Question

• Describe the role of securities markets and of investment bankers.

• Identify the stock exchanges where securities are traded.

• Compare the advantages and disadvantages of equity financing by issuing stock, and detail the differences between common and preferred stock.

• Compare the advantages and disadvantages of obtaining debt financing by issuing bonds, and identify the classes and features of bonds.

• Explain how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.

• Explain the investment opportunities in mutual funds and exchange-traded funds (ETFs).

• Explain what money is and what makes money useful. ​

• Describe how the Federal Reserve controls the money supply.

• Explain how buying the appropriate insurance can protect your financial base

Answer 1

The role of Securities markets:

• A Security market is mainly created to finance the new Corporations, it either finances directly by investing or lending their own funds
• It also helps investors and lenders to find the right securities that match their objectives
• It provides liquidity to the shares that are traded allowing immediate selling or purchasing of nay security at any time

Stock exchanges where securities are traded:

Every stock exchange necessarily had securities traded. The kind of securities traded may include stock issued by listed companies, derivates, unit trusts etc.

The advantages and disadvantages of equity financing by issuing stock

Advantages

• A company can provide the investors with different rights and protections by issuing common or preferred stock or by further subdividing these into classes, or tranches, of stock according to their needs
• Equity provides a company with flexible funding. Companies pay the investors in the form of dividends or pay capital when cash is in surplus.
• Equity financing by issuing stock does not require any personal guarantees or collaterals

Disadvantages

• By selling the shares of the company you are giving away your share of ownership on it thereby requiring you to reveal any information that they would require
• If you default on payment of dividend which you have to offer either monthly or quarterly in case of equity financing , your company’s reputation is ruined which will in turn affect the share price

Difference between common and Preferred stock

• The main difference between common stock and preferred stock is that preferred stock usually does not give shareholders voting rights where as common stock does, usually at one vote per share owned.
• Preferred stockholders have a greater claim to a company's assets and earnings. The dividends for this type of stock are usually higher than those issued for common stock. Preferred stock also gets priority over common stock, so if a company misses a dividend payment, it must first pay any arrears to preferred shareholders before paying out common shareholders.
• Preferred stock may also be referred to as a hybrid security because of its bond-like characteristics. Like bonds, preferred shares have a par value which is affected by interest rates. When interest rates rise, the value of the preferred stock declines, and vice versa. With common stocks, however, the value of shares is regulated by demand and supply of the market participants.

Advantages and disadvantages of obtaining debt financing by issuing bonds

Advantages

• Issuing bonds allows a company to access capital much faster than if it first had to earn and save profits.
• Growing companies might decide to borrow money rather than selling assets because they don’t have assets to sell in order to raise money
• Issuing bonds is much cheaper than issuing shares. Since shareholders take on more risk than bondholders shareholders require a higher rate of return than do bond investors.
• it can reduce the amount of taxes a company owes. That's because the interest a company pays its lenders is counted as an expense, which means pre-tax profits are lower.

Disadvantages

• Borrowing money can also be riskier than the alternatives. If a company borrows too much money, or if its fortunes change and it is no longer able to pay back its lenders, it might have to raise even more capital on painful terms or go bankrupt.
• the potential for your business' share value to be reduced if your profits decline - this is because bond interest payments take precedence over dividends

• bondholder restrictions - because investors are locking up their money for a potentially long period of time, they can impose certain covenants or undertakings on your business operations and financial performance to limit their risk

Classes and features of bond

There are 7 broad categories

1. Treasury bonds;
   2.) other U.S. government bonds;
   3.) investment-grade corporate bonds (high quality);
   4.) high-yield corporate bonds (low quality), also known as junk bonds;
   5.) foreign bonds;
   6.) mortgage-backed bonds; and
   7.)municipal bonds.

Features of bond

• Face/ Par value - This represents the amount of principal that a bondholder will receive at maturity. The majority of corporate bonds today carry a face value of $1,000, but may vary by issuer
• Coupon/ Yield - The coupon or yield of a bond is the interest rate the issuer agrees to pay its bondholders.
• Maturity - The maturity is the date at which the bond’s principal comes due and must be repaid to lenders in full.
• Issuer - The type and quality of the bond issuer is also an important characteristic of a bond, as the issuer's stability is your main assurance of getting paid back in full.

how to invest in securities markets and set investment objectives such as long-term growth, income, cash, and protection from inflation.

There are two types of markets to consider when investing in securities: primary and secondary. In the primary market, the money for securities is received from investors in a public offering transaction, such as offering stock to the public. In the secondary market, the securities are assets held by one investor selling them to another investor. The secondary market must exist for the primary market to thrive because holders of securities are able to sell them for cash in the secondary market to other investors. For this reason, investing in securities oftentimes comes with organized exchanges to perpetuate both markets.

<Note: There are so many sub-parts to this question and hence the first 6 are answered>