SAPM+ Basics+1

8/3/2019 SAPM+ Basics+1

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Security Analysis

A pre-requisite for making investments



Investment

Parting with one¶s fund, to be used byanother party, for productive activity.

Conversion of cash into a monetary assetor a claim on future money for a return.



Investment Activity

Investor

Physical Financial Marketable Assets Assets Assets



Investor (by acquiring assets)

Investment Alternatives

SAVER

House,Land,BuildingsGold, Silver, Etc

Consumer durables

Banks,depositsPF, LIC,PensionSchemesPO CertificatesNSS, NSC, etc

Shares (categories)BondsGovt. SecuritiesMF SchemesUTI etc.DerivativesMoney market instruments

I Physical Assets II Financial Assets III Marketable Assets(Non-Marketable)



SECURITYInvestments in capital market in variousfinancial instruments (shares, scrips,bonds, debentures) which are all claims of money.

Is an instrument of promissory note.



S ecurity analysis

S uperior returns are possible by proper security analysis thro ±

Better forecasting abilityS uperior expertise in security analysis

Insider information



PORTFOLIO

Combination of various assets & / or instruments of investments.

An analysis of µrisk & return¶characteristics of individual securities inthe portfolio.



O bjectives of Investment

1. S afety of P rincipal___ «.&Diversification2. S tability of Income3. Capital Appreciation4. Liquidity & Collateral Value5. Minimise risk & Maximise returns6. P rotection against inflation7. Tax-saving



Year Inflation rate(consumer prices )

2003 5.40 %2004 3.80 %2005 4.20 %

2006 4.20 %2007 5.30 %



Financial MarketsS ecurities market Forex market

National International(eg. Euromarket)

Capital market Money Market

Equity market Debt Market

P rimary market S econdary market

S pot market Derivative



Domestic capital market (RBI & S EB I)

Capital Market

Advanced marketsUS AUKJapanGermanyEmerging marketsIndiaKoreaChina

MarketCapitalisation ($ bn)

1510425773157

1207166172

581

Total listedcompanies

752419042561

10229922

704

1086



Modes:I ) S ecurity Forms II ) Non S ecurity Forms

(Marketable) (Non Marketable / contractualforms of investment )

Corporate Bonds NSS

Public sector bonds NS CP reference PF

Equity L IC

UTIPO savingsCompany & Bank FDs



Non-security forms (Non-marketable)

Deposits ± * Types* S afety

* Interest rate* premature encashment* loans

* Interest between 10 th andlast date of the month



Post-office Time deposits

Multiples of Rs 50Interest rate

Calculated 1/2yearly & paid annuallyWithdrawal after 1 year Penal deduction of 2%

P ledgedTax exemption 80C



Monthly Income scheme

Tenure ± 6 yearsMin amount ± Rs1000

Max ± Rs 300,000Interest 8%Bonus ± 10% on maturity

P remature withdrawal with 5% before 3years



KVP

Min ± Rs.1000Max ± No limit

Investment doubles in 8 years & 7 monthsCI - 8.4%Withdrawal after 21/2years



NS C

Denominations ± Rs100; Rs.500; Rs.1000;Rs.5000 & Rs.10,000

6 yearsCI ± 8.16%S ec 80 C

No withdrawal



Company deposits

CLB and RBITerm 1 to 3 years (non-banking ± 25mths to 5 years)25% of its NW from public & addl amount of 10% of its NW from shareholdersInterestUnsec. Loans & so credit ±rated

No tax benefit (except more than Rs.5000)Premature withdrawal allowed



Portfolio Management P rocess

Specification of Investment objectives & constraints

Choice of Asset Mix

Formulation of Portfolio Strategy

Selection of securities

Portfolio execution

Portfolio Revision

Performance Evaluation



CHA R ACTE RIS TICS

1. Risk2. Return3. S afety

4. Liquidity5. Marketability6. Hedge against Inflation

7. Tax S helter



CharacteristicsRisk:

Credit worthiness of the borrower Nature of instrumentRisk of variability of returns ± Business risk & Financial riskNature of tax liability (NSS , NS C, UT I)

Return:Y ield + Capital appreciation

S afetyCertainty of return on capital without loss of time or moneyinvolvedGovernment bonds vs. private securities.

Liquidity

Bank deposit vs. equityHigher Liquidity Lesser return

Marketabilityeasily transferable ±low cost- price change (listed companies,

public ltd., companies & non listed & Pvt Ltd companies. )

Depth ± Breadth ± Resilience



Risk ± Return RelationshipVenture funds

Equity shares

Corporate deposits

Convertible debentures

Non-convertible debentures

UTI & Mutual funds

Post ± office certificates

Bank Deposits & Insurance Schemes

Risk Taken b Investor

R EWAR D

X

Y

0



Return =

Annual Income + (Ending price ± beginning price)X 100

Beginning price

ie., Capital Appreciation + dividend X 100Purchase P rice



Speculation

S hort term objectiveMaximizes return thru buying & selling

Delivery of securities ± nilS takes of risk is higher & returns alsohigher.



Investment vs. Speculation1. Risk : Assumes moderate / low risk Higher Risk

2. Returns: Low / Moderate return Higher Return

3. Use of funds : Own funds Borrowed funds (supplement hisPersonal resources).

4. Ownership : Owns the instruments No intention to own

5. Holding period: Commitment of funds Trades frequently ± holdingfor a Longer term period too short(1 year to few years) (few days to months)

6. Motives: direct income + capital gains Achieve profits through pricechanges ( i.e capital gains )

7. Diligence: high in selecting securities Speculates on experience

8. Factors real worth of the Market behaviour, priceconsidered: security movement & inside information



Any four differences between speculationand Gambling?!



Classification of financial marketsNature of claim a) Debt market

b) Equity marketMaturity of claim a) Money market

b) Capital marketS easoning of claim a) P rimary market

b) secondary market

Timing of delivery a) spot marketb) Forward/Futures

O rganisational structure a) ET marketb) O TC market



Financing Decision

Raising of funds DebtEquity

Best / O ptimum mix ( proportion)E.g. Infosys purely non debt

RCL purely non debt



How are funds raised?

Through ³Financial Markets´

Financial market establishes a bridgebetween the ³savers´ and ³investors´ of money to accelerate the growth of economic development.



How to raise funds?

Public issues Deals with previouslyRights issues issued / existing securitiesBonus issue through a brokerage firmPrivate placement authorized to trade inADRs & GDRs the market ( Eg: BSE, NSE)

PRIMARY MARKET SECONDARY MARKET



Debenture ± Types

1. S ecured and non-secured2. Fully convertible debenture

3. Partly convertible debenture4. Non- convertible debenture5. S ecured or unsecured



Bonds At par / discountFixed interest rate (coupon rate)Redemption value at par or premium

Types:1. S ecured / unsecured2. Perpetual and redeemable3. Fixed or floating interest

4. Zero-coupon (sell at discount and repaid atface value)

5. Deep Discount bonds (IDBI (1992) & ICICI (1997)



6. Capital Indexed bonds- principal amount is adjusted for inflation

for every year - to avail benefit of inflated principal the

investor need to hold the instrument for entire 5 year period

- can be sold in the secondary market ,value of principal repayment adjusted byIndex Rate (IR)



Blue ± chip shares

Heavy weight sharesHigh Market Cap.

Large volume tradedHigh Performers



Growth S hares

Higher rate of growth than industrialgrowth rate

Eg In 1999 major gainers were softwarestocksHCL & Infosys rised sharply



Income shares

S table operationsLimited growth opportunities

Eg: Banks, FMCG (HLL , Nestle,etc.)



Defensive S hares:

- unaffected by market movements- Eg. Pharma, O il, telecom etc



Cyclical S hares

Business prospects affected by businesscycles

Low to moderate yieldCapital gain is highly variableEg. Automobile, durable goods etc.



S peculative shares

S mall and Midcap companiesS hort term gains

O nly speculative purpose And day trading



Fixed Income securities

P referenceDebentures

BondsIVP s and KV P s (P O savings certificates)Govt. securities

Money Market S ecurities ( Treasury Bills,CP s, C O D)



Money Market InstrumentsTreasury Bills

- 91 days , 364 days maturity- low interest- sold at discount & redeemed at par

CPs- fixed maturity period (3 to 6 months)- unsecured P ro-note- 1993 ± extended to one year

- sold at discount and redeemed at face value- mostly for companies & IIs- min. period reduced to 30 days



C ertificate of Deposits

- marketable receipt of funds depositedin a bank.

- Fixed period & fixed interest

- bearer documents & negotiable- For IIs and companies- Min. size is Rs. 10 lakh and additional

amount in multiples of Rs. 5 Lakh- issuers ± banks & F Is- investors ± banks, corporates,F Is, MFs



Ready Forward Contracts (REPO )

Transaction where two parties agree tosell and repurchase the same security. ( ata mutually agreed future date & price)Buyer purchases , to sell the same to the

seller at an agreed date & predeterminedprice

Rate of interest agreed ± ³ repo rate´. Approved by RBI ( T ± bills & Governmentsecurities)



P rimary & S econdary Market

Parties Involved in the New Issue:Managers to the issue (Eg. SBI Capital

Markets Ltd., ICICI Securities & FinanceCo.; DSP Financial Consultants; etc)

Registrars to the issueUnderwriters (insurance against inadequate

subscription)

Bankers to the issue Advertising AgentsFinancial Institutions



Regulatory Bodies

S EB IRegistrar of Companies

RBIS tock ExchangesIndustrial Licensing Authorities

Pollution Control Authorities



P lacement of Issues:Initial Issues are floated through:-

P rospectus offer Bought out deals (offer for sale - sponsors)

P rivate P lacement (FIs, Corporates, H NI)Eg. UT I, MFs, Insurance Cos., MerchantBanks etc. )

Rights IssueBook Building



S econdary Market

Types of O rdersLimit O rders Eg. Buy RP L at Rs60

Best Rate order (lowest for buying &highest for selling)Discretionery order Eg. Buy TC S 100

shares around Rs.800S top Loss order Eg. S ell S BI at Rs.990,stop loss at 897



Functions of S E

Maintains Active TradingFixation O f prices

Ensures safe and fair dealingHelps Financing IndustryDissemination O f Information

Performance Indicator S elf-regulating organisation



Executions of Trade

S ettlement CycleRolling settlement

P rice filters / circuit filtersIntraday P rice bands



S tock Exchanges

23 S Es ± 20 regional

3 NS Es (NS E, O TCE I, IS E)P rovides an organized market for transactions in shares & securities

BS

E & NS

E ( primary exchanges) accountfor nearly 72% of all capital market activityin India



BS E:

1887: Native S hare & S tock Broker

Association in DalalS

treet1899 ± inaugurated as B S EGoverned by a Board chaired by a non ±executive chairman supported by electeddirectors, S EB I nominee & publicrepresentatives.



NS E:

P romoted by leading Financial Institutions

June 1994 ± commenced its operation inthe wholesale debt market segment.November 1994 ± equity market

June 2000 ± derivative segment.



S econdary Market

An organized market place where securities aretraded.

An association of members brokers for the

purpose of facilitating and regulating the tradingin securities. According to S ecurities Contract Regulation Act(1956), securities trading regulated by centralgovernment conducted in stock exchanges ( 23in Numbers)Normal trading hours 10 AM to 3.30 PM



Types of delivery

S pot Delivery ( S ame day / next day)Hand Delivery ( 7 to 14 days)Through clearing ( 2 months)S pecial Delivery ( longer period) > 14 days

< 2 months

No carried forward ( D & P )



Listing:

making a quotation available for acompany¶s share to be traded.Trading on a S E ± Public Ltd. Companieswith minimum paid up capital of Rs. 5CroresTrading on B S E / NS E - Minimum paid upcapital of Rs. 10 Crores



Types of O rders

Limit orders ± Buy RP L at Rs. 61

Best rate order ± execute at best possibleratediscretionary order ± range of price , µ BuyS BI 100sh. Around Rs.952¶S top loss order ± µsell RP L at Rs. 65, stoploss @ Rs.62 to limit the loss on sale.



S EB I ± April 1988NeedTo regulate & develop the S tock & Capital Market in IndiaTo curb the malpractices in case of companies, merchantbankers & brokers.

Manipulation of market prices before new issuesDelay in allotment letters / refund orders / dispatch of sharecertificates.Lack of transparency in the trading operations.Delay / not passing contract notes.Delay in making payments / giving delivery of shares to clients.

Insider training.Investor protection for steady flow of savings.P romote efficient services by brokers & intermediaries.Fair disclosures of the companies in the new issue market.



New guidelines ± from June 1992

Free pricing ± companies having 3 yearsof track record of consistent profitabilityout of last 5 years. Not less than 20 % of equity offered to the public.S eptember 1999 ± IT companied subjectto a min. public offer of only 10 % of theissued capital instead of 25% for other companies. ( offer at least Rs. 50 crores /at least give out 20 lakh shares)



Certificates of Deposit Market ( CDs)

Issued by banks & F Is

Is a negotiable promissory note, secure &short term ( one year)Issued at a discount to face value - tocorporates trusts, high net worthindividuals & others.



Commercial Paper (CP )

Unsecured promissory noteIssued by highly rated corporate borrowers & financialinstitutions ( on limit fixed by RBI)Corporate borrower & having tangible NW greater than 4crore.Issuers need to obtain credit rating from recognized

rating agencies.Maturity ± minimum 15 days & maximum of one year

Issued at a discount to face value & redeemed at facevalueHeld in dematerialized form thru registered depositories.



Call Market

Amount borrowed / lent on demand ( for ashort period)Period of one day to 14 days ± ³ noticemoney´ otherwise called ³ call money´

Adjustments for cash reserve requirementP layers ± banks, financial institution, MFs

Entirely an µ Inter Bank¶ marketBorrowers & lenders maintain a currentaccount with RBI



T ± Bill Market

S hort term upto one year ( borrowing instruments of the Govt)RBI issues T ± Bills on a predetermined day.

Auctioned at regular intervalsIssued at a discount to face value & prepaid at face value on maturity.4 types - 14 days , 91 days, 182 days & 364 days

Auction every Friday Alternate Wednesdayof every week

Amount for 14 days , 91 days 7 82 days ± Rs 100 Crores & 364 days T ± Bill auction is Rs 500 CroresInvestors - banks ( T ± Bills form part of S LR)

Insurance companies & financial institutionsIssued as entries in the ³subsidiary General ledger´ maintained by RBI

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