BUS202: Principles of Finance

Market actors include individual retail investors, mutual funds, banks, insurance companies, hedge funds, and corporations.

TERMS

• closed-end

  Closed-end funds (or closed-ended funds) are mutual funds with a fixed number of shares (or units). Unlike open-end funds, new shares/units are not created by managers, to meet demand from investors, but the shares can only be purchased (and sold) in the market.

• open-end

  An open-end(ed) fund is a collective investment scheme which can issue and redeem shares at any time.
  
  

The individual actors in the financial markets can be broken down into three main categories: investors, intermediaries, and issuers. Specifically, market actors include individual retail investors, institutional investors such as mutual funds, banks, insurance companies and hedge funds, and also publicly traded corporations trading in their own shares. The value of a stock is derived from buying and selling decisions of these actors. Some studies have suggested that institutional investors and corporations trading in their own shares generally receive higher risk-adjusted returns than retail investors.

Investors

An investor is someone who allocates capital with the expectation of a financial return. The types of investments include, - equity, debt securities, real estate, currency,commodity, derivatives such as put and call options, etc. A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy businessmen, usually with long family histories to particular corporations. Over time, markets have become more "institutionalized" . Buyers and sellers are largely institutions. Investors can include: pension funds, insurance companies, mutual funds, index funds, exchange-traded funds, and hedge funds.

Issuers

The issuer is a legal entity that develops, registers, and sells securities for the purpose of financing its operations. Issuers may be domestic or foreign governments, corporations, or investment trusts.

Intermediaries

Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans. Other classes of intermediaries include: credit unions, financial advisers or brokers, collective investment schemes, and pension funds.

Pension Funds

A pension fund is any plan, fund, or scheme that provides retirement income.

Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold about $6 trillion in assets. In January 2008, The Economist reported that Morgan Stanley estimates that pension funds worldwide hold over $20 trillion in assets, the largest for any category of investor ahead of mutual funds, insurance companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.

Insurance Companies

Insurance companies are generally classified as either mutual or proprietary companies. Mutual companies are owned by the policyholders, while shareholders (who may or may not own policies) own proprietary insurance companies.

Mutual Funds

A mutual fund is a type of professionally-managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal definition of mutual fund, the term is most commonly applied only to those collective investment vehicles that are regulated, available to the general public, and open-ended in nature. Hedge funds are not considered a type of mutual fund.

There are three types of U.S. mutual funds: open-end, unit investment trust, and closed-end. The most common type, the open-end mutual fund, must be willing to buy back its shares from its investors at the end of every business day. Exchange-traded funds are open-end funds or unit investment trusts that trade on an exchange. Open-end funds are most common, but exchange-traded funds have been gaining in popularity.

Index Fund

An index fund or index tracker is a collective investment scheme (usually a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. As of 2007, index funds made up over 11% of equity mutual fund assets in the United States.

Exchange-Traded Fund (ETF)

An exchange-traded fund (ETF) is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features. ETFs are the most popular type of exchange-traded product.

Hedge Fund

A hedge fund is an fund that can undertake a wider range of investment and trading activities than other funds. It is generally only open to certain types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high-net-worth individuals, who are considered to have the knowledge or resources to understand the nature of the funds. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage.