Understanding Financial Instruments and Investments
Risk Level:
- Blue Chip: High-yield, large-cap.
- Chicharro: Small or medium-sized, high-risk company.
- Cyclical: Benefits tied to economic activity.
Stock Market Admission and Operations
The admission of shares to trading is the responsibility of the governing bodies of the stock exchange. Companies must be S.A. (public limited companies) and have a minimum capital of €1,202,024.21. They need a minimum number of shareholders (100) who hold less than 25% of the social capital. Companies should have shown profits for the 2 years prior, or 3 years prior, or non-consecutive 5 years.
Profitability:
- Dividends (gross, net, to act cta, complementary).
- Difference.
- Trading stock splits.
Capital Reduction
Capital reduction occurs through a decrease in the nominal value of shares and the redemption of shares (the purchase by partners).
Public Offering of Share Acquisition (OPA)
A public offering of shares acquisition (OPA) is an operation in which a natural or legal person offers to buy shares of a company from its shareholders, almost always at a price higher than the market price, in order to have significant participation in the company.
Mutual Funds
Mutual funds are IICs (collective investment institutions) configured as separate assets without legal personality, belonging to various investors. The constitution and monitoring of the funds are the responsibility of the CNMV (National Securities Market Commission).
Types of IICs
- Financial IICs (if they aim for investments or financial asset management).
- Non-financial IICs (if they operate on other assets).
Elements of an Investment Fund
Participant: Natural or legal persons who deposit their savings in the fund. They are co-owners of the assets, with a percentage depending on their input. The number of units of a mutual fund must not be less than 100.
Duties:
- Refund and transfer of shares.
- Obtain complete information.
- Accountability for non-compliance.
- Separation rights when changes occur.
Participation is the part into which the fund is divided. Investment funds have no legal personality; rights are only to participate in investment results. The net asset value or share price = (Total Assets) / (Number of Participants). The purpose of the fund managers is to get the most return for its participants.
- Collective Investment Management Company: These are S.A. whose social mission is the management of IICs.
- Trustee: Entities entrusted with the deposit of valuables.
Profitability: The fixed or variable amount expected from the amount invested.
Risk
Risk is the dispersion of the different values of the substance with the average yield obtained.
Classification of Investment Funds
By assets involved:
- Money: Fixed income assets at short term, minimal risk, and low profitability.
- Fixed-income funds: Investments in public or private debt.
- Mixed-income funds.
- Variable-income funds.
- Investment funds in non-financial securities: Investing in real estate.
- Benefit-sharing: Accumulation or delivery.
By liquidity:
- Open.
- Closed.
By origin and destination of investment:
- International.
- National.
- Currency.
Other classifications:
- Guaranteed funds.
- Fixed-income funds.
- Funds of funds.
- Exchange-traded funds (mix of funds and shares).
- Hedge funds.
- Fund of hedge funds.
Derivatives
Derivatives are financial instruments whose value is based on the price of another asset, called the underlying asset.
Futures
Futures: Acquiring a future means incurring a liability to buy or sell an underlying asset at a predetermined price and date. It obliges both parties, requiring the seller to pay and receive money on the scheduled date. What is really negotiated is the change in prices, so almost anything can be contracted.
Classification by underlying asset:
- On physical assets (agricultural products).
- Financial Institutions (stocks, bonds).
It trades on an organized market, supervised by the CNMV and the Ministry of Economy and Finance. If the future is not traded in an organized market, it is called a FORWARD.
Options
Options are traded on the organized market MEFF. These are contracts that give the holder a right to buy (call) or sell (put) property or assets (underlying asset) at a predetermined price at a future date or deadline, in exchange for paying a premium.
The owner can choose to:
- Exercise the option, buying or selling the asset at the set price.
- Let it expire, reaching maturity without buying or selling, losing the premium payment.
- Sell it before maturity.
Types of Options:
- Call option: Gives the holder the option to buy an underlying asset on a specific date and at a predetermined price. The seller is obligated to sell.
- Put option: Gives the holder the right to sell an underlying asset on a specific date at a specified price. The buyer has no obligation to buy.