MODULE IV

Circular flow of economic activities – Stock and flow – Final goods and intermediate goods
- Gross Domestic Product - National Income – Three sectors of an economy - Methods of
measuring national income – Inflation - causes and effects – Measures to control inflation
Monetary and fiscal policies – Business financing - Bonds and shares - Money market and
Capital market – Stock market – Demat account and Trading account - SENSEX and NIFTY
MICROECONOMICS VS. MACROECONOMICS
Economics is divided into Microeconomics and Macroeconomics, based on the scope of
study.

1. Microeconomics (Small Scale)

Definition:
Microeconomics studies individual economic units like consumers, firms, and markets.
It focuses on how decisions are made at a small scale.

Key Topics:
• Demand & Supply – How prices are determined.
• Consumer Behavior – Why people buy certain goods.
• Production & Costs – How businesses decide what and how much to produce.
• Market Structures – Monopoly, perfect competition, etc.

Example:
• How a bakery sets the price of bread.
• Why people buy more mangoes in summer.

2. Macroeconomics (Large Scale)

Definition:
Macroeconomics studies the entire economy at a national or global level. It focuses on
big-picture issues like growth, inflation, and unemployment.

Key Topics:
• National Income – GDP, GNP.
• Inflation & Deflation – Changes in price levels.
• Unemployment – Joblessness in a country.
• Government Policies – Fiscal & monetary policies.

Example:
 • Why prices of all goods increase (inflation).
• How India’s GDP grew by 7% in a year.

3. Key Differences Between Micro and Macro Economics

Feature Microeconomics Macroeconomics

Scope Studies individuals and firms. Studies the whole economy.

Price levels of all products

Focus Price of a single product (e.g., sugar).
(inflation).

How a farmer decides how much How a country’s economy grows

Example
wheat to grow. over time.

Policy
Helps businesses set prices & wages. Helps governments plan policies.
Impact

4. Why is it Important to Study Both?

✔ Microeconomics helps businesses and consumers make better financial decisions.

✔ Macroeconomics helps governments plan policies for economic growth.
 CIRCULAR FLOW OF ECONOMIC ACTIVITIES IN A TWO-SECTOR
ECONOMY

1. Introduction
The circular flow of economic activities explains how money, goods, and services move
between different sectors in an economy. In a two-sector economy, we consider only
households and firms, assuming no government or foreign trade involvement.
2. Assumptions of a Two-Sector Model
• The economy has only two sectors: Households and Firms.
• Households provide factors of production (land, labor, capital, and
entrepreneurship) to firms.
• Firms produce goods and services and sell them to households.
• No government intervention or foreign trade (closed economy).
3. Two Main Flows in the Economy
There are two types of flows in this model:
• Real Flow → The physical exchange of goods, services, and factors of production.
• Money Flow → The movement of money in the form of income, expenditure, and
payments.
4. Circular Flow Diagram for a Two-Sector Economy
It consists of two key markets:
1. Product Market (Goods & Services Market)
o Firms produce goods/services and sell them to households.
o Households spend money (expenditure) to buy these goods/services.
2. Factor Market (Resources Market)
 o Households provide labor, land, and capital to firms.
o Firms pay wages, rent, interest, and profits to households (income).
5. Representation of the Flow

Real Flow (Physical Exchange)

• Households → Supply factors of production → Firms
• Firms → Supply goods & services → Households

Money Flow (Monetary Exchange)

• Households → Spend money on goods & services → Firms (Consumption
Expenditure)
• Firms → Pay wages, rent, interest, and profit → Households (Factor Income)
The circular flow model shows the continuous interaction between households and firms.
It highlights how income is generated and spent in an economy, ensuring the smooth
functioning of economic activities.
 CIRCULAR FLOW OF INCOME IN A MULTI-SECTOR ECONOMY

The circular flow of income in a multi-sector economy expands beyond the simple
two-sector model (households and firms) to include government, financial
institutions, and foreign trade. This gives a more realistic picture of how money, goods,
and services flow in an actual economy.

1. Sectors in a Multi-Sector Economy

1. Households
• Own and supply factors of production (land, labor, capital, entrepreneurship).
• Receive income in the form of wages, rent, interest, and profit from firms.
• Spend money on goods and services (consumption expenditure).
2. Firms (Producers)
• Use factors of production to produce goods and services.
• Sell goods/services to households, government, and foreign markets.
• Pay wages, rent, interest, and profit to households.
3. Government
• Collects taxes from households and firms.
• Provides public services (education, roads, defense).
 • Gives subsidies, pensions, and welfare payments to support the economy.
4. Financial Institutions (Banks, Stock Market, etc.)
• Facilitate savings and investments by collecting money from households and
lending to firms.
• Provide credit to businesses for expansion and innovation.
5. Foreign Sector (Rest of the World)
• Handles exports and imports of goods and services.
• Brings foreign investments into the country.
• Affects exchange rates and balance of payments.

2. Circular Flow of Income in a Multi-Sector Economy

1. Real Flow (Goods & Services Flow)
• Households → Provide factors of production → Firms.
• Firms → Produce goods/services → Sold to households, government, and foreign
markets.
2. Money Flow (Monetary Exchange)
• Firms pay households for factors of production (income).
• Households spend money on goods/services (consumption expenditure).
• Firms and households pay taxes to the government.
• Government spends on public services and welfare (government expenditure).
• Households and firms save money in banks, which is then given as
loans/investments.
• Businesses and individuals engage in exports and imports, bringing money in
and out of the economy.

The multi-sector circular flow model shows a more realistic economic system where
money and resources circulate through households, firms, government, banks, and
foreign trade. It helps in understanding economic policies, GDP growth, and financial
stability.
 CONCEPT OF FLOW IN ECONOMICS
The concept of flow in economics refers to the continuous movement of economic
variables over a period of time. It is different from stock, which represents a quantity at
a particular point in time.

1. Definition of Flow

✔ A flow variable is measured over a period of time (e.g., per month, per year).
✔ It shows the movement or change in an economic activity.
✔ Flow variables are dynamic and continuous.

Examples:
• Income earned per month.
• Government spending in a year.
• Exports and imports in a financial year.
• Production of goods and services in an economy.

Example: If a worker earns ₹50,000 per month, his salary is a flow variable because
it is measured every month.

2. Difference Between Flow and Stock

Flow Stock

Measured over a period of time. Measured at a specific point in time.

Static and remains unchanged unless affected by

Dynamic and continuous.
flow.

Examples: Income, expenditure, Examples: Wealth, total population, national debt

savings per year. at a particular date.

Example:
• Savings per month (Flow) → ₹5,000 per month.
• Total savings in the bank (Stock) → ₹2,00,000 as of today.
 FINAL GOODS AND INTERMEDIATE GOODS
In economics, goods are classified into final goods and intermediate goods based on
how they are used in production and consumption.

1. Final Goods

Definition:
Final goods are ready for consumption and are not used for further production. These
goods directly satisfy the needs of consumers or businesses.

Types of Final Goods:

1. Consumer Goods → Used by individuals for personal consumption.
o Durable Goods (e.g., TV, car, refrigerator) – Used for a long period.
o Non-Durable Goods (e.g., food, clothes) – Used up quickly.
o Services (e.g., education, healthcare) – Intangible consumption.
2. Capital Goods → Used by businesses to produce other goods.
o Examples: Machinery, tools, buildings, equipment.

Example: A car purchased by a household for personal use is a final good.

2. Intermediate Goods

Definition:
Intermediate goods are used in the production of other goods and are not meant for
final consumption. They undergo further processing before becoming final goods.

Characteristics:
• Not counted in GDP separately (to avoid double counting).
• Used as raw materials in manufacturing.
• Lose their identity when converted into final goods.

Examples:
• Flour used to make bread.
• Steel used to manufacture cars.
• Cotton used to produce textiles.

Example: Flour purchased by a bakery to make bread is an intermediate good, but

bread sold to consumers is a final good.
3. Difference Between Final Goods and Intermediate Goods

Final Goods Intermediate Goods

Ready for final consumption. Used as inputs for further production.

Not included separately in GDP (to avoid double

Included in GDP calculation.
counting).

Can be consumer goods or capital

Always used in the production process.
goods.

Example: A car purchased by a

Example: Steel used to manufacture a car.
household.
 CONCEPTS RELATED TO NATIONAL INCOME
National income refers to the total monetary value of all final goods and services
produced by a country within a given period (usually a year). It is a key indicator of a
country's economic performance.

1. Gross Domestic Product (GDP)

Definition: The total value of all final goods and services produced within a
country's borders in a given year.

Formula:
GDP=C+I+G+(X−M)
where,
C = Private Consumption (Household spending)
I = Investment (Business investments in capital goods)
G = Government Spending (Infrastructure, salaries, etc.)
X - M = Net Exports (Exports - Imports)

Example:
If in India,
• C = ₹100 lakh crore,
• I = ₹50 lakh crore,
• G = ₹30 lakh crore,
• X = ₹20 lakh crore,
• M = ₹15 lakh crore,
Then,
GDP=100+50+30+(20−15)=₹185 lakh crore

2. Gross National Product (GNP)

Definition: The total value of all final goods and services produced by a country’s
residents, including income from abroad.

Formula:
GNP=GDP + Net Factor Income from Abroad (NFIA)
where,
NFIA = (Income earned by residents abroad) - (Income earned by foreigners within
the country).
 Example:
If India’s GDP = ₹185 lakh crore and NFIA = ₹5 lakh crore,
GNP=185+5=₹190 lakh crore

✔ GNP is higher than GDP if a country earns more from abroad and lower if foreign
investments take away more earnings.

3. Net National Product (NNP)

Definition: GNP adjusted for depreciation (wear and tear of capital assets).

Formula:
NNP=GNP−Depreciation

Example:
If GNP = ₹190 lakh crore and Depreciation = ₹10 lakh crore,
NNP=190−10=₹180 lakh crore

✔ NNP at Factor Cost (NNPfc) = National Income, which removes taxes and adds
subsidies.

4. Net Domestic Product (NDP)

Definition: GDP adjusted for depreciation. It represents the actual productive

capacity of a nation.

Formula:
NDP=GDP−Depreciation

Example:
If India’s GDP = ₹185 lakh crore and Depreciation = ₹10 lakh crore,
NDP=185−10=₹175 lakh crore

✔ Useful for measuring sustainable growth as it excludes asset deterioration.

5. Personal Income (PI)

Definition: The total income received by individuals and households, including

wages, rent, interest, and dividends, before taxes.

Formula:
PI=NationalIncome−CorporateTaxes−RetainedProfits+TransferPayments
✔ Transfer payments = Pensions, subsidies, welfare payments, etc.

6️. Disposable Personal Income (DPI)

Definition: The income remaining after paying taxes, which is available for spending
and saving.

Formula:
DPI = PI - Personal Taxes

✔ Higher DPI leads to more consumer spending, boosting economic growth.

7️. Per Capita Income (PCI)

Definition: The average income per person in a country, used to compare living
standards.

Formula:
PCI=National Income / Total Population

Example:
If India’s National Income = ₹180 lakh crore and Population = 140 crore,
PCI=180/ 140 = ₹1.28 lakh per person per year

✔ PCI is useful for comparing wealth between countries.

Summary Table

Concept Definition Formula

Total value of goods & services

GDP GDP = C + I + G + (X - M)
within a country

GNP GDP + Income from abroad GNP = GDP + NFIA

NDP GDP adjusted for depreciation NDP = GDP - Depreciation

NNP GNP adjusted for depreciation NNP = GNP - Depreciation

PI = NI - Corporate Taxes +
Personal Income (PI) Income before taxes
Transfer Payments

Disposable Personal
Income after taxes DPI = PI - Personal Taxes
Income (DPI)
Concept Definition Formula

Per Capita Income PCI = National Income /

Average income per person
(PCI) Population

Importance of National Income Concepts

Helps in policy-making and economic planning.

Used for international comparison of economies.
Determines growth rate, inflation, and living standards.
Guides government spending and taxation policies.
Methods of National Income Calculation
National income is the total monetary value of all final goods and services produced
in a country within a specific time period (usually a year). There are three main methods
to calculate national income:
1. Production Method (Value-Added Method)
2. Income Method
3. Expenditure Method
Each method provides the same national income figure when calculated correctly.

1. Production Method (Value-Added Method)

Concept:
• Measures national income by adding the value added at each stage of production.
• Only includes the value added at each stage to avoid double counting.

Formula:
GDP at Market Price=∑(Value of Output−Value of Intermediate Goods)

Steps:
1. Divide the economy into primary (agriculture), secondary (manufacturing),
and tertiary (services) sectors.
2. Calculate total output of each sector.
3. Subtract value of intermediate goods used in production.
4. Add indirect taxes and subtract subsidies to get GDP at Market Price.
5. To get National Income (NNP at Factor Cost):
NNP at Factor Cost=GDP at Market Price+Net Factor Income from Abroad−Depre
ciation−Net Indirect Taxes

Best for: Economies with strong agriculture & manufacturing sectors.

2. Income Method

Concept:
• Measures national income by adding all incomes earned by individuals and
businesses in a country.
• Includes wages, rent, interest, and profit.

Formula:
NNP at Factor Cost=Wages+Rent+Interest+Profit+Mixed-Income

Steps:
1. Wages & Salaries → Payments to workers.
2. Rent → Payments for land use.
3. Interest → Payments to capital providers.
4. Profit → Income earned by businesses.
5. Mixed-Income → Earnings of self-employed individuals.
6. Add all the above to get Net National Product (NNP) at Factor Cost.

Best for: Economies where income distribution and wages play a key role.

3. Expenditure Method

Concept:
• Measures national income by adding all spending on final goods & services in
an economy.
• Includes household consumption, investment, government spending, and net
exports.

Formula:
GDP at Market Price=C+I+G+(X−M)
Where,
• C = Private Consumption (spending by households)
• I = Investment (spending by businesses)
• G = Government Expenditure
• (X - M) = Net Exports (Exports - Imports)

Steps:
1. Collect data on consumer spending, business investments, and government
purchases.
2. Calculate net exports (exports - imports).
3. Add all components to get GDP at Market Price.
4. Convert GDP to NNP at Factor Cost by adjusting for depreciation and indirect
taxes.

Best for: Economies with high consumer spending & government involvement.
Comparison of Methods

Method What It Measures Best for

Production Value-added at each stage of Industrial & manufacturing

Method production economies

Total income earned by

Income Method Wage-based economies
individuals & firms

Expenditure Total spending on goods &

Consumption-driven economies
Method services

Difficulties in Measuring National Income

Measuring national income is not easy due to various challenges. Some of the main
difficulties are:

1. Unrecorded Economic Activities

Many economic activities, like farming for self-use or household work, are not recorded in
official data, leading to underestimation of national income.

2. Informal Sector

Small businesses and street vendors often do not report their earnings, making it hard to
include them in national income calculations.

3. Double Counting

If both raw materials and final products are counted, the national income will be overstated.
Only final goods and services should be considered.

4. Black Market Transactions

Illegal activities like smuggling and tax evasion involve money but are not included in
national income, leading to errors in calculation.

5. Difficulty in Valuing Non-Market Services

Household work, voluntary services, and environmental benefits do not have a fixed price,
making them hard to measure in monetary terms.

6. Inflation and Price Changes

If prices rise, the national income may seem higher even if production remains the same,
creating a misleading picture of economic growth.

7. Inaccurate Data Collection

Census and surveys may have errors, outdated information, or missing data, leading to
incorrect national income calculations.

8. Estimating Depreciation

Machines and buildings wear out over time, and estimating their depreciation accurately is
difficult, affecting net national income calculations.

9. Exclusion of Transfer Payments

Government payments like pensions and subsidies are not counted in national income, even
though they contribute to people’s income.

10. Foreign Income Calculation

Tracking the income earned by residents in foreign countries and foreigners in the domestic
economy is complex and may lead to miscalculations.
 THREE SECTORS OF AN ECONOMY
An economy is divided into three sectors based on the type of economic activity:
1. Primary Sector (Agriculture & Natural Resources)
2. Secondary Sector (Manufacturing & Industry)
3. Tertiary Sector (Services & Trade)

1. Primary Sector (Agriculture & Natural Resources)

Definition:
The primary sector involves activities that extract natural resources directly from the
Earth.

Key Activities:
• Agriculture – Farming crops, dairy farming.
• Fishing – Catching fish and seafood.
• Forestry – Cutting trees for timber.
• Mining – Extracting coal, oil, minerals.

Example:
A farmer growing rice, a fisherman catching fish, or a miner extracting coal.

Importance:
• Provides raw materials for other sectors.
• Employs a large workforce in developing countries like India.

2. Secondary Sector (Manufacturing & Industry)

Definition:
The secondary sector involves activities that convert raw materials into finished goods
through manufacturing and construction.

Key Activities:
• Manufacturing – Factories producing clothes, cement, steel.
• Construction – Building houses, bridges, roads.
• Power Generation – Electricity production.

Example:
A factory producing mobile phones or a textile mill making cotton clothes.

Importance:
 • Creates jobs and contributes to economic growth.
• Increases the value of raw materials by turning them into products.

3. Tertiary Sector (Services & Trade)

Definition:
The tertiary sector involves activities that provide services instead of goods.

Key Activities:
• Trade & Transport – Shops, online businesses, logistics.
• Banking & Finance – Banks, insurance companies.
• Education & Healthcare – Schools, hospitals.
• Tourism & Entertainment – Hotels, restaurants, movies.

Example:
A teacher providing education, a doctor treating patients, or an online delivery service.

Importance:
• Drives modern economies, especially in developed countries.
• Improves quality of life through better services.

Comparison of the Three Sectors

Sector What It Involves Example

Primary Using natural resources Farming, fishing, mining

Secondary Making products from raw materials Factories, construction

Tertiary Providing services Banking, healthcare, transport

 MONEY MARKET & CAPITAL MARKET
The financial market is divided into two major segments:
✔ Money Market – Deals with short-term funds (less than a year).
✔ Capital Market – Deals with long-term investments (more than a year).

1. What is the Money Market?

The money market is a financial system where short-term borrowing and lending occur.
It is used by governments, banks, and companies to manage short-term liquidity needs.

✔ Short-term maturity (less than 1 year)

✔ High liquidity (easily converted to cash)
✔ Lower returns, lower risk
✔ Regulated by the Reserve Bank of India (RBI)

Example:
A company needs funds for 3 months to cover business expenses. It issues a Commercial
Paper, and investors buy it for a short-term return.
Instruments of the Money Market

✔ Treasury Bills (T-Bills) – Issued by the government (risk-free)

✔ Commercial Papers (CPs) – Issued by large companies
✔ Certificates of Deposit (CDs) – Issued by banks
✔ Repurchase Agreements (Repo & Reverse Repo) – Short-term loans between
banks

2. What is the Capital Market?

The capital market is where long-term investments take place. Companies and
governments raise funds by issuing shares and bonds.

✔ Long-term maturity (more than 1 year)

✔ Higher returns, but higher risk
✔ Regulated by SEBI (Securities & Exchange Board of India)

Example:
A company needs ₹500 crore for expansion. It issues shares through an IPO (Initial
Public Offering), and investors buy them to gain ownership.
Types of Capital Market

✔ Primary Market – New shares/bonds are issued (e.g., IPOs).

✔ Secondary Market – Existing shares/bonds are traded (e.g., stock exchanges).
Instruments of the Capital Market
✔ Equity Shares – Ownership in companies
✔ Debentures & Bonds – Long-term corporate/government debt
✔ Mutual Funds – Professionally managed investment funds

If you need short-term funds → Invest in the Money Market

If you want long-term wealth growth → Invest in the Capital Market
 STOCK MARKET
The stock market is where investors buy and sell shares (ownership units) of
companies. It helps businesses raise funds and provides investors with an opportunity
to earn profits.

1. What is a Stock Market?

The stock market is a marketplace where companies’ shares are bought and sold. It
consists of:
• Primary Market → Where companies issue new shares through IPO (Initial
Public Offering).
• Secondary Market → Where investors trade shares after they are issued.
Major Stock Exchanges in India

BSE (Bombay Stock Exchange) – Oldest stock exchange in India.

NSE (National Stock Exchange) – Largest stock exchange in India.

2. What is a Demat Account?

A Demat (Dematerialized) Account is used to store shares in electronic form, just like
a bank account holds money.
Features of a Demat Account

✔ Stores shares, bonds, mutual funds, and ETFs (Exchange Traded Funds).
✔ Eliminates risks of losing physical share certificates.
✔ Managed by NSDL (National Securities Depository Limited) and CDSL (Central
Depository Services Limited).

Example:
If you buy 10 shares of Reliance, they will be stored in your Demat account, not as
paper certificates but electronically.

3. What is a Trading Account?

A Trading Account is required to buy and sell shares in the stock market.
Features of a Trading Account

✔ Acts as a link between your bank account and Demat account.

✔ Every buy/sell order is placed through this account.
✔ Required for active trading (daily buying and selling).
 Example:
If you want to buy 10 TCS shares at ₹3,500 each, your Trading Account will execute the
transaction using money from your bank account. The shares will then be stored in
your Demat account.

4. Difference Between Demat and Trading Accounts

Feature Demat Account Trading Account

Purpose Stores shares electronically Used to buy/sell shares

Function Acts as a share locker Acts as a transaction wallet

Holds Shares, bonds, ETFs No holdings, only transactions

Required For Long-term investments Active trading

To trade stocks, you need both Demat and Trading accounts.

5. What is SENSEX?
SENSEX (Stock Exchange Sensitive Index) is the benchmark index of BSE. It tracks
the performance of the top 30 financially strong companies listed on the Bombay
Stock Exchange.
Features of SENSEX

✔ Represents India’s economic and stock market health.

✔ If SENSEX rises, it means most companies are doing well.
✔ If SENSEX falls, it indicates market weakness.

Example:
• If SENSEX moves from 6️0,000 to 6️1,000, stock prices have increased.
• If it drops to 59,500, stock prices have decreased.
Companies in SENSEX: Reliance Industries, TCS, Infosys, HDFC Bank, Tata Steel, etc.

6️. What is NIFTY?

NIFTY (National Index Fifty) is the benchmark index of NSE. It represents the top 50
companies across different sectors.
Features of NIFTY
✔ Covers multiple industries (IT, Banking, Pharma, etc.).
✔ Provides a broader view of the stock market.
✔ Indicates the overall economic performance of India.

Example:
• If NIFTY moves from 18,000 to 18,500, it means stock prices are rising.
• If it drops to 17️,900, stocks are losing value.
Companies in NIFTY: HDFC Bank, SBI, Infosys, Tata Motors, ITC, Wipro, etc.

7️. Difference Between SENSEX and NIFTY

Feature SENSEX (BSE) NIFTY (NSE)

Stock Exchange BSE (Bombay Stock Exchange) NSE (National Stock Exchange)

Number of
30 50
Companies

Base Year 1978-79 1995

Sector Coverage Less diversified More diversified

Market Capitalization Market Capitalization

Calculation
Weighted Weighted

Both indices help investors track the market’s overall performance.

9. Importance of Stock Market

✔ Helps companies grow by raising funds.

✔ Provides investment opportunities to earn profits.
✔ Reflects economic conditions (A rising market shows economic growth).
✔ Encourages savings and investments.

10. NSE vs. BSE – A Detailed Comparison

BSE (Bombay Stock

Feature NSE (National Stock Exchange)
Exchange)

Established 1875 (Oldest in Asia) 1992 (Modern and Digital)

Benchmark
SENSEX (Top 30 companies) NIFTY 50 (Top 50 companies)
Index
 BSE (Bombay Stock
Feature NSE (National Stock Exchange)
Exchange)

Trading Volume Lower than NSE Higher, preferred by traders

Listed
5,500+ 2,000+
Companies

Faster (preferred for intraday

Trading Speed Slower
trading)

Market Share Lower than NSE Higher than BSE

Fully electronic (since the

Type of Trading Traditional and electronic
beginning)

Conclusion:
BSE is good for long-term investors looking for a wide variety of stocks.
NSE is better for traders who buy and sell frequently due to its speed.
 BONDS AND SHARES
Bonds and shares are two major investment instruments in the financial market. They
represent different ways in which companies and governments raise capital from
investors.

1. What are Bonds?

A bond is a debt instrument where an investor lends money to an entity (government or
corporation) for a fixed period at a predetermined interest rate.

✔ Issued by governments, banks, or corporations

✔ Pays periodic fixed interest (coupon rate)
✔ Principal is repaid at maturity
✔ Lower risk than shares

Example:
You buy a ₹10,000 government bond at 7️% interest. Every year, you receive ₹7️00 as
interest. After 5 years, you get back your ₹10,000 principal.
Types of Bonds

✔ Government Bonds – Issued by the government (safe investment)

✔ Corporate Bonds – Issued by companies (higher returns, higher risk)
✔ Municipal Bonds – Issued by local government bodies
✔ Convertible Bonds – Can be converted into shares

2. What are Shares?

A share represents ownership in a company. When you buy shares, you become a part-
owner of the company and can earn returns through dividends and capital gains.

✔ Issued only by companies

✔ Returns depend on market price fluctuations
✔ Higher risk but higher profit potential

Example:
You buy 10 shares of TCS at ₹3,000 each. If the price rises to ₹3,500, you can sell them
for a ₹5,000 profit (₹500 × 10 shares).
Types of Shares

✔ Equity Shares – Represents ownership in the company

✔ Preference Shares – Fixed dividend payout before equity shareholders
✔ Bonus Shares – Free shares issued to existing shareholders
✔ Rights Shares – Offered to existing shareholders at a discounted price
3. Key Differences Between Bonds and Shares

Feature Bonds (Debt) Shares (Equity)

You become a part-owner of the

Ownership No ownership, just lending money.
company.

Variable dividends and capital

Returns Fixed interest payments
gains

Risk Low risk (stable returns) High risk (market fluctuations)

Issued by Government, Banks, Companies Companies only

Voting Voting rights in company

No voting rights
Rights decisions

Regulated SEBI (Securities & Exchange Board

RBI & SEBI
by of India)

Government Bond (₹10,000 at 7% TCS Share (₹3,000 per share, price

Example
interest) fluctuates)