Unit 1: Investment fundamentals and markets

Investment is the commitment of funds to one or more assets that will be held over some future period in anticipation of a return (Sharpe). In finance, it means buying financial assets (shares, bonds) or real assets (property, gold).

• Nature: sacrifice of current consumption, return expected, risk involved, time element, liquidity varies.

Other objectives: tax benefits, marketability, regular income, wealth creation for goals.

Risk is the possibility that the actual return differs from the expected return.

• Total risk = Systematic risk + Unsystematic risk.
• Diversification across 15–20 well-chosen securities removes most unsystematic risk; systematic risk remains.

• Beta interpretation: β = 1 moves with the market; β > 1 aggressive (more volatile); β < 1 defensive; β estimated by regressing stock returns on market (Nifty) returns — characteristic line.

The primary market issues new securities. Methods: public issue (IPO — first issue; FPO — further issue), rights issue, private placement, preferential allotment and qualified institutions placement (QIP). SEBI's ICDR Regulations set eligibility, disclosure in the offer document, minimum promoter contribution and lock-in, and allocation among investor categories (qualified institutional buyers, non-institutional and retail investors).

• SEBI (ICDR) Regulations, 2018 govern public issues: eligibility (profitability track record or the alternative QIB route), minimum promoter contribution of 20% locked in, disclosure in the offer document, allocation to retail, non-institutional and qualified institutional buyers, ASBA and UPI-based applications, listing within T+3 days of issue closure.

• Book building discovers the issue price through bids within a price band; the final price is set at the level where demand is strongest (the cut-off price).
• Online IPOs use the stock exchanges' electronic systems; investors apply through ASBA (Application Supported by Blocked Amount) or UPI, and the money is blocked, not debited, until allotment. Listing now happens within T+3 days of the issue closing.
• Green-shoe option (over-allotment option): allows the issuer to allot extra shares (up to 15%) to stabilise the post-listing price.

The secondary market trades existing securities on stock exchanges — NSE and BSE.

Listing is admitting a security for trading on an exchange, under the SEBI LODR Regulations (listing obligations and disclosure requirements).

• Market indices: Sensex (30 stocks, BSE), Nifty 50 (NSE); sectoral and thematic indices.
• Investor protection: SEBI regulations, Investor Protection Fund, SCORES, circuit breakers, margin requirements, surveillance.

• Stop-loss order: an order to sell (or buy) automatically when the price reaches a trigger level, limiting losses. Example: bought at ₹500, stop loss at ₹460.
• Margin trading facility (MTF): the broker funds part of the purchase; the investor pays the initial margin and interest; positions are subject to mark-to-market and margin calls. It magnifies both gains and losses.
• Short selling: selling shares one does not own, expecting to buy them back later at a lower price. In India, institutions must disclose short positions upfront; naked short selling is not permitted — sellers must be able to deliver at settlement, using the Securities Lending and Borrowing (SLB) mechanism if needed.
• Insider trading: dealing in securities while in possession of unpublished price-sensitive information (UPSI) — prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015: trading window closures, pre-clearance of trades, codes of conduct, structured digital database of UPSI holders, penalties under Section 15G of the SEBI Act.