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Understanding Capital Markets

Understanding Capital Markets. August 2013. Investor Awareness. An  investor  is someone who puts money into some avenue with the expectation of a financial return. Types of investments include: Equity Debt securities Real estate Currency Commodity

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Understanding Capital Markets

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  1. Understanding Capital Markets August 2013

  2. Investor Awareness An investor is someone who puts money into some avenue with the expectation of a financial return. Types of investments include: Equity Debt securities Real estate Currency Commodity Derivatives such as put and call options This definition makes no distinction between those in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors. 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  3. Investor Awareness Speculation is a financial action that does not promise safety of capital investment and/or return on the principal sum. Any person who engages in speculation is known as a speculator. In the capital markets, speculation refers to the buying, holding, and selling of securities to profit from fluctuations in price, as opposed to buying these instruments for use or for income via methods such as dividends or interest. Speculation is typically a short-term strategy. The role of speculators in a market economy is to absorb risk and to provide liquidity in the marketplace, for the chance of monetary reward. Speculators provide trading volume and liquidity in what would otherwise be an illiquid market. Speculators take large risks, especially with respect to anticipating future price movements, in the hope of making quick, large gains.  098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  4. Investor Awareness Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs. In terms of personal finance, saving means low-risk preservation of money, as in a savings bank deposit account, versus investment, wherein risk is higher. Why is Saving Not an Investment? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  5. Investor Awareness A spendthrift (also called profligate) is someone who spends money prodigiously and who is extravagant and recklessly wasteful, often to a point where the spending climbs well beyond his or her means. Spendthrift refers to someone who is able to spend money acquired by the thrift of predecessors or ancestors 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  6. Investor Awareness 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  7. Investor Awareness At only six years old, Buffett purchased 6-packs of Coca Cola from his grandfather’s grocery store for twenty five cents and resold each of the bottles for a nickel, pocketing a five cent profit. While other children his age were playing, Warren was making money. He bought a small farm at age 14 with savings from delivering newspapers. Today he owns 7% in Coke Coke is valued at Rs. 4,00,000 crores 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  8. Investor Awareness He bought his first share at age 11 and he now regrets that he started too late! He made his first stock purchase buying 3 shares of Cities Services for $38 per share for himself and his older sister Doris. Shortly after buying the stock it fell to just over $27 per share. A frightened but resilient Warren held his shares until they rebounded to $40. He promptly sold them - a mistake he would soon come to regret. Cities Service shot up to $200. The experience taught him to invest in good companies for long term. He never invests in technology stocks and internet stocks not even in MICROSOFT. His logic is he doesn’t invest in companies where he cannot foresee the balance sheet after 20 years. He ran his investment business out of his bedroom. These investments made in excess of 30% compounded annually, in a market where 7% to 11% was the norm. 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  9. Investor Awareness He still lives in the same small 3 bedroom house in mid-town Omaha, that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a compound wall or a fence. He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch television. Once however, when at a party, someone offered him a drink saying: its premium scotch, about $ 100 for a peg. Buffet replied, “Can I have the $ 100, instead?” Bill Gates, the world's richest man met him for the first time only a few years ago. Bill Gates did not think he had anything in common with Warren Buffet. So he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet. Warren Buffet does not carry a cell phone, nor has a computer on his desk. His advice to young people: Stay away from credit cards and invest in yourself. Richest on earth for 4 years Then gives away 75% to Charities 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  10. At one point in time, in the early part of the 21st century it was said that, Bill Gates (born October 28, 1955) earns US $250/= every second. That is about US $20 million in a day or US $7.8 billion in a year. The narration goes further to say that, if he drops a thousand dollar note, he won’t even bother to pick it up. Reason: in the 4 seconds, he stops & stoops to pick it up, he would have earned it elsewhere. He could donate US $15/= to everyone on earth and still have a balance of US $5 million. If Bill Gates were a country, he would be the 37th richest country in the world. If you change all of his money into US $1/= notes, you could make a road from earth to moon and back. Bill Gates is over 50 now. If we presume that he will live for another 25 years, he must spend US $6.78 millions every day to finish all his money, before departing. Lastly, if Microsoft Windows users can claim US $1/= every time their computers hang, because of Windows, Bill Gates will be bankrupt in 3 years. 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

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  12. Investor Awareness We know the world's richest man is Carlos Slim Helu of Mexico, followed by Bill Gates and Warren Buffett of USA . 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  13. Investor Awareness Slim and his siblings were taught basic business practices by their father, and at the age of 12 Slim bought shares in a Mexican bank. He went on to study engineering, while simultaneously teaching algebra and linear programming there. In 1965 he incorporated Inversora Bursátil and then bought Jarritos del Sur. In 1966, already worth US$40 million, he founded Inmobiliaria Carso. On March 29, 2007, Slim surpassed Warren Buffett as the world's second richest person with an estimated net worth of $53.1 billion compared to Buffet's $52.4 billion. On August 4, 2007, The Wall Street Journal ran a cover story profiling Slim. The article said, "While the market value of his stake in publicly traded companies could decline at any time, at the moment he is probably wealthier than Bill Gates”. According to The Wall Street Journal, Slim credits part of his ability to "discover investment opportunities" early to the writings of his friend, futurist author Alvin Toffler. In March 2011, Forbes stated that Slim had maintained his position as the wealthiest person in the world, with his fortune estimated at $74 billion. 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  14. Investor Awareness When Savings = Income – Expenses Income = Expenses + Savings + Investments Income = Pocket Money + Part-Time Job Stipend When Income – Savings = Expenses Expenses = Needs + Desire Expenses = Necessities + Luxuries 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  15. Investor Awareness Compounding • Hedge against inflation • Prepared for contingencies • Have disciplined control over finances • May be labeled as Kanjoos, today • May attract fewer “true friends” • May appear unglamorous in the present • Will never have to borrow even for a day • No surprises in store • Will avoid debt traps • Survives Economic Downturn & Reaps the fruits of economic upturn • Will be consumed by inflation • Contingencies will kill • Experience shortage of finances, always • May be labeled as “Prince”, today, “Pauper” tomorrow • May attract many fair weather “friends” • Glamorous in the present, sins tomorrow & finished in months • Will have to dodge lenders seeking repayment & interest, forever • Future is full of shocks • Can’t avoid debt traps, lives in it • Victim of economic downturn Investor Spendthrift 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  16. Investor Awareness Needs = Necessities A human can survive: 40 days without food 3 days without water 4 minutes without air But, not a second Without Hope 2000 calories in a day is the maximum 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  17. Investor Awareness Most of our expenses are linked to: Lust Gluttony Pride Greed Sloth Wrath Envy People spend money which they don’t have To buy things they don’t need, To impress people whom they don’t like 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  18. Investor Awareness How much should you save? How much should you spend? Savings > 20% EMIs < 30% 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  19. Investor Awareness Investment Avenues in Project Finance Equity Debt Promoters’ Equity Bank Funds Friends & Relatives Equity Unsecured Deposits Secured Bonds IPO + FPO 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  20. Investor Awareness Securities Market Primary Market Secondary Market 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  21. Investor Awareness Issuer Public Primary Market Intermediaries Merchant Banker Banker to Issue Underwriters Registrar to Issue What is ASBA? Brokers 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  22. Investor Awareness Issue of Capital Fixed Price Issue Book Built Issue Offer for Sale Rights Issue IPO IDR Bonus Issue FPO 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  23. Investor Awareness 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  24. Investor Awareness 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  25. Investor Awareness 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  26. Investor Awareness Safety Net? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  27. Investor Awareness Secondary Market Intermediaries Stock Exchange Depository Stock Broker Depository Participant Registrar & Transfer Agent 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  28. Investor Awareness Dematerialization A process of converting physical shares into dematerialized shares. Rematerialization A process of converting dematerialized shares into physical shares. Depository An organization which holds securities of investors in electronic form. Depository Participant An agent of depository to act as an interface between the investor and the depository. Beneficial Owner The investor who enjoys the benefits of owning the securities. Registered Owner A depository in whose name the securities are registered 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  29. Investor Awareness Demat Physical Paper based trading Manual transfer of securities which was a time consuming factor Possibilities of bad delivery, fake certificates, signature differences, etc. Burden of filling of transfer form, affixing share transfer stamps Threat of loss of securities and fraudulent interception of certificates in transit Paperless trading Immediate transfer of securities No problem of bad delivery, fake certificates, signature differences, etc. No requirement of filling of transfer form and affixing share transfer stamps No threat of loss of securities and fraudulent interception of certificates in transit Marketable Lot? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  30. Investor Awareness An investor is required to pay charges towards: Dematerialization Rematerialization Account Maintenance Sell transactions. An investor need not pay charges towards: Account opening Custody of securities Buy transactions Closure/Transfer of account Cost 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  31. Investor Awareness How do I start? Agreements Agreements Bank Account Demat Account KYC Permanent Account Number Proof of Age & Residence 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  32. Investor Awareness How do I trade? Identify a SEBI registered Broker Open account with him Give instructions over phone Give instructions by eMail Trade via website 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  33. Investor Awareness The stock broker is obliged to provide contract notes confirming the trades done within 24 hrs of executing the trade – either physical or electronic mode The stock broker is entitled to recover: Brokerage charges @2.5% - max Service tax as stipulated – 12.36% Securities Transaction Tax -  0.1% Penalties arising on specific default on behalf of client (investor) 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  34. Investor Awareness Securities Market Primary Market Secondary Market Cash Segment % Cash Segment Derivatives Segment 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  35. Investor Awareness How soon can I see my securities in my Demat Account? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  36. Investor Awareness What is “War Chest”? War chest is surplus cash reserves, emergency reserves or rainy day funds. Determine this amount; Keep in Savings Bank Account; Not Elsewhere; Not More 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  37. Investor Awareness Savings in excess of War Chest should be invested Where should you invest? Tried & Tested Principles: • Don’t put all eggs in one basket – sectoral investments • Diversify between High Income/Potential Shares to High Safety Debentures – depending upon your age profile • Allow investment in each company upto your risk appetite • Depend upon P/E ratio; Avoid Intra-Day Transactions & Impulsive Investing • Track your portfolio regularly & thoroughly • Alternately invest in Mutual Funds • Don’t borrow for Investing • You must earn > inflation rate What is risk appetite? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  38. Investor Awareness Beat Inflation With The Power of Compounding 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  39. Investor Awareness Investment Avenues 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  40. Investor Awareness Smart Goals Measurable Specific Achievable Realistic Time-Bound Do “Get Rich Quick” Formulae Work? 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  41. Investor Awareness Richness is not “earning more” Richness is “spending more” Richness is “saving more” Richness is: When You NEED No More 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

  42. Investor Awareness Understanding Capital Markets Thank You August 2013 098 251 20338 CS Smitesh Desai lex4biz@yahoo.com

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