FUNDAMENTAL OF INVESTMENT

UNIT-1
 THE INVESTMENT DECISION PROCESS
The investment decision process typically involves
several key steps:

1. *Goal Setting*: Define your financial goals, such as

saving for retirement, buying a house, or funding
education.

2. *Risk Assessment*: Evaluate your risk tolerance based

on factors like age, financial situation, and investment
objectives.

3. *Asset Allocation*: Determine the mix of asset classes

(stocks, bonds, real estate, etc.) that align with your goals
and risk tolerance.

4. *Research*: Conduct thorough research on potential

investments, considering factors like performance, fees,
and management quality.

5. *Diversification*: Spread investments across different

assets and sectors to reduce risk and maximize potential
returns.

6. *Execution*: Implement your investment strategy by

buying and selling assets according to your plan.

7. *Monitoring and Rebalancing*: Regularly review your

portfolio's performance and adjust allocations as needed
to stay aligned with your goals and risk tolerance.
8. *Continuous Learning*: Stay informed about market
trends, economic indicators, and investment strategies to
make informed decisions over time.

 TYPES OF INVESTMENT

There are several types of investments, each with its own

characteristics, risk profile, and potential return:

1. *Stocks*: Ownership in a company, offering potential

for capital appreciation and dividends, but also subject to
market volatility.

2. *Bonds*: Loans to governments or corporations,

providing regular interest payments and returning the
principal upon maturity, with lower risk compared to
stocks.

3. *Mutual Funds*: Pooled investments that invest in a

diversified portfolio of stocks, bonds, or other assets,
managed by a professional fund manager.

4. *Exchange-Traded Funds (ETFs)*: Similar to mutual

funds but traded on stock exchanges, offering
diversification and flexibility with lower fees.

5. *Real Estate*: Investment in physical properties or real

estate investment trusts (REITs), providing rental income
and potential for property appreciation.

6. *Commodities*: Investments in physical goods like

gold, oil, or agricultural products, offering diversification
and a hedge against inflation.

7. *Cryptocurrencies*: Digital currencies like Bitcoin and

Ethereum, known for their high volatility and potential for
significant gains or losses.
8. *Options and Futures*: Derivative contracts that allow
investors to speculate on the future price movements of
underlying assets, with higher risk and potential leverage.

9. *Fixed Deposits*: Investment in bank deposits with a

fixed interest rate and maturity period, offering low risk
but lower returns compared to other investments.

10. *Peer-to-Peer Lending*: Direct lending to individuals

or businesses through online platforms, offering
potentially higher returns but with higher risk compared
to traditional lending.

Each type of investment has its pros and cons, and the
right mix depends on your financial goals, risk tolerance,
and investment horizon. Diversifying across different
asset classes can help mitigate risk and optimize returns
over time.

 THE INDIAN SECURITIES MARKET

The Indian securities market encompasses various

segments and regulatory bodies that govern the buying
and selling of securities in India. Here's an overview:

1. *Securities and Exchange Board of India (SEBI)*: SEBI

is the regulatory authority for the securities market in
India. It regulates the functions of stock exchanges,
intermediaries, and other participants in the market to
promote fair and transparent dealings and protect the
interests of investors.

2. *Stock Exchanges*: The primary stock exchanges in

India are the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE). These exchanges provide
platforms for trading in equities, derivatives, and other
financial instruments.

3. *Equities*: Equities, or stocks, represent ownership in a

company and are traded on stock exchanges. Indian
companies can issue equity shares through initial public
offerings (IPOs) to raise capital from the public.

4. *Derivatives*: Derivatives such as futures and options

are financial instruments whose value is derived from an
underlying asset, such as stocks, indices, or
commodities. They are traded on exchanges like the NSE
and BSE.

5. *Debt Securities*: Debt securities include bonds,

debentures, and government securities. They represent
loans provided by investors to issuers (companies or
governments) in exchange for periodic interest payments
and repayment of the principal amount at maturity.

6. *Mutual Funds*: Mutual funds pool money from

investors to invest in a diversified portfolio of securities,
including equities, debt instruments, and money market
instruments. They are regulated by SEBI and offer
investors a way to access diversified investment
portfolios managed by professional fund managers.

7. *Foreign Institutional Investors (FIIs) and Foreign

Portfolio Investors (FPIs)*: FIIs and FPIs are institutional
investors from outside India that are registered with SEBI
to invest in Indian securities markets. They play a
significant role in the Indian stock market.

8. *Depositories*: Depositories such as the National

Securities Depository Limited (NSDL) and the Central
Depository Services Limited (CDSL) facilitate the holding
and transfer of securities in electronic form, eliminating
the need for physical share certificates.

9. *Regulatory Framework*: The regulatory framework

governing the Indian securities market includes the
Securities Contracts (Regulation) Act, 1956, SEBI Act,
1992, and various SEBI regulations and guidelines.

Overall, the Indian securities market offers a wide

range of investment opportunities across various asset
classes, regulated by SEBI to ensure investor protection
and market integrity.

 THE MARKET PARTICIPANTS

The Indian securities market encompasses various

segments and regulatory bodies that govern the buying
and selling of securities in India. Here's an overview:

1. *Securities and Exchange Board of India (SEBI)*: SEBI

is the regulatory authority for the securities market in
India. It regulates the functions of stock exchanges,
intermediaries, and other participants in the market to
promote fair and transparent dealings and protect the
interests of investors.

2. *Stock Exchanges*: The primary stock exchanges in

India are the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE). These exchanges provide
platforms for trading in equities, derivatives, and other
financial instruments.

3. *Equities*: Equities, or stocks, represent ownership in a

company and are traded on stock exchanges. Indian
companies can issue equity shares through initial public
offerings (IPOs) to raise capital from the public.
4. *Derivatives*: Derivatives such as futures and options
are financial instruments whose value is derived from an
underlying asset, such as stocks, indices, or
commodities. They are traded on exchanges like the NSE
and BSE.

5. *Debt Securities*: Debt securities include bonds,

debentures, and government securities. They represent
loans provided by investors to issuers (companies or
governments) in exchange for periodic interest payments
and repayment of the principal amount at maturity.

6. *Mutual Funds*: Mutual funds pool money from

investors to invest in a diversified portfolio of securities,
including equities, debt instruments, and money market
instruments. They are regulated by SEBI and offer
investors a way to access diversified investment
portfolios managed by professional fund managers.

7. *Foreign Institutional Investors (FIIs) and Foreign

Portfolio Investors (FPIs)*: FIIs and FPIs are institutional
investors from outside India that are registered with SEBI
to invest in Indian securities markets. They play a
significant role in the Indian stock market.

8. *Depositories*: Depositories such as the National

Securities Depository Limited (NSDL) and the Central
Depository Services Limited (CDSL) facilitate the holding
and transfer of securities in electronic form, eliminating
the need for physical share certificates.

9. *Regulatory Framework*: The regulatory framework

governing the Indian securities market includes the
Securities Contracts (Regulation) Act, 1956, SEBI Act,
1992, and various SEBI regulations and guidelines.
Overall, the Indian securities market offers a wide range
of investment opportunities across various asset classes,
regulated by SEBI to ensure investor protection and
market integrity.

 ONLINE AND OFFLINE TRADING IN

SECURITIES
Online trading and offline trading in securities both
involve buying and selling financial instruments like
stocks, bonds, or derivatives, but they differ in the method
of execution:

1. *Online Trading:*
- *Execution:* Online trading is done electronically
through internet-based platforms provided by brokerage
firms. Investors can place orders, monitor their portfolios,
and execute trades in real-time using these platforms.
- *Accessibility:* It offers convenience and accessibility,
allowing investors to trade from anywhere with an internet
connection, using computers or mobile devices.
- *Speed:* Transactions are typically executed quickly,
and investors can react to market movements promptly.

2. *Offline Trading:*
- *Execution:* Offline trading, also known as traditional
or manual trading, involves placing orders through a
broker via phone, fax, or in person at a physical location.
 - *Accessibility:* It requires direct communication with
the broker, either verbally or through written instructions,
and may involve delays in execution compared to online
trading.
- *Assistance:* Offline trading may provide personalized
assistance from brokers who can offer advice and
guidance to investors.

While online trading has become increasingly

popular due to its speed and convenience, some investors
still prefer offline trading for the personal interaction and
assistance it offers. Ultimately, the choice between online
and offline trading depends on individual preferences,
trading style, and access to technology.

 SECURITY MARKET INDICES

Security market indices are benchmarks used to
measure the performance of various segments of the
financial markets. They track the value of a hypothetical
portfolio of securities representing a particular market or
sector. Examples include:

1. *Stock Market Indices:* These measure the

performance of a specific group of stocks, such as the
S&P 500, Dow Jones Industrial Average (DJIA), and
NASDAQ Composite in the United States.
2. *Bond Market Indices:* These track the performance of
fixed-income securities like government bonds, corporate
bonds, or municipal bonds.

3. *Commodity Market Indices:* These measure the

performance of commodities like gold, oil, or agricultural
products.

4. *Sectoral Indices:* These focus on specific sectors

within the economy, like technology, healthcare, or
energy.

5. *Global Market Indices:* These provide a broad view of

the global financial markets, such as the MSCI World
Index or FTSE Global Equity Index Series.

These indices serve as important tools for investors to

gauge market trends, compare investment performance,
and make informed decisions.

 SOURCES OF FINANCIAL INFORMATION

There are several sources where you can obtain
financial information:

1. *Financial News Websites:* Websites like Bloomberg,

CNBC, Reuters, and Financial Times provide up-to-date
news and analysis on financial markets, companies, and
economic trends.

2. *Financial Publications:* Magazines and newspapers

like The Wall Street Journal, Barron's, and Forbes offer in-
depth analysis, market insights, and investment advice.

3. *Financial Data Providers:* Platforms like Yahoo

Finance, Google Finance, and Morningstar offer financial
data, stock quotes, company profiles, and historical
market performance.

4. *Company Websites:* Many publicly traded companies

provide detailed financial information, including annual
reports, quarterly earnings releases, and investor
presentations on their corporate websites.

5. *Government Agencies:* Government agencies like the

U.S. Securities and Exchange Commission (SEC) provide
access to regulatory filings, financial disclosures, and
market data through their online portals.

6. *Brokerage Platforms:* Online brokerage platforms like

E*TRADE, Fidelity, and Charles Schwab offer access to
financial research, market data, and investment analysis
tools for their clients.
7. *Social Media and Forums:* Platforms like Twitter,
Reddit, and stock trading forums can provide real-time
discussions, opinions, and insights on financial markets
and specific stocks.

8. *Financial Analyst Reports:* Research reports from

investment banks, equity research firms, and independent
analysts offer detailed analysis and recommendations on
specific stocks, sectors, and market trends.

It's important to verify the credibility and reliability of

the sources you use for financial information and to cross-
reference information from multiple sources to ensure
accuracy.

 CONCEPT OF RETURN AND RISK

The concept of return and risk is fundamental in
finance and investing:

1. *Return:* Return refers to the gain or loss generated on

an investment over a specific period of time. It is typically
expressed as a percentage of the investment's initial cost
or current value. Returns can be realized through capital
appreciation (increase in the value of the investment)
and/or income (such as dividends, interest, or rental
income). Different types of investments offer varying
potential returns, with higher returns usually associated
with higher risk.
2. *Risk:* Risk, on the other hand, represents the
uncertainty or variability associated with the potential
returns of an investment. It encompasses the possibility of
losing some or all of the invested capital, as well as the
likelihood of achieving lower-than-expected returns.
Various types of risk exist in investing, including:

- *Market Risk:* The risk of losses due to changes in

market factors such as economic conditions, interest
rates, and overall market sentiment.

- *Credit Risk:* The risk of losses arising from the failure

of a borrower to repay a loan or fulfill financial
obligations.

- *Liquidity Risk:* The risk of not being able to buy or sell

an investment quickly and at a fair price, leading to
potential losses or missed opportunities.

- *Inflation Risk:* The risk that inflation will erode the

purchasing power of investment returns over time.

- *Political and Regulatory Risk:* The risk associated

with changes in government policies, regulations, or
geopolitical events that could affect investment values.
 Investors typically seek a balance between return
and risk based on their investment objectives, time
horizon, and risk tolerance. They often use diversification,
asset allocation, and risk management strategies to
manage risk while aiming to achieve their desired level of
return. The relationship between return and risk is central
to investment decision-making and portfolio management.

 IMPACT OF TAXES AND INFLATION ON

RETURNS

Taxes and inflation can significantly impact the

real returns investors receive from their investments:

1. *Taxes:* Taxes reduce investment returns by

lowering the amount of income or gains retained by
the investor. Different types of investments are
subject to various tax treatments. For example:
- *Capital Gains Tax:* This tax is levied on the profit
earned from selling an asset at a higher price than its
purchase price. The rate of capital gains tax depends
on factors like the holding period and the investor's
tax bracket.
- *Dividend Tax:* Dividend income received from
investments such as stocks is subject to taxation at
different rates, depending on factors like the type of
dividend (qualified or non-qualified) and the
investor's tax bracket.
- *Interest Income Tax:* Interest income earned
from investments like bonds, savings accounts, or
certificates of deposit is generally subject to ordinary
income tax rates.
- *Tax-Advantaged Accounts:* Investing through
tax-advantaged accounts like IRAs, 401(k)s, or 529
plans can help mitigate the impact of taxes on
investment returns by providing tax-deferred or tax-
free growth opportunities.

2. *Inflation:* Inflation erodes the purchasing power

of investment returns over time, reducing the real
(inflation-adjusted) value of investment gains. If the
rate of return on investments does not outpace the
rate of inflation, investors may experience a
decrease in their purchasing power. For example:
- If an investment generates a nominal return of 5%
per year, but inflation is 3% per year, the real return
(adjusted for inflation) is only 2%.
- Investments that offer returns below the rate of
inflation can result in a loss of purchasing power over
time, even if they generate positive nominal returns.

To accurately assess investment performance

and make informed decisions, investors need to
consider both the nominal returns (before taxes and
inflation) and the real returns (after taxes and
inflation). Strategies such as tax-efficient investing,
asset allocation, and selecting investments with the
potential to outpace inflation can help mitigate the
impact of taxes and inflation on investment returns.