Basics of Investment & other options

2

What is Investment?The money earned is partly spend and the rest saved for meeting future expenses. Instead of

keeping the savings idle or in piggy bank in which the money does not grow one may like to

invest the same in a financial product to get return (extra money) on it in the future. This gives

rise to the concept of investment.

For example: If you have Rs. 1000 and you don’t want to spend this money, can put it in piggy

bank, burry in the wall, put it at a secret place, etc. etc. But these all will not give you anything

extra, if you want to earn something extra from that Rs. 1000, you should invest it in some

financial product.

3

Why should one invest?One needs to invest to:

Earn some extra money on the idle money.

Generate a desired sum of money for a specific goals.

Create a back up for any uncertain future.

4

What are the various options available for investment?There are two options available for investment:

1. Physical Asset:

It is an asset which can be seen, touch and feel. Like; Gold, Real Estate & commodities etc.

2. Financial Asset:

It is an asset which cannot be touch, feel or seen, there is documents or certificate which

represents the worth of investment. Like; Shares, Bonds, Mutual Funds, Insurance etc.

5

Few financial assets are:Financial Market

Debt Market

Organized Debt Market

Primary Market

Bonds, FD & NCDs

Secondary Market

Bonds & NCDs

Unorganized Debt Market

Money lenders

Equity Market

Primary Market

IPO

Secondary Market

NSE & BSE

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Story timeMr. A is planning to start a gaming centre, but unable to start because of insufficient funds, then

Mr. A asked few of his friends to invest money and become a part owner in his organization. Five

of them agreed on the same and invested Rs. 10,000 each. On against of that Mr. A offered

partnership right to each partner. With the contribution of Rs. 10,000 by each partner and Mr. A

invested his own Rs. 1,00,000. Total collected money is Rs. 1,50,000 (which is also known as

capital). Now with this capital Mr. A started a partnership firm and name of the firm is ABC

gaming centre. After an year, ABC gaming centre started booking handsome profits. Now, Mr. A

and his partners decided to make it a registered company under companies act 1956. Now, ABC

gaming centre become ABC pvt. Ltd. Company

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Continued…Next year, ABC pvt. Ltd. Generated further huge amount of profits. Now partners decided to

expand it throughout the nation. But expansion needs a huge capital. Again partners stuck

because of insufficient fund, then, Mr. A decided do go to the public and offer them to invest their

money and become a part owner in his company, on against of that ABC pvt. Ltd. Will issue shares

to the investors. This concept is known as IPO (Initial Public Offer). Post IPO, company will be listed

in stock exchange (share market) NSE & BSE ( this is a market where in investor can so further

purchase and sell of shares of the company). This entire function describes Equity market. And,

public who have invested in this company become shareholder which is nothing but equity

investor.

Now, ABC pvt. Ltd. Is no more private company. Now it’s a listed company called ABC Ltd. All the

profits and major decision of the company has to disclose it to the public.

A promoter start a business, and form a joint stock company.

Company approaches to regulator to launch IPO (Initial Public Offer), wherein investor can invest in that company. This is also known as primary market.Here, company open the window called (IPO) and collect money from investors, against which it issues shares.

Post IPO, the particular company get listed in stock exchange (e.g.. BSE & NSE).Further transactions will be executed through stock exchange, and it requires counter party.If someone wants to buy need a seller, and to sell requires buyer.

Primary Market

Secondary Market

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Advantages of Secondary Market:If an investor can invest in IPO, why there is a need of secondary market,

Wherein, a stock get listed in stock exchange and further transaction happened in stock exchange only.

The importance of stock exchange is because,

1. Transparency: Stock exchange is pretty transparent, like stock prices, volume of shares trading,

performance of the stock, net profit, peer group comparison, etc.

2. Regulated market: This market is regulated by SEBI, which takes care of each and every stock listed in

exchange.

3. Organized Market: Stock exchange is an organised market. Every stock exchange has a management

committee, which has all the rights related to management and control of exchange. All the transactions

taking place in the stock exchange are done as per the prescribed procedure under the guidance of the

management committee.

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4. Spreading of Equity Cult: Stock exchange encourages people to invest in ownership securities by

regulating new issues, better trading practices and by educating public about investment.

5. Promotes the Habits of Savings and Investment:: The stock market offers attractive

opportunities of investment in various securities. These attractive opportunities encourage

people to save more and invest in securities of corporate sector rather than investing in

unproductive assets such as gold, silver, etc.

6. Contributes to Economic Growth: In stock exchange securities of various companies are bought

and sold. This process helps to invest in most productive investment proposal and this leads to

capital formation and economic growth.

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Equity Market (Share Market)This is an investment asset, which gives the part ownership to investor in a particular company. In layman

terms we also known as “share market”.

The investment in equity means, investment in shares of listed companies.

The investor of equity, is a part owner of the company.

The risk involved in this is capital loss. Because the returns of the investment will be purely base on the

performance of the company.

There is no guaranteed return in equity.

Investor gets the dividend. (Ideally when company earns profit, it distribute among its shareholder

through dividend).

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Few Examples: JustDialJustDial is a renowned company.

1996

This company started in 1996 by its owner called Mr. VSS Mani.

May 2013

On this period, JustDial launched its IPO, means Mr. Mani went to public for investment and be

a part owner of this company and issued shares on against of that.

The share price of the company was Rs. 417 approx.

June 2013

This company got listed in NSE & BSE post its IPO, so that further transaction (buying & selling)

can be done

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Few Examples: MT Educare (Mahesh Tutorials)

MT Educare is renowned with the name of Mahesh Tutorials.

1988

The owner of the company Mr. Mahesh Shetty launched its first branch in Mulund Mumbai.

May 2012

On this period, MT Educare pvt. Ltd. launched its IPO, means Mr. Shetty went to public for investment and

be a part owner of this company and issued shares on against of that. Now, MT Educare Pvt. Ltd. Become

MT Educare LTD.

The share price of the company was Rs. 74 approx.

June 2012

This company got listed in NSE & BSE post its IPO, so that further transaction (buying & selling) can be

done

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Pointers:1. Equity: It’s an financial asset wherein an investor can invest and become the part owner in that particular

company.

2. Shares: Company allots shares on against of investment in the company as a proof that a particular investor

has invested in it.

3. Shareholder: The equity investor of a company is known as shareholder.

4. Dividend: A company distribute some part of company’s profit among all its partner (equity investor). This is

always declared in % and calculated on face value. E.g. if a company declared 10% dividend and the face value

of the company is Rs. 10, then investor will get Re. 1 for every shares he has of that particular company.

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Points to remember:5. Stock Exchange: It is a market where buying and selling of shares take place in secondary market. The

major exchange in India is

• Bombay Stock Exchange (BSE)

• National Stock Exchange (NSE)

6. Index: Now there are more than 15,000 stocks listed in exchange, to know the performance of each and

every stock is difficult, so market has filter bunch of stocks and by seeing the performance of these stocks

we can gauge the performance of entire market. Like;

• SENSEX- top 30 stocks of BSE

• NIFTY- top 50 stocks of NSE

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How secondary markets are classified:Once a company get listed in stock exchange and its prices move according to its demand and supply. This describe the size of the

company.

As per the size of a company is divided into three category:

1. Large Cap Stocks: A company whose market cap is above 10,000cr example: Infosys, Tata, SBI etc.

2. Mid Cap Stocks: A company whose market cap is 2,000 Cr. to 10,000cr example: Crompton Greaves, Pedilite, Bank of

India etc.

3. Small Cap Stocks: A company whose market cap is less than 2,000cr example: Nippo Batteries etc.

M a r k e t C a p i t a l i z a t i o n = N o . o f l i s t e d s h a r e s X C u r r e n t m a r k e t p r i c e

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Why share price fluctuates: The primary reason of movement of share price of a company is, demand and supply. This also, function like a

normal market. Wherein the price of a product moves due to its demand and supply, the same way it moves

in stock exchange also.

Fundamental performance of the shares: If a company fundamentally stable, will have a higher price in the

market.

Market scenario: This is at a macro level, where the situation of a nation or/and industry comes into the

picture, and share price moves up & down due to the situation in a nation.

For example: In 2008, US economy was not doing well, so the shares of company in US was also not doing well.

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Pariksha 11. Who can start its own business?

Indian resident

An unemployed

Government employee

All of the above

19

2. Which of the following is a company?

ABC Traders.

ABC Hotels

ABC pvt. Ltd.

None of the above

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3. Which of the following is a listed company?

ABC pvt. Ltd.

ABC Ltd.

Both of the above

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4. What is Dividend?

A company share its profit among its shareholder.

A company ask for additional investment from investor.

Both of the above

None of the above

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5. If a company declares dividend of 20% and share price of the company is Rs. 50, what

will be the dividend amount received by investor.

Rs. 2

Rs. 10

Rs. 2 per shares

Rs. 10 per shares

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6. IPO is in primary market.

True

False

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7. Market Cap. Of Rs. 2,500 Cr. Is Small Cap Stock

True

False

25

8. NSE is a index

True

False

26

10. SENSEX has 30 large stocks of BSE

True

False

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