Financial Markets & Services

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From Very basics.Investment

Investment is the employment of funds on assets to earn income or capital
appreciation.
The individual who makes an investment is known as the investor.
In economic terms, investment is defined as the net addition made to the
capital stock of the country.
In financial terms, investment is defined as allocating money to assets with a
view to gain profit over a period of time.
Investments in economic and financial terms are inter-related where an
individual's savings flow into the capital market as financial investment, which
are further used as economic 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
To beat the devaluation of money ....inflation : Time
Value of Money

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Speculation.A situation : Real One

Speculation means taking business risks with the anticipation
of acquiring short term gain.
It also involves the practice of buying and selling activities in
order to profit from the price fluctuations.
An individual who undertakes the activity of speculation is
known as speculator.

Difference between Investor and Speculator

Base

Investor

Speculator

Time horizon Has a relatively longer planning

horizon. His holding period is
usually of one or more than one
year.

Has a very short planning

horizon. His holding period
may be few days to months.

Risk return

His risk is less.

His risk is high.

Decision

Attaches greater significance to

fundamental factors and
carefully evaluates the
performance of the company.

Attaches greater significance

to market behaviour and
inside information.

Funds

Uses his own funds.

Uses borrowed funds along

with his personal funds.

Investment Objectives
Return Income: The total income, the investor
receives during his holding period.
End period value Purchase period value
+ Dividends
Return =
100
Purchase period value

Risk: Variability in the return.

Liquidity: The ease with which the investment is
converted into cash.
Safety: It refers to the legal and regulatory
protection to the investment.
Hedge against inflation: The returns should be
higher than the rate of inflation.

Securities

They are instruments which represent a claim

over an asset or any future cash flows.
Securities are classified on the basis of return
and source of issue.
Fixed income securities

Return
Variable income securities

Issuers

Government
Quasi-Government
Public Sector Enterprises
Corporates

Equity Shares
Common stock or ordinary shares are most
commonly known as equity shares.
Stock is a set of shares put together in a bundle.
A share is a portion of the share capital of a
company divided into small units of equal value.
The advantages of equity shares are:
Capital appreciation
Limited liability
Hedge against inflation

Preference Stock
Preference stock provides fixed rate of return.
Preference stockholders do not have any voting rights.
Like the equity, it is a perpetual liability of the corporate.
Preference stockholders do not have any share in case the
company has surplus profits.

Types of Preference Stocks

There are different types of preference stocks, which
are:

Cumulative preference shares

Non-cumulative preference shares
Convertible preference shares
Redeemable preference shares
Irredeemable preference shares
Cumulative convertible preference shares

Sweat Equity
It is a new equity instrument introduced in the
Companies (Amendment) Ordinance, 1998.
It forms a part of the equity share capital as its
provisions, limitations and restrictions are same as
that of equity shares.
Sweat Equity is for:
The directors or employees involved in the process of
designing strategic alliances.
The directors or employees who have helped the
company to achieve a significant market share.

Non-voting Shares
The shares that carry no voting rights are known as nonvoting shares.
They provide additional dividends in the place of voting
rights.
They can be listed and traded on the stock exchanges.

Bonus Shares
Distribution of shares, in addition to the cash dividends, to
the existing shareholders are known as bonus shares.
These are issued without any payment for cash.
These are issued by cashing on the reserves of the
company.
A company builds up its reserves by retaining part of its
profit over the years.

Debenture
It is a debt instrument issued by a company, which carries
a fixed rate of interest.
It is generally issued by private sector companies in order
to acquire loan.
A company can issue various types of debentures, which
are:

Secured bonds or unsecured debenture

Fully convertible debenture
Partly convertible debenture
Non-convertible debenture

Bond
A bond is a debt security issued by the government,
quasi- government, public sector enterprises and
financial institutions.
Various features of a bond are:
The interest rate is generally fixed
It is traded in the securities market
At the time of issue of bonds, maturity date is specified

Some of the types of bonds that a company can issue

are:
Secured bonds and unsecured bonds
Perpetual bonds and redeemable bonds
Fixed interest rate bonds and floating interest rate bonds
Zero coupon bonds

Warrants
A warrant is a detachable instrument, which gives the right
to purchase or sell equity shares at a specified price and
period.
It is traded in the securities market where the investor can
sell it separately.
.

Some of the advantages of warrants are:

They have limited risk.
They offer potential for unlimited profits.
They can be traded in the securities market.

Assignment
List down 20 Investment Indian products/avenues /options
for individual investor with classifying the risk as High Risk,
Moderate Risk & Low Risk and defining them under two
category , Fixed Income & variable Income. Give the
range of returns from the above options( In Indian
Context)

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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.

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Indian Financial System An

Overview
PHASES
* Upto 1951
Pvt. Sector
* 1951 to 1990
Public Sector
* Early Nineties Privatisation
* Present Status Globalisation

19

Pre 1951
1.
2.
3.
4.
5.
6.
7.
8.
9.

Control of Money Lenders

No Laws / Total Private Sector
No Regulatory Bodies
Hardly any industrialization
Banks Traditional lenders for Trade and that too
short term
Main concentration on Traditional Agriculture
Narrow
industrial
securities
market
(i.e.
Gold/Bullion/Metal but largely linked to London Market)
Absence of intermediatary institutions in long-term
financing of industry
Industry
had
limited
access
to
outside
saving/resources.
20

1951-1990
Nationalization
RBI
SBI
LIC
Banks

1948
1956 (take-over of Imperial Bank of India)
1956 (Merges of over 250 Life Insurance Companies)
1969 (14 major banks with Deposits of over Rs. 50
Crs.nationalised)
1980 (6 more Banks)
Insurance 1972 (General Insurance Corp. GIC by New India,
Oriental, united and National.

21

POST 1990
INDUSTRIES

Rise & Growth of Service Sector industries.

Reliance & Dependence on technology.
E-mail & mobile made sea-change in communication, data collection etc.
Computerization a catch phrase and inevitable need of an hour.
Dependent on Capital Market rather than only Debts dependency.
Scalability of operations through globally competitive size.
Broad basing of Board.
Professional Management.

NBFC

NBFC under RBI governance to finance retail assets and mobilize

small/medium sized savings.
Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata
Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.

22

STRUCTURE OF FINANCIAL MARKETS IN INDIA

Financial Markets in India

Debt Market
Primary /
Secondary

RBI
RBI

Forex
Market

RBI

Capital Market
Primary /
Secondary &
Depository

SEBI

Insurance
Life/General

IRDA

Banks (including
RRBs, co-op etc)

RBI

Mutual
MutualFunds,
Funds,
Venture
VentureFunds,
Funds,
Investment
Investment
Bonds
Bonds

RBI/SEBI

REGULATORY AUTHORITY

23

Two Main Sources of Funds

Debt And Equity

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So Technically .Capital Market is

Definition: Capital market is a market where buyers and
sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants
such as individuals and institutions.
Description: Capital markets help channelise surplus funds
from savers to institutions which then invest them into
productive use. Generally, this market trades mostly in longterm securities.

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Capital market deals with medium term and long term funds.
It refers to all facilities and the institutional arrangements for
borrowing and lending term funds (medium term and long
term).
The demand for long term funds comes from private business
corporations, public corporations and the government.
The supply of funds comes largely from individual and
institutional investors, banks and special industrial financial
institutions and Government

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ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA

Mobilization Of Savings And Acceleration Of Capital
Formation
Raising Long - Term Capital - The investors cannot commit their funds for a
permanent period but companies require funds permanently.

Promotion Of Industrial Growth & Development

Ready And Continuous Market
Proper Channelization Of Funds : Ex Gold
Foreign Capital
Easy Liquidity

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Functions of a capital
market
Disseminate information
efficiently
Enable quick valuation of
financial instruments both
equity and debt
Provide insurance against
market risk or price risk
Enable wider participation
Provide operational efficiency
through
-simplified transaction

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