Real Assets Vs Financial Assets

Real Assets:
Physical assets such as real estates,
collectables, machine, and automobiles etc.

Financial Assets:
Pieces of Paper (or electronic) evidencing a
claim on some issuer e.g. common stock,
preferred stock, bonds, future, and options etc.

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 Financial Environment
• Businesses interact continually with the
Financial Markets.
• The purpose of Financial Markets is to
efficiently allocate savings to ultimate users.
• Financial Markets are composed of all
institutions and procedures for bringing
buyers and sellers of financial instruments
together.

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 Financial Markets
Money market versus Capital market
• Money market:
– The market for short term (maturity from one day
to one year), highly liquid, low risk assets sold by
government, financial institutions and corporations
such as treasury bills, Commercial paper and
Certificate of Deposit (CDs) etc.
• Capital market:
– The market for long term (maturity greater than
one year), high riskier than money market, such as
corporate bonds and stocks (shares).
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 Financial Markets
Primary versus Secondary markets
Within Money and Capital markets there exist both primary and
secondary markets

1. Primary market: a market where new securities are bought and

sold for the first time (for new issues of instruments)
2. Secondary market: a market for existing securities (used ) rather
than new issues)
– Increases liquidity of shares
– Generates pricing information
– Barometer of corporate performance. For-example NYSE
(Security exchange)
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 Flow of Funds in the
Economy

INVESTMENT SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS

SECONDARY MARKET

SAVINGS SECTOR

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 Flow of Funds in the
Economy

INVESTMENT SECTOR
INVESTMENT
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Businesses

SECONDARY MARKET Government

Households
SAVINGS SECTOR

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 Flow of Funds in the
Economy

INVESTMENT SECTOR
SAVINGS
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Households

SECONDARY MARKET Businesses

Government
SAVINGS SECTOR

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 Flow of Funds in the
Economy

INVESTMENT SECTOR
FINANCIAL
BROKERS

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Investment Bankers

SECONDARY MARKET Mortgage Bankers

SAVINGS SECTOR

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 Flow of Funds in the
Economy

INVESTMENT SECTOR
FINANCIAL
INTERMEDIARIES

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Commercial Banks
Savings Institutions
SECONDARY MARKET Insurance Cos.
Pension Funds
Finance Companies
SAVINGS SECTOR
Mutual Funds

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 Flow of Funds in the
Economy

INVESTMENT SECTOR
SECONDARY
MARKET

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Security
Exchanges (NYSE)
SECONDARY MARKET
OTC
Market (NASDAQ)
SAVINGS SECTOR

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 Allocation of Funds
• Funds will flow to economic units that are willing
to provide the greatest expected return (holding
risk constant).
• In a rational world, the highest expected returns
will be offered only by those economic units with
the most promising investment opportunities.
• Result: Savings tend to be allocated to the most
efficient uses.

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 Financial Broker
1. Investment banker: a financial institution that
underwrites (purchases at a fixed price on a fixed
date) new securities for resale (Goldman Sachs,
Morgan Stanley, JPMorgan Chase, Bank of
America Merryll Lynch, Meezan Bank, Faisal
Bank etc)
2. Mortgage banker: a financial institution that
originates (buys) mortgages primarily for resale
(bank of America, Wells Fargo mortgage, Chase,
CitiMortgage, Alfalah, UBL, Askari etc).
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 Financial Intermediaries
• Financial intermediaries are institutions that accept money
from the savers and use those funds to make loans and
other investments in their own name.
1. Deposit institutions: commercial banks (HBL, Askari,
National saving),
2. Insurance companies: life insurance companies (state life
insurance) and property & causality companies (Askari
general insurance, EFU, Shaheen insurance)
3. Other financial intermediaries: mutual investment fund
companies (NAFA, NIT), Pension and retirement funds
(NAFA)
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 Why do we invest?
• Retirement decisions
• Luxurious life
• Children obligations
• Building wealth over lifetime
• ???????????????????

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 What is Investment?
“The commitment of funds to one or more assets that
will be held over some future time period”

• The investment is concerned with the management of an

investor’s wealth, which is the sum of current income and
the present value of all future income.

• It often refers to investing money in certificates of deposits

(national savings), bonds, common stocks, preferred stocks
and mutual funds. More knowledgeable investors also
invests in options, future contracts, commodities and
tangible assets such as real estates, gold and collectibles
etc.

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 Instruments of investment in
financial markets
Expected Return (%)

Linear relationship

Options Future contract

Common stock
Corporate bonds Preferred stock

RF
Treasury bills

0 Risk (β)16
 Financial instruments
• Treasury bills:
– A short term money market instrument sold at
discount rate by the stable governments. Normally
they are considered risk free.
• Corporate Bonds:
– Long term debt instruments representing the
issuer’s contractual obligation.
• Preferred stock:
– An equity security with an intermediate claim
(between the bond-holders and the stock-holders)
on a firm’s assets and earnings.
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 Financial instruments
• Common stock:
– An equity security representing the ownership
interest in a corporation
• Options:
– Right to buy or sell a stated number of shares of a security
within a specified period at a specified price.
– Call option: An option to buy a specified number of shares
of stock at a stated price within a specified period.
– Put option: An option to sell a specified number of shares of
stock at a stated price within a specified period.
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 Future contracts
• Future contracts:
– Contract agreement providing for the future exchange of a
particular asset at a currently determined price.
– Long position: A commitment to purchase (buy) the asset at
contract maturity date.
– Short position: A commitment to deliver (sell) the asset at contract
maturity date.

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