Module 3, Summary

Summary
Lesson 1 of 1

Summary

Once they have determined financial goals and constraints, individual and institutional
investors must develop and implement a strategy for achieving their goals. Investment
management services are frequently required. The range of these services that investors have
access to depends largely on the amount of investable assets they have.

Some high-net-worth and institutional investors rely on investment professionals

to take care of the entire investment process, whereas other clients use the services
of investment professionals selectively. Many investment professionals receive
authority from their clients to trade securities and assets on their behalf.

The three major services that investment managers provide to clients are asset
allocation, investment analysis, and portfolio construction.

Retail investors do not typically require the full range of services used by high-net-
worth and institutional investors. They frequently obtain assistance and advice on
investment management from financial planners or brokers.

The investment research, financial data, and consultancy that investors need comes from
investment research providers, credit rating agencies, financial news services, financial data
vendors, and investment consultants. We looked at each of these types of service providers.

Many investors and their investment managers rely on investment information

services to obtain investment research, financial data, and consultancy services
that help them make decisions. The investors use research reports that dive deeper
into the risk and return prospects of investments, which can be helpful to estimate
the fundamental value of securities.
 Credit rating agencies specialise in providing opinions about the credit quality of
bonds and of the companies or governments who issue the bonds. A high credit
rating indicates that the credit rating agency believes that the bond issuer has a
high probability of making all future payments of principal and interest when they
are due. Most credit rating agencies do not charge investors for their ratings,
although they may charge them for the detailed reports on which the ratings are
based.

Data vendors provide investors with current, accurate data about companies and
market conditions. Market data feeds provide information on market quotes, the
orders investors submit for securities, and the prices and volumes of recent trades,
all of which are helpful for investors who want to trade. Access to investment data
was once very expensive and, thus, restricted to investment firms and institutional
investors. The growth of information technologies, particularly those involving the
internet, has substantially reduced the cost of accessing data and increased
accessibility. The widespread availability of investment data has greatly changed the
investment industry landscape. Although access to data used to be a key driver of
investment profits, it is increasingly dependent on the ability to analyse data.

Finally, we examined how trading service providers — including brokers, dealers, clearing
houses, settlement agents, custodians, and depositories — facilitate investment by holding
assets for clients and by helping buyers and sellers of securities and investment assets arrange
trades with each other.

Brokers act as agents, arrange trades for their clients, and ensure that clients settle
their trades. For complex trades, they often serve as professional negotiators.

Dealers participate on the opposite side of their clients’ trades and are willing to
trade on demand, thus providing liquidity.

After a trade has been agreed on, clearing houses arrange for final settlement of the
trade, and then settlement agents organise the final exchange of cash for securities.

Custodians and depositories hold money and securities for safekeeping on behalf of
their clients and help prevent loss from securities investment fraud.
Module Glossary

In this module, you learned the following terms (in order of appearance):

Lesson 1: Investment Management Services

–

Investment managers: Investment professionals who receive authority from their clients to
trade securities and assets on their behalf. Also called asset managers.

Asset allocation: The process to determine the proportion of a portfolio to hold in various
asset classes, or the proportion of a portfolio held in various asset classes.

Passive investment managers: Managers who follow a buy-and-hold approach and seek to
match the return and risk of a benchmark.

Active investment managers: Managers who try to predict which securities and assets will
outperform or underperform comparable securities and assets and who act on their
opinions by buying the securities and assets that they expect to outperform and selling (or
simply not buying) the securities and assets that they expect to underperform.

Lesson 2: Investment Information Services

–

Credit rating agencies: Investment research service providers that specialise in providing
opinions about the credit quality of bonds and of their issuers.

Data vendors: Investment research service providers of historical and real-time data about
companies and market conditions.

Lesson 3: Trading Services

–
Brokerage services: Trading services provided to clients who want to buy and sell securities;
they include not only execution services (that is, processing orders on behalf of clients) but
also investment advice and research.

Brokers: Trading services providers who act as agents and, in exchange for a commission,
arrange trades by finding sellers for their clients who want to buy and buyers for their clients
who want to sell.

Block brokers: Brokers who help investors who want to trade large blocks of securities.

Prime brokerage: Bundle of services that brokers provide some of their clients, including
typical brokerage services and financing of their clients’ positions.

Dealers: Trading services providers who participate in their clients’ trades and stand ready
to buy or sell when their clients want to sell or buy, providing liquidity and profiting when
they can buy securities for less than they sell them. Also called market makers.

Bid price: Price at which a dealer is willing to buy an asset or a security, typically qualified by
a maximum quantity (bid size).

Ask price: Prices at which a dealer is willing to sell an asset or a security, typically qualified
by a maximum quantity (ask size). Also called o er price.

Proprietary traders: Traders who trade directly with their clients rather than by arranging
trades with others on behalf of their clients.

Primary dealers: Dealers that central banks trade with when conducting monetary policy.

Clearing: All activities that occur from the arrangement of the trade to its settlement.

Settlement: Activity that consists of the final exchange of cash for securities following a
trade.

Clearing houses: Trading services providers that arrange for final settlement of trades.

Settlement risk: The risk that, when settling a transaction, a firm performs one side of the
deal but the counterparty does not complete its side of the deal as agreed, often because it
has declared bankruptcy.

Custodians: Typically, banks and brokerage firms that hold money and securities for
safekeeping on behalf of their clients.

Depositories: Typically, banks and brokerage firms that are regulated and act not only as
custodians but also as monitors, playing an important role in preventing investment fraud.
Up Next

In the next module, you will learn how investment professionals organise their e orts to help
clients meet their financial goals and explore how fintech is transforming the world of finance.