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Primary market Intermediaries

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Capital Market intermediaries are the important link between the regulators, issuer, and investor. SEBI has issued regulations in respect of each intermediary to ensure proper services to be rendered by them to the investors and the capital market. In this post, we will learn about some primary market intermediaries. The following market intermediaries are involved in the primary market: Merchant Bankers/Lead Managers Registrars and Share Transfer Agents Underwriters Bankers to the Issue Debenture Trustees etc. Merchant Bankers Merchant Bankers play an important role in the issue management process. Merchant Bankers are mandated by SEBI to manage public issues (as lead managers) and open offers in take-overs. Apart from these, they have other diverse services and functions. These include organizing and extending finance for investment in projects, assistance in financial management, acceptance house business, raising Euro-dollar loans and issue of foreign currency bonds. Lead Managers (Category 1 merchant bankers) has to ensure correctness of the information furnished in the offer document. They have to ensure compliance with the SEBI Rules and regulations and also guidelines for Disclosure and Investor Protection. To this effect, they have are to submit to SEBI a Due Diligence Certificate confirming that disclosures made in the draft prospectus or letter of offer are true, fair and adequate to enable the prospective investors to make a well-informed investment decision. Regulation: Merchant Bankers are one of the major intermediaries between the issuer and the investors, hence their activities are regulated by SEBI (Merchant Bankers) Regulations, 1992 Guidelines of SEBI and Ministry of Finance Companies Act 1956. Securities Contracts (Regulation) Act, 1956. and so on. Criteria for Merchant Banker: Regulation 3 of SEBI (Merchant Bankers) Regulations, 1992 lays down that the application by a person desiring to become merchant banker shall be made to SEBI in the prescribed form seeking a grant of a certificate of registration along with a non-refundable application fee as specified. The applicant shall be a body corporate other than NBFC The applicant has the necessary infrastructure like adequate office space, equipment’s and manpower to effectively discharge his activities. the applicant has in his employment a minimum of two persons who have the experience to conduct the business of the merchant banker. The applicant shall be a net worth of not less than 5 Crore rupees. The applicant, his director, partners, or principal officer is not involved in any litigation connected to securities market the applicant, his director, partner, or principal officer has not any time been convicted for any offence involving moral turpitude or has been found guilty of any offence. the applicant has the professional qualification from an institution recognized by the Government of Finance, Law or Business Management. the applicant is fit and proper person grant of certificate to the applicant is in the interest of investors Registrars and transfer agents R & T agents form an important link between the investor and issuer in the Securities Market. R & T agent is appointed by the issuer to act on its behalf to service the investors in respect of all corporate actions like sending out notices and other communications to the investors as well as dispatch of dividends and other non-cash benefits. R & T agents perform an equally important role in the depository system as well. R & T agents are registered with SEBI in the terms of SEBI (Registrars to the Issue and Share Transfer Agents) Rules and Regulations, 1993. Underwriters Underwriting services are provided by some large specialists financial institutions such as banks, insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee. Securities underwriting is the process by which investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equities and debt capital). The services are typically used during a public offering in the primary market. Underwriters are required to register with SEBI in terms of SEBI (Underwriters) Rules and Regulations, 1993. Bankers to the Issue Bankers to an Issue means a scheduled bank carrying on all of the following activities: acceptance of application and application money acceptance of allotment of call money refund of application money Payment of dividends or interest warrants etc. The activities of the Banker to an issue in the Indian Capital Market are regulated by SEBI (Bankers to an issue) Regulations, 1994 Debenture Trustees Debenture Trustee means a Trustee of a Trust deed for securing any issue of debentures. Debenture trustees call for periodical reports from the body corporate takes possession of trust property in accordance with the provisions of the trust deed enforce security in the interest of debenture holders do such acts as necessary in the event the security becomes enforceable carry out such acts as are necessary for the protection of debenture holders and to do all things necessary in order to resolve the grievances of the debenture holders. ascertain and specify that debenture certificates have been discharged within 30 days of registration of the charge with ROC ascertain and specify that debenture certificates have been discharged in accordance with the provisions of the Company Act ascertain and specify that interest warrants for interest due on the debentures have been dispatched to the debenture holders on or before the due date and so on. To inform SEBI in case of breach of Trust Deed and take measures accordingly. The activities of Debenture Trustee in the Indian Capital Market are regulated by SEBI (Debenture Trustees) Regulations, 1993.

Fixed Price Issue and Book Building Issue

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An Initial Public Offering (IPO) is a common way that a company goes public and sells shares for the first time to raise financing. There are two common types of IPOs: a fixed price and a book building offering. Let us discuss both types in detail in this post. What is meant by Issue Price? The Price at which a company’s shares are offered initially in the primary market is called as the Issue Price. When they begin to be traded, the Market Price may be above or below the issue price. Who decides the price of an issue? SEBI does not play any role in the price fixation. There is no price formula stipulated by SEBI. SEBI has provided guidelines under which Issuer shall decide the Issue price in consultation of Merchant Banker The Company and the merchant banker are required to give full disclosures of the parameters which they had considered while deciding the issue price. What is the Fixed Price Issue? Under the Fixed Price Offering, the company going public determines a fixed price at which its shares are offered to investors. Price at which the securities are offered and would be allotted is made known in advance to the investors. Demand for the securities offered is known only after the disclosure of the issue. To take part in this IPO, the investor must pay the full share price making the application. What is the Book Buiding Issue? Under Book building, the company going public offers a 20% price band within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding Demand for the securities offered, and at various prices, is available on a real-time basis on the websites of major stock exchanged during the book building process. Investors must specify the number of shares they want to buy and how much they are willing to pay. Unlike Fixed price, there is no fixed price per share. What is the Book Building Process? Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which IPO is open, bids are collected from Investors at various prices, which are above or equal to floor price. The process is directed towards both the institutional as well as retail investors. The issue price is determined after the bid closure based on the demand generated in the process. What is a Price Band in a book built IPO? The prospectus contains either the floor price for the securities or a price band within which the investors can bid. Floor Price is the minimum price at which bids can be made Cap price is the maximum price at which bids can be made The spread between the floor and cap of the price band should not be more than 20% It is up to the company to decide on the price band in consultation with the merchant bankers. 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’. What is the main difference between the Book Building Issue and Fixed Price issue? Price at which securities will be allotted is not known in case of book building offer while in case of offer of shares through fixed price issue the price is known in advance to investors. Under book building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares. In case of book building, the demand can be known everyday as the book is being built. But in case of Fixed price issue the demand is known at the closure of the issue.

Flow chart of IPO Process

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The process of offering shares in a private corporation to the public for the first time is called Initial Public Offering (IPO). Flow Chart of IPO Process Approval of Board: An approval of the Board of Directors of the company is required fo raising capital from the public. Appointment of Lead Managers: The Lead Manager is a Merchant banker who orchestrates the issue in consultation with the company. Appointment of other Intermediaries: Several intermediaries facilitate the IPO process. A company secretary, an underwriter, bankers, brokers, registrars etc. are selected. Filing of the Prospectus with SEBI: All the companies seeking to make a public issue have to file their offer document with SEBI. The Offer document or Prospectus communicates the information about the company and the proposed security issue to the investing public. Filing of the Prospectus with Registrar of Companies: Once the SEBI and Stock Exchanges gives approval to the prospectus, offer document, must be filed with the Registrar of Companies, along with required documents by the Companies Act, 1956 Filing of Initial Listing Application: Within 10 days of filing the prospectus, the initial listing application must be made to the concerned stock exchanges, along with the initial listing fees. Promotion of the Issue: To promote the issue the company holds conferences for brokers, press, and investors. Advertisements are also released in newspapers and periodicals to generate interest among potential investors. Statutory Announcement: The Statutory announcement of the issue must be made after seeking the approval of the lead stock exchanges. This must be published at least 10 days before the opening of the subscription list. Collection of Applications: During the period of subscription, the bankers to the issue collect application money on behalf of the company. While the managers of the issue, with the help of registrar, monitor the situation. Information is gathered about the number of application received in various categories, the number of shares applied for, and the amount received. Processing of Applications: The applications forms received by the bankers are transmitted to the registrars of the issue for processing. This mainly involves scrutinizing the applications, coding the applications, preparing a list of applications with all the relevant details. etc. Establishing the Liability of Underwriters: If the issue is undersubscribed, the liability of the underwriter has to be established. Allotment of Shares: According to SEBI guidelines, one-half of the net public offers have to be reserved for applications up to 1000 shares and the balance one-half for larger applications. For each of these segments, the proportionate system of allotment is followed. Listing of the issue: The detailed listing application should be submitted to the concerned stock exchanges along with the listing agreement and the listing fee. The allotment formalities should be completed within 30 days after the subscription list is closed or such extended period as permitted by the lead stock exchanges. STAGES OF THE IPO 1) Pre-issue Due Diligence Draft Offer document to be filed with SEBI Final Offer document to be filed with SEBI Application for listing with Stock Exchange Promoter’s Contribution to be brought in prior to the issue Appointment of Compliance Officer In-Principal approval from Stock Exchange to be obtained and filed with SEBI Issue Advertisement Book-building and Bidding processes to be followed 2) Issue Subscription list to be kept open for at least 3 days Issue open with in the time prescribed 3) Post-Issue Monitoring reports to be submitted to SEBI Final Post issue monitoring reports Post Issue Advertisements Dispatch of shares certificates etc. and allotment of the documents.

Advantages and disadvantages of going public

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The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called the Initial Public Offering (IPO). Often going public is the best choice of growing business. The decision to go public is a very important business financing strategy of a company. Therefore we must discuss the Advantages and Disadvantages of going public. Advantages of going public Lets first discuss some advantages of going public: 1) Access to Capital: The principal motivation for going public is to have access to larger capital. A company that does not tap the public financial market may find it difficult to grow beyond a certain point for want of capital. The biggest advantage of going public is the capital raised. 2) Respectability A company which goes public commands respectability. Pubic companies offer more growth potential compared to non-public companies. Hence they can attract superior talent. 3) Exploit the opportunity Many companies are usually started privately by their promoter(s). When a non-public company recognizes that other companies in the industry are overpriced. It has an incentive to go public and exploit that opportunity 4) Scope for diversification When a company goes public, original owners, investors, managers etc. can cash out of the firm and build a diversified portfolio. 5) Reality Check from Market Market forces decides stocks prices of the companies which are publicly listed. Managers can use this information as a feedback for the improvement of the company. 6) Reduces the Marketing cost Going public attracts media attention. Business Newspapers, TV Channels, Websites, Magazines etc. focus on public companies for providing information to the Investors. This increases the exposure of the public listed companies and their products. 7) Helps Business growth Going public gives companies an increased availability of capital which can be used for building a competitive edge and increasing the market share by increasing the market penetration. 8) Increases Network Public companies can build a great network of suppliers, distributors, and partners due to their reputation as a Publicly listed company. 9) Ability to take advantage of market price fluctuations: Once public, a company can take advantage of market price fluctuations to sell stock when the markets are hot, buy back the stock when the market is cold. This can often be an effective and low cost way to raise significant capital. Disadvantages of going public A public company (or, more precisely, a listed company) is not an unmixed blessing. There are several disadvantages to going public 1) Adverse Selection Investors, in general, know less than the issuers about the value of companies that go public. Hence to stimulate interest and participation of Investors, companies has to under price its securities. 2) Loss of Flexibility The affairs of a public company are subject to fairly comprehensive regulations. Hence when a non-public company is transformed into a public company there is some loss of flexibility 3) Disclosures Public companies must make extensive disclosures and submit to stringent regulations. They are required to disclose a lot of information to investors and regulator. They can not keep secrecy of their expansion plans and product marketing strategies. 4) Accountability Understandably, the degree of accountability of a public company is higher. It has to explain a lot to its investors. Investors who want to see the rise in their share prices often scrutinize every action of management 5) Public Pressure Because of its greater visibility a public company may be pressurized to do things that it may not otherwise do. It really upsets the Entrepreneurs who started those businesses. Market pressure can compel Management to focus on short-term results instead of long term growth. 6) Expenses The cost of complying with SEBI rules and regulations is high and it is getting higher. The cost of going public is substantial both initially and on an ongoing basis. Fees of financial reporting documents and investors relations, stock holding meetings, and other expenses are significant. These are some of the disadvantages of going public.

Primary Market

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Capital Market can be broadly divided in Primary Market and Secondary Market. What is a Primary Market? The Primary Market is the part of Capital Market that deals with the issuance of new securities and then sold to investor directly by the issuer. It is also known as a New Issue Market. In this Market, Investors buy securities that were never traded before. New Issue Markets are facilitated by underwriting groups, consisting of investment banks that set a beginning price range for a given security and oversee its sale to investors. Once the initial sale is complete, further trading is conducted on the secondary market. Investors typically pay less for securities on the primary market than secondary market. What is the role of the ‘Primary Market’? It issues new securities on an exchange for companies, Government and other groups to obtain financing through debt-based or equity-based securities. It provides the channel for sale of new securities. It create long term instruments through which corporate entities raise funds from the capital market. It provides the issuers the opportunity to raise resources to meet their requirements of investment and/or discharge of 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. Ways of raising funds through Primary markets Corporate entities raise funds from New Issue Market in three ways. Public Issue: A stock exchange lists the securities and corporate raises funds through Initial Public Offering (IPO). Rights Issue: Existing shareholders are offered more shares at a discounted price and or a pro-rata basis. Private Allotment: A corporate issues shares at a price which may or may not be related to the current market price of the same security. Major Players of Primary Market There are several major players in the New Issue market. These include the merchant bankers, mutual funds, financial institutions, foreign institutional investors (FIIs) and individual investors.

Money Market

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Features of Money Market Money market deals with all the transactions in short term instruments with a period of maturity of 0-364 days. It is based on the Management of liquidity It is largely regulated by RBI and to an extent by SEBI It is a market where low risk, unsecured and short term debt instruments that are highly liquid are issued and actively traded every day. One of the important functions of a well-developed money market is to channel savings into short term productive investments like working capital. Call money market, treasury bills market, and markets for commercial paper and certificate of deposits are some of the examples of a money market. MONEY MARKET INSTRUMENTS: Treasury Bills (T-Bills) An Instrument of short-term borrowing by the Government of India maturing less than one year. These are also known as Zero Coupon Bonds. These are issued by RBI on behalf of Government of India to meet its short term requirement of funds They are issued in the form of Promissory notes. T-Bills are highly liquid and have assured yield with negligible risk of default. They are issued in discount but then paid at par. T-Bills are available for a Minimum amount of Rs. 25,000/- and in the multiple thereof. Call Money Market The call Money market forms a part of the national money market, where day-to-day surplus funds, mostly that of the banks are traded. The call money loans are of very short term in nature and the maturity period of these loans vary from 1 to 15 days. In this market, any amount could be lent or borrowed at a convenient interest rate, which is acceptable to both borrower and lender. The loans are considered as highly liquid, as they are repayable on demand at the option of either the lender or the borrower. Commercial Banks maintain CRR as per the directives of RBI. By using Call Money, banks borrow from each other to be able to maintain the CRR. A rise in Call Money rates makes other sources of finances like CoDs and CPs cheaper. Commercial Papers Commercial Papers are short term, unsecured promissory notes issued at a discount to face value by well-known companies that are financially strong and carry high credit rating. They have the maturity of 15 days to 1 year They are sold directly by the issuers to the investor or else placed by borrowers through agents like merchant banks and security houses. They are sold at discount and redeemed at par. The flexible maturities at which they can be issued are one of the main attractions for borrowers and investors since issues can be adapted to the needs of both. CPs are negotiable instrument transferable by endorsement and delivery. The commercial paper market has the advantage of giving highly rated corporate borrowers cheaper funds than they obtain from the banks while still providing the institutional investor with higher interest earnings that they could obtain from the banking system. They can be used as an alternative to bank borrowings. Funds raised through Commercial Paper are used to meet the floatation costs. The issue of Commercial Paper imparts a degree of financial stability to the system as the issuing company has an incentive to remain financially strong. Certificates of Deposits Certificate of deposits is defined as short term deposit by way of usance promissory notes having a short maturity of not less than three months and not more than one year. They are bank deposits which are transferable to one party to the other. They are different from conventional time deposits due to their free negotiability. Due to this negotiable nature, they are also known as negotiable certificates of deposits. They are issued in the period of tight liquidity when the deposits by individuals and households in less but demand for credit is high. They help to mobilize large amounts of money in short time period. Money Market Mutual Funds Money Market Mutual Funds that invest primarily in money market instruments of very high quality and of very short maturity. Commercial banks, RBI and public financial institutions can set it either directly or through their existing mutual funds subsidiaries. The scheme offered by MMMF can either be open-ended or closed-ended. In case of open-ended schemes, the units are available on continuous basis and the MMMF would be willing to repurchase the units, while a close ended scheme is available for subscription for a limited period and is redeemed at maturity. Commercial Bills Commercial Bill is a short-term, self-liquidating,negotiable instrument used for financing credit sales of a firm. When Goods are sold on credit, the buyer becomes liable to make a payment on a specified date in future. The seller could wait till the specified date or make a use of a bill of exchange. If the seller draws a Bill of Exchange on Buyer who accepts it then it becomes marketable instrument known as trade bills. When a seller presents this to a bank and accepts it and gives funds against it to the seller, it becomes a commercial bill.

Indian Financial System

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Overview of Indian Capital Markets Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions. The financial market is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers). It consists of investors or buyer of securities, borrowers or sellers of securities, intermediaries and regulatory bodies. Financial Market does not refer to the physical location. Formal trading rules, relationships and communication networks for originating and trading financial securities link the participants of the market. Indian Financial System The phenomenon of imbalance in the distribution of capital or funds exist in every economic system.  There are areas or people with surplus funds and there are those with the deficit. A financial system functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A financial system is a composition of various institutions, market, regulations, laws, practices, money managers, analysts, transactions and claims and liabilities. The functions performed by Financial Systems: The functions performed by Financial Systems: The Saving function Liquidity Function Payment Function Risk Function Policy Function Financial Markets The Financial Market is a broad term describing any marketplace where trading of securities including equities, bonds, currencies and derivatives occur. Financial markets can be defined as the market in which financial assets are created or transferred. Financial assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payments in the form of interest or dividend. Financial Markets are sometimes classified as Primary and Secondary Markets. But more often they are classified as Money Markets and Capital markets.  The term financial market is often used to refer just to markets that are used to raise finance; for long term capital markets and for short term finance, the money markets. Functions of Financial Markets Borrowing and lending Price discovery Information collection and distribution Risk sharing Liquidity Efficiency

12 important steps to investing

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Investing is an art. We have seen ‘Why Investing is important?’ Now let’s see what care should be taken while investing? Authorized intermediary: There are many investment avenues and different investment products. There are hundreds of Financial Services firms in India. It is important to approach SEBI registered Financial Advisers only. They will recommend products which are managed by authorized intermediaries only. Don’t fall for online Advertisements. Research is very important: It is important to do enough research about Authorized Intermediary through which you are doing the investment. Read about reviews on them, visit their websites, if possible talk to their existing clients etc. Same is applicable for the Investment products. You are investing your hard-earned money. Do proper research before investing in any product. Explore the options available: It is important to explore all the options available to you. It will help you make an informed decision. In Financial Services, client servicing is frequently needed. See if your Service Provider gives you customized services and proper attention or not. If anything goes wrong, it is difficult to switch in some products/services. A comparative study is important before investing. Obtain Written Documents: Don’t do any financial transactions based only on verbal communications. It is important to have written communication wiz. application letters, emails, acknowledgement of forms, fees receipts etc when you do any transaction. Go through all the documents related to the investment. Obtain copies of the all those written documents of your investment. Brochure of the products, Rules and Regulations, company profile etc. should be obtained before investing. Read and Understand such documents: We have developed a habit of scrolling down terms and conditions of installed software. We just tick on ‘I agree’ and submit it without reading single word from it. This shouldn’t be done while investing. It is very important to read and understand such documents to avoid future disputes. Verify the legitimacy of the investment: We have seen many cases of chit-funds and money-rolling businesses where the company management eloped by duping investors money. If such things happen, we hardly get any justice in time which leads to regret and frustration. The only way to avoid such fraudsters is to invest only in the products run by well-known companies or Government etc. It is important to verify the legitimacy of the investment before investing. Find out the costs and benefits associated with the Investment: Financial Products sellers have a Sales target to achieve. Sometimes they really don’t bother about the needs of the customer and sell them products on which they get good commission. It is the responsibility of Investors to find out costs and benefits associated with the investment first. Investors should find of whether there is any hidden cost which seller isn’t revealing to you. Fortunately, we have various websites where you can easily get details about these products. No harm in cross-verifying the facts before investing. Assess the Risk-Return profile of the investment: More the risk more is the return. is the basic principle of Investment. It is important to first know your own risk profile. Then accordingly you can see which products suit you more. Assess the risk-return profile of the financial products before investing. If someone promises you Double returns in short-time, run away from that person. Even a 10% CAGR returns are considered to be a good return which beats the inflation. More than 16% return on the portfolio is an excellent return on equities. Know the liquidity and safety aspects of the investment: In case of emergency, you should be able to sell your assets and raise funds from the same. Assets should be liquid enough. The safety aspect of Investment is one of the most important aspects of investing. We have seen people who have lost their down-payment in properties which didn’t have all the clearances certificates. Invest in safe investment avenues where the only risk involved in about ‘investing related risk’. Ascertain if it is appropriate for your specific goals?: The success of financial planning depends on how you choose an accurate product for achieving some specific financial goal. Goals can be divided based on time duration. Less risky products are good for long-term goals while you can take some amount of risk for your short term goals. Compare with other Investment Opportunities available: Suppose, you are willing to buy a financial product for Investment. You can have your Pension Fund with a company with which you are working, you could take Atal Pension Yojna or National Pension Scheme by Government or you can choose some Hybrid Mutual fund which can give 10-12% annual returns. The choice is completely yours. Based on your risk appetite, income, and requirements you should choose the right option. Right Fit in the Portfolio: Never keep all eggs in one basket. Proper diversified portfolios allow you to sleep peacefully in nights without worrying much about your investments. Your every Investment should be complementary to each other. Avoid Repetition and over-diversification. Examine if the product you are investing in fits in with other investments you have already done or considering to make. These are the most important steps to Investing. Next time when you will buy any financial product or invest in any investment avenues, please consider these points. Will you follow these points properly? Do let me know in the comments. Basics of Investing by Stocksbaazigar Part – 1 (Youtube Live video) (Disclaimer: Stocksbaazigar Mr. Deepak Doddamani is not a SEBI registered Financial Adviser. He is NSE’s Certified Investment Analysis Professional and NSE’s Certified Marketing Professional Level – 4).

Magic of compounding

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When we hear success stories in Share Market, we normally appreciate only the Stock-picking skills of that Investor. We don’t give them enough credit for their discipline and patience. Those who don’t believe in the power of Share market rubbish it calling gambling. If you will tell them about an Investor who has a portfolio worth more than Market capital of Small Cap companies, they will argue that either that Investor is born with a silver spoon or simply he might have started with huge Investment Capital. We can’t actually blame them. They don’t know about the most important concept of Financial Market ‘compounding’ and the most widely known phenomena of creating wealth – the Magic of compounding. To know the importance of the power of compound interest one should first learn the concept of ‘time value of money’. Time value of money is the greater benefit of receiving money now rather than later. It is founded on time preference. When I was in school I bought bus Ticket from my home to School in 50 Paise. Now to travel the same distance, I have to take the BEST bus ticket of Rs. 10. Even a layman knows a term for it – ‘Mehengai’ or ‘inflation’. But it is not only about ‘inflation rate’ alone. It is also because of ‘time value of money’. Time value explains why interest is earned or paid. FV = PV (1+r) I am sure you have come across this formula several times in life. Yes, it is the easiest formula to calculate the future value of money from its present value. here ‘r’ is obviously the rate of interest. This formula explains to us why one should Invest in avenues which can give returns with higher interest rates than the inflation rate. We also pay taxes on our Income, brokerages on our buying and selling of Equities. We must obviously consider them as our cost on Investment too. If your returns on investments are more than the factors discussed, then only we will call them ‘real return’. You don’t have to lose your heart after reading about how hard it is to earn from Share Market. Yes, for short term investors it is very difficult to earn good sizable and respectable returns from the share market. But it is very easy for long term Investors to do so thanks to the Magic of Compounding. “Compound Interest is the eighth wonder of the world. He who understands it earns it and who doesn’t pay it.” – Albert Einstein The phenomena of making returns on returns is called as power of compounding. In long term we see exponential growth in our wealth due to magic of compounding. The amount you invest today, Regular monthly investment, Investment period, Rate of interest on savings and compounding intervals etc. are the key parameters using which we can easily find what corpus we can generate in long term by systematic investments. By systematic investment, you have to invest good capital in the Portfolio of stocks you selected and then let the Compound interest play its role. We all know the simplest formula of compound interest that we all learned at school. Aren’t we? A = P (1 + r/n)^nt Where, A = Final Amount that will be received P = Principal Amount (i.e. initial investment) r = annual interest rate n= frequency of interest rate (e.g. quarterly,half-yearly, monthly etc) t = number of years. Compounding means that the initial returns that you earned on your investment shouldn’t be removed as profit. It should be re-invested as ‘added capital’. Over a longer duration, compounding creates enormous wealth. Only those investors who not only understand this secret behind the magic of compounding but also implement it with lots of discipline and patients have become super-rich investors. The early you start more returns you can generate. Now, as you too have learned the ‘Magic of compounding’, when are you stopping your short term trading to focus on becoming Long Term investor? Do let me know in the comment below.

Why Investing is important?

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Future uncertainty: India is the second most populated country in the world with nearly a fifth of the world’s population. Its population growth rate is 1.13%. The average age of Indian is 29 years. As of September 2018, India had 31 million jobless people. Despite being one of the fastest growing economies of the world India has a significant problem of poverty. As a nation, we have completely failed to even fulfill the basic needs of Roti-Kapda-Makaan to every citizen. Most of the employed people are underpaid. They barely save anything in the month end. Competition is so high that one who has Job today can be replaced tomorrow by someone more competent. There is no ‘social security’ available in India. The government no more gives pension to employees in Government Jobs. Future is very uncertain. Financial planning has become so very important in today’s time. Every wise person will tell you that. Provision for future: Whether you are a Salaried Individual or a Businessmen, we all earn for our families. Most of us have only one Source of Income. Part of our Income goes into paying bills, buying groceries, paying un-avoidable expenses etc. We also have other liabilities like paying Wi-Fi Bills, Premium of Insurance policies, EMIs of Bank Loans and so on. So once all these expenses are taken care off, we spend the rest of the money for luxuries like watching movies in multiplexes, Pizza party with family, fine dining with loved one, holiday trips and so on. After spending money on everything mentioned above, we are hardly left with some money which we save regularly for meeting future expenses. That money is called Savings. Let Money Make work for you To increase our savings we have only two options available, either increase our Income or reduce the Expenses. Income can be increased by either working overtime, finding some additional source of income, shifting to high-paying jobs or moving to another country for currency difference. Expenses can be reduced by cost-cutting, adopting the simple lifestyle, buying only those things which are really very necessary. For normal people, Income minus expenditure is saving. Smart people save first and then spend the rest. It is important to make your hard-earned money earn you some more instead of lying idle. That is where Investing comes into Picture. A cash flow statement is essential to understand how much you should invest. It is important to make regular saving your habit and systematic investment your priority. The investment will generate us much needed alternate source of income. It not only earns a return on our idle resources but also helps us generate a specific sum of money for a specific goal in life. Above all it helps us make a provision for an uncertain future. For beating the Inflation: The day you earn your first salary, start your Systematic Investment Plan in a good Mutual Fund. It is important to start investing early. SIP helps you Invest regularly. Choose a long-term Investment plan as it will help you create good corpus in the future. .It is important to allow your investment more time to grow. In long term, it will give handsome returns. Little drops do make an ocean. When we talk about Money, we also talk about Time Value of Money. Inflation reduces our purchasing power. Whenever we Invest we must consider only those avenues of Investment which can beat the Inflation. If we need real returns from our Investment, we should invest in avenues such as mutual funds and equities which have a higher rate of return than the inflation rate. Re-investing your profits and dividends again will increase our capital invested. Compounding and High frequency of compounding of our Investment can create huge wealth for us in long term. So take your first step today. There is no point in investing in the financial instruments/products which our previous generation invested. Without sufficient risk, we can’t achieve our financial goals. Don’t let the noise of conservative people stop from entering in Market. Gain adequate knowledge and start investing today. (Disclaimer: Stocksbaazigar Mr. Deepak Doddamani is NSE’s Certified Investment Analysis Professional and NSE’s Marketing Professional Level – 4. This post is for Educational purpose.Thank you)

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