Security Analysis Security Analysis &&

Portfolio Portfolio Management Management Investment Investment OverviewOverviewByBy

B.Pani B.Pani M.Com,LLB,FCA,FICWA,ACS,DISA,MBAM.Com,LLB,FCA,FICWA,ACS,DISA,MBA

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Concept of InvestmentConcept of Investment‘‘Sacrificing something now for the prospect of Sacrificing something now for the prospect of

gaining something later’gaining something later’Three dimension to an Investment:Three dimension to an Investment:1.1. Time 2. Today's sacrifice 3. Prospective gain.Time 2. Today's sacrifice 3. Prospective gain.

The sacrifice is certain but return in future may be uncertain. This attributes of investment indicate risk factor

Various meanings :Various meanings :For Layman : Some monetary commitmentFor Layman : Some monetary commitmentFor Economist : Net addition made to national incomeFor Economist : Net addition made to national incomeFor Finance professional : The allocation of money to For Finance professional : The allocation of money to

assets that are expected to yield some gain over a assets that are expected to yield some gain over a period of time. period of time.

Some ExamplesSome Examples1.1. A young couple buys a house for Rs. 5 lakhs.A young couple buys a house for Rs. 5 lakhs.2.2. A wealthy farmer pays Rs. 2 lakhs for a piece A wealthy farmer pays Rs. 2 lakhs for a piece

of land in his village.of land in his village.3.3. A cricket fan bets Rs. 1000 on the outcome of A cricket fan bets Rs. 1000 on the outcome of

the test match in India.the test match in India.4.4. A govt official buys units of UTI worth Rs. A govt official buys units of UTI worth Rs.

20,000.20,000.5.5. A professor buys 100 shares of SBI.A professor buys 100 shares of SBI.6.6. A Clark deposits Rs.5000 in a post office.A Clark deposits Rs.5000 in a post office.7.7. Mr. John invests all his savings in a newly Mr. John invests all his savings in a newly

floated shares.floated shares.

Genuine Genuine InvestmentInvestment Vs Vs SpeculationSpeculation Genuine investment are carefully thought Genuine investment are carefully thought

out decision. The expected return is out decision. The expected return is consistent with the underlying risk of the consistent with the underlying risk of the investment.investment.

Speculation means taking up the business Speculation means taking up the business risk in the hope of getting short term gains. risk in the hope of getting short term gains. Speculation essentially involves Speculation essentially involves simultaneously buying and selling activities simultaneously buying and selling activities with the expectation of getting profit from with the expectation of getting profit from the price discrepancies.the price discrepancies.

Speculation is based on the rumors, hot Speculation is based on the rumors, hot tips, insider information or often simply on tips, insider information or often simply on hunch.hunch.

Main difference :Main difference :I.I. Time horizonTime horizonII.II. Risk – return characteristics.Risk – return characteristics.

Genuine Investment Vs Genuine Investment Vs GamblingGambling

A gambling is usually a very short A gambling is usually a very short term investment. The time horizon term investment. The time horizon involved in gambling is shorter than involved in gambling is shorter than speculation. speculation.

In gambling the outcome is largely a In gambling the outcome is largely a matter of luck; no rational economic matter of luck; no rational economic reasons is given for it.reasons is given for it.

A clear demarcation between these A clear demarcation between these three is not always easy.three is not always easy.

Investment ObjectiveInvestment Objective Near term high priority goalNear term high priority goal : attached high : attached high

emotional priority. Eg. A own house. emotional priority. Eg. A own house. (investment : short term & risky assets)(investment : short term & risky assets)

Long term high priority goalLong term high priority goal : Need for financial : Need for financial independence. Eg. Higher education of child. independence. Eg. Higher education of child. (investment : long term & defensive assets).(investment : long term & defensive assets).

Low priority goalLow priority goal : not painful if not achieved. : not painful if not achieved. Eg. Foreign trip. (investment : speculative Eg. Foreign trip. (investment : speculative assets).assets).

Money making goalMoney making goal : not satisfied by : not satisfied by conventional saving. Eg. Entrepreneurial. conventional saving. Eg. Entrepreneurial. (investment : short term & risky assets on (investment : short term & risky assets on regular basis).regular basis).

Investment ConstraintsInvestment Constraints

LiquidityLiquidity AgeAge Time horizonTime horizon Risk toleranceRisk tolerance Tax liabilityTax liability Need for regular incomeNeed for regular income

InvestmentInvestment AlternativesAlternatives

((SecuritySecurity formform))1.1. Equity sharesEquity shares

Blue chip : large, well established, financially Blue chip : large, well established, financially strong.strong.

Growth stock : relatively new, opportunity to Growth stock : relatively new, opportunity to grow in the future.grow in the future.

Income stock : Relatively limited growth Income stock : Relatively limited growth opportunity but fairly stable operation.opportunity but fairly stable operation.

Cyclical stocks : Pronounced cyclically in Cyclical stocks : Pronounced cyclically in there operation.there operation.

Speculative stocks : Widely fluctuate because Speculative stocks : Widely fluctuate because lot of speculative trading. lot of speculative trading.

Cont….Cont….

2. Bonds : Govt bonds (gilt edge), 2. Bonds : Govt bonds (gilt edge), Private sector debenture, PSU bonds.Private sector debenture, PSU bonds.

3. Mutual funds : Equity schemes, Debt 3. Mutual funds : Equity schemes, Debt schemes, Balanced schemes.schemes, Balanced schemes.

4. Money market instruments : T-bills, 4. Money market instruments : T-bills, Commercial paper, Certificates of Commercial paper, Certificates of deposits.deposits.

5. Financial Derivative : Futures, 5. Financial Derivative : Futures, options.options.

Investment AlternativesInvestment Alternatives(Non-Security form)(Non-Security form)

1.1. Non-marketable financial assets : Bank Non-marketable financial assets : Bank deposits, Post office savings, Provident deposits, Post office savings, Provident fund deposit.fund deposit.

2.2. Real estate : Agricultural land, Real estate : Agricultural land, Commercial property.Commercial property.

3.3. Life insurance policy : Endowment Life insurance policy : Endowment policy, Money back policy etc.policy, Money back policy etc.

4.4. Precious object : Gold, Precious stone, Precious object : Gold, Precious stone, Art object.Art object.

Financial SystemFinancial SystemFinancial system:Financial system: A system that aims at A system that aims at

establishing & providing a regular, establishing & providing a regular, smooth, efficient and cost effective smooth, efficient and cost effective linkage between depositors & investors.linkage between depositors & investors.

Features:Features:(i)(i) Linkage between depositor & investor.Linkage between depositor & investor.(ii)(ii) Expansion of financial market over Expansion of financial market over

space & time.space & time.(iii)(iii) Promotes efficient allocation of Promotes efficient allocation of

resources.resources.Constituents:Constituents:Institutions, Services, Markets & Institutions, Services, Markets &

Instruments.Instruments.

Concept of MarketConcept of Market

A market is a location (Physical or virtual) A market is a location (Physical or virtual) where buyers and sellers come into where buyers and sellers come into contact to exchange goods and services.contact to exchange goods and services.

Financial MarketFinancial Market : This markets : This markets channelize the savings of the household channelize the savings of the household to the institutions who need funds. By to the institutions who need funds. By performing this role the, the financial performing this role the, the financial markets aid in increasing production and markets aid in increasing production and income for various units.income for various units.The nature of transactions, the type of The nature of transactions, the type of participants and the magnitude of participants and the magnitude of operations made various sub markets.operations made various sub markets.

Approaches to Investment Approaches to Investment Decision MakingDecision Making

Fundamnental- Based on fundamental factors Fundamnental- Based on fundamental factors relating to company,industry and economyrelating to company,industry and economy

Psychological- Guided by emotion,rather than Psychological- Guided by emotion,rather than reason i.e. greed, euphoria, fear and despair.reason i.e. greed, euphoria, fear and despair.

Academic –Market are efficient i.e. Market Academic –Market are efficient i.e. Market Price=Intrinsic ValuePrice=Intrinsic Value

Positive relationship between risk and returnPositive relationship between risk and return

Prices corresponds to a random walk i.e.present Prices corresponds to a random walk i.e.present price behaviour cannot used to determine price behaviour cannot used to determine future pricefuture price

Eclectic Approach- Mixture of all approachesEclectic Approach- Mixture of all approaches

Types of Financial MarketsTypes of Financial Markets Money MarketMoney Market : The money mkt is wholesale : The money mkt is wholesale

debt market for the low risk, highly liquid, short debt market for the low risk, highly liquid, short term instruments. Funds are available in this mkt term instruments. Funds are available in this mkt for a period ranging from a single day upto a for a period ranging from a single day upto a year. This mkt is mostly dominated by Govt, year. This mkt is mostly dominated by Govt, banks and FI’s.banks and FI’s.

Capital MarketCapital Market : This mkt is designed to finance : This mkt is designed to finance the long term instruments. the long term instruments.

Forex marketForex market : This market deals with : This market deals with multicurrency requirements which are met by multicurrency requirements which are met by exchange of currencies. This is one of the most exchange of currencies. This is one of the most developed & integrated mkt across the globe.developed & integrated mkt across the globe.

Credit marketCredit market : This is the place where banks, : This is the place where banks, FI’s and NBFC’s deal in short, medium & long FI’s and NBFC’s deal in short, medium & long term loans to the corporates and individuals.term loans to the corporates and individuals.

Salient features of Market Salient features of Market

BreadthBreadth : It indicates the number of : It indicates the number of participants with homogenous expectation.participants with homogenous expectation.

DepthDepth : The volumes of securities traded par : The volumes of securities traded par day. It also called the liquidity of the market.day. It also called the liquidity of the market.

Information flowInformation flow : Participants do not have any : Participants do not have any scope to reap abnormal profit.scope to reap abnormal profit.

Operational efficiencyOperational efficiency : Operating costs : Operating costs (Transaction & Admn) should be as low as (Transaction & Admn) should be as low as possible.possible.

Allocational efficiencyAllocational efficiency : Efficiently market : Efficiently market channelized the resources into projects.channelized the resources into projects.

Development of security market in Development of security market in IndiaIndia

Evolution : The first unstructured stock Evolution : The first unstructured stock exchange was BSE.exchange was BSE.

- The cotton & textile industry was the main The cotton & textile industry was the main contributor. contributor.

The next stock exchange was CSE.The next stock exchange was CSE.- Jute, coal, and mining, contributed to its birth.Jute, coal, and mining, contributed to its birth.

In 1956 Govt implemented Security Contract ActIn 1956 Govt implemented Security Contract Act

From 1957 the stock exchanges started taking From 1957 the stock exchanges started taking registration.registration.

At present India has 23 stock exchanges including At present India has 23 stock exchanges including BSE,NSE and OTCEI.BSE,NSE and OTCEI.

National Stock ExchangeNational Stock Exchange It was established in 1993. It was established in 1993. The biggest attraction was that it offered screen The biggest attraction was that it offered screen

based trading.based trading. It reduced the probability of manipulation by It reduced the probability of manipulation by

brokers.brokers. The average daily trading volume was 7 crore The average daily trading volume was 7 crore

in Nov 1994 now it is 10,350 crore.in Nov 1994 now it is 10,350 crore. Currently it is handling 28,50,000 traders daily.Currently it is handling 28,50,000 traders daily. Number of securities available for trading is Number of securities available for trading is

nearly 1500.nearly 1500.

Primary MarketPrimary Market

The market is also known as IPO The market is also known as IPO market. The very first sale of stocks to market. The very first sale of stocks to the public is called IPO.the public is called IPO.

The issuer may be a new company or The issuer may be a new company or an existing company.an existing company.

The IPO are managed by one merchant The IPO are managed by one merchant banker through book building process.banker through book building process.

Book Building Process.Book Building Process.

Fiscal yearFiscal year Money raisedMoney raised No. of IPOsNo. of IPOs

2000-012000-01 6,6186,618 2424

01-0201-02 6,4236,423 1919

02-0302-03 5,7325,732 1414

03-0403-04 22,14522,145 3535

04-0504-05 25,52625,526 3434

05-0605-06 23,63223,632 101101

06-0706-07 3,8203,820 88

Secondary MarketSecondary Market After the listing of a security it can be After the listing of a security it can be

bought and sold in the secondary market.bought and sold in the secondary market. Previously in India physical form of shares Previously in India physical form of shares

exists.exists. In Nov 1996 National Securities In Nov 1996 National Securities

Depository Limited (NSDL) was Depository Limited (NSDL) was established.established.

The NSDL was sponsored mainly by IDBI, The NSDL was sponsored mainly by IDBI, UTI, and NSE.UTI, and NSE.

In Feb 1999 Central Depository Services In Feb 1999 Central Depository Services Ltd. Was established.Ltd. Was established.

NSDL & DPNSDL & DP NSDL :NSDL : It is an organization where the It is an organization where the

securities of the participating investors are held securities of the participating investors are held in an electronic form.in an electronic form.

An investor has to open a depository A/C An investor has to open a depository A/C through a depository participants.through a depository participants.

NSDL operates on two tier structures wherein it NSDL operates on two tier structures wherein it maintain accounts of its DP and the DP maintain accounts of its DP and the DP maintains the accounts of this clients.maintains the accounts of this clients.

DP :DP : It can be a public financial institution, It can be a public financial institution, bank, registered stock brokers or the NBFC bank, registered stock brokers or the NBFC subject to approval of NSDL.subject to approval of NSDL.

DP has to deposit some amount to NSDL and DP has to deposit some amount to NSDL and subsequently they pass it to the investors. subsequently they pass it to the investors.

Participants in the secondary Participants in the secondary marketmarket

Individual Investors.Individual Investors. Mutual funds.Mutual funds. Indian Financial Institutions.Indian Financial Institutions. Foreign Institutional Institutions.Foreign Institutional Institutions. Non – resident Indians.Non – resident Indians. Brokers.Brokers. Sub – brokers.Sub – brokers.

Listing of SecuritiesListing of Securities Listing refers to the admission of the security of a public limited Listing refers to the admission of the security of a public limited

company on a recognized stock exchange for trading.company on a recognized stock exchange for trading. Objective : Providing marketability, liquidity and transferability of a Objective : Providing marketability, liquidity and transferability of a

stock.stock. Advantages of listing - To the company :Advantages of listing - To the company :i.i. The company gains national & international importanceThe company gains national & international importanceii.ii. Getting loan from banks & FIs easily.Getting loan from banks & FIs easily.iii.iii. In case of expansion program it is easy for the company to In case of expansion program it is easy for the company to

mobilized resources through right issue.mobilized resources through right issue.iv.iv. Ensure wide distribution of share holding thus avoiding fear of Ensure wide distribution of share holding thus avoiding fear of

takeover.takeover.To the investors : To the investors : i.i. The liquidity of the investment is ensured.The liquidity of the investment is ensured.ii.ii. Since it is quoted there is no price secrecy or price manipulation.Since it is quoted there is no price secrecy or price manipulation.iii.iii. Listed Companies are obliged to furnished audited financial report.Listed Companies are obliged to furnished audited financial report.iv.iv. Stock exchange also protects the interest of the investors if any Stock exchange also protects the interest of the investors if any

fraud occurs.fraud occurs.

Qualification for listingQualification for listing Minimum Issued CapitalMinimum Issued Capital : Should be Rs.3 Cr. & : Should be Rs.3 Cr. &

minimum public offering is Rs.75 lakh.minimum public offering is Rs.75 lakh. Listing on multiple exchangeListing on multiple exchange : If paid up capital is more : If paid up capital is more

than Rs.5 cr. it is mandatory for the Co. to seek listing than Rs.5 cr. it is mandatory for the Co. to seek listing on more than one stock exchange.on more than one stock exchange.

No. of Share holdersNo. of Share holders : For every Rs.1 lakh of fresh issue : For every Rs.1 lakh of fresh issue there should be atleast 10 Shareholders.there should be atleast 10 Shareholders.

Articles of associationArticles of association : It should be in tune with the : It should be in tune with the sound corporate practice and duly authorized from sound corporate practice and duly authorized from SEBI.SEBI.

Cost of public issueCost of public issue : The Co. should adhere to the : The Co. should adhere to the ceiling in the expenditure of the public issue as ceiling in the expenditure of the public issue as prescribed by SEBI. prescribed by SEBI.

Applying modeApplying mode : The prospectus should provide : The prospectus should provide information on how the investor should apply.information on how the investor should apply.

Public offer sizePublic offer size : The size of the offer, the value of : The size of the offer, the value of shares & if the shares are issued at premium should be shares & if the shares are issued at premium should be stated in the first page of the prospectus.stated in the first page of the prospectus.

Qualities for successful Qualities for successful InvestingInvesting

Contrary thinking(not to have herd Contrary thinking(not to have herd mentality)mentality)

Patience(not to look for immediate result)Patience(not to look for immediate result) Composure(keep your head up when all Composure(keep your head up when all

around you are loosing theirs)around you are loosing theirs) Flexibility and openness(Interpret new Flexibility and openness(Interpret new

developments with an open mind)developments with an open mind) Decisiveness(procastination leads to loss Decisiveness(procastination leads to loss

of opportunities and gains) of opportunities and gains)

““There is no free lunch. There is no free lunch. Never investment on Never investment on sentiment. Never sentiment. Never investment on a tip investment on a tip ””

John John TempletonTempleton