Equities

Usually, companies sell a portion of their ownership to the public in exchange for money. Investors purchase a share of the ownership by buying shares of the company. They then become shareholders. Company stocks are called equities.

Equities are traded on the stock market. These could be in the primary or secondary market. In the primary market, companies get listed through an Initial Public Offering. Thus, new securities are available in the primary market. In the secondary market, investors buy or sell securities that have already been issued. Currently, more than 1,300 securities are available for equity trading on the National Stock Exchange (NSE) and over 6,000 on the Bombay Stock Exchange (BSE).

Why invest in equities

Simply saving money and keeping it aside does not help too.

Here’s why you should invest in the stock market:

·       Beat inflation: People invest to beat inflation – the increase in prices of everyday goods and services. Because of inflation, you have to keep paying extra amounts of money to purchase the same quantity of goods. As a result, you feel the need to save more to meet future expenses. Hence, you invest. This increases the value of your money through timely returns. Equity trading is one of the best ways to beat inflation.

·       Better than cash: Equity trading is one of the riskiest investments. As a result, many people are afraid of stock market investments. They fear that a fall in the stock market might jeopardize their financial security. However, there is an element of risk in all investments. Simply holding cash in bank accounts or keeping money aside in lockers may be considered very safe, but its low returns do not help beat inflation. Equity scores over cash as an effective long-term investment.

·       Best long-term returns: Equity investments can provide excellent long-term returns, illustrated by the chart below

Derivatives Trading

In the stock market, you can buy and sell shares of companies. Based on these shares, derivative instruments are also traded on the market. These instruments are an agreement to buy or sell the underlying shares in the future. This agreement is sold in the market. They are called contracts.

Derivative instruments are available for shares, indices, currencies as well as commodities. Their value is tied to the underlying security.

Types of Derivative Instruments:

There are two kinds of derivative instruments – futures and options. Futures are contracts or an agreement between two parties to either buy or sell a fixed quantity of assets at a particular time in the future for a fixed price. An option is also a similar contract, except the parties are not obligated to fulfill the terms of the agreement. These contracts are then traded in the market. The minimum value of a contract is Rs 2 lakh.

Arbitrage: While dealing in the derivatives market, you are essentially betting on the future increase or decline in stock prices. As a result, many stock traders use the segment to enhance their profits. This is called arbitrage.

Hedging: The most common use of derivatives trading is hedging. As part of this, you buy in the cash segment and agree to sell in the derivatives market or vice versa. Thus, you are essentially safeguarding yourself from potential losses. Hedging is mainly used by importers and exporters in the currency derivatives segment.

Margin trade: While trading in the derivatives market, you only pay a margin. This is because the actual value of the contracts would be too large in lakhs and crores. However, when you make a profit, the percentage of growth is exponentially higher. This allows you to make more money.

Mutual Funds

Mutual funds are investment vehicles that pool money from investors. The money is then invested across a wide variety of assets like stocks, bonds, gold, etc., depending on the investment objective to earn returns.

How do mutual funds work?

·       A mutual fund is set up by the sponsor or promoter. An asset management company (AMC) is appointed to oversee and manage the fund’s portfolios.

·       An investor puts in money in a mutual fund scheme in exchange for units. Some fund units can be bought only during a New Fund Offering, while some can be bought any time.

·       This money collected from a pool of investors is then used to purchase stocks, bonds, money-market instruments, government securities, ETFs, gold, and so on. The scheme’s prospectus will give a detailed idea about the kind of assets that will be purchased.

·       The AMC generally charges a small fee for managing the assets.

·       The portfolio is managed by the AMC. They regularly buy and sell the assets. Any profits made would be distributed among the investors as dividends.

What are the benefits?

Over the years, mutual funds have emerged as a highly popular investment option among investors in India and across the globe. Here’s why mutual funds are beneficial:

·       Diversification: Mutual funds give you access to a diversified portfolio. If you had to invest directly, you would have had to shell out a lot of money for diversification. In contrast, using a minor amount, you can have access to a portfolio with investments across multiple stocks or bonds.

·       Professional management: As an investor, you conduct your own research before buying a stock or bond. However, there are so many options out there that it can become confusing. A mutual fund, however, allows you to save time and resources in this research. Experts in the asset management company will be investing on your behalf through a mutual fund.

·       Timing: In the stock market, timing is one of the most important factors. A mutual fund allows you to sit back and relax, and not worry about buying or selling at the right time.

·       Transaction cost: When you buy a stock or bond, you have to pay a small amount as fees every time. Imagine, if you were to buy a hundred assets to diversify your portfolio, you had to pay a charge for each of them. This is not so for a mutual fund. All you have to do is pay a small fee once.

Demat Account

A dematerialized or demat account is a facility that allows investors to hold shares in an electronic format. This is similar to a bank account, where you keep your money. In this case, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange-traded funds (ETFs).

You need a demat account before you start to trade on India’s stock exchanges.

What are the benefits?

CUTS PAPERWORK:

Since all your certificates are electronic, transactions are less cumbersome. You never have to deal with the physical documents and the related paperwork. When you trade shares or other financial instruments, there is no need to actually hand over certificates to the buyer or seller.

LESS RISK:

When you are dealing with physical copies of certificates, there are many risks involved like fake securities, bad delivery, incomplete paperwork, or simple destruction of the paper or ink. In the demat form, certificates last longer and you eliminate these risks.

LOW COSTS:

Dealing in physical securities involves a lot of additional costs such as handling expenses, stamp duty as well as for safety. These are very hard to determine beforehand. All these are eliminated when maintaining a demat account. Also, all costs are detailed in advance.

INSTANT:

Since we are dealing in the electronic format, delivery is completed within a few days. Earlier, this used to take weeks, if not months. This means transactions become seamless and inexpensive.

Ways to Secure

·     Life Insurance: Low Premium, High Security

Life insurance provides you with the opportunity to protect yourself and your family from personal risk exposures like

·                repayment of debts after death,

·                providing for a spouse and children,

·                fulfilling other economic goals (such as putting your kids through college),

·                paying for funeral expenses, etc.

Life insurance protection is also important if you are a business owner or a key person in someone else's business, where your death (or your partner's death) might wreak financial havoc.

·     Health Insurance

Health insurance may be the most important type of insurance you can own. Without proper health insurance, an illness or accident can wipe you out financially and put you and your family in debt for years. Be insured.

·     Property and Casualty Insurance/ General Insurance

Property and casualty insurance is insurance that protects against property losses to your business, home, or car and/or against legal liability that may result from injury or damage to the property of others. This type of insurance can protect a person or a business with an interest in the insured physical property against losses.

COMMODITIES

Global institutional investor interest in commodity trading has increased significantly over the past few years. This, in part, reflects powerful cyclical and structural forces working in favor of commodity markets, while also the realization of the need to diversify personal investments into upcoming and popular financial products.

Commodities are goods that are typically used as inputs in the production of other goods and services. Commodity prices are determined largely by supply and demand interactions in the global marketplace. Supply and demand conditions may be influenced by factors like the weather, geopolitical events, and supply-side shocks (e.g., wars, hurricanes). Some examples of commonly traded commodities are energy products like oil and natural gas, metals like gold, copper, and nickel, and agricultural products like sugar, coffee, and soybean. Commodities exhibit an interesting risk-return profile. Commodities not only offer a good way to diversify a portfolio of stocks and bonds, but they also often offer better returns. According to a Yale study, since 1959, commodities futures have produced better annual returns than stock returns and outperformed bond returns    even more. During the 1970s, commodities futures outperformed stocks; during the 1980s the exact opposite was true - evidence of the    "negative correlation" between stocks and commodities that many of us have noticed. The returns on commodities futures "positively correlate" with inflation. Higher commodity prices lead a wave of high     prices in general (i.e., inflation), and that's why commodity returns do better in inflationary times, while stocks and bonds perform     poorly. The returns on commodities futures were "triple" the returns on stocks in companies that produced the same commodities.

Benefits of Investing in Commodities

 Diversification

Commodity returns have historically had low or negative correlations with the returns of other major asset classes and may be used to diversify a portfolio. Other factors remaining the same, diversified portfolios with low aggregate correlation tend to have lower volatility of returns. Therefore, diversification may improve risk-adjusted returns. Commodities may react differently from stocks and bonds in various economic and geopolitical situations, enhancing risk-adjusted returns and reducing the overall volatility of a portfolio.

 Inflation protection

Changing macroeconomic factors (like inflation) tend to impact commodities differently from other financial products. Prices of goods and services rise in tandem with input prices, while prices of stocks and bonds tend to decline because of rising commodity input prices, which put pressure on the economy and lower the value of future cash flows.

 Hedge against event risk

Geopolitical events like wars and supply disruptions due to natural disasters like hurricanes, droughts, and floods may impact the supply of, and increase the demand for, certain commodities. Including commodities in a portfolio may act as a potential hedge against certain types of event risks.