Toronoto Financial Institutions

Toronto Financial Institutions

Very broadly defined, a financial institution supplies financial services to its clients. A bank provides such services and is chartered by the respective government in that respect. Other similar word uses may refer to slightly different meanings such as the World Food Bank. The World Bank and IMF (International Monetary Fund) are prominent international business world players.

There is a distinction between commercial (for profit) and central banking.

Individuals cannot open an account with the central bank, only the government; individuals must go to the commercial banks. Statistical tools and mathematical models greatly facilitate financial forecasting.

Proficiency in the banking industry most often than not requires a thorough knowledge of the underlying numerical concepts. Central banks operate in most countries to ensure financial stability and avoid the bank panics and failures seen during the Great Depression. Many other organisations collectively make sure that the country’s financial health is well monitored.

Davenport Road near Bay Street. Illustration by Elena

In Canada, in addition to the central bank (the Bank of Canada), the Canadian Deposit Insurance Corporation (CDIC) protects patrons’ funds within certain conditions. The American counterpart is the Federal Deposit Insurance Corporation (FDIC).

A skeptical point was raised: if one of the big five banks were to fail, then the whether they needed protection or not would take second place to the disarray that would likely have engulfed the economy. Perhaps. But perhaps also, having the system in place prevents any such awful outcome, just as in the psychological construct of the self-fulfilling prophecy. Aside from major Canadian banks discussed at length elsewhere on the present Website, there are many insurance companies, trust funds and credit unions.

The United States may dominate the continent economically, but Canadians can expect to live the longest and face a lower infant mortality rate.

Financial Market

Financial Market

When using some of the formulas, it is important to remember that the amount of stocks held can be negative: this situation is called shorting stocks. Basically, shorting a stock is trading in borrowed shares and is profitable when the price of a stock goes down. To illustrate, if person A believes that stock X will go down in the near future, A can borrow shares X from person B, sell them at current market price, buy the same number of stocks once price goes down, and profit by the difference.

The theory of efficient markets elucidates why it would be unwise to even try to beat the market. A random walk postulates that if there was a drunk man near a lamppost and every one of his steps were random, it would be impossible to predict where he would end up after 15 minutes and the best guess would be at the lamppost, since that is rationally the only place that has any link. Of course that is an imperfect analogy, but markets are unpredictable because of unforecastable information noise. In the hypothetical alternative, if the drunk had an elastic band attached to an ankle, the randomness would change because he would be pulled back, that is the autoregressive rationale. In the random walk (efficient market model) it is impossible to profit from trading due to the unpredictability of stock price behavior, whereas in the autoregressive model it is less so.

If price earnings ratio is low (usual around U.S. $15), prices are likely to go down, theoretically, and in no way sufficient motive to act on; dividends are fundamental since the only other way to make money on stocks is if price went up, but why would it rise if dividends were not paid. Companies that are just starting often do not pay dividends.

Toronto Dominion Tower. some of the most beautiful buildings in Toronto there are the city’s banks.  I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years (Warren Buffet). Illustration: Megan Jorgensen (Elena)

Since human behavior is rarely perfectly quantifiable and even less exactly mathematically predictable, behavioral finance comes in. The markets are in fact influenced by many aspects of other social sciences than economics, mainly political science, sociology and last but not least psychology.

Kahneman & Tversky (1979) developed a paradigm in their famous article on behavioral economics, proposing the prospect theory, in which expected utility is replaced with a value function. Utility is the economic measure of how happy an outcome makes an individual.

The utility function has an upward slope that gets less and less steep with every additional outcome; this process is called diminishing marginal utility. The suggested aspect is discontinuity in the slope of the value function, explained by the characteristic valuing of losses much more than gains. Hence, at times, losses dominate decision-making, as in sunk costs, when person is less likely to give up something in which much has been invested, even when continuing with the doomed undertaking seems irrational and counterproductive.

Reference:

    Kahneman, D. & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2): 263-92.

A Few Thesis on Finance

A Few Thesis on Finance

The Five (5) Most Important Questions of Finance

1. How to get rich quick;

2. Which financial markets to play? Which commodities to bet on?

3. Where to get pertinent financial information, including Google Scholar, Google Finance, Yahoo Finance and financial trends?

4. Which financial analysts to trust. Which are more trustworthy appropriate to a task constantly planners.

5. How much money should you invest, what kind of ratio loan-to-asset to maintain and which institutions to work with (financial institutions history and overview including mergers, banks, central banks, and other financial and accounting firms).

Normative economics suggest what ought to be.

Hudson Bay Chain, Toronto Headquaters. Photo by Elena

Economists define the market equilibrium as the point when demand and supply are equal. Demand is the willingness and ability to buy goods and services, while supply corresponds to the willingness and ability to produce these.

Microeconomics concentrates on individual and firm behaviour, such as fixed and variable costs.

Break-even point analysis is an economics tool to find out sales volume to break even, alternatively may be done to obtain a certain amount after all costs have been covered.

Economists and management accountants will be less likely to advise  shutting down a business as long as fixed costs are covered, since variable costs are costs of production and remain nil when production halts.

Common Financial Abbreviations

Common Financial Abbreviations

Finance

Some claim that the Ancient Romans had the first, albeit very small, stock market exchange. In the United States of America, in 1811, the New York Securities Law established:

Anybody can set up a corporation and trade, provided they fit the required criteria.

Limited liability - stock market investors cannot be sued for the misdeeds of a company. In 1975 the Intermarket Trading System was implemented to allow traders to oversee all the differences in prices in diverse exchanges. The National Market System linkage, an upgraded version, was proposed in 2006. An alternative arrangement is large institutions trading among themselves, usually as part of some deal.

FINRA - Financial Industry Regulatory Authority, organization overseeing brokerage firms, branch offices and registered securities representatives. In addition, FINRA offers continuing education and certification exams. Churning, overtrading a customer’s account in order to make more commissions (resulting in the client’s inability to make real profits) is a way to get disbarred (ousted from the profession) for life.

CFA - Chartered Financial Analyst, an internationally recognized professional designation. Successful results on a six hours long exam and four years of relevant work experience are the minimum requirements. Sometimes combined with the MBA (Master of Business Administration) program. Most MBA, and many MFin, admission offices also require a minimum of several years of work experience

CFP - Certified Financial Planner. According to the FPSC (Financial Planning Standards Council), there are more than 17500 CFPs in Canada. In Quebec, this role is filled by the IQPF (Institut Québécois de planification financière).

NYSE - New York Stock Exchange. The NYSE, the largest stock exchange in the world, was founded in 1792. The NYSE is located at 11 Wall Street.

NASDAQ - (National Association of Securities Dealers Automated Quotation System). The NASDAQ was the first electronic stock exchange, founded in 1971. NASDAQ Small Cap (capitalization: price per share times shares outstanding, i.e. total company value).

SEC - Security and Exchange Commission. Federal governmental agency of the United States of America. The SEC regulates the financial industry and enforces corresponding laws.

Toronto Dominion Securities. Proficiency in the banking industry most often than not requires a thorough knowledge of the underlying numerical concepts. Photo by Elena.

Accounting

All accounting designations require at the least a BAcc or a BComm (BCom), BAdmin (BBA) with accounting majors, requirements may vary by region and office. In some cases a bachelor’s degree in a different discipline with a professional practice certificate or a combination of skills and pertinent work experience may suffice.

CA - Certified Accountant. In Quebec the professional association is the Ordre des comptables agrées du Québec. CAs work in public practice, government, education and as senior finacial professional in industrial organizations.

CMA - Certified Managerial Accountant. The provincial office is Ordre des comptables en management accrédités du Québec. CMAs are valuable members of organizations, generating innovative change and implementing financial strategies.

CGA - Certified General Accountant. The professional order is named Ordre des CGA du Québec; they have an affiliation with the CGA - Canada (Certified General Accountants of Canada). The most flexible of the three designations (CA, CMA, CGA).

CPA - Certified Public Accountant. American accounting certification, given out by the American Institute of CPAs. The minimum requirement to obtain the certification is successfully passing the Uniform Certified Public Accountant Examination.

MECE

MECE

When you analyze, you need to be logical and coherent. You also need to avoid becoming confused. A method used by the best management consultants to analyze a project logically is called MECE for Mutually Exclusive and Collectively Exhaustive.

This involves finding a way of listing all aspects in a project so that they do not overlap (do not become mutually exclusive). You must ensure that the aggregated list covers all possibilities (collectively exclusive).

You must break down the options even further by actions to be taken to assess the work properly. For example – “How do I assess the feasibility option of signing an agreement with local distributors?”

To achieve MECE, follow a step-by-step process:

•     Do a market screening of the distributors;
•     See which competitors are already in contact with them;
•     Contact the most relevant ones;
•     Understand if they would be interested in distributing your product.
•     You can even put a time at the end of each action, such as: Do a market screening… (two days)…

MECE stands for Mutually Exclusive and Collectively Exhaustive. Picture by Elena

You if do the same for each action and total the time of all actions, you will come up with a timescale. It is very important that you understand which actions you fully control or that only you can influence. For example, the market screening of distributors may take more time or contacting the most relevant distributors may take one day. In fact, you don’t know how easy it will be to reach the good contacts in the organisation, or how fast will they respond to you. Actually, for those actions you do not fully control, you can raise the time allotted by 50% to get to a fair assessment of the time needed.

Then, you need to understand whether you want to under-promise and how to communicate it to your boss or client. When you communicate a deadline on the delivery of an agreed end product, you raise an expectation. You cannot move the deadline afterward. You may have good reasons, but this is not your boss’s or client’s problem.

Thus if you are afraid of not being able to deliver on time, do not hesitate to add 20 percent more time on the deadline before communicating it. However, be careful not to overly extend the deadline, as it would mean lowering you boss’s expectations – which could be a huge handicap if you are an ambitious person willing to grow fast in a company.