I will skip long introduction into the investment funds, what they are and how they came to be to make place for the main topic of this article, and that is types of the investment funds. And there are many of those types, and I am not certain that I will be able to mention them all, or to explain them all in a way for everyone to understand. But I will try, that is only thing I can do.
We have basic mutual funds in which money stands ready to be sold or redeemed by its investors at the net asset value, and this is their classification:
They represent owners of market funds that invest their money in money market instruments and similar other equivalents
Equity type funds that are mostly in stocks
Fixed income funds
And funds that are mixture of both stocks and bonds which are known as hybrid funds
Closed-end funds ( mutual fund type ) hold constant share number that is sold on all kinds of public exchanges, and they have discount more than often. Their size is rather small when compared with open-end funds and their expenses are higher as well. They produce higher yields than the underlying bonds, which happens due to their discounts.
Similar to closed-end funds are exchange-traded funds. In their case ETF shares represent several portfolios of securities traded on the stock exchange. These funds are in most cases based on index which causes very small fees that are charged.
You are all aware of the hedge funds, and I think that there is nothing new I can tell you about them. Many traders use these funds, including hedges of those hedge funds to protect themselves from great losses on the financial markets. Hedge funds have some rules that are set to enable only serious parties to join them. In most cases the rule of certain minimum net worth is required to be reached before the entry to a hedge fund is allowed. There are hedge funds that are open for everyone willing to invest some money in them prior to entering them and gaining privileges they offer. These hedge funds are mentioned by organizations that promote things like binary option robot software, and it should be already known by everyone the legitimacy of the most sites from that financial area.
Managed futures are also a type of funds, which involve certain financial instruments and commodities. This is rather new type of funds that were first created in 2009. In these funds all trading is done through CTA ( a commodity trading advisor ) whose exact job is to trade futures for accounts that belong to the fund. If a portfolio is properly hedged then CTA can get high investment return with a fairly low risk. Investors can access their account once every month with prior notification to the fund.
Private equity funds earn profit through trading of companies. Partners in this kind of find infuse certain companies with capital, and work toward turning them around and eventually selling them for higher price.
This article will have its focus on risk classification in which we will talk about risks that affectdifferent number of subjects. I will also try to say few words about hazard and what it represents.
Basic breakdown of risk when we talk about these factors comes down to fundamental and particular risk. Fundamental risk is a risk that has a possibility to endanger bigger amount of people (earthquake), and one of its sub-groups is economic risk, which contains all risks on the level of economy such as unemployment. Particular risk does what its name suggests, it affects only a particular individual ( vandalism or robbery ).
Insurance companies are willing to insure most of the particular risks, but only some of the fundamental risks such as wind or hurricane damage, but they will not insure economic risks like unemployment because government is responsible to that. Unemployment and similar economic risks are insured by country itself, due to their control of such risks through policies and similar economic tools. To manage the possibility of loss insurance companies will limit the coverage of their insurance, and to prevent great losses due to big disasters they will use the ability to reinsure ( buy insurance form other insurance companies for potential losses through payment of their own insurance ).
Fundamental risks are risks that affect great number of people, but they also can affect organizations as well, and because of that there are few other categories of fundamental risks than just economic risk. One of the examples of such category is enterprise risk, which is a group of risks that affect business enterprises. All speculative risks that can and will affect organizations can be divided in three risk groups, strategic, operational and financial risk.
Goal-oriented behaviour of an organization carries strategic risk. To explain it more clearly, it means that all efforts that go toward the improvement of efficiency of the organization through buying new equipment or implementation of new techniques carries strategic risk because it can backfire and cause loss instead of expected profit.
Every operation within the enterprise that involves a chance of loss through several means can be seen through operational risk group. To give you simple explanation, an injury of the employee is one of those risks, and other example would be leak of customer data caused by insufficient and bad security. Risk of leak of credit card data through software listed in Best Binary Option Brokers articles cam cause financial loss that is hard to recover due to risk that sites like that carry.
Financial risk is a simple kind of risk in which the risk covers the chance of failure of an investment. That is why every serious organization has a body that works toward risk management.
Hazard is everything that increases the chance of loss. There is physical hazard ( smoking increases a chance of house fire) and moral hazard which is a bit more complicated. Moral hazard is every act that is aimed toward intentional loss that leads toward insurance payout, also known as insurance fraud.
World works on the principle of demand. People demand goods, and those that produce them are suppliers that allocate those resources. This is a simple explanation of that process, but to ensure that it works as it should efficient financial system is required. The main task of such financial system is to get money from people who got it, and to allocate it to the people who can use it to the best extent. This allocation yields the best return on the investment of that money.
All kinds of financial institutions ( banks, pension funds and so on ) are providers of those products and services. All of them serve to create economic transactions required to keep this world running. In reality every economic transaction that occurs is affected by one of the financial institutions. Their job is to create financial instruments, which are based on following fundamental objectives of financial system:
To create a working payment system
To enable money time value
To reduce a chance of financial risk which includes compensation of risk-taking to achieve desirable objectives through creation of products and services
To allow best form of allocation of the economic resources through collection and dispersion of information
To provide prices which are indicators of investment performance by the means creation and maintenance of financial markets all of which serves to maintain economic stability.
When it comes to payment methods systems money is the most convenient method of payment between individuals, but that is not true to banks, governments and other organizations. Reason for that is twofold, transactions between such organizations are done in large amounts of money, and doing it in cash is inconvenient, and parties in those transactions require some kinds of confirmations of those transaction for various reasons.
First big step in payment methods between these organizations were checks, but they were forged easily and their life ended with introduction of electronic money transfer. Checks were basically paper with relevant information on it, but with development of electron transfer paper became useless because that information was then transferred electronically. Checks had to be transported between parties, which was another thing that was inconvenient about them, and it changed with introduction of electronic transfer which is very fast. This was one of the greatest accomplishments of financial systems, the introduction of efficient payment system.
One more thing I will mention which holds importance is interest, and in some level capital gains. If a party requires certain amount of money for a project which they don’t have they can aslo someone to lend them that money. When it comes to returning that money they will return the original amount plus interest on that amount that was agreed prior to the transaction.
Capital gains is a profit that is made through stock and other markets by buying stocks with low price and selling them when their price rises. There are trading markets that promise trading with low risk involving stocks, banc de binary review article as an example, which are shady at best, with general lack of knowledge that is on the web about them.
Financial instruments are all agreements on legal ground that require one side to pay money or make some other form of payment to the other side for equal payment in return, which can be in the form of interest, acquisition of rights, premiums or number of other things. Payment from the first party doesn’t have to happen at the moment, it can be a promise of payment under decided conditions as well.
These instruments come in many forms, documents, stock certificates or loan contracts. But lately they are in the form of records that are electronically stored and pretty much standardized ( parties of that deal are recorded also ).
There are quite a few financial instruments and they can be categorized in a number of ways, but I will stick to basics and show you categorization on a ground of type of the exchange that happens in them.
All exchanges who aim Is to achieve some kind of future interest payment or repayment of principal can be divided in two groups:
Bonds and loans in which money is given to borrower by lender which in return receives regular payments of both principal and interest.
Asset-backed securities which are made when lenders pool all their loans and then sell them to investors. Lenders get immediate payment, where investors get payments in the form of principal and interest from that loan pool.
Exchanged that are made for (possible) capital gains, or in some case interest can be:
Stocks which are partial ownership of the company and are sold to buyers. Company receives immediate payment while buyers gain rights to trade with those stocks and get annual payment for their stocks.
Funds which include many forms of funds like mutual funds, hedge funds and others. Those funds bring securities that interest or capital gains that in return increase the worth of those funds.
Offset risk and possible capital gains are goals of following exchanges:
Options and futures are tools that are used in trading on stock market. They work in form of promises, where one party promises to buy certain number of stocks on certain price. The profit in these kind of transactions is called premium, but it also can be capital gain plus premium depending on the price movement of the said stock.
Currency is also traded on a market called forex. This is done for offset risk, but more commonly for capital gain. It’s a bit complicated market but it comes down to buying and selling of currencies with other currencies. Profit is made in the difference between the value of currency when you buy and sell it.
Swaps are exchanges of interests in which one party pays fixed rate of interest while other party pays floating rate. Exchange is done only with the net amount.
I would like to mention an exchange type that is not really safe for traders. That would be binary options trading. Reason for this are the sites, so called brokers, like banc de binary site, which carry a strong scam vibe, but are promoted in that trading area as excellent brokers.
This title could have been a bit different ( advantages instead of pros and disadvantages instead of cons ) but the content of the article is the most important thing, and conveying the message and information using most appropriate word forms is my goal. Everything has pros and cons, and investment funds are not different in that aspect. Every action that involves money also involves certain amount of risk, and that is what I am going to write about in this particular article. This article will not be unique, I won’t claim that, but it will relay some important knowledge to those that are interested in it.
Assets that are managed by professionals have few advantages over other parties. Many laws were created which serve nicely in protection of the money in these funds. And then there are laws that restrict funds in order to prevent them form gaining too large influence over companies they invest their resources in.
Diversification is one other advantage that is important. There are many assets on the market and the rise of one is the fall of the other. By owning assets that very little(or no) correlation with each other the chance of loss is non-existent. When a asset a fund owns goes up with its price they sell it and get money from it, or cash in its rise, while they don’t suffer the loss from owning of opposite assets.
Government is there to provide more safety to investment funds through restriction on certain types one might take on market. These rules are (in short and simple form):
Ant security in any fund, no matter the type, must be held by an appointed custodian rather than fund
Taxation on entity level is avoided by distribution of 90 percent of the taxable income being distributed among shareholders
Buying assets on margin price and selling them on short is prohibited for all funds and their representatives ( this is hard to keep an eye on, but rules and regulations are introducing new tools that help them fight against these things )
All companies that are participants in investments must be registered with SEC, and they have to file them investment policies, annual reports and all of the other information SEC requires from them
Investment banks can’t issue bonds or stocks ( preferred type ), all they can do is borrow money from other financial institutions ( namely banks )
Investment funds have their share of disadvantages as well. One of the biggest disadvantages of the investment funds are the fees. Finds have numerous fees that they need to pay to keep them on the market and alive. But that is not everything, low control over taxable income for investors is another con fund members have to tackle. Customization of a portfolio is restricted as well.
Many articles that speak about disadvantages of certain financial instruments tend to draw out adds from sites similar to 24option. I can tell you to be careful if you descent in that part of trading instruments, there are a lot of bad apples there.