Unit 1: Investment
Investment Overview of Capital Market
Capital Market: Introduction
The capital market is a type of financial market where long-term financial instruments like stocks, bonds, and debentures are traded. It helps channel savings into productive investments, especially for governments and businesses.
Nature of Capital Market
- Deals in medium- and long-term funds
- Includes both primary and secondary markets
- Facilitates capital formation and economic growth
Structure of Capital Market
Capital Market is divided into:
- Primary Market (New Issue Market)
- Secondary Market (Stock Exchange)
Market of Securities
Nature: The market of securities includes financial instruments like:
- Equity shares
- Preference shares
- Bonds
- Debentures
- Mutual funds
Structure
- Organized markets (e.g., NSE, BSE)
- Unorganized markets (less regulated brokers or agents)
Functioning
- Securities are issued and traded
- Prices fluctuate based on demand-supply and company performance
- Regulated by SEBI (Securities and Exchange Board of India)
Limitations
- High volatility
- Information asymmetry
- Speculative activities can mislead investors
Stock Exchange (Secondary Market)
Nature: A stock exchange is a regulated marketplace where existing securities are bought and sold. Examples: NSE, BSE
Structure
- Listed companies
- Brokers and traders
- Regulatory body (SEBI)
Functioning
- Investors trade shares via brokers
- Prices are determined by market forces
- Offers liquidity to investments
- Real-time information on trades
Limitations
- Market manipulation by large investors
- Speculation leads to price distortion
- Lack of investor knowledge
New Issue Market (Primary Market)
Nature: The primary market deals with new securities issued for the first time to raise capital. It is also called the New Issue Market (NIM).
Structure
- Initial Public Offer (IPO)
- Private placement
- Rights issue
- Offer for sale
Functioning
- Companies issue securities to raise funds
- Investment banks (underwriters) help in pricing and marketing
- Investors apply for shares directly
Limitations
- Lack of pricing transparency
- High risk for retail investors
- Time-consuming and heavily regulated
Comparison: Stock Exchange vs New Issue Market
Overall Limitations of Capital Market
- Volatility – Risk of market fluctuations
- Lack of awareness – Retail investors may not understand risks
- Fraudulent practices – Insider trading, pump-and-dump schemes
- Dependency on economic factors – Sensitive to inflation, interest rates, global trends
Trading of Securities: Equity and Debentures/Bonds
Securities trading refers to buying and selling financial instruments like equity shares, debentures, and bonds in the financial markets (like NSE/BSE).
Types of Securities Traded
Securities Trading: Process Overview
- Investor opens a Demat and Trading Account
- Places a buy/sell order through a broker or online platform
- Order is matched in the stock exchange
- Trade is executed
- Clearing & settlement is done
- Securities and money are exchanged between buyer and seller
Types of Orders in Trading
Margin Trading
Features
- Offered by brokers
- Involves leverage
- High returns possible but also high risk
Risks
- If the stock price falls, losses multiply
- Brokers may sell your holdings if margin is not maintained (called "margin call")
Clearing and Settlement Process
Clearing
- Determines the obligations of buyers and sellers
- Conducted by a clearing house (e.g., NSCCL for NSE)
Settlement
- Actual exchange of money and securities
- Follows T+1 system in India (Trade day + 1 working day)
Summary Table
Key Limitations and Risks in Securities Trading
- Market Volatility – Sudden price movements
- Leverage Risk – Through margin trading
- Operational Errors – Wrong orders, wrong prices
- Settlement Risk – Delay in receiving securities/funds
Regulatory Systems for Equity Markets
Purpose of Regulation: To ensure transparency, investor protection, fair practices, and smooth functioning of the equity markets.
Key Regulatory Bodies in India
SEBI Regulations Include
- Listing obligations
- Insider trading prohibition
- Takeover code
- Mutual fund regulations
- Corporate governance norms
Types of Investors in Equity Markets
Security Analysis
Aim of Security Analysis
Approaches to Security Analysis
Fundamental Analysis
📌 Key Components
- Financial statements (P&L, Balance Sheet, Cash Flows)
- Management quality
- Industry position
- Economic indicators
Used by
- Long-term investors
- Value investors (e.g., Warren Buffett)
Technical Analysis
📌 Tools Used
- Charts (candlestick, line, bar)
- Indicators (MACD, RSI, Moving Averages)
- Support and resistance levels
Comparison Table
To invest wisely in equity markets, one must understand the regulatory framework (like SEBI’s role), identify the type of investor they are, and choose the right approach to security analysis based on their goals. Both fundamental and technical analysis are essential tools that help reduce risk and maximize returns.