Unit 1 Markets and

Financial Instruments
What is investment
1. The money is partly spent and partly saved for meeting future expenses.
2. Instead of keeping the money idle you may like to use saving in order to get
returns on it in the future. This called investment
WHY SHOULD ONE INVEST
● Earn return on your idle resources
● Generate a specified sum of money for a specific goal in life
● Make a provision for an uncertain future
● One of best reason why one needs to invest wisely is to meet the cost of
inflation. Inflation cause money to lose value because same of money cannot
buy same amount of goods in future what we are buying today
● If we are holding 100 today and inflation rate is 6% then after 20 years then in
future we have to spend 321
What is meant by interest
When we borrow money we are expected to pay for using it - this is known as interest.
Interest is an amount charged to the borrower for the pervillage of using the lenders
money.
Interest is calculated as a percentage of principal balance
The percentage rate may be fixed for the life of the loann, it may be variable, depending
on the terms of the loan
The factor related to it are mostly economy related and are commonly referred to as
macroeconomic factors
1. Demand for money
2. Level of Government borrowings
3. Supply of money
4. Inflation rate
What are the various option available for investment
1) Physical asset
2) Financial asset such as fixed deposit with banks, small saving
instruments with post offices, insurance/provident /pension fund etc.
or securities market related instrument like shares.
When to start Investing The sooner one starts investing the better he
will get returns.

By investing early you allow your investment

The three golden rules for all investors

1. Invest early
2. Invest regularly
3. Invest for long term and not short term
What care should one take while
investing
1) Obtain written document which explain the
investment
2) Read and understand such document
3) Verify the legitimacy of the investment
4) Find out the cost and benefits associated with the
investment
5) Assess the risk return profile of the investment
6) Know the liquidity and safety aspects of the
investment
7) Ascertain if it is appropriate for your specific goals
8) Examine if it fits with other investment opportunities
available
9) Deal only through authorised dealer
10) Seek all clarification about the intermediary and the
investment and invest only when you are
comfortable.
What are the various short term financial options available
for investment
1) Saving bank account:- it is often the first banking products people use, which
offers low interest, making them only marginally better than fixed deposits.

2) Money market and liquid funds:- it is specialized form of mutual fund that invest
in short term invest in short term fixed security. It provide more liquidity as
compare to other investment

3) Fixed deposit with banks are also referred to as term deposit and minimum
investment period for bank is 30 days. Fixed deposit with banks with low appetite.
FD interest for the period of 6-12 months period carrying normally low interest as
compared to money market fund returns
What are various long term financial option available for
investment
1) Post office savings:- it is low saving risk instrument which can be availed through any post office. It provides an
interest rate of 8.4% per annum, which is paid monthly.
● Minimum amount 1000
● Additional investment 1500
● Maximum amount 450000(if single)
● Maximum amount 900000 (if held jointly) it has maturity period of 6 months
● A bonus of 10% if withdraw at the time of premature
● Premature withdrawal is allowed after one year deposit
● A deduction of 5% is levied from the principal amount if withdrawn prematurely
2) PPF:-LOng term investment with the maturity period with the maturity period of 15 years and interest
8.7%. A PPF can be opened through nationalised banks at any time.
● Tax benefit can be availed and interest can be tax free
● Withdrawal is permissible after 7 years after the opening of account and amount can be withdrawn is
upto 50 % of the amount which is deposited at the end of 4th year immediately preceding the year in
which the amount is withdrawn or at the end of preceding year whichever is earlier
Company fixed deposits
These are short term and medium return deposit borrowings made by the company zat the fixed rate maturity period
of six months or annually. These can also be cumulative fixed deposit

The rate of interest varies between 8-12% for the company fixed deposit.

The interest received is after the deduction of taxes

4) Bonds and debentures

It is issued from the central and state government or alike corporation called bonds. The central and state
government,corporation and similar institution sell bonds.

A bond is generally promise to repay the principal along with interest rate at the time of maturity

Debentures are similar to bonds that may be convertible debentures non convertible debentures

Convertible debentures may be convert into equity at the option of the debentures
5) mutual fund
These are the funds operated by the an investment company which raises the money through public funds. It is
substitute for those who are unable to invest directly in equities or debt instrument because of time or resource
constraints. It is generally long term assets

Benefits includes

a) Professional money management

6) life insurance policies

Life insurance policy is a contract providing for payment of sum of money to the person assured

It is a good method to protect your family financially, in case of death, by providing funds for the loss of
income.. Types of policies include term life insurance, endowment policies, annuities/pension policies and
Unit Linked Insurance Plans or ULIPs. In term life policies, lump sum is paid to designated beneficiary in case
of the death of the insured.
What is meant by stock exchange
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‗Stock Exchange‘ as any body 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 can be regional stock exchange or national stock exchange

What do you mean by share

Debt instrument refers to one party lends money to other on predetermined terms
for payment of interest, principal by the borrower to lender

In indian security market the term bond is used for central and state government
and debenture is used for corporate sector

What is derivative
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.
What is mutual fund
A mutual fund is a body corporate registered with SEBI that pools money from individual
corporate ventures and invest in same way in differant form of security like government security,
bonds debentures etc.
It is considered as financial intermediaries
Mutual fund issue units to investors and appreciation in value of investment in mutual fund leads
to appreciation in value of units

What is index
An index shows the specified investments price in portfolio to indicate the changes in it. It is the
basket of securities and change sin it will shows index movement
The main index is Nifty 5 showing the 51 stock index of 13 sectors
What is securities
The definition of securities as explained Securities contract act 1996 that security
refers to any share, debentures, any government security or any derivative of any
instrument or any units of collective instrument or any other instrument declared
by the central government
What are the function of securities market
Securities Markets is a place where buyers and sellers of securities can enter into
transactions to purchase and sell shares, bonds, debentures etc
Transfer of resources from those having idle resources (investors) to others who
have a need for them (corporates) is most efficiently achieved through the
securities market.
Why does Securities Market need Regulators?
The regulator ensures that the market participants behave in a desired manner so
that securities market continues to be a major source of finance for corporate and
government and the interest of investors are protected.
The regulator ensures that the market participants behave in a desired manner so
that securities market continues to be a major source of finance for corporate and
government and the interest of investors are protected.
Who regulates the Securities Market?
The responsibility for regulating the securities market is shared by Department of
Economic Affairs (DEA), Department of Company Affairs (DCA), Reserve Bank of
India (RBI) and Securities and Exchange Board of India (SEBI).