Introduction to Economics and Finance

7/31/2019 Introduction to Economics and Finance

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Inflation, Stagflation, Disinflation, Deflation, CPI and WPISince India has been witnessing unprecedented rise in inflation rates which has burnt a hole in tax payer s

pocket one may be curious to know about inflation in greater depth. Put in simple terms inflation indicates the

rise in general price level of goods and services in an economy. If price of goods and services increases then

naturally the buying power of money will decrease as one can buy fewer goods and services with each unit of

currency. Let us take an example suppose one week earlier you went to have breakfast in a nearby restaurant

and you have taken a 50 rupee note with you. If the price a piece of sandwich was Rs. 10 price then with you

could buy 5 sandwich pieces. Now over the week the prices of bread and vegetables have gone up on account of

inflation and as a result the restaurant has increased the price of a piece of sandwich to Rs.12.5. Now if you can

only buy 4 sandwich pieces with the same 50 rupee note today.

Now you may be thinking as to how one can measure inflation. The answer to your question is inflation rate, the

measure of rise in price level of goods and services. It indicates the rate of rise in price level of goods and

services. Given the large number of goods and services produced in an economy it is not feasible to calculate the

average change in price level of all goods and services. Consequently a representative basket of goods and

services (also known as market basket) is used for which the change in price is calculated to get an indicative

figure of change in price level, which is called inflation rate.

Mathematically inflation rate is calculated as the percentage rate of change of a certain price index. Generally

each commodity in the market basket is linked to an index and the index has a certain value (usually 100) in a

particular year known as base year which is proportional to the price of commodity. This index value keeps

changing with time in proportion to change in price of commodity. The index for market basket is calculated as

the weighted average of the individual index of commodities where each commodity has been assigned a

particular weight based on its influence in economy. The index for market basket is used for calculation of

inflation rate. If the index values for the beginning and end of year are known then the inflation rate for year is

the percentage change in index value for year.

The measurement process will become clearer with a simple example that is being provided here. Let us

consider the market basket has only one product say rice. Assume the base year for index to be 2000 and

corresponding index value to be 100. Let the price of sugar in base year is Rs. 5. Now suppose we want to

calculate the inflation rate for year 2009. For this as mentioned earlier we need to calculate the index values at

beginning and end of year 2009 which can be done using the price of sugar on the corresponding date. Let the

price of sugar at beginning and end of year 2009 be Rs. 6 and Rs.6.50 respectively. Applying unitary method the

index value at the beginning and end of year 2009 is 120 and 125 respectively. Since the percentage increase in

index value over the year 2009 is 4.17% so inflation rate for year 2009 is 4.17%.

In above paragraph we illustrated the calculation of inflation rate for a year but you must have come across

newspaper articles reporting Inflation rate for month ending December 31, 2010 was 8.43%. So now one

needs to understand the meaning of the above mentioned statement. The statement also mentions the inflation

rate on a yearly basis only and for calculating the inflation rate the index values on December 31, 2009 and

December 31, 2010 are considered. The percentage change in index values for the period between December

31, 2009 and December 31, 2010 gives the required inflation rate. If this inflation rate keeps increasing over a

period of time then it is said that the economy is facing inflation.

Based upon the type of price of commodity being considered for the calculation of index there are two types of

indexes Consumer Price Index (CPI) and Wholesale Price Index (WPI). WPI accounts for price change at thewholesaler or producer level whereas CPI measures the change in consumer price level and retail margins. It is

important to note that the composition of market basket for the two indexes is also different. The market


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basket for CPI is determined and maintained by United States Bureau of Labor Statistics. Another minor point of

difference between the two indexes is that WPI is generally calculated and reported on a weekly basis while CPI

follows a monthly calculation and reporting procedure. At present most of the countries including USA, UK,

Japan and China use CPI for inflation rate calculation. However India follows WPI method for inflation

calculation. The market basket of WPI consists of 435 commodities which are grouped into three categories:

1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments and

spices, fibers, oil seeds and minerals. Their weight age is 22.02 %.

2. Fuel, Power, Light & Lubricants: consist of coal and petroleum related products, lubricants, electricity etc.

Their weight age is 14.23%.

3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth, toothpaste,

batteries, automobiles etc. Their weight age is 63.75%.

The base year in India for WPI is 1993-94 and base index value is 100. However there is on-going debate on

increasing the number of commodities in market basket to 980 and shifting the base year to 2004-05. However

India does not follow the normal weekly reporting period for WPI and instead reports the inflation rate on a

monthly basis. The inflation rate calculation procedure remains same for both the indexes. However there are

four types of Consumer price indexes which are mentioned below:

1. CPI Industrial Workers;2. CPI Urban Non-Manual Employees;3. CPI Agricultural labourers;4. CPI Rural labour

When inflation is accompanied by an increase in unemployment rate then the situation is called stagflation. Theterm stagflation is combination of two terms stagnation and inflation. Stagnation here refers to economic

stagnation which means a slowdown in economic growth as indicated by increase in unemployment rate.

The counterpart of inflation is disinflation which is the case of decrease in inflation rate over a period of time.

This means that rate of increase in price level of goods and services has slowed down over the time period. If

the decrease in inflation rate continues then the rate may become negative, a situation referred as deflation.

During deflation the price level of goods and services decreases and consequently the purchasing power of

money increase. This means that one can buy more amount of a given commodity with the same amount of

money. Referring to the sandwich example given above now let us suppose that the price of a piece of sandwich

has dropped to Rs. 5 and so now you can buy 10 sandwich pieces for Rs. 50.

Policy Rates and Reserve ratiosIf one is a regular reader of business section of a newspaper then one must have come across at least once in a

month an article on RBIs (Reserve Bank of India) monetary policy review in which different rates and ratios like

repo rate, cash reserve ratio, etc. are mentioned. It is important to understand the meaning of these rates and

ratios in order to appreciate the implication of change in their values.

At first let us consider two similar rates bank rate and repo rate. Bank rate is the rate of interest that

commercial banks and other financial intermediaries have to pay on the loan that they take from countryscentral or federal bank. Repo rate is similar to bank rate except that it is applicable to short term loans while

bank rate is applicable to long term loans. In India Reserve Bank of India (RBI) is central bank. Suppose that bank

rate in India is 5% which means that if a commercial bank takes a loan of 1 million rupees from central bank


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then it has pay 5% of 1 million i.e. Rs. 50,000 as the interest. Reverse repo rate is the counterpart of repo rate. It

is the rate of interest commercial banks and other financial intermediaries receive on excess funds they deposit

with the central bank. Now suppose the commercial bank deposits 1 million rupees in central bank with reverse

repo rate being 5% then the commercial bank will receive Rs. 50, 00 as interest on their deposit. The three

above mentioned rates are also referred to as policy rates.

Cash reserve ratio(CRR) and statutory liquidity ratio(SLR) are reserve ratios which put a limit on the minimum

amount of reserve that commercial banks and other financial intermediaries are required to keep in central

bank. CRR is the percentage of their total deposits that the commercial banks have to keep in central bank in

form of cash. SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as

gold and approved short term securities like treasury bills may be used to meet the reserve requirements. A

better understanding of reserve ratio will be possible after going through the example provided below. Assume

that the CRR and SLR are 6% and 20% respectively and a commercial bank has a total deposit of 10 million

rupees with itself. Now the bank has to keep 0.6 million rupees in cash as a deposit with central bank and make

a net deposit of 2 million rupees in form of liquid assets with the central bank.

The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply and

inflation rate in economy. Suppose if India is undergoing inflation then to increase the supply of money in

economy RBI may decrease its policy rates and reserve ratios. The decrease will have the combined effect of

increasing the deposits available with the commercial banks which may be offered as loans to general public

thereby pumping money into the economy. One can refer to the current value of these ratios and rates by

visiting the homepage of RBIs website - http://www.rbi.org.in/home.aspx.

GDP and GNPGross Domestic Product (GDP) refers to the market value of goods and services produced within a country in a

financial year. GDP is calculated using the formula provided below:

GDP = Private Consumption + Investment + Government Spending + Net exportsWhere Net Exports = Exports Imports

Private Consumption here refers to the household consumption expenditure which will fall under one of the

three categories durable goods, non-durable goods and services.

Investment here refers to business investment in buying new equipment like purchase of software, buying of

machinery, etc. and does not include exchange of assets. This should not be confused with financial investment

in purchase of financial products.

Government Spending is the expenditure of government on final goods and services. It is inclusive of salaries of

public servants and purchase of military equipment but excludes social security and unemployment benefits.

GDP is considered to be an indicator of standard of living of a country. Countries with higher GDP are considered

to have better standard of living. When net income receipt is added to GDP then it gives Gross National Product

(GNP). Net income receipt is arrived at by summing the income from overseas investment and subtracting from

the sum the income earned by foreign nationals and companies domestically. Let us consider an example for

further clarification. Suppose the GDP and GNP of India are to be calculated, now if an Indian company has a

plant in China then the profit made by that plant will not be included in GDP but will be included in GNP.

Similarly if a Chinese firm has a plant in India then the plants income will be accounted for in GDP but will be

subtracted from GNP value. To summarize the basis of production allocation is geographical location and

ownership for GDP and GNP respectively.

Classical and Keynesian TheoryMicroeconomics is economics related to individual and firms whereas macroeconomic deals with the behaviour

of economy as a whole and not just individual firms but entire industries. The history of macroeconomics has

witnessed several economic theories but the two pivotal theories among them have been Classical and

Keynesian theory given the influence they had in guiding the functioning of economy. Classical theorys origin


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may be traced back to the all-time classic book, Wealth of Nations by Adam Smith in which the concept of

invisible hand was proposed.

The concept of invisible hand states that in a free market if individuals carry out their economic affairs for their

own self-interest then they will be led by the invisible hand to maximize the general welfare of the economy.

The concept should not be misinterpreted to mean that there will be no wealth inequality in a country and that

a country will be insulated from the effects of drought, war or political instability. It just proposes that given the

initial distribution of wealth in a country and the resources (natural, human and technological) at its disposal,

the existence of free markets will make country men as well of as possible.Central to the existence of free market is the assumption of price and wage flexibility. Price and wage flexibility

assumption implies that price and wage adjust rapidly enough to maintain equilibrium where the supply of a

commodity equals its demand. For example if for a commodity say rice the quantity demanded exceeds quantity

supplied then the price rises to bring down the demand so that it equals supply. Change in price and wage

influence the action of people in an economy. As existence of free market requires minimum regulatory

requirements so followers of classical theory often advocate limited role of government in functioning of

economy.

The theory of classical economics took a severe blow in 1930 with its failure to come up with an effective

solution for Great Depression that had crippled the economy of United States. At that time a British economist,

John Maynard Keynes came up with an alternative to classical theory in his book The General Theory of

Employment, Interest and Money. The theory is popularly named Keynesian theory after his name and it rejectsthe assumption of wage and price flexibility which forms the basis of classical theory. Keynes on the contrary

assumed that wages and prices adjust slowly and are not able to reduce the number of people who want to

work so as to make it equal to the number of people which the firm wants to employ which results in

unemployment.

Keynes proposed increased government intervention through purchase of goods and services as a solution to

the problem of high unemployment. Purchase of goods and services by government will increase the market

demand and the producers will have to ramp up production level to meet the increasing demand that will

require hiring more people which will bring down the unemployment rate. The newly hired people will have

more disposable income to spend which will further raise demand and consequently employment. For this

reason Keynesian theory advocated increased government involvement for smooth functioning of economy.

Purchasing Power ParityPurchasing Power Parity is a theory in economics which states that the cost of goods in one country should be

the same as the cost of goods in another country when adjusted for the exchange rates. However in practice

such a condition does not exist and we see price differentials across many countries. The theory states that in

the long run the prices in both the countries and the exchange rates would stabilize such that we have the same

cost of goods irrespective of the country in which the purchase is made. To illustrate how the prices would

adjust, suppose a TV set costs Rs. 30,000 in India and the same set sells in the US for $700. Thus at the exchange

rate of INR = 40/US$, the same product costs $700 in the US when in India it costs $750. Thus ignoring the

transportation costs, people would prefer to buy the TV set in the US rather than in India. More practically, a

company can buy thousands of TV sets in the US and sell them in India at a profit. Because of this two things

would happen. Firstly the demand in the US would go up and that in India would go down. Also the company

would have to buy the TV sets by paying in dollars. Thus the company would buy dollars and sell rupeesincreasing the exchange rate. The exchange rates and prices would finally settle down to values where we have

purchasing power parity. However such a situation does not occur in practice due to a variety of reasons like

trade barriers, central bank intervention in the Forex markets etc.

Generally PPP is measured by the cost of a basket of goods in different countries. A famous indicator used to

measure PPP is the Big Mac Index. This index was proposed by The Economist and it measures the price of

McDonalds Hamburger across various countries.

FDI and FIIForeign Direct Investment refers to the investment by foreign investors in projects in the country. This type of

investment is more involved with the management, technology transfer and other field expertise and knowhowin the project. FII refers to Foreign Institutional Investors. These investors invest in the country indirectly by


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purchasing stocks of the companies listed on the stock exchanges. The FII money inflows or outflows are also

called hot money flows.

Currency exchange rate and different exchange rate regimes

The currency exchange rates tell us how much one currency is worth in terms of the other currency. For

example when we write INR = 45.34/US$ we mean that we would receive INR 45.34 for every US$ we possess.

The manner in which a country manages its exchange rate with other currencies in the world is called as theexchange rate regime. There are many types of exchange rate regimes like Fixed, Floating and Pegged float.

Fixed exchange rate regime was prevalent before the 1970s when there was a direct convertibility between

different currencies of the world that is the exchange rate is fixed in this regime. Today most economies follow

the floating exchange rate regime where the exchange rates are determined by the market forces rather than

the governments. Pegged floating rate is a type of floating rate regime where the central bank of the country

allows the exchange rate to fluctuate in a band about the pegged value. If the rate moves outside the band, the

central bank would intervene in the market by buying or selling the currency to bring the rate back to the

pegged value.

Fiscal and Monetary PolicyThe government exerts its control over the nations economy using two distinct set of policies. One is the

monetary policy (the central bank manages this on behalf of the government) and secondly the fiscal policy.

With the help of the monetary policy the central bank (RBI) controls the total supply of money in the market.

With the control over the money supply the central bank could control the spending by various people and

institutions thus controlling the prices and the economic output. Monetary Policy comprises of various policy

rates and reserve ratios that are explained in a section above. The other tool that government uses to control

the nations economy is explained below:-

Fiscal policy: Fiscal policy refers to the government spending of its resources and taxation policies which affect

the economy of the country. The levels of taxation and expenditures are mostly decided when the budget is

presented in March. With the help of taxation, the government can change the levels of disposable incomes

which households have, thus modifying the demand levels in the country. Also with the help of subsidies andspecial plans the government can support the growth certain sectors, regions, social segments in the economy.

Microeconomics

Law of Demand

It basically establishes the relationship between the demand of a product and its price. It states that Demand

of a particular product is inversely proportional to its price keeping other factors such as Income, Price of

substitutive products etc. constant.

For example, if we consider the recent example we can easily see that the demand of the onion decreased

considerably with recent hike in its price.Law of Supply

It basically establishes the relationship between the supply of a product and its price. It states that Supply of a

particular product is directly proportional to its price keeping other factors such as supply of substitutive

products etc. constant. The logic behind this law is actually the fact that the higher price motivates the supplier

to produce more for higher amount of profit.

For example, the rise in the price of the onion will motivate the farmers to produce more so that they will get

more profit in the future. One thing that we will have to keep in mind is the fact that in the short term its supply

will remain the same but in the long term its supply will increase considerably.

Types of Industry

Monopoly

It exists when a specific individual or an enterprise has sufficient control over a particular product or service to

determine significantly the terms on which other individuals shall have access to it. Monopolies are thus


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characterized by a lack of economic competition to produce the good or service and a lack of viable substitute

goods.

For Example, Indian Railway has monopoly in serving passengers through train as no other player exists.

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers .Because

there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm

influence, and are influenced by, the decisions of other firms. Example: - Indian Petroleum Industries which is

dominated by few players like HPCL, BPCL, IOCL etc. and the decisions of the one influences the decision of the

others.

Perfect competition

It describes markets such that no participants are large enough to have the market power to set the price of a

homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly

competitive markets. Still, buyers and sellers in some auction-type markets say for commodities or some

financial assets may approximate the concept. Perfect competition serves as a benchmark against which to

measure real-life and imperfectly competitive markets.

Money market and Capital marketDifference and demarcation between money market and capital market is made on the basis of maturity period

of instruments and claims.

Money Market: Short-term instruments maturing within a period of one year are traded in money marketsuch as inter-corporate deposits, certificate of deposits, treasury bonds, commercial papers, commercial bills,

etc. Money market is a wholesale market and the participants in money market are large institutional investors,

commercial banks, mutual funds, and corporate bodies.

Capital Market: Capital market deals with longer maturity financial assets and claims. Capital marketincludes trading in the financial instruments such as shares (equity as well as preference), public sector bonds

and units of mutual funds. In case of capital market even a small individual investor can deal by sale/purchase of

shares, debentures or mutual fund units.

SENSEX Calculation

The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of the 30 largest

and most actively traded stocks, representative of various sectors. These companies account for around one-

fifth of the market capitalization of the BSE. The Bombay Stock Exchange (BSE) authorities review and modify its

composition to make sure it reflects current market conditions.

Sensex in nothing but the average weighted movement of these stocks.

For Eg: Reliance Industries LTD (RIL) has 10% weightage in the index and overall growth in RIL is 5% on a

particular day, so RIL contribution will be 10*1.05, and so on so forth. All the calculation will be done by this

method and final average increase or decrease of the BSE index is done.

Regional and national stock exchanges - how do you trade on exchange?

Regional Stock Exchange: A Regional stock exchange is usually located in a particular city and is open for trading

only to the residents of that particular city/state which makes it inaccessible for other investors who do not

reside in that region.

In India, there are 21 regional stock Exchanges existing in cities like Ahmedabad, Bangalore, Bhubaneshwar,

Calcutta, Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Jaipur, Ludhiana, Madhya Pradesh, Madras,

Magadh, Mangalore, Meerut, OTC Exchange Of India, Pune, Saurashtra Kutch, UttarPradesh and Vadodara.

National Stock Exchange: The BSE and NSE are the two national stock exchanges of India meaning they are

common to all residents of the country. Today NSE network stretches to more than 1,500 locations in the

country and supports more than 2, 30,000 terminals.

How to trade on an Exchange?

The stock market system is an avenue to trade stocks of the listed companies. The Securities can either be

bought when a company issues IPO or can be traded in the secondary market wherein stocks can be bought and


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sold through brokers who facilitate this procedure. A particular individual can decide on which stocks to buy or

sell depending upon the companys growth prospects and performance and various other parameters. This

information will help the investors to become more aware of the directions of the companies where they have

share of stocks on and this will also aid them in how to trade stock and where to direct their investment

strategies.

What are different caps of companies?The sum derived from the current stock price per share times the total number of shares outstanding is termedas market capitalization. It is indicative of the value of the Company. Depending upon the market capitalization

of a company, all the companies are divided into Large-cap, mid-cap and small-cap. Given below are the

approximate categories of Market Capitalization, but there is no sure shot definition:

Large Cap: Over Rs.550 crores

Mid Cap: Rs.150 cr to Rs.550 crores

Small Cap: Less than Rs. 150 crores

Source: Dalal Street Journal

Different Investor Types:

Conservative investors: They prefer investing in low risk profiles. Such people mostly put all their money ininterest bearing savings accounts, fixed deposit, mutual funds, treasury bills, Certificate of deposits. Such

instruments provide fixed amount of returns at a particular interest rate.

Moderate investors: They often invest in cash and bonds. They may even invest in stock market in stocks with

low or moderate risks.

Aggressive investors: Commonly invest in the stock market which is a higher risk. They also tend to investin business ventures as well as higher risk real estate. The return on investment here is not guaranteed.

In stock market too, there are different types of investors:

Day Traders: Those who buy and sell various types of stocks, currencies, and futures within the same day.

Short-term Traders: They hold the stocks/ investments for a very short time. Short-term trading minimizesrisk due to the fact that the shorter they hold the stock, the less time the price has to go down. Likewise the

gains that are to be had are also minimal, so the profits grow very slowly.

Long-term Traders: They have a long-term strategy and aren't in a rush to make quick money but to makemore money over a greater period.

Difference between shareholders and stakeholders

Shareholders: They hold shares in the company that is they own part of it. They are mainly interested in their

dividends and capital growth of their shares. They have the right to

Stakeholders: They have an interest in the company but do not own it. A stakeholder is any individual or

organization that is affected by the activities of a business. Shareholders are a part of stake holders. The otherstakeholders can be Employees of the company, Vendors, Customers and Suppliers, Government, Lenders.

Promoters

An individual or a company who devises a plan for a business venture or some kind of a business activity; one

who takes the preliminary steps necessary for the formation of a corporation. Promoters help in raising the

money to fund the new business from the public in the form of various investment instruments such as limited

partnerships and direct investment activities.

Different types of financial instruments shares, bonds, options, futures and

derivatives

Shares: A unit of ownership interest in a corporation or financial asset. While owning shares in a business doesnot mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder


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does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends.

The two main types of shares are common shares and preferred shares.

Bonds: A debt investment in which an investor loans money to an entity (corporate or governmental) thatborrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies,

municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are

commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks

and cash equivalents.

Derivatives: A security whose price is dependent upon or derived from one or more underlying assets. Thederivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the

underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest

rates and market indexes. Most derivatives are characterized by high leverage.

Options: A financial derivative that represents a contract sold by one party (option writer) to another party(option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a

security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a

specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give

the option to sell at a certain price, so the buyer would want the stock to go down.

Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a

physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detailthe quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures

exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.

The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Bull and bear market and strategies followed in markets

Bull market: A financial market of a group of securities in which prices are rising or are expected to rise. The

term "bull market" is most often used to refer to the stock market, but can be applied to anything that is traded,

such as bonds, currencies and commodities.

Bull markets are characterized by optimism, investor confidence and expectations that strong results will

continue. It's difficult to predict consistently when the trends in the market will change. Part of the difficulty is

that psychological effects and speculation may sometimes play a large role in the markets.

Bear market: A market condition in which the prices of securities are falling, and widespread pessimism causes

the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling

continues, pessimism only grows.

A bear market should not be confused with a correction, which is a short-term trend that has duration of less

than two months. While corrections are often a great place for a value investor to find an entry point, bear

markets rarely provide great entry points, as timing the bottom is very difficult to do.

Long (or Long Position): The buying of a security such as a stock, commodity or currency, with the

expectation that the asset will rise in value. In the context of options, it is the buying of an options contract.

Short (or Short Position): The sale of a borrowed security, commodity or currency with the expectation that

the asset will fall in value. In the context of options, it is the sale (also known as "writing") of an options

contract.

Short Selling: The selling of a security that the seller does not own, or any sale that is completed by the

delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a

lower amount than the price at which they sold short.

Dematerialization and Depositories

Dematerialization: The move from physical certificates to electronic book keeping. Actual stock certificates are

slowly being removed and retired from circulation in exchange for electronic recording. With the age of

computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be

registered and transferred electronically.

Depositories: On the simplest level, depository is used to refer to any place where something is deposited forstorage or security purposes. More specifically, it can refer to a company, bank or an institution that holds and


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facilitates the exchange of securities. Or a depository can refer to a depository institution that is allowed to

accept monetary deposits from customers.

SEBI its role as a regulator

The Securities and Exchange Board of India is the regulatory body for the investment market in India. The

purpose of this board is to maintain stable and efficient markets by creating and enforcing regulations in the

marketplace. The SEBI is relatively new (1992) but is a vital component in improving the quality of the financialmarkets in India, both by attracting foreign investors and protecting Indian investors.

Commercial banking v/s Investment Banking

A commercial bank is a financial institution which accepts deposits, provides loans for business and personal

purposes and offers services like providing accounts. Other services that these offer include issuing Demand

drafts, cheques, lockers (safe deposit boxes) credit cards and debit cards facilities etc. Examples include State

Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank etc.

An Investment bank is financial investment institution that acts as an intermediary and offers the following

services:

1) Underwriting The process by which capital is raised from investors on behalf of companies by issuing

shares(equity) or bonds(debt)

2) Help a company in the complete process of raising capital by arranging stock issues in market and deciding

the prices of the shares.

3) Strategic Advisory during mergers and acquisitions

4) Acting as broker for institutional investors

5) Preparing the companys Red herring Prospectus

Examples include Goldman Sachs, Morgan Stanley, HSBC, JPMorgan Chase, Deutsche bank etc.

Differences: A commercial bank provides retail banking services like loans and deposits, but an investment bank

does not. Further, both of them handle different type of transactions.

NBFCsNon-Banking Financial companies (NBFCs) are financial institutions that provide banking services, but do not

have a banking license. Ideally, they are not allowed to take deposits from the public.

Some of their services include:

1) Providing loans and credit facilities

2) Wealth Management

3) Advisory during Mergers and Acquisitions

4) Retirement Planning

5) Underwriting

It differs from commercial banks in the following aspects

1) NBFCs do not hold a banking license

2) NBFCs cannot take deposits from public

Types of Accounts

1) Savings Account: This type of account is most popular and commonly used account by individuals. This

account provides cheque facility and money can be withdrawn from the account. However, there is a limit on

the amount of cash that can be withdrawn on a single day. This account also fetches interest on the amount of

money deposited. Currently, the interest rate is 3.5% p.a .2) Current Account: This account is used mainly by business houses and is not for investment. The purpose of

this account is to provide flexible liquidity and hence there is no limit on the amount of money that can be


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withdrawn on a single day or on the number of withdrawals within a certain period of time. No interest is paid

on these accounts and bank actually levies service charges on such accounts.

3) Fixed Deposit(FD) account: Customers deposit money in a fixed deposit account for a fixed period of time

at a fixed rate of interest. Money cannot be withdrawn from such accounts before the time period ends, though

some banks allow withdrawal by paying a penalty fee

4) Demat Accounts: Also known as dematerialized accounts, these are used for selling or buying stocks in

share market. In India, such accounts are maintained by NSDL (National Securities Depository Ltd). The shares

are stored digitally in such accounts.5) Joint Account: This account is owned by two or more individuals. Any of the owners can withdraw money

from this account, but the permission of other owners is required.

6) NRI Account: It is a bank account opened in India by a non-resident Indian for the purpose of his personal

financial transaction.

Documents

Introduction to Economics and Finance