Equity
Now, we will talk about equity. We will start with an overview of how the market is organized. We will introduce some asset classes, following the structure of the official CFA material. After that, we will move into equity itself.
Market Organization
In this introductory chapter, there are definitions, but the most important takeaway is the comparison between hedgers, pure investors, and information-motivated traders. This concept frequently appears in exercises and is essential to understand.
- Hedgers are market participants who use financial instruments to reduce or transfer financial risk.
- Pure investors accept the market risk premium, often linked with terms like passive investment or passive management.
- Information-motivated traders aim to profit from superior information—examples include active fund managers seeking specific risks where they have an informational advantage over the market.
A pure investor can, at times, be an information-motivated trader, and vice versa.
Major Asset Categories
- Securities: Debt Instruments (Fixed Income), Equities, and Pooled Investment Vehicles like mutual funds.
- Currencies
- Contracts: derivatives
- Commodities and Real Assets: Precious Metals, Real Estate, etc.
Financial vs Physical Assets
- Financial Assets: Securities, Currencies, and Contracts
- Physical Assets: Commodities and Real Assets
Public vs Private Securities
Public securities trade in public markets, are usually more liquid, and meet stringent regulatory standards. Private securities are not registered for public trading, usually limited to qualified investors, often sold through special vehicles, and tend to be illiquid (e.g., venture capital).
Primary vs Secondary Market
In the primary market, companies sell securities directly to investors, creating new securities and receiving cash inflows (IPOs, bond issuance). In the secondary market, securities simply change hands without new capital flowing to the issuer.
Money Markets vs Capital Markets
Money markets trade debt instruments maturing in one year or less: repos, certificates of deposit, government bills, commercial paper.
Capital markets cover longer-term instruments: bonds, equities, long-term debt, often used for financing long-term operations.
Traditional vs Alternative Investments
- Traditional: publicly traded debt, equities, and funds
- Alternative: hedge funds, private equity, private debt, venture capital, commodities, real estate, securitized debts, operating leases, collectibles