Understanding Finance from scratch

Chapter 3 If you want to swim, you must first know how deep the water is - learn some financial market knowledge every day (2)
In addition, according to different investment objects, investment funds can also be divided into option funds, index funds and warrant funds, etc., which will not be listed here.However, here we need to introduce the more popular "hedge funds" in recent years.Hedge funds are those investment funds that use different markets for arbitrage trading.From a formal point of view, hedge funds are a group of investment tools that trade in almost all types of markets, including foreign exchange, stocks, bonds, futures and various derivatives.The first hedge fund was launched in 1949.

According to the organizational form, investment funds can be divided into the following categories:

Corporate Fund: refers to an investment fund in which investors with common investment goals form a joint-stock investment company for the purpose of profit, and invest assets in specific objects.

Contract fund: also known as trust investment fund, refers to the investment fund established by the fund sponsor by issuing beneficiary certificates according to the fund contract concluded with the fund manager and fund custodian.

Here we briefly introduce the main differences between corporate funds and contractual funds.The former is based on the company law, while the latter is based on the trust law; the former has legal personality; the latter has no legal personality; the former issues stocks, and the latter issues beneficiary certificates; The latter wait until the contract expires to terminate the fund's operations.

According to the transaction method, investment funds can be divided into the following categories:

Open-end fund: Refers to an investment fund in which investors can purchase or redeem fund units at any time after the fund is established, and the fund size is not fixed.

Closed-end fund: Refers to an investment fund whose fund size has been determined before issuance, and the fund size is fixed within a specified period after the completion of the issuance.

According to financing channels, investment funds can be divided into:

Public fund: Refers to an investment fund that is regulated by the competent government department and publicly issues beneficiary certificates (or stocks) to unspecified investors.

Private equity fund: Refers to an investment fund that raises funds from specific investors through non-public means.

Generally speaking, public offering funds have a wide range of investors and strong financing capabilities. They can apply for listing on exchanges (such as closed-end funds), and information disclosure is open and transparent.However, private equity funds have clear investors, simple issuance procedures, and low information disclosure.

If divided according to risk and return, investment funds can be divided into the following categories:
Growth fund: Refers to an investment fund that takes long-term capital appreciation as its investment goal.Such funds usually invest in financial instruments with relatively high risks and returns, and rarely pay dividends, and often reinvest investment profits to achieve capital growth.

Income fund: Refers to an investment fund whose investment objective is to pursue the current income of the fund.The investment objects of such funds are usually financial instruments with relatively low risks and returns, and generally distribute investment profits to investors.

Balanced fund: refers to an investment fund that pursues both long-term capital appreciation and current income.This type of fund usually has a relatively stable portfolio ratio in the investment portfolio, and its risk and return are between growth funds and income funds.

On a Thursday morning in December 1912, lawyer Untermeyer asked JP Morgan, the most powerful banker at the time, in the U.S. Capitol: "Is commercial credit mainly based on currency or property mortgages?" Morgan replied: "No, Sir, character is the most important thing." The fund has low risk, flexible operation, various varieties, and considerable returns. Such character will inevitably promote its healthy growth. We look forward to a brighter future for China's fund market!
The futures market: hovering between a feast and a big gamble

In the 15th century, after more than 100 years of civil wars among various families in Japan, after the Tokugawa family unified Japan in 1605, Tokugawa forced the leaders and landlords from all over the country to move to Tokyo.When the heads of the families and the landowners from various places return to their territories, the family members must stay in Tokyo as hostages. If these leaders who return to the territories do not return or rebel, their families will be executed.

The source of income for the chiefs and landlords was the rent paid by tenant farmers and farmers in rice. Since the rice could not be transported all the way to Tokyo, they set up warehouses in Osaka to store the rice.

Since all the clan heads and their families live a luxurious life around Tokyo, in order to maintain this lifestyle, the heads and their families sell rice stored in Osaka, and even sell future harvests, forming rice futures trading .In futures trading, the warehouse will issue "rice tickets", and these rice tickets are called "empty rice tickets" ("empty rice tickets" means that the rice does not actually exist).Then, "empty rice tickets" gradually formed a market, which is one of the earliest futures markets in the world.

So how did the futures market develop?What is the structure of the futures market?

The so-called futures market refers to the place for futures trading, which is the sum of various futures trading relationships.It is a highly organized and standardized market form developed on the basis of the spot market in accordance with the principle of "openness, fairness and justice".It can be said that the futures market is not only an extension of the spot market, but also another advanced development stage of the market.From the perspective of organizational structure, the futures market in a broad sense includes futures exchanges, clearing houses or settlement companies, brokerage companies and futures traders; the futures market in a narrow sense only refers to futures exchanges.

We already know that futures was born in Japan, and until the 19th century, it was still unique to Japan, and then it was gradually followed by the world. On March 1848, 3, the first modern futures exchange, the Chicago Board of Trade (CBOT), was established. At the beginning of the establishment of the Chicago Board of Trade, it was not a futures exchange in the true modern sense, but a centralized A venue for spot trading and the transfer of spot medium and long-term contracts.

In 1865, the Chicago Board of Trade realized contract standardization for the first time and launched the first batch of standard futures contracts.Contract standardization includes the standardization of quality, quantity, delivery time, delivery location and payment terms in the contract.Standardized futures contracts reflect the most common business practices, making it very convenient for market participants to transfer futures contracts. Participating in trading greatly improves the market liquidity of futures trading.While standardizing contracts, the Chicago Board of Trade also stipulates that 10% of the total contract value should be paid as a trading margin.

However, with the development of futures trading, settlement has become more difficult.The initial settlement method adopted by the Chicago Board of Trade was the ring settlement method, but this settlement method was cumbersome and difficult. In 1891, the Minneapolis Grain Exchange was the first to establish a clearing house, followed by the Chicago Board of Trade.It was not until the establishment of the modern clearing house that futures trading in the true sense came into being and the futures market was completely established.

Compared with stock funds, ordinary investors are not familiar with the futures market, and many people do not even know what futures are.Futures are relative to spot.Futures are the subject matter that is traded now, but will be delivered or delivered in the future. The subject matter can be a certain commodity such as gold, crude oil, agricultural products, financial instruments, or financial indicators.The date of futures delivery can be 1 week later, 1 month later, 3 months later, or even 1 year later.A contract or agreement to buy or sell futures is called a futures contract.Let's make an analogy: a fruit farmer has 100 peach trees in his home and is expected to produce 300 boxes of peaches.A big buyer plans to buy when it is mature, and it can be negotiated verbally, or it can be agreed in writing.But we all know that there will be various risks when it comes to delivery, such as poor harvests, insect damage, or high peach production this year and lower prices, etc., and there will be various default risks.And futures is a contract, which standardizes the content of various matters, and has a margin ratio to control the risk. We only need to buy and sell this contract.If you keep holding this contract, then when the time comes, you have to exchange currency items, which is delivery, but generally we close the position before the contract expires and earn the difference... Simply put, futures are like this.

Well, let's go back to the futures market.The futures market is basically composed of four parts: futures exchanges; futures clearing houses; futures brokerage companies; futures traders (including hedgers and speculators).

A futures exchange is a non-profit organization that provides venues, facilities, services and trading rules for futures trading, and its income comes from membership fees.Exchanges generally adopt a membership system.The membership requirements of exchanges are very strict, and each exchange has specific regulations.First of all, an application for membership must be submitted to the exchange, and the exchange will investigate the applicant's financial credit status, pass the assessment, and those who meet the requirements can only join the membership after approval by the board of directors.Exchange membership seats are generally transferable.The highest authority of the Exchange is the General Assembly.There is a board of directors or a council under the general meeting of members, which is generally elected by the general meeting of members. The board of directors appoints the president of the exchange to be responsible for the daily administration and management of the exchange.

Where there is a transaction, there must be settlement.There are generally three forms of composition of futures clearing houses: the first type is that the clearing house is affiliated to the exchange, and the members of the exchange are also clearing members; The third is that the clearing house is independent from the exchange and becomes a completely independent clearing house.The responsibility of the futures clearing house is very important. It is responsible for the settlement of futures contract trading, guarantees for futures transactions, supervises physical delivery, and publishes market information.

Next is the futures brokerage company, which is also called a brokerage by many people.Its main function is to conduct futures transactions on behalf of clients, provide relevant futures transaction services, and charge certain commissions when acting on behalf of clients in futures transactions.

Finally, there are futures traders.In the futures market, without the participation of speculators, its two functions of avoiding risks and discovering prices cannot be realized.Participation of speculators in transactions can increase the liquidity of the market and act as a "lubricant".

According to the purpose of participating in futures trading, futures traders are basically divided into two types: hedgers and speculators.The purpose of the former type of futures trading is to use the futures market for hedging transactions to reduce the risks brought about by price fluctuations and ensure the normal profits of production and operation.Those who do this kind of hedging are generally producers, traders, real users, etc.The purpose of speculators participating in futures trading is opposite to that of hedgers. They are willing to bear the risk of price fluctuations.Its purpose is to gain more profit with a small amount of capital.The speculation methods of futures exchanges can be said to be varied and diverse, and their methods are far more complicated than hedging.

In the futures market, risk control is always a central topic, for both traders and managers.Therefore, investors should constantly polish their risk control capabilities.The futures market is a place where news is flying all over the sky. It is necessary to gradually develop analytical skills and fully grasp valuable information.Remember, the market is always right.Market risk is unpredictable, but it can be prevented through analysis.In this regard, investors have to do a lot of work. The most important thing is that when investing in the market, they must first start with the varieties they are familiar with, do a good job of basic work, start with fundamental analysis, supplemented by technical analysis, Don't go against the trend. You must set a "stop loss point" in the early stage, so as to avoid the loss from expanding and it is difficult to get out of the whole body.

Foreign exchange market: the world's largest financial market
A person from country A is going to travel and study in country B. At that time, the exchange rate between country A and country B was 1:9. When he left country A, he brought 10 yuan.When he arrived in country B, he first exchanged 10 yuan into country B's local currency of 90 yuan.This person lived in country B for more than 2 years and spent 25 yuan in local currency.When he was about to leave, the local currency appreciated, and the exchange rate against country A was 1:5, so the traveler exchanged the remaining 65 country B currency for 13 country A currency.That is to say, he played in country B for 2 years in vain and earned a net profit of 3 yuan in country A currency.

This little story tells the essence of the foreign exchange market, making use of the variability of the exchange rate to earn the difference.Now that more and more people have invested in the foreign exchange market, how does the foreign exchange market work?Why does it become an investment hotspot?
A few years ago, ordinary investors' understanding of the foreign exchange market was only a concept of foreign currency. However, after several periods of evolution, it has been better understood by ordinary investors, and people have been able to use foreign exchange trading as a financial management tool.

In fact, whether we know the foreign exchange market or not, we are already a part of it, because the money in the pocket has made you an investor in currency.For example, if you live in China, all loans, stocks, bonds and other investments are denominated in RMB. In other words, unless you are one of the few multi-currency investors who have foreign currency accounts or have bought foreign currencies and stocks, it is RMB investors.

And if you live in the United States, you have basically chosen not to hold other countries' currencies, because the stocks, bonds and other investments you buy or deposit in your bank account are all denominated in US dollars.Due to the appreciation or depreciation of the dollar, it may affect the value of your assets, which in turn affects the overall financial situation.Therefore, many savvy investors have made use of the changeable foreign exchange rate to conduct foreign exchange transactions and profit from it.

What needs to be said here is that the foreign exchange market is not a "market" in the traditional sense, and it does not have a specific trading venue like stocks and futures.Instead, transactions are conducted through electronic networks among banks, businesses and individuals.The direct inter-bank market is dominated by traders with foreign exchange clearing transaction qualifications, and their transactions constitute a large amount of transactions in the overall foreign exchange transaction, and these transactions have created a huge amount of transactions in the foreign exchange market.It is precisely because there is no specific exchange that the foreign exchange market can operate 24 hours a day.At present, the world's major foreign exchange markets include London, Frankfurt, Paris, and Zurich foreign exchange markets in Europe, New York in North America, Tokyo, Hong Kong, China, and Singapore foreign exchange markets in Asia, and Sydney and Wellington markets in Australia. The global uninterrupted foreign exchange market, among which the London foreign exchange market has the largest trading volume, so the European market is also a market with strong liquidity.Today, the foreign exchange market is the largest financial market in the world, with a single-day transaction volume as high as 1.5 trillion US dollars.

Transactions in the foreign exchange market can be divided into three levels, namely between banks and customers, between banks and between banks and the central bank.

Generally speaking, foreign exchange banks offer two types of spot exchange rate and forward exchange rate.There are three ways to quote the spot exchange rate: direct quotation, indirect quotation and US dollar quotation; there are two ways to quote the forward exchange rate: direct quotation and point quotation.Under different exchange rate pricing methods, the calculation methods of forward exchange rates are different.

Under the direct pricing method, forward exchange rate = spot exchange rate + premium, or forward exchange rate = spot exchange rate - discount.

Under the indirect pricing method, forward exchange rate = spot exchange rate - premium, or forward exchange rate = spot exchange rate + discount.

Let me introduce the trading methods of the foreign exchange market: spot foreign exchange transactions, forward foreign exchange transactions, swap transactions, foreign exchange futures transactions and option transactions.

According to the degree of foreign exchange control, the foreign exchange market can be divided into free foreign exchange market, foreign exchange black market and official market.

Free foreign exchange market: refers to the market where the government, institutions and individuals can buy and sell any currency and any amount of foreign exchange.The main characteristics of the free foreign exchange market are: first, the foreign exchange bought and sold is not regulated; second, the transaction process is open.For example: the foreign exchange markets in the United States, the United Kingdom, France, and Switzerland are all free foreign exchange markets.

(End of this chapter)