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Learning Center

Equities

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Equity investments are basically investments in shares of companies which are listed/being listed on trading exchanges. Stocks can be bought/sold from the exchanges (secondary market) or via IPOs – Initial Public Offerings (primary market). Stocks can be termed as one of the best long-term investment options as the market volatility and the resultant risk of losses are mitigated by the general upward momentum of the economy in the long run.
Shares define the portion of investment an investor has made in a particular company at a given price. The total equity capital of a company is divided into equal units of small denominations, each called a share. The holders of such shares are members of the company and have voting rights.
Prior to the concept of electronic exchanges shares were issued to investors in physical form. 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).
It is a shared responsibility jointly taken by Department of Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of India (SEBI).
The nominal or stated amount (in Rs.) assigned to a security by the issuer. For shares, it is the original cost of the stock shown on the certificate. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and is a small contributor on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price.

Derivatives

Derivatives are financial contracts, which derive their value off a spot price time-series, which is called "the underlying". The underlying asset can be equity, index, commodity or any other asset. Some common examples of derivatives are Forwards, Futures, Options and Swaps.
Derivatives help to improve market efficiencies because risks can be isolated and sold to those who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can be managed independently. From a market-oriented perspective, derivatives offer the free trading of financial risks.
There are several risks inherent in financial transactions. Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks.
Hedgers - Operators, who want to transfer a risk component of their portfolio. Speculators - Operators, who intentionally take the risk from hedgers in pursuit of profit. Arbitrageurs - Operators who operate in the different markets simultaneously, in pursuit of profit and eliminate mis-pricing.
A forward contract is a customized contract between two parties, where settlement takes place on a specific date in future at a price agreed today.
Futures are exchange traded contracts to sell or buy financial instruments or physical commodities for Future delivery at an agreed price. There is an agreement to buy or sell a specified quantity of financial instrument/ commodity in a designated Future month at a price agreed upon by the buyer and seller. The contracts have certain standardized specifications.
A long position in futures, can be closed out by selling futures while a short position in futures can be closed out by buying futures on the exchange. Once position is closed out, only the net difference needs to be settled in cash, without any delivery of underlying. Most contracts are not held to expiry but closed out before that. If held until expiry, some are settled for cash and others for physical delivery.

Currency

The Currency Futures Trading System of Bombay Stock Exchange Ltd. is called BSE-CDX (BSE Currency Derivatives Exchange)
Currency Futures traded on BSE-CDX
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Currency Futures allows investors to take a view on the movement of the Indian Rupee (INR) against other currencies.
Currently, only Currency Futures are allowed to be traded by SEBI.
A currency forward contract is traded in the over-the-counter market usually between two financial institutions or between a financial institution and its client.
You do not need to own the underlying currency when you enter into a futures contract. The contract simply represents a commitment to either sell or buy the asset on the set expiry date.

Mutual Fund

A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investable surplus of as little as a few thousand rupees can invest in Mutual Funds. These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy the money thus collected is then invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme's stated objectives. The income earned through these investments and the capital appreciations realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment program or as a supplement, Mutual Fund schemes can help you meet your financial goals.

A. By Structure

Open-Ended Schemes

These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices.

Open-Ended Schemes

Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unitholders' expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.

Interval Schemes

These combine the features of open-ended and close- ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

B. By Investment Objective

Growth Schemes

Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short- term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short-term. Ideal for:
  • Investors in their prime earning years.
  • Investors seeking growth over the long-term

Income-Schemes

Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for:
  • Retired people and others with a need for capital stability and regular income.
  • Investors who need some income to supplement their earnings.

Balanced-Schemes

Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. Ideal for:
  • Investors looking for a combination of income and moderate growth

Money Market Schemes

Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter- bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for:
  • Corporate and individual investors as a means to park their surplus funds for short periods or awaiting a more favorable investment alternative.

Tax Saving Schemes

These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. Recent amendments to the Income Tax Act provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax savings are provided in the relevant offer documents. Ideal for:
  • Investors seeking tax rebates.

Special Schemes

This category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. Remember, as always, higher the return you seek higher the risk you should be prepared to take. A few frequently used terms are explained here below:

Net Asset Value ("NAV")

Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.

Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.

Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.

Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.

Sales Load Is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.

Repurchase or 'Back-end' Load Is a charge collected by a scheme when it buys back the units from the unit holders.

The advantages of investing in a Mutual Fund are:
  • Professional Management. You avail of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analyses the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme.
  • Diversification. Mutual Funds invest in a number of companies across a broad cross-section of industries and sectors. This diversification reduces the risk because seldom do all stocks declare at the same time and in the same proportion. You achieve this diversification through a Mutual Fund with far less money than you can do on your own.
  • Convenient Administration. Investing in a Mutual Fund reduces paperwork and helps you avoid many problems such as bad deliveries, delayed payments and unnecessary follow up with brokers and companies. Mutual Funds save your time and make investing easy and convenient.
  • Return Potential. Over a medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities
  • Low Costs. Mutual Funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial and other fees translate into lower costs for investors.
  • Liquidity. In open-ended schemes, you can get your money back promptly at net asset value related prices from the Mutual Fund itself. With close-ended schemes, you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase at NAV related prices which some close-ended and interval schemes offer you periodically.
  • Transparency. You get regular information on the value of your investment in addition to disclosure on the specific investments made by your scheme, the proportion invested in each class of assets and the fund manager's investment strategy and outlook.
  • Flexibility. Through features such as regular investment plans, regular withdrawal plans and dividend reinvestment plans, you can systematically invest or withdraw funds according to your needs and convenience.
  • Choice of Schemes. Mutual Funds offer a family of schemes to suit your varying needs over a lifetime.
  • Well Regulated. All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by SEBI.
All investments whether in shares, debentures or deposits involve risk: share value may go down depending upon the performance of the company, the industry, state of capital markets and the economy; generally, however, longer the term, lesser the risk; companies may default in payment of interest/ principal on their debentures/bonds/deposits; the rate of interest on an investment may fall short of the rate of inflation reducing the purchasing power. While risk cannot be eliminated, skillful management can minimize risk. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales, help them to build a diversified portfolio that Minimizes risk and maximizes returns.
As a unit holder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, ("Regulations") you are entitled to:
  • Receive unit certificates or statements of accounts confirming your title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund;
  • Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme;
  • Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase;
  • Vote in accordance with the Regulations to:
    • Either approve or disapprove any change in the fundamental investment policies of the scheme which are likely to modify the scheme or affect your interest in the Mutual Fund; (as a dissenting unit holder, you would have a right to redeem your investments);
    • Change the asset management company;
    • Wind up the schemes.
  • Inspect the documents of the Mutual Funds specified in the scheme's offer document. In addition to your rights, you can expect the following from Mutual Funds:
    • To publish their NAV, in accordance with the regulations: daily, in case of most open ended schemes and periodically, in case of close-ended schemes
    • To disclose your schemes' portfolio holdings, expenses, policy on asset allocation, the Report of the Trustees on the operations of your schemes and their future outlook through periodic newsletters, half- yearly and annual accounts;
    • To adhere to a Code of Ethics which require that investment decisions are taken in the best interests of the unit holders?

Corporate Fixed Deposit

Company Fixed Deposit is the deposit placed by investors with companies for a fixed term carrying a prescribed rate of interest.
Interest is paid on monthly/quarterly/half yearly/yearly or on maturity basis and is sent either through cheque or ECS facility.
  • Companies which offer interest higher than 15%.
  • Companies which are not paying regular dividends to the shareholder.
  • Companies whose Balance Sheet shows losses.
  • Companies which are below investment grade (A or under) rating
Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Company can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.

Insurance

Life insurance is nothing but an agreement or a contract between the insurer and the insured or the policyholder. In case of uncertainties such as death, critical illness or disabilities, the life insurance company agrees to pay certain amount to the insured’s nominee in return of timely premiums paid by the insured. Life insurance offers a financial shield on the event of death or an accident of the insured. It ensures a comfortable lifestyle to the loved ones on the death of the bread-winner of the family. The unpaid loans and other debts and expenses are well taken care off in your absence by the life insurance policy.
Insurance is a hedge against the occurrence of unforeseen incidents. Insurance products help you in not only mitigating risks but also helps you by providing a financial cushion against adverse financial burdens suffered.
Premium is the fixed amount of sum paid over the period by the insured to the insurance company to take insurance policy and to complete the contract of insurance.
Time is always right to do the right thing. So you must not delay the process or overthink when it comes to buying a life insurance plan. The best thing to do is to buy when you are young because the premiums are far lower than at the old age. The right age would be from the age of 25 to 30 when you are financially independent, have dependents for their financially needs, and you need to build funds.

IPO

An Initial Public Offer or IPO is the first sale of a company’s shares to investors on a public stock exchange. While IPOs are effective at raising capital, being listed on a stock exchange imposes regulatory compliance and reporting requirements.

When a shareholder sells shares it is called a “secondary offering” and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering. To avoid confusion, it is imporatnt to remember that only a company which issues shares can make a “primary offering”. Secondary offerings occur on the “secondary market”, where shareholders (not the issuing company) buy and sell shares to each other.

There are two types of IPOs. These are listed below :
  • Fixed Price Issue – In this case, the issue price is pre ascertained by the issuer.
  • Book Building – In this case, an indicative price range is declared by the company for a public offer of its equity shares. Interested investors place bids within this price range for the quantum of securities they want to subscribe to. Prospective investors can revise their bids at anytime during the bid period, that is, the quantity of shares or the bid price or any of the bid options. Usually, the bid must be for a minimum of 500 equity shares and in multiples of 100 equity shares thereafter. By recording the bids (quantum of shares ordered and the respective prices offered) received in a “book”, the issuer makes an assessment of the demand for the securities proposed to be issued. After the bid closing date, the book runner and the company fix the issue price and decide the allocation to each syndicate member. Thus, book building method helps in optimum price discovery for the security.
To apply for an IPO, the applicant needs to mention the details of his Bank account, Pan Card and Demat Account along with his other personal details in the IPO Application Form.

Primary Market refers to a market which provides the channel for creation and sale of securities. Primary market provides an opportunity to investors to apply & own stocks issued by the corporate (as well as the government) through an IPO (Initial Public Offer). A corporate raises capital from the public to meet its expansion plans or discharge financial obligations.

The resources in this kind of market are mobilized either through the public issue in which anyone can subscribe for it, or through the private placement route in which the issue is made available only to a selected group of subscribers such as banks, FIs, MFs and high net worth individuals. In private placement, the stringent public disclosure regulations and registration requirements are relaxed since these securities are allotted to a few sophisticated and experienced investors,. The Companies Act, 1956, states that an offer of securities to more than 50 persons is deemed to be public issue.

Secondary Market refers to a market where shares are traded after being initially offered to the public in the primary market. It is a market in which an investor purchases shares from another investor through stock exchange. Majority of the stock trading is done in the secondary market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs.

The bidder has to pay the maximum bid price at the time of bidding based on the highest bidding option of the bidder. The bidder has the option to make different bids like quoting a lower price for higher number of shares or a higher price for lower number of shares. The syndicate member may waive the payment of bid price at the time of bidding. In such cases, the issue price may be paid later to the syndicate member within four days of confirmation of allocation. Where a bidder has been allocated lesser number of shares than he or she had bid for, the excess amount paid on bidding, if any will be refunded to such bidder.
Equities
Derivatives
Currency
Mutual Fund
Corporate Fixed Deposit
Insurance
IPO
Attention Investor
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