Please enable JavaScript.
Coggle requires JavaScript to display documents.
MENTORING - Fundamentals - Financial Instruments 1 - Coggle Diagram
MENTORING - Fundamentals - Financial Instruments
1
A financial instrument is an asset that is bought and sold. It is also called a financial asset.
A financial asset when bought becomes a position, that is liable to be closed.
Financial assets are like real assets.In real assets we are changing real goods and services for money. But in financial assets, here we are changing a stake in a company or something for money. So we are exchanging a position for something.
A position is opened in a financial asset and is also closed at a later time.
A financial transaction is never incomplete. It is both opened and closed, even if different parties. So financial assets shift control for money.
So in financial assets or real assets a buyer always has a seller, means demand is always having a supply. But sometimes demand chases supply and supply chases demand. That is only the difference.
Real assets are assets that are felt in real. Such as commodities, real estate, wine, art et al.
Financial assets cannot be felt. They only give you a stake, also called control. Control for what? For the financial gains in terms of cash flows, dividends and capital appreciation.
However, all financial assets are based on some real assets down the value chain. We should not miss our eye on that.
What are the types of financial assets. These can not be touched or felt. They can only be used for gaining control. Control on cash flows.
How do financial players use these financial instruments or assets.
Retail players do not understand a bit about various financial assets. They know the names but they do not know the properties of financial assets in depth.
For equity markets, financial assets are equity segment (or cash equity segment ) and derivatives on those equities.
Why does someone want a ownership in something? Because they want something in return, especially as a financial gain.
The equity segment is pretty straight forward. That means you buy a cash equity and you get a control on the company for its financial and underlying real assets. This is an asset where ownership is created.
In cash equity, the financial gains come in the form of dividends, cash flows and capital appreciation. Cash flow is something connects both dividends and capital appreciation.
Dividends are regular or frequent gains, while capital appreciation is a one time gain.
Unlike retail, financial institutions look at all these things before buying or selling.
Financial markets opened up the derivatives markets in 1970s with the introduction of futures and options.
We buy a house and that is ownership. It is same as buying a stock in cash equity segment.
But we take a house on rent too! Right? That is like leasing a house for living a shorter period.
We can lease out or take a cash equity on lease. That is what we do with a financial futures asset. We pay a margin amount and stay in the futures contract for a month until that contract expires. As long as I am in that contract, I am eligible to buy the asset at that particular price on expiry date.
A futures contract gives the right to buy or sell a stock on the expiry day. That is called stock settlement. Until recently our market had cash settlement. Both buyers and sellers settle in cash. If it is a stock settlement, you are liable to settle in stock. In a stock settlement, it is an obligation.
An exchange creates a contract specification note. Brokers create a template for them. We just have to follow it.
A future only cost a margin, not a full amount. When it comes to expiry or delivery, a huge liability is created in both longs and shorts.