Essay

Introduction to the Financial System Financial Instruments Financial instruments can be: • Equity This is usually through the selling of common shares and/or common stock. It gives the buyer some ownership of the firm and thus, voting power when it comes to electing the board of directors. Debt This is money that is borrowed from someone else. Debt must be repaid at set intervals. Debt can be divided into short and long-term debt. This should follow the matching principle where short-term assets should be funded with short-term debt.

The behaviour of markets and investors, the decision making in the market place and the dynamics of demand and supply in any given market cannot be determined with a hundred percent accuracy. However master minds in the past have designed various techniques and theories that help investors make a particular buying decision, or to make choices logically. These theories and techniques help today’s investors to peep into the future and make almost immaculate predictions regarding the future behaviour of the market and the ongoing trends. A lay man night view the decision making of an investor as being solely based upon speculation but in reality every move that an investor makes today in the market place is backed up by sound calculation and

Advisors and investors would do well to pay as much attention to the expected volatility of any portfolio or investment as they do to anticipated returns. Moreover, all things being equal, a new investment should only be added to a portfolio when it either reduces the expected risk for a targeted level of returns, or when it boosts expected portfolio returns without adding additional risk, as measured by the expected standard deviation of those returns. Lesson 2: Don’t assume bonds or international stocks offer adequate portfolio diversification. As the world’s financial markets become more closely correlated, bonds and foreign stocks may not provide adequate portfolio diversification. Instead, advisors may want to recommend that suitable investors add modest exposure to nontraditional investments such as hedge funds, private equity and real assets. Such exposure may bolster portfolio returns, while reducing overall risk, depending on how it is structured. Lesson 3: Be disciplined in adhering to asset allocation targets. The long-term benefits of portfolio diversification will only be realized if investors are disciplined in adhering to asset allocation guidelines. For this reason, it is recommended that advisors regularly revisit portfolio allocations and rebalance

“The Benefits of diversification are clear. Portfolio theory has played a crucial role in explaining the relationship between risk and return where more than one investment is held. It also enables us to identify optimal and efficient portfolios.”

Investing behavior should be driven by information, analysis, and self-discipline, not by emotion or ‘hunch.’

For example, stocks traditionally have a potential for higher return than bonds over time because stocks are usually a riskier investment than bonds.

Sales growth is an important driver of the need to invest in various types of assets and of the

Explain why investors may be attracted to high-risk investments such as exchange-traded derivatives, global funds, and other complex investment vehicles.

Money Market Mutual Funds are investments whose purpose is to provide investors with a safe place to invest. They are

In the financial markets, the most common forms of marketable securities are stocks and bonds. Though they have some similarities to each other, they differ greatly in many aspects. Broadly speaking, both financial instruments enable one to invest in corporations, public and/or private, with possible profitable returns in the future.

Gittman (2004, pp. 312) divided stock into two types, such as common stock and preferred stock. He also showed that dividends are the outcome of investment. So, common stocks are an ownership claim against primarily real or productive asset (Higgins, 1995), but he also said that if the company prospers, stockholders are the chief beneficiaries, if it falters, they are the chief losers. Smith (1988) presented that stocks are one of the most popular forms of investment. People buy stocks for various reasons: some are interested in the long-term growth of their investment by buying low priced stock of a new company in the hope of substantially growth of share price over the next few years. Another reason he suggested that in a well established firm stockholders expect the stock growth will be stable over the long run. (Smith,1988).

Finally, when the expected return up to 10 percent, it will result an undiversified and higher risk portfolio whereby dependent based on the higher risk financial assets.

2. Maximization of Shareholder wealth: Investment decision is linked with strategic and tactical business decisions and therefore need to achieve desired long-term objectives. The most usual objective being the maximization of shareholder wealth.

An investment also known as a security is a pledge of money from an individual, government, or cooperation that is expected to accrue additional wealth on top of its original dollar amount. An investment can be a long-term or short-term obligation depending on the investor’s goals and/or assets they choose to invest in. The investment decision process is a two-step process which is necessary to make a sound trustable and efficient investment. The first step involves an evaluation of the investment you as the investor are interested in committing money towards, including characteristics of the security (i.e. how it acts in the current market, how the current/future market may react to this investment and possible returns on your investment). Finally, the management of your investment portfolio, including how often it should be revised, how the performance of your securities should be measured (how often they should be measured), and other important aspects of your current investments. Investing revolves around one basic concept, improving our future, investors invest money today to improve their welfare in the future which is why understanding what an investment is and the process of decision making before investing is extremely important.

Lease et al. (1974) tried to find out who the individual investor is, how he makes his decisions, how he is dealing with his broker and analysis of his asset portfolio among the US investors. With the help of a questionnaire, the investment strategies followed by investors were determined. The responses portrayed that the investors followed a fundamental approach preferring a balanced and well-diversified portfolio of income. It was found that investors preferred long-term capital appreciation securities withdividend income instead of short-term gains. The decision framework of investors revealed by their responses was that the groups preferred journals and newspapers as sources of information. The factors such as age, income level and sex