Introduction to Markets

Introduction to Markets Abhijan Khosla (Director of Mentorship)

Welcome • Please bring your laptop to every session • Questions are very important, if you have a question don’t hesitate to ask • We will meet from 6 -7 p.m. every Tuesday and Thursday for the next 4 weeks • My email – ankhosla@gmail.com • Feel free to email questions, comments or concerns • Mentorship sign-up; tinyurl.com/mentorship13 GTSF Investments Committee

Quiz Time! In what year was the student foundation created? • 1992 • 1980 • 1986 • 1984 GTSF Investments Committee

Quiz Time! Which of the following is NOT an GTSF Committee? • Allocations • Advertising • Financial Planning • Development GTSF Investments Committee

Quiz Time! My career opportunities in finance include • Hedge Fund Analyst • Investment Bank Analyst • Corporate Credit Analyst • OilTrader • All of the Above GTSF Investments Committee

Quiz Time! My career opportunities in finance include • Hedge Fund Analyst • Investment Bank Analyst • Corporate Credit Analyst • Oil Trader • All of the Above GTSF Investments Committee

Who Am I? GTSF Investments Committee

What has been happening in the markets? GTSF Investments Committee

What is a market? • Two different types of markets • Primary and secondary • Let’s learn the difference! GTSF Investments Committee

Markets • Primary Market - the market in which an investment bank will go to to sell new securities before they go to the public - IPO • This is why investments banks are needed for sales of debt and equity • Mostly institutional investors buying massive blocks of the security • Secondary Market - market in which a security trades after the initial offering GTSF Investments Committee

Prices in a Market • How are prices determined in a market? GTSF Investments Committee

Efficient Market Hypothesis • There are 3 different levels of “efficient markets” • Strong form efficient markets - the stock market reflects all information public and private making it impossible to earn outsized returns • Semi-strong form - the price reflects all public information and only private information can be used to beat the market • Weak form - the market doesn’t reflect all public or private information GTSF Investments Committee

What are the different kinds of markets? • Listed vs Over The Counter • Listed - prices are listed on an exchange, what you see is what you get • NYSE • NASDAQ • CBOE • When you buy a stock through your broker they fill the order any way they see fit • They can buy that from a client, sell it to you from their own inventory, buy it from an exchange GTSF Investments Committee

What are the different kinds of markets? • Over The Counter (OTC) • OTC securities (bonds and FX) don’t have listed prices • You can go onto Googleand find the current exchange rate for a currency but that is not the price you will pay • OTC markets have no listing, all prices are determined by “market makers” who take on risk by buying or selling securities GTSF Investments Committee

Trading Logistics • Betting that a security will rise is called being long said security • Betting that a security will fall is called being short said security • How to short a security; • Borrow the shares from a counterparty (lender) • Sell the borrowed shares to someone (buyer) • Give a % of the proceeds of the sale to the lender to act as collateral • Buy the stock at a lower price • Return the shares to the lender and keep the profits GTSF Investments Committee

Investing in Markets • Regardless of what form of efficiency you believe markets attract investors • Investors have different styles based on how and why they invest • The main investing styles are • Value • Growth • Momentum • Each investing style has a number of variables making each investor’s ultimate approach unique GTSF Investments Committee

Value Investing • Benjamin Graham - considered the father of value investing • Wrote two books in the early 90’s • “Security Analysis” and “The Intelligent Investor” • Idea is to buy securities that are “undervalued” by the market • Using key metrics, Graham would find the intrinsic value of a security and determine if the market had mispriced it • Warren Buffett is the best known value investor GTSF Investments Committee

Growth Investing • Growth investors invest in the potential of companies • They believe that the market is undervaluing the company’s growth potential • Growth investors still use fundamental analysis but they focus more on the potential opportunities that the firm is exploring • How may these opportunities present themselves in a company’s financial statements? GTSF Investments Committee

Momentum Investing • Momentum investors look to capitalize on the trends in the marketplace • Momentum investors believe that stocks that have large increases will continue to have large increases and stocks with price shocks will continue to drop in price • Once a stock gains “momentum” price is often driven by demand and not by fundamental earnings GTSF Investments Committee

Momentum Investing GTSF Investments Committee

Holding Periods • As an investor you must make a decision as to how long you will hold a stock • Value and growth investors - usually hold on to securities for an extended period of time given the believe in the fundamentals and potential of a company • Momentum investors - usually hold securities long enough to ride out the momentum wave before selling • If you believe in your investment then you will be willing to take some losses for larger future gains GTSF Investments Committee

Liquidity • Liquidity is the ability for a security to be converted into cash • If you are a buyer and no one is selling then you are not in a very liquid environment • Finding liquidity is very important you want to know that you can get out of a bad position easily if the tide turns • Highly illiquid markets can be moved by a few individuals and can be potentially disastrous GTSF Investments Committee

Market Cap • The market cap of a company usually gives an idea as to its size since larger companies need more money and finance more via equity • Large Cap > $10 Billion • Mid Cap - between $2 and $10 Billion • Small cap < $2 Billion • How do you think the market cap of a company impacts its trading and the way it moves in the marketplace? GTSF Investments Committee

Bonds or Fixed Income • Bonds are essentially fancy loans • Used by corporations and companies to raise money for operations • Much more prevalent than equity since companies need constant funding and can usually access the market quickly when needed • The yield on a bond is the interest rate paid on said bond • Prices and interest rates on bonds perform inversely i.e. as price rises the interest rate falls • If you hold a bond until maturity then price and rate fluctuations don’t matter GTSF Investments Committee

The IC’s investing Style • Since we are an endowment we must be smart with the way we use our money • The IC is a growth focused fund which holds securities for 6 + months • We focus on Large Cap and Large Mid Cap firms in highly liquid environments • Our alternatives sector allows us to invest in different securities such as preferred stock and gold • The rise of ETF’s has allowed us to look at a number of different investment avenues GTSF Investments Committee

Quiz Time! Who is the father of value investing? • Alexander Graham Bell • Benjamin Graham • Warren Buffett • Ben Bernanke GTSF Investments Committee

Quiz Time! You shorted AAPL at $750 and covered at $250 (assuming $10 in fees) how much do you make on this trade? • 200 • 190 • -200 • -190 GTSF Investments Committee

Quiz Time! Which is not true of an OTC Market? • The prices are not listed in any central location • Buyers assume all the risk • Market makers help to determine prices • Fixed income is an example of an OTC security GTSF Investments Committee

Next Time • What are the basics of valuation? • Review of today’s concepts GTSF Investments Committee

Introduction to Markets