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INDEX

S.NO TOPICS PAGE NO

1 FINANCIAL MARKET 3

2 TYPES OF FINANCIAL MARKETS 3

3 BOND MARKETS 16

4 MUTUAL FUNDS 18

5 TYPES OF MUTUAL FUNDS 20

6 SHARES AND STOCK MARKET 22

7 FACTORS THAT AFFECTS THE STOCK MARKET 24

8 RISKS ASSOCIATED WITH FINANCIAL MARKETS 26

9 WALL STREET & MAIN STREET 27

10 TERMS USED IN FINANCIAL MARKETS 28





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FINANCIAL MARKET

Definition:

A Financial Market is a market in which

people trade financial securities and

derivatives such as futures and options at

low transaction costs. Securities include

stocks and bonds, and precious metals.

A place where individuals are involved in

any kind of financial transaction refers to

financial market. Financial market is a

platform where buyers and sellers are

involved in sale and purchase of financial

products like shares, mutual funds,

bonds and so on.

Main Functions of Financial Market

(1) Mobilisation of Savings and their

Channelization into more Productive

Uses:

Financial market gives impetus to the

savings of the people. This market takes

the uselessly lying finance in the form of

cash to places where it is really needed. The

investors can invest in any of these

instruments according to their wish.

(2) Facilitates Price Discovery:

The price of any goods or services is

determined by the forces of demand and

supply. Like goods and services, the

investors also try to discover the price of

their securities. The financial market is

helpful to the investors in giving them

proper price.

(3) Provides Liquidity to Financial

Assets:

This is a market where the buyers and the

sellers of all the securities are available all

the times. This is the reason that it provides

liquidity to securities. It means that the

investors can invest their money,

whenever they desire, in securities

through the medium of financial market.

They can also convert their investment into

money whenever they so desire.

(4) Reduces the Cost of Transactions:

Various types of information are needed

while buying and selling securities. Much

time and money are spent in obtaining the

same. The financial market makes available

every type of information without

spending any money. In this way, the

financial market reduces the cost of

transactions.

TYPES OF FINANCIAL MARKETS

Capital markets

Commodity markets

Money markets

Derivatives markets

Futures markets

Foreign exchange markets





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Cryptocurrency market

Spot market

Interbank lending market

CAPITAL MARKET

A capital market is a financial market in

which long-term debt (over a year) or

equity-backed securities are bought and

sold. Capital markets channel the wealth of

savers to those who can put it to long-term

productive use, such as companies or

governments making long-term investments.

Capital markets help channelize surplus

funds from savers to institutions which then

invest them into productive use. Generally,

this market trades mostly in long-term

securities.

Securities Market

A securities market is a market where

securities are traded either on physical or

electronic exchanges. Securities markets are

generally divided between stock markets

and bond markets. A stock market

involves the trade of equity securities, which

are ownership interests of a company

commonly known as shares.

Bond markets, which provide financing

through the issuance of bonds, and enable

the subsequent trading thereof.

It is also classified into two interdependent

segments, i.e.

They are

1. Primary Market

2. Secondary Market

BASIS FOR COMPARISON PRIMARY

MARKET

SECONDARY

MARKET

Meaning The market place for new shares is

called primary market.

or

The securities are formerly issued

in a market.

The place where formerly

issued securities are traded is

known as Secondary Market.

or

Issued securities is then

listed on a recognized stock





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exchange for trading.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to budding

enterprises and also to existing

companies for expansion and

diversification.

It does not provide funding to

companies.

How many times a security

can be sold?

Only once Multiple times

Buying and Selling between

Company and Investors Investors

Who will gain the amount

on the sale of shares?

Company Investors

Intermediary Underwriters Brokers

Price Fixed price Fluctuates, depends on the

demand and supply force

Organizational difference Not rooted to any specific spot or

geographical location.

It has physical existence.

The public issue is of two types, they are:

Initial Public Offer (IPO): Public issue

made by an unlisted company for the very

first time, which after making issue lists its

shares on the securities exchange is known

as the Initial Public Offer.

Further Public Offer (FPO): Public

issue made by a listed company, for one

more time is also known as a Follow-On

Offer. An FPO is a stock issue of additional

shares made by a company that is already





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publicly listed and has gone through the IPO

process.

TWO IMPORTANT STOCK EXCHANGES IN

INDIA

Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) is an

Indian stock exchange established in 1875,

the BSE (formerly known as Bombay Stock

Exchange Ltd.). It is the Asia’s first stock

exchange. It claims to be the world's

fastest stock exchange, with a median

trade speed of 6 microseconds. The BSE is

the world's 10th largest stock exchange with

an overall market capitalization of more

than $2.3 trillion on as of April 2018.

Over the past 141 years, BSE has facilitated

the growth of the Indian corporate sector by

providing it an efficient capital-raising

platform. BSE's popular equity index - the

S&P BSE SENSEX - is India's most widely

tracked stock market benchmark index. It is

traded internationally on the EUREX as well

as leading exchanges of the BRCS nations

(Brazil, Russia, China and South Africa).

The BSE is also a Partner Exchange of the

United Nations Sustainable Stock Exchange

initiative, joining in September 2012. BSE

established India INX on 30 December

2016. India INX is the first international

exchange of India. Its headquarters is

located in Mumbai, Maharashtra.

Chairman of BSE – S Ravi; Ashish kumar

Chauhan (MD & CEO).

National Stock Exchange (NSE)

The National Stock Exchange of India

Limited (NSE) is the leading stock

exchange of India. The NSE was

established in 1992 as the first

demutualized electronic exchange in the

country.

NSE was the first exchange in the country to

provide a modern, fully automated

screen-based electronic trading system

which offered easy trading facility to the

investors spread across the length and

breadth of the country. Vikram Limaye is

Managing Director & Chief Executive Officer

(MD & CEO) of NSE. Its headquarters is

located in Mumbai, Maharashtra.

National Stock Exchange has a total market

capitalization of more than US$2.27 trillion,

making it the world’s 11th-largest stock

exchange as of April 2018.NSE's flagship

index, the NIFTY 50, the 50-stock index is

used extensively by investors in India and

around the world as a barometer of the

Indian capital markets. Nifty 50 index was

launched in 1996 by the NSE.





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COMMODITY MARKET

A Commodity Market is a market that

trades in primary economic sector rather

than manufactured products. Soft

commodities are agricultural products such

as wheat, coffee, cocoa, fruit and sugar.

Hard commodities are mined, such as gold

and oil. The term “commodity market”

denotes the place where commodities or

products are bought or sold.

A commodity market has its own set of rules

and regulations like any other market, but it

is clearly not a share market as physical

form of goods are traded here. It can be said

that the weather plays a huge role in this

market as most agricultural products are

dealt in the commodity market.

Types of Contracts:

Forward contracts

Futures contract

OTC

Forward contract: Forward contract is an

agreement between two parties to sell or

buy a certain commodity at a fixed price

in the future. This contract hedges the risk

for the buyer against price fluctuations and

the seller can get a guaranteed price for his

product at a specified date.

For example, if A has the machinery that

produces 10 bales of cotton, then he can

secure an agreement with B to sell the bales

at a certain price after an year irrespective

of the price that is trending. This is called

hedging the risk. “A” hedges the risk by

securing the price and “B” speculates by pre-

booking the price expecting that prices

would go up in the near future which would

benefit him.

Futures contract: Futures contract is an

agreement between two parties who

agree to buy or sell a particular asset at

a specified date and at a pre-determined

price. The payment and delivery of the asset

is made on the future date termed as

delivery date. The buyer in the futures

contract is known to hold a long position.

The seller in the futures contracts is said to

be having short position.

On reading the meanings of future and

forward contract, you may find that the

meaning is the same. But there are some

points of difference:

Forward contracts are traded over the

counter, while futures contracts are traded

on the exchanges.

Forward contracts can be privately

negotiated. Futures contract have a

standardized way of execution and the

transaction is guaranteed by the clearing





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house which leads to lesser defaults on the

agreement.

Forward contracts are mostly used by

hedgers (they try to eliminate the price

risk). Futures contracts are used by

speculators. (who predict the way the asset

price moves).

Major commodity Exchanges in India:

The place where all the transaction or

contracts regarding commodities take place

is called the exchanges. In India the these

are

Multi Commodity Exchange of India Ltd,

Mumbai (MCX) –Non-agricultural products

like gold, silver, aluminium, copper, nickel,

lead, zinc and energy products like crude oil

and natural gas are traded on this exchange.

MCX is the main exchange where all

commodity trading takes place.

National Commodity and Derivative

Exchange, Mumbai (NCDEX) - in

Agricultural products like pulses, cereals,

sugar etc are traded on this exchange.

OTC:

Another type of contract authorized by the

clearing house called the Over The Counter

(OTC) contract where transaction is done

privately by the contracting parties without

the need of involving the exchanges.

Types of commodities traded in the

commodity market:

There are basically two types of

commodities, the hard commodity and the

soft commodity. It is further divided into

four categories namely;

Energy- Natural Gas and Crude Oil.

Agriculture – Cereals, Pulses, Potato,

Oil and Oil Seeds, Rubber, Fibres, Sugar,

And Spices.

Metals – Aluminium, Lead, Zinc, Nickel,

Copper

Bullions – Gold, Silver

Caution:

Trading in the commodity market requires a

sound working knowledge of the

transactions and the trader should make

an informed decision while trading. It is

always better to enlist the services of a

brokerage firm whilst dealing in

commodities.

MONEY MARKET

The Money market in India correlation for

short-term funds with maturity ranging

from overnight to one year in India

including financial instruments that are

deemed to be close substitutes of money.





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The money market is where financial

instruments with high liquidity and very

short maturities are traded. It is used by

participants as a means for borrowing and

lending in the short term.

Money Market’s Instruments are

Call/Notice/Term money market, Repurchase

Agreement (Repo & Reverse Repo) market,

Treasury bill market, Commercial Bill

market, Commercial paper market,

Certificate of Deposit market, Cash

Management Bill (CMB).

FUNCTIONS OF MONEY MARKET

Money markets serve five functions—to

finance trade, finance industry, invest

profitably, enhance commercial banks' self-

sufficiency, and lubricate central bank

policies.

Financing Trade:

The money market plays crucial role in

financing domestic and international

trade. Commercial finance is made available

to the traders through bills of exchange,

which are discounted by the bill market. The

acceptance houses and discount markets

help in financing foreign trade.

Financing Industry:

The money market contributes to the growth

of industries in two ways: They help

industries secure short-term loans to

meet their working capital requirements

through the system of finance bills,

commercial papers, etc.

Industries generally need long-term loans,

which are provided in the capital market.

However, the capital market depends upon

the nature of and the conditions in the

money market. The short-term interest rates

of the money market influence the long-term

interest rates of the capital market. Thus,

money market indirectly helps the

industries through its link with and

influence on long-term capital market.

Profitable investment:

The Money Market enables the commercial

banks to use their excess reserves in

profitable investment. The main objective of

the commercial banks is to earn income

from its reserves as well as maintain

liquidity to meet the uncertain cash

demand of the depositors. In the money

market, the excess reserves of the

commercial banks are invested in near-

money assets (e.g., short-term bills of

exchange), which are easily converted into





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cash. Thus, commercial banks earn profits

without sacrificing liquidity.

Self-sufficiency of commercial bank:

Developed money markets help the

commercial banks to become self-sufficient.

In the situation of emergency, when the

commercial banks have scarcity of funds,

they need not approach the central bank and

borrow at a higher interest rate. On the

other hand, they can meet their

requirements by recalling their old

short-run loans from the money market.

Help to central bank:

Though the central bank can function and

influence the banking system in the absence

of a money market, the existence of a

developed money market smooths the

functioning and increases the efficiency

of the central bank. Sensitive and

integrated money markets help the central

bank secure quick and widespread influence

on the sub-markets, thus facilitating

effective policy implementation.

CALL /NOTICE / TERM MONEY

The call/notice/term money market

facilitates lending and borrowing of funds

between banks and entities like Primary

Dealers. An institution which has surplus

funds may lend them on an

uncollateralized basis to an institution

which is short of funds. Money market

transactions are categorized as follows:

Call Money - Borrowing/Lending for 1

day

Notice Money - Borrowing/Lending for

2-14 days

Term Money - Borrowing/Lending for

more than 14 days

The interest rates on such funds depend on

the surplus funds available with lenders

and the demand for the same which remains

volatile. This market is governed by the

Reserve Bank of India which issues

guidelines for the various participants in the

call/notice money market.

Participants

Scheduled commercial banks (excluding

RRBs), co-operative banks (other than Land

Development Banks) and Primary Dealers

(PDs), are permitted to participate in

call/notice money market both as borrowers

and lenders.





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Prudential Limits

Prudential Limits for Transactions in Call/Notice Money Market

Sr.

No.

Participant Borrowing Lending

1

Scheduled

Commercial

Banks

On a daily average basis in a reporting

fortnight, borrowing outstanding

should not exceed 100 per cent of

capital funds (i.e., sum of Tier I and

Tier II capital) of latest audited

balance sheet.

However, banks are allowed to borrow

a maximum of 125 per cent of their

capital funds on any day, during a

fortnight.

On a daily average basis in a

reporting fortnight, lending

outstanding should not exceed 25

per cent of their capital funds.

However, banks are allowed to

lend a maximum of 50 per cent of

their capital funds on any day,

during a fortnight.

2

Co-operative

Banks

Outstanding borrowings of State Co-

operative Banks/District Central Co-

operative Banks/ Urban Co-operative

Banks in call/notice money market, on

a daily basis should not exceed 2.0 per

cent of their aggregate deposits as at

end March of the previous financial

year.

No limit.

3

PDs

PDs are allowed to borrow, on daily

average basis in a reporting

fortnight, up to 225 per cent of their

net owned funds (NOF) as at end-

March of the previous financial year.

PDs are allowed to lend in

call/notice money market, on

daily average basis in a reporting

fortnight, up to 25 per cent of

their NOF.





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The prudential limits in respect of both

outstanding borrowing and lending

transactions in call/notice money market for

scheduled commercial banks, co-operative

banks and PDs are as follows: -

The limits so arrived at may be conveyed

to the Clearing Corporation of India Ltd.

(CCIL) for setting of limits in NDS-CALL

System, under advice to Financial Markets

Regulation Department (FMRD), Reserve

Bank of India.

Non-bank institutions (other than

PDs) are not permitted in the call/notice

money market.

Eligible participants are free to decide

on interest rates in call/notice money

market.

With the implementation of the core

banking solution, the Negotiated Dealing

System (NDS) has been discontinued for

reporting of OTC Call/Notice/Term Money

transactions.

TYPES OF MONEY

Money can be described as a generally

accepted medium of exchange for goods and

services. They are divided into four types,

they are commodity money, fiat money,

fiduciary money, and commercial bank

money.

Commodity money:

Commodity money is closely related to (and

originates from) a barter system, where

goods and services are directly exchanged

for other goods and services. Commodity

money facilitates this process, because it

acts as a generally accepted medium of

exchange. Examples of commodity money

include gold coins, beads, shells, spices, etc.

Fiat Money:

Fiat money gets its value from a government

order (i.e. fiat). That means, the government

declares fiat money to be legal tender, which

requires all people and firms within the

country to accept it as a means of payment.

Examples of fiat money include coins and

bills.

Fiduciary Money:

Fiduciary money depends for its value on the

confidence that it will be generally accepted

as a medium of exchange. Unlike fiat money,

it is not declared legal tender by the

government, which means people are not

required by law to accept it as a means of

payment.

Instead, the issuer of fiduciary money

promises to exchange it back for a

commodity or fiat money if requested by the

bearer. Examples of fiduciary money include

cheques, bank notes, or drafts.





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Commercial Bank Money:

Commercial bank money can be described as

claims against financial institutions that can

be used to purchase goods or services. It

represents the portion of a currency that is

made of debt generated by commercial

banks. At this point just note that in

essence, commercial bank money is debt

generated by commercial banks that can be

exchanged for “real” money or to buy goods

and services.

MONEY MARKET INSTRUMENTS

Certificate of deposit – Time deposit,

commonly offered to consumers by banks,

thrift institutions, and credit unions.

Repurchase agreements – Short-term

loans—normally for less than one week and

frequently for one day—arranged by selling

securities to an investor with an agreement

to repurchase them at a fixed price on a

fixed date.

Commercial paper – Short term

instruments promissory notes issued by

company at discount to face value and

redeemed at face value

Eurodollar deposit – Deposits made in

U.S. dollars at a bank or bank branch located

outside the United States.

Federal agency short-term securities

– In the U.S., short-term securities issued by

government sponsored enterprises such as

the Farm Credit System, the Federal Home

Loan Banks and the Federal National

Mortgage Association. Money markets is

heavily used function.

Federal funds – In the U.S., interest-

bearing deposits held by banks and other

depository institutions at the Federal

Reserve; these are immediately available

funds that institutions borrow or lend,

usually on an overnight basis. They are lent

for the federal funds rate.

Municipal notes – In the U.S., short-

term notes issued by municipalities in

anticipation of tax receipts or other revenues

Treasury bills – Short-term debt

obligations of a national government that are

issued to mature in three to twelve months

Money funds – Pooled short-maturity,

high-quality investments that buy money

market securities on behalf of retail or

institutional investors

Foreign exchange swaps – Exchanging

a set of currencies in spot date and the

reversal of the exchange of currencies at a

predetermined time in the future

Short-lived mortgage and asset-

backed securities.





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DERIVATIVE MARKETS

The general practice is to use derivatives as

a risk management tool that allows an

investor to transfer the risks attached

with the underlying asset to the party

who is willing to take it. There can be a

number of risks such as market risks, credit

risk and liquidity risk.

A derivative is a type of a financial

instrument, whose value is derived from

underlying assets. These underlying assets

can be equities, interest rates, currencies

and commodities.

TYPES OF DERIVATIVE MARKETS

On the basis of their trading rationale,

participants in the Derivatives Market can

be classified into 3 categories. These are

as follows:

Arbitrageurs:

In this category, the price difference

between two different markets is exploited.

A trader simultaneously buys an asset at a

cheaper rate from one market and sells it

at a higher price in another market,

making it a low rich trade. However, it

should be noted that such opportunities are

very brief in the derivatives market. Since an

arbitrageur rushes to grab this opportunity,

it eventually narrows down the price gap.

For example: The cash market price of ABC

Ltd is trading at Rs.100 per share but is

quoting at Rs. 102 in the future market. An

arbitrageur would buy 100 shares at Rs. 100

in the cash market & simultaneously, sell

100 shares at Rs. 102 in Future markets,

thereby making a profit of Rs. 2 per share.

Hedgers:

In simple terms, hedging means buying

insurance in order to minimize the risk. An

investor/trader who wants to protect himself

from unfavourable price movements is called

a Hedger. The main objective of a hedger is

to limit his exposure risk and they do so

by creating an exact opposite position in

the derivatives market.

For example: An investor has a portfolio of

Rs. 5,00,000 and he does not want to

liquidate his portfolio ahead of key events,

such as budget, policy announcements or

even elections. Hence, to protect his

portfolio from volatility, he can short index

futures to make his portfolio beta neutral or

he can buy Put option by paying a fixed cost

known as premiums

Speculator:

Speculators are risk takers, who are willing

to take high risk in the anticipation of

making higher gains in a short span of time.

They tend to buy stocks with the expectation





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that the price will rise and hope to eventually

sell stocks at a higher level. While this

category opens up the possibility of making

large profits, it also exposes a trader to

losing the principal amount.

For example:

If a speculator feels that the price of ABC

company is likely to fall in a few days due to

some upcoming market developments, he

would short sell the ABC company’s share in

a derivatives market. If the stock price falls

as expected, then he would make a good

profit depending on his holding. However, if

stock prices go up against the expectation,

then his loss would be equivalent.

FOREIGN EXCHANGE MARKET

The Foreign Exchange Market (Forex, FX, or

currency market) is a global decentralized or

over-the-counter (OTC) market for the

trading of currencies. This market

determines the foreign exchange rate. It

includes all aspects of buying, selling and

exchanging currencies at current or

determined prices. In terms of trading

volume, it is by far the largest market in the

world, followed by the Credit market.

The main participants in this market are the

larger international banks. It has no

physical location and operates 24 hours a

day from 5 p.m. EST on Sunday until 4 p.m.

EST on Friday because currencies are in high

demand. It sets the exchange rates for

currencies with floating rates.

Foreign exchange trading is a contract

between two parties. There are three

types of trades. The spot market is for

the currency price at the time of the trade.

The forward market is an agreement to

exchange currencies at an agreed-upon price

on a future date.

A swap trade involves both. Dealers buy a

currency at today's price on the spot market

and sell the same amount in the forward

market. This way, they have just limited

their risk in the future. No matter how much

the currency falls, they will not lose more

than the forward price. Meanwhile, they can

invest the currency they bought on the spot

market.

INTERBANK MARKET

The interbank market is a network of banks

that trade currencies with each other. Each

has a currency trading desk called a dealing

desk. They are in contact with each other

continuously. That process makes sure

exchange rates are uniform around the

world.





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The minimum trade is one million of the

currency being traded. Most trades are much

larger, between 10 million and 100 million in

value. As a result, exchange rates are

dictated by the interbank market.

The interbank market includes the three

trades mentioned above. Banks also engage

in the SWIFT market. It allows them to

transfer foreign exchange to each other.

SWIFT stands for Society for World-Wide

Interbank Financial

Telecommunications.

Banks trade to create profit for themselves

and their clients. When they trade for

themselves, it's called proprietary trading.

Their customers include governments,

sovereign wealth funds, large corporations,

hedge funds, and wealthy individuals.

SWIFT (Society for Worldwide

Interbank Financial Telecommunication)

Code

A SWIFT code is an international bank

code that identifies particular banks

worldwide. It's also known as a Bank

Identifier Code (BIC).Bank uses SWIFT

codes to send money to overseas banks. A

SWIFT code consists of 8 or 11 characters.

The robustness of the message format

design allowed huge scalability through

which SWIFT gradually expanded to provide

services to the following:

1. Banks

2. Brokerage Institutes and Trading Houses

3. Securities Dealers

4. Asset Management Companies

5. Clearing Houses

6. Depositories

7. Exchanges

8. Corporate Business Houses

9. Treasury Market Participants and Service

Providers

10. Foreign Exchange and Money Brokers

For example: Bank's SWIFT code is

“CSTAAU2B”. You’ll need to give this code to

anyone sending money to you from

overseas. The code is made up of letters and

numbers as follows:

CSTA – Bank code (4 digits)

AU – Location Code (2 digits)

2B – Country Code (2 digits)

BOND MARKETS

Definition:

The bond market also called the debt

market or credit market – is a financial

market in which the participants are

provided with the issuance and trading

of debt securities.





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The bond market primarily includes

government-issued securities and

corporate debt securities, facilitating the

transfer of capital from savers to the issuers

or organizations requiring capital for

government projects, business expansions

and ongoing operations.

Its primary goal is to provide long-term

funding for public and private

expenditures. The bond market is part of

the credit market, with bank loans forming

the other main component. The global credit

market in aggregate is about 3 times the

size of the global equity market.

Types of Bond Markets

The general bond market can be classified

into

Corporate Bonds:

Corporations provide corporate bonds to

raise money for different reasons, such

as financing ongoing operations or

expanding businesses. The term "corporate

bond" is usually used for longer-term debt

instruments that provide a maturity of at

least one year.

Government and Agency Bonds:

National governments issue government

bonds and entice buyers by providing the

face value on the agreed maturity date

with periodic interest payments. This

characteristic makes government bonds

attractive for conservative investors.

Municipal Bonds:

Local governments and their agencies,

states, cities, special-purpose districts, public

utility districts, school districts, publicly

owned airports and seaports, and other

government-owned entities issue municipal

bonds to fund their projects.

Mortgage-Backed Securities Bonds:

Pooled mortgages on real estate properties

provide mortgage bonds. Mortgage bonds

are locked in by the pledge of particular

assets. They pay monthly, quarterly or semi-

annual interest. If a third category of

bonds is backed by a number of

mortgages, they are known as mortgage-

backed securities or MBS. These bonds are

typically reserved for sophisticated or

institutional investors and not individuals.

Asset-Backed Securities Bonds:

A third category of bonds is issued by

banks or other financial sector

participants and are referred to as asset-

backed securities or ABS. These bonds are

created by packaging up the cash flows





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generated by a number of similar assets and

offering them to investors.

RELATIONSHIP BETWEEN LENDERS AND BORROWERS

Lenders Financial

Intermediaries

Financial Markets Borrowers

Individual

Companies

Banks

Insurance Companies

Pension Funds

Mutual Funds

Interbank

Stock Exchange

Money Market

Bond Market

Foreign Exchange

Individuals

Companies

Central Government

Municipalities

Public Corporations

MUTUAL FUNDS

A mutual fund is a professionally

managed investment fund that pools

money from many investors to purchase

securities. These investors may be retail or

institutional in nature.

The primary advantages of mutual funds

are that they provide economies of scale, a

higher level of diversification, they provide

liquidity, and they are managed by

professional investors. On the negative

side, investors in a mutual fund must pay

various fees and expenses.

Primary structures of mutual funds include

open-end funds, unit investment trusts,

and closed-end funds. Exchange-traded

funds (ETFs) are open-end funds or unit

investment trusts that trade on an exchange.

Mutual funds are also classified by their

principal investments as money market

funds, bond or fixed income funds, stock or

equity funds, hybrid funds or other. Funds

may also be categorized as index funds,

which are passively managed funds that

match the performance of an index, or

actively managed funds. Hedge funds are

not mutual funds; hedge funds cannot be

sold to the general public and are subject to

different government regulations.

Advantages and disadvantages to

investors

Mutual funds have advantages and

disadvantages compared to investing directly

in individual securities:





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Advantages

Increased diversification: A fund

diversifies holding many securities. This

diversification decreases risk.

Daily liquidity: Shareholders of open-

end funds and unit investment trusts may

sell their holdings back to the fund at regular

intervals at a price equal to the net asset

value of the fund's holdings. Most funds

allow investors to redeem in this way at the

close of every trading day.

Professional investment

management: Open-and closed-end funds

hire portfolio managers to supervise the

fund's investments. Ability to participate in

investments that may be available only to

larger investors. For example, individual

investors often find it difficult to invest

directly in foreign markets.

Service and convenience: Funds often

provide services such as check writing.

Government oversight: Mutual funds

are regulated by a governmental body.

Transparency and ease of

comparison: All mutual funds are required

to report the same information to investors,

which makes them easier to compare to

each other.

Disadvantages

Fees

Less control over timing of recognition

of gains

Less predictable income

No opportunity to customize

Fund structures of Mutual Funds

There are three primary structures of mutual

funds: Open-End Funds, Unit Investment

Trusts, and Closed-End Funds. Exchange-

traded funds (ETFs) are open-end funds or

unit investment trusts that trade on an

exchange.

Open-End Funds

Open-end mutual funds must be willing to

buy back ("redeem") their shares from their

investors at the Net Asset Value (NAV)

computed that day based upon the prices of

the securities owned by the fund. In the

United States, open-end funds must be

willing to buy back shares at the end of

every business day. In other jurisdictions,

open-funds may only be required to buy

back shares at longer intervals. For example,

UCITS funds in Europe are only required to

accept redemptions twice each month

(though most UCITS accept redemptions

daily).





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20

Most open-end funds also sell shares to the

public every business day; these shares are

priced at NAV. Most mutual funds are open-

end funds.

Closed-end funds

Closed-end funds generally issue shares to

the public only once, when they are

created through an initial public offering.

Their shares are then listed for trading on a

stock exchange. Investors who want to sell

their shares must sell their shares to another

investor in the market; they cannot sell

their shares back to the fund. The price

that investors receive for their shares may

be significantly different from NAV; it may be

at a "premium" to NAV (i.e., higher than

NAV) or, more commonly, at a "discount" to

NAV (i.e., lower than NAV).

Unit investment trusts:

Unit investment trusts (UITs) are issued

to the public only once when they are

created. UITs generally have a limited life

span, established at creation. Investors can

redeem shares directly with the fund at any

time (similar to an open-end fund) or wait to

redeem them upon the trust's termination.

Less commonly, they can sell their shares in

the open market.

Unlike other types of mutual funds, unit

investment trusts do not have a professional

investment manager. Their portfolio of

securities is established at the creation of

the UIT.

Exchange-traded funds:

Exchange-traded funds (ETFs) are

structured as open-end investment

companies or UITs. ETFs combine

characteristics of both closed-end funds and

open-end funds. ETFs are traded throughout

the day on a stock exchange. An arbitrage

mechanism is used to keep the trading price

close to net asset value of the ETF holdings.

TYPES OF MUTUAL FUND

Equity Funds

Primarily investing in stocks, they also go by

the name stock funds. These funds are

invested in equity or shares of the

companies. They invest the money

amassed from investors from diverse

backgrounds into shares of different

companies. The returns or losses are

determined by how these shares perform

(price-hikes or price-drops) in the stock

market. As equity funds come with a quick

growth, the risk of losing money is

comparatively higher.





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21

Debt Funds

Debt funds invest in fixed-income

securities like bonds, securities and

treasury bills – Fixed Maturity Plans (FMPs),

Gilt Fund, Liquid Funds, Short Term Plans,

Long Term Bonds and Monthly Income Plans

among others – with fixed interest rate and

maturity date. Go for it, only if you are a

passive investor looking for a small but

regular income (interest and capital

appreciation) with minimal risks.

Money Market Funds

Just as some investors trade stocks in the

stock market, some trade money in the

money market, also known as capital market

or cash market. It is usually run by the

government, banks or corporations by

issuing money market securities like bonds,

T-bills, dated securities and certificate of

deposits among others. The fund manager

invests your money and disburses regular

dividends to you in return. If you opt for a

short-term plan (13 months max), the risk is

relatively less.

Hybrid Funds

As the name implies, Hybrid Funds (also go

by the name Balanced Funds) is an optimum

mix of bonds and stocks, thereby bridging

the gap between equity funds and debt

funds. The ratio can be variable or fixed. In

short, it takes the best of two mutual funds

by distributing, say, 60% of assets in stocks

and the rest in bonds or vice versa. This is

suitable for investors willing to take more

risks for ‘debt plus returns’ benefit rather

than sticking to lower but steady income

schemes.

Types Based on Structure

Mutual funds can be categorized based on

different attributes (like risk profile, asset

class etc.). Structural classification – open-

ended funds, close-ended funds, and interval

funds – is broad in nature and the difference

depends on how flexible the purchase and

sales of individual mutual fund units is.

Open-Ended Funds:

These funds don’t have any constraints in

a time period or number of units – an

investor can trade funds at their convenience

and exit when they like at the current NAV

(Net Asset Value). This is why its unit capital

changes constantly with new entries and

exits. An open-ended fund may also decide

to stop taking in new investors if they do not

want to (or cannot manage large funds).





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Closed-Ended Funds:

Here, the unit capital to invest is fixed

beforehand, and hence they cannot sell a

more than a pre-agreed number of

units. Some funds also come with an NFO

period, wherein there is a deadline to buy

units. It has a specific maturity tenure and

fund managers are open to any fund size,

however large. SEBI mandates investors to

be given either repurchase option or listing

on stock exchanges to exit the scheme.

Interval Funds:

This has traits of both open-ended and

closed-ended funds. Interval funds can be

purchased or exited only at specific

intervals (decided by the fund house) and

are closed the rest of the time. No

transactions will be permitted for at least 2

years. This is suitable for those who want to

save a lump sum for an immediate goal (3-

12 months).

SHARES AND STOCK MARKET

SHARE MARKET

An organization in order to raise money

divides its entire capital into small units

of equal value. Each unit is called a share.

A share is nothing but an indivisible unit of a

company’s capital to be sold among

individuals to increase profit of the

organization.

Shareholder

An individual owning one or more than one

share of an organization is called a

shareholder. In simpler words, an individual

purchasing one or more than one share from

any private or public organization is called a

shareholder.

A shareholder can sell his shares anytime

depending on the current value of the share.

He/she can purchase any new share issued

by any other or same organization.

A shareholder has the right to declared

dividend.

Dividend

An organization pays the shareholders for

investing in their company’s shares. The

income earned by an individual by investing

in an organization’s share (private or public)

is called as dividend.

The profit earned by an organization is put

into use in the following two ways:

It is paid to the shareholders as dividend.

The profit earned by the organization is not

distributed amongst the shareholders but is

retained and reinvested in the organization.

This portion of the income is called retained

earnings.





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When an individual purchases shares from

any organization, he/she is issued a

certificate as a proof of his investment. Such

a certificate issued by an organization to the

shareholders is called a share certificate.

TYPES OF SHARES

Equity Shares:

Equity shares also called as ordinary shares

are the shares where the payment of

dividend is directly proportional to the

profits earned by the organization.

Higher the profits earned, higher the

dividend, lower the profits, and lower the

dividend. In an equity share, dividends are

paid at a fluctuating/floating rate.

Preference Shares:

Shares which enjoy preference over

payment of dividends are called

preference shares. Shareholders enjoy fixed

rate of dividends in case of preference

shares.

Founder Shares:

Shares held by the management or

founders of the organization are called as

founder shares.

Bonus Shares:

Bonus shares are often issued to the

shareholders when the organization

earns surplus profits. The company

officials may decide to pay the extra profits

to the shareholders either as cash (dividend)

or issue a bonus share to them.

Bonus shares are often issued by

organizations to the shareholders free of

charge as a gift in proportion to their

existing shares with the organization.

To invest in shares, one needs to open a

DEMAT Account for online trading. A DEMAT

Account is mandatory for sale and purchase

of shares anytime and anywhere.

An individual need to have his PAN Card, a

bank account, other necessary Identity

proofs, address proofs and so on.

STOCK MARKET

A stock market is a platform for trading of

company’s shares at an agreed rate.A

stock market, equity market or share market

is the aggregation of buyers and sellers

(a loose network of economic transactions,

not a physical facility or discrete entity) of

stocks (also called shares), which represent

ownership claims on businesses; these may

include securities listed on a public stock

exchange, as well as stock that is only

traded privately.

TYPES OF STOCK MARKET

Aside from the private/public distinction,

there are two types of stock that companies





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can issue: Common Stock and Preferred

Stock.

Common Stock:

When people talk about stocks, they are

usually referring to common stock. In fact,

the great majority of stock is issued is in this

form. Common shares represent a claim

on profits (dividends) and confer voting

rights. Investors most often get one vote

per share-owned to elect board members

who oversee the major decisions made by

management. Over the long term, common

stock, by means of capital growth, has

tended to yield higher returns than

corporate bonds.

Preferred Stock:

Preferred stock functions similarly to bonds,

and usually doesn't come with the voting

rights (this may vary depending on the

company, but in many cases preferred

shareholders do not have any voting rights).

With preferred shares, investors are usually

guaranteed a fixed dividend in

perpetuity. This is different from common

stock which has variable dividends that are

declared by the board of directors and never

guaranteed. In fact, many companies do not

pay out dividends to common stock at all.

Top 10 Benefits of Stock Investing

Stock ownership takes advantage of a

growing economy

Best way to stay ahead of inflation

Liquidity

Easy to buy and sell

Incremental Investment Strategy

Money making more money

No limit to rewards

Tax Benefits

Improves Emotional Intelligence

Cash flow

FACTORS THAT AFFECTS THE STOCK

MARKET

Stock prices can be affected by:

Company News and Performance, Industry

Performance, Investor Sentiment and

Economic Factors

Company News and Performance:

Here are some company-specific factors that

can affect the share price:

News releases on earnings and profits,

and future estimated earnings

Announcement of dividends

Introduction of a new product or a

product recall

Securing a new large contract

Employee layoffs

Anticipated takeover or merger





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25

A change of management

Accounting errors or scandals

Industry Performance:

Often, the stock price of the companies in

the same industry will move in tandem with

each other. This is because market

conditions generally affect the companies

in the same industry the same way. But

sometimes, the stock price of a company will

benefit from a piece of bad news for its

competitor if the companies are competing

for the same market.

Investor Sentiment:

Investor sentiment or confidence can

cause the market to go up or down, which

can cause stock prices to rise or fall. The

general direction that the stock market takes

can affect the value of a stock:

Bull Market – a strong stock market where

stock prices are rising, and investor

confidence is growing. It’s often tied to

economic recovery or an economic boom, as

well as investor optimism.

Bear Market – a weak market where stock

prices are falling, and investor confidence

is fading. It often happens when an economy

is in recession and unemployment is high,

with rising prices.

Economic factors

a. Interest rates

For Example: The Bank of Canada can raise

or lower interest rates to stabilize or

stimulate the Canadian economy. This is

known as monetary policy. If a company

borrows money to expand and improve its

business, higher interest rates will affect

the cost of its debt. This can reduce

company profits and the dividends it pays

shareholders.

As a result, its share price may drop. And, in

times of higher interest rates, investments

that pay interest tend to be more attractive

to investors than stocks.

b. Economic outlook

If it looks like the economy is going to

expand, stock prices may rise. Investors

may buy more stocks thinking they will see

future profits and higher stock prices. If the

economic outlook is uncertain, investors

may reduce their buying or start selling.

c. Inflation

Inflation means higher consumer prices.

This often slows sales and reduces profits.

Higher prices will also often lead to higher

interest rates. For example, the Bank of

Canada may raise interest rates to slow





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26

down inflation. These changes will tend to

bring down stock prices. Commodities,

however, may do better with inflation, so

their prices may rise.

d. Deflation

Falling prices tend to mean lower profits

for companies and decreased economic

activity. Stock prices may go down, and

investors may start selling their shares and

move to fixed-income investments like

bonds. Interest rates may be lowered to

encourage people to borrow more. The goal

is increased spending and economic activity.

The Great Depression (1929-1939) was one

of the worst periods of deflation ever.

e. Economic and political shocks

Changes around the world can affect both

the economy and stock prices. For example,

a rise in energy costs can lead to lower

sales, lower profits and lower stock prices.

An act of terrorism can also lead to a

downturn in economic activity and a fall in

stock prices.

f. Changes in economic policy

If a new government comes into power, it

may decide to make new policies.

Sometimes these changes can be seen as

good for business, and sometimes not. They

may lead to changes in inflation and interest

rates, which in turn may affect stock prices.

RISKS ASSOCIATED WITH FINANCIAL

MARKETS

The various risks which affect your

investment returns in the financial market

are the market risk, inflation risk, credit risk,

interest rate risk, investment risk, liquidity

risk, Social/Political/Legislative risk,

exchange rate risk, reinvestment risk,

concentration risk, foreign investment risk.

Market risk:

It is the risk of investments declining in

value due to economic developments or

other events that affect the entire

market. The prices or yields of all securities

in particular market risk or fall to large

outside influences. This change in rate is due

to market risk.

Inflation risk:

It is the risk of a loss of your purchasing

power because the value of your

investments does not keep up with

inflation. This is sometimes referred to as

‘loss of purchasing power.’ Whenever the

rate of inflation exceeds the earnings on

your investments, you will run the risk that

you will be able to buy less and not more.

Credit risk:

In short, how stable is the company or

entity to which you lend your money when

you invest? How confident are you that will





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27

be able to pay the interest you are promised

or repay your principal when the investment

matures? It is the risk that the government

or the company that issued the bond will run

into financial difficulties and won’t be able to

pay the interest or repay the principal at

maturity.

Interest rate risk:

Interest rate movements in the Indian

debt markets can change time to time and

lead to the possibility of significant price

movements up or down in debt and money

market securities.

Investment risk:

It is the probability or chance of occurrence

of losses relative to the expected return

on any particular investment.

Liquidity risk:

This occurs due to the inability to convert

security or asset to cash easily without a

loss of capital and income.

Social/Political/Legislative risk:

It is due to changes in legislation, changes

in government policies. Instability in the

country, change in foreign policies. Social

changes are causing a loss in value. Any

government policy which results in

adverse consequences is known as

legislative risk.

Exchange rate/currency risk:

Fluctuations in foreign currency in which

an investment is valued compared to home

currency may add risk to the value of a

security.

Reinvestment risk:

Investors such as bondholders who would

like to re-invest the proceeds after

redemption. In case of declining, interest

rate situation will lead to lead to a decline

in cash flow from an investment when its

principal and interest payments are

reinvested at lower rates.

Concentration risk:

This risk is associated because all our money

is concentrated in one investment. When

you diversify your investments, you spread

the risk over different types of investments,

industries and geographic locations.

Foreign investment risk:

There is a risk involved when investing in

foreign companies. When you buy

investments of a foreign company, you may

face risk, for example, the risk of

nationalization.

WALL STREET & MAIN STREET

WALL STREET:

Wall Street refers to all the banks, hedge

funds, and securities traders that drive

the American financial system.





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Geographically, Wall Street is the centre of

Manhattan's financial district. It runs

east/west for eight blocks from Broadway to

South Street.

"Wall Street" stands in contrast to "Main

Street." While Wall Street is used to

describe the capital markets and the

financial industry, Main Street is typically

used to describe the larger economy in

which the vast majority of people live and

work.

MAIN STREET:

Main Street refers collectively to members of

the general population who invest in the

capital markets. Individuals and businesses

that do not work for financial and investment

companies are considered part of Main

Street. Main Street should not be confused

with Wall Street, which refers to members of

the brokerage and financial services

community. Main Street invests in the

capital markets as investment clients

through Wall Street.

How it works?

Main Street investors grow their money in

the capital markets through Wall

Street's brokerage and advisory

services. Wall Street depends on Main

Street's capital to function and stay in

business. Some people believe that the Main

Street's interest to grow their money in the

capital markets that contrasts the interest of

Wall Street, which is to generate profit.

TERMS USED IN FINANCIAL MARKETS

Beta: A financial instrument’s beta is a

measure of its risk or volatility when

compared to the wider market.

Bear market: a general decline in the stock

market over a period of time.

Bull market: a period of generally rising

prices.

Face Value: Face value is the nominal

value or dollar value of a security stated

by the issuer. For stocks, it is the original

cost of the stock shown on the certificate.

For bonds, it is the amount paid to the

holder at maturity, generally $1,000. It is

also known as "par value" or simply "par."

Initial public offering or IPO: a type of

public offering in which shares of a company

are sold to institutional investors.

Institutional investor: an entity which

pools money to purchase securities, real

property, and other investment assets or

originate loans.





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