In the early 18 th century, the Dutch East India company issued the first ever shares. The
investor is called as a shareholder of the company and the profits are shared in proportion to
the shareholding of each investor in the company. The relative performance of the
companies impacts the price of the shares positively or negatively. Majorly there are two
types of shareholders: Common Shareholders and Preferred Shareholders. While the
common shareholders own company’s common stock and have voting rights, preferred
shareholders own company’s preferred stock and do not have any voting rights. Preferred
shareholders are entitled to a fixed amount of annual dividend and common shareholders to
the earnings per share of the company in the financial year. Preferred share holders are paid
before common shareholders.
Equity Mutual Funds
Mutual fund is the pool of money formed by multiple investors, that is further used to invest
in assets. An equity mutual fund primarily invests its assets in listed market securities.
These investments feature limited exposure. Mutual fund houses create a diversified
portfolio because of which individual price movements tend to have only a limited impact
on the investment as a whole. These are not completely risk-free either and the rate of
returns are not assured. Equity mutual funds have an advantage of the professional fund
management, transparency and ability to regularly invest small amounts through SIP.
Equity mutual funds are ideal investment opportunities for investors who have a limited
understanding of financial markets.
Futures and Options
A derivative is a financial security which derives its value from the underlying equity
asset at current price. F&O is basically a bet that the investor is making with respect to
movements of the underlying asset/index. F&O contracts can be used by the investor
either to earn money by speculating price movements of the underlying stock or to
hedge current investments. F&O allows an investor to buy or sell equities of a company
in large quantities by just depositing a small amount of margin money. This way, these
leveraged products have the potential to earn higher returns as compared to equity. But
the higher returns opportunity comes at the cost of higher risk exposure and have short
expiry dates typically up to 3 months, which makes these unsuitable for long term
creation of wealth. It is therefore advisable to tread with caution while dealing with F&O
Arbitrage in the stock market refers to purchasing and selling of the same stock at the
same time but on different exchanges to take advantage of price differential opportunity
available in different markets. Arbitrage schemes typically invest in equity and derivative
market simultaneously. This ensures that the investor makes a profit no matter which
way the market moves. It must, however, be pointed out that this type of equity
investment strategy often involves very thin net margins from individual transactions
after payment of charges such as securities transaction payments have been made.
Since the gains by executing an arbitrage transaction are usually small, arbitrage funds
make hundreds of such trades in a day to convert the small gain into a meaningful gain.
However, this increases the expense ratio of this investment and reduces the potential
returns that an investor can receive from arbitrage funds.
Alternative Investment Funds
Alternative investment funds are a relatively new concept in India for equity investment.
They are tightly regulated in India and only available as an option for only selected
investor groups. AIFs are privately held and managed investment fund pooled from
domestic or foreign investors including HNIs (High Net-worth Individuals). Examples of
AIFs include hedge funds, angel investment schemes, real estate investment trusts
(REITs) and infrastructure funds. These are some of the riskiest investments currently
available in India with the potential to provide one.
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