Notes on Capital Market The history of Indian stock market dates back to 1830 when a handful of stock brokers

use to assemble on the ground, presently known as Horniman Circle, Mumbai. They used to buy and sell shares of the companies among themselves or for their constituents on their own terms and conditions. It was in 1875, these stock brokers who grew to 312, formally united and formed an association named as The Native Shares & Stock Brokers Association of India at a nominal fee of Rs.1.00, as a self regulatory body for dealing in company stocks. Since then, a lot of water has flown and steadily, the stock market has grown to its present position which is transparent, dynamic and hassle free. The activities in Share Bazar or Stock Market originate from savings and their investments techniques. People save money for the following purposes: 1. To look after themselves when they grow old and their earning capacity is no more in other words to create a pension. 2. To fulfill certain objectives in near future children education, Thread ceremony, their marriage, construction of a house or any other purpose. The time period could be one year to 20 years or more. 3. Provision for an uncertain difficulty accident or death These objectives necessitate savings. These savings are converted into investments, which could be in any form real estate, gold, cash, securities i.e. shares, debentures, bonds, commodities, insurance, mutual funds, bank deposits, post office deposits, etc. Now question comes, why should we invest? Basically, one invests to earn return on ideal resources. The cash does not grow at all. On the contrary, its value declines because of inflation as the cost of living increases. It can be understood by an example. If there is an inflation of 5% per annum, than todays Rs.100 would be less than Rs.30 after 10 years. As such, all investment must earn more than 5% per annum minimum so that your original money remains intact, even it does not grow any further. While investing, one should not only take inflation but should also consider growth factor so that his money multiplies. Thus the basic objective of investment is ones capital to grow. Another factor relating to investment is time, when one should invest ? Those who invest early, get better returns since more time is available for compounding the principal and interest or dividend as the case may be. The basic rules of investment are invest early, invest regularly and be invested for long term. While investing every investors priority is that he should get back his capital along with the interest or dividend and that his capital is not eroded. Therefore, every investor must answer the following 4 points before he decides to invest in particular investments.

1. 2. 3. 4.

Whether the investment is safe? Whether enough liquidity is with the investment ? Whether the investment will give any return and how much? and last Whether the value of the investment will grow?

Every investor would consider the fact, before his investment whatever way he/she put in, whether the money he is investing is safe and would get back. In simple meaning, his investment is not ruined if there is a failure of the investments. Each and every investment has a risk associated with. The return on a investment have a direct relation to the risk. Higher the risk higher the return and lower the risk lower the return. In case of Bank deposits or Post office deposits, this risk is practically zero, and hence rate of return are quite low. On the other hand, returns on loan are quite high, sometime very high, because there is always a risk that the money lent may not come back. Second point is Liquidity. In financial market liquidity means to convert ones asset into cash. In other words, if one has made investment, he should be able to sell it at his wish. Real estate cannot be sold at a hurry. Similarly, some of the saving instruments like NSC, Kisan Vikas Patra cannot be converted into cash. Although, term deposits in banks are for certain term say 1 year to 5 years, but they can be encashed on demand and therefore, considered as most liquid. On the other hand, equities which are listed and traded at stock exchanges can be sold quite fast and considered liquid. However, certain equities may not fall in that category. Return on investment is another factor which is important. Inflation reduces the value of money. The return on investment should at least cover the inflationary impact. Tax is another point which is related to the return. Dividend on equities are tax free. Thus a return on debt instrument will attract tax but the dividend received on equities are tax free, which would then be considered a good investment. Appreciation in the value of investment is another point to which every investor is concerned. Many investor feels that even if certain investment do not give them a regular income, their value is appreciated over the time which compensate much more than the regular income.. Investment like real estate or in gold are of this types. But you get appreciated value only if you sell the investment. It is seen that during the last 3 years prices of real estates have grown by over 100%. Equity market also appreciates significantly. It very difficult to come to a conclusion for an investment taking into account all the above 4 principles. As such, there is no theory of a perfect investment. All investment decisions are therefore, based on Higher the risk higher the return or Lower the risk lower the return. Investor has to select an investment which would be based on either safety (low return) or risk factor (high return) or a combination of both. Thus, it is he/she who has to take a decision for his/her investment judiciously considering his/her overall portfolio, financial requirements over the period, risk bearing capacity etc. so that he/she can invest in different avenues.

Based on the above fundamentals, investors can be classified in 3 catagories: 1. Orthodox: One who does not take risk at all. He is very particular of his capital. As such, these persons invest in Banks, Post Offices, etc which give them a regular monthly income although at lower rate. They do not bother about appreciation of the investments. 2. Entrepreneurs: The one who takes some sort of risks. He wants not only dividends or interest but also an appreciation in his investments. 3. Speculators: They believe in taking risks and want to make money at a short term basis. They are also categorized as gamblers. It is advisable to be a mixed investor and should invest appropriately following all the three types of investing attitudes for better returns. Factors affecting the share/stock prices Company specific: peoples expectations about the companys future returns/growth, which depends upon its future earning capacity , financial health and management, level of technology employed and its marketing skills. These factors affect individual share prices of a particular company at a given time or for a longer period. Market Specific: Investors sentiments towards stock market as a whole, environment of market. Economic, political or regulatory environments like high economic growth, friendly budget, stable Government, etc. may lead to a boom conditions in the market. Un-favorable events such as war, economic crisis, communal riots, minority Government, etc. depress the market sentiments. These factors either affect all the companies in one sector or entire market. Shares/Stocks : The word Share denotes a share in the assets of the company. It gives a right of ownership in the company to the holder of the share in the company. The owner of share is entitled to receive a part of the profit and other benefits of the company in a pro rata basis. Thus, if a company issues 1,00,00,000 shares of Rs. 10 each, the companys total share capital will be Rs.10,00,00,000 distributed in 1 crore shares of Rs.10 each. It implies that if a person who owns one share in that company, is entitled to receive dividend or any other benefit in the ratio of 1 to 1,00,00,000. Since the ownership in the company is in proportion of the number of shares one held, a person holding 1000 shares will drive benefit 1000 times than the person who drives benefits from one share. The companies are liable to keep informed its shareholders through Annual General Meetings, Emergency General Meeting or Extra ordinary General Meetings about the performance and the developments of the company. It gives its Annual Accounts and the Reports of the Board of Directors to each and every shareholders irrespective of the fact as how much shares are held

by a person. In other words, a person having only 1 share in a company is entitled to receive a copy of the Annual Accounts and the Reports of the Board of Directors. Shares are issued to the public duly authorized as per Memorandum and Articles of Association of the Company which is known as issued capital. Issued capital will always be at lower or at par with the authorized capital, as a company may not issue the entire authorized capital. If the issued capital is partly paid, it known as partly paid up equity shares of the company and if the shares are fully paid, the shareholders have no liability thereafter. Shares are of two types : Equity Share Equity share or ordinary shares are the shares that have a right to the profits of the company after preference shareholders have been paid and between which the assets of the company are distributed after all other claims are settled. Preference shares are those shares which carry the right of a fixed rate of dividend and preferential treatement at the time the company is liquidated. Preference shareholders are to be paid prior to the ordinary shareholders. Preference shareholders do not have right to vote in annual general body meetings or decide on company policy. Cumulative Convertible Preference Shares First issued in 1985-86. When a company is unable to declare dividend to, cumulative convertible preference shares , the dividend is kept in abeyance and whenever dividend is announced, previous dividend is also given i.e it is cumulative. These shares are also converted at a future date into equity shares.

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