📘 17.1 Investors and the Investing Process

What is the Investing Process?

The investing process involves understanding who can invest, the onboarding process, and the regulatory and informational requirements. Investors must go through a formal process to start investing, and it is essential to understand these steps and requirements to ensure compliance and a smooth investment experience.

17.1.1 Who Can Invest?

Eligible Investors

Typically, individuals, institutions, and entities that meet certain financial criteria and regulatory guidelines can invest. This includes residents, non-residents (NRIs), foreign entities, trusts, and others, depending on the specific regulations of the market. Investors must also adhere to the eligibility criteria set by investment managers and funds.

17.1.2 Client Onboarding Process

Steps in Onboarding

The onboarding process for investors involves several steps. Initially, the investor must complete necessary documentation, including Know Your Customer (KYC) forms. Then, the investor’s financial profile is assessed, and an investment strategy is discussed. This process ensures that the investment options align with the investor’s risk tolerance and financial goals.

17.1.3 Terms of Offer

Understanding Terms of Offer

The **Terms of Offer** outline the terms and conditions under which investments are made. These terms cover the investment’s duration, minimum investment amount, expected returns, fees, and other important factors. Investors should carefully read these terms to ensure that the investment aligns with their expectations and requirements.

17.1.4 Regulatory Requirements

Compliance and Regulations

Investments are subject to specific regulatory requirements set by the **Securities and Exchange Board of India (SEBI)** or other relevant authorities in different countries. These requirements may include proper documentation, disclosure of fees, taxes, and adherence to the regulations regarding the type of investments being offered. Compliance ensures that investors are protected and that the investment process is transparent.

17.1.5 Mandatory Investor Information

Required Information

Investors must provide essential information, such as personal details, financial status, risk tolerance, and tax information. This data helps investment managers to tailor portfolios to meet the investor’s needs and comply with regulatory standards. Proper documentation is vital to ensure transparency and security in the investment process.

17.1.6 Investor Folio or Account

What is an Investor Folio?

An investor folio is a unique identification assigned to each investor by the investment firm or fund manager. It helps in tracking the investments, maintaining records of transactions, and managing the portfolio. Each folio contains details of the investor’s holdings and helps manage the account effectively.

📘 6.2 Role and Function of the Secondary Market

🔄 6.2.1 Functions of Secondary Markets

💧 Liquidity

Enables investors to buy/sell previously issued securities. Ensures marketability, timely exit, and flexibility in portfolio management.

📈 Price Discovery

Prices reflect demand-supply and investor perception. Aids fair valuation for future issues and corporate actions.

📡 Information Signalling

Market prices instantly reflect new information, forcing companies to stay efficient and transparent.

📊 Economic Indicator

Indices and trading trends reflect the overall economy’s strength or slowdown — acting as financial barometers.

🏛️ Corporate Control

Low market valuation may invite takeovers — ensuring better governance and accountability by management.

🏗️ 6.2.2 Market Structure & Participants

  • Market Infrastructure: Stock exchanges, clearing corporations, depositories
  • Investors: Individuals, institutions, FPIs
  • Issuers: Listed companies
  • Intermediaries: Brokers, banks, custodians
  • Regulators: SEBI and exchange compliance teams

📊 6.2.3 Market Information

🏷️ Market Capitalisation

Total value = share price × outstanding shares. Used to classify stocks (large, mid, small cap) and track market-to-GDP ratio.

💹 Market Turnover

Total trading volume/value. Indicates liquidity. Higher turnover = more active and efficient market.

📈 Market Indices

Representative benchmarks (Sensex, Nifty) track price movement of key stocks or sectors. Used for tracking, benchmarking, and forecasting.

🛡️ 6.2.4 Risk Management in Secondary Markets

📊 Capital Adequacy

Members must maintain minimum capital and net worth to absorb risks and meet obligations.

💼 Margins

Upfront payment by traders to reduce default risk. Collected on both buy and sell orders based on volatility.

🚦 Circuit Breakers

Auto-trading halts on abnormal index movements. Prevents panic and extreme volatility.

🔐 Settlement Guarantee

Clearing corporations ensure every trade settles — even if one party defaults.

🖥️ Online Monitoring

Real-time surveillance systems flag suspicious trades, large exposures, and unusual price/volume behavior.

📉 Price Monitoring

Exchanges monitor order books, unusual bids, and act against manipulation attempts.

📚 Book Inspection

Exchange/SEBI audits of brokers and trading firms to ensure compliance with all norms and investor protection rules.

📘 6.3 Corporate Actions

📌 Overview:
Corporate actions are decisions taken by a company that affect its shareholders — such as bonus issues, dividends, buybacks, and mergers. They impact stock price, capital structure, or ownership, and are regulated by SEBI and the Companies Act【225:0†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

📝 6.3.1 Rights Issue

New shares offered to existing shareholders at a fixed ratio and price. Avoids dilution of holding. Traded as RE in demat form【225:1†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

🎁 6.3.2 Bonus Issue

Free shares issued from company’s reserves. Increases number of shares, no cash flow involved. Improves market perception and liquidity【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

💰 6.3.3 Dividend

Share of profits paid to shareholders. Can be interim or final. Must be declared from earned profits; not allowed if company is in loss or has defaulted【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

📉 6.3.4 Stock Split

Face value of shares reduced, increasing number of shares held. Makes high-priced shares more affordable and increases market liquidity【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

🔙 6.3.5 Share Buyback

Company repurchases its own shares from open market using surplus funds. Reduces share capital, boosts EPS, and signals financial health【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

🚫 6.3.6 Delisting

Permanent removal of shares from stock exchange. Can be voluntary (reverse book building) or compulsory (non-compliance)【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

🔗 6.3.7 Mergers & Acquisitions

Changes shareholding pattern. SEBI regulations protect minority shareholders by providing exit opportunities【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

📤 6.3.8 Offer for Sale

Existing investors (promoters, institutions) sell shares to the public. No fresh capital is raised. Used to meet minimum public shareholding norms【225:3†NISM Series X-A-Investment Adviser Level 1 2025-2.pdf】.

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