Investment in Equity & Preference Shares

Stock market is an investment opportunity that can offer both high risks and high returns.
Capital is the money required to run a business. When a business wishes to expand or
commercialize a new product or service, it needs to raise capital.

 Capital can be raised in 2 ways

1. Debt this is the borrowed capital.
2. Equity This is the company s own capital

Equity capital represents ownership capital. Equity shareholders collectively own the
company. ?hey bear the risk and enjoy the rewards of ownership. The potential rewards and
the downsides of equity shares make this an exciting, attractive and at the same time a risky
proposition for investment.

In financial markets, the stock capital or equity capital of a corporation or joint stock
company is the capital raised through the issuance, sale, and distribution of shares. A person
or organization that holds at least a partial share of stock is called a shareholder.

Types of Share Capital

The share capital or stock capital exists in 2 forms

Equity/ordinary Shares: - Equity shares or Common stock is the most usual and
commonly held form of stock in a company. Common stockholders typically have voting
rights in corporate decision matters. In order of priority for receipt of their investment in the
event of liquidation of corporation, the owners of common stock are the last.

Preference Shares: - These have priority over common stock in he distribution of

dividends and assets. Most preferred shares do not provide voting rights in corporate decision
matters. However, some preferred shares have, special voting highs to approve certain
extraordinary events such as the issuance of new shares, the approval of the acquisition of the
company, or to elect directors.

Advantage of Equity Shares

1. Transferability/ Liquidity: - Equity stock may be purchased and sold in the stock
market .after purchase. The transferability clause gives great liquidity to the investor.

2. Liability: - The liability of the stock holder is limited only to the extent of his
investment, while he has the right of being the owner of the company.

3. Tax Free Dividends: - Equity, shareholders earn income in form of dividends; such
dividends earned are totally tax free in the hands of the investor.
4. Capital Appreciation: - Value of share appreciates in long term; therefore apart from
dividend income shareholders also earn returns inform of capital appreciation.

5. Participation In decision making of the company: - Shareholders have right to

vote at the general meetings of the company, this gives them a right to participate in almost
all major decisions taken by the company.

6. Pre-empative right to buy shares:- shareholders get pre-emptive right to apply for
shares if the company comes up with fresh issue of shares, this gives them the opportunity to
increase there shareholding in the company by purchasing shares at a relatively lower value
as compared to the current market price.

 Disadvantages of Equity Shares.

1. High Risk: - Equity shares involve high degree of risk in form of loss in the value of
share over time if the company is not performing to well.

2. Uncertain dividend: - paying dividend is totally at the discretion of the management,

even if company is making profits the management may think not to pay dividends during
some years. Although, this may lead to capital appreciation in form of increased market price
of the share but at the same time it also leads to too much funds being available at the
disposal of the management and may lead to overcapitalisation in long term.

3. Speculation:- Not every investor takes an informed decision in the stock market, many
of them take investment decision based on some 'tip' that they get from there so called
investment consultant or even friends, such activity is pure speculation. But this is most
prevalent in Indian stock markets and because of this investors often end up loosing money.

 Blue Chip Shares

Blue chip Stock in a well-known and highly respected publicly-traded company. Blue chip
companies are usually financially sound and are thought to be relatively low-risk
investments. They tend to be less volatile than other companies and to provide solid growth
to portfolios.
There is a reason blue-chip shares are known as such-they're named after the top-end chips at
the casino. Opting to buy these types of shares mean you. Get to buy into some major
companies-that is, if you can afford it.
Blue-chip shares are investments in the bigger companies, usually listed in the stock market's
top 20. Generally, these types of shares have been trading for a long time and have a history
of returning solid profits-which means regular dividends for their shareholders.
One of the advantages of blue-chip investments is that the dividends can be expected to grow
over time if a business performs as forecast. The upshot? Your investment grows during
times when share prices elsewhere may be stagnant, volatile or dropping.
  Some Blue Chip companies in India are
1. 0il and Natural Gas Corporation (ONGC)
2. Reliance industries
3. National Thermal Power Corporation (NPTC)
4.-Indian Oil Corporation (10C)
5. State Bank of India (SBI)

 Preference Shares
Preference shares represent a hybrid security that has some characteristics of equity shares
and some features of debentures. The relevant features of preference shares are as follows:
1. Preference shares carry a fixed rate of dividend. But the company has discretion of not
paying such dividend for a particular year.
2. Preference dividend is payable only out of distributable profit.
3. Dividend on preference shares is generally cumulative i.e. dividend
Skipped in the year has to be paid up in the subsequent year before
Equity dividend can be paid.
4. Preference shares are redeemable.
5. Preference shares may be convertible into equity shares.
6. Dividend on preference shares also totally exempt from tax.
 Components of Financial Market

Primary Market
On the basis of
Market Level
Secondary Market

Financial Money Market

Market Equity Market

Capital Market
Debt Market

On the basis of
Commodity
security types
Market

Forex Market

Derivative Market

Introduction
Efficient transfer of resources from those having idle resources to others who have a pressing
need for them is achieved through financial markets, Stated Formally, Financial Markets
provides channels for allocation of savings to investment .These provide a variety of assets to
savers as well as various forms in which the investors can raise funds And thereby decouple
the acts of savings and investment. The savers and investors are constrained not by their
individual abilities, but by the economy's ability, to invest and save respectively. The
financial markets, thus, contribute to economic development to the extent that the latter
depends on the rates of savings and investment.
COMPONENTS OF FINANCIAL MARKETS
The financial markets have two major components: the money market and the capital market.

Money Market
The money market refers to the market where borrowers and lenders exchange short-term
funds to solve their liquidity needs. Money market instruments are generally financial claims
· that have low default risk, maturities under one year and high marketability.

Capital Market
Tine capital Market is a market for financial investments that are direct or indirect claims to
capital. It is wider than the Securities Market and embraces all forms of lending and
borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The
capital market comprises the complex of institutions and mechanisms through which
intermediate term funds and long term funds are pooled and made available to business,
government and individuals. The capital market also encompasses the process by which
securities already outstanding are transferred.

The capital market and in particular the stock exchange is referred to as the barometer of
economy. Government's policy is so moulded that creation of wealth through products and
services is facilitated and surplus and profits are channelized into productive uses through
capital market operations. Reasonable opportunities and protection are afforded by the
Government through special rneasures in the capital market to get new investments from the
public · and the institutions and to ensure their liquidity.

Securities Market
The securities market, however, refers to the markets for those financial instrument / claims /
obligations that are commodity and readily transferable by sales.

The securities markets have two inter- dependent and inseparable segment, the New issue
(primary) market and the \ Stock (Secondary) Market.

Primary Market
The primary market provides the channel for sale of new securities, while the secondary
market deals in securities previously issued. The issuer of securities sells the securities in the
primary market to raise funds for investment and/or to discharge some obligation.

In other words, the market wherein resources are mobilised by companies through issue of
new securities is called the primary market. These resources are required for new projects as
well as for existing projects with a view to expansion, modernisation, diversification and
upgradation.
  The issue of securities by companies can take place in any of the
following methods.
1. Initial public Offer (IPO) [these are securities issued for the first time to the public by the
company)

2. Further issue of capital [any issue of' securities by the company to public after the IPO is
known as further issue of capital ·

3. Rights issue to existing shareholders (On renunciation of rights, the shares can be sold by
the company to others also)

4. 0ffer of securities under reservation/firm allotment basis to :

I) Foreign partners and collaborators,

ii) Mutual Funds,

iii) Merchant Bankers,

iv) Banks and institutions,

v) Non Resident Indians and overseas corporate bodies,

vi) Employees, etc.

STOCK MARKET INDEX

Introduction
Stock Market Index is representative of the entire stock market, especially if it is a major
index like BSE's Sensex or NSE's Nifty. Index movements are a representative of returns
earned by investors in the stock market. Fluctuation in the index as compared to a base year
with a basket of base shares. The change in the market price of these shares is calculated on a
daily basis. The shares' included in the index are those shares which are traded rurally in high
volume. In case the trading in any share stops or comes down then it gets excluded and
another company's shares replaces it.

Each stock exchange has many indices out of which one is its main or flagship index, for
example in India, BSE has Sensex and NSE has Nifty as their flagship index. Outside India
some major indices are Dow Jones, FTSE, etc.
Indices at BSE

1. SENSEX
SENSEX, first compiled in 1986, Was calculated on a “market Capitalization ; Weighted
“methodology of 3o component stocks representing large, well-established and financially
sound companies across key sectors. The base year of SENSEX was taken as 1978-79.
SENSEX today is widely reported in both domestic and international markets through print
as well as electronic media. It is scientifically designed and is based on globally accepted
construction and review methodology. Since September 1, 2003, SENSEX is being calculated
on a free-float market capitalization methodology. The free-float market capitalization-
weighted "methodology is a widely followed index construction meth od ology on which
majority of global equity indices are based ; all major index providers like MSCI, WSE, S &
p and Dow Jones use the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right
from early nineties, the stock market witnessed heightened activity in terms of various bull
and bear runs. In the late nineties, the Indian market witnessed a huge frenzy in the “TMT”
sectors. More recently, real estate caught the fancy of the investors. SENSEX has captured all
these happenings in them most judicious manner. One can identify the booms and busts of the
Indian equity market through SENSEX. As the oldest index in the country, it provides the
time series data over a fairly long period of time (from 1979 onwards). Small wonder, the
SENSEX has become one of the most prominent brands in the country.

 Other Indices
a) BSE-100 Index

b) BSE-200 Index

c) Dollex Series of BSE Indices

d) BSE-500 Index

e) BSE IPO Index

f) BSE TECK Index

g) BSE PSU Index

h) BSE Mid-Cap and BSE Small-Cap Index.

  Indices at NSE

1. S&P CNX Nifty

The S&p CNX Nifty is the headline index on the National Stock Exchange of India Ltd.
(NSE). The Index tracks the behaviour of a portfolio of blue chip companies, the largest and
most liquid Indian securities. It includes 50 of the approximately 1430 companies listed on
the NSE, captures approximately 65% of its float-adjusted market capitalization and is a true
reflection of the Indian stock market. The S&P CNX Nifty covers 23 sectors of the Indian
economy and offers investment managers exposure to the Indian market in one efficient
portfolio. The Index has been trading since April 1996 and is well suited for bench marking,
index funds and index based derivatives.

2. S & P CNX Defty

The S&P CNX Defty is a U. S. dollar-denominated index based on the S&P CNX Nifty. His
index was developed to provide a benchmark of Indian stocks to international investors,
providing them with an instrument for measuring returns on their equity investment in dollar
terms. This ensures that the risk arising out of currency fluctuation is covered through the
S&P CNX Defty.

3. S & P CNX SOQ

The S & p CNX 500 is India's first broad based benchmark of the Indian capital market. It
represents about 90% of the Free Float Market Capitalization and about 87% of the total
turnover on the NSE as on Sept 30, 2010.

The S & p CNX 500 companies are disaggregated into 72 industry indices viz. S& CNX
Industry Indices. Industry weightages in the index reflect the industry weightages in the
market. For e.g. If the banking sector has a 5% weightage in the universe of stocks traded on
NSE, banking stocks in the index would also have an approx. Representation of 5% in the
index.

4. CNX Nifty Jr.

CNX Nifty Junior (junior Nifty) is an index comprised of the next rung of 50 most liquid
stocks after S&P CNX Nifty. In fact S&P CNX Nifty and Junior Nifty may be regarded as a
basket of 100 most liquid stocks in India. Stocks in Junior Nifty are filtered on their liquidity
characterized by their impact cost and market value represented by their market
capitalization. The stocks comprising S&P CNX Nifty and Junior Nifty are mutually
exclusive I.e. a stock will never appear in both indexes at the same time. Junior Nifty may
also be considered an incubator for stocks entering Nifty.
5. CNX MIDCAP
The medium capitalised segment of the stock market is being increasingly perceived as an
attractive investment segment with high growth potential. The primary objective of the CNX
Midcap Index is to capture the movement and be a benchmark of the midcap segment of the
market.

6. Nifty Midcap 50
The medium capitalized segment of the stock market is being increasingly perceived as an
attractive investment segment with high growth potential. The primary objective of the Nifty
Midcap 50 Index is to capture the movement of the midcap segment of the market. It can also
be used for index-based derivatives trading.

7. CNX 100
CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy. CNX 100
is owned and managed by India Index Services & Products Ltd. (IISL) which is a joint
venture between CRISIL & NSE. IISL is India's First specialized company focused upon the
index as core product . IISL has a licensing & marketing agreement with standard & poor’s
(S&P), who are leaders in index services.

8. Others Indices
CNX IT Index, CNX Bank Index, CNX FMCG Index, CNX PSE Index, CNX MNC Index,
CNX service Sector Index) S&P CNX industry Indices, Customised PSU BANK Index, CNX
Realty Index, S&P CNX Sharia, S&P ESG India Index.

 WHY AN INDEX FLUCTUATES?

It’s quite common to hear that nifty fell by or increased by certain points on daily basis, same
is true for Sensex. But the question is what makes these indices fluctuate? The answer is that
as the market value of share listed in these fluctuates, the value of the index also fluctuates.
Market value of share fluctuates due to changes in future expected earning of respective
companies. Thus we can conclude that index fluctuation happens due to change in investor
expectation about companies listed in the index. Thus, index fluctuation can also be regarded
as barometer of the economy as a whole.

COMPUTATION OF INPEX
Index value can be computed using following steps:

1. Calculate market capitalization of each company's share listed in the index as per
respective company’s opening share price.

2. Add market capitalization of all companies computed in the above step.

3. Repeat above two steps for closing share prices.

4. Closing Index value will be computed as follows

Total market capitalisation for current day

Index Value = Index on Previous Day ×
Total capitalisation of the previous day

 Introduction
The National Association of Securities dealers automated quotations or NASDAQ stock
market commonly known as the NASDAQ is an American stock exchange. It is the second-
largest exchange in the world by market capitalization, behind only the New York stock
Exchange. The exchange platform is owned by NASDAQ OMX Group, which also owns the
OMX stock market network and several other US stock and options exchanges.

It was founded in 1971 by the National Association of Securities Dealers (NASD), which
divested itself of NASDAQ in a series of sales in 2000 and 2001. NASDAQ stock is listed on
its own stock exchange marketing July 2, 2002, under the ticker symbol NDAQ.

NASDAQ begins trading on February 8, 1971 and is world's first electronic stock market. At
First, it was merely a quotation system and did not provide away to perform electronic trades.
It helped lower the spread (the difference between the bid price and the ask price of the
stock), because of this it was unpopular among brokers who made much of their money on
the spread.

In 1992, NASDAQ joined with the London Stock Exchange to form the first intercontinental
linkage of securities markets. The National Association of securities Dealers spun off
NASDAQ in 2000 to form a public company, the NASDAQ Stock Market, Inc.

To qualify for listing on the exchange, a company must be registered with the United States
Securities and Exchange Commission (SEC), must have at least three market makers
(financial firms that act as broker s or dealers for specific securities) and must meet.
Minimum requirements for assets, capital, public, shares, and shareholders.

 NASDAQ composite
'NASDAQ Composite is the main index of NASDAQ, which has been published since its
inception. However, its exchange-traded fund tracks the large-cap NASDAQ-100 index,
which was introduced in 1985 alongside the NASDAQ 100 Financial Index.

The Nasdaq Composite Index is the market-capitalization weighted index of the more than
3000 common equities listed on the NASDAQ stock exchange. The types of securities in the
index include American depositary receipts, common stocks; real estate investment trusts
(RELTs) and tracking Stocks. The index includes all NASDAQ listed Stocks that are not
derivatives, preferred shares, funds, exchange traded funds (ETFs) or debentures.

Unlike other market indexes the NASDAQ composite is not limited to companies that have
U.S. headquarters. It is very common to hear the closing price of the Nasdaq Composite
index reported in the financial press, or as partSS of the evening news.
Some major companies listed on NASDAQ composite along with their ticker and percentage
value are Apple (AAPL) -14.60% , Microsoft (MSFT)-7.40%,Amazon (AMZN) -3.84%,
Google (GOOG) Class C-3.50%, Facebook (FB) -3.41%, Gilead Sciences (GILD) - 3.22%,
Intel (INTC) - 3.14%, Google (GOOGL) Class A- 3.01%, etc.

Automated Confirmation Transaction Service-ACT

ACT, or automated Confirmation of Transactions, is a system for reporting and clearing
trades in the over-the-counter (OTC) and NASDAQ securities markets. ACT facilitates and
simplifies the process of clearing by providing single counterparty to interact with.

Prior to using the ACT, the NASDAQ utilized the Trade Acceptance and Reconciliation
Service or TARS.ACT replaced TARS and assumed its functionality in the third quarter of
1998.

ACT offers a risk management system that allows clearing firms to monitor the activity of
their clients. This tool is unique within the clearing business. The Financial Industry
regulatory Authority (FINRA) also refers to ACT as the Trade Reporting Facility (TRF).