Professional Documents
Culture Documents
C8
Avenues of Investment
Chapt
er
Avenues of Investment
8 1
Excel Books
Avenues of Investment
Financial assets
ii.
New Issue
Market
Physical
assets
(real assets)
iii.
b)
Non-securitized investments.
8 2
Excel Books
Avenues of Investment
Investment Attributes
Market
RiskNew
andIssue
return
b)
c)
Tax advantages
d)
Convenience
8 3
Excel Books
Avenues of Investment
Equity Shares
Equity shares represent equity capital, which is the ownership capital
because equity shareholders collectively own the company. Equity shares,
Issue Market
however,New
possess
an unlimited potential for dividend payments and price
appreciation. In contrast, bonds and preference shares have a contract for
fixed interest or dividend payments that equity shares do not have. A share
certificate states the number of shares, their par value, the certificate
number, distinctive numbers and the name of owner of the certificate.
8 4
Excel Books
Avenues of Investment
Advantages
Newshares
Issue Market
Equity
have no fixed maturity date it is permanent capital
that does not have to be "paid back".
Cont.
Copyright 2008, Sudhindra Bhat
8 5
Excel Books
Avenues of Investment
Disadvantages
The sale of equity shares extends voting rights, or even control,
to
the additional new shareowners who are brought into the company.
For this reason, small firms, whose owner- managers may be
unwilling
to share
control, often avoid additional equity financing.
New Issue
Market
The use of debt enables the firm to acquire funds at a fixed
cost, whereas the use of equity shares means more share in the firm's
net profits.
The costs of underwriting and selling equity shares are usually
higher than the costs of underwriting and selling preferred
shares or debt.
The sale of the new equity shares may be perceived by investors as
a negative signal and hence may cause the share price to fall.
Cont.
8 6
Excel Books
Avenues of Investment
All money market securities are debts that mature within 364 days or less.
Money market securities are frequently issued instead of longer-term debt
securities
in order to avoid long and costly formalities. Money market
New Issue Market
securities pay continuously fluctuating rate of interest that hovers
somewhere between the rate of inflation and the rate paid by the longerterm debt instruments. Money market securities typically pay interest to
their investors, as a discount from their face (or maturity) values.
Cont.
Copyright 2008, Sudhindra Bhat
8 7
Excel Books
Avenues of Investment
Cont.
Copyright 2008, Sudhindra Bhat
8 8
Excel Books
Avenues of Investment
Bearer Bonds
Call Provision
Sinking Fund
Credit Rating
Refunding Analysis
Cont.
Copyright 2008, Sudhindra Bhat
8 9
Excel Books
Avenues of Investment
do not participate if profits soar. There is, however, a flip side to this
- even if profits fall, the debt-holders must still be paid their interest.
Cont.
Copyright 2008, Sudhindra Bhat
8 10
Excel Books
Avenues of Investment
Financial leverage increases the firm's risk exposure, hence the cost
of both debt and equity also rise accordingly.
Debt normally has a fixed maturity; hence the firm has to repay the
principal on a fixed date. It cannot be deferred.
Cont.
Copyright 2008, Sudhindra Bhat
8 11
Excel Books
Avenues of Investment
Cont.
Copyright 2008, Sudhindra Bhat
8 12
Excel Books
Avenues of Investment
Permits Diversification
Increases liquidity
Disadvantages
Cost of Reporting
Disclosure
Self-Dealings
Control:
Cont.
Copyright 2008, Sudhindra Bhat
8 13
Excel Books
Avenues of Investment
There are five different ways of offering equity shares: public issues,
and value of the shares held by the shareholders does not change.
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Excel Books
Avenues of Investment
Hybrid Instruments
A warrant is a long-term call option issued along with a bond or on a
standalone basis. Warrants are generally detachable from the bond, and
Newseparately.
Issue MarketWhen warrants are exercised, the firms receive
they trade
additional equity capital and the original bonds remain outstanding.
Warrants are 'sweeteners' that are used to make the underlying debt or
preferred share issue more attractive to investors.
8 15
Excel Books
Trade Bills
Bankers' Acceptances
Treasury Bills
Commercial Papers
Hundis
Copyright 2008, Sudhindra Bhat
8 16
Excel Books
Avenues of Investment
Cont.
Copyright 2008, Sudhindra Bhat
8 17
Excel Books
Avenues of Investment
Bank Deposits
New Issue
Market
Monthly
Income
Scheme of The Post Office (Mispo)
Company Deposits
8 18
Excel Books
Avenues of Investment
UNITS
The units of the Unit Trust of India provide investment facilities to small
investors for giving them a good current income and also capital
appreciation.
The UTI
is required by law to distribute not less than 90% of its
New Issue
Market
income. Individuals, companies, corporate bodies, etc. through direct
agency, bank or post offices can open accounts. Investments in units enjoy
tax benefits. Units can be considered as a channel of investment on a very
8 19
Excel Books
deposits.
Household sector savings in the form of insurance comprise of the life
funds of Life Insurance Corporation of India (LIC), Postal Insurance, State
Insurance Fund and Central Government Group Insurance Funds.
Cont.
Copyright 2008, Sudhindra Bhat
8 20
Excel Books
Avenues of Investment
8 21
Excel Books
8 22
Excel Books
like part trusts, electricity boards, public sector financial institutions and
other public sector units are broadly known as gilt-edged securities. Giltedged securities include Treasury bills and dated securities.
Treasury bills are the short-term securities issued by the Central
Cont.
Copyright 2008, Sudhindra Bhat
8 23
Excel Books
Avenues of Investment
Dated government securities have a maturity period longer than one year
and carry a fixed coupon rate. The dated securities are either in the form of
promissory notes or in the form of stock certificates. The rates of return on
dated government securities are higher than those on treasury bills and the
New Issue Market
only risks are the risk of unexpected inflation and the interest rate risk.
Semi-government dated securities are those issued by government
undertakings and guaranteed by the Central/state governments. Corporate
securities, excluding equity shares, consist of Debentures and Commercial
paper (CP).
Cont.
Copyright 2008, Sudhindra Bhat
8 24
Excel Books
Avenues of Investment
Cont.
Copyright 2008, Sudhindra Bhat
8 25
Excel Books
Avenues of Investment
1.
2.
3.
New Issue
Market
Generally
secured
by the assets of the issuing company.
4.
5.
Bonds that can be converted into equity shares have built- in potential
for capital gains.
6.
7.
8 26
Excel Books
Avenues of Investment
8.
9.
8 27
Excel Books
Dated securities
b)
c)
d)
e)
8 28
Excel Books
Avenues of Investment
Advantages
1.
3.
8 29
Excel Books
Avenues of Investment
Disadvantages
There is no tax deducted at source and the investor can avail tax benefit
u/s 80L i.e. Rs 3,000/The New
minimum
Issue amount
Market for investing in gilts varies depending on the
primary dealer. Hold these instruments in a demat form.
Cont.
Copyright 2008, Sudhindra Bhat
8 30
Excel Books
Avenues of Investment
8 31
Excel Books
Residential house
Commercial property
Agricultural land
Cont.
Copyright 2008, Sudhindra Bhat
8 32
Excel Books
Avenues of Investment
Suburban land
Unimproved land
Improved
real Market
estate
New Issue
Vacation homes
Advantages
Copyright 2008, Sudhindra Bhat
8 33
Excel Books
ULIP
Art
8 34
Excel Books