Generally speaking, long-term investing for individuals is often thought to be in the range of at least seven to ten years of holding time, although there is no absolute rule. Long term is one of those phrases that is so ubiquitous in finance that it has become difficult to pin down a specific meaning.
The media frequently advises people to "invest for the long term," but determining whether or not an investment is long-term is very subjective. A day trader , for example, would define "long term" much differently than a buy-and-hold investor. For the day trader, a position held overnight would be a long-term commitment. For the buy-and-hold investor, anything less than several years may be considered short-term. A long-term investment is found on the asset side of a company's balance sheet, representing the company's investments , including stocks, bonds, real estate, and cash, that it intends to hold for more than a year.
When a firm purchases shares of stock or another company's debt as investments, determining whether to classify it as short-term or long-term affects the way those assets are valued on the balance sheet. Short-term investments are marked-to-market, and any declines in their value are recognized as a loss. However, increases in value are not recognized until the item is sold.
This means that classifying an investment as long- or short-term has a direct impact on the reported net income of the company holding the investment. Analysts look for changes in long-term assets as a sign that a company may be liquidating to cover current expenses—generally a problem if it continues. For many individuals, saving and investing for retirement represents their main long-term project. While it is true that there are other expenses that require a multi-year effort, such as buying a car or buying and paying off a house, retirement is the main reason most people have a portfolio.
In this case, we are encouraged to start early and invest often. Using both a long-term outlook and the power of compounding, individual investors can use the years they have between themselves and retirement to take prudent risks. When your time horizon is measured in decades, market downturns and other risks can be taken for the long-term rewards of a higher overall return.
Investing Essentials. Income Tax. Portfolio Management. Mutual Fund Essentials. Actively scan device characteristics for identification.
The bonds under SGB Scheme may be held by a person resident in India, being an individual, in his capacity as an individual, or on behalf of minor child, or jointly with any other individual. Nominal Value of the bonds shall be fixed in Indian Rupees on the basis of simple average of closing price of gold of purity published by the India Bullion and Jewelers Association Limited for the last three business days of the week preceding the subscription period.
The Bonds shall bear interest at the rate of 2. Interest shall be paid in half-yearly rests and the last interest shall be payable on maturity along with the principal.
The redemption price shall be fixed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.
The above subscription limits, interest rate discount etc. There is no maximum limit for investment in these bonds. Interest on these Bonds will be taxable under the Income Tax Act, as applicable according to the relevant tax status of the Bond holders. These Bonds will be exempt from wealth-tax under the Wealth Tax Act, CDD No. SDLs are dated securities issued through normal auction similar to the auctions conducted for dated securities issued by the Central Government please see question 3.
Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Investment in gold has attendant problems in regard to appraising its purity, valuation, warehousing and safe custody, etc. In comparison, investing in G-Secs has the following advantages:. They can be held in book entry, i.
They can also be held in physical form. G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
The settlement system for trading in G-Secs, which is based on Delivery versus Payment DvP , is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk. G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.
Besides banks, insurance companies and other large investors, smaller investors like Co-operative banks, Regional Rural Banks, Provident Funds are also required to statutory hold G-Secs as indicated below:.
Such liquid assets shall be in the form of cash, gold or unencumbered investment in approved securities. The exposure of a trust to any individual gilt fund, however, should not exceed five per cent of its total portfolio at any point of time.
Commercial banks, scheduled UCBs, Primary Dealers a list of Primary Dealers with their contact details is given in Annex 2 , insurance companies and provident funds, who maintain funds account current account and securities accounts Subsidiary General Ledger SGL account with RBI, are members of this electronic platform.
All members of E-Kuber can place their bids in the auction through this electronic platform. A Gilt Account is a dematerialized account maintained with a scheduled commercial bank or PD. A Notification and a Press Communique giving exact particulars of the securities, viz. RBI places the notification and a Press Release on its website www. The investors are thus given adequate time to plan for the purchase of G-Secs through such auctions. A specimen of a dated security in physical form is given at Annex 1.
A sample of the auction calendar and the auction notification are given in Annex 3 and 4 , respectively. The Reserve Bank releases a quarterly calendar of T-bill issuances for the upcoming quarter in the last week of the preceding quarter.
The Reserve Bank of India announces the issue details of T-bills through a press release on its website every week. The tenor, notified amount and date of issue of the CMBs depend upon the temporary cash requirement of the Government. The tenors of CMBs is generally less than 91 days. The announcement of their auction is made by Reserve Bank of India through a Press Release on its website.
The non-competitive bidding scheme referred to in paragraph number 4. However, these instruments are tradable and qualify for ready forward facility.
First set of CMB was issued on May 12, In terms of Sec. Under Article 3 of the Constitution of India Under section 48A of Union territories Act, in case of Union Territory , a State Government has to obtain the permission of the Central Government for any borrowing as long as there is any outstanding loan that the State Government may have from the Centre.
Market borrowings are raised by the RBI on behalf of the State Governments to the extent of the allocations under the Market Borrowing Program as approved by the Ministry of Finance in consultation with the Planning Commission. RBI, in consultation with State Governments announces, the indicative quantum of borrowing on a quarterly basis. Before every auction, respective state governments issue specific notifications indicating details of the securities being issued in the particular auction.
RBI places a press release on its website and also issues advertisements in leading English and vernacular newspapers of the respective states. Currently, SDL auctions are held generally on Tuesdays every week. What are the different types of auctions used for issue of securities? Prior to introduction of auctions as the method of issuance, the interest rates were administratively fixed by the Government.
With the introduction of auctions, the rate of interest coupon rate gets fixed through a market-based price discovery process. Investors bid in yield terms up to two decimal places e.
Bids are arranged in ascending order and the cut-off yield is arrived at the yield corresponding to the notified amount of the auction. The cut-off yield is then fixed as the coupon rate for the security. Successful bidders are those who have bid at or below the cut-off yield. Bids which are higher than the cut-off yield are rejected.
An illustrative example of the yield-based auction is given below:. Price Based Auction: A price based auction is conducted when Government of India re-issues securities which have already been issued earlier.
Bids are arranged in descending order of price offered and the successful bidders are those who have bid at or above the cut-off price. Bids which are below the cut-off price are rejected. An illustrative example of price based auction is given below:.
In a Uniform Price auction, all the successful bidders are required to pay for the allotted quantity of securities at the same rate, i. In the example under ii above, if the auction was Uniform Price based, all bidders would get allotment at the cut-off price, i. Competitive bids are made by well-informed institutional investors such as banks, financial institutions, PDs, mutual funds, and insurance companies.
Multiple bidding is also allowed, i. Retail investor, for the purpose of scheme of NCB, is any person, including individuals, firms, companies, corporate bodies, institutions, provident funds, trusts, and any other entity as may be prescribed by RBI. Regional Rural Banks RRBs and Cooperative Banks shall be covered under this Scheme only in the auctions of dated securities in view of their statutory obligations and shall be eligible to submit their non-competitive bids directly.
State Governments, eligible provident funds in India, the Nepal Rashtra Bank, Royal Monetary Authority of Bhutan and any Person or Institution, specified by the Bank, with the approval of Government, shall be covered under this scheme only in the auctions of Treasury Bills without any restriction on the maximum amount of bid for these entities and their bids will be outside the notified amount. Under the Scheme, an investor can make only a single bid in an auction. Allocation of non-competitive bids from retail investors except as specified above will be restricted to a maximum of five percent of the aggregate nominal amount of the issue within the notified amount as specified by the Government of India, or any other percentage determined by Reserve Bank of India.
In the auctions of GoI dated securities, the retail investors can make a single bid for an amount not more than Rupees Two crore face value per security per auction. Such costs may be built into the sale price or recovered separately from the clients. It may be noted that no other costs, such as funding costs, should be built into the price or recovered from the client.
In case the aggregate amount of bids is less than the reserved amount, the shortfall will be taken to competitive portion. The bidding and allotment procedure is similar to that of G-Secs. RBI has from April 22, started conducting the auction for conversion of Government of India securities on third Monday of every month.
The source securities along with notified amount and corresponding destination securities are provided in the press release issued before the auction. The market participants are required to place their bids in e-kuber giving the amount of the source security and the price of the source and destination security expressed up to two decimal places. The price of the source security quoted must be equal to the FBIL closing price of the source security as on the previous working day.
When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market. Repurchase buyback of G-Secs is a process whereby the Government of India and State Governments buy back their existing securities, by redeeming them prematurely, from the holders.
The objectives of buyback can be reduction of cost by buying back high coupon securities , reduction in the number of outstanding securities and improving liquidity in the G-Secs market by buying back illiquid securities and infusion of liquidity in the system. The repurchase by the Government of India is also undertaken for effective cash management by utilising the surplus cash balances.
For e. Repurchase of four securities 7. State Governments can also buy-back their high coupon high cost debt bearing securities to reduce their interest outflows in the times when interest rates show a falling trend. States can also retire their high cost debt pre-maturely in order to fulfill some of the conditions put by international lenders like Asian Development Bank, World Bank etc. Repurchase of seven securities of Government of Maharashtra was done through reverse auction on March 29, Governments make provisions in their budget for buying back of existing securities.
Buyback can be done through an auction process generally if amount is large or through the secondary market route, i. NDS-OM if amount is not large. Basically, LAF enables liquidity management on a day to day basis.
The operations of LAF are conducted by way of repurchase agreements repos and reverse repos — please refer to paragraph numbers LAF is an important tool of monetary policy and liquidity management. The substitution of collateral security by the market participants during the tenor of the term repo is allowed from April 17, subject to various conditions and guidelines prescribed by RBI from time to time.
Further market value of collateral securities instead of face value will be reckoned for calculating haircut and securities acquired by banks under reverse repo with RBI will be bestowed SLR status. Scheduled commercial banks, Primary Dealers along with Mutual Funds and Insurance Companies subject to the approval of the regulators concerned maintaining Subsidiary General Ledger account with RBI are permitted to re-repo the government securities, including SDLs and Treasury Bills, acquired under reverse repo, subject to various conditions and guidelines prescribed by RBI time to time.
Physical form: G-Secs may be held in the form of stock certificates. A stock certificate is registered in the books of PDO. Ownership in stock certificates cannot be transferred by way of endorsement and delivery. They are transferred by executing a transfer form as the ownership and transfer details are recorded in the books of PDO. The transfer of a stock certificate is final and valid only when the same is registered in the books of PDO.
Demat form: Holding G-Secs in the electronic or scripless form is the safest and the most convenient alternative as it eliminates the problems relating to their custody, viz. Besides, transfers and servicing of securities in electronic form is hassle free. The holders can maintain their securities in dematerialsed form in either of the two ways:. Only financially strong entities viz. The servicing of securities held in the Gilt Accounts is done electronically, facilitating hassle free trading and maintenance of the securities.
This facilitates trading of G-Secs on the stock exchanges. How does the trading in G-Secs take place and what regulations are applicable to prevent abuse? Whether value free transfer of G-Secs is allowed? This is an order driven electronic system, where the participants can trade anonymously by placing their orders on the system or accepting the orders already placed by other participants.
Anonymity ensures a level playing field for various categories of participants. Other participants can access this system through their custodians i. The custodians place the orders on behalf of their customers. The scheme seeks to facilitate efficient access to retail individual investor to the same G-Sec market being used by the large institutional investor in a seamless manner.
Such negotiations are usually done on telephone and a deal may be struck if both counterparties agree on the amount and rate. In the case of a buyer, like an UCB wishing to buy a security, the bank's dealer who is authorized by the bank to undertake transactions in G-Secs may get in touch with other market participants over telephone and obtain quotes.
Should a deal be struck, the bank should record the details of the trade in a deal slip specimen given at Annex 5. The dealer must exercise due diligence with regard to the price quoted by verifying with available sources See question number 14 for information on ascertaining the price of G-Secs. Since notifications of orders executed as well as various queries are available online to the GAH, they are better placed to manage their positions. PMs, however, may recover the actual charges paid by them to CCIL for settlement of trades or any other charges like transaction cost, annual maintenance charges AMC etc.
Constituents not desirous of availing this facility may do so by opting out in writing. In compliance to this, stock exchanges have launched debt trading G-Secs as also corporate bonds segment which generally cater to the needs of retail investors. The process involved in trading of G-Secs in Demat form in stock exchanges is as follows:.
The directions are applicable to all persons dealing in securities, money market instruments, foreign exchange instruments, derivatives or other instruments of like nature as specified from time to time. Major players in the G-Secs market include commercial banks and PDs besides institutional investors like insurance companies.
PDs play an important role as market makers in G-Secs market. A market maker provides firm two way quotes in the market i. Other participants include co-operative banks, regional rural banks, mutual funds, provident and pension funds. Foreign Portfolio Investors FPIs are allowed to participate in the G-Secs market within the quantitative limits prescribed from time to time.
This circular can also be accessed from the RBI website under the Notifications — Master circulars section. The important guidelines to be kept in view by the UCBs relate to formulation of an investment policy duly approved by their Board of Directors, defining objectives of the policy, authorities and procedures to put through deals, dealings through brokers, preparing panel of brokers and review thereof at annual intervals, and adherence to the prudential ceilings fixed for transacting through each of the brokers, etc.
Segregate dealing and back-office functions. Officials deciding about purchase and sale transactions should be separate from those responsible for settlement and accounting. Monitor all transactions to see that delivery takes place on settlement day. The funds account and investment account should be reconciled on the same day before close of business.
Restrict the role of the broker only to that of bringing the two parties to the deal together, if a deal is put through with the help of broker. Have a list of approved brokers.
A disproportionate part of the business should not be transacted with or through one or a few brokers. Open a funds account for securities transactions with the same Scheduled Commercial bank or the State Cooperative bank with whom the Gilt Account is maintained.
Ensure availability of clear funds in the designated funds accounts for purchases and sufficient securities in the Gilt Account for sales before putting through the transactions. Do not use brokers in the settlement process at all, i. Do not routinely make investments in non-SLR securities e.
The deal slips should be serially numbered and verified separately to ensure that each deal slip has been properly accounted for. Once the deal is concluded, the deal slip should be immediately passed on to the back office it should be separate and distinct from the front office for recording and processing. For each deal, there must be a system of issue of confirmation to the counter-party. The timely receipt of requisite written confirmation from the counter-party, which must include all essential details of the contract, should be monitored by the back office.
In case of trades finalized in the OTC market and reported on NDS-OM reported segment, both the buying and selling counter parties report the trade particulars separately on the reporting platform which should match for the trade to be settled. What are the important considerations while undertaking security transactions? Which security to invest in — Typically this involves deciding on the maturity and coupon.
Maturity is important because this determines the extent of risk an investor like an UCB is exposed to — normally higher the maturity, higher the interest rate risk or market risk. If the investment is largely to meet statutory requirements, it may be advisable to avoid taking undue market risk and buy securities with shorter maturity. Within the shorter maturity range say years , it would be safer to buy securities which are liquid, that is, securities which trade in relatively larger volumes in the market.
The coupon rate of the security is equally important for the investor as it affects the total return from the security. Where and Whom to buy from- In terms of transparent pricing, the NDS-OM is the safest because it is a live and anonymous platform where the trades are disseminated as they are struck and where counterparties to the trades are not revealed.
In case, the trades are conducted on the telephone market, it would be safe to trade directly with a bank or a PD. Wherever a broker is used, the settlement should not happen through the broker. Trades should not be directly executed with any counterparties other than a bank, PD or a financial institution, to minimize the risk of getting adverse prices.
To be sure of prices, only liquid securities may be chosen for purchase. A safer alternative for investors with small requirements is to buy under the primary auctions conducted by RBI through the non-competitive route. Since there are bond auctions almost every week, purchases can be considered to coincide with the auctions.
Please see question 14 for details on ascertaining the prices of the G-Secs. The price of a G-Sec, like other financial instruments, keeps fluctuating in the secondary market. The price is determined by demand and supply of the securities. Specifically, the prices of G-Secs are influenced by the level and changes in interest rates in the economy and other macro-economic factors, such as, expected rate of inflation, liquidity in the market, etc.
Developments in other markets like money, foreign exchange, credit, commodity and capital markets also affect the price of the G-Secs. Policy actions by RBI e. This will show a screen containing the details of the latest trades undertaken in the market along with the prices. On this page, the list of securities and the summary of trades is displayed. The total traded amount TTA on that day is shown against each security.
Typically, liquid securities are those with the largest amount of TTA. Pricing in these securities is efficient and hence UCBs can choose these securities for their transactions.
Since the prices are available on the screen they can invest in these securities at the current prices through their custodians. The screenshots of the above webpage are given below:. Reporting on NDS-OM is a two stage process wherein both the seller and buyer of the security have to report their leg of the trade.
System validates all the parameters like reporting time, price, security etc. The securities leg of these trades settles in the CSGL account of the custodian. The system, in turn, will match the orders based on price and time priority.
That is, it matches bids and offers of the same prices with time priority. It may be noted that bid and offer of the same entity do not match i. The mentality associated with an active trading strategy differs from the long-term, buy-and-hold strategy found among passive or indexed investors.
Active traders believe that short-term movements and capturing the market trend are where the profits are made. There are various methods used to accomplish an active trading strategy, each with appropriate market environments and risks inherent in the strategy.
Here are four of the most common active trading strategies and the built-in costs of each strategy. Day trading is perhaps the most well-known active trading style. It's often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities within the same day.
Positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders, such as specialists or market makers.
However, electronic trading has opened up this practice to novice traders. Active trading is a popular strategy for those trying to beat the market average. Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading.
Position trading uses longer term charts — anywhere from daily to monthly — in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the "wave," trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels.
Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult and its positions are generally reduced. When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself.
Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis. These trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another.
A range-bound or sideways market is a risk for swing traders. Scalping is one of the quickest strategies employed by active traders. Essentially, it entails identifying and exploiting bid-ask spreads that are a little wider or narrower than normal due to temporary imbalances in supply and demand. A scalper does not attempt to exploit large moves or transact high volumes. Rather, they seek to capitalize on small moves that occur frequently, with measured transaction volumes.
Since the level of profit per trade is small, scalpers look for relatively liquid markets to increase the frequency of their trades. Unlike swing traders , scalpers prefer quiet markets that aren't prone to sudden price movements.
There's a reason active trading strategies were once only employed by professional traders. Not only does having an in-house brokerage house reduce the costs associated with high-frequency trading , but it also ensures better trade execution.
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