Ongoing Trends of Investment
The contemporary investment environment consists of three major aspects: securities, security markets, and financial institutions. However, some changes have been observed in these aspects in recent periods because of four major ongoing trends in the investment environment. Those ongoing trends are globalization, securitization, financial engineering, and information and computer networks.
There is a broad choice of securities available to investors. As a result, they do not limit themselves to investment in domestic securities. The increasing use of information and communication technology and the deregulation in the financial environment of the global economy have globalized securities investment in recent years. Consequently, investors have opportunities to participate in foreign security investment. They can particularly be involved in foreign security investment in four ways: they can purchase foreign securities by investing in domestically traded securities that represent claims to the foreign securities; they can purchase foreign securities offered in domestic currencies; they can buy units of mutual funds having international investments; and they can buy derivative securities that offer returns depending on the price change in foreign security markets.
Also Read: The Major Players in The Financial Markets
Securitization of mortgages has been much more popular in developed capital markets these days. It has enabled the trading of mortgages equivalent to other securities. Securitization of mortgageable assets has facilitated particularly homebuyers who otherwise would have to depend on local credit conditions and be influenced by the monopoly power of local banks. Securitization also expands the list of options for investors. In the past, it was impossible for investors to invest in mortgages directly. But, now they can purchase mortgage pass-through securities. Today, the majority of honæ mortgages are pooled into mortgage-backed securities. Other loans that have been securitized are automobile loans, student loans, credit card loans, and self-employment loans.
Financial engineering refers to the creation of new securities. It can be done in two ways: unbundling and bundling. Unbundling refers to breaking up one security to create several new securities. On the other hand, bundling refers to combining more than one security to create a single security. Financial engineering allows one to design new securities with conventional adaptation of different risk attributes. For example, hybrid security that carries the features of preferred stock can be used with various call-and-pull option contracts to create new securities. Often, creating a security that appears to be attractive requires the unbundling of an asset. Financial engineers view securities as bundles of possible risky cash flows that may be sliced up and rearranged according to the needs of traders in the security markets.
INFORMATION AND COMPUTER NETWORKS:
Transformation of the economy, including the financial sector, has been possible at a rapid pace due to the advent of information and computer networks. Advancement has taken place in the financial sector in the i fields of online trading, online information flow, and automated trading. The investors today are not required to visit brokers. Instead, online trading connects.
them directly to a brokerage firm. Brokerage firms are operating online orders that can process trades more rapidly and cheaply resulting in lower execution costs. The use of the internet has also facilitated adequate information flow to the investors cheaply. Investors can obtain more information and can be equipped with investment tools and even analyst reports online. Direct trading among investors has been possible through electronic communication networks that allow them to post buy or sell orders and to match their orders automatically with others. This has eliminated the cost of intermediaries, such as securities dealers.
What is Globalization?
A trend of Investment in foreign Securities.
What is Securitization?
A Process of pooling back assets into mortgage-backed securities.
What is Financial Engineering?
A Process of Creating New Securities.