Introduction to Capital Markets. September 30, 2014

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Abraham Clark
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1 Introduction to Capital Markets September 30, 2014

2 Disclaimer This presentation was prepared exclusively for the benefit and use of the members of Western Capital Markets ( WCM ) for the purpose of teaching and discussing financial and investment matters. This presentation is proprietary to WCM. The information and any analyses contained in this presentation are taken from, or based upon, information obtained from the WCM Executive Team or from publicly available sources. Any information taken from external literature is appropriately referenced. The completeness and accuracy of this presentation cannot be assured by WCM. To the extent projections and financial analyses are set forth herein, they may be based on estimated financial performance prepared by WCM and are intended only to suggest reasonable ranges of results. Any calculations or value ranges indicated herein are preliminary and should not be construed as opinions of WCM or their individual members as to value, fair market value, or target prices at which a transaction would be considered fair from a financial point of view and must not be relied upon or disclosed as constituting such a document or opinion. WCM does not take liability for any inaccurate information, and is not liable for any investment advice. Before acting on any information, from WCM or external sources, you should contact a Certified Financial Advisor.

3 Table of Contents Current Events Siemens to acquire Dresser-Rand Subprime Auto Loan Bubble Introduction to Financial Markets Equity Markets Debt Markets Why Invest?

4 Current Events

5 Siemens to acquire Dresser-Rand Siemens is a conglomerate that makes products for the energy sector Plans to acquire Dresser-Rand Group, an oil services & equipment manufacturer company in Texas $7.6 billion deal, at an implied 16x EV/EBITDA multiple the deal was considered pricey Hoping this acquisition will allow them to benefit from the explosive growth in equipment capex (~100% real growth from )

6 Subprime Auto Loan Bubble Number of auto loans made to subprime borrowers has doubled since 2009 Greater increase than in any other loan type Allegations of dealer misbehavior and the involvement in the stock market Auto loans are also being bundled into risky securities, much like the subprime mortgage loans

7 Financial Markets

8 Why Study Financial Markets? Markets channel funds from savers to investors leading to economic efficiency Market activity affects personal wealth, the behavior of business firms and the economy as a whole

9 Function of Financial Markets Improves economic efficiency by channeling funds between people and businesses Lenders-Savers Households Business firms Governments Foreigners Borrowers-Spenders Business firms Government Households Foreigners

10 Structure of Financial Markets Primary Market New security issues sold to initial buyers Secondary Market Securities previously issued are bought and sold Allows for liquidity and sets a selling price Exchanges and Over-the-Counter Markets

11 What is the difference between direct and indirect finance? 10

12 Segments of Financial Markets Direct Finance Borrowers borrow directly from lenders in financial markets by selling financial instruments which are claims on the borrower s future income or assets Indirect Finance Borrowers borrow indirectly from lenders via financial intermediaries by issuing financial instruments which are claims on the borrower s future income or assets 11

13 Function of Financial Markets 12

14 Financial Intermediaries the intermediary obtains funds from savers the intermediary then makes loans/investments with borrowers primary means of moving funds from lenders to borrowers. Reduces the impact of asymmetrical information *More important source of finance than securities markets (such as stocks) 13

15 Equity Markets

16 Financial Intermediaries Transaction Costs Financial intermediaries make profits by reducing transactions costs Reduce transactions costs by developing expertise and taking advantage of economies of scale Allows more liquidity for customers Allow customers to diversify their asset holdings 15

17 Stocks A stock represents ownership in a company every stock represents a small portion of the assets of a company, after subtracting the portion that was financed with debt Shareholders get special privileges depending on the type of stock Right to vote Right to purchase new shares

18 Stock Markets The stock market is where common stock is traded Companies initially sell stock in the primary market to raise money The stock is then traded among investors in the secondary market

19 Debt Markets

20 Debt Markets Debt markets allow governments, corporations and individuals to borrow to finance activities In this market, borrowers issue a security called a bond Promises timely payment of interest and principal over a specific amount of time Interest rate is the cost of borrowing

21 Why Invest?

22 Inflation Average inflation rate, measured by change in CPI, between 1915 and now is 3.3%

23 How Do Stocks Make You Money? Two ways to get a return in a company s stock Capital Appreciation Dividends Capital appreciation increase in the price of a stock Dividends payments made by a corporation to its shareholders When a company earns a profit, they can reinvest it in the business or paid to shareholders Can be cash dividends or stock dividends A stock is only worth the investment if you can receive a fair return on it

24 What to Invest in? Several types of investment vehicles: Savings accounts Treasury Bills Bonds Preferred Stock Common Stock Derivatives Each investment vehicle comes with a certain level of risk this determines the expected return Hedge an investment that is made in order to offset the volatility in another investment theoretically reduces exposure to unwanted risk

I. Introduction. II. Financial Markets (Direct Finance) A. How the Financial Market Works. B. The Debt Market (Bond Market)

I. Introduction. II. Financial Markets (Direct Finance) A. How the Financial Market Works. B. The Debt Market (Bond Market) University of California, Merced EC 121-Money and Banking Chapter 2 Lecture otes Professor Jason Lee I. Introduction In economics, investment is defined as an increase in the capital stock. This is important