BFINELAX

• Index


  A measure of something over time. In the financial market, a market index measures performance by securities or financial instruments
• A market index tracks the rise and fall of stocks, bonds, financial derivatives, and trading commodities
• Money market


  Trading in very short-term debt investments
• Creating a market index


  1. Select a number of assets from each category

  2. Weight each item to create a certain percentage of the overall holdings index

  3. Aggregate the index to represent the performance of a market segment, specific asset class, or industry
• Participants in the money market

  • Institutions and traders at the wholesale level
  • Money market mutual funds bought by individual investors
  • Money market accounts opened by bank customers
• S&P 500 index


  • Tracks the performance of about 500 of the biggest companies listed on the New York Exchange Market
• Money market


  • High degree of safety
  • Relatively low rates of return
• Rise in the index level


  Suggests many investors are buying shares under the index component rather than selling
• What we need to know about the money market

  • It involves the purchase and sale of large volumes of very short-term debt products, such as overnight reserves or commercial paper
  • An individual may invest in the money market by purchasing a money market mutual fund, buying a Treasury bill, or opening a money market account at a bank
  • Money market investments are characterized by safety and liquidity, with money market fund shares targeted at $1
  • Money market accounts offer higher interest rates than a normal savings account, but there are higher account minimums and limits on withdrawals
• Financial security


  A type of financial asset that holds value and can be traded in financial markets
• Fall in the index level


  Suggests many investors are selling stocks rather than buying
• The money market is one of the pillars of the global financial system
• The most important thing for investors is the movement of the indexes
• Financial securities


  • Usually issued by governments or companies
  • Used to raise capital to finance operations and growth
• The majority of money market transactions are wholesale transactions that take place between financial institutions and companies
• Investors are keen on how much an index gained or lost compared to the previous period
• Trading of securities


  1. Transactions involve a variety of laws and regulations

  2. Designed to protect investors

  3. Ensure fair and transparent trading practices

  
• Institutions that participate in the money market


  • Banks that lend to one another and to large companies in the eurocurrency and time deposit markets
  • Companies that raise money by selling commercial paper into the market, which can be bought by other companies or funds
  • Investors who purchase bank CDs as a safe place to park money in the short term
• Types of market indexes

  • Stock indexes
  • Bond indexes
  • Currency indexes
  • Commodities indexes
• Some of those wholesale transactions eventually make their way into the hands of consumers as components of money market mutual funds and other investments
• Stock indexes


  • S&P 500, Dow Jones Industrial Average (US)
  • FTSE 100 Index, FTSE 250 Index, FTSE All-share index (UK)
  • Nifty 50, S&P Asia 50 (Asia)
• Market risk


  The value of financial securities can fluctuate quickly and dramatically in response to changes in the economy, politics, and other factors
• Commercial paper


  A popular borrowing mechanism in the wholesale market because the interest rates are higher than for bank time deposits or Treasury bills, and a greater range of maturities is available, from overnight to 270 days
• Bond indexesExample


  • Bloomberg US Aggregate Bond Index
• Types of securities


  • Equity
  • Debt
• Currency indexes

  • UK Pound Sterling Index, U.S. Dollar Index
• Risk of default


  Significantly higher for commercial paper than for bank or government instruments
• Commodities indexes


  • Asia-Pacific Commodities Index, The Afreximbank African Commodity Index
• Equity securities


  • Represent ownership in a company
  • Shareholders are typically not entitled to regular payments
  • Can profit from capital gains when sold
• Ways individuals can invest in the money market

  • Buying money market funds
  • Buying short-term certificates of deposit (CDs)
  • Buying municipal notes
  • Buying U.S. Treasury bills
• It is crucial to understand what each index measures
• Debt securities

  • Represent a debt obligation, usually issued for a fixed period of time
  • Investors lend money to the issuer in exchange for regular interest payments and return of principal at maturity
• The U.S. government issues Treasury bills in the money market, with maturities ranging from a few days to one year
• Importance of market indexes

  • Indicators of market health and economic trends
  • Benchmarks for investments
  • Basis for index investing
• Primary dealers buy Treasury bills in large amounts directly from the government to trade between themselves or to sell to individual investors
• Falling stock/bond indexes

  Indicates a bear market and an economy heading or in recession
• Hybrid securities

  • Combination of characteristics of both debt and equity securities
  • Offer fixed interest payments like bonds
  • Have features of equities, such as potential to appreciate in value and ability to convert into issuer's stock
• Individual investors can buy Treasury bills directly from the government through its TreasuryDirect website or through a bank or a broker
• Rising stock/bond indexes

  Indicates substantial growth by many companies, characterized by rising investments, increased consumption, and spending
• Hybrid securities

  • Convertible bonds
  • Equity warrants