Investment is the employment of funds on assets with the aim of earning

income or capital appreciation. Investment has two attributes namely time and risk.

Present consumption is sacrificed to get a return in future. The sacrifice that has to be

borne is certain but the return in the future may be uncertain. This attribute of

investment indicates risk factor. The risk is undertaken with a view to reap some

return from the investment. For a layman investment means some monetary

commitment. A person’s commitment to buy a flat or a house for his personal use

may be an investment from his point of view. This cannot be considered as an actual

investment as it involves sacrifice but does not yield any financial return.

To the economist, investment is the net addition made to the nation’s capital

stock that consists of goods and services that are used in the production process. A net

addition to the capital stock means an increase in the buildings, equipments or

inventories. These capital stocks are used to produce other goods and services.

Financial investment is the allocation of money to assets that are expected to

yield some gain over a period of time. It is an exchange of financial claims such as

stocks and bonds for money. They are expected to yield returns and experience

capital growth over the years.

The financial and economic meanings are related to each other because the

savings of individual flow into the capital market as financial investments to be used

in economic development.

Investment is different from savings as the first refers to the act of putting

aside money for future use, while the second refers to the money itself. In common

usage savings generally means putting money aside, for example:- by putting money

in the bank. In broader sense, savings is typically used to refer to economizing,

cuttings costs or to rescuing someone or something.

Investment is an economic activity and it is fascinated by people from all

walks of life. Investment is a term with several closely related meanings in finance

and economics. It refers to the accumulation of some kind of asset in hopes of getting

a future return from it. Investment is the money that is invested with an expectation of

profit. It can be anything of value purchased to provide capital appreciation and or

income. Examples include stocks, bonds, mutual funds, unit investment, trusts, real

estate etc.

Investment – definition

“Purchase of financial asset that produce a yield that is proportionate to the risk

assured over some future investment period”

F. Aniling

“Investment is sacrifice of certain present value for some uncertain future value”

Sharpe

INVESTMENT OBJECTIVES

The main investment objectives are increasing at the rate of return and

reducing the risk. Other objectives like safety, liquidity and hedge against inflation

can be considered as subsidiary objectives.

Return

Investors always expect a good rate of return from their investments. Rate of

return could be defined as the total income the investor receives during the holiday

period stated as a percentage of the purchasing price at the beginning of the holding

period.

Rate of return is stated semi-annually or annually to help comparison among

the different investment alternatives. If it is a stock, the investor gets the dividend as

well as the capital appreciation as returns. Market return of the stock indicates the

price appreciation for the particular stock.

Risk

Risk of holding securities is related with the probability of actual return becoming

less than the expected return. The word risk is synonymous with the phrase variability

of return. Investments risk is just as important as measuring its expected rate of return

because minimizing risk and maximizing the rate of return are interrelated objectives

in the investment management. An investment whose rate of returns varies widely

from period to period is risky than whose return that does not change much. Every

investor likes to reduce the risk of his investment by proper combination of different

securities.

Liquidity

Marketability of the investment provides liquidity to the investment. The liquidity

depends upon the marketing and trading facility. If a portion of the investment could

be converted into cash without much loss of time, it would help the investor meet the

emergencies. Stocks are liquid only if they command good market by providing

adequate return through dividends and capital appreciation

Hedge against inflation

Since there is inflation in almost all the economy, the rate of return should

ensure a cover against the inflation. The return rate should be higher than the rate of

inflation, otherwise the investor will have loss in real terms. Growth stocks would

appreciate in their values overtime and provide a protection against inflation. The

return thus earned should assure the safety of the principal amount, regular flow of

income and be a hedge against inflation

Safety

The selected investment avenue should be under the legal and regulatory

framework. If it is not under the legal frame work, it is difficult to present the

grievances, if any .Approval of the law itself adds a flavor of safety. Even though

approved by law, the safety of the principal differs from one mode of investment to

another. Investments done with the government assure more safety than with the

private party. From the safety point of view investments can be ranked as follows:

Bank deposits, government bonds, UTI units, on-convertible debentures, equity

shares, and deposits with the non-banking financial companies.

THE INVESTMENT PROCESS

The investment process involves a series of activities leading to the purchase of

securities or other investment alternatives. The investment process can be divided into

five stages (i) investment analysis (ii) investment analysis (iii) valuation (iv) portfolio

evaluation. The flow chart 1.1 explains the stages and factors connected thereof.

Flowchart 1.1

Investment Process

INVESTMENT POLICY

The government or the investor before proceeding into investment formulates the

policy for the systematic functioning. The essential ingredients of the policy are the

investible funds, objectives and the knowledge about the investment alternatives and

market.

Investible funds

Investme

nt

Policy

Analysis Valuation Portfolio

Constructi

on

Portfolio

Evaluatio

n

-

Investible

fund

-

Objective

-Market

-Industry

-

Company

-

Intrinsi

c

Value

-

Diversificatio

n

-Selection &

allocation

-

Appraisal

-Revision

The entire investment procedure revolves around the availability of investible

funds. The fund may be generated through savings or from borrowings. If the funds

are borrowed, the investors have to be careful in the selection of investment

alternatives. The return should be higher than the interest he pays. Mutual funds

invest their owner’s money in securities.

Objectives

The objectives are framed on the required rate of return, need for regularity of

income, risk perception and the need for liquidity. The risk taker’s objective is to earn

high rate of return in the form of capital appreciation, whereas the primary objective

of the risk averse is the safety of the principal.

Knowledge

The knowledge about the investment alternatives and markets plays a key role in

the policy formulation. The investment alternatives range from security to real estate.

The risk and return associated with investment alternatives differ from each other.

Investment in equity is high yielding but has more risk than the fixed income

securities. The tax sheltered schemes offer tax benefits to the investors.

The investors should be aware of the stock market structure and the function of

the brokers. The mode of operation varies among BSE, NSE and OTCEI. Brokerage

charges are also different. The knowledge about the stock exchanges enables him to

trade the stock intelligently.

SECURITY ANLAYSIS

After formulating the investment policy, the securities to be bought have to be

scrutinized through the market, industry and company analysis.

Market analysis

The stock market mirrors the general economic scenario. The growth in the gross

domestic product and inflation are reflected in the stock prices. The recession in the

economy results in a bear market. The stock prices may be fluctuating in the short run

but in the long run they move in trends i.e either upwards or downwards. The

investors can fix his entry and exit points through technical analysis.

Industry analysis

The industries that contribute to the output of the major segments of the economy

vary in their overall contribution to economic activity. Some industries grow faster

than the GDP and are expected to continue in their growth. For example the

information technology industry has experienced higher growth rate than the GDP in

1998. The economic significance and the growth potential of the industry have to be

analyzed.

Company analysis

The purpose of company analysis is to help the investors to make better decisions.

The company’s earnings, profitability, operating efficiency, capital structure and

management have to be screened. These factors have direct bearing on the stock

prices and the return of investors. Appreciation of the stock value is a function of the

performance of the company. Company with high product market share is able to

create wealth to the investors in the form of capital appreciation.

VALUATION

The valuation helps the investors to determine the return and risk expected from

an investment in the common stock. The intrinsic value of the share is measured

through the book value of the share and price earnings ratio. Simple discounting

models also can be adopted to value the shares. The stock market analysts have

developed many advanced models to value the shares. The real worth of the share is

compared with the market price and then the investment decisions are made.

Future value

Future value of the securities could be estimated by using a simple statistical

technique like trend analysis. The analysis of the historical behavior of the price

enables the investor to predict the future value.

CONSTRUCTION OF PORTFOLIO

A portfolio is a combination of securities. The portfolio is constructed in such a

manner to meet the investor’s goals and objectives. The investor should decide how

best to reach the goals with the securities available. The investor tries to attain

maximum return with minimum risk. Towards this end he diversifies his portfolio and

allocates funds among the securities.

Diversification

The main objective of diversification is the reduction of risk in the loss of capital

and income. A diversified portfolio is comparatively less risky than holding a single

portfolio. There are several ways to diversify the portfolio.

Debt and equity diversification

Debt instruments provide assured return with limited capital appreciation.

Common stocks provide and capital aim but with the flavor of uncertainty. Both debt

instruments and equity are combined to complement each other.

Industry diversification

Industries growth and their reaction to government policies differ from each other.

Banking industry shares may provide regular returns but with limited capital

appreciation. The information technology stock yields high return and capital

appreciation but their growth potential after the year 2002 is not predictable. Thus,

industry diversification is needed and it reduces risk.

Company diversification

Securities from different companies are purchased to reduce risk. Technical

analyst suggests the investors to buy securities based on the price movement.

Fundamental analysts suggest the selection of financially sound and investor friendly

companies.

Selection

Based on the diversification level, industry and company analyses the securities

have to be selected. Funds are allocated for the selected securities. Selection of

securities and the allocation of funds and seals the construction of portfolio.

EVALUATION

The portfolio has to be managed efficiently. The efficient management calls for

evaluation of the portfolio. This process consists of portfolio appraisal and revision.

Appraisal

The return and risk performance of the society vary from time to time. The

variability in returns of the securities is measured and compared. The developments

in the economy, industry and relevant companies from which the stocks are bought

have to be appraised. The appraisal warns the loss and steps can be taken to avoid

such losses.

Revision

Revision depends on the results of the appraisal. The low yielding securities

with high risk are replaced with high yielding securities with low risk factor. To keep

the return at particular level necessitates the investor to revise the components of the

portfolio periodically.

INVESTMENT AVENUES

The problem of surplus gives rise to the question of where to invest, as the part

investment avenues were limited to real estate, schemes of post office and banks. At

present a wide variety of investment avenues are open to the investors to suit their

needs and nature. Knowledge about the different avenues enables the investors to

choose investment intelligently. The required level of returns and the risk tolerance

level decide the choice of the investor. The investment alternatives range from

financial securities to traditional non-security investment.

There are large numbers of investment avenues for savers in India. Some of them

are marketable. Some of them are highly risky while some others are almost riskless.

The investor has to choose proper avenues from among them, depending on his

specific need, risk preference, and return expectation.

Flow Chart 1.2

Investment Avenues

SAFE & LOW RISK INVESTMENT AVENUES

Traditional

investment

avenues

Moderate

risk

investment

avenues

Highrisk

investment

avenues

Safe and

low risk

investment

avenues

Savings a/c

Bank fixed deposits

Public provident

fund

National saving

certificate

National saving

scheme

Post Office savings

Govt.securities

Pension Fund

Mutual fund

Life insurance

Debentures

Bonds

Equity share market

Commodity share

market

Forex market

Real estate

Gold/Silver

Chit funds

1. Bank deposits

a) Fixed deposit account: Cash is deposited in this account for a fixed period. The

depositors can withdraw money only on the expiry of the period for which the deposit

has been made on such deposits the banks pay higher rate of interest, depending on

the length of the time period and amount of deposit.

b) Current Deposit Account: In this account depositor can deposit and withdraw his

funds any number of times he likes. Businessmen deposit their funds in this account.

c) Saving Deposit Account: This account is meant for small savings. There is a limit

on total weekly withdrawals.

d) Recurring deposit Account: Under this account a specified amount is deposited

every month for a specified period for e.g.:- 12, 24, 36 or 60 months. The amount

cannot be withdrawn before the expiry of the given period except under exceptional

circumstances.

2. Public Provident Fund

Public Provident Fund earns an interest rate of 12 percent per year, which is

exempted from the income tax under sec88. The individuals and Hindu undivided

families can participate in this scheme. The maximum limit per annum for the deposit

is 60,000. The interest is accumulated in the deposit. It provides early withdrawal

facilities from 7th year and every year thereafter, the account holder has an option to

withdraw 50 per cent of the balance to his credit 4 years ago or 1 year ago whichever

s lower. The facility makes Public Provident Fund a self-sustaining account from 7 th

year onwards.

3. National Saving Certificate

This scheme is offered by the post office. These certificates come in the

denominations of Rs 500, 1,000, 5,000 and 10,000. The contribution and the interest

for the 5 years are covered by Sec 88. The interest is cumulative at the rate of 12%

per annum and payable biannually is covered bysec80L. No withdrawals are

permitted. There is no deduction at maturity.

3. National Savings scheme

This scheme helps in deferring the tax payment. Individuals and HUF are eligible

to open NSS account in the designated post office. The NSs-87 gives 100 percent

income tax rebate but the interest as well as the capital is fully taxable if withdrawn

during their lifetime. Investments in the NSS scheme, with a lock in period of 4 years

qualify for a rebate of 20percent under section 88 of the Income Tax Act, subject to

maximum of 12,000. The investment also earns an interest rate of 11 percent per year

covered by Sec 80L. Compared to other tax savings instruments the return offered by

this scheme is lower.

On the liquidity aspect, withdrawal is permitted at any time after four years from

the end of the financial year in which the account is opened. The entire amount can be

withdrawn. The account can be closed on the expiry of 4 years. There is no fixed

tenure for investment. One can also keep the account alive and earn interest at 11

percent per annum.

As a tax saving instrument “anytime” withdrawal after 4 years is the only

interesting feature to the prospective investor. The tax deduction at source at the rate

of 20 percent on the entire amount withdrawn has proved too costly to the investors.

5. Post Office Deposits

Like the banks, post office also offers fixed deposit facility and monthly income

scheme. Post office Monthly Income Scheme is a popular scheme for the retired. The

investment avenues provided by post office are non-marketable. However most of the

saving schemes in post offices enjoy tax concessions. Post office accepts savings

deposits as well as deposits from the public. NSC’s are also marketed by post office

to investors. The interest on the amount interested is compounded half yearly and is

payable along with the principal at the time of maturity which is 6years from the date

of issue. An interest rate of 13% is paid monthly. The term of the scheme is 6 years,

at the end of which a bonus of 10% is paid. The annualized yield to maturity works

out to be 15.01% per annum. After three years, premature closure is allowed without

any penalty. If the closure is after one year, a penalty of 5% is charged.

6. Government Securities

The securities issued by the Central, state Government and quasi government

agencies are known as government securities or gilt edged securities. As government

guarantees security is a claim on the Government, it is secured financial instrument,

which guarantees the income and the capital. The rate of interest on these securities is

relatively lower because of their high liquidity and safety.

Government and semi government bodies such as PSU’s borrow money from the

public through the issue of government securities and public sector bonds. These are

less risky avenues of investment because of the credibility of government and

government undertakings. The Government Issue securities is the money market and

in the capital market. Money market instruments are tracked in the wholesale debt

market trade and retailer segments. Instruments traded in the money markets are short

term instruments such as TB and repos.

7. Pension Fund

A pension fund is an entity setup to collect money from employers and

employees, invest the proceeds in securities and other assets and pay benefits to

retirees from the funds accumulated resources. It has an investment policy statement

that portrays the nature of the asset in which the pension fund is to invest. Thus they

provide means for individuals to accumulate savings over the working life so as to

finance their consumption needs in their retirement, either by means of lump sum or

by provision of an annuity, while also supplying funds to end user such as

corporations, other households( via securitized ) or governments for investment

consumption.

According to Davis (1995) pension funds may be defined as forms of institutional

investor, which collect pool and invest funds contributed by sponsors and

beneficiaries to provide for the future pension entitlements of beneficiaries.

It can be defined as the fund established by an employer to facilitate and organize

the investment of employee’s retirement funds contributed by the employer and

employees. It is the common asset pool meant to generate stable growth over the long

term, and provide pension for employees when they reach the end of the working

years and commence retirement

MODERATE RISK INVESTMENT AVENUES

1. Mutual fund

Investment companies or investment trust obtained funds from large number of

investors through sale of units. The funds collected from the investors are placed

under professional management for the benefit of the investors. The mutual funds are

broadly classified into open-ended scheme and close-ended scheme.

a) Open-ended schemes: The Open-ended scheme offer its units on continuous bases

and accepts funds from investors continuously. Repurchased is carried out on a

continuous bases thus, helping the investors to withdraw their money at any time. In

other words, there is an uninterrupted entry and exit into the funds. The open end

scheme has no maturity period and they not listed in the stock exchanges. Investor

can deal directly with the mutual fund for investment as well as redemption. The open

ended fund provides liquidity to the investors since the repurchase facility is

available. Repurchase price is fixed on the basis of net asset value of the unit. In 1998

the open ended schemes have crossed 80 in number.

b) Close ended funds: The close ended funds have fixed maturity period. The first

time investments are made when the close end scheme is kept open for a limited

period. Once closed, the units are listed on a stock exchange. Investors can buy and

sell their units only through stock exchanges. The demand and supply factors

influence the prices of the units. The investor’s expectation also affects the unit

prices. The market price may not be the same as the net asset value.

Sometimes mutual funds with the features of closed ended and open ended

scheme as launched known as interval funds. They can be listed in the stock exchange

or may be available for repurchase during specific periods at net asset value or related

prices.

Other Classification

The open-ended and close-ended schemes are classified on the basis of their

objectives. Some of them are given below

Growth scheme: Aims to provide capital appreciation over medium to long term.

Generally these funds invest their money in equities.

Income scheme: This scheme aims to provide a regular return to its unit holders.

Mostly these funds deploy their funds I fixed income securities.

Balanced scheme: A combination of steady return as well as reasonable growth. The

funds not these schemes are invested in equities and debt instruments.

Money market scheme: This type of fund invests its money on money market

instruments like treasury bills, commercial paper, etc

Tax saving schemes: This type of scheme offers tax rebates to investors. Equity

linked saving schemes and pension schemes provide exemption from capital aims on

specific investment.

Index scheme: Here investment is made on the equities of the index. Benchmark

index is BSE Sensex or NSE-50. The returns are approximately equal to the return on

the index.

2. Life Insurance

Life insurance is a contract for payment of sum of money to the person assured on

the happening of event insured against. Usually the contract provides for the payment

of an amount on the date of maturity or at specified dates at periodic intervals or if

unfortunate death occurs. Among other things, the contracts also provide for the

payment of premium periodically to the corporation by the policy holders. Life

insurance eliminates risk. The major advantages of life insurance are given below:

i) Protection: Saving through life insurance guarantees full protection against

risk of death of the saver. The full assured sum is paid, whereas in other

schemes only the amount saved is paid.

ii) Easy payments: For the salaried people the salary savings schemes are

introduced. Further, there is an easy installment facility method of payment

through monthly, quarterly, half yearly or yearly mode.

iii) Liquidity: Loans can be raised on the security of the policy.

iv) Tax relief: Tax relief in Income Tax and wealth Tax is available for amounts

paid by way of premium for life insurance subject to the tax rates in force.

Schemes of LIC

LIC offers a wide range of schemes to suit the needs of the individual

investor.

Basic Life Insurance Plans

Whole life assurance plan: It is a low cost insurance plan where the sum assured is

payable on the death of the life assured and premiums are payable throughout life.

Endowment assurance plan: Under this plan, the sum assured is payable on the date of

maturity or on the death of the life assured, if earlier.

Both these plans are available with the facility of paying the premiums for a limited

period.

Term Assurance plan

Two-year temporary assurance plan: Under this plan, term assurance for two years is

available. The sum assured is payable only on the death of the life assured during the

term.

Convertible term assurance plan: It provides term assurance for 5 to 7 years with an

option to purchase a new, Limited Payment Whole Life Policy or an Endowment

Assurance Policy at the end of the selected term; provided policy is in full force.

Bima sandesh: This is basically a Term Assurance Plan with the provision for return of

premiums paid, on the life assured surviving the term.

Bima kiran: This plan is an improved version of Bima Sandesh with an added attraction

of loyalty addition, in-built accident cover and Free Term Cover after maturity =,

provided the policy is then in full force

Plans for children

Various children’s deferred assurance plans available viz, Jeevan Balya, and Jeevan

kishore. Jeevan Sukanya is a plan specially designed for girls. The children’s money back

assurance is specially designed to provide for children’s higher educational expenses with

added attraction of guaranteed additions, loyalty additions and optional family benefit.

Pension Plans

These plans provide for either immediate or deferred pension for life. The pension

payments are made till the death of the annuitant (unless the policy has provision of

guaranteed period). Both the Deferred Annuity and Immediate annuity plans are available

with the return of the GIVE amount on death after vesting under the Jeevan Dhara Plan

and return of Purchase Price on death under the Jeevan Akshay Plan.

Jeevan Sarita

This is a Joint-life survivor-annuity-cum-assurance plan (for husband and wife)

where the claim amount is payable partly in lump sum and partly in the form of an

annuity. Balance sum is assured on the death of the survivor.

3.Debenture

According to Companies Act 1956” Debenture includes debebturestock, bonds

and any other securities of company, whether constituting a charge on the assets of the

company or not”. Debentures are generally issued by the private sector companies as a

long –term promissory note for raising loan capital. The company promises to pay

interest and principal as stipulated. Bond is an alternative form of debenture in India.

Public sector companies and financial institutions issue bonds.

Characteristic Features of Debentures

Form: it is given in the form of certificate of indebtedness by the company specifying the

date of redemption and interest rate.

Interest: The rate of interest is fixed at the time of issue itself which is known as

contractual or coupon rate of interest. Interest is paid as a percentage of the par value of

the debenture and may be paid annually, semi annually or quarterly. The company has

legal binding to pay the interest rate.

Redemption: as earlier the redemption date would be specified in the issue itself. The

maturity period may range from 5 years to 10 years in India. They may be redeemed in

installments. Redemption is done through a creation of sinking fund by the company. A

trustee in charge of the fund buys the debentures either from the market or owners.

Creation of the sinking fund eliminates the risk of facing financial difficulty at the time of

redemption because redemption requires huge sum.

Buy back provisions help the company to redeem the debentures at a special price

before the maturity date. Usually the special price is higher than the par value of the

debenture.

Indenture: Indenture is a trust deed between the company issuing debenture and the

debenture trustee who represents the debenture holders. The trustee takes the

responsibility of protecting the interest of the debentures holders and ensures that the

company fulfills the contractual obligations. Financial institutions, Banks, insurance

companies or firm attorneys act as trustees tot the investors. In the indenture the terms of

the agreement, description of debentures, rights of the debentures holders, and rights of

the issuing company and the responsibilities of the company are specified clearly.

Types of Debentures

Debentures are classified on the basis of the security and convertibility

i) Security or unsecured

ii) Fully convertible debenture

iii) Partly convertible debenture

iv) Non- convertible debenture

Secured or Unsecured: A Secured debenture is security by a lien on the company’s

specific assets. In the case of default the trustee can take can take hold of the specific

asset on behalf of the debenture holders. In the Indian market secured debentures have a

charge on the present and future immovable assets of the company.

When the debentures are not protected by any security they are known as

unsecured or naked debentures. In the American capital market debenture means

unsecured bonds while bonds could be secured or unsecured. Unsecured debentures find

it difficult to attract investors because of the risk involved in them. Generally debentures

are rated by the cr4edit rating agencies.

Fully convertible debenture: This type of debenture is converted into equity shares of the

company on the expiry of specific period. The conversion is carried out according to the

guidelines issued by SEBI. The FCD carries lower interest rate than other types of

debentures because of the attractive feature of convertibility into equity shares.

Partly convertible debenture: This debenture consists of two parts namely convertible and

non convertible. The convertible portion can be converted into shares after a specific

period. Here, the investor has the advantage of convertible and non-convertible

debentures blended into one debentures. Ex. Procter and Gamble has issued PCD of Rs

200 each to its existing shareholders. The investor can get a share of Rs 65 with face

value of Rs 10 after 18 months from allotment.

Non-convertible debenture: Non- convertible debentures do not confer any option on the

holder to convert the debentures into equity shares and are redeemed at the expiry of the

specified period.

4. Bond

Bond is a long term debt instrument that promises to pay a fixed annual sum as

interest for specified period of time. The basic features of the bonds are given below

i) Bonds have face value. The face value is called par value. The bonds may be

issued at par or at discount.

ii) The interest rate is fixed. Sometimes it may be variable as in the case of

floating rate bond. Interest is paid semi-annually or annually. The interest rate

is known as coupon rate. The interest rate is specified in the certificate.

iii) The maturity date of the bond is usually specified at the issue time except in

the case of perpetual bonds.

iv) Bonds are traded in the stock market. When they are traded the market value

may be at par value or at premium

v) Bonds are traded in the stock market. When they are traded the market value

may be at par or at premium or at discount. The market value and redemption

value need not be the same.

Secured bonds and unsecured bonds unsecured bonds: The secured bond is secured

by the real assets of the issuer. In the case of the unsecured bond the name and fame

of issuer may be the only security.

Perpetual bonds and redeemable bonds: Bonds that do not mature or never mature are

called perpetual bonds. The interest alone would be paid. In the redeemable bond, the

bond is redeemed after a specific period of time. The redemption value is specified by

the issuer.

Fixed interest rate bonds and floating interest rate bonds: In the fixed interest rate

bonds, the interest rate is fixed at the time of the issue.

HIGH RISK INVESTMENTS AVENUES

1. Equity Shares

Equity shares are commonly referred to common stock or ordinary shares. Even

though the words shares and stocks are interchangeably used, there is a difference

between them. Share capital of a company is divided into a number of small units of

equal value called shares. The term stock is the aggregate of a member’s fully paid up

shares of equal value merged into one fund. It is a set of shares put together in a

bundle. The “stock” is expressed in terms of money and not as many shares. Stock

can be divided into fractions of any amount and such fractions may be transferred like

shares.

Share certificate means a certificate under the common seal of the company

specifying the number of shares held by any member. Share certificate provides the

prma facie evidence of title of the members to such shares. This gives the shareholder

the facility of dealing more easily with his shares in the market. It enables him to sell

his shares by showing marketable title.

Equity shares have the following rights according to section 85(2) of the

Companies Act 1956.

i) Right to vote at the general body meetings of the company

ii) Right to control the management of the company

iii) Right to share in the profits in the form of dividends and bonus shares.

iv) Right to claim on the residual after repayment of all the claims in the case of

winding up of the company

v) Right of pre-emption in the matter of issue of new capital

vi) Right to apply to court if there is any discrepancy in the rights set aside

vii) Right to apply the central government to call an annual meeting when a

company fails to call such a meeting.

viii) Right to apply the company law board for calling an extraordinary general

meeting

In a limited company the equity shareholders are liable to pay the company’s

debt only to the extend of their share in the paid up capital. The equity shares

have cetain advantages. The main advantages are

Capital appreciation

Limted liability

Free Tradeability

Tax advantages( In certain cases) and

Hedge against inflation

Sweat Equity

Sweat equity is a new equity instrument introduced to the companies

(Amendment) Ordinance, 1998. Newly inserted Section 79A of the Companies Act

1956 allows issue of seat equity. However, it should be issued out of a class of

equity shares already issued by the company. It cannot form a new class of equity

shares section 79A (2) explains that all limitations, restrictions and provisions

applicable to equity shares are applicable to sweat equity. Thus sweat equity forms a

part of equity share capital.

Non-Voting Shares

Non-voting shares carry not voting writes. They carry additional dividends

instead of the voting writes. Even through the idea was widely discussed in 1987; it

was only in the year 1994 that the finance ministry announced certain board

guidelines for the issue of non-voting shares.

They have right to participate in the bonus issue. The non-voting shares also can

be listed and traded in the stock exchanges. If Non-voting shares are not paid

dividend for 2 years, the shares would be automatically get voting rights; The

Company can issue this to a maximum of 25% of the voting stock.

The dividend non- voting shares would have to be 20% higher than the dividend on

the voting shares. All rights and bonus share for the non-voting shares have to be

issued in the form of non-voting shares only.

Right shares

Shares offered to the existing share holders at the price of the company are called

right shares. They are offered to the share holders as a matter of legal right. If a public

company wants to increase its subscribed capital by way of issuing shares after two

years from its formation date or one year from the date of fast allotment., whichever

is earlier, such shares should be offered first to the existing share holders in

proportion to the capital paid up on the shares held by them at the date of such offer.

This pre-emptive right can forfeit by the share holders through a special resolution.

The share holders can renounce the right shares in favor of his nominee. He may

renounce all or part of the shares offered of him. The right shares partly paid

minimum subscription limited is prescribed for right issues. In the event of company

failing to receive 90% subscription, the company shall have to return the entire

money received. At present, SEBI has removed the limit. Right issues are regulated

under the provisions of the companies Act and SEBI.

Bonus Shares

Bonus share is the distribution of share in addition to the cash dividends to the

existing share holders. Bonus shares are issued to the existing share holders with any

payment of cash. The aim of bonus share is to capitalize the free resource. The bonus

issue is made out of free resource built out of genuine profit of share. The premium

collected in cash only. The bonus issue could be made only when all the party paid

shares, if any, existing are made fully paid up

The declaration of the bonus issue used to have favorable impact on the psychology

of the share holders. They take it has an indication of higher feature profit.

Bonus shares are declared by the directions only when they expect a rise in the

profitability of the concern. The issue of bonus shares enables the share holders to sell

the shares and get capital gains while returning original shares.

Preference Stock

The characters of the preferred stock are hybrid in nature. Some of its features

resemble the bond of others the equity shares. Like the bonds, their claims on the

company’s income are limited and they receive fixed dividend. In the event of

liquidation of the company their claims on the assets of the firm are also fixed. At the

same time like equity, it’s a perpetual liability of the corporate. The decision to pay

dividend to the preferred stock is at the discretion of the Board of Directors. In the

case of bonds, payment of interest rate is mandatory.

The dividend received by the preferred stock is treated on the par with the

dividend received from the equity share for the tax purposes. These share holders do

not enjoy any of the voting powers except when any resolution affects their rights.

2. Commodity

Commodities are any mass goods traded as an exchange or in cash market.

Industrial metal such as copper, aluminum, zinc, nickel, silver are also included in the

commodities. Commodities are traded in order to make profit from the fluctuation in

price. These potential profits results from the buying or selling futures contracts in a

particular good.

The value of a commodity changes as it supply and demand change. Investors

are able to make money by selling the commodity for more than what they brought it

for you. The prices of commodities can go up or down of course. Example of

commodities is gold, silver, oil, sugar, coffee, cotton, rubber and many more. The

prices of commodities are driven mostly by supply and demand. For example, oil

prices will go if there is a shortage. Investment in commodities is very

speculative because their future demand is difficult to predict.

A popular way to invest in commodities is through a future contract, which is

an agreement to buy or sell in the future a specific quantity of a commodity at a

specific price. Futures are available on commodities such as gold and natural gas,

as well as agriculture products such as cattle or corn.