In order to understand what the differences between things are you first need to understand what each of the items is. In this case before you can understand the difference between money market and capital market you are going to need to understand what money market is and what capital markets is. Once you understand the two items are it will be easier to see what the difference or differences are between the two markets. What is Money Market? Basically the 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 average amount of time that companies borrow money in a money market is about thirteen months or lower. Some of the more common types of things used in the money market are certificates of deposits, bankers’ acceptance, repurchase agreements and commercial paper to name a Continue reading
Investment Analysis
The Process of Diversification of Investment Portfolio
The process of diversification of investment portfolio has various phases involving investment into various classes of assets like equity shares, preference shares, money market instruments like commercial paper, inter-corporate investments, certificate of deposits etc. Within each class of assets, there is further possibility of diversification into various industries, different companies etc. The proportion of funds invested into various classes of assets, instruments, industries and companies would depend upon the objectives of investor, under portfolio management and his asset preferences, income and asset requirements. A portfolio with the objective of regular income would invest a proportion of funds in bonds, debentures and fixed deposits. For such investment, duration of the life of the bond/debenture, quality of the asset as judged by the credit rating and the expected yield are the relevant variables. Bond market is not well developed in India but debentures, partly or fully convertible into equity are in good Continue reading
Modern Portfolio Theory – Markowitz Portfolio Selection Model
Markowitz Portfolio Theory Harry Markowitz developed a theory, also known as Modern Portfolio Theory (MPT) according to which we can balance our investment by combining different securities, illustrating how well selected shares portfolio can result in maximum profit with minimum risk. He proved that investors who take a higher risk can also achieve higher profit. The central measure of success or failure is the relative portfolio gain, i.e. gain compared to the selected benchmark. Modern portfolio theory is based on three assumptions about the behavior of investors who: wish to maximize their utility function and who are risk averse, choose their portfolio based on the mean value and return variance, have a single-period time horizon. Markowitz portfolio theory is based on several very important assumptions. Under these assumptions a portfolio is considered to be efficient if no other portfolio offers a higher expected return with the same or lower risk. Continue reading
Different Types of Stock Beta
Beta coefficient is a comparative measure of how the stock performs relative to the market as a whole. It is determined by plotting the stock’s and market’s returns at discrete intervals over a period of time and fitting (regressing) a line through the resulting data points. The slope of that line is the levered equity beta. When the slope of the line is 1.00, the returns of the stock are no more or less volatile than returns on the market. When the slope exceeds 1.00, the stock’s returns are more volatile than the market’s returns. The beta coefficient is a key component for the Capital Asset Pricing Model (CAPM), which describes the relationship between risk and expected return and that is used in the pricing of risky securities. The important types of stock beta used in financial analysis are historical beta, adjusted beta and fundamental beta. An historical betas are Continue reading
Investment Diversification
Diversification is the strategy of combining distinct asset classes in an investment portfolio in order to reduce overall portfolio risk. In other words, investment diversification is the process of selecting the asset mix so as to reduce the uncertainty in the return of an investment portfolio. Diversification helps to reduce investment risks because different investments may rise and fall independent of each other. The combinations of these assets will nullify the impact of fluctuation, thereby, reducing risk. Most financial assets are not held in isolation, rather they are held as parts of portfolios. Banks, pension funds, insurance companies, mutual funds, and other financial institutions are required to hold diversified portfolios. Even individual investors – at least those whose security holdings constitute a significant part of their total wealth – generally hold stock portfolios, not the stock of a single firm. Why is it so? An important reason is the lowering Continue reading
Risk-Return Trade off
Risk may be defined as the likelihood that the actual return from an investment will be less than the forecast return. Stated differently, it is the variability of return form an investment. Financial decisions incur different degree of risk. Your decision to invest your money in government bonds has less risk as interest rate is known and the risk of default is very less. On the other hand, you would incur more risk if you decide to invest your money in shares, as return is not certain. However, you can expect a lower return from government bond and higher from shares. Risk and expected return move in one behind another. The greater the risk, the greater the expected return. Financial decisions of a firm are guided by the risk-return trade off. These decisions are interrelated and jointly affect the market value of its shares by influencing return and risk of Continue reading