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Financial assets VS Real assets


Every thing that you own is either financial or real asset Real assets include the entire useful things e.g. Houses, cars, clothes etc Financial assets have no intrinsic value of their own Rather they fulfill certain expectations or meeting, certain obligations/claims Financial instrument or a security is more general term for financial asset/liability Financial asset is a claim against the income or wealth of a business firm, individual, or unit of government represented by certificate, receipt or other legal document. The value of financial assets rests on existence of real assets/services, which the financial asset owner will receive.

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There are features that make financial assets unique: 1. They cant depreciate b/se they dont wear out 2. Their physical condition or form usually is not relevant in determining market value 3. Their cost of transport is little 4. They have little or no value as a commodity 5. They are fungible( can easily be changed in form) 6. A bond or stock can be quickly converted in to cash at lower cost and are able to be converted it to another asset what the holder wants. 7. They are generally represented by piece of papers.

Financial Market
The financial system fulfills its various roles though markets where financial claims and financial services are traded. These markets are served as a channel for the demanders and suppliers of fund Financial markets are where individuals and institutions come together in order to trade financial assets Functions of financial markets The three major functions are: 1. To provide price information about the financial asset trade in them 2. To offer liquidity, hence allowing holders to alter their portfolio easily 3. To reduce the costs of buying and selling financial asset. This comprises: search cost which are time and resource and Information costs

Types of Financial Markets


The flow of funds through financial market may be divided in to different segments based on Cxs of financial claims being traded and needs of different groups. Based on that they may be classified as follows: 1. Money Market Vs Capital Market 2. Open Vs Negotiable Market 3. Primary Vs Secondary Market 4. Spot Vs futures, forward and Option markets

Money Market Vs Capital Market


Capital market is the market for securities where either companies or the government can raise long term funds. Money market is the global financial market for short-term borrowing and lending and provides short term liquid funding for the global financial system. The difference is: Capital market enables us to borrow or invest funds for a longer period of time, but Money market is short term. capital markets deal with stocks and bonds while money markets deal with certificates of deposits, bankers' acceptance repurchase agreements and commercial paper. There are more speculations in the capital market as compare to the money market because capital market offers high maturity on the credit instruments. Higher returns are paid on the securities traded in the capital market as compare to the money market because of the high risk in capital markets.

Open Vs Negotiable Market


An open market operation (also known as OMO) is an activity by a central bank to buy or sell government bonds on the open market. A central bank uses them as the primary means of implementing monetary policy. The usual aim of open market operations is to control the short term interest rate and the supply of base money in an economy, and thus indirectly control the total money supply. This involves meeting the demand of base money at the target interest rate by buying and selling government securities, or other financial instruments. Monetary targets, such as inflation, interest rates, or exchange rates are used to guide this implementation.

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Negotiable certificates of deposit are issued in denominations over $100,000. They are sold on the open market. The depositor of a negotiable CD is allowed to negotiate the interest rate with the financial institution that issued it. Negotiable CDs are the only interest-bearing money market securities. The secondary market is where investors can sell their certificates of deposit to other investors before maturity if they need cash. However, the CDs must be $1 million or more in value to be traded. Negotiable CDs have maturities ranging from 14 days to more than one year. Their rates are closely tied to the going rate of Treasury bills. They are the only interest-bearing money market securities.

Primary Vs Secondary Market


Primary markets deal with the trading of newly issued securities/ initial public offering Secondary market is part of the capital market that deals with the securities that are already issued in the primary market. When the companies issue securities in the primary market, they collect funds directly from the investors through the securities sales. But, in the secondary market the money earned from selling a security does not go to the company. The money thus earned goes to the investor who sells the security. It provide a venue for converting securities in to ready cash.

The N-day forward or future rate is the rate which appears in a contract to exchange a currency for another N days in the future, but the price fixes now. This is used to hedge or speculate Spot rate is the rate used in agreements to exchange one currency for another immediately. An option is a contract in which the writer of the option grants the buyer of a right, but not the obligation, to purchase from or sell to the writer something at a specified price with in specified period of time/date. In this case your loss is limited to the price paid, and helps to reduce risk of adverse change in security price. An option grants the buyer to purchase is called call option A buyer has the right to sell to the writer is called put option. The price at which the asset may be bought or sold is called exercise or strike price. The date at which the option is void is called expiration date

Spot Vs futures, forward and Option markets

Different between Future and forward market


In forwards the amounts tailored to suit the parties needs There is no secondary market: contracts are liquid & parties have clear commitment. The only occasion when cash actually flows is on delivery. There is risk of defaulting by parties, when not guaranteed. If not delivered from stock it must buy on spot market to fulfill the forward contract. Futures are standard terms, are not negotiated between parties Can be sold and bought in secondary market Are not usually intended to delivery of Commodity or currency Are usually offset, a purchase by sale, or vise versa before delivery.

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