Investment Basics Quiz

Investment Basics

• Investment is using saved money to generate a return in the future.
• Money earned is partly spent and the rest saved for future expenses.

Why Invest?

• Investment is needed to earn returns on idle resources.
• Investment can generate a specified amount of money for a specific goal.
• Investment provides a means to prepare for future uncertain events like inflation.

Inflation

• Inflation is the rate at which the cost of living increases.
• Inflation causes money to lose value over time.
• A 6% inflation rate for 20 years significantly increases the cost of goods.

Investment Options

• Physical assets like real estate, gold, and jewellery are investment options.
• Real estate and gold investing can be challenging but potentially rewarding, requiring patience and time.
• Gold prices increased from Rs. 88 in 1947 to nearly Rs. 75,000 in 2024, indicating considerable long-term growth (∼9% CAGR).

Comparison of Investment Options

• Equity investments need a relatively small initial investment.
• Gold investments also require a significant amount of capital.
• Real estate demands a high initial investment, especially to rent out property or land.

Short-term Financial Options

• Savings bank accounts usually offer low interest rates (4-5% p.a).
• Fixed deposits from banks are also known as term deposits and have minimum investment periods of 30 days or more.
• Interest rates on short-term deposits may be lower than money market fund returns.

Long-term Financial Options

• Post Office Savings accounts offer a 8% annual interest rate, paid monthly.
• Public Provident Funds (PPF) are long-term savings instruments with a 15-year maturity and an 8% interest rate annually.
• Bonds and debentures, long-term fixed-income instruments, are issued by governments and private companies.

Mutual Funds

• Mutual funds pool money from investors and invest in a selection of assets (e.g., stocks, bonds, etc)
• Mutual Fund units trade based on their Net Asset Value (NAV) (calculated during each trading session).
• Senior Citizen Savings Scheme (SCSS) is available for individuals aged 55 and above, offering 8.20% interest payable quarterly.

Stock Exchange

• The Securities Contract (Regulation) Act, 1956 defines a stock exchange as an entity for assisting, regulating, or controlling buying/selling of securities.
• A stock represents a fractional ownership in a company (a share).
• Shareholders share in the company's profits.

Primary and Secondary Markets

• The primary market is for issuing new securities (stocks, bonds).
• The secondary market involves the buying and selling of existing securities.
• Major stock exchanges in India include the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Regulator: SEBI

• SEBI (Securities and Exchange Board of India) is responsible for protecting investor interests, developing the securities market, and regulating the market.

Key Market Participants

• Issuers are entities seeking capital (e.g. corporations and governments).
• Underwriters (typically investment banks) assist issuers with selling securities to the public.
• Investors are individuals or institutions that buy securities.

IPOs and Other Issues

• IPO (Initial Public Offering) is when an unlisted company issues shares to the public for the first time.
• Further Issues occur when a company with already listed shares makes another public offering.
• Rights Issues are offerings to existing shareholders before general public.
• Preferential Issues are private offerings to specific groups of investors.

Allotment and Refunds

• Allotment of shares in an IPO/offer for sale is typically within 8 days from the issue close date.
• Refunds for un-allotted shares are processed within 2 working days of the allotment outcome.

Key Indicators of the Securities Market

• Market indices (such as S&P BSE Sensex and CNX Nifty) reflect price trends in the stock market.
• Market capitalization refers to the total value of a company's outstanding shares.
• Stock trading occurs within defined market segments (e.g., capital market, derivative market).

Stock Trading

• Trading in stock exchanges used to employ open outcry and has transitioned to screen-based trading for efficient liquidity.
• NSE utilizes satellite communications technology for trading.

Stock Brokers

• Stock brokers act as intermediaries between buyers/sellers of securities.
• SEBI regulates brokers and defines criteria for registration, including eligibility, infrastructure, and experience.

Sub-Brokers

• Sub-brokers act as agents for registered stock brokers, assisting clients in buying and selling securities.
• Eligibility standards for a sub-broker are regulated by SEBI.

Precautions Before Investing

• Ensure the broker is registered with SEBI and exchanges.
• The maximum permissible brokerage fee is 2.5% of the purchase/sale value.
• Review contract notes of transactions for verification.
• Understand the risk associated with market investments.
• Study company fundamentals and market updates.

Broker-Client Relationship

• Trading members need to execute agreements, typically on non-judicial stamped paper.
• Know Your Client (KYC) procedures to protect investor financial details, and security.
• Unique client codes aid in investor identification and transactions.

Investor Service Cell and Arbitration

• The investor service cell (ISC) handles investor complaints about trading members/companies.
• Arbitration is an alternate dispute resolution method, providing a quasi-judicial process.

Why Invest in Equities?

• Equities (stocks) have the potential for long-term capital appreciation, outpacing many other investment types.
• Equity investments, ideally, should be thoroughly researched by the investor before making any decisions.

Factors Influencing Stock Price

• Stock-specific factors relate to company expectations, financial health, and management skills.
• Market-specific factors are influenced by broader economic and investor sentiment.

Growth vs Value Stocks

• Growth stocks highlight companies with significant earnings and sales potential, generally paying fewer dividends.
• Value stocks are those overlooked by investors but have intrinsic worth higher than their current market price.

Portfolio

• A portfolio is a compilation of different investments to achieve a specific goal.
• Diversification is a risk management technique to balance investments across various asset types.

Debt Investment

• Debt instruments (bonds and debentures) represent a lending agreement with predetermined terms for interest rate and repayment dates.
• Key features of debt instruments involve maturity date, coupon rate of interest, and principal amount.
• Debt market participation is primarily from institutional investors.

Mutual Funds

• Mutual funds consolidate money from several investors to create a diversified portfolio of investments.
• Investment experts (fund managers) manage these funds, and the fund house (AMC) charges a fee.

Different Types of Mutual Funds

• Diversified funds: Invest across various sectors, suitable for balanced risk tolerance.
• Sector funds: Focus on particular sectors for appreciation, but riskier.
• Index funds: Mimic market indices, aiming for market-rate returns.
• Tax-saving funds: Offer tax benefits.
• Debt funds: Primarily invest in bonds, offering regular income and capital preservation.
• Liquid funds: Offer high liquidity and are ideal for short-term cash management.
• Balanced funds: Combine equity and debt investments for lower and steadier returns.

NAV (Net Asset Value)

• NAV is the per-unit market value of a mutual fund's assets.
• This is essential in evaluating a fund's performance.
• High NAVs do not necessarily represent improved investment prospects.

ETF (Exchange Traded Funds)

• ETFs are baskets of stocks similar to index funds but trade on stock exchanges at market prices.
• ETFs provide diversified, low-cost, and liquid market exposure suitable for various investors.
• ETFs may pay dividends on company stocks in which they have an investment.

Market Terminologies:

• Bull market: Implies rising stock prices;
• Bear market: Indicates falling stock prices;
• 52-week high/low: Reports extreme price points for a stock over a year;
• Long position: Indicates a belief that stock prices will increase;
• Short position: Indicates a belief that stock prices will decrease;
• Square off: Means closing a particular position (either long or short);
• Intraday position: Taking a trading position that is expected to be squared off within a day;
• Volumes: The total number of transactions of a stock in a day
• Circuit breakers: A system that halts trading in response to large price drops in stock markets. 

Corporate Actions

• Corporate actions refer to activities like dividends, mergers, acquisitions, or bonus issues, which can affect a company's stock price.
• Dividends are distributions of a company's profits to shareholders.
• Dividend yield is a ratio between the annual dividend and the current stock price.