Financial investment involves of funds in various assets, such as stock, Bond, Real Estate,

Mortgages etc. Investment is the employment of funds with the aim of achieving additional
income or growth in value. It involves the commitment of resources which have been saved or
put away from current consumption in the hope some benefits will accrue in future. Investment
involves long term commitment of funds and waiting for a reward in the future.

From the point of view people who invest their finds, they are the supplier of ‘Capital’ and in
their view investment is a commitment of a person’s funds to derive future income in the form of
interest, dividend, rent, premiums, pension benefits or the appreciation of the value of their
principle capital. To the financial investor it is not important whether money is invested for a
productive use or for the purchase of secondhand instruments such as existing shares and stocks
listed on the stock exchange. Most investments are considered to be transfers of financial assets
from one person to another.

Economic investment means the net additions to the capital stock of the society which consists of
goods and services that are used in the production of other goods and services. Addition to the
capital stock means an increase in building, plants, equipment and inventories over the amount of
goods and services that existed.

The financial and economic meanings are related to each other because investment is a part of
the savings of individuals which flow into the capital market either directly or through
institutions, divided in ‘new’ and secondhand capital financing. Investors as ‘suppliers’ and
investors as ‘users’ of long-term funds find a meeting place in the market.

So from above we know the term investment. The savers become the investors in the following
term and invest in unique assets:
Other definitions for investment:

“Investment may be defined as the purchase by an individual or institutional investor of a

financial or real asset that produces a return proportional to the risk assumed over some future
investment period.” – F. Amling

“Investment defined as commitment of funds made in the expectation of some positive rate of
return. If the investment is properly undertaken, the return will commensurate with the risk the
investor assumes.”- Fisher & Jordan
Investment refers to acquisition of some assets. It also means the conversion of money into
claims on money and use of funds for productive income earnings assets. In essence, it means the
use of funds for productive purpose, for securing some objectives like, income, appreciation of
capital or capital gains, or for further production of goods and services with the objective of
securing yield

Book building
Public issue of common shares is essentially carried out in two ways:
 Fixed price method, and
 Book-building method.

Fixed price issues are issues in which the issuer is allowed to price the shares as he wishes. The basis for the price
is explained in an offer document through qualitative and quantitative statements. This offer document is filed with the
stock exchanges and the registrar of companies.

Book-building is a process of price discovery used in public offers. The issuer sets a base price and a band within
which the investor is allowed to bid for shares. Take the recent, Yes Bank [ Get Quote ] IPO, the floor price was Rs 38
and the band was from Rs 38 to Rs 45.

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The investor had to bid for a quantity of shares he wished to subscribe to within this band. The upper price of the
band can be a maximum of 1.2 times the floor price.

Every public offer through the book-building process has a book running lead manager (BRLM), a merchant banker,
who manages the issue.

Further, an order book, in which the investors can state the quantity of the stock they are willing to buy, at a price
within the band, is built. Thus the term 'book-building.'

An issue through the book-building route remains open for a period of 3 to 7 days and can be extended by another
three days if the issuer decides to revise the floor price and the band.

Cut-off price

Once the issue period is over and the book has been built, the BRLM along with the issuer arrives at a cut-off price.
The cut-off price is the price discovered by the market. It is the price at which the shares are issued to the investors.

Investors bidding at a price below the cut-off price are ignored. So those investors who apply at a price higher than
the cut-off price have a higher chance of getting the stock. So the question that arises is: How is the cut-off price
fixed?
The cut-off price is arrived at by the method of Dutch auction. In a Dutch auction the price of an item is lowered, until
it gets its first bid and then the item is sold at that price.

Let's say a company wants to issue one million shares. The floor price for one share of face value, Rs 10, is Rs 48
and the band is between Rs 48 and Rs 55.

At Rs 55, on the basis of the bids received, the investors are ready to buy 200,000 shares. So the cut-off price cannot
be set at Rs 55 as only 200,000 shares will be sold. So as a next step, the price is lowered to Rs 54. At Rs 54,
investors are ready to buy 400,000 shares. So if the cut-off price is set at Rs 54, 600,000 shares will be sold. This still
leaves 400,000 shares to be sold.

The price is now lowered to Rs 53. At Rs53, investors are ready to buy 400,000 shares. Now if the cut-off price is set
at Rs 53, all one million shares will be sold.

Investors who had applied for shares at Rs 55 and Rs 54 will also be issued shares at Rs 53. The extra money paid
by these investors while applying will be returned to them.

Types of investors

There are three kinds of investors in a book-building issue. The retail individual investor (RII), the non-institutional
investor (NII) and the Qualified Institutional Buyers (QIBs).

RII is an investor who applies for stocks for a value of not more than Rs 100,000. Any bid exceeding this amount is
considered in the NII category. NIIs are commonly referred to as high net-worth individuals. On the other hand QIBs
are institutional investors who posses the expertise and the financial muscle to invest in the securities market.

Mutual funds, financial institutions, scheduled commercial banks, insurance companies, provident funds, state
industrial development corporations, et cetera fall under the definition of being a QIB.

Each of these categories is allocated a certain percentage of the total issue. The total allotment to the RII category
has to be at least 35% of the total issue. RIIs also have an option of applying at the cut-off price. This option is not
available to other classes of investors. NIIs are to be given at least 15% of the total issue.

And the QIBs are to be issued not more than 50% of the total issue. Allotment to RIIs and NIIs is made through a
proportionate allotment system. The allotment to the QIBs is at the discretion of the BRLM.

Lately there have been some complaints by the QIBs of BRLMs resorting to favouritism while allocating shares. The
Securities and Exchange Board of India [ Images ] (Sebi) is in the process of reviewing this mechanism.

Let's suppose, A Ltd, makes an offer for 200,000 shares. The issue is oversubscribed -- i.e. there is demand for more
shares than the issuer plans to issue. Further, a minimum allotment of 100 shares is to be made for every investor.

The cut-off price has been decided and now the allotments are to be made. In the RII category, 1,500 applicants have
applied for 100 shares each, i.e. there is a demand for 150,000 shares.
A Ltd plans to issue 35% of the total issue to this category, i.e. 70,000 shares. In the NII category, 200 applicants
have applied for 500 shares each, i.e. 100,000 shares. A Ltd plans to issue 15% of the total issue to this category, i.e.
30,000 shares.

The cut-off price has already been decided, so adjusting the quantity remains the only way of reaching the
equilibrium. Applying the proportionate allotment system each investor in the RII category will get 46.67 shares
[(70,000/ 150,000) x 100)]. But the minimum allotment has to be 100 shares.

So through a lottery, 700 investors are chosen and allotted 100 shares each, making a total of 70,000 shares. In the
NII category every investor will get 150 shares [(30,000/100,000) x 500)]. And that is how equilibrium is reached.

Green shoe option

In case the issue has been oversubscribed, as was the case with A Ltd, the company has to exercise a green shoe
option to stabilize the post-listing price. When a particular issue is oversubscribed the appetite of investors for the
stock has not been satisfied and once it gets listed they tend to pick up the stock from the secondary market.

Since the demand is greater than supply the prices tend to rise way beyond what the fundamentals of the stock would
justify. So in order to stabilise the post-issue price of the stock, the issuer has to issue more shares in case of
oversubscription.

These shares are taken from the pre-issue shareholders or promoters and are issued to the investors who have
come in through the public offer on a prorata basis. The green shoe option can be a maximum of 15% of the public
offer

What is the role of the 'Primary Market'?

The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of
securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or
discharge some obligation. They may issue the securities at face value, or at a discount/premium and these
securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market
and/or international market.

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Primarily there are two types of stock markets – the primary market and the secondary market.
This is true for the Indian stock markets as well. Basically the primary market is the place where
the shares are issued for the first time. So when a company is getting listed for the first time at
the stock exchange and issuing shares – this process is undertaken at the primary market. That
means the process of the Initial Public Offering or IPO and the debentures are controlled at the
primary stock market. On the other hand the secondary market is the stock market where existing
stocks are brought and sold by the retail investors through the brokers. It is the secondary market
that controls the price of the stocks. Generally when we speak about investing or trading at the
stock market we mean trading at the secondary stock market. It is the secondary market where
we can invest and trade in the stocks to get the profit from our stock market investment.

Now these are the broadest classification of the stock markets that is true for any country as well
as India. But the Indian stock markets can be divided into further categories depending on
various aspects like the mode of operation and the diversification in services. First of the two
largest stock exchanges in India can be divided on the basis of operation. While the Bombay
stock exchange or BSE is a conventional stock exchange with a trading floor and operating
through mostly offline trades, the National Stock Exchange or NSE is a completely online stock
exchange and the first of its kind in the country. The trading is carried out at the National Stock
Exchange through the electronic limit order book or the LOB. With the immense popularity of
the process and online trading facility other exchanges started to take up the online route
including the BSE where you can trade online as well. But the BSE is still having the offline
trading facility that is carried out at the trading floor of the exchange at its Dalal Street facility.

Apart from these classifications there are also different types of stock market in India and the
classification is made on the type of instrument that is being traded at the market. Both the
Bombay Stock Exchange and the National Stock Exchange have these types of stock markets.

Equity market or the cash segment – The first type of market is the equity market or the cash
segment where stocks are traded. In this type of trading the buyers of the stocks book a buying
order with a bid price and the order is executed through the broker at a negotiated ask price
offered by the sellers at the market. In most cases the deal is closed or the stocks are brought at
the best available ask price. In this type of trading the buyer pays the entire amount of the value
of the stocks that is determined by multiplying the number stocks with the current price of the
stock. Once the buyer pays the entire amount along with the brokerage and taxes of the
transaction the stocks are deposited to the DP account of the buyer.

Derivative Market – In the derivative market trading is done mainly through two instruments –
the Future contract and the Option contract. In both these types of contracts the stocks are bought
and sold in lot. The number of stocks for each lot depends on the valuation of the stock and the
valuation of the lot is determined by the number of the stocks in a lot multiplied with the current
market price of the stock. For trading in derivative market you have to buy either the future
contract or the option contract. In a future contract you are bound to close the deal within a
specific time and at a fixed arte. While in case of option contract you can also choose to ignore
the contract.

Trading system in Indian Stock Markets

There are four things in the trading system in Indian Stock Markets. They are Trading Members, Clearing
Members, Professional Clearing Members and Participants.

Trading Members:
Trading members are members of NSE (National Stock Exchange) of India. They may trade, either for
their own account or on behalf of their clients, including participants. Exchange allocates a Trading
member ID to each trading member. Each Trading Member may have more than one user. The number
of users allowed for each trading member is informed by the Stock Exchange from time to time. Each
user of a trading member shall be registered with the exchange and is given a unique user ID. The
exclusive trading ID is used as a reference for all orders/trades of different users. This identification is
common to all users of a trading member. It is the responsibility of exchange members to maintain
sufficient control over who has access to the firm's User IDs.

Clearing Members:
Clearing Members are members of National Securities Clearing Corporation Ltd (NSCCL). They carry out
risk management activities and confirmation/request of trades through the trading system.

Professional Clearing Members:

A Professional Clearing Member is a clearing member who is not a trading member. Usually, Banks and
Custodians become Professional Clearing Members and clear and settle for their trading members.

Participants:
A Participant is a client of trading members and financial institutions. These clients may trade through
several members, but to settle by a single clearing member.