Financial Training

Introduction

Value creation and wealth creation are the most important aspects of stock investment. However, it is a common myth that investing in stock markets is not different from gambling. If you are an investor or a fresh professional seeking a placement in the finance industry, you must understand the basic differences between gambling and investing. Let us try to shatter that myth.

Before going further, it makes sense to review the behavior of Indian stock markets during the period 2003 to 2008 in the context of “Stock markets –Gambling or Investing”.

About Present Indian Stock Markets

Having started its bull phase from 2003, Indian stock markets surged to record high in a very short span. Later half of 2007 witnessed frenzied state in the markets with 1000 points gain every other week. Business channels and news media were in the race to display placards with every 1000 points gain in BSE Sensex.

Every family member was glued to the screens of online trading terminals and cheering up at their fortunes. Every penny stock on the bourse was daily scaling new highs after breaching upward circuit breakers in its first hour of the trade. F&O segment of the market witnessed historical build up of huge amount of open interest. People rarely hesitated in deploying the money kept aside for children’s education to stock markets. Indian stock market was flooded with hot tips, astrologically linked tips, thousands of so-called analysts and experts on the business channels and stock websites.

What did the behavior of hysterical masses demonstrate? Well, it was nothing but a sign of greed, punting, quick bucks, momentum play, gravely inebriated investors (or gamblers?) and disastrous speculation. It is OK until the going gets good.

However, there are some unpleasant truths in the stock markets – markets never move in one direction, markets are not money minting machines and downturn in the market is as fast as the its upmove.

Indian stock markets are presently facing the realities of these unpleasant truths. Markets have crashed during the last eight months from January 2008 onward. Nobody knows the bottom. Hardly anybody wants to speculate the extent of downside left in the markets. Hundreds of experts and millions of investors have vanished from the stock markets.

Status of Indian stock markets as mentioned above strongly supported the myth ‘Stock markets – gambling or investing’ in favor of gambling.

All the same, excesses in the Indian stock markets (or for those matter global stock markets) do not necessarily prove that stock markets are a gambling den. On the contrary, the stock markets have been the biggest wealth creator for millions of investors all over the world.

About Stock markets – Gambling or Investing

How do various dictionaries define gambling and investing?

Gambling – Predicting unpredictable, take a bet on an uncertain outcome, game of chance

Investing – Putting money to work for gainful purposes or for profitable returns or financial returns,

Well, the definitions by themselves do not throw much light on the distinction between gambling and investing. In fact, investing is also a chance, as the stock may not provide the expected returns due to various reasons.

So let us once again try to distinguish between an investor and a gambler. Table given below narrates the basic differences between gambling and investing. I hope it provides a reasonable guidance to you.

Although the liberalization process in India commenced in early 90s, but the reforms in Financial Markets in India went on fast track only by 2000. During the last few years, Indian financial markets have witnessed a distinct vibrancy due to the excellent policy initiatives of Government of India. As a result, Indian investor has wider choices of financial products.

With higher disposable income and awareness about the basic difference between saving and investment, Indian investor has become market savvy. Government of India has permitted large-scale foreign participation in various sectors. Global giants in brokerage, banking, insurance, mutual funds and commodities have established their foothold in India. Besides the abundant financial products, Indian investor has a vast choice of the suppliers due to large competition in the financial markets.

Finance industry comprising of securities market (primary and secondary equity and debt markets), foreign exchange markets, commodities markets, insurance, banking and mutual fund is facing acute shortage of thousands of skilled finance professionals.

Finance industry has large number of participants: exchanges, depositories, brokers, sub-brokers, corporate brokers, portfolio managers, share transfer agents, merchant bankers, venture capital funds, PE funds, foreign venture capital funds and foreign institutional investors.

In an endeavor to provide additional knowledge, necessary skills, and practical approach to the beginners who are aspiring to serve finance industry like Met Life, LIC, HDFC Mutual Funds, Share Khan, TATA Mutual Funds, Tata AIG Insurance, Aviva Life Insurance, Reliance Mutual Funds, ICICI Prudential, Geojit etc., FinancialTraining.in is starting a separate section on “Financial Markets”.

The Financial Market section will help you to get placed in the Financial Fields of your choice in the ocean of finance industry. The financial market in India is going through a boom and need over 1,000,00 qualified professionals. You can be among the best of these professionals using our site FinancialTraining.in. Information in this section would surely help to equip you with sound and practical knowledge base that in turn would provide you an extra edge before entering the finance industry.

Section on “Financial Markets” would cover highly informative articles related to equities markets, debt markets, derivatives, futures and options, commodities, portfolio management and financial mathematics.

Here’s a quick recap on Fundamentals of Financial Markets:

What is a Financial Market?

It is a market for creation and exchange of financial assets. Majority of the people participate in financial markets in one way or the other when they buy or sell the financial assets.

What is a Financial Asset?

Anything that provides value in exchange is an asset. It can be a tangible asset or an intangible asset. Tangible asset is a physical asset like property, machine, vehicle etc. Intangible assets are those assets that represent a claim to future cash flows. Financial assets fall under the category of intangible assets. Bonds, equities, options, debentures etc are examples of financial assets. Financial asset has alternative names like financial instrument or security.

What are the Main Functions of Financial Markets?

1. Allocate resources in an economy
2. Facilitate price discovery
3. Provide liquidity to financial assets
4. Reduce the cost of transactions

How are the Financial Markets Classified?

1. Based on Nature of Claim – Equity Markets (Residual Claim) and Debt Markets (Fixed Claim)
2. Based on Maturity of Claim – Money Markets (Short Term) and Capital Markets (Long Term)
3. Based on Types of Issues – Primary Markets (New issues) and Secondary Markets (Outstanding Issues)
4. Based on Timing of Delivery – Cash or Spot Markets (Immediate) and Forward or Future Markets (In future)
5. Based on the Structure – Exchange Traded Markets and OTC (Over the Counter) Markets

Choosing a debit card or credit card or both may not be as difficult as you might imagine, provided you are aware about the basic differences between the debit card and credit card. Carry on reading further to understand different aspects of debit cards and credit cards. To make it simpler, we have given the comparison in a tabular form and in the format of questions and answers.