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A financial instrument, or a security, is an asset (an item of value) that can be bought and sold freely on the market.
To make sure investors choose the right instruments for their needs, those instruments are classified into different asset classes based on their characteristics, behavior, or the regulations that affect them.
This article covers the numerous financial instruments that are available for investments and how they are divided into asset classes to offer a clarification for investors.
An asset class groups together financial securities (tradable financial assets that are monitored by a regulatory authority) with similar features based on factors such as:
Glad you found the article informative. Please feel free to ask any queries in relation to the material.
Valuation is a method of determining how much an asset or company is worth. Market value (Market capitalization), on the other hand, is simply the number of outstanding shares multiplied by the current share price (i.e. the buyer-willingness to pay a particular amount for the stock).
The valuation of a stock is based on: (Valuation does not refer to actual market price of the stock)
To understand this better, let’s take a scenario whe...
Ratios are relationships between two numbers. For example, the ratio of current assets to total asset is one ratio related to the structure of assets. They help stakeholders assess the performance of companies, make it easier to compare their performance by using unified measures, and help investors understand the business models of companies.
Ratio analysis answers the following questions about a company:
A financial instrument, or a security, is an asset (an item of value) that can be bought and sold freely on the market.
To make sure investors choose the right instruments for their needs, those instruments are classified into different asset classes based on their characteristics, behavior, or the regulations that affect them.
This article covers the numerous financial instruments that are available for investments and how they are divided into asset classes to offer a clarification for investors.
An asset class groups together financial securities (tradable financial assets that are monitored by a regulatory authority) with similar features based on factors such as:
A stock or a share gives you a small ownership in a company — as the word “share” itself implies, you are sharing something with the company. As the company earns profits or losses, your stock price either appreciates or depreciates. For example, if a Company has 100 shares and you own 10 shares, you own 10% of the company.
Stocks play a very important role in a diversified portfolio. They are dependent on the growth rate of the economy and automatically adjust for the rate of inflation (the rate at which expenses increase) and other positive macroeconomic signals. As a consequence, they offer a higher rate of return compared with traditional or debt instruments.
Consider the case of McDonald's burger, which were p...
When it comes to various financial instruments, Risk and Return go hand-in-hand. Every security has a risk and return trade-off associated with it — usually, the more the underlying risk involved, the higher the proportion of returns that are likely to occur in the future.
We'll briefly cover risk here, but will go into more detail in a later tutorial.
Risks can be divided broadly into two types:
Also known as “Diversifiable Risk”, it is the risk which an asset or security carries due to the industry’s or company’s performance in general. For example, if you have a stock portfolio with 5 stocks in it, two of which are prone to Unsystematic Risk, your por...
There are various techniques that are followed by investors to analyze stocks.
Fundamental analysis is a method to determine a stock price movement based on some underlying factors. The analysis could be performed on a holistic level for the industry or at an economic or global level. It helps in answering different questions, such as:
Fundamental analysis takes into account factors like