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Questions
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What is Investment?
Money is a need in today’s environment and everybody has a varied income level.
Whatever is earned is partly spent and partly saved for meeting future expenses.
Instead of keeping the savings idle an individual uses the savings in order to get
return on it in the future and mitigate inflation to some extent. This is called
Investment.
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What is Inflation?
The rate at which the cost of living increases is termed as inflation. It is simply
the costs to buy the goods and services you need to live. Inflation causes money
to lose value as the same amount of money will not buy the same amount of a good
or a service in the future as it does now or did in the past. For example, if the
average inflation rate is 7% for the next 20 years, goods or serviced that are priced
at Rs. 1000 today would cost Rs. 3617 in 20 years. This makes it all the more important
to consider inflation as a factor in any long-term investment strategy. One should
look at an investment's 'actual' rate of return, which is the return after inflation.
One should aim to invest to get a return above the inflation rate ensuring that
the investment does not decrease in value.
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What is Equity?
Equity investments are basically investments in shares of companies which are listed/being
listed on trading exchanges. Stocks can be bought/sold from the exchanges (secondary
market) or via IPOs – Initial Public Offerings (primary market). Stocks can
be termed as one of the best long-term investment options as the market volatility
and the resultant risk of losses are mitigated by the general upward momentum of
the economy in the long run.
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What is a Share?
Shares define the portion of investment an investor has made in a particular company
at a given price. The total equity capital of a company is divided into equal units
of small denominations, each called a share. The holders of such shares are members
of the company and have voting rights.
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What is a Derivative?
It is a product whose value is derived from the value of one or more basic variables,
which is called underlying. The underlying asset can be equity, commodity or any
other asset. These products had initially emerged as hedging devices to safe guard
an individual/ organization from the volatility of commodity prices over a period
of time. Financial derivatives gained momentum post-1970 period due to growing instability
in the financial markets. However, since their emergence, these products have become
very popular.
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What is an Index?
An Index is a basket of securities and the average price movement of the basket
of securities indicates the index movement, whether upwards or downwards The leading
Indices in the Indian markets are based on BSE( e.g. BSE SENSEX) and NSE Exchanges(e.g.
NSE NIFTY) . These indices are a reflection of the overall price movement in the
market.
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What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures,
bonds, government securities, units etc.) in electronic form. In India currently
there are two depositories namely National Securities Depository Limited(NSDL) &
Central Depository services Limited(CDSL) whose services are availed of by many
members who are called ‘Depository Participants’.
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What is Dematerialization?
Prior to the concept of electronic exchanges shares were issued to investors in
physical form. Dematerialization is the process by which physical certificates of
an investor are converted to an equivalent number of securities in electronic form
and credited to the investor’s account with his Depository Participant (DP).
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What is the function of Securities Market?
Securities Markets, in India they are majorly Stock Exchanges namely NSE –
National Stock Exchange and BSE – Bombay Stock Exchange, is a place where
buyers and sellers of securities can enter into transactions to purchase and sell
shares, bonds, debentures etc. These exchanges also perform an important role of
enabling corporates, entrepreneurs to raise resources for their companies and business
ventures through public issues. It efficiently facilitates transfer of resources
from investors to others who have a need for those (corporates). It links savings
to investments by a variety of intermediaries, through a range of financial products,
called ‘Securities’.
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Due to the changing economy and ratio between supply and demand resulting in the
absence of conditions of perfect competition in the securities market, the role
of the Regulator is extremely important. The regulator ensures that the market participants
behave in a desired manner so that securities market continues to be a major source
of liquidity for corporate and government and the interest of investors are protected.
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Who regulates the Securities Market?
It is a shared responsibility jointly taken by Department of Economic Affairs (DEA),
Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities
and Exchange Board of India (SEBI).
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Who are the participants in the Stock Exchanges?
The Stock Exchanges essentially has three categories of participants, which are,
the issuers of securities, investors in securities and the intermediaries which
bring in the issuers and the investors together, such as merchant bankers, brokers
etc.
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Is it necessary to transact through an intermediary?
It is advisable to conduct transactions through an intermediary as you need a trading
member of a stock exchange if you intend to buy or sell any security on stock exchanges,
maintain an account with a depository if you intend to hold securities in demat
form, need to deposit money with a banker to an issue if you are subscribing to
public issues. One also gets guidance while transacting through an intermediary.
We should choose a SEBI registered intermediary, as he is accountable for its activities.
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What are the major segments of a Stock Exchange?
The Stock Exchanges has two interdependent segments: the primary (new issues) market
and the secondary market. The primary market provides the channel for sale of new
securities while the secondary market deals in securities previously issued.
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