Markets & Products Part 1

Capital Markets Fundamentals

Capital markets involve raising money through debt and equity markets while helping companies maximize shareholder value through financing, acquisitions, lowering cost of capital, and risk management

Cost of Capital

The required return investors and lenders demand for providing financing to a company

Debt vs Equity Financing

Debt financing involves borrowing money that must be repaid with interest, while equity financing involves selling ownership shares in the company

Equity vs Debt Investing

Equity investments generally offer higher risk and higher return potential, while debt investments offer lower risk and more stable income

Young vs Older Investor Preferences

Younger investors often prefer equities due to longer time horizons and higher risk tolerance, while older investors often prefer debt for stability and income

Startup vs Mature Company Financing

Startups are usually equity financed because they lack stable cash flows, while mature companies are often debt financed because they can support interest payments

Equity Capital Markets (ECM) vs Debt Capital Markets (DCM) vs Leveraged Finance

ECM raises money through equity products like IPOs, DCM raises money through debt products like bonds and loans, and Leveraged Finance focuses on high-debt financing transactions such as leveraged buyouts

IPO (Initial Public Offering)

The first sale of previously private shares to the public on a stock exchange, often used to raise capital and provide liquidity for shareholders

Primary vs Secondary Market

The primary market involves issuance of new securities directly from companies to investors, while the secondary market involves trading existing securities between investors

Advantages and Disadvantages of an IPO

IPOs help raise capital, improve liquidity, and increase visibility, but also increase regulation, reporting requirements, costs, and public scrutiny

Trading Venues

Stock exchanges provide transparent public trading, dark pools allow private large-volume trades without displaying liquidity, and ATS systems electronically match buyers and sellers outside traditional exchanges

Stock Exchange

Public marketplace where securities are traded with transparent pricing and displayed liquidity

Dark Pool

Private trading venue used mainly for large trades to avoid significantly impacting stock prices

Alternative Trading System (ATS)

Electronic trading network matching buyers and sellers outside traditional exchanges

Short-Term Debt Products

Revolving credit facilities, overdrafts, and commercial paper provide flexible short-term borrowing options for companies

Revolving Credit Facility

Flexible borrowing arrangement allowing repeated borrowing and repayment up to a limit

Commercial Paper

Unsecured short-term debt issued by high-quality companies, usually lasting less than one year

Long-Term Debt Products

Term loans, finance leases, investment-grade bonds, and high-yield bonds provide longer-term financing solutions

Investment Grade vs High Yield Bonds

Investment-grade bonds have lower default risk and lower interest rates, while high-yield bonds have higher risk and higher interest rates

Loans vs Bonds

Loans generally have floating rates, flexible restructuring, and fewer investors, while bonds typically have fixed rates, broader investor bases, and lower borrowing costs

Cash Equities

Securities transactions where investors directly purchase shares using cash

Delta One Products

Products such as ETFs and index swaps that provide the same exposure as owning the underlying asset or index directly

ETF (Exchange Traded Fund)

Open-ended fund traded on an exchange that tracks an index, trades close to NAV, and allows intraday trading

NAV (Net Asset Value)

Total value of a fund’s assets minus liabilities divided by shares outstanding

Quote-Driven vs Order-Driven Markets

Quote-driven markets rely on market makers quoting bid and ask prices, while order-driven markets directly match buyers and sellers through an order book

Market Maker

Institution that provides liquidity by continuously quoting both buy and sell prices for securities

Bid-Ask Spread

Difference between the bid price and ask price, representing a key source of profit for market makers

Order Book

Public list of unmatched buy and sell orders ranked by price

Major Exchanges

NYSE, NASDAQ, London Stock Exchange, Tokyo Stock Exchange, Shanghai, Hong Kong, and Euronext are major global securities exchanges

ECM vs Trading Desk

ECM advises companies on raising equity and works in primary markets with inside information access, while trading desks execute trades and make markets in secondary markets without inside information access

Trading Desk Functions

Principal trading means the bank itself takes risk as a counterparty, agency trading means the bank trades on behalf of clients, and market making provides liquidity through bid and ask quotes

Block Trade vs Basket Trade

A block trade is a large-volume transaction executed quickly, while a basket trade involves many securities traded simultaneously

Convertible Securities

Convertible bonds and convertible preferred stock can convert into equity shares, while warrants give investors the right to buy shares at a fixed future price

Convertible Bond Conversion Ratio

Number of shares an investor receives when converting a convertible bond into equity

Convertible Bond Conversion Price

Bond par value divided by the conversion ratio

Market Conversion Price

Convertible bond market price divided by the conversion ratio

Embedded Call Option Value

Additional value of a convertible bond above equivalent straight debt due to its conversion feature

ETF Tax Advantage

ETF shares can trade between investors without forcing the fund to sell underlying securities, helping reduce taxable events