What is Underlying Securities? Key Insights You Need to Know

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Underlying securities are a fundamental yet crucial concept in financial markets. Not only are they a popular investment tool, but they also serve as the foundation for the development of many financial products. Let DLMvn guide you through a detailed exploration of underlying securities in this article.

What Are Underlying Securities?

Definition of Underlying Securities

Underlying securities are basic financial assets such as stocks and bonds, issued by companies or government entities. These securities reflect the actual value and performance of the issuing organization.

Key Characteristics of Underlying Securities

• Liquidity: Underlying securities, especially stocks, typically have high liquidity as they are traded daily on major stock exchanges.
• Transparency: The value of underlying securities is clearly determined based on business performance and market factors.
• Diversification: Investors can choose from a wide variety of underlying securities, ranging from stocks to bonds, to suit their investment objectives.

The Role of Underlying Securities in Financial Markets

Why Are Underlying Securities the Foundation of Other Financial Products?

Underlying securities are the basis for derivative products such as futures, options, and ETFs. These products derive their value from underlying securities, allowing investors to benefit from price fluctuations without owning the underlying assets.

For example, ETFs (Exchange-Traded Funds) are designed to track the performance of a group of underlying securities, offering investment opportunities with low costs and high diversification.

How Underlying Securities Reflect Market Health

The price movements of underlying securities are an indicator of economic health and market trends. When the VN-Index (representing Vietnam’s stock market) grows, it often signifies investor confidence and the growth of listed companies.

Factors Affecting the Price of Underlying Securities

1. Macroeconomic Conditions

Economic factors such as interest rates, inflation, and GDP growth have a significant impact on the price of underlying securities.

• Interest Rates: When interest rates decrease, borrowing costs are lower, stimulating business activity and investments, which in turn supports stock price growth.
• Inflation: High inflation can reduce purchasing power, exerting pressure on revenue and profitability for businesses.

2. Company Performance

Quarterly financial reports and indicators such as EPS (Earnings Per Share) or ROE (Return on Equity) form the basis for valuing securities. Companies with strong performance often attract investor interest, driving stock prices higher.

3. Market Sentiment and International Events

Investor sentiment is often influenced by major events such as elections, trade wars, or pandemics. For example, during the COVID-19 pandemic, many stocks in the technology and healthcare sectors experienced significant growth due to sudden surges in demand for these industries.

How to Invest in Underlying Securities

1. Open an Underlying Securities Account

To start investing, you need to open an account with a reputable securities company. Nowadays, the process is simple and quick, often completed online within minutes.

2. Trade Underlying Securities

Once your account is set up, you can buy or sell underlying securities through the online trading platform provided by the securities company. The basic steps include:

• Select the stock or bond you wish to trade.
• Place a buy/sell order at market price or a limit price.
• Monitor the status of your order and manage your portfolio.

3. Trading Fees for Underlying Securities

Transaction fees are an important factor to consider when investing. In Vietnam, these fees typically range from 0.15% to 0.35% per transaction. Choosing a securities company with low fees and excellent services can help maximize your returns.

Tip: Take time to thoroughly research factors affecting stock prices before investing. Use financial analysis tools to make data-driven decisions instead of relying solely on emotions.

Advantages and Disadvantages of Investing in Underlying Securities

1. Advantages

Transparency

• Underlying securities, especially stocks, provide transparent and publicly available information about business performance, financial statements, and other relevant data. This allows investors to make decisions based on real data.

Higher Safety Compared to Derivatives

• Unlike derivatives, underlying securities do not require high leverage, reducing the risk of substantial capital loss during market volatility.

2. Disadvantages

Lower Short-Term Profit Potential

• Underlying securities generally experience less volatility than derivative products. Consequently, investors may need more time to achieve significant returns.

Frequent Monitoring Required

• Investors must regularly update themselves on company and market developments, especially when holding individual stocks.

Effective Investment Strategies for Underlying Securities

1. Value Investing

This strategy involves purchasing stocks undervalued compared to their intrinsic value. Investors use indicators like P/E (Price-to-Earnings Ratio) or P/B (Price-to-Book Ratio) to identify potential stocks.

Example: During economic recessions, the stocks of large companies that are undervalued can be excellent buying opportunities.

2. Growth Investing

This strategy focuses on companies with high revenue and profit growth rates, often in the technology or healthcare sectors.

Example: Investing in technology companies like Tesla or VinFast during their market expansion phases.

3. Dividend Investing

This strategy is suitable for investors seeking stable income from dividends. Companies with high dividend payouts are often in sectors like utilities or finance.

Example: Stocks like Vinamilk or FPT are popular among dividend-focused investors.

Differences Between Underlying Securities and Derivatives

1. Understanding Derivatives

Derivatives are financial contracts derived from underlying securities. These include futures, options, and swap contracts.

2. Key Differences

Trading Duration

• Underlying securities have long trading durations, while derivatives have specific, often short, expiration periods.

Capital Requirements

• Derivatives use financial leverage, requiring lower initial capital but carrying higher risks compared to underlying securities.

Short Selling

• Derivatives allow for easier short selling, enabling investors to profit during market downturns. On the other hand, short selling underlying securities is more complex and less common in markets like Vietnam.

Market Structure

• The derivatives market is often more complex and requires in-depth knowledge, while underlying securities are suitable even for new investors.

3. Risks and Opportunities

• Derivatives: High profit potential but also significant risk due to leverage.
• Underlying Securities: Safer but requires more time to generate substantial profits.

Challenges When Investing in Underlying Securities

1. Unexpected Price Fluctuations

The prices of underlying securities can experience sharp fluctuations due to economic or political factors such as changes in interest rates, trade wars, or tax policies. Investors must be prepared to face such volatility.

2. Lack of Information or Misinformation

Incomplete or inaccurate information from companies, media outlets, or analytical organizations can lead to poor investment decisions and significant losses.

3. Managing Emotions and Avoiding Impulsive Actions

Investor sentiment is often swayed by short-term market fluctuations, leading to unplanned buying or selling.

Tip: Always base your investments on data and long-term strategies. Use financial analysis tools to evaluate stocks instead of relying solely on intuition.

Comparing Investment in Underlying Securities in Vietnam and International Markets

1. Differences in Regulations, Liquidity, and Investment Opportunities

• Regulations: Vietnam’s stock market has more restrictions compared to international markets. For example, short selling is not widely implemented, and foreign ownership in some companies is limited. Meanwhile, international markets like the U.S. or Europe offer more flexibility with a wide range of investment products.

• Liquidity: The Vietnamese market has lower liquidity than major exchanges like NYSE or NASDAQ, making it more challenging to trade large volumes.

• Investment Opportunities: In Vietnam, investors can find high-growth stocks driven by the economy’s emerging status. Conversely, international markets provide opportunities for global diversification and access to leading global companies.

2. Key Characteristics of Vietnam’s Stock Market

• Rapid Growth: Vietnam is one of the fastest-growing economies in Southeast Asia, offering significant investment opportunities in sectors like real estate, technology, and consumer goods.

• Policy Support: The government has introduced numerous policies to encourage stock market development and attract foreign investments.

• Investor Sentiment: The Vietnamese market is heavily influenced by retail investor sentiment, often leading to unexpected volatility.

The Impact of Technology on Investing in Underlying Securities

1. The Role of Online Trading Platforms

Technology has revolutionized the way underlying securities are traded through the introduction of online platforms.

• Convenience: Investors can trade anytime, anywhere, with just an internet connection.
• Lower Costs: Online trading platforms reduce brokerage fees, maximizing profitability.
• Transparency: Real-time updates on prices, trading volumes, and indices enhance transparency.

2. Applications of AI and Big Data in Stock Analysis

• AI (Artificial Intelligence): AI helps predict price trends and identify investment opportunities by analyzing millions of data points.
• Big Data: Big data supports the collection and analysis of vast financial information, enabling quicker and more accurate decision-making.

Common Mistakes to Avoid When Investing in Underlying Securities

1. Investing Based on Rumors Without Verification

Rumors can easily cause confusion, leading to poor investment decisions. Failure to verify information through official reports or reliable sources can result in significant losses.

2. Lack of Knowledge and Analytical Skills

Many new investors rely on intuition rather than technical or fundamental analysis. This often leads to incorrect valuation of stocks, resulting in buying high and selling low.

3. Poor Risk Management

Failing to set stop-loss levels or investing beyond one’s financial capacity can lead to heavy losses.

Tip: Always adhere to your investment strategy and avoid letting emotions influence your trading decisions.

Tools for Analyzing and Making Investment Decisions

1. Using Financial Reports to Evaluate Companies

Financial reports are essential for assessing a company’s financial health and growth potential.

• Key Indicators: EPS, ROE, and P/E are commonly used to compare companies within the same industry.
• Cash Flow: A company with stable positive cash flow is a positive sign for long-term investors.

2. Popular Technical Indicators Like RSI and MACD

• RSI (Relative Strength Index): Measures relative strength to identify overbought or oversold conditions.
• MACD (Moving Average Convergence Divergence): A tool for analyzing price trends, often used to identify short-term trading signals.

Conclusion

Investing in underlying securities requires not only market knowledge but also the ability to use technology and analytical tools effectively. With thorough preparation and a clear strategy, you can achieve long-term financial goals. Start your investment journey today to seize the opportunities in this promising market!