Definition of Investment

Investment refers to the acquisition of the asset, in the expectation of generating income. In a
wider sense, it refers to the sacrifice of present money or other resources for the benefits that
will arise in future. The two main element of investment is time and risk

Nowadays, there is a range of investment options available in the market as you can deposit
money in the bank account, or you can acquire property, or purchase shares of the company,
or invest your money in government bonds or contribute in the funds like EPF or PPF.

Investments are majorly divided into two categories i.e. fixed income investment and variable
income investment. In fixed income investment there is a pre-specified rate of return like
bonds, preference shares, provident fund and fixed deposits while in variable income
investment, the return is not fixed like equity shares or property.

Definition of Speculation
Speculation is a trading activity that involves engaging in a risky financial transaction, in
expectation of making enormous profits, from fluctuations in the market value of financial
assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset
by the probability of significant profit. Although, the risk is taken by speculators is properly
analysed and calculated.

Speculation ca be seen in markets where the high fluctuations in the price of securities such as
the market for stocks, bonds, derivatives, currency, commodity futures, etc.

Difference Between Investment and Speculation

In financial jargon, the terms investment and speculation are overlapping and used
synonymously. In investment, the time horizon is relatively longer, generally spanning at least
one year while in speculation, the term may extend up to a half year only.

As per Benjamin Graham, an American economist, and professional investor, investment is an

activity, which upon complete analysis assures the safety of the amount invested and adequate
return. Conversely, speculation is an activity which does not satisfy these requirements.

The basic distinguishing point amidst these two is that income in the investment is consistent,
but in the case of speculation is inconsistent. So this article makes an attempt to clear the
differences between investment and speculation
Key Differences Between Investment and Speculation
The basic difference between investment and speculation are mentioned in the points given
below:

1. Investment refers to the purchase of an asset with the hope of getting returns. The term
speculation denotes an act of conducting a risky financial transaction, in the hope of
substantial profit.
2. In investment, the decisions are taken on the basis of fundamental analysis, i.e.
performance of the company. On the other hand, in speculation decisions are based on
hearsay, technical charts, and market psychology.
3. Investments are held for at least one year. Hence, it has a longer time horizon than
speculation, where speculators hold assets for short term only.
4. The quantity of risk is moderate in investment and high in case of speculation.
5. The investors, expect profit from the change in the value of the asset. As opposed to
speculators who expect profit from the change in the prices, due to demand and supply
forces.
6. An investor expects the modest rate of return on the investment. On the contrary, a
speculator expects higher profits from the speculation in exchange for the risk borne by
him.
7. The investor uses his own funds for investment purposes. Conversely, speculator uses
borrowed capital for speculation.
8. In speculation, the stability of income is absent it is uncertain and erratic which is not
in the case of investment.
9. The psychological attitude of investors is conservative and cautious. In contrast,
speculators are daring and careless.

A Security Investment is freely transferable and salable. It also includes the risk of loss in
value. Security investments include mutual funds, stocks, government bonds etc.

A Non-Security Investment is a kind of non-marketable security, wherein the ownership

cannot be transferred. Non-security investments include life insurance, artwork, gold,
diamonds, bank guarantees etc.

Unlike Security investments, Non-Security investments do not need the backing of a bank or
of an underwriter. It involves much less documentation and paper-work when compared to
Security investments.
Investment Scenario in India
Emerging strong even during the scariest phase of global financial meltdown, India has become
one of the favorite investment destinations for the foreign investors across the globe. The
investment scenario in India is getting better and better with each passing day due to high
confidence level of the investors. Today, India is considered the 4th biggest economy in the
world. Its impressive GDP rate, especially in the field of purchasing power, has catapulted it
to second position among all the developing nations.

According to forecasts, Indian economy will grow to become 60% in size of the economy of
US. It will also witness macro-level stability in economic conditions. Behind all this,
investment can be said to be the key player.
To know investment environment in India in the best possible way, it will be wise to consider
the performance of 3 core sectors including education, infrastructure and security.

Private Education Investment

Since Independence, Indian education scene has improved for the better. As against 0.1 Million
enrollment in 1947, India experienced over 11 Million enrollments in 2005-06. At present, the
educational sector has become more attractive with its growing enrollment rates and the credit
for this can be given to the whole fresh team of education providers, consisting of distance
learning course providers, private institutes, foreign education providers and public
institutions.

Though the Foreign Direct Investment (FDI) in educational sector, comprising higher
education, has been allowed by the Indian government, there are still many shortfalls that need
to be overcome. An increase in the enrollment figures is being constantly witnessed. But, when
it comes to cumulative states expenditure, the scene is quite gloomy. For the period 2007-08,
a fall of about 18% has been seen in the total expenditure. Further, a clear gap in the per capita
education expenditure among the states can also be seen. Per capita fund inflow to educational
sector in Uttar Pradesh stood at ` 483 whereas in Bihar it was ` 487 in 2005-06. Himachal
Pradesh has ` 1777 and Maharashtra and Kerala show ` 1034 per capita fund flow.

Despite good financial performance of many of the states, their spending scenario in
educational sector has been found in poor condition.
Infrastructure Investment:
Investment scenario in India in infrastructure sector is attractive. Many sectors have been
allowed to receive private investment, which is truly a turning point. In past few years, many
road projects have been launched under National Highway Development Programme. The
project costing neared about US$ 12 billion. In this, the foreign construction companies have
also been invited to take part. Telecom sector and power reforms have also experienced
massive improvement. Telecom and Oil and Gas sector are seeing disinvestments processes.
Government is also thinking of introducing a more integrated transport system with chalking
out plans for the investment.

It cannot be denied that India has been successful in launching plenty of infrastructure projects
with encouraging private participation in the sector. The booming IT and BPO sectors of India
are the absolute testimony to its success story in the infrastructure projects.

The overall outlook of the roads and highways in India has also changed for the better. Many
cities and towns have been inter-connected to each other. Both state and central governments
have dished out significant amount to the development of highways.

Security Investment:
Security investment scenario in India is also bright. While several industries in India are
grappling with the impact of global meltdown and recent Mumbai attacks by terrorists, the one
industry which is predicted to register profits in near future is the Indian security industry. The
private security business in India is expected to become ` 50,000 crore (` 500 billion) worth
industry.

Current Investment Scenario in India

Globalization and Foreign Direct Investment form an integral part of all the developed as well
as developing economies. In fact, the growth of the underdeveloped economies is also
dependant on these key factors. These components equip any nation with new skills, new items
and provide smooth access to markets and technology. Today, every nation across the globe is
looking for foreign and overseas investors. Whether it's India or China, everyone wants foreign
investments. According to recent trends, India is only second to China in the league of favorite
investment destinations.

In the report issued by Department of Industrial Policy and Promotion, the fund inflow to India
reached US$ 27.3 billion in the period 2008-09, considered from the month of April 2008 to
the month of March 2009. Last quarter of 2008-09 alone witnessed an inflow of approx. US$
6.2 billion.

In the reports issued by Reserve Bank of India for outward investment from India, a growth of
29.6% to US$17.4 billion has been seen in the period 2007-08. The figures do not include
individuals and banks. India is considered the 2nd highest foreign employer in the United
Kingdom after the United States.

Global Investment Scenario

Along with India, the others who are participating in the race of investment among the
developing economies are China, Singapore, Malaysia, Russia and Brazil. Most of them are
vying for contracts from USA and Europe.
INTRODUCTION TO THE SECURITIES MARKETS: PRIMARY AND
SECONDARY MARKETS
A Securities market is an exchange where sale and purchase transactions of securities are
conducted on the base of demand and supply. A well-functioning securities market should be
able to provide timely and accurate information on the past transactions, liquidity, low
transaction costs (internal efficiency) and securities prices that rapidly adjusted to all available
information (external efficiency).

There are two level of securities markets:

Primary Market is the market for new securities issues and is facilitated by underwriting
groups. The companies sell their securities to the public directly to the investors through the
underwriters (normally investment banks for stock and bond issuance). When the firm is
issuing shares for the very first time, it is called Initial Public Offering (IPO). New shares issued
by firms whose shares are already trading in the market are called seasoned or secondary issues.
Issuing company receives cash from the sale and uses it to expand or fund the operations. After
the initial sale, the securities trading will be conducted on the secondary market.
Secondary market, also known as the aftermarket, is the market where the trading of the
previous issued securities is conducted. On a secondary market, an investor buys securities
from another investor instead of the issuer. It is important that the secondary market provides
liquidity and therefore provides continuous information about the market price of the securities.
Secondary markets are mainly organized in two ways. One is to form a centralized and
organized exchange where all buyers and sellers (or their representative agents) meet and
conduct trading. The more investors participate in a market, the greater the centralization of
that market, and the more liquid the market. Some examples of this form of secondary markets
are New York Stock Exchange (NYSE) and American Stock Exchange (AMEX). The other
way is Over-the-counter (OTC) market which a secondary market where securities are traded
directly between two parties. Trading occurs via dealers who carry inventories of securities and
contact each other by computer, telephone or other electronic network instead of a physical
trading floor. Over-the-counter dealers quote a bid price at which they would buy, and an ask
 price at which they would sell. An example of an over-the-counter securities market is the
National Association of Securities Dealers Automated Quotations System (Nasdaq).

SECURITIES MARKET IN INDIA – OVERVIEW

Securities Market in India is very well developed and this is largely due to several policy
initiatives since 2000, which have created a vibrant environment for all types of
investors. Today, India is second only to the United States in terms of number of listed
companies.

The present capital market scenario features

 an advanced regulatory environment

 steadily increasing market capitalisation
 better allocation and mobilisation of resources
 a rapidly developing derivatives market
 a robust mutual fund industry
 increased issuer transparency.
A major step has been the implementation of the decision to separate ownership, management
and operation of stock exchanges – also known as demutualisation and corporatisation. This
has ensured that SEBI, the market regulator is more effective.

Demutualisation is the process through which any member-owned organisation becomes a

shareholder-owned company.

SECURITIES
As per the Securities Contracts (Regulation) Act, 1956, securities include

 shares
 bonds
 scrips
 stocks
 other marketable securities of like nature in or of any incorporate company or body corporate
 government securities
 derivatives of securities
 units of collective investment scheme
 interest and rights in securities
 security receipt
 any other instruments so declared by the central government.
As per NISM, securities are financial instruments issued to raise funds. The primary function
of the securities markets is to enable to flow of capital from those that have it to those that
need it. Securities market help in transfer of resources from those with idle resources to
others who have a productive need for them. Securities markets provide channels for
allocation of savings to investments and thereby decouple these two activities. As a result, the
savers and investors are not constrained by their individual abilities, but by the economy’s
abilities to invest and save respectively, which inevitably enhances savings and investment in
the economy.
Participants
Securities Market in India has three participants

1. issuers of securities
2. investors in securities
3. intermediaries
History of Securities Market in India
1947 Capital Issues (Control) Act, 1947
1956 Securities Contracts (Regulation) Act, 1956 Companies Act, 1956
1992 Repeal of Capital Issues (Control) Act, 1992

SEBI Act, 1992 to:

a. protect interest of investors
b. promote development of securities market
c. regulate the securities market

SEBI has powers

a. to investigate and examine companies
b. to visit their premises
c. to inspect records and personnel and
d. to impose penalties that are commensurate with any misconduct.

1993 National Stock Exchange was set-up. Today, the National Stock Exchange of India
Limited is the third largest exchange in the world in terms of the number of equity
transactions, after the New York Stock Exchange and NASDAQ.

1996 Depositories Act, 1996

2001
 Rolling settlement on a T + 5 basis was introduced
 Trading in index options commencement
 Launch of future contracts on individual stocks
2002
 Rolling settlement on a T + 3 basis was introduced
 Negotiated Dealing System (NDS) and Clearing Corporation of India Limited
(CCIL) commenced operations
2003
Rolling settlement on a T + 2 basis was introduced
Futures and options on individual securities

Market Participants in Securities Market in India

 Securities Appellate Tribunal
 Regulators – SEBI, RBI, DCA, DEA
 Depositories
 Stock Exchanges
 Brokers
 Corporate Brokers
 Sub-broker
 FIIs
 Portfolio Manager
 Custodians
 Share Transfer Agent
 Primary Dealers
 Merchant Bankers
 Bankers to an Issue
 Debenture Trustee
 Underwriters
 Venture Capital Funds
 Foreign Venture Capital Investors
 Mutual Funds
 Collective Investment Schemes

Important Concepts in Securities Market in India

It is important that we be aware of some of the Important Concepts as relates to Securities
Market in India. These will be discussed in details in future.

 Legal Framework
 Trade Confirmation
 Settlement Cycle
 Central Counter-parties
 Securities Lending
 Central Securities Depositories
 Delivery versus Payment (DvP)
 Timing of Settlement Finality
 CSD risk controls to address participant’s failures to settle
 Cash settlement Assets
 Operational Reliability
 Protection of Customers’ securities
 Governance
 Access
 Efficiency
 Communications Procedures and Standards
 Transparency
 Regulation and Oversight
 Risks in cross-border links

MARKET INDICES
India Index Services & Products Limited (IISL) is India’s first specialist company dedicated to
providing investors in Indian equity with Indices and Index services. IISL is the joint venture
between CRISIL and NSE. IISL has a consulting and licensing agreement with Standard &
Poor Corporation, the worlds leading provider of investible equity indices, for co-branding
IISL’s equity indices.

IISL Indices for Index Derivatives / Index Funds

S&P CNX Nifty
It comprises 50 stocks and is a market capitalization weighted index. Stocks are selected based
on their market capitalization and liquidity. All stocks in the index should have market
capitalization of more than 500 crores and should have traded for 85% of the trading days at
an impact cost of less than 1.5%. The low impact cost of S&P CNX Nifty makes it an optimal
index for derivative trading.
S&P CNX Defty
It is a dollar denominated index based on S&P CNX Nifty. All computations are done using
the S&P CNX Nifty index and the online exchange rates ($ vs. Rs.) disseminated by
information vending systems.
CNX Nifty
Junior It comprises 50 midcap stocks and is a market capitalization weighted index. All stocks
in the index should have market capitalization of more than Rs. 200 crores and should have
traded for 85% of the trading days at an impact cost of less than 2.5%.
Index Maintainence
Index maintenance plays a crucial role in ensuring stability of the index as well as in meeting
its objective of being a consistent benchmark in the equity markets. IISL has constituted an
Index Policy Committee, which evolves policies and guidelines for managing the CNX indices.
An index maintenance sub committee takes decision on addition / deletion of companies on
any index. Each index has a Replacement Pool comprising companies that meet all criteria for
candidacy to that index. All replacement of companies in the index comes from this pool, which
is continuously monitored.
CALCULATION OF BSE AND NSE
Full Form of Sensex is Sensitive Index. People are happy when the Sensex goes up and upset
when it goes down. Sensex is the stock market index of the Bombay Stock Exchange or BSE
– it is also called BSE Sensex.
Sensex Meaning
It is the market weighted stock index of 30 companies that are selected on the basis of financial
soundness and performance. Usually, large and well-established companies that are are
representatives of the various industrial sectors are chosen.

SENSEX i.e. Sensitive Index is the benchmark index of Bombay Stock Exchange (BSE)
composed of 30 of the largest and most actively-traded stocks of BSE.

Market capitalization
Market capitalization is the combined worth of all the stocks of different companies within the
stock exchange.
The market capitalization of a company is arrived at by the product of the price of its stock and
number of shares issued by the company.
This figure is multiplied by the free-float factor to determine the free-float market
capitalization. The free float factor is derived from the information each company submits
regarding the free floating shares. Every company has to give the information on a quarterly
basis in a format given by BSE.

The free float market capitalization of all companies is summed up.

The free float market capitalisation is then divided by an index divisor to get the Sensex value.
This divisor adjusts for changes in stocks and other corporate actions. The divisor is the value
of the Sensex Index in the base year.
Calculation Method
BSE uses Free-Float methodology (multiplying the number of shares of top 30 companies
with their respective equity’s price excluding locked in shares i.e. the ones hold by promoters,
government and those having controlling interest in the concern) to calculate the index. For
e.g. A company has 2 promoters X and Y and shares held by them are 1000 and 2000
respectively and to take a loan 1500 shares has been issued to government as a collateral. So
1000+2000+1500=4500 shares will be taken as locked in securities and all other shares are
used to calculate SENSEX. Now question arises what is the process.
Here it is –
1. Each company’s Market capitalization is determined (No. of shares x price)
2. Free float factor of company is determined by BSE. Free float factor (between 0.05-1.00) is
a multiple by which company’s Market capitalization is multiplied to arrive at Free-float
market capitalization. The factor is determined by details submitted by company. It is a kind
of weightage given to companies. Say Capitalization is 36,00,000
3. Now Ratio and Proportion is used. How? Base index of 1978-79 is used. Index of 1978-79
is taken as 100. Say the Free-float market capitalization was 60,000 (may vary) at the time.
When the capitalization was 60,000 index was 100
When the capitalization is 36,00,000 index is 6000
So it means SENSEX is 6000 INDEX
AS OF 20th SEPTEMBER 2017
1. Bajaj Auto Ltd
2. Hindustan Unilever Ltd
3. Oil and Natural Gas Corporation Ltd
4. Bharat Heavy Electricals Ltd
5. Housing Development Finance Corporation Ltd
6. Reliance Industries Ltd
7. Bharti Airtel Ltd
8. ICICI Bank Ltd
9. Sesa Goa Ltd
10. Cipla Ltd
11. Infosys Ltd
12. State Bank of India
13. Coal India Ltd
14. ITC Ltd
15. Sun Pharmaceutical Industries Ltd
16. Dr.Reddy's Laboratories Ltd
17. Jindal Steel And Power Ltd
18. Tata Consultancy Services Ltd
19. GAIL (India) Ltd
20. Larsen & Toubro Ltd
21. Tata Motors Ltd
22. HDFC Bank Ltd
23. Mahindra and Mahindra Ltd
24. Tata Power Company Ltd
25. Hero MotoCorp Ltd
26. Maruti Suzuki India Ltd
27. Tata Steel Ltd
28. Hindalco Industries Ltd
29. NTPC Ltd
 30. Wipro Ltd
NSE CALCULATION
National Stock Exchange (NSE) is the leading stock exchange of India. Full form of NIFTY is
“National Stock Exchange Fifty” – it is the broad index of NSE. NIFTY normally comprises
of 50 stocks but right now there are 51 stocks. It is known as NIFTY 50 or CNX Nifty. It is
owned and managed by India Index Services and Products Ltd. (IISL).The base period for the
Nifty index is November 3, 1995. The base value of the index has been set at 1000, and a base
capital of Rs 2.06 trillion.

Which companies are part of the NIFTY 50? There are certain eligibility criteria for
companies that have to be met –

1. Liquidity – The stock should have traded at an average impact cost of 0.50 % or less
during the last six months, for 90% of the observations for portfolio of Rs. 2 crores.

2. Float Adjustment – Companies must have at least twice the float-adjusted market
capitalization of whatever is the current smallest index constituent.

3. Domicile – The Company should be domiciled in India and trade on the NSE.

Sun
Bharti Airtel HDFC Bank Kotak Mahindra
ACC Ltd. Pharmaceutical
Ltd. Ltd. Bank Industries
Tata
Bharti Infratel Hero MotoCorp Larsen &
Adani Ports Consultancy
Ltd. Ltd. Toubro Services
Ambuja Bosch Ltd. Hindalco Lupin Ltd. Tata Motors
Cements Ltd. AUTOMOBILE Industries Ltd. PHARMA (DVR)
Asian Paints Cipla Ltd. Hindustan Mahindra & Tata Motors
Ltd. PHARMA Unilever Ltd. Mahindra Ltd.
Housing
Aurobindo Maruti Suzuki
Coal India Ltd. Development Tata Power Co.
Pharma Ltd. India
Finance
Dr. Reddy’s NTPC Ltd.
Axis Bank Ltd. ITC Ltd. Tata Steel Ltd.
Laboratories ENERGY
Eicher Motors ICICI Bank Tech Mahindra
Bajaj Auto Ltd. ONGC
Ltd. Ltd. Ltd.
GAIL (India) Idea Cellular Power Grid UltraTech
Bank of Baroda Ltd. Ltd. Corporation Cement Ltd.
Bharat Heavy Grasim IndusInd Bank Reliance Wipro Ltd. IT
Electricals Industries Ltd. Ltd. Industries Ltd.
Bharat HCL State Bank of
Petroleum Technologies Infosys Ltd. IT Yes Bank Ltd.
India
Corporation Ltd.
 Zee
Entertainment
Enterprises
The NIFTY 50 Index represents about 65% of the free float market capitalization of these
stocks listed on NSE Nifty as on March 31, 2016.

How NIFTY is calculated?

NIFTY 50 is computed using free float market capitalization weighted method, wherein the
level of the index reflects the total market value of all the stocks in the index relative to a
particular base period

Here is the mathematical formula to arrive at the value of NIFTY –

Market Capitalization = Equity Capital x Price

Free Float Market Capitalization = Equity Capital x Price x IWF

Index Value = Current Market Value / Base Market Capital x Base Index Value (1000)

*IWF = Investible Weight Factor – It is a factor to determine the number of shares available
for trading

The index is calculated in real-time daily whenever the value of any scrip changes.