Financial Markets: A Comprehensive Guide
Portfolio Analysis
A portfolio is a collection of financial assets, such as stocks, bonds, and mutual funds, that are managed to meet specific investment goals. Portfolio management involves selecting and adjusting the assets in a portfolio to achieve the desired balance of risk and return.
Modern Portfolio Theory
Modern Portfolio Theory (MPT) is a mathematical framework for constructing portfolios that minimize risk for a given level of expected return. MPT suggests that diversification, or investing in a variety of assets, can reduce overall portfolio risk.
Money Market
The money market is a financial market where short-term funds are borrowed and lent. It provides a mechanism for businesses and governments to raise short-term capital and for investors to earn interest on their savings.
Functions of Money Market
- Provides short-term financing for businesses and governments
- Facilitates monetary policy implementation
- Balances demand and supply of short-term funds
- Allocates short-term funds through inter-bank transactions
- Provides non-inflationary funding for government deficits
- Supports economic development
Money Market Instruments
- Treasury Bills (T-Bills): Short-term government debt instruments with low risk and low returns.
- Repurchase Agreements (Repos): Short-term loans secured by government securities.
- Commercial Papers: Unsecured promissory notes issued by corporations and financial institutions.
- Certificates of Deposit (CDs): Short-term bank deposits that pay interest.
- Bankers’ Acceptances: Short-term credit investments guaranteed by banks.
Capital Market
Capital markets are financial markets where long-term debt and equity securities are issued and traded. They provide a channel for businesses to raise capital for investment and for investors to access long-term growth opportunities.
Functions of Capital Market
- Mobilizes savings and accelerates capital formation
- Raises long-term capital for businesses
- Promotes industrial growth
- Provides a liquid market for securities
- Offers technical assistance to businesses
- Guides investment decisions
- Supports development of backward areas
Segments of Securities Market
- Primary Market: Where new securities are issued.
- Secondary Market: Where existing securities are traded.
Initial Public Offer (IPO)
An IPO is the first public offering of a company’s shares. It allows the company to raise capital and become publicly traded.
Instruments in the Secondary Markets
- Shares: Represent ownership in a company.
- Bonds: Debt securities that pay interest and mature on a specified date.
- Debentures: Unsecured debt instruments issued by companies.
- Convertible Debentures: Debentures that can be converted into shares.
- Non-Convertible Debentures: Debentures that cannot be converted into shares.
Stock Exchange
A stock exchange is a marketplace where stocks, bonds, and other securities are traded. It provides a platform for buyers and sellers to meet and execute trades.