study on equity and forex market and their interdependence

7/21/2019 Study on Equity and Forex Market and Their Interdependence

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INDEX

1

SR NO PARTICULARS PG NO

1 INTRODUCTION 2

2 FOREIGN EXCHANGE AND FOREIGN EXCHANGE

MARKET

6

3 FOREIGN EXCHANGE MANAGEMENT ACT 12

4 EQUITY 16

5 INTERDEPENDENCE BETWEEN EQUITY

MARKET AND FOREX MARKET

24

6 CONCLUSION 27

7 WEBLOGRAPHY 2


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1! INTRODUCTION

EQUITY OR STOCK MARKET

Are markets in which shares are issued and traded either through exchanges or over-the-counter markets. Alsoknown as the equity market, it is one of the most vital areas of a market economy as it provides companies with

access to capital and investors with a slice of ownership in the company and the potential of gains based on the

company's future performance.

STOCK

Plain and simple, stock is a share in the ownership of a company. tock represents a claim on the company's

assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. !hether

you say shares, equity, or stock, it all means the same thing. "he importance of being a shareholder is that you are

entitled to a portion of the company#s profits and have a claim on assets. Profits are sometimes paid out in theform of dividends. "he more shares you own, the larger the portion of the profits you get.

"he securities market has two interdependent segments$ the primary %new issues& market and the secondary

market. Primary market is where new issues are first offered, with any subsequent trading going on in the

secondary market. "he primary market provides the channel for sale of new securities. econdary market refers to

a market where securities are traded after being initially offered to the public in the primary market andor listed

on the tock (xchange. )a*ority of the trading is done in the secondary market. econdary market comprises of

equity markets and the debt markets.

ORIGIN " EXCHANGES

hare market in +ndian started functioning in /. "he name of the first share trading association in +ndia was

0ative hare and tock 1roker's Association, which later came to be known as 1ombay tock (xchange %1(&.

"his association kicked of with 2 members. +ndian hare )arket mainly consists of two stock exchanges

namely 1ombay tock (xchange %1(& 3 0ational tock (xchange %0(&.

BOMBAY STOCK EXCHANGE #BSE$

1ombay tock (xchange is the oldest stock exchange not only in +ndia but in entire Asia. +ts history is

synonymous with that of the +ndian hare )arket history. 1( started functioning with the name, "he 0ativehare and tock 1roker's Association in /. +t got 4overnment of +ndia's recognition as a stock exchange in

5/6 under ecurities 7ontracts %8egulation& Act, 5/6. At the time of its origin it was an Association of Persons

but now it has been transformed to a corporate and demutualised entity. 1( is spread all over +ndia and is

present in 9 towns and cities. "he total number of companies listed in 1( is around 2/::.

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"he main index of 1( is called 1( (0(; or simply (0(;. +t is composed of 2: financially sound

company stocks, which are liable to be reviewed and modified from time-to-time.

I%&'( )*+),+*-./% 0'-/&/+/

(0(;, first compiled in 56 was calculated on a utures %both index and stock&

G Cptions %7all and Put&

G !holesale Debt )arket

G 8etail Debt )arket

0('s leading index is 0ifty /: or popularly 0ifty and is composed of /: diversified benchmark +ndian company

stocks. 0ifty is constructed on the basis of weighted average market capitali=ation method.

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FOREIGN EXCHANGE MARKET

"he foreign exchange market %forex, >;, or currency market& is a global decentrali=ed market for the trading of

currencies. "he main participants in this market are the larger international banks. >inancial centres around the

world function as anchors of trading between a wide range of multiple types of buyers and sellers around the

clock, with the exception of weekends. "he foreign exchange market determines the relative values of different

currencies.

"he foreign exchange market works through financial institutions, and it operates on several levels. 1ehind the

scenes banks turn to a smaller number of financial firms known as Hdealers,I who are actively involved in large

quantities of foreign exchange trading. )ost foreign exchange dealers are banks, so this behind-the-scenes market

is sometimes called the Hinterbank marketI, although a few insurance companies and other kinds of financial

firms are involved. "rades between foreign exchange dealers can be very large, involving hundreds of millions of

dollars. 1ecause of the sovereignty issue when involving two currencies, >orex has little %if any& supervisory

entity regulating its actions.

"he foreign exchange market assists international trade and investments by enabling currency conversion. >orexample, it permits a business in the Fnited tates to import goods from the (uropean Fnion member states,

especially (uro=one members, and pay euros, even though its income is in Fnited tates dollars. +t also supports

direct speculation and evaluation relative to the value of currencies, and the carry trade, speculation based on the

interest rate differential between two currencies.

+n a typical foreign exchange transaction, a party purchases some quantity of one currency by paying for some

quantity of another currency. "he modern foreign exchange market began forming during the 5:s after three

decades of government restrictions on foreign exchange transactions %the 1retton !oods system of monetary

management established the rules for commercial and financial relations among the world's ma*or industrial states

after !orld !ar ++&, when countries gradually switched to floating exchange rates from the previous exchangerate regime, which remained fixed as per the 1retton !oods system.

"he foreign exchange market is unique because of the following characteristics$

+ts huge trading volume representing the largest asset class in the world leading to high liquidity.

+ts geographical dispersion.

+ts continuous operation$ ?9 hours a day except weekends, i.e., trading from ??$:: 4)" on unday

%ydney& until ??$:: 4)" >riday %0ew Jork&.

"he variety of factors that affect exchange rates.

"he low margins of relative profit compared with other markets of fixed income.

"he use of leverage to enhance profit and loss margins and with respect to account si=e.

As such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency

intervention by central banks.

According to the 1ank for +nternational ettlements, the preliminary global results from the ?:2 "riennial

7entral 1ank urvey of >oreign (xchange and C"7 Derivatives )arkets Activity show that trading in foreign

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exchange markets averaged K/.2 trillion per day in April ?:2. "his is up from K9.: trillion in April ?:: and K2.2

trillion in April ?::. >oreign exchange swaps were the most actively traded instruments in April ?:2, at K?.?

trillion per day, followed by spot trading at K?.: trillion.

According to the 1ank for +nternational ettlements, as of April ?::, average daily turnover in global foreign

exchange markets is estimated at K2.5 trillion, a growth of approximately ?:L over the K2.? trillion daily

volume as of April ?::. ome firms speciali=ing on foreign exchange market had put the average daily turnover

in excess of FK9 trillion.

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2! FOREIGN EXCHANGE AND FOREIGN EXCHANGE MARKET

FOREIGN EXCHANGE

>oreign (xchange refers to foreign currencies possessed by a country for making payments to other countries. +t

may be defined as exchange of money or credit in one country for money or credit in another. +t covers methodsof payment, rules and regulations of payment and the institutions facilitating such payments.

FOREIGN EXCHANGE MARKET

A foreign exchange market refers to buying foreign currencies with domestic currencies and selling foreign

currencies for domestic currencies. "hus it is a market in which the claims to foreign moneys are bought and sold

for domestic currency. (xporters sell foreign currencies for domestic currencies and importers buy foreign

currencies with domestic currencies.

According to (llsworth, oreign (xchange )arket comprises of all those institutions and individuals who buy

and sell foreign exchange which may be defined as foreign money or any liquid claim on foreign moneyoreign (xchange transactions result in inflow 3 outflow of foreign exchange.

FUNCTIONS OF FOREIGN EXCHANGE MARKET

>oreign exchange is also referred to as forex market. Participants are importers, exporters, tourists and investors,

traders and speculators, commercial banks, brokers and central banks. >oreign bill of exchange, telegraphic

transfer, bank draft, letter of credit etc. are the important foreign exchange instruments used in foreign exchange

market to carry out its functions.

"he >oreign (xchange )arket performs the following functions.

1! T*%' / P,)*.% P/' 8 C+'*.% F,%)-./%

"he basic function of the foreign exchange market is to facilitate the conversion of one currency into another i.e.

payment between exporters and importers.

>or eg. +ndian rupee is converted into F.. dollar and vice-versa. +n performing the transfer function variety of

credit instruments are used such as telegraphic transfers, bank drafts and foreign bills. "elegraphic transfer is the

quickest method of transferring the purchasing power.

2! C'&.- F,%)-./%

"he foreign exchange market also provides credit to both national and international, to promote foreign trade. +t is

necessary as sometimes, the international payments get delayed for 6: days or 5: days. Cbviously, when foreign

bills of exchange are used in international payments, a credit for about 2 months, till their maturity, is required.

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>or eg. )r. A can get his bill discounted with a foreign exchange bank in 0ew Jork and this bank will transfer the

bill to its correspondent in +ndia for collection of money from )r. 1 after the stipulated time.

3! H'&.% F,%)-./%

A third function of foreign exchange market is to hedge foreign exchange risks. 1y hedging, we mean covering of

a foreign exchange risk arising out of the changes in exchange rates. Fnder this function the foreign exchange

market tries to protect the interest of the persons dealing in the market from any unforeseen changes in exchange

rate. "he exchange rates under free market can go up and downM this can either bring gains or losses to concerned

parties. Nedging guards the interest of both exporters as well as importers, against any changes in exchange rate.

Nedging can be done either by means of a spot exchange market or a forward exchange market involving a

forward contract.

PARTICIPANTS 8 DEALERS IN FOREIGN EXCHANGE MARKET

A$>oreign exchange market needs dealers to facilitate foreign exchange transactions. 1ulks of foreign exchange

transaction are dealt by 7ommercial banks 3 financial institutions. 81+ has also allowed private authorised

dealers to deal with foreign exchange transactions i.e buying 3 selling foreign currency. "he main participants in

foreign exchange markets are as follow$

1! R'-*.+ C+.'%-

8etail 7lients deal through commercial banks and authorised agents. "hey comprise people, international

investors, multinational corporations and others who need foreign exchange.

2! C/00').*+ B*%9

7ommercial banks carry out buy and sell orders from their retail clients and of their own account. "hey deal with

other commercial banks and also through foreign exchange brokers.

3! F/'.% E()*%' B/9'

(ach foreign exchange market centre has some authorised brokers. 1rokers act as intermediaries between buyers

and sellers, mainly banks. 7ommercial banks prefer brokers.

4! C'%-*+ B*%9

Fnder floating exchange rate central bank does not interfere in exchange market. ince 52, most of the central

banks intervened to buy and sell their currencies to influence the rate at which currencies are traded.

>rom the above sources demand and supply generate which in turn helps to determine the foreign exchange rate.

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B$ TYPES OF FOREIGN EXCHANGE MARKET

>oreign (xchange )arket is of two types retail and wholesale market.

1! R'-*.+ M*9'-

"he retail market is a secondary price maker. Nere travellers, tourists and people who are in need of foreign

exchange for permitted small transactions, exchange one currency for another.

2! W/+'*+' M*9'-

"he wholesale market is also called interbank market. "he si=e of transactions in this market is very large. Dealers

are highly professionals and are primary price makers. "he main participants are 7ommercial banks, 1usiness

corporations and 7entral banks. )ultinational banks are mainly responsible for determining exchange rate.

3! O-' P*-.).:*%-

*$ B/9'

1rokers have more information and better knowledge of market. "hey provide information to banks about the

prices at which there are buyers and sellers of a pair of currencies. "hey act as middlemen between the price

makers.

;$ P.)' T*9'

Price takers are those who buy foreign exchange which they require and sell what they earn at the price

determined by primary price makers.

)$ I%&.*% F/'.% E()*%' M*9'-

+t is made up of three tiers

i. Nere dealings take place between 81+ and Authorised dealers %ADs& %mainly commercial banks&.ii. Nere dealings take place between ADsiii. Nere ADs deal with their corporate customers.

TYPES OF TRANSACTION IN FOREX MARKET

>or those who have never heard of foreign exchange, also known as forex, they may be incredibly confused when

you explain to them that investors buy, sell, and trade currencies. "hey may be even more confused to hear that

the exchange rates for these currencies rely on the forex market and the way that investors view the currencies

around the world. "hose who begin to get into forex trading and investing may find that it can be even more

confusing to determine what kind of investment to go with. "here are multiple ways to have a transaction in the

forex world. ome people may not understand the pros and cons between each, and why they may want to go

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with a certain forex transaction type over another. 1y trying to understand the top / transactions made on the

forex market, you may better understand what you may want to do with your own investment.

F/*& T*%*)-./%

A forward transaction is a transaction that is made for the futureM this means that the money does not actually

come into play until a future date. "he buyer and seller agree on a specific, stuck exchange rate for that certain

date in the future. 1ecause of the fixed date, the rate is stuck to the choice on that day. "he actual market numbers

on the day of the transaction do not matter, as the fixed rate cannot be changed. "here is no limit on the extent of

a future forward transaction, as it is dependent on the buyer and seller alone.

S:/- T*%*)-./%

"he spot transaction is the quickest and fastest way to actually exchange your currency. "here is an exchange of

two currencies over a two day period on the forex exchange, meaning that no contracts are signed. "his allows the

transaction to happen at a faster pace.

F,-,' T*%*)-./%

"hese transactions are also forward transactions, and deal with contracts much like the normal forwardtransactions. "he contracts usually deal with a certain amount by a certain date, rather than on a certain date. "he

contract lasts for the time specified, and are ma*or on the forex market.

S*: T*%*)-./%

wap transactions are easily the most normal and common of the multiple ways to do transactions on the forex

market. wap transactions are also forward transactions, but they do not happen as a trade through the forex

market itself. A swap transaction can be confusing at first, two investors agree to change currencies for a certain

amount of time. A later date is set for the two investors to change currencies back.

O:-./% T*%*)-./%

Cption transactions in the forex market common. "he foreign exchange options give an investor the right %or

option& to exchange money on the forex market. "his option has a fixed exchange rate and a specific date. "he

option transaction is the most prominent in the forex market because of the high traffic and amount of money that

is sunk into the currency forex market daily.

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FOREX MARKET IN INDIA

"raditionally +ndian forex market has been a highly regulated one. "ill about 55?-52, government exercised

absolute control on the exchange rate, export-import policy, >D+ % >oreign Direct +nvestment& policy. "he >oreign

(xchange 8egulation Act%>(8A& enacted in 52, strictly controlled any activities in any remote way related toforeign exchange. >(8A was introduced during 52, when foreign exchange was a scarce commodity. Post

independence, union government#s socialistic way of managing business and the license ra* made the +ndian

companies noncompetitive in the international market, leading to decline in export. imultaneously +ndia import

bill because of capital goods, crude oil 3 petrol products increased the forex outgo leading to sever scarcity of

foreign exchange. >(8A was enacted so that all forex earnings by companies and residents have to reported and

surrendered %immediately after receiving& to 81+ %8eserve 1ank of +ndia& at a rate which was mandated by 81+.

>(8A was given the real power by making Hany violation of >(8A was a criminal offense liable to

imprisonmentI. +t a professed a policy of Ha person is guilty of forex violations unless he proves that he has not

violated any norms of >(8AI. "o sum up, >(8A prescribed a policy O Hnothing %forex transactions& is permittedunless specifically mentioned in the actI.

Post liberali=ation, the 4overnment of +ndia, felt the necessity to liberali=e the foreign exchange policy. Nence,

>oreign (xchange )anagement Act %>()A& ?::: was introduced. >()A expanded the list of activities in which

a personcompany can undertake forex transactions. "hrough >()A, government liberali=ed the export-import

policy, limits of >D+ %>oreign Direct +nvestment& 3 >++ %>oreign +nstitutional +nvestors& investments and

repatriations, cross-border )3A and fund raising activities.

Prior to 55?, 4overnment of +ndia strictly controlled the exchange rate. After 55?, 4overnment of +ndia slowly

started relaxing the control and exchange rate became more and more market determined. >oreign (xchange

Dealer#s association of +ndia %>(DA+&, set up in 5/, helped the government of +ndia in framing rules and

regulation to conduct

forex exchange trading and developing forex market +n +ndia.

A ma*or step in development of +ndian forex market happened in ?::, when currency futures %+ndian 8upee and

F Dollar& started trading at 0ational tock (xchange %0(&. ince the introduction, the turnover in futures has

increased leaps and bound. "hough banks and authori=ed dealers were undertaking forex derivatives contracts,

but the introduction of exchange traded currency futures marked a new beginning as the retail investors were able

to participate in forex derivatives trading.

F/'.% E()*%' M*9'- .% I%&.*< H.-/.)*+ P':')-.='

+ndian forex market since independence can be grouped in three distinct phases.

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1>47 -/1>777?1>>2(8A Act was part of the exchange rate regulation practices followed by 81+.

+ndia#s perennial trade deficit widened during this period. 1y the beginning of 55, +ndian foreign exchange

reserve had dwindled down to such a level that it could barely be sufficient for three-week#s worth of imports.

During une 55, +ndia airlifted 6 tonnes of gold, pledged these with Fnion 1ank of wit=erland and 1ank of

(ngland, and raised FK 6:/ millions to shore up its precarious forex reserve. At the height of the crisis, between?nd and 9th une 55, rupee was officially devalued by 5./L from ?:./ to ?9./ to FK. "his crisis paved the

path to the famed Hliberali=ation programI of government of +ndia to make rules and regulations pertaining to

foreign trade, investment, public finance and exchange rate encompassing a broad gamut of economic activities

more market oriented.

1>>2 /%*&D+, >oreign Portfolio +nvestment etc.

Cne important policy changes pertinent to +ndia#s forex exchange system was brought in -- rupees was made

convertible in current account. "his paved to the path of foreign exchange paymentsreceipts to be converted at

market-determined exchange rate. Nowever, it is worthwhile to mention here that changes brought in by

government of +ndia to make the exchange rate market oriented have not happened in one big bang. "his process

has been gradual. C/%='-.;.+.- .% ),'%- *))/,%-means that individuals and companies have the freedom to

buy or sell foreign currency on specific activities like foreign travel, medical expenses, college fees, as well as for

paymentreceipt related to export-import, interest paymentreceipt, investment in foreign securities, business

expenses etc. An related concept to this is the Hconvertibility in capital accountI. C/%='-.;.+.- .% )*:.-*+

*))/,%-indicates that +ndian people and business houses can freely convert rupee to any other currency to any

extent and can invest in foreign assets like shares, real estate in foreign countries. )ost importantly +ndian bankscan accept deposit in any currency. (ven though the exchange rate has been market determined, from time to time

81+ intervenes in spot and forward market, if it feels exchange rate has deviated too much.

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3! FOREIGN EXCHANGE MANAGEMENT ACT

"he >oreign (xchange )anagement Act, 555 %>()A& is an Act of the Parliament of +ndia (8A&. "his act seeks to

make offenses related to foreign exchange civil offenses. +t extends to the whole of +ndia., replacing >(8A, which

had become incompatible with the pro-liberalisation policies of the 4overnment of +ndia. +t enabled a new foreign

exchange management regime consistent with the emerging framework of the !orld "rade Crganisation %!"C&.

+t also paved way to Prevention of )oney Eaundering Act ?::?, which was effected from uly ?::/.

Fnlike other laws where everything is permitted unless specifically prohibited, under this act everything was

prohibited unless specifically permitted. Nence the tenor and tone of the Act was very drastic. +t required

imprisonment even for minor offences. Fnder >(8A a person was presumed guilty unless he proved himself

innocent, whereas under other laws a person is presumed innocent unless he is proven guilty.

S.-) /0 FERA

>(8A, in place since 5/, did not succeed in restricting activities such as the expansion of transnational

corporations %"07s&. "he concessions made to >(8A in 55-552 showed that >(8A was on the verge of

becoming redundant. After the amendment of >(8A in 552, it was decided that the act would become the

>()A. "his was done in order to relax the controls on foreign exchange in +ndia, as a result of economic

liberali=ation. >()A served to make transactions for external trade %exports and imports& easier O transactions

involving current account for external trade no longer required 81+#s permission. "he deals in >oreign (xchange

were to be Qmanaged# instead of Qregulated#. "he switch to >()A shows the change on the part of the government

in terms of foreign capital.

N''& / -. 0*%*'0'%-

"he buying and selling of foreign currency and other debt instruments by businesses, individuals and

governments happens in the foreign exchange market. Apart from being very competitive, this market is also the

largest and most liquid market in the world as well as in +ndia. +t constantly undergoes changes and innovations,

which can either be beneficial to a country or expose them to greater risks. "he management of foreign exchange

market becomes necessary in order to mitigate and avoid the risks. 7entral banks would work towards an orderly

functioning of the transactions which can also develop their foreign exchange market.

!hether under >(8A or >()A#s control, the need for the management of foreign exchange is important. +t is

necessary to keep adequate amount of foreign exc from +mport ubstitution to (xport Promotion.

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2

0(! "(8) +0>()A

"erms like 7apital Account "ransaction,current Account "ransaction, person,service etc. were not defined in >(8A.

"erms like 7apital Account"ransaction, current account"ransaction person, service etc., havebeen defined in detail in >()A

9

D(>+0+"+C0 C>AF"NC8+S(DP(8C0

Definition of (8A was a narrow one % ?%b&

"he definition of Authori=edpersonhas been widened to include banks,money changes, off shore bankingFnits etc. %? % c &

/

)(A0+04 C>()A may notnecessarily be a non-resident under the+ncome "ax Act, for instance abusiness man going abroad andstaying therefore a period of ? days

or more in a financial year will becomea non-resident under >()A.

6

PF0+N)(0" Any offence under >(8A, was a criminaloffence , punishable with imprisonment asper code of criminal procedure, 52

Nere, the offence is considered to be acivil offence only punishable withsome amount of money as a penalty.+mprisonment is prescribed only whenone fails to pay the penalty.

TFA0"F) C>P(0AE"J.

"he monetary penalty payableunder>(8A, was nearly the five times the

amount involved.

Fnder >()A the quantum of penaltyhas been considerably decreased to

three times the amount involved.

APP(AE An appeal against the order of oreign (xchange.A+"A07(DF8+04 E(4AEP8C7((D+04.

>(8A did not contain any expressprovision on the right ofonimpleaded person to take legal assistance

>()A expressly recogni=es the rightof appellant to take assistance of legalpractitioner or chartered accountant%2?&

:PC!(8 C>(A87N A0D(+S(

>(8A conferred wide powers on a policeofficer not below the rank of a Deputyuperintendent of Police to make a search

"he scope and power of search andsei=ure has been curtailed to a greatextent

A S-': *'*& F/0 FERA T/ FEMA

(nactment of >()A has brought in many changes in the dealings of >oreign (xchange, as compared to >(8A.ome of them are restrictive, and some has widened the scope.

Nowever some of the relevant progress made, from >(8A to >()A, are as follows$

W.-&**+ / F/'.% E()*%'

0ow, the restrictions on withdrawal of >oreign (xchange for the purpose of current Account "ransactions, hasbeen removed. Nowever, the 7entral 4overnment may, in public interest in consultation with the 8eserve 1ankimpose such reasonable restrictions for current account transactions as may be prescribed.

>()A has also by and large removed the restrictions on transactions in foreign (xchange on account of trade ingoods, services except for retaining certain enabling provisions for the 7entral 4overnment to impose reasonablerestriction in public interest.

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4! EQUITY

T' D'.%.-./% / E@,.-

Plain and simple, equity is a share in the ownership of a company. (quity represents a claim on the company's

assets and earnings. As you acquire more equity, your ownership stake in the company becomes greater. !hether

you say shares, equity, it all means the same thing.

B'.% *% O%'

Nolding a company's equity means that you are one of the many owners %shareholders& of a company and, as

such, you have a claim %albeit usually very small& to everything the company owns. Jes, this means that

technically you own a tiny sliver of every piece of furniture, every trademark, and every contract of the company.

As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the

equity.

A stock is represented by a stock certificate. "his is a piece of paper that is proof of your ownership. "oday its in

demateriali=ed form i.e. in electronic form shares have been kept safe. "his is done to make the shares easier to

trade. +n the past, when a person wanted to sell his or her shares, that person physically took the certificates downto the brokerage. 0ow, trading with a click of the mouse or a phone call makes life easier for everybody.

1eing a shareholder of a public company does not mean you have a say in the day-to-day running of the business.

+nstead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say

in the company. >or instance, being a 8eliance shareholder doesn't mean you can call up )ukesh Ambani and tell

him how you think the company should be run.

"he management of the company is supposed to increase the value of the firm for shareholders. +f this doesn't

happen, the shareholders can vote to have the management removed, at least in theory. +n reality, individual

investors like you and + don't own enough shares to have a material influence on the company.

D';- =! E@,.-

!hy does a company issue stockU !hy would the founders share the profits with thousands of people when theycould keep profits to themselvesU "he reason is that at some point every company needs to raise money. "o dothis, companies can either borrow it from somebody or raise it by selling part of the company, which is known asissuing stock. A company can borrow by taking a loan from a bank or by issuing bonds. 1oth methods fit underthe umbrella of debt financing. Cn the other hand, issuing stock is called equity financing. +ssuing stock isadvantageous for the company because it does not require the company to pay back the money or make interestpayments along the way. All that the shareholders get in return for their money is the hope that the shares willsomeday be worth more than what they paid for them. "he first sale of a stock, which is issued by the private

company itself, is called the initial public offering %+PC&.

+t is important that you understand the distinction between a company financing through debt and financingthrough equity. !hen you buy a debt investment such as a bond, you are guaranteed the return of your money %theprincipal& along with promised interest payments. "his isn't the case with an equity investment. 1y becoming anowner, you assume the risk of the company not being successful - *ust as a small business owner isn't guaranteeda return, neither is a shareholder. As an owner, your claim on assets is less than that of creditors. "his means thatif a company goes bankrupt and liquidates, you, as a shareholder, don't get any money until the banks and

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bondholders have been paid outM we call this absolute priority.hareholders earn a lot if a company is successful,but they also stand to lose their entire investment if the company isn't successful.

R.9

+t must be emphasi=ed that there are no guarantees when it comes to individual stocks. ome companies pay outdividends, but many others do not. And there is no obligation to pay out dividends even for those firms that havetraditionally given them. !ithout dividends, an investor can make money on a stock only through its appreciation

in the open market. Cn the downside, any stock may go bankrupt, in which case your investment is worthnothing.Although risk might sound all negative, there is also a bright side. "aking on greater risk demands a greater return

on your investment. "his is the reason why stocks have historically outperformed other investments such as bonds

or savings accounts. Cver the long term, an investment in stocks has historically had an average return of around

:-?L.

DIFFERENT TYPES OF STOCKS

C/00/% S-/)9

7ommon stock is, well, common. !hen people talk about stocks they are usually referring to this type. +n fact,

the ma*ority of stock is issued is in this form. !e basically went over features of common stock in the last section.

7ommon shares represent ownership in a company and a claim %dividends& on a portion of profits. +nvestors get

one vote per share to elect the board members, who oversee the ma*or decisions made by management.

Cver the long term, common stock, by means of capital growth, yields higher returns than almost every other

investment. "his higher return comes at a cost since common stocks entail the most risk. +f a company goes

bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and

preferred shareholders are paid.

P'''& S-/)9

Preferred stock represents some degree of ownership in a company but usually doesn't come with the same votingrights. %"his may vary depending on the company.& !ith preferred shares, investors are usually guaranteed a fixed

dividend forever. "his is different than common stock, which has variable dividends that are never guaranteed.Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common

shareholder %but still after debt holders&. Preferred stock may also be callable, meaning that the company has theoption to purchase the shares from shareholders at anytime for any reason %usually for a premium&.

ome people consider preferred stock to be more like debt than equity. A good way to think of these kinds of

shares is to see them as being in between bonds and common shares.

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CHANGING STOCK PRICES

tock prices change every day as a result of market forces. 1y this we mean that share prices change because of

supply and demand. +f more people want to buy a stock %demand& than sell it %supply&, then the price moves up.7onversely, if more people wanted to sell a stock than buy it, there would be greater supply than demand, and the

price would fall.

Fnderstanding supply and demand is easy. !hat is difficult to comprehend is what makes people like a particular

stock and dislike another stock. "his comes down to figuring out what news is positive for a company and what

news is negative. "here are many answers to this problem and *ust about any investor you ask has their own ideas

and strategies.

"hat being said, the principal theory is that the price movement of a stock indicates what investors feel a companyis worth. Don't equate a company's value with the stock price. "he value of a company is its market capitali=ation,

which is the stock price multiplied by the number of shares outstanding. >or example, a company that trades at 8s:: per share and has million shares outstanding has a lesser value than a company that trades at 8s /: that has/ million shares outstanding %8s :: x million B 8s :: million while 8s /: x / million B 8s ?/: million&."o further complicate things, the price of a stock doesn't only reflect a company's current value, it also reflects the

growth that investors expect in the future.

"he important things to grasp about this sub*ect are the following$

. At the most fundamental level, supply and demand in the market determines stock price.

?. Price times the number of shares outstanding %market capitali=ation& is the value of a company.7omparing *ust the share price of two companies is meaningless.

2. "heoretically, earnings are what affect investors' valuation of a company, but there are otherindicators that investors use to predict stock price. 8emember, it is investors' sentiments, attitudes andexpectations that ultimately affect stock prices.

9. "here are many theories that try to explain the way stock prices move the way they do. Fnfortunately,

there is no one theory that can explain everything.

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HOW TO READ A STOCK8 QUOTE

A stock quote will look like something below.

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S-/)9 S0;/+ ?"his is the unique alphabetic name which identifies the stock. +f you watch financial "R, youhave seen the ticker tape move across the screen, quoting the latest prices alongside this symbol. +f you arelooking for stock quotes online, you always search for a company by the ticker symbol. +n above stock quote it#s

R'+)*:.-*+

52?W''9 H. *%& L/ ?"hese are the highest and lowest prices at which a stock has traded over the previous

/? weeks %one year&. "his typically does not include the previous day's trading.

S'),.- N*0' " T:' / S-/)9 ? "his column lists the name of the company. +f there are no special symbolsor letters following the name, it is common stock. Different symbols imply different classes of shares.>or example,


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After knowing about the stock basics. Eet#s discuss now about the company research analysis which can help youin deciding which particular stocks to choose.

TYPES OF RESEARCH

FUNDAMENTAL ANALYSISundamental analysis is the cornerstone of investing. +n fact, some would say that you aren't really investing ifyou aren't performing fundamental analysis. 1ecause the sub*ect is so broad, however, it's tough to know where

to start. "here are an endless number of investment strategies that are very different from each other, yet almost

all use the fundamentals.

"he biggest part of fundamental analysis involves delving into the financial statements. Also known as

quantitative analysis, this involves looking at revenue, expenses, assets, liabilities and all the other financial

aspects of a company. >undamental analysts look at this information to gain insight on a company's future

performance. A good part of this tutorial will be spent learning about the balance sheet, income statement, cash

flow statement and how they all fit together.

B*.)

!hen talking about stocks, fundamental analysis is a technique that attempts to determine a security#s value by

focusing on underlying factors that affect a company's actualbusiness and its future prospects. Cn a broader

scope, you can perform fundamental analysis on industries or the economy as a whole. "he term simply refers to

the analysis of the economic well-being of a financial entity as opposed to only its price movements.

>undamental analysis serves to answer questions, such as$

G +s the company#s revenue growingU

G +s it actually making a profitU

G +s it in a strong-enough position to beat out its competitors in the futureU

G +s it able to repay its debtsU

0ote$ "he term fundamental analysis is used most often in the context of stocks, but you can perform

fundamental analysis on any security, from a bond to a derivative. As long as you look at the economic

fundamentals, you are doing fundamental analysis. >or the purpose of this tutorial, fundamental analysis always

is referred to in the context of stocks.

FUNDAMENTAL ANALYSIS

study on equity and forex market and their interdependence

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