Financial securities - Research Paper Example

Financial securities Making an investment decision is one of the most critical processes that any investor will ever go through. Making a wrong investment decision will lead to loss of funds while the right investment decision will help the investor gain or increase his or her capital. It should be noted that the aim of every investor is to increase their capital. Therefore, they are concerned with making the right investment decision. Financial markets have become increasingly famous as many people today are opting to invest in financial assets/ securities (Madura, Pg. 3). These are assets such as stocks and bonds.

Given 100,000 dollars, it is important to make a decision on the right investment decision so as to make the maximum possible profits from the investment. One can choose from a number of securities which are classified into money market securities, capital market securities or derivative securities (Atack and Larry, Pg. 76). Money market securities are those securities that facilitate the sale of short term debt securities. They have a maturity of one year or less.Capital securities on the other hand facilitate the sale of long term securities such as bonds, mortgages, stocks and mortgage backed securities.

Bonds are issues by the treasury or by the government agencies (Madura, Pg. 163). They can also be issued by corporations which want to raise funds to expand their operations. Mortgages on the other hand are obligations that are created with the aim of purchasing real estate, while mortgage backed securities are those debt obligations that represent claims on a package of mortgages. Finally, stocks are documents that warrant partial ownership in corporations that issue them (Bhole, Pg. 46). The returns of these securities are influenced by the interest rates prevailing in the economy at particular times.

The performance of the various corporations will also influence the returns of these securities (Madura, Pg. 249). When the performance of the corporation is high, the rate of returns will also be high and it will be worth investing in them. Derivative securities are financial contracts whose values are derived from the values of the underlying assets. They could be for the purpose of speculation or risk management and hedging. An investor is able to speculate on the movement of prices of assets without necessarily buying the assets (Madura, Pg. 341). These securities also help in adjusting the risk of their existing investments in securities.

With the 100,000 dollars, one should invest in securities with the least risk and at the same time high returns. In most cases, the securities with low risk have low returns while securities with higher risk have relatively high returns. Therefore, one should spread the portfolio among those types of securities. 30% of the 100,000 dollars can be invested in bonds. By investing in bonds, one will almost be assured of getting returns and that the money is safe. However, the rate of returns will be relatively low.

About 50% of the amount can be invested in securities with higher returns. These could be stocks. However, before purchasing the stocks of any corporation, one should seek to know its performance. One should only invest in stocks of corporations which have a positive trend in its performance. The rest 20% should be kept apart for speculative purposes. One will buy a security whose value is low and is expected to rise in the future. This would be a good portfolio that will reduce the level of risk and maintain high returns.

Works CitedAtack, Jeremy, and Larry Neal. The Origins and Development of Financial Markets and Institutions: From the Seventeenth Century to the Present. Cambridge UK: Cambridge University Press, 2009. Print. Bhole, L M. Financial Institutions and Markets: Structure, Growth and Innovations. New Delhi: Tata McGraw-Hill Pub, 2004. Print.Madura, Jeff. Financial Markets and Institutions. Mason, Ohio: South-Western Centage Learning, 2014. Print.