Understanding Capital Markets

098 251 20338 CS Smitesh Desai [email protected]

An investor is someone who puts money into some avenue with the expectation of a financial return. Types of investments include:EquityDebt securitiesReal estateCurrencyCommodityDerivatives such as put and call optionsThis definition makes no distinction between those in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors.

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Speculation is a financial action that does not promise safety of capital investment and/or return on the principal sum. Any person who engages in speculation is known as a speculator. In the capital markets, speculation refers to the buying, holding, and selling of securities to profit from fluctuations in price, as opposed to buying these instruments for use or for income via methods such as dividends or interest. Speculation is typically a short-term strategy. The role of speculators in a market economy is to absorb risk and to provide liquidity in the marketplace, for the chance of monetary reward. Speculators provide trading volume and liquidity in what would otherwise be an illiquid market. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.



Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving means low-risk preservation of money, as in a savings bank deposit account, versus investment, wherein risk is higher.



A spendthrift (also called profligate) is someone who spends money prodigiously and who is extravagant and recklessly wasteful, often to a point where the spending climbs well beyond his or her means. Spendthrift refers to someone who is able to spend money acquired by the thrift of predecessors or ancestors



At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather’s grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing, Warren was making money. He bought a small farm at age 14 with savings from delivering newspapers.



He bought his first share at age 11 and he now regrets that he started too late! He made his first stock purchase buying 3 shares of Cities Services for $38 per share for himself and his older sister Doris. Shortly after buying the stock it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him to invest in good companies for long term. He never invests in technology stocks and internet stocks not even in MICROSOFT. His logic is he doesn’t invest in companies where he cannot foresee the balance sheet after 20 years. He ran his investment business out of his bedroom. These investments made in excess of 30% compounded annually, in a market where 7% to 11% was the norm.



He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a compound wall or a fence. He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television. Once however, when at a party, someone offered him a drink saying: its premium scotch, about $ 100 for a peg. Buffet replied, “Can I have the $ 100, instead?” Bill Gates, the world's richest man met him for the first time only a few years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet. Warren Buffet does not carry a cell phone, nor has a computer on his desk. His advice to young people: Stay away from credit cards and invest in yourself.


At one point in time, in the early part of the 21st century it was said that, Bill Gates (born October 28, 1955) earns US $250/= every second. That is about US $20 million in a day or US $7.8 billion in a year. The narration goes further to say that, if he drops a thousand dollar note, he won’t even bother to pick it up. Reason: in the 4 seconds, he stops & stoops to pick it up, he would have earned it elsewhere. He could donate US $15/= to everyone on earth and still have a balance of US $5 million. If Bill Gates were a country, he would be the 37th richest country in the world. If you change all of his money into US $1/= notes, you could make a road from earth to moon and back. Bill Gates is over 50 now. If we presume that he will live for another 25 years, he must spend US $6.78 millions every day to finish all his money, before departing. Lastly, if Microsoft Windows users can claim US $1/= every time their computers hang, because of Windows, Bill Gates will be bankrupt in 3 years.




Bill Gates Earns US$ INR @ 50/=

Every Second 250 12,500

Every Minute 15,000 750,000

Every Hour 900,000 45,000,000

Every Day 21,600,000 1,080,000,000

Every Year 7,884,000,000 394,200,000,000


We know the world's richest man is Carlos Slim Helu of Mexico, followed by Bill Gates and Warren Buffett of USA .



Slim and his siblings were taught basic business practices by their father, and at the age of 12 Slim bought shares in a Mexican bank. He went on to study engineering, while simultaneously teaching algebra and linear programming there. In 1965 he incorporated Inversora Bursátil and then bought Jarritos del Sur. In 1966, already worth US$40 million, he founded Inmobiliaria Carso. On March 29, 2007, Slim surpassed Warren Buffett as the world's second richest person with an estimated net worth of $53.1 billion compared to Buffet's $52.4 billion. On August 4, 2007, The Wall Street Journal ran a cover story profiling Slim. The article said, "While the market value of his stake in publicly traded companies could decline at any time, at the moment he is probably wealthier than Bill Gates”. According to The Wall Street Journal, Slim credits part of his ability to "discover investment opportunities" early to the writings of his friend, futurist author Alvin Toffler. In March 2011, Forbes stated that Slim had maintained his position as the wealthiest person in the world, with his fortune estimated at $74 billion.



1) Will be consumed by inflation2) Contingencies will kill3) Experience shortage of finances,

always4) May be labeled as “Prince”, today,

“Pauper” tomorrow5) May attract many fair weather

“friends”6) Glamorous in the present, sins

tomorrow & finished in months7) Will have to dodge lenders seeking

repayment & interest, forever8) Future is full of shocks9) Can’t avoid debt traps, lives in it10)Victim of economic downturn


Compounding



Promoters’ Equity

Friends & Relatives Equity

IPO + FPO Secured Bonds

Unsecured Deposits

Bank Funds



Issuer Public

What is ASBA?



IPO

FPO

Offer for

Sale

IDR

Rights Issue

Bonus Issue

Book Built Issue

Fixed Price Issue



Safety Net?



DematerializationA process of converting physical shares into dematerialized shares.RematerializationA process of converting dematerialized shares into physical shares.DepositoryAn organization which holds securities of investors in electronic form.Depository ParticipantAn agent of depository to act as an interface between the investor and

the depository.Beneficial Owner The investor who enjoys the benefits of owning the securities.Registered OwnerA depository in whose name the securities are registered



1. Paper based trading2. Manual transfer of securities

which was a time consuming factor

3. Possibilities of bad delivery, fake certificates, signature differences, etc.

4. Burden of filling of transfer form, affixing share transfer stamps

5. Threat of loss of securities and fraudulent interception of certificates in transit

1. Paperless trading2. Immediate transfer of

securities3. No problem of bad delivery,

fake certificates, signature differences, etc.

4. No requirement of filling of transfer form and affixing share transfer stamps

5. No threat of loss of securities and fraudulent interception of certificates in transit



An investor is required to pay charges towards:DematerializationRematerializationAccount Maintenance Sell transactions.

An investor need not pay charges towards:Account opening

Custody of securitiesBuy transactions

Closure/Transfer of account



Agreements Agreements

Proof of Age & Residence



The stock broker is obliged to provide contract notes confirming the trades done within 24 hrs of executing the trade – either physical or electronic mode

The stock broker is entitled to recover:Brokerage charges @2.5% - max Service tax as stipulated – 12.36%Securities Transaction Tax - 0.1%Penalties arising on specific default on behalf of client (investor)



Activity DayTrading Rolling Settlement Trading TClearing Custodial Confirmation T+1 working days Delivery Generation T+1 working daysSettlement Securities and Funds pay in T+2 working days Securities and Funds pay out T+2 working days Valuation Debit T+2 working daysPost Settlement Auction T+2 working days Auction settlement T+3 working days Bad delivery reporting T+4 working days Rectified bad delivery pay-in and pay-out T+6 working days Re-bad delivery reporting and pickup T+8 working days

Close out of re-bad delivery and funds pay-in & pay-out

T+9 working days



War chest is surplus cash reserves, emergency reserves or rainy day funds.


1) Don’t put all eggs in one basket – sectoral investments2) Diversify between High Income/Potential Shares to High Safety

Debentures – depending upon your age profile3) Allow investment in each company upto your risk appetite4) Depend upon P/E ratio; Avoid Intra-Day Transactions &

Impulsive Investing5) Track your portfolio regularly & thoroughly6) Alternately invest in Mutual Funds7) Don’t borrow for Investing 8) You must earn > inflation rate

Instrument Expected Rate of ReturnBank FD 5% to 8%

Company Debentures 8% to 10%Company Deposits 10% to 12%

Mutual Funds 12% to 15%Gold & Silver 20%Real Estate 25%

Shares 30%098 251 20338 CS Smitesh Desai [email protected]


Do “Get Rich Quick” Formulae Work?

Understanding Capital Markets

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