What is Investment?

• The money you earn is partly spent and the rest saved
for meeting future expenses. Instead of keeping the
savings idle you may like to use savings in order to get
return on it in the future. This is called Investment.
 Why should one invest?
One needs to invest to:
• earn return on your idle resources .
• generate a specified sum of money for a specific goal in
life.
• make a provision for an uncertain future.

One of the important reasons why one needs to invest

wisely is to meet the cost of Inflation. Inflation is the
rate at which the cost of living increases. The cost of
living is simply what it costs to buy the goods and
services you need to live.
 INFLATION
JOB BUSINESS

year Salary Year product growth

2001 5000 2001 Vadapav 1rs

2021 20000 2021 Vadapav 20rs

 When to start Investing?
• 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:

 Invest early.
 Invest regularly.
 Invest for long term and not short term.
What care should one take while
investing?
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment .
2. read and understand such documents .
3. verify the legitimacy of the investment .
4. find out the costs and benefits associated with the investment.
5. assess the risk-return profile of the investment .
6. know the liquidity and safety aspects of the investment.
7. ascertain if it is appropriate for your specific goals .
8. compare these details with other investment opportunities available .
9. examine if it fits in with other investments you are considering or you have already made.
10. deal only through an authorized intermediary .
11. seek all clarifications about the intermediary and the investment.
12. explore the options available to you if something were to go wrong, and then, if satisfied,
make the investment.
These are called the Twelve Important Steps to Investing.
 What is meant by Interest?
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 fixed for
the life of the loan, or it may be variable, depending on
the terms of the loan.
What factors determine interest
rates?
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 fixed 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:
• Demand for money
• Level of Government borrowings
• Supply of money Inflation rate
• The Reserve Bank of India and the Government policies which determine some of
the variables mentioned above
What are various options
available for investment?
• One may invest in: Physical assets like real estate,
gold/jewellery, commodities etc. and/or Financial
assets such as fixed deposits with banks, small saving
instruments with post offices,
insurance/provident/pension fund etc. or securities
market related instruments like shares, bonds,
debentures etc.
What are various Short-term
financial options available for
investment?
• 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 first banking product people use, which offers low
interest (4%-5% p.a.), making them only marginally better than fixed deposits.
• Money Market or Liquid Funds are a specialized form of mutual funds that invest in
extremely short-term fixed 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.
 What are various Long-term
financial options available for
investment?
• Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits,
Bonds and Debentures, Mutual Funds etc. Post Office Savings: Post Office
Monthly Income Scheme is a low risk saving instrument, which can be availed
through any post office. 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.
• Fixed deposit
• Mutual funds
 What is meant by a Stock
Exchange?
• The Securities Contract (Regulation) Act,
1956 [SCRA] defines ‘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 specified 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. BSE NSE
 What is an ‘Equity’/Share?
• 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.
 What is a ‘Debt Instrument’?
• 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.
 What is a Derivative?
• 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 financial derivatives came
into spotlight in post-1970 period due to growing
instability in the financial markets.
• However, since their emergence, these products have
become very popular and by 1990s, they accounted for
about two thirds of total transactions in derivative
products.
 What is a Mutual Fund?
• 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 financial
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
 What is an Index ?
• An Index shows how a
specified 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
 What is a Depository?
• A depository is like a bank wherein the deposits are
securities (viz. shares, debentures, bonds, government
securities, units etc.) in electronic form.
 What is Dematerialization ?
• Dematerialization is the process by which physical
certificates 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).
 What is the function of Securities
Market?
• 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 efficiently
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 financial products, called ‘Securities’.
Which are the securities one can
invest in?
• Shares
• Government Securities
• Derivative products
• Units of Mutual Funds etc., are some of the securities
investors in the securities market can invest in.
 What is the role of the ‘Primary
Market’?
• 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.
Why do companies need to issue
shares to the public?
• Most companies are usually started privately by their
promoter(s). However, the promoters’ capital and the
borrowings from banks and financial institutions may
not be sufficient 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.
 What is meant by Market
Capitalisation?
• 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 capitalization of company A is Rs.
12000 million.
 What is an Initial Public Offer
(IPO)?
• 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 first 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.
 What is a Prospectus ?
• A large number of new companies float 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 identifies 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 financing, product and capacity etc. It also contains lot
of mandatory information regarding underwriting and statutory
compliances. This helps investors to evaluate short term and
 What is meant by Secondary
market?
• 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.
 What is a Contract Note?
• Contract Note is a confirmation 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.