Investment Definition?

 
An investment is essentially an asset that is created with the intention of allowing
money to grow. The wealth created can be used for a variety of objectives such as
meeting shortages in income, saving up for retirement, or fulfilling certain specific
obligations such as repayment of loans, payment of tuition fees, or purchase of
other assets.

Investment may generate income for you in two ways.

One, if you invest in a saleable asset, you may earn income by way of profit.

Second, if Investment is made in a return generating plan, then you will earn an
income via accumulation of gains.

Generally, investments fall in any one of three basic categories, as explained

below.

Types of Investments 
The first refers to equity investments, and the second category includes debt
instruments.

Equity investments can offer greater returns and carry relatively higher risk.

While debt instruments are less risky, but offer relatively low returns.

Categories of Investments 
1. Ownership Investments 
Ownership investments, as the name clearly suggests, are assets that are purchased
and owned by the investor. Examples of this kind of investment include stocks,
real estate properties, and bullion, among others. Funding a business is also a kind
of ownership investment.
2. Lending Investments 
When you invest in lending instruments, you’re essentially behaving like the bank.
Corporate bonds, government bonds, and even savings accounts are all examples
of lending investments. The money you park in a savings account is basically a
loan that you give the bank. This money is used by the bank to fund the loans it
gives out to its customers.

3. Cash Equivalents 
These are investments that are highly liquid and can easily be converted into cash.
Money market instruments, for instance, are excellent examples of cash
equivalents. Cash equivalents generally offer low returns, but correspondingly, the
risk associated with them is also negligible.

Following are different types of investments in India:

1. Stocks
This includes shares of ownership of any company and helps you earn dividends in
return.

2. Bonds 
Wondering what is investment meaning in terms of bonds? It means lending your
money to an institution or government, for which you receive fixed interest at
regular intervals and also the face value upon maturity.

3. Mutual Funds
Mutual funds are a type of investment where money from multiple investors are
pooled and invested by professional fund manager. Depending on your risk
tolerance, investment tenure and returns expectations, you can choose to invest in
Equity Mutual Funds, Debt Mutual Funds or Hybrid Mutual Funds. You can also
make tax saving investments through mutual funds. Investments made into ELSS
(equity-linked savings scheme) mutual funds are eligible for tax benefits under
Section 80 C.
4. ULIP
ULIPs or Unit Linked Insurance Plans are a type of investment that provides both
investment and life insurance benefits. A portion of the money invested into ULIPs
is allocated for investment, meaning in this plan a part of your premium is invested
in different funds and helps you earn market linked returns. It also offers tax-
saving benefits of up to Rs. 1.5 lakhs under Section 80C.

5. Public Provident Fund (PPF)

Public Provident Fund (PPF) is considered as one of the best investment options
for long-term investors who are seeking guaranteed returns. Current PPF interest
rate is 7.1% p.a. till September 2022 and being a government-backed scheme, it
features minimal risk to the principal amount invested.

Method of investment- how to invest

1. Analyze Your Financial Needs
Firstly, analyze your financial situation concerning risk tolerance, investment
objectives and other factors like family size, number of earning members and life
goals. You may even take help from a financial professional. It will help you
clarify any doubts about ‘what is investment meaning for you?’ and identify the
suitable options.

2. Investment Diversification
Build a diversified financial portfolio according to your investment objectives by
putting your funds in different instruments for maintaining the right balance
between risk and returns.

Also, when thinking about ‘what is investment meaning’ and ‘where to invest,’
consider giving priority to those instruments that offer security to your loved ones.
It may include life insurance policies like term plan, ULIP (ULIP full form: Unit
Linked Insurance Plan) and other such instruments. You may consider the
objectives for investment to generate appropriate returns from it. 
3. Time Period
while considering what is investment, know what time you have before turning
your investments into cash. This is a crucial element that determines your
investment objectives. Depending on your requirements, you may choose short-
term or long-term funds.

4. Periodical Reassessment
Since funds are influenced by market forces, it is imperative that you closely
monitor them periodically. You may also consider readjustment if your portfolio is
not generating good returns.

Depending on your investment and savings objectives, you can choose from a
variety of investment plans offered by Max Life including Guaranteed Income
Plan, Smart Wealth Plan, Savings Advantage Plan and more. 

What are the Objectives of Investment?

The individual objectives of investment may vary from one investor to another, the
overall goals of investing money may be any one of the following reasons..

Reasons to Start Investing Today

1. To Keep Money Safe
Capital preservation is one of the primary objectives of investment for people.
Some investments help keep hard-earned money safe from being eroded with time.
By parking your funds in these instruments or schemes, you can ensure that you do
not outlive your savings. Fixed deposits, government bonds, and even an ordinary
savings account can help keep your money safe. Although the return on
investment may be lower here, the objective of capital preservation is easily met. 
2. To Help Money Grow
Another one of the common objectives of investing money is to ensure that it
grows into a sizable corpus over time. Capital appreciation is generally a long-term
goal that helps people secure their financial future. To make the money you earn
grow into wealth, you need to consider investment objectives and options that offer
a significant return on the initial amount invested. Some of the best investments to
achieve growth include real estate, mutual funds, commodities, and equity. The
risk associated with these options may be high, but the return is also generally
significant.
3. To Earn a Steady Stream of Income
Investments can also help you earn a steady source of secondary (or primary)
income. Examples of such investments include fixed deposits that pay out regular
interest or stocks of companies that pay investors dividends consistently. Income-
generating investments can help you pay for your everyday expenses after you
have retired. Alternatively, they can also act as excellent sources of supplementary
income during your working years by providing you with additional money to
meet outlays like college expenses or EMIs.
4. To Minimize the Burden of Tax
Aside from capital growth or preservation, investors also have other compelling
objectives for investment. This motivation comes in the form of tax benefits
offered by the Income Tax Act, 1961. Investing in options such as Unit Linked
Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity Linked Savings
Schemes (ELSS) can be deducted from your total income. This has the effect of
reducing your taxable income, thereby bringing down your tax liability.
5. To Save up for Retirement
Saving up for retirement is a necessity. It is essential to have a retirement fund you
can fall back on in your golden years, because you may not be able to continue
working forever. By investing the money you earn during your working years in
the right investment options, you can allow your funds to grow enough to sustain
you after you’ve retired.
6. To Meet your Financial Goals
Investing can also help you achieve your short-term and long-term financial goals
without too much stress or trouble. Some investment options, for instance, come
 with short lock-in periods and high liquidity. These investments are ideal
instruments to park your funds in if you wish to save up for short-term targets like
funding home improvements or creating an emergency fund. Other investment
options that come with a longer lock-in period are perfect for saving up for long-
term goals.

What Is Investment Meaning in Comparison to Savings?

The question, ‘What is investment meaning?’ becomes crucial when asked about
savings. Savings simply mean putting aside a part of your earnings over time. The
saved amount of money is subject to no risk and, therefore, does not help you earn
any profits or returns. However, its value appreciation remains more or less
stagnant, as there is no addition over and above what you add each month.

On the other hand, investment definition is based on the concept of earning returns

or profit on the money you first put in a fund or spent on an asset purchase.
Remember here that the involvement of risk is what makes them profitable.
When understanding ‘what is investment meaning,’ remember that there is a direct
relation between returns and risk, meaning more significant the risk involved,
higher are the chances of earning greater returns.

Frequently Asked Questions (FAQs)

Q. What do you mean by Investment?
A. Investment definition is an asset acquired or invested in to build wealth and
save money from the hard earned income or appreciation. Investment meaning is
primarily to obtain an additional source of income or gain profit from the
investment over a specific period of time.
Q. What are the different types of investments?
A. Following are some of the different types of investments available in India:
 Stocks
 Certificate of Deposit
 Bonds
 Real Estate
 Fixed Deposits
 Mutual Funds
 Public Provident Fund (PPF)
 National Pension System (NPS)
 Unit Linked Insurance Plan (ULIP)
 Senior Citizens’ Savings Scheme
Q. How does an investment work?
A. Investment is done keeping a financial goal in mind. The investment
objectives help generate income and grow over a certain period of time. Investment
includes bonds, stocks, PPF amongst others, which helps in growing money and
providing an additional source of income.

As investment helps us in growing our money over a certain period of time, there
is a certain risk accompanying the investment. You might get better returns in
some of the investment options, but they might also come with higher risk in
comparison to other investment options providing moderate returns.

Q. How do I start investing?

A. You need to consider some essential points before you start identifying
investment objectives and opportunities. Following are 4 key points to know more
about how to begin with investments in India:
 Analyse Your Financial Goals
 Diversify your Investments
 Investment Period
 Periodical Reassessment
Q. What are the objectives of investment?
A. Following are some of the primary objectives of investment:
 To Keep Funds Safe & Secure
 To Grow Your Funds Exponentially
 To Earn a Steady & Additional Source of Income
 Minimize Income Tax Burden
 Retirement Planning
 Meet Financial Goals

What is a deposit
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A short introduction to the meaning of deposit and its various types.

Key Takeaways

 A deposit is money you put into your bank account.

 You should deposit money in a bank to create savings and earn interest on it.
 A demand deposit is made for funds you can withdraw anytime.
 A time deposit is a long-term investment.
 A deposit could also be the collateral amount you pay when you take on a
loan.
The process of banking at its core involves putting away or saving money in
a savings account. The bank plays the role of a safe keeper – an entity that lets you
put away your hard-earned money while it pays you interest on sums saved. One of
the most frequently used terms in the world of banking is ‘deposit’. So, what is the
deposit? Let us understand its meaning and types.

What is Deposit?

Fundamentally, a deposit is money held by a bank. The money that you put for
savings in your bank account for any reason. It could be to safeguard your money,
increase your savings, or money received via cheques and other forms of fund
transfers – all come under the umbrella of deposits. Every time a transaction
involves a fund transfer into your bank account, it is referred to as a deposit
payment.

The word deposit can also refer to an amount of money serving as collateral in a
transaction. Suppose you apply for a loan from a bank. The bank might keep a
security deposit of your property papers or fixed deposits as collateral. The
property papers or fixed deposit serves as the collateral against the loan.

Types of Deposits

Deposits are broadly classified into two types:

1. Demand Deposit
A demand deposit is a general deposit that you make into your bank account.
It could simply be a transfer of money to any account – savings, current,
salary account, etc. With demand deposits, you can withdraw money from
 your account at your discretion. For example, if you deposit to your savings
account, you can freely withdraw money from the bank, its ATMs, or while
paying for your expenses using the debit card provided by the bank, as and
when you need.

2. Time Deposit
A time deposit refers to money you put in the bank for set periods to earn
interest. Unlike a demand deposit, you do not have the option of
withdrawing money whenever you want to. Your deposit is locked away for
a fixed term or time – a Fixed Deposit, for instance. Then there is the
Recurring Deposit, wherein you have to deposit a fixed sum for a set period
specified time intervals. The deposit period is a fixed long period, and the
bank pays you cumulative or non-cumulative interest based on the type of
time deposit you choose. The interest paid on time deposits is higher than
what you would earn on your demand deposits like a Savings Account.

How Does a Deposit Work?

When you deposit your money in a bank, you are safeguarding it. The bank
promises to pay this money back to you as and when you need it. The deposit is
your asset, and the bank owes you the amount you save and pays interest on it. The
interest rate differs based on the type of deposit you make. While there are no
restrictions on demand deposits, banks may levy penalties for withdrawing a time
deposit prematurely.

Conclusion

Bank deposits help you grow your money gradually. They teach the discipline of
saving money. You can start with demand deposits money into a savings account
to earn interest and gradually create time deposits with the lump sum saved in your
account.

MUTUAL FUNDS

1. Introduction
A mutual fund is a financial intermediary in capital market that pools collective
investments in form of units from retail and corporate investors and maintain a
portfolio of various schemes which invest that collective investments in equity and
debt instruments on behalf of these investors. Mutual fund is expert entity which
helps an investor invest in equity and debt instruments indirectly rather than taking
risk of investing money directly in these instruments. An ordinary investor has no
expertise or knowledge to invest money directly into equity market in India and
most of the times investors lose their money due to wrong selection of equity
shares, or bonds. Hence, mutual funds as intermediary provide expertise of
portfolio management actively and diversify risk by spreading investments from all
investors in various equity shares and debt instruments. This helps investors earn
good returns at low risk compared to returns at high risk if investors invest on their
own directly in capital market.

A mutual fund is a collective reservoir or pool of funds which is managed by a

qualified and expert Fund Manager. It is a trust that takes funds from a number of
investors who have a common investment goal and invests those funds in equities,
bonds, money market instruments and other securities. The income generated from
this combined portfolio is distributed proportionately amongst the investors after
subtracting relevant expenses and levies, by calculating a scheme’s ‘Net Asset
Value’ or NAV. Simply placed, the money pooled in by a large number of
investors are allotted in units by a mutual fund scheme. This pooled money
invested in equity or bonds or short term securities shall grow or go down
depending upon the performance of these investments. This shall get reflected in
the value of NAV.

Mutual funds are perfect for investors who either lack large sums for investment,
or for those who neither have the knowledge nor the time to research the market,
yet want to grow their wealth. In return, the fund house charges a small fee for
their professional expertise which is subtracted from the investment. The fees
charged by mutual funds are restricted to certain limits stated by the Securities and
Exchange Board of India (SEBI).During the past few years mutual funds have
achieved a favoured status when investors have been investing regularly in
equity/balanced schemes through them.

2. What is ‘NAV’?

Just like an equity share has a market price which is determined through trading in
stock exchanges, a mutual fund unit has Net Asset Value per Unit (NAV) based on
closing price of shares and bonds which are part of respective portfolio of mutual
fund scheme. The NAV is the combined market value of the shares, bonds and
securities held by a fund on any particular day in a portfolio of particular mutual
fund scheme (as reduced by legitimate expenses and charges). NAV per Unit
denotes the market value of all the shares/debentures/bonds or any other instrument
in a mutual fund scheme on a given day, net of all expenses and liabilities plus
income accrued, divided by the outstanding number of Units in the scheme.

NAV = Market Price of Securities + Other Assets – Total Liabilities + Units

Outstanding as at the NAV date

NAV = Net Assets of the Scheme + Number of units outstanding, that is, Market
value of investments + Receivables + Other Accrued Income + Other Assets –
Accrued Expenses – Other Payables – Other Liabilities + No. of units outstanding
as at the NAV date

3. Benefits of Mutual Funds

Mutual funds are managed by professionals organised firm called AMC (Asset
Management Company) through professional fund managers who actively manage
investment portfolio of various mutual fund schemes which deliver following
benefits to investors:

(1) Portfolio Diversification: Mutual Funds invest in a diversified portfolio of

financial instruments which enables a small investor to hold a diversified
investment portfolio even if the amount of investment is small.

(2) Low Risk: Even with a small amount of investment, Investors can acquire a
diversified portfolio of financial instruments. The risk in a diversified portfolio of
mutual fund scheme is lesser than investing directly in only 2 or 3 shares or bonds.

(3) Low Transaction Costs: Due to the economies of scale mutual funds incur
lesser transaction costs. These benefits are shared with the investors.

(4) Liquidity: Units of a mutual fund can be redeemed easily with the funds being
credited directly to the investors account though ECS payment.

(5) Choice: Mutual funds offer investors with variety of schemes with diverse

investment objectives. Investors, therefore, have a plenty of investing in a scheme
matching their financial goals. These schemes further provide various
plans/options e.g. dividend option or growth option or reinvestment option etc.
(6) Transparency: Funds provide investors with latest information related to the
markets and the schemes. All material facts are revealed to investors as per the
guidelines of SEBI and AMFI. They provide on a daily basis latest NAV to
investors.

(7) Flexibility: Investors are also provided flexibility by Mutual Funds. Investors

can transfer their units from a debt scheme to an equity scheme or a balanced
scheme through systematic transfer plan option (STP). Option of systematic
investment through monthly/quarterly instalments (SIP) and systematic withdrawal
at regular intervals (SWP) is also offered to the investors in open-ended schemes.

(8) Safety: Mutual Fund industry is fully regulated under SEBI rules where the
interests of the investors are safeguarded. All funds have to be registered with
SEBI and complete compliance with the rules and transparency is ensured.

(9) Professional management: Mutual funds portfolios are managed by expert

professional managers possessing skills and qualifications to analyse the
performance and prospects of companies. They actively manage portfolios through
close monitoring on a daily basis, which is not possible for a retail investor.

4. History of Mutual Funds in India

A robust financial market with funds flowing from retail investors is essential for a
developed economy. First mutual fund was set up in 1963, by Unit Trust of India
(UTI), at the initiative of the Government of India and RBI with a view to boost
savings and investments. Participation in the income, profits and gains earned by
UTI from the acquisition, holding, management and disposal of securities was
made available to retail investors.

First Phase: In 1978, UTI was de-linked from the RBI and IDBI took over the
regulatory and administrative control of UTI.US-64 was the first scheme launched
by UTI which was the best scheme of UTI for a long period of time.

Second Phase: SBI Mutual Fund was the first non-UTI mutual fund set up in June
1987, followed by Can bank Mutual Fund (Dec. 1987), PNB Mutual Fund (Aug.
1989), Indian Bank (Nov. 1989), Bank of India (Jun. 1990) and Bank of Baroda
Mutual Fund (Oct. 1992).

Third Phase: The Former Kothari Pioneer (now merged with Franklin Templeton
MF) was the first private sector MF registered in July 1993. A new era started in
the Indian MF industry in 1993 when private sector mutual funds entered the fray,
providing Indian investors a diverse choice of MF products.

Fourth Phase: In February 2003, the UTI Act, 1963 was repealed and UTI was
bifurcated into two separate entities e.g. the Specified Undertaking of the Unit
Trust of India (SUUTI) and UTI Mutual Fund which functions under the SEBI MF
Regulations, 1996.

Fifth Phase since 2012: Taking note of the lack of penetration of Mutual Funds,
especially in tier II and tier III cities, and keeping in view of the interest of various
stakeholders, SEBI initiated several positive measures in September 2012 to revive
the sluggish Indian Mutual Fund industry and to increase MFs’ penetration in the
remote corners of the country.

5. Organisation Structure of Mutual Funds in India

M
utual funds schemes on the basis of structure, investment objective & others
criteria
 De
tail classification of Mutual funds schemes on basis of investment objectives

7. Functional Classification of Mutual Funds

(1) Open-ended schemes: In case of open-ended schemes, investors can sell and

buy its units at net asset value (NAV) or NAV based prices at any point of time.
Investors can enter and exit the scheme any time during the life of the open-ended
fund. The key nature of open-ended funds is liquidity. Since there is no lock in
period these funds increase liquidity of the investors as the units can be bought and
sold anytime.

(2) Close-ended schemes: Close-ended schemes have a fixed corpus and a defined

maturity period ranging between 2 to 10 years. Investors can invest in the scheme
when it is opened for subscription for few days as new fund offer (NFO). The
scheme remains open for a limited time period not exceeding 45 days. The fund
has no interaction with investors till redemption except for paying dividend or
bonus. In exceptional cases some close ended mutual funds may announce buy
back schemes like Morgan Stanley announced buy back scheme of its close ended
mutual fund. There is a restriction on buying period in these schemes in form of
buying lock in. These schemes are listed on stock market for trading.

(3) Interval Schemes: Interval schemes provide the features of both open-ended

and close-ended schemes. They are open for sale or redemption during
predetermined intervals at NAV related prices. They are also called partial open
ended schemes.

8. Portfolio Classification of Mutual Funds

(1) Growth Funds (Equity oriented funds): The main objective of growth funds
is capital appreciation over the medium-to-long- term. They invest most of the
corpus in equity shares with significant growth potential and they offer higher
return to investors in the long-term at average risk. The risks associated with equity
investments and no surety or assurance of returns are the features of these equity
schemes. Growth funds can be further categorised into various schemes like large
cap fund, mid cap fund and small cap fund, multi/diversified equity fund, equity
linked saving scheme (ELSS), sectoral funds and index funds.

(2) Income Funds (Debt oriented funds): The purpose of income funds is to

provide safety of investments along with regular income to investors. These
schemes invest largely in income-bearing instruments like bonds, debentures,
government securities, and commercial papers. The returns as well as the risks
both are lower in income funds as compared to growth funds. Debt funds, liquid
funds, Monthly income plans, fixed maturity plans and floating rate funds are
different types of income fund schemes under the banner of income funds. These
funds are also called fixed income or money funds. These funds too have some risk
in case the corporate bond defaults.

(3) Balanced funds: The aim of balanced scheme is to provide both capital

appreciation and regular income. They divide their investment between equity
shares and fixed interest Debt instruments in such a ratio that the portfolios are
balanced. These funds usually comprise of companies with good profit and
dividend track records. The risk as well as rate of return is moderate.

(4) Money Market mutual funds: They specialise in investing in short-term

money market instruments like treasury bills, and certificate of deposits. The aim
of such funds is highest liquidity with lower rate of return at least possible risk.

9. Geographical Classification

(1) Domestic funds: Funds which mobilise funds from particular geographical

locality like a country or a region are called domestic funds. The market is limited
and restricted to the boundaries of a country in which the fund operates. They can
invest only in the instruments which are issued and traded in the domestic financial
markets. Indian Mutual fund investing in Indian securities is a domestic fund.
(2) Offshore funds: Offshore funds are funds which facilitate cross-border
investment. Such mutual funds can invest in instruments of foreign companies and
therefore provide investors the benefit of international diversification.

10. Others

(1) Sectoral Funds: These funds invest in particular core sectors like energy,

telecommunications, IT, Banking, construction, transportation, Steel, FMCG and
financial services etc.

(2) Tax Saving schemes: Tax-saving schemes provide special tax benefits to

investors. Mutual funds have launched variety of tax saving schemes. These are
close-ended funds and investments have lock-in period of at least 3 years. These
schemes have various choices like dividend, growth or capital appreciation.

(3) ELSS: In order to boost investors to invest in equity market, the government

has allowed tax benefits through special funds. Investment in these funds ensures
the investor to claim an income tax deduction under section 80C, but these funds
carry a 3 year lock-in period.

(4) Gilt funds: Mutual funds which deal only in gilts or government securities are
called gilt funds. With a view to create a larger investor base for government
securities, the RBI encourages setting up of gilt schemes.

(5) Index funds: An index fund is a mutual fund which invests in portfolio exactly
following same ratio of securities in the index on which it is based e.g. S&P BSE
Sensex or Nifty. It invests only in those shares which are part of the market index
and in exactly the same ratio as the weightage in the index so that the value of such
index schemes varies exactly with the market index. An index fund adopts a
passive investment strategy as fund manager need not analyse stocks for
investment or redemption in these schemes.

(6) Exchange traded funds (ETF): Exchange Traded Funds (ETFs) are a hybrid

of open-ended mutual funds and stocks traded on stock exchanges. These funds
can be purchased and sold like shares on stock exchanges at their changing current
NAV on exchange. They are open-ended Mutual funds listed on stock exchanges.

11. Role of Mutual Funds in Indian Capital Market development

The Indian Mutual Fund segment is one of the fastest expanding segments of our
Economy. During the last ten year period the industry has grown at nearly 22 per
cent CAGR. With assets of US $ 125 billion, India ranks 19th and one of the rapid
growing countries of the world. The factors leading to the development of the
industry are large market Potential, high savings rate, comprehensive regulatory
framework, tax policies, innovations of new schemes, aggressive role of
distributors, investor education awareness by SEBI, and past performance. Mutual
funds are not only providing growth to capital market through channelization of
savings of retail investors but themselves playing active role as active investor in
Indian companies in secondary as well as primary market. Let’s examine mutual
funds role in capital market development in detail.

(1) Mutual fund as a source of household sector savings mobilization: Mutual

fund industry has come a long way to assist the transfer of savings to the real
sector of the economy. Total AUM of the mutual fund industry clocked a CAGR of
12.4 per cent over FY 07-16. That shows how mutual funds have played pivotal
role in mobilising retail investors’ savings into capital market in last 10 years in
India. By the end of March, 2017 AUM with Mutual funds are around Rs. 17.5
lakh crores. In 2017 itself, investors poured Rs. 3.4 lakh crores across all the
categories of Mutual funds in India.

(2) Mutual Fund as Financial service or Intermediary: The financial services

sector is the second-largest component after trade, hotels, transport and
communication all combined together, and contributes around 15 per cent to
India’s GDP. With the rapid growth, mutual funds have become increasingly
important suppliers of debt and equity funds. In fact, corporations with access to
the low interest rates and increased share prices of the capital markets have
benefited from the expansion in mutual fund assets. In recent years, mutual funds
as a group have been the largest net purchaser of equities and a major purchaser of
corporate bonds. All the MFs collect funds from both individual investors and
corporate to invest in the financial assets of other companies. The number of fund
houses is also increasing each year in the fast growing Indian economy. As of
FY16, 42 asset management companies were operating in the country.

(3) Mutual funds popularity among small investors: Small investors have lots of

problems like limited funds, lack of expert advice, lack of access to information
etc. Mutual funds have come as a great help to all retail investors. It is a special
type of institutional mechanism or an investment method through which the small
as well as large investors pool their savings which are invested under the advice of
a team of professionals in large variety of portfolios of corporate securities Safety
with good return on investment is the outcome of these professional investment in
mutual funds. It forms a significant part of the capital market, providing the
advantage of a well-diversified portfolio and expert fund manager to a large
number, particularly retail investors. An ordinary investor who applies for shares in
a IPO of any company is not sure of any guaranteed allotment. But mutual funds
who invest in the particular capital issue made by companies get confirmed
allotment of, shares, therefore, the investment in good IPO’s can be achieved
though investment in a mutual fund.

(4) Mutual Funds as part of financial inclusion policy of Govt. of India: Now

SEBI is motivating mutual funds to spread in smaller cities and in rural India to
attract small savings and making rural people aware of new investment avenue like
mutual fund providing good returns at low risk. So Govt. of India policy of
financial inclusion to mobilise savings of unbanked people of India is being
supported actively by mutual funds now. In its effort to encourage investments
from smaller cities, SEBI allowed AMCs to hike expense ratio up to 0.3 per cent
on the condition of generating more than 30 per cent inflow from smaller cities.
Mutual funds and AMFI undertake Investor awareness programmes for this
purpose of financial inclusion.

INSURANCE

Nobody ever knows how their life is going to pan out. You may win the
lottery tomorrow or may get that job offer you've been dreaming about for
years. You may choose to set up your own business or want to ensure that
your children will never have to struggle to achieve any of their dreams. To
help you meet all your financial goals you need to do one simple thing
– invest in insurance.

If you aren't sure whether life insurance is the perfect fit for you, here are
just 10 reasons why investing in a good policy will help you with all your
needs:

1. It helps you save on taxes

If nothing else, you should purchase insurance simply because you can get
tax deductions on the premiums you pay.

2. It helps you plan for retirement

Not every kind of insurance can help you plan for retirement. Thankfully,
several insurance providers have tailor-made retirement plans that you can
invest in. The earlier you purchase one of these plans, the more money you
will have to enjoy once you decide to retire.

3. It will help your family pay off debts

We never know what life has in store for us. If anything were to happen to
you, your family may have to deal with a car loan, or a credit card bill, or
other types of loans. The payout from a life insurance policy can help your
loved ones repay these debts.

4.  It isn't too expensive

The earlier you start your insurance policy, the more it will benefit you. As a
young individual who is in great health, your premiums are likely to be
lower, while the insurance cover will be higher.

5. It can help take care of your business

If you run your own company, then you should definitely invest in a term
plan. This short-term cover option has incredibly low premiums but offers a
generous pay out in case anything were to happen to you. The sum will
help your business partner settle all your accounts.

6. It can help you fulfil long-term plans

Depending on the insurance plan you choose, you can invest small
amounts that will accumulate over time to help you purchase your dream
home or start up that business you've always dreamed about.

7. It provides a financial safety net

As an earning member of your family, your loss will not only hurt your
family emotionally, but also financially. If you have a good life cover, your
family will have a financial safety net to help them through their grief.
8. It serves as a saving tool

You should look at your insurance policy as your very own piggy bank.
Apart from keeping a part of your salary safe, many policies will also allow
you to borrow money against your insurance – which can help at times
when you need to liquidate assets.

9. It is customisable

Depending on the kind of provider and policy you choose, you may be able
to customise your plan to include any personal health problems or major
illnesses. This offers you and your family greater protection.

10. It offers mental peace

More than anything, insurance offers you complete peace of mind. When
you have insurance on your side, you know that you've done whatever you
can to secure the financial future of your family.

When looking for investment options, there are many choices for where to
put your money. Stocks, bonds, exchange-traded funds, mutual funds, and
real estate are all good investments no matter what level of experience
you have; forex or cryptocurrency may be too volatile for beginning
investors. Which option you choose will depend on how involved you want
to be in your investment, how much money you have to start investing, and
how much risk you are comfortable taking on.

Buying and owning real estate is an investment strategy that can be both

satisfying and lucrative. Unlike stock and bond investors, prospective real
estate owners can use leverage to buy a property by paying a portion of
the total cost upfront, then paying off the balance, plus interest, over time.

What makes a good real estate investment? A good investment has a high
chance of success, or return on your investment. If your investment
involves a high level of risk, that risk should be balanced out by a high
possible reward. Even if you choose investments with a high probability of
success, though, that isn't a guarantee. You shouldn't put money into real
estate—or any other investment—if you cannot afford to lose that money.
Though a traditional mortgage generally requires a 20% to 25% down
payment, in some cases, a 5% down payment is all it takes to purchase an
entire property. This ability to control the asset the moment papers are
signed emboldens both real estate flippers and landlords, who can, in turn,
take out second mortgages on their homes in order to make down
payments on additional properties. Here are five key ways investors can
make money on real estate.

Real Estate Investment Groups (REIGs)

Real estate investment groups (REIGs)  are ideal for people who want to
own rental real estate without the hassles of running it. Investing in REIGs
requires a capital cushion and access to financing.

REIGs are like small mutual funds that invest in rental properties.5 In a

typical real estate investment group, a company buys or builds a set of
apartment blocks or condos, then allows investors to purchase them
through the company, thereby joining the group.

A single investor can own one or multiple units of self-contained living

space, but the company operating the investment group collectively
manages all of the units, handling maintenance, advertising vacancies,
and interviewing tenants. In exchange for conducting these management
tasks, the company takes a percentage of the monthly rent.

A standard real estate investment group lease is in the investor’s name,

and all of the units pool a portion of the rent to guard against occasional
vacancies. To this end, you'll receive some income even if your unit is
empty. As long as the vacancy rate for the pooled units doesn’t spike too
high, there should be enough to cover costs.

Pros

 More hands-off than owning rentals

 Provides income and appreciation

Cons

 Vacancy risks
  Fees similar to those associated with mutual funds

 Susceptible to unscrupulous managers

Real estate investing involves the purchase, management and sale or

rental of real estate for profit. Someone who actively or passively invests in
real estate is called a real estate entrepreneur or a real estate investor.
Some investors actively develop, improve or renovate properties to make
more money from them.

During the 1980s, real estate investment funds became increasingly

involved in international real estate developed. This shift led to real estate
becoming a global asset class. Investing in real estate in foreign countries
often requires specialized knowledge of the real estate market in that
country. As international real estate investment became increasingly
common in the early 21st century, the availability and quality of information
regarding international real estate markets increased. [1] Real estate is one
of the primary areas of investment in China, where an estimated 70% of
household wealth is invested in real estate.
Types of real estate investments
Real estate is divided into several broad categories, including residential
property, commercial property and industrial property.
Valuation
Real estate markets in most countries are not as organized or efficient as
markets for other, more liquid investment instruments. Individual properties
are unique to themselves and not directly interchangeable, which makes
evaluating investments less certain. Unlike other investments, real estate is
fixed in a specific location and derives much of its value from that location.
Industrial real estate with residential real estate, the perceived safety of a
neighborhood and the number of services or amenities nearby can
increase the value of a property. For this reason, the economic and social
situation in an area is often a major factor in determining the value of its
real estate.[4]
Property valuation is often the preliminary step taken during a real estate
investment. Information asymmetry is commonplace in real estate markets,
where one party may have more accurate information regarding the actual
value of the property. Real estate investors typically use a variety of real
estate appraisal  techniques to determine the value of properties prior to
purchase. This typically includes gathering documents and information
about the property, inspecting the physical property, and comparing it to the
market value of similar properties. A common method of valuing real estate
is by dividing its net operating income by its capitalization rate, or CAP rate.
Numerous national and international real estate appraisal associations
exist for the purpose of standardizing property valuation. Some of the larger
of these include the Appraisal Institute, the Royal Institution of Chartered
Surveyors and the International Valuation Standards Council.
Investment properties are often purchased from a variety of sources,
including market listings, real estate agents or brokers, banks, government
entities such as  public auctions, sales by owners, and real estate
investment trusts.
Financing
Real estate assets are typically expensive, and investors will generally not
pay the entire amount of the purchase price of a property in cash. Usually,
a large portion of the purchase price will be financed using some sort of
financial instrument or debt, such as a mortgage loan collateralized by the
property itself. The amount of the purchase price financed by debt is
referred to as leverage. The amount financed by the investor's own capital,
through cash or other asset transfers, is referred to as equity. The ratio of
leverage to total appraised value (often referred to as "LTV", or loan to
value for a conventional mortgage) is one mathematical measure of the risk
an investor is taking by using leverage to finance the purchase of a
property. Investors usually seek to decrease their equity requirements and
increase their leverage, so that their return on investment is maximized.
Lenders and other financial institutions usually have minimum equity
requirements for real estate investments they are being asked to finance,
typically on the order of 20% of appraised value. Investors seeking low
equity requirements may explore alternate financing arrangements as part
of the purchase of a property (for instance, seller financing, seller
subordination, private equity sources, etc.)
If the property requires substantial repair, traditional lenders like banks will
often not lend on a property and the investor may be required to borrow
from a private lender utilizing a short term bridge loan like a hard money
loan from a Hard money lender. Hard money loans are usually short-term
loans where the lender charges a much higher interest rate because of the
higher risk nature of the loan. Hard money loans are typically at a much
lower loan-to-value ratio than conventional mortgages.
Some real estate investment organizations, such as real estate investment
trusts (REITs) and some pension funds and hedge funds, have large
enough capital reserves and investment strategies to allow 100% equity in
the properties that they purchase. This minimizes the risk which comes
from leverage but also limits potential ROI.
By leveraging the purchase of an investment property, the required periodic
payments to service the debt create an ongoing (and sometimes large)
negative cash flow beginning from the time of purchase. This is sometimes
referred to as the carry cost or "carry" of the investment. To be successful,
real estate investors must manage their cash flows to create enough
positive income from the property to at least offset the carry costs.
A newer method of raising equity in smaller amounts is through real estate
crowd funding which can pool accredited and/or non-accredited investors
together in a special purpose vehicle for all or part of the equity capital
needed for the acquisition. Fund rise was the first company to crowdfund a
real estate investment in the United States.
Sources of investment returns
Real estate properties may generate revenue through a number of means,
including net operating income, tax shelter offsets, equity build-up,
and capital appreciation. Net operating income is the sum of all profits from
rents and other sources of ordinary income generated by a property, minus
the sum of ongoing expenses, such as maintenance, utilities, fees, taxes,
and other expenses. Rent is one of the main sources of revenue in
commercial real estate investment. Tenants pay an agreed upon sum to
landlords in exchange for the use of real property, and may also pay a
portion of upkeep or operating expenses on the property.
Tax shelter offsets occur in one of three ways :  depreciation (which may
sometimes be accelerated), tax credits, and carryover losses which reduce
tax liability charged against income from other sources for a period of 27.5
years. Some tax shelter benefits can be transferable, depending on the
laws governing tax liability in the jurisdiction where the property is located.
These can be sold to others for a cash return or other benefits.
Equity build-up is the increase in the investor's equity ratio as the portion of
debt service payments devoted to principal accrue over time. Equity build-
up counts as positive cash flow from the asset where the debt service
payment is made out of income from the property, rather than from
independent income sources.
Capital appreciation is the increase in the market value of the asset over
time, realized as a cash flow when the property is sold. Capital appreciation
can be very unpredictable unless it is part of a development and
improvement strategy. The purchase of a property for which the majority of
the projected cash flows are expected from capital appreciation (prices
going up) rather than other sources is considered speculation rather than
investment.
Foreclosure investment
Some individuals and companies focus their investment strategy on
purchasing properties that are in some stage of foreclosure. A property is
considered in pre-foreclosure when the homeowner has defaulted on their
mortgage loan. Formal foreclosure processes vary by state and may be
judicial or non-judicial, which affects the length of time the property is in the
pre-foreclosure phase. Once the formal foreclosure processes are
underway, these properties can be purchased at a public sale, usually
called a foreclosure auction or sheriff's sale. If the property does not sell at
the public auction, then ownership of the property is returned to the
lender. Properties at this phase are called Real Estate Owned, or REOs.
Once a property is sold at the foreclosure auction or as an REO, the lender
may keep the proceeds to satisfy their mortgage and any legal costs that
they incurred minus the costs of the sale and any outstanding tax
obligations.
The foreclosing bank or lending institution has the right to continue to honor
tenant leases (if there are tenants in the property) during the REO phase
but usually, the bank wants the property vacant in order to sell it more
easily.
Buy, rehab, rent & refinance
Buy, rehab, rent, refinance (BRRR) is a real estate investment strategy,
used by real estate investors who have experience renovating or rehabbing
properties to "flip" houses.
Real estate investing involves the purchase, management and sale or
rental of real estate for profit. Someone who actively or passively invests in
real estate is called a real estate entrepreneur or a real estate investor.
Some investors actively develop, improve or renovate properties to make
more money from them.

What Are Financial Markets?

Financial markets refer broadly to any marketplace where the trading of securities
occurs, including the stock market, bond market, forex market, and derivatives
market, among others. Financial markets are vital to the smooth operation of
capitalist economies.

 Financial markets refer broadly to any marketplace where the trading of

securities occurs.
 There are many kinds of financial markets, including (but not limited to)
forex, money, stock, and bond markets.
 These markets may include assets or securities that are either listed on
regulated exchanges or else trade over-the-counter (OTC).
 Financial markets trade in all types of securities and are critical to the
smooth operation of a capitalist society.
 When financial markets fail, economic disruption including recession and
unemployment can result.
Financial Market

Understanding the Financial Markets

Financial markets play a vital role in facilitating the smooth operation of capitalist
economies by allocating resources and creating liquidity for businesses and
entrepreneurs. The markets make it easy for buyers and sellers to trade their
financial holdings. Financial markets create securities products that provide a
return for those who have excess funds (Investors/lenders) and make these funds
available to those who need additional money (borrowers). 

The stock market is just one type of financial market. Financial markets are made
by buying and selling numerous types of financial instruments including equities,
bonds, currencies, and derivatives. Financial markets rely heavily on informational
transparency to ensure that the markets set prices that are efficient and appropriate.
The market prices of securities may not be indicative of their intrinsic value
because of macroeconomic forces like taxes.
Some financial markets are small with little activity, and others, like the New York
Stock Exchange (NYSE), trade trillions of dollars of securities daily. The equities
(stock) market is a financial market that enables investors to buy and sell shares of
publicly traded companies. The primary stock market is where new issues of
stocks, called initial public offerings (IPOs), are sold. Any subsequent trading of
stocks occurs in the secondary market, where investors buy and sell securities that
they already own.

FINANCIAL MARKET

Mechanism that allows people to buy and sell financial securities (such as shares
& bonds) and items of value at low transaction cost Markets work by placing
many interested buyers and sellers at one place, thus making it easier for them to
find each other

PARTICIPANTS IN FINANCIAL MARKET

Borrower : Issues a receipt to lender promising to pay back capital Individuals –

e.g. Bank loans, mortgages Companies - for short term or long term cash flows or
future business expansion Government - for public expenditure, or on behalf of
nationalized industries, municipalities or other public sector bodies Public
corporations- e.g. postal services, railways and utility companies

Lender: Will expect some compensation in form of interest or dividend, in return.

Lender could be - Individuals - Companies - Government

Functions of the Markets

The role of financial markets in the success and strength of an economy

cannot be underestimated. Here are four important functions of financial
markets:

1. Puts savings into more productive use

As mentioned in the example above, a savings account that has money in it

should not just let that money sit in the vault. Thus, financial markets like
banks open it up to individuals and companies that need a home loan,
student loan, or business loan.
2. Determines the price of securities

Investors aim to make profits from their securities. However, unlike goods
and services whose price is determined by the law of supply and demand,
prices of securities are determined by financial markets.

3. Makes financial assets liquid

Buyers and sellers can decide to trade their securities anytime. They can use
financial markets to sell their securities or make investments as they desire.

4. Lowers the cost of transactions

In financial markets, various types of information regarding securities can

be acquired without the need to spend.

Importance of Financial Markets

There are many things that financial markets make possible, including the
following:

 Financial markets provide a place where participants like investors

and debtors, regardless of their size, will receive fair and proper
treatment.
 They provide individuals, companies, and government organizations
with access to capital.
 Financial markets help lower the unemployment rate because of the
many job opportunities it offers

Types of Financial Markets

The above classifications are relevant for different types of it. The types of
Financial markets of these capital markets are mentioned below:
A Financial Market is a term meant for a Business setup where different
types of bonds and securities trade are done at lower rates of transaction. It
includes different kinds of Financial securities like bonds, shares,
derivatives, and forex Markets, to name a few.

To ensure that a capitalist economy functions well, the Financial Market is

very necessary as it helps in resource allocation and creates liquidity for
Businesses. 
The Financial Market ensures that the flow of capital between investing and
collecting parties is mobilized properly.

Understanding Financial Markets and Institutions

Financial Markets help in smooth functioning of economies by allocating
resources while also creating liquidity for Business enterprises. Different
types of Financial holdings can be traded in these Markets. A vital
importance of Financial Markets is that it enforces informational
transparency to set efficient and appropriate Market prices.

Notably, macroeconomic factors like tax and other aspects often influence
the Market values of Financial holdings which are not indicative of their
intrinsic value. There are various types of Financial Markets, the New York
Stock Exchange is one of the biggest stock Markets on this globe and this
Financial Market records trade worth trillions of dollars everyday.

As an institution, Financial Markets aid in the flow of investments and

savings. In turn, this facilitates the growth of funds, which goes on to help in
production of goods and services. Another significance of Financial
Markets is that it contributes to the demands of receivers, investors and
even that of a country’s economy.

Different institutions which offer Financial holdings like mutual funds,

insurances, pension, etc. combined with that of Financial Markets which
offer bonds and shares contribute to a nation’s economic growth.
Types of Financial Markets
 Stock Markets- In this kind of Market, an organization makes a
listing of its shares which traders and investors buy and sell. Stock
Marketing, through the usage of IPO(Initial Public Offering), allows
companies to increase their capital.
 Over The Counter Markets- It is a kind of decentralized Market,
without fixed geographical locations. Here, the trade is directly done
between two parties instead of an agent/broker. Most stock trading is
done through exchanges.
 Bond Markets- The kind of securities that allow investors to borrow
money from the lender for a certain period of time, with a fixed
interest rate is known as bonds. Bonds are issued to aid Financial
projects by different state and central government bodies, municipal
corporations, etc. Bonds are usually issued as bills and notes.
 Money Markets- This kind of Market trades in holdings with higher
liquidities and is relatively safer. In addition, the interest return is also
cheaper. The capacity of trading between organizations and traders
is quite huge if viewed on the wholesale level.
 Derivative Markets- This is a kind of Market where a contract is
signed between two or more parties depending upon the Financial
securities or assets. The worth of the derivatives is derived from the
primary source of security to which it is linked, thus making it
“secondary security”.
 Forex Market- Foreign Exchange Market, also called the Forex
Market, is the kind of Market that basically deals with currencies. As
cash is the most liquid asset, Forex Market has the highest liquidity of
all Markets around the globe. Banks, commercial organizations, and
investment management firms comprise the majority of the Forex
Market.

Functions of Financial Market

Financial Markets helps in mobilizing savings, determining and settling the
prices of various securities, providing liquidity to assets, and easing access
to all types of traders.

While studying the functions of Financial Markets, students must take note
of these aspects discussed below.
 Mobilising Funds: Among the diverse types of functions served by
Financial Markets, one of the most crucial functions is that of
 mobilisation of savings. Financial Markets also utilise this savings
investing it for productive use, thereby contributing to capital and
economic growth.
 Determination of Prices: Another vital function served by Financial
Markets is that of pricing different securities. Essentially, demand and
supply in Financial Markets along with its interaction between
investors determine these pricing.
 Liquidity of Financial Holdings: Tradable assets must be provided
with liquidity for its smooth functioning and flow. This is another role
of the Financial Market which goes on to help in the functioning of a
capitalist economy. It not only allows investors to easily sell their
securities and assets, but also allows them to easily convert them into
cash money.
 Ease of Access: Financial Markets also offer efficient trading since
they bring traders to the same Market. As a result, relevant parties do
not have to spend any resource, be it capital or time, to find interest
buyers or sellers. Additionally, it also provides necessary information
related to trading, which also reduces the effort that interested parties
must put in to complete their trades.

Students must note, the importance of the Financial Market is undeniable in

this global economy. However, these Markets do not necessarily need a
physical location and trading can often be conducted online or via phone.

Classifications of Financial Markets

Students trying to learn “what are the different Financial Markets” must note
these classifications described below. These classifications can be divided
into two further sections, which are explained in detail.

1. By Nature of Claim
 Debt Market: These Markets offer debt instruments and fixed claims
like bonds and debentures, etc. for trading. Traders can buy these
Financial holdings at debt Markets  for a fixed return and an agreed-
upon maturity period.
 Equity Market: These Markets are designed for residual claims.
Investors can deal in equity Financial holdings in such Markets.
2. By maturity of claim
  Money Market: Certificates of deposits, treasury bills, etc. are
available in these Markets for trading. These are usually short term
Financial holdings, and can be traded online since these Markets
usually do not exist physically.
 Capital Market: Among classification of Financial Markets, capital
Markets are divided into primary and secondary Markets. Primary
Markets allow newly listed companies to issue new securities, while
also allowing listed companies to issue new shares.
3. By Timing of Delivery
 Cash Market: These Markets offer real time transactions which are
immediately settled between different sellers and buyers.
 Futures Market: Among various types of Financial Markets and their
functions, these Markets offer transactions where settlements and
commodities are delivered in future dates.
4. By organizational Structure
 Exchange-Traded Market: These are centralised trading Markets
which record immense trading on a daily basis. These have standard
procedures which regulate their functioning while trading Financial
holdings like shares.
 Over-the-Counter Market: These Markets have customised
procedures and do not have any centralised organisation. Traders
can trade without involving any broker in their transactions. Typically
offering shares from small companies, investors can trade in these
Markets online.

https://testbook.com/learn/primary-and-secondary-market/
1. PRIMARY MARKET
NEW ISSUE MARKET Stocks available for the first time are offered through
new issue market. The issuer may be a new company or an existing company.
The objectives of a capital issue are given below:
 To start a new company.
 To expand an existing company.
 To diversify the production.
  To meet the regular working capital requirements.
 To capitalize the reserves.

RELATIONSHIP BETWEEN THE PRIMARY & SECONDARY MARKET

The new issue market cannot function without the secondary market. The
secondary market or the stock market provides liquidity for the issued securities.
The stock exchanges through their listing requirements, exercise control over the
primary market. The primary market provides a direct link between the
prospective investors and the company. The health of a primary market depends
on the secondary market and vice versa.

Classification of securities in Primary Market:

Securities dealt in the new issue market or primary market are classified
as
1. Equity Shares. 2. Preference Shares. 3. Debentures.
1. Equity shares: These are shares issued by companies for raising
capital. The owners of these shares are shareholders. Normally, the face
value of the shares may be Rs.10 or Rs.100. A group of fully paid shares
are called stock and these can be transferred. The shareholders are
entitled for profit, which are distributed to them in the form of dividend.
The share capital will be refunded to them only during the winding up of
the company, provided the company has sufficient assets.
2. Preference shares: Preference shares are similar to equity shares but
are given on a preference basis to certain shareholders like promoters,
auditors, etc. There are cumulative, noncumulative, participating,
redeemable, irredeemable, convertible and non-convertible preference
shares. Preference shareholders will get the first preference in the
distribution of dividend over equity shareholders. The same condition
applies in the repayment of capital at the time of winding up.
3. Debentures: It is a loan obtained by the company from the public for
a fixed interest rate for a fixed period. Those investors who do not want
to take any risks will prefer debentures as they have less risk on the
repayment compared to shares. There are debentures which have
 mortgage charge on the assets of the company and these debenture
holders are assured of the repayment.

Types of Financial Markets

Stock Markets
Perhaps the most ubiquitous of financial markets are stock markets. These are
venues where companies list their shares and they are bought and sold by traders
and investors. Stock markets, or equities markets, are used by companies to raise
capital via an initial public offering (IPO), with shares subsequently traded among
various buyers and sellers in what is known as a secondary market.

Stocks may be traded on listed exchanges, such as the New York Stock Exchange
(NYSE) or , or else over-the-counter (OTC). Most trading in stocks is done via
regulated exchanges, and these play an important role in the economy as both a
gauge of the overall health of the economy as well as providing capital gains and
dividend income to investors, including those with retirement accounts such as
IRAs and 401(k) plans.

Typical participants in a stock market include (both retail and institutional)

investors and traders, as well as market makers (MMs) and specialists who
maintain liquidity and provide two-sided markets. Brokers are third parties that
facilitate trades between buyers and sellers but who do not take an actual position
in a stock.

Over-the-Counter Markets
An over-the-counter (OTC) market is a decentralized market—meaning it does not
have physical locations, and trading is conducted electronically—in which market
participants trade securities directly between two parties without a broker. While
OTC markets may handle trading in certain stocks (e.g., smaller or riskier
companies that do not meet the listing criteria of exchanges), most stock trading is
done via exchanges. Certain derivatives markets, however, are exclusively OTC,
and so they make up an important segment of the financial markets. Broadly
speaking, OTC markets and the transactions that occur on them are far less
regulated, less liquid, and more opaque.
Bond Markets
A bond is a security in which an investor loans money for a defined period at a pre-
established interest rate. You may think of a bond as an agreement between
the lender and borrower that contains the details of the loan and its payments.
Bonds are issued by corporations as well as by municipalities, states, and sovereign
governments to finance projects and operations. The bond market sells securities
such as notes and bills issued by the United States Treasury, for example. The
bond market also is called the debt, credit, or fixed-income market.

Money Markets
Typically the money markets trade in products with highly liquid short-term
maturities (of less than one year) and are characterized by a high degree of safety
and a relatively low return in interest. At the wholesale level, the money markets
involve large-volume trades between institutions and traders. At the retail level,
they include money market mutual funds bought by individual investors and
money market accounts opened by bank customers. Individuals may also invest in
the money markets by buying short-term certificates of deposit (CDs), municipal
notes, or U.S. Treasury bills, among other examples.

Derivatives Markets
A derivative is a contract between two or more parties whose value is based on an
agreed-upon underlying financial asset (like a security) or set of assets (like an
index). Derivatives are secondary securities whose value is solely derived from the
value of the primary security that they are linked to. In and of itself a derivative is
worthless. Rather than trading stocks directly, a derivatives market trades in futures
and options contracts, and other advanced financial products, that derive their
value from underlying instruments like bonds, commodities, currencies, interest
rates, market indexes, and stocks.

Futures markets are where futures contracts are listed and traded. Unlike forwards,
which trade OTC, futures markets utilize standardized contract specifications, are
well-regulated, and utilize clearinghouses to settle and confirm trades. Options
markets, such as the Chicago Board Options Exchange (CBOE), similarly list and
regulate options contracts. Both futures and options exchanges may list contracts
on various asset classes, such as equities, fixed-income securities, commodities,
and so on.

Forex Market
The forex (foreign exchange) market is the market in which participants can buy,
sell, hedge, and speculate on the exchange rates between currency pairs. The forex
market is the most liquid market in the world, as cash is the most liquid of assets.
The currency market handles more than $6.6 trillion in daily transactions, which is
more than the futures and equity markets combined.1

As with the OTC markets, the forex market is also decentralized and consists of a
global network of computers and brokers from around the world. The forex market
is made up of banks, commercial companies, central banks, investment
management firms, hedge funds, and retail forex brokers and investors. 

Commodities Markets
Commodities markets are venues where producers and consumers meet to
exchange physical commodities such as agricultural products (e.g., corn, livestock,
soybeans), energy products (oil, gas, carbon credits), precious metals (gold, silver,
platinum), or "soft" commodities (such as cotton, coffee, and sugar). These are
known as spot commodity markets, where physical goods are exchanged for
money.

The bulk of trading in these commodities, however, takes place on derivatives

markets that utilize spot commodities as the underlying assets. Forwards, futures,
and options on commodities are exchanged both OTC and on
listed exchanges around the world such as the Chicago Mercantile Exchange
(CME) and the Intercontinental Exchange (ICE).

Cryptocurrency Markets
The past several years have seen the introduction and rise of cryptocurrencies such
as Bitcoin and Ethereum, decentralized digital assets that are based
on blockchain technology. Today, thousands of cryptocurrency tokens are
available and trade globally across a patchwork of independent online crypto
exchanges. These exchanges host digital wallets for traders to swap one
cryptocurrency for another, or for fiat monies such as dollars or euros.

Because the majority of crypto exchanges are centralized platforms, users are

susceptible to hacks or fraud. Decentralized exchanges are also available that
operate without any central authority. These exchanges allow direct peer-to-peer
(P2P) trading of digital currencies without the need for an actual exchange
authority to facilitate the transactions. Futures and options trading are also
available on major cryptocurrencies.

What is Stock Exchange?

Meaning of Stock Exchange
A stock exchange is an important factor in the capital market. It is a secure place where trading is
done in a systematic way. Here, the securities are bought and sold as per well-structured rules
and regulations. Securities mentioned here includes debenture and share issued by a public
company that is correctly listed at the stock exchange, debenture and bonds issued by the
government bodies, municipal and public bodies.

Typically bonds are traded Over-the-Counter (OTC), but a few corporate bonds are sold in a
stock exchange. It can enforce rules and regulation on the brokers and firms that are enrolled
with them. In other words, a stock exchange is a forum where securities like bonds and stocks
are purchased and traded. This can be both an online trading platform and offline (physical
location).

Functions of Stock Exchange

Following are some of the most important functions that are performed by  stock exchange:

1. Role of an Economic Barometer:  Stock exchange serves as an economic barometer that is

indicative of the state of the economy. It records all the major and minor changes in the share
prices. It is rightly said to be the pulse of the economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the valuation of securities based on the factors of
supply and demand. The securities offered by companies that are profitable and growth-
oriented tend to be valued higher. Valuation of securities helps creditors, investors and
government in performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as the securities that are traded in the
stock exchange are listed, and the listing of securities is done after verifying the company’s
position. All companies listed have to adhere to the rules and regulations as laid out by the
governing body.
4. Contributor to Economic Growth: Stock exchange offers a platform for trading of securities of
the various companies. This process of trading involves continuous disinvestment and
reinvestment, which offers opportunities for capital formation and subsequently, growth of the
economy.
 5. Making the public aware of equity investment: Stock exchange helps in providing information
about investing in equity markets and by rolling out new issues to encourage people to invest in
securities. 
6. Offers scope for speculation: By permitting healthy speculation of the traded securities, the
stock exchange ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready
platform for the sale and purchase of securities. This gives investors the confidence that the
existing investments can be converted into cash, or in other words, stock exchange offers
liquidity in terms of investment.
8. Better Capital Allocation: Profit-making companies will have their shares traded actively, and so
such companies are able to raise fresh capital from the equity market. Stock market helps in
better allocation of capital for the investors so that maximum profit can be earned.
9. Encourages investment and savings: Stock market serves as an important source of investment
in various securities which offer greater returns. Investing in the stock market makes for a better
investment option than gold and silver.

Features of Stock Exchange:

 A market for securities- It is a wholesome market where securities of government, corporate
companies, semi-government companies are bought and sold.
 Second-hand securities- It associates with bonds, shares that have already been announced by
the company once previously.
 Regulate trade in securities- The exchange does not sell and buy bonds and shares on its own
account. The broker or exchange members do the trade on the company’s behalf.
 Dealings only in registered securities- Only listed securities recorded in the exchange office can
be traded.
 Transaction- Only through authorised brokers and members the transaction for securities can
be made.
 Recognition- It requires to be recognised by the central government.
 Measuring device- It develops and indicates the growth and security of a business in the index
of a stock exchange.
 Operates as per rules– All the security dealings at the stock exchange are controlled by
exchange rules and regulations and SEBI guidelines.
The above mentioned concept ‘What is a stock exchange?’ is elucidated in detail for Commerce
students. To know more, stay tuned to BYJU’S.

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Frequently Asked Questions on Stock Exchange

Q.1 Why is the stock exchange important?

Stock markets help companies to trade publicly in order to raise capital. It acts as a platform for
sale and purchase of securities.

Q.2 What are the 4 types of stocks?

Following are the 4 types of stock:

1. Preferred stock
2. Common stock
3. Growth stock
4. Yield stock (Dividend)

Q.3 What is the purpose of the stock exchange?

The purpose of a stock exchange is to help in capital formation and act as intermediary between
companies and investors by providing a common platform for exchange.

Q.4 What are some examples of a stock exchange?

Some examples of stock exchanges across the globe are:

1. BSE
2. NASDAQ
3. LSE
4. NYSE

Over the Counter Exchange of India (OTCEI) is established on the lines of the National
Association of Securities Dealers Automated Quotations (NASDAQ). NASDAQ is the
OTC exchange in the USA and has been promoted by ICICI, IDBI, LIC, SBI, IFCI, GIC
Capital Markets and Bank Financial Services.

Objectives of Over the Counter Exchange of India (OTCEI)

The objectives of OTCEI are as follows:

1. Provide quicker liquidity to the securities at a fair and fixed price.
2. Provide easy and cheaper means to the traders to make public sale of new issues.
3. Provide liquidity for the less traded securities or the securities of small companies.
4. Provide a simple process of buying and selling to the traders.

Advantages of Over-the-Counter Market

1. The OTC Market provides the smaller and less liquid companies with a trading
platform. This platform cannot be listed on a regular stock exchange.
2. The OTC Market helps family concerns and closely held companies to go public
through it.
3. Investors, with the help of the OTC Market can freely choose stocks by dealers for
market making in primary as well as secondary markets.
4. OTC Market is cheaper because the cost of issuing securities and the expenses of
servicing the investors of the country through it is much less.
5. The dealers can also freely operate in new issues as well as a secondary market.
6. The OTC Market provides traders with transparent trading without any problem of
short or bad deliveries.
7. It also gives an advantage of free flow of information between the market makers and
customers because of the close contact between them.
Over the Counter Exchange of India (OTCEI) is similar to the National Stock Exchange of India
(NSEI). The common features between them are as follows:
1. Incorporate Entities: The National Stock Exchange of India and Over the Counter
Exchange of India, both have been established as companies which are promoted by the
leading banks, financial institutions, insurance companies, and other financial
intermediaries.
2. Transparent Market: As the transactions taking place are screen-based, both NSE
and OTCEI provide the traders with a transparent market. Besides, the investors can
check the exact price of the securities at which the transaction has taken place.
3. Nationwide Coverage: The NSEI and OTCEI, both have nationwide coverage. It
means that there are no geographical and distance barriers in the National Stock
Exchange of India and the Over the Counter Exchange of India.
4. No Trading Floor: The NSEI and OTCEI both don’t have a trading floor. In other
words, the trading in both exchanges takes place through a computer network.
5. Screen-Based Trading: The transactions under NSEI and OTCEI are conducted
electronically through computers by using a satellite link. 
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National Stock Exchange of India

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 What is NSE?

What is NSE?
Established in 1992, the National Stock Exchange of India Limited (NSE) is the first

dematerialised electronic exchange institution in the Indian stock market. NSE was the first

modern, transparent, and fully automated platform, facilitating seamless electronic trading. It is

one of India’s premier exchanges and ranks fourth globally in terms of the trading volume

metrics.

The first stock exchange successfully integrated all the investors under a single roof supporting

equity, derivatives, and debt instruments. This feat was possible since it was the first stock

exchange in India, providing electronic trading facilities.

What is the benchmark index of the National Stock Exchange of India?

S&P CNX Nifty (Nifty 50) was introduced as the benchmark index of NSE in 1996. The CNX

Nifty signifies the weighted average of the top 50 companies across 17 sectors.

With a base period of November 1995, NIFTY50 has a base value of 1000 and a base capital of

Rs. 2.06 lakh crore (USD 27.28 billion). The stocks included in the NIFTY50 represent a

significant portion of the NSE market capitalisation as they contribute to over 50 percent of

stocks traded in the exchange in the last six months.

What is the trading process of the National Stock Exchange of

India?

The trading process is based on market orders. Computer terminals match these orders, and there

is no involvement of market makers. The investor directly places a market order and is allotted a

unique trading number. The trading computer then matches it with a limit order instantaneously.

Both the buyer and seller remain anonymous during the entire transaction.
If a match is not found, the order is added to a list. The order sequence is determined on price-

time precedence. The exchange prioritises the order with the best price. If two orders are at par,

then the one with the earlier timestamp is matched first in such cases.

Benefits of the trading process of the National Stock Exchange of India

– The order driven mechanism provides objectivity and invokes investor confidence in both

buyers and sellers.

– The entire procedure being automated offers transparency and efficiency in executing trade
transactions and processing settlements

– The volume of trading activity on the stock exchange incentivises buyers and sellers to

participate, which results in higher liquidity.

Functions of NSE

– To establish an accessible trading facility for investors across the nation dealing with debt,

equity, and other asset classes.

– To act as an equal opportunity communication channel for all interested investors

– To establish a trading platform that meets the global standard for financial exchange markets.

– To enable the book-entry settlement system and allow shorter periods for trade settlements.

NSE Listing Benefits

Easy to gauge the market depth

There is a lot of trading and post-trading information provided on the platform. Moreover, you

can also look up the top buyers and sellers effortlessly. The total number of securities available
and the top buy and sell orders are visible for each transaction. Thus, NSE provides

comprehensive visibility of the market depth.

Transparency 

There is a large volume of trading activity bringing down the impact cost. Thus, the burden of

trading expenses on investors is less. Also, the trading system is automated, which boosts

visibility and transparency in trading.

Trade statistics

The listed companies are provided trading statistics each month. They are highly beneficial for

tracking the performance and the market sentiments of the company.

Investment Segments

National Stock Exchange of India includes the following investment segments within its fold–

Equity

Such investments include equities, mutual funds, indices, and others.

Equity derivatives

Derivates trading on the NSE began with the launch of index futures in 2002. Subsequently, the

Dow Jones Industrial Average and S&P 500 were launched in 2011 on this platform. With these

methods, the exchange made remarkable traction in equity derivates trading.

Debt

The core asset holding in such investment comprises various short-term and long-term bonds,

security products, and more.

 The NSE launched India’s first debt platform on 13th May 2013. It aimed to provide investors

with a digital, transparent, and liquid platform for all the debt-based instrument trading.

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Table of Contents

 What Is a Commodity Market?

 How Commodity Markets Work
 History of Commodity Markets
 Types of Commodity Markets
 Examples of Commodities Markets
 Commodity Market Requirements
 Trading: Commodity Market or Stock
 Commodity Market FAQs

 FUTURES AND COMMODITIES TRADING   

 STRATEGY & EDUCATION
Commodity Market: Definition, Types,
Example, and How It Works
By 

ADAM HAYES




Updated October 30, 2021

Reviewed by CHARLES POTTERS

Fact checked by 

VIKKI VELASQUEZ
Investopedia / Zoe Hansen

What Is a Commodity Market?

A commodity market is a marketplace for buying, selling, and trading raw materials or primary
products.
Commodities are often split into two broad categories: hard and soft commodities. Hard
commodities include natural resources that must be mined or extracted—such as gold, rubber,
and oil, whereas soft commodities are agricultural products or livestock—such as corn, wheat,
coffee, sugar, soybeans, and pork.

KEY TAKEAWAYS

 A commodity market involves buying, selling, or trading a raw product, such as oil, gold, or
coffee.
 There are hard commodities, which are generally natural resources, and soft commodities,
which are livestock or agricultural goods. 
 Spot commodities markets involve immediate delivery, while derivatives markets entail delivery
in the future.
 Investors can gain exposure to commodities by investing in companies that have exposure to
commodities or investing in commodities directly via futures contracts. 
 The major U.S. commodity exchanges are ICE Futures U.S. and the CME Group, which holds four
major exchanges: the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York
Mercantile Exchange, and the Commodity Exchange, Inc.
0 seconds of 1 minute, 23 secondsVolume 75%

1:23

Commodity Market

How Commodity Markets Work

Commodities markets allow producers and consumers of commodity products to gain access to
them in a centralized and liquid marketplace. These market actors can also use commodities
derivatives to hedge future consumption or production. Speculators, investors, and arbitrageurs
also play an active role in these markets.

Certain commodities, such as precious metals, have been thought of to be a good hedge against
inflation, and a broad set of commodities as an alternative asset class can help diversify a
portfolio. Because the prices of commodities tend to move in opposition to stocks, some
investors also rely on commodities during periods of market volatility.

In the past, commodities trading required significant amounts of time, money, and expertise, and
was primarily limited to professional traders. Today, there are more options for participating in
the commodity markets.

History of Commodity Markets

Trading commodities goes back to the dawn of human civilization as tribal clans and newly
established kingdoms would barter and trade with one another for food, supplies, and other
items. Trading commodities indeed predates that of stocks and bonds by many centuries. The rise
of empires such as ancient Greece and Rome can be directly linked to their ability to create
complex trading systems and facilitate the exchange of commodities across vast swaths via
routes like the famous Silk Road that linked Europe to the Far East.12

Today, commodities are still exchanged throughout the world and on a massive scale. Things
have also become more sophisticated with the advent of exchanges and derivatives markets,
Exchanges regulate and standardized commodity trading, allowing for liquid and efficient
markets.

Perhaps the most influential modern commodities market is the Chicago Board of

Trade (CBOT), established in 1848, where it originally traded only agricultural commodities
such as wheat, corn, and soybeans in order to help farmers and commodity consumers manage
risks by removing price uncertainty from those agricultural products.3 Today, it lists options
and futures contracts on a wide range of products including gold, silver, U.S. Treasury bonds,
and energy products. The Chicago Mercantile Exchange (CME) Group merged with the Chicago
Board of Trade (CBOT) in 2007, adding interest rates and equity index products to the group's
existing product agricultural offerings.4

Some commodities exchanges have merged or gone out of business in recent years. The majority
of exchanges carry a few different commodities, although some specialize in a single group. In
the U.S., the Chicago Mercantile Exchange (CME) acquired three other commodity exchanges in
the mid-2000s. First, CME acquired the Chicago Board of Trade (CBOT) in 2007 and then in
2008, acquired the New York Mercantile Exchange (NYMEX) and the Commodity Exchange,
Inc. (COMEX).56 All four exchanges make up the CME Group. Also in 2007, the New York
Board of Trade merged with Intercontinental Exchange (ICE), forming ICE Futures U.S.78 Each
exchange offers a wide range of global benchmarks across major asset classes.

Practice trading with virtual money

Find out what a hypothetical investment would be worth today.

SELECT A STOCK

TSLA

TESLA INC

AAPL

APPLE INC

NKE

NIKE INC

AMZN

AMAZON.COM, INC

WMT
 WALMART INC

SELECT INVESTMENT AMOUNT

SELECT A PURCHASE DATE

 CALCULATE

Types of Commodity Markets

Generally speaking, commodities trade either in spot markets or derivatives markets. Spot
markets are also referred to as “physical markets” or “cash markets” where buyers and sellers
exchange physical commodities for immediate delivery.

Derivatives markets involve forwards, futures, and options. Forwards and futures are derivatives

contracts that use the spot market as the underlying asset. These are contracts that give the owner
control of the underlying at some point in the future, for a price agreed upon today. Only when
the contracts expire would physical delivery of the commodity or other asset take place, and
often traders will roll over or close out their contracts in order to avoid making or taking delivery
altogether. Forwards and futures are generically the same, except that forwards are customizable
and trade over-the-counter (OTC), whereas futures are standardized and traded on exchanges.

Examples of Commodities Markets

The major exchanges in the U.S., which trade commodities, are domiciled in Chicago and New
York with several exchanges in other locations within the country. The Chicago Board of
Trade (CBOT) was established in Chicago in 1848. Commodities traded on the CBOT include
corn, gold, silver, soybeans, wheat, oats, rice, and ethanol.9 The Chicago Mercantile
Exchange (CME) trades commodities such as milk, butter, feeder cattle, cattle, pork bellies,
lumber, and lean hogs.10

The New York Mercantile Exchange (NYMEX) trades commodities on its exchange such as oil,
gold, silver, copper, aluminum, palladium, platinum, heating oil, propane, and
electricity.11 Formerly known as the New York Board of Trade (NYBOT), ICE Futures U.S.
commodities include coffee, cocoa, orange juice, sugar, and ethanol trading on its
exchange.1213

The London Metal Exchange and Tokyo Commodity Exchange are prominent international

commodity exchanges.
Commodities are predominantly traded electronically; however, several U.S. exchanges still use
the open outcry method. Commodity trading conducted outside the operation of the exchanges is
referred to as the over-the-counter (OTC) market.