THE INVESTMENT ENVIRONMENT

A study and understanding of the investment environment would be of importance to the investor.

In addition, the more experience he has gained in dealing in and with the various components of

this environment, the better prepared he would be to face the various situations he would come

across during the investment time horizon.

While we dwell on the investment environment, we shall discuss the following aspects:

INTRODUCTION TO THE INVESTMENT ENVIRONMENT: To study the investment environment would be of

importance to the investor, as it would also encompass the demand supply match and mismatch.

INVESTMENT AVENUES: There are a large number of investment instruments available today. To make

our lives easier we would classify or group them under 4 main types of investment avenues. We shall

name and briefly describe them.

INVESTMENT ATTRIBUTES: To enable the evaluation and a reasonable comparison of various

investment avenues, the investor should study the following attributes; namely, the rate of return, risk,

marketability, taxes and convenience.

COMPARISON OF INVESTMENT AVENUES: across various financial securities and instruments ranging

from equity (or stocks) to bank deposits to provident fund through to mutual funds and real assets (like

real estate and gold/silver).

INVESTMENT DECISION MAKING: APPROACHES: As investors we would have diverse investment

strategies with the primary aim to achieve superior performance, which would also mean a higher rate of

return on our investments. All investment strategies can be broadly classified under 4 approaches, which

are explained.
 COMMON ERRORS IN INVESTMENT MANAGEMENT: In any endeavor we undertake, we are sometimes

right and make correct decisions and sometimes we are wrong and prone to errors. We are prone to

these errors, when we do not have a correct perspective of the environment or lack a correct assessment

of the current situation in the environment.

INVESTMENT AND SPECULATION: There is a very thin and blurred line between investing and

speculating (or gambling). To have a clearer understanding of this, we would differentiate between the

two.

INVESTMENT WISDOM: ONE LINERS: Listed here are wisdom one liners which would give an investor an

insight to what he or she is up against.

THE SECURITIES MARKET: The term securities markets enclose a number of markets in which

securities can be bought and sold.

UNDERSTANDING INVESTMENT BANKS: As investors seeking a better understanding of the investment

environment it would be appropriate to understand the composition, structure and various functions

associated with investment banks; as they are amongst the important participants of the global financial

markets.

THE BROKER: As investors we are not able to deal with the market directly. It would be like entering and

trying to find our way through an unending maze. The markets on their part, are too large, to attend to

every single investor directly. This would be a Herculean task and a management nightmare for it. So, the

markets introduce and authorize the middleman to act on its behalf. This middleman is also called the

Broker.

CYCLE PROGRAMS AND PONZI SCHEMES: People make money and people lose money with cycling

programs. People also make or lose money with network marketing and any other kind of legitimate

business under the sun! While Ponzi schemes are illegal, some people make money with them, too, while

many more lose money. I would like to give the reader some information about Ponzi schemes and about

"Cycling" programs.
INTRODUCTION TO THE INVESTMENT ENVIRONMENT

To study the investment environment would be of importance to the investor, as it would also

encompass the demand supply match and mismatch.

Let us visualize the world and its economy. There are many countries with their many economies in this

environment. We see the interaction between countries at different stages in their development. We see

the many markets to enable this interaction between the various countries. Each of these markets has its

regulator, the trading platform and its system, its agents (or brokers), and the participants. Here it is a

question of demand and supply of various commodities, products & services and trading instruments. And

the analysis would encompass the demand-supply match/mismatch.

In this global environment, we have India with its economy and its own many markets.

Among these markets we have the securities market, with its regulator (SEBI), the trading platform and its

systems (stock exchanges), its agents (brokers) and its many participants (including corporate, financial

institutions both domestic and foreign, mutual funds, insurance companies, banks and individual

investors). Here again it is a question of demand and supply of various commodities, products & services

and trading instruments. And the analysis would encompass the demand-supply match and mismatch.

It would be advisable to note at this stage, that due to the liberalization process undertaken by India over

the last 18 years, we are today in an environment where events that take place in other parts of the world

have a direct or indirect effect on our economy. This would further effect the specific market and finally

would have an effect on the equity market.

Let us visualize a scenario of an industrial slowdown in the U.S. Amongst other things, this would have a

direct bearing (i.e. a reduction) on the demand of steel. To protect its own domestic steel industry, the

U.S. government would temporarily introduce trade barriers on steel imports. This in turn would cause a

reduced export of steel from India to the U.S., causing a temporary over supply of steel in the domestic

market. The steel manufacturers would have to tackle the higher levels of inventory and its associated

costs. In the domestic steel market, even if the demand were constant, the excess supply would cause a

reduction in the price realization per marketable ton of steel. This in turn would directly effect the incomes

and profit margins of the steel manufacturers. Such a situation would temporarily cause a drop in the

share prices of steel stocks in the equity market.

This example is to describe to you how logical the sequence of events is and what the end result would

be. However, this sequence does take a long duration of time to unfold, sometimes may even take years.

INVESTMENT AVENUES

There are a large number of investment instruments available today. To make our lives easier we

would classify or group them under 4 main types of investment avenues. We shall name and

briefly describe them.

1. Financial securities: These investment instruments are freely tradable and negotiable. These would

include equity shares, preference shares, convertible debentures, non-convertible debentures, public

sector bonds, savings certificates, gilt-edged securities and money market securities.

2. Non-securitized financial securities: These investment instruments are not tradable, transferable nor

negotiable. And would include bank deposits, post office deposits, company fixed deposits, provident fund

schemes, national savings schemes and life insurance.

3. Mutual fund schemes: If an investor does not directly want to invest in the markets, he/she could buy

units/shares in a mutual fund scheme. These schemes are mainly growth (or equity) oriented, income (or

debt) oriented or balanced (i.e. both growth and debt) schemes.

4. Real assets: Real assets are physical investments, which would include real estate, gold & silver,

precious stones, rare coins & stamps and art objects.

Before choosing the avenue for investment the investor would probably want to evaluate and compare

them. This would also help him in creating a well diversified portfolio, which is both maintainable and

manageable.
INVESTMENT ATTRIBUTES

To enable the evaluation and a reasonable comparison of various investment avenues, the

investor should study the following attributes:

1. Rate of return

2. Risk

3. Marketability

4. Taxes

5. Convenience

Each of these attributes of investment avenues is briefly described and explained below.

1. Rate of return: The rate of return on any investment comprises of 2 parts, namely the annual income

and the capital gain or loss. To simplify it further look below:

Rate of return = Annual income + (Ending price - Beginning price) / Beginning price

The rate of return on various investment avenues would vary widely.

2. Risk: The risk of an investment refers to the variability of the rate of return. To explain further, it is the

deviation of the outcome of an investment from its expected value. A further study can be done with the

help of variance, standard deviation and beta.

3. Marketability: It is desirable that an investment instrument be marketable, the higher the marketability

the better it is for the investor. An investment instrument is considered to be highly marketable when:

It can be transacted quickly.

The transaction cost (including brokerage and other charges) is low.

The price change between 2 transactions is negligible.

Shares of large, well-established companies in the equity market are highly marketable. While shares of

small and unknown companies have low marketability.

To gauge the marketability of other financial instruments like provident fund (which in itself is non-

marketable). Then we would consider other factors like, can we make a substantial withdrawal without

much penalty, or can we take a loan against the accumulated balance at an interest rate not much higher

than our earning rate of interest on the provident fund account.

4. Taxes: Some of our investments would provide us with tax benefits while other would not. This would

also be kept in mind when choosing the investment avenue. Tax benefits are mainly of 3 types:

Initial tax benefits. This is the tax gain at the time of making the investment, like life insurance.

Continuing tax benefit. Is the tax benefit gained on the periodic return from the investment, such as

dividends.

Terminal tax benefit. This is the tax relief the investor gains when he liquidates the investment. For

example, a withdrawal from a provident fund account is not taxable.

5. Convenience: Here we are talking about the ease with which an investment can be made and

managed. The degree of convenience would vary from one investment instrument to the other.

COMPARISON OF INVESTMENT AVENUES

Rate of Rate of
return return

Annual Capital Tax

Income Appreciation Risk Marketability Benefit Convenience
Financial
Securities
Equity Low High High High Yes High
Non-
convertible
Debentures High Low Low Average Nil High
Financial
Securities
(Non-
securitized)
Bank
deposits Low Nil Low High Yes High
 Provident
fund Nil High Nil Average Yes High
Life
insurance Nil High Nil Average Yes High

Mutual funds

Growth/equity Low High High High Yes High

Income/debt High Low Low High Yes High

Real assets

Real estate Low High Low Low Limited Average

Gold/silver Nil Average Average Average Nil Average

INVESTMENT DECISION MAKING: APPROACHES

As investors we would have diverse investment strategies with the primary aim to achieve

superior performance, which would also mean a higher rate of return on our investments.

All investment strategies can be broadly classified under 4 approaches, which are explained

below.

Fundamental approach: In this approach the investor is concerned with the intrinsic value of the

investment instrument. Given below are the basic rules followed by the fundamental investor.

There is an intrinsic value of a security, which in turn is dependent on the underlying economic factors.

This intrinsic value can be ascertained by an in-depth analysis of the fundamental or economic factors

related to an economy, industry and company.

At any point in time, many securities have current market prices, which are different from their intrinsic

values. However, sometime in the future the current market price would become the same as its intrinsic

value. We as fundamental investors can achieve superior results by buying undervalued securities and

selling overvalued securities.

Psychological approach: The psychological investor would base his investment decision on the premise

that stock prices are guided by emotions and not reason. This would imply that the stock prices are
influenced by the prevalent mood of the investors. This mood would swing and oscillate between the two

extremes of 'greed' and 'fear'. When 'greed' has the lead stock prices tend to achieve dizzy heights. And

when 'fear' takes over stock prices get depressed to lower than lower levels.

As psychic values seem to be more important than intrinsic values, it is suggested that it would be more

profitable to analyze investor behaviour as the market is swept by optimism and pessimism. Which seem

to alternate one after the other. This approach is also called 'Castle-in-the-air' theory. In this approach the

investor uses some tools of technical analysis, with a view to study the internal market data, towards

developing trading rules to make profits.

In technical analysis the basic premise is that price movement of stocks have certain persistent and

recurring patterns, which can be derived from market trading data. Technical analysts use many tools like

bar charts, point and figure charts, moving average analysis, market breadth analysis amongst others.

Academic approach: Over the years, the academics have studied many aspects of the securities market

and have developed advanced methods of analysis. The basic rules are:

The stock markets are efficient and react rationally and fast to the information flow over time. So, the

current market price would reflect its intrinsic value at all times. This would mean "Current market price =

Intrinsic value".

Stock prices behave in a random fashion and successive price changes are independent of each other.

Thus, present price behavior can not predict future price behavior.

In the securities market there is a positive and linear relationship between risk and return. That is the

expected return from a security has a linear relationship with the systemic or non-diversifiable risk of the

market.

Eclectic approach: This approach draws upon all the 3 approaches discussed above. The basic rules of

this approach are:

1. Fundamental analysis would help us in establishing standards and benchmarks.

2. Technical analysis would help us gauge the current investor mood and the relative strength of demand

and supply.
3. The market is neither well ordered nor speculative. The market has imperfections, but reacts

reasonably well to the flow of information. Although some securities would be mispriced, there is a

positive correlation between risk and return.

COMMON ERRORS IN INVESTMENT MANAGEMENT

In any endeavor we undertake, we are sometimes right and make correct decisions and

sometimes we are wrong and prone to errors. We are prone to these errors, when we do not

have a correct perspective of the environment or lack a correct assessment of the current

situation in the environment.

We would have to watch out for these errors to reduce the probability of losses. For instance, it would be

very difficult and an error to be in a buy or hold position if the market is in a bearish mode. Similarly, it

would be difficult and an error to be in a sell or short position if the market is in a bullish trend. It would be

advisable, correct and profitable to trade with the trend and not against it.

Still investors of all hues and levels of experience are prone to errors. Some of these errors are listed and

described below:

Goals beyond rational expectation: Here the investor probably thinks that he owns the company lock,

stock and barrel. Or that the market owes him his profits for having exposed himself to the market risks.

Or the investor may have a targeted expected rate of return beyond what the market would be able to

give him consistently over time.

On the other hand, unrealistic goals could also be a result of unjustified claims made by a company going

for a new issue. Or misplaced expectations due to exceptionally good past performance of the investment

instrument or a mutual fund or a portfolio manager. Or promises not kept by tipsters, market operators

and fly by night operators.

An investment policy not clearly defined: This would also include an unclear view on risk. Here, the

investor would be prone to greed and fear as the market goes up and down, respectively. This vacillation

would cause the investor much loss and pain.

Seat of the pant decision making: Investors without even realizing it base their decisions on incomplete

information. Some of the thoughts of the investor would be:

Come on! I know what is going on in the market, and there isn't any time to do a detailed analysis. I don't

want an opportunity loss if I delay.

All that hard work is strictly for the mediocre. I know I am right.

He is my guru and can't be wrong.

We must clarify at the beginning whether we are doing an investment exercise or are we indulging in ego

satisfaction. If it is investment then do the analysis as the markets and the investment instruments will still

be there tomorrow. On the other hand, if it is ego satisfaction, then may the Gods bless you, as other

would profit from your market actions.

Another situation could cause the investor a loss of balance. As the market goes up and continues going

up, the investor tends to set aside all thoughts on the various investment risks and follows the investing

public. Here, the investor is being greedy, and sooner or later would pay the price for this error of

judgment.

Stock switching: In this situation, the investor is selling one stock and at the same time buying another

stock. This is interesting, as here the investor expects that the first stock would go down in value, while

the second stock would go up. This is unique and is rarely successful.

Two scenarios require our attention:

It maybe the right time to sell the first stock, but it may not be the right time to buy the second stock, as

that too maybe on its way down.

It maybe the right time to buy the second stock, but it may not be the right time to sell the first stock, as it

may still have some upside left.

The love for a cheap stock: A cheap stock is a very attractive proposition for any investor, as he is able to

buy large quantities of the same. Investors find it easier to buy 1,000 shares of a INR 10.00 stock, and
find it difficult to buy 100 shares of a INR 100.00 stock. The total investment amount is the same in both

cases.

In certain situations, when a stock price moves down, investors start buying and continue to buy larger

quantities of the same stock. The investor here is averaging his price down. But, he does not have a

guarantee that in the foreseeable future the price trend of this stock would reverse and go above his

average purchase price. Averaging can be dangerous.

Over-diversification: Is a situation, when an investor has a large number of names in his portfolio, maybe

50 or 60 or even more.

Let's be practical, it is like owning an index and more. Therefore the investor's portfolio performance

would be about the same as the index or marginally above or below it depending on the names in the

portfolio.

Secondly, managing and monitoring would become a Herculean task. The investor would get a false

sense of safety in numbers. Decision-making would become slow and ineffective. If the market goes

down due to a systemic risk factor, all the stocks including the best would move down in price. And the

investor would not know what to sell, at what price to sell and when to sell.

Ideally, a portfolio should consist of 10-15 well-researched stocks. In any case as individual investors we

are not institutions, nor do we have the requisite staffing to effectively monitor and manage a larger

number of stocks.

Under-diversification: Is a situation in which an investor has only 1-2 stocks in his portfolio. This maybe

due to a situation of over-confidence in the expected performance of these stocks. Or maybe the result of

plain complacency.

This is not a good portfolio strategy, as the investor has exposed himself to all market risks to a larger

extent due to a lack of diversification. We must always remember that we diversify our portfolio to

minimize the systemic or non-diversifiable risks. In any case, this high level of risk exposure is not really

necessary if we view ourselves as long term investors.

The lure of known companies: Investors are tempted to buy shares of companies that they know and are

familiar with. However, the investor should keep in mind, that his knowing a company is not correlated to

the returns he expects to derive from his investments in its stock.

Wrong attitude towards profits and losses: An average investor due to ego and pride does not want to

recognize or admit that he may have made a mistake. Let's look at two situations:

An investor buys a stock, and soon thereafter its price goes down. Instead of applying a stop loss and

getting out of the stock, the investor holds the stock in expectation of a rebound or trend reversal.

However, the price continues moving down with a potential of a further decline. Now, the investor is

holding the stock at a 30%-40% loss. Here, the investor wants to postpone the booking of this substantial

loss and the acknowledgement of having made a mistake.

When the stock price does move up, the investor is ready and waiting to sell this stock at or marginally

above his purchase price, even if the stock is expected to move up into a higher trading range. Here the

investor sells to gain the relief of not having incurred a substantial loss and also he does not have to

acknowledge his mistake at the start of this investment. Both these situations are loaded towards the

reinforcement of losses and not profits.

INVESTMENT AND SPECULATION

There is a very thin and blurred line between investing and speculating (or gambling). To have a

clearer understanding of this, we would differentiate between the two.

There is a tendency for investors to be speculative when the markets are bullish and buoyant. However,

for long term and profitable survival in the markets we must try and control this urge to speculate. After all,

we are here to learn and apply investment management and not speculation management.

To be part of the speculative herd in a bull market situation has been the waterloo of many participants in

the financial markets across the globe. This participant maybe an individual investor, a NBFC, a financial

institution, a pension fund, a bank, or a brokerage. Some are responsible corporate citizens while others

are not.

Investor Speculator
 Relatively long,
holding period of at Very short, holding period
Planning horizon least 1 year. a few days or weeks.

Moderate, rarely high Normal to assume high

Risk disposition risk. risk.

Moderate returns at High return at high risk

Return expectation limited risk. exposure.

Fundamental factors,
careful evaluation of Relies on hearsay, tips
Basis for decisions proposed investment. and market psychology.

With regard to the differentiation between investors and speculators listed above it would be opportune to

elaborate on these points of reference. We would first explain the investor's position and mindset;

thereafter, we would explain the speculator's views in this regard.

Planning horizon: The investor would be willing to buy and hold stock positions for long periods of time

and probably well beyond the 1 year listed above. This would mostly be the result of the investor having

prepared himself both financial as well as psychologically for the inevitable changes in the prices of the

stocks held in his stock portfolio. His intention would be to benefit from the advances in the value of his

stocks at various levels of the market; in other words it is highly probable that most of his stock positions

would turn out to be multi-baggers by the time he sells them. In a sense he would buy these stocks at

prices which offer a fair discount over value to him; in other words he would be "buying low and selling

high". Even if his intent were to indulge the short term on occasion, it would be with the full knowledge

that he is now speculating.

The speculator on the other hand is seeking immediate gratification. Thus, he would trade within the day

while buying some stocks and selling them later at the rise of a few points and selling other stocks and

buying them back after a fall of a few points. Usually, the speculators would be in moment to moment

contact with the trade desk of their broker. They are of the view that the life cycle of the earning capacity

and capability of the selected stocks and their underlying enterprise can be replicated within the span of a

trading day. This is also called day trading. The speculators may indulge margin trading and on occasion

even the futures & options segment of the stock market to leverage their meagre financial resources.
Risk disposition: The investor would at all times seek a discount to the intrinsic value of the stocks he

would buy subsequently for capital gains sometime in the future. For instance, he would seek stocks

priced at levels at or below their book value per share; of course, the earnings per share would be at

reasonable levels and maintainable into the future and the price earning multiplier would be at a lower

level when compared with other similar stocks. Thus, the investor would need to wait while the stock price

gains to levels at or above its book value per share and sell the stock at a reasonable profit. This price

range may on occasion be the first point of profit; and depending on the future performance and outlook

of the underlying enterprise the investor may find occasion to buy the stock again at higher price levels

(including after a downward price correction from the recent higher price levels) and subsequently sell

them at even higher levels. In this fashion and style the investor would be able to considerably reduce his

risk exposure.

The speculator would be willing to take on a higher level of risk in expectation of a higher return in the

short term. As his holding period is very short he is able to take on larger stock positions probably on

margin. But given the short duration of his holding period he is unable to mitigate the risk in any fashion

and style and the moment to moment stock price during the day (or a few days or weeks) would guide the

decision to sell the stock at the gain of a few points during the day or a few percentage points during the

week. On the flip side, if the stock price were to move against the speculator's position he would need to

quickly sell it to minimize the loss. It would be the stock price which would rule the trading decisions.

Return expectation: The investor as already listed above would expect moderate returns from his stock

market investments as he would be limiting his risk exposure to acceptable and reduced levels. However,

the discerning investor with many years of experience would be able to compound his investment capital

at a reasonable rate over the years of his investment time horizon. On average such compounding would

be at 16% to 18% annualized and on occasion may be at levels of 50% and even more.

The speculator on the other hand would adopt a higher level of risk exposure in the expectation of a

higher return in the short term. As such decisions are mostly based on the daily price volume data

pertaining to the stocks selected for trading, they would not take into account the unsystemic risk

associated with these stocks or the systemic risks associated with the stock market in general. If the

speculator is right he has gains to be had, and if he is wrong he would have to book the loss and move on

to the next trade. On most occasions it would be a zero sum game, as he would win some and also lose

some.
Basis for decisions: The investor would consider the fundamental factors easily found in the balance

sheet, profit & loss account and cash flow statements of the underlying enterprise. This study would

revolve around the profit after tax which is also the earnings per share, dividends paid, and the present

premium over earnings afforded by the current market price which is also called the price earnings

multiplier. This study on most occasions would also expand into an understanding of the products and

services of the enterprise, its plant locations, its markets and its relative position in such markets. To

complete this study would require the investor to also gain knowledge of the management and an

understanding of their management style. This evaluation of the stock would be in the lines of enabling

part minority ownership in such enterprise for the investor.

The speculator would give little regard to an evaluation of the fundamentals underlying a stock. His

trading decisions would be based mostly on tips, grapevine news and hearsay. It would indeed be market

psychology at play as its the present price trend that is being addressed. His decision would be mostly

based on the here and now with little or no regard to the future prospects of the underlying enterprise.

It would surprise most to learn that in today's time and age the speculators usually call themselves short-

term investors, probably in an attempt to bring recognition and dignity to their trade and craft.

Indeed this would blur the distinction between investors and speculators even further; as the

investors would now be the long-term investors while the speculators would be the short-term

investors.

INVESTMENT WISDOM

Listed below are wisdom one liners which would give an investor an insight to what he or she is

up against:

o The market is a discounting machine.

o A cynic knows the price of everything and the value of nothing.

o Investment management is 10% inspiration and 90% perspiration.

o To err is human, to hedge divine.

o No stock is good or bad, it is the price that makes it so.

o No price is too high for a bull or too low for a bear.

o Somebody is wrong every time a trade is made.

o Ride the winners and sell the losers.

o You never understand a stock unless you are long or short in it.

o Be long term but watch the ticks.

o Never throw good money after bad.

o To achieve superior performance, you have to differ from the majority.

o Two things cause stocks to move, the expected and the unexpected.

o No tree grows to the sky.

o A pie doesn't grow through its slices.

o Never confuse brilliance with a bull market.

o Successful investment managers have brains, nerves and luck.

o All generalizations are false, including this one.

o The market makes mountains out of molehills.

o Investigate, then invest.

o The memory of people in the stock market is very short.

o Open-mindedness and independent thinking will pay big dividends in the stock market.

o It is only a step from the sublime to the ridiculous.

 o It is only a step from common stock investment to common stock speculation.

o The market is a pendulum that swings back and forth through the median line of rationality.

o The only way to beat the market is to discover and exploit other investors' mistakes.

o No investment manager can perform successfully in all kinds of markets. There is no man for all

seasons.

o Better is one forethought than two after.

o The greatest of all gifts is the power to estimate things at their true worth.

o Shallow men believe in luck, wise and strong men in cause and effect.

SECURITIES MARKET

he term securities markets enclose a number of markets in which securities can be bought and

sold.

These securities markets can be classified into four types of markets:

Primary market: Corporate entities offer new issues to the investing public through the issue of equity

shares. After the initial issue, the securities are subsequently shifted to the secondary market, where the

can be traded.

Secondary market: Have securities of corporate entities that are already outstanding and owned by

investors. These securities can be traded (i.e. bought and sold) in the secondary market.

Money market: Enables trading of securities with maturity of one year or less.

Capital market: Securities with a maturity period of more than one year are traded in the capital market.

The existence of these markets is advantageous to both the issuer of the security and the investor.
The "issuers", i.e. business entities and government need to raise funds or capital at competitive rates for

productive and improvement activities, respectively. The markets allow the transfer of funds from the

surplus to the deficit sectors both efficiently and at low cost.

The investors also benefit, as they are able to invest their excess funds or savings through the market in

the expectation of a future return on their investments. The investors are also able to trade (i.e. buy and

sell) these securities through the markets.

Of course, there are also the other markets like the commodities markets and the metals exchange; while

not forgetting the markets for agricultural produce and flowers. But, these would be separate markets and

are not considered here.

UNDERSTANDING INVESTMENT BANKS

As investors seeking a better understanding of the investment environment it would be

appropriate to understand the composition, structure and various functions associated with

investment banks; as they are amongst the important participants of the global financial markets.

Investment banks are financial institutions (not to the exclusion of banks with brokerage subsidiaries)

which provide financial securities, products and services to their clientele. The clientele would include

corporate entities, financial institutions (including other investment banks), governments (including their

departments and agencies), institutional investors and retail investors (including high networth

individuals).

The products and services offered by investment banks are usually full range financial products across

various major financial markets. They also provide advisory services based on high quality market

research; with the view to enable corporate restructuring to improve performance, capital raising via debt

and equity, risk management, market making and cost efficient brokerage.

The function of the investment banks would be to mostly mediate the flow of assets between the seller of

assets (or the issuer) and the buyers of these assets (or the investors). This would require the investment

banks to set up an elaborate and complex network amongst themselves as well as with external agencies

(including regulators) and their clients on the sell side as well as the buy side. This would also require the
constant flow of information and relevant advise. Of course, the investment banks get paid when the deal

is done.

It is through the delivery of these high quality financial products and services that the investment banks

are able to generate earnings for themselves and create value for their stockholders. Their mission is to

be profitable in each of their verticals (including strategic business units enabled from time to time with

specific objectives); while providing relevant and value added products and services to their clients across

the globe. This is usually achieved through an appropriate admix of financial products, technology and

human expertise. The services usually provided by investment banks are listed below:

Investment Banking: Provide financial products and research in the areas of equity, fixed income

instruments, interest rates, foreign exchange and commodities. Advise and assist access to the global

capital markets for corporate, institutional, intermediary and alternative asset management clients.

Retail Financial Services: Retail banking and consumer lending with the view to serve consumers and

business entities through personal services at the bank branches, ATMs, net banking and telephone

banking.

Commercial Banking and Card Services: Provide banking and securities services for retail and corporate

clients.

Treasury and Security Services: Provide cash management services, wholesale card and liquidity

products and services to small and medium size companies, multinational corporations, financial

institutions and government entities.

Global Asset management: Provide innovative investment management solutions in various asset classes

to retail, institutional and corporate clients; on occasion provided via financial intermediaries on the lines

of franchise.

Wealth Management: Provide services designed for high net worth individuals from across the world;

whether investing domestically or internationally. Provide unbiased advisory services as per client

objectives and requirements; including but not limited to asset management, estate planning, financing

and banking.
Private Equity: Provide financial management services with a view to improve the underlying asset value

of the portfolios under management to add value to the advantage of the clients, employees and

stakeholders.

Evolution of Investment Banking, a historical perspective:

The evolution of Investment banking can be traced back to Europe of 1815; Napoleon had been defeated

followed by a period of peace and financial stability. The world's financial capital gravitated to England,

the victors of the war. Before which the global financial center had shifted from Italy to Spain to Portugal,

followed by France and Amsterdam. In later history that is after the 1 st world war the financial center of the

world shifted yet again from England to New York.

It was America's need for capital which was met by representatives from the European financial houses;

like the Barings, Rothchilds and Speyers amongst others. During the later part of the 19th century there

was also a requirement of finance from the private sector corporations; it is also during this time that other

German immigrant (some of whom had financial family backgrounds) made their presence felt in the

American financial markets. Notable amongst them were Seligam, Lehman, Kahn, Loeb and Goldman. All

of them prospered due to their privileged access to European capital and the already existing branch

networks developed along the way. In addition to the incorporated commercial banks, some financial

services were also provided by auctioneers, speculators, brokers (including foreign exchange), merchants

and shippers.

It would be reasonable to expect that investment banking systems, processes and methodology would

also find their origin in British and European merchant banking practices.

With the passage of time the bankers started influencing corporate policy of their clients through

memberships to corporate boards and committees; with the result that there was long term loyalty

between the banker and the client, ensuring better revenues and margins to the banker. Today, the

leading US Investment Banks have a dominant market position and are a force to reckon with in the

financial markets both domestically and internationally.

Given the many verticals and diverse functions associated with most investment banks, the young

academically inclined with suitable work expertise under the belt would be able to find relevant

employment. Although, the varied specializations would range from human resources to operations
research to investment analysis and portfolio management; it would be unfair to leave out economists,

annuity specialists, practitioners of general management and real estate specialists. This of course would

not deny others who specialize in sales and marketing, business promotion and advertising amongst

other areas of specialization. Thus, it would be relevant for the persons seeking employment in

investment banks to communicate with relevant niche human resource and employment organizations.

THE BROKER

As investors we are not able to deal with the market directly. It would be like entering and trying to

find our way through an unending maze. The markets on their part, are too large, to attend

to every single investor directly. This would be a Herculean task and a management

nightmare for it. So, the markets introduce and authorize the middleman to act on its behalf.

This middleman is also called the Broker.

To reinforce this point, consider the following:

1. We want an insurance policy, we would deal with the insurance company's agent.

2. We want to buy a car or motor cycle or scooter, we would deal with the dealer of the automobile

manufacturer.

3. We want to buy a pair of trousers or shirt or a dress, we would go to the retail store which sells these

products. The retail store would be the representatives of various fashion brands.

4. We want to buy the shares of a company traded in the NSE or BSE. We would have to deal with the

many stock brokers of these exchanges.

Agents, dealers, representatives and brokers mean the same thing, and they perform the same function.

Which is that of a middleman. They do this function as they would be receiving commissions in return for

the services they provide.

For instance, whether an investor buys or sells a stock in the stock exchange the middleman or broker

would receive a commission either ways. Which is a percentage of the value traded by the investor. The

same (that is, the broker's commission or charges and fees) would also be applicable to transactions the
investors may undertake in the futures and options segment of the stock market as well as ETFs (or

equity traded funds).

For investors it is very important to choose a broker correctly. Also that the broker is able to provide the

services that the investor requires.

In this selection of a broker, the investor would be well advised to consider the following:

1. Is the brokerage well established and known in the market?

2. Is the representative of the brokerage house able to attend to him or is he overloaded with too many

accounts?

3. Does the brokerage have a research department. How many qualified professionals do they have on

their staff?

There are many other questions, which may be asked and answered. The main aim here is whether the

broker we are proposing to deal with, meets all our requirements or not.

In more recent years, this brokerage function of the stock markets as well as other financial markets has

been engaged by the leading banks through their brokerage subsidiaries. This has indeed brought all

market services (including the trading platform and advisory services) and back office support to the retail

investors at very cost effective fees and charges. Some of the banks and their subsidiaries would be the

SBI, HDFC Bank, Kotak Mahindra Bank, ICICI Bank, amongst other leading banks.

Ideally, an investor may contact these banks with regard to stock market services (including the trading

platform, advisory services and brokerage function) required by them. Similar questions as listed above

would again be asked to enable the selection of the best fit bank and its subsidiary for the efficient

management of an investor's financial resources (including the investment capital he or she may have

available for the task of investment and its management).

CYCLING PROGRAMS AND PONZI SCHEMES

People make money and people lose money with cycling programs. People also make or lose

money with network marketing and any other kind of legitimate business under the sun!

While Ponzi schemes are illegal, some people make money with them, too, while many more

lose money. I would like to give the reader some information about Ponzi schemes and

about "Cycling" programs.

Ponzi Schemes: Ponzi schemes are a type of illegal pyramid scheme, named for Charles Ponzi, who

duped thousands of New England residents. In the year 1920, Ponzi offered 50% profits every 45 days.

He collected $9.8 million dollars from 10,550 people and paid out $7.8 million in just 8 months.

This was a kind of swindle, also called a "bubble" and has existed for hundreds of years. In reality, it is not

an "investment" as people are led to believe. Money is simply being transferred from new investors to

earlier investors. It is a fraud in which the "investors" are promised extremely high returns over a very

short period of time. This short payment time and high rate of return soon attracts large numbers of

people. Initial "investors" make a lot of money, but their profits are not a result of the success of a

business. Their profits actually come from the contributions of those people who later join, thinking they

are participating in a legal business investment.

Ponzi schemes typically claim that their moneymaking abilities are because of their elaborate, inventive

investments or business process. Because of word-of-mouth advertising about this great "opportunity",

new depositors are quick to jump on board. Usually a Ponzi scheme will not last very long. It eventually

collapses since it was based on something that either never existed, or was grossly overvalued.

A major attraction of a Ponzi scheme is that it appears to be a high paying investment opportunity. As a

passive type of program, a person does not need to work in order to generate great profits. The

impression that people are given is that they need only to put their money into it and wait for the money to

come rolling in. Unfortunately, only a few "early birds" actually make money, which they actually receive

by fraud, while everyone else loses most of or maybe their entire investment!

Cycling Programs: Most people who are looking for ways to make money, truly just want to find something

that is legitimate and is within their ability to do. A conventional business generally requires a large

investment and long working hours. Network marketing, even though it is also a business that takes
investment of time and money before a great deal of success is realized, has the advantages of being

able to work part time and takes far less investment than does a conventional business. Unfortunately,

with network marketing or MLM, there is a lot of hype. Often people are made to believe that they should

be making lots of money in a short time. Since that usually doesn't happen with MLM, as in any other

legitimate business, people may begin looking for something that has less involvement and is more

"passive" in nature.

So along comes an offer of a promise to make money in a short period of time. All you have to do is invest

your money and wait. There may or may not be some sort of product involved. A product of some sort at

least keeps the program within "legal" limits. The so-called product may be leads that have been used

over and over again, or some other internet thing that a person would not normally spend their hard-

earned bucks for.

The promoters can be very skilled at making a person think that they are getting into a type of investment

that really pays off. Indeed, a person, provided they are in "early" enough, does get paid. Investors are led

to believe that the "investment" is what is paying off, when in reality, it may be they are being paid from

new people investing their money, or even may be getting part of their own money back. These high-yield

investment programs (HYIP's) are actually much like the "cycling" programs only they are not called that.

Most of those programs last no longer than about 6 months or so, and then collapse.

Then there are the programs that tell you that you will get paid when you cycle, or it is your turn. At first it

takes only a few days to "cycle" and your money may double. The longer the program lasts, the longer it

takes for a person to cycle. Eventually the cycle program collapses and the promoter starts another one.

Most likely the same people that got in early on one program, will be the ones who get in early on the next

program, and so on. A few people make real money, while the majority of folks are left holding the bag.

The promoter of this kind of program, I believe, is running an illegal Ponzi scheme! Even the people who

get in early and make money are actually making money at the expense of those who invested later on,

and may be in legal trouble, at least in the United States.

From the little bit of experience I have had with both the HYIP's and the cycling programs, even though at

the time I believed each was probably legitimate, a close analysis now tells me different. In general, I

would advise anyone to stay far, far away from HYIP's and from cycling programs. However, I believe
there may be some exceptions to the above information: there are at least a couple companies which

have been around for several years that offer cycling plans to their members to help them in advertising

or obtaining leads for their business. It should be noted, though, that the members purchase product from

these companies each month. Their compensation plan is not based on when they "cycle".

Dear reader, face up to it, if you are going to develop an income in a legitimate business, you will need to

be prepared to work, invest some money, and allow time before you realize the income of your dreams.