Final Exam

Group F2
Research one Investing Vs. Gambling
Research Two Basel I, II, III, & IV
Research Three Capital Market (Stocks & Bonds)

Presented by : Ahmed Mohamed Naguib

ID # 20121441

Presented to :DR.Ashraf Helmy

 Research One

Introduction
A sure route to making the most out of your money and creating wealth is
to invest in the stock market. However, if you are new to the world of
investing, identifying safe investments and figuring out where to invest
money can seem like a scary task! In fact, to a beginner, it may seem as if
investing is very much like gambling in a casino.

But both gambling and investing have choices and risks while having the
potential to multiply your money manifold. But if you are a beginner, you
might find these terms intimidating and end up confusing one for the
other! So, you must understand them and make an informed decision as
to where to invest.

The first and foremost question that we all have is: are they the same?
What Is Investing?

Investing is the act of parking your money in different types of

assets, such as stocks, real estate, business ventures, etc., with the
expectation of generating an income or profit.

The different kinds of investment depend on the duration of

investment and risk factors. As an investor, you can choose
investment options that allow for short-term, medium-term, or
long-term gains, depending on your affinity, and risk appetite.
Before investing your money in an asset or activity, it is a general
practice to learn as much as possible about the asset and estimate
potential returns. Investing for beginners is made easier with readily
available beginners’ guides from credible sources. But, if you don’t
have the patience to learn everything on your own, you can always
opt for ready-made portfolios.
What Is Gambling?

With gambling, there’s no scope of finding helpful guides or ready-

made portfolios. Gambling is the act of betting your money on some
kind of possibility or event. Since the event’s outcome is subject to
chance and is usually uncertain, gambling becomes less about
learned moves or skill application and more about odds.
Also, the risk quotient increases because once the event is over,
winning or losing is absolute and finalized once the event is over.
There are no partial losses or wins!

That’s why professional gamblers learn risk management to

decide the amount of capital to gamble with at every stage.
Gamblers also try to study their opponents or the game before
putting in their bets to better understand the odds of a favorable
return.

But beyond that, gambling and investing are very different.

Differences Between Investing and Gambling

1. Time Horizon
A vast difference between investing and gambling is the time horizon. Gambling is a
limited-period, event-bound activity. The moment the event is over and its outcome is
defined, the act of gambling is concluded. Sometimes, the whole gamble can end within
minutes!

By comparison, investments have a much longer time horizon. So you have the option
to stay invested in a particular stock or asset for years or even decades. Of course,
short-term investments and intra-day trades are also possible. Still, if you follow
the trading rules, your investment opportunity will rarely be limited by a single event.
1. Risk Minimisation
With both investing and gambling, you are supposed to look out for profit maximisation
and risk minimisation. While you have the reins to control with investing, it’s not the
case with gambling. You can always define a stop-loss strategy and sell off an
investment that is not giving you expected returns.

On the other hand, when you gamble in a casino and bet against the house, your
expected returns can be anywhere between -0.5% to -5%. Technically, the house always
has an advantage, and the more you play, the more you are likely to lose. And your
losses are absolute, which you can’t cut even by quitting midway through a gamble!

3. Need for Skill

Even though the outcome depends largely on chance, professional gambling requires
experience and skill. To increase your chances of winning, you have to study your
opponents and the odds long before making a bet.
Investing doesn’t depend on any particular skill set. Anyone can learn to be a profitable
investor. Successful investment in the stock market requires knowledge and study of
the companies and financial instruments.

4. Availability of information

Another thing that sets investing apart from gambling is the availability of information
to make an informed decision. All the information that an investor seeks about a stock
or asset is available in the public domain. You can find out about a stock’s historical
performance and profitability projections by going through the company’s annual report.
But information is rare to come by when it comes to gambling. Even though you can
know the pedigree of the horse you are betting on or the opponents you are playing
poker with, the credibility and reliability of the information remain questionable.

5. Diversification
When investing, diversification is an accepted strategy to reduce risk and maximise
returns. You can invest in different asset classes and diverse opportunities within the
same asset category at the same time. If one investment doesn’t perform well, the
others can cover its losses.
But when gambling, diversification doesn’t protect you in any way. If you spread your
risk capital across multiple gambles, you reduce your reward potential rather than
mitigating your risk.
So, in essence, investing is very different from gambling.
 Research Two
BASEL I, II, III, & IV

Basel I

Basel I, also known as the Basel Capital Accord, was formed in 1988. It was
created in response to the growing number of international banks and the
increasing integration and interdependence of financial markets.
Regulators in several countries were concerned that international banks
were not carrying enough cash reserves. Since international financial
markets were deeply integrated at that time, the failure of one large bank
could cause a crisis in multiple countries.

Basel I was enforced by law in G10 countries in 1992, but more than 100
countries implemented the regulations with minor customizations. The
regulations aimed to improve the stability of the financial system by
setting minimum reserve requirements for international banks.

It also provided a framework for managing credit risk through the risk-
weighting of different assets. According to Basel I, assets were classified
into four categories based on risk weights:
 • 0% for risk-free assets (cash, treasury bonds)
• 20% for loans to other banks or securities with the highest credit
rating
• 50% for residential mortgages
• 100% for corporate debt

Banks with a significant international presence were required to hold 8%

of their risk-weighted assets as cash reserves. International banks were
guided to allocate capital to lower-risk investments. Banks were also given
incentives for investing in sovereign debt and residential mortgages in
preference to corporate debt.

Basel II

Basel II, an extension of Basel I, was introduced in 2004. Basel II included

new regulatory additions and was centered around improving three key
issues – minimum capital requirements, supervisory mechanisms and
transparency, and market discipline.

Basel II created a more comprehensive risk management framework. It

did so by creating standardized measures for credit, operational, and
market risk. It was mandatory for banks to use these measures to
determine their minimum capital requirements.

A key limitation of Basel I was that the minimum capital requirements

were determined by looking at credit risk only. It provided a partial risk
management system, as both operational and market risks were ignored.

Basel II created standardized measures for measuring operational risk. It

also focused on market values, instead of book values, when looking at
credit exposure. Additionally, it strengthened supervisory mechanisms
and market transparency by developing disclosure requirements to
oversee regulations. Finally, it ensured that market participants obtained
better access to information.
Basel III

The Global Financial Crisis of 2008 exposed the weaknesses of the

international financial system and led to the creation of Basel III. The Basel
III regulations were created in November 2010 after the financial crisis;
however, they are yet to be implemented. Their implementation’s
constantly been delayed in recent years and is expected to occur in
January 2022.

Basel III identified the key reasons that caused the financial crisis. They
include poor corporate governance and liquidity management, over-
levered capital structures due to lack of regulatory restrictions, and
misaligned incentives in Basel I and II.

Basel III strengthened the minimum capital requirements outlined in Basel

I and II. In addition, it introduced various capital, leverage, and liquidity
ratio requirements. According to regulations in Basel III, banks were
required to maintain the following financial ratios:
Also, Basel III included new capital reserve requirements and
countercyclical measures to increase reserves in periods of credit
expansion and to relax requirements during periods of reduced lending.
Under the new guideline, banks were categorized into different groups
based on their size and overall importance to the economy. Larger banks
were subjected to higher reserve requirements due to their greater
importance to the economy.

The Basel Accords are extremely important for the functioning of

international financial markets. They can never be constant and need to
continuously be updated based on present market conditions and lessons
learned from the past.
Summary: Basel I, II, and III:
- The differences between the Basel I, II, and III agreements are mainly due to changes in the
objectives established to achieve them. Although very different in the standards and
requirements presented, all 3 roam the bank's risk management by rapidly changing
international business conditions. With the development of globalization, banks are linked
everywhere in the world. If banks take unforeseen risks unresolved situations may arise due
to a large amount of money involved and the harmful perception could be quickly spread
among many nations. The financial crisis that began in 2008 that caused huge economic
losses is a timely example of this.

Basel IV:
- It was originally intended to start on January 1, 2022, with the start of the output until 1
January 2027, March 202, in response to the epidemic, the BCB's, defined a timeline for the
killing of Basel IV by 12 months, 1 January 2022 to 1st January 2023.
How to comply with Basel IV:
- Basel IV's regulatory framework that helps banks meet more than compliance standards,
banks are urged to consider risks in a prudent and critical manner that compels them to
rethink their strategies and business models, allowing them to promote growth.
Basel Committee on Banking (BCBS):
- BCBS has set January 1, 2023, as the international deadline for Basel IV. However, local
Jurisderations
define the actual application deadline by way of categories. A notable example is
the European Commission, which has set a date for January 1, 2025.
Purpose of Basel IV:
- The purpose of Basel IV is to balance the platform and harmonize the way banks calculate
risk, not to increase banking rates at the international level.
 Research Three
Capital Market
(Stocks & Bonds)

What are capital market ?

Capital markets are venues where savings and investments are channeled between the suppliers
who have capital and those who are in need of capital. The entities that have capital include retail
and institutional investors while those who seek capital are businesses, governments, and people.
Capital markets seek to improve transactional efficiencies. These markets bring those who hold
capital and those seeking capital together and provide a place where entities can exchange
securities.

What are capital market types ?

1. Primary Markets: The primary market is the part of the capital market that deals with the
issuance and sale of securities to investors directly by the issuer. An investor buys securities
that were never traded before. Primary markets create long term instruments through which
corporate entities raise funds from the capital market.
2. Secondary Markets: The secondary market, also called the aftermarket and follow on public
offering is the financial market in which previously issued financial instruments such as
stock and bonds are bought and sold
Examples of capital markets are given below.

1. Stock Market: A stock market, equity market or share market is the aggregation of buyers
and sellers of stocks, which represent ownership claims on businesses
2. Bond Market: The bond market is a financial market where participants can issue new debt,
known as the primary market, or buy and sell debt securities
3. Currency and Foreign Exchange Markets: The foreign exchange market is a global
decentralized or over-the-counter market for the trading of currencies. This market
determines foreign exchange rates for every currency.

Do we need capital Market ?

Capital market is a cog in the wheel of the modern economy since capital markets move money
from the entities that have money to the entities that require money for productive use.

Capital market future

In capital markets, there are 2 entities, one who supplies capital and the other entity is the one who
needs capital.
Usually, entities with surplus capital in the capital markets are retail and institutional investors.
Entities seeking capital are people, governments and businesses.
Some common examples of suppliers of capital are

1. Pension funds: A pension fund, also known as a superannuation fund in some countries, is
any plan, fund, or scheme which provides retirement income
2. Life insurance companies: Life insurance companies offer contracts between an insurance
policyholder and an insurer or assurer, where the insurer promises to pay a designated
beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an
 insured person (often the policyholder). The Insurance Development and Regulatory
Authority of India manage everything related to insurance in India.
3. Non-financial companies: Non-financial companies are those businesses which don’t accept
deposits or make loans. Examples of non-financial companies are Healthcare, Technology,
Industrial, sector related companies.
4. Charitable foundations: A charitable foundation is a category of a nonprofit organization that
will typically provide funding and support for other charitable organizations through grants.

Some common examples of users of capital

1. People looking to purchase vehicles, homes

2. Governments
3. Non-financial companies.

Capital market – structure

Capital markets structure is made of primary and secondary markets.

Primary markets consist of companies that issue securities and investors who purchase those
securities directly from the issuing company. These securities are called Initial Public Offerings
(IPO). Whenever a company goes public it sells its stocks and bonds to large scales institutional
investors like hedge funds and mutual funds.
Secondary markets are places where the trade of already issued certificates between investors are
overseen by regulatory bodies. Issuing companies play no part in the secondary market. Examples
of secondary markets are New York Stock Exchange (NYSE), London Stock Exchange (LSE), Bombay
Stock Exchange (BSE).
To know more about the Major Stock Exchanges in India, visit the linked article.
 Capital Market Functions:

1. Capital markets bring together those requiring capital and those having excess capital.
2. Capital markets aim to achieve better efficiency in transactions.
3. It helps in economic growth
4. It ensures there is the continuous availability of funds
5. By ensuring the movement and productive utilisation of capital, it helps in boosting the
national income.
6. Minimizes transaction costs and information costs.
7. Makes trading of securities easier for companies and investors.
8. It offers insurance against market risk.

Capital Market Advantage:

1. Money moves between people who need capital and who have the capital.
2. There is more efficiency in the transactions.
3. Securities like shares help in earning dividend income.
4. With the passage of time, the growth in value of investments is high.
5. The interest rates provided by securities like Bonds are higher than interest rates given by
banks.
6. Can avail tax benefits by investing in stock markets.
7. Scope for a wide range of investments.
8. Securities of capital markets can be used as collateral for getting loans from banks.