01.UNDERSTANDING MARKET
Imagine a Cake Bakery with
Staring
Kitchen = Primary Market
Counter Sales = Secondary Market
Cafeteria lounge = Futures Market
What happens in Cake Bakery Kitchen? Baking cake off course
Here they would acquire ingredients to make a cake these would be
- Sugar
- Butter
- Flour
- Eggs
- Milk
- Baking powder
Kitchen can be compared to Primary market, where Initial Public Offerings are done by company. If you are imagining each company as a new cake to be made, for each cake different ingredients has to be bought whenever a cake is made. So in reality our ingredients be like
- Sugar - High Net-worth Investors
- Butter -Investment Banks
- Flour- Domestic Institutional Investors
- Eggs-Retail Investors
- Milk -Foreign Institutional Investors
- Baking powder- Promoters
As like cake, combination of different companies can be made with different ratio of participation from different segment. There could be an infinite number of combinations from these; hence you can make any type of cake as long as you will be able to find ingredients for the same.
Now you have your cake baked and ready
Now you can place it on the glass shelves on counters, so that others can come and see the cake and if they like it, they could buy the same. In general here in this bakery only cake pieces are sold. You can later call them ownership shares in cake.
So this cake is ready for display, unlike regular price tag, this cake pieces owners would be the people from Kitchen, each ingredient would be carrying his particular share in the pieces of cakes.
Price of Cake would be
The price would be determined by an agreement arrived by what the ingredient holders ask and what counter shop customers are willing to pay. This would be a regular auction, when they meet on price both agree a piece of cake is sold. Now the person who bought the cake is the owner of that particular piece, he can keep it in his plate or he can sell them to others if others are willing to buy.
Counter Sales
Good cakes would be valued more
Some cakes are big 1 Kg or some are 10 Kg, different types are available
Some cakes are chocolate, some are vanilla, some are exotics
So this would be your secondary market ,which everyone says as stock market in general term ,when people say that you are going to invest in shares, it in a general sense means to be a counter customer . It’s unlikely someone who new to all this gets a chance to kitchen, even though it’s permitted.
Take Away
Piece of cake = Shares /Stocks of company
Price of it= Share Price
Price*Total Number of Pieces = Market Value of Company
So far I hope you understood
What is Primary Market?
What is Secondary Market?
Now let’s move into Cafeteria lounge
They are the people who speculate whether a cake would rotten or not.
People are different here
they would offer you a specific menu
- you can buy this menu
- you can hold this menu
- you can sell this menu
Price of this menu you hold would be based on the cakes it has in menu
But remember there is no actual cake
So all day they be selling this menu back and forth based on the cakes in the list
Then there are others Menus which would be a menu based on the menu said above it too would be bought and sold as people in cafeteria agree.
Now imagine cafeteria as Futures & Options Market
First degree menu is - Futures Contracts
Second Degree menu is - Option Contracts
Take Away
Futures & Options Market Trades contracts
Based on shares, in the scenario we build cake pieces at counter sales
There are no cakes in cafeteria that means nobody brings the shares to futures and options, these are promises.
General Conditions
To enter this Bakery house you need a trading account with a broker.
From kitchen they can kick you out as they like it
To enter cafeteria you need special permission
All this would only portray a general infrastructure of the market; in upcoming contents we would discuss details into the operations of these specific financial instruments and their uses and purposes.
