Capital is a key factor in economic growth, but most countries look to foreign investors because domestic resources alone cannot meet their general capital needs. Foreign Portfolio Investment (FDI) and Foreign Direct Investment (FDI) are the two most common ways to invest in a foreign economy.
Published on 29 January 2023
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FPI means laying out money in financial assets like bonds and stocks of companies located in foreign countries. FDI refers to direct investment by foreign investors in the production assets of another country.
FPI and FDI are similar in some ways but very different in other ways. Therefore, countries with high levels of FDI should clarify the difference between FDI and FPI since overseas investors with high levels of FPI may face currency turmoil and market volatility during uncertain times.
What is FDI?
FDI or Foreign Direct Investment is when a company invests a significant amount in a foreign company by acquiring a controlling interest and participating in the company's day-to-day operations. Together with capital in foreign direct investment, the company provides knowledge, skills, and technical know-how. So, they have good control in terms of decision-making.
FDI typically comes from countries with high growth potential and a skilled workforce.
FDI may also arise if a company acquires assets or starts a business in another country. It is also very common to expand a business to a new country. In addition, companies may merge with foreign companies or form joint ventures.
Foreign Direct Investment can lead to horizontal expansion, vertical expansion, or conglomerates. The horizontal investment allows a company to invest in or start a similar business or establish a similar business. In vertical investing, companies invest in companies that complement their business. In the case of large companies, they invest in businesses that are completely unrelated to their main business.
The Indian economy opened to the world in 1991 and has attracted foreign investment since then.
FPI or Foreign Portfolio Investment refers to passive investment in financial assets belonging to an overseas economy. Financial assets like bonds, stocks, and other financial belongings. Furthermore, none of these involves the active management of investors.
The main motive for FPI is to lay out money in foreign markets with the expectation of rapid returns. Therefore, it involves buying securities that can be easily sold and bought.
FPI is designed to generate short-term financial returns but not control administrative operations.
FPI is considered less profitable than direct investment because portfolio investments are easily liquidated. Sometimes the foreign direct investment is made to generate short-term profits rather than long-term investments in foreign countries (economy).
India recorded the highest FPI outflows in October 2018 and July 2020. This could mean that foreign investors turn to other developing countries for higher returns.
Difference Between FDI and FPI
FDI and FPI are more or less similar since they both deal with foreign investment. However, there exist certain differences:
FDI
FDI investors generally have a dominant position in joint ventures or domestic companies and are ardently involved in their management.
FDI investors take a very long approach to their investments and take years from planning to project execution.
FDI investors cannot liquidate their assets and leave the country since they are very illiquid and large.
FPI
FPI investors tend to be passive who do not actively participate in domestic companies' daily operation and strategic planning despite having a controlling stake.
FPI investors can insist on a long-term view, but the investment period is often much shorter, especially when the local economy faces instability.
FPI investors have to leave the country as their financial assets are widely traded and highly liquid.
Conclusion
FDI and FPI can be essential sources of capital for the economy, but FPI tends to be highly volatile, and such volatility can exacerbate economic problems in uncertain times. As such volatility may have a notable negative effect on investment portfolios, individual investors should be aware of the differences between these two major offshore investment sources.
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Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
Options are derivatives in the trading strategy that are amongst the most popular tools for traders in the stock markets. This is because the price of the options can move very fast, thereby making the investors lose or make a lot of money quickly. Options strategies can range from complex ones to simple ones, with several payoffs, and at times with odd names.
Futures are used in the different stock markets to guard against price volatility. For investors who wish to take advantage of the price volatilities in the market, investing in stock futures can be the best solution. A futures contract provides a buyer or a seller with the right to buy or sell an asset at a specified future price.
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
Sharekhan Comtrade Private Limited (TM) operates the web site accessible from the URL www.myespresso.com (the “web site”').
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The Web Site's online surveys ask visitors for contact information (like their mobile number or e-mail address) and demographic information (like their pin code, gender, age or income level). The Web Site uses contact data from its surveys to send the user information about Sharekhan Comtrade Private Limited and promotional material from some of Sharekhan Ltd.'s partners. The customer's contact information is also used to contact the visitor when necessary. Users may opt-out of receiving future mailings; see the choice/opt-out section below. Demographic and profile data is also collected at the Web Site. The Web Site use this data to tailor its visitor's experience at the Web Site, showing them content that it thinks they might be interested in, and displaying the content according to their preferences. This information is shared with advertisers on an aggregate basis.
Sharekhan Comtrade Private Ltd run contests on the Web Site in which we ask visitors for contact information (like their e-mail address). Sharekhan Comtrade Private Limited uses contact data from its contests to send users information about Sharekhan Comtrade Private Ltd. and promotional material from some of our partners. The customer's contact information is also used to contact the visitor when necessary. Users may opt-out of receiving future mailings; see the choice/opt-out section below.
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Further to the above, in light of the recently notified Information Technology (Reasonable security practices and procedures and sensitive personal data or information) Rules, 2011. (Hereinafter referred to as the Rules)
The following shall be deemed to be sensitive information :
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Collection of Information:
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Disclosure of information:
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Provided no consent may be required in case the same is being shared as per compliance guidelines or as required by regulators.
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Download Client Registration Documents (Rights & Obligations, Risk Disclosure Document, Do's & Don't's) in Vernacular Language :
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