Investment in Stock Markets

1. We all do Savings and we invest our savings in different ways. Can you explain what is savings and why should we invest?

2. What are the investment avenues available and how do we chose the best among them? What are the points to be kept in mind while doing any investment?

In India, we have a lot of investment avenues or products to invest in. We can deposit our savings in a Bank FD, We can buy gold, We can invest in real estate, We can invest in equity shares or mutual funds. Choosing the best among them depends on the natures of your needs. Basically, the factors considered by anybody, knowingly or unknowingly, are 1. the Rate of Return, 2. the Risk Involved ; and 3. the Liquidity of your investment.

When you take more risk or invest in a product in which a higher risk is involved, you expect more returns too. And your expectation reduces when it's the opposite. You can simply keep your savings in your SB account or a short term FD and get a nominal interest. It's a good example of less risk and less return investment. But what does the bank do with your money ? The Bank in turn lend it to many borrowers, like, say corporates, for a higher interest. If you can take that risk, instead of keeping your money in the bank, you too may lend to corporates or Govt., taking the route of debentures, bonds, etc. Going little more forward/Taking more risk, you can take the equity/mutual fund route and buy those corporates itself who take this fund at a higher interest and are still confident of making profits. Here, the risk is high as the company may make loss also but if your selection was
right you gets rewarded for sure.

Another factor is liquidity. Always keep in mind that you cannot lock in your savings for long if your requirement is contingent in nature or if the time left is too short. A term deposit with lock in period or an investment in real estate are examples of less liquid investments. An investment in real estate may not be of use for an emergency but your investment is shares may be useful at that time because you can encash it easily.

Even after considering all these, when you make an investment always remember not to put all your eggs in one basket ! You should diversify your investments. You should prepare your own product mix. In another words, you need to have a Clear and Definite Asset Allocation. For this you need to consider your age, the size of your savings, the time available to you, your assets and liabilities, your risk taking capacity and many person specific parameters. You also need to have an adequate insurance coverage and should have provided for a reserve to take care of any emergency.

Considering all the above, you may approach a bank, the money market or the capital market, as the case may be, for investing your hard earned money.

3. What is a capital market?

We have discussed about savings and investments or the money which is saved and ready to be invested. On the other side we have the ones who are in need of funds. It can be the Govts, Corporates, etc, etc. A capital market is basically a common platform where these two basic participants are brought together. i .e. the one who have money and the ones who need money or the Investors and the Corporates.

An efficient capital market helps both the investors and the corporates to match their respective interests. It also channelize the savings to be invested and used effectively. And thus a CAPITAL MARKET is very VITAL to the functioning of ANY economy.

4. How does a capital market or stock market function?

Capital Market can be broadly classified into two. The Primary market and the Secondary market.

Primary market is where the new companies raise fresh capital. Existing companies also take the route of primary market for raising funds for their expansion or new projects. This is what we see in the markets as Initial Public offer IPO or a Follow on Public Offer FPO. Here the price is usually dictated by the issuer or the seller.

Secondary Market is where the transfer of shares take place between an existing investor and a potential investor. Here, no fresh funds are raised and the price is decided between the buyer and the seller. A healthy secondary market is very important for any economy because it ensures fund flow into primary market and thus facilitates new projects. An investor in the primary market are assured of the liquidity of his investments through a continuous secondary market.

Now coming to the functioning of the capital markets - As you know, IPOs are normally known to public through advertisements and distribution channels like banks and the price are also quoted. What you need to do is just analyze the company offering the shares and make a cheque if you find its good. There is only one seller and all others are buyers. But in the secondary market, things are different. You need to find a counter party. If you want to buy a share, you need to find sellers. Or if you want to sell you need to find buyers. After finding the parties you need to chose from among them who offer you the best price. You will always want to sell at a higher price and want to buy at a lower price. So the problems are finding counter parties to your deal and fetching the best quote from an unknown crowd and ensuring that nobody defaults. All these problems are solved when you approach
a Stock Exchange. It's a place where all buyers and sellers come together and raise their quotes. You can chose your party and deal. Further the risk of default (like you sell and you don't get the promised price or vice versa ) is also take care by the stock exchange. The stock exchange acts as the counter party for each trade occurring through them and take the liability of settling the obligation.

5. We hear a lot of "jargons" such as speculators, day traders, investors, etc. in the market. Basically what are the types of trades happening in the market?

Speculators are high risk takers who try to make profits from the price fluctuations in the market. They hold the shares for a very short span of time and mostly sell them in few minutes / hours or on the same day itself. They are mostly intra day traders, as they are called. At the same time, there are persons who buys shares after sufficient study of companies. Their primary objective is to buy shares, hold them, wait for the right time and make profits by selling them at right price. They hold the shares for a few weeks to few years and are called Investors. In intraday trades you don't take delivery of the shares you buy. You sell them off on the same day and settle whatever be the difference in cash. Only if you have not sold the shares on the same day, you make full payment for it and the shares get credited into your demat account.

6. What is a demat account ?and What is dematerialisation?

The process of converting your share certificates from the paper form into electronic form is named dematerialisation and Demat account is an account where you hold your shares in the electronic form.

Its just like how you keep your money in a bank account. When you need to pay money from your account what do you do ? You issue a cheque. Same is the case here also. You hold your shares in demat account and issues slips whenever you need to transfer it. The main advantage is that you avoid the risk of duplication, theft, forgery, mutilation, etc. Transfer, Pledging, etc also becomes very easy & convenient in the electronic form.

7. How do one start investing in shares? How much money does one need to get started?

To invest in shares, you need to open two accounts namely trading account and demat account. To open a trading account you may approach any SEBI registered trading member like UAE Exchange, fill in a simple kyc form. There is no condition on any minimum investment to begin with in stock market. Its your own choice to decide how much money you invest. It can be even a single rupee. Even students can start investing with their pocket money.

To hold the shares you buy you need to open a demat account with any depository participant, like UAE Exchange. For this, you may need to pay a nominal amount as Annual Maintenance Charges for maintaining the demat account. You can also have a demat account with no shares, unlike banks where most of them insist on a minimum balance.

8. Now that one has opened a trading and demat account, How does he know which stock to buy?

The decision on which stock to buy / which stock to avoid and how many shares to buy purely depends on one's perspective about a company. We should always take Informed Decisions on stock selection. REALISE and ACCEPT that there are no short cuts in life. There are persons who are able to quickly go through company reports and identify profitable opportunities and dangers. But if you're not one of those, always take advice from some experts. Don't ever go behind rumours unless you have your own reasons to believe them.

Generally, the selection of shares are based on technical analysis and /or fundamental analysis. Under technical analysis, you analyse the price movements of a particular share and the quantity traded. One may arrive at a pattern for its movement history and fix a price to buy it and decide when to sell it also. Under fundamental analysis, you analyse the financial status of a company, you analyse the management of a company, you analyse the prospects of its business, you compare it with its peers and arrive at a value. If you find the share is available at a lower price than the value you arrived at, you buy the share. Mostly the decisions are typically formed out of a mixed analysis and also the general market conditions and the economic conditions influence the decision. Sometimes, even very good stocks get ignored due to misconceptions. One need to identify those shares and buy them.
Predicting a market crash is literally impossible but there may be stocks which are more likely to be beaten up then. One need to identify those shares and avoid them. In short, you need to do your HOME WORK well before making an investment. In other words you need to INVEST your TIME before you INVEST your MONEY.

9. What is a Mutual Fund? How is it different from buying shares?

Mutual Fund is a pool of money collected from many investors with similar objectives. The money so gathered is operated by a fund manager who invests this money into shares, bonds, etc. His aim is to generate returns from the investment and distribute it to those who have contributed to the fund. As we discussed earlier there are a lot of analysis involved in deciding which share to buy, what price to be paid, when to buy it, when to sell it and at what rate to sell it. Equity Mutual Funds are a solution to those investors with lesser expertise and sometimes lesser amounts to invest. Here the total funds collected are divided as units of small denomination amounts and each investor holds that many number of units in proportion to the amount he invested. The fund manager make investment subject to the guidelines or holds cash in the fund. At the end of the day, the stocks held are valued,
cash held, if any, is added to get the total net worth of the fund. This net worth is then divided by the number of units issued and the value you get is known as the NAV of each unit. That way each investor comes to know the current value of his investment on a daily basis. And he can decide on withdrawing his money or investing further.

Association of Mutual Funds in India AMFI acts like a self regulatory body and Mutual Fund units can be purchased through any of the AMFI registered Distributor like UAE Exchange. In a nut shell, the main advantage of mutual funds, esp equity mutual funds, to any investor is, the expertise of the fund manager who professionally manages the fund, then comes the reduced risk due to diversification of investment, and here the tracking of your investment is easier and you get tax benefits also as per the laws from time to time. Again, he can invest any small amount, any big amount, he can invest in lump sum or in installments.

10. How do you buy mutual funds in regular installments? Can you explain a little more?

In fact, its not like you buy something today and pay for it in fixed installments. Here, the entire concept and purpose is different. Here you make investments regularly and accumulate wealth. Its called systematic investment plan SIP. When you invest in stocks, timing is an important thing to look at. You need to buy the right share at right price, which may not be possible at all the times. This constraint is addressed to a great extent when you take the SIP route i.e when you invest a fixed amount regularly. Today its possible to start an SIP with amounts as lower as Rs.100/- through few mutual funds like LIC, Reliance, etc

What happens when you do an SIP ? When the stock markets are on an upswing and all the rates are high, you buy mf units at a higher price or NAV but in smaller numbers. And when the markets are cheap, you buy mf units at a lower NAV or price but in bigger numbers. So going for an SIP results in buying more when shares are cheap and buying less when shares are expensive.

11. What are the different types of Mutual Funds and how do they differ from each other?

Mutual Funds differ from each other due to various attributes like, where the fund invests in, whether its in equity / debt, their investment objectives, aiming periodic returns, aiming capital appreciation, and so on. Equity M Fs predominantly invests in the equity shares of various companies and they are again sub divided into large cap funds/mid cap funds/etc. Then again, debt funds invests in the money market and invests in govt bonds, treasury bills, etc. We need to be clear about our investment objective and there are a number of sub divisions available which is helpful for you to easily invest according to your requirement and make results.

12. We discussed many things now, right from the concepts up to different investment products. Please share a few tips for beginners?

Always have clear Financial Targets in your life and Prioritise them meaningfully. Review your Targets periodically. Identify the right investments/product mix to suit your needs and most importantly always stick to your plan. Once you invest, track your investments regularly. Follow all these and success is yours for sure.