Business Management: Navigating Capital Markets

Study Notes

Capital markets enable the buying and selling of goods, bonds, and other financial resources, as well as the expansion of small businesses and the building up of reserves for companies.

The primary function of capital markets is to secure or raise long-term financing for firms, entrepreneurs, and governments.
Capital markets facilitate business expansion, debt repayment, and the introduction of new products by connecting investors with publicly issued equity shares, bonds, and debentures.

Stocks (Equities): Represent ownership in a company, granting shareholders voting rights and increasing acquired assets and dividends.
Bonds: Used to finance infrastructure projects, covering government or company debt.
Derivatives: Legally binding agreements between two parties, derived from stocks, commodities, and currencies.

Aims to mitigate risk by establishing precise investing goals, specifying risk tolerance, and creating an all-inclusive investment plan.
Key principles of risk management include:
- Diversification: Dispersing assets among several asset classes, industries, and regions to reduce exposure.
- Asset Allocation: Distributing assets according to risk tolerance, investing objectives, and market conditions.
- Stop-Loss: Setting a predefined price level to sell an investment if it drops below that level.
- Position Sizing: Determining each investment's ideal size based on risk and expected returns.
- Regular Monitoring: Regularly reviewing and rebalancing the portfolio to ensure it remains aligned with the investment plan.

Aims to maximize returns by investing in companies with high growth potential.
Key principles of risk management include:
- Diversification: Spreading investments across different asset classes, sectors, and geographies to minimize exposure.
- Stop-Loss: Setting a predetermined price level to sell an investment if it falls below that level.
- Position Sizing: Determining the optimal size of each investment based on expected returns and risk.
- Regular Monitoring: Regularly reviewing and rebalancing the portfolio to ensure it remains aligned with the investment plan.

Involves investing in a broad market index, such as the S&P 500, to achieve long-term returns.
Key characteristics include:
- Limited risk exposure due to broad market coverage.
- No explicit asset allocation, as the portfolio tracks the overall market.
- Built-in diversification through broad market coverage.

Involves actively selecting individual securities to beat the market's returns.
Key characteristics include:
- Higher risk exposure due to individual security selection.
- Explicit asset allocation to achieve specific return targets.
- Diversification is crucial to reduce risk and increase potential returns.

A comprehensive examination of a company's intrinsic value to determine its stock's true worth.
Key elements include:
- Financial Statements Analysis: Analyzing a company's financial statements to understand its financial performance, profitability, and liquidity.
- Ratio Analysis: Finding different ratios to evaluate a company's financial health, efficiency, and profitability.
- Industry and Market Analysis: Studying the industry in which the company operates, including market trends, competition, and regulatory environment.
- Management Team Analysis: Evaluating the experience, track record, and leadership style of the company's management team.
- Economic Analysis: Examining the broader economic conditions that affect the company's business, such as interest rates, inflation, and GDP growth.