National Finance Olympiad

Chapter 03

Navigating Investment
Opportunities and
Risks

Learning Outcomes:

Students will be able to:

• Understand the fundamental concepts of investments.
• Define investment types and explain their associated risks and rewards.
• Differentiate between stocks, bonds, mutual funds, real estate, and commodities as investment
options.
• Understand the role of SEBI in regulating the stock market and ensuring investor protection.
• Demonstrate how to buy and sell stocks through brokers using Demat and Trading accounts.
• Analyse market types and apply fundamental and technical analysis to assess investment
opportunities.
• Recognise key financial ratios and their role in assessing the financial health of companies.

3.1 Introduction to the chapter 3.2 Introduction to Investments

Imagine you have some money saved up, and you Investing involves putting money into assets such
want to make it grow. Instead of letting it sit in your as stocks, bonds, real estate, or other financial
bank account, you might consider investing it. instruments with the aim of earning returns or profits
Investing means using your money to buy things like over time. Unlike saving, which is focused on keeping
stocks, bonds, real estate, or other assets with the money safe, investing carries some level of risk with
hope that their value will increase over time. The goal the objective of growing that money. Key concepts in
is to earn more money in the future, whether it's to investing include:
buy a house, pay for education, or save for retirement.
• Principal: The original amount of money
However, every investment comes with some risk. invested.
There is always a chance that you could lose money,
just as there is a chance to earn more. So, how do you • Return: The profit or loss generated from an
decide where to invest? investment over time.
In this chapter, we'll learn about different types of
investments, such as stocks, bonds, and real estate. • Risk: The chance that the investment could
We will also discuss how investments can help you decrease in value.
reach your financial goals and how to understand the
risk involved. By the end of this chapter, you will know • Diversification: Spreading investments across
how to start thinking about investments and how to various assets to minimise risk.
choose the right ones for you.

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3.2.1 Goals of Productive Investment

Investing is a powerful way for individuals to grow
their wealth and achieve their long-term financial
goals. Although the specific objectives of investing
may differ from person to person, the main goals
are generally the same: wealth creation, reaching
financial milestones, and earning passive income.

1. Wealth creation: Investing enables your money

to grow over time. Rather than simply saving, you
allocate your funds into assets such as stocks or
real estate that have the potential to appreciate
in value. Over time, the returns from these
investments can help you build wealth more
quickly than simply keeping money in a savings • Market risk: This is the risk that the overall
account. market (such as the stock market) will decline,
impacting the value of investments. Factors like
2. Achieve financial goals: Investing helps you economic recessions, political instability, or other
achieve important financial goals, such as external events can lead to market risk. It is also
funding your studies or building a travel fund. known as systematic risk because it affects a wide
By investing, you can grow your money, allowing range of investments.
yourself to reach these goals more quickly than if
they were just saving. • Credit risk: This risk arises when the issuer of a
bond fails to meet its debt obligations. If a company
3. Generate passive income: Investments such or government defaults on its bond, investors could
as dividend-paying stocks or rental properties lose part or all of their investment. Credit risk is
generate regular income without requiring active commonly linked with bonds, especially those
work. This income can be used for everyday from issuers with lower credit ratings.
expenses or saved for the future, providing
a consistent cash flow while your original • Interest rate risk: This occurs when changes
investment continues to appreciate. in interest rates affect the value of investments,
particularly bonds. When interest rates rise,
bond prices generally fall, and when interest
rates fall, bond prices usually rise. This type of
risk is particularly significant for fixed-income
investments like government or corporate bonds.

• Inflation risk: This is the risk that inflation will

reduce the purchasing power of your investment
returns over time. If inflation outpaces the return
on an investment, the value of what you can
purchase with those returns could be diminished
in the future.
3.3 Risk and Return
3.3.1 How Are Risk and Return
Investment risk refers to the chance that the value of
Related
an investment could decrease or that the returns may
fall short of expectations. Investors face various types Risk and return are related the more risk you take with
of risks when committing their money to different an investment, the higher the potential return. But,
investment options: taking more risk also means more potential for loss.
Factors that influence risk and return include the type,
quality, and duration of the investment, the market

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conditions, and the investor’s behaviour. For example, markets, can experience significant ups and
if you invest in a company with a strong track record, downs in returns. This creates the potential for
your risk might be lower, but so might your return. On both substantial gains and substantial losses.
the other hand, if you invest in a new company with an Volatility makes it harder for investors to predict
unproven track record, you could make a lot of money the performance of their investment.
if the company succeeds, but you also risk losing your
entire investment if the company fails. • Low Volatility = Stability but Lower Returns:
On the other hand, investments with low
The relationship between risk and return is a key volatility, like government bonds or large-
principle in investing. In simple terms, it means cap stocks, typically offer more stable and
that the higher the risk you take on, the greater the predictable returns, but these returns tend to
potential return you can earn. be lower compared to those from more volatile
investments.
• Higher Risk = Higher Potential Return:
Investments with greater risk usually have the Volatility affects an investment’s return because large
potential for higher returns. For example, stocks price fluctuations can result in quick gains or losses.
are riskier than bonds, but over time, stocks tend Long-term investors are generally able to ride out
to provide higher returns. short-term volatility, while short-term investors might
find it more difficult to handle market swings.
• Lower Risk = Lower Return: On the flip side,
low-risk investments, like savings accounts or 3.3.3 Risk Tolerance and Its Role
government bonds, typically offer lower returns.
in Choosing Suitable Investment
These investments are safer, but they usually do
not generate significant returns.
Options
Risk tolerance refers to the level of risk you are
The return on an investment refers to the profit or comfortable taking on when investing. It varies for
loss made from it. This return can come from: each individual and is influenced by factors such as
age, financial objectives, and investment experience.
• Capital gains: When the value of the investment
rises and it is sold for more than what was • Low risk tolerance:
originally paid. If you’re uneasy about market fluctuations, you
likely have a low risk tolerance. In this case,
• Interest income: Earned from fixed-income you may prefer safer investment options like
investments such as bonds or fixed deposits. government bonds or fixed deposits, which offer
lower but more stable returns.
• Dividend income: Paid out by stocks that offer
dividends to their shareholders. • High risk tolerance:
If you are open to accepting short-term losses in
• Rental income: Earned from investing in real hopes of higher long-term gains, you may have a
estate properties. higher risk tolerance. In this case, you would likely
invest in assets such as stocks, real estate, and
3.3.2 Understanding Volatility and mutual funds, which carry higher volatility but
also offer the potential for greater returns.
Its Impact on Investment Returns:
Volatility refers to how much the price of an Understanding your risk tolerance is key to selecting
investment fluctuates over time. High volatility means investment choices that match both your comfort
the price or return of an investment can change level and financial goals. Your risk tolerance directly
dramatically in a short period, while low volatility influences the kind of returns you can expect from
indicates more consistent price movements. your investments. While higher-risk investments
often lead to higher returns, they can also bring
• High Volatility = High Risk + High Potential greater fluctuations. If you are not comfortable with
Return: Investments with high volatility, such this, a more conservative approach with lower-risk
as stocks from smaller companies or emerging investments might be a better fit.

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The relationship between risk and return is [Link] Key Features of Stocks:
fundamental to understanding how your investments
will perform. Generally, higher risk means the • Capital gains: Capital gains refer to the rise in
potential for higher returns (and vice versa). To make a stock’s price over time. If you buy a stock at
well-informed decisions, it’s important for investors one price and later sell it at a higher price, the
to evaluate their risk tolerance and weigh the difference between the selling price and the
potential returns of each investment. By managing buying price is your capital gain. Stocks typically
volatility and diversifying across different asset types, offer the potential for significant capital gains,
one can work towards their financial goals—whether especially when investing in companies with
that means pursuing higher returns with greater risk strong growth potential or in emerging sectors.
or aiming for more stable growth with lower risk.
Example: Let’s say you buy 200 shares of a
company at ₹200 per share.
Types of invest-
Risk & return Over the next year, the price of the stock increases
ment
to ₹250 per share.
Low-risk and low- Money markets, trea- You decide to sell your 200 shares at ₹250 each
return sury bills, bonds
Calculation: Purchase price = 200 shares × ₹200 =
Moderate-risk & Mutual funds. index
₹40,000
moderate-return funds
Selling price = 200 shares × ₹250 = ₹50,000
High-risk & high-re- Stocks crypto currency, Capital gain = Selling price - Purchase price =
turn commodities ₹50,000 - ₹40,000 = ₹10,000

In this case, your capital gain is ₹10,000 because

the stock price increased by ₹50 per share.

• Dividends: Some companies distribute a part

of their profits to shareholders as dividends,
usually every quarter or year. These dividends
offer a regular source of income for shareholders,
which can either be reinvested or used as
personal income. However, not all companies pay
dividends, especially those that choose to reinvest
their profits back into the business to support
further growth.

Example: You own 150 shares of Company ABC,

and the company pays an annual dividend of ₹15
3.4 Investment Options per share.

3.4.1 Stocks (Equities) Calculation:

Dividend per share = ₹15
Stocks, or equities, represent a share of ownership in Total dividend = 150 shares × ₹15 = ₹2,250
a company. When you purchase a stock, you become In this case, you will receive ₹2,250 as a dividend
a partial owner of the company. As a shareholder, you for your 150 shares. You can either reinvest this
may receive a portion of the company’s profits in the dividend to buy more shares or use it as your
form of dividends and gain the right to vote on key income.
corporate matters, such as electing board members or
approving significant company decisions. • Dividend yield: The dividend yield helps you
assess the income you earn from your investment
through dividends. It is calculated using this
formula:

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Dividend Yield = (Dividend per Share / Price per d) Selling for profit: If the share price goes up to
Share) × 100 ₹150, you can sell your 20 shares for ₹3,000,
making a ₹1,000 profit.
Example: Let’s assume the current price of a stock
is ₹400, and the company pays a ₹15 dividend per So, by owning ordinary shares, you have a
share. chance to earn money through dividends or by
selling the shares for more than you paid, but
Dividend Yield = (15/400) × 100 = 3.75% you also risk losing money if the company does
So, in this example, the investor is earning a not do well.
3.75% return annually in the form of dividends.
2. Preference shares: Preference shares are a
[Link] Types of Stocks type of stock that guarantees shareholders a
fixed dividend, which is paid out before any
1. Common stocks (Equity shares): Common stocks, dividends are given to common shareholders.
or equity shares, are the most commonly owned These shareholders have priority when it comes
and traded type of stock in India. These stocks to receiving dividends and getting their capital
give shareholders ownership in a company, and repaid if the company goes bankrupt or if it closes
they usually have the right to vote on important down (liquidated), making it a safer investment
company matters, like choosing the board of option compared to common stocks.
directors or approving major business decisions.
Key features of preference shares:
Key features of equity shares: • Fixed dividends: Preference shares usually
• Ownership in companies: Equity shareholders provide a fixed dividend, regardless of how well
are real owners of the company. When you the company is performing. This makes them
buy equity shares, you own a small part of the an appealing option for more conservative
business. investors who are looking for a steady income.

• Voting rights: Shareholders can vote on • No voting rights: Preference shareholders

important company matters, such as electing generally do not have voting rights, meaning
directors or approving major decisions. they cannot participate in shareholder
meetings or vote on company decisions, unlike
• Dividends: Equity shareholders may get a part common stockholders.
of the company’s profits as dividends, but it is
not guaranteed or fixed. The company decides • Priority over common stock: If the company
whether to pay dividends. goes bankrupt or is liquidated, preference
shareholders have a higher claim to the
• Transferability: Equity shares can be bought company’s assets than common shareholders.
or sold freely in the stock market, making them They are paid before common shareholders,
a liquid investment. but after debt holders (people or institutions
who loaned money to the company).
Example: Imagine there is a company called
ABC Ltd. selling 1,000 shares for ₹100 each. • Less volatility: Preference shares tend to be
You buy 20 shares for ₹2,000. more stable and less volatile than common
stocks because they offer fixed dividends,
a) Ownership: You now own part of the company. making them a safer choice for investors
seeking reliable income.
b) Voting rights: You can vote on decisions like
who should be on the board of directors. • Convertible preference shares: Some
preference shares can be converted into
c) Dividends: If ABC Ltd. makes a profit, they common stock at a later time. These are known
might pay you ₹5 per share as a dividend. So, as “convertible preference shares.”
you get ₹100 (20 shares × ₹5).

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Example: Let’s say a company, XYZ Ltd., issues Advantages:

preference shares offering a fixed dividend of • High returns: Equity shares have the potential
₹5 per share annually. If you buy 100 preference to generate high returns as they are high-risk
shares of XYZ Ltd., you are guaranteed to receive investments. Higher the risk, the higher the
₹500 (100 shares × ₹5) every year, regardless of reward. These shares are highly volatile, and the
how well the company performs. prices fluctuate owing to many factors. Demand,
supply, economic factors, company performance,
However, as a preference shareholder, you will not geo-political factors, etc., all impact the share
have any voting rights in company decisions, like price.
voting for the CEO or on company policies. If XYZ
Ltd. goes bankrupt, you will be paid before the • Voting rights: Equity shareholders enjoy voting
common shareholders, but after the company’s rights. They can vote for or against corporate
debt holders. policies and business decisions.

If XYZ Ltd. offers convertible preference shares, • Limited legal obligations: Though equity
you might have the option to convert your shareholders own a part of the company, they
preference shares into common shares at a later have limited legal liabilities.
date. This could be beneficial if the company grows • Liquidity: These shares trade on the stock
and its stock price increases over time. exchange. Buying and selling them is quite easy.

[Link] Advantages and Disadvantages of Disadvantages:

Investing in Stocks • Company’s performance: The performance
of the share largely depends on the company’s

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performance. When the company is not 2. Long-term vs. Short-term investing:

performing and is unable to make profits, the • Long-term investing: Stocks are usually
equity shareholder will not receive any dividends. better suited for long-term investments. Over
time, stock prices tend to increase, allowing
• Capital loss: Since equity shares are high-risk, investors to weather short-term volatility.
high-reward investments, the probability of Many investors hold stocks for several years or
capital loss is also high. Due to many internal even decades, benefiting from market growth
and external factors, the share price fluctuates. A and compounding returns.
negative impact may lead to a capital loss for the
investors. • Short-term investing: Some investors focus
on short-term trading, where they buy and
• Volatility: Volatility in share prices can be for sell stocks quickly to take advantage of market
many reasons. The market sentiments drive the movements. This method requires a deep
share prices up and down. Timing the markets is understanding of market timing, trends, and
an impossible strategy to adopt. The share prices more expertise. Short-term trading is riskier
fluctuate within seconds and microseconds. due to higher volatility and the potential for
losses.
[Link] Considerations When Investing in
Stocks: Stocks can be a key part of an investment portfolio,
offering both growth opportunities and income
1. Market analysis: Successful stock investing through dividends. However, they come with risks,
requires a strong understanding of market trends such as volatility and the possibility of loss. By
and analysis techniques. Investors typically rely understanding the types of stocks, market analysis
on two main types of analysis to make informed methods, and your personal risk tolerance, you can
stock choices: make well-informed decisions that align with your
long-term financial goals. Investing in stocks is about
• Technical analysis: This involves studying more than just picking individual companies—it is
price movements, trading volumes, and chart about creating a strategy that balances potential
patterns to forecast future price changes. Price returns with the level of risk you’re comfortable with.
movements show how the price of a stock goes
up or down over time — this helps investors 3.4.2 Bonds
understand if the stock is gaining value or
losing it. Trading volumes tell us how many A bond is essentially a type of loan where an investor
shares of a stock are being bought and sold in lends money to a company, government, or other
a day. A high trading volume usually means a organisation. In exchange, the issuer of the bond
lot of people are interested in the stock, while a (the borrower) agrees to repay the original amount,
low volume shows less activity. Chart patterns known as the principal, on a set date in the future (the
are shapes or trends that appear when these maturity date). Additionally, the issuer agrees to make
price movements are shown on a graph. regular interest payments, called coupon payments,
during the life of the bond.
• Fundamental analysis: This focuses on
evaluating a company’s financial health, [Link] Important concepts of Bond:
performance metrics, and broader market • Face value: Face value is the amount the bond
conditions. Financial health of the company promises to pay on maturity. Also known as par
includes its profits, debts, and how much money value, it is decided by the bond issuer before the
it is making. Performance metrics are numbers bond issuance.
that show how well the company is doing, such
as sales growth, earnings, and how efficiently • Coupon rate: The coupon rate determines the
it runs its business. Broader market conditions coupon or interest payment (in rupee terms) the
can include the overall economy or trends in the bondholders are eligible to receive as long as they
industry the company belongs to. By examining own the bond.
these factors, investors can assess whether a
stock is undervalued or overvalued.

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• Bond tenure: Bond tenure is the period for which • Put option: If a bond has an embedded put option,
the bond will be active. Unlike maturity, which it means that the bondholder has the right (but
indicates the bond’s life at the time of issuance, not the obligation) to return the bond to the
tenure indicates the bond’s remaining life. issuer at specific points in time or when specific
conditions are met.
• Credit quality: A bond’s credit quality reflects the
bond issuer’s trustworthiness. The credit rating [Link] Types of Bonds:
assigned by independent credit rating agencies
represents each bond’s credit quality. 1. Government bonds: Government bonds are
issued by either the central or state governments
• Maturity: Maturity is the period of the bond’s of a country. In India, these bonds are issued
total life. Unlike bond tenure, which indicates the by the Government of India or individual state
bond’s remaining life and changes, maturity is governments. They are considered very safe
fixed and indicates the entire life of the bond. investments because the government is unlikely
to fail in making payments. Typically, government
• Yield to maturity: Yield to maturity or YTM bonds are low-risk and offer lower returns
indicates the total annual return expected if you compared to corporate bonds.
invest in the bond on a given day and hold it
until maturity. YTM assumes that the coupons or 2. Corporate bonds: Companies issue these bonds
interest payments are reinvested at the YTM. to raise capital for business operations, growth, or
debt repayment. Corporate bonds are riskier than
• Tradable bonds: Tradable bonds are bonds that government bonds because the company might
can be traded by market participants either on an experience financial difficulties that could hinder
exchange (like BSE) or over-the-counter (OTC). its ability to repay bondholders. Stronger, more
financially stable companies typically offer lower-
• Accured interest: Accrued interest is the interest risk corporate bonds, whereas smaller or newer
that a bond has accrued since the last interest companies may provide higher-risk bonds with
payment but has yet to be paid out to the investor. higher interest rates.

• Call option: If a bond has an embedded call 3. Treasury bonds: Treasury bills are short-
option, it means that the bond issuer has the right term money market instruments issued by the
(but not the obligation) to call the bond back at Government of India, serving as a promissory
specific points in time or when specific conditions note with a guaranteed repayment at a specified
are met. future date. The funds raised through these bills
are primarily used by the government to meet its
short-term financial needs.

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These are short-term securities with maturities New yield calculation:

of 14 days, 91 days, 182 days, and 365 days. New Yield = (50 / 800) × 100 = 6.25%
According to the regulations set by the RBI, In this case, the yield rises from 4.54% to 6.25%,
individuals wishing to invest in short-term because the bond price dropped, making the
treasury bills must invest a minimum of Rs. fixed ₹50 coupon payment represent a higher
25,000. Any additional investment must be made percentage of the lower price.
in multiples of Rs. 25,000.
[Link] Why One Should Invest in Bonds
[Link] Bond Yield:
Investing in bonds can help you in multiple ways. A
Yield represents the actual return on a bond, factoring few use cases of bonds are discussed below:
in both the bond’s coupon payment and the price you
paid for it. It helps you understand how much you’re • Low-risk investing: Bonds are a low-risk
earning in relation to the amount you invested in the investment choice. They can be a good option
bond. for people who usually invest in fixed deposits,
offering the chance to earn better returns with
The formula for yield is: just a little more risk.
Yield= Coupon Payment / Current Price ×100
• Diversification: If your investment portfolio
Inverse relationship between price and yield mainly consists of stocks, adding bonds can help
diversify it. A mix of bonds and stocks can create a
• When bond prices increase, the yield on the more balanced portfolio, offering stability without
bond decreases. This happens because the fixed losing out on potential returns.
interest payments become a smaller portion of
the bond’s market price. • Helps build a prosperous India: When you invest
in bonds — whether government bonds that fund
Example 1: Bond Price Increase → Yield national development projects or corporate bonds
Decrease that support business growth — you’re not just
Imagine you have a ₹1,200 bond with a 6% growing your savings, but also helping strengthen
coupon rate, and the bond price rises to ₹1,400. the economy and contribute to a better future for
India.
Calculation:
Coupon Payment = ₹1,200 × 6% = ₹72 [Link] Advantages and Disadvantages of
Yield when price is ₹1,400 = (72 / 1,400) × 100 = Bonds
5.14%
In this case, the yield is 5.14%, which is lower Advantages:
than the original 6% coupon rate. This happens • Stable income: They provide regular interest
because the bondholder paid ₹1,400 for a bond payments.
that only provides a ₹72 annual coupon payment,
so the yield relative to the price paid is reduced. • Lower risk: Bonds are generally less volatile than
stocks.
• When bond prices decrease, the yield on
the bond increases because the fixed coupon • Predictable returns: Bonds usually have a fixed
payments make up a larger percentage of the term and Interest. They are suitable for someone
bond’s lower market price. who wishes to make safe investments.

Example 2: Bond Price Decrease → Yield • Diversification: Adding types of bonds to your
Increase investment portfolio can help balance out the
risky investments.
Suppose the price of the same ₹1,000 bond with
a ₹50 coupon payment falls to ₹800 (due to rising
interest rates in the market).

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Disadvantages: is only following the index, they will keep very little
• Interest rate risk: Bond prices can drop when cash, just enough to handle withdrawals. Next, we
interest rates go up, which might lead to losses if will look at how these types of funds differ in their
you sell before maturity. features.

• Inflation risk: Inflation can reduce the real value Performance and volatility:
of the fixed interest payments you receive. 1. Active vs. Passive fund performance:
• Actively managed funds aim to beat the
• Credit risk: There is always the chance that the market, but they can also underperform if the
bond issuer could default on their payments. manager’s decisions are wrong.

• Lower returns: Compared to stocks, bonds often • Active funds may have higher volatility in
offer lower returns, which might not keep pace returns compared to the benchmark.
with inflation.
• Passively managed funds aim to replicate the
3.4.3 Mutual Funds: performance of a market index, so the risk
of significant underperformance is minimal.
A mutual fund is an investment vehicle that combines Any small differences in returns are known as
money from various investors to invest in a broad tracking error, which measures how closely
range of assets, such as stocks, bonds, and other the fund mirrors the index. These differences
financial instruments. A professional fund manager typically arise due to factors such as timing of
oversees the fund, making investment choices trades, management fees, or slight variations
according to the fund’s goals and strategy. in the fund’s investment holdings.

2. Flexibility and diversification:

• Active funds offer more flexibility and
diversification options, allowing you to choose
from different market segments (e.g., large-
cap, mid-cap, small-cap) and strategies (e.g.,
growth or value).

• Active funds can also invest in a mix of equity

and debt or focus on market valuations.

[Link] Active vs Passive Management of • Passively managed funds in India have limited
Funds options, with few focusing on mid-cap and
small-cap stocks. Also, they do not offer a mix
Active management: of asset classes or adjust their equity allocation
In active management, the fund manager tries to based on market conditions.
choose stocks that will outperform the market and
deliver better returns. The fund manager chooses 3. Management during market crashes:
not to stick to the same stocks in the index and opt • In market crashes (like 2008 or 2002), active
for different stocks and sectors. If the fund manager funds can sell stocks and move money into
believes the market is overpriced or too unstable, they safer options like cash or money market funds
can also hold more cash or move some assets into to prevent further losses.
safer money market instruments.
• Passively managed funds, like index funds and
Passive management: ETFs, cannot make such changes.
A fund is considered passively managed if the fund
manager copies the index exactly, using the same 4. Performance in inefficient markets:
stocks in the same proportions. The goal is to match • In markets like India, where information is not
the index’s performance with as little difference always equally available, well-managed active
(called tracking error) as possible. Since the manager

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funds tend to outperform and generate better d) Sectoral funds - Invests in companies within a
returns. specific industry, like banking, technology, or
healthcare.
5. Long-term wealth building:
• For those focused on building wealth over the 2. Debt mutual funds: These funds invest in fixed-
long term, actively managed funds generally income securities with varying maturity periods.
do a better job than passive funds due to their They are classified based on the maturity of the
ability to adapt to market conditions. underlying debt securities,

[Link] Types of Mutual funds: • Long-term debt funds: Long-term debt

mutual funds mainly invest in debt securities
Classification of mutual funds depends upon the asset with longer durations, usually over 5 years.
type in which a mutual fund is investing into. A broad These funds aim to provide higher returns by
classification has been summarised into the following investing in long-term bonds or debentures,
table: but they also come with a higher level of
interest rate risk.
1. Equity mutual funds: These funds invest
exclusively in the equity shares of companies. • Medium-term debt funds: Medium-term debt
They are classified into different types based on mutual funds invest in debt instruments with
the kind of stocks they invest in: maturities between 3 and 5 years. These funds
aim to balance risk and return by selecting
• By market capitalisation: securities that provide moderate returns while
a) Large cap - Invests primarily in well- being less sensitive to interest rate changes
established, blue-chip companies. compared to long-term funds.

b) Mid cap - Focuses on medium-sized • Short-term debt funds: Short-term debt

companies. mutual funds invest in debt securities with
maturities between 6 months and 12 months.
c) Small cap - Invests in smaller companies. These funds are considered low-risk options

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for investors seeking safer investments that • Close-ended funds: These funds are a type
still provide some income. The returns are of mutual fund that allows investors to buy
generally moderate and more stable compared units only during the initial offering period,
to equity funds. known as the New Fund Offer (NFO). Once the
NFO period ends, the fund is closed to new
• Liquid funds: Liquid mutual funds invest in investments. After this, investors can only buy
short-term debt instruments with maturities or sell units in the secondary market, typically
of up to 91 days. These funds are perfect through a stock exchange, and the number of
for investors looking to park their money units remains fixed. These funds do not allow
temporarily while earning a small return, with for continuous buying or selling like open-
minimal risk involved. ended funds, and their value is determined by
market demand and supply in the exchange.
3. Hybrid mutual funds: Funds in this category
combine elements from any of the above [Link] How Mutual Funds Generate Money
categories. The most common hybrid categories (Returns):
are:
This is the key question every investor wants to
• Balanced funds: These funds invest at least understand before investing in a mutual fund: Once
65% in equity shares, with the rest allocated to investors provide money to a mutual fund, they
debt. They offer a ready-made, diversified asset receive units in return. But what happens next?
mix for investors and are tax-efficient, as long-
term capital gains on these funds are not taxed. The fund manager, who is responsible for managing
the fund, will invest the pooled money from all unit
• Monthly income schemes: These are debt- holders according to the fund’s objectives. For example,
focused funds, with 70-100% of their assets if the fund’s goal is to invest in gold, the fund manager
invested in debt securities, and the rest in will allocate the money to gold investments. If the aim
equity. They offer investors stability while also is to achieve growth by investing in banking stocks, the
providing growth potential. manager will invest in shares of banking companies.
These investment decisions are made based on the
• Gold funds: Invests into Gold Exchange Traded fund manager’s research and market outlook.
Funds.
Example:
• Fund of funds: These funds are similar to Gold Suppose 50,000 people invest in a fund house, each
Funds but invest in a variety of funds, not just contributing Rs. 20, giving the fund a total of Rs.
limited to gold. For example, a fund may invest 10,00,000. The fund house issues 50,000 units in this
in other funds across different regions. case. The fund manager invests this amount in two
stocks as per the fund’s objectives. Let’s assume the
4. Open Vs Close ended funds: fund manager invests as follows:
• Open-ended funds: They are a type of mutual
fund that allows investors to buy and sell units • Share A – 5,000 shares at Rs. 150 each – Rs.
at any time, even after the New Fund Offer 750,000
(NFO) period has ended. During the NFO, the
mutual fund offers a set number of units to • Share B – 4,000 shares at Rs. 75 each – Rs. 300,000
the public for the first time. Once the NFO
concludes, the fund remains open, meaning • Total investment: Rs. 10,00,000
investors can continue to buy or sell units
based on the current value of the fund’s assets After one year, the prices of the shares have changed:
(NAV). Open-ended funds are flexible and
continuously open for investment, offering • Share A – 5,000 shares at Rs. 180 each – Rs.
liquidity to investors whenever they wish to 900,000
enter or exit the fund.

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• Share B – 4,000 shares at Rs. 100 each – Rs. sufficient space, modern facilities, and strong
400,000 tenant retention potential.

• Total value of the fund’s investment: Rs. 13,00,000 3. Industrial real estate: Industrial real
estate includes properties like warehouses,
Since the fund is divided into 50,000 units, the value manufacturing facilities, and distribution centres
per unit is Rs. 13,00,000 / 50,000 = Rs. 26. This means used for production, storage, and distribution.
that investors who initially purchased units for Rs. These spaces are purpose-built for industrial
20 can now redeem their units for Rs. 26. Therefore, operations, offering lower purchase and
there is a growth of Rs. 6 per unit, which is a 30% management costs while providing consistent
return over the course of one year. cash flow, making them a stable and attractive
asset class within real estate in India.
3.4.4 Real Estate
4. Raw land: Raw land in India refers to
Real estate investment involves buying physical undeveloped, vacant land that has not been built
property with the goal of earning capital appreciation, on or improved. It serves as a potential asset for
rental income, or both. Investors can choose to invest development and investment, with possibilities
in residential properties (homes or apartments), for creating residential, commercial, or industrial
commercial properties (offices, retail spaces), properties, depending on local zoning laws and
or industrial properties (warehouses, factories), regulations.
depending on their investment objectives.
[Link] Why Understanding Real Estate is
Important in India:

Real estate plays a crucial role in India’s economy,

impacting both personal wealth and national growth.
With rapid urbanisation, a growing population,
and increasing demand for homes and commercial
spaces, real estate offers many investment and
development opportunities.

Whether it is residential, commercial, industrial, or

[Link] Types of Real Estate: special-purpose property, knowing the different types
helps you make better decisions if you’re planning
1. Residential real estate: Residential real estate to invest, buy a home, or grow a business. Real estate
focuses on the design and development of living also contributes to job creation, infrastructure
spaces, with buyers needing to consider factors growth, and economic stability.
like proximity to essential services, markets,
and transport hubs when selecting a property. The sector boosts other industries, generates
They often face a choice between pricier government revenue through taxes, and aids urban
central locations and more affordable, spacious planning. So, understanding market trends, legal
properties located further from the city centre. factors, and property features is key to making smart
It is crucial to assess the property’s value and investment choices, especially in a complex market
the potential for neighbourhood growth over like India.
the medium to long term, as this will help guide
investment decisions for optimal returns. [Link] Considerations in Real Estate
Investment:
2. Commercial real estate: Commercial real estate
refers to properties used exclusively for business 1. Market conditions: The local real estate market
purposes, such as office buildings, retail spaces, is impacted by factors like demand and supply,
hotels, and shopping malls. Key factors to economic growth, interest rates, and government
consider when investing in commercial properties policies. Investors need to stay informed about
for steady cash flow include a convenient location,

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 National Finance Olympiad

these factors, as any changes can influence quickly and unexpectedly due to factors like
property prices and rental values. weather, geopolitical events, or economic shifts.

2. Liquidity: Real estate is generally considered an 4. Used in various industries: Commodities are
illiquid asset, meaning it cannot be quickly sold essential for industries like manufacturing,
or converted into cash without a significant time energy production, and food processing.
delay or price compromise. Think about it – you
have to find a buyer, agree on a price, handle [Link] Types of Commodities:
paperwork, and complete legal processes — all of
which can take weeks or even months. If you want 1. Bullion:
to sell quickly, you might have to lower the price, • Gold: Various contracts, including Gold, Gold
which means you could lose money compared Mini, Gold Guinea, Gold Petal, Gold Petal (New
to the property’s actual value. Investors should Delhi), and Gold Global.​
be prepared for longer holding periods and plan • Silver: Contracts such as Silver, Silver Mini,
their finances accordingly. Silver Micro, and Silver 1000.

3. Legal and regulatory compliance: It is essential 2. Base Metals:

to ensure that the property has clear legal • Aluminium: Including Aluminium Mini.​
titles and all necessary approvals. Compliance • Copper: Including Copper Mini.​
with laws like RERA (Real Estate Regulation • Lead: Including Lead Mini.​
and Development Act) helps reduce risks and • Nickel: Including Nickel Mini.​
improves transparency. • Zinc: Including Zinc Mini.

3.4.5 Commodities: 3. Energy:

• Crude Oil: Including Crude Oil Mini and Brent
Commodities are basic items or raw materials that Crude Oil.​
are used to produce other goods or services. They are • Natural Gas: Including Natural Gas Mini.
usually the same no matter who produces them. For
example, wheat, gold, and oil are all commodities. 4. Agro Commodities:
• Cardamom.
Example: • Cotton.
• Wheat is a commodity because it is grown by • Crude Palm Oil.
many farmers, and it is used to make products • Kapas.
like bread and pasta. No matter where the wheat • Mentha Oil.
comes from, it is still wheat. • Castor Seed.
• RBD Palmolien.
• Similarly, gold is a commodity because it can • Black Pepper.
be bought and sold anywhere, and it is used in
jewellery or electronics.

Key features of commodities:

1. Tangible assets: Commodities are physical items

like gold, oil, grains, and metals that can be
touched and used.

2. Influenced by supply and demand: The price

of commodities often depends on how much is
available (supply) and how much people want
(demand).

3. Volatile prices: Commodity prices can change

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[Link] Advantages and Disadvantages of [Link] Considerations When Investing in

Investing in the Commodities: Commodities:

Advantages: • Market volatility: Commodity prices can change

Investing in the commodity market offers several rapidly due to factors like weather, political
advantages. Here are some of the key benefits of instability, or economic events. Be prepared for
investing in commodities: price swings that could lead to both gains and
losses.
• Portfolio diversification: Commodities tend to
have a low correlation with other asset classes, • Supply and demand: Commodity prices are
such as stocks and bonds. As a result, investing in heavily influenced by supply and demand. A
commodities can help diversify risk and enhance shortage in supply (like a drought or geopolitical
the potential for returns. issues) can drive prices up, while excess supply
can cause prices to fall.
• Hedge against inflation: Commodities, especially
precious metals like gold, are often viewed as a • Economic indicators: Global economic trends,
hedge against inflation. As the value of currency inflation, and interest rates can affect commodity
declines, the value of commodities may rise, prices. For example, inflation often drives up the
offering protection against the diminishing price of precious metals like gold.
purchasing power of money.
3.5 Understanding Stock Market
• High potential returns: The commodity market
offers the potential for significant returns, but 3.5.1 How Do Shares Come into
it also carries high risks. Certain commodities,
Existence?
such as oil and gas, can experience price volatility
due to factors like supply and demand dynamics, When an individual or group of people wants to start
geopolitical events, and natural disasters. While a business, they typically form a company, which
the possibility of high returns exists, it also comes involves registering your business as a legal entity
with the risk of substantial losses. separate from yourself as an individual. This means
that the business and the owner are treated separately
• Tangible asset ownership: Unlike stocks for legal, financial, and operational purposes.
and bonds, commodities are physical assets.
Owning commodities such as precious metals or For the company to start its operations, it will need
agricultural products gives investors a sense of money to set up an office, hire employees, etc. To
ownership and can provide a sense of security for raise money, the owner purchases shares from the
some. company. These shares represent the ownership of
the owner and with the money received, the company
Disadvantages: can start its operations. Initially, as the owner, you
• High risk: The commodity market is hard to may hold all of the shares of the company. However,
predict because prices change based on things as your business expands, it may require more money
like how much is being made, how much people to grow and operate. At this point, the company can
want, and changes in the world. This can cause raise money by offering a portion of the company
investors to lose money. To do well in trading to external investors in exchange for funds. This is
commodities, you need to understand how the usually done by selling more equity shares.
economy works, trade between countries, and
how supply and demand affect prices. Knowing Imagine the company has 100 shares in total. The
these things helps reduce the risk. owner holds all 100 shares, so they have full control
of the company. Now, the owner wants to raise some
• Limited returns: Commodities are different from money and offers 10 new shares to investors. The
stocks and bonds because they do not pay regular company’s total number of shares will now increase
money like dividends or interest. You make to 110 shares (100 original shares + 10 new shares).
money from commodities only when their prices After the investors buy those 10 shares, the owner
go up.

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still holds their 100 shares, but now the company has companies, and the share prices on both exchanges
a total of 110 shares. This means the owner still has are generally very similar.
most of the shares (100 out of 110), and the investors
own the remaining 10 shares. Just like the buyers in the electronics market can
choose whether to buy from one market or the other,
From having 100% ownership, the owner’s control investors can choose to buy shares from either the
has now reduced to approximately 90.91% (100 out of NSE or BSE, depending on which exchange they
110). So, while the owner still holds the majority, their prefer. Similarly, sellers can choose which exchange
overall control is slightly reduced after issuing new to list their shares on.
shares to raise funds.
Listing and IPO:
As your business grows and you need more funds When a company decides to raise funds from the
to expand even further, you may decide to take public, it goes through an Initial Public Offering (IPO).
your company to a larger scale. One way to raise a The company offers its shares for the first time, and
significant amount of money is by launching an Initial these shares are then listed on one or both of the
Public Offering (IPO). stock exchanges. Listing means that the company’s
shares are now available for public trading on those
• An IPO is the process where a company offers exchanges. When a company offers its shares to the
its shares to the general public for the first time. public for the first time through an Initial Public
This allows the company to sell shares to a large Offering (IPO), it is in the primary market. In this
number of investors (both individuals like you market, the company sells shares directly to investors
& me and institutions), and in exchange, the and raises money to fund its growth or other business
company raises a substantial amount of money. needs.

• Once the IPO is completed, the company is listed For example, if a company goes through an IPO and
on a stock exchange, and its shares are now decides to list its shares on the BSE, its shares will be
available for buying and selling by the public. available for buying and selling there. Alternatively,
the company might choose to list its shares on the
3.5.2 Understanding Stock Exchange NSE. Once the shares are listed, buyers can purchase
them, and sellers can sell their shares.
A stock exchange is a platform that connects the
thousands of buyers and sellers to transact with each In conclusion, the stock exchange is like the
other. When a company decides to go public and offer marketplace where buyers and sellers meet to trade.
its shares for sale to the general public, it has to list Companies that undergo an IPO must list their shares
itself on a stock exchange. This means the company’s on a stock exchange (like the NSE or BSE), where their
shares can now be bought and sold on the stock shares can be bought and sold by the public.
exchange, making it accessible to a much larger pool
of investors. [Link] The Role of the Stock Exchange:

Imagine an electronics market where many sellers • The stock exchange ensures transparency and
(businesses) and buyers (investors) gather. This is a fairness in the trading process by making sure
market place where buyers can purchase products that all transactions are conducted according to
from various sellers. Now, let’s say there are two rules and regulations.
electronics markets. Both markets sell similar
products, and the prices of these products are also • The rules set by Securities Exchange Board of
similar across both markets. Buyers can choose India (SEBI) for the stock exchange protects both
which market they want to visit based on their the buyers and sellers. It ensures that companies
preference, convenience, or reputation of the market. provide accurate information about their
Similarly, in the stock market, there are two major business, and it ensures that the transactions
stock exchanges in India: the NSE (National Stock between buyers and sellers happen smoothly and
Exchange) and the BSE (Bombay Stock Exchange). efficiently.
Both exchanges typically sell shares of the same

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3.5.4 SEBI – The Regulator of the companies give honest and clear information
Indian Stock Market before asking people to invest in their shares.

2. Regulating the market: SEBI creates rules for how

stock markets, brokers, mutual funds, and listed
companies should operate. This helps keep the
market stable and well-organised.

3. Approving IPOs: Before a company can sell its

shares to the public through an IPO, it must get
SEBI stands for the Securities and Exchange Board of SEBI’s approval. SEBI checks the company’s
India. It was established in 1988 and became a legal background and ensures the details shared with
authority in 1992. SEBI’s main job is to regulate and the public are correct.
oversee the stock market in India, making sure that
all participants including companies, brokers, and 4. Monitoring brokers and mutual funds: SEBI
investors follow the rules and participate fairly. keeps an eye on brokers and mutual funds,
ensuring they do not overcharge or misguide
[Link] Why is SEBI Needed? investors.

SEBI (Securities and Exchange Board of India) 5. Preventing unfair practices: SEBI takes
is the government authority that regulates and strong action against insider trading, market
supervises the stock markets in India. It ensures that manipulation, and any unfair means of earning
all participants—like companies, stockbrokers, and profit. This helps in building trust in the market.
investors—follow the rules and act fairly. SEBI protects
the interests of investors by preventing fraud, ensuring 6. Educating investors: SEBI also runs awareness
transparency, approving IPOs, and monitoring trading programs to help people learn about investing,
activities. It also creates guidelines for how markets risks, and smart financial decisions.
should function so that investing remains safe,
organised, and trustworthy for everyone. Insider trading is the illegal act of buying or
selling stocks based on confidential, non-public
[Link] Key Roles and Functions of SEBI: information about a company. It gives an unfair
advantage to those with access to this inside
1. Protecting investors: SEBI works to safeguard information, which is why it’s strictly regulated
investors from frauds and scams. It ensures that

Term Meaning
Market Capitalisation The total value of a company’s outstanding shares, calculated by mul-
(Market Cap) tiplying the number of shares by the current market price.

A portion of a company’s profit paid to its shareholders.

Dividends

A regulated marketplace where securities such as stocks and bonds

Stock Exchange
are bought and sold. Examples include BSE (Bombay Stock Exchange)
and NSE (National Stock Exchange).

The first time a company offers its shares to the public to raise capi-
Initial Public Offering (IPO) tal.

Demat Account An electronic account where investors hold their securities in digital
form, eliminating the need for physical certificates.

An account that allows an investor to buy and sell securities through a

Trading Account stockbroker.

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3.5.5 How Stocks Are Bought and 6. Income proof: Can include salary slips, ITR, or
bank statements.
Sold
During an IPO, the company offers a portion of its Most brokers now allow online account opening
shares to the public for the first time. As an investor, through e-KYC using Aadhaar and OTP, making the
you can apply to buy these shares during the IPO process quick and paperless.
period. Once listed on the stock exchange (like NSE
or BSE), these shares can be bought and sold freely 3. Brokerage and charges: When you buy or sell
in the secondary market. The secondary market is shares through a broker, they charge a small fee
where investors buy and sell shares of companies called brokerage. Some brokers charge a flat fee
that are already listed on a stock exchange. Let’s now per trade, while others may charge a percentage
understand how you, as an investor, can buy and sell of the transaction value. There may also be
shares: additional charges like GST, transaction tax, and
Securities Transaction Tax (STT).
1. Stockbroker: A stockbroker acts as the middleman
between you (the investor) and the stock market. 4. IPO application process: When a company
You cannot directly buy or sell shares on stock announces an IPO, here’s how you can apply:
exchanges like BSE or NSE—only registered
brokers can do so. So, to trade in the stock market, • Log in to your broker’s platform (mobile app or
you need to open an account with a broker (like website).
Zerodha, Groww, Angel One, Upstox, etc.). • Go to the IPO section.
• Select the IPO you want to apply for.
2. Demat and trading accounts: To invest in stocks • Enter the number of shares (in lots). Some IPOs
in India, you need two essential accounts: let you choose a price within a pre-defined
range.
• Demat account: This is like a digital locker • Authorise the payment via UPI or net banking.
where your shares are stored in electronic • Wait for the allotment. If shares are allotted,
form. It is managed by depositories like NSDL they will be credited to your Demat account.
and CDSL. • After listing, the shares can be sold on the
stock exchange.
• Trading account: This account is used to place
buy and sell orders in the stock market. Note: IPOs are often oversubscribed, which
means the number of applications received is
Demat holds your shares, and trading executes more than the number of shares offered in an
your transactions. These accounts are usually IPO. In such cases, allotment happens through a
opened together through a broker. lottery system. So, there is a chance that you may
not receive any shares even after applying. If not
To open these accounts, you typically need the allotted, your blocked money will be automatically
following documents: released back to your account within a few days.

1. PAN card: Mandatory for all financial 5. Trading timings in India: Stock market timings
transactions. (NSE/BSE):
2. Aadhaar card or other valid address proof (like • Pre-opening session: 9:00 AM – 9:15 AM
passport, voter ID, or utility bill). • Regular trading session: 9:15 AM – 3:30 PM
3. Bank account details: A cancelled cheque or a • Post-market session: 3:40 PM – 4:00 PM (for
copy of your bank passbook. closing price orders)
4. Photograph: Recent passport-sized photo.
5. Signature: A scanned or physical copy of your Only during this period can you place buy or sell
signature. orders.

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3.5.6 Meaning of Bull Market and Example: In December 2023, the BSE Sensex
Bear Market: surpassed the 69,000 mark for the first time, with the
Nifty index also reaching new highs. This surge was
[Link] Bull Market: driven by strong macroeconomic data, expectations
of a U.S. Federal Reserve rate cut, and the Bharatiya
A bull market refers to a period when the prices of Janata Party’s success in key state elections. ​
stocks are rising, encouraging buying. The term
“bull” comes from the way a bull attacks, thrusting its [Link] Bear Market:
horns upward, symbolising upward movement in the
market. A bear market is when the prices of stocks are falling,
encouraging selling. It is a time when investors are
Characteristics of bull market: worried, and there’s a general feeling of negativity.
• Price increase: A bull market is characterised During a bear market, people are more likely to sell
by a significant rise in stock or commodity their stocks to avoid losses, causing prices to drop
prices. even more.

• Investor optimism: There is general optimism Characteristics of bear market:

and confidence in the market, with investors • Price decrease: A bear market is characterised by
believing that prices will keep rising. a significant decline in stock or commodity prices.

• Strong economic indicators: Bull markets • Investor pessimism: There is a general sense of
often occur when the economy is growing, fear or pessimism, where investors believe that
characterised by high employment, increasing prices will continue to drop.
GDP, and strong consumer spending.
• Weak economic indicators: Bear markets often
• Increased trading volume: A rising number coincide with periods of economic decline, like
of buyers and trading volumes are common in recessions, where indicators like GDP growth
bull markets, as more people want to invest. slow down, unemployment rises, and consumer
spending drops.
• Inflation and low interest rates: Typically,
inflation is moderate, and central banks keep • Declining trading volume: In a bear market,
interest rates low to stimulate the economy. investors may sell off their positions, leading to
lower trading volume.

Feature Bull market Bear market

Stock prices Rising continuously Declining by 20% or more

Investor sentiment Optimistic and confident Pessimistic and fearful

Strong GDP growth, low Slowing GDP, job losses and

Economic growth
unemployment economic contraction

Generally low, supporting Higher rates may be implemented

Interest rates
economic passion to control inflation

Increasing, leading to higher Declining, affecting stock

Corporate earnings
stock valuations performance

High volatility and frequent sell-

Market volatility Generally low, with steady gains
offs

Buy and hold, growth investing, Defensive stocks, bonds and cash
Investment strategies
momentum trading holdings

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 National Finance Olympiad

Example: A notable example of a bear market This means the company generates a 20% return
occurred in early 2025 when the Nifty IT index on every rupee invested by its shareholders.
declined over 21% from its December 2024 peak of
45,995.80. This downturn was driven by concerns 2. Price-to-Earnings(P/E) Ratio: It is a financial
over a potential U.S. recession, cautious client metric that compares a company’s stock
spending, and rising competition in the IT sector. price to its earnings per share (EPS). It helps
investors assess whether a stock is overvalued or
undervalued relative to its earnings. A high P/E
3.5.7 Fundamental Analysis:
ratio might suggest that the stock is overvalued,
Fundamental analysis is a technique used to assess while a low P/E ratio could indicate that the stock
the true value of an asset, like stocks or bonds, is undervalued or that the company is facing
by analysing a variety of economic, financial, and challenges.
qualitative factors. The main aim is to determine if
the asset is undervalued or overvalued in relation The formula is:
to its current market price. This method focuses P/E = Stock Price / Earnings per Share (EPS)
on understanding the key elements that influence
a company’s financial performance, such as its Where:
revenue, earnings, growth prospects, and the overall • Stock Price is the current market price of the
market environment. company’s stock.

[Link] Ratios and Metrics: Key Ratios • Earnings per Share (EPS) is the company’s net
Include- income divided by the number of outstanding
shares.
When investing, it’s important to understand key
financial ratios that can provide insight into a Example:
company’s financial health and performance. If a company’s stock price is ₹200 and its earnings
per share (EPS) is ₹10, the P/E ratio would be:
1. Return on Equity (ROE): Return on Equity (ROE)
is a key financial ratio that measures a company’s P/E = ₹200 / ₹10 = 20
ability to generate profits from its shareholders’
equity. It shows how effectively the company is This means investors are willing to pay ₹20 for
using the money invested by its shareholders to every ₹1 of the company’s earnings. A P/E ratio
generate earnings. A higher ROE indicates that of 20 could suggest that investors have high
the company is more efficient in using its equity expectations for future growth, but it should be
capital to produce profits. compared with industry peers and historical P/E
ratios for context.
The formula is:
ROE = Net Income / Shareholder’s Equity 3. Current ratio and quick ratio: The current ratio
show if a company can pay its short-term debts
Where: using its assets, with a ratio above 1 indicating
• Net Income is the company’s profit after taxes it can. The quick ratio is stricter, excluding
and expenses. inventory, and focuses on cash and receivables. A
quick ratio of 1 or higher means the company can
• Shareholder’s Equity is the total value of the cover its debts without relying on inventory.
equity owned by shareholders, calculated as
total assets minus total liabilities. The formula is:
Current Ratio = Current Assets / Current
Example: Liabilities
If a company has a net income of ₹100,000 and
shareholder equity of ₹500,000, the ROE would be: Quick Ratio = (Current Assets - Inventory) /
Current Liabilities
ROE = ₹100,000 / ₹500,000 = 0.20 or 20%

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 National Finance Olympiad

Where: Where:
• Current assets are assets expected to be • Total Debt refers to all of a company’s interest-
converted into cash within a year (e.g., cash, bearing liabilities, both short-term and long-
accounts receivable, inventory). term (e.g., loans, bonds).

• Current liabilities are obligations the company • Total Equity refers to the shareholders’ equity,
must pay within the next year (e.g., accounts which is the difference between the company’s
payable, short-term debt). total assets and total liabilities (it represents
the net worth of the company).
• Inventory is subtracted because it may not be
easily converted into cash in the short term. Example:
If a company has ₹800,000 in total debt and
Example: ₹400,000 in total equity, the D/E ratio would be:
If a company has ₹5,00,000 in current assets,
₹3,00,000 in current liabilities, and ₹100,000 in D/E Ratio = ₹800,000 / ₹400,000 = 2.0
Inventory the Current ratio and Quick ratio would
be: This means the company has ₹2 of debt for every
₹1 of equity, indicating high financial leverage,
Current Ratio = ₹500,000 / ₹300,000 = 1.67 which could be risky if the company faces
challenges in generating profits or managing its
This means the company has 1.67 times more debt obligations. A ratio under 1 typically suggests
current assets than its current liabilities, a more conservative capital structure with lower
indicating a strong ability to pay off short-term financial risk.
debts. However, a ratio too high (above 3 or 4)
might suggest inefficiency in utilising resources. 5. Net profit margin: Net Profit Margin is a
profitability ratio that shows the percentage
Quick ratio = (₹500,000 - ₹100,000)/ ₹300,000 = of revenue a company keeps as net profit after
1.33 deducting all expenses, including operating costs,
interest, taxes, and other non-operating expenses.
This means that the company has ₹1.33 in liquid It gives a clear picture of a company’s overall
assets (excluding inventory) for every ₹1 of current profitability.
liabilities, suggesting that it can cover its short-
term debts even without relying on inventory. The formula is
Net Profit Margin = Net Profit / Revenue × 100
4. Debt-to-Equity (D/E) Ratio: It is a financial metric
that compares the amount of debt a company has Where:
to its equity. It helps assess the financial leverage • Net Profit is the final profit left after deducting
of a company and indicates how much debt the all expenses (cost of goods sold, operating
company is using to finance its operations relative expenses, interest, taxes, etc.) from total
to its shareholders’ equity which in simple revenue.
terms is the amount of money the company has
borrowed compared to how much money the • Revenue is the total income generated by the
shareholders have invested. This basically shows sale of goods or services.
whether a company is mostly using borrowed
money or its own funds to run the business. Example:
A high D/E ratio suggests that the company is If a company has a net profit of ₹300,000 and
heavily reliant on debt, which may increase its revenue of ₹2,000,000
financial risk, especially if it struggles to meet
debt obligations. Net Profit Margin = ₹300,000 / ₹2,000,000 × 100 =
15%
The formula is:
D/E Ratio = Total Debt / Total Equity This means the company keeps 15% of its total
revenue as net profit after covering all expenses.

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A higher net profit margin indicates better overall • Bar chart: A bar chart provides more detailed
profitability and financial health. information than a line chart. It uses a vertical
line to display the highest and lowest prices, often
3.5.8 Technical Analysis: referred to as an OHLC (Open, High, Low, Close)
chart. The horizontal dash on the left represents
Technical analysis is a method used to predict future the opening price, while the one on the right
price movements of assets, especially stocks, by shows the closing price. The top of the vertical line
analysing historical price data and trading volumes. indicates the highest price during the period, and
Unlike fundamental analysis, which examines a the bottom marks the lowest price. The green bar
company’s financial health, technical analysis focuses shows an up day, where the stock’s closing price is
on chart patterns, trends, and market psychology to higher than its opening price. The red bar shows
inform investment decisions. It operates on the belief a down day, where the closing price is lower than
that all relevant information is already incorporated the opening price.
into the asset’s price, and that past price movements
can provide insights into future price behaviour.

[Link] Who Are Traders?

Traders are people who buy and sell stocks to make a

profit in a short period of time. Traders aim to make
money by taking advantage of price volatility in the
market. They primarily use technical analysis tools to • Candlestick chart: A candlestick chart is similar
take buy and sell decisions to a bar chart as it shows the open, high, low, and
close prices, but it offers a more visual format.
Types of charts used by traders in technical Each “candlestick” consists of a body and wicks
analysis: (lines). A green candle indicates the price has
risen, meaning the closing price is higher than the
• Line chart: A line chart is a basic chart used opening price, while a red candle shows the price
in technical analysis that connects the closing has fallen, with the closing price being lower than
prices of a stock over a specific time period. It the opening price. The highest price is at the top
shows the overall trend of the stock but does not of the candlestick, and the lowest price is at the
include details like the opening price, highest bottom. Green candles represent a bullish market,
price, or lowest price. It’s simple and easy to while red candles sign
understand, making it great for beginners and
comparing multiple stocks. However, its limitation
is that it only shows closing prices and lacks
other important data needed for a more detailed
analysis.

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Summary of the Chapter

1. Introduction to Investments
• Investing involves putting money into assets like stocks, bonds, or real estate to generate
returns. It carries risk but offers potential for growth, wealth creation, and achieving financial
goals over time.
• Investment risk includes market, credit, interest rate, and inflation risks. The relationship
between risk and return shows that higher risk typically leads to higher potential returns,
while lower risk offers stability but lower gains. Volatility measures price fluctuations, affecting
returns. Risk tolerance helps investors choose suitable investments, balancing comfort with
financial goals, and guiding decisions between high-risk and low-risk options.
2. Investment Options
• Stocks represent ownership in companies, offering potential capital gains and dividends.
They include common and preference shares, with varying risks and rewards. Common stocks
provide voting rights and growth potential, while preference shares offer fixed dividends.
Investment success depends on market analysis and long-term strategy.
• Bonds are loans where investors lend money to issuers (governments or companies) in
exchange for regular interest payments and repayment of principal at maturity. They offer
stable income, lower risk, and diversification but are affected by interest rates, inflation, and
credit risks.
• Mutual funds pool money from investors to invest in diverse assets, managed by professionals.
They can be actively or passively managed, with different performance, flexibility, and
risk. Funds include equity, debt, hybrid, and gold options. Returns come from asset growth,
calculated per unit value.
• Real estate investment involves purchasing properties for capital appreciation or rental
income. Types include residential, commercial, industrial, and raw land. Key considerations
include market conditions, liquidity, and legal compliance. Understanding these factors helps
make informed investment decisions, especially in India’s growing real estate market.
• Commodities are raw materials like gold, oil, and wheat, traded based on supply and demand.
They offer portfolio diversification, inflation protection, and high return potential but come
with risks such as volatility and limited returns. Market factors and economic trends influence
commodity prices.
3. The Stock Market
• Shares are created when a company sells ownership to raise funds, often through an Initial
Public Offering (IPO). The stock exchange, like the NSE or BSE, facilitates buying and selling of
shares. Companies list their shares post-IPO, ensuring transparency and fairness in trading,
governed by SEBI regulations, protecting both buyers and sellers.
• SEBI (Securities and Exchange Board of India) regulates the stock market to ensure fairness,
protect investors, approve IPOs, monitor brokers, and prevent fraud, including insider trading,
promoting transparency and trust.
• Buying & Selling Stocks: Stocks are bought/sold through brokers using Demat and Trading
accounts, with IPOs providing first access. Brokers charge a fee, and trading occurs during
specific market timings.
• IPO Process: Investors apply for IPOs through brokers; shares are allotted via lottery if
oversubscribed. Post-listing, shares can be bought/sold on the stock exchange.
4. Market Types and Analysis Overview
• Market Types: Bull markets see rising stock prices, investor optimism, and economic growth.
Bear markets involve falling prices, pessimism, and economic decline, often leading to lower
trading volumes.

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• Fundamental analysis evaluates an asset’s true value by analysing economic, financial, and
qualitative factors. It helps determine if an asset is undervalued or overvalued. Key metrics
include Return on Equity (ROE), Price-to-Earnings (P/E) ratio, Current and Quick ratios,
Debt-to-Equity ratio, and Net Profit Margin. These ratios assess a company’s financial health,
profitability, and risk levels.
• Technical analysis predicts future price movements by analysing
historical data, trends, and market psychology. Traders use chart
patterns, such as line, bar, and candlestick charts, to make short-
term buy and sell decisions.

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