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Equity
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• Stock markets, which facilitates equity investment and buying and selling of shares
of stock. Bond markets, which provides financing through the issue of debt contracts
and the buying and selling of bonds and debentures. • Money markets, which provides
short term debt financing and investment.
• Derivatives markets, which provides instruments for handling of financial risks.
• Futures markets, which provide standardized contracts for trading assets at a
forthcoming date.
• Insurance markets, which facilitates handling of various risks.
• Foreign exchange markets
These markets can be either primary markets or aftermarkets.
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3) What is Stock Market?
A stock market is a market for
the trading of publicly held company stock and associated financial instruments
(including stock options, convertibles and stock index futures).
Many years ago, worldwide, buyers and sellers were individual investors and businessmen.
These days markets have generally become "institutionalized"; that is, buyers and
sellers are largely institutions whether pension funds, insurance companies, mutual
funds or banks. This rise of the institutional investor has brought growing professionalism
to all aspects of the markets.
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4) What is Money Market?
The money market is a subsection
of the fixed income market. We generally think of the term "fixed income" as a synonym
of bonds. In reality, a bond is just one type of fixed income security. The difference
between the money market and the bond market is that the money market specializes
in very short-term debt securities (debt that matures in less than one year). Money
market investments are also called cash investments because of their short maturities.
Money market securities are essentially IOUs (an abbreviation of the phrase "I owe
you") issued by governments, financial institutions and large corporations. These
instruments are very liquid and considered extraordinarily safe. Since they are
extremely conservative, money market securities offer significantly lower returns
than most of the other securities.
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5) Who are the main participants in the capital
market?
The capital market framework consists
of the following participants:
• Stock Exchanges
• Market intermediaries, such as stock-brokers and Mutual Funds
• Investors
• Regulatory institutions (e.g. SEBI)
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6) Who are the main participants in the capital
market?
The following are the different
types of financial instruments-
Debentures
A debenture is the most common form of long-term loan taken by a company. It is
usually a loan repayable at a fixed date, although some debentures are irredeemable
securities; these are sometimes called perpetual debentures. Most debentures also
pay a fixed rate of interest, and this interest must be paid before a dividend is
paid to shareholders.
Bonds
A bond is a debt investment with which the investor loans money to an entity (company
or government) that borrows the funds for a defined period of time at a specified
interest rate.
Preference shares
Preferential shareholders enjoy a preferential right over equity shareholders with
regards to: Receipt of dividend
Receipt of residual funds after liquidation
However, preferential shareholders do not have voting rights; they are entitled
only to a fixed dividend.
Equity shares
Equity shares represent proportionate ownership in a company. Investors who own
equity shares in a company are entitled to ownership rights, such as:
• Share in the profits of the company (in the form of dividends)
• Share in the residual funds after liquidation / winding up of the company
• Selection of directors in the board, etc.
Government Securities
The Central Government and the State Governments issue securities periodically for
the purpose of raising loans from the public. There are 2 main types of Government
securities:
Dated Securities: have a maturity period of more than 1 year
Treasury Bills: have a maturity period of less than 1 year
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7) How do I buy financial instruments as investment
options?
One cannot buy directly from the
market or stock exchange. A buyer has to buy stocks or equity through a Stock Broker,
who is a registered authority to deal in equities of various companies. In effect
a lot many intermediaries might come in between the buyer and seller, as brokers
do their business through many sub-brokers and the like.
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8) How risky is the Stock Market?
The general theory goes that the
higher the profit, the greater the risk. Since there is scope for high profit in
the Stock Market, investing in the Stock Market can be risky. In fact, more than
80% of the people who put money in the market lose it and a majority of the rest
are barely able to protect themselves from losses. Only a minuscule minority of
investors are able to garner any substantive profits.
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9) If Stock Market is so risky, why are people
in it?
Basic human psychology. Men want
profits- big and fast. Not many are deterred by the risks involved. The fact is
that investment in the stock markets can give, potentially, the fastest ROI (Return
On Investment), as the value of a stock can rise pretty fast, ensuring huge profit
for investor. People buy shares in a company for either of two reasons:
• They have a stake in the company. They are concerned not only in the future growth
in stock value but in the worth of the company itself. Their investments are long-term
and they don't sell their shares in an impulse.
• They want quick profit and don't have any stake or interest in the company, but
merely want some quick value addition. Most investors belong to this category. Their
investments - both buying and selling - are impulsive. Mostly, they don't do any
market research and don't follow any sector or company to gain proper knowledge
before investing.
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10) How can I achieve success in stock market?
The precept is very easy their
investment, saving your investment is the first and most important part. This can
be done by ensuring that you do not put your money in a company that does not show
solid prospects. Fly- by- nights companies or companies whose shares touch the roof
suddenly, need to be avoided. Companies that show a steady prospect are good to
invest in. Needless to say, this process involves close acquaintance with market
movements and a thorough understanding of the concepts involved. You should know
when to dump your shares especially when they are becoming just junk papers.
The second thing is that adequate market knowledge is very
important especially when you have invested in the stock market. One should be patient
and judiciously responsive to market swings. Of course, luck is also a major factor.
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11) What is the best suggestion for investment?
Undoubtedly, it is 'Don't put all
your eggs in the same basket'. It is very tempting to make all your investment in
the same sector when their stocks are going up, but since market trends are very
volatile, you are, at the same time, making yourself extremely vulnerable to lose
all your money. Dealing with single sector investment requires razor sharp timing
with zero margin for error - a tall order in such a speculative and volatile business.
Hence, it is always advisable to make investments in different companies and in
different sectors, so that you can achieve stable portfolio diversification and
compensate losses in one sector against profits in an another sector.
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