India has adopted the Depository System for securities trading in which book entry is done electronically and no paper is involved. The physical form of securities is extinguished and shares or securities are held in an electronic form. Before the introduction of the depository system through the Depository Act, 1996, the process of sale, purchase and transfer of securities was a huge problem, and there was no safety at all. Key Features of the Depository System in India 1. Multi-Depository System: The depository model adopted in India provides for a competitive multi-depository system. There can be various entities providing depository services. A depository should be a company formed under the Company Act, 1956 and should have been granted a certificate of registration under the Securities and Exchange Board of India Act, 1992. Presently, there are two depositories registered with SEBI, namely: National Securities Depository Limited (NSDL), and Central Depository Service Continue reading
Stock Investments
Market Timing for Investors
persoMarket Timing is a top down view of the stock market and its prospects. Market Timing is an approach that attempts to determine when to be in the market, when to be out of the market and when to short (bet on a price decline by borrowing stock and selling with the hope to buy it back at a cheaper price and repay at cheaper prices). Market timing includes the following four components. Trends of interest rates: The future behavior of interest rates, i.e., the tightening or easing bias of the Central Bank. Interest rates are critical to market values for three reasons. Stocks are basically the present value of future earnings. An investor invests his money in an expectation of certain rate of return. The higher the general level of risk-free rates, the greater the expected rate of return and the lower the present value of future returns. Additionally, Continue reading
Importance of Derivatives Instruments
Derivatives are becoming increasingly important in world markets as a tool for risk management. Derivatives instruments can be used to minimize risk. Derivatives are used to separate the risks and transfer them to parties willing to bear these risks. The kind of hedging that can be obtained by using derivatives in cheaper and more convenient than what could be obtained by using cash instruments. It is so because, when we use derivatives for hedging, actual delivery of the underlying asset is not at all essential for settlement purposes. The profit or loss on derivatives deal alone is adjusted in the derivative market. Moreover, derivatives do not create any new risk. They simply manipulate risks and transfer them to those who are willing to bear these risks. To cite a common example, let us assume that Mr. X owns a car. If he does not take an insurance, he runs a Continue reading
Financial Derivative – Futures: Definition, Features and Types
Meaning and Definition of Futures A futures contract is very similar to a forward contract in all respects excepting the fact that it is completely a standardized one. Hence, it is rightly said that a futures contract is nothing but a standardized forward contract. It is legally enforceable and it is always traded on an organized exchange. Clark has defined future trading “as a special type of futures contract bought and sold under the rules of organized exchanges”. The term ‘future trading’ includes both speculative transactions where futures are bought and sold with the objective of making profits from the price changes and also the hedging or protective transaction where future are bought and sold with a view to avoiding unforeseen losses resulting from price fluctuation. A future contract is one where there is an agreement between two parties to exchange any asset or currency or commodity for cash at Continue reading
Basic Investment Objectives
Investing is a wide spread practice and many have made their fortunes in the process. The starting point in this process is to determine the characteristics of the various investments and then matching them with the individuals need and preferences. All personal investing is designed in order to achieve certain objectives. These objectives may be tangible such as buying a car, house etc. and intangible objectives such as social status, security etc. similarly; these objectives may be classified as financial or personal objectives. Financial objectives are safety, profitability, and liquidity. Personal or individual objectives may be related to personal characteristics of individuals such as family commitments, status, dependents, educational requirements, income, consumption and provision for retirement etc. The basic objectives of investment can be classified on the basis of the investors approach as follows: Short term high priority objectives: Investors have a high priority towards achieving certain objectives in a Continue reading
Demutualization of Bombay Stock Exchange (BSE)
The change in the name of Asia’s oldest stock exchange, from the Stock Exchange, Mumbai to the Bombay Stock Exchange Ltd., (BSE Ltd.) is of more than cosmetic significance. Along with the change in name comes a new perspective, one brought about by a comprehensive change in its ownership and management. Until now, the BSE like most other exchanges in India was owned and managed by brokers, who also had the sole right to trade in the exchanges. Conflicts of interest were bound to arise in such situations. Until the advent of the National Stock Exchange in 1994, the BSE was India’s pre-eminent exchange, accounting for an overwhelmingly large proportion of the share market transactions of the country. Companies wherever located were advised to seek a listing of their shares on the BSE so that they could have access to its large reservoir of capital and investor base. Legally speaking, Continue reading