Investment is the employment of funds on assets with the aim of earning

income or capital appreciation. Investment has two attributes namely time and risk.
Present consumption is sacrificed to get a return in future. The sacrifice that has to be
borne is certain but the return in the future may be uncertain. This attribute of
investment indicates risk factor. The risk is undertaken with a view to reap some
return from the investment. For a layman investment means some monetary
commitment. A persons commitment to buy a flat or a house for his personal use may
be an investment from his point of view. This cannot be considered as an actual
investment as it involves sacrifice but does not yield any financial return.
To the economist, investment is the net addition made to the nations capital
stock that consists of goods and services that are used in the production process. A net
addition to the capital stock means an increase in the buildings, equipments or
inventories. These capital stocks are used to produce other goods and services.
Financial investment is the allocation of money to assets that are expected to
yield some gain over a period of time. It is an exchange of financial claims such as
stocks and bonds for money. They are expected to yield returns and experience capital
growth over the years.
The financial and economic meanings are related to each other because the
savings of individual flow into the capital market as financial investments to be used
in economic development.
Investment is different from savings as the first refers to the act of putting
aside money for future use, while the second refers to the money itself. In common
usage savings generally means putting money aside, for example:- by putting money
in the bank. In broader sense, savings is typically used to refer to economizing,
cuttings costs or to rescuing someone or something.
Investment is an economic activity and it is fascinated by people from all
walks of life. Investment is a term with several closely related meanings in finance
and economics. It refers to the accumulation of some kind of asset in hopes of getting
a future return from it. Investment is the money that is invested with an expectation of

profit. It can be anything of value purchased to provide capital appreciation and or

income. Examples include stocks, bonds, mutual funds, unit investment, trusts, real
estate etc.

Investment definition
Purchase of financial asset that produce a yield that is proportionate to the risk
assured over some future investment period
F. Aniling
Investment is sacrifice of certain present value for some uncertain future value
Sharpe

INVESTMENT OBJECTIVES
The main investment objectives are increasing at the rate of return and
reducing the risk. Other objectives like safety, liquidity and hedge against inflation
can be considered as subsidiary objectives.
Return
Investors always expect a good rate of return from their investments. Rate of
return could be defined as the total income the investor receives during the holiday
period stated as a percentage of the purchasing price at the beginning of the holding
period.
Rate of return is stated semi-annually or annually to help comparison among
the different investment alternatives. If it is a stock, the investor gets the dividend as
well as the capital appreciation as returns. Market return of the stock indicates the
price appreciation for the particular stock.
Risk
Risk of holding securities is related with the probability of actual return becoming
less than the expected return. The word risk is synonymous with the phrase variability

of return. Investments risk is just as important as measuring its expected rate of return
because minimizing risk and maximizing the rate of return are interrelated objectives
in the investment management. An investment whose rate of returns varies widely
from period to period is risky than whose return that does not change much. Every
investor likes to reduce the risk of his investment by proper combination of different
securities.
Liquidity
Marketability of the investment provides liquidity to the investment. The liquidity
depends upon the marketing and trading facility. If a portion of the investment could
be converted into cash without much loss of time, it would help the investor meet the
emergencies. Stocks are liquid only if they command good market by providing
adequate return through dividends and capital appreciation
Hedge against inflation
Since there is inflation in almost all the economy, the rate of return should
ensure a cover against the inflation. The return rate should be higher than the rate of
inflation, otherwise the investor will have loss in real terms. Growth stocks would
appreciate in their values overtime and provide a protection against inflation. The
return thus earned should assure the safety of the principal amount, regular flow of
income and be a hedge against inflation
Safety
The selected investment avenue should be under the legal and regulatory
framework. If it is not under the legal frame work, it is difficult to present the
grievances, if any .Approval of the law itself adds a flavor of safety. Even though
approved by law, the safety of the principal differs from one mode of investment to
another. Investments done with the government assure more safety than with the
private party. From the safety point of view investments can be ranked as follows:
Bank deposits, government bonds, UTI units, on-convertible debentures, equity
shares, and deposits with the non-banking financial companies.

THE INVESTMENT PROCESS

The investment process involves a series of activities leading to the purchase of
securities or other investment alternatives. The investment process can be divided into
five stages (i) investment analysis (ii) investment analysis (iii) valuation (iv) portfolio
evaluation. The flow chart 1.1 explains the stages and factors connected thereof.
Flowchart 1.1
Investment Process

Inves

Analy

Valua

Portfol

Portf

tmen

sis

tion

io

olio

Constr

Evalu

Inves

Mark

Intr

Diversif

Appr

tible

et

insi

cation

aisal

Selectio

Revis

fund
-

Indus

c
Val

INVESTMENT POLICY
The government or the investor before proceeding into investment formulates the
policy for the systematic functioning. The essential ingredients of the policy are the
investible funds, objectives and the knowledge about the investment alternatives and
market.
Investible funds

The entire investment procedure revolves around the availability of investible

funds. The fund may be generated through savings or from borrowings. If the funds
are borrowed, the investors have to be careful in the selection of investment
alternatives. The return should be higher than the interest he pays. Mutual funds
invest their owners money in securities.
Objectives
The objectives are framed on the required rate of return, need for regularity of
income, risk perception and the need for liquidity. The risk takers objective is to earn
high rate of return in the form of capital appreciation, whereas the primary objective
of the risk averse is the safety of the principal.
Knowledge
The knowledge about the investment alternatives and markets plays a key role in
the policy formulation. The investment alternatives range from security to real estate.
The risk and return associated with investment alternatives differ from each other.
Investment in equity is high yielding but has more risk than the fixed income
securities. The tax sheltered schemes offer tax benefits to the investors.
The investors should be aware of the stock market structure and the function of
the brokers. The mode of operation varies among BSE, NSE and OTCEI. Brokerage
charges are also different. The knowledge about the stock exchanges enables him to
trade the stock intelligently.

SECURITY ANLAYSIS
After formulating the investment policy, the securities to be bought have to be
scrutinized through the market, industry and company analysis.
Market analysis
The stock market mirrors the general economic scenario. The growth in the gross
domestic product and inflation are reflected in the stock prices. The recession in the
economy results in a bear market. The stock prices may be fluctuating in the short run

but in the long run they move in trends i.e either upwards or downwards. The
investors can fix his entry and exit points through technical analysis.
Industry analysis
The industries that contribute to the output of the major segments of the economy
vary in their overall contribution to economic activity. Some industries grow faster
than the GDP and are expected to continue in their growth. For example the
information technology industry has experienced higher growth rate than the GDP in
1998. The economic significance and the growth potential of the industry have to be
analyzed.
Company analysis
The purpose of company analysis is to help the investors to make better decisions.
The companys earnings, profitability, operating efficiency, capital structure and
management have to be screened. These factors have direct bearing on the stock
prices and the return of investors. Appreciation of the stock value is a function of the
performance of the company. Company with high product market share is able to
create wealth to the investors in the form of capital appreciation.

VALUATION
The valuation helps the investors to determine the return and risk expected from
an investment in the common stock. The intrinsic value of the share is measured
through the book value of the share and price earnings ratio. Simple discounting
models also can be adopted to value the shares. The stock market analysts have
developed many advanced models to value the shares. The real worth of the share is
compared with the market price and then the investment decisions are made.
Future value
Future value of the securities could be estimated by using a simple statistical
technique like trend analysis. The analysis of the historical behavior of the price
enables the investor to predict the future value.

CONSTRUCTION OF PORTFOLIO
A portfolio is a combination of securities. The portfolio is constructed in such a
manner to meet the investors goals and objectives. The investor should decide how
best to reach the goals with the securities available. The investor tries to attain
maximum return with minimum risk. Towards this end he diversifies his portfolio and
allocates funds among the securities.
Diversification
The main objective of diversification is the reduction of risk in the loss of capital
and income. A diversified portfolio is comparatively less risky than holding a single
portfolio. There are several ways to diversify the portfolio.
Debt and equity diversification
Debt instruments provide assured return with limited capital appreciation.
Common stocks provide and capital aim but with the flavor of uncertainty. Both debt
instruments and equity are combined to complement each other.
Industry diversification
Industries growth and their reaction to government policies differ from each other.
Banking industry shares may provide regular returns but with limited capital
appreciation. The information technology stock yields high return and capital
appreciation but their growth potential after the year 2002 is not predictable. Thus,
industry diversification is needed and it reduces risk.
Company diversification
Securities from different companies are purchased to reduce risk. Technical
analyst suggests the investors to buy securities based on the price movement.

Fundamental analysts suggest the selection of financially sound and investor friendly
companies.
Selection
Based on the diversification level, industry and company analyses the securities
have to be selected. Funds are allocated for the selected securities. Selection of
securities and the allocation of funds and seals the construction of portfolio.

EVALUATION
The portfolio has to be managed efficiently. The efficient management calls for
evaluation of the portfolio. This process consists of portfolio appraisal and revision.
Appraisal
The return and risk performance of the society vary from time to time. The
variability in returns of the securities is measured and compared. The developments in
the economy, industry and relevant companies from which the stocks are bought have
to be appraised. The appraisal warns the loss and steps can be taken to avoid such
losses.
Revision
Revision depends on the results of the appraisal. The low yielding securities
with high risk are replaced with high yielding securities with low risk factor. To keep
the return at particular level necessitates the investor to revise the components of the
portfolio periodically.

INVESTMENT AVENUES
The problem of surplus gives rise to the question of where to invest, as the part
investment avenues were limited to real estate, schemes of post office and banks. At
present a wide variety of investment avenues are open to the investors to suit their
needs and nature. Knowledge about the different avenues enables the investors to
choose investment intelligently. The required level of returns and the risk tolerance

level decide the choice of the investor. The investment alternatives range from
financial securities to traditional non-security investment.
There are large numbers of investment avenues for savers in India. Some of them
are marketable. Some of them are highly risky while some others are almost riskless.
The investor has to choose proper avenues from among them, depending on his
specific need, risk preference, and return expectation.
Flow Chart 1.2
Investment Avenues
Safe and

Moderate

Highrisk

Tradition

low risk

risk

investment

al

investment

investment

avenues

investmen

avenues

avenues

Savings a/c
Bank fixed
deposits
Public provident
fund
National saving

Mutual fund
Life
insuran
ce
Debentures
Bonds

t avenues

Equity share
market
Commodity share

market
Forex market

certificate
National saving
scheme
Post Office savings
Govt.securities
Pension Fund

SAFE & LOW RISK INVESTMENT AVENUES

Real estate
Gold/Silver
Chit funds

1. Bank deposits
a) Fixed deposit account: Cash is deposited in this account for a fixed period. The
depositors can withdraw money only on the expiry of the period for which the deposit
has been made on such deposits the banks pay higher rate of interest, depending on
the length of the time period and amount of deposit.
b) Current Deposit Account: In this account depositor can deposit and withdraw his
funds any number of times he likes. Businessmen deposit their funds in this account.
c) Saving Deposit Account: This account is meant for small savings. There is a limit
on total weekly withdrawals.
d) Recurring deposit Account: Under this account a specified amount is deposited
every month for a specified period for e.g.:- 12, 24, 36 or 60 months. The amount
cannot be withdrawn before the expiry of the given period except under exceptional
circumstances.
2. Public Provident Fund
Public Provident Fund earns an interest rate of 12 percent per year, which is
exempted from the income tax under sec88. The individuals and Hindu undivided
families can participate in this scheme. The maximum limit per annum for the deposit
is 60,000. The interest is accumulated in the deposit. It provides early withdrawal
facilities from 7th year and every year thereafter, the account holder has an option to
withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever
s lower. The facility makes Public Provident Fund a self-sustaining account from 7th
year onwards.
3. National Saving Certificate
This scheme is offered by the post office. These certificates come in the
denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution and the interest
for the 5 years are covered by Sec 88. The interest is cumulative at the rate of 12%

per annum and payable biannually is covered bysec80L. No withdrawals are

permitted. There is no deduction at maturity.
3. National Savings scheme
This scheme helps in deferring the tax payment. Individuals and HUF are eligible
to open NSS account in the designated post office. The NSs-87 gives 100 percent
income tax rebate but the interest as well as the capital is fully taxable if withdrawn
during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years
qualify for a rebate of 20percent under section 88 of the Income Tax Act, subject to
maximum of 12,000. The investment also earns an interest rate of 11 percent per year
covered by Sec 80L. Compared to other tax savings instruments the return offered by
this scheme is lower.
On the liquidity aspect, withdrawal is permitted at any time after four years from
the end of the financial year in which the account is opened. The entire amount can be
withdrawn. The account can be closed on the expiry of 4 years. There is no fixed
tenure for investment. One can also keep the account alive and earn interest at 11
percent per annum.
As a tax saving instrument anytime withdrawal after 4 years is the only
interesting feature to the prospective investor. The tax deduction at source at the rate
of 20 percent on the entire amount withdrawn has proved too costly to the investors.
5. Post Office Deposits
Like the banks, post office also offers fixed deposit facility and monthly income
scheme. Post office Monthly Income Scheme is a popular scheme for the retired. The
investment avenues provided by post office are non-marketable. However most of the
saving schemes in post offices enjoy tax concessions. Post office accepts savings
deposits as well as deposits from the public. NSCs are also marketed by post office
to investors. The interest on the amount interested is compounded half yearly and is
payable along with the principal at the time of maturity which is 6years from the date
of issue. An interest rate of 13% is paid monthly. The term of the scheme is 6 years, at

the end of which a bonus of 10% is paid. The annualized yield to maturity works out
to be 15.01% per annum. After three years, premature closure is allowed without any
penalty. If the closure is after one year, a penalty of 5% is charged.
6. Government Securities
The securities issued by the Central, state Government and quasi government
agencies are known as government securities or gilt edged securities. As government
guarantees security is a claim on the Government, it is secured financial instrument,
which guarantees the income and the capital. The rate of interest on these securities is
relatively lower because of their high liquidity and safety.
Government and semi government bodies such as PSUs borrow money from the
public through the issue of government securities and public sector bonds. These are
less risky avenues of investment because of the credibility of government and
government undertakings. The Government Issue securities is the money market and
in the capital market. Money market instruments are tracked in the wholesale debt
market trade and retailer segments. Instruments traded in the money markets are short
term instruments such as TB and repos.
7. Pension Fund
A pension fund is an entity setup to collect money from employers and
employees, invest the proceeds in securities and other assets and pay benefits to
retirees from the funds accumulated resources. It has an investment policy statement
that portrays the nature of the asset in which the pension fund is to invest. Thus they
provide means for individuals to accumulate savings over the working life so as to
finance their consumption needs in their retirement, either by means of lump sum or
by provision of an annuity, while also supplying funds to end user such as
corporations, other households( via securitized ) or governments for investment
consumption.

According to Davis (1995) pension funds may be defined as forms of institutional

investor, which collect pool and invest funds contributed by sponsors and
beneficiaries to provide for the future pension entitlements of beneficiaries.
It can be defined as the fund established by an employer to facilitate and organize
the investment of employees retirement funds contributed by the employer and
employees. It is the common asset pool meant to generate stable growth over the long
term, and provide pension for employees when they reach the end of the working
years and commence retirement
MODERATE RISK INVESTMENT AVENUES
1. Mutual fund
Investment companies or investment trust obtained funds from large number of
investors through sale of units. The funds collected from the investors are placed
under professional management for the benefit of the investors. The mutual funds are
broadly classified into open-ended scheme and close-ended scheme.
a) Open-ended schemes: The Open-ended scheme offer its units on continuous bases
and accepts funds from investors continuously. Repurchased is carried out on a
continuous bases thus, helping the investors to withdraw their money at any time. In
other words, there is an uninterrupted entry and exit into the funds. The open end
scheme has no maturity period and they not listed in the stock exchanges. Investor
can deal directly with the mutual fund for investment as well as redemption. The open
ended fund provides liquidity to the investors since the repurchase facility is
available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998
the open ended schemes have crossed 80 in number.
b) Close ended funds: The close ended funds have fixed maturity period. The first
time investments are made when the close end scheme is kept open for a limited
period. Once closed, the units are listed on a stock exchange. Investors can buy and
sell their units only through stock exchanges. The demand and supply factors

influence the prices of the units. The investors expectation also affects the unit
prices. The market price may not be the same as the net asset value.
Sometimes mutual funds with the features of closed ended and open ended
scheme as launched known as interval funds. They can be listed in the stock exchange
or may be available for repurchase during specific periods at net asset value or related
prices.
Other Classification
The open-ended and close-ended schemes are classified on the basis of their
objectives. Some of them are given below
Growth scheme: Aims to provide capital appreciation over medium to long term.
Generally these funds invest their money in equities.
Income scheme: This scheme aims to provide a regular return to its unit holders.
Mostly these funds deploy their funds I fixed income securities.
Balanced scheme: A combination of steady return as well as reasonable growth. The
funds not these schemes are invested in equities and debt instruments.
Money market scheme: This type of fund invests its money on money market
instruments like treasury bills, commercial paper, etc
Tax saving schemes: This type of scheme offers tax rebates to investors. Equity linked
saving schemes and pension schemes provide exemption from capital aims on
specific investment.
Index scheme: Here investment is made on the equities of the index. Benchmark
index is BSE Sensex or NSE-50. The returns are approximately equal to the return on
the index.
2. Life Insurance
Life insurance is a contract for payment of sum of money to the person assured on
the happening of event insured against. Usually the contract provides for the payment

of an amount on the date of maturity or at specified dates at periodic intervals or if

unfortunate death occurs. Among other things, the contracts also provide for the
payment of premium periodically to the corporation by the policy holders. Life
insurance eliminates risk. The major advantages of life insurance are given below:
i)

Protection: Saving through life insurance guarantees full protection against

risk of death of the saver. The full assured sum is paid, whereas in other

ii)

schemes only the amount saved is paid.

Easy payments: For the salaried people the salary savings schemes are
introduced. Further, there is an easy installment facility method of payment

iii)
iv)

through monthly, quarterly, half yearly or yearly mode.

Liquidity: Loans can be raised on the security of the policy.
Tax relief: Tax relief in Income Tax and wealth Tax is available for amounts
paid by way of premium for life insurance subject to the tax rates in force.

Schemes of LIC
LIC offers a wide range of schemes to suit the needs of the individual
investor.
Basic Life Insurance Plans
Whole life assurance plan: It is a low cost insurance plan where the sum assured is
payable on the death of the life assured and premiums are payable throughout life.
Endowment assurance plan: Under this plan, the sum assured is payable on the date of
maturity or on the death of the life assured, if earlier.
Both these plans are available with the facility of paying the premiums for a limited
period.
Term Assurance plan
Two-year temporary assurance plan: Under this plan, term assurance for two years is
available. The sum assured is payable only on the death of the life assured during the
term.

Convertible term assurance plan: It provides term assurance for 5 to 7 years with an
option to purchase a new, Limited Payment Whole Life Policy or an Endowment
Assurance Policy at the end of the selected term; provided policy is in full force.
Bima sandesh: This is basically a Term Assurance Plan with the provision for return of
premiums paid, on the life assured surviving the term.
Bima kiran: This plan is an improved version of Bima Sandesh with an added attraction
of loyalty addition, in-built accident cover and Free Term Cover after maturity =,
provided the policy is then in full force
Plans for children
Various childrens deferred assurance plans available viz, Jeevan Balya, and Jeevan
kishore. Jeevan Sukanya is a plan specially designed for girls. The childrens money back
assurance is specially designed to provide for childrens higher educational expenses with
added attraction of guaranteed additions, loyalty additions and optional family benefit.
Pension Plans
These plans provide for either immediate or deferred pension for life. The pension
payments are made till the death of the annuitant (unless the policy has provision of
guaranteed period). Both the Deferred Annuity and Immediate annuity plans are available
with the return of the GIVE amount on death after vesting under the Jeevan Dhara Plan
and return of Purchase Price on death under the Jeevan Akshay Plan.
Jeevan Sarita
This is a Joint-life survivor-annuity-cum-assurance plan (for husband and wife)
where the claim amount is payable partly in lump sum and partly in the form of an
annuity. Balance sum is assured on the death of the survivor.
3.Debenture
According to Companies Act 1956 Debenture includes debebturestock, bonds
and any other securities of company, whether constituting a charge on the assets of the

company or not. Debentures are generally issued by the private sector companies as a
long term promissory note for raising loan capital. The company promises to pay
interest and principal as stipulated. Bond is an alternative form of debenture in India.
Public sector companies and financial institutions issue bonds.
Characteristic Features of Debentures
Form: it is given in the form of certificate of indebtedness by the company specifying the
date of redemption and interest rate.
Interest: The rate of interest is fixed at the time of issue itself which is known as
contractual or coupon rate of interest. Interest is paid as a percentage of the par value of
the debenture and may be paid annually, semi annually or quarterly. The company has
legal binding to pay the interest rate.
Redemption: as earlier the redemption date would be specified in the issue itself. The
maturity period may range from 5 years to 10 years in India. They may be redeemed in
installments. Redemption is done through a creation of sinking fund by the company. A
trustee in charge of the fund buys the debentures either from the market or owners.
Creation of the sinking fund eliminates the risk of facing financial difficulty at the time of
redemption because redemption requires huge sum.
Buy back provisions help the company to redeem the debentures at a special price
before the maturity date. Usually the special price is higher than the par value of the
debenture.
Indenture: Indenture is a trust deed between the company issuing debenture and the
debenture trustee who represents the debenture holders. The trustee takes the
responsibility of protecting the interest of the debentures holders and ensures that the
company fulfills the contractual obligations. Financial institutions, Banks, insurance
companies or firm attorneys act as trustees tot the investors. In the indenture the terms of
the agreement, description of debentures, rights of the debentures holders, and rights of
the issuing company and the responsibilities of the company are specified clearly.
Types of Debentures

Debentures are classified on the basis of the security and convertibility

i)
ii)
iii)
iv)

Security or unsecured
Fully convertible debenture
Partly convertible debenture
Non- convertible debenture

Secured or Unsecured: A Secured debenture is security by a lien on the companys

specific assets. In the case of default the trustee can take can take hold of the specific
asset on behalf of the debenture holders. In the Indian market secured debentures have a
charge on the present and future immovable assets of the company.
When the debentures are not protected by any security they are known as
unsecured or naked debentures. In the American capital market debenture means
unsecured bonds while bonds could be secured or unsecured. Unsecured debentures find
it difficult to attract investors because of the risk involved in them. Generally debentures
are rated by the cr4edit rating agencies.
Fully convertible debenture: This type of debenture is converted into equity shares of the
company on the expiry of specific period. The conversion is carried out according to the
guidelines issued by SEBI. The FCD carries lower interest rate than other types of
debentures because of the attractive feature of convertibility into equity shares.
Partly convertible debenture: This debenture consists of two parts namely convertible and
non convertible. The convertible portion can be converted into shares after a specific
period. Here, the investor has the advantage of convertible and non-convertible
debentures blended into one debentures. Ex. Procter and Gamble has issued PCD of Rs
200 each to its existing shareholders. The investor can get a share of Rs 65 with face
value of Rs 10 after 18 months from allotment.
Non-convertible debenture: Non- convertible debentures do not confer any option on the
holder to convert the debentures into equity shares and are redeemed at the expiry of the
specified period.
4. Bond

Bond is a long term debt instrument that promises to pay a fixed annual sum as
interest for specified period of time. The basic features of the bonds are given below
i)

Bonds have face value. The face value is called par value. The bonds may be

ii)

issued at par or at discount.

The interest rate is fixed. Sometimes it may be variable as in the case of
floating rate bond. Interest is paid semi-annually or annually. The interest rate

iii)

is known as coupon rate. The interest rate is specified in the certificate.

The maturity date of the bond is usually specified at the issue time except in

iv)

the case of perpetual bonds.

Bonds are traded in the stock market. When they are traded the market value

v)

may be at par value or at premium

Bonds are traded in the stock market. When they are traded the market value
may be at par or at premium or at discount. The market value and redemption
value need not be the same.

Secured bonds and unsecured bonds unsecured bonds: The secured bond is secured
by the real assets of the issuer. In the case of the unsecured bond the name and fame
of issuer may be the only security.
Perpetual bonds and redeemable bonds: Bonds that do not mature or never mature are
called perpetual bonds. The interest alone would be paid. In the redeemable bond, the
bond is redeemed after a specific period of time. The redemption value is specified by
the issuer.
Fixed interest rate bonds and floating interest rate bonds: In the fixed interest rate
bonds, the interest rate is fixed at the time of the issue.
HIGH RISK INVESTMENTS AVENUES
1. Equity Shares
Equity shares are commonly referred to common stock or ordinary shares. Even
though the words shares and stocks are interchangeably used, there is a difference
between them. Share capital of a company is divided into a number of small units of
equal value called shares. The term stock is the aggregate of a members fully paid up

shares of equal value merged into one fund. It is a set of shares put together in a
bundle. The stock is expressed in terms of money and not as many shares. Stock
can be divided into fractions of any amount and such fractions may be transferred like
shares.
Share certificate means a certificate under the common seal of the company
specifying the number of shares held by any member. Share certificate provides the
prma facie evidence of title of the members to such shares. This gives the shareholder
the facility of dealing more easily with his shares in the market. It enables him to sell
his shares by showing marketable title.
Equity shares have the following rights according to section 85(2) of the
Companies Act 1956.
i)
ii)
iii)
iv)

Right to vote at the general body meetings of the company

Right to control the management of the company
Right to share in the profits in the form of dividends and bonus shares.
Right to claim on the residual after repayment of all the claims in the case of

v)
vi)
vii)

winding up of the company

Right of pre-emption in the matter of issue of new capital
Right to apply to court if there is any discrepancy in the rights set aside
Right to apply the central government to call an annual meeting when a

viii)

company fails to call such a meeting.

Right to apply the company law board for calling an extraordinary general
meeting
In a limited company the equity shareholders are liable to pay the companys
debt only to the extend of their share in the paid up capital. The equity shares
have cetain advantages. The main advantages are
Capital appreciation
Limted liability
Free Tradeability
Tax advantages( In certain cases) and
Hedge against inflation

Sweat Equity

Sweat equity is a new equity instrument introduced to the companies

(Amendment) Ordinance, 1998. Newly inserted Section 79A of the Companies Act
1956 allows issue of seat equity. However, it should be issued out of a class of
equity shares already issued by the company. It cannot form a new class of equity
shares section 79A (2) explains that all limitations, restrictions and provisions
applicable to equity shares are applicable to sweat equity. Thus sweat equity forms a
part of equity share capital.
Non-Voting Shares
Non-voting shares carry not voting writes. They carry additional dividends instead
of the voting writes. Even through the idea was widely discussed in 1987; it was only
in the year 1994 that the finance ministry announced certain board guidelines for the
issue of non-voting shares.
They have right to participate in the bonus issue. The non-voting shares also can
be listed and traded in the stock exchanges. If Non-voting shares are not paid
dividend for 2 years, the shares would be automatically get voting rights; The
Company can issue this to a maximum of 25% of the voting stock.
The dividend non- voting shares would have to be 20% higher than the dividend on
the voting shares. All rights and bonus share for the non-voting shares have to be
issued in the form of non-voting shares only.
Right shares
Shares offered to the existing share holders at the price of the company are called
right shares. They are offered to the share holders as a matter of legal right. If a public
company wants to increase its subscribed capital by way of issuing shares after two
years from its formation date or one year from the date of fast allotment., whichever
is earlier, such shares should be offered first to the existing share holders in
proportion to the capital paid up on the shares held by them at the date of such offer.
This pre-emptive right can forfeit by the share holders through a special resolution.
The share holders can renounce the right shares in favor of his nominee. He may

renounce all or part of the shares offered of him. The right shares partly paid
minimum subscription limited is prescribed for right issues. In the event of company
failing to receive 90% subscription, the company shall have to return the entire
money received. At present, SEBI has removed the limit. Right issues are regulated
under the provisions of the companies Act and SEBI.
Bonus Shares
Bonus share is the distribution of share in addition to the cash dividends to the
existing share holders. Bonus shares are issued to the existing share holders with any
payment of cash. The aim of bonus share is to capitalize the free resource. The bonus
issue is made out of free resource built out of genuine profit of share. The premium
collected in cash only. The bonus issue could be made only when all the party paid
shares, if any, existing are made fully paid up
The declaration of the bonus issue used to have favorable impact on the psychology
of the share holders. They take it has an indication of higher feature profit.
Bonus shares are declared by the directions only when they expect a rise in the
profitability of the concern. The issue of bonus shares enables the share holders to sell
the shares and get capital gains while returning original shares.
Preference Stock
The characters of the preferred stock are hybrid in nature. Some of its features
resemble the bond of others the equity shares. Like the bonds, their claims on the
companys income are limited and they receive fixed dividend. In the event of
liquidation of the company their claims on the assets of the firm are also fixed. At the
same time like equity, its a perpetual liability of the corporate. The decision to pay
dividend to the preferred stock is at the discretion of the Board of Directors. In the
case of bonds, payment of interest rate is mandatory.
The dividend received by the preferred stock is treated on the par with the
dividend received from the equity share for the tax purposes. These share holders do
not enjoy any of the voting powers except when any resolution affects their rights.

2. Commodity
Commodities are any mass goods traded as an exchange or in cash market.
Industrial metal such as copper, aluminum, zinc, nickel, silver are also included in the
commodities. Commodities are traded in order to make profit from the fluctuation in
price. These potential profits results from the buying or selling futures contracts in a
particular good.
The value of a commodity changes as it supply and demand change. Investors
are able to make money by selling the commodity for more than what they brought it
for you. The prices of commodities can go up or down of course. Example of
commodities is gold, silver, oil, sugar, coffee, cotton, rubber and many more. The
prices of commodities are driven mostly by supply and demand. For example, oil
prices will go

if there is a shortage. Investment in commodities is very

speculative because their future demand is difficult to predict.

A popular way to invest in commodities is through a future contract, which is
an agreement to buy or sell in the future a specific quantity of a commodity at a
specific price. Futures are available on commodities such as
as well as agriculture products such as cattle or corn.

gold and natural gas,