NCERT Textbook: Investment Basics | Financial Literacy for Class 10 PDF Download

 Page 1


What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
Introduction to Financial Markets
3
Page 2


What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
Introduction to Financial Markets
3
What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
2
Page 3


What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
Introduction to Financial Markets
3
What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
2
What are various short-term financial options available for investment?
What are various long-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with 
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest 
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely 
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual 
funds, money market funds are primarily oriented towards protecting your capital and then, aim 
to maximise returns. Money market funds usually yield better returns than savings accounts, but 
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period 
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and 
may be considered for 6-12 months investment period as normally interest on less than 6 
months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and 
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which 
can be availed through any post office. It provides an interest rate of 8% per annum, which is 
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional 
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is 
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year 
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% 
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest 
payable at 8% per annum compounded annually. A PPF account can be opened through a 
nationalized bank at anytime during the year and is open all through the year for depositing 
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A 
withdrawal is permissible every year from the seventh financial year of the date of opening of 
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the 
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the 
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) 
borrowings by companies at a fixed  rate of interest which  is payable  monthly,  quarterly,  semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal 
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the 
purpose of raising capital. The central or state government, corporations and similar institutions 
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest 
on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from 
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated 
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt 
because of resource, time or knowledge constraints. Benefits include professional money 
management, buying in small amounts and diversification. Mutual fund units are issued and 
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which 
is determined at the end of each trading session. NAV is calculated as the value of all the shares 
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are 
usually long term investment vehicle though there some categories of mutual funds, such as 
money market mutual funds which are short term instruments.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of 
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or 
controlling the business of buying, selling or dealing in securities. Stock exchange could be a 
regional stock exchange whose area of operation/jurisdiction is specified at the time of its 
recognition or national exchanges, which are permitted to have nationwide trading since 
inception. NSE was incorporated as a National Stock Exchange.
Total equity capital of a company is divided into equal units of small denominations, each called 
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into 
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then 
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of 
the company and have voting rights.
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount 
by the borrower to the lender.
‘
In the Indian securities markets, the term bond’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and the term debenture’ is used 
for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, 
called underlying. The underlying asset can be equity, index, foreign exchange (forex), 
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity 
prices and commodity-linked derivatives remained the sole form of such products for almost 
three hundred years. The financial derivatives came into spotlight in post-1970 period due to 
growing instability in the financial markets. However, since their emergence, these products 
have become very popular and by 1990s, they accounted for about two-thirds of total 
transactions in derivative products.
What is meant by a Stock Exchange?
What is an ‘Equity’/Share?
What is a ‘Debt Instrument’?
What is a Derivative?
Introduction to Financial Markets
5
Page 4


What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
Introduction to Financial Markets
3
What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
2
What are various short-term financial options available for investment?
What are various long-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with 
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest 
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely 
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual 
funds, money market funds are primarily oriented towards protecting your capital and then, aim 
to maximise returns. Money market funds usually yield better returns than savings accounts, but 
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period 
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and 
may be considered for 6-12 months investment period as normally interest on less than 6 
months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and 
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which 
can be availed through any post office. It provides an interest rate of 8% per annum, which is 
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional 
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is 
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year 
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% 
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest 
payable at 8% per annum compounded annually. A PPF account can be opened through a 
nationalized bank at anytime during the year and is open all through the year for depositing 
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A 
withdrawal is permissible every year from the seventh financial year of the date of opening of 
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the 
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the 
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) 
borrowings by companies at a fixed  rate of interest which  is payable  monthly,  quarterly,  semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal 
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the 
purpose of raising capital. The central or state government, corporations and similar institutions 
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest 
on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from 
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated 
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt 
because of resource, time or knowledge constraints. Benefits include professional money 
management, buying in small amounts and diversification. Mutual fund units are issued and 
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which 
is determined at the end of each trading session. NAV is calculated as the value of all the shares 
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are 
usually long term investment vehicle though there some categories of mutual funds, such as 
money market mutual funds which are short term instruments.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of 
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or 
controlling the business of buying, selling or dealing in securities. Stock exchange could be a 
regional stock exchange whose area of operation/jurisdiction is specified at the time of its 
recognition or national exchanges, which are permitted to have nationwide trading since 
inception. NSE was incorporated as a National Stock Exchange.
Total equity capital of a company is divided into equal units of small denominations, each called 
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into 
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then 
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of 
the company and have voting rights.
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount 
by the borrower to the lender.
‘
In the Indian securities markets, the term bond’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and the term debenture’ is used 
for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, 
called underlying. The underlying asset can be equity, index, foreign exchange (forex), 
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity 
prices and commodity-linked derivatives remained the sole form of such products for almost 
three hundred years. The financial derivatives came into spotlight in post-1970 period due to 
growing instability in the financial markets. However, since their emergence, these products 
have become very popular and by 1990s, they accounted for about two-thirds of total 
transactions in derivative products.
What is meant by a Stock Exchange?
What is an ‘Equity’/Share?
What is a ‘Debt Instrument’?
What is a Derivative?
Introduction to Financial Markets
5
What are various short-term financial options available for investment?
What are various long-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with 
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest 
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely 
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual 
funds, money market funds are primarily oriented towards protecting your capital and then, aim 
to maximise returns. Money market funds usually yield better returns than savings accounts, but 
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period 
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and 
may be considered for 6-12 months investment period as normally interest on less than 6 
months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and 
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which 
can be availed through any post office. It provides an interest rate of 8% per annum, which is 
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional 
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is 
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year 
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% 
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest 
payable at 8% per annum compounded annually. A PPF account can be opened through a 
nationalized bank at anytime during the year and is open all through the year for depositing 
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A 
withdrawal is permissible every year from the seventh financial year of the date of opening of 
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the 
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the 
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) 
borrowings by companies at a fixed  rate of interest which  is payable  monthly,  quarterly,  semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal 
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the 
purpose of raising capital. The central or state government, corporations and similar institutions 
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest 
on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from 
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated 
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt 
because of resource, time or knowledge constraints. Benefits include professional money 
management, buying in small amounts and diversification. Mutual fund units are issued and 
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which 
is determined at the end of each trading session. NAV is calculated as the value of all the shares 
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are 
usually long term investment vehicle though there some categories of mutual funds, such as 
money market mutual funds which are short term instruments.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of 
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or 
controlling the business of buying, selling or dealing in securities. Stock exchange could be a 
regional stock exchange whose area of operation/jurisdiction is specified at the time of its 
recognition or national exchanges, which are permitted to have nationwide trading since 
inception. NSE was incorporated as a National Stock Exchange.
Total equity capital of a company is divided into equal units of small denominations, each called 
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into 
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then 
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of 
the company and have voting rights.
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount 
by the borrower to the lender.
‘
In the Indian securities markets, the term bond’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and the term debenture’ is used 
for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, 
called underlying. The underlying asset can be equity, index, foreign exchange (forex), 
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity 
prices and commodity-linked derivatives remained the sole form of such products for almost 
three hundred years. The financial derivatives came into spotlight in post-1970 period due to 
growing instability in the financial markets. However, since their emergence, these products 
have become very popular and by 1990s, they accounted for about two-thirds of total 
transactions in derivative products.
What is meant by a Stock Exchange?
What is an ‘Equity’/Share?
What is a ‘Debt Instrument’?
What is a Derivative?
4
Page 5


What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
Introduction to Financial Markets
3
What is Investment?
Why should one invest?
When to start Investing?
What care should one take while investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of 
keeping the savings idle you may like to use savings in order to get return on it in the future.  
This is called Investment.
One needs to invest to:
earn return on your idle resources
generate a specified sum of money for a specific goal in life
make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. 
Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs 
to buy the goods and services you need to live. Inflation causes money to lose value because it 
will not buy the same amount of a good or a service in the future as it does now or did in the 
past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today 
would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any 
long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is 
the return after inflation. The aim of investments should be to provide a return above the 
inflation rate to ensure that the investment does not decrease in value. For example, if the annual 
inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in 
value. If the after-tax return on your investment is less than the inflation rate, then your assets 
have actually decreased in value; that is, they won’t buy as much today as they did last year.
The sooner one starts investing the better. By investing early you allow your investments more 
time to grow, whereby the concept of compounding (as we shall see later) increases your income, 
by accumulating the principal and the interest or dividend earned on it, year after year. The 
three golden rules for all investors are:
Invest early
Invest regularly
Invest for long term and not short term
Before making any investment, one must ensure to:
1. obtain written documents explaining the investment
2. read and understand such documents
3. verify the legitimacy of the investment
¦
¦
¦
¦
¦
¦
INVESTMENT BASICS
Chapter 1
4. find out the costs and benefits associated with the investment
5. assess the risk-return profile of the investment
6. know the liquidity and safety aspects of the investment
7. ascertain if it is appropriate for your specific goals
8. compare these details with other investment opportunities available
9. examine if it fits in with other investments you are considering or you have already made
10. deal only through an authorised intermediary
11. seek all clarifications about the intermediary and the investment
12. explore the options available to you if something were to go wrong, and then, if satisfied, 
make the investment.
These are called the Twelve Important Steps to Investing.
When we borrow money, we are expected to pay for using it - this is known as Interest. Interest 
is an amount charged to the borrower for the privilege of using the lender’s money. Interest is 
usually calculated as a percentage of the principal balance (the amount of money borrowed). The 
percentage rate may be fixed for the life of the loan, or it may be variable, depending on the 
terms of the loan.
When we talk of interest rates, there are different types of interest rates -rates that banks offer to 
their depositors, rates that they lend to their borrowers, the rate at which the Government 
borrows in the Bond/Government Securities market, rates offered to investors in small savings 
schemes like NSC, PPF , rates at which companies issue fixed deposits etc.
The factors which govern these interest rates are mostly economy related and are commonly 
referred to as macroeconomic factors. Some of these factors are:
Demand for money
Level of Government borrowings
Supply of money
Inflation rate
The Reserve Bank of India and the Government policies which determine some of the 
variables mentioned above
One may invest in:
Physical assets like real estate, gold/jewellery, commodities etc. and/or
Financial assets such as fixed deposits with banks, small saving instruments with post 
offices, insurance/provident/pension fund etc. or securities market related instruments like 
shares, bonds, debentures etc.
What is meant by Interest?
What factors determine interest rates?
What are various options available for investment?
¦
¦
¦
¦
¦
¦
¦
2
What are various short-term financial options available for investment?
What are various long-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with 
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest 
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely 
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual 
funds, money market funds are primarily oriented towards protecting your capital and then, aim 
to maximise returns. Money market funds usually yield better returns than savings accounts, but 
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period 
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and 
may be considered for 6-12 months investment period as normally interest on less than 6 
months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and 
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which 
can be availed through any post office. It provides an interest rate of 8% per annum, which is 
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional 
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is 
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year 
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% 
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest 
payable at 8% per annum compounded annually. A PPF account can be opened through a 
nationalized bank at anytime during the year and is open all through the year for depositing 
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A 
withdrawal is permissible every year from the seventh financial year of the date of opening of 
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the 
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the 
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) 
borrowings by companies at a fixed  rate of interest which  is payable  monthly,  quarterly,  semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal 
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the 
purpose of raising capital. The central or state government, corporations and similar institutions 
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest 
on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from 
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated 
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt 
because of resource, time or knowledge constraints. Benefits include professional money 
management, buying in small amounts and diversification. Mutual fund units are issued and 
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which 
is determined at the end of each trading session. NAV is calculated as the value of all the shares 
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are 
usually long term investment vehicle though there some categories of mutual funds, such as 
money market mutual funds which are short term instruments.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of 
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or 
controlling the business of buying, selling or dealing in securities. Stock exchange could be a 
regional stock exchange whose area of operation/jurisdiction is specified at the time of its 
recognition or national exchanges, which are permitted to have nationwide trading since 
inception. NSE was incorporated as a National Stock Exchange.
Total equity capital of a company is divided into equal units of small denominations, each called 
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into 
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then 
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of 
the company and have voting rights.
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount 
by the borrower to the lender.
‘
In the Indian securities markets, the term bond’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and the term debenture’ is used 
for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, 
called underlying. The underlying asset can be equity, index, foreign exchange (forex), 
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity 
prices and commodity-linked derivatives remained the sole form of such products for almost 
three hundred years. The financial derivatives came into spotlight in post-1970 period due to 
growing instability in the financial markets. However, since their emergence, these products 
have become very popular and by 1990s, they accounted for about two-thirds of total 
transactions in derivative products.
What is meant by a Stock Exchange?
What is an ‘Equity’/Share?
What is a ‘Debt Instrument’?
What is a Derivative?
Introduction to Financial Markets
5
What are various short-term financial options available for investment?
What are various long-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with 
banks may be considered as short-term financial investment options:
Savings Bank Account is often the first banking product people use, which offers low interest 
(4%-5% p.a.), making them only marginally better than fixed deposits.
Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely 
short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual 
funds, money market funds are primarily oriented towards protecting your capital and then, aim 
to maximise returns. Money market funds usually yield better returns than savings accounts, but 
lower than bank fixed deposits.
Fixed Deposits with Banks are also referred to as term deposits and minimum investment period 
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and 
may be considered for 6-12 months investment period as normally interest on less than 6 
months bank FDs is likely to be lower than money market fund returns.
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and 
Debentures, Mutual Funds etc.
Post Office Savings: Post Office Monthly Income Scheme is a low risk saving instrument, which 
can be availed through any post office. It provides an interest rate of 8% per annum, which is 
paid monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional 
investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 
6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is 
paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year 
old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% 
bonus is also denied.
Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest 
payable at 8% per annum compounded annually. A PPF account can be opened through a 
nationalized bank at anytime during the year and is open all through the year for depositing 
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A 
withdrawal is permissible every year from the seventh financial year of the date of opening of 
the account and the amount of withdrawal will be limited to 50% of the balance at credit at the 
end of the 4th year immediately preceding the year in which the amount is withdrawn or at the 
end of the preceding year whichever is lower the amount of loan if any.
Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) 
borrowings by companies at a fixed  rate of interest which  is payable  monthly,  quarterly,  semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal 
alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-
9% per annum for company FDs. The interest received is after deduction of taxes.
Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the 
purpose of raising capital. The central or state government, corporations and similar institutions 
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest 
on a specified date, called the Maturity Date.
Mutual Funds: These are funds operated by an investment company which raises money from 
the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated 
set of objectives. It is a substitute for those who are unable to invest directly in equities or debt 
because of resource, time or knowledge constraints. Benefits include professional money 
management, buying in small amounts and diversification. Mutual fund units are issued and 
redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which 
is determined at the end of each trading session. NAV is calculated as the value of all the shares 
held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are 
usually long term investment vehicle though there some categories of mutual funds, such as 
money market mutual funds which are short term instruments.
The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of 
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or 
controlling the business of buying, selling or dealing in securities. Stock exchange could be a 
regional stock exchange whose area of operation/jurisdiction is specified at the time of its 
recognition or national exchanges, which are permitted to have nationwide trading since 
inception. NSE was incorporated as a National Stock Exchange.
Total equity capital of a company is divided into equal units of small denominations, each called 
a share. For example, in a company the total equity capital of Rs 300,00,000 is divided into 
20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then 
is said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of 
the company and have voting rights.
Debt instrument represents a contract whereby one party lends money to another on pre-
determined terms with regards to rate and periodicity of interest, repayment of principal amount 
by the borrower to the lender.
‘
In the Indian securities markets, the term bond’ is used for debt instruments issued by the 
Central and State governments and public sector organizations and the term debenture’ is used 
for instruments issued by private corporate sector.
Derivative is a product whose value is derived from the value of one or more basic variables, 
called underlying. The underlying asset can be equity, index, foreign exchange (forex), 
commodity or any other asset.
Derivative products initially emerged as hedging devices against fluctuations in commodity 
prices and commodity-linked derivatives remained the sole form of such products for almost 
three hundred years. The financial derivatives came into spotlight in post-1970 period due to 
growing instability in the financial markets. However, since their emergence, these products 
have become very popular and by 1990s, they accounted for about two-thirds of total 
transactions in derivative products.
What is meant by a Stock Exchange?
What is an ‘Equity’/Share?
What is a ‘Debt Instrument’?
What is a Derivative?
4
What is a Mutual Fund?
What is an Index?
What is a Depository?
What is Dematerialization?
A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) 
that pools money from individuals/corporate investors and invests the same in a variety of 
different financial instruments or securities such as equity shares, Government securities, 
Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the 
investment business that collect funds from the public and invest on behalf of the investors. 
Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which 
the mutual fund has invested the money leads to an appreciation in the value of the units held 
by investors. The investment objectives outlined by a Mutual fund in its prospectus are binding 
on the Mutual Fund scheme. The investment objectives specify the class of  securities a  Mutual  
Fund can  invest in.  Mutual  Funds invest in various asset classes like equity, bonds, debentures, 
commercial paper and government securities. The schemes offered by mutual funds vary from 
fund to fund. Some are pure equity schemes; others are a mix of equity and bonds. Investors are 
also given the option of getting dividends, which are declared periodically by the mutual fund, 
or to participate only in the capital appreciation of the scheme.
An Index shows how a specified portfolio of share prices are moving in order to give an 
indication of market trends. It is a basket of securities and the average price movement of the 
basket of securities indicates the index movement, whether upwards or downwards.
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, 
government securities, units etc.) in electronic form.
Dematerialization is the process by which physical certificates of an investor are converted to an 
equivalent number of securities in electronic form and credited to the investor’s account with his 
Depository Participant (DP).
Unit Code: 2 Unit  Title: Securities
Session-1 : Securities Market
Location:
Class Room,
Business
Channels,
FMM Lab
Learning 
Outcome
Knowledge 
Evaluation
Performance 
Evaluation
Teaching and 
Training Method
·
·
Who can 
invest 
Insecurities 
Market?
Securities 
Platform
· Trading 
Techniques 
Basics
·
·
Steps to 
Trade
Market 
Behaviour
Interactive lecture:
Brief about Market 
Operations, Show 
Business Channels.
Activity:
Live Trading/Watch 
Business Channels
·
·
Need of 
Regulators
Role of SEBI
· Describe all 
Market 
Regulators
· Draw 
Regulatory
Interactive lecture:
Scam in the 
Securities Market
Activity:
Role Play of SEBI 
Representative
Session-2 : Regulators
·
·
Participant 
Registration
Transaction 
through 
Participants
· Name all the 
Market 
Participants
· Role, Code of 
conduct for 
the Market 
Participants
Interactive lecture:
How to become 
Participants.
Activity:
Role Play.
Session-3 : Market Participants
Introduction to Financial Markets
7