Friday 26 April 2019

CFA Institute Investment Foundations Program: Chapter 1 – The Investment Industry


In a previous article, we introduced the CFA Institute Investment Foundation Program (Read more here).  It is a free program designed for anyone who wants to enter or advance within the investment management industry, including IT, operations, accounting, administration, and marketing.  Candidates who successfully pass the online exam earn the CFA Institute Investment Foundations Certificate.

There are total of 20 Chapters in 7 modules, covering all the essential topics in finance, economics, ethics and regulations.  This series of articles will highlight the core knowledge of each chapter.
Chapter 1 provides an overview of the investment industry. The learning outcome of chapter 1 is as follows:

·        Describe the financial services industry;
·        Identify types of financial institutions, including banks and insurance companies;
·        Define the investment industry;
·        Explain how economies benefit from the existence of the investment industry;
·        Explain how investors benefit from the existence of the investment industry;
·        Describe types and functions of participants of the investment industry;
·        Describe forces that affect the evolution of the investment industry.

The financial system helps link savers who have money to invest and spenders who need money. Within the financial system, the financial services industry offers a range of products and services to savers and spenders and helps channel funds between them (Exhibit 1).




The type of financial services includes financial planning, investment management, investment information, trading and custodial (Exhibit 2).



The main financial institutions are banks and insurance companies. Banks collect deposits from savers and transform them into loans to borrowers. Insurance companies are not only financial intermediaries that connect buyers of insurance contracts with providers of capital who are willing to bear the insured risks, but also among the largest investors.

The investment industry provides numerous benefits to the economy, including the efficient allocation of scarce resources, better information about investment opportunities, products and services that are appropriate for providers and users of capital, and liquidity.

The benefits for investors of a well-functioning investment industry include a broad range of investment products and services that meet their needs, competitive markets that provide liquidity and keep transaction costs low, timely and efficient disclosure of information, and the ability to modify their risk exposures.

Four key forces that drive the investment industry are competition, technology, globalisation, and regulation (Exhibit 3).




An institutional investor that invests a government’s surpluses is a(n):
 
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