CBSE Class 11 Financial Markets and Instruments

Financial Markets and Instruments

LEARNING OBJECTIVES

After studying this chapter, you will be able:

To understand the financial markets.

To understand various alternative financial instruments.

To compare alternative financial instruments on key parameters.

To know various investment objectives and constraints of the financial instruments.

To understand the difference between real investments and financial investments.

We had the opportunity to watch the action from the ring side seat – and the things we saw, heard and experienced stirred some deeper thoughts in our mind about our wisdom or lack of it, in matters related to financial markets and money.

Many investors in spite of distressing evidence all around still get carried away by hype. Financial business is all about informed decisions. We realize that discerning data if not readily available in one place can make it difficult for anyone to choose intelligently. In an effort to capture the diverse issues of financial markets in a single summary, we share our experiences; views and insights in this chapter.

You have heard about the heart rendering stories of how people were driven to destitution when they lost all their money in reckless investments. You may have also been captivated by tales of how some others vaulted to indecent riches through the same process. This chapter tries to discourage you from adopting a similar approach to investments. Instead, it suggests that an early and habitual flow of savings if invested prudently can make millionaires out of common men. A disciplined and cautious approach to wealth management rewards you in more ways than one.

Financial markets are full of imperfections, which make results inconsistent with the expectations. Genuine conditions apart, in the present world of finance, human greed, system failures or national afflictions can make things very unpredictable. This is where risk comes into play. This chapter deals in sufficient details, the different manifestations of risk in each asset class and tries to suggest you the ways to minimize it.

Many of us have one simple approach to dealing with risk. That is to avoid it by all means. In financial investment matters, this may not be a good strategy. As risk and return are correlated, every risk you are avoiding possibly deprives you of a handsome opportunity to build your wealth. Balancing risk with return in line with your individual circumstances is what financial market management is all about? This chapter throws some light on these simple but mostly neglected aspects of managing one’s own finance.

1.1 Types of Markets

Efficient transfer of resources from those having idle resources to others who have a pressing need for them is achieved through financial markets. Stated formally, financial  markets provide channels for allocation of savings to investment. These provide a varietyof assets to savers as well as various forms in which the investors can raise funds and thereby decouple the acts of saving and investment.

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