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Investment
Parting with ones fund, to be used by another party, for productive activity. Conversion of cash into a monetary asset or a claim on future money for a return.
Investment Activity
Investor
Physical Assets
Financial Assets
Marketable Assets
Investment Alternatives
SAVER Investor (by acquiring assets)
I Physical Assets
II Financial Assets
(Non-Marketable)
Banks, deposits PF, LIC, Pension Schemes PO Certificates NSS, NSC, etc
SECURITY
Investments in capital market in various financial instruments (shares, scrips, bonds, debentures) which are all claims of money. Is an instrument of promissory note.
Security analysis
Superior returns are possible by proper security analysis thro
Better forecasting ability Superior expertise in security analysis Insider information
PORTFOLIO
Combination of various assets & / or instruments of investments. An analysis of risk & return characteristics of individual securities in the portfolio.
Objectives of Investment
1.Safety of Principal___ .& Diversification 2. Stability of Income 3. Capital Appreciation 4. Liquidity & Collateral Value 5. Minimise risk & Maximise returns 6. Protection against inflation 7. Tax-saving
Year
Financial Markets
Securities market National Capital market International
(eg. Euromarket)
Forex market
Money Market
Equity market
Debt Market
Primary market
market
Advanced markets USA 15104 UK 2577 Japan 3157 Germany 1207 Emerging markets 166 India 172 Korea China 581
Modes:
I ) Security Forms (Marketable) Corporate Bonds Public sector bonds Preference Equity II ) Non Security Forms (Non Marketable / contractual forms of investment ) NSS NSC PF LIC UTI PO savings Company & Bank FDs
KVP
Min Rs.1000 Max No limit Investment doubles in 8 years & 7 months CI - 8.4% Withdrawal after 21/2years
NSC
Denominations Rs100; Rs.500; Rs.1000; Rs.5000 & Rs.10,000 6 years CI 8.16% Sec 80 C No withdrawal
Company deposits
CLB and RBI Term 1 to 3 years (non-banking 25mths to 5 years) 25% of its NW from public & addl amount of 10% of its NW from shareholders Interest Unsec. Loans & so credit rated No tax benefit (except more than Rs.5000) Premature withdrawal allowed
CHARACTERISTICS
1. 2. 3. 4. 5. 6. 7. Risk Return Safety Liquidity Marketability Hedge against Inflation Tax Shelter
Characteristics Risk:
Credit worthiness of the borrower Nature of instrument Risk of variability of returns Business risk & Financial risk Nature of tax liability (NSS, NSC, UTI)
Return:
Yield + Capital appreciation
Safety
Certainty of return on capital without loss of time or money involved Government bonds vs. private securities.
Liquidity
Bank deposit vs. equity Higher Liquidity Lesser return
Marketability
easily transferable low cost- price change (listed companies, public ltd., companies & non listed & Pvt Ltd companies. ) Depth Breadth Resilience
Venture funds
Equity shares
R E W A R D
Corporate deposits Convertible debentures Non-convertible debentures UTI & Mutual funds Post office certificates Bank Deposits & Insurance Schemes
Return =
Annual Income +(Ending price beginning price) X 100 Beginning price
Speculation
Short term objective Maximizes return thru buying & selling Delivery of securities nil Stakes of risk is higher & returns also higher.
1. Risk
Investment
: Low / Moderate return Own funds
vs.
Speculation
Higher Risk Higher Return Borrowed funds (supplement his Personal resources). No intention to own Trades frequently holding period too short (few days to months) Achieve profits through price changes ( i.e capital gains) Speculates on experience Market behaviour, price movement & inside information
4. Ownership :
5. Holding period: Commitment of funds for a Longer term (1 year to few years) 6. Motives: direct income + capital gains
Financing Decision
Raising of funds Debt Equity Best / Optimum mix ( proportion) E.g. Infosys purely non debt RCL purely non debt
Public issues Rights issues Bonus issue Private placement ADRs & GDRs
Deals with previously issued / existing securities through a brokerage firm authorized to trade in the market ( Eg: BSE, NSE)
Debenture Types
1. 2. 3. 4. 5. Secured and non-secured Fully convertible debenture Partly convertible debenture Non- convertible debenture Secured or unsecured
Bonds
At par / discount Fixed interest rate (coupon rate) Redemption value at par or premium Types: 1. Secured / unsecured 2. Perpetual and redeemable 3. Fixed or floating interest 4. Zero-coupon (sell at discount and repaid at face value) 5. Deep Discount bonds (IDBI (1992) & ICICI (1997)
6. Capital Indexed bonds - principal amount is adjusted for inflation for every year - to avail benefit of inflated principal the investor need to hold the instrument for entire 5 year period - can be sold in the secondary market , value of principal repayment adjusted by Index Rate (IR)
Growth Shares
Higher rate of growth than industrial growth rate Eg In 1999 major gainers were software stocks HCL & Infosys rised sharply
Income shares
Stable operations Limited growth opportunities Eg: Banks, FMCG (HLL , Nestle,etc.)
Defensive Shares:
- unaffected by market movements - Eg. Pharma, Oil, telecom etc
Cyclical Shares
Business prospects affected by business cycles Low to moderate yield Capital gain is highly variable Eg. Automobile, durable goods etc.
Speculative shares
Small and Midcap companies Short term gains Only speculative purpose And day trading
Treasury Bills - 91 days , 364 days maturity - low interest - sold at discount & redeemed at par CPs - fixed maturity period (3 to 6 months) - unsecured Pro-note - 1993 extended to one year - sold at discount and redeemed at face value - mostly for companies & IIs - min. period reduced to 30 days
Certificate of Deposits - marketable receipt of funds deposited in a bank. - Fixed period & fixed interest - bearer documents & negotiable - For IIs and companies - Min. size is Rs. 10 lakh and additional amount in multiples of Rs. 5 Lakh - issuers banks & FIs - investors banks, corporates,FIs, MFs
inadequate
Regulatory Bodies
SEBI Registrar of Companies RBI Stock Exchanges Industrial Licensing Authorities Pollution Control Authorities
Placement of Issues: Initial Issues are floated through:Prospectus offer Bought out deals (offer for sale - sponsors) Private Placement (FIs, Corporates, HNI) Eg. UTI, MFs, Insurance Cos., Merchant Banks etc. ) Rights Issue Book Building
Secondary Market
Types of Orders Limit Orders Eg. Buy RPL at Rs60 Best Rate order (lowest for buying & highest for selling) Discretionery order Eg. Buy TCS 100 shares around Rs.800 Stop Loss order Eg. Sell SBI at Rs.990, stop loss at 897
Functions of SE
Maintains Active Trading Fixation Of prices Ensures safe and fair dealing Helps Financing Industry Dissemination Of Information Performance Indicator Self-regulating organisation
Executions of Trade
Settlement Cycle Rolling settlement Price filters / circuit filters Intraday Price bands
Stock Exchanges
23 SEs 20 regional 3 NSEs (NSE, OTCEI, ISE) Provides an organized market for transactions in shares & securities BSE & NSE ( primary exchanges) account for nearly 72% of all capital market activity in India
BSE:
1887: Native Share & Stock Broker Association in Dalal Street 1899 inaugurated as BSE Governed by a Board chaired by a non executive chairman supported by elected directors, SEBI nominee & public representatives.
NSE:
Promoted by leading Financial Institutions June 1994 commenced its operation in the wholesale debt market segment. November 1994 equity market June 2000 derivative segment.
Secondary Market
An organized market place where securities are traded. An association of members brokers for the purpose of facilitating and regulating the trading in securities. According to Securities Contract Regulation Act (1956), securities trading regulated by central government conducted in stock exchanges ( 23 in Numbers) Normal trading hours 10 AM to 3.30 PM
Types of delivery
Spot Delivery ( Same day / next day) Hand Delivery ( 7 to 14 days) Through clearing ( 2 months) Special Delivery ( longer period) > 14 days
Listing:
making a quotation available for a companys share to be traded. Trading on a SE Public Ltd. Companies with minimum paid up capital of Rs. 5 Crores Trading on BSE / NSE - Minimum paid up capital of Rs. 10 Crores
Types of Orders
Limit orders Buy RPL at Rs. 61 Best rate order execute at best possible rate discretionary order range of price , Buy SBI 100sh. Around Rs.952 Stop loss order sell RPL at Rs. 65, stop loss @ Rs.62 to limit the loss on sale.
Investor protection for steady flow of savings. Promote efficient services by brokers & intermediaries. Fair disclosures of the companies in the new issue market.
New guidelines from June 1992 Free pricing companies having 3 years of track record of consistent profitability out of last 5 years. Not less than 20 % of equity offered to the public. September 1999 IT companied subject to a min. public offer of only 10 % of the issued capital instead of 25% for other companies. ( offer at least Rs. 50 crores / at least give out 20 lakh shares)
Call Market
Amount borrowed / lent on demand ( for a short period) Period of one day to 14 days notice money otherwise called call money Adjustments for cash reserve requirement Players banks, financial institution, MFs Entirely an Inter Bank market Borrowers & lenders maintain a current account with RBI
T Bill Market
Short term upto one year ( borrowing instruments of the Govt) RBI issues T Bills on a predetermined day. Auctioned at regular intervals Issued at a discount to face value & prepaid at face value on maturity. 4 types - 14 days , 91 days, 182 days & 364 days
Auction every Friday Alternate Wednesday of every week Amount for 14 days , 91 days 7 82 days Rs 100 Crores & 364 days T Bill auction is Rs 500 Crores Investors - banks( T Bills form part of SLR) Insurance companies & financial institutions Issued as entries in the subsidiary General ledger maintained by RBI