Any (reasonable) investor goes through three stages of the investment process:

-Selection of securities - The balance of the desired yield and acceptable risk
-Choosing the moment to buy or sell - Avoiding premature or delayed purchases or sales
-Structuring and managing portfolio - Minimization of risk and / or profit maximization

Inrinsic value - actual value based on facts relationship between intrinsic and market value :
-Graham i Dodds Approach
-Eugena Famas Efficiant Market Hypothesis
-Burton Malkiels Random walk
-Bihavioral Approach of Smith, Kahneman and Tversky

Graham & Dodd - the analytical approach involves a careful study of available facts with the intention
of drawing conclusions based on accepted principles and sound logic. Three functions of financial
analysis:
-Descriptive gathering information about the company or security
-Critical - continual review of information, models and analysis findings
-Selective select security (or project) and moment for investment

Efficient market hypothesis - Market efficiently process information. Market efficiency idea does not
require the stock price to be equal to the intrinsic value of the company at any time, but that the
difference between them is unbiased (random). The randomness of price deviations from the
intrinsic value implies an equal chance of overestimating and underestimating meaning there is no
way to constantly beat the market.
EMH is classified into three forms:
-Weak form - the capital market in the security's price assimilate only information on the movement
of price of that security in the past
-Semi-strong form - the price of a security is the result of all publicly available information - on the
price movements of securities in the past, as well as information which, by its nature or the origin,
are public - that were published in any mass media
-Strong form - the market price assimilates all the information available to the public, and even
information that have private character, that are known to a narrow circle of persons

Random walk - Burton Malkiel (1973) - "A Random Walk implies movement in which future steps or
path can not be predicted based on previous steps or earlier path. Malkiel categorises analysts and
investors as followers either
-The Firm-Foundation Theory, or
-The Castle-in-the-Air Theory
Warnings:
-The future is unpredictable
-Definitive results of mathematical calculations based on indefinite data are unreliable
-Investor perceptions about the importance of the fundamental determinants of the share market
price is different, and evem the objective importance of these determinants differs through time

Behavioral approach - calls into question the rationality of investors in the financial market (which is
the basic assumption of all analytical models).

"Classic" Finance, through ceteris paribus models describes how individuals in the market should
behave, while behavioral finance talk about what is actually happening - how individuals actually
behave
 Financial markets are not perfect due to a number of anomalies in the
Macro level
Fundamental anomalies - actual performance deviates from the estimated
Technical anomalies - technical analysis is not always consistent with the
assumption of efficient markets
Calendar anomalies - "the January effect, booming cycles, etc..
Micro level
Investors are not perfectly rational (on the contrary, they tend to a range of
cognitive and emotional biases)
All investors do not always act exclusively in their own interests
Investors are not perfectly informed, do not process information the same
way, neither they draw same conclusions

Theoretical approaches to valuation, to a lesser or greater extent, are in favor of either an intrinsic
value (in the broadest sense) or the market value of the company
Two basic directions of financial analysis have been developed from the theoretical approach to the
valuation:
-Fundamental analysis
Different understanding of the value of the company (accounting, liquidation, "The Break-Up,"
"Going Concern" ...)
Financial ratios (ratio analysis)
Based on the present value of future earnigs or cash-flow (ie. Time value of money)
-Technical Analysis
Based solely on the graphical interpretation of trends in price movements and other parameters of
trading in securities market

Key elements of legal entity:

Sturdy and durable organization with organs through which formulates interests and act in
relations with third parties
Object for which it was established, in conformity with the legal system
Occurrence in the acquisition of rights and taking obligations in its own name independently
and separately from the owners of the company
Separate property, independent and separate from the property of the owners of the
company
Attributes of identity - the legal personality: company name, residence, activities and
citizenship (nationality)
Legal entity begins with the registration at the Registrar of business companies and ends with
entering the termination of the company in the Registrar

Corporate governance - group of principles and structures governing the major participants inside
and outside the corporation, as well as their relationships in terms of their rights and obligations

The aim is to establish a balance between the interests of the various interested parties within and
outside the corporation (stakeholders)

Corporate governance is the structure through which :

The objectives of the company
Ways to achieve these objestives
Funding for monitoring the effects
are provided

Assets either can be entered in the company or self-generated in the company

Three ways of financing long-term projects of the company:

-From the company's own resources
-With bank loans - borrowing
-Issuing securities

Interest of an investor - securities buyer:

-Return in the form of dividends or interest
-The profit that can be realized due to the increase in market prices of securities (capital gain)
-The right to participate in managing the company emerged from owning securities

Groups of securities: ownerships and debt

Security - "document or electronic record that contains rights that without them you can not realize
nor transfer"

Types of securities:
-Shares
-Bonds
-Convertible securities (into shares)

Shares
Basic features
dematerialized
undividable
registered on the name
transmittable
The rights arising from shares
Managerial
Property

Rights termination either by transfer of shares or exclusion of shareholders

Priority shares priority in dividend payment

Preference shares - fixed rate of return

 Shares for employees
A special class of shares - for employees
Often limited to portion of companys equity
Rights as common, unless legal restrictions
Could be owned only by employees and retired employees of the company

COPENHAGEN CRITERIA
-Stable institutions guaranteeing democracy, rule of law, human rights, respect and protection of
minorities
-Functioning market economy with capacity to cope with competitive pressure, in order to be able to
tako on the obligation of membership, Including the aims of political, economic and monetary union.

Three stages towards EMU

-I phase (1990-93) Single European Market
-II phase (1994-98) European Monetary Institute
-III phase (1999- ) irrevocable fixing of exchange rates, the transfer of monetary policy competence
to the ECB and the introduction of the euro

CONVERGENCE CRITERIA
High degree of stability of prices
Sound and stable public finance
Maintanance of stable exchange rate
Low and stable long term interest rates

Benefits of single currency:

A real single market for goods and services
Foreign exchange risks and transaction costs eliminated
Integration of financial markets

Eurosystem the ECB and the NCBs of the EU Member States which have adopted the euro
key ECB interest rates
minimum bid rate on the main refinancing operations
interest rates on the marginal lending facility
interest rate on the deposit facility
foreign exchange operations
foreign reservs assets management
smooth operations of payment system
exclusive right to authorise the issue of euro banknotes

Independence base for integrity, accountability and confidence. Personal and functional

National CBs act as agents of ECB and in their own name in matters of foreign reserve management,
cashless setlements, providing central bnak money to credit institutions with end goal of maintaining
price stability. They also collect statistical data and issue euro banknotes in their countries.

Governing Council
-to formulate the monetary policy of the euro area
-to adopt the guidelines and take the decisions necessary to ensure the performance of the
Eurosystems tasks
Executive Board
-to prepare the meetings of the Governing Council
-to implement monetary policy in the euro area in accordance with the guidelines and decisions laid
down by the Governing Council and, in so doing, to give instructions to the NCBs
-to manage the day-to-day business of the ECB
-to exercise certain powers, including regulatory powers, delegated to it by the Governing Council

MONETARY POLICY MECHANISM

Price stability
Consistent and systematic approach
to stabilise inflation, expectations and enhance credibility of the ECB
Harmonized Index of Consumer Prices (HICP) < 2%
but close to 2%, in order to control deflatory pressure
Should there be any conflict between the objectives, the maintenance of price stability must
always be given priority by the ECB
Transmission of monetary policy decisions (money market is first to be affected)
Open market operations
Standing facilities
Minimun reserve requirements

MONETARY POLICY INSTRUMENTS

-open market operations
-standing facilities (marginal lending and marginal deposit rates)
-minimum reserve requirements

Capital market - a meeting place between lenders and business entities deficient in capital

Financial intermediation - essentially a simple process of connecting sellers or issuers of financial

instruments with buyers who have money

A financial instrument is an investment for one side, and source of funds for the other side

Intermediation
-In the primary market - advice, underwritting
-On the secondary market - the restructuring of the portfolio (for portfolio investors), the -
restructuring of corporate influence (for direct investors)
Financial Intermediaries
-Banks and savings and loan institutions, insurance
-Broker-dealers
-Investment and pension funds, venture capital companies

And to its credit - for the sake of greed-driven placing own interest before clients
-First, the distance between the client and the broker, which secured equal treatment of all clients,
has been lost
-Then the barrier between the different services dissepeared
-From specialists for services, markets and customers, intermediaries become "financial
supermarkets" ("one-stop-shop")
-Different perception of risk in general, and specifically for individual clients
-Created a new class of financial instruments, the nature of which was not related to the mobilization
of capital, but rather to use certain characteristics and conditions of the market for profits that do
not spring from real investment rather than from intervention "per se"
-Clients are deliberately deceived about the risks and their purchasing power
-Then, pure lie was institutionalized and began to sell as a separate financial instrument
(securitised "sub-prime" loans)
-Finally, the crisis erupted worldwide

In BiH:
Bank-based, expensive, and on foreign financing dependant financial market
(for example: changes in risk premiums after a change of EURIBOR)
Negligible and entirely wrong set primary market, dominated by private placement for
known investors, where the corporate control is traded, rather then capital
Incompetent and unethical brokers who regularly put their interests before of the interests
of the client

Capital market is place for trading in intangible "goods," and it works

-While investors are convinced that they can forecast what will happen in the near future
-While the prices are the result of supply and demand

People are driven in investing either by

-Greed (buy as soon as possible, sell it later), or
-Fear (buy when it's safe, sell before you lose)

Confidence in the market rests on the balance between greed and fear - as soon one or the other
overcomes, confidence is compromised

The main problem for the maintenance of confidence in the market is also a human impulse - the
tendency of people to lie when they think that will bring them benefits

The system of investor protection rests on three pillars

-Timely, complete and correct reporting and publication or presentation of information about issuers
of securities and the securities themselves
-Qualifications, knowledge and ethical integrity of professional market participants
-Prevention of fraud and market manipulation

EU regulations I pillar European Passport for Issuers

II pillar MiFID
III pillar Market Abuse Directive
Securities Market Acts in BH identified three pillars of protection
1 A passport for issuers
-Prescribed, completed and verified - but no visa
-The sense of transparency is problematic
2 Professional intermediation
-Control and monitoring function well
-Ethical aspect - far away from good
3 Market abuse
-The law in BH in essence follows the European regulations
-Detection of abuse is relatively successful evidencing is the painstaking process - sanctions are
limited to licensed participants - judicial procedures slow or no effect
-The complete absence of "self-defense"

Organization of surveillance and enforcement of rules in capital markets:

Implemented by stock exchanges and securities commissions
Jurisdiction of the stock exchange is very narrow - based on members and compliance withe
stock exchange rules
The jurisdiction of the commission very broad

Commissions enforcement extends to the following segments

Issue of securities
Trading in securities clearing and settlement and related activities
Depository and registration of securities
Depository and other securities-related activities of banks
Investment funds and FMCs operations
Reports and disclosure of supervised entities, and other persons in accordance with the law and
regulations of the Commission
Application of corporate governance standards
Other activities in accordance with law and other regulations

Surveillance and enforcement are carried out in four directions

Approval of the issue of securities
Evaluation of criteria of maintaining permits of licensed market participants
Indirect (off-site) control
Direct (on site) control

Extraordinary control is carried out in the case of

Investors complaints
Ex officio on the basis of knowledge of a suspected breach of regulations
Based on indications from the indirect control

As a rule, most of the documentation on which to build a case could be obtained on the field

According to MAD directive use of inside information has the same treatment as market
manipulation - "market abuse"

Inside information is any information of a precise nature which has not been made public, relating,
directly or indirectly, to one or more issuers of financial instruments or to one or more financial
instruments
Insiders:
Members of the supervisory board and the management and employees of the issuer
Individuals who control the issuer
Other persons who, by position or contract, have access to inside information
All of them are required to report to regulator of all transactions during and after (usually six
months) of "insider" position

Insider information must not

be publicly disclosed, without explicit permission
be given to third parties
be used in trading in securities
be used to give advice on the purchase and sale of securities to which they relate

Market manipulations:
Transactions or orders to trade:
which give, or are likely to give, false or misleading signals as to the supply of, demand for or
price of financial instruments, or
which secure, by a person, or persons acting in collaboration, the price of one or several
financial instruments at an abnormal or artificial level
Transactions or orders to trade which employ fictitious devices or any other form of deception
or contrivance
Dissemination of information through the media or by any other means, which gives, or is likely
to give, false or misleading signals as to financial instruments where the person who made the
dissemination knew, or ought to have known, that the information was false or misleading

Groups of market manipulations:

False image of activities
Impact on the price
Creating scarcity
Manipulations in time
Manipulation on the basis of information

False image of activities:

Transactions in which there is no real change of ownership ("wash sales")
Transactions in which demand and supply are entered at the same time, in the same quantity
and price, by ostensibly different, but in fact the same parties ("improper matched orders")
Participation in a series of transactions that are made public in order to create the illusion of
trading or price ("painting the tape")

Impact on the price:

The creation of the group that, by intra-group transactions, raises the price at artificially high
level, after which sells securities ("pumping and dumping")
Incresing demand for securities in order to raise its prices - creating the impressions that
demand increased driven by market ("advancing the bid")

Creating scarcity - Maintaining sufficient level of control over a demand or supply of a

particular stock, derivative, or other financial asset to allow the price to be manipulated(cornering)

Manipulations in time:
Buying or selling at the end of working hours in order to change the closing price, and the use
of such prices in deceptive purposes ("marking the close")
 Trading in order to influence the price of the instrument at the spot market in order to make
an impact on the price at a derivative market

Manipulations on basis of information:

Purchase of securities for its own account and subsequently advising the client to buy the
same securities at a higher price ("scalping")
Giving orders to buy and sell based on the knowledge that someone else has given or will
give an order to buy or sell the same securities on the same or approximate price ("front
running")
Spreading rumors in order to increase trading (the "boiler room")

Providing evidence is extremely difficult because it is usually based on the statements of participants
(inside information), or the conclusions drawn on the basis of various information (manipulation)

The effect on the market - short-term disturbance, the long-term strengthening of confidence

The Commission is not authorized to directly sanction (except in the domain of permits that it issued)
anyone, nor is authorized to cancel the concluded transaction in securities

Types of actions and measures:

-preventive action
-restrictive measures
-repressive measures

Secondary capital market is traditionally regarded as a suitable place for money laundering

Money laundering and capital markets should be viewed from two possible angles
MONEY LAUNDERING IN CAPITAL MARKET - Participants came on the market exclusively to
launder illegally acquired money (so they can appear as legitimate investors)
MANIPULATION OF CAPITAL MARKET - Participants use the capital markets for market
manipulation which may (but not necesserily) include money laundering

The structure of the typology by 7 criteria

Financial products
Financial markets
Payment methods
Professional intermediaries
Customers and types of account
Valuation
Unscrupulous employees

Professional intermediaries are key contributors to both parties in money laundering launderers
and investigators

Typical launderers in the capital market

Humanitarian and non-for-profit organizations
Unregulated investment funds or pools of assets
Accounts that do not have clearly stated identity of the owner (the trust", "nominee" or
omnibus accounts)
VALUATION: Indicated are two situations
Transactions in illiquid securities that are difficult to determine the market value
Transactions in which an established price significantly deviates from the previously established
trend of prices
What are also the indications of certain categories of market manipulation

Motives for valuation: obtaining funds, borrowing capacity estimate, restructuring, transofrmation of
ownership, debt/equity swap, joint venture, insurance base, tax base

Methods of valuation:
-asset baset
-profit generation potential based
-combined

The success - performance - the achievement of objectives planned

Profit itself is not a success

Definitions of success: Meeting the needs of customers, Increasing shareholders wealth, Technical
improvements and efficiency of business processes, Increase employee satisfaction, The fulfillment
of the social mission, Satisfying and improvement of environmental standards

MEASURABLE - FINANCIAL INDICATORS

Two sides of the coin of financial performance:
Inside view financial stetements categories
Outside view - stock price

Fundamental (ratio) analysis

Activity ratios
Liquidity ratios
Gearing ratios
Profitability ratios

Technical Analysis - graphical analysis of stock prices in order to establish trends and anticipate
future price

IMMEASURABE INDICATORS
Meeting needs of customers, increasing shareholder wealth, employee satisfaction, technical and
efficiency improvements, fulfilment of social mission, meeting environmental standards

VALUATION OF SHARES
The concept of intrinsic value fundamental analysis ratio analysis
The concept of the market value technical Analysis analysis and trend extrapolation

Ratio analysis:
-profitability
-indebtness
-liquidity
-operating activity
Basic principles of technical analysis:
Dow theory (Charles Dow)
The market discounts all the circumstances and information
Prices of securities move in trends
The main trend has three clearly distinguishable phases - the accumulation phase, the phase of
public participation and distribution phase
The main trend in the market as a whole can not be established until all the indices that are
used in the market starts to move in the same direction
Confirmation of main trend has to be the increase of the trading volume which corresponded
with the trend development

Trends: up, flat, down

Reversal patterns
"Head and Shoulders"
The inverse "head and shoulders"
Complex "Head and Shoulders"
Double and triple "Tops and Bottoms"
Spikes and saucers

Continuity patterns
Triangles
Flags and pennants

Limitiations on the use of technical analysis on the stock exchanges of transition countries
Short history of trading in stock exchanges hard to establish the trend
Identification and interpretation of trend patterns
Trading systems and impact on prices
Market inneficiency and gray market impact

When bank receives deposits, reserves by equal amount; when bank loses deposits, reserves
by equal amount

Principles of bank management:

1. Liquidity management
2. Asset management
Managing credit risk
Managing interest-rate risk
3. Liability management
4. Managing capital adequacy

Asset Management
1. Get borrowers with low default risk, paying high interest rates
2. Buy securities with high return, low risk
3. Diversify
4. Manage liquidity

Liability Management
1. Important since 1960s
2. No longer primarily depend on deposits
3. When see loan opportunities, borrow or issue CDs (commmercial papers) to acquire
funds
Capital adequacy management:
1. Bank capital is a cushion that prevents bank failure
2. Higher is bank capital, lower is return on equity
3. Tradeoff between safety (high capital) and ROE
4. Banks also hold capital to meet capital requirements
5. Strategies for Managing Capital
1. Sell or retire stock
2. Change dividends to change retained earnings
3. Change asset growth

EM = Assets/Equity Capital

ROE=ROA*EM

Off balance sheet activities:

1. Fee income from
Foreign exchange trades for customers
Servicing mortgage-backed securities
Guarantees of debt
Backup lines of credit
2. Financial futures and options
3. Foreign exchange trading
4. Interest rate swaps
5. Loan sales

Financial innovation:
-reaction to change in demand (e.g. adjustable rate mortgage)
-reaction to change in supply (e.g. credit cards, electronic banking)

Regulations behind financial inoovations:

-reserve requirements
-deposit rate ceiling

Thrift institutions:
Mutual Savings Banks
Depositors owners of the firm
Stock in the bank, not sold or issued
Savings and Loan Association
Created by Congress
Insured deposits and scandals
S&L bailout
Credit Unions
Ownership
Membership

Credit union:
Mutual Ownership - Owned by depositors
Common Bond Membership - Defined field of membership
Nonprofit, Tax-Exempt Status - Lower service fee
Central Credit Unions - Help with members credit needs, Invest excess funds, Hold
clearing balances, Provide educational services
 Advantages
Employer support
Tax advantage
Strong trade associations
Disadvantages
Common bond requirement

Fundamentals of insurance:
1. There must be a relationship between the insured and the beneficiary
2. The insured must provide full and accurate information to the insurance company
3. The insured is not to profit as a result of insurance coverage
4. If a third party compensates the insured for the loss, the insurance companys obligation is
reduced by the amount of the compensation
5. The insurance company must have a large number of insured so that the risk can be spread
out among many different policies
6. The loss must be quantifiable
7. The insurance company must be able to compute the probability of the losss occurring

Those most likely to suffer loss are most likely to apply for insurance.
Insurance companies give lower rates to group plans because they help control this problem

The insured is not as likely to protect property as uninsured.

Insurance companies prefer deductible to help control this problem.

Types of insurance:
Life Insurance
Health Insurance
Property and Casualty Insurance

Property and casualty insurance:

Property Insurance
Named-peril policies
All-risk policies
Casualty Insurance
Reinsurance

Insurance management:
Screening
Risk-Based Premium
Restrictive Provisions
Prevention of Fraud
Cancellations of Insurance
Deductibles
Coinsurance
Limits on the Amount of Insurance

Pension plan - Definition: An asset pool that accumulates over an individuals working years and is
paid out during the nonworking years.