Continuing inflationary pressure has surged the equity market investment as equity shares deliver higher rate of return as compared to other havens. However, the investors have faced many complexities in understanding the equity market. We have tried to make the concept of equity shares a cakewalk through our YouTube videos, just click on the link to get the elementary knowledge of Equity market:
In order to be able to invest in share market in India, the following procedure is need to be followed.
Investor has a choice of timing for investment in equity shares, firstly when the shares are issued to the public to raise capital and secondly when these shares are traded on the stock exchange. The primary objective of investing is to buy the shares at low price and sell at a higher price. If a stock promises potential future growth and is under-priced in comparison to it’s book value during its Initial Public Offering (IPO), then it is most profitable time to buy the stock.
A common investor can apply for an IPO of a company in following procedure:
The first step is to choose the IPO that applicant wishes to apply for. One can find the list of upcoming IPOs on Securities and Exchange Board of India’s (SEBI’s) website. The best way to decide is by going through the companies’ prospectus available on SEBI’s site. The prospectus gives a fair idea about the company’s business plan and its purpose.
After the selection of desired IPO, investor has to ensure sufficient funds in his or her account.
A Demat account is a prerequisite to apply for an IPO. A Demat account is nothing but a facility to store your stocks and financial securities electronically. The account can be opened by submitting your PAN card, Aadhaar card, address and identity proofs.
Now, IPO can be applied through Trading or bank account. Sometimes trading, demat and bank accounts are clubbed together by the banks for better facilities. Applicant needs to bid while applying for shares, as per the lot size mentioned in the prospectus. Lot size is the minimum number of shares applicant has to apply during an IPO.
The company usually sets a price band. The upper limit is known as the cap price while the lower is called floor price. Applicant has to bid for shares in this price range.
When this application is submitted, applicant’s account doesn’t get debited until shares are allotted to him or her. During the IPO process banks are authorized to block the amount of application in applicant’s account as per ASBA (Applications Supported by Blocked Amount, a process developed by the India’s Stock Market Regulator SEBI for applying to IPO).
If the applicant gets full allotment then he will receive a Confirmatory Allotment Note (CAN) within six working days after closure of the IPO process. On the other hand if the applicant gets fewer shares than he had applied for or fails to get allotment then bank will unlock the bid money (in part or full).
Final step is to wait for the listing of shares on stock exchanges, which is done within seven days from the finalization of issue. After the listing investor can either sell the shares (partly or fully) or keep his money invested in that company.
There are two kinds of investors in the market one is risk-taker & other is risk-avoider. The Risk-taker (Aggressive Investor) always makes investment in risky instruments like equity for instance & end up making either huge profits or huge losses. But those who are risk avoiders (Conservative Investors) always choose an option which is least risky. India is a risk averse country especially when it comes to investment and hence most of the investors park their funds in Fixed Deposits due to its least risk feature. But there are various debt instruments which Conservative Investors can opt for, to earn higher returns than FDs.
Before proceeding further let us explain; “What are Debt instruments?”; Debt Instruments are obligation of issuer of such instrument as regards to certain future cash flow representing Interest & Principal, which the issuer would pay to the legal owner of the Instrument. Today let’s discuss debt investment opportunities prevailing in India:
Bonds: It is a debt instrument which is simply called “IOU”- I Owe You, in which an investor agrees to lend money to a company or government for a particular period of time in exchange of pre-determined interest rate. Various types of bonds issued in the market are – Government Bonds, Municipal Bonds, Institution Bonds, Corporate Bonds. Each bond has different risk & return involved in it. For example, Government bonds having sovereign rating (backed by Government) have the lowest risk & lowest return. On the other hand, there are corporate bonds which may vary in terms of risk return depending upon financial health of company.
Debentures: These are similar to bonds but they are mostly unsecured loans unlike bonds which are secured & backed by assets of the company. Simply put, debenture is a long-term debt instruments used by Government or large companies to obtain funds which are not secured by the any asset. These instruments are little riskier than bonds as they are not backed by any lien of assets. There are some more differences between bonds & debenture which you can read from our earlier blog; https://financialbook.in/2017/05/09/bonds-vs-debentures-whats-the-difference/
Commercial Papers (CP): CPs are also unsecured money market instruments which are issued in form of promissory notes. These were introduced in India in 1990s & are used for short term borrowings by the companies. Investment is done in denomination of 5 lakhs or more for a duration ranging between 15 to 365 days.
Certificate of Deposits(CD): CDs are financial products usually issued by banks, institutions or Credit Unions. These are regular term deposits often for 3 months, 6 months,1 year & 5 years having fixed interest rates which are usually higher than the rate offered by banks on Fixed deposits.
Government Securities: Commonly these instruments are known as G-secs which are issued by RBI on behalf of Government of India. These include Central G-sec, State G-sec, Treasury Bills. These are mostly issued in face value & do not carry default risk as they are sovereign rated. Maturity ranges from 2 years to 30 years. There is no TDS as well.
National Savings Certificate: NSC is a fixed income long-term investment. It is issued by authorized post offices with a rate of return of 8% for maturity period of 6 years. It needs minimum investment of 500 and there is no maximum limit. Its also qualifies for deduction u/s 80C. There is no TDS also.
These points have already highlighted that investment in debt market is much better than the fixed deposits. So rather than going for FDs investors must evaluate the profits that can be earned from debt instruments without using aggressive investment techniques.