INTRODUCTION TO INVESTMENT AND SECURITIES

Investment

Investment mean sacrifice of some money value at present with the expectations to gain in the future.

Examples:

Mr Raj buys 200 shares of Wipro ltd for Rs 750 per share.

Mr Manu buys a piece of land with the aim to sell it in future at an appreciation.
Ms Deepa buys ticket of playwin with the aim of winning it. Tailor & Co. buys a plant for Rs 20 lakh to set up a factory. Smt Pooja puts Rs 10,000 in a post office savings bank account.

Dimensions of Investment

Element of sacrifice

Element of futurity

Element of risk Expectation of gain

Pure Investment

Pure investment
Financial investments are like exchange of financial claims like buying of shares, debenture, insurance policy, investing money in bank or post office.

Features

1. carefully thought of 2. well planned

3. based on study of fundamental factors about investment avenues

4. long time horizon 5. expected returns will commensurate with the risk 6. low risk or risk avoidance 7. do not borrow for investment

Speculation

Speculation is an act of investing money on the basis of market wide information avenue such as information about the trends of share prices or traded volume of shares. Features

1. Investor has an attitude to take more risk

2. Shorter duration
3. Based on market related information 4. Speculator tends to borrow money for making investment the expectation to gain more than what he has to pay for borrowed money. 5. Speculator has positive attitude towards losses.

Examples.

Jobbing, Badla / Carry forward , Derivative transactions.

Jobbing
Jobbing is an activity in which a broker / client tries to square up his position by the end of the settlement or the same trading day. The main purpose of jobbing is to gain profit from the price difference between the bid and ask prices as specified by the jobber.

Lower Quotation is bid rate and higher quotation is his ask rate.

Jobbing
At 10:10 am Mr. Ghosh purchases500 shares of Wipro at Rs 230 and he expects the price to rise within the same day and plans to sell it by the end of the same trading session During the day, he hears from his broker that shares of Tisco will decline from the level of 190 and he sell 200 shares of TISCO at 190 with the hope to buy it back by the end of the days trading. At 12:10 pm, price of Wipro increases to Rs 246 and he sells 500 shares and books the profit At 3:20 p.m price of TISCO has become Rs 200 in contrast to his expectations and he covers ( buys ) 200 shares of TISCO at 200 and books a loss. In this way jobbing is used by investors to have gain within same trading session, he might even have a loss in this process.

Badla / Carry Forward

When a buyer does not have money to settle a transaction but is hopeful about the future scenario, hence is not willing to square up his position, then the badla is an alternative to keep the transaction for the next settlement. Similarly when seller is not willing to square up the transaction or does not have the delivery, he can carry forward his sales position to the next settlement.

Badla / Carry Forward

A badla transaction has the following features:

Badla Charges
Badla margin

Eligible Scrips
Badla financier

Regulated by stock Exchange

A tool to speculate

A tool to Hedge

Caselet on speculation with the help of Badla

During the period when badla was in practice , an investor used to take the following steps to execute badla transaction with the aim of speculation: Danish buys 100 shares of RIL at Rs 1000 on Monday By the end of trading settlement, i.e. Friday, Danish does not have Rs 1,00,000 to pay and he requests his broker to do a badla transaction i.e. carry forward his purchase position to the next settlement. His Broker executes badla in badla Trading Session

The broker asks for badla charges and badla margin from Danish. Badla margin is around 20 % of the transaction value.

Contd
Through the process of Badla, Danish could retain the transaction by paying only equal to 20 % of thet transaction value and badla charges.

This is the manner to speculate, i.e. expecting a higher gain by paying only a little amount
In the next settlement, Danish has three alternatives:

1. Square up the transaction by selling the shares

2. Settle the transaction by making rest of the payment 3. Again do the carry forward ( Badla ) of the transaction by paying badla charges Through this process, Danish could hold the transaction for 90 days by paying only equal to 20 % of the transaction value and badla charge every time when badla is executed. Thus he could expect a higher gain in a shorter time span by investing only a limited amount.

Derivative Transactions
A derivative transaction is such a transaction the value of which is dependant on the underlying asset on which such transaction has been created. It includes Options, Futures, Forwards, Swaps.

Caselet on Speculation with the help of Option Transaction

At present one can speculate in the stock market with the help of Option Transaction:

Danish is bullish on HDFC Bank and he expects that price of this share could rise to a level of Rs 1200 or more in two month time from the current level of Rs 900 per share. But he doesnt have enough money to buy 200 share ( this is the quantity of one lot in F &O segment ) of HDFC Bank. Danish is told by his broker that he can buy a call option on HDFC Bank in one lot for two months with exercise price of Rs 950. This option is available in the market at a premium of Rs 20 per share.
Danish agrees and buys one lot HDFC Bank call Option with exercise price of Rs 950 for two months and pay a premium of Rs 4,000 ( 20 * 200 ) . This premium amount is over and above the exercise price and paid to the seller of the option . Now Danish has the right to buy 200 shares of HDFC Bank at Rs 950 at any time up to the expiry of the two months period irrespective of the market price. If he does not opt to buy it, then he can not be forced to buy.

 Within 25 days time the price of HDFC Bank rises to Rs 1250 in the cash market and Danish exercises his option- show his willingness to buy the shares at Rs 950 each. The call option is assigned to seller of the option and Mr. Danish can get either 200 shares if it is settled through physical settlement, or he can get Rs 60,000 ( 200 * 300) the difference between exercise price and the current market price multiplied by the quantity.

If market for HDFC Ban does not go up and remains below Rs 950 then Mr. Danish will not exercise his option and seller cannot force him as he has all rights without any obligation.
When market goes up he has ample change of having unlimited gain. But when market does not go up rather starts declining his maximum loss is Rs 4000. Tr. Danish could speculate in the market by putting only a small amount i.e. Rs 4000.

Gambling

Gambling involves high risk with the expectation of earning high returns. Features

1. Unplanned and unscientific 2. High risk

3. Based on rumours, tips and hunches.

Examples: horse race, card games, lotteries etc

Speculation starts where pure investment ends and gambling starts where speculation ends.

Objectives of investment

Safety

Regularity of income
Capital gains

Tax savings
Liquidity Speculation Hedging Arbitrage

Risk Associated with Investment

Systematic Risk is non- diversifiable risk because it cannot be avoided and is inherent in almost all investment avenues. They are as follows:

1. Risk due to inflation 2. Interest rate risk 3. Political risk 4. Market Risk

Risk Associated with Investment

5. Risk due to Government policies

6. Natural Calamities
7. Scams and Malpractices

8. Monsoon
9. Industrial growth or outputs

10. International events

11. War-like situation .

Non- Systematic risk

This is created due to industry or company specific factors like performance of a company, merger or acquisition, industry specific announcements by the government which might affect a particular industry.

Non- Systematic risk

It is also called diversifiable risk as it can be minimised or eliminated. They are as follows

1. Business Risk 2. Financial Risk 3. Risk due to industry specific policies 4. Disputes

Returns from investment

Types of investment avenues

Level of risk
Market trends

Financial performance
Premises for expected returns

Yield

Yield can be defined as effective returns per annum obtained during the holding period. Holding Period Yield = R1 + ( Pt1 Pto ) * 100 Pto

R1 = interest or dividend received at the end of one year. Pto = price at which investment is made. Pt1 = Market price at the end of one year.