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Concept of Investment

Investment refers to the process of committing money or capital to an asset, project, or venture with
the expectation of generating a return or profit over time.

🔑 Key Elements of Investment

1. Capital Commitment: Putting money, time, or resources into something.

2. Expectation of Return: The primary goal is to earn a return, such as:

o Income (e.g., interest, dividends, rent)

o Capital Appreciation (e.g., rise in asset value)

3. Time Horizon: Investments are typically held over a period—short-term, medium-term, or

long-term.

4. Risk: All investments carry some degree of risk—the possibility of losing part or all of the
original capital.

📊 Types of Investment

Type Example Return Type

Financial Investments Stocks, bonds, mutual funds Interest, dividends, capital gains

Real Assets Real estate, gold, commodities Rent, appreciation

Business Investments Starting or funding a business Profits, equity appreciation

Human Capital Education, training Higher income over time

📈 Why Do People Invest?

 Wealth creation

 Beating inflation

 Generating passive income

 Saving for future goals (e.g., retirement, education, home)

 Tax benefits (in some cases)

Definitions of Investment by Authors

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1. John Maynard Keynes (Economist):

"Investment is defined as the purchase of a capital asset that is expected to produce income
or appreciate in value."
🔹 From "The General Theory of Employment, Interest and Money" (1936)

2. Irving Fisher (Economist):

"Investment is the act of creating capital, or increasing the stock of real productive assets."
🔹 From his work on capital and interest theory

3. William F. Sharpe (Nobel Laureate in Economics):

"Investment is the sacrifice of certain present value for (possibly uncertain) future value."
🔹 From "Investments" (co-authored with Gordon Alexander and Jeffery Bailey)

4. Benjamin Graham (Father of Value Investing):

"An investment operation is one which, upon thorough analysis, promises safety of principal
and a satisfactory return."
🔹 From "The Intelligent Investor"

5. Frank K. Reilly & Keith C. Brown (Finance Authors):

"Investment is the current commitment of dollars for a period of time in order to derive
future payments that will compensate the investor for the time the funds are committed, the
expected rate of inflation, and the uncertainty of the future payments."
🔹 From "Investment Analysis and Portfolio Management"
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💡 Concept of Speculation

Speculation refers to the act of buying assets or financial instruments with the hope of
making a quick profit from short-term price movements — without focusing on the
fundamental value of the asset.

📘 Simple Definition:

Speculation is the act of taking high-risk financial positions in the market with the
expectation of earning large returns from short-term changes in price.

🔑 Key Features of Speculation:

Feature Description

High Risk Speculators accept a higher chance of loss.

Short-Term Focus Typically aims for quick profits (hours, days, or months).

Uncertain Returns Returns are not guaranteed and can be highly volatile.

Based on Market Decisions are often based on price trends, rumors, or

Movements market sentiment—not deep analysis.

Little Emphasis on Speculators may ignore a company’s real performance or

Fundamentals long-term value.

📈 Examples of Speculation:

 Day trading stocks or cryptocurrencies.

 Buying penny stocks expecting them to double in days.

 Betting on currency fluctuations in the forex market.

 Short-selling a stock expecting its price to fall quickly.

👤 Who is a Speculator?

A speculator is someone who:

 Accepts high levels of risk,

 Trades frequently,

 Aims for short-term profits,

 Often uses leverage (borrowed funds) to increase potential returns.

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⚠️Difference from Investor:

Investor Speculator

Focuses on value and growth Focuses on price movement

Long-term view Short-term gains

Moderate risk High risk

Based on analysis Based on timing and trends

📚 Definitions of Speculation by Authors

1. Benjamin Graham (Father of Value Investing):

“An investment operation is one which, upon thorough analysis, promises safety of
principal and a satisfactory return. Operations not meeting these requirements are
speculative.”
🔹 From his book **“The Intelligent Investor”
🔸 Graham distinguishes investment from speculation, saying speculation lacks proper
analysis and margin of safety.

2. Irving Fisher (American Economist):

“Speculation consists of buying or selling assets with the hope of making a profit from
future price changes, without regard to the fundamental value.”
🔹 Fisher emphasized the role of expectations in speculative behavior.

3. John Maynard Keynes:

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the position
is serious when enterprise becomes the bubble on a whirlpool of speculation.”
🔹 From “The General Theory of Employment, Interest and Money” (1936)
🔸 He warned that too much speculation can destabilize markets.

4. Frank K. Reilly & Keith C. Brown (Finance Authors):

“Speculation is the assumption of considerable business risk in the expectation of high

returns.”
🔹 From “Investment Analysis and Portfolio Management”

5. Lawrence J. Gitman & Michael D. Joehnk (Financial Authors):

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“Speculation involves buying an asset primarily to benefit from expected price movements
rather than to earn a return from income generated by the asset.”
🔹 From “Fundamentals of Investing”

📊 Difference Between Investment and Speculation

Basis Investment Speculation

Committing capital to earn a Taking high risk for a

Definition
return over time chance of quick profit

Short-term (days to
Time Horizon Long-term (years)
months)

Risk Level Moderate to low risk High risk

Objective Wealth creation and income Quick gains

Decision Based on research, fundamentals, Based on market trends,

Basis and analysis rumors, or guesses

Steady, long-term returns Potential for high profits or

Returns
(dividends, interest, growth) heavy losses

Buying shares of a stable company Day trading stocks or

Examples
for long-term growth crypto for quick profit

Safety of
Focus on capital preservation High chance of capital loss
Capital

Investor Risk-averse or moderate-risk Risk-seeking or aggressive

Type investor trader

🧠 In Simple Terms:

 Investment = Buying something safe and valuable for long-term growth

e.g., Buying shares of a blue-chip company for retirement.

 Speculation = Taking a risky bet hoping for quick profit

e.g., Buying a new crypto coin hoping its price will double in a week.
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📊 Security Investment vs Non-Security Investment

🔐 1. Security Investment

✅ Definition:

Security investment involves investing in tradable financial instruments that represent

ownership or creditor relationships, typically regulated by financial authorities.

📌 Examples:

 Equity securities (e.g., shares/stocks)

 Debt securities (e.g., bonds, debentures)

 Mutual funds

 Exchange-Traded Funds (ETFs)

📈 Key Features:

 Easily bought and sold in stock markets or exchanges

 Regulated by securities authorities (e.g., SEBI in India, SEC in the USA)

 Highly liquid

 Prices fluctuate frequently

 Return depends on market performance

🏠 2. Non-Security Investment

✅ Definition:

Non-security investment involves investing in physical assets or non-tradable instruments

that are not regulated as securities.

📌 Examples:

 Real estate (land, buildings)

 Gold and precious metals

 Bank deposits (FDs, savings accounts)

 Insurance policies

 Business ventures (e.g., opening a shop)

📉 Key Features:
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 Not traded on public exchanges

 Generally less liquid

 May offer stable or fixed returns

 Often less volatile

 Regulated by other bodies (e.g., RBI, IRDAI—not securities regulators)

📋 Comparison Table

Basis Security Investment Non-Security Investment

Investment in financial Investment in physical or

Definition
market instruments fixed-return assets

Easily tradable on stock Usually not tradable in

Tradability
exchanges markets

Liquidity High liquidity Lower liquidity

Market-dependent (can be
Risk Level Often lower or fixed-risk
high)

Regulatory
SEBI, SEC, etc. RBI, IRDAI, etc.
Body

Market-based (dividends,
Return Type Fixed or rental income
capital gains)

Real estate, gold, bank

Examples Shares, bonds, mutual funds
deposits

🧠 Conclusion:

 Security Investments are suitable for those comfortable with market risks and looking for
higher returns and liquidity.

 Non-Security Investments suit more risk-averse individuals looking for stability, tangible
assets, or fixed returns.
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💼 Forms of Investment

Investment can take many forms depending on the asset type, purpose, time horizon, and
risk appetite. Below are the main forms of investment, categorized for clarity:

🔹 1. Financial Investments

These involve investing in financial assets or instruments, usually through markets.

✅ Examples:

 Equity (Stocks/Shares) – Ownership in a company.

 Bonds – Lending money to governments or companies.

 Mutual Funds – Pooled investment managed by professionals.

 Fixed Deposits (FDs) – Bank deposits with fixed returns.

 Exchange-Traded Funds (ETFs) – Like mutual funds but traded like stocks.

🔹 2. Real Assets / Physical Investments

These involve tangible assets that have intrinsic value.

✅ Examples:

 Real Estate – Land, residential, commercial property.

 Gold and Precious Metals – Physical or digital gold, silver.

 Commodities – Oil, agricultural products, etc.

🔹 3. Business Investments

Investing in entrepreneurial or business activities, either your own or others’.

✅ Examples:

 Starting a business

 Buying a franchise

 Venture capital or angel investing in startups

 Partnership in a firm

🔹 4. Human Capital Investment

Investing in yourself or others to improve future earning potential.

✅ Examples:
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 Education and skill development

 Professional certifications

 Training and courses

🔹 5. Retirement and Pension Plans

Long-term investment plans focused on retirement savings.

✅ Examples:

 Public Provident Fund (PPF)

 National Pension Scheme (NPS)

 Employee Provident Fund (EPF)

 401(k), IRA (in countries like the U.S.)

🔹 6. Insurance as Investment

Some insurance products have investment components.

✅ Examples:

 Unit-Linked Insurance Plans (ULIPs)

 Endowment policies

 Whole life insurance with cash value

🔹 7. Alternative Investments

Unconventional investment options outside traditional asset classes.

✅ Examples:

 Cryptocurrencies (e.g., Bitcoin, Ethereum)

 Collectibles (art, stamps, vintage cars)

 Private equity

 Hedge funds
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Investment Environment in India
📌 Definition

The investment environment refers to the economic, financial, legal, and market conditions
that influence investors’ decisions in a country. In India, the investment environment is
shaped by government policies, regulatory bodies, capital markets, investor sentiment, and
macroeconomic indicators.

Key Components of the Investment Environment in India

1. Economic Environment
 GDP Growth: India is one of the fastest-growing major economies.

 Inflation & Interest Rates: Managed by RBI; affects bond and equity returns.

 Fiscal Policy: Government spending and taxation impact investment flows.

 Monetary Policy: RBI uses tools like repo rate, CRR, and SLR to manage liquidity.

2. Regulatory Framework
 Securities and Exchange Board of India (SEBI): Regulates stock markets, protects investors.

 Reserve Bank of India (RBI): Regulates the banking system and monetary policy.

 Ministry of Finance: Creates economic policy and financial legislation.

 Taxation Laws: Income Tax Act, GST, Capital Gains Tax affect investment decisions.

3. Financial Markets
 Equity Markets: NSE, BSE are major stock exchanges. High liquidity and diversity of stocks.

 Debt Markets: Government bonds, corporate bonds, and money market instruments.

 Derivative Markets: Futures and options allow hedging and speculation.

 Commodity Markets: MCX, NCDEX allow investment in commodities.

4. Investment Instruments
 Equity Shares: Ownership in companies.

 Mutual Funds: Professionally managed portfolios of equities, debt, etc.

 Fixed Deposits & Bonds: Safer options, lower returns.

 Real Estate & Gold: Traditional investment avenues in India.

 Sovereign Gold Bonds, ETFs: Government-backed securities.

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5. Foreign Investment
 Foreign Direct Investment (FDI): Long-term investment by foreign companies.

 Foreign Portfolio Investment (FPI): Investment in Indian securities.

 Liberalized FDI policies in sectors like retail, telecom, infrastructure attract global investors.

6. Investor Profile
 Retail Investors: Growing participation via digital platforms.

 Institutional Investors: Mutual funds, insurance companies, pension funds, FIIs.

 High Net-Worth Individuals (HNIs): Often invest in alternate investment funds (AIFs), PMS.

📈 Trends in Indian Investment Environment

Trend Description

Rise of online trading, UPI, digital KYC has increased

Digitization
accessibility.

SIPs (Systematic Investment Plans) have become popular

Mutual Fund Boom
among small investors.

Start-up & Venture India is a top destination for venture capital in tech & fintech
Capital sectors.

ESG (Environmental, Social, Governance) investments gaining

Sustainable Investing
ground.

Government "Make in India", "Digital India", PLI schemes boost investor

Initiatives confidence.

🔍 Relevance to Security Analysis & Portfolio Management

Concept Relevance

Understanding company fundamentals, macroeconomic factors,

Security Analysis
industry trends is crucial in evaluating investment opportunities.

Portfolio A stable and transparent investment environment supports risk-

Management return optimization, diversification, and strategic allocation.

Indian markets are exposed to risks like political shifts, currency

Risk Assessment
volatility, regulatory changes. Risk management is key.

🚦 Challenges in Indian Investment Environment

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 Regulatory delays and policy inconsistency.

 Market volatility due to global economic shifts.

 Financial literacy among retail investors.

 Corporate governance issues in some sectors.

🔍 Detailed Exploration of the Investment Environment in India

🔸 1. Macroeconomic Indicators Influencing Investments

Understanding macroeconomic variables is crucial for both security analysis and portfolio
construction:

Indicator Impact on Investment

Higher GDP growth indicates robust economic health →

GDP Growth
positive for equities.

High inflation reduces purchasing power → affects interest

Inflation Rate
rates and stock valuations.

RBI’s repo rate changes influence cost of capital and returns

Interest Rates
on debt instruments.

Lower unemployment implies higher consumption → better

Unemployment Rate
company performance.

Exchange Rates Impacts import/export-heavy companies, FPI inflows, and

(INR/USD) currency risk.

High deficits can lead to inflation and lower investor

Fiscal Deficit
confidence.
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🔸 2. Capital Market Structure in India
India's capital markets are regulated and structured to support various kinds of investors:

a. Primary Market

 New issues, IPOs, FPOs.

 SEBI regulates disclosure norms.

 Used by companies to raise capital.

b. Secondary Market

 NSE and BSE are key platforms.

 Provides liquidity to investors.

 Price discovery through market forces.

c. Debt Market

 Government securities, corporate bonds, municipal bonds.

 Low risk, suitable for income-focused portfolios.

d. Derivatives Market

 Futures and options on stocks, indices, commodities, and currencies.

 Used for hedging, speculation, and arbitrage.

🔸 3. Role of SEBI and Other Regulatory Bodies

Regulator Role

SEBI (Securities and Exchange Protects investor interests, regulates markets,

Board of India) ensures fair trade.

Controls monetary policy, regulates banking

RBI (Reserve Bank of India)
sector, foreign exchange.

IRDAI Insurance sector regulation.

PFRDA Regulates pension funds.

Ministry of Finance Sets fiscal policy, tax reforms, budget allocations.

🔸 4. Types of Investment Opportunities in India

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India offers a wide array of investment options:

a. Traditional Instruments

 Bank Fixed Deposits

 Post Office Schemes

 Provident Fund (EPF/PPF)

b. Market-based Instruments

 Equities (Large-cap, Mid-cap, Small-cap)

 Debt Funds, Corporate Bonds

 Mutual Funds (Active and Passive)

c. Alternative Investment Funds (AIFs)

 Hedge Funds

 Private Equity

 Venture Capital

d. Sustainable Investment Options

 ESG Funds

 Green Bonds

🔸 5. Investor Segmentation in India

Investor Type Characteristics

Small ticket size, risk-averse, growing fast due to

Retail Investors
fintech platforms.

HNI/UHNI Invest in PMS, AIFs, structured products.

Domestic Institutional
Mutual funds, banks, insurance companies.
Investors (DIIs)

Foreign Portfolio Investors Significant in Indian equities, sensitive to global

(FPIs) interest rates.

🔸 6. Government Policies & Programs Supporting Investment

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Initiative Impact

Make in India Boosts manufacturing sector investments.

Startup India Encourages VC/PE in early-stage companies.

Atmanirbhar Self-reliance in critical sectors → more investment in domestic

Bharat companies.

PLI Schemes Production-linked incentives for sectors like pharma, electronics.

Digital India Encourages IT sector, fintech innovation.

🔸 7. Technological Innovations & Financial Inclusion

 Fintech platforms like Zerodha, Groww, Paytm Money simplified investing.

 UPI & digital banking promote seamless money transfers.

 Robo-advisors help in automated portfolio creation.

 Financial literacy is on the rise through online content, webinars.

🔸 8. Risk Factors in Indian Investment Environment

Risk Type Description

Market Risk Volatility due to geopolitical events, macroeconomic changes.

Regulatory Risk Sudden changes in taxation or compliance rules.

Political Risk Elections, policy changes can shift market sentiment.

Liquidity Risk Certain securities (e.g., small-cap stocks, AIFs) may be hard to exit.

Currency Risk Depreciation of INR impacts FPIs and international businesses.

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📊 Implications for Security Analysis & Portfolio Management
✅ Security Analysis:

 Analyze fundamentals (P/E ratio, ROE, EPS, etc.).

 Monitor macroeconomic trends.

 Study industry cycles and competitive positioning.

✅ Portfolio Management:

 Diversification across asset classes (equity, debt, gold).

 Asset allocation based on investor risk profile.

 Use of Modern Portfolio Theory and CAPM for optimizing risk-return trade-off.

 Periodic review and rebalancing as per changing market conditions.

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What is the Investment Process?
The investment process is a step-by-step approach used to make smart decisions about how
to invest money. It helps investors choose the right investments, manage risks, and work
toward their financial goals in an organized way.

📊 The 5 Main Steps of the Investment Process

1. Set Investment Objectives

This step is about defining your goals. Ask yourself:

 What am I investing for? (e.g., retirement, buying a house, education)

 How much risk am I willing to take?

 How long can I keep the money invested?

 Do I want income, growth, or both?

Example: You may want to invest for retirement in 20 years, and you’re okay with some risk
to get higher returns.

2. Do Research and Analyze Investments

Next, you gather information to make informed decisions.

 Study the economy, markets, and sectors

 Analyze individual investments like stocks, bonds, or real estate

 Look at data like company earnings, debt, and growth potential

Example: You analyze Apple stock to see if it’s a good long-term investment.

3. Build a Portfolio

A portfolio is a collection of your investments. Here, you decide:

 How to split your money across different assets (called asset allocation) like:

o Stocks

o Bonds

o Real estate

o Cash

 How much to put into each one, based on your goals and risk level

 Diversify to spread risk

Example: You might invest 60% in stocks, 30% in bonds, and 10% in cash.
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4. Invest and Execute the Plan

Now you actually invest the money.

 Buy the selected investments using a broker or investment platform

 Try to minimize costs and follow your plan without reacting emotionally

Example: You buy ETFs and government bonds using an online brokerage.

5. Monitor and Review the Portfolio

Investment isn’t a “set it and forget it” activity. You need to:

 Track performance (e.g., monthly or quarterly)

 Compare returns to your goals or a benchmark

 Adjust the portfolio if needed (called rebalancing)

Example: If your stocks grow too much and now make up 80% of your portfolio, you may sell
some and buy more bonds to reduce risk.

🧠 Why the Investment Process Matters

 Keeps emotions out of investing

 Helps you stay disciplined and consistent

 Improves the chances of reaching your financial goals

 Makes it easier to manage risk

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Sources Of Investment Information
📚 1. Financial News and Media

These provide up-to-date market news, economic updates, and analysis.

Examples:

 Websites: Bloomberg, CNBC, Reuters, Yahoo Finance

 Newspapers: The Wall Street Journal, Financial Times

 TV Channels: Bloomberg TV, CNBC, Fox Business

 Podcasts/YouTube Channels: Market updates and expert interviews

📊 2. Company Reports and Filings

These offer detailed financial and operational data from the companies themselves.

Examples:

 Annual Reports (10-K)

 Quarterly Reports (10-Q)

 Earnings Calls / Transcripts

 SEC Filings (via www.sec.gov)

Use these for fundamental analysis of stocks or bonds.

📈 3. Investment Research Platforms

These provide tools for screening, analyzing, and comparing investments.

Examples:

 Morningstar – Fund and stock research, risk analysis, ratings

 Yahoo Finance – Stock charts, news, and financials

 Seeking Alpha – Analyst opinions and earnings breakdowns

 Zacks Investment Research – Stock ratings and forecasts

 Value Line – In-depth analysis of stocks and mutual funds

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🏦 4. Brokerage Platforms

Most brokers provide research tools, market data, and analyst reports.

Examples:

 Fidelity, Charles Schwab, TD Ameritrade, E*TRADE

 Robinhood, Webull (for simpler, mobile-first interfaces)

 Interactive Brokers (advanced tools for professionals)

📘 5. Government and Regulatory Sources

Trusted for macroeconomic data and industry regulation.

Examples:

 Federal Reserve – Interest rates, economic data

 U.S. Bureau of Labor Statistics (BLS) – Inflation, employment

 U.S. Securities and Exchange Commission (SEC) – Public company filings

 Central banks and finance ministries globally

🧠 6. Academic and Professional Research

Provides deeper insights into investment theory and long-term trends.

Sources:

 Harvard Business Review, MIT Sloan, CFA Institute

 Peer-reviewed journals: Journal of Finance, Financial Analysts Journal

 White papers from asset managers (e.g., BlackRock, Vanguard, JP Morgan)

👥 7. Financial Advisors and Planners

Licensed professionals who give personalized investment advice.

 CFP® (Certified Financial Planners)

 CFA® (Chartered Financial Analysts)

 Robo-advisors (e.g., Betterment, Wealthfront) for automated advice

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🔍 8. Social Media & Online Communities (Use with caution)

Fast, informal, and sometimes risky—verify all info.

Examples:

 Reddit (e.g., r/investing, r/stocks)

 Twitter/X – Analysts, traders, and economists

 LinkedIn – Expert articles and discussions

 YouTube – Tutorials and stock breakdowns

⚠️Be careful: Not all content is accurate or unbiased.

📱 9. Mobile Apps and Tools

Quick access to news, portfolio tracking, and insights.

Popular apps:

 Investing.com, Bloomberg, Seeking Alpha

 StockTwits, Finviz, MarketWatch

 Broker apps with built-in research tools

🧾 Summary Table

Source Type Examples Use For

Financial News CNBC, Bloomberg, WSJ Daily updates, trends

Deep company
Company Reports SEC.gov, investor websites
analysis

Morningstar, Zacks, Yahoo Stock/fund

Research Platforms
Finance comparison

Fidelity, Robinhood,
Brokerage Platforms Research + execution
Schwab

Economic indicators,
Government Data Fed, BLS, SEC
filings

CFA Institute, finance

Academic Research Strategy and theory
journals

Financial Advisors CFPs, CFAs, robo-advisors Personalized advice

Social Ideas, trends (verify

Reddit, Twitter, YouTube
Media/Communities carefully)
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Source Type Examples Use For

Bloomberg app, Finviz, Real-time tracking and

Mobile Tools & Apps
Investing.com news

✅ What Are Security Markets?

Security markets are places (physical or digital) where buyers and sellers trade financial
securities such as stocks, bonds, derivatives, and other instruments.

They are essential to the financial system because they:

 Connect companies and governments (who need money) with investors (who want returns)

 Provide liquidity (you can easily buy/sell)

 Help discover prices based on supply and demand

 Allow risk management through diversification and hedging

🧩 Types of Security Markets

1. 📦 Primary Market

 Where new securities are created and sold for the first time

 Investors buy directly from the issuer

 Helps companies raise capital

Examples:

 Initial Public Offering (IPO)

 Corporate bond issuance

 Government bond auctions

Key Point: Money from the sale goes to the issuing company or government.

2. 🔁 Secondary Market

 Where existing securities are traded between investors

 Issuers don’t receive money — it’s investor-to-investor

 Most public market trading happens here

Examples:

 Stock markets (NYSE, NASDAQ, etc.)

 Bond markets
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 Derivatives exchanges (e.g., CME)

Key Point: Provides liquidity, price discovery, and the ability to exit investments.

💡 Types of Securities Traded in These Markets

Security Type Description Traded Where

Stocks Ownership in a company Stock exchanges

Debt instruments with fixed

Bonds Bond markets, OTC
returns

Futures/options
Derivatives Contracts based on other assets
exchanges

ETFs Baskets of assets traded like stocks Stock exchanges

Pools of money managed Bought from fund

Mutual Funds
professionally providers

Major Security Markets Around the World

Region Market Type

USA NYSE, NASDAQ Stock exchanges

UK London Stock Exchange Stock, bonds

Japan Tokyo Stock Exchange Stocks

India NSE, BSE Stocks, derivatives

Global CME Group Futures/options

Global OTC Markets Bonds, Forex

🔄 How Securities Are Traded

 Exchanges: Centralized, regulated (e.g., NYSE, NASDAQ)

 Over-the-Counter (OTC): Decentralized, direct between parties (common in bond/derivative

markets)

 Electronic Trading Platforms: Used by brokers and institutions for fast, automated trading

🔐 Regulators of Security Markets

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Country Regulator

USA SEC (Securities and Exchange Commission)

UK FCA (Financial Conduct Authority)

India SEBI (Securities and Exchange Board of India)

Global IOSCO (International Organization of Securities Commissions)

These bodies ensure:

 Fair practices

 Investor protection

 Transparency

 Prevention of fraud

📌 Key Benefits of Security Markets

 Access to Capital for businesses and governments

 Investment Opportunities for individuals and institutions

 Liquidity – You can buy/sell relatively easily

 Price Discovery – Market sets fair prices

 Risk Management – Through diversification and hedging

Definitions
📚 1. Reilly & Brown (Investment Analysis and Portfolio Management)

“Security markets are mechanisms through which investors can buy and sell securities,
providing a platform for price discovery, liquidity, and efficient allocation of capital.”
— Frank K. Reilly & Keith C. Brown

📚 2. Bodie, Kane, and Marcus (Investments)

“A security market is a set of arrangements that allows trading of financial assets such as
stocks and bonds, including both organized exchanges and over-the-counter markets.”
— Zvi Bodie, Alex Kane, and Alan J. Marcus

📚 3. Sharpe, Alexander & Bailey (Investments)

“Security markets are structures that bring together buyers and sellers of securities and
facilitate the execution of trades and the flow of capital from savers to borrowers.”
— William F. Sharpe, Gordon J. Alexander, and Jeffery V. Bailey
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4. U.S. Securities and Exchange Commission (SEC)

“The securities markets are where investors buy and sell securities, such as stocks and
bonds. These markets bring together individuals and institutions to raise capital, transfer risk,
and provide liquidity.”

5. International Organization of Securities Commissions (IOSCO)

“Securities markets play a central role in the economy, enabling the transfer of capital from
investors to entities that need funding, while offering transparency and investor protection.”
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📊 Difference Between Primary and Secondary Market

Aspect Primary Market Secondary Market

Market where new Market where existing

Definition securities are issued for the securities are traded among
first time investors

To raise capital for the To provide liquidity and

Purpose
issuer price discovery

Investors only (buyer and

Participants Issuer and investors
seller)

Funds go directly to the

Funds go to the selling
Flow of Funds issuer (e.g., company or
investor, not the issuer
government)

IPOs, FPOs, Government

Stock exchanges (e.g., NYSE,
Examples bond issues, Private
NSE), bond markets
placements

Price Determined by market

Set by issuer or underwriter
Determination forces (supply and demand)

Frequency of Securities are traded

Securities are sold once
Trade multiple times

Trading rules, market

Underwriting and disclosure
Regulation Focus regulation, investor
by issuer
protection

Intermediaries Investment banks,

Stockbrokers, exchanges
Involved underwriters

🧠 Simple Example:

 When a company sells its shares to the public for the first time in an IPO, it's using the
primary market.

 When you buy or sell that stock later on a stock exchange like the NYSE or NASDAQ, it's
happening in the secondary market.
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Types of Securities in the Indian Capital Market
The Indian capital market is where companies and the government raise long-term funds,
and investors buy/sell financial instruments. It includes a variety of securities, which can be
broadly categorized as follows:

🔹 1. Equity Securities (Shares)

These represent ownership in a company.

Types:

 Equity Shares (Common Stock)

o Owners have voting rights and share in profits (dividends).

o Traded on stock exchanges like NSE and BSE.

 Preference Shares

o Fixed dividend, paid before equity shareholders.

o Limited or no voting rights.

o Convertible or non-convertible.

🔹 2. Debt Securities (Fixed-Income Instruments)

These represent a loan made by an investor to the issuer.

Types:

 Debentures

o Unsecured debt issued by companies, typically with fixed interest.

 Bonds

o Issued by companies or the government (e.g., RBI, SEBI-regulated).

o Government bonds, PSU bonds, municipal bonds.

 Fixed Deposits (Company)

o Companies raise money by accepting deposits from the public at fixed interest.

 Commercial Papers (CPs)

o Short-term unsecured debt issued by companies (usually < 1 year).

 Certificates of Deposit (CDs)

o Short-term securities issued by banks, regulated by the RBI.

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🔹 3. Derivative Securities

Contracts whose value is derived from an underlying asset (stock, index, commodity, etc.)

Types:

 Futures Contracts

o Agreement to buy/sell an asset at a future date at a fixed price.

 Options Contracts

o Right, but not obligation, to buy/sell at a predetermined price.

 Swaps (Less common in retail)

o Agreements to exchange cash flows (e.g., interest rate swaps).

✅ Regulated by SEBI and traded on platforms like NSE’s F&O segment.

🔹 4. Hybrid Securities

Combine features of both debt and equity.

Examples:

 Convertible Debentures

o Bonds that can be converted into equity shares later.

 Preference Shares (with convertibility features)

 Warrants

o Give the holder the right to buy shares at a specific price in the future.

🔹 5. Mutual Fund Units

Investment pooled from multiple investors and managed by professionals.

Types:

 Equity Mutual Funds

 Debt Mutual Funds

 Hybrid Funds

 ELSS (Tax-saving Mutual Funds)

Managed by AMCs (Asset Management Companies) and regulated by SEBI.

🔹 6. Government Securities (G-Secs)

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Issued by the Reserve Bank of India (RBI) on behalf of the Government of India.

Types:

 Treasury Bills (T-Bills) – short term

 Government Bonds – long term

 State Development Loans (SDLs)

📌 Summary Table

Category Security Type

Equity Equity Shares, Preference Shares

Debt Bonds, Debentures, CPs, CDs

Derivatives Futures, Options

Hybrid Convertible Debentures, Warrants

Collective Investment Mutual Fund Units

Government G-Secs, T-Bills, SDLs

📈 What is a Market Index?

A market index is a statistical measure that tracks the performance of a group of stocks or
securities representing a particular segment of the market.

 It gives investors an idea of how the market or a sector is performing.

 Acts as a benchmark to compare individual investment performance.

 Can represent entire markets (broad indices) or specific industries (sectoral indices).

🔑 Why Are Market Indices Important?

 Track market trends: Upward or downward movements signal overall market health.

 Benchmarking: Investors and fund managers use indices to compare returns.

 Investment products: Many mutual funds and ETFs aim to replicate index performance.

 Market sentiment: Reflect investor confidence or concerns.

🌍 Major Global Market Indices

Index Name Market/Region Description

S&P 500 USA Tracks 500 large-cap US stocks

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Index Name Market/Region Description

Dow Jones Industrial Tracks 30 large, well-established

USA
Average (DJIA) US companies

NASDAQ Composite USA Focus on tech and growth stocks

Top 100 companies listed on

FTSE 100 UK
London Stock Exchange

Tracks 225 large Japanese

Nikkei 225 Japan
companies

Tracks 40 major German

DAX Germany
companies

🇮🇳 Major Indian Market Indices

Index Name Exchange Description

Sensex (BSE Bombay Stock Tracks 30 largest and most actively

Sensex) Exchange (BSE) traded stocks on BSE

Nifty 50 (NSE National Stock Tracks 50 diversified large-cap stocks

Nifty) Exchange (NSE) on NSE

Represents 50 companies next in line

Nifty Next 50 NSE
after Nifty 50

Tracks 12 major banking stocks on

Nifty Bank NSE
NSE

Nifty IT NSE Tracks major IT sector companies

📊 How Are Indices Calculated?

 Price-weighted: Index value depends on stock prices (e.g., DJIA)

 Market-cap weighted: Stocks weighted by market capitalization (e.g., S&P 500, Sensex,
Nifty)

 Equal-weighted: All stocks have equal impact (less common)

📊 Calculation of Sensex
What is Sensex?
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 Sensex (Sensitive Index) is the benchmark index of BSE (Bombay Stock Exchange).

 It tracks 30 large, well-established companies representing various sectors.

How is Sensex Calculated?

Sensex is a market capitalization-weighted index, calculated using the Free-float Market

Capitalization method.

Formula:

Sensex= (A/B)*C

 A=Free-float Market Capitalization = (Number of shares available for trading) × (Current

market price)

 B=Base Market Capitalization = Market cap at the base year (1978-79)

 C=Base Value = 100 (the index value at the base year)

Steps:

1. Calculate the free-float market capitalization of the 30 constituent stocks.

2. Divide it by the base market capitalization.

3. Multiply by the base value (100).

📊 Calculation of Nifty

What is Nifty?

 Nifty 50 is the benchmark index of NSE (National Stock Exchange).

 It represents 50 large-cap companies across sectors.

How is Nifty Calculated?

Nifty is also a free-float market capitalization-weighted index.

Formula:

Nifty= (∑(Free-float Market Cap of all 50 stocks)/Base market Capitalisation)×Base Value

 Same concept as Sensex, just over 50 stocks.

 Base date: 3rd November 1995

 Base value: 1000

Steps:
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1. Calculate the free-float market cap of each of the 50 companies.

2. Sum them up.

3. Divide by base market capitalization.

4. Multiply by base value (1000).

🔍 What is Free-Float Market Capitalization?

 It considers only the shares available for trading in the market.

 Excludes promoter holdings, government holdings, and locked-in shares.

 Makes the index more reflective of the actual market behavior.

🧩 Summary

Feature Sensex Nifty 50

Number of Stocks 30 50

Base Year 1978-79 1995

Base Value 100 1000

Weighting Free-float market cap Free-float market cap

Method weighted weighted

Exchanges BSE NSE