SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
.

DEFINITION:
y Investment is the current commitment of money for a particular

period of time in order to derive anticipated future benefits that

will compensate for:
a) The time for which funds are committed.
b) The expected rate of Inflation.
C) The uncertainty of future payment.
y Investments refers to sacrifice of current resources in
anticipation of a future benefit.
y Investment involves commitment of certain current cash flow in
anticipation of an uncertain future cash flows.
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DEFINITION:

y 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.
y Investment thus refers to postponement of current consumption
in anticipation of a future benefit.
y The investor can be an Individual, Government, Pension fund,
or a Corporation.

Investment Attributes
y Rate of Return e.g. stock return of two types
y Risk

transacted easily
y Marketability-Three factors

y Tax shelter
y Convenience

Low transaction cost

Price change b/w
transactions is low

Nature and Scope of Investment Decision:

y Higher the Risk, Higher is the Expected Return.
y A well diversified Portfolio reduces Unsystematic risk by a

large way.
y Higher the time period of investment, lesser is the

uncertainties of Investment.
y Investor prefers among securities which yield higher return for

the same risk or lower risk for the same return.

y Investment decisions are based on Investment objectives and

Constraints.
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INVESTMENT Vs SPECULATION

Investor

Speculator

Planning horizon

Longer Planning horizon

At least one year

Very Short planning horizon

A few days or few moths

Risk Disposition

Does not assume more than

moderate risk

Willing to assume high risk

Return Expectation

Seeks a moderate rate of

return

High rate of return in

exchange of high risk borne

INVESTMENT Vs SPECULATION
.

Investor

Speculator

Basis for Decisions

An investor attaches greater Relies more on hearsay,

significance to fundamental
technical charts and market
factors and careful evaluation psychology
is done.

Leverage

Generally uses his own funds Normally resorts to

and eschews borrowed funds substantial borrowings

Volume of trade

Smaller volume

Larger volume.

INVESTMENT Vs GAMBLING:

Gambling is defined as an act of betting on an uncertain outcome.

Results of gambling are known in quick time.

E.g. Roll of a dice, Turn of a card etc.

The outcome of gambling is largely a matter of luck.

The risk that gamblers assume is highly disproportionate to that of

their expected return.

INVESTMENT Vs GAMBLING:
y Gambling does not involve a bet on economic activity rather it is

a bet on artificial risk.

y Gamblers show a sign of addiction and fun loving.
y The results of gambling are random in nature and it is not

correlated with an past events.

INVESTMENT CLASSIFICATION:

yReal Vs Financial.

ySecurity Vs Non Security.

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Real Vs Financial assets:

` Real assets includes assets like land, building, machinery,

furniture, knowledge etc, where as Financial assets includes

assets like cash, bonds, shares, derivative instruments etc.
` Real assets appear only on the asset side of the balance sheet
where as Financial assets appear both on asset side and liability
side of Balance Sheet.
` Real asset are destroyed only by accident or by wearing out over
time where as Financial assets are created and destroyed in
ordinary course of doing business.
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Security Vs Non Security:

y Security investments are traded in the market and are

transferable in nature. Ex: Shares, Debentures etc.

y Non Security investments are neither traded nor

transferable. Ex: Post office savings deposits, Deposits with

commercial banks, etc.

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INVESTMENT PROCESS
Setting up of Investment Objectives.
e.g. Current income, risk , liquidity, taxes etc.

Choice of Asset mix.

Formulation of Portfolio strategy.

Active portfolio passive portfolio strategy

Selection of securities.
For Stocks-Fundamental analysis, Technical Analysis
For bondsAnalyze YTM, tax shelter, credit rating etc
y

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INVESTMENT PROCESS
y Portfolio Execution.

Buying and Selling

y Portfolio Revision.

a)Stocks
Bonds
b)Change the shares or bonds etc.
y Portfolio Evaluation.

Risk and Return evaluation

Approaches to Investment
Decision
y Fundamental approach
y Psychological approach
y Academic approach
y Eclectic Approach

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Fundamental approach
y Intrinsic Value of a security
y Intrinsic Value Depends on Company, Industry and

Economy.
y Market Price will always fall in line with Intrinsic Value
y Buying Undervalued shares and Selling overvalued shares.

Psychological approach
y Stock Prices are guided by emotion rather than reason
y Good news greedMarkets price rise
y Bad newsDespair Market prices fall
y Psychic values appear to be more important than intrinsic

value
y This approach also involves Technical analysis.

Academic approach
y Stock markets are reasonably efficient in reacting quickly and

rationally to the flow of the information

y Stock prices reflect the intrinsic value fairly well
y Stock prices corresponds to the random walk. Past behavior

cannot be used to predict the future price behavior.

y There is a linear relationship between risk and return.

Eclectic Approach
y

Draws conclusion from all the three different approaches.

Fundamental analysis helps in establishing basic standards and

benchmarks but exclusive reliance should be avoided.

Technical analysis helps in studying the market and the mood of

the investors but exclusive reliance should be avoided.

Market is neither well ordered as academic approach.

We should combine the results of the three approaches and then

take decisions.

Errors in Investment
Management
y Inadequate comprehension of risk and return
y Vaguely formulated Investment policy
y Nave extrapolation of the past
y Cursory Decision making
y Simultaneous switching
y Misplaced love for cheap stocks
y Over diversification and under-diversification
y Buying Shares of Familiar companies
y Wrong attitude towards losses and profits
y Tendency to speculate
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CAPITAL MARKETS :
y It comprises of both New issue markets and

Secondary markets.
y The number of stock exchanges have raised to 23
till date.
y All of these exchanges are regulated by SEBI.
y New issue market also known as Primary market
supplies fresh or additional capital to the
companies.
y The securities already issued on the new issue
market are traded on the secondary market.

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BOMBAY STOCK EXCHANGE (BSE):

y Apex Stock exchange of India.
y Established in 1875.
y BSE

introduced BOLT (Bombay Online

Trading) system on 19th Jan 1995.
y It provides for a quote driven automated trading
platform with an order book functioning as an
auxiliary jobber.

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NATIONAL STOCK EXCHANGE OF INDIA (NSEI):

y NSEI is a fully automated, electronic, screen

based trading system sponsored by IDBI and

co-sponsored by other term lending
institutions such as LIC, GIC and other
insurance companies, commercial banks and
other financial institutions.
y NSEI has 2 separate segments namely:
a)The whole sale debt market segment.
(WDMS)
b)The Capital market segment. (CMS)
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OBJECTIVES OF NSEI:
y To provide national wide equal access and fair,

efficient, completely transparent securities

trading system to investors.
y To provide for shorter settlement cycles.
y To bring Indian stock markets in line with
international markets.
y To promote secondary markets even in debt
instruments. (Both Government and Corporate
Bonds)
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OVER THE COUNTER EXCHANGE OF INDIA (OTCEI):

y It was set up in 1992.
y First stock exchange of India to introduce screen

based automated ringless trading system.

y It is promoted by UTI, ICICI, IDBI, IFCI, LIC,
GIC, SBI Caps and CANBANK as a Company
under Sec 25 of Companies act with
headquarters at MUMBAI.
y The major players in OTCEI markets include
Members and Dealers (Instead of Brokers).
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OBJECTIVE OF OTCEI:
y To help companies raise capital from the

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market at the cheapest cost and on optimal

terms.
y To help investors to access capital markets
safely and conveniently.
y To cater to the needs of the companies which
cannot be listed on the other official
exchanges.
y To eliminate the problems of illiquid
securities, delayed settlements and unfair
prices faced by the investors.

CAPITAL MARKETS:
y Capital markets instruments include:
a)Equity Shares.
b)Preference Shares.
c)Debentures.

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ORDINARY SHARES:
y These shares are ownership shares of the

company which carry fluctuating dividend.

y They enjoy voting power, dividend and Capital
appreciation if any.
y They are highly liquid due to the availability of
secondary market.
y Ordinary shares without voting power are also
popular now a days.
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PREFERENCE SHARES:

y These shares carry a fixed return in the form of

dividend.
y They have preference over equity shareholders
on payment of dividend and on repayment of
Capital.
y Cumulative Vs Non Cumulative PS.
y Convertible Vs Non Convertible PS.
y Redeemable Vs Irredeemable PS.
y Participating Vs Non Participating PS.
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DEBENTURES:
y Debenture or Bond is a creditor ship security

with a fixed rate of return, fixed maturity period,

perfect income certainty and low capital
uncertainty.
y Types of Debentures include: Registered,
Bearer, Redeemable, Perpetual, Convertible,
Non Convertible, Partially Convertible, Callable
etc.
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NEW ISSUE MARKET:

y It is the direct method of raising capital

available for the company from the public.

y The various methods of New issue market
include:
a)Issue through Prospectus.
b)Offer for Sale.
c)Private Placing.
d)Right Issue.
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INVESTMENT AVENUES OR
ALTERNATIVES OR CHANNELS
y Bank Deposits
y Post office Deposits
y Insurance
y Mutual Fund
y Equities.
y Preference shares.
y Debentures.

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INVESTMENT AVENUES OR
ALTERNATIVES
y Real estate.
y Provident fund.
y Derivative market.
y Commodity market.
y Currency market.
y Gold.
y Money market instruments.
y Precious and Aesthetic articles.
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