Posted by : Munish Gogna Saturday, January 8, 2011

From a bird’s eye any financial system looks like as shown below (self explanatory):

In any Financial system we have Accounts, Portfolios, Positions, Orders, and Transaction etc. Let's understand these in details.

The term's meaning depends very much on the context. In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset (A resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit) are paid off. For example, a car or house with no outstanding debt is considered the owner's equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company.
What Does Equity mean in different context?
1. A stock or any other security representing an ownership interest.
2. on a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). It is also referred to as "shareholders' equity".
3. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.
4. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio. 

What Does Account Mean?
1. An arrangement by which an organization accepts a customer's financial assets and holds them on behalf of the customer at his or her discretion.
 2. A statement summarizing the record of transactions in the form of credits, debits, accruals and adjustments that have occurred and have an affect on an asset, equity, liability or past, present or future revenue.
 3. A relaying of happenings from one party to another.
Account may also have sub accounts:
A sub account is often used to compartmentalize larger accounts, thereby allowing for better tracking of various budget details and expenses. For example, a company might set up sub accounts for each of its departments for ease of record keeping.
Account Types:
Accounts can be of various types and I am sure most of us are aware of at least two very common types saving and current. We can have other types also like:
  • Joint Account – Account having multiple owners.
  • Cash Account: The basic account where you deposit cash to buy stocks, bonds, mutual funds, etc. 
  • Margin Account: - Margin basically allows you to borrow from your broker against the cash and securities in your account. Profits can diminish quickly when you use margin, so be very careful!
  • Forex Account etc.

In simple words a portfolio is a collection of investments held by an institution or an individual. Before we dive into more details it is very important to understand risk-limiting strategies called Diversification and Hedging.

In finance, diversification means reducing risk by investing in a variety of assets. The simplest example of diversification is provided by the proverb "don't put all your eggs in one basket". Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg, but less risk of losing all of them. In finance, an example of an undiversified portfolio is to hold only one stock. This is risky; it is not unusual for a single stock to go down 50% in one year. It is much less common for a portfolio of 20 stocks to go down that much, even if they are selected at random. If the stocks are selected from a variety of industries, company sizes and types (such as some growth stocks and some value stocks) it is still less likely.

Making an investment to reduce the risk of adverse price movements in an asset is called hedging. The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters. If you take LIC policy, you are hedging your family’s dependency on you (in terms of money matters only).
Another classical example is if you are married and are in Singapore then you would like your partner to also earn some money to hedge against your job loss J
Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).
If you are reading these lines it means you have now understanding of why an account will have different portfolios. It is as simple as it can get - avoid risk and make more profits.
Any portfolio could include these assets - bank accountsstocksbondsoptionswarrantsgold certificatesreal estatefutures contracts, production facilities, or any other item that is expected to retain its value. All these assets belong to a specific class, let’s understand asset classification now.

A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).
It should be noted that in addition to the three main asset classes, some investment professionals would add real estate and commodities, and possibly other types of investments, to the asset class mix. Whatever the asset class lineup, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.
Sub-Asset Class
more specific holdings of a general category of assets. A sub-asset class is a collection of assets that have common characteristics within both the asset class and the sub-asset class. For example, stock is an asset class, and large-capitalization stock is a sub-asset class.

Before we move to Positions lets understand these terms:
Securities: In finance, a security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities (such as bonds and debentures) and equity securities, e.g., common stocks; and derivative contracts, such as forwards, futures, options and swaps.
Bonds/Debentures: As discussed earlier, there are a whole host asset classes that are available for investors. A bond is one of them to meet the financial goals of the respective investors. A bond is a debt security or an obligation to repay money. Bonds are usually considered as fixed-income securities because they carry a fixed rate of interest. Bonds provide a steady stream of cash flows to the bondholders. Typically, interest is paid by the issuer at half-yearly intervals. Governments issue bonds to raise money for spending on infrastructure projects or for their day-to-day expenditure. Likewise, companies also raise money through bonds to meet their capital expenditure or working capital needs. In the Indian Securities Market, the term ‘bonds’ is generally used for debt instruments issued by the Central and State Governments and public sector organizations; and the term ‘debentures’ is used for debt instruments issued by the private corporate sector. However, the terms bonds, debentures, and debt instruments are used by the general public inter-changeably. There are two features that set bonds apart from equity investments. First, the promised cash flows on a bond (that is, the coupon payments and the face value of the bond) are usually set at issue and do not change during the life of the bond. Even when they do change, as in floating rate bonds, the changes are generally linked to changes in interest rates. Second, bonds usually have fixed lifetimes, unlike stocks; since most bonds specify a maturity date (perpetual bonds are exception since they do not carry any maturity date).
Yield - The yield on an investment is loosely defined as the income one earns on it as a percentage of what one spent on it. The crucial piece of information to know in order to compare a bond with other potential investments is its ‘yield’, calculated by dividing the amount of interest it will pay during a year by its price.
Futures -  In finance, a futures contract is a standardized contract between two parties to buy or sell a specified asset (e.g. oranges, oil, gold) of standardized quantity and quality at a specified future date at a price agreed today (the futures price). The contracts are traded on a futures exchange. Futures contracts are not "direct" securities like stocks, bonds, rights or warrants. They are still securities, however, though they are a type of derivative contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position.
Forwards - In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a forward contract. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position.
Note: Future contracts are very similar to forward contracts, except they are exchange-traded and defined on standardized assets.

Let’s understand what is Position?
Position - In financial trading, a position is a binding commitment to buy or sell a given amount of financial instruments, such as securities, currencies or commodities, for a given price.
The term "position" is also used in the context of finance for the amount of securities or commodities held by a person, firm, or institution, and for the ownership status of a person's or institution's investments.
There are two basic types of position: a long and a short. Net position is the difference between total open long (receivable) and open short (payable) positions in a given assets (security, foreign exchange currency, commodity, etc...) held by an individual. This also refers the amount of assets held by a person, firm, or financial institution as well as the ownership status of a person's or institution's investments.

An order in a market such as a stock marketbond marketcommodity market or financial derivative market is an instruction from customers to brokers to buy or sell on the exchange.
The Orders relate to buying and selling of stocks in the Stock market. However, before you can start buying and selling stocks, you must know the different types of orders and when they are appropriate. 

Market vs. Limit
Two basic types of orders that we should be aware of are the market order and the limit order.
  • A market order is an order to buy or sell immediately at the best available price. These orders do not guarantee a price, but they do guarantee the order's immediate execution. Typically, if you are going to buy a stock, then you will pay a price near the posted ask. If you are going to sell a stock, you will receive a price near the posted bid. 
  • A limit order sets the maximum or minimum price at which you are willing to buy or sell. For example, if you wanted to buy a stock at $10, you could enter a limit order for this amount. This means that you would not pay a penny over $10 for the particular stock. It is still possible, however, that you buy it for less than the $10.
An agreement between a buyer and a seller for the exchange of goods or services for payment is Transaction.
You are ready to trade, now what? 
In order to make your trade you have to be specific about how you want the transaction to be performed. The above mentioned order types are most common types you'll encounter when placing an equity order using an online interface or the phone.

For example an Order from XYZ customer can have following four transactions.

Date                             Operation        Stock               Quantity 
January 5, 2011             SELL                MG                   16
January 6, 2011             BUY                 MG                   18
January 7, 2011             SELL                MG                   11
January 8, 2011             BUY                 MG                   10
That's All.
See you soon.....
Source- wikipedia & encyclopedia

One Response so far.

Leave a Reply

Subscribe to Posts | Subscribe to Comments

Popular Post


enums (1) java (2) JAX-RS (1) JPA (1) mysql (1) request 2 (1) RESTful (1) sphinx (1) tomcat (1) web service (2) ws (2)