Why do we investment ?

Investment Motives:

1. Need for liquidity: Liquidity management- regulatory

requirements and short term investments.
2. Speculation: Earning risk adjusted return on
investment.
3. Hedging : Management of downside risk of
investment.

Who are the investors?

Types of Investors in the Market:
Individual: Investment for savings and investment.
Company: Investment of excess liquidity/fund,
mergers and takeovers etc.
Institutional Investors: Professional function.

Types of Financial Assets

DIRECT INVESTMENT
Nonmarketable

- Deposit accounts and Savings certificates.

A. Money Market

Treasury bills and bonds.

Other short term instruments like Commercial
Paper, Repo, Reverse Repo etc.

B. Capital Market

Equities: Common stock & Preferred Stock etc.

Fixed Income: Bonds and Debentures.
Asset Backed Securities
Forward Contracts
Future Contracts
Options Put options, Call options
Swaps etc.

C. Derivative Market

E. FX Market

Currency Pairs
Currency Derivatives

INDIRECT INVESTMENT
D. Investment Companies
(AMCs - Fund Managers)

Open End & Close End Mutual Funds

A. Money Market Securities (MMS)

Money markets securities include short term, highly
liquid, relatively low-risk debt instruments.
MMS are sold by government, financial institutions and
corporations to investors with temporary excess fund to
invest and are traded in the money market.
The maturities of money market instruments range from
one day to one year and are often less than 90 days.

B. Capital Market Securities (CMS)

Long term securities issued by the public
limited companies and the Government and
are listed with the stock exchanges are known
as capital market securities.
Stock exchange provide market mechanism to
buy and sell securities.

2. Debt Securities: Bonds and Debentures

Bonds (debentures) can be described simply as long
term debt instruments representing the contractual
obligation, or IOU.
The buyer of a bond is lending money to the issuer
who, in turn, agrees to pay interest on the loan and
repay the principal at a standard maturity date.
The bond-holders are not the owner of the issuer.
Since the rate of return is fixed the bonds are also
called fixed income securities.

Different types of Bonds (key features)

Zero coupon bond

Floating rate bond
Callable bonds
Putable bonds
Convertible bonds
Cumulative bonds
Income bonds
Index bonds
Euro bonds etc.

Asset-Backed Securities (ABS)

A financial security backed by a loan, lease or receivables
against assets other than real estate and mortgagebacked securities. For investors, asset-backed securities
are an alternative to investing in corporate debt.

An ABS is essentially the same thing as a mortgagebacked security, except that the securities backing it are
assets such as loans, leases, credit card debt, a
company's receivables, royalties and so on, and not
mortgage-based securities.

C. Derivative Market Securities

Forward, Futures, Options, Swaps etc.
Financial derivatives have several important
applications, including risk management, trading
efficiency, and speculations.
Derivatives offer an opportunity to limit the risk
faced by both individual and institutional investors.

It also allows investors to speculate on underlying

securities.

Currency Futures and Options Market

Forwards & Futures contracts specify a standard volume
of a particular instrument to be exchanged on a specific
settlement date. Unlike forward contracts however,
futures contracts are sold on exchanges (e,g CME &
CBOT).
Options contracts give the right to buy or sell a specific
instrument at a specific price within a specific period of
time. They are sold on exchanges too.
Swap contract is an agreement between two parties to
exchange sequences of cash flows for a set period of
time.

D. FX Market Instruments
Foreign Currency:
Hundreds of banks facilitate foreign exchange
transactions, though the top 20 handle about 50% of
the transactions.
At any point in time, arbitrage ensures that exchange
rates are similar across banks.
Trading between banks occurs in the interbank
market. Within this market, foreign exchange
brokerage firms sometimes act as middlemen.

E. Mutual Funds : Managed Funds

Investors likely to diversify their investment over
several different securities so that the losses on some
securities may be compensated by the gains of others.
Forming such portfolios, however, is time consuming and
expensive for individual investors.

Asset Management Companies (AMC) manage such

portfolio and issues unit against such portfolio to the
public which is known as unit of mutual funds.
Investors buy units in these mutual funds and receive
benefits of diversification.

Different types of Mutual Funds

Close-end mutual funds: Close-end mutual fund
means any fund which is listed with stock exchange and
whos tenure and size are prefixed.
Open-end mutual funds: Open-end mutual fund does
not have any prefixed tenure or size and this fund also
does not take listing in the stock exchange.

Security Prices
Security prices in the capital market is determined by the
process of supply and demand.
Under ideal condition the market price of a security
should be equal to the intrinsic value of the securities.
The intrinsic value of a security comes from the cash
flows expected from the security in the future.
Since investors differ from each other in information,
age, attitude, tax brackets, and needs they arrive at
different estimates for the same security.

Down Trend and Up Trend

If the market price is below the estimated value or
intrinsic value, investor want to buy the security, and
the if price is above the estimated value, they want to
sell it.
The market price of the security responds to demand and
supply. It goes up if the demand exceeds supply, and it
goes down if the supply exceeds demand (up/down
trending market!).

The condition when supply equals demand is known as

equilibrium (no trend) .

Types of Order
Instructions to the brokers on how to complete
the order

Market Order
Limit Order
Day Order
Good till Canceled Order
Stop loss Order etc.