Many people are interested in investing, but before doing investments, it is better to understand some basic concepts of the financial world.

Investment is the act of allocating resources, usually money, in order to generate income or profit. It can take many forms, such as stocks, bonds, real estate, or mutual funds. In another word, investment is the use of assets to earn income or profit.

Investment forms

Stocks, bonds, real estate, and mutual funds are some of the most common forms of investment. Each has its own characteristics, risks, and potential returns.

Stocks

Stocks represent ownership in a company. When you buy a stock, you become a shareholder and have a claim on the company’s assets and earnings. Stocks can provide high returns, but they also come with higher risks.

Profit from stocks

When you invest in stocks, you are essentially buying a piece of a company. The value of your investment can increase or decrease based on the company’s performance and market conditions. There are two main ways to get profit from stocks:

1. capital gains: selling the stock for more than you paid.
2. dividends: payments made by the company to its shareholders.

Market

A market for buying and selling stocks is called the stock exchange. It is a platform where investors can trade shares of publicly listed companies.

A brokerage firms acts as an intermediary between buyers and sellers, facilitating the transaction. Investors can buy and sell stocks through brokerage accounts, which can be traditional or online. This is often the case for individual investors like us who want to trade stocks.

Bonds

Bonds are debt securities (IOU) issued by governments or corporations. When you buy a bond, you are lending money to the issuer in exchange for periodic interest payments and the return of the principal at maturity. Bonds are generally considered safer than stocks but offer lower returns. There are three components of bonds:

1. Coupon rate: The interest rate the bond pays.
2. Maturity date: The date when the bond will mature and the issuer will pay back the face value.
3. Par value amount: The face value of the bond, which is the amount the issuer will pay back at maturity.

Financial Intermediaries

Financial intermediaries are institutions that help move funds from savers to borrowers. They are:

1. Banks: Accept deposits and make loans.
2. Mutual funds: Pool money from investors to buy a diversified portfolio of stocks and bonds (finantial assets).
3. hedge funds: Similar to mutual funds but typically have fewer regulations and invest in a wider range of assets, including derivatives and alternative investments. They are often private investment organizations that employs risky strategies that can often make hugo profits for investors.
4. Pension funds: Manage retirement savings and invest in various assets.

Security

Security is a financial instrument that represents an ownership position in an asset, a creditor relationship with a government body or corporation, or rights to ownership as represented by an option. Securities can be classified into three main categories:

1. equity securities: stocks
2. debt securities: bonds
3. Derivative Securities: These are complex financial instruments whose value is derived from an underlying asset or index, such as options and futures. Derivatives are often used for hedging or speculative purposes.

Interst

There are two types of interest:

1. Simple interest: Calculated only on the principal amount. $$ A = P(1 + rt) $$ where:

• A is the total amount after interest
• P is the principal amount
• r is the interest rate
• t is the time in years

1. Compound interest: Calculated on the principal and accumulated interest, leading to exponential growth over time. $$ A = P(1 + r/n)^{nt} $$ Where:

• A is the total amount after interest
• P is the principal amount
• r is the interest rate
• n is the number of times interest is applied per time period
• t is the time in years We have $$ (1+n)^t \approx 1 + nt $$ if n is small, so we can approximate the compound interest with the simple interest formula.

Financial instruments

Finnancial instruments are assests that can be traded. Some exmaples of financial instruments include stock shares (equities), exchange-traded funds (ETFs), bonds, certificates of deposit (CDs), mutual funds, loans, and derivatives contracts like options and futures. There are three kinds of financial instruments that I will discuss here:

You may wonder what is a share class. Share Class is a subdivision of shares within the same fund or company, where each class has distinct rights, privileges, fees, or characteristics but represents ownership in the same underlying entity.

1. Mutual Fund Share Class: Different share classes of the same mutual fund may have different fees or minimum investment requirements.
2. Stock Share Class: Companies may issue different classes of stock (e.g., Class A and Class B shares) with varying voting rights or dividend policies. For example, Google has two classes of shares: GOOGL (Class A) and GOOG (Class C), where Class A shares have voting rights, while Class C shares do not.
3. ETF Share Class: ETFs can also have different share classes, such as institutional and retail shares, which may have different expense ratios or minimum investment amounts. But we often call them just different ETFs.

Description of the financial instruments

There are generally two types of data for a financial instrument. The metadata and the time series data. The metadata is the information about the financial instrument, such as its name, ticker symbol, and other characteristics. The time series data is the historical data of the financial instrument, such as its daily price, NAVs, and other metrics over time.

Likes take the example of a mutual fund. I company can have several mutual funds, and each mutual fund can have several share classes.

Metadata

Fund

This is the fund that issues the share classes. It is a collection of assets that are managed by a financial institution.

• Name: The name of the fund, such as “Vanguard 500 Index Fund”.

• Entity ID: A identifier for the institution or fund that issue the share classes.

• UCITS compliance (Undertakings for Collective Investment in Transferable Securities): Indicates whether the fund is compliant with UCITS regulations, which are European Union regulations that provide a harmonized framework for investment funds. For example, a fund that is UCITS compliant can be marketed to retail investors in the EU.

• Domicile: The country where the fund is registered or domiciled, such as “United States of America” or “Ireland”. This can affect the fund’s tax treatment and regulatory requirements.

• Etp Type: The type of exchange-traded product (ETP) that the share class represents, such as an exchange-traded fund (ETF), exchange-traded note (ETN), or exchange-traded commodity (ETC). For example, SPY is an ETF, while GLD is an ETN.

• Asset Class: The asset class of the share class, such as alternatives (Anything that doesn’t fit into traditional categories, e.g., private equity, hedge funds, real estate, art, venture capital, crypto.), commodities (Physical goods like gold, oil, agricultural products. Often used to hedge against inflation.), currency (Investing in foreign exchange (buying/selling currencies). Driven by interest rates, geopolitics, etc.), equity (Ownership in a company. You benefit from its growth through capital gains and sometimes dividends.), fixed income (Lending money to a company or government in exchange for regular interest payments.). For example, SPY is an equity share class, while TLT is a fixed income share class.

• Asset Class Category: A finer classification of the asset class, such as US equity (Stocks of companies based in the United States), international equity (Stocks of companies outside the United States), emerging markets equity (Stocks of companies in developing countries). Several asset class categories can have the same asset class.

• Focus: This is finer than asset class category. This refers to the primary investment objective or area of interest of the fund. The focus could be on specific sectors (e.g., technology or healthcare), geographic regions (e.g., emerging markets or Europe), or thematic investments (e.g., sustainability or innovation), suger industry, etc.

• Niche: A niche is a very narrow or specialized subclass within a category or focus. A niche fund may focus on a specific industry, asset class, or investment strategy that is not widely covered by other funds. For example, a fund that invests exclusively in renewable energy companies would be considered a niche fund.

• Segement: A segment is sometimes defined as a tuple of (asset class, asset class category, focus, and niche). It represents a specific area of investment within the broader financial market. For example, a fund that invests in US large-cap technology stocks would have a segment defined by its asset class (equity), asset class category (US equity), focus (large-cap), and niche (AI driven technology). Normally for each segment, there is a fund in the segment and we can use it as a benchmark (ther is often an instrument index that a segment is mapped to) for the segment. A benchmark is a standard or point of reference against which the performance of a fund can be measured. It is often an index that represents the performance of a specific market segment or asset class. For example, the S&P 500 Index is a benchmark for US large-cap equity funds.

• Selection Criteria: This describes the methodology or criteria the fund employs to select its investments. It may include factors such as financial performance metrics, sustainability criteria, growth potential, or any set of parameters that guide the fund’s investment choices.

• Investment Strategy: There are strategies like Bullet Maturity (A Bullet Maturity strategy involves investing in bonds that all mature around the same time.), Bullet Maturity Fundamental, Growth Strategy (Focuses on companies with high earnings growth potential, Innovative products or industries), Value Strategy (Focuses on undervalued companies with strong fundamentals, Often uses metrics like P/E ratio, P/B ratio),

• Strategy Group: strategy group is a higher-level categorization used to group investment strategies by their style, structure, or behavior. There are strategy groups like, Vanilla (simplest, most traditional investment approaches.Often passive or rule-based. Follows broad market indices or basic asset allocation rules.), Idiosyncratic (unique, specialized strategies that may not fit into traditional categories. Often focused on specific themes, sectors, or niches. Can be more complex and require deeper analysis.), Strategic ( “Strategic” implies long-term thematic or asset allocation strategies — often implemented with some rules or constraints.), Active (strategies involve human discretion and frequent decision-making to outperform a benchmark.)

Share Class

This is actually what we buy and sell in the market. A fund can have multiple share classes, each with different characteristics. like fees, minimum investment amounts, intrest rates, minimum holding periods, and other attributes. As the name suggests, a way to classify the shares of a fund or a company.

• Name: The name of the share class, such as “Vanguard Long-Term Bond Index Fund - Admiral Shares - United States of America”.

• Ticker: The unique identifier for the share class, such as “VFIAX” for Vanguard 500 Index Fund Admiral Shares.

• CUSIP: The Committee on Uniform Securities Identification Procedures number, a unique identifier for the share class in the United States and Canada.

• SEDOL: The Stock Exchange Daily Official List number, a unique identifier for the share class in the United Kingdom.

• ISIN: The International Securities Identification Number, a unique identifier for the share class.

• Security PermID: The unique identifier for the share class in the PermID system (often an internal identifier).

• Actively Managed: Indicates whether the share class is actively managed or passively managed. Actively managed share classes have a fund manager who makes investment decisions, while passively managed share classes track an index. For example, FXAIX (ticker) is a passively managed share class of the Vanguard 500 Index Fund. FCNTX (ticker) is managed with the goal of outperforming benchmarks through strategic investment decisions made by fund managers.

• Leveraged or inverse: Indicates whether the share class is leveraged or inverse. Leveraged share classes use financial derivatives and debt to amplify returns, while inverse share classes aim to deliver the opposite performance of an index. For example, TQQQ (ticker) is a leveraged share class that aims to deliver three times the daily performance of the Nasdaq-100 Index, while SQQQ (ticker) is an inverse share class that aims to deliver three times the opposite daily performance of the Nasdaq-100 Index.

• Leverage Ratio: The ratio of the share class’s leverage, which indicates how much leverage is used in the share class. For example, a leverage ratio of 2 means that the share class uses two times leverage, while a leverage ratio of 3 means that the share class uses three times leverage.

• Primary Advisor: The primary advisor of the share class, which is the financial institution that manages the share class. For example, Vanguard is the primary advisor of the Vanguard 500 Index Fund Admiral Shares (VFIAX).

• Index Provider: The provider of the index that the share class tracks, if applicable. For example, the Vanguard 500 Index Fund Admiral Shares (VFIAX) tracks the S&P 500 Index, which is provided by S&P Dow Jones Indices.

• Exchange: The stock exchange where the share class is traded, such as the New York Stock Exchange (NYSE) or the Nasdaq Stock Market.

• Listing Currency: The currency in which the share class is listed, such as USD for US dollars or EUR for euros. SPY-US, SPY-EUR, and SPY-GBP are examples of share classes listed in different currencies.

• Currency Hedged: Indicates whether the share class is currency hedged, meaning that it has measures in place to mitigate the impact of currency fluctuations on returns. For example, SPY-HEDGED is a share class that is currency hedged against US dollars, while SPY-HEDGED-FROM-EUR is a share class that is currency hedged from euros.

• Dividend Treatment: The treatment of dividends for the share class, such as accumulating (reinvesting dividends) or distributing (paying out dividends to shareholders). For example, VTI is an accumulating share class, while VOO is a distributing share class.

Time Series Data

Time series data is the historical data of the financial instrument, such as its daily price, NAVs, and other metrics over time. It is often used to analyze the performance of the financial instrument over time and to make investment decisions. There can be fund level time series data and share class level time series data. The fund level time series data is the aggregated data of all the share classes of the fund, while the share class level time series data is the data of a specific share class. So here we talk about the share class level time series data.

Time Series Data

The time series data is often the time series data that is collected and used for analysis. It is the most important data that is used to analyze the performance of the financial instrument over time. The core time series data includes:

• NAV: Net Asset Value, The price per share of the fund.
• AUM: Assets Under Management, The total value of assets managed by the fund.
• SHO: Shares Outstanding, The number of fund shares that investors currently own.
• PRICE: Current value of an asset as determined by the market.
• DIST: Distributing, Fund pays dividends/interest to you in cash.
• FEES: Expense Ratio (automatically deducted daily from the fund’s NAV, 0.07% of the NAV for example), Management Fee (Part of the expense ratio; goes to the fund manager.), Performance Fee (Charged only if the fund exceeds a certain return), Entry/Exit Fee, Trading Fees.
• FLOWS: Represent the net movement of money into or out of a fund over a specific period.
• SEC YIELD: Standardized Yield Measure, a standardized 30-day yield used by U.S. funds to show investors the fund’s expected income return, based on the income it generated over the last 30 days.
• SPLITS: A split occurs when a fund (or stock) divides its shares into more shares, reducing the price per share but not the total value.

Formula Time Series Data

The formula time series data is the data that is derived from the core time series data using some formulas. For example: $$ NAV = \frac{AUM}{SHO} $$

$$ DIST = long_term_capital_gain + short_term_capital_gain + dividend + interest $$

$$ Flows = \text{New Investments} - \text{Redemptions} $$

$$ Flows = (SHO * SF - PREV_SHO) * PREV_NAV $$