1.
Introduction to Investment
Investment vs Speculation: Investment focuses on long-term wealth creation, whereas
speculation involves short-term risk-taking for quick profits.
Key Attributes of Investment:
o Time: Investment involves exchanging a known amount today for uncertain
future gains.
o Risk: The possibility that actual returns differ from expected returns.
o Return: Compensation for time, inflation, and uncertainty.
2. Types of Assets
Real Assets
Represent the productive capacity of an economy.
Can be tangible (land, machinery) or intangible (patents, trademarks).
Financial Assets
Do not contribute to societal wealth but facilitate economic transactions.
Examples:
o Equity (Shares): Ownership claims.
o Bonds: Creditor claims.
o Mutual Funds & Hedge Funds: Indirect investment.
o Derivatives: Contracts based on other financial assets.
Purpose of Financial Assets:
o Separation of ownership and management.
o Efficient capital allocation.
o Risk distribution.
3. Investment Process
Setting Investment Objectives
Return: Regular income vs capital appreciation.
Risk: Assess risk tolerance.
Liquidity: Availability of cash.
Tax Factors: Tax-efficient investments.
Legal & Regulatory Considerations.
Unique Preferences (ethical investing, social impact, etc.).
Asset Allocation
Major Asset Classes: Fixed Income, Equity, Real Estate.
Strategic vs Tactical Asset Allocation:
o Strategic: Long-term, stable allocation.
o Tactical: Short-term adjustments based on market conditions.
Security Selection
Growth vs Value Stocks:
o Growth: High potential future earnings (e.g., Tesla, Amazon).
o Value: Undervalued stocks (e.g., JPMorgan, ExxonMobil).
Cyclical vs Defensive Stocks:
o Cyclical: Affected by economic cycles (e.g., General Motors, Delta Airlines).
o Defensive: Stable in all conditions (e.g., Coca-Cola, Johnson & Johnson).
Execution & Market Timing
When to enter or exit investments based on market conditions.
Portfolio Review & Revision
Performance tracking and rebalancing.
4. Risk & Return
Components of Return
Income (Dividend/Interest): Earnings distributed to investors periodically.
Capital Appreciation: Increase in asset value over time.
Reinvestment Income: Compounding effect when returns are reinvested.
Tax Considerations: Different tax treatments impact net returns.
Risk Measurement
Standard Deviation & Variance: Measure of volatility and deviation from expected
return.
Risk Premium: Additional return required to compensate for taking higher risk.
Types of Risk
Systematic Risk: Market-wide, unavoidable (e.g., interest rate changes, inflation,
economic recessions).
Unsystematic Risk: Firm-specific, diversifiable (e.g., management decisions, product
failures, company bankruptcy).
5. Taxation & Investment
Long-Term Capital Gains (LTCG) on equities taxed at 12.5% beyond Rs. 1.25 lakh.
Short-Term Capital Gains (STCG) taxed at 20%.
Dividend Taxation: Post-April 1, 2020, fully taxable.
Public Provident Fund (PPF): Government-backed, tax-free interest with a tenure of 15
years, extendable in 5-year blocks.
Tax-efficient investments: Strategies such as investing in ELSS mutual funds, PPF,
NPS, and tax-exempt bonds can reduce tax liability.
6. Risk-Return Relationship
Risk-Free Assets: Government bonds and fixed deposits offer stable but lower returns.
High-Risk Assets: Equities and derivatives provide potentially higher returns but come
with greater volatility.
Risk Premium: The additional return expected for investing in riskier assets over risk-
free investments.
Portfolio Diversification: The practice of investing in a variety of assets to minimize
exposure to any single risk factor.
Modern Portfolio Theory (MPT): Suggests that investors can optimize returns for a
given level of risk by diversifying their investments.
Beta Coefficient: A measure of a stock’s volatility in relation to the overall market. A
beta greater than 1 indicates higher risk, while a beta less than 1 suggests lower risk.
SECOND PDF
1. Introduction to Financial Markets
Definition: Financial markets facilitate the buying and selling of financial assets like
stocks, bonds, and derivatives.
Segmentation: Financial markets are traditionally segmented into:
o Money Markets (short-term instruments, <1 year maturity)
o Capital Markets (long-term instruments, >1 year maturity)
2. Money Market
Characteristics:
o Short-term debt instruments
o High liquidity and low risk
o Regulated by RBI in India
Money Market Instruments:
o Treasury Bills (T-Bills): 91-day, 364-day short-term government securities
o Certificates of Deposits (CDs): Issued by banks with fixed maturity
o Commercial Papers (CPs): Unsecured promissory notes issued by corporations
o Call/Notice Money Market: Short-term lending between banks (Overnight to 14
days)
o Repos and Reverse Repos: Agreements to repurchase government securities
3. Capital Market
Characteristics:
o Long-term securities traded
o Includes both debt and equity markets
o Regulated by SEBI (except government bonds)
Segments of Capital Market:
o Bond Market (Fixed Income Securities)
Government Securities (G-Secs) (1 to 30 years maturity)
PSU Bonds, State Government Bonds, Municipal Bonds
Corporate Debentures
o Equity Market
Preference Shares
Equity Shares
o Derivative Market
Futures and Options (F&O) trading
4. Primary vs. Secondary Market
Primary Market (New Issuances)
Companies raise capital by issuing securities for the first time
Modes of Issue:
o Public Offer: IPO (Initial Public Offering), FPO (Follow-on Public Offering)
o Private Placement: Securities sold directly to select investors
o Rights Issues: Existing shareholders get the right to purchase new shares
o Bonus Issues: Free additional shares given to shareholders
Secondary Market (Trading of Existing Securities)
Investors trade securities among themselves via stock exchanges
Major Stock Exchanges in India:
o NSE (National Stock Exchange) - 92.7% market share (Cash Market), 97.2%
(F&O)
o BSE (Bombay Stock Exchange) - 7.3% market share (Cash Market), 1.8%
(F&O)
Stock Exchange Mechanisms:
o Order-driven market (Used in India) – Buyers and sellers place orders directly
o Quote-driven market – Market makers provide bid-ask quotes
o T+1 Settlement: Transactions settled the next business day
5. Participants in Financial Markets
Retail Investors: Individual investors
Institutional Investors: Mutual funds, insurance companies, pension funds
Foreign Institutional Investors (FIIs): Foreign investors in Indian markets
Hedge Funds: High-risk, high-return investment entities
Market Participants by Objective:
o Investors: Long-term holdings
o Speculators: Short-term risk-takers
o Arbitrageurs: Profit from price differences across markets
6. Derivatives Market
Definition: Financial contracts whose value is derived from underlying assets
Common Derivative Products:
o Index Futures & Index Options
o Stock Futures & Stock Options
Purpose of Derivatives:
o Hedging against price fluctuations
o Speculation for profit
o Arbitrage opportunities
7. Market Indices
Stock Market Indices Types:
o Market Value Weighted Index: Weights stocks based on market capitalization
o Price Weighted Index: DJIA (Dow Jones Industrial Average)
Indian Market Indices:
o BSE Sensex: 30 largest, actively traded stocks (Base year 1978, Base value 100)
o NSE Nifty 50: 50 large-cap stocks (Base year 1995, Base value 1000)
8. Trading Mechanisms
Trading Schedule in India
Pre-open session: 09:00 - 09:15 AM (Price discovery period)
Regular trading session: 09:15 - 03:30 PM
Order Types
Market Order: Buy/sell at current market price
Limit Order: Buy/sell at a specified price
Stop Orders:
o Stop-loss order: Executes when a stock reaches a predetermined price
o Buy-stop order: Used for short covering
o Sell-stop order: Used for limiting losses on long positions
9. Clearing & Settlement
Process:
o Trade Execution → Clearing → Settlement
Clearing Agencies:
o NSCCL (National Securities Clearing Corporation Ltd.) for NSE
o ICCL (Indian Clearing Corporation Ltd.) for BSE
10. Depository System
Demat Accounts:
o NSDL (National Securities Depository Limited)
o CDSL (Central Depository Services Ltd.)
Purpose: Electronic holding of securities, eliminating the risk of paper-based trading
11. Margin Trading & Short Selling
Margin Trading:
o Investors borrow money from brokers to trade more than they can afford
o Requires maintaining an initial margin and a maintenance margin
Short Selling:
o Selling borrowed securities with the intent to buy them back later at a lower price
o Security Lending & Borrowing Scheme (SLB): Allows lending of idle
securities
12. International Financial Markets
Major Global Stock Exchanges:
o New York Stock Exchange (NYSE) – $28.33 Trillion Market Cap
o Nasdaq (US) – $26.62 Trillion
o Tokyo Stock Exchange (Japan) – $6.67 Trillion
o Shanghai Stock Exchange (China) – $6.41 Trillion
o Euronext (Europe) – $5.68 Trillion
o Bombay Stock Exchange (India) – $5.30 Trillion
o National Stock Exchange (India) – $5.10 Trillion
o London Stock Exchange (UK) – $3.42 Trillion
13. Benefits & Risks of International Investing
Advantages:
Fractional Investment: Access to high-value stocks at lower amounts
Geographical Diversification: Spread risk across global markets
Exposure to High-Tech Companies: Invest in global leaders like Apple, Tesla,
Microsoft
Currency Advantage: Gains from currency depreciation
Disadvantages:
High Transaction Costs: Bank remittance fees, exchange rates, maintenance charges
Tax Implications:
o Short-Term Capital Gains (STCG) (within 24 months) – 30% tax
o Long-Term Capital Gains (LTCG) (after 24 months) – 20% tax
14. Trading Platforms for International Investing
IND Money
Vested
Groww
Stockal
Winvesta
15. UAE Stock Market Overview
Major UAE Stock Exchanges:
o Abu Dhabi Securities Exchange (ADX) – ADX General Index
o Dubai Financial Market (DFM) – DFMGI Index
o NASDAQ Dubai – Middle East’s international financial exchange
Regulation: Securities and Commodities Authority (SCA), Dubai Financial Services
Authority (DFSA)
