Financial Markets - An Overview

A financial market or a capital market is a part of the financial sector where people trade shares, bonds, derivatives, securities, commodities, and other items of value at low transaction costs and at prices that reflect supply and demand. 

 Securities include stocks and bonds, equities and commodities include precious metals or agricultural products.

These markets are the place where businesses go to raise cash to grow, enabling companies reduce risks, and giving investors and shareholders an opportunity to make money. 

It is the true economic center of the country, where major financial transactions are carried out and millions of people are affected by the trading that goes out on the trading floor.

Everyday, stocks, futures, options, and bonds are traded and one will find both domestic and international corporations that are traded on a stock exchange daily and the money involved in these trades does not go directly to the trading companies listed.

A share or stock is defined as a portion of ownership in a given company and most stock holders do not own major stakes in a company to play a role in the management of the company.

Stockholders can purchase stocks, so that their investments rise in price, and those stocks can be sold at a profit at the right time.

Futures trading can be defined as a trading instrument that can be used for trading grains and other agricultural products.

It is a financial contract where you have to predict the future value of a commodity that must be delivered at a specific time in the future.

Commodities include oil, silver, natural gas, cotton and minerals that are bought and sold on a commodity exchange.

Futures contracts have a seller and a buyer and one can also can speculate on the contract depending on which side you are on and the contract states the price at which you agree to pay for or sell a certain amount of this future product when it is delivered at a specific future date.

 Most futures contracts are based on a physical commodity, but some futures contracts also are sold based on the future value of stock indexes.

You cannot take delivery or actually provide the commodity for which you are trading a futures contract but you can sell the futures contract you bought before you actually have to accept the commodity from a commercial customer.

Futures contracts are the contracts that can be used as financial instruments by producers, consumers, and speculators.

Bonds are loan instruments that allow companies sell bonds to borrow cash.

If you buy a bond, you are holding a company’s debt or the debt of a governmental entity and the company that sells the bond agrees to pay you a certain amount of interest for a specific period of time in exchange for the use of your money.

The difference between stocks and bonds is that bonds are debt obligations and stocks are equity wherein stockholders actually own a share of the corporation.

Bondholders lend money to the company with no right of ownership however bonds are considered safer, because if a company files bankruptcy, bondholders are paid before stockholders.

 Bonds act as a precaution and not actually a part of the trading world for position traders, day traders, and swing traders.

An option is a contract that gives the buyer the right, but not the option, either to buy or to sell the asset upon which it is based at a price specified in the contract on or before a date that is specified in the contract.

Before the options period expires, a purchaser of an option must decide whether to exercise the option and buy the asset at the target price.

 If the options buyer decides not to buy the asset, his or her initial investment in the option is lost. Options also are called derivatives.

Mutual Funds - An Investment Option

Mutual funds are a means of investment and can be viewed as a financial trust in which many investors pool their funds keeping in mind a predetermined objective of investment.

 The funds are pooled together and they are invested in various instruments of the capital market like securities,bonds, shares and debentures and other money market instruments.

These funds are managed and watched over by a financial expert who studies the market conditions and invests the money accordingly.

The profits earned on the investments are shared between the investors according to the number of units of shares held by them.

Types of Mutual Fund Schemes

Open - ended schemes are all about liquidity and are generally available throughout the year, they are bought and sold on demand at their net asset value, or NAV, which is based on the value of the funds securities and is generally calculated at the close of every trading day. 

Investors buy shares directly from a fund. they do not have a fixed date of maturity and can be bought and sold as per their requirements.

Close - ended schemes is a fund with a pre-determined maturity period and investors can directly invest the open ended scheme during the initial issue.
There are two types of exit options in this kind of schemes depending on the type of the scheme and it raises a fixed amount of capital through an initial public offering (IPO). 
The fund is then structured, listed and traded like a stock on a stock exchange.

Interval Schemes are a combination of both open-ended and close-ended schemes and one can trade the units directly or redeem them at the NAV related rates.

Currently investing in mutual funds is considered to be one of the most beneficial forms of investments available in comparison to the other investments instruments. 

Mutual funds are comparatively cost efficient and also carry a low level of risk.

The biggest advantage of investing in mutual funds is that they are managed by qualified and professional expertise.

Investing in diverse group of mutual funds does not require the investor to buy individual bonds and stocks he purchases units of different mutual funds thereby distributing the amount of risk. 

When investing in different assets the investor it reduces the risk factor and he is sure that if he incurs losses in any particular fund then he might gain from another investment and you can liquidate your investment as and when you like.

Investing in mutual funds is very easy and simple to understand and does not require large amounts of money to invest.

One must be careful while investing as mutual fund managers are not experienced enough and do not research all the available opportunities in the market.

When you purchase a unit of a mutual fund there is an entry load charge which is an extra cost and when exiting from the mutual fund you are again charged extra as an exit cost.

Since investors have their money spread across different assets the high returns earned can be diluted due to diversification and as result do not have an impact on your earnings.

Tax is something that is often ignored as the mutual fund manager sells a particular security it triggers the tax of the individual thereby making it useless as a tax savings investment.