Intro To Investment Economics PDF

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INVESTMENT CONCEPTS AND SOME

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IMPORTANT ECONOMIC PARAMETERS
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23/10/2016
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Introduction to Investment and
some Economic Concepts
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Related to Investments
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This chapter will acquaint you with the basic terminologies
used in Investment world including some Important
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Economic Parameters
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Investment as a Concept and
Investment Analysis and Research
What is investment?
In economic terms investment is forgoing current consumption to consume more in future. Basically
invest money, earn interest and enable yourself to consume more in future.
Investment is an asset or item that is purchased with the hope that it will generate income or will
appreciate in the future.
In finance terms An investment is a monetary asset purchased with the idea that the asset will
provide income in the future or will be sold at a higher price for a profit.
Now lets see what famous investors have to say about investment.
Benjamin Graham in his book The Intelligent Investor defines investment activity in the following
words:
An investment operation is one which, upon thorough analysis promises safety of principal and an
adequate return. Operations not meeting these requirements are speculative.
Warrant buffet, the wizard of stock market said about investment,

Rule no 1 never lose money (in investment) and rule no. 2 never forget rule no. 1
He also quoted for method of selecting suitable investment,
Only buy something that youd be perfectly happy to hold if the market shut down for 10 years. If
you arent willing to own a stock for ten years, dont even think about owning it for ten minutes
So, here what have we learned from the legends investment is a systematic process of selecting right
assets, which is suitable for your reasonable return goals, keeping in mind the risk bearing ability and
income base of an individual. It is a process of believing that an investment made, will generate returns
and yield either a fix income or capital gain in future. So, Investment is a philosophy of looking at a
better future and believing in future opportunities.
In short, Investment is a process based on optimism.
We have gone through all the investments products and options available in prior chapters. Now in this
chapter we will try to understand how to value them and how to analyze which products are suitable
for an investor.
Lets break down Mr. Grahams definition of investment and try to understand the characteristics of an
investment procedure.
An investment operation is one which, upon thorough analysis promises safety of principal and an
adequate return. Operations not meeting these requirements are speculative.
Investment Operation:
Investment is a process which requires a dedicated amount of time and research. One has to analyze
the factors affecting the investment, Time period, Adequacy etc. In normal terms its a business activity
which requires constant up gradations, Monitoring and analysis. Thats what Warren Buffet said I am
a good investor because I am a businessmen and I am a good businessmen because I am an investor.
Investment is considering stock as an ownership if the underlying company and thinking just like a
entrepreneur who is running it.
Through Analysis:
As mentioned previously it requires in depth idea about the business. One should have enough ideas
about the legal norms, business requirements, creditors, product, consumer preference etc. about the
business. Just like if you are running a grocery shop you will monitor the stock, look for client,
suppliers, do demand analysis of the products, technically you will focus on each parameter that is
related to the shop. Thats the same thing you do with the investment it requires same amount of
concentrations and detailing before making one. It includes both qualitative and quantitative
parameter. So, investment is all about being the entrepreneur who is running the show and without
knowledge it is nothing but just speculations.
Safety of investment:
The first rule of investment is preservation of capital, because if the safety is not there then it is not
fulfilling the basic purpose of the whole process. Anything done without considering the safety first is
called speculation rather than investment. So, preservation of capital is first and foremost priority. One
should go for proper due diligence and risk return analysis before making any investment. The main
area of safety analysis is time horizon and return expectations. Graham has introduced certain
criterions before making an investment which he called margin of safety ( This we will deal in freater
details in the forthcoming chapters)
Adequate return:
Banks provide you 8% on fixed deposit. When you invest somewhere else you should expect higher
return. There are certain parameters that need to be considered regarding return expectations. Return
should always be looked as a risk-adjusted basis. Every investment has risk attached to it so in banks
there are safety for your money so you receive 8% return in equity market you expect 15% return as
risk factor is higher than bank. So balanced risk adjusted return is the key for balanced investment. To
understand risk adjusted return you should look at bank loans, banks take into account that some of
their loans will turn to NPA (Non Performing Assets) and hence the return rates are calculated in a way
which makes people pay for the NPAs that may occur. Similarly in your investment too, as risks are
higher than bank deposits one must look at earning more from the winners to cover the losses from
the losing investments.
Difference between investing and speculating:

Go to Mahalaxmi race-course or some casino, bet your money. What would be the outcome? Either
you gain a lot on your money or lose everything. Invest with proper due-diligence, Check all parameter
mentioned above with proper time horizon and return expectations. The first process is speculation
and second is investment. So, investment is all about careful choosing after thorough analyses risk
assessment and understanding, speculation is playing the probability card for a favorable outcome. All
technical trades can be called speculations as they bet for a probable outcome without any
understanding or analysis of the business they are betting on.
Aligning the investment needs:

Analysis of the logic behind the investment is must. You should be able to write points and need for an
investment. It that matches with the requirements then only go for one. Mr. Vijay Kedia famously
quoted that, If you cant write page full of reason why I should make an investment, dont make one.
Link your needs with investment characteristics. E.G You cant buy future and option products for a
pensioner, as it kills the safety and higher than his risk appetite. Then again a aged person with high
net worth and low needs from life need not go for any equity linked investment as that puts his money
into risk for something that he just dont need. So, it is important to look into oneself and understand
the needs for investment. So, time wise goal setting is a must. Remember investment is always done
for a financial goal in life and not just for the kick of it.
Become a skilled investor or hire someone to manage money:

What would you do when you feel sick? Option 1 self diagnose the problem and take medicine without
anyones consent. Option 2 Go to doctor and get his opinion and prescribed medicine? Option 1 will
make you an individual who is more of a speculator. Option 2 would be considered smart person, who
rely on investment advisor or expert who has knowledge and ability to find proper investment vehicle
for you. To choose the right person for right job is also a part of intelligent investors job. For a person
who is not really passionate about investing but interested to get the benefit of the same, the best way
would be to invest through mutual fund that has expertise and skill to manage money.
Now we will try to get into the different areas of Investment Analysis and Research
Fundamental analysis
Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets. When applied
to futures and Forex, it focuses on the overall state of the economy, interest rates, production,
earnings, and management quality. When analyzing a stock, futures contract, or currency using
fundamental analysis there are two basic approaches one can use; Bottom up Analysis and Top Down
Analysis. (We will see this in-detail).
The term is used to distinguish such analysis from other types of investment analysis, such
as quantitative analysis and technical analysis. It helps us identify the strength of the equity or the
underlying business. Fundamentals of the stocks includes numbers like Earnings per share, Operating
profit margin, Return on equity, Cash flow and future growth potentials of the companys business.
Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts and understanding the businesses future potential. There are several possible
objectives:
To conduct a company stock valuation and predict its probable price evolution,
To make a projection on its business performance,
To evaluate its management and make internal business decisions,
To calculate its credit risk,
To assign a valuation to the business for merger and acquisition or takeover decisions.
Fundamental analysis believes that a stocks price follows the earning and earning potential of the
underlying business and maintains that markets may misprice a security in the short run but that the
"correct" price will eventually be reached. Profits can be made by purchasing the mispriced security
and then waiting for the market to recognize its "mistake" and reprise the security. Fundamental
analysis contradicts basic efficient market theory which states that share price has already included
all the information in the market and price is a true picture of the business.
Fundamental analysis includes three major areas:
1. Economic analysis
2. Industry analysis
3. Company analysis
1. Economics analysis includes analysis the factors affecting the business of the company. Like
demand/supply, interest rates movements, business conditions, Legal frameworks government
interventions etc.
2. Industry analysis includes the factors affecting the industry at micro levels. Competitions,
Product preferences of clients, competitive advantage, economies of scale, the cycle of the
industry etc. It also includes the govt. policies and decisions that can affect the industry.
3. Company analysis: It mainly tackles with the analysis the internal factors of the company
including supply chain, production capacity, expansion plans, cost of raw materials, profits etc.
It basically includes the internal environments of the company both in terms of the relations
between management and employee to performance analysis.
So if we start analysis from economy to company than it is called Top down approach ( Going 1,2,3) as
you are going from macro level (economy) to lower level (company) it is considered best for long term
investments. FII follows this approach as they got to choose from different countries and different
industries.
Other approach from company to economy is called bottom up approach (Going 3, 2, 1). Analysts going
for secular growth stories (Selecting companies which have enough trigger to do well even if Industry
and Economic parameters are not favorable) generally follow this approach.
On the basis of these three analyses the investment decisions are made.
Technical analysis
Technical analysis is a method to determine the price of the stock on the basis of past historical data
and chart patterns. It basically works on analysis of some particular price movements, volumes and
indicators which tracks and tells you when to buy/sell a stock considering patterns. Contrary to
fundamental analysis, technical analysis believes in the Efficient market theory and believes that
price is almost the true value of the stock and moves in a way which prices in all the fundamental and
economical factors, so, historical price movements can give the best ideas about what could be the
future price of the share. Technicians (sometimes called chartists) believe that market activity will
generate definitive patterns in price trends that can be used to forecast the direction and magnitude of
stock price movements in near future.
So, for technical analysis two things that make or break a trade are Price action and Volume action. As
they believe all other factors like industry dynamics, economic situation is priced into the stock.
There are three essential elements in understanding price behavior:

The history of past prices provides indications of the underlying trend and its direction.
The volume of trading that accompanies price movements provides important inputs on the
underlying strength of the trend ( Read momentum)
The time span over which price and volume are observed factors in the impact of long term
factors that influence prices over a period of time.
History:
The term "technical analysis" is a complicated sounding name for a very basic approach to investing.
Simply put, technical analysis is the study of prices and volume, with charts being the primary tool. The
roots of modern-day technical analysis stem from the Dow Theory developed around 1900 by Charles
Dow. Stemming either directly or indirectly from the Dow Theory, these roots include such principles
as the trending nature of prices, discounting all known information, confirmation and divergence,
volume mirroring changes in price, and support/resistance. And of course, the widely followed Dow
Jones Industrial Average is a direct offspring of the Dow Theory. Charles Dow's contribution to modern
day technical analysis cannot be understated. His focus on the basics of security price movement gave
rise to a completely new method of analyzing the markets.
There are some important terminologies in technical analysis on which basic technical study has been
conducted. Lets have a look at some terminologies.
Technical analysis is based almost entirely on the analysis of price and volume. The fields which define
securitys price and volume are explained below.
Open - This is the price of the first trade for the period (e.g., the first trade of the day). When analyzing
daily data, the Open is especially important as it is the consensus price after all interested parties were
able to "sleep on it."
High - This is the highest price that the security traded during the period. It is the point at which there
were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High
represents the highest price buyers were willing to pay)
Low - This is the lowest price that the security traded during the period. It is the point at which there
were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low
represents the lowest price sellers were willing to accept).
Close - This is the last price that the security traded during the period. Due to its availability, the Close
is the most often used price for analysis. The relationship between the Open (the first price) and the
Close (the last price) are considered significant by most technicians. This relationship is emphasized in
candlestick charts and other charting methods.
Volume - This is the number of shares (or contracts) that were traded during the period. The
relationship between prices and volume (e.g., increasing prices accompanied with increasing volume) is
important.
Open Interest - This is the total number of outstanding contracts (i.e., those that have not been
exercised, closed, or expired) of a future or option. Open interest is often used as an indicator to
understand whether big moves are coming in market.
Bid - This is the price a market participant is willing to pay for a security (i.e., the price you will receive
if you sell).
Ask - This is the price a market maker is participant to accept (i.e., the price you will have to pay to buy
the security).
These simple fields are used to create literally hundreds of technical tools that study price volume
relationships, trends, patterns, etc.
There are many other important parameters like support (floor), resistance (ceiling) on which targets is
been determined. Technical analysis converts the price and volume data into charts that represent the
stock price movements over a period of time. Some of the charts used include line charts, bar charts,
candlestick chart. The patterns thrown up by the charts are used to identify trends, reversal of trends
and triggers for buying or selling a stock. Typically, chartists use moving average of the price of the
stock to reduce the impact of day to day fluctuations in prices that may make it difficult to identify the
trend.
Unlike fundamental analysis, technical analysis is not concerned if the stock is trading at a fair price
relative to its intrinsic value. It limits itself to the future movements in prices as indicated by the
historic data. It is used for short-term term trading activities and not necessarily long-term investing.
Behavioral finance
Behavioral finance is a relatively new field that seeks to combine behavioral and psychological theory
with conventional economics and finance to provide explanations for why people make irrational
financial decisions. This is an attempt to identify the behavioral constraints and bias that lead investors
to make wrong decisions. Remember, investment is a rational process which shouldnt have any kind of
factor influencing ones decision other than planned strategy. This study tries to find these all factors
and try to identify the solutions for the same. It is more of a philosophy wrapped with investment
decision making. (We will study in detail in further chapters).
Some Concepts of Economics Related to

Investments
Economic analysis
Economics is the study of how people make choices under conditions of scarcity or abundance and the
impact of those choices for people at an individual level and broadly to society at macro level.
Economic analysis of human behavior begins with the assumption that people are rational - they have
well defined goals and try to achieve them as best they can. In trying to achieve their goals, people
normally face trade-offs: resources both material and human are limited and making one choice would
generally mean letting go of something else. It requires prioritization of needs and wants and
allocation of limited resources to the desired goals.
Micro-economics:
Microeconomics is the social science that studies the implications of individual human action,
specifically about how those decisions affect the utilization and distribution of limited resources that
they have at their disposal.
Microeconomics shows how and why different goods have different values, how individuals make
more efficient or more productive decisions, and how individuals best coordinate and cooperate with
one another.
The philosophy of Microeconomics believes that prices and production levels of goods and services in
an economy are driven by consumer demand. Accordingly, Microeconomics focuses on the drivers of
decision making, as well as the ways in which individuals decisions affect the overall supply and
demand and supply of particular goods and services, in an economy, and in turn their prices. E.g.
Indians consume more Rice, U.S consumes more Wheat. So price of both the commodities would be
different depending on consumption patterns and production capacity of the two countries.
The importance and uses of microeconomics in brief are as under:

Microeconomics deals with the understanding and working of a free market economy.
Microeconomics helps us understand how the prices of the products and services get
determined in an economy, how individuals and firm behave with regard to those prices and
how goods and services in an economy are distributed among its various participants.
Microeconomics does not try to explain what should happen in a market. Instead, microeconomics
only explains what to expect if certain conditions change. If a manufacturer raises the prices of cars,
microeconomics says consumers will tend to buy fewer than before. If a major copper mine collapses,
the price of copper will tend to increase, because supply is restricted and benefit the mines that are
still in working condition. The same situation can be found now in Indian chemical manufacturers, as
they face industrial tailwind due to large chemical plants shut down in China.
Microeconomics could help an investor to see why price of Airlines stock might fall if recession hits the
economy. Microeconomics could also explain why Infosys removes 3000 employees if it loses a big
client like RBS.
Macro-economics:
Macroeconomics is a branch of the Economics field that studies how the aggregate economy behaves.
In macroeconomics, a variety of economy-wide phenomena is thoroughly examined such
as, inflation, price levels, rate of growth, national income, gross domestic product and changes in
unemployment. It focuses on trends in the economy and how the economy moves as a whole. It helps
us give an idea about the economic scenario at country level.
Macroeconomics understands the relation of macro factors we have seen above and analyze how
different sectors relate to each other and how they function on a macro level. Macroeconomists
develop models explaining relationships between a variety of factors such as consumption, inflation,
savings, investments, and finance, national income and output. These macroeconomic parameters help
government to decide the economic policy. It also helps to compare one economy with other on a
similar parameters like per capita GDP, Inflation rate, Growth etc. Late John Maynard Keynes laid great
emphasis on macroeconomic analysis. His work, captured in the book - General Theory of
Employment, Interest and Money, is quite revolutionary and brought drastic changes in economic
thinking.
Macroeconomics helps us understand the general state of the economy

Production, Domestic Consumption, General Price levels, Growth, Quality of life etc.
Macroeconomics helps us understand drivers of income, savings, investments and employment
in an economy.
Macroeconomic models help governments and central bankers formulate economic policies for
achieving long run economic growth with stability.
Macroeconomics helps us understand various aspects of international trade of goods and
services - exports, imports, balance of payment, exchange rate dynamics etc.
Macroeconomics also facilitates understanding on how inter-linkages across the economies
work.
As we have already seen macro economic analysis helps government and the central bank RBI to
determine the fiscal and monitory related decisions now we will try to understand what all macro-
economic factors helps with these decisions.
The government and central banker, in any economy, as policy makers strive to promote economic
stability and growth. Their continuous attempt is to implement policies, which ensure low
unemployment rate, price stability with low inflation rate and steady growth in economic outputs.
However, in spite of the best intentions and efforts of policy makers, economies go through the cycles
of booms and busts.
Example: There are multiple variables that influence an outcome and it may not be possible to control
all of them. For example, RBIs attempt to tame the high inflation in India in 2011, 2012 and 2013 by
increasing interest rates, which is the standard policy action to reduce inflation, did not get the desired
results because food prices remained high. Policy makers, in different countries, may take different
routes to arrive at the same common goal, depending upon the economic conditions prevalent there.
Japan reduced interest rate to 1% in 1990 to poise growth which lead them to great real estate
bubble and country is in state of deflationary stage since last 20 years which is famously referred as
LOST DECADES ( You can read about it https://en.wikipedia.org/wiki/Lost_Decade_(Japan) )
Introduction to Various Macroeconomic Variables
1. National income: As name suggest it is the income generated across country within a year. It is
calculated as a various measures like Gross domestic product and Gross national product.
GNI: Gross national income (GNI) is defined as the sum of value added by all producers who are
residents in a nation, plus any product taxes (minus subsidies) not included in output, plus
income received from abroad such as employee compensation and property income. GNI
measures income received by a country both domestically and from overseas.
GDP: Gross domestic product (GDP) is the monitory value of all the finished goods and services
produced within a country's borders in a specific time period. GDP includes all private and
public consumption, government outlays, investments and exports minus imports that occur
within a defined territory.
Now we will look at the methods to calculate national income. Basically there are 3 measures to
calculate NI. 1. Product method 2. Income method 3. Expenditure method.
(These dont have direct linkage to your investment decisions, but these are good to know facts, which
will make you a better investment thinker for sure. Also, these will help you to decode all the jargons
that typical analysts love to use. These are important to know and keep at the back of mind.)
Product method:
In this method, national income is measured as a flow of goods and services. We calculate money value
of all final goods and services produced in an economy during a year including all sectors mainly
bifurcated into agriculture, industry and services. Final goods refer to those goods which are directly
consumed and not used in further production process. I.e. if we have calculated grains of wheat, we
wont reconsider it in calculation for wheat or any ready product.
Income method:
Under this method income is calculated as an aggregated income of individuals in the economy. There
are 4 main category including Land, labour, capital and entrepreneurship, and all receives
compensation in one and other forms like profit, wages, interest etc. Sum of all these is national
income.
Expenditure method:
As all the goods and services produced in an economy are bought (consumed) by someone, National
Income may also be calculated from the consumption end. Expenditure method attempts to undertake
the same philosophy while computing the National Income. Consumers in an economy are broadly
divided into three categories individuals, Corporate and government.
Further, as an economy would also have exports (people of foreign countries spending on goods and
services produced by an economy) and imports (people of an economy spending on goods and services
produced by other economies), necessary adjustments are made for the same by the economist while
arriving at the National Income through this method. The aggregate demand for goods and services is
computed as the sum of private consumption, government spending, gross capital formation and net
exports.
Relevance of national income
It indicates performance of the economy signifying economys strength and weaknesses.

It helps to find out structural changes in the economy For instance, in India, proportional share
of primary (agricultural) sector in national income is declining whereas those of secondary
(industrial) sector and tertiary (services) sector are rising.
It reflects how national income is shared among various factors of production. In this context, it
is especially helpful to trade unions in making rational analysis of remuneration that the labour
is getting.
It helps in making comparison among nations in respect of national income and per capita
income which lead us to make suitable changes in plans and approaches to achieve economic
development.
National income statistical data reflect the specific contribution of individual sectors and their
growth over time.
2. Savings and investments
Savings, is defined as income over and above expenses, and are computed for three categories
separately. Savings of individuals is called personal savings, savings of corporate (undistributed
profits) is called corporate savings and savings of government is called public savings (rarely there;
governments generally run deficits). Individuals and corporate entities may be clubbed together as
private savings. Economists arrive at National Saving by summing savings of these three constituents -
personal, corporate and public savings.
It is also important to understand that savings does not mean investment. Savings needs to be
channelized towards productive venues called investments given to corporate or government to
invest to generate further earnings. When savings are turned into investments, they take the shape of
some financial instrument Equity, Bonds, Government Securities and others to transfer the funds
from the savers to users (issuers of securities) who are expected to employ these savings to productive
activities. Government and Central Bankers continuously focus on facilitating the conversion of savings
into investments through creation of efficient and effective Financial Markets wide range of
products, ease of conversion, simplicity in transactions, safety in dealing, low cost and transparency in
operations.
3. Inflation
In 1990 a family was able to manage in 15000 Rs a month. Today, in 2016 even 45000 rs are not
enough. Why this happens? There are two aspects of it which are quite interrelated. First money has
depreciated in value. i.e same amount of money is not able to buy the same goods as it used to be
before 20 years. Second, Prices of the goods has increased of all the goods and services. So this
increase in prices is called INFLATION.
The bookish definition for inflation would be Inflation is the rate at which the general level of prices
for goods and services is rising and, consequently, the purchasing power of currency is falling. Central
banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.
Inflation is an important parameter for growing economy. In fact for growing economy like India
inflation is part and parcel of growth process. Dont think inflation as a negative aspect always,
inflation is a parameter which shows country is growing and demand and supply of goods are leading
towards value addition in the economy. In fact it signals the growth in consumption and hence broadly
in economy. GDP growth calculated with in inflation consideration is known as Nominal GDP growth
and without inflation its known as Real GDP growth.
Inflation can be caused by demand pull factors or cost push factors. An increase in the price of goods
and services because demand being in excess of available supply, is called demand pull inflation. An
increase in prices because of an increase in input costs is called cost-push inflation.
To defuse the inflation, policy makers adopt several measures to reduce the demand or increase the
supply or both.
Generally, inflation is measured in two ways - at wholesale level in terms of Wholesale Price Index
(WPI) and retail level in terms of Consumer Price Index (CPI). Typically, economists define a basket of
products based on general consumption in the economy and compute its prices based on wholesale
prices and retail prices defining WPI and CPI respectively. Statistics on WPI and CPI over several years
provides trend in inflation numbers and feeds as important input for policy measures by both
government and central banker.
Further, interest and inflation are closely linked parameters. Higher inflation demands higher interest
rates for people to get motivated to save. As they save more and consume less, consumption goes
down. On the other hand, higher rates reduce the investments (high cost of capital) and may slow
down the overall economy. Higher rates affect some sectors such as real estate and auto more
intensely as of most the buying here by the middle class people happens through loans, which become
expensive in higher rates scenario. Higher inflation reduces the discretionary income that people have
and impacts their demand for products and services across the board.
4. Unemployment rate
It shows the number of jobless eligible people who are not willingly unemployed. Lets see in India we
have working age of 18 to 58 so people that are capable and wanted to have a job but not working
currently is considered as unemployed. This number shows how efficiently government able to manage
the workforce. It is an important factor for developed economy. Many economical and financial
decisions are taken after considering this numbers. E.G in US rate has not been hiked since 2008 the
main reason behind holding it is unemployment numbers which are higher than threshold.
P.S: Willingly unemployed people are not considered under unemployment tag.
5. Inflows from FII and FDI
Foreign institutional investors and foreign direct investment lets first understand the terms. FII are
foreign investors who invest in off shore markets in equity and bond markets to have an exposure of
international equity. (Generally these investors are from developed nations and invest in developing
nations to have an exposure for high growth). We have already covered this topic before in market
participants please refer.
A foreign direct investment is an investment in the form of a controlling ownership in a
business enterprise in one country by an entity based in another country. It is thus
distinguished from FPI by a notion of direct control. They have fix long term capital
expenditure in the country. Unlike FII they tend to have longer investment periods in the
country. They choose relevant business models to enter in the country and sell their
product and services. They establish proper business structure, hire employees, pay taxes
as per Indian companies just their ownership is foreign. If company has established business
since long time it may issue equity in the country to raise fund and continue business
expansions.
These types of investment are very helpful for the country for organic growth as they bring
technological advancement to the country and improve the living standard of the company.
Government introduces many offers to attract this type of FDI investment. Recently Mr. Modi is
heavily focusing on this to bring growth to the country. Some advantages these companies enjoy
are low corporate tax and individual income tax rates tax holidays, other types of tax concessions,
preferential tariffs, special economic zones, EPZ Export processing zones investment financial
subsidies, free land or land subsidies, relocation & expatriation, infrastructure subsidies R&D
support.
Ways for FDI to enter into business in other countries.
by incorporating a wholly owned subsidiary or company anywhere

by acquiring shares in an associated enterprise
through a merger or an acquisition of an unrelated enterprise
participating in an equity joint venture with another investor or enterprise
6. Fiscal Policies and their Impact on Economy
P.S. (Please focus its important topic to understand)
Country also has balance sheet and profit and loss account just like a normal company which is
basically divided into 2 parts capital account and current account. Capital account accounts for how
much foreign capital inflow or outflow is happening in the country, while current account accounts for
trade deficit or surplus of the country.
Both capital and current has to balance, but if it doesnt happen company | country has to manage it
through its investments. (Countries like India generally is considered as import oriented economy so it
has deficit in its current account but it has huge surplus when it comes to capital account as it receive
high amount of FII money. While china which is export oriented country has current account surplus
they face issue with capital account)
That is the reason our government try to control our currency fall and china try to devalue it as it will
be beneficial for their exports.
Now lets understand the process.

Budgeted excess of Governments expenditure over its revenues in a specific year is known as fiscal
deficit, which is generally defined as a percentage of GDP. The fiscal deficit is bridged by the
government through market borrowings, both short-term and long term. A large fiscal deficit, and
consequently a higher borrowing by the government, will push up interest rates in the economy and
make it difficult for corporate borrowers to access funds. A high interest rate environment is
detrimental to economic growth.
A country has trade and other contracts with entities abroad which results in receipts and payment of
funds. These include payments for imports and receipts for exports, interest and dividend received and
paid and other transfers from abroad. The current account balance is the difference between the
receipts and the payments. A country may have a current account surplus (receipts > payments) or
deficit (receipts<payments). A high fiscal deficit in proportion to the GDP caused by lack of
competitiveness in trade or excessive consumption is a negative commentary on the economy. A high
CAD (Current Account Deficit) causes the nations currency to weaken relative to other currency.
This makes imports more expensive and will affect the productivity of the economy as capital goods
and commodities become expensive. It reduces the credit worthiness of the nation and makes
borrowings more expensive. A depreciating currency makes exports of the nation more competitive
and may help narrow the deficit. If the country is seen as an attractive investment destination, the
capital inflows in the form of FDI and FII inflows will offset the CAD and protect the currency from
devaluation.
Expenditure is funded by the Government through multiple ways, mainly through:
P/L measures - Income from operations: Taxation, interest and dividend income
B/S measures - Borrowing and Sale of assets
While Government tries to balance between its inflows and outflows, based on its actions, fiscal
policy is being categorized as:
Neutral fiscal policy When governments income and expenditure are in equilibrium. No major
changes required in the Fiscal policies.
Expansionary fiscal policy Fiscal measures when governments spending exceeds its income.
This policy stance is usually undertaken during recessions/slow moving economy.
Contractionary fiscal policy Fiscal measures when governments spending is lower than its income.
Government uses excess income to repay its debts/obligations or acquire assets.
7. General Anti-Avoidance Rules (GAAR)
Entities in an economy adopt various methods to reduce their tax liabilities and the same may be
categorized as: "Tax Evasion", "Tax avoidance", "Tax Mitigation" or even "Tax Planning". General
Anti-Avoidance Rules (GAAR) are framed to minimize tax avoidance. Simple example of tax avoidance
is routing of investments by investors through tax havens such as Mauritius. In India GAAR is applicable
since April, 2015. Investments made before 30, August 2010 are not to be covered under the rules and
investments made under an FII structure in listed securities will not be covered. GAAR will not apply if
the tax benefit is below Rs. 30 million.
General Anti-Avoidance Rules empower the revenue authorities in a country to deny the tax benefits
to the entities on a transaction, which is primarily carried out in a specific manner to avoid taxes. GAAR
provides discretionary powers to revenue authorities to impose taxes on such transactions. Though
market do not like it, but this is beneficial for the nation in long run.
8. Monetary Policies and their Impact on Economy
Monetary policy is the process by which the monetary authority of a country controls the supply of
money, often targeting an inflation rate or interest rate to ensure price stability and general trust in
the currency.
Decision authority: Governor of Reserve bank of India

Monetary policy is maintained through actions such as modifying the interest rate, buying or selling
government bonds (open market operations), and changing the amount of money banks are required
(CRR rate and SLR ratio) to keep in the vault (bank reserves). Monetary policy, similar to Fiscal policy, is
referred to as either being expansionary or Contractionary depending on policy stance.
Expansionary monetary policy issued to push the economy up by increasing the money supply steeply
and reduction in the interest rates (When people talk about liquidity push, they are refereeing to this
phenomenon). On the other hand, Contractionary policy is intended to cool down the heated up
economy through reduction in the money supply or slow increase in money supply and increase in the
interest rates. (When people talk about liquidity crunch, they are refereeing to this phenomenon)!
Central banker controls the money supply and interest rates with tools such as Repo rate (rate at
which the central bank lends money to commercial banks), Reverse repo rate (rate at which the
central bank borrows money from commercial banks), Cash Reserve Ratio (minimum percentage of
the total deposits, which commercial banks have to hold as cash reserves with the central bank) and
Statutory liquidity ratio (SLR) (minimum percentage of the total deposits, which commercial banks
have to hold in cash equivalents such as gold and government of India securities).
There is no sure shot formula to handle economic issues such as slowing down in growth, inflation,
exchange rate management and others. Given the variations in the composition of the
GDP, growth rate, demographic features of different economies, and the same policy action may have
different outcomes in different economies. Moreover, a policy action taken to correct one economic
problem may have unintended consequences and create a fresh probe. For example, stimulating a
stagnant economy by increasing money supply, increasing spending and/or lowering taxes runs the risk
of causing inflation to rise. On the other hand, when economy is heated up, it may need fiscal measures
to slowdown. In such a situation, a government can increase taxes to suck money out of the economy
or decrease in its spending thereby decreasing the money in circulation. However, possible negative
effects of such a policy in the long run could be a slow moving economy and high unemployment levels.
E.G. India is fighting to curb inflation and Japanese economy is facing issue of deflation since last 20
years. They are trying to make people use money and bring growth to the economy. They are into
condition where easy money has brought them to the stage that there are no options to get in positive
growth or even maintain the current deflation levels. Virtually they have run out of all the investment
options in their country. So they have to invest in other country and literally borrow growth. Thats
why they are trying to enter/help India with bullet train projects, which would in other case not
possible as their own country is over populated with infrastructure.
9. International Trade, Exchange Rate and Trade Deficit
International trade is the exchange of capital, goods, and services across international borders or
territories. Such trade represents a significant share of gross domestic product (GDP).
Exchange rate is the value of one currency for the purpose of conversion to another.
E.g. 66 rs - 1 USD. This is called exchange rate in terms of rupee for 1 dollar.
Trade deficit is deficit between export and import. If country is exporting goods worth of 100 and
importing worth 120 than it is called in 20 rs deficit. India has trade deficit due to high consumption of
gold and oil, while china is in trade surplus due to high export driven economy. Similarly, capital
account will be in surplus if inflows are more than outflows and in deficit if outflows are more than
inflows on capital account. Surplus and/or deficit on both current and capital accounts put together
makes it balance of payment ( BOP) number for a country.
If a country is running continuous deficit on current account, it would need surplus on capital account
to support that or deplete its foreign currency reserves. In both these situations, the country runs the
risk of losing confidence of market participants in the country as the currency of the country would
lose value very fast.
Currencies get traded in the world markets like commodities. Exchange rate refers to the value of one
unit of a currency with respect to other currency/currencies. For example, if Indian Rupee is quoted
against the dollar as $/Rs. 62, it means one dollar is priced at Rs. 62. Currencies can become more
expensive and/or lose their value vis a vis other currencies based on the relative strength of the
countries economy.
10. Globalization Positives and Negatives
Globalization is ability or permission to produce and sell goods and services outside the country. You
can consume American product in India and U.S can outsource IT services to India simply with low
barriers and great competitive advantages, it is called globalization. There are many positives and
negatives attached to it like it gives competitive advantage in low production cost but it kills local raw
material industry.
Positives of Globalization:
Best allocation of global resources as they are able to flow where they produce best and earn
best. ( American company investing in developing countries and backward countries)
Integration of developing economies with the developed world and opportunities for them to
learn and grow, access new products and services, exposure to new technologies etc. (Japan
investing in India for bullet train projects)
Benefits to end consumers through global competition, which encourages creativity and
innovation and keeps prices for goods and services under check. (telecom industry)
Greater access to foreign culture in the form of art, movies, music, food, clothing etc. In other
words, the world has more choices today. (Netflix coming to India)
Negative of Globalization:
Increasing divide between the rich and the poor - the rich are getting richer and the poor are
becoming poorer. (See the impact of capitalism in CHINA)
Competition results in survival of the fittest. As jobs can move to the most competitive
countries, countries with less competent talent may be left without opportunities. (IT industry
going to Malaysia and Philippines due to cheap labor.)
Integrated economies mean that problem in one part of the world would affect the other parts
of the world. For example, credit crisis in U.S. in 2008 created havoc across the world.
Thank you

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SHOW ME THE WAY Protected

INVESTMENT CONCEPTS AND SOME

SHOW ME THE WAY | R2R

Investment as a Concept and

Investment Analysis and Research

Warrant buffet, the wizard of stock market said about investment,

Difference between investing and speculating:

Aligning the investment needs:

Become a skilled investor or hire someone to manage money:

Fundamental analysis includes three major areas:

There are three essential elements in understanding price behavior:

Some Concepts of Economics Related to

The importance and uses of microeconomics in brief are as under:

Macroeconomics helps us understand the general state of the economy

Introduction to Various Macroeconomic Variables

Relevance of national income

It indicates performance of the economy signifying economys strength and weaknesses.

2. Savings and investments

5. Inflows from FII and FDI

Ways for FDI to enter into business in other countries.

by incorporating a wholly owned subsidiary or company anywhere

6. Fiscal Policies and their Impact on Economy

P.S. (Please focus its important topic to understand)

Now lets understand the process.

Expenditure is funded by the Government through multiple ways, mainly through:

7. General Anti-Avoidance Rules (GAAR)

8. Monetary Policies and their Impact on Economy

Decision authority: Governor of Reserve bank of India

9. International Trade, Exchange Rate and Trade Deficit

10. Globalization Positives and Negatives

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