Hello. This is (hopefully) one of the many posts I will start to publish with what I know about finance. My method of learning and storing information is rather erratic and I wish this would help to cement my knowledge better and also help others with similar attributes to pick up what I know. For knowledge is like happiness - the totality only increases when shared.
This list is by no mean bridging and so it is not meant to be learnt in order. You can skip to any points you want/are more interested in but generally I will try to state the simpler ones first.
[xx] markers denote further in-depth topics that are separately discussed, yet to be written.
1 - Asset classes.
These are broad terms that includes securities that share the similar attributes. Examples are
-Stocks (I will use 'stocks' and 'shares' and 'equities' interchangeably and they mean the same thing unless otherwise stated),
-Bonds,
-Options
-and Cash.
However, we will learn later that different items in the same asset class can behave very differently, even to the extent of having characteristics from multiple asset classes.
Stocks are in its simplest form, rights to part of a company. Assuming a company has 100 shares issued, and you own 1 of them, then you own 1% of the company, simple as that. These holds true for private and public companies. The only difference for public companies is that their shares are PUBLICLY traded and are subject to much more stringent compliance laws and regulations. Private companies (usually identifiable by the 'Pte Ltd' in their names) have no shares available in the public, but among their founders, such as a family, they can internally trade their shares but of course these are much less legally binding.
I will not be covering the public listing of a private company since that is more of an investment bank underwriting topic than finance.
For example, DBS bank now has approximately 2.5 billion shares outstanding. You can also see it as this company is divided into 2.5 billion parts, each share representing a part. If you buy 100 shares of it (~$20 per share as of writing) costing $2000 then you own 100/2.5billion of the company or 0.000004%. Yes $2000 is no small amount, and yes the fraction you would own is also rather negligible. That's how large it is. All stocks work based on this concept, no matter how small you are, where you are (USA/Europe/HK). There are definitely much more sub-classes of stocks such as defensive, aggressive, growth and passive but we will go through that in future topics. [xx]
Bonds are a rather fancy term for a legal loan contract. By contract it means that compared to equities, bonds do have some legally binding function in it. What this means is that if you, the investor, purchases a bond for $100, you are technically LENDING $100 to the bond SELLER. The seller would then be a borrower, or debtor, and the investor the creditor. This part of the article is not meant to discuss laws and thus I won't go into details how are they enforced but just know that the borrower are obligated to repay their debts (unless they pull off a Greece, but that's another story).
As such, borrowers usually pay interest on their loans, say 5% p.a. This would result in the lender getting back $5 every year until a fixed amount of time (the maturity of the bond) where the lender will repay the capital ($100). This percentage of interest is normally called the coupon rate. Our Singaporean government do offer bonds such as these, although corporates issue them as well. An example can be seen here :
http://www.sgs.gov.sg/savingsbonds/Your-SSB/This-months-bond.aspx
Government bond yields are pretty low at ~2% and there is a whole topic regarding bond risks and yield that I will go through in later topics. [xx]
Options are technically a subset of a bunch of securities called derivatives, which are endlessly technical and has too many innovative products in it (read: weird stuffs) but options are the most commonly used. What an option is is a payment that entitles you to something, imagine it as a gym membership, the membership ENTITLES you to use the gym, but you can choose not to.
Most options comes in the form of you paying X amount of money that entitles you to buy a certain share at price Y. Logically, 99% of the time share price will be = Y at the time of option purchase, but what happens is that share price fluctuates, while Y doesn't. 1 Year later, if share price > Y+X, you earn money, but the interesting thing here is that IF share price is lesser than Y, you can simply choose not to use('exercise') the option and let it expire. What you are losing here is then X.
If this concept seems hard to grasp, it kinda is, and there is much more innovative stuffs in options and derivatives, which the average guy has no business dabbling with for their financial safety. Do not mess with options and definitely not derivatives. Avoid them like a plague. Oh yeah, also they are one of the key causes in the global financial crisis of 2008.
Cash is pretty self-explanatory, but just to make things complete - Cash is fiat money that holds transactional value enforced by the governing body that issues the said currency. Fiat money means that the denoted value on the currency is usually much higher than how much that piece of paper/polymer is actually worth. And this value is enforced by governments. So the fed and USA government can exert its laws onto citizens rejecting it, but not USA citizens rejecting Singapore dollars. Likewise, the USA can't do anything if a Singaporean citizen rejects US dollars as payment in Singapore. That's that legal tender written on it means. Didn't know that before about money eh?
2 - Financial markets
These includes primary markets and secondary markets. The primary market is where any financial asset is first sold/transacted. Examples of these are initial public offerings (IPOs) of shares when a private company goes public and initial issuance of bonds by corporations or governments.
Subsequently, trading among investors always happen in the secondary market. Examples are the stock exchanges such as SGX and NYSE. In between the investor and the secondary market there are usually brokers who does the technical part of actually doing the transactions. Broker services are usually provided by financial institutions such as DBS, OCBC... almost every bank and broker houses such as Phillip capital.
... I will update this list as it goes on on the future, for now we'll proceed to more educational stuffs.
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