2. Financial Markets
A financial market is a market in which people
and entities can trade financial securities,
commodities, and other fungible items of
value at low transaction costs and at prices
that reflect supply and demand. Securities
include stocks and bonds, and commodities
include precious metals or agricultural goods.
3. Functions Of Financial Markets
• Facilitate price discovery.
• Provide liquidity to financial assets.
• Considerably reduce the cost of Transcations.
4. Classification of Financial Markets.
• According to Nature of Claim : Debt Market &
Equity Market.
• According to Maturity Of Claim ; Money Market
& Capital Market.
• According to Seasoning of Claim : Primary
Market & Secondary Market.
• According to Timings of Delivery : Cash or Spot
Market & Forward or Futures Market.
• According to Organizational Structure : Exchange
Traded Market & Over the Counter Market.
6. Direct Investing Indirect Investing
• Money Markets • Mutual Funds : Open
:Treasury Bills , Ended , Close Ended.
Commercial Paper , • Exchange Traded
Certificates Of Deposits. Funds.
• Capital Market : Shares
, Bonds & Debentures.
• Capital Market
Derivatives : Futures &
Options.
7. Direct Investing Indirect Investing
• Direct investment refers to • Indirect investing refers to a
an investment which is way of investing in real
sufficiently large to affect a state without actually
company's subsequent investing in the property.
decisions. • Indirect investment can be
• This is sometimes a done in many ways,
majority ownership, but including securities, funds,
sometimes it's just a or private equity. Most
significant minority investors interested in
ownerships. indirect investment would
do so through a company or
advisor who has experience
in this type of investing.
8. • Investments in financial assets can be used to
built up diverse types of strategies they are :
Hedging
Arbitrage.
Diversification.
9. Hedging
• Making an investment to reduce the risk of adverse price
movements in an asset. Normally, a hedge consists of
taking an offsetting position in a related security, such as a
futures contract.
• Example : A hedge would be if you owned a stock, then
sold a futures contract stating that you will sell your stock
at a set price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what
the market will do. A perfect hedge reduces your risk to
nothing (except for the cost of the hedge).
10. ARBITRAGE
• Arbitrage refers to the opportunity of taking advantage between
the price difference between two different markets for that same
stock or commodity.
• The trade is carried simultaneously at both the markets so
theoretically there is no risk.
• Arbitrage trading, a trading system, works in this way:
• Example : A trader wants to sell a share at a specific price. He places
sell order on the first exchange at that price and simultaneously
buys order at a higher price on the second exchange.
11. • Arbitrage is the process of making profit from the price
difference between two or more markets and a person
who engages in arbitrage is called an arbitrageur.
• For example, an investor is trading simultaneously in NSE
and BSE, for particular stock the price in BSE is lower than
the trading price in NSE.
• He can then make profit from this price difference by
opting for arbitrage.
• But arbitrage is not the simple act of buying one asset at
one market and then selling it to another market at a later
time when the price is higher.
• Rather to avoid market risks of price change you need to
make sure that both the transactions at both the market
are done simultaneously.
• To eliminate the risk of price fluctuation you need to make
sure that both the transaction is completed even before
the change in the price at any of the markets.
12. Diversification
• Diversification is a method of portfolio
management whereby an investor reduces the
volatility (and thus risk) of his or her portfolio by
holding a variety of different investments that
have low correlations with each other.
• The basic idea behind diversification is that the
good performance of some investments
balances or outweighs the negative
performance of other investments.
16. Real Estate
• For the bulk of the investors the most important
asset in their portfolio is a residential house.
• In addition to a residential house the most
affluent investors are likely to be interested in
the following types of real estate :
Agricultural Land.
Semi-Urban Land.
Commercial Property.
A Resort Home.
A second House.
