Author : Anky, the 'Sabu' guy.
No you are not the ONE.. Neither am I .. But here i draw parallelism with matrix because these markets are truly fascinating and inter-linked. And yes the first bit of exploration journey will reveal so much within these markets that you will ask yourself did this world always existed around you or were you asleep.
Lets get down to core points and focus on few assets and inter-linkage of various markets. Also, how actions by central bankers or policy makers impact these assets and markets overall.
Equity: Its simply money raised by company by giving you ownership. If your country, industry or exclusively your company does well then you are bound to make profits. With ownership comes consequences as well like if your company isnt doing well then you would suffer and loose value. Remember this core principle rest of finance and how to analyze shares comes later. Some terms we will look at later editions are Price by earning ratio, leverage ratio, etc.
Bond: Its capital raised by company or govt and in return they agree to pay you annual ( or could be semi-annual) coupon along with repayment of total capital (yeah just lik Loans, but these are tradeable). Yield is the total return expected from the bond. Its calculated incorporating annual coupon and capital repayment at the end.. More such details later
Equities are the more riskier assets and thus have higher returns but can also result in higher losses. Bonds are less risky assets and thus offer less returns. You would be wondering whats the risk in bond. The risk is if the company or govt whose bond you have bought fails to pay you coupon or capital repayment. So you have rating agencies which rate these corporates and govt sovereign rating to give you an idea as to what is the probability that they will repay.
Now lets put some practical case and see how various assets react to it. Today, when central bank cut rates (repo rate or refi rate) they are basically cutting the rate at which they lend money to banks (commercial banks). So in real life if you get loans at lesser rate you would be encouraged to borrow money, similarly is this case commercial banks would borrow more from central bank and thus infusing more money into the markets
Banks then, ideally should, lend out this money to customers and corporates at higher than repo rate and make money. So this leads to more loans, more business projects, more growth, more jobs and more purchasing power.
Now the simple theory is that if you know well ahead that RBI will cut rates then you can go and buy risk assets like equities becoz this inflow of new cash in the system would spur the businesess and help profitability
Why does RBI cut rates? In order to spur growth. The fear is with rate cut and money infusion into the system its likely to increase inflation and which is bad for economy. So any central bank has to watch mix factors like inflation, growth and unemployment to come to a decision to cut or not.
So can RBI hike rates? Yes. It does that to remove money floating in the system to reduce inflation.
No you are not the ONE.. Neither am I .. But here i draw parallelism with matrix because these markets are truly fascinating and inter-linked. And yes the first bit of exploration journey will reveal so much within these markets that you will ask yourself did this world always existed around you or were you asleep.
Lets get down to core points and focus on few assets and inter-linkage of various markets. Also, how actions by central bankers or policy makers impact these assets and markets overall.
Equity: Its simply money raised by company by giving you ownership. If your country, industry or exclusively your company does well then you are bound to make profits. With ownership comes consequences as well like if your company isnt doing well then you would suffer and loose value. Remember this core principle rest of finance and how to analyze shares comes later. Some terms we will look at later editions are Price by earning ratio, leverage ratio, etc.
Bond: Its capital raised by company or govt and in return they agree to pay you annual ( or could be semi-annual) coupon along with repayment of total capital (yeah just lik Loans, but these are tradeable). Yield is the total return expected from the bond. Its calculated incorporating annual coupon and capital repayment at the end.. More such details later
Equities are the more riskier assets and thus have higher returns but can also result in higher losses. Bonds are less risky assets and thus offer less returns. You would be wondering whats the risk in bond. The risk is if the company or govt whose bond you have bought fails to pay you coupon or capital repayment. So you have rating agencies which rate these corporates and govt sovereign rating to give you an idea as to what is the probability that they will repay.
Now lets put some practical case and see how various assets react to it. Today, when central bank cut rates (repo rate or refi rate) they are basically cutting the rate at which they lend money to banks (commercial banks). So in real life if you get loans at lesser rate you would be encouraged to borrow money, similarly is this case commercial banks would borrow more from central bank and thus infusing more money into the markets
Banks then, ideally should, lend out this money to customers and corporates at higher than repo rate and make money. So this leads to more loans, more business projects, more growth, more jobs and more purchasing power.
Now the simple theory is that if you know well ahead that RBI will cut rates then you can go and buy risk assets like equities becoz this inflow of new cash in the system would spur the businesess and help profitability
Why does RBI cut rates? In order to spur growth. The fear is with rate cut and money infusion into the system its likely to increase inflation and which is bad for economy. So any central bank has to watch mix factors like inflation, growth and unemployment to come to a decision to cut or not.
So can RBI hike rates? Yes. It does that to remove money floating in the system to reduce inflation.
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