INTRODUCTION

INDIAN FINANCIAL SYSTEM

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. Financial System; The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation.

FINANCIAL MARKETS

A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend. Money Market: The money market ifs a wholesale debt market for low-risk, highlyliquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. Capital Market: The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Forex Market:

The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies.

Learn Share Trading and Processes Share Trading Buying and Selling of shares is called share trading. Mainly there are two ways of doing share trading. Online Share Trading. Offline Share Trading. Online Share Trading Doing share trading with help of computer, internet connection and with trading/demat account is called Online Share Trading. If you would like to do online share trading then you should have a computer, internet connection and online trading account. Details of Online share trading has been given in next chapter. Offline Share Trading Doing share trading with the help of broker or through phone is called Offline trading. In other words trading will be done by another person on your behalf based on the instructions given by you, and then the other person can be a broker.The broker will do buying and selling of shares on your behalf depending on the instructions given by you. If you want to do offline share trading then you need to open the demat account. (provide link for procedure to open the demat account) Details of Offline share trading has been given in next chapter.

Different methods of buying and selling of shares Following are the types of orders which are used for buying and selling of shares. MarketOrder When you put buy or sell price at market rate then the price get executes at the current rate of market. The market order get immediately executed at the current available price. In market order there is no need to mention the price; the shares will get executed at the best current available price. If you wish to buy or sell shares at any specific price then market order is not suitable for you then you have to go for limit order. Market order is for those who want to buy or sell immediately at the current available price. Limit Order Its totally different to market order. In limit order the buying or selling price has to be mentioned and when the share price comes to that price then your order will get executed with the mentioned price by you. But here its not sure that the price will come to your limit order. In day trading its risk because you have to close all your transactions before 3:30 PM and if in case price doesnt reach to your limit order then your order will be open and then you have to go through (bare) the heavy penalties. Importantly limit order and stop loss trigger price are used together. Stop Loss Trigger PriceStop loss and trigger price are used to reduce the losses. This is very important term especially if you are doing day trading (intraday).Stop Loss as the name indicates this is used to reduce the loss.

INDUSTRY PROFILE
Securities market has essentially three categories of participants namely the issuer of securities, investors in securities and the intermediaries and two categories of products, the services of the intermediaries the securities including derivatives. The securities market has two interdependent and inseparable segments the new issue (primary market) and the stock (secondary market). The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued

STOCK EXCHANGE:
The stock exchange is the important segment of its capital market. If the stock exchange is well-regulated function smoothly, then it is an indicator of healthy capital market. If the state of the stock exchange is good, the overall capital market will grow and otherwise it can suffer a great set back which is not good for the country. The government at various stages controls the stock market and the capitals market. A capital market deals in financial assets, excluding coin and currency. Banking accounts compromises the majority of financial assets. Pension and provident funds insurance policies shares and securities. Financial assets are claim of holders over issuer (business firms and governments). They enter low different segment of financial market. Those having short maturities that are non transferable like bank savings and current accounts set the identification of the monetary financial assets. This market is known as money market, Equity, Preferential shares and bonds and debentures issued by companies and securities

issued by the government constitute the financial assets, which are traded in the capital market. Money Market and Capital Market Both money market and capital market constitute the financial market. Capital market generally known as stock exchange. This is a institution around which every activity of national capital market revolves. Through the medium stock exchange the investor gets on impetus and motivations to invest in securities without which they would not be able to liquidate the securities. If there would have been no stock exchange many of the savers would have hold their saving either in cash i.e. idle or in bank with low interest rate or low returns. the stock exchange provides the opportunity to investors for the continuous trading in securities. It is continuously engaged in the capital mobilization process. Another consequence of non-existence of stock exchange would have been low saving of the community, which means low investment and lower development of the country.

Securities Market

Equity Market

Debt Market

Derivatives Market

Government Securities Market

Corporate Debt Market

Money Market

Options Market

Futures Market

Participants in the securities market The Indian securities market comprises of a number of participants as described below: Regulators: The key agencies that have a significant regulatory influence, direct or indirect, over the securities market are currently as follows: The Company Law Board (CLB) which is responsible for the administration of the Companies Act, 1956. The Reserve Bank of India (RBI) which is primarily responsible, inter alia, for the supervision of banks, money market, and government securities market. The Securities and Exchange Board of India (SEBI) which is responsible for the regulation of the capital market. The Department of Economic Affairs (DEA), an arm of the government, which, inter alia, is concerned with the orderly functioning of the financial markets as a whole. The Department of Company Affairs (DCA), an arm of the government, which is responsible for the administration of corporate bodies. Stock Exchanges: A stock exchange is an institution where securities that have already been issued are bought and sold. Presently, there are 23 stock exchanges in India, the most important ones being the NSE and BSE. Listed Securities: Securities that are listed on various stock exchanges and hence eligible for being traded there are called listed

securities. Presently, about 10,000 securities are listed on all the stock exchanges in India put together. Depositories: A depository is an institution which dematerializes physical certificates and effects transfer of ownership by electronic book entries. Presently there are two depositories in India, viz. the National Securities Depository Limited (NSDL) and the Central Securities Depository Limited (CSDL). Brokers: Brokers are registered members of the stock exchanges through whom investors transact. There are about 10,000 brokers in India. Foreign Institutional Investors: Institutional investors from abroad who are registered with SEBI to operate in the Indian capital market are called foreign institutional investors. There are about 500 of them and they have emerged as a major force in the Indian market.

Merchant Bankers: Firms that specialize in managing the issue of securities are called merchant bankers. They have to be registered with SEBI. Primary Dealers: Appointed by the RBI, primary dealers serve as underwriters in the primary market and as market makers in the secondary market for government securities. Mutual Funds: A mutual fund is a vehicle for collective investment. It pools and manages the funds of investors. There are about 30 mutual funds in India.

 Custodians: A custodian looks after the investment back office of a mutual fund. It receives and delivers securities, collects income, distributes dividends, and segregates the assets between schemes. Registrars: Also known as a transfer agent, a registrar is employed by a company or a mutual fund to handle all investor-related services. Underwriters: An underwriter agrees to subscribe to a given number of shares (or any other security) in the event the public subscription is inadequate. The underwriter, in essence, stands guarantee for public subscription. Bankers to an Issue: The bankers to an issue collect money on behalf of the company from the applicants. Debenture Trustees: When debentures are issued by a company, a debenture trustee has to be appointed to ensure that the borrowing firm fulfills its contractual obligations. Venture capital Funds: A venture capital fund is a pool of capital which is essentially invested in equity shares or equity-linked instruments of unlisted companies. Credit Rating Agencies: A credit rating agency assigns ratings primarily to debt securities.

THE BOMBAY STOCK EXCHANGE (BSE)

The stock exchange mumbai, popularly known as BSE was established in 1875 as the native share and stock broker association. It is the oldest one in Asia, even older than the Tokyo stock exchange, which was established in 1878. Some say it has it roots in the 16th century where trading would take place under a baniyan tree. Which still exists under Dalal Street. It has evolved over the years into its present status as the premier stock exchange in the country. It is the first stock exchange in the country to have obtained permanent recognition in 1956 from Government of India. Under Securities Contracts (regulation) Act, 1956. it is the world renowned for its transformation from a primitive market to a state of-the art technological trading system. The settlement period has decreased from 3 weeks to 3 days in just past 4-5 years. The exchange, while providing an efficient and transparent market for trading in securities, debt and derivatives upholds the interests of the investor and ensures redressal of their grievances whether against the companies or its own member-brokers. It also strives to educate and enlighten the investor by conducting investor education programmes & making available to them necessary informative inputs. A governing board having 20 directors is the apex body, which decides the policies and regulates affairs of exchange. The governing board consists of 9 elected directors, who are from broking community (one third of them retired every year by rotation). ,3 SEBI nominees, 6 public

representative & an Executive Director and Chief Executive Officer and a Chief Operative Officer.

BSE key statistics Market Capitalization Listed Companies Average Turnover Average Daily No.Of. Trades 22,249,240 Around 7400 Rs. 1797428.38 crores

Daily Rs. 2800 crores

The Bombay Online Trading (BOLT)

The BOLT is online trading system in use at the stock exchange, mumbai (popularly known as BSE, from its original name Bombay Stock Exchange) since March,1995. it is one of the few stock trading system in the world that handles hybrid/ mixed modes of trading; both order-driven & codedriven. It supports the normal segment, the auction segment , Odd Lot segment & Continuous Net settlement. There are more than 6000 BSE trading terminals installed across the country.

Brokers sent their quotes, orders , Negotiated deals & in-house deals from their offices to the Central trading engine (CTE) from their broker work stations. The top five best bids & their best offers (which is commonly known as Best Bid& offer BBO) are available to all broker workstations using a mechanism called Broadcast of Market Information . the buy & sell orders placed by the brokers / traders are matched with the best available price in the market for that scrip. After they are match & transaction concluded, a confirmation sent to broker, which can be printed out.

BOLT: Central Trading Engine

LAN of exchange premises ----------------------------------------------------------------------------

Market operations Workstation

Surveillance Workstation

Broker Workstations on LAN

LAN at remote end ----------------------------------------------------

Broker Workstation connected through WAN

THE NATIONAL STOCK EXCHANGE (NSE)

Based on recommendations of a Special Task Force made up of a panel of leading financial institutions , NSE was promoted by leading financial institutions at behest of Govt. of India and was incorporated in November,1992 as a tax paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,1956 in April,1993, NSE commenced operations in wholesale debt market (WDM) segment in June, 1994. the Capital market (Equities) segment commenced operations in November,1994 & operations in Derivatives Segments commenced in june,2000.

The NSE operates through a network through a very small Aperture Terminals or VSATs. Its counterpart to BSEs BOLT trading system is the NSEs Internet Based Information System or NIBIS.

NSE key statistics

Number of VSATs Number of Cities covered

2,289 345

Market Capitalization (in Rs. crores) Listed Securities

17,42,748 1,347

Average Daily Turnover (in Rs. crores) 10,466,552 Average Daily No. of Trades 28,50,998

2. LEGAL & REGULATORY & LEGAL FRAME WORK Capital Issues (Control) Act,1947:The act has its origin during the war of 1943 when the objective was to channel the resources to support the war effort. It was retained with some modifications as a means of controlling the raising of capital by companies and to ensure national resources were channeled into proper lines, i.e. for desirable purposes to serve goals 7 priorities of the government & to protect the interest of investors. Under the Act, any firm wishing to issue securities had to obtain approval from the Central Government, which also determined the amount, type & price of the issue. As a part of the Liberalization process, the act was repealed in 1992 paving way for market-determined allocation of resources.

The Securities Contracts & Regulations Act, 1956 It provides direct & indirect control of virtually all aspects of securities trading & running stock exchanges and aims to prevent undesirable transactions in securities. It gives regulatory jurisdiction over (a) stock exchanges through a process of recognition & continued supervision, (b) contracts in securities, (c) listings of securities on stock exchanges. As a condition of recognition a stock exchange complies with the conditions prescribed by the Central government. The stock exchanges determine their own listing regulations on which have to confirm to minimum listing criteria set out in the rules.

The Companies Act, 1956 :This Act was passed to monitor the activities of companies. This Act is very important because it contains some crucial informations pertaining to Shares , which is key tool in stock market, application ,allotment & call procedures, types of shares, dividends, transfer of shares etc. It contains very crucial issues of company. In Concise, this act is Magna-Charta of Companies activities. Following are some of the important sections of this act: Section 86 this section explains types of shares, i.e. Preference & Equity shares. Their dividends & voting rights. Section 85 states & explains about the preference shares, their status, voting & rate of dividend.

Section 108 this section says that a company shall register transfer of shares in, debentures of, company if a proper instrument of transfer duly stamped & executed on behalf of transferor or on behalf of transferee , specifying name & address of the same party. Section 205 Dividend Section 205C Investor Education & Protection Section 159 &160

SEBI Act,1992 :Major part of liberalization process was the repeal of the Capital Issues (Control) Act, 1947., in May,1992. With this, Governments control over issues of capital, pricing of the issues, fixing of premium & rates of interests on debentures etc. ceased, & the office which administered the act was abolished: the market was allowed to allocate the resources to competing uses. However, to ensure effective regulation of the market, SEBI Act, 1992 was enacted to establish SEBI with statutory powers for: Protecting interests of investors in securities Promoting the development of securities market, and Regulating the securities market.

Constitution of SEBI: -

The Central Government has constituted a board by the name of SEBI under section 3 of SEBI Act. The head office of SEBI is in mumbai. SEBI consists of following members only; a) A chairman; b) Two members amongst the officials of ministries of central government dealing with finance & administration of companies act, 1956; c) One member amongst the officials of reserve bank of India; d) Five other members of whom at least three shall be whole time members to be appointed by central government.

The general superintendence, direction and management of the affairs of SEBI vests in board of directors, which exercises all powers and all acts and things which may be exercised or done by SEBI.

Functions of SEBI: SEBI has been obligated to protect the interest of investors in securities and to promote & development of, & to regulate securities market by such measures as it thinks fits. The measures referred to therein may provide for: -

A. Regulating the business in stock exchanges and any other regulated market; B. Registering and regulating the working of stock brokers, sub brokers, share transfer agent, bankers to an issue, trustees of trust deeds, underwriters, portfolio managers, merchant bankers, registrar to an issue, and such other intermediaries who may be associated with in securities market in any manner; C. Registering and regulating the working of depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as SEBI may, by notification, specify in this behalf; D. Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds; E. Promoting and regulating self regulatory organizations; F. Prohibiting fraudulent trade practices in securities market; G. Promoting investors education and training of intermediaries of securities market; H. Prohibiting insider trading in securities. I. Regulating substantial acquisition of shares and take over of companies;

Depository
A depository is an organization where the securities of an investor are held in electronic form. A depository can be compared to a bank. To avail of the services of a depository, an investor has to open an account with the depository through a depository participant, just as he opens an account with the bank. Holding shares in the account is a kin to holding money in the bank At present, India has only two depositories-

1.National Securities Depository Ltd. (NSDL) 2.Central Depository Services Ltd (CDSL). NSDL is the first depository in the county, which is promoted by three major financial institutions - Unit Trust of India, Industrial development Bank of India and National Stock Exchange of India Limited. The second depository of the country (CDSL) is set up in 1999 by the Bombay Stock Exchange and Bank `of India However, most of the services offered by both these depositories are similar. Today almost all the companies listed in dematerialized from with NSDL are available with CDSL. No. of depository participants in India National Securities Depository Ltd. - NSDL - Having 95 Cr. Demat A/c as on 31-03-2010 - 300 DPs in India

2.Central Depository Services Ltd. - CDSL - Having 65 laks Demat A/c as on 31-03-2010 - 500 DP s in India

About NSDL
Although India had a vibrant capital market which is more than a century old, the paper-based settlement of trades caused substantial problems like bad delivery and delayed transfer of title till recently. The enactment of Depositories Act in August 1996 paved the way for establishment of NSDL, the first depository in India. This depository promoted by institutions of national stature responsible for economic development of the country has since established a national infrastructure of international standards that handles most of the securities held and settled in dematerialised form in the Indian capital market. Using innovative and flexible technology systems, NSDL works to support the investors and brokers in the capital market of the country. NSDL aims at ensuring the safety and soundness of Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk and reduce costs. At NSDL, we play a quiet but central role in developing products and services that will continue to nurture the growing needs of the financial services industry. In the depository system, securities are held in depository accounts, which is more or less similar to holding funds in bank accounts. Transfer of ownership of securities is done through simple account transfers. This method does away with all the risks and hassles normally associated with paperwork. Consequently, the cost of transacting in a depository environment is considerably lower as compared to transacting in certificates. Other Shareholders State Bank of India HDFC Bank Limited Deutsche Bank A.G. Axis Bank Limited Citibank N.A.

ABOUT CDSL
A Depository facilitates holding of securities in the electronic form and enables securities transactions to be processed by book entry by a Depository Participant (DP), who as an agent of the depository, offers depository services to investors. According to SEBI guidelines, financial institutions, banks, custodians, stockbrokers, etc. are eligible to act as DPs. The investor who is known as beneficial owner (BO) has to open a demat account through any DP for dematerialisation of his holdings and transferring securities.

The balances in the investors account recorded and maintained with CDSL can be obtained through the DP. The DP is required to provide the investor, at regular intervals, a statement of account which gives the details of the securities holdings and transactions. The depository system has effectively eliminated paper-based certificates which were prone to be fake, forged, counterfeit resulting in bad deliveries. CDSL offers an efficient and instantaneous transfer of securities.

CDSL was promoted by Bombay Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank of India and Centurion Bank.

CDSL was set up with the objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. Some of the important milestones of CDSL system are:

DEPOSITORY SYSTEM IN INDIA

The Indian capital market witnessed an explosive growth between mid Eighties and mid Nineties. The total number of companies listed in the stock exchanges had grown by 72.3% from 2729 in 4702 in 1995. The market capitalization of the companies listed with stock exchanges had gone up from Rs.21, 000 crores in 1985 to more than Rs.4, 50,000 crores in 1995.The secondary market trading activity also gathered momentum. There has been tremendous growth in secondary market trading at BSE and NSE. Other regional exchanges like Calcutta, New Delhi have also become active players in the market. This sudden growth had exposed the limitations of the system. The system used was not able to withstand the strain caused by the tremendous growth in the securities market.

The entire securities market started experiencing a gridlock, posing obstacles in its growth. Moreover, this sudden growth has also magnified the risks that have always been plaguing the Indian system, viz., credit risk and systematic risk. International institutional investors wanting to invest in India had become apprehensive about the reliability of the trade settlement mechanisms used in the country, which did not match international standards. Besides affecting the inflow of foreign capital, the lack of efficient settlement systems had affected all those operating in the stock market,

be it institutional investors, individual investors or brokers. They suffered due to lost trading days (liquidity), lost scrips improperly paid dividends, mistaken registration, unnecessary financing cost, inappropriate risk like failure of counter party and fraud.

Depository Services India

Depository Services India is required for almost any and every monetary investment that one desires to make in the Indian stock market, either directly or through a stock broker. These DEMAT or depository accounts are meant for holding shares in an electronic form. This feature itself is one of the biggest advantages

for investors. Earlier, shares used to be held physically in the form of share certificates. These certificates, as they were made of paper, used to get worn out after a certain amount of time. Also, there existed a very high possibility of them being stolen or lost. And the danger of these certificates getting damaged or torn too was always existent.

With an account with any of the providers of Depository Services India, you can breathe a sigh of relief as all these dangers and worries size to exist. This is because all your shares are stored in an electronic form. And you can have a full fledged statement with all the vital details about them at your fingertips. Be it in your computer, laptop or even in the cell phone that rests in your palm. DEMAT accounts can easily be accessed today over the internet, this not only enables you to have round-theclock access to your assets and investments, but also make changes and even opt for online trading and make the most of the money invested by you.

Depository participant

A depository participant is an agent appointed by the depository and is authorized to offer depository services to all investors. An investor cannot directly open a Demat account with the depository. An investor has to open his account through a DP only. The DP in turn opens the account with the depository. The DP in turn takes up the responsibility of maintaining the account and updating them as per the instructions given by the investor from time to time. The DP generates and provides the holdings statement from time to time as required by the investor. Thus, the DP is basically the interface between the investor and the depository.

The person who holds a Demat account is a beneficiary owner. In case of a joint account, the account holders will be beneficiary holders of that joint account. The Demat account number of the beneficiary holder(s) is known as the BO Id. A DP id is the number of the depository participant allotted by the depository.

In India, a Depository Participant (DP) is described as an agent of the depository. They are the intermediaries between the depository and the investors. The relationship between the DPs and the depository is

governed by an agreement made between the two under the Depositories Act. In a strictly legal sense, a DP is an entity who is registered as such with SEBI under the subsecton 1A of Section 12 of the SEBI Act. As per the provisions of this Act, a DP can offer depository-related services only after obtaining a certificate of registration from SEBI. SEBI (D&P) Regulations, 1996 prescribe a minimum net worth of Rs. 50 lakh for stockbrokers, R&T agents and non-banking finance companies (NBFC), for granting them a certificate of registration to act as DPs. If a stockbroker seeks to act as a DP in more than one depository, he should comply with the specified net worth criterion separately for each such depository. No minimum net worth criterion has been prescribed for other categories of DPs; however, depositories can fix a higher net worth criterion for their DPs.

EFFICIENT MARKET HYPOTHESIS In finance, the efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. There are three major versions of the hypothesis: "weak", "semi-strong", and "strong". The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or "insider" information. Critics have blamed the belief in rational markets for much of the late-2000s financial crisis. In response, proponents of the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals. Historically, there was a very close link between EMH and the randomwalk model and then the Martingale model. The random character of stock market prices was first modelled byJules Regnault, a French broker, in 1863 and then by Louis Bachelier, a French mathematician, in his 1900 PhD thesis, "The Theory of Speculation".[5] His work was largely ignored until the 1950s; however beginning in the 1930s scattered, independent work corroborated his thesis. A small number of studies indicated that US stock prices and related financial series followed a random walk model. Research by Alfred Cowles in the 30s and 40s suggested that professional investors were in general unable to outperform the market. The efficient-market hypothesis was developed by Professor Eugene Fama at the University of Chicago Booth School of Business as an academic concept of study through his published Ph.D. thesis in the early 1960s at the same school. It was widely accepted up until the 1990s, when behavioral finance economists, who had been a fringe

element, became mainstream. Empirical analyses have consistently found problems with the efficient-market hypothesis, the most consistent being that stocks with low price to earnings (and similarly, low price to cash-flow or book value) outperform other stocks. Alternative theories have proposed that cognitive biases cause these inefficiencies, leading investors to purchase overpriced growth stocks rather than value stocks. Although the efficient-market hypothesis has become controversial because substantial and lasting inefficiencies are observed, Beechey et al. (2000) consider that it remains a worthwhile starting point. The efficient-market hypothesis emerged as a prominent theory in the mid-1960s. Paul Samuelson had begun to circulate Bachelier's work among economists. In 1964 Bachelier's dissertation along with the empirical studies mentioned above were published in an anthology edited by Paul Cootner. In 1965 Eugene Fama published his dissertation arguing for the random walk hypothesis, and Samuelson published a proof for a version of the efficient-market hypothesis. In 1970 Fama published a review of both the theory and the evidence for the hypothesis. The paper extended and refined the theory, included the definitions for three forms of financial market efficiency: weak, semistrong and strong (see below). It has been argued that the stock market is micro efficient but not macro inefficient. The main proponent of this view was Samuelson, who asserted that the EMH is much better suited for individual stocks than it is for the aggregate stock market. Research based on regression and scatter diagrams has strongly supported Samuelson's dictum Beyond the normal utility maximizing agents, the efficient-market hypothesis requires that agents have rational expectations; that on average the population is correct (even if no one person is) and whenever new relevant information appears, the agents update their expectations appropriately. Note that it is not required that the agents be rational. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors' reactions be random and follow a normal distribution pattern so that the net effect on market prices cannot be reliably exploited to make an abnormal profit, especially when considering transaction costs (including commissions and spreads). Thus, any one person can be wrong about the marketindeed, everyone

can bebut the market as a whole is always right. There are three common forms in which the efficient-market hypothesis is commonly statedweak-form efficiency, semi-strong-form efficiency and strongform efficiency, each of which has different implications for how markets work. In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no "patterns" to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner. In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strong-

form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers.

1. The "Weak" form asserts that all past market prices and data are fully reflected in securities prices. In other words, technical analysis is of no use. 2. The "Semistrong" form asserts that all publicly available information is fully reflected in securities prices. In other words, fundamental analysis is of no use. 3. The "Strong" form asserts that all information is fully reflected in securities prices. In other words, even insider information is of no use

a) Fundamental Analysis The name itself indicates that this analysis is totally based on companies fundamentals. Fundamental analysis is used for long term analysis and long term returns. Following are the few fundamental terms used to forecast and analyze the companies future growth and based on this analysis transaction of shares will be done. o o o o o Companies expansion or planning in coming future. Management processes and planning Meeting of Board of directors Declaration of yearly financial statements Study of past performance of the company.

o Study of quarterly, half yearly and annual reports. Companies involvement in foreign investment/collaboration, political or economic involvements, etc. o Depending on these factors and many others, fundamental analysts prepares certain share market and share trading related terms which will be used to forcast the company growth and prospects. The terms like o o o o Whether the share prices are overvalued or under valued, Working capital ratio, Return on equity ratio, Debt equity ratio etc. Based on these terms and other fundamentals, the analysts predict the movement of share prices that is either bullish or bearish in coming future. Basically fundamental analysis is meant for long term investments and not for day trading or short term investment. So traders planning to invest for long term in share market then they must go for fundamental analysis. Always good fundamental companies give good results and returns for share holders in long term. b) Technical Analysis As fundamental analysis made for long term investments, likewise technical analysis is made for day traders and short term traders. Technical analysis is nothing but study of charts, support and resistance levels, technical indicators and other parameters which are useful to analyze the share price movements in short term or in day trading. There are several factors and terms in Technical analysis which will be discussed in detail in further topics.

TYPES OF INVESTMENT
Financial Instruments

SHARES: An investor may purchase share in a companys equity. He calculates that the company is likely to make a profit in the future and thus he will receive a return on his investment by way of dividends and bonuses. But this is not usually the reason why most investors who are into shares have bought them. The stock prices of companies fluctuate over periods of time due to various intrinsic and extrinsic factors affecting it. Simply put, the investor buys the share when price is low and sells when it is high, and the difference is profit he makes.

FIXED DEPOSIT: FDs can be made into banks, private companies and other institutions. These have medium to high return depending upon the risk factor. The popularity of fixed deposits is fading out because of shutting down of many institutions, which were offering FDs. The main advantage of fixed deposits is it serves the purpose of middle class people who prefer limited return at minimum risk.

DEBENTURES & BONDS: Debentures are securities sold by government and industry that raise the funds for their capital and revenue expenditure. The rate of interest and time of maturity is prefixed. On the maturity of the debenture, the investor receives his return. They are long-term securities normally with a maturity period ranging from 5-20 years. They may even be listed in the stock exchange and can be traded.

Bonds are securities similar to debentures but the difference is that the capital collected will be invested in projects for which the bond has been declared for e.g. government infrastructure bonds invest only in infrastructure development expenditures. Such securities and bonds usually offer a low return r5ate in exchange for safety and surety of return. Debentures may also be secured against the security of a particular asset, or unsecured if they are raised as a general loan.

GOLD, SILVER & PLATINUM: Gold is a universal investment tool. In the sense, it can be bought and sold anywhere in the world. The reason gold is considered a great investment is because it will never lose its value. Even during war and political turmoil, while all other investment tools lose valuation, golds value rises. This has led to many countries in the world storing much of their reserves in form of gold and silver bullion. It is such type of assets which can be liquidate anytime, anywhere, & in any currency. The gold market is very flexible and so one should liquidate the gold when rate is high and purchase when the rate drops down. But the major constraint in investment in gold, silver, & platinum is most of the people in India love to stock the gold in the form of ornaments & they do not want to part with it even they get huge return on their on their investment. It is very difficult to change the mentality of the common man to treat Gold or silver as trading asset and not as a status indicator.

MUTUAL FUNDS: Mutual funds have newly been cast into limelight with the booming economy. A mutual fund is a tool used by company or agency to collect investment from the public to reinvest it in any of the other investment instruments. The funds assure a certain minimum return and tempt you with the possibility of greater return if their investments prove fruitful. Since the mutual funds are managed by qualified professionals in the field and the returns are satisfactory, it attract high participation from public.

COMMODITIES; An upcoming investment avenue is the commodity market. Normally, it consists of huge quantities of commodities like rice, pulses, spices etc. being traded. The prices of commodities fluctuate depending on the commodity and market conditions. The investor trade in commodity market to take the advantage of the heavy price fluctuation and make his profit. . DIAMONDS AND OTHER PRECIOUS STONES: The value of diamonds and other precious stones can be used as an investment. Like gold and silver, the value of precious stones is also very good tool of investment and gives a very reasonable return with utmost safety and is a very good hedge against inflation. Diamonds and precious stones, along with the precious metals are considered to be safest investment.

GOLD BONDS: Safeguarding gold is a very difficult task and is also against national economic interest. If gold has to be bought purely for investment purposes rather than for sentimental or esteem purpose, it is wiser to purchase a gold bond. By purchasing a gold bond, the government buys and stores gold against your payment. It may be converted into gold at the time of maturity of the bond or alternatively, the government may buy back the bond at the prevalent gold rate. It may also be traded in the stock exchange. It has good liquidity.

ART & ANTIQUES:

Art and antiques are also considered tools of investment as their value may appreciate with time but it requires expertise in the field of valuation of the artwork or antique piece.

LAND & HOUSE PROPERTY: Land and house property value appreciates with time and development of the surrounding area or due to discovery of resources specified to that area. The advantages are that it can also be used for self-use, have moderate return, capital growth. This is one of the most preferred avenues. The major disadvantage of investing in house property is one time investment is huge & income starts after 2/3 years of investment due to time involved in completion of construction.

PRIVATE LENDING: In a situation of private lending, the lender gets to choose his own rate of interest. This goes on primarily in smaller towns and villages, or when the borrower is not able to get a loan from a bank. The lender has an advantage of being able to fix his own rate of interest but this factor is balanced out by the fact that risk is very high of borrower being able to repay the loan.

VENTURE CAPITAL: Capital may be invested into a project that seems feasible and profitable to the investor. It is similar to equity-to-equity but there are usually no other share holder expect for the promoters.

Factors influencing investment decision

Capital investment decisions are not governed by one or two factors, because the investment problem is not simply one of replacing old equipment by a new one, but is concerned with replacing an existing process in a system with another process which makes the entire system more effective. We discuss below some of the relevant factors that affects investment decisions:

(i) Management Outlook: lf the management is progressive and has an aggressively marketing and growth outlook, it will encourage innovation and favor capital proposals which ensure better productivity on quality or both. In some industries where the product being manufactured is a simple standardized one, innovation is difficult and management would be extremely cost conscious. In contrast, in industries such as chemicals and electronics, a firm cannot survive, if it follows a policy of 'make-do' with its existing equipment. The management has to be progressive and innovation must be encouraged in such cases.

(ii) Competitors Strategy: Competitors' strategy regarding capital investment exerts significant influence on the investment decision of a company. If competitors continue to install more equipment and succeed in turning out better products, the existence of the company not following suit would be seriously threatened. This reaction to a rival's policy regarding capital investment often forces decision on a company'

(iii) Opportunities created by technological change: Technological changes create new equipment which may represent a major change in process, so that there emerges the need for re-evaluation of existing capital equipment in a company. Some changes may justify new investments. Sometimes the old equipment which has to be replaced by

new equipment as a result of technical innovation may be downgraded to some other applications, A proper evaluation of this aspect is necessary, but is often not given due consideration. In this connection, we may note that the cost of new equipment is a major factor in investment decisions. However the management should think in terms of incremental cost, not the full accounting cost of the new equipment because cost of new equipment is partly offset by the salvage value of the replaced equipment. In such analysis an index called the disposal ratio becomes relevant. Disposal ratio = (Salvage value, Alternative use value) / Installed cost

(iv) Market forecast: Both short and long run market forecasts are influential factors in capital investment decisions. In order to participate in long-run forecast for market potential critical decisions on capital investment have to be taken.

(v) Fiscal Incentives: Tax concessions either on new investment incomes or investment allowance allowed on new investment decisions, the method for allowing depreciation deduction allowance also influence new investment decisions.

(vi) Cash flow Budget: The analysis of cash-flow budget which shows the flow of funds into and out of the company may affect capital investment decision in two ways. 'First, the analysis may indicate that a company may acquire necessary cash to purchase the equipment not immediately but after say, one year, or it may show that the purchase of capital assets now may generate the demand for major capital additions after two years and such expenditure might clash with anticipated other expenditures which cannot be postponed. Secondly, the cash flow budget shows the timing of cash flows for alternative investments and thus helps management in selecting the desired investment project.

(vii) Non-economic factors: new equipment may make the workshop a pleasant place and permit more socializing on the job. The effect would

be reduced absenteeism and increased productivity. It may be difficult to evaluate the benefits in monetary terms and as such we call this as non-economic factor. Let us take one more example. Suppose the installation of a new machine ensures greater safety in operation. It is difficult to measure the resulting monetary saving through avoidance of an unknown number of injuries. Even then, these factors give tangible results and do influence investment decisions.

EQUITY AS AN INVESTMENT
Equity is: 1. Stock or any other security representing an ownership interest. 2. On the balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses), also referred to as "shareholder's equity". 3. In the context of margin trading, the value of securities in a margin account minus what has been borrowed from the brokerage. Equity is a term whose meaning depends very much on the context. In general, one can think of equity as ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered the owner's equity since he or she can readily sell the items for cash. Stocks are equity because they represent ownership of a company, whereas bonds are classified as debt because they represent an obligation to pay and not ownership of assets. The ability of equities to deliver over longer time frames and even

outperform other investment avenues like gold, property and bonds is an often chronicled fact. However, over shorter time frames, equities also hold the potential to be a very risky asset class and expose the portfolio to high levels of volatility. This is the primary reason why any fund manager worth his salt always recommends a sufficiently long (at le ast 3 years) time frame for an equity-oriented investment. Similarly financial planners advocate pruning of the equity holdings with advancement in the investors age, when the investor is typically closer to retirement (shorter investment horizon) and has a lower risk appetite as well.

INVESTING PRINCIPLES

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Invest for Real Returns Keep an Open Mind Never Follow the Crowd Everything Changes Avoid the Popular Learn from your Mistakes Buy During Times of Pessimism Hunt for Value and Bargains Search Worldwide No-one Knows Everything

If you buy the same securities as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward. Bear markets have always been temporary. And so have bull markets. Share prices usually turn upward from one to twelve months before the bottom of the business cycleand vice versa. If a particular industry or type of security becomes popular with investors,that popularity will always prove temporary and, when lost, may not return for many years.