The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by a
cumulating the principal and the interest or dividend earned on it,
year after year. The three golden rules for all investors are:
Before making any investment, one must ensure to:
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fi xed for the life of the loan, or it may be variable, depending on the terms of the loan.
When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fi xed deposits etc. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors.
Some of these factors are:
One may invest in:
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may be considered as short-term financial investment options:
Savings Bank Account is often the fi rst banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fi xed deposits.
Money Market or Liquid Funds are a specialized form of mutual
funds that invest in extremely short-term fi xed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.
Post Offi ce Savings Schemes, Public Provident Fund, Company
Fixed Deposits, Bonds and Debentures, Mutual Funds etc.
Post Offi ce Savings: Post Offi ce Monthly Income Scheme is a
low risk saving instrument, which can be availed through any post offi ce. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% bonus is also denied.
Public Provident Fund: A long term savings instrument with
a maturity of 15 years and interest payable at 8% per annum
compounded annually. A PPF account can be opened through a
nationalized bank at anytime during the year and is open all through
the year for depositing money. Tax benefi ts can be availed for the
amount invested and interest accrued is tax-free. A withdrawal is
permissible every year from the seventh fi nancial year of the date of
opening of the account and the amount of withdrawal will be limited
to 50% of the balance at credit at the end of the 4th year immediately
preceding the year in which the amount is withdrawn or at the end of
the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to fi ve years) borrowings by companies at a f xed rate of interest which is payable monthly, quarterly, semi10 annually or annually. They can also be cumulative fi xed deposits where the entire principal alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fi xed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specifi ed date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefitsinclude professional money management, buying in small amounts
and diversifi cation. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short
The Securities Contract (Regulation) Act, 1956 [SCRA] defi nes
‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specifi ed at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception. NSE was incorporated as a national stock exchange.
Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 11 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights
Debt instrument represents a contract whereby one party lends
money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The fi nancial derivatives came into spotlight in post-1970 period due to growing instability in the fi nancial markets. However, since their emergence, these products have become very popular and
by 1990s, they accounted for about twothirds of total transactions in derivative products.
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/ corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as fi nancial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures,commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are also given the
option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.
An Index shows how a specifi ed portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.
Dematerialization is the process by which physical certifi cates
of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most effi ciently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of fi nancial products, called ‘Securities’.
The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.
Most companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and fi nancial institutions may not be suffi cient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.
The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company A is Rs. 12000 million.
An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the fi rst time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.
A large number of new companies fl oat public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifi es future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of 23 information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of fi nancing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.
Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
Contract Note is a confi rmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for fi ling a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.
Here are some useful pointers to bear in mind before you invest in the markets:
For more information on Basics of Financial Markets, please refer to the NCFM module : Financial Markets : A Beginners’ Module. Details are available on the website ww.nseindia.com under the link ‘NCFM’.
The information contained herein is subject to change without prior notice. While every effort is made to ensure the accuracy and completeness of information contained, the Exchange makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. Please refer to relevant regulations and circulars in case of specific cases and problems.