poor money management kills traders.”
When you buy a stock, you own a part of the company. With futures, you do not own anything, but rather you enter into a contract for a future purchase of merchandise. These contracts deliver a specific quantity of a commodity by a certain date.
What is the difference between a futures contract and an options contract?
A futures contract is binding on both buyer and seller as opposed to options, where the buyer has the right but is not obligated to take delivery.
In futures, if the market goes against you, you have to keep adding money to your margin or get out of your trade at a loss. In order to exit the commitment before the futures contract’s delivery date, the holder of a futures position has to offset his/her position by either selling a long position or buying back a short position. This would close out the futures position and its contract obligations.
Like options, there are two main reasons why investors use futures: to speculate and to hedge (reduce risk).
Keep in mind that the main difference between futures and options is that an option grants the trader the right, not the obligation to fulfill the contract, whereas both traders of a futures contract must fulfill contract by the delivery date.
Tags: alexander elder, bonds, come into my trading room, derivative security, derivatives, difference between options and futures, direct securites, dr. alexander elder, futures contracts, futures market, futures trader, hedge, option contracts, option traders, options market, reduce risk, sepculate, stocks, what are futures
Posted in Learn The Stock Market | Comments Off
Monday, June 8th, 2009
Learn The Stock Market Lesson - What are Financial Derivatives?
Most of us have heard about the controversial uses of derivatives, the debates between whether they should or should not be regulated, and the amount of oversight there should be on them. Derivatives are the complex financial instruments that contributed to not only the collapse of the giant insurer AIG but also 3 of the largest bankruptcies in American history – WorldCom, Enron, and Global Crossing. I will be discussing a little more in-depth about its debate in my next post.
So what exactly are derivatives?
Derivatives refer to a general class of investments, rather than a specific type of investment like stocks or bonds. As the name suggests, derivatives are investment vehicles that are derived from other types of investments. In other words, it is a security whose price is dependent upon or derived from one or more underlying assets.
They are contracts between 2 or more parties and its value is determined by the fluctuation of another underlying asset, such as a commodity, equities (stocks), loans (bonds), currencies and more. For example, the changing value of crude oil futures depends primarily on the movement and the fluctuation of oil prices.
The most common types of derivatives are futures contracts, forward contracts, options and swaps, which I will be discussing further in a later post.
How are derivatives different from stocks and bonds?
Stocks – represent shares of ownership in something tangible, such as a corporation
Bonds – also represents something tangible since they are promises of loan repayments, or IOUs from a borrower
Derivatives – hybrid investments based on these more basic investments. And because they are hybrids, investing in derivatives is more complex, and often far more risky than investing in stocks or bonds.
What’s the purpose of derivatives?
Derivatives are generally used as a financial instrument to hedge, or reduce, risk for one party but can also be used for speculative purposes. Investors sometimes purchase and sell derivatives to manage the risk associated with the underlying asset, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Don’t forget that these techniques can be quite complicated and risky.
Tags: AIG, bankruptcy, bonds, chapter 11 bankruptcy, derivatives, derivatives finance, derivatives trading, enron, financial instrument, forward contract, future contracts, futures, futures trading, global crossing, hybrid investment, investment, options, options trading, reduce risk, risky, stocks, swaps, underlying assets, worldcom
Posted in Learn The Stock Market | 1 Comment »
Thursday, May 7th, 2009
Learn The Stock Market Lesson - Stocks VS. Bonds! Which one should YOU choose?
Stocks are equity investments. What does equity mean? Equity is a term that simply means ownership or having a stake in something. Therefore, this would mean that one share of a stock would give you ownership in the corporation that issued that stock. You now own a percentage of that company.
Bonds, also known as fixed income investments or debt securities, are a form of debt in which an investor loans money to an entity, such as corporate or governmental. A bond is like an “IOU” (I owe you) from the issuer (borrower) to the bondholder (lender), which indicates that the issuer will repay the bondholder over time for the loan, with a fixed interest rate. Unlike stocks, bonds are not only issued by corporations, as they are also issued by the federal government, state government, and municipal government. In summary, bonds allow people to invest their money as a loan to an entity in return for a stable rate of interest. The main categories of bonds are corporate bonds, municipal bonds (which are issued by cities), and U.S. Treasury bonds, notes and bills. Simply think of bonds as loans.
Another difference between stocks and bonds is that the owner of a corporate bond is among the first to receive any assets (their investment) from the dissolution of a company, should the company go bankrupt. In this sense, bonds are safer investments than stocks, particularly common stocks (as mentioned in my previous blog that common stock holders have last priority). Meanwhile, this also means that bonds do not receive a share in the wealth generated by a fast-growing company. Safer investments mean less risk, which means their potential of receiving high profits are lower compared to investments that are riskier. In other words, investments with higher risk have the potential for greater rewards. Why else would anyone take on risky investments, right?
So, now that you know the differences, which one should YOU choose? This is where the issue of risk VS. reward comes into battle. Do you to be a bondholder and have a better chance of getting a piece of your investment back if a company goes bankrupt? (Common stockholders usually lose their entire investment after the company pays back all their creditors, which includes bondholders and preferred stockholders.) OR are you willing to take on that risk in hopes of receiving high profits and nice rewards?
Tags: bonds, bonds vs. stocks, common stocks, equity, greater profit, high risk, municipal bond, stock market, treasury bonds
Posted in Learn The Stock Market | Comments Off
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