FAQs on Share Market Basics from GWC India
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as anybody 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.
An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership (derivatives) it is essentially a contract that can be assigned a value and traded. Examples of a security include a note, stock, preferred share, bond, debenture, option, future, swap, right, warrant, or virtually any other financial asset.
An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership (derivatives) it is essentially a contract that can be assigned a value and traded. Examples of a security include a note, stock, preferred share, bond, debenture, option, future, swap, right, warrant, or virtually any other financial asset.
Online trading’s primary advantages are that it allows you to manage your trades at your convenience.
What is an ‘Equity’/Share ?
The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc. While the corporates and government raise resources from the securities market to meet their obligations, it is households that invest their savings in the securities market.
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 the total transactions in derivative products.
What is a Currency Derivative ?
Commodity market is an organized traders’ exchange in which standardized, graded products are bought and sold. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts.
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.
A 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 instrument issued by private corporate sector.
An Index shows how a specified portfolio of share prices is 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.
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).
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.
It is advisable to conduct transactions through an intermediary. You receive guidance if you are transacting through an intermediary.
Issues may be classified as Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Initial Public Offering (IPO) 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. A Follow on Public Offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. A Rights Issue is when a listed company proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in the Chapter pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.
The main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares : Equity Shares: An equity share represents the form of fractional ownership in a business venture. Rights Entitlement: The issue of fresh securities to existing shareholders as a ratio of current holding, for a price. Eg. A 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share. Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares currently held by the shareholder owns. Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Bonds: Bonds are negotiable certificates evidencing indebtedness. They are normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows: Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Treasury Bills: Short -term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
The main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares : Equity Shares: An equity share represents the form of fractional ownership in a business venture. Rights Entitlement: The issue of fresh securities to existing shareholders as a ratio of current holding, for a price. Eg. A 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share. Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares currently held by the shareholder owns. Preference shares: Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Bonds: Bonds are negotiable certificates evidencing indebtedness. They are normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows: Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Treasury Bills: Short -term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
Stock split is a corporate action in which a company’s existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total Rupee value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split
A stock split strategy that includes the use of a reverse stock split followed by a forward stock split. A reverse/forward stock split is usually used by companies to cash out shareholders with a less-than-certain amount of shares. This is believed to cut administrative costs by reducing the number of shareholders who require mailed proxies and other documents.
A buyback can be seen as a method for company to invest in itself by buying shares from other investors in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the company with the purpose to improve the liquidity in its shares and enhance the shareholders’ wealth. Under the SEBI (Buy Back of Securities) Regulation.
Commodity market organized trader’s exchange in which standardized, graded products are bought and sold. Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. Market in which goods or services are bought and sold. Commodities are raw materials such as tea, rubber, tin or copper, which generally need processing to reach their final state. The actual commodities are seldom present, and what is traded is their ownership. The oldest existing commodity exchange in the world is CBOT in Chicago established in 1848.
Any product that can be used for commerce or an article of commerce which is traded on an authorized commodity exchange is known as commodity. Commodity includes all kinds of goods. Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”. The national commodity exchanges, recognized by the Central Government, permits commodities which include precious (gold and silver) and non-ferrous metals; cereals and pulses; ginned and un-ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes and onions; coffee and tea; rubber and spices. Etc.
Agricultural (Corn, Oat, Soya bean, Wheat, Coca etc) Energy (WTI Crude Oil, Brent Crude, Natural Gas, Heating Oil, Gulf Coast Gasoline, Uranium) Precious metals (Gold, Platinum, Palladium, Silver) Industrial metals (Copper, Lead, Zinc, Tin, Aluminum, Aluminum alloy, Nickel)
India is among the top-5 producers of most of the commodities, in addition to being a major consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the Indian economy. It employees around 57% of the labour force on a total of 163 million hectares of land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this indicates that India can be promoted as a major centre for trading of commodity derivatives.
A well-developed and effective commodity futures market, unlike physical market, facilitates offsetting the transactions without impacting on physical goods until the expiry of a contract. Futures market attracts hedgers who minimize their risks, and encourages competition from other traders who possess market information and price judgment. While hedgers have long-term perspective of the market, the traders, or arbitragers as they are often called, hold an immediate view of the market. A large number of different market players participate in buying and selling activities in the market based on diverse domestic and global information, such as price, demand and supply, climatic conditions and other market related information. All these factors put together result in efficient price discovery as a result of large number of buyers and seller transacting in the futures market.
Hedgers Hedging means taking a position in the future market that is opposite to position in the physical market with the objective of reducing or limiting risk associated with price changes. For instance, if the hedger is going to buy a commodity in the cash market at a future date, he buys a future contract now and when he buys the commodity in cash market, the future contract is squared off to reduce or limit the risk of the purchase price. They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk. For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch the prices discovered in trading at the [COMMODITY EXCHANGE] CBOT and, when they reflect the price he wants, will sell futures contracts to assure him of a fixed price for his crop. Speculators Speculators wish to bet on the future movement in the price of an asset. They use derivatives to get extra leverage. A speculator will buy and sell in anticipation of future price movements, but has no desire to actually own the physical commodity. Arbitrators Arbitrage means locking in a profit by simultaneously entering in to transactions in two or more markets. If the relationship between spot prices and future prices in terms of basis or between prices of two future contracts in terms of spread changes, it gives rise to arbitrage opportunity. Difference in the equilibrium prices determined by the demand & supply at two different markets also gives opportunities to arbitrage. Arbitrage, involves buying and selling a security and taking advantage of prices differences that may exists on different markets. While rare, this does happen from time to time. For example, suppose you find on eBay that someone is selling a brand new iPod for Rs 11500 while the local store is buying the same iPods for Rs12000. In theory, you can buy all the iPods available on eBay and sell them all to the local store, pocketing Rs500 per music player. Taking advantage of this price inequality is the essence of true arbitrage.
In cash market, a physical commodity is exchanged in a buy and a sell agreement.
In futures market, you are paper trading and don’t take physical possession of the commodity in most cases.
Futures
Futures are traded on a stock exchange
Futures are contracts having standard terms and conditions
No default risk as the exchange provides a counter guarantee
Exit route is provided because of high liquidity on the stock exchange
Highly regulated with strong margining and surveillance systems
Forwards
Forwards are non tradable, regotiated instruments
Forwards are contracts customized by the buyer and seller
High risk of default by either party
No exit route for these contracts
No such systems are present in a forward market.
Commodity and Futures contracts are similar as “Forward” Contracts.
Early days “future” contracts (agreements to buy now, pay and deliver later) were used as a way of getting products from producer to the consumer.
These typically were only for food and agricultural Products.
Now it is used for every metal.
Future contract for commodity trading and for share trading is all different from one another
Futures are traded in certain contract months
Contracts are at specified and pre-determined amounts
Owner doesn’t take physical possession of commodity
Forwards :
A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.
Futures :
A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index
Options:
Is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types:
Options can be divided into two different categories depending upon the primary exercise styles associated with options. These categories are: European Options European options are options that can be exercised only on the expiration date. All options based on indices such as Nifty, Mini Nifty, Bank Nifty, CNX IT traded at the NSE are European options which can be exercised by the buyer (of the option) only on the final settlement date or the expiry date. American options American options are options that can be exercised on any day on or before the expiry date. All options on individual stocks like Reliance, SBI, and Infosys traded at the NSE are American options. They can be exercised by the buyer on any day on or before the final settlement date or the expiry date.
At the time of buying an option contract, the buyer has to pay premium. The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell. Option premiums are always paid up front.
A currency derivative is a contract between the seller and the buyer, whose value is to be derived from the underlying asset, the currency amount. A derivative based on currency exchange rates is a future contract which stipulates the rate at which a given currency can be exchanged for another currency as at a future date. Currency futures are standardised foreign exchange contracts traded on approved stock exchanges to buy or sell one currency against another on a specified date in the future at a specified price (exchange rate).
Currency derivatives can be described as contracts between the sellers and buyers, whose values are to be derived from the underlying assets, the currency amounts. These are basically risk management tools in forex and money markets. They are used for hedging risks and act as insurance against unforeseen and unpredictable currency and interest rate movements. It is not completely risk free. Market risks can’t be avoided, but have to be managed. The currency derivative serves the purpose of financial risk management. A futures contract is a standardized contract, traded on an exchange, to buy or sell a certain underlying asset or an instrument at a certain date in the future, at a specified price. When the underlying is an exchange rate, the contract is termed a “currency futures contract. The origin of futures can be traced back to 1851 when the Chicago Board of Trade (CBOT) introduced standardized forward contracts The Chicago Mercantile Exchange (CME) first conceived the idea of a currency futures exchange and it launched the same in 1972. The Chicago Mercantile Exchange, or CME, provides the most popular currency futures.
Hedgers Currency futures are widely used as hedging tools by financial institutions, banks, exporters, importers etc. There is a strong need to hedge currency risk and this need has grown manifold with fast growth in cross-border trade and investments flows. The currency risk arising from exchange rate fluctuations that is faced by exporters and importers needs to be properly managed. For example, an exporting firm is expecting to receive dollar inflows. If the rupee appreciates against the dollar, then there will be a negative impact on the profitability of these companies. If a company has un-hedged exposures in foreign currency on account of borrowings, and the rupee depreciates against the borrowed currency, there could be a loss requiring disclosure. Though this is not a direct business loss, it adds to the liability and as such impacts the balance sheet. It is possible that subsequently the rupee might appreciate or regain the lost ground; but, what is relevant is the rate as on the day of the closure of the books. The deficit on the date is considered a notional loss as the liability has not crystallised and there is no outflow of rupees. Speculators All those interested in taking a view on appreciation (or deprecation) of exchange rate in the long term and short term can participate in the currency futures. Speculation: Bullish, buy futures Speculation: Bearish, sell futures For example, if one expects deprecation of Indian rupee against the US dollar, then he can hold on long position in USD-INR contracts for returns. Contrarily, he can sell the contracts if he sees the appreciation of the Indian Rupees. Arbitrageurs Arbitrage is the strategy of taking advantage of difference in price of the same or similar product between two or more markets. That is, arbitrage is striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. If the same or similar product is traded in say two different markets, any entity which has access to both the markets will be able to identify price differentials, if any. If in one of the markets the product is trading at higher price, then the entity shall buy the product in the cheaper market and sell in the costlier market and thus benefit from the price differential without any additional risk. <
The forex market is where one currency is traded for another. The average traded turnover in global forex and related markets is in trillion of US dollars. The spot exchange rates refer to the current prevailing rate at which the currency can be bought or sold for another. Forwards exchange rates are those quoted and traded for future delivery of underlying currencies and payment.
The forwards rates are different from the spot rates depending on the market sentiments and expected future conditions. Typically, the pricing of forward contract is determined by prevailing spot rate and interest rate differential of perspective countries for a specified date in future.
Forward Rate =Spot Rate+/- Forward points (i.e. benefit/disadvantage for holding a currency for a specified period of time)
The forward contracts are customised bilateral agreement between two counter parties agreeing to buy and sell the underlying on a specified future date at a specified rate.
A currency future contracts is a standardised version of a forward contract traded on a regulated exchange it is an agreement to buy or sell the underlying currency, on a specified date in future on a specified rate.
Currency futures can be bought and sold on the MCX-SX through the member of exchange, after opening a trading account and depositing stipulated cash/collaterals with the trading member.
Initially, monthly futures contract for a maximum maturity of 12 months will be available on USDINR. The final settlement price would be the Reserve Bank Reference Rate on the date of expiry.
Future contracts
Are traded on an exchange.
Use a Clearing House which provides protecton for both parties.
Require a margin to be paid.
Are used for heading and speculating.
Are standardised and published.
Are transparent – futures contracts are reported by the exchange.
Forwards contracts
Are not traded on an exchange.
Are private and are negotiated between the parties with no exchange guarantees.
Involve no margin payments
Are used for hedging and physical delivery.
Are dependent on the negotiated contract conditions.
Are not transparent as they are all private deals.
Possible Scenario: Indian Rupee will depreciate against USD Dollar due to country’s rising import cost and slowing down of foreign equity inflows. However, INR may appreciate after some period when conditions in domestic and global market change in favour.
Example 1
Suppose an edible oil importer wants to import edible oil worth USD 100,000 and places his import order on July 15, 2008 with the delivery date being 4 months ahead. At the time when the contracts is placed in the spot market, one USD was worth, say INR 44.50. But, suppose the Indian Rupee depreciates to INR 44.75 per USD when the payment is due in Oct 08, the value of the payment for the importer goes up to INR 4,475,000 rather than 4,445,000. The heading strategy for the importer thus would be:
Thus, through heading in futures market the importer covers up to RS 20,000 of loss due to depreciation of Indian Rupees over the contract period.
Contrarily, if an exporter takes a reserve view on the exchange rate movement, he can lock in the exchange rate by selling the USD-INR contracts.
Example 2
A jeweler who is exporting gold jewelry worth USD 50,000 wants protection against the Indian Rupee appreciation in Dec’08 i.e. when he receives his payments. He wants to lock in the exchange rate for the above transaction. His strategy would be:
The net receipt in INR for hedged transaction would be: 50,000*44.35+15,000=2,232,500
Had he not participated in futures market he would have got only INR 2,217,500. Thus he kept his sales unexposed to foreign exchange rate risk.
All trades on MSEI takes place on its nationwide electronic trading platform that can be accessed from dedicated terminals at locations of the members of the exchange.
All participants on the MSEI trading platforms have to participate only through the trading member of the Exchange. Participants have to open a trading account and deposit stipulated cash/collaterals with the trading member.
Clearing house/corporation of MSEI stands in as the counter party for each transaction; so participants need not worry about the default.
In event of a default clearing house/corporation fulfils all obligations and recovers dues and penalties from the defaulter.
Contracts can be squared of anytime during the Exchange’s working hours and during the life of the contract.
All contracts are open on expiry will be settled in Indian Rupees in cash at the reference rate specified by the RBI.
Underlying
Trading Hours(Monday to Friday)
Contract Size
Tick Size
Trading Period
Contract Months
Final Settlement date / Value date
Last Trading Day
Settlement
Final Settlement Price
Rate of exchange between one USD and INR
9:00 a.m to 5:00 p.m
USD 1000
0.25 paisa or 0.0025
Maximum expiration period of 12 months
12 near calendar months
Last working day of the month(subject to holiday calendars)
Two working days prior to final Settlement Date
Cash Settled
The reference rate fixed by RBI two working days prior to the final settlement date will be used for final settlement
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds. All the mutual funds must get registered with SEBI.
There are several benefits from investing in a Mutual Fund:
Small investments:
Mutual funds help you to reap the benefit of returns by a portfolio spread across a wide spectrum of companies with small investments.
Professional Fund Management:
Professionals having considerable expertise, experience and resources manage the pool of money collected by a mutual fund. They thoroughly analyse the markets and economy to pick good investment opportunities.
Spreading Risk:
An investor with limited funds might be able to invest in only one or two stocks/bonds, thus increasing his or her risk. However, a mutual fund will spread its risk by investing a number of sound stocks or bonds. A fund normally invests in companies across a wide range of industries, so the risk is diversified.
Transparency:
Mutual Funds regularly provide investors with information on the value of their investments. Mutual Funds also provide complete portfolio disclosure of the investments made by various schemes and also the proportion invested in each asset type.
Choice:
The large amount of Mutual Funds offers the investor a wide variety to choose from. An investor can pick up a scheme depending upon his risk/ return profile.
Regulations:
All the mutual funds are registered with SEBI and they function within the provisions of strict regulation designed to protect the interests of the investor.
Mutual funds are classified in the following manner:
a) Mutual funds are classified in the following manner:
Equity Funds/ Growth Funds
Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
Diversified funds
These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.
Sector funds
These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.
Index funds
The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.
Tax Saving Fund
These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.
Debt/Income Funds
These funds invest predominantly in high-rated fixed-income -bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
Liquid Funds/Money Market Funds
These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have emerged as an alternative for savings and short – term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporate, institutional investors and business houses that invest their funds for very short periods.
Gilt Funds
These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
Balanced Funds
These funds invest both in equity shares and fixed-income -bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.
b) On the basis of Flexibility
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors’ perspective, they are much more liquid than closed-ended funds.
Close-ended Funds
These funds are open initially for entry during the New Fund Offering (NFO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
Growth Plan and Dividend Plan
A growth plan is a plan under a scheme wherein the returns from investments are reinvested and very few income distributions, if any, are made. The investor thus only realizes capital appreciation on the investment. Under the dividend plan, income is distributed from time to time. This plan is ideal to those investors requiring regular income.
Dividend Reinvestment Plan
Dividend plans of schemes carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors.
No. The depository has not prescribed any minimum balance. You can have zero balance in your account.
ISIN (International Securities Identification Number) is a unique identification number for a security.
In order to dematerialise physical securities one has to fill in a Demat Request Form (DRF) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise. Separate DRF has to be filled for each ISIN number.
Yes. The process is called Rematerialisation. If one wishes to get back your securities in the physical form one has to fill in the Remat Request Form (RRF) and request your DP for Rematerialisation of the balances in your securities account.
Yes. You can dematerialise and hold all such investments in a single demat account.
The benefits of participation in a depository are:
Immediate transfer of securities.
No stamp duty on transfer of securities
Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.
Reduction in paperwork involved in transfer of securities
Reduction in transaction cost
Ease of nomination
Change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately
Transmission of securities is done directly by the DP eliminating correspondence with companies
Convenience of consolidation of folios/accounts
Holding investments in equity, debt instruments and Government securities in a single account; automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.
A financial instrument that had a fixed stream payment resulting from the initial investment.
The price of fixed income instrument is greatly affected by the interest rate and hence by prevailing macroeconomic conditions.
Bank Deposit
The simplest of Investment Avenue, opening a bank account and depositing money in it can make a bank deposit.
Post Office Scheme
Monthly Income Scheme of the Post Office
Kisan Vikas Patra (KVP)
National Saving Certificate
Post Office Time deposit
Company Deposit
Many companies large and small solicit fixed deposits from the public. Fixed deposit mobilised by manufacturing companies are regulated by Company Law Board and fixed deposits mobilised by finance companies are regulated by Reserve bank of India.
Public Provident Fund scheme
Employee Provident Fund Scheme
Money Market Instruments
Treasury Bills
Certificate of deposits
Commercial Paper
Repos
Bond & debentures
Central & State Government Bond
RBI Relief Bonds
Private sector debentures
Public sector Undertaking Bonds (PSUs Bond)
You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement, which every client needs to enter into with his or her broker.
internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading – member.
The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades via Courier and email.
Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Insist on periodical statement of accounts of funds and securities from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately.
If your broker/sub-broker does not resolve your complaints within a reasonable period (say within 15 days); please bring it to the attention of the ‘Investor Grievances Cell’ of the NSE.
