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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

Unit- I

Investment: Investment -Meaning- Types - Objectives -Process- Investment Vs Speculation Vs Gambling -Primary and Secondary Markets – indices-types of orders – margin trading - Trading Mechanism. Online, mock, and Virtual trading, Portfolio theory: Concept of Risk, Measuring Risk and Returns – risk classification – Systematic risk – unsystematic risk - standard deviation – variance – correlation coefficient – Beta – Calculating expected return and risk. Financial calculations in Excel using the data from NSE and BSE (Smart beta)

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Unit-II

Securities valuation: Approaches of valuation – fixed income valuation -Bond valuation (Types of Bonds, Interest Rates, Term Structure of Interest Rates, Measuring Bond Yields, Yield to Maturity, Yield to Call, Holding Period Return, Bond Pricing Theorems, Bond Duration, Modified Duration. Active and Passive Bond Management Strategies, Bond immunization, Bond Volatility, Bond Convexity). -equity stock

Valuation -Discounted Cash Flow Techniques, Dividend Discount Models (DDM), Growth Rate cases for DDM, Free Cash Flow Valuation Approaches, Relative Valuation Techniques, Earnings Multiplier Approach, Price/ Earnings, Price/ Book Value, Price/ Sales Ratio, EVA.

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Unit- III

Fundamental analysis and technical analysis: Fundamental Analysis Vs Technical Analysis –Fundamental Analysis - Economy, Industry and Company analysis Technical Analysis –Dow Theory -Line chart, Bar chart, Candle stick chart, Point figure chart-Support level, Resistance Level-Head and Shoulders. Using Excel for charts. Specific five indicators.

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Unit – IV:

Portfolio Analysis: Risk and Return Analysis, Markowitz Portfolio Theory, Mean-Variance Approach, Portfolio Selection, Efficient Portfolios, Single Index Model, Capital Asset Pricing Model, Arbitrage Pricing Theory.

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UNIT-V

Performance Evaluation of Mutual Fund: Mutual Funds, Types of Mutual Funds Schemes, Structure, Trends in Indian Mutual Funds, Net Asset Value, Risk and Return, Performance Evaluation Models: Sharpe Model, Treynor Model, Jensen Model, Fama’s Decomposition Financial calculations in excel Exchange traded funds momentum strategies.

Textbooks

1. Donald E. Fisher, Ronald J. Jordan, “Security Analysis and Portfolio Management”, Prentice Hall of India (P) Ltd., New Delhi, 7th Edition 2018.
2. Jack Clark Frances, “Investment Analysis and Management”, McGraw Hill Book Company New York.
3. Security Analysis And Portfolio Management Paperback – 1 January 2015 by Kevin S. (Author)
4. Securities analysis and portfolio management Hardcover – 3 October 2016 by V.A .Avadhani (Author)
5. Investment Analysis and Portfolio Management | 5th Edition Paperback – 10 March 2017 by Prasanna Chandra (Author)

Reference Books

1. Ranganatham & Madhumathi Security Analysis Portfolio Management, Pearson Education, 2011.

2. Sudhindra Bhat Security Analysis and Portfolio Management, 2017, excel

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COURSE EDUCATIONAL OBJECTIVES (CEO’S):

1. To acquaint the students with working knowledge of investment

2 .To provide students with a conceptual and analytical framework for evaluating a financial security

3 .To familiarize students with fundamental analysis and technical analysis

4 .To construct the optimum portfolio by diversifying risk and maximizing return

5 .To familiarize students with portfolio evaluation and management techniques and strategies.

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COURSE OUTCOMES (CO’S):

At the end of the course students would be able to

CO1 :Apply practical knowledge of investment principles to real-world scenarios.

CO2 :Evaluate financial securities using a conceptual and analytical framework.

CO3 :Analyze financial instruments through both fundamental and technical approaches.

CO4 :Synthesize risk diversification techniques to construct an optimal portfolio.

CO5 :Utilize portfolio evaluation and management techniques for effective decision-making

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INTRODUCTION OF INVESTMENT

Investment is the commitment of money or other assets to acquire assets that are expected to generate income or appreciate in value over time. It is a crucial aspect of financial planning and wealth

OR

Investment involves the allocation of money towards purchasing an asset, which is not to be consumed in the present but hoping it will generate stable income or is expected to appreciate in the future. So, investment is a commitment of funds to derive the future income in the form of interest, dividend, rent, premium or appreciation in the value of principal capital.

OR

Investment may be defined as an activity that commits funds in any financial/physical form in the present with an expectation of receiving additional return in the future.

OR

In other words, Investment is a commitment of funds to derive the future income in the form of interest, dividend, rent, premium or appreciation in the value of principal capital .

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Definition

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1. Investment involves employment of own funds or borrowed funds on a real or financial asset for a certain period of time in anticipation of a return in future.

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• Investments refers to sacrifice of current resources in anticipation of a future benefit.
• Investment involves commitment of certain current cash flow in anticipation of an uncertain future cash flows.

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Definition of Investment

Investing involves allocating funds to assets with the expectation of generating returns. These returns can be in the form of interest, dividends, capital appreciation, or a combination of these.

Financial Security

Investing allows individuals to build a financial safety net and protect their wealth from inflation and market fluctuations.

Long-Term Growth

Investing for the long term allows individuals to accumulate wealth and achieve their financial goals, such as retirement planning, purchasing a home, or funding education.

Passive Income

Investing can generate passive income streams, such as dividends from stocks or rental income from real estate, providing financial independence.

Importance of Investment

Investing is essential for individuals and businesses seeking to grow their wealth and secure their financial future. It plays a crucial role in economic development.

1

Economic Growth

Investments fuel economic growth by providing capital for businesses to expand and create jobs.

2

Inflation Protection

Investing in assets that can outpace inflation, such as stocks or real estate, helps preserve wealth and maintain purchasing power.

3

Financial Independence

Investing allows individuals to achieve financial independence by generating income streams and building wealth over time.

4

Risk Management

Diversifying investments across different asset classes reduces portfolio risk and helps mitigate potential losses.

Types of Investment

Stocks

1

Equity Ownership

Stocks represent ownership in a company, making you a shareholder. When the company does well, your stock value can increase.

2

Potential for Growth

Stocks have the potential to generate high returns, but they also carry higher risk than other investments.

3

Diversification

Investing in a diverse portfolio of stocks can help mitigate risk and increase returns.

4

Long-Term Perspective

Stocks are considered a long-term investment, typically held for several years or decades.

Bonds

Debt Securities

Bonds are essentially loans you make to a company or government. You receive interest payments over the life of the bond, and the principal is repaid at maturity.

Lower Risk

Bonds generally have lower risk than stocks, but they also offer lower potential returns. They can be a good option for more conservative investors.

Income Generation

Bonds provide a predictable stream of income through interest payments. They are often used to supplement retirement income or provide a steady stream of cash flow.

Mutual Funds

Diversification

Mutual funds pool money from multiple investors to buy a basket of stocks, bonds, or other assets. This diversification helps to reduce risk.

Professional Management

Mutual funds are managed by experienced professionals who make investment decisions on behalf of investors. This can be a benefit for those who lack the time or expertise to manage their own investments.

Accessibility

Mutual funds are generally accessible to investors of all income levels. You can invest in a mutual fund for a small amount of money, making them a good option for those just starting out.

Exchange-Traded Funds (ETFs)

Similar to Mutual Funds

ETFs are similar to mutual funds in that they track a specific index or basket of assets.

Traded on Exchanges

ETFs are traded on stock exchanges, making them more liquid and responsive to market fluctuations than mutual funds.

Lower Fees

ETFs typically have lower expense ratios than mutual funds, which can result in higher returns over time.

Real Estate

Rental Income

Real estate can generate passive income through rental properties. It can be a good way to diversify your investment portfolio and hedge against inflation.

Potential for Appreciation

Real estate values can appreciate over time, providing a return on your investment. It can also be a good way to build equity.

Tax Advantages

Real estate investments can offer various tax advantages, such as mortgage interest deductions and depreciation write-offs.

Tangible Asset

Real estate is a tangible asset, meaning it is something you can physically own and touch. It can provide a sense of security and stability.

Government Saving Schemes

1

National Savings Certificates

These offer guaranteed returns with tax benefits, making them popular for long-term savings.

2

Public Provident Fund

A government-backed scheme with tax advantages, offering a secure and stable investment option for retirement planning.

3

Sukanya Samriddhi Account

Specifically designed for girls, this scheme offers tax benefits and encourages long-term savings for their education and marriage.

Money Market Instruments

Treasury Bills

Short-term debt securities issued by the government, providing a safe and liquid investment option.

Commercial Paper

Unsecured short-term debt issued by corporations, offering higher yields but with greater risk compared to Treasury Bills.

Certificate of Deposit

Time deposits with a fixed interest rate, offering a secure and predictable return on investment for a specific period.

Money Market Instruments

Treasury Bills

Short-term debt securities issued by the government, providing a safe and liquid investment option.

Commercial Paper

Unsecured short-term debt issued by corporations, offering higher yields but with greater risk compared to Treasury Bills.

Certificate of Deposit

Time deposits with a fixed interest rate, offering a secure and predictable return on investment for a specific period.

Commodities

1

Raw Materials

Commodities are basic raw materials, such as oil, gold, wheat, and cotton. They are often used as inputs in manufacturing and production.

2

Price Fluctuations

Commodity prices can be highly volatile, affected by supply and demand factors, as well as geopolitical events.

3

Hedging

Commodities can be used as a hedge against inflation. As the price of goods and services rises, the price of commodities often follows suit.

Precious Metals

Gold

Silver

Platinum

Safe Haven Asset

Industrial Uses

Industrial and Jewelry Uses

Historically a Hedge Against Inflation

Less Volatile Than Gold

Higher Price Than Gold and Silver

Insurance Products

Life Insurance

Provides financial protection to beneficiaries in case of the policyholder's death, ensuring their financial security.

Home Insurance

Covers losses or damages to a homeowner's property due to various risks, such as fire, theft, or natural disasters.

Motor Insurance

Provides financial protection against accidents, theft, and damages to vehicles, covering both the insured vehicle and third-party liabilities.

Health Insurance

Protects individuals against medical expenses incurred due to illnesses or injuries, providing financial support for healthcare costs.

Cryptocurrencies

Decentralized Digital Currencies

Cryptocurrencies, like Bitcoin and Ethereum, are digital assets that operate on a decentralized network, eliminating the need for intermediaries.

Potential for Growth

Cryptocurrencies have experienced rapid growth in recent years, attracting investors seeking high returns.

Venture Capital

High-Growth Companies

Venture capital is invested in early-stage companies with high growth potential, typically in sectors such as technology, healthcare, and biotechnology.

High Risk, High Reward

Venture capital investments are high-risk, as many startups fail. However, those that succeed can generate enormous returns for investors.

Limited Access

Venture capital investments are typically reserved for accredited investors, who have a high net worth or significant financial experience.

Private Equity

High Risk

Private equity investments carry high risk, as they are often illiquid and can be difficult to sell quickly.

Potential High Returns

The potential for high returns is often the main attraction to private equity investors.

Limited Availability

Private equity investments are often only available to accredited investors with a high net worth.

Angel Investing

Early-Stage Companies

Angel investors typically invest in startups or early-stage companies with high growth potential.

High-Risk, High-Reward

Angel investing is a high-risk, high-reward proposition. The potential for large returns is balanced by the risk of losing the entire investment.

Active Involvement

Angel investors often take an active role in the companies they invest in, providing mentorship and guidance.

Savings Accounts

1

Safe and Secure

Savings accounts are FDIC-insured, meaning that your deposits are protected up to a certain amount.

2

Low Returns

Savings accounts typically offer low interest rates, meaning that your money will grow slowly.

3

Easy Access

You can easily access your money in a savings account at any time.

Certificates of Deposit (CDs)

Fixed Interest Rates

CDs offer a fixed interest rate for a set period of time.

Maturity Date

You cannot withdraw money from a CD before its maturity date without incurring a penalty.

Potential for Higher Returns

CDs typically offer higher interest rates than savings accounts.

Money Market Accounts

High Liquidity

Variable Interest Rates

FDIC-Insured

Low Minimum Balance Requirements

Life Insurance

1

Financial Protection

Life insurance provides a death benefit to your beneficiaries, which can help to cover funeral expenses and other financial obligations.

2

Different Types

There are many different types of life insurance, including term life insurance and whole life insurance.

3

Investment Component

Some life insurance policies also have an investment component, which allows you to grow your money over time.

TYPES OF INVESTMENT

• Financial & Non-financial Deposits
• Government Saving Schemes
• Money Market Instruments
• Bonds Or Debentures
• Equity Shares
• Mutual Fund Schemes
• Insurance Products
• Retirement Products
• Real Estate
• Precious Objects
• Financial Derivatives

• Investment involves making of a sacrifice in the present with the hope of deriving future benefits.
• It is considered the sacrifice of certain present value of money in anticipation of a reward.

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INVESTMENT ALTERNATIVES

These are the tools used to reduce risk through diversification.

91- Day, 182- day, 364- day, and 14- day TBs

Blue-chip shares

Blue chip stocks are shares of very large and well-recognised companies with a long history of sound financial performance. ... Since then the term has been used to refer to highly-priced stocks, but now it is used more commonly to refer to high-quality stocks.

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A blue-chip stock is a huge company with an excellent reputation. These are typically large, well-established and financially sound companies that have operated for many years and that have dependable earnings, often paying dividends to investors. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. For all of these reasons, blue-chip stocks are among the most popular to buy among investors. Some examples of blue-chip stocks are IBM Corp., Coca-Cola Co. and Boeing Co.

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https://www.samco.in/knowledge-center/articles/best-blue-chip-stocks-to-buy-now-in-india/

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Income shares :

These stocks belong to companies that have comparatively stable operation and limited growth opportunities . The bank shares and some of the fast moving consumer goods , stocks as nestle and Hindustan lever may be termed as income shares

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Penny stocks

Penny stocks are those that trade at a very low price, have very low market capitalisation, are mostly illiquid, and are usually listed on a smaller exchange. Penny stocks in the Indian stock market can have prices below Rs 10. These stocks are very speculative in nature and are considered highly risky because of lack of liquidity, smaller number of shareholders, large bid-ask spreads and limited disclosure of information.

https://ournifty.com/nse-penny-stocks-list.html#:~:text=Penny%20stocks%20below%20Rs.10%3A%20%20%20%20Serial,%20%206.9%20%20115%20more%20rows%20

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Growth shares

the stocks that have higher rate of growth than the industrial growth rate in profitability are refereed to as growth shares

Right now all IT companies shares

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Defensive shares

Defensive stocks are relatively unaffected by the market movements for ex : pharmaceutical stock

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Cyclical shares:

The business cycles affects the cyclical shares the upward and downward movement of the business cycle affect the business prospects of certain companies and their stock prices

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Ex : auto mobile

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Speculative shares

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Shares that have lot of speculative trading in them are referred to as speculative shares .during the bull and bear phases of the market . This shares attracts the attention of the traders

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Value share

A value stock refers to shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales, making it appealing to value investors . A value stock can generally be contrasted with a growth stock . A value stock is trading at levels that are perceived to be below its fundamentals.

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Investment objectives /charterstics

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• Return
• Risk
• Liquidity
• Hedge against inflation
• Safety

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Return : investor always expected a good rate of return from their investment . Rate of return could be defined as the total income the investor receives during the holding period stated as a percentage of the purchasing price at the beginning of the holding period

Return = (End period value – beginning period value +Dividend )/beginning period value x100

or

= (Today price – yesterday price)/yesterday price x100

= (Capital appreciation + dividend)/Purchase price x100

Share is purchased in 2020 at Rs ,1000 , disposed at Rs 1100 in 2021 and the dividend yield is RS 50 , then the return would be calculated as follows

= (100 +50)/1000 x100

= 150/1000 x100

= 15 %

https://www.bseindia.com/markets/equity/EQReports/StockPrcHistori.html?flag=0

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Risk: Risk of holding securities is related with the probability of actual return becoming less than the expected return

(Risk may relate to loss of capital , delay in repayment of capital , non- payment of interest, or variability of returns )

Liquidity: Marketability of the investment provides liquidity to the investment . The liquidity depends upon the marketing and trading facility . If the portion of the investment could be converted into cash without much loss of time , it would help the investor meet the emergencies

Hedge against inflation :Since there is inflation in almost all the economy, the economy, the rate of return should ensure a cover against the inflation. The return rate should be higher than the rate of inflation , otherwise the investor will have loss in real terms. Growth stocks would appreciate in their values overtime and provide a protection against inflation.

https://tradingeconomics.com/india/inflation-cpi

Safety :The safety of on investment implies the certainty of return of capital without loss of money or time. Safety is another feature which an investor desires for his investments. Every investor expects to get back his capital on maturity without loss and without delay.

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Factors affecting for investment

• Interest rates (the cost of borrowing)
• Economic growth (changes in demand)
• Confidence/expectations
• Technological developments (productivity of capital)
• Availability of finance from banks.
• Others (depreciation, wage costs, inflation, government policy)

Interest rate :

investment is strongly influenced by interest rates. High interest rates make it more expensive to borrow. High interest rates also give a better rate of return from keeping money in the bank. With higher interest rates, investment has a higher opportunity cost because you lose out the interest payments.

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Economic growth

Firms invest to meet future demand. If demand is falling, then firms will cut back on investment. If economic prospects improve, then firms will increase investment as they expect future demand to rise. There is strong empirical evidence that investment is cyclical. In a recession, investment falls, and recover with economic growth.

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Confidence

Firms will only invest if they are confident about future costs, demand and economic prospects. Confidence will be affected by economic growth and interest rates, but also the general economic and political climate. If there is uncertainty (e.g. political turmoil) then firms may cut back on investment decisions as they wait to see how event unfold.

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Inflation

inflation rates can have an influence on investment. High and variable inflation tends to create more uncertainty and confusion, with uncertainties over the future cost of investment. If inflation is high and volatile, firms will be uncertain at the final cost of the investment, they may also fear high inflation could lead to economic uncertainty and future downturn. Countries with a prolonged period of low and stable inflation have often experienced higher rates of investment.

Productivity of capital

Long-term changes in technology can influence the attractiveness of investment. In the late nineteenth century, new technology such as Bessemer steel and improved steam engines meant firms had a strong incentive to invest in this new technology because it was much more efficient than previous technology. If there is a slowdown in the rate of technological progress, firms will cut back investment as there are lower returns on the investment.

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Government regulations

can make investment more difficult. For example, strict planning legislation can discourage investment. On the other hand, government subsidies/tax breaks can encourage investment. In China and Korea, the government has often implicitly guaranteed – supported the cost of investment. This has led to greater investment – though it can also affect the quality of investment as there is less incentive to make sure the investment has a strong rate of return.

Investment process

Investment process involves a series of activities leading to purchase of securities or other investment alternatives

It consist of five stages

1. Framing of investment policy
2. Investment analysis
3. Valuation
4. Portfolio construction
5. Portfolio evaluation

The investor or government before proceeding into investment formulates the policy for the systematic functioning . The essential ingredients of the policy are the investible funds, objectives and the knowledge about the investment alternatives and market

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Investible funds : the entire investment procedure revolves around the availability of investible funds. The fund may be generate through saving or from borrowings . if the funds are borrowed , the investor of has to be extra careful in the selection of investment alternatives . The return should be higher than the interest he pays . Mutual funds invest their owner’s money in securities .

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Objectives:

The objectives are framed on the premises of the required rate of return , need for regularity of income , risk perception and the need for the liquidity . The risk taker is objective is to earn high rate of return in the form of capital appreciation , whereas the primary objective of the risk averse is the safety of the principal.

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Knowledge :

The knowledge about the investment alternatives and markets plays a key role in the policy formulation . The investment alternatives range from security to real estate . The risk and return associated with investment alternatives differ from each other. investment in equity is high yielding but has more risk than the fixed income securities . Tax sheltered schemes offer tax benefit to the investor

The investor should be aware of the stock market structure and the functions of the brokers .the mode of operation varies among BSE, NSE . Brokerage charges are also different . The knowledge about the stock exchange enable him to trade the stock intelligently.

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Security analysis

After formulating the investment policy , the securities to be bought have to be scrutinised through the market and company analysis

Market analysis

The stock market mirrors the general economic scenario . The growth in gross domestic product and inflation are reflected in the stock prices .the recession in the economy results in a bear market . The stock prices may be fluctuating in the short run but in the long run they move in trends . i.e either upwards or downwards. The investor can fix his entry and exit point through technical analysis

Industry analysis

The industries that contribute to the output of the major segments of the economy vary in their growth rates and their overall contribution to economic activity .some industries grow faster than the GDP and are expected to continue in their growth . For ex : Information technology and Pharmaceutical industry . The economic significance and the growth potential of the industry have to be analysed

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Company analysis

The purpose of company analysis is to be help the investor to make better decision . The company’s earnings, profitability , operating efficiency , capital structure and management have to be screened . The factor have direct bearing on the stock prices and the return of the investors . Appreciation of the stock value is a function of the performance of the company. Company with high product market share is able to create wealth to the investors in the form of capital appreciation

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Valuation

The valuation helps the investor to determine the return and risk expected from an investment in the common stock . The intrinsic value of the share is measured through the book value of the share and price earing ration . Simple discounting models also can be adopted to value the shares. The stock market analysts have developed many advanced models to value the shares. The real worth of the share is compared with the market price and then the investment decision are made

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Future value :

The future value of securities could be estimated by using a simple statistical technique like trend analysis . The analysis of historical behaviour of the price enables the investor to predict the future values.

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Construction of portfolio

A Portfolio is a combination of securities . The portfolio is constructed in such manner to meet the investor goals and objectives. The investor should decide how best to reach the goals with securities available. The investor tries to attain maximum return with minimum risk. Towards this end he diversifies his portfolio and allocates funds among the securities

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Diversification : the main objective of diversification is the reduction of the risk in the loss of capital and income . A diversified portfolio is comparatively less risky than holding a single portfolio . There are several ways to diversify the portfolio

Debt and equity diversification : Debt instrument provide assured return with limited capital appreciation . Common stocks provide income and capital gain but with the flavour of uncertainty . Both debt instruments and equity are combined to complement each other.

Industry diversification : industries growth and their reaction to government polices differ from each other . Banking industry shares may provide the regular return but with limited capital appreciation . Information technology stock yield high return and capital appreciation but their growth potential after covid is not predicate . Thus industry diversification is needed and it reduce risk

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Company diversification :

Securities from different companies are purchased to reduce the risk . Technical analysis suggest that the investor buy securities based on the price movement. Fundamental analysis suggest the selection of financially sound and investor friendly companies

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Selection based on the diversification level , industry and company analyses the securities have to be selected .funds are allocated for the selected securities. Selection of securities and the allocation of funds and seals the construction of portfolio

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Evaluation

The portfolio risk has to be managed efficiently . The efficient manager calls for evaluation of the portfolio

The process consists of portfolio appraisal and revision

Appraisal the return and risk performance of the security vary from time to time . The variability in returns of the securities is measured and compared . The developments in the economy , industry and relevant companies from which the stocks are brought have to be appraised . The appraisal warns the loss and steps can be taken to avoid such losses

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Revision : Revision depends on the result of the appraisal , the low yielding securities with high risk are replaced with high yielding securities with low risk factor .to keep the return at a particular level necessitates the investor to revise the components of the portfolio periodically

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Investment vs Speculation

Speculation means taking up the busines risk in the hope of getting short term gains .speculation involves buying and selling activities with the expectation of getting profit from the price fluctuations

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Financial market is a market which facilitates creation of assets and exchange of securities to provide short, medium and long term business finance.

• It mobilizes funds between savers and investors.
• It locates funds into the most productive investment opportunities.
• There are two types of Financial Markets:
• Money Market
• Capital Market

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MONEY MARKET:

It is a market which deals in short term securities and whose maturity period is less than one year

Capital Market:

It is a market which deals in medium and long term securities with a maturity period of more than one year.

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Functions of Financial Market

• Mobilisation of savings and channelling them into the most productive uses: A financial market performs the allocative function by linking the savers and investors, thus mobilising savings and channelising them to make the most use of these idle savings. 
• Facilitating price discovery: The interaction between the households (supplier of funds) and business firms helps to establish a price for the traded financial asset in the market.
• Providing liquidity to financial assets: Financial assets can be easily converted into cash as financial markets provide facility of purchase and sale of financial assets.
• Reducing the cost of transactions: Financial markets provide information about the traded securities and save time, effort and money of both the buyers and sellers of a financial asset.

Money Market Instruments

Distinction between Capital Market and Money Market��

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Capital market is of further two types:

1. Primary Market
2. Secondary Market

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Primary Market

• Primary market deals with the securities which are issued for the first time in the market and is also known as new issues market.
• Banks, financial institutions, insurance companies, mutual funds and individuals are the main participants in the primary market.

Methods of Floatation

• Offer through prospectus: The public companies issue prospectus to raise funds from the public by issuing financial instruments like shares, debentures, etc., through an advertisement in the newspaper and magazines.
• Offer for sale: Public companies offer securities for sale to the brokers or issuing houses at an agreed price and in turn, these intermediaries resell them to the investors.
• Private placement: Private placement means issue and allotment of shares to the selected individuals and companies privately and not to the general public through public issue.
• Rights issue: Rights issue refers to issue of new shares to the existing shareholders in accordance to the terms and conditions of the company.
• e-IPOs: A company can raise funds by issuing capital to the public through the online system of stock exchange and this is called an initial public offer (IPO).

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Difference between Primary and Secondary Market:��

�

• Secondary Market
• Secondary market is a market which deals with the sale and purchase of existing securities. It is also called the stock market or stock exchange.
• SEBI prescribes the framework within which all the securities are traded, cleared and settled.
• It provides opportunities of disinvestment and reinvestment to investors by exchange of securities.

Securities indices

Nifty indices in india

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https://www1.nseindia.com/live_market/dynaContent/live_watch/live_index_watch.htm

Listing of securities

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Depositories

As an investor you must know about the depositories in the country. In India, there are two depositories: National Securities Depositories Ltd (NSDL) and Central Securities Depositories Ltd (CDSL). Both the depositories hold your financial securities, like shares and bonds in dematerialised form, and facilitate trading in stock exchanges. Before starting your trading journey, you must keep in mind that you are compulsorily required to open a demat account and a trading account. You must always remember to open the best demat account with a reliable stock broker as it will help you make wise investment decisions

A clearing house acts as a mediator between any two entities or parties that are engaged in a financial transaction. Its main role is to ensure that the transaction goes smoothly, with the buyer receiving the tradable goods he intends to acquire and the seller receiving the right amount paid for the tradable goods he is selling.

Clearing house

Securities trading :Types of orders

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Buy and sell orders are placed with members of the stock exchanges by the investors. The order are different types

Market Order

•  Market Order is the simplest types of orders.
• A market order is a trading order to buy or sell a security at the best possible price at the current market.
• it means once the order to buy or sell is entered, the system will execute the orders with the best prices available in the market.

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• Market order gets executed almost immediately.
• In a market order, the trader or investor do not have control on the price but there is a very high probability that the order will get executed.

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Limit Order

A limit order is one of the types of orders, where the trader can set a price to buy or sell a security.

Unlike market order, where the trader doesn’t have any control over price, in a limit order, the trader will set the price.

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Stop-Loss types of orders

• A stop-Loss order is one of the most important types of orders where a trader can limit his or her losses by exiting a trade if a specific price is reached.
• By placing a stop-loss order, one can save himself from incurring high losses if the price goes against them.

Stop-loss market order

Stop-loss market order is types of orders, where the trader sets a trigger price to exit the trade if the price goes against his expectation.

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• Stop-loss limit order
• Stop-loss limit order is almost similar to stop-loss types of orders but it does not get executed at market price.
• It will get executed at the specified limit price set by the trader.
• In these types of orders, the trader will have to set a trigger price and a limit price.

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• Bracket Order (BO)
• Bracket order is one of the types of orders in which 3 orders bundled into one.
• You can enter a new position with a target and a stop-loss. All bracket orders are limit orders.
• The stop-loss and target will have to be in absolute points (i.e. 1,2,5,10, etc).
• Eg: If the share of ABC is trading at Rs. 1000. We can put a bracket order to buy it at Rs. 1000 with a target of 10 points and a stop loss of 5 points.

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Cover Order

• Cover order is one of the types of orders by which we can enter a position along with a stop-loss in the same order form.

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Based on Time Duration

Also based on time duration, there can be:

Good For Day Order – order will stay valid till the end of the current trading session.

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Good Till Day Order – We can keep our order active for a few days.

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Eg- If we place an order on 1^st March and it does not get executed, we can carry forward to say till 4^th march.

If it doesn’t get executed even on 4^th march, the order will be cancelled.

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Immediate or Cancel Order – Types of orders once placed will be executed immediately if it is not executed it will cancel itself.

In this case, it may so happen that the order will be partially executed.

Eg- If we place an order to buy 1000 shares and only 600 shares get immediately purchased, the rest order of 400 will gets cancelled.

MARGIN TRADING

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Margin trading is buying stocks without having the entire money to do it.

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The exchanges have an institutionalised method of buying stocks without having the capital through the futures market.

A method of buying shares that involves borrowing a part of the sum needed from the broker executing the transaction. The collateral for the loan is normally securities in the investor's account.

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The investor must deposit an initial amount of cash(down payment called “margin”) or securities (initial margin or margin requirement) into a margin account with the broker & can purchase stocks worth more, and must thereafter maintain a minimum amount of cash or securities (margin) in the account as collateral (maintenance margin, minimum maintenance or maintenance requirement).

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The broker charges interest on this loan(in addition to the commission on each buy/sell trade). 

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The investor has to keep the entire stockholding with the broker as collateral.  Also, the investor has to put up additional cash in case the value of the stockholding falls below a certain amount.

Regularity systems for equity markets

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The Securities and Exchange Board of India (SEBI)– Regulator of the financial markets in India that was established on 12th April 1988.

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It was initially established as a non-statutory body, i.e. it had no control over anything but later in 1992, it was declared an autonomous body with statutory powers. he

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This regulatory authority plays an important role in regulating the securities market of India. Thereby it is important to know the purpose and objective of the same.

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Role of SEBI:

This regulatory authority acts as a watchdog for all the capital market participants and its main purpose is to provide such an environment for the financial market enthusiasts that facilitate the efficient and smooth working of the securities market. SEBI also plays an important role in the economy.

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To make this happen, it ensures that the three main participants of the financial market are taken care of, i.e. issuers of securities, investors, and financial intermediaries.

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1. Issuers of securities

These are entities in the corporate field that raise funds from various sources in the market. This organization makes sure that they get a healthy and transparent environment for their needs.

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2. Investor

Investors are the ones who keep the markets active. This regulatory authority is responsible for maintaining an environment that is free from malpractices to restore the confidence of the general public who invest their hard-earned money in the markets.

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3. Financial Intermediaries

These are the people who act as middlemen between the issuers and investors. They make the financial transactions smooth and safe.

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Functions of SEBI:

The main primary three functions are-

1. Protective Function
2. Regulatory Function
3. Development Function

1. Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and other financial participants.

It includes-

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

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2. Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the financial markets.

These functions include-

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

3. Development Functions

This regulatory authority performs certain development functions also that include but they are not limited to-

• Imparting training to intermediaries
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

Portfolio concept

RISK

• Risk is involved in every activity whether it is of professional ,personal or business. Every individual while doing any activity expects some returns. But it is obvious that the actual returns may never be the same as that of the expected returns .There always exists a difference between the expected and the actual returns. This difference is termed as “RISK”

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Risk definition

• Definition: Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.

• In finance, risk is the probability that actual results will differ from expected results.

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• Risk is measured by the variability of return

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TYPES OF RISK AND IMPLICATIONS

Different types of risk can be classified under two main groups, viz.,

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A. Systematic Risk

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Systematic risk is due to the influence of external factors on an organization. Such factors are normally uncontrollable from an organization's point of view.

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It is a macro in nature as it affects a large number of organizations operating under a similar stream or same domain. It cannot be planned by the organization.

The types of systematic risk are depicted and listed below.

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Interest rate risk

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Interest-rate risk arises due to variability in the interest rates from time to time. It particularly affects debt securities as they carry the fixed rate of interest.

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The meaning of price and reinvestment rate risk is as follows:

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Price risk arises due to the possibility that the price of the shares, commodity, investment, etc. may decline or fall in the future.

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Reinvestment rate risk results from fact that the interest or dividend earned from an investment can't be reinvested with the same rate of return as it was acquiring earlier.

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Market risk

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Market risk is associated with consistent fluctuations seen in the trading price of any particular shares or securities. That is, it arises due to rise or fall in the trading price of listed shares or securities in the stock market.

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1. Absolute risk is without any content. For e.g., if a coin is tossed, there is fifty percentage chance of getting a head and vice-versa.
2. Relative risk is the assessment or evaluation of risk at different levels of business functions. For e.g. a relative-risk from a foreign exchange fluctuation may be higher if the maximum sales accounted by an organization are of export sales.
3. Directional risks are those risks where the loss arises from an exposure to the particular assets of a market. For e.g. an investor holding some shares experience a loss when the market price of those shares falls down.
4. Non-Directional risk arises where the method of trading is not consistently followed by the trader. For e.g. the dealer will buy and sell the share simultaneously to mitigate the risk
5. Basis risk is due to the possibility of loss arising from imperfectly matched risks. For e.g. the risks which are in offsetting positions in two related but non-identical markets.
6. Volatility risk is of a change in the price of securities as a result of changes in the volatility of a risk-factor. For e.g. it applies to the portfolios of derivative instruments, where the volatility of its underlying is a major influence of prices.

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Purchasing power or inflationary risk

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Purchasing power risk is also known as inflation risk. It is so, since it emanates (originates) from the fact that it affects a purchasing power adversely. It is not desirable to invest in securities during an inflationary period.

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Demand inflation risk arises due to increase in price, which result from an excess of demand over supply. It occurs when supply fails to cope with the demand and hence cannot expand anymore. In other words, demand inflation occurs when production factors are under maximum utilization.

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Cost inflation risk arises due to sustained increase in the prices of goods and services. It is actually caused by higher production cost. A high cost of production inflates the final price of finished goods consumed by people.

Unsystematic Risk

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Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such factors are normally controllable from an organization's point of view.

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It is a micro in nature as it affects only a particular organization. It can be planned, so that necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.

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Business or liquidity risk

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Business risk is also known as liquidity risk. It is so, since it emanates (originates) from the sale and purchase of securities affected by business cycles, technological changes, etc.

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Asset liquidity risk is due to losses arising from an inability to sell or pledge assets at, or near, their carrying value when needed. For e.g. assets sold at a lesser value than their book value.

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Funding liquidity risk exists for not having an access to the sufficient-funds to make a payment on time. For e.g. when commitments made to customers are not fulfilled as discussed in the SLA (service level agreements).

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Financial or credit risk

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Financial risk is also known as credit risk. It arises due to change in the capital structure of the organization. The capital structure mainly comprises of three ways by which funds are sourced for the projects. These are as follows:

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Owned funds. For e.g. share capital.

Borrowed funds. For e.g. loan funds.

Retained earnings. For e.g. reserve and surplus.�

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Exchange rate risk is also called as exposure rate risk. It is a form of financial risk that arises from a potential change seen in the exchange rate of one country's currency in relation to another country's currency and vice-versa. For e.g. investors or businesses face it either when they have assets or operations across national borders, or if they have loans or borrowings in a foreign currency.

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Recovery rate risk is an often neglected aspect of a credit-risk analysis. The recovery rate is normally needed to be evaluated. For e.g. the expected recovery rate of the funds tendered (given) as a loan to the customers by banks, non-banking financial companies (NBFC), etc.

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Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations

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Sovereign risk is associated with the government. Here, a government is unable to meet its loan obligations, reneging (to break a promise) on loans it guarantees, etc.

Settlement risk exists when counterparty does not deliver a security or its value in cash as per the agreement of trade or business.EE

Operational risk

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Operational risks are the business process risks failing due to human errors. This risk will change from industry to industry. It occurs due to breakdowns in the internal procedures, people, policies and systems.

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Model risk is involved in using various models to value financial securities. It is due to probability of loss resulting from the weaknesses in the financial-model used in assessing and managing a risk.

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People risk arises when people do not follow the organization’s procedures, practices and/or rules. That is, they deviate from their expected behavior.

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Legal risk arises when parties are not lawfully competent to enter an agreement among themselves. Furthermore, this relates to the regulatory-risk, where a transaction could conflict with a government policy or particular legislation (law) might be amended in the future with retrospective effect.

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Political risk occurs due to changes in government policies. Such changes may have an unfavorable impact on an investor. It is especially prevalent in the third-world countries.

Risk measurement

understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms . Expressing the risk of a stock in quantitative terms makes its comparable with other stocks .

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Measurement cannot be assured of cent per cent accuracy because risk is caused by numerous factors such as social , political , economic and managerial efficiency .

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Measurement provides an approximate quantification of risk . The statistical tool often used to measure and used as a proxy for risk is the standard deviation

• EXPECTED RETURN�Investors receive their returns from shares in the form of dividends and capital gains/ losses. The formula for calculating the annual return on a share is:�
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RISK

• Expected return are insufficient for decision making . The risk aspect should also be considered . The most popular measure of risk is the variance or standard deviation of the probability of possible returns

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• The returns on securities A and B are given below

Give the security of your preference. the security has to be selected on the basis of return and risk

Return E(r) = R₁ XP₁ + R₂ XP₂₊ R₃ XP₃

Security A = 4 x 0.5 + 2 X 0.4 +0 x 0.1

= 2 + 0.8 + 0

Expected Return = 2.8

Security B = 0 x 0.5 + 3 X 0.4 +3 x 0.1

= 0 +1.2+0.3

Expected Return = 1.5

Return wise, security A is return is high

RISK

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• Security A

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Security A:

Standard deviation

σ = √1.76 =1.33

Security B

Security B:

Standard deviation

σ = √2.25 =1.5

In security A, the return is high and risk is low , hence A is Preferrable

A share is currently selling at Rs 50 . it is expected that a dividend of Rs 2 per share would be paid during the year and the share could be sold at Rs .54 at the end of the year . calculate the expected return from the share

R = 2+(54-50)/50

= (2+4)/50

= 6/50

= 0.12 = 12%

Calculate the expected return and the standard deviation of the returns for a stock having the following probability distribution of the return

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Standard deviation = √274.69 = 16.57 %

• A stock costing Rs 120 Pays no dividends. The possible prices that the stock might sell for the end of the year with the respective probabilities as follows

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• 1.Calculate the expected return
• 2.Calculate the standard deviation of the return

Here the probable returns have to be calculated using the formula

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Calculation of probable returns

Price Possible return (per cent )

115 =(0+(115-120)/120 =-0.0416=4.17

120 0.00

125 4.17

130 8.33

135 12.50

140 16.67

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Calculation of expected return

• Monthly return data ( in per cent ) are presented below for ITC stock and BSE National index for a 12 month period

• Calculate beta of ITC Stock