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Project report on investors perception towards equity and mutual funds.

Transcript of Anand Rathi

Investors Perception Towards Equity and Mutual Fund

Investors Perception Towards Equity and Mutual Fund

CHAPTER NO.1

INTRODUCTION

FINANCIAL MARKETS

The Financial markets can be broadly classified into Organized and Unorganized markets. The Unorganized markets include Money lenders, Indigenous Bankers, etc. Whereas, the organized market is classified as shown in the below chart:

CHART NO 1.1

Financial Markets

Primary MarketsIndustrial Securities MarketCommercial Bill MarketCall Money MarketGovt. Sec MarketLong Term Loan MarketIndustrial Securities MarketMoney MarketsCapital Markets

Short Term loan Market

Secondary Markets

The Financial Markets can broadly be divided into Money Market and Capital market. 1. Money market:

Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.2. Capital market:

The Capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities which have a maturity period of above one year. Capital market may be further divided into three, namely:

Government securities market

Industrial securities market

Long term loans market

Government Securities market:

The Government Securities market is otherwise called Gilt-Edged securities market. It is a market where Government securities are traded. Govt. securities are issued in denominations of Rs.100 and interest is payable half yearly. They carry tax exemptions also.

Long term loans market:

Development banks and commercial banks play a significant role in Long term loans market by supplying long term loans to corporate customers. Long term loans can be further classified as:

(i) Term loans market

(ii) Mortgages market

(iii) Financial guarantees market. Industrial securities market:

The Industrial securities market is a market for industrial securities namely, (a) Equity shares or ordinary shares (b) Preference shares, & (c) Debentures or bonds. It is the market where industrial concerns raise their capital or debt by issuing appropriate instruments

The Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into;

(A) PRIMARY MARKET OR NEW ISSUE MARKET:

This market deals with those securities which are issued to the public for the first time. This market facilitates capital formation. The most common method of raising capital by new companies is through issue of securities to the public. It is mainly done through IPO (Initial Public Offering).

CHART NO 1.2

Issues

PublicPreferencialRights

Offer For SaleFresh IssueOffer For SaleFresh IssueFurther Public OfferingInitial Public Offering

Primarily issues can be classified as Public, Rights or Preferential issues (also known as Private placements).While public & rights issues involve a detailed procedure, preferential issues are relatively simpler. The classification of issues is illustrated above.

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves the way for listing and trading of the issuers securities.

A follow on public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alia include pricing, disclosures in notice etc.

The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been carried out in the same in line with the market dynamics and requirements SEBI (Disclosure and investor protection) guidelines 2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances by the companies.

(B) SECONDARY MARKET:

Secondary market is a market for secondary sale of securities. The securities which have already passed through new issue market are traded here. Generally such securities are quoted in the Stock Exchange and it provides a continuous and a regular market for buying and selling of securities.Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

DIFFERENCES BETWEEN PRIMARY MARKET AND SECONDARY MARKET:

In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

INVESTMENT BASICS:

The idea behind investing is that money is put to use in such a way that it is likely to grow into more money. This could happen because someone is willing to pay interest to use the money or because the value of whatever security the money was used to buy increases during the period of ownership.Destinations for invested money include savings accounts, stocks, bonds, mutual funds, and numerous other investment options. There are many reasons why people save and invest. One reason is financial security. A fund for emergencies helps people cope with unexpected events such as illness, unemployment, and accidents. Saving and investing are also used to reach financial goals such as a new car, a college education, a trip, or a down payment on a house. Of course, one of the most important reasons for people to save and invest is to provide the funds for a comfortable, financially secure life after retirement.

The type of investment option selected by any person depends upon his financial soundness, risk-taking capacity and future expectations/aims. As a general rule, the greater the promised return the greater the risk. Risk tolerance is a person's ability to ride out the ups and downs of the market without panicking when the values of investments go down. Risk tolerances vary from person to person and at different stages in the life cycle.Young adults with growing income potential may take greater investment risks than people who are approaching retirement.

PYRAMID OF INVESTMENT RISK:

Figure no 1.1

Common types of higher risk investments include stocks, corporate and municipal bonds, mutual funds, real estate, collectibles, and futures contracts. The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity. Investments may produce current income while you own the investment through the payment of interest, dividends, or rent payments. When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation.

HIGH RISK CHOICES:

Corporate and Municipal bonds

High-quality Corporate stock with a history of steady earnings

Telephone, Gas, or Electrical utility stocks

Mutual funds that focus on current income

Factors to consider when selecting savings and investments include:

Liquidity,

Risk & Return,

Inflation,

Diversification,

Taxes and

Stage in the life cycle

The basic idea of i