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    Asset Classes: Understanding Securities and Investments

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    Aatish Pandit
    There are various types of asset classes that investors can choose from to diversify their portfolio, each with different risk and return profiles. The main asset classes include equities like common stock and preferred shares, debt instruments like bonds, cash and cash equivalents, mutual funds, derivatives, commodities, and currencies. Within each asset class are various sub-categories with unique features. Successful investing requires understanding the tradeoff between risk and return of each investment option.

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    Asset Classes: Understanding Securities and Investments

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    Aatish Pandit
    51 views26 pages
    There are various types of asset classes that investors can choose from to diversify their portfolio, each with different risk and return profiles. The main asset classes include equities like common stock and preferred shares, debt instruments like bonds, cash and cash equivalents, mutual funds, derivatives, commodities, and currencies. Within each asset class are various sub-categories with unique features. Successful investing requires understanding the tradeoff between risk and return of each investment option.

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    There are various types of asset classes that investors can choose from to diversify their portfolio, each with different risk and return profiles. The main asset classes include equities like common stock and preferred shares, debt instruments like bonds, cash and cash equivalents, mutual funds, derivatives, commodities, and currencies. Within each asset class are various sub-categories with unique features. Successful investing requires understanding the tradeoff between risk and return of each investment option.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    51 views26 pages

    Asset Classes: Understanding Securities and Investments

    Uploaded by

    Aatish Pandit
    There are various types of asset classes that investors can choose from to diversify their portfolio, each with different risk and return profiles. The main asset classes include equities like common stock and preferred shares, debt instruments like bonds, cash and cash equivalents, mutual funds, derivatives, commodities, and currencies. Within each asset class are various sub-categories with unique features. Successful investing requires understanding the tradeoff between risk and return of each investment option.

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    © All Rights Reserved
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    of 26

    ASSET CLASSES

    Understanding Securities
    and Investments

    Understand Risk vs. Return

    In almost all investments, there is a


    fundamental tradeoff between risk and return.
    High-risk investments tend to have higher
    returns than low-risk investments.
    Why? People dont like risk, so you have to
    pay them more to take on risky investments.
    The Two Major Investment Choices
    Lender
    Owner

    Main Types Of Investments

    Equity
    Common Shares

    Mutual Funds

    Derivatives

    Preferred Shares

    Forward & Futures

    Options

    Debt

    Cash & Cash

    Commodities

    Equivalent

    Currency

    Securities Markets
    Securities
    Stocks and bonds representing secured, or asset-based,
    claims by investors against issuers

    Primary Securities Market


    Market in which new stocks and bonds are bought and
    sold

    Investment Bank
    Financial institution engaged in issuing and reselling new
    securities

    Secondary Securities Market


    Market in which stocks and bonds are traded

    Investment Banking
    Provides three important services:
    They advise companies on the timing and
    financial terms of new issues.
    By underwriting (buying) new securities, they
    bear some of the risks of issuing them.
    They create the distribution networks for
    moving new securities through groups of
    other banks and brokers into the hands of
    individual investors.

    The Securities and Exchange


    Board of India (SEBI)

    Oversees many phases in the process through which


    securities are issued
    Regulates the public offering of new securities by
    requiring that all companies file prospectuses before
    proposed offerings commence

    Prospectus: Registration statement filed with the SEC before


    the issuance of a new security
    Insider Trading: Illegal practice of using special knowledge
    about a firm for profit or gain
    Blue-Sky Laws: Laws requiring securities dealers to be
    licensed and registered

    Equity Investments
    Objectives:
    Obtain higher return
    Minimize tax
    Minimize risk
    Diversify portfolio

    Common Shares

    Represent ownership in
    a company
    Privileges
    Right to vote
    Right to annual/other
    reports
    Right to attend annual
    meetings
    Right to share in profits
    dividends
    capital gains

    Par Value
    Market Value
    Capital Gain
    Book Value

    Investment Traits of Common


    Stock
    Blue-Chip Stock
    Common stock
    issued by a wellestablished company
    with a sound financial
    history and a stable
    pattern of dividend
    payouts

    Preferred Shares
    Preferred stock is
    usually issued with a
    stated par value, and
    dividends are typically
    expressed as a
    percentage of par
    value.

    Preferred

    as to:

    Assets
    Dividends

    Features
    cumulative
    voting rights

    Types

    straight / variable
    convertible
    redeemable
    retractable

    Stock Exchanges

    Stock Exchange: Organization of individuals


    formed to provide an institutional setting in
    which stock can be traded
    The Trading Floor: Actual physical location
    trading may occur
    The floor is equipped with a vast array of
    electronic communications equipment for
    conveying buy-and-sell orders or confirming
    completed trades.

    Brokers
    Individuals or organizations who
    receive and execute buy-and-sell
    orders on behalf of other people in
    return for commissions

    Online Trading

    Capitalization
    The dollar value
    (market value) of
    stocks that are listed
    on a stock
    exchange

    Bonds
    Bond: Security through which an issuer
    promises to pay the buyer a certain
    amount of money by a specified future
    date
    Government Bond: Bond issued by the
    federal government
    Municipal Bond: Bond issued by a state or
    local government
    Corporate Bond: Bond issued by a
    company as a source of long-term funding

    Bond Features

    Issued with a
    specific:
    Face amount
    Coupon rate
    Maturity

    Short or long term


    Callable
    Registered or Bearer
    Secured or Naked
    Convertible

    Based on $100 units

    Discount Bonds
    Inversely related to
    interest rates
    Bond Ratings
    Dominion Bond Rating
    Service A++

    May be:

    Canadian Bond Rating


    Service AAA

    Rating: AAA - C
    Cutoff BBB

    Cash / Cash Equivalents


    Savings

    Accounts
    Term Deposits
    Call Money
    Treasury Bills
    Money Market

    Indian Money Market


    Fixed Rate
    Floating Rate
    LIBOR
    MIBOR

    Bank Rate
    CRR
    SLR

    6.0%
    8.75%
    25.0%

    Other Investments
    Mutual Fund
    Company that pools investments from individuals
    and organizations to purchase a portfolio of stocks,
    bonds, and short-term securities

    No-Load Fund
    Mutual fund in which investors pay no sales
    commissions when they buy in or sell out

    Load Fund
    Mutual fund in which investors are charged sales
    commissions when they buy in or sell out

    Mutual Fund
    Mutual Funds pool capital from many investors
    to buy portfolios of securities
    they spread risk out across many securities
    allow investors to diversify across many
    securities without having to purchase each
    can focus on specific areas: e.g. small-cap
    growth, precious metals, overseas, etc.
    mutual funds charge investors a fee for
    managing them
    No-Load Fund or Load Fund

    Derivatives
    Derivatives derive their value from the
    value of an underlying asset such as a
    security or commodity
    trading in derivatives can be risky!
    trades are leveraged
    requires more specialized knowledge

    Forwards & Futures


    Forwards and futures contracts are
    requirements to deliver specific quantities of a
    commodity at an exact date and location
    but these are usually offset rather than filled
    these prices reflect where the market is
    going
    futures can be used for hedging, speculating
    or arbitrage
    hedging: protect against price changes
    speculating: betting against the market
    arbitrage: make money on pricing inefficiency

    Options
    Options give the right (but not
    obligation) to purchase or sell the
    underlying asset at some future time
    at some fixed (strike) price
    call option: right to buy
    put option: right to sell
    options are purchased and if not
    exercised, they simply expire

    Commodities
    Futures Contract
    Agreement to purchase specified amounts of a
    commodity at a given price on a set future date

    Commodities Market
    Market in which futures contracts are traded

    Margin
    Percentage of the total sales price that a buyer must
    put up to place an order for stock or futures contracts

    Currency

    Direct Quote
    Indirect Quote
    Benchmark Interest Rates
    India
    Reverse Repo Rate
    Repo Rate

    6.0%
    9.00%

    Market Index
    Summary of price trends in a specific
    industry and/or the stock market as a
    whole

    Bull Market
    Period of
    rising
    stock
    prices

    Bear Market
    Period of
    falling
    stock
    prices

    Placing Orders

    Market Order: Order to buy or sell a security at the


    market price prevailing at the time the order is placed

    Limit Order: Order authorizing the purchase of a stock


    only if its price is equal to or less than a specified
    amount

    Stop Order: Order authorizing the sale of a stock if its


    price falls to or below a specified level

    Round Lot: Purchase or sale of stock in units of 100


    shares

    Odd Lot: Purchase or sale of stock in fractions of round


    lots

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