The Financial Infrastructure Includes:

1) Buy side

Warren Buffett

Warren Buffett

People who are in the business of buying securities like stocks and bonds.

They do it as professionals.

Professional Investment Managers and Their Influence

The law prescribes that Investment Managers who manage other people’s money to have a duty to act in the best interest of the person they are managing the money for.

There is also a “prudent person rule” which states that the investment manager has to manage the money prudently.

2) Sell-side

Investment Bank

Investment Bank

People who are in the business of selling securities such as stocks and bonds.

An example of that is The Investment Bank. They are companies that specialize in helping firms issue securities to raise the finance they need for their operations – they have relationships with the potential buyers of these securities and they use the relationships and trust to sell the securities.

Many investment banks have closed down during the financial crisis and a notable example is Bear Steams company which was once a huge investment bank and now, it has been taken over by JP Morgan Chase.

Many investment banks that have failed also have converted to a commercial bank – with an investment banking division.

Investment Banking is still an important profession. They are the publicist which publicize investment that makes it possible for financing to proceed.

Investment Banks

Investment Banker

Investment Banker

Their clients can include, profit and non-profit corporations, governments and even individuals who have a company incorporated.

Investment bankers often serve as a consultant because when someone comes up to them wanting to issue shares, they would also have a problem that needs to be solved. A good investment banker will talk about their client’s overall corporate strategy and how to solve their problems.

In a sense, an investment bank is similar to a consulting firm but they are more than that because they issue shares on top of doing a consultation for their clients.

A Pure Investment Bank Does:

1) Underwriting of securities

Investment banks have contacts among people who make big investments and they use these contacts to help people sell their securities to raise funds. They also manage the issuance of the new shares and that is called underwriting of shares.

True investment banking should not be involved in the buying and selling of securities to make a profit because their primary role should revolve around issuing of securities.

If it is the first time a company is issuing shares, it would be called Initial Public Offering (IPO).

For a company that has already gone public but they would like to issue more shares, it would be called seasoned offering.

2) Bought deal

Investment bank buys the clients company shares and then resell it a few years later on the market in the hope of a higher price.

3) Best efforts offering

Investment bank does not buy the clients company shares but they would make their best efforts to sell the issued securities.

Investment Bank Solves The Moral Hazard Problem Because:

Investment bank separates and filters out the good company with good prospects who would like to issue shares to the public.

As opposed to without them, a fraudulent company can issue shares to the public and raise funds even though the company themselves knew that their chance of succeeding and making money is very low.

As a result, investment banking is built around trust and establishing trust.

3) In between

UOB Kay Hian

UOB Kay Hian



Brokerage firms, dealers, and the exchanges bring people together to trade securities.

Exchanges, Brokers, Dealers, Clearinghouses

These are places to where shares of corporations are traded – it is central to economic activity.

A broker is someone who trades on behalf of others to earn a commission.

An example is that when we buy or sell a house, we hire a real estate broker and promises that we would pay them a commission once the contract and the deal have been made.

A dealer is someone who trades for himself or herself acting as a principal, not an agent to earn profit from a markup.

An example is when we want to buy an antique furniture for our new house, we will go to an antique furniture dealer and we buy the furniture from them, the dealer earns based on the markup price from the price they bought the furniture at to the price they sold the furniture to us.

Stock exchanges are an important part of the economy.

The more famous stock exchange includes New York Stock Exchange (NYSE) which has been around for at least 100 years while the newer ones such as the Shanghai Stock Exchange has only been around for around 20 plus years – since 1990, before that they were still very communist – hence no stock exchange.

After the NYSE, National Association of Securities Dealers Automated Quotations (NASDAQ) was incorporated.

The Different Types of Order in A Stock Market:

1) Market

You buy or sell at a specific quantity at the opening market price

2) Limit

You buy a specified quantity and at a specified price or lower

You sell a specified quantity and at a specified price or higher

3) Stop Loss

You sell a specified quantity and at a specified price or lower.

It is done when you think the stock price would go up but instead it went down further and you would want to cut loss.

4) Buy Stop

You buy a specified quantity and at a specified price or higher.

It is done when you think the stock price would go down but instead it went up further (shorting a stock) and you would want to cut loss.

Guest Speaker – Schwarzman



Schwarzman is the CEO of BlackStone group which specializes in doing real estate private equity acquisitions- his returns are approximately 20% annually for the past 20 years after fees.

He said that we do not have to be an expert at economics, calculus to be good in finance.

He said that in buying shares in the public stock market, it is hard to get the relevant data to make a decision – often times the company executive could not reveal a lot of information because it is supposed to be an insider information.

To him, the whole concept of business is an integrated system.

For example, if a company wants to develop a product for sale, it would be good to know if somebody else wants it. There is a need to integrate all the different knowledge from various sides to know whether it is a good company.

What he does is that he borrows money to buy companies – historically for every $3 of debt, he has $1 of equity. Then he uses managerial decisions to improve the companies that he bought and it would usually grow with the general economy.

He feels that real estate business is easier because buildings do not talk – while management talks so we would have to figure out what they are saying – which is more complex.

It has been a long 7 weeks journey for me, stay tuned to next week’s summary – my final week 8 summary of the Yale University Financial Markets Course!

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