Rewarding read

The guide from the stable of The Economist cuts through the maze of investment jargon and cures a novice’s finance phobia, says Sharadh Manian.

March is distressing for school students and conservative investors alike. Students wish they could have studied throughout the year to save on burning the midnight oil; conservative investors for having missed several opportunities to invest.


PAGES: 250
THE ECONOMIST (in association with PROFILE BOOKS)

Majority of investors in India still do not see beyond NSCs, PPF and insurance policies. “It’s risky and I don’t know how they work” is the excuse they use to not invest in equities or derivatives.

Guide to Financial Markets is a cure for investors suffering from such financial disquietude.


 What the book offers

Concise compendium for everyday reference
Primer to invest in equity, derivatives and commodities markets

Understand correlation between inflation, currency appreciation and your investment

Investment guides in general evoke little interest in lay readers. Because of their pedantic approach the appeal of guides is usually limited to academia. This is where the guide marks a departure. It facilitates topicwise reading with specific chapters devoted to different sectors of the market. The reader can choose to go straight to the chapters of interest or relevant to him for personal investing.
Equity investment is perceived to be high risk and, at least partially, that perception stems from inadequacy of knowledge on stocks and companies. The chapter on equities traces the origin and explains the functioning of equity markets. Concepts like initial public offering, secondary offering, stock splits are explained in detail and through examples.

Author Marc Levinson, former finance and economic editor with The Economist, delves into methods of evaluating equities through parameters like PE ratio and Beta.


Historical references have been used liberally to explain complex topics. Consider the book’s explantion of futures trading. Levinson takes the reader to 16th century Renaissance Holland. Fish dealers in that country were buying and selling herrings that had yet to be caught.

Futures trade began in commodities to manage the risk associated with getting a fair value for the commodity, like a soyabean crop, at a later date. A futures contract represents a deal between two investors who may be unknown to each other and unaware of one another’s motives. It is a derivative, because it’s price and terms are derived from an underlying asset—commodities or financial instruments, often known as the underlying. Contracts are unlimited unlike assets which are fixed. For instance, there may be a limit to the amount of copper mined in a given year, but there is no limit to the number of copper futures that can be traded.

Financial Markets also covers bonds, foreign exchange markets, securities, and money markets. Foreign exchange markets is the very first chapter—after the introduction. The reason, as the book explains, is because in today’s globalised world foreign exchange markets are the largest financial market with an average daily turnover of $1.9 trillion. The chapter explains the global dominance of the US dollar (accounts for 44% of total foreign exchange trading) and its implications.

The book is laced with anecdotes. It mentions how the Argentinian economy collapsed when peso was pegged against the dollar under a fixed exchange currency rate. Businessmen with income in pesos defaulted on contracts in dollars as the currency tumbled.

Patience is the key in reading guides, as it is to investing. Reading this book may give you particularly good returns as its Indian reprint is onetenth of the UK price. Use it as a companion while you watch your children toil hard to score well in exams.