This course covers not only the stock market but also all aspects of investment. The stock market or share market is just another option of investment.
What is an investment?
An investment is an acquisition of asset(s) in order to generate income. Investments are also known as securities.
Before the era of digitalization, if one invested, he was issued an official document citing the investment information. Those documents called securities as those were proof of investment. Paper securities can be bought and sold just like we are trading it today on the digital platforms.
The term security is referred to as a negotiable financial instrument such as stock, bond, options contract, or shares of a mutual fund.
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Securities or investments fall into three broad categories:
1) Debt
2) Equity
3) Derivative
1) Debt Investments: The traditional option of borrowing money for the business is a bank. Normally, banks do not take a huge risk, so they lend a limited amount to a company. Hence, businesses search for other options to raise money. Some businesses issue debt security called bonds. When one buys a bond, he/she is lending their money to a company, and they pay it back with an interest. These interest payments are called coupons.
2) Equity Investments: When a business takes on additional owners to grow and raise money, it can either find private investors or go to the capital markets and issue securities in the form of publically-traded stock. Equity represents ownership in a company, when one buys a stock, one is purchasing ownership or share in a company. As the company makes a profit, the shareholder will participate in that profit in one of two ways: Either the company will pay a dividend which a shareholder will receive quarterly or the company uses it to grow the business. If the company continues to grow, the shareholder subsequently sees his stock rise in value.
Important term: IPO: IPO's full form is 'Initial Public Offering'. When a company first-time offers its equity shares to the public. It's also called "company going public" informally. Owners of the company first time give up their part or shares to the public.
3) Derivative Investments: Instead of owning shares of a company, derivative securities give the right to trade other financial securities at pre-agreed upon terms. Options contracts are a type of derivative security, which gives the right to buy or sell shares of existing security at a specific price by a specified date in the future. The holder pays for the right, and the price he pays is called a premium. For instance, let's say Google's stock is trading at $50 per share. If you buy an option contract that gives the right to buy it at $50 per share because you feel sure of it reaching $60 per share, but just in case it does not; you don't want to be out the full cost of $50 per share. Let's say options cost you $1 per share and Google does go to $60, and so you should immediately sell your options contract making an instant $9 per share. ($10 profit minus $1 cost)
We will learn more in detail later in the course.
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There will be two results from the investment:
i) Increase in the value of an asset
ii) Decrease in the value of an asset
- Many investments trade daily on the public market. Current events and company performance can cause a company's stock to rise and fall, and significant news can affect the entire stock market.
- If a person follows safe investment practices like the longer they invest, the greater the chances they grow their wealth. In contrast, the shorter the period of investment, the higher the risk of that investment losing money.
Financial Assets and Marketable Securities:
i) Financial assets: A liquid asset that gets its value from a contractual right or a document evidencing a claim of stocks, bonds, mutual funds, and bank deposits. Unlike land, real estate, gold, and silver, or other tangible assets, financial assets do not necessarily have physical worth. Rather, its value reflects factors of supply and demand in the marketplace in which they are traded, as well as the degree of risk they carry.
ii) Marketable Securities: Marketable securities are assets that can be liquidated to cash quickly. These short-term liquid securities can be bought or sold on a public stock exchange or a public bond exchange. These securities tend to mature in a year or less and can be either debt or equity. Marketable securities include common stock, treasury bills, and money market instruments, among others.
Importance of studying investment management:
i) Personal Aspect:
- Retirement benefit
- Building wealth
- For a specific goal
ii) Investment Profession/ as a career:
- Investment Banker
- Security analysis and portfolio manager
- Stockbrokers and financial & investment advisors
- Chartered financial analyst
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The connection of the investment and country's economy:
According to Pew Research in the United States of America, more than half of households have some investments in the stock market. Among that family income of less than $35,000, about one-in-five have assets in the stock market. The share increases as income rises. That is the biggest secret of a developed country. Here's why.
The Stock market has a significant influence on the country's gross domestic product (GDP).
- GDP measures the output of all goods and services in an economy. As the stock market rises and falls, it does sentiment in the economy. As sentiment changes, so do people's spending, which drives GDP growth either negative or positive
- Consumer spending is the primary driver of GDP in the USA
- Business spendings, which includes the purchases of assets and investing in manpower and in new technologies, also drives the GDP
- Exports, which are sales from domestic companies to customers internationally, also drives the GDP
- Government spendings such as building infrastructure and providing financial support to the corporates also drives the GDP.
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