By: Shashank Makode

 Investment is nothing but saving money in a way that will get you returns for it in the future (short-term or long-term)  Need of investment?  Future goals, hedge inflation, money making

 One can invest in physical asset such as real state, jewellery, commodities (seeds, crude oil, natural gas, metals etc)  Also in financial assets fixed deposits with banks, provident/pension fund etc or in securities market such as shares, bonds, debentures, mutual funds

 Investment Bank is a financial entity that suggests an individual, company, government sectored firm, etc. on how to raise their financial capital by participating in the market activities.  The main role of the Investment Bank is to act as a mediator between the companies (who are interested in selling their securities / shares) and the individuals (who are willing to purchase the same).

 Investment bank operates in two ways – ‘buy side’ and ‘sell side’.  ‘Buy side’ includes services such as buying shares for investors whereas ‘Sell side’ includes underwriting the stock and selling the shares to the investors from companies.  ‘Buy side’ operation of Investment Bank with an example:  Suppose an investor wants to buy 50 shares of ABCD Company. Then he will consult an Investment bank where the stock broker places an order for the same and delivers the shares to the Investor.  ‘Sell side’ operation of Investment Bank with an example:  Suppose a Company PQR plans to issue new shares of stock in IPO then the Investment Bank verifies the shares and sells the same to their Clients. This way PQR Company raises funds by issuing their stock.

 1) Stock Exchange: An entity that controls the business of buying and selling of securities. Stock Exchange can be regional or national exchanges. Stock Exchange  Example: NASDAQ – USA, NSE – India etc.  2) Stock/Share/Equity: Total capital of a company is divided into equal units; each unit is termed as share/equity/stock. Stock also represents a part of ownership of a company.  3) Face value of a Share: The amount or value (used during buying or selling) allotted to a share by the company.

 4) Issue Price: The price of a company’s shares at which they are available in the market. When these shares are traded in the market the price may be below or above the issue price.  5) Initial Public Offering (IPO): This is nothing but selling the securities or shares of a company to the public for the first time in the market.  6) Market Capitalization: The financial value of a company is calculated by multiplying the share price with number of shares which is termed as Market Capitalization.  Example: Suppose a Company X has 100 shares. The current market price of each share is $50. Then the market capitalization of the Company X is $5000

 7) Security Market: Security market is a place where buyers and sellers of securities (bonds, debentures, stocks etc.,) do their transactions of buying and selling the securities.  8) SEBI (Security and Exchange Board of India): An authority that makes sure whether the buyers and sellers behave in a proper way in the market. So that they get their desired profits. There are different security and exchange boards/commissions as per the country.  9) Dividend on share: Dividend is a percentage of the value of a share, which a company returns to its share holders from its annual profits.

 10) Bid Price: Bid Price is the rate at which the buyer is ready to buy the stock.  11) Ask Price: This is the price at which the seller wants to sell his stock.  12) Futures: A future contract is an agreement between the buyer and the seller in which the stock of future delivery is transacted at a particular price.

 For example, if you want to purchase a March future contract of XYZ Company then you have to do that at the current price available in the market. Let’s say that the March futures are trading at $100 per share. By the time the contract expires (last day of the contract in March month) the price of the stock may not be the same. It may be $95 or $110. Based on these price differences investors makes profits in the markets.

 13) Options: It is a financial contract between the buyer and seller in which the buyer has the right to buy or sell a security at a particular price on or before a particular date.  Options are of two types: Calls, and Puts. Call means the right to buy an asset at a price within a period of time. Put means the right to sell an asset at a price within a period of time.  14) Portfolio: A Portfolio is a combination of various investment assets mixed and matched for gaining profits as per an investor’s goal. Items that are included in the portfolio can be shares, debentures, mutual funds etc

 15) Depository: An entity that holds the securities and funds of depositors in an account. The two depositories in India are National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL).  16) Mutual Funds: An entity that collects money from investors and invests the same in various financial instruments like shares, bonds, debentures etc.  17) Net Asset Value (NAV): NAV of the fund is the cumulative market value of the asset. NAV per unit is the net value of the assets divided by the number of units. Buying and selling of shares in the market are done on the basis of NAV related prices.  18) Nifty Index: It is a scientifically developed, 50 stock index, which shows the movement of the Indian markets. It behaves as a barometer for the Indian markets.

 Investment Banking Front officeMiddle office Back office

 This plays a major role in generating funds. The main areas of front office are Investment banking, Sales & trading, and Research.  ‘Investment Banking’ helps customers in raising funds in capital markets and also suggests the companies in raising their capital.  ‘Sales & Trading’ deals with buying and selling of stock (shares, bonds etc.,)  ‘Research’ involves reviewing the company reports about their buy/sell ratings, company’s prospects etc. This will help in providing advice to their clients in the right way.

 This deals with ‘Risk Management’, ‘Corporate Treasury’ and ‘Financial Control’.  ‘Risk Management’ involves analyzing the market situations and informing the clients of the risks involved in their trades.  ‘Corporate Treasury’ is responsible for the funds of Investment Banks.  ‘Financial Control’ tracks the capital flow of the firm and its success.

 This includes ‘Operations’ and ‘Technology’.  ‘Operations’ checks whether the trades have been executed properly and funds transferred successfully.  ‘Technology’ supports the software, data, and systems of Investment Banks.

 The main goal of every trade order is to get executed at a suitable price with a minimum risk spread.  The various stages of a trade order are as follows,  Decision of the investor to trade  Placing the trade order  Execution of the trade  Clearing of the trades (Trade validation and confirmation)  Settlement of trades  Funds / Securities settlement

 1) The Investment banking applications have different logins for different users like brokers, dealers, individuals or investors etc. Verify the logins of appropriate users with their login IDs as the permissions for accessing the application for all the users may not be the same.  For example, a broker has the permission to view the trading limits of the individuals based on the amount/funds in the individual’s account. However, this facility may not be available for the individual.

 2) The function of the Watch-list can be verified by adding, removing the securities/symbols to it. Ensure that the removed symbols should get deleted from the Watch-list and vice versa.  3) Buy Order – To test this functionality, place a trade buy order for any symbol with some quantity like 10 or 20 etc and submit the same. Then go the orders section and verify the details whether the order has been placed successfully or not.  4) Sell Order – Place a trade sell order as above (buy order) and verify the details.

 5) Change Order – Go to the orders section and open any previous order or existing order and make few changes like editing the quantity or symbol etc and verify whether the modifications get updated or not.  6) Cancel Order – Open an existing order and try to cancel it. The order should be cancelled successfully.  7) Order validity: Immediate or cancel, good for a day, Valid till cancelled (future date)

 8) Different types of orders have to be tested.  Market order – Try to place a trade order for the market price and check whether the trade gets executed for that price at the same point of time.  Limit order – Try to place an order for a particular price and check whether the trade has been executed when the market price meets the price set by the user.

 9) Check and verify whether the proper notifications or warning messages are getting displayed for the corresponding actions.  For example, after placing a trade buy order and submitting it, a message should be displayed that the ‘order has been placed successfully’.