 Hello. Hello. Hello. Good afternoon and welcome to this session in the course on financial literacy. I am very happy to welcome Rupali who is going to lead the discussions today. She is responsible for training on all financial products, markets and other aspects for the entire country for our company. We are very fortunate indeed to have her here with us so that you will get actually an industry perspective of the financial activities. She will be presenting a few major details and then she would be interacting with people selectively. Please don't forget to post your questions on chat sessions and of course during face to face interaction you are all familiar with this model and therefore I need not spend time in advising you on how to do that. Welcome once again and all the best for the session and thank you Rupali and welcome all yours. So very good afternoon. So a very good afternoon to all of you and at the outset let me appreciate all of you taking out time to invest in your own upskilling. So today we are going to talk about the entire financial system landscape and in speaking on that we are going to cover the various financial products, the market participants and the financial markets that operate and also do a quick recap in terms of how the overall landscape works and the various payment systems that form the lifeblood of the entire system. So by way of my introduction my name is Rupali Chimote and by qualification I am a chartered accountant and a CPA and I also am a certified IFRS Diploma Holder from ACCA London. I have a overall industry experience of close to 16 years in the accounting and finance domain and currently I am engaged with an organization called JP Morgan Chase. So the views that I am going to expressing in my session today are based on my overall professional experiences and have no connection or represent the views of the organization that I work with. So with that let us get started. So let me show you a quick glimpse of what we are going to accomplish out of today's discussion. So we are going to touch upon the overall financial system landscape. We are going to talk about the different kinds of financial products in detail. We are also going to talk about how the various financial markets operate. We are also going to speak about the various financial institutions, regulatory agencies and central bank who are all collectively called as market participants. And of course we are going to take questions in between so stay tuned. So let me move on to the next slide and before I explain you any further I would like to show you a quick video. So if you have seen that let us just do a quick recap. So basically financial system is any system that allows for exchange of funds between two or more parties. These parties could be investors, depositors, borrowers, lenders. The entire financial system in a country has got various components of which it is made of. Money being the foremost component because it acts as a medium of exchange, a store of value and a unit of account and that is the most accepted method of exchange for a transaction between two parties. Then you have the financial instruments which are also called financial products that offer to satisfy the financial needs of customers. Equities, bonds, fixed income products, derivatives, currencies and there are a whole host of those which we are going to cover in one of the subsequent slide. Financial institutions, predominantly banks, credit card companies, insurance companies, pension funds, mutual funds. These are people who get buyers and sellers together and offer financial products that are traded. Financial institutions, regulatory agencies and central banks are collectively known as market participants because they are the ones who kind of facilitate the trading that goes on in the marketplace. A financial system is crucial to the allocation of resources within various sectors in an economy and because of this complex networks, we make sure that funds are transferred from units where there is a surplus to units where there is a deficit or where people need funds to finance their personal or investing activities. So, if I were to compare the financial system, the financial system is like the human body and it is made up of various components and the existence of each component is critical to the efficient operation of the human body and if one of the system components were to fail, you can appreciate what kind of a catastrophic impact it could have on the entire system. Similarly, if one of these components fails in a financial system, the events could be catastrophic and it could lead to the collapse of an economy. In the next slide, we will now be talking about payment systems because they act as the lifeblood of transmitting funds from one party to the other. So, what are payment systems? Payment systems are systems that basically facilitate the transfer of money from one party who is technically called a payer to another party who is called a paying. It includes a complex set of institutions, instruments, people, rules, procedures, guidelines and the technologies that make such kind of an exchange possible. Payment systems can be both paper based mechanisms which is what we see when we deal in checks, drafts and letters of credit in case of import and export transactions or it could be paperless mechanisms that are electronic mechanisms like your RTGS which stands for Real Time Gross Settlement, NEFT, National Electronic Fund Transfer, ECS mechanisms, credit card payments, debit card payments and then wallets like PayPal, e-wallets, mobile enable wallets and the list goes on endlessly. Payment systems form a vital part of a country's financial system just like blood carries oxygen and nutrients to every cell in the body. Payment systems, I would draw similar analogy that help channelize payments from one end of the spectrum to the another. I would like to give a quick example here in terms of how the payment system actually operates. So, when we do transactions these days electronically everything happens in a GFI, but there is a behind the scene activity that goes on whenever a payment has to go from A place to B and I would like to demonstrate that with the help of an illustration. So, if you look at the slide, Amazon had this great Indian sale a few days back and as many of the users in the country would have shop even I shop and I bought a fitness band. So, and obviously I paid by way of plastic money which is my credit card. So, now let us take a look at how the payment has flown from my end to Amazon's end for the product that I purchased. So, here is the technology at its best. So, here we have Amazon which is the online somewhere in between. Let me abbreviate Amazon as A. So, here I have Amazon who is the merchant and here is where I am. Now, Amazon would have its own banking partner who is responsible for collecting payments on behalf of Amazon. This in finance terms is called a merchant acquirer or an acquirer simply. They are the ones who are going to acquire the payment from the paying in the name of Amazon. Obviously, I have used a credit card. So, I have a company or a bank credit card company or a bank who has issued the credit card to me they are called the issuer some technical glitch. So, please bear with us. So, this is the merchant acquirer here and I have the credit card with me which is issued by the issuer bank. Now, between me and Amazon there has to be some technology or infrastructure that is used to channelize the flow of money from me to Amazon and the shipment of goods from Amazon to me. This technology and infrastructure for a payment perspective is given by two players. One is called as the payment gateway. This is the entity which links the shopping cart of Amazon to the payment processing mechanism within the network. So, obviously, the other entity without much ado would be the payment processor. The payment processor is an entity who does all the heavy lifting of channelizing the funds through the entire network which means corresponding with the merchant acquirer bank and the issuer bank for movement of funds from one side to the other, sending a billing statement to the issuing bank in terms of the charge that has been incurred on the card and then finally moving the money from out of the issuing bank to the merchant acquiring bank through RBI's payment channels. Now, within the payment processor there are two activities that happen. One is the authentication and the other is the settlement. So, when you use your credit card if you use it online or if you use it at a terminal at a particular shop you would notice that some sort of an activity goes on. So, when you insert the card in the first place or put your card number on the e-payment system some processing happens. So, what is happening is the data on your card is being transmitted by the payment processor through the payment gateway to the bank who has issued the card to the issuer bank. The issuer bank will perform all validations from their side. Is it a valid customer? Is the customer having enough credit limit? Is the customer credit worthy of granting the credit? Is it a valid authentication by the customer? Is the customer KYC compliant? So, all these checks and balances will be performed by the issuing bank and a reverse message will be sent by the issuing bank to the payment processor saying that this particular transaction has been authenticated. Based on this the payment processor will in turn send a messaging to the merchant acquiring bank that the transaction has been authenticated and now they will collect funds from the issuing bank and give it to the merchant acquiring bank that process is called settlement. So, this is the structure through which online remittances and credit card payments are all those digital payments sort of happen. Merchant acquiring bank will collect the payment from the issuing bank through the payment processor and then Amazon will obviously ship the product to me with tie ups that they have with all the shipping agencies and courier agents. So, now in this whole spectrum obviously these participants would not do it all for free. There are costs involved at every stage of this transaction which is what all of us pay in the nature of your internet handling charges or payment processing charges or convenience fees or call it you know whatever. So, there are different fee structures that exist between each of these parties, but from a customer standpoint they are all bundled and put up as one charge which could be your internet handling or convenience fee or merchant authorizing charge or whatever and then each of the these players claim a share in that overall pie right. Just to give you some examples here of a payment gateway Amazon has got its own payment gateway called Amazon Pay and in terms of the payment providers they would be the ones whose logo is printed on the card that I use. So, if I used a HDFC bank card which had got a visa logo visa here would be the payment provider. The card issuing company here in this case would be HDFC and let us say Amazon has got a banking arrangement with ICICI as an example. So, ICICI would be the acquiring bank in such case. So, this is how you know the behind the scene activity happens whenever any digital transaction is initiated either at a point of sale terminal at a physical location in a store or online through your web enabled mechanism. We will now flip back to the slide. So, this was just to give you a quick snapshot of how the overall financial landscape operates and what importance do payment systems have in the entire scheme of things. And at this point in time I would like to take any questions if anyone has before we move further. So, we have IES College of Technology Bhopal. Yes, you have a question that you want to ask? IES College of Technology Bhopal. Hello, hello. Yeah, we can hear you. Hello, hello. Yeah, we could we can hear you go ahead. Hello. We are going to ok. So, we are going to Savitha Engineering College. Savitha. Anybody has a question? Hello, yes. Yeah, go ahead. Hello. Go ahead, go ahead. Good afternoon, ma'am. This is Murugan from Savitha Engineering College. Would like to know more about the authentication process which the merchant banker uses. The authentication process you are referring? Yes, yes, yes. So, I am sure all of us have used a credit card or a debit card or done an online transaction anywhere right. So, if you closely observe what happens when you provide your card number or you swipe the card at the terminal. So, what is happening is when you put the card inside the card terminal you will get a message saying initializing. What that means is the barcode magnet is strip on your card is read if it is a physical terminal and if you have put it on the net then the payment processor has captured the information on your card including the CVV details and then transmitted that to the card issuing bank via swift messaging via the messaging system which is approved by the RBI and then the details are checked against the database that the issuer bank has. All the checks and balances will be performed at that level including whether the customer is a valid customer of the bank is the credit card expired or live is the customer having sufficient credit limit to spend considering the past transactions he might have done should credit be advanced to the customer for the amount that he has requested for and then last but not the least they also do checks and balances on money laundering and related activities which you know RBI mandates them to do and then the message on the charge slip would come out to be authenticated which means your credit history you as a customer have been authenticated with the bank and then credit has been approved to you after which the words authenticated on that card machine would change to approved and a transaction slip would come out and now if you are doing this online there is an additional authentication process that RBI now mandates all e-commerce sites to put which is called the verified by an additional third party verification process so it is either through generating an OTP on your registered mobile number or you have set up pin with the card issuer which you enter as a second layer of authentication and once you do that again you see some dot dot dot dots moving on your screen which is what is the processing that is taking place behind the scenes and then the transaction completes with issuing you the movie ticket or the product bought confirmation or whatever item you bought at the shopping site so that is the whole authentication process and this authentication process behind the scene activity is carried out by the payment processors so whichever entity's logo is printed on your card if it is a Visa, it's a Visa, it's a MasterCard, MasterCard, Amex, PayPal, Roupay all of these entities does that answer your questions? thank you ma'am and I would like to know the contract is the contract between the business and the bank it's a contract between business people and the bank yes yes so all these merchants on or if it is a physical place pantaloons or shoppers stop or reliance mart or whoever would have a contract with their own banking partner and their banking partner in that case is called a acquiring bank because they acquire the transaction on behalf of the merchant thank you ma'am thank you we will go on to Ahilya Devi University Indore that's their one to ask in the first place this is Vincent Paloti Engineering College yes you have a question hello hello I want to know what are the objectives of this course and how will it be benefited ok so as of now for this session slightly out of syllabus question but you know in the interest of time what I could tell you is this course is going to equip you on the aspects of financial literacy so you would be soon transitioning from your college life into the corporate domain and then awareness of financial concepts is important for you to be good professionals in the corporate life so and you want to know more details log into IIT Bombay X and you have the entire objectives loaded on there in terms of how it will benefit you as a professional as well so I would strongly encourage you to go through that thank you ma'am so we will take one more question in the interest of covering the whole course and the ones who still have a question on so far what we have covered can post it on the blog and we will address that foreign exchange how does it work I want to know about foreign exchange how does it work foreign exchange ok hold on to your thought we are going to discuss in detail on foreign exchange as a product in the next half an hour or so I hope all your doubts on that will be answered then right ok so what we are going to do is in the interest of time we are going to move on with the next part of a session which is doing a deep dive into the various financial products so let me flip over to the so now it is essential to understand in the first place what does a financial product mean right so financial products are basically financial assets that can be traded right now what do we mean by a financial asset for a particular thing to qualify as a financial asset there are three criteria that need to be met the first one financial asset should be something that you own the second one financial asset should be something that has got a monetary value and third one the monetary value is derived from an underlying contract between two parties so if a particular item satisfies all these three conditions it is fit to be called as a financial asset the simplest example is a bank fixed deposit the money is something you own the fixed deposit has a attached monetary value and the fixed deposit is essentially a contract between you and your bank that the bank has to repay you back the fixed deposit after a specified point of time in maturity or if it is a savings bank account on demand so there is a contract underlying which specifies your rights and the bank's duties right another example here is of an insurance policy so you enter into a contract with an insurance company who will reimburse you for a claim that you put in case of an unforeseen event right so unlike physical assets which you can touch and feel like gold, house, land with financial assets what you can usually see is an underlying piece of paper or a digital certificate somewhere which actually represents the value of the asset right financial products actually offer you every other kind of financing right from saving to getting insurance to getting a loan or keeping a deposit they are issued by various banks, credit card companies, stock brokers, insurance companies, pension funds, mutual funds they offer different types of products to different types of customers for a variety of financial needs that may exist and we are now going to look in details in terms of all these products in our subsequent slide right so let us now jump on to looking at the broad spectrum of the financial products so what I have listed out here on this slide is the broad characteristics of the broad types of financial products that exist there are multitude of them apart from what I have listed here which are sophisticated complex ones but they essentially fall in the categories of any of these products right right from the simplest of the products which is your loans and deposits, stocks or shares and bonds to very complex sophisticated products like derivatives there are a variety of financial products that are traded in the financial markets to satisfy different types of financial needs that the consumers may have so let us now take a look at the first product which is loans and deposits so what is a loan simply put it is money that is lent by one party to another the party who is lending the money is called the lender the party who is borrowing the money is called the borrower and the underlying agreement is such that upon maturity of the loan throughout the lender has to the borrower has to pay interest to the lender as compensation for giving the money and at the end of the loan term the outstanding amount automatically gets recovered by way of recovery of principal and interest payments loans could be secured loans which mean they are backed by an underlying asset or a security which in financial terms is called a collateral so simplest example of this is your housing loan when you take a housing loan from the bank the bank actually puts a charge on your house which means if you fail to repay back the loan to the bank the bank can take possession of your house sell it off and recover the amount that they have loaned to you another example here is of car insurance or auto insurance right on the other hand you could also have unsecured loans wherein the bank will not have a charge on any underlying asset examples here are your student loans education loans or personal loans or travel loans there it is it is just based upon your credit worthiness as a customer and you satisfying the bank norms of granting credit otherwise nothing is kept as a security so these are called unsecured loans loans are usually time bound which means they are given out for a specific period of time 10 years 15 years 2 years 3 years based on the type of asset for which a loan is given but they can be open lines of credit also and this is very particularly evident in case of large MNCs or manufacturing companies who are borrowing for financing their working capital and production requirements so there will be a line of credit that is issued by the bank and depending upon your production levels or the stock or inventory that you hold at any point in time you can draw in extra money or repay back the money as your need may be the low amount which is advanced out is called the principal and the interest payment is something which is paid by the borrower to the lender as compensation for the loan. On the other hand deposit is keeping funds with the institution predominantly a bank or it could be an individual also for the purpose of safe keeping now these also earn you interest because cash has an incentive and cash has got what is called as an opportunity cost so if you are putting it idle it can be used somewhere else so the bank is going to compensate you for keeping cash with them with them that they are going to use for a variety of other requirements. It is important to remember here that in case of a deposit and deposit could take the nature of your savings bank account current account fixed deposit account the ownership of the deposit is with the depositor and it is usually repayable back by the bank based on the type of deposit that is placed so if it is a savings bank account or a current account it is payable back on demand whenever you ask bank has to pay you back if it is a time deposit it is usually for a fixed period of time so bank is obligated to pay that back to you upon maturity if you need money for some specific reason before maturity banks will not refuse you banks will still give you but they are going to charge you what is called as a prepayment penalty or a slightly penalty for early withdrawal it is called partial withdrawal. Again the amount which you are keeping within the bank is called a principle and bank will pay you interest which is income for you it is an expense for the bank. Banks and credit card companies typically are the major players in this space and borrowing and lending are the basic primary business of the bank and therefore I am going to take a step back and explain you how a banking model works and for that I am again going to use the whiteboard and show you a quick illustration. So here is a bank and what they do is borrow and they lend what are the various forms in which a bank can borrow obviously we spoke about deposits they are the biggest sources of borrowing for the bank and deposits could be in the form of your savings bank account, current accounts or fixed deposit accounts and you have a variety of combinations which are essentially a mix of either a savings or a fixed deposit account. Now if I were to take the India examples specifically savings bank would offer you an interest rate of around 3 to 4 percent. Current accounts are accounts which are basically used by businesses small medium size businesses they offer you the flexibility of maintaining zero balance but they do not pay you any interest. You can also overdraw if you do not have balance in that account in which case the bank is going to charge you interest rather than pay you and fixed deposit typically in India the range between 6 and 7 percent if you are a senior citizen you get 0.5 basis points higher but it is broadly in this spectrum the other source in which banks could borrow is what is called as inter bank borrowing. This in financial terms is also called overnight market or repo market then these transactions are called repurchase agreements in the US parlance these are called federal funds transactions these are offered at the interest rates which are prescribed by the central bank of the country. So, you may have heard terms like PLR, LIBOR and all of that these are rates which are applicable in the inter bank market. India perspective the rate at which one bank can borrow from other bank or from the central bank which is RBI is currently 5.75 percent. The third source in which a bank can borrow is by way of long term loans. So, these are loans which are typically 15 years, 20 years, 30 years which they could be taking from another MNC or institutions like the world bank international monetary funds so on and so forth and these are also somewhere in the range of around 8 to 9 percent higher cost slightly because the risk in world is higher. Now, on the other hand bank does lending and lending can be in various forms. We talked about a variety of loans, it could be a auto loan, it could be a home loan, it could be a credit card loan or a credit card outstanding as you would call it, it could be a loan against shares it could be a loan against property and it could be a loan against anything basically what you can hypothetical with the bank right. So, there are various forms and each have got different rates of interest which the bank is charging depending upon whether it is secured, unsecured and the kind of risk that is involved. On an average if I were to sum up it would roughly come to somewhere around 9 to 10 percent across all the asset, across all the loan classes right. Now, whatever surplus money the bank has after they give out all these loans from all these sources of money that they have received they will invest. Where they will invest? They will invest in the entire gamut of financial products that are offered in the market right. So, for a bank there is a department called treasury department and investment office or investment function as it is called these departments take charge of the investment activities after look taking a look at what are the daily borrowings and the daily landings right. This process happens on a daily basis and in banks this is called as asset liability management. So, I am basically managing my asset side which are my loans and my liability side which are my borrowings of all sorts and then I am covering myself for any risks that arise in this process by investing into various avenues right. This technically in financial terms is what is called as hedging right. Now, how income is generated here? So, obviously if I were to look at an average of all these rates it would come to somewhere around 6 odd percent and an average of rates here is your 10 percent. This is interest expense for the bank the bank has to pay this out to the people from whom it borrows and this is interest income the bank will earn from the people to whom it lands right. The difference between the two 4 percent is what is the money that the bank is making. This in banking terminology is what is called as net interest income or some banks call it as net interest margin or it is sometimes simply called as spread right. This whole model that we talked about assumes that there is always an underlying fund that the bank has access to which they deploy in their business and make money. So, money which is earned by this model is technically called as fund based income. Apart from this banks charge a variety of fees for value added services that they provide and fees could be as simple as your checkbook fees fees for demand drafts loan processing fees to more complex fee structures like asset management fees which are charged to high H&I individuals for managing their assets investment banking fees which are charged for acting as advisors in M&A process so on and so forth and there are a variety of them. These are all fees fee avenues from which the bank earns. So, these are called fee based incomes and a bank will always operate with a combination of both. So, the model predominantly comprises of fund based income plus your fee based income right. Now, at this point in time I also want to draw your reference to some of the commonly used terminologies within the banking sector specifically talking about things like leverage, CASA which is nothing but current account savings account it is abbreviated term for current account savings account and then how the bank is subject to liquidity requirements and what regulators prescribe so that a bank stays liquid right. So, there are two aspects to a bank's performance one is profitability and the other is liquidity right. As a bank when I will be profitable is when my spreads are higher based on the example when will my spreads be higher either the rates at which I lend to people are higher or the rates at which I borrow are lower right. Now, market competition and market forces will not allow me to raise my lending rates. So, a safer avenue for me is to look at my cost of funds which is the cost at which I borrow that 6 percent what we spoke in the example. And here is where CASA as a concept is of immense importance CASA stands for current account savings account and what it means is basically the proportion of my total deposits that are held in the form of current accounts and savings accounts because current account and savings account I pay a very low rate of interest. So, the more higher is my CASA the lower is my cost of deposits which is going to lead to increased profitability. And therefore, whenever a bank's performance is analyzed CASA ratios are heavily relied upon by the entire analyst community right. The other aspect to a bank's performance is liquidity. So, have you ever come across a bank using to pay a fixed deposit with you when it matures? Technically, though there have been cases in history when banks have imposed restrictions and if you are interested you can look up those banks which were in the news for doing that, but technically there is an underlying contract. So, the bank is not obligated to refuse to pay a deposit to you. So, how is it that they make sure that they always have the money with them when the deposits fall due. They do this internally through a series of mechanisms one of which I spoke about earlier which is called asset liability management. So, my investments on a daily basis will be evaluated and re-evaluated liquidated, reassessed, redone to make sure my assets are generating enough money to match my liabilities when they are falling due. This is internally from the bank side what they do to maintain the liquidity status. To protect the consumer's interest because all banks may not do that diligently there are penalties and fines if you do not do, but having said that it really depends upon the bank's internal management in terms of how they handle this aspect. But so from the regulator's side there are a slew of measures that are prescribed which banks have to compulsory comply with. And couple of concepts involved here are some reserves which the bank has to maintain with the central bank of the country. So, you may have heard terms called CRR and SLR. CRR stands for cash reserve ratio. In Indian context currently that is the amount of money the bank has to maintain with the RBI in the form of liquid cash. So, bank has to open an account with RBI and deposit cash which is equal to 4 percent of their deposits. And this is a daily limit. So, your deposit base may go on changing every day you have to evaluate and accordingly have to move money into the account or out of the account. The second requirement is around SLR which stands for statutory liquidity ratio. Currently it is 19 and a half percent of your deposits RBI mandates that banks will maintain that amount into government owned securities which the RBI prescribes. So, RBI will list down that these are the various types of government securities in which you have to compulsorily invest 19.5 percent of your total deposits. So, that makes it roughly 23-24 percent. Another important dimension here is something called as Basel guidelines which prescribe that the bank's capital which means the their own money apart from the deposits and the other borrowings that they have their own money which they are putting in the business in simplistic terms should be 8 percent of what is called as risk weighted assets. So, all the assets on the balance sheet will be evaluated on a daily basis to measure the amount of risk involved and the Basel guidelines have prescribed ratios in terms of what calculations to apply and you find out what is the risk associated with the assets 8 percent of that amount has to be maintained by the bank as its own capital. And one more thing which is prescribed by the regulatory bodies is what is called as deposit insurance. So, in India any deposit which is 1 lakh or more per depositor has to be compulsorily insured by the bank with the authority called DICG, Deposit Insurance and Credit Guarantee Corporation. So, that is the limit which is prescribed and it is per per depositor. Obviously, to some extent it will protect you, but if you have deposits of 25 lakhs and the bank goes for a run at best you will get 1 lakh. So, but that is the measure which is prescribed. So, using a variety of these measures the central bank of the country tries to put in place a system to make sure that banks do not fail. So, we slightly deviated on the loans and deposits topic, but it is very important to understand this aspect because this is how your major financial institutions which are the banks in the country are regulated. We will now move on to the next product which is stocks. So, stocks is basically a collective term used to describe ownership in any corporation. What we buy are shares of a corporation. All shares of the corporation put together represent the stock. When you buy the share of any company you become the fractional holder or a proportional share in the company's earnings and assets and therefore, stocks or shares are said to be equitable claims on the business itself. And that is the reason why fundamentally if you own the basic class of shares which is the common stock, you are entitled to vote in all business matters of the company including to appointment of directors and auditors. Common stock, there are two classes basically. Common stock and preference stock. Common stock also known as equity shares come with voting rights and they may or may not pay dividends and when the company goes into liquidation, the common stock or equity shares are the last to get paid after satisfying all external claims which the company has. On the other hand, preference stock or also known as preference shares or preference share capital do not come with voting rights, carry a slightly higher rate of dividend. They carry a preference in the receipt of dividend before it can be paid to your equity shareholders and in event of a liquidation of a company before equity shareholders can be paid out, preference shareholders get a preference in payments. There is also a hybrid form of shares called convertible preference shares which are basically preference shares that are issued to start with and after a specified period of time of you holding the shares, you basically get an option to convert the shares into a fixed number of equity shares. So, earlier you did not have voting rights and if you choose to convert, you will then have voting rights. Shares pay you dividend based on the performance of the company. Company may have a discretion whether or not to pay dividends based on their strategic priorities in a particular year. But if they decide to pay dividends, they have to pay the preference shareholders first because that is a fixed rate of dividend that they carry and then later on whatever remaining amount has to be paid to the equity shareholders. Capital appreciation refers to the profit that you make in case the share price appreciates in the near future. So, let us say today you buy a share of Tata Motors. Today it is trading at 214 bucks and let us say you hold it for a period of 6 months and at the end of 6 months it is trading at 250 rupees. You have made a profit of 36 rupees on that share. You will not realize that profit until you sell it. So, technically this is called as notional profit or unrealized profit in accounting terms. If you happen to sell it, you will realize that profit. Buying and selling of stock takes place through 2-3 avenues. The most common and popular is through the stock exchange where the exchange acts as a central counterparty to both the buy and the sell side. So, you have prices that the stock exchange will match for every quote that you put on the exchange. You can only trade on the stock exchange if you are a member of the stock exchange and memberships of stock exchange are not cheap. They are very costly and they are basically given to institutions and corporates because you need to have a certain amount of net worth, market capitalization and certain other regulatory aspects in place before you can be onboarded as a member of stock exchange. So, the intelligent question is how do people like all of us invest? We invest in the stock exchange through somebody who is already a member of the stock exchange. So, most banks whom we deal with are all members of the stock exchange. So, we invest through them. They are acting as our broker to sell or buy shares on our behalf for which we will be paying them brokerage. This is the most common way a share or stock gets traded. There are other ways house shares and stock are bought or sold. One of the other ways is through what is called as initial public offer. So, that is when a company decides to go public for the first time which means offer shares to amjanta. At the outset it is only offered to the promoters and then later on the company decides to offer it to the broader public which is when they would engage with a bank or a middleman and this bank or middleman is what is known as an investment bank who will basically do all the work to list the shares on the stock exchange, collect subscriptions from people and then make the stock public. So, that is the second way you could buy or sell stock. The third way that you could buy or sell stock is what is called as private placement. So, in private placement what happens is the corporation identifies a middleman party most commonly an investment bank who buys out the entire stock from the corporation and then they are already members of the stock exchange. So, they later on upload the entire stock offering on the stock exchange by acting as a buyer or a seller party through the exchange mechanism. And last but not the least on stocks the share price determination fluctuation is simply a equation of demand and supply and this in economic terms is what is called as efficient market hypothesis. So, what this means is if the demand for a particular share or a security is high as compared to the supply of that security on the exchange the price will be higher and vice versa. And contradictory to this there is also something called as greater fools theory and I do not know how many of you have heard about this, but there is something called as greater fools theory which says that people at times make irrational decisions based on how they perceive the market to be. So, in a market place there are always two sets of sentiments going on one set of people is pessimistic they feel things will appreciate in the future one set of people is optimistic saying it things I spoke the other way around one set of people are optimistic they feel things will appreciate in future the other set of people are pessimistic they feel things will go down for the worse in future and based on these emotions which people carry in investors make irrational decisions of buy and sell. So, while normally the market pattern would follow a normal distribution curve because of the greater fools theory sometimes there could be irrational behaviors in the market which is what causes the share price to fluctuate. So, now we will go on to bonds now bonds are a debt security they are exactly similar in shape and form to a fixed deposit the only difference is that a fixed deposit is not traded bonds are traded again the ways they are traded could be the various ways we talked about how a share is traded it could be traded on the stock exchange it could be done by a private placement it could be done by a new issues or flotations of bonds where people actually bid for bonds and acquire it. Bonds are favorite instruments that are used by large corporations banks brokerage houses and government and municipal corporations and entities to finance their business needs. So, corporation may want to look at financing for their business requirements a government or a municipality or a corporation may want to have funds for financing the social and infrastructure projects that they run or a government could have deficit financing and they are looking at raising money by issuing bonds. To name a few examples in the Indian context privately private company issuing bonds could be the likes of L and T infrastructure bonds that are issued or real estate bonds that are issued or corporations like your road transport agencies which issue bonds that finance construction of highways metro project is launched and this public expenditure involves a government may roll out a bond offering which is available for subscription to the public that will raise finances for financing this infrastructure project. So, the person who issues the bonds is called a bond issuer the bond is issued for a specific period of time and has a end date where the bond proceeds have to be redeemed back by the issuer to the investor that date is called the maturity date. The amount on which the bond pays interest which is also known in technical bond terms as coupons is called the principal value or the notional or the face value. This is the amount which is used for the calculation of the coupons when a bond is issued it could be issued at face value it could be issued at a discount to the face value it could be issued at a premium to the face value at what price it is issued really depends upon the prevailing market conditions and the economics of demand and supply again. Bonds are issued through two processes primarily one is the underwriting process which is what we spoke about when we spoke about the IPO process in shares and the other way bonds are issued is via an auction process. This is a process which is most popular for issue of government bonds. So, government will auction the bonds and bids will be invited from members of the public and the private both who will bid for those bonds and they will get the bonds at the highest bids that they are quoting. Then we spoke about maturity coupons yields. So, this is a bond terminology again. So, what is a yield? Yield is basically the return that you would get on a bond. So, bond pays and a yield is different from a coupon. So, coupon is the interest payment which happens on a bond. Most bonds pay coupon either on a semi annual or annual basis. Most bonds in India pay on a semi annual basis. Bonds in the US typically pay annual coupons. Bonds in Europe also pay semi annual coupons. Yields is a concept which calculates the rate of return on a bond. So, let us say the bond has got a face value of 100 and it pays a coupon of 8 percent. So, what is the amount of interest that will be paid? It will be 8 rupees and let us say two months down the line or on the coupon payment date, the bond is trading in the market at 102. Again as a factor of demand and supply which influences the price. So, what has been the return on your bond? It is the coupon that you received 8 divided by the market price of the bond which is 102. So, the more the market price, coupon will remain fixed. So, the more the market price of the bond, the more will be the denominator, the lesser will be your numerator and vice versa. So, bond yields and price follow a inverse relationship. When it comes to the market price, market price is again a factor of demand and supply, but in bond terminology there are two specific concepts which you should know. One is called a clean price and the other is called a dirty price. So, what is a clean price and a dirty price? The price at which the bond is coating in the market could be a clean price or could be a dirty price depending upon the type of nomenclature used in different countries. So, what happens on a bond is let us say I purchase a bond on 1st of January. Again face value is 100 and it is paying a 8 percent coupon which is semi annual. So, on 30th of June, I am entitled to receiving a coupon of 4 rupees. 8 percent is the annual for 6 months it will be 4 rupees. What happens if I were to sell this bond on 1st of March? I will not get pro-rata coupons because from a bonds perspective, the person who holds the packet in hand on the date the payment falls due receives the money. So, let us say somebody else purchase the bond from me and the coupon is payable on 30th June, the coupon will be paid out in the name of that person. Now, that person is not going to give to me in every good fit because 1st of all I do not know whom it has gone through, they are electronically traded. So, when I am selling it off in the 1st place, I will quote a price which is the current price of the bond plus the accrued interest which I would have received if I would have held the bond in the 1st place. So, interest for those 3 months which I am losing out, I am going to quote or include in the pricing of the bond that is the dirty price. If I sell it out without including the accrued interest on the bond, it is called as the clean price. Another important thing to note in terms of bonds is the credit quality. So, credit quality essentially is reflected in the probability that a bond will be repaired on a specific date. So, the person who is issued the bond or the entity who is issued the bond will be credit rated by the different credit rating agencies based on various parameters, the interest rates in the economy, the credit worthiness of the issuing entity and all bonds carry a credit rating by the respective credit rating authority. Bonds at times could also come with some options. There are two types of options here which can be issued when some bonds are issued. The two options are call options and put options. So, you could have something which is called as a callable bond or a puttable bond. So, callable bond basically gives the issuer of the bond to the right to call back the bond or redeem the bond on an early maturity. Before maturity they can call back and redeem it at par or at a premium. So, incidentally I can give you an example here. I used to hold some bonds of L and D infrastructure which were issued in 2010 that had a callable option in 2017. So, 2017 actually L and D reached out to the bond holder to say that current market price is X and we are willing to buy back the bond from you at a premium. So, those who want to exercise can exercise the option. So, that is a callable option in a bond. The other option is a puttable option which means here the person holding the bond. So, I as an investor have a option to demand the issuer to redeem the bond to me before maturity. Last but not the least what are indentures and covenants? Indenture is a formal agreement which is documented between the bond issuer and the bond holder and it list out all the conditions around the bond issue and covenants are the various clauses in these agreement which actually list out the rights of bond holders and the duties of the bond issuers. So, it is a formal legally documented contract based on which a bond is issued. To sum it up if I look at the bond characteristics you could have different classifications of the bonds. So, the first classification could be based on the issuer. So, if it is a corporate bond or a municipality in India we do not have municipal bonds, but they are very popular form in the US they are called munis and if it is a government a domestic government issuing a bond based on the maturity period of the bond they could be bucketed as treasury bills, maturity is less than one year, treasury notes, maturity is between 1 to 10 years and simply government bonds if it is maturity of 10 years or plus. If an international bond offering is happening we could have again various categories the first one is a euro bond. Euro bond stands for a US dollar denominated bond which is issued by a non US entity outside the US. A foreign bond is a bond issued in foreign currency so it is like a US dollar denominated bond issued by a non US entity in the US. Similar more examples could be Yankee bonds these are again US dollar denominated bonds issued by a non US entity in the US or an Indian example could be what is called as Masala bonds. So, these are Indian rupee denominated bonds issued by a non Indian entity in India. So, these are called Masala bonds and then I could also have global bonds which are bonds issued in different currencies at the same time by a single bond issuer. Based on priority of redemption payments in the event of liquidation of the bond issuing company I could have junior or subordinated bonds which carry a lower preference of repayment when it comes to liquidation of a company and unsubordinate bonds which are called senior bonds which carry a higher preference when it comes to liquidation of a company. Most of the asset backed securities and mortgage backed securities which are issued in the market are examples of subordinated debt because they are based on underlying mortgages that are not a grade at times. Based on the coupon rate two three classifications are there the first one is called fixed income floater in which the coupon rate varies in relation to the benchmark rate. So, for example a bond pays 50 basis points plus the PLR rate or 50 basis points plus the LIBOR rate. So, as LIBOR moves the interest coupons also move we could also have a inverse floater which means as LIBOR moves the coupon reduces and we could also have zero coupon bonds which are actually bonds issued at a deep discount to the face value, but they are redeemed at par value on maturity. So, these do not pay any coupons they offer low yields, but they are still an attractive option for many institutional investors because of the ability to lock in yields especially in falling market prices. And then on the options redemption options we already spoke about callable and puttable bonds and convertible bonds are bonds which can be converted into equity shares at a future date alright. So, then we will move on to foreign exchange. So, foreign exchange basically refers to exchange of one currency for another it is a global market that never sleeps 24 by 7 market and the largest trading centers are Tokyo, New York, Singapore and London. Other markets are also there, but these four are the largest right currencies are virtually traded around the clock. So, when Japanese markets open the US market sleeps and then the Indian Australian market opens Japanese market sleeps and so on and so forth. So, there are basically happening through exchanges which are connected 24 by 7 and the transactions could range right from a traveler exchanging currency at a airport kiosk or taking currency from a bank to million dollar payments that are made by multinationals and corporations for their import-export payments and loan obligations. So, some terminology involved here I have tried to capture. So, there is something called a spot market or spot price. So, spot price is a trade that happens today, but settles into working days which means price of the trade is fixed as per today's exchange rate and the settlement happens two days afterwards at an at the rate what we have agreed two days back right and settlement mean moving the currency. So, paying US dollars for exchange of Indian rupees forward market of forward price the trade happens today, but the exchange of currencies takes place at a future date beyond to working days at the price which is determined today. So, price I am going to determine today it will be different from today's spot price it will have a cost of carry that is embedded which means I am going to settle a transaction in future. So, I am going to use the time value of money theory to simulate and predict a forward market price which I will use to settle the transaction at a future date. Forward market are customized contracts between two or more parties and I could have as much a level of customization as I need. When these forward contracts are traded on a stock exchange the stock exchange will make sure that there are standardized terms and conditions that are attached to each of the contracts being traded which is when they are called a futures market or the futures price. So, forwards are contracts that are not traded through the stock exchange, but traded through what is called as over the counter mechanisms. So, these are mechanisms which are electronically connected through telecom and infrastructure equipment and involve a syndicate or a network of dealers who are getting together on electronic mediums and telephones to conduct and settle trades. Whereas a futures is the same forward contract when it is listed and trades on an exchange, the exchange acts as a central counterparty between the buyer and the seller. So, there is a very high level of standardization involved when it comes to the terms and conditions of the contract. Foreign exchange contracts are or transactions are always coated in pairs. So, the first pair in the currency is called the base currency and the second pair is called the quote currency. So, for example, USD to INR. So, USD will be the base currency, INR will be the quote currency and the quotes are always what are listed as a two way quote. So, a forex dealer will buy the currency from you at a X price and a forex dealer will sell the same currency to you at a Y price. So, the price at which a forex dealer will buy the currency is called the bid price and the currency the price at which the forex dealer will sell you the same currency is called the ask price. Ask price is slightly higher than the bid price and the difference between the two is what is called as the bid ask spread that is the actual profit which the forex trader is making. So, if you were to take the example of USD INR the current exchange rate is somewhere around 63.7 which is the bid price and 63.750 which is the ask price. So, that 50 points extra is the spread which the forex dealer is earning by acting as both parties to the transaction. FX trades happen mostly through the exchanges, but there could be customized forward contracts on exchange rates that happen in the forward market over the counter as well. And then we will go on to commodities before we take a small break. So, commodities basically refers to goods that have got full or substantial fungibility. What that means is the market regards instances of that commodity as having the same size, shape, characteristics, features, textures, color, form and uniformity. Examples here are rice, copper, gold, etc. Each grain of rice is a rice. A grain of rice can be called a wheat because it's got the same composition, color, texture may vary, but essentially it's got the same form and that is what is meant by fungibility. So, by that commodities could be classified as hard versus soft commodities. So, commodities which are produced and traded like rice, wheat, pulses, livestock, agricultural fodder, etc., etc., these are called soft commodities, coffee, cocoa, few more examples and commodities which are basically mined and traded are called hard commodities. So, gold, copper, silver, nickel, aluminum, crude metals and all and we have also something called as energy commodities which is the whole spectrum of oil, natural gas, petroleum and related products. So, basically commodities are split across four groups, energy, bullion which is gold, silver, base metals which is copper, nickel, aluminum, etc., and then soft commodities which are all these produced and grown and traded commodities. Commodities are traded both over the counter as well and through the exchange as well. So, exchange, there are specific commodity exchanges which are there that deal in specialized trading of respective commodities. An example here could be the Dubai gold exchange. So, there is a Dubai gold exchange which specializes in the trading of gold. And commodities can be traded also across the counter. So, a slightly old movie but those of who have seen a movie called Guru starring Abhishek Bachchan and Aishwarya Rai. There was this example where all the traders get into a room to trade Kera silk by standing and bidding and optioning for the silk trade process. That is a OTC network which is an in-person syndicate. But OTC network can also happen over the exchange of telecommunication and telecom networks. So, commodities are traded both places OTC as well as the commodity exchanges. So, we have round about five minutes before we go into a break and I would again like to invite if there are any questions. Please press the hand raised button at the bottom of the user list if you have any questions. Sveri college your life is very college. Go ahead and ask your question. Seems your bandwidth is a bit low. Yeah. So, you are not audible and I guess your bandwidth is also low. Can you please check again? Yeah, you are audible now. Please speak. Go ahead and ask your questions. My question is that how to diversify the money? How to diversify the money while creating the financial asset? Okay. So, if I get that correctly your question is how to diversify the money by getting financial assets trading. Okay. So, reserve the best for the last. There is a session happening next Saturday on financial planning and budgeting where we will be basically building on to what you learned during this session. So, the idea today is to equip you with knowledge around the various products and in the session upcoming on Saturday there will be someone talking to you about how do you create your own financial plan based on the various investment horizons and needs that you have and how can you then utilize the various financial products or trade in the various financial products that will satisfy your own personal needs. Right. So, stay tuned. More to come. One more question. Yes, go ahead. What about the cryptocurrency? That is, it will like a bitcoins or a geomoney. It will be considered as a financial asset or not? No, they are not. So, if you happen to listen to the finance minister's budget speech, if you haven't go and listen, so Arun Jaitley has clearly made a statement that bitcoins are not an accepted legal tender. So, we have a very fundamental question at least in India that bitcoins are not accepted as a form of payment. So, though there are users and people who trade in bitcoins, but the whole question around cryptocurrency being accepted as a legal currency system in the country is a big question mark. So, I mean each one to himself, invest with your own risks and if you looked at the markets a couple of days back post the budget announcement, there has been some panic selling in the bitcoin space because now since that statement has been made, bitcoin providers have also been skeptical as to how much money people would lose. So, I would really stay away from that at least in India from the current economic scenario. Does that answer you? Sorry? Can you hold the mic a little bit closer and speak? I didn't get your question. I get answer about the bitcoin, but what about the geomoney which will be launching in the next two months? What about the cryptocurrency of geomoney? Geo is the JIO. So, geomoney is actually not money, it is actually a mobile enable wallet system. So, like you know how you have of your other banks, RBI there especially in India has got a directive you know from a financial inclusion perspective to enable all these mobile banking payment channels also and link to these wallets. So, geomoney will also use the RBI's underlying settlement system. So, RBI has got an act which is called a payment and settlement services act of 2007 which lays down rules and regulations in terms of all these entities. How if they have to be given license to operate they have to follow the conditions that are listed out in this act and they have to use RBI's clearing mechanism to move their money. So, it will work, it will be a wallet for all you say, but you can't keep deposits, you cannot withdraw the money out of what you have put in the wallet. That's the primary difference between the geomoney wallet and your normal banking channel. Is that the answer you are looking for? Yes, I get the answer. Ok, alright. So, we are at 3.30 and ok, so we can take one more question before we get into a break. Yes, Walchan Institute. Good afternoon, ma'am. I am Mr. Srikor. Yes. And I am actually, initially you have taken an example of Amazon and yourself that when we are going to pay the money using the credit card then there is one middleware system that you told that technology or some infrastructure is there. Yes. So, ma'am similarly when I have my ATM card and when I go to any of the banks it may be suppose my ATM card is of bank of Maharashtra and then I can use that same ATM card in any of the banks like IGSE or any of the banks. So, that also for 3 or 2 chances they give me 3 and afterwards they will cut some of my the rate like 20 rupees or 25 rupees. So, actually how they manage all these things is there is any middleware system like you told initially like Amazon and yourself there is one middleware system. Yes. So, RBI has got a clearing and settlement system which all the banks have to use. So, your example of using a bank of Maharashtra card at a SBI will be allowed only if SBI and bank of Maharashtra are all using the core banking system of RBI and since the government has got a policy of financial inclusion they are now trying to tie up more and more banks by bringing them into the net of the broader clearing system that RBI has and of course from a licensing standpoint any new offering coming in the market which involves movement of money will not be given license to operate until the it goes through the RBI's clearing system. So, you may withdraw from any ATM but because the system that SBI or the bank of Maharashtra and whichever other bank is using is part of the same system therefore you know the transaction can happen and there are some digits that are you know associated with your account and with the banks are also given what is called as the IFSC code. So, through those codes the transactions are rooted from RBI's clearing mechanism and that is why you can enjoy that seamless facility and about the charges what happens is that if I were ICICI or I were a bank of Maharashtra and I issued an ATM card to you I obviously have to pay an administrative charge for putting that ATM out there right and if somebody is withdrawing money from a bank of Maharashtra account which is not my account then obviously I have to pay some charges to convenience charges to the other bank right. So, there will be a inter bank fee system also which is why banks will discourage you that you know 5 withdrawals you do but the 6 withdrawals you do I am going to debit you with whatever that 25 rupees plus transaction charges because in turn I have to pay a bank of Maharashtra if their card was used. But what about that IFSC code now what you told that using that code they do some all these things so can you explain me exactly what happens because I am if I want to withdraw that money from the Pune or from out of Maharashtra also I have also done that in Sikkim state actually what they done using that IFSC code can you please explain me. So, I will try to put it a little simpler for you. So, let's say you are in Mumbai and you want to withdraw today and tomorrow you are traveling to Pune and you want to withdraw from there right you are using your ATM card which is let's say a bank of Maharashtra's ATM card that that ATM card has got a 16 digit number on your card you insert the card in your ATM machine the card reader of the ATM machine is going to read that 16 digit code that 16 digit code will also be cross referenced with the IFSC code and a routing number will be generated. So, what is a routing number which means that wherever you are withdrawing point of sale terminal from there the messaging system which RBI has as part of its clearing mechanism will transmit that 16 digit account number plus IFSC code plus that routing connection number to the bank's server right and bank of Maharashtra server will then validate you know all your card details and all of that and then it will authenticate the transaction send a message back saying this transaction has been authenticated and now Gurpreet right yeah. So, Gurpreet is a valid customer she is a bona fide customer this transaction authenticated she has balance in her account ATM will push out the money right. What I spoke about in the Amazon example in here also the same payment processing gateways and payment processes are used the only thing is you do not have a payment gateway because you are using an ATM right, but on your debit card there will be a visa or a master card or some some logo or a rupee or whatever if you have not checked check it out on your ATM card there will be some logo that person is the payment processor who will do all this heavy lifting of connecting messages and passing on monies from one place to other. Thank you very much. Thank you so I think we will take a break and we will be back at four o'clock and if there are any further questions you may choose to post it on the blog or when we come back we might take a question or two.