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SECURITY ANALYSIS AND INVESTMENT MANAGEMENT

Presentation prepared by: Dr. Ankit Saxena

Unit I
Overview of Capital Market: Market of securities, Stock Exchange and New Issue Markets - their nature,

structure, functioning and limitations;


Trading of securities: equity and debentures/ bonds. Regulatory Mechanism: SEBI and its guidelines; Investor Protection.

INVESTMENT

Investment involves Sacrifice of Current Savings for Expected Future Benefits.

Sacrifice is in the present and is certain. The Reward comes later and the amount of reward is

uncertain.

Investment Decision involves two attributes viz. Risk and Return.

Investment may be Real (e.g. Land, Machinery etc.) and Financial (e.g. Common Stocks and Bonds).

INVESTMENT PROCESS
1) Setting Investment Policy

2)

Perform Security Analysis


a) b) Technical Analysis Fundamental Analysis

3) 4)

Construct a Portfolio Portfolio Revision

5)

Portfolio Performance Evaluation

INVESTMENT ALTERNATIVES
Investment Alternatives Non-Marketable Financial Assets Bonds Mutual Fund Schemes Real Estate Financial Derivatives Equity Shares Money Market Instruments Life Insurance Policies Precious Objects

INVESTMENT ATTRIBUTES

Rate of Return

Risk
Marketability Tax Shelter Initial Tax Benefit Continuing Tax Benefit

Terminal Tax Benefit

Convenience

INVESTMENT VS. SPECULATION


Investor Relatively Longer Planning Horizon Not willing to assume more than Moderate Risk Seek a Modest Rate of Return Greater significance to Fundamental Factors Uses his own fund and eschews borrowed funds Speculator Very Short Planning Horizon Willing to assume High Risk Look for a High Rate of Return Rely more on Hearsay, Technical Charts, and Market Psychology Resorts to borrowings, to supplement his personal resources

Planning Horizon Risk Disposition

Return Expectation Basis for Decisions

Leverage

COMMON ERRORS IN INVESTMENT MANAGEMENT


Inadequate comprehension of Return and Risk Vaguely formulated Investment Policy Nave Extrapolation of the Past Cursory Decision Making

Simultaneous Switching
Misplaced Love for Cheap Stocks Over-diversification and Under-diversification

Buying Shares of familiar Companies


Wrong Attitude towards Losses and Profits Tendency to Speculate

QUALITIES FOR SUCCESSFUL INVESTING


Contrary Thinking

Patience
Composure Flexibility and Openness Decisiveness

STRUCTURE OF SECURITIES MARKET

Securities Market

Equity Market

Debt Market

Derivatives Market

Government Securities Market

Corporate Debt Market

Money Market

Options Market

Futures Market

PARTICIPANTS IN SECURITY MARKET


Regulators Stock Exchanges Listed Securities Depositories Brokers Foreign Institutional Investors Merchant Bankers Primary Dealers

Mutual Funds Custodians Registrars Underwriters Bankers to an Issue Debenture Trustees Venture Capital Funds Credit Rating Agencies

INVESTMENT APPROACHES
Fundamental Approach

Psychological Approach

Academic Approach

Eclectic Approach

FUNDAMENTAL APPROACH

Most Commonly advocated by the Professionals


Intrinsic Value of Securities is considered

BUY:
SELL:

Under-valued Securities (IV>MP)


Over-valued Securities (IV<MP)

PSYCHOLOGICAL APPROACH

Stock Prices are guided by emotions rather than reason. It is based on Technical Analysis. BUY: SELL: Optimism Pessimism (Greed & Euphoria) (fear & Despair)

Castles in the Air

ACADEMIC APPROACH

Stock Price behaviour corresponds a random walk.


Past Price Behaviour can not be used to predict future. There is a positive relationship between Risk and Return.

ECLECTIC APPROACH

Use Fundamental Analysis To Establish Standards and


Benchmarks

Use Technical Analysis To assess the state of Market

Psychology

Combine Fundamental and Technical Analysis for Security Analysis

Remember High Risk, High Return


Respect Market Price

Stock Market Operations

Economic System

Surplus Generating Units

Deficit Generating Units

Holding Liquid Cash

Investment

FOUR ELEMENTS OF SECURITY MARKET


Investors

Intermediaries

Issuers

Regulatory Bodies

Capital Market: An Introduction

A Place where people buy and sell financial

instruments

A Mechanism to facilitate the exchange of financial assets.

Purpose of Stock Market

Capital Formation of Company

Maintains Active Trading Increased Liquidity of Financial Assets Useful in Price Recovery Process

Classification

On the Basis of Nature of Transactions Primary (New Issue) Market


Public Issue Right Issue Private Issue Preferential Issue Organized Stock Exchange Over the Counter (OTC) Market

Secondary (Stock) Market

On the Basis of Duration of Transactions Money Market (Less than One Year) Capital Market (More than One Year)

Roles and Functions of Stock Exchanges


Provides a Market Place for purchase and Sale of

Securities
Provides Linkage between Savings of Household

Sector and Investment in company.


Provides a Market Quotation of the prices of Shares

and Bonds

Principal Weakness of Indian Stock Market


Rampant Speculation

Insider Trading
Oligopolistic Market (Not Truly Competitive) Limited Forward Trading Outdated Share Trading System Lack of a Single Market (No Inter-market Operations) Problems of Interface between Primary and Secondary Market Inadequacy of Investors Services

Primary Equity Market


There are four ways in which a company may raise

equity capital in the primary market:


Public Issue Right Issue Private Placement Preferential Allotment

(A) Public Issue


Sale of Securities to the public at large

Public issues in India are governed by provisions of


The Companies Act, 1956 SEBI Guidelines on Investors Protection Listing Agreement between the Issuing Company and the Stock Exchanges

Public Issue: Process


Approval of Board of Directors

Approval of Shareholders
Appointment of Lead Manager and other
Intermediaries like Co-managers, advisors,

underwriters, bankers, brokers, and registrars

Preparation and filing of draft prospectus with SEBI Application of Listing in Stock Exchange Filing of prospectus with the Registrar of Companies Promotion of Issue

Public Issue: Process (Contd..)


Printing and Distribution of applications

Statutory Announcement
Collection of Applications Processing of Applications Determination of the liability of underwriters Finalization of Allotment Giving of demat credit (Dispatch of Share Certificates)
and Refund Orders

Listing of the Issue

Stockinvest Scheme
When public issues get heavily over-subscribe;

A Large number of Investors lose interest on the


subscription money locked with the company, While Issuing Company enjoys the benefit of float money. SEBI has announced this Stockinvest Scheme to

overcome this problem.

Stockinvest Scheme Eligibility


Reserve Bank of India has restricted the use of

stockinvests to individual investors and mutual funds


only. Stockbrokers, Corporate Bodies, Banks, and Financial

Institutions are not allowed to apply through


stockinvests. A ceiling of Rs. 50,000 per individual per stockinvest has been imposed by the banks.

Stockinvest Scheme Process


Application of Stockinvest by Investor to Bank Finalization of Allotment and Claim by Registrar to Collecting Banker

Issue of Stockinvest by Bank to Investor

Collecting Banker gives credit to Companys A/c

Submission of Application Form & Stockinvests to Collecting banker

Formal Allotment (Allotment Advice or Return of Application Form)

Collecting Bankers transmits to Registrar of Companies

Intimation by Issuing Bank about the release of lien

Book Building
A method of offering shares to investors in which the

issue price is not fixed in advance (as in case of Fixed


Price Offer) Issue Price is determined through a bidding process. Thus, Pricing reflects revealed demand and contemporary market conditions.

(B) Right Issue


Selling securities in the primary market by issuing rights to the existing shareholders. A Letter of Offer along with a composite application form consisting of four forms (A, B, C, & D) is sent to shareholders.
Form A : Acceptance of Rights & Application for Additional Shares

Form B : To Renounce the rights in favour of someone else.


Form C : Application by the Renouncee Form D : To make a request for split forms.

NOTE: The Composite application form must be mailed to the company within a stipulated period (i.e. normally 30 days)

(C) Private Placement


Sale of Securities to a limited number of sophisticated investors such as financial institutions, mutual funds, venture capital funds, banks and so on.

Identity of investors in not known when the offer document


(popularly known as Information Memorandum)

(D) Preferential Allotment


An issue of equity by a listed company to selected investors at a price may or may not be related to the prevailing market price. For example, Issue to Promoters or Friendly investors to ward off the threat of takeover. Price should be at Higher of the average of Weekly High and Low of Closing Prices of the shares during Six months before relevant date; OR during the two weeks period before the relevant date.

Trading of Securities in Secondary Market


Two ways of organizing the Trading Activity:

Open Outcry System (Till 1994 in India) Screen-based System

Enhances the Informational Efficiency of the market as


more participants trade at a faster speed

Permits the market participants to get a full view of the


market, which increases their confidence in the market

Establishes transparent Audit Trails.


Open Electronic Limit Order Book (ELOB)

Settlement
Traditionally, it was by Physical Delivery.

Now transactions are settled mainly through Electronic


Delivery facilitated by depositories (The Depositories Act, 1996)

National Securities Depository Limited (NSDL) {set up


in 1996} Central Securities Depositories Limited (CSDL)

Shift to Rolling Settlement

Transaction Cost
Trading Cost

Brokerage Cost
Market Impact Cost (i.e. Difference between the actual
transaction price and the ideal price)

Securities Transaction Cost (i.e. a levy on securities


transactions)

Clearing Cost Settlement Cost

Regulatory Framework of Securities Market


Legislations
(1) The SEBI Act, 1992

Scope
Investor s Protection Security Market Regulation

(2) The Companies Act, 1956

Issue, Allotment, & Transfer of Shares; Public Disclosure

(3) The Securities Contracts (Regulation) Act, 1956 (4) The Depositories Act, 1996

Regulation of Transactions in Securities Listing of Securities on Stock Exchanges Electronic Maintenance and Transfer of Ownership of Demat Securities

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