Thursday, 25 August 2011

Shares and Mutual Funds-3

Greetings to fellow blog readers......

Prospectus: Inviting of the public for subscribing on shares or debentures of the company. It is issued by the public companies.
The amount must be subscribed with in 120 days from the date of prospects.

Simple Interest: It is the interest paid only on the principal amount borrowed. No interest is paid on the interest accured during the term of the loan.
Compound Interest: It means that, the interest will include interest caliculated on interest.
Time Value of Money: Money has time value. A rupee today is more valuable than a rupee a year hence. The relation between value of a rupee today and value of a rupee in future is known as “Time Value of Money”.
NAV: Net Asset Value of the fund is the cumulative market value of the fund net of its liabilities. NAV per unit is simply the net value of assets divided by the number of units out standing. Buying and Selling into funds is done on the basis of NAV related prices. The NAV of a mutual fund are required to be published in news papers. The NAV of an open end scheme should be disclosed ona daily basis and the NAV of a closed end scheme should be disclosed atleast on a weekly basis.

Financial markets: The financial markets can broadly be divided into money and capital market.
ü    Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, banker’s acceptance, certificates of deposits, etc.

ü    Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.

Primary Market: It provides the channel for sale of new securities. Primary Market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation.
                                          They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.
Secondary Market: It refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Majority of the trading is done in the secondary market. It comprises of equity markets and the debt markets.

Difference between the primary market and the secondary market: In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

SEBI and its role: The SEBI is the regulatory authority established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith and incidental thereto.

Portfolio: A portfolio is a combination of investment assets mixed and matched for the purpose of investor’s goal.

Market Capitalisation: The market value of a quoted company, which is caliculated by multiplying its current share price (market price) by the number of shares in issue, is called as market capitalization.

Book Building Process: It is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.

Cut off Price: In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut off price”. This is decided by the issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP) guidelines permit only retail individual investors to have an option of applying at cut off price.
Bluechip Stock: Stock of a recognized, well established and financially sound company.

Penny Stock: Penny stocks are any stock that trades at very low prices, but subject to extremely high risk.

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