Question

Pick one of the many financial markets from around the world and explain how it operates. Then, pick a security of some sort (stock, bond, mutual fund) and explain how you would buy or sell this security. In addition, find a particular security that you have an interest in and tell us why you think that security might be one you would consider investing in.

Answer 1

1. One of the Financial Market :

Capital Market - It is the market where long term debt and equity funds are traded.It plays an important role in a country's industrial growth. This market provides liquidity into the economy. It is an effective source of allocation of capital to the industry and government.

How Capital market operates - Capital market can be divided into primary market & Secondary market . Primary market is utilized by companies for the purpose of setting up new businesses or for expanding or modernizing the existing business. Secondary market provides opportunity to the company to raise the market price of their shares, thereby enabling them to attract more capital from investors and loan from banks.

2. Security : Mutual Fund- Mutual Fund is a trust that pools the resources of investors and make the investment in the Capital Market.

Buying & Selling of this security - The Fund is managed by a professional money manager who invests the money collected from different investors in various stocks, bonds or other securities.It is cheaper compared to investing directly in the capital markets. Following are the factors which needs to be taken into consideration before buying/ investing in mutual funds-

1. NAV - The Net Asset Value is the yardstick for evaluating the Mutual Fund. Performance is based on the growth of NAV. The higher the NAV, the better it is
2. Timing - The timing when the mutual fund is raising money from the market is important. As the value of investment in mutual funds differs in bullish & bearish market.
3. Fund Manager - The person handling the fund management should be of repute
4. PE ratio - It helps to identify the risk levels in which the mutual fund operates
5. Portfolio Turnover -The fund manager decides as to when he should enter or quit the market. A simple average of the portfolio turnover ratio of peer group updated by mutual fund agencies serves as a benchmark.

When the mutual fund consistently under performs the broad based index, then the security should be sold.  

3. Interest in Particular security : Mutual Fund is the security that I am interest in.

The reason for investing in Mutual Funds are as follows:

• The funds are managed by skilled & experienced managers
• Mutual Funds offer diversification in portfolio which reduces risk
• There are no administrative risks of share transfer
• Over a medium to long term investments, investors always get higher returns as compared to other investment options
• Mutual Funds provide regular withdrawal and systematic investment plans according to the need of the investors.