Contents

Financial market and regulatory systems........................................................................................2

Money market..............................................................................................................................2

Capital market..............................................................................................................................3

Financial management.................................................................................................................4

Objectives of financial management...........................................................................................4

Financial fund manager...............................................................................................................5

Financial management cycle........................................................................................................5

Share capital.................................................................................................................................5

Private placement.........................................................................................................................6

Portfolio and portfolio management............................................................................................7

Social stock exchange..................................................................................................................8

Debenture and debenture trustee.................................................................................................8

Charge and collateral.................................................................................................................10

Venture capital fund..................................................................................................................10

Sovereign gold bonds................................................................................................................11

Masala bonds.............................................................................................................................12

Elephant Bond...........................................................................................................................13

Green bonds...............................................................................................................................13

Relationship between bond price and interest rate....................................................................14

Tracking stock and targeted stock.............................................................................................14

Derivatives and future trading...................................................................................................15

P/E Ratio, EPS...........................................................................................................................17

Commodities market..................................................................................................................17

Energy sector and commodity trading.......................................................................................18

 Rule of Return............................................................................................................................19

Price to book value....................................................................................................................20

Stocks under GSM/ASM...........................................................................................................20

Rule of 72..................................................................................................................................22

FINANCIAL MARKET AND REGULATORY SYSTEMS

 Financial market is bifurcated into various sub-heads such as capital market, money
market, forex markets, etc. This is in order to have different regulations and sectoral
regulators.
 Section 2(9) of Companies Act separately defines a banking company. And 1956
Companies Act clearly states that a company does not include a banking or insurance
company.
 Similarly, financial market is an umbrella term under which various sectoral regulators
are included.
 Financial market is further bifurcated into money market and capital market.

MONEY MARKET

 Money market is a highly volatile and each security is traded for short term. The
maximum period is 1 year.
 While in capital market, each security is traded for long term i.e., more than one year.
 Every company can have working capital (operational cost) and fixed capital (assets). If
company wishes to revamp its working capital, it will go to money market where short-
term fund requirements are met.
 Money market is further divided into – call money, treasury bills/zero coupon bond bills,
certificate of deposits, promissory notes, etc.
 Call money – when one commercial bank borrows funds from another commercial bank,
it is call money. This is for short term. And rate of interest is determined by RBI.
  Treasury bills – issued in open market in lieu of loan taken by government. T-bills are
issued by RBI. 3 types of T-bills – 91, 182 and 364 days. They are issued on discounted
and paid back on face value, the difference being the interest in an indirect manner. They
are called zero coupon bonds because they do not carry any interest. For instance, issued
at 90, but at the time of redeeming the bond, 100 is paid back which is the face value.
 Certificate of deposit – there is no role of government here, and they are issued by private
entities. It is a promissory note having an underlying value attached to it. In lieu of the
payment, a COD is issued fixing a due date in the future. If the lender requires money on
an urgent basis, it can approach the bank, which will give a discounted amount to lender.
For instance, for a COD of 50,000, bank will give 45,000. Then on the maturity date, the
bank will go to the original person and take back the full amount.
 COD is different from fixed deposit because FD is non-transferable while COD is
transferable freely.
 Commercial paper – it is issued by organizations which have a specific purpose. Time
period is 91, 182 and 364 days.
 Players involved in money market – commercial banks, NBFCs, mutual funds,
individuals (in case of T-bills). But T-bills are generally purchased by entities which have
huge liquid cash.
 Thus, when you want to generate liquid cash for a shorter duration, money market is the
resort. For instance, working capital requirements.

CAPITAL MARKET

 When a person wants to invest money for a longer duration i.e., more than one year, he
will go for capital market. For instance, if a company wishes to change its dynamics by
acquiring fixed capital, it will resort to capital market.
 Capital market is divided into primary and secondary market.
 In primary market – company raises capital for the first time.
 In secondary market – where there is daily trading in securities.
 Whenever a company makes further issue, it dilutes the equity of the company, therefore,
it doesn’t go for public issue frequently.
  In secondary market, company keeps on generating money, as by trading of shares, the
price of shares increases through demand and supply. Share capital increases with the
increase in price of shares. This raises the repute of the company, attracts investors and
makes acquiring debt easy. Thus, generation of money takes place.
 The price and quantum of securities offered are determined based on economic principles
such as consumer preference, market penetration, etc.
 There can be offer for sale also by diluting the equity of promoters, but it is generally a
last resort.
 When a promoter dilutes his equity, it can be positive if such dilution doesn’t affect the
company basics.
 Both primary and secondary market are further bifurcated into equity and debt markets.

FINANCIAL MANAGEMENT

 It is based on 3 things – strategy and planning, controlling and directing the fund, and
organizing the fund.
 Strategic management – modality and situation of the market, and your necessity.
 Controlling and directing – You should be in the position to control and give a proper
direction to your money.
 Organizing the fund – any entity would not invest funds in a single pool. The investment
would be diversified into different funds comprising equity and debt. Also, if any fund is
performing well, the amount would be taken out and invested in that area.
 Without these three, it is not financial management, but only investment.

OBJECTIVES OF FINANCIAL MANAGEMENT

 Maximization of wealth – returns are high with proper financial management.

 Risk minimization – any business is aimed at minimizing risk. Without proper financial
management, investment would be in risky avenues.
 Continuous flow of liquidity is ensured through financial management.
 Good returns are also a part of financial management.
FINANCIAL FUND MANAGER

A number of individuals invest in any portfolio. And the corpus generated by any portfolio must
also be further invested. The fund manager has the responsibility to analyze the market, and to
decide what, when and how much to invest, and how and where to reinvest.

FINANCIAL MANAGEMENT CYCLE

 Framing a timeline for investments is a part of the cycle.

 Budgeting is another part – where to spend and how much.
 Proper allocation of fund is required.
 Strategic planning is required to make investments.
 Monitoring of fund is another necessary element.
 Reinvestment is another element due to compounding of original amount.
 Thus, financial management cycle comprises the basic attributes a person needs to
understand while going for any financial allocation of funds or resources. Otherwise,
person wouldn’t be able to maximize wealth.

SHARE CAPITAL

 Share is a unit in the ownership of the company. It is defined in the section 2(84)
Companies Act as meaning a share in the share capital of the company and it includes
stock.
 Capital of the company is divided into various heads such as debt capital, fixed capital,
working capital, etc. Share is only a part of the share capital.
 Share capital means the total money that you are raising from issuing the shares.
 There is a single account wherein all money raised from issuing shares goes.
 The amount of share capital of a company is mentioned in the MOA. Section 61 allows
alteration of share capital. This allows expansion of business.
 Only a simple resolution is required.
 Section 43 provides there are two categories of share capital – equity and preference.
 Irredeemable preference shares cannot be issued.
 Authorized share capital – total amount of share capital authorized under MOA.
  Called up share capital – the amount which has been called up from the public.
 Subscribed share capital – the amount the investors have subscribed to.
 Called up can also be bifurcated into first call, second call, etc. depending on its need i.e.,
out of face value of 10, only 6 has been called up.
 If there is unsubscribed share capital, majority of companies have underwriting
agreements with merchant bankers who will buy the unsubscribed shares.
 Capital reserve and reserve capital – reserve capital account is for uncalled money. When
the money comes, it goes to reserve capital account. This account is used for only 3
purposes – redemption, repayment and winding up.
 Conditions for winding up –
i. If the company acts against the sovereignty or integrity of the nation.
ii. If the company is declared fraud.

PRIVATE PLACEMENT

 The company selects a group of individuals and issues securities only to that group.
 Both private and listed companies can opt for private placement.
 Threshold – the group can be maximum of 50 persons in one go, and in one financial
year, the number cannot exceed 200. But exception is that QIBs and ESOPs are not
included in this calculation.
 Once amount is received from these persons, within 60 days, allotment has to be made.
Otherwise, interest has to be paid.
 Fine of the quantum of private placement, or 2 crores, whichever is higher.
 Segments of allotment – QIB, retail individual investor, non-institutional investor.
 There are 13 listed categories of QIBs. Funds having corpus of more than 25 crores are
only listed as QIBs.
 QIBs are kept out of scope of private placement as they do not invest as retail investors,
rather invest with a lock-in period and provide financial stability to company.
 Employees Stock Option Plan – it is an option generally provided by a new company to
employee as part of his salary and shares are offered at discounted price. Employee may
opt only for salary or may subscribe to this option along with salary. There is a high
probability that there will be good returns in future.
  In ESOP, there is ESOP plan where there is a vesting period – time period during which
person has to wait, and only after its completion person can exercise the right. The aim is
that if the person leaves the company during the vesting period, the vesting wouldn’t be
done.
 Vesting period depends on the ESOP plan. It is minimum 1 year.
 Once vesting is done, there is an exercise period to exercise the ESOP right.
 If the employee is dismissed from the company for a reasonable cause, he cannot exercise
ESOP right. But the ESOP report goes to ROC, and if no reasonable cause for dismissal,
person can still exercise ESOP right.

PORTFOLIO AND PORTFOLIO MANAGEMENT

 It means the overall accumulated wealth in any form – cash, gold, stock, bond, etc.
 Segregation of portfolio – growth, income and value portfolio.
 Income portfolio – those portfolio/assets through which income can be generated on a
regular basis.
 Growth portfolio – stock is risky, but if invested in it, the growth might be high. High-
risk funds are involved here.
 Value portfolio – retail investors and small institutional investors invest in it. It is for
long-term trading wherein a good amount would be generated. Value would be generated
with time. Here, the growth would not be as exponential as growth portfolio, but the risk
involved would also be low.
 Portfolio manager – an individual not having adequate knowledge appoints a portfolio
manager who invests in various avenues on his behalf and manages the investment.
 Cash inflow and share purchase – portfolio manager places orders in the market at such
prices and such quantum which are according to the economics of the market. This is the
primary role.
 Once stock is purchased, portfolio manager monitors the stocks, and rotates the funds
from one stock to the other so that the fund increases.
 Monitoring agency
SOCIAL STOCK EXCHANGE

 Zero coupon zero principal bonds – whenever money is invested in any company, some
interest is associated with it. however, ZCZP is a new concept in context of SSEs.
 There is no principal and no interest if money is invested in SSEs. Here, all organizations
doing anything related to social impact and social work would be listed so that they can
receive financial aid.
 Entities wanting to be listed as SSEs shouldn’t be religious charitable foundation,
corporate foundation, housing corporation, etc.
 The investor investing in SSE has an assurance that the end utilization of fund is for
social purpose only.
 India is the 7th country to implement SSE mechanism. Before this, there have been a
number of NGOs and NPOs which were actually created by corporates to siphon off
funds with NGO as the cover. In such situation, government couldn’t trace the origin and
utilization of funds.
 In SSEs, the government allows only those entities to be listed which have been approved
by the government.
 The concept of agents, etc. is done away with by SSEs, as investors can directly invest in
entities of their choice.
 Only those entities can list themselves which have made expenditure of at least 50 lakhs
in the last financial year.
 SSEs have solved the problem of undisclosed funds – the sources from where the fund
comes cannot be undisclosed. Earlier, funds could be received without issue of any
receipt against it which led to utilization of funds earned from shady avenues. But this
cannot be done now.
 However, there is requirement of 50 lakh expenditure in last financial year. This leaves
out all NGOs which have made expenditure of less than 50 lakhs.
 Distribution and complete utilization of funds can be identified in SSEs.

DEBENTURE AND DEBENTURE TRUSTEE

 Debenture means borrowing made by the company.

 This is done by company to ensure equity is not diluted. There are also tax benefits.
 Company can approach the bank also for loans, so why go for debentures.
 Interest has to be given on debentures also.
 If loan is taken from bank, banks would be the priority 1 secured creditors under section
53 of IBC, while debentures are covered under remaining dues and debts which is very
later in the waterfall mechanism.
 Bank loan always requires collateral.
 Secured debentures – there is charge against a specific asset. While unsecured debenture
– there is charge on the company by virtue of the instrument itself, but the security is not
on any specific asset. Accounting standard 27 talks about this.
 In unsecured debentures, there is high rate of interest because the security is lesser, as it is
not against any specific asset.
 Redeemable debentures – where principal and interest has to be returned upon maturity.
Time period is 10 years, and for infrastructural projects – 20 years.
 Section 2(30) talks about debentures and 2(81) talks about security which refers to 2(h) of
SCRA, which states that security includes debentures. This also triggers section 23.
 Section 71(3) states that secured debentures may be issued subject to such terms and
conditions as may be prescribed.
 Rule 18 of Companies (Share Capital and Debentures) Rules, 2014.
 Charge is not mandatory for debentures, as debentures itself talk about charge. In
secured, charge is created against a specific asset, while in unsecured, there is a general
charge.
 Also, debenture redemption reserve, where the money comes from, and for what kind of
companies it is mandatory to maintain DRR.
 Section 71(4) talks about debenture redemption reserve. Rule 18(7) provides that not all
companies are required to have DRR.
 Section 179(3) states that company’s board has the power to issue debentures.
 Amount in DRR goes through the following – premium, percentage of profit, and amount
available for dividend.
 Difference between bond and debentures:
 i. In debenture, there is no collateral (not even in secured debentures, as the asset
against which it is secured is not considered a collateral), while all bonds require
collateral. Charge is different from collateral.
ii. In bond, only primary dealers can deal in them.
iii. Debentures can be traded in and transferred, while in bonds, there are categories
which can be traded, but not all bonds can be traded and transferred.
iv. Bonds can be brought to market by banks, governments, etc. They are brought
through auction – yield bidding, price bidding, competitive bidding and non-
competitive bidding. But debentures do not come through auctions.
 Chapter III D of RBI Act – securities include debentures, thus banks can issue
debentures. But whether Chapter III D of RBI Act or anything issued by banks amounts
to debentures. The answer is no. Share capital and debenture rules also mention this. This
is because banks are exposed to more risk by issuing debentures as compared to a
company. Banks are exposed to investors, debenture holders.
 Difference between debentures and bonds and government securities – Government
Securities Act, 2006.
 Government security is created and issued by the government.

CHARGE AND COLLATERAL

 Charge creates a value and an equivalent right.

 While in collateral, there are chances of change in title.
 Mortgage is defined in section 58 of Transfer of Property Act, and charge is defined in
section 100.
 Both charge and collateral are evidence which shows that there is a debt on the property.
 But in charge, there is no right on property, while in collateral, there is.
 In TPA, charge keeps on changing on the basis of mortgage.
 While in Companies Act, when charge is crystallized, the money is given to creditor.

VENTURE CAPITAL FUND

 Retail investors and investors of high net worth come together and invest in startups and
early stage companies.
  Mutual fund and VCF is different as in VCF, return on investment and risk both are very
high. Most important difference is that the investors of VCF have control and decision-
making power.
 There are 3 major types of funding:
i. Seed funding – at the stage of idea and project inception.
ii. First round of investment – where project is initiated.
iii. Second round of investment – where business is expanded.
i. In between, there is bridging round also – to link two different startups.
ii. For management of VCF, there are general partners, as opposed to fund manager in
mutual funds.

SOVEREIGN GOLD BONDS

 SGBs are issued by the RBI on behalf of the government.

 SGBs are on the same price as actual gold. So SGBs are preferred because of following
reasons – first, safety in terms of safekeeping. Secondly, there is neither any making
charge nor tax. Third, there is fixed rate of interest of 2.5% on SGBs. Also, there is issue
of purity.
 For SGBs, redemption can be done after 5 years from the date of issue. Thus, lock-in
period of 5 years. Total time period is 8 years.
 The maximum limit for purchase of SGB is 4kg for individuals and HUFs and 20kg for
trusts.
 Person would invest in SGB rather than normal gold because it is easier to keep SGB as
collateral than normal gold.
 Lock-in period is required because otherwise there would be volatility in the market and
in prices of gold.
 SGBs cannot be traded anytime. There are series which are opened twice a year.
 Trading of gold in open market is also difficult, especially with respect to big jewelers.
 In SGB, downside is that if investment is small, there would be no returns. Benefit is only
if investment is high.
MASALA BONDS

 In masala bonds, Indian company raises funds from foreign market in Indian currency.
This protects the company from currency risks. But what is the benefit for foreign
investor.
 As it is a bond, there is always a collateral. So there is high security. Principal amount is
always secure, and even if currency fluctuation, risk is only in interest, not principal.
 Only member parties of FATF can invest in masala bonds.
 Also, in following avenues, money raised from masala bonds cannot be used:
i. In real estate, except for affordable housing scheme.
ii. For further lending.
iii. For equity investment.
 Mostly, money raised can be used for working capital requirements.
 Applicable sections – section 2(31) since debenture includes bonds, and section 71
(debentures).
 Whether section 23-42 are applicable – MCA clarification stated that it is not applicable.
But MCA notified that 2(31) is applicable.
 Also, whether section 117, 179 are applicable – since 71 is applicable, 117 and 179 are
automatically applicable.
 Who can issue masala bonds – private, public companies and government companies.
 MCA was of the opinion that by applying 23-42, it will defeat the entire purpose of bond
mechanism.
 If 2(31) needs to be taken into picture, it will automatically attract 71, 117 and 179.
 Minimum maturity period is 3 years.
 In Masala bonds – the rate of interest prevailing at the date of settlement would be used at
the time of repayment. This is the unique feature of masala bonds.
 Maharaja bonds – when Indian investor invests in Indian currency, it is called Maharaja
bond. The framework is same as masala bonds.
 But masala bonds have not been a success because investors want to invest in currency
which is for global trading. Also, investor would want to invest in a sector which has high
interest rate and no risk for the investor.
ELEPHANT BOND

 High Level Advisory Group Report under Surjit Singh Bhalla (Advisor to PM) brought
the concept of elephant bond.
 This bond gives an open privilege that whoever discloses black money stashed overseas
would be asked no questions, no prosecution under any law.
 There was a 15:40:45 mechanism – as soon as income is disclosed, 15% direct tax, 40%
is mandatory investment in elephant bond, and 45% is the income which the person can
take with him.
 Elephant bonds were created as long-term bonds with maturity period of 20-25 years,
which could only be used for infrastructural projects. On these bonds, there was interest
of 5%.
 Also, on the interest, 75% would be tax.
 HLAG Committee report stated that this scheme is a very big success in Indonesia.
 Benefits –
i. There is no fear of prosecution.
ii. Black money would come back to India.
 Negatives –
i. Time period is very high which degrades the time value of money.
ii. Rate of interest is only 5% which is very low.
iii. From the money which came back, it can be used for further generation of black
money or for criminal purposes.
iv. If the infrastructural project for which bond amount goes is never complete, what
happens to the bond money is not clear.
v. If the source of money is not being traced, it is an apprehension that the fund is
actually being rerouted outside India. This happened in Pakistan.

GREEN BONDS

 Article 48A of the Constitution provides that the State shall endeavour to protect and
improve the environment and to safeguard the forests and wildlife of the country. This
laid the basic foundation with respect to green bonds.
RELATIONSHIP BETWEEN BOND PRICE AND INTEREST RATE

 In primary market, securities are traded for first time, while in secondary market, there is
regular trading of securities.
 Price of bond is inversely proportional to interest rate offered on the bond. Thus, if
interest rate increases, the price (face value) of bond would have to be reduced. This is
because person would not be interested in purchasing the bond at the same value when a
bond issued at same price by the same entity is offering a higher interest rate. Suppose
face value is 1000 and interest rate is 4% which is increased to 5%. The new price would
be determined based on original interest/ new interest rate i.e., 40/5% = 800.
 But this inverse relation is only applicable to secondary market and not primary market.
 The inverse relation would be applicable only when the risk involved is also the same.
All the conditions involved should be the same. If risk is high in another category of
bonds, then inverse relation would not be applicable.
 Time period, face value, risk involved should be same and change should only be in the
rate interest.
 Bond yield – change in bond prices.

TRACKING STOCK AND TARGETED STOCK

 Stock is an indicator which indicates one’s ownership in the company.

 Demand of a stock fluctuates.
 If a company is engaged in telecom and has minor software segment also. Software
segment is performing well, but telecom segment is suffering losses. It can launch a
separate category of stock specifically for the software segment, which is distinct and
independent of the telecom stock of the parent company.
 Tracking stock / targeted stock means parent company will issue a separate distinct class
of stock for a particular business unit. This stock will be dealt with in a different manner,
and it wouldn’t be affected by the performance of parent company’s stock.
 Advantage is that company is able to sustain for a longer period of time. Second,
company can diversify stock and create segregation between sectors of business.
  Disadvantage is that even if the parent organization is doing good in the market, tracking
stock would fall because of sectoral issues. Second, dividend of tracking stock is very
low as compared to parent company’s stock. Third, there are lesser voting rights and
dividend rights, as they are limited to the particular segment only. Fourth, there would be
parent organization’s hold over tracking stock, but tracking stockholders do not have any
control over the activities of parent organization.
 There is segregation of profits of parent organization and profits generated by tracking
stock.
 If a parent organization decides to sell off the business, then the opinion of tracking
stockholders doesn’t matter.
 Why invest in tracking stock – profit maximization, future prospects (the particular
segment may be the future).
 Spin-off – creating an independent company. When a particular segment is doing well, it
is created into a separate company and dealt with that way. Difference between spin-off
and tracking stock is that spin-off stock would be a normal stock, and holders would have
complete dividend and voting rights and not partial or limited rights. While in tracking
stock, there is limited dividend and voting rights and limited policy making rights.
 In spin-off, role of economics i.e., demand and supply is applicable and company’s
accountability and profitability would influence the price of stock. While in tracking
stock, the performance of parent company doesn’t affect the price of tracking stock.

DERIVATIVES AND FUTURE TRADING

 Derivative – which derives its value from an underlying asset.

 Trading can be future, options, commodity, swap.
 Future trading – it is a contract entered into seller and buyer and SEBI acts as buyer.
Contract is with respect to future performance of contract. It is based on speculation of
how the market would perform.
 The current price is immaterial but on a future date, if price is increased, then person will
have to pay, and if price has reduced, the difference is the profit.
 Margin money – payment of a part of money that is actually made. Margin can be span
margin and exposure margin. Span margin keeps on changing from time to time.
 Prior to circular of 11 April, 2018, we used to have cash settlement. Margin money was
directly transferred into account. While after 11 April, there is delivery-based settlement.
Actual delivery is taken and then the security is sold, and then money is received.
 In future trading, we do not determine the trend of market for a day or two, but for a few
months. Thus, it is completely based on speculation. Here, share is not being purchased at
current price and is not being traded.
 Options trading – difference with future trading is that there is no obligation on the
purchaser of the option. There is a token amount (called premium amount) which is paid
at the time of subscribing to the option initially. Later, if the price is decreased, there are
two options – one is to let go of token money and purchase at prevailing price, second is
to go ahead with the option and pay the remaining sum. But in future trading, there is an
obligation to purchase and fulfill the contract. While in options trading, there are multiple
options and no obligation.
 Call means buy, put means sell.
 There is a concept of DNE – do not exercise, but this will be removed soon.
 Suppose current market price of SBI is 500. I purchased a call of SBI at 530. Single unit
share is not purchased, a lot has to be purchased. Say lot is of 1500. On call of 530, not
the entire money, but only a premium has to be paid. Suppose in future, price remains at
500, then the premium is lost. If price goes to 530, then again, premium is lost. If price
goes to 600, then there would be net profit.
 Call is taken when you anticipate market would go up. While put is taken when it is
anticipated market would go down. Second, put is when person is of the opinion that he
has so many units in demat account that he thinks value would not reduce.
 In India, we follow European option, and not American option. In American option, even
before the end date, the contract can be fulfilled. While in European option, the contract
can be squared off before end date, but contractual obligations would be fulfilled only on
the end date.
 ITM – in the money. SBI is trading at 513. So if you get an option that is of lesser than
513 i.e., you are in profit since first day. This is only when you have information of near
future losses of company.
  ATM – at the money. Getting an option at current market price i.e., current market price
is equal to call money price.
 OTM – on the money. This happens generally. Getting an option at more than 513.
 DNE concept would be done away with from 1st April 2023. Once a call is taken, and
physical delivery is not taken, then premium amount would be gone, and heavy penalty
would be imposed. Earlier, only premium was gone.
 This is done because if no physical delivery, then at end date also, trading would be done
from the market only, and if this is to be done, then what is the purpose of option.
 CA 3 – Nominal interest, real interest and inflation (real interest after deducting
inflation).
 Bond and interest – inverse relationship (bond price calculated on this basis).

P/E RATIO, EPS

COMMODITIES MARKET

 Commodity market is derivative instrument which derives its value from a physical
tangible object, on which the entire trading is based upon. Thus, goods are involved.
 Goods are defined in SCRA – tangible objects which can be traded in market.
 Bifurcation of goods is between agricultural and non-agricultural. In non-agricultural –
metals (precious and semi-precious metals), energy (oil, natural gas, etc.), gems and
stones. Agricultural includes all kinds of seeds.
 We are trying to create a balance in the volatility of commodity prices. Commodity
derivatives market also helps safeguard interests of various parties.
 With the help of such contracts, we are trying to preserve the dynamics of the market –
interests of both farmers and purchasers are secured by entering into a future contract
based on a specified price for the underlying commodity.
 Trading is on a different market – MCDX. And timing for trading is different. It is from
9-5 for commodities with no foreign element, and 9-11pm for commodities involving
foreign element.
 Physical delivery would be
 Difference between normal futures market and commodities market:
 i. In commodities, there is tangible commodity.
ii. Time period depends on nature of goods and specific contract.
iii. Premium is there in both markets.
iv. There is involvement of mandi in commodities market, while not in futures.
v. There can be direct and indirect impact of foreign elements and external factors
such as weather in commodities market. While in futures market, there may be
indirect effect, but not direct effect of external factors.
 International pricing concept – because of international market, there is external trading
window till 11pm. Whenever there is a fluctuation of plus minus 5% in international
prices, it affects the domestic prices to a great extent. If this is the case, international
market would be able to dictate its terms on the domestic market, and the next day, there
would be a lot of upside trend. Therefore, extra time period for trading has been given to
minimize such effects.
 Commodity trading is a risky business. This is because international pricing has a limited
impact on the domestic prices in normal trading, while international pricing has a major
impact on domestic prices in commodities market. This is especially in case of energy
sector. It is difficult to judge whether there would be upside or downside trend.
 Still, with the help of commodities market, hedging is easy and risk can be shifted from
one commodity to another. For instance, producer and sleepwell can enter into a future
contract to purchase cotton at stipulated prices irrespective of the conditions of market.
Thus, risk can be hedged. Person can share the risk by going outside the market. Persons
with major pockets and risk appetites benefit from commodities market.

ENERGY SECTOR AND COMMODITY TRADING

 In energy sector, three major commodities being traded are crude oil mini, crude oil, and
natural gas.
 Sector is separated into downstream, midstream and upstream.
 We deal in the raw commodity i.e., crude oil.
 For natural gas, unit for trading is MMBTU, while for crude oil, unit for trading is barrel
(1 barrel = approx. 158 liters).
  If we take entire commodities market as a whole, external geopolitical factors only have
an indirect impact. Direct impact is only on precious metals and crude oil and natural gas.
 Factors affecting crude oil and natural gas prices:
i. Law of demand and supply.
ii. External geopolitical factors – such as wars.
iii. Weather and natural disasters – due to weather, extraction process of natural gas
is affected. Also, for crude oil, sulphur content changes taking it out of tradeable
crude oil.
iv. Internal laws and trade and taxation policies affect the commodities market.
 Trade is from Monday to Friday. Time is 9am-11pm.
 Another difference in trading in commodities energy sector is tick size. It is the minimum
changing price that will always be at least Rs. 1. Unlike equity trading, in commodities
trading, there cannot be changes in decimals.
 Minimum lot size – for crude oil mini, it is 10 barrels. For crude oil, 100 barrels. For
natural gas, 10 MMBTU.
 Minimum margin – 10%.
 Oil benchmark and natural gas benchmark – WTM, brentoil, Dubai crude. These are
benchmark agencies. Benchmark decides allocation of barrels – how many barrels will
trade in what units. This is decided by the benchmark agencies.
 Commodity trading can also be used for hedging and speculation. Hedging is by entering
into future contract. Similarly, price increase and decrease can be speculated and
purchase can be done on that basis. As there is cash to cash settlement, profits can be
earned if speculation is correct.

RULE OF RETURN

 Return can be Absolute return, SAGR, CAGR, XIRR.

 Investment of 10,000 for 5 years. After 5 years, gets back 16,000. Here, absolute return is
6000 i.e., 60% of investment. But here, time is not taken into calculation. In absolute
return, it is a traditional concept wherein time is not included.
  Simple annual growth rate – 60%/5 = 12% annually. Here, time is included. But here,
compounded part is missed out on. Also, assumption is being made that interest is static
in nature and interest rate is not changing. But in reality, interest rate keeps on changing.
 Compounded annual growth rate – here, compounding is taken into account. Also, it
takes into account every time there is change in the rate of interest. Formula is (final
value/initial value)1/n.
 But CAGR has a basic problem. It can be applied in lump sum, but not in SIP. Therefore,
XIRR was needed. There is a deviation related to time period. As in SIP, amount is paid
in installments, the time period for each payment is different, therefore, compounding is
done differently – for the first installment, 5 years, for second installment, 4 years 11
months, and so on.
 Extended internal rate of return. Here, deviation in time period is taken into account.

PRICE TO BOOK VALUE

 In price to earning, everytime x rupees are spent, 1 rupee is generated i.e., how much
spending to generate 1 rupee.
 In P/B ratio, it can be ascertained whether the share is overpriced or not. For 1 rupee, how
much rupees a person is willing to spend. The higher the P/B ratio, the higher the price of
share. Book value is asset – liability.
 Suppose book value is 10 and current market price is 100. Thus, in order to get Rs. 10
asset, person is spending Rs. 100. This is not problematic in a normal situation.
 But at the time of winding up, company will only pay the book value.
 It cannot be said that P/B ratio is low because assets are less. This is because both
tangible and intangible assets have to be taken into account.
 Also, even if P/B ratio is low, it cannot be said it is bad if the company has stable
operations.
 P/B shows the real purchase of a person.

STOCKS UNDER GSM/ASM

 GSM – graded surveillance method. ASM – additional surveillance method.

 Surveillance is done by stock exchange or SEBI.
 If the SEBI or stock exchange is of opinion that the stock is prone to price manipulation,
then surveillance is done.
 Surveillance is needed because the right of the investor is supreme and it needs to be
protected.
 On 14th March, 2017, surveillance was introduced for the first time.
 GSM: If the P/E ratio of the company is very high, then company would be considered
overvalued and it would be considered price manipulation.
 It has to be seen whether there is a problem with the fundamentals of the company. For
this, various fundamentals are seen. To see whether P/E ratio is high, benchmark would
be nifty 500’s P/E ratio. Also, if the P/E is negative while industry P/E is high, it is also
an indicator.
 Second fundamental is P/B ratio.
 Another fundamental is market cap.
 If a stock/security is put under the GSM category, first thing which is imposed is trade to
trade i.e., those securities which cannot be dealt with in intra-day manner. It can only be
trade to trade basis i.e., only sold, or only delivery can be taken. Security cannot be
purchased and sold on the same day for such company. As the aim is to reduce volatility.
 Second is price band/circuit – the circuit can only be from 2-5%.
 Third imposition can be once in a week trading – trading in the stock can only be done
once in a week.
 Another imposition – additional surveillance deposit mechanism. 100% more margin has
to be paid (additional surveillance margin cost) to trade in the securities which will be for
90 days or till the period it is in GSM category.
 There would be a monthly review by stock exchange, and after the review, the company
can be removed from the GSM category.
 GSM is more stringent as compared to ASM. Also, there are various stages in GSM – in
stage 1, low restrictions, while in stage 4, high restrictions.
 ASM: if there is a high-low variation in the price of security, then the stock is put in
ASM category. Suppose minimum price is 800 and maximum price is 1500, then stock
would be put under ASM.
  Here, also, there is a power to ban intra-day trade and go with delivery option.
 If a single security/unit is showing client concentration despite the market being dynamic,
it shows price manipulation. Suppose all stocks are falling but one is rising, it can be put
under ASM category.
 To see whether to put under ASM – if the market cap of the company is less than 25
crores, net worth is less than 10 crores. If P/E ratio is very different from industry P/E.
 If P/E ratio is negative, or two times more than industry P/E, then stock would be put
under GSM and not ASM.
 Purpose of putting in ASM/GSM – a red flag notice is issued to the investors that their
investment has high chances of loss, as there are high chances that stock prices are
manipulated.

RULE OF 72

 72 divided by rate of interest would give the time period in which investment would be
doubled.
 As an investor, the vision is to double the investment in as lesser time as possible.
 Rule of 72 shows how much time x amount would take to become 2x.
 Thus, rule of 72 is part and parcel of P/E ratio, P/B ratio, CAGR and XIRR.
 Rule of 72 also states that investor should be aware about this rule. If an investor invests
in avenues where rate of interest is low, it is not worth it.