This summary work dealing with financial markets is based on the topics seen in the course Introduction to Financial Markets taught by Prof. De Ceuster at the Faculty of FBE of the University of Antwerp.
This summary work dealing with financial markets is based on the topics seen in the course Introduction to Financial
Markets taught by Prof. De Ceuster at the Faculty of FBE of the University of Antwerp.
1
,UNIT 1 - THE FINANCIAL SYSTEM (dia 11 - 50)
1. The actors
In the financial system and in the economy, there are two main parties
● haves = lenders = possess capital and can lend it out (+ net position)
● have-nots = borrowers = have more needs than money and will have to raise capital (- net position = debt)
Haves can always fulfill the needs of have-nots, but sometimes in different ways. Households are the main actor of
the economy and will keep it running.
Net wealth can grow because of
● value changes in assets and liabilities
● net-income from labor, capital or transfers (e.g. pensions, social security based income)
● inheritances, gifts
Lenders Intermediaries Markets Borrowers
● individuals (households) ● banks ● interbank ● individuals
● companies ● insurance companies ● equity market ● companies / corporates
● pension funds ● money market ● central government
● mutual funds ● bond market ● municipalities
● foreign exchange ● public corporations
● financial industry (bank)
Securities = promises to pay back, which show key information (how much is owned, when it will be paid back and the
rate of interest to reward the lender)
The household balance sheet
Household balance sheet = overview of the assets and the liabilities of a single household
● stocks = the part you own of a company (aandelen)
● bonds = a piece of paper stating the terms on which the money will be paid back
Asset = a possession that has value in an exchange transaction
● tangible assets = real assets = derive value from their physical character and the utility they generate
● intangible assets = derive value from a legal claim to some future benefit
● financial assets = intangible assets that represent a claim to future cash
2
,Asset classes
Traditional assets Alternative assets
● common stock (buy on stock exchange) ● real estate
● bonds (you don’t become owner, only provide) ● commodities
● cash (and cash equivalents) ● private equity (buy on private market)
● hedge funds
● venture capital
● currencies (forex)
Liabilities
● mortgage loans = type of loan that is used to finance property, secured loan (hypothecaire lening)
● consumer loans = transaction in which the bank agrees to lend money to a customer so they can buy a
product or use a service
● tax debt = any taxes that you owe to the IRS (overheidsinstelling, de fiscus) after the filing deadline
Wealth creation
There are different types of households in the economy
POOR
When people must work hard for a certain income, they only have income for living expenses.
● short horizon: try to bridge the month
● balance sheet is almost empty
● sleep, work, eat, repeat
MIDDLE CLASS
These are “poor people with a house”, who are dependent on their house and real estate.
● longer horizon: save money and put it into assets
● more vulnerable than the rich people
RICH
These people have a lot of assets. Assets generate money, so they become independent.
● long horizon: independent of what happens to the market
● get income without doing anything
3
, 2. What do the balance sheets of other actors look like?
Corporates
Liabilities
● equity = shares = what the company owns (market value → difference with accountancy)
● debt = what the company owns, but isn’t theirs (schuld)
→ as a company, you hope that the cost of the interest of the loan is lower than the profit of the company
Leverage
Leverage = a financial technique involving borrowing funds to buy things, hoping that future profits will be many
times more than the cost of borrowing
Companies can be funded with
● shareholder funds (equity) consisting out of the original equity, right issues and the retained profit
● debt → leverage (= relationship between debt and equity on a balance sheet)
Thanks to this system, a company can control a lot of money by only investing a little amount.
e.g. company A is the mother company so controls €800 of company C by investing only €200
Most companies use leverage to raise the ROE above the ROA
● ROE = return on equity = how much that a shareholder gets as return on their investment = profit/equity
● ROA = return on assets = the return that a company gets with all the money they use = profit/assets
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