Few days ago one of my ex-students, Nisha (who did not specialise in Finance) asked me whether I could write something on the functioning of stock markets through my blog. Since it requires lot of discussion, I thought of doing so in a series of blogs, this one being the first. Though some of my readers may find it elementary, I am sure you would enjoy reading the same.
We generally classify assets into two (a) real assets and (b) financial assets. You might remember that in an earlier blog, I had mentioned that the wealth is always created with the help of real assets. The real assets represent land, building, machinery, and all other physical resources required for production of goods and services. All those involved in production of goods and services require capital for investment. So they represent the demand for capital. All those entities who have income in excess of their expenditure are looking out for avenues to invest the same; and they represent the supply of capital. Like any other market, a market is required for the interaction between those who are in need (demand) of capital and those who have surplus capital (supply). Financial markets provide a platform for the same.
How does the money move from one set of people to the other? Let us take an example from the real market. When you place demand for a car, the manufacturer supplies the car to you and you pay him cash. Here two real assets are exchanged. But when you are providing money as a supplier of capital, what you are getting back is not a tangible asset; but a promise that the other party would return the same to you in future with interest. So the supplier of capital has a claim on the other party. The instruments that help us/ or through which we establish this claim are known as Financial Assets. Bank pass book, Fixed Deposit receipt, NSC, Equity share, Debenture etc. are all examples of financial assets. I will explain some characteristics of financial assets in my next blog in this series.
We generally classify assets into two (a) real assets and (b) financial assets. You might remember that in an earlier blog, I had mentioned that the wealth is always created with the help of real assets. The real assets represent land, building, machinery, and all other physical resources required for production of goods and services. All those involved in production of goods and services require capital for investment. So they represent the demand for capital. All those entities who have income in excess of their expenditure are looking out for avenues to invest the same; and they represent the supply of capital. Like any other market, a market is required for the interaction between those who are in need (demand) of capital and those who have surplus capital (supply). Financial markets provide a platform for the same.
How does the money move from one set of people to the other? Let us take an example from the real market. When you place demand for a car, the manufacturer supplies the car to you and you pay him cash. Here two real assets are exchanged. But when you are providing money as a supplier of capital, what you are getting back is not a tangible asset; but a promise that the other party would return the same to you in future with interest. So the supplier of capital has a claim on the other party. The instruments that help us/ or through which we establish this claim are known as Financial Assets. Bank pass book, Fixed Deposit receipt, NSC, Equity share, Debenture etc. are all examples of financial assets. I will explain some characteristics of financial assets in my next blog in this series.
Thank you Sir! Looking forward to the next one in the series.
ReplyDeleteso .. neat and clear!! thank you!
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