Basics of Investment

Why should one invest?

1. To beat Inflation
2. To earn returns on your idle resources
3. Accumulate a specified sum of money for a specific goal
4. Make provisions for an uncertain future

The objective of investment is that the rate of return should be higher than the inflation rate. Inflation is the rate at which the cost of living increases. Inflation causes money to lose its value because you will not be able to buy the same goods or services with the same amount in future.

For example, if there is a 5% inflation rate in our country, a Rs. 100 good/service today would cost Rs. 105 in the next year. If your earning does not increase in future then you will not be able to buy the product.

The Three Golden Rules of Investing

A. Invest early – Time allows you to take risk. For instance, investors who have the time to recover if something were to go wrong, have the opportunity to make riskier moves than those who begin to invest late in life are often more cautious towards their approach.

B. Invest Regularly – By continuously reinvesting your earnings, you are exponentially increasing your return on investment. Let’s say in case of compounding where reinvestment of income at the same rate of return will constantly grow the principal amount. The longer the period of your investment, the more you accumulate, because of the power of compounding, which is why it makes sense to start investing early.

C. Invest for long term and not short term – Investment should be for long-term. Long-term investing is the process of buying and holding investment which will compound your wealth in the future. The longer you stay invested the better returns you get on your investments.

What do you mean by Interest?

Interest is an amount charged by the lender on the amount of money lent to the borrower. Interest is usually charged as a percentage of the principal amount (the amount of money lent/borrowed). The percentage rate at which interest will be charged may be fixed or variable for the tenure of the loan.

What are various options available for investment?

1. Physical assets like real estate, gold/jewellery, commodities etc.
2. Financial assets assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

What is meant by a Stock Exchange?

The stock exchange provides a trading platform whereby the buyers and sellers can meet to transact securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading. Currently, there are 19 stock exchanges in India, out of which the two largest & prominent exchanges in India are the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).

What is an Index?

An Index is a method of measuring a section of the stock market. It shows how a group of stocks and their share prices are moving in order to give an indication of market trend i.e. a basket of securities and the average price movement of the basket of securities indicates the movement in the index. The two leading indices are the Nifty 50 and the BSE Sensex:

1. Nifty 50 - The Nifty 50 index is National Stock Exchange of India's benchmark stock market index for Indian equity market. It is wholly owned and managed by India Index Services and Products (IISL). It comprises of 51 stocks covering 22 sectors in India.
2. BSE Sensex – Sensex of Bombay Stock Exchange is one of the oldest stock index in India. It comprises of 30 stocks of leading Indian companies and is well diversified with representation from almost all the sectors of the economy like banking, information technology, cement, automobile, manufacturing, capital goods, etc.

What is a Depository?

A depository is an institution that holds investor’s securities in dematerialized/electronic form and facilitates transactions. One of the main functions of the depository is to transfer the ownership of the shares form one investor's account to another investor's account whenever trade takes place. Depository is an institution that works like bank. Likewise our banks holds investor's funds, similarly depository holds securities (shares, debentures, mutual funds) in electronic form.

In India there are two such Depositories - National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).

Depository Participant

The market intermediary through whom the depository services can be availed by the investors is called a Depository Participant (DP). As per SEBI regulations, DP could be organizations involved in the business of providing financial services like banks, stock brokers, custodians and financial institutions.

What is Dematerialization?

Dematerialization is a process by which an investor can convert his physical securities into electronic form to his demat account. The investors can dematerialize only those share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories.

What is an ‘Equity’/Share?

Companies issue shares to the investors to raise capital. The owner of shares in the company is called a shareholder of the company. A share is an equal unit of capital, expressing the ownership relationship between the company and the shareholder.Equity Share represents the form of fractional or part ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. Equity shares give their holders the power to share the earnings/profits in the company as well as have voting rights.

What is a ‘Debt Instrument’?

Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest payment and repayment of principal amount. The term bond is used for debt instruments issued by the Central and State governments and public sector organizations and debenture is a term used for instruments issued by private sector.