Finance and Investment Overview

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Questions and Answers

Which market primarily deals with short-term securities?

Primary Market

Capital Market

Secondary Market

Money Market (correct)

The Capital Market is known for having low levels of risk.

False

What type of funds are typically supplied by banks in the Capital Market?

Large amounts of funds for long-term periods

The Money Market primarily aims for raising funds for financing of __________.

working capital and current needs Signup and view all the answers

Match the financial instruments to their markets:

Certificates of deposits = Money Market Common stocks = Capital Market Treasury bills = Money Market Corporate bonds = Capital Market Signup and view all the answers

What type of investors are typically referred to as retail investors?

Private investors Signup and view all the answers

Direct investing allows investors to have no control over their investment decisions.

False Signup and view all the answers

What are money market instruments commonly known as?

short term investment vehicles Signup and view all the answers

___ are long term capital market instruments that offer fixed returns over a period of time.

Fixed-income securities Signup and view all the answers

Match the type of investment vehicle with its characteristic:

Short term investment vehicles = Matures in a year or less Fixed-income securities = Fixed returns over a period Common Stock = Ownership share in a corporation Treasury notes = Issued by the government Signup and view all the answers

What is a key characteristic of financial investments?

They are paper or electronic contracts. Signup and view all the answers

Real investments refer to assets that are intangible and cannot be physically touched.

False Signup and view all the answers

What is the primary purpose of making an investment?

To generate future income or profit. Signup and view all the answers

Investing involves trading a known dollar amount today for some expected greater future stream of ________.

payments Signup and view all the answers

Match the type of investment with its description:

Real Investment = Funds invested in tangible assets like machines Financial Investment = Funds invested in stocks or bonds Individual Investors = People who invest on their own Liquidity = The ability to buy or sell an asset quickly Signup and view all the answers

Which of the following is NOT an advantage of investing in financial assets?

Higher risk Signup and view all the answers

The trade-off in investing means sacrificing future consumption for present consumption.

False Signup and view all the answers

What is commonly understood as the current commitment of funds in hopes of future payments?

Investment Signup and view all the answers

Study Notes

Finance

Finance is both a science and an art, applying economic and accounting principles to manage, allocate, and utilize financial resources, investments, and expenditures.

Investment

Investment involves forgoing immediate consumption to accumulate a larger amount for future consumption.
It's a trade-off between present and future consumption.
Investment commits capital for a specific period to obtain future payments compensating for time, expected inflation, and uncertainty.
Real investment involves tangible assets like machines, land, and plant, contributing to the economy's productive capacity.
Financial investment relates to paper or electronic contracts (e.g., stocks, bonds) enabling individuals to claim real assets.

Advantages of Investing in Financial Assets

Divisibility
Marketability/Liquidity
Shorter holding period
Information availability

Investment Types

Individual Investors: These are individuals investing on their own. Often called retail investors.
Institutional Investors: These are legal entities that gather funds to invest in securities or other assets. They often buy and sell securities in larger quantities.

Investment Types

Direct Investment: Buying or selling financial instruments directly in financial markets.
Indirect Investment: Buying or selling financial instruments through financial intermediaries.

Direct vs. Indirect Investment

Direct Investment: Provides control and allows investors to decide when to buy/sell.
Indirect Investment: Managed by professionals, diversifying risk and allowing smaller investors access to more diversified investments.

Common Investment Vehicles

Short-term investment vehicles: Such as money market instruments (Matures in a year or less), Certificate of Deposits, Treasury Bills, Commercial Paper.
Fixed-income securities: Long-term investments with fixed returns over a set period. Examples include preferred stock and long-term debt securities (bonds).
Bonds, Treasury notes/bonds- debt instruments issued by government for more than a year, corporate bonds - long-term debt instruments for private institutions borrowing money. Examples include Secured bonds, unsecured bonds (debentures), callable bonds, convertible bonds.
Common stocks: ownership shares in a corporation, representing residual claims with limited liability.
Speculative investment vehicles: High-risk with potential for significant returns.

Financial Markets

Capital Market: Markets for securities with maturities longer than a year, like stocks and bonds.
Money Market: Short-term securities market (a year or less) where funds are borrowed and lent.
Primary Market: Where securities are first issued to investors.
Secondary Market: Allows investors to buy and sell existing securities.

Money Market vs. Capital Market

Money Market: Short term, low risk, readily converted to cash.
Capital Market: Long term, potentially higher risk.

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Description

Explore the essential concepts of finance and investment in this quiz. Understand the principles of managing financial resources and the distinction between real and financial investments. Discover the advantages of investing in financial assets and the types of investors involved.