September 14, 2007

Introduction to Capital Markets

 

One Day Educational Program

Assumptions:

The course participants have little to no knowledge of the financial markets

Objectives:

  • To develop the fundamental understanding of the capital markets and how they operate
  • Build a working knowledge of capital markets terminology
  • Understand how products are used in the capital markets
  • To examine the features and characteristics of fixed income and equity securities

Session 1: Capital Markets - 1 Hour

This introductory session introduces the course participant to the very fundamental aspects of the capital markets. Starting off with a definition of the capital markets and discusses the economic functions the markets perform. The types of markets and financial intermediaries are discussed. The basic instruments are also introduced. By the end of this session, the course participant will be able to:

  • Define the capital markets
  • Understand the economic foundations/roles of the capital markets including:
    • Channeling accumulated wealth into real investment
    • Risk management
    • Portfolio rebalancing
    • Asset pricing
    • Information dissemination
    • Identify the financial intermediaries (a chart will be developed to show interactions of departments within an investment bank). These include:
  • Types
    • Broker-dealers
    • Commercial banks
    • Pension funds
    • Investment companies, including mutual funds
    • Others
  • Capacity
  • Principal
  • Agent
  • Explain the types of markets
    • Primary markets
      • Public offerings
      • Private placements
    • Secondary Markets
      • Exchanges
      • Over-the Counter (OTC)
  • Explain the different instruments including:
    • Debt securities
    • Equity Securities
    • Derivatives

Session 2: Regulation of the US Financial System - ½ Hour

This high level overview identifies the main regulatory bodies within the financial industry in the United States. By the end of this session, the course participant will be able to:

  • Discuss who the major regulators are in the US. This includes
    • Securities and Exchange Commission (SEC)
    • Self-Regulatory Organizations (SROs)
      • New York Stock Exchange – NYSE
      • National Association of Securities Dealers
      • NASD
      • Other
    • Banking Industry
    • Federal Reserve System
    • Federal Depository Insurance Corporation (FDIC)
    • Comptroller of the Currency (OCC)
    • Other sectors of the financial system
    • Pension funds – ERISA
    • Futures – Commodity Futures Trading
    • Commission (CFTC)

Session 3: Fixed Income Securities – 1 Hour

This high level overview introduces the fundamental aspects of fixed income securities. The characteristics and features of fixed income instruments are introduced. Basic price-yield relationships are discussed and illustrated. US Treasuries and agencies are introduced. By the end of this session, the course participant will be able to:

  • Define a fixed income instrument
  • Identify the features and characteristics of a fixed income instrument including:
    • Issuer
    • Maturity
    • Coupon
    • Yield to maturity
    • Call provision
  • US Government securities
    • T-bills, notes and bonds
    • Zero coupon bonds
  • Agency securities
    • Characteristics
      • Are they guaranteed?
      • Issuers

Session 4: Equity Markets – 1 ½ Hours

Starting off with an overview of the equity markets, this session examines the structures of the markets. The focus then turns to the features and characteristics of stocks. Returns of stocks are discussed. Analysis of equities is introduced. By the end of this session, the course participant will be able to:

  • Discuss the structure of the markets including:
    • Primary and secondary markets
      • Public markets vs. private placements
      • OTC vs. Exchanges
  • Differentiate between US equity markets and foreign markets
  • Discuss the relative size of the markets in dollar terms and number of shares
  • Identify features and characteristics of stocks including:
    • Terminology
      • Authorized shares
      • Issued shares
      • Treasury stock
      • Shares outstanding
    • Rights of common shareholders
      • Voting
      • Preemptive rights
      • Dividends, if declared
      • Residual claims on company assets
    • Distributions to common shareholders
      • Cash dividends
      • Stock dividends
      • Stock splits
      • Stock buy-backs
  • Investment characteristics
    • Returns on common stocks
      • Sources of returns-dividends and capital gains
      • Historic returns
      • Comparison to returns on other securities
    • Types of common stocks – (Brief overview)
      • Blue chip
      • Growth
      • Emerging markets
      • Income
      • Defensive
      • Cyclical
      • Interest sensitive
    • How to value common stocks-examines how decisions are made
      • Price/earnings ratio
      • Dividend discount model
      • Discounted cash flows analysis
      • Book value multiples
      • Sales multiples
      • Cash flow multiples
      • Liquidation value
  • Equity Securities analysis
    • Types of analysis
      • Technical analysis
      • Quantitative analysis
      • Fundamental analysis

Session 5: Derivatives Futures, Swaps and Options ½ Hour

This high level overview introduces futures, swaps and options. These instruments are briefly introduced and defined. Their main uses as hedges are explained. By the end of this session, the course participant will be able to:

  • Define futures, swaps and options
  • Understand how they are used by portfolio managers

Session 6: Portfolio Management – 1 ½ Hours

Examine risk and its relationship to return. The session starts off with a definition of the risk free rate and goes on to discuss the trade off between risk and return. How risk is measured and other factors such as correlation is discussed. Portfolio objectives and constraints are introduced. Modern portfolio theory (MPT) along with the capital asset pricing model (CAPM) is explored. Differences between fixed income and equity portfolio are explored. Finally asset allocation is examined and new trends, regulations scandals are discussed. By the end of this session, the course participant will be able to:

  • Understand the difference between risk and return
  • Identify the main measures of risk including standard deviation, correlation and beta
  • Identify portfolio parameters such as objectives and constraints
  • Understanding risk in the MPT and CAPM (overview only)
  • Discuss active vs. passive management
  • Identify equity investing styles:
    • Value
    • Growth
    • Indexing and enhanced returns
  • Define asset allocation
  • Identify different asset classes and the considerations when determined the proper mix of a portfolio
  • Discuss the current trends in the market including:
    • Regulatory – Sarbanes Oaxley
    • Equity trends
    • What people are concerned about
    • Governance
    • Scandals
    • Basel II