Session 4 : Financial Instruments

I - Equities

Equities: common stocks

Equities, also known as stocks or shares, represent ownership in a company and give investors certain rights and claims to the company's assets and earnings.

Ordinary or Common Stock

• The most basic type of equity and represents ownership in a company.

• Shareholders have voting rights and may receive dividends, which are typically paid from the company's profits.

• Common shareholders are at the bottom of the priority list in the event of bankruptcy or liquidation, and their dividends are not

guaranteed.

Equities: common stocks, key features

Définition

Ownership

Each common share typically carries one vote, allowing shareholders to participate in corporate governance by electing the board of directors and voting on key matters.

Dividends

Common shareholders may receive dividends, but these dividends are not guaranteed

Capital Appreciation

Common stockholders have the potential to benefit from capital appreciation as the value of their shares may increase over time.

Risk and Reward

Common stockholders bear the most risk and enjoy the highest potential rewards

Equities: preferred stocks

A Preferred Stock or Share is a Hybrid security that combines features of both equity and debt.

• Preferred stock is a class of corporate ownership that entitles its holders to certain rights and privileges superior to those of common stockholders.

• Preferred shareholders have a claim on the company's assets and earnings that takes precedence over the claims of common stocks.

• Preferred stock is an attractive investment for those seeking regular income and capital preservation.

Equities: preferred stocks, key features

Définition

Dividends

Preferred shareholders have a priority claim to receive dividends before common shareholders. These dividends are typically fixed and often paid at regular intervals.

No Voting Rights

Unlike common stockholders, preferred shareholders usually do not have voting rights in corporate decisions. This means they don't participate in electing the board of directors or voting on major company matters.

Priority in Liquidation

In the event of a company's liquidation or bankruptcy, preferred shareholders have a higher claim on the company's assets compared to common shareholders. They are ahead of common shareholders but behind bondholders and other creditors.

Cumulative vs. Non-Cumulative

Cumulative preferred stock means that if the company misses a dividend payment, the unpaid dividends accumulate and must be paid before common shareholders receive any dividends. Non-cumulative preferred stock does not accumulate unpaid dividends.

Callable

Many preferred stocks are callable, which means the issuer has the option to redeem (call) the shares at a specified price after a certain date. Callable preferred are typically issued with a call schedule.

Convertible

Some preferred stocks are convertible into a specified number of common shares. This feature allows preferred shareholders to participate in the potential capital appreciation of the common stock.

Participating

Participating preferred stock provides the opportunity for shareholders to receive additional dividends beyond the fixed rate if the company performs exceptionally well.

Yield and Par Value

Preferred shares often have a stated yield (dividend rate) and a par value. The yield is based on the par value of the shares.

Redemption Provisions

Preferred shares may have redemption provisions that allow the issuer to redeem the shares at predetermined prices and dates.

Equities: navigating the jargon of stocks as investments

Définition

Blue-Chip Stocks

Shares in well-established, financially stable, and large-cap companies. They’re good for long-term investing.

Growth Stocks

Shares of companies expected to grow faster than average in earnings and revenue.

Value stocks

Shares in companies considered undervalued by the market. These companies often have solid fundamentals but may be temporarily out of favor with investors.

Small-Cap, Mid-Cap, and Large-Cap Stocks:

• Small-Cap: Companies with a relatively small market capitalization.

• Mid-Cap: Companies with a medium-sized market capitalization.

• Large-Cap: Companies with a large market capitalization.

Définition

Cyclical stocks

These are tied to the economic cycle, and their performance may vary with economic conditions. Examples are carmakers and construction companies.

Defensive stocks

These are stable during economic ups and downs, like healthcare and utility companies.

II - Debt securities

Debt securities (Titres de créance), also known as fixed-income (titres à revenu fixe) securities or bonds (obligations), are a key component of financial markets.

They represent a form of borrowing by governments, corporations, or other entities, and they are typically bought and sold in various financial markets. They offer regular interest payments to bondholders.

Définition

Treasury Bonds

These are issued by the government and are considered one of the safest investments. In the U.S., they are issued by the Treasury Department.

Municipal Bonds

These are issued by state or local governments to fund public projects like roads, schools, or hospitals. The interest earned is often tax-free at the federal level.

Corporate Bonds

Companies issue these to raise money for things like growth, paying off debt, or daily operations.

Zero-Coupon Bonds

These don’t pay regular interest. Instead, they are sold for less than their face value and give the full amount back when they mature.

Asset-Backed Securities (ABS): These are

investments backed by a group of assets, like car loans, credit card debt, or student loans.

Investors who buy ABS receive payments of

interest and principal, but they also take on the risk of the underlying assets (assets in the pool).

Mortgage-Backed Securities (MBS): These are created by pooling together individual mortgages and selling shares in this pool to investors. They provide a way for investors to participate in the real estate market.

III - Derivatives

Derivative instruments (Instruments dérivés) are financial contracts whose value is derived from the performance of an underlying asset, index, or reference rate. Derivatives are used for various purposes, including risk management, speculation, and investment strategies. Examples of derivatives include:

Futures contracts are standardized agreements to buy or sell an underlying asset (e.g., commodities, currencies, stock indexes) at a future date and a predetermined price. They are traded on organized futures exchanges.
Options contracts give the holder the right (but not the obligation) to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) within a certain period. Options can be traded on exchanges or in the over-the-counter (OTC) market. Call and put options can be on individual stocks, stock indexes, futures, currencies, …
Structured products, which combine various types of products and underlying assets.

IV - Money market instruments

Money Market: This is a part of the financial market where short-term debt securities (maturing in 1 day to 1 year) are bought and sold.Money market instruments are low-risk, highly liquid (easy to convert to cash), and help manage short-term funding needs.

The main types are:

• Treasury Bills: Issued by governments.

• Certificates of Deposit (CDs): Issued by banks and financial institutions.

• Commercial Paper: Issued by companies.

• Repurchase Agreements (Repos): A financial institution sells a security, usually to a central bank, and agrees to buy it back later.

Financial instrument valuation

Financial instrument valuation is the process of determining its intrinsic value, which helps investors make informed decisions about buying or selling a financial instrument. It is important to understand that valuation is both an art and a science, and different methods may yield different valuations.

Investors often use a combination of methods, consider qualitative factors, and conduct further analysis to make investment decisions. Additionally, financial instrument prices can be influenced by market

sentiment, economic conditions, and other external factors, which may not always align with fundamental valuations

I - Equities

Equities: common stocks

Equities, also known as stocks or shares, represent ownership in a company and give investors certain rights and claims to the company's assets and earnings.

Ordinary or Common Stock

• The most basic type of equity and represents ownership in a company.

• Shareholders have voting rights and may receive dividends, which are typically paid from the company's profits.

• Common shareholders are at the bottom of the priority list in the event of bankruptcy or liquidation, and their dividends are not

guaranteed.

Equities: common stocks, key features

Définition

Ownership

Each common share typically carries one vote, allowing shareholders to participate in corporate governance by electing the board of directors and voting on key matters.

Dividends

Common shareholders may receive dividends, but these dividends are not guaranteed

Capital Appreciation

Common stockholders have the potential to benefit from capital appreciation as the value of their shares may increase over time.

Risk and Reward

Common stockholders bear the most risk and enjoy the highest potential rewards

Equities: preferred stocks

A Preferred Stock or Share is a Hybrid security that combines features of both equity and debt.

• Preferred stock is a class of corporate ownership that entitles its holders to certain rights and privileges superior to those of common stockholders.

• Preferred shareholders have a claim on the company's assets and earnings that takes precedence over the claims of common stocks.

• Preferred stock is an attractive investment for those seeking regular income and capital preservation.

Equities: preferred stocks, key features

Définition

Dividends

Preferred shareholders have a priority claim to receive dividends before common shareholders. These dividends are typically fixed and often paid at regular intervals.

No Voting Rights

Priority in Liquidation

Cumulative vs. Non-Cumulative

Callable

Convertible

Some preferred stocks are convertible into a specified number of common shares. This feature allows preferred shareholders to participate in the potential capital appreciation of the common stock.

Participating

Participating preferred stock provides the opportunity for shareholders to receive additional dividends beyond the fixed rate if the company performs exceptionally well.

Yield and Par Value

Preferred shares often have a stated yield (dividend rate) and a par value. The yield is based on the par value of the shares.

Redemption Provisions

Preferred shares may have redemption provisions that allow the issuer to redeem the shares at predetermined prices and dates.

Equities: navigating the jargon of stocks as investments

Définition

Blue-Chip Stocks

Shares in well-established, financially stable, and large-cap companies. They’re good for long-term investing.

Growth Stocks

Shares of companies expected to grow faster than average in earnings and revenue.

Value stocks

Shares in companies considered undervalued by the market. These companies often have solid fundamentals but may be temporarily out of favor with investors.

Small-Cap, Mid-Cap, and Large-Cap Stocks:

• Small-Cap: Companies with a relatively small market capitalization.

• Mid-Cap: Companies with a medium-sized market capitalization.

• Large-Cap: Companies with a large market capitalization.

Définition

Cyclical stocks

These are tied to the economic cycle, and their performance may vary with economic conditions. Examples are carmakers and construction companies.

Defensive stocks

These are stable during economic ups and downs, like healthcare and utility companies.

II - Debt securities

Debt securities (Titres de créance), also known as fixed-income (titres à revenu fixe) securities or bonds (obligations), are a key component of financial markets.

Définition

Treasury Bonds

These are issued by the government and are considered one of the safest investments. In the U.S., they are issued by the Treasury Department.

Municipal Bonds

These are issued by state or local governments to fund public projects like roads, schools, or hospitals. The interest earned is often tax-free at the federal level.

Corporate Bonds

Companies issue these to raise money for things like growth, paying off debt, or daily operations.

Zero-Coupon Bonds

These don’t pay regular interest. Instead, they are sold for less than their face value and give the full amount back when they mature.

Asset-Backed Securities (ABS): These are

investments backed by a group of assets, like car loans, credit card debt, or student loans.

Investors who buy ABS receive payments of

interest and principal, but they also take on the risk of the underlying assets (assets in the pool).

III - Derivatives

Futures contracts are standardized agreements to buy or sell an underlying asset (e.g., commodities, currencies, stock indexes) at a future date and a predetermined price. They are traded on organized futures exchanges.
Options contracts give the holder the right (but not the obligation) to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) within a certain period. Options can be traded on exchanges or in the over-the-counter (OTC) market. Call and put options can be on individual stocks, stock indexes, futures, currencies, …
Structured products, which combine various types of products and underlying assets.

IV - Money market instruments

The main types are:

• Treasury Bills: Issued by governments.

• Certificates of Deposit (CDs): Issued by banks and financial institutions.

• Commercial Paper: Issued by companies.

• Repurchase Agreements (Repos): A financial institution sells a security, usually to a central bank, and agrees to buy it back later.

Financial instrument valuation

sentiment, economic conditions, and other external factors, which may not always align with fundamental valuations