CHAPTER I

INTRODUCTION

1.1 Background of the Study
Business enterprises in India, as in every other country, are closely linked with the financial markets, capital market and institutions. Saving pool provide funds for investment in industry, trade and service organization, the financial intermediaries, and financial instrument or securities which facilitate transfer of funds, all together enable the financial system an integral part of the economic system. The money and capital markets are two inter-related constituents of the financial sector. The reforms and regulations in financial sector have continued to be of great significance with the changing perspective of business environment.

1.2 Indian Money Market
The nationalized and private sector, commercial banks constitute the core of the modern sector of the Indian money market. The co-operative banks, foreign banks and the Reserve Bank of India are the other constituents of this sector. By all accounts the modern sector is fairly well organized and integrated. But taken as a whole, the Indian money market does not satisfy the criteria of a developed money market. It is not fully integrated since the indigenous bankers are outside the purview of control of the Reserve Bank of India. Besides, the money market suffered from several deficiencies like the Treasury bill market continuing to remain undeveloped, failure of all measured aimed at developing the commercial bill market due to the popularity of the cash credit system, and the absence of a rational interest rate structure.

1.3 Investment Management
Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Types of financial investments include shares, other equity investment, and bonds (including

bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses. Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

1.4 Personal Finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation. In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment. The most basic economic laws say, that prices rise when demand exceeds over supply. This is just as true for money as for onions. The “price” of money is the interest rate. When prices are rising and the demand for credit is high, a hike in interest rates can rebalance the supply demands seesaw. At higher rates, lenders will lend more while borrowers tighten their bells. The twin effects kill two birds with one stone. Right now, inflation is climbing – the Consumer Price Index has risen from 5% in April 2006 to 6.9 % in December 2006 (see page 52). Bank credit has risen by over 30% in 2006 over 2005, and that was on the back of 30% rise in 2005. Bank deposits

grew only 15. lower rates are depreciated. Bear in mind though. So the humble FD may be a genuine investment option.31%. Rising interest rates can also trigger stock market collapse though that hasn’t happened.25% to depositors. debt mutual have struggled to deliver returns since 2005. One of the basic rules in investment of stock markets guru Warren Buffet is to be “fearful when others are greedy and greedy when others are fearful.7% last year. the value of loans made at previous. but the stock market is highly valued and it would be foolhardy to expect it to continue climbing forever. economic status. a wide variety of investment avenues are open to the investors to suit their needs and nature. schemes of the post office and banks.” Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation. On 31 January. By early January 2007. The real return of a debt instrument is positive only if the interest rate is higher than inflation. banks as well). the RBI nudged rates up once again with a 0. What should an investor do? When rates. rise. There is a tax rebate under Section 80C of the I. Yet. If inflation settles close to current levels (7%) or drops. Act 1961 on the principal although the interest received is taxable.25% hike of a key policy rate. banks were offering 5.T. When a person has more money than he requires for current consumption. he would be coined as a potential investor.m banks need more deposits and the RBI wants to control inflation. education and family background. In the past. . The problem of surplus gives rise to the question of where to invest. This causes losses to debt mutual funds (and often. fixed deposit (FDs) had moved into the 9% zone and some banks were accepting 5 year and even 10 year deposits at effective yields of 9. A glance at historic returns versus historic inflation levels shows that inflation often outruns FD rates. In January 2004. Interest rates have risen steadily since early 2004. that FDs might not beat inflation in the long run. At present. when inflation was 4%. then 9% is a handsome pre-tax return and the returns would be even juicier for senior citizens. investment avenues were limited to real assets. The message is clear and banks are likely to hike FD rates again. Indeed. But FDs may work over shorter time periods.

CHAPTER II OBJECTIVE AND METHODOLOGY .

1 Primary Objective  Definitions about Investment and Speculation  To analyze the Indian capital markets and the genesis of Investment in Capital Market and the reasons behind it popularity. Commodity Mkt.(Bulls & Bear.  To devise an ideal investment plan for investing in the capital market. The factors that will be used to devise the plan are: • • • • • • • Brief Overview of Company Role of SEBI Defining the right time for Buy and Sell Three basic principle should kept in mind before investment How to analysis the profitable opportunities in Capital market How to Invest in IPO and Mutual Fund Tips of successful investment 2. . Demat A/c. Secondary Market.2 Secondary Objective  To list down the various stock exchanges in Indian & international Market  To define the basic terminologies in Money market trading.. and. Listing of Companies.1.1 Objectives of the Project The main objectives of this Project report can be listed as hereunder: 2.1. etc)  To enlist the procedure and steps for dealing in stock markets  To enlist the risks involved in investing in the capital markets and the ways to avoid them. Derivative Mkt. Bid & Ask rate. IPO.2 . The proposed study will define the following market segment like Primary Market.  To study the constituents and participants of the Indian capital market.

With respect to this. This included officials of the three selected brokerage firms and the customers who have invested in capital markets. so as to attempt an industry perception. 2.2. undisguised questionnaire. .2 Research Methodology The manner in which a study is conducted is the basic plan that guides the project. This is instrumental in providing information for the evaluation of particular courses of action. This included: • Interviews and idea of people with informed about the subject of the project. • A structured.2 Data Collection Approach The plank on which the study rests is information. the building blocks of the research may be explained as under.2.1 Type of Research The objectives of the project study necessitated the design of the research to be Conclusive and Descriptive. 2. journals) Official reports on Indian capital Market The World Wide Web for Information ‘or’ the Internet  Primary Data Data was collected specifically for the research need at hand. which was procured as a judicious mix of both secondary data and primary sources of data. This included: • • • • Books on Investment Management Periodicals (magazines.  Secondary Data Already published data formed the launch pad for the study.2. Descriptive research is inevitable so far as the characteristics of housing loans of three banks have to be studied.

 Volatility was beyond the expectation due to uncertainty involved in market  Investment planning may be influenced because of speculation . officials of the selected brokerage firms never reveal certain information.3 Limitation Obstacles are an inherent part of all endeavors.  A lack of understanding of certain technical areas on the Capital markets was a limitation. 2.  Capital market is a dynamic sector in the country. the time period of the study will be insufficient to conduct an exhaustive insight. Sampling Design • • Sampling Element: Three Broking Firms in New Delhi Population: People who have invested in the capital markets and the people who want to invest in the capital markets.  With regards to strategic concerns. Sampling Extent: The procedure of sampling was restricted to the South Delhi region. in order to give adequate coverage to all possible types of customers. • • Sample Size: A sample size of 75 was taken. • Sampling Methodology: The probability-based approach of random sampling will be adopted. and success is about seeing them through.

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CHAPTER III LITERATURE REVIEW .

Once a newly issued stock is listed on a stock exchange. The market that exists in a new security just after the new issue. This is typically done through a syndicate of securities dealers. this sale is an initial public offering (IPO).  Secondary Market: The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. and the secondary market. investors and speculators can easily trade on the exchange. Dealers earn a commission that is built into the price of the security offering.  Primary Market: The primary is that part of the capital markets that deals with the issuance of new securities. where existing securities are traded. The capital market includes the stock market and the bond market. though it can be found in the prospectus.1 Capital Market: The capital market (securities markets) is the market for securities. governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. such as the RBI and SEBI. secondary market can refer to the market for any kind of used goods. .3. oversee the capital markets in their respective countries to ensure that investors are protected against fraud. The process of selling new issues to investors is called underwriting. as market makers provide bids and offers in the new stock. Financial regulators. In the case of a new stock issue. where companies and the government can raise long-term funds. where new issues are distributed to investors. is often referred to as the aftermarket. Alternatively. The capital markets consist of the primary market. Companies.

and other regulatory bodies." These groups function under a system of their own rules. .  Groups of persons operating as "funds" or "associations. landlords. relatives. and so on." "saving club. In India.3. Securities and Exchange Board of India (SEBI). Reserve Bank of India (RBI). These groups use names such as "fixed fund. The informal financial system consists of:  Individual moneylenders such as neighbors. and chit-fund companies. the spread of banking in rural areas has helped in enlarging the scope of the formal financial system." and so on. The formal financial system comes under the purview of the Ministry of Finance (MOF). investment. storeowners. traders.2 The Indian Financial System: The Indian financial system can also be broadly classified into the formal (organized) financial system and the informal (unorganized) financial system.  Partnership firms consisting of local brokers. and non-bank financial intermediaries such as finance. pawnbrokers." "association.

Below the Board. RBI and experts). Ms. The Board comprises whole time members and outside members (representing the finance ministry. The organizational structure of SEBI can be found under the SEBI website by clicking on the RTI Act 2005 at the top. . Damodaran a respected turnaround civil servant credited with turning around large public sector companies from near death scenarios including the famous Unit Trust of India. Though it has pushed systemic reforms aggressively and successively (e. M. there is an appeals process to create accountability. the staff/officers of the organization are led by Executive Directors. Though this makes it very powerful. Also Mr. It has recently been announced that it is going to the top law campuses to recruit talent and has found reasonable success there. TC Nair and Mr. It drafts rules in its legislative capacity. G Anantharaman. VK Chopra. RK Nair. headed by the Chairman. it conducts enquiries and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.3 Securities and Exchange Board of India (SEBI) It is a board (autonomous body) created by the Government of India in 1988 and given statutory form in 1992 with the SEBI Act 1992 with its head office at Mumbai. MS Ray is an Officer on Special Duty (equivalent to an ED). Justice NK Sodhi. it lacked the legal expertise. Dr.Mr. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former high court judge . The present members are Mr. Sandeep P Parekh. Usha Narayanan and Mr. quasi-judicial and quasi-executive. needed to sustain prosecutions/enforcement actions. Sebi has three functions rolled into one body: quasi-legislative.g. the quick movement towards making the markets electronic and paperless). It is chaired by Mr. The present EDs are Mr. A second appeal lies directly to the Supreme Court directly (where important questions of law arise). till recently.3.SEBI has had a mixed history in terms of its success as a regulator.

While the liabilities of banks are part of the money supply.4 Components of the Formal Financial System The formal financial system consists of four segments or components. and financial services. Tourism Finance Corporation of India (TFCI). In the post-reforms era. In India.  Financial Institutions Financial institutions are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient manner. Industrial Credit and Investment Corporation of India (ICICI).banking financial institutions. . financial markets. These are: financial institutions. and sectorial such as the financial institutions National Bank for Agricultural and Rural Development (NABARD) and National Housing Bank (NHB). this may not be true of non-banking financial institutions. Financial institutions can be classified as banking and non-banking financial institutions. GIC and its subsidiaries) are classified as financial institutions. the Developmental Financial Institutions (DFIs) and Non-Banking Financial Companies (NBFCs) as well as housing finance companies (HFCs) are the major institutional purveyors of credit. Industrial Financial Corporation of India (IFCI). namely. There are state-Level financial institutions such as the State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs) which are owned and managed by the State governments. Infrastructure Development Finance Company (IDFC). financial instruments. ICICI Venture. Financial institutions can also be classified as term-finance institutions such as the Industrial Development Bank of India (IDBI). non. their role and nature of activity have undergone tremendous change. Financial institutions can be specialized finance institutions like the Export Import Bank of India (EXIM). Investment institutions in the business of mutual funds (UTI. Public Sector and Private Sector Mutual Funds) and insurance activity (LIC.3. Banking institutions are creators of credit while non-banking financial institutions are purveyors of credit. Small Industries Development Bank of India (SIDBI) @d Industrial Investment Bank of India (IIBI).

There are two components of the secondary market: Over the Counter (OTC) market and the Exchange traded market. mutual fund units. The term 'and/ or' implies that either of the payments will be sufficient but both of them may be promised. the secondary market is meant for trading in outstanding or existing securities. In an OTC market. and insurance policies are secondary securities. The first is a market for short-term securities while the second is a market for long-term securities. Financial securities may be primary or secondary securities. . that is. Financial Markets Financial Markets are a mechanism enabling participants to deal in financial claims. Bank deposits. the derivates market-exchange traded has come into existence. While the primary market deals in new issues. securities having a maturity period of one year or more. Financial markets are also classified as primary and secondary markets. as they are issued by the financial intermediaries to the ultimate savers. Primary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of funds to the ultimate savers. The main organized financial markets in India are the money market and capital market. Recently.  Financial Instruments Financial instrument is a claim against a person or an institution for the payment at a future date a sum of money and/or a periodic payment in the form of interest or dividend. trading takes place over a trading cycle in stock exchanges. The government securities market is an OTC market. spot trades are negotiated and traded for immediate delivery and payment while in the Exchange traded market. Examples of primary or direct securities include equity shares and debentures. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. Secondary securities are also referred to as indirect securities.

Security Market Corporate Debt Market Money Market Option Market Future Market Financial instruments differ in terms of marketability. Financial intermediaries have .  Financial Services Financial intermediaries provide key financial services such as merchant banking. Their interaction leads to the development of a smoothly functioning financial system. liquidity. industrial expansion.Security Market Equity Market Debt Market Derivative Market Govt. The Reserve Bank of India regulates the money market and Securities and Exchange Board of India (SEBI) regulates capital market. credit-rating. type of options. They are interdependent and interact continuously with each other. Financial institutions or intermediaries mobilize savings by issuing different types of financial instruments which are traded in financial markets. risk and transaction costs. Financial services rendered by the financial intermediaries’ bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. and so on. and economic growth. reversibility. they need to be reassured that it is safe to exchange securities for funds. These financial services are vital for creation of firms. hire purchase. return. Financial instruments help the financial markets and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers. leasing. Before investors lend money. they acquire specialization and render specialized financial services. To facilitate the credit allocation process.  Interaction among the Components These four sub-systems do not function in isolation. and intermediaries to protect the investors' interests. This reassurance is provided by the financial regulator who regulates the conduct of the market.

and financial services may encourage further savings if the net returns to investors are raised or increased. . Moreover. The latter are. The evaluation of these complex securities.close links with the financial markets in the economy. Financial markets have also made an impact on the functioning of financial intermediaries such as banks and financial institutions. today. Financial intermediaries rely on financial markets to raise funds whenever they are in need of some. portfolios. stable. liquid and broad markets make financial instruments a more attractive avenue for savings. and diversified. and trade financial securities which not only help in the credit-allocation process but also make the financial markets larger. hold. Financial institutions acquire. more liquid. radically changed entities as the bulk of the service fees and non-interest income that they derive is directly or indirectly linked to financial market-related activities. and strategies requires financial expertise which financial intermediaries provide through financial services. The development of newsophisticated markets has led to the development of complex securities and complex portfolios. This increases the competition between financial markets and financial intermediaries for attracting investors and borrowers.

An efficient financial system aims at containing risk within acceptable limits and reducing the cost of gathering and analyzing information to assist operators in taking decisions carefully. One of the most important functions of a financial system is to achieve optimum allocation of risk bearing. It also reduces the cost of borrowing. A financial system minimizes situations where the information is asymmetric and likely to affect motivations among operators or when one party has the information and the other party does not. It limits. Financial broadening refers to building an increasing number and a variety of participants and instruments. One of the important functions of a financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings efficiently and effectively. Thus. It provides financial services such as insurance and pension and offers portfolio adjustment facilities. It makes available price-related information. A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. . the system generates an impulse among the people to save more. which is a valuable assistance to those who need to take economic and financial decisions. This has a beneficial influence on the rate of return to savers. By acting as an efficient conduit for allocation of resources. A financial system helps in the creation of a financial structure that lowers the cost of transactions. pools. It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries. and trades the risks involved in mobilizing savings and allocating credit. Functions of the Financial System A good financial system serves in the following ways. A well-functioning financial system helps in promoting the process of financial deepening and broadening. it permits continuous up gradation of technologies for promoting growth on a sustained basis. Financial deepening refers to an increase of financial assets as a percentage of the Gross Domestic Product (GDP).

such as in Germany. Different designs of financial systems are found in different countries. the securities markets share center stage with banks in mobilizing the society's savings to firms. its pattern of evolution. and easing risk management. overseeing the investment decisions of corporate managers. At one extreme is the bank. In bank-based financial systems. Financial System Designs A financial system is a vertical arrangement of a well-integrated chain of financial markets and financial institutions for providing financial intermediation. banks playa pivotal role in mobilizing savings. as in the US.dominated system. where a few large banks playa dominant role and the stock market is not important. The other major industrial countries fall in between these two extremes. exerting corporate control. The structure of the economy. technical and cultural differences affect the design (type) of financial system. At the other extreme is the market-dominated financial system. In market. and political. allocating capital.5 Market Review INDIAN VERSUS WORLD MARKET Indian NSE ♦ S&P CNX Nifty ♦ CNX Nifty Junior ♦ CNX IT ♦ Bank Nifty ♦ CNX 100 BSE ♦ SENSEX ♦ MIDCAP ♦ SMLCAP ♦ BSE-200 ♦ BSE-500 World ♦ NYSE ♦ NASDAQ ♦ DOW JONES ♦ S&P 500 ♦ NIKKEI 225 . Two prominent polar designs can be identified among the variety that exists. where financial markets play an important role while the banking industry is much less concentrated.based financial systems. and providing risk-management facilities. 3.

and the components are reviewed once a year.  Nikkei 225: Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). S&P 500 is used in reference not only to the index but also to the 500 actual companies whose stocks are included in the index.  The Dow Jones Industrial Average DJI.S. The Nikkei average is the most watched index of Asian stocks. Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. The index is the most notable of the many indices owned and maintained by Standard & Poor's.  S&P 500: The S&P 500 is an index containing the stocks of 500 Large-Cap corporations. the Dow Jones or The Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1971. which Dow also created. most of which are American. market index. a division of McGraw-Hill. Dow 30. It is a price-weighted average (the unit is Yen). also called the DJIA. NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1. or informally the Dow industrials.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. It is the oldest continuing U. aside from the Dow Jones Transportation Average. a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years. .  New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE). for example.

competence to undertake involved risks and the amount of returns that the investor is expecting.6 Investment Alternatives While some plans accrue short term profits some are long term deposits. INVESTMENT Financial Assets Real Estate Gold Silver Previous objects Painting /Art Land / Building Machinery/Equipment etc Marketable Financial Assets.P. These can be classified into the following broad categories. Fixed Insurance bond Govt. Bank deposits Post office deposits Company deposits Provident deposits/EPF LIC NSC NSS fund KVP . Repo Govt. Below are most common Investment Options in India which assure safe and satisfactory returns.D. The first step towards investing in Indian market is to evaluate individual requirements for cash. C.3. Treasury Bills C. Securities Debenture Equity Shares Mutual Fund Pref Nonmarketable Financial Assets Bank Deposit Post Office KVP NSC NSS Company Deposit EPF/PPF LIC Non – marketable Financial Assets: A good portion of financial assets is represented by non-marketable financial assets.

you have an ownership stake in the company. Bonds may be classified into the following categories.  Government securities.  Blue chip shares  Growth shares  Income shares  Cyclical shares  Speculative shares Bonds: Bonds or debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flow. This essentially means that you have a residual interest in income and wealth.  Savings bonds  Government agency securities. Perhaps the most romantic among various investment avenues. equity shares are classified into the following brand categories by stock market analysis. The important money market instruments are:  Treasury bills  Commercial paper  Certificates of deposit .  PSU bonds  Debentures of private sector companies  Preference shares Money Market Instruments: Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments.Equity Shares: Equity shares represent ownership capital. As an equity shareholder.

The table below gives an overview into the existing types of schemes in the Industry. professionally managed basket of securities at a relatively low cost. debentures and other securities. The flow chart below describes broadly the working of a mutual fund: Mutual Fund Operation Flow Chart The mutual fund industry is a fast growing segment of the Indian Financial Market and it provides a variety of schemes to suit the needs and risk return profile of different categories of investors who are kept completely informed regularly through periodical reports and statutory disclosures. . The money thus collected is then invested in capital market instruments such as shares. risk tolerance and return expectations etc. Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them.Mutual Funds: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified.

Insurance premiums represent the sacrifice. the benefit. the more affluent investors are likely to be interested in the following types of real estate:  Agricultural land  Semi – urban land  Commercial property . In addition to a residential house. life insurance may be viewed as an investment. and the assured sum. Life Insurance: In a broad sense. Balanced Fund. and Income Fund etc.Schemes can be classified by way of their stated investment objective such as Growth Fund. The important types of insurance policies in India are :  Endowment assurance policy  Money back policy  Whole life policy  Term assurance policy Real Estate: For the bulk of the investors the most important asset in their portfolio is a residential house.

such as a stock. It may be viewed as a side bet on the asset. or a financial asset. stock index. Some important precious objects are . from the value of an underlying asset. Derivative Market Future Market Future Contract Say – One month – Two month – Three month Option Market Call Option Premium will change at the time of buying No Risk Put Option Premium will change at the time of sells No Risk . such as gold wheat or oil. bond or foreign currency.  Gold and silver  Precious stones  Art objects Financial Derivatives: A financial derivative is an instrument whose value is derived.Precious Object: Precious objects are items that are generally small in size but highly valuable in monetary terms. as the basic definition of the word implies. are a synthetic by-product created or derived from the value of the underlying asset. Derivatives. be it a real asset.

in the case of a put a specified quantity of an asset at a predetermined price on or before a specified future date option contract would expire if it is not in the best interest of the option owner to exercise. which is now the largest segment of the derivatives market as provided by the international swap dealers associations (ISDA) and the Bank of international settlements (BIS) Swaps which are agreement between two parties to exchange cash flows in the future according to a prearranged formula. The price of the good is determined at the initial time of contracting. In case of popular interest rate swap. As in all forward contracts. Option Option contracts confer the right but not the obligation to buy in the case of a call or sell. Futures A futures contract is a type of forward contract with highly standardized and closely specified contract terms. The price at which the exchange occurs is set at the time of the initial contracting. So defined. with the payment for the good to occur at that future date.When compared to global derivatives markets Indian derivative markets are still in the nascent stage. one party agrees to pay a series of fixed cash flows in exchange for a sequence of variable cost.Forwards A forward contract. Further. . almost everyone has engaged in some kind of forward contract. the type of forward contracting to be considered here always involves an exchange of one asset for another. Actual payment and delivery of the good occur later. The purchaser of a futures contract undertakes to receive delivery of the good and pay for it while the seller of futures promises to deliver the good and receive payment. performance in accordance with the terms of the contract occurs at one time. always involves a contract initiated at one time. performance in accordance with the terms of the contract occurs at a subsequent time. as it occurs in both forward and futures markets. futures contract calls for the exchange of some good at a future date for cash. Swaps Swaps generally trade in the OTC market but there is monitoring of this market segment.

2.  Rate of return  Risk • • • • Safety Profitability Purchasing power risk Maturity  Marketability  Tax shelter  Convenience Rate of Return: The rate of return on an investment for a period (which is usually a period of one year) is defined as follows: Rate of return = Annual income + (Ending price – Beginning price) Beginning price To illustrate.40 . consider the following information about a certain equity share. 60. the following attributes are relevant.00 : Rs.  Price at the beginning of the year  Dividend paid towards the end to the year : Rs.The major exchanges and the derivative products traded in India:  Bombay Stock Exchange (BSE)  National Stock Exchange OF India Ltd (NSE)  National Commodity & Derivatives Exchange Limited (NCDEX)  Multi Commodity Exchange of India Ltd (MCX)  National Multi Commodity Exchange of India Ltd (NMCE) Investment Attributes For evaluating an investment avenue.

00 Yield : Rs.0-60.40 + (66.  With stocks. in other words. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.00  In general. Investors looking to generate income or cash flow streams from equity investments commonly look for stocks that pay high dividend yields.00) = 0. .14 or 14 percent 60. yield can refer to the rate of income generated from a stock in the form of regular dividends. Capital appreciation is one of two major ways for investors to profit from an investment in a company. Capital Appreciation: It’s the rise in the market price of an asset. 66. Higher risk securities generally offer higher expected yields as compensation for the additional risk incurred through ownership of the security. This is often represented in percentage form. Annual income (interest or dividends) divided by the current price of the security. Price at the end of the year The rate of return of this share is calculated as follows: 2. The other is through dividend income. yield is the annual rate of return for any investment and is expressed as a percentage. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. stocks that provide a relatively large amount of annual cash dividends for a relatively low share price. Investors can use yield to measure the performance of their investments and compare it to the yield on other investments or securities. calculated as the annual dividend payments divided by the stock's current share price.

and gold can vary rather widely. real estate. Actual Return > or < Expected Return is risky investment . The greater variability of these cash flows indicates greater risk. which is simply the difference between the highest and the lowest values. Actual Return = Expected Return = Risk Free Investment  If. Other measures commonly used in finance are as follows: Variance : This is the mean of the squares of deviations of individual returns around their average values Standard deviation : Beta : This is the square root of variance This reflects how volatile the return from an investment is. Type of Risk  Internal Rate of  Business Risk  Financial Risk  Management Risk  Liquidity Risk Return Risk  Market risk  Inflation Risk  Default Risk The rate of return from investments like equity shares. The risk of investment refers to the variability of its rate of return: How much does individual outcomes deviate form the expected value? A simple measure of dispersion is the range of values. Risk = Actual Return – Expected Returns Condition:  If.Risk Risk in investment is defined as the variability that is likely to occur in future cash flows from an investment. in response to market swings.

breadth. The liquidity of a market may be judged in terms of its depth. How does one evaluate the marketability of an investment like a provident fund deposit which is non-marketable by its very nature? In such a case. . and resilience. equity shares of large. Generally. High marketability is a desirable characteristic and low marketability is an undesirable one. the relevant questions of ask is: can withdrawals be made or loans be taken against the deposit? Such as investment may be regarded as highly marketable if any of the following conditions are satisfied:  A substantial portion of the accumulated balance can be withdrawn without significant penalty. Depth refers to the existence of buy as well as sells orders around the current market price. and (c) the price change between two successive transactions is negligible.Marketability: An investment is highly marketable or liquid if: (a) it can be transacted quickly: (b) the transaction cost is low.  A loan (representing a significant portion of the accumulated balance) can be raised at a rate of interest that is only slightly higher than the rate of interest earned on the investment itself. well – established companies enjoy high marketability and equity shares of small companies in their formative years have low marketability. Breadth implies the presence of such orders in substantial volume. Resilience means that new orders emerge in response to price changes.

Terminal Tax Benefits: A terminal tax benefit refers to relief from taxation when an investment is realized or liquidated. you get a tax benefit under Section 80 C of the Income Tax Act. Tax benefits are of the following three kinds. Initial Tax Benefit: An initial tax benefit refers to the tax relief enjoyed at the time of making the investment. upto a certain limit. in the hands of the recipient. For example. the questions that we ask to judge convenience are:   Can the investment be made readily? Can the investment be looked after easily? The degree of convenience associated with investments varies widely.Tax Shelter: Some investments provide tax benefits. Convenience: Convenience broadly refers to the ease with which the investment can be made and looked after. For example. others do not. dividend income and income from certain other sources are tax – exempts. At one end of the spectrum is the deposit in a savings bank account that can be made readily and that does not require any maintenance effort. . a withdrawal from a Public Provident Fund Account is not subject to tax. Put differently. Continuing Tax Benefit: A continuing tax benefits represent the tax shield associated with the periodic returns form the investment. when you make a deposit in a Public Provident Fund Account. For example. At the other end of the spectrum is the purchase of a property that may involved a lot of procedural and legal hassles at the time of acquisitions and a great deal of maintenance effort subsequently.

It must be emphasized that within each investment category individual assets display some variations.How do various Investment Avenues Compare? A summary evaluation of these investment avenues in terms of key investment attributes is given in Exhibit below. Exhibit: Summary Evaluation of Various Investment Avenues Return Current yield Equity Shares Non convertible Debentures Equity Schemes Debt Schemes Moderate Low Low High No tax on Very high dividends Bank deposits Public provident fund Residential Gold Silver Moderate and Nil Moderate Moderate Negligible Average Low Average Moderate Nil Nil Moderate Negligible Nil High Average Nil Section 80 benefit High Nil Fair Average C Very high Very high Low High High High High Very high Low Capital appreciation High Negligible High Low Fairly high Average High Nil High High Risk Marketability Liquidity / Tax shelter Convenienc e – High .

Debenture holders are creditors of the company because the company owes them money — whereas shareholders are owners of the company. A shareholder cannot be held personally responsible or liable for the actions of a company. or any of its directors or employees. Market Segment Large caps Mid caps Small caps Market Capitalization Above Rs 35 bn Below Rs 35 bn Below Rs 6 bn • Liabilities and rights of shareholders A company has an independent legal existence of its own. A company is managed by a board of directors. sell and own property. The amount so raised is called the equity capital of the company. Important Things Every Investor Should Know • What is a company? A company is a form of business organization. The money that a company raises for starting and running its business is called capital. banks and other financial institutions. This means that a company can. which consists mostly of elected representatives of the shareholders. It is basically an association of individuals called shareholders who get together for the purpose of running a particular business. enter into contracts. without in anyway involving its shareholders.. This means that if you buy 100 shares of face value Rs. The people who buy debentures are called debenture holders. engage in litigation. 10 each in XYZ Ltd. The liability of the shareholder to his company is limited to the value of the share he holds in the company. buy. quite distinct from that of its shareholders. This is initially raised from the shareholders who jointly own the company. . or incur debts. Companies also raise capital by borrowing from the public. This is a purely financial liability which is fully discharged when the shares are bought — it ceases to exist after that. They raise money from the public either through fixed deposits or by selling debentures. then your financial liability to the company is Rs.

gifted. So when you buy shares in a company. nor are they freely available for sale. When we talk of investment in shares.000. private limited companies are expressly prohibited from selling their shares to the . you can do so with full confidence that you will not be incurring unlimited or unforeseen financial liabilities. Shares are movable property which can be bought. For example. All companies are required by law to use the word "Limited" (or its common abbreviation "Ltd.000 which is fully discharged by you on the purchase of these shares. or getting involved with the company's financial and legal problems in any other way. Thereafter. it does not mean that the company is now 300 times richer. if a Rs. It is mandatory for a private limited company to end its name with the words "private limited". we are actually referring to investment in shares of public limited companies. the company is not affected by any subsequent transactions in which its shares are bought and sold in the stock exchanges. it is not affected by any changes in its owners. shares in the company can be bought at their face value by making payments directly to the company. Since the company has an independent existence of its own.000 each. public limited and private limited. Thereafter. The shares of private limited companies are neither quoted on the stock exchange. Under no circumstances can you be asked to pay any additional money to XYZ Ltd. becomes bankrupt and goes into liquidation. This is how companies raise their initial financial capital. the worst that can possibly happen to you is that the price of your shares may fall to zero and you may not be able to recover your initial investment of Rs.") after their names to show that the financial liability of its shareholders is limited. Initially when a company is formed. sold. This is the essence of the concept of "limited liability".1. while a public limited company simply ends its name with the word "limited". In fact. if XYZ Ltd. 1. All it means is that buyers of its shares consider that the company has a bright future and its shares are worth the high price they are paying for it. bequeathed or transferred in any other manner permitted by law. As a shareholder you can transfer your ownership rights by selling your shares to others. or to its creditors. • Public limited and private limited companies There are two types of companies. 10 share of a company is sold in the stock market at Rs 3.

In fact.public. most listed companies have now transferred their shares to the depositories who. and 3) A Fully-audited Balance Sheet and Profit and Loss Account of the company for the previous year. Nowadays this information is also maintained by the two depositories: the NSDL (National Securities Depository Ltd. The annual report is one of the most important and useful documents for a shareholder and a prospective investor.) and the CSDL (Central Securities Depository Ltd. rights and bonus shares. in turn. . shares of public limited companies are widely held by the public and are normally freely available for sale and purchase on the stock exchange. The auditors' report informs the shareholders whether the. 2) Auditors' Report. its future prospects.). • Register of members Shareholders are often also referred to as members of the company. keep a record of the shareholders and their particulars. The annual report comprises the: 1) Directors' Report. Every company is required to maintain a register of members where the names. This makes it easier for the depositories to service the shareholders with respect to dividends. The directors' report gives information on the general condition of the company's business. • Annual report Every company prepares an annual report on its functioning and accounts and sends it to each of its shareholders well before the date fixed for the company's annual general body meeting. accounts of the company give a "true and fair" view of the state of the company's finances at the close of the company's accounting year. allocation to reserves and other information having a bearing on the finances and operations of the company. and of the profits made by the company during the year. proposals regarding declaration of dividends. addresses and other relevant particulars of its shareholders and their shareholdings are recorded. On the other hand.

Unpaid dividends on these shares do not lapse. companies" issue what are called cumulative preference shares. To provide for such an eventuality. However. they are entitled to all the residual profits and accumulated reserves of the company after all its obligations to its creditors and preference shareholders have been met.3. In fact. irrespective of the extent of losses which the company may incur. Companies which make losses are sometimes not in a position to pay any dividends to their preference shareholders. Preference shares give a fixed rate of dividend. which is currently around 6 to 8 per cent per annum. don't carry a fixed rate of dividend. on the other hand. when profits go down it is the equity shareholders who have to bear the brunt and are often deprived of even a modest dividend. equity shareholders cannot claim dividends as a matter of right. They exercise full voting power on all important matters affecting the company. This gives added security to preference shareholders by assuring them of their fixed dividend. A company cannot pay any dividends to its equity shareholders until all such arrears of accumulated preference dividends have been paid. or "redeemed" from the company after a certain fixed period of time. an exception is usually made in the case of holders of redeemable preference shares as their share capital can be refunded. Since equity shareholders are the owners of the company. but are allowed to accumulate till the company is in a position to clear all the arrears of accumulated dividends. Equity shares. Equity shareholders form a bulk of the shareholders of a company. When a company makes large profits. The share capital of a company is not refunded to the shareholder so long as the company is in existence. .7 Preference shares and equity shares  There are two categories of shares: 1) Preference shares. the lion's share goes to its equity shareholders. Conversely. Preferential shares give a right to their holders to receive dividends and repayment of capital in case the company is wound up in preference to equity shareholders. and 2) Equity shares.

When such shares are offered for sale at their face value. whereas the former gets the double benefit of substantial capital appreciation. Thus an equity shareholder bears higher risks than the preference shareholder and. they are said to be offered at par. The latter gets only his fixed rate of dividend. His shareholding also expands with the addition of rights and bonus shares. Premium is the difference between the issue price of a share and its face value. reserves are back-up funds which a company keeps for meeting unforeseen increases in ex- . is rewarded with higher profits. or for their expansion and diversification programmes. Finally.In growing and expanding companies.  Rights shares Companies often require additional funds for their working capital. an equity shareholder gets a much higher rate of return on his investment than does a preference shareholder. The issue of rights shares increases the equity capital of the company but does not dilute an existing shareholder's proportionate ownership in the company. it is the equity shareholder who experiences the excitement and thrills of stock market investment. In order to make the issue attractive. A fairly large part of the profit is retained and added on to what is commonly called the reserves of the company. The number of rights shares offered to each shareholder is directly proportionate to the number of equity shares he owns. A preference shareholder does not get the benefits of capital appreciation on his investment. and when the sale price is higher. Rights shares could either be offered at par. in return. if he subscribes to his rights entitlement in full. Such shares are called "rights shares" because the company's shareholders have a prior right to buy these shares by virtue of their existing shareholding. they are said to be offered at a premium. They sometimes raise these funds by the sale of additional equity shares on a "rights basis" to its shareholders. the price of rights shares is invariably fixed at a level below the prevailing market price of the company's share. or at a premium. As the name indicates.  Bonus shares Companies do not generally distribute their entire profits to the shareholders as dividends. plus higher dividends.

the ex-bonus price of XYZ shares would probably fall to around Rs. With the issue of bonus shares.8 The stock exchange . adversely affect the shareholder because such a fall in the market price is more than offset by the increase in the size of his shareholding. This benefits the shareholder because he gets the same rate of dividend on a larger shareholding. your shareholding doubles to 200 shares. most profit-making companies build up large reserves. 25 per share is fully compensated by the increase in your shareholding from 100 to 200 shares. It is essentially a book transfer by which a sum of money equal to the value of the bonus shares is transferred from the reserves to the equity capital in the company's books of accounts. and for financing its future expansion or diversification programmes. companies often find that their equity capital is too small compared to the expanded size of their business operations. Actually. Therefore. share prices generally do not fall in the same proportion in which bonus shares. 5. sales and volume of business.penditure. Let us also assume the market price to be Rs. 27 per share. Bonus shares. The fall in price from Rs. when it issues bonus shares in the ratio of 1:1. It is not advantageous for companies to operate a continuously expanding business on a narrow capital base. 50 per share prior to the bonus issue. There is also a sizeable increase in their assets. When such growth takes place. The issue of bonus shares enlarges a shareholder's shareholding without any dilution in his proportionate ownership of the company. are issued free to existing shareholders in proportion to the number of shares held by them. 50 to Rs. are issued. To illustrate how this happens. Companies usually continue to pay the same rate of dividend after the issue of bonus shares as they were paying prior to the issue. however. 25 per share. you do not lose because the value of your shareholding remains at Rs. At the same time. This does not. as the name suggests. in order to expand their equity capital they capitalize a part of their reserves by issuing bonus shares to their shareholders. The issue of bonus shares almost always leads to a fall in the market price of a share. Even though the price has fallen. the market price of the shares would probably fall to Rs. In this case. Over the years.000. let us assume that you own 100 shares in XYZ Ltd. 3.

but trading in it is subject to the regulation and control of the stock exchanges authorities. Companies have to list their securities with one or more stock exchanges in order to make them eligible for trading. As such. That is why it is also called a stock market. and The Hindu Business Line. preference shares. is called brokerage. listed securities enjoy greater confidence among investors. give a more comprehensive and detailed coverage. The brokerage rates are fixed by the stock exchanges. The stockbroker is authorized to buy and sell shares on behalf of others on a commission basis. According to the stock exchange rules you have to do so through a licensed member of the stock exchange called a stockbroker. Trading in recognized stock exchanges in India is confined only to listed securities. . or through his registered sub-broker. of course.5 per cent of the transaction value. Business Standard.  Reading daily market quotations The prices at which shares are transacted on the stock markets get wide coverage in daily newspapers. The maximum brokerage allowed by the stock exchanges can be verified from their web sites.The stock exchange is basically a marketplace for shares and securities. The Financial Express. Listing not only gives easy marketability and liquidity to a share. The term "security" is a broad. At the time of writing. semigovernment and local authorities. Just like any other market. Stock market quotations in a financial newspaper will typically give you the following information: 1) Name of the company. Unlike other markets. the maximum brokerage permitted was 2. Financial newspapers. you are not permitted to buy or sell shares directly in a stock exchange. debentures and bonds issued by government. it brings together the potential buyers and sellers of securities. generic term covering equity shares. however. or fee. This commission. For all practical purposes now there are only two nation-wide stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). like The Economic Times. Listing is not a statutory obligation for public limited companies but most of them prefer to get their securities listed because of the numerous advantages and benefits of doing so.

such restrictions on foreign holdings in Indian companies have been removed. Now. no two investors would ever agree on . and have built up a reputation for growth. MNC is an abbreviation which stands for multinational companies which were earlier also known as FERA companies when the erstwhile Foreign Exchange Regulation Act (FERA) was in force. 10) Current P/E ratio. An MNC is a company in which foreigners held more than 40 per cent of its equity capital. however. regular payment of high dividends. It is a term that is loosely used for companies that are sound investments in every respect. and integrity in business dealings would normally qualify to be labeled as blue chips. 5) Opening price of the previous day. and 11) High/low prices of the year.  Multinational companies (MNCs) As an investor you would frequently come across the term MNC -in newspapers and magazines. 4) Closing price of the previous day. Companies that are large in size. 9) Volume of shares traded. 7) Value of shares traded. technologically advanced. FERA put a number of restrictions on the operations of companies owned and controlled by foreigners. 8) Number of trades that took place in the share. 3) BSE code number assigned to the company. However. 6) High and low prices of the previous day. It is quite easy to read these quotations since almost all these newspapers provide easy-to-understand explanatory notes.  Blue chips This is another frequently used term though there is no standard definition of what a blue chip is.2) Separate set of quotations for BSE and NSE. Many MNCs have foreign holdings going up to 80 per cent. or the past 52-weeks. have professional management of a high caliber.

where to draw the line separating blue chip companies from the others. When a lot of bull activity dominates the stock market there is a general all-round rise in share prices. A buyback of shares reduces the equity capital of a company. As a result. He expects share prices to fall in the immediate future and seeks to make money by selling shares now in the hope of being able to buy them later at lower prices. A bear. this is referred to as short selling. not only does the equity capital reduce. It is a term which is commonly used to describe a falling market. He is a speculator because he buys with the short-term objective of making quick profits out of price fluctuations. This happens because the shares bought back from the market are extinguished and cease to exist. He expects the price of a particular share to rise in the immediate future and. buys shares at their current price in the hope of selling them later at a higher price. Such a market is commonly referred to as a bull market. he sells shares which he doesn't possess and expects that he can buy them later for delivery to the buyer. Bull market thus is a term used to describe a rising market. on the other hand.  Bulls and bears Most stock exchange speculators can be broadly grouped into two categories: 1) Bull 2) Bear A bull is a speculator who takes an optimistic view of the future. but also the floating stock of the company's shares in the market shrinks to a lower level. It all finally boils down to subjective and personal preferences. In stock market parlance. A bear is also a speculator because he hopes to make quick profits by taking advantage of a short-term fall in prices. Usually. The Company's Act debars the company from reissuing these shares again. is a speculator who takes a pessimistic view of the future.  Buyback of shares Buyback of shares is a term that refers to a situation where a company buys back its own shares with its own capital. A bear market is one which is characterized by a lot of bear activity. . accordingly.

sometimes considerably higher. or par value. 10 per share. In a stock split. However. the shares of the company get a better discounting. 5. the existing shares of the company are simply split into shares which have a smaller face value. on the bourses and their price appreciates to a level that is considerably higher than the pre-buyback level. When this happens. The buyback of shares by a company is usually announced at rates. As a consequence.000 and the stock is split five for one. Stock splits do not in any way increase or reduce the company's equity capital. 10 share into five shares with a par value of Rs. than their current quoted prices on the market. Sometimes. the price of the new (split) share should be Rs. 1. which are higher. as a step towards de-listing of their shares from the stock exchanges. Such cases too result in a significant appreciation in the price of the company's shares. This gives investors an opportunity to make a windfall profit that they would not have got on the stock exchange under normal circumstances. A bonus issue of shares results in an increase in the equity capital of a company because through a book entry money is transferred from its reserves to its equity capital. it usually has a dampening effect on the price of a company's shares. as a result of the great confidence in the value of its shares shown by its management. The company's net assets or equity capital does not undergo any increase or decrease. theoretically speaking. or P/E multiple.Consequently the earnings per share (EPS) go up because the same amount of net post-tax earnings (as before the buyback) gets spread over the reduced equity capital. let us take the stock split of XYZ Company whose shares have a par value of Rs. shareholders do get ample opportunity to exit the company at better-than-market prices. company managements buy back their shares with a view to reducing the public holding in their company. Sometimes the buyback announcement indicates the company management's belief that the market has undervalued its shares and that they deserve a higher price. then. as a saving grace.  Stock splits A stock split is completely different from a bonus issue of shares. Suppose the company splits its Rs. 2 each.000. For example. If the pre-split price of the share was Rs. A stock split benefits the investor because the share .

10 per share were split into five shares with a par value of Rs. A depository provides services to investors through its agents called Depository Participants (DPs). material. is a term used for conversion of shares from their physical form (physical share certificates) to the dematerialized or electronic form.  Dematerialization of shares Dematerialization. Its pre-split price (after adjusting for the split) was around Rs. shares cease to exist in their physical. i. These DPs are mostly banks. Dealing with a depository participant in depositing and withdrawing your Demat shares (an abbreviated form of dematerialized shares) is quite similar to operating a bank account. whereas the NSDL acts as a depository for the NSE. the GSDL (Central Securities Depository Limited) and the NSDL (National Securities Depository Limited). think of it as a bank. This will make your share transactions easier and speedier.becomes cheaper in price. It issues account holding statements and account transaction statements to its depositors in the same way that a bank does.284 per share. 2 each on 15 October 1999. Locating a depository participant in your city is not a major problem. which. This invariably results in attracting more buyers with a. There are two depositories in India. . as the name suggests. 2. by 31 December 1999 had risen to Rs. The best course of action is to deal with the same DP as does your broker. The CSDL acts as a depository for BSE. This conversion is done by the depository which also keeps custody of dematerialized shares on behalf of shareholders. To best understand what a depository is and how it functions.e. financial institutions and brokers. It has therefore been observed that the post-split price of the share that undergoes a stock split does not fall to its proportionate level compared to its pre-split price. consequent increase in liquidity and a proportionately higher post-split price. Also. After dematerialization. in case any problem arises it would be easier for you and your broker to solve it since you would both be dealing with the same DP. form. 1.522 per share. For all intents and purposes a depository is a securities bank which holds shares and bonds in the electronic form on behalf of its deposit holders just as your money held in normal bank is reflected as an entry in your pass book. Take the case of Wipro whose shares with a par value of Rs.

Neither is there a complicated transfer form to fill up.  Re-materialization Re-materialization is the reverse of dematerialization. The DP then sends the DRF to the company. bearing new folio numbers and distinctive numbers. It means converting shares held in the demat form back into physical share certificates. you can rest assured that there is no risk of their being fake. in turn. Your DP will forward your request to the depository. After conversion they are credited to your account with the DP. or its registrars and share transfer agents. share certificate numbers. forged or stolen shares as it sometimes happens with shares held in the physical form. Moreover. In the case of demat shares there is also no stamp duty on transfer of shares.  Advantages of dematerialization The biggest advantage is that when you buy demat shares. in the case of demat shares you need not worry about bad deliveries. form. for conversion of the share certificates to their dematerialized. an investor not only saves money but is also freed from the tedious and repetitive paperwork which invariably accompanies the buying and selling of shares in the physical form. All you need to do is to request your DP for re-materialization of your shares.Dematerialization of shares with a DP involves a simple procedure. intimate the concerned company. This whole process of dematerialization normally takes about one month or so. You have the complete freedom to re-convert your shares from the demat form to the physical form whenever you want. it would be advisable to consult your DP. back to you. As a result. In the DRF you will be required to fill in all particulars of your shares. after cancelling them. such as their folio numbers. The depository will. who will send the required share certificates. or its registrars and transfer agents. or electronic. to the DP along with a Demat Request Form (DRF). distinctive numbers. For the detailed procedure of opening and operating a Demat account and how to operate it. all you have to do is to surrender your physical share certificates. etc. The stock exchanges have now discarded the earlier concept of . After opening a Demat account with a DP.

and consider this price to be its intrinsic.m. management proficiency. is now placed on an equal footing with his counterpart in Mumbai. Equally.  Fundamental Analysis Fundamental analysis is a term used to describe the approach some investors adopt for taking investment decisions.  On-line trading The earlier outcry system of auctions in the trading ring has now been replaced by the BOLT and NEAT systems. This is called the intrinsic price of the share because it reflects its inherent worth and value.m. Through the BOLT and NEAT systems brokers can now enter orders on behalf of their clients from computer terminals installed in their offices instead of physically assembling in the trading ring. no matter how small the denomination or how low the share price. They try to estimate the intrinsic worth of a company's share by studying its sales. He does not suffer from any disadvantage arising from his geographical location. This became possible only because of dematerialization of shares. all-India network platform for trading instantaneously. can be bought or sold easily on the exchange. in real time. They try to estimate what the price of a particular company's share ought to be. profits. demat enables the small investor to sell his odd lots and small lots of shares at market prices. whereas. the NSE has a similar system called NEAT. The purpose of these on-line trading systems is to provide an automated. They then use it to judge whether the company's shares are currently over-priced or under-priced in the . The BSE on-line trading system is called BOLT. On-line trading has numerous advantages over the earlier system.marketable lots. Demat is a big advantage for the small investor as it enables him to buy high-priced shares in small quantities which were earlier often out of his reach because a marketable lot of high-priced shares would usually involve a fairly large sum of money. Persons who follow this approach are called fundamentalists. dividends. or true. value. earnings. who has access to a computer terminal which is hooked on to the BOLT or NEAT systems. small lots. Any investor/trader. computerized. Trading is conducted from Monday to Friday between 9:55 a. and 3:30 p. Now even one share. and odd lots. and a host of other economic factors that have a bearing on the company's profitability and business prospects.

earnings. the whole market. By its very nature. It is an attempt to predict the future price of a particular share on the basis of a study of its price movements in the past. They believe that these factors have already been taken into account by the market and are fully reflected in the current market price of a share.  Technical Analysis Technical analysis is another type of investment analysis commonly used for making buying and selling decisions in the stock market. dividends. The fundamentalist makes his money by buying under-priced shares and selling them when they later become over-priced. high trading . They believe that a study of share price charts and graphs will reveal regular and recurrent patterns of price behavior. They use this knowledge to predict future price movements. its overwhelming emphasis is on fundamental analysis. or almost represents. which is why they are often referred to as chartists. technical analysis is particularly suitable for speculators and short-term traders in shares. It is difficult to take a long-term view on the basis of technical analysis. which are likely to be repeated in the future. Technical analysts use charts and graphs for keeping a record of share price movements. On the other hand. such as sales. Technical analysts usually ignore all fundamental data. profits. It is basically an average of a carefully selected portfolio that represents.stock market. they make money by appropriately timing their buying and selling of shares. business prospects of the company. The stock market index is like an instrument that tracks the overall behavior of the stock market. Since this book has been written for investors and not speculators. high market capitalization. After determining what future price movements are going to be like.  Stock market indices The main purpose of a stock market index is to provide a means for measuring the overall trends in share prices in the market. fundamental analysis is more useful for long-term investors. etc. The shares selected for inclusion in the index generally have a high floating stock which is held by the public.

• This is the main index of the National Stock Exchange. popularly known as Nifty. represents the market. • The shares comprising the Sensex and Nifty are listed in Appendix E. Nifty stocks account for 65 to 70 per cent of the traded volumes on NSE. If you want to know whether the market has gone up or down. His short planning horizon.volumes. • The most widely used stock market index in India is the BSE Sensitive Index. popularly known as Sensex. Investor Planning horizon Speculator An investor has a relatively A speculator has a very longer planning horizon. The index. and high liquidity. His . then all you have to do is to look at the movement of the index. The other widely used index in India is the S&P CNX Nifty Index. The BSE Sensitive Index was constructed in 1986. Sensex is composed of 30 scrips selected on the basis of their size and daily trading volumes. with 1978-79 as its base year. • The value of Sensex in the base year was taken to be 100. • The index is therefore extremely sensitive to changes in the share prices of the larger companies. You don't have to look at the price movements of each and every share listed on the market. The Nifty is composed of 50 stocks representing over 20 sectors of the economy. However. Investment versus Speculation While it is difficult to draw the line of distinction between investment and speculation. Scrips are given weightage on the basis of their market capitalization (number of equity shares multiplied by their share price). The index is useful in that it gives you a quick fix on the market. thus. or five years ago. or what the level of the market was one year ago.. it is possible to broadly distinguish the characteristics of an investor from those of a speculator as follows. thus making it more broadbased and diversified than the Sensex. it must be remembered that the composition of the indices is changed quite frequently to reflect changes in the market capitalization and volume of trading.

factors and attempts a careful and market psychology. The outcome of a roll of dice or the turn of a card is known almost immediately. Return expectation An investor usually seeks a A speculator looks for a modest rate of return which is high rate of return in commensurate with the limited exchange for the high risk risk assumed by him borne by him. moderate risk. to supplement his personal resources. evaluation of the prospects of the firm Leverage Typically an investor uses his A own funds and borrowed funds. Rarely does he knowingly assume high risk. speculator to can normally borrowings. Basis for decisions An investor attaches greater A speculator relies more on significance to fundamental hearsay. not for income. technical charts. An investor is normally not A speculator is ordinarily willing to assume more than willing to assume high risk. . be very eschews resorts which substantial.  Gambling Gambling is fundamentally different from speculation and investment in the following respects: • Compared to investment and speculation. the result of gambling is known more quickly. Risk disposition to a few months. • Rational people gamble for fun.holding period is usually at holding may be a few days least one year.

Investment management (or portfolio management) is a complex activity. capital appreciation. as appropriate portfolio strategy has to be a hammered out. For stock selection. on the other hand. investors pursue an active stance with respect to security selection. this is concerned with the proportions of ‘stocks’ (equity shares and units / shares of equity – oriented mutual funds) and ‘bonds’ (fixed income investment vehicles in general) in the portfolio.  Selection of Securities: Generally. A passive portfolio strategy. which may be broken down into the following steps:  Specification of Investment Objectives and Constraints: The typical objectives sought by investors are current income. investors commonly go by fundamental .  Choice of the Asset Mix: The most important decision in portfolio management is the asset mix decision. Two broad choices are available: an active portfolio strategy or a passive portfolio strategy.  Formulation of Portfolio Strategy: Once a certain asset mix is chosen. the constraints arising from liquidity.• Gambling does not involve a bet on an economic activity. The relative important of these objectives should be specified. time horizon. and safety of principal. involves holding a broadly diversified portfolio and maintaining a pre – determined level of risk exposure. It is based on risk that is created artificially. or some combination of these. or sector rotation. Further. 3. Very broadly. • Gambling creates risk without providing any commensurate economic return. and special circumstances must be identified. or security selection.9 Portfolio Management Process The Processes on Demand portfolio management process is a best practice for management of the projects and programs of the portfolio. An active portfolio strategy strives to earn superior risk adjusted returned by resorting to market timing. tax. The appropriate ‘stock-bond’ mix depends mainly on the risk tolerance and investment horizon of the investor.

analysis and / or technical analysis. to maturity. tax shelter. The key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. it may call for sector rotation as well as security switches. Such a review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis. This primarily involves a shift from stocks to bonds or vice versa. periodic rebalancing of the portfolio is required.  Performance Evaluation: The performance of a portfolio should be evaluated periodically.  Portfolio Revision: The value of portfolio as well as its composition – the relative proportions of stock and bond components – may change as stocks and bonds fluctuate. . credit rating. Though often glossed over in portfolio management discussions.  Portfolio Execution: This is the phase of portfolio management which is concerned with implementing the portfolio plan by buying and / or selling specified securities in given amounts. term. and liquidity. the fluctuation in stocks is often the dominant factor underlying this change. In addition. this is an important practical step that has a bearing on investment results. The factors that are considered in selecting bonds (or fixed income instruments) are yield to maturity. Of course. In response to such changes.

They bear the risk and enjoy the rewards of ownership. 1) Inadequate comprehension of return and risk. Of all the form of securities. equity shares appear to be most romantic. 2) Vaguely formulated investment policy 3) Naïve extrapolation of the past 4) Cursory decision making 5) Simultaneous switching 6) Misplaced love for cheap stocks 7) Over-diversification and under-diversification 8) Buying shares of familiar companies 9) Wrong attitude toward losses and profits 10) Tendency to speculate Investing In Equity Shares Equity capital represents ownership capital. APPROACHES TO INVESTMENT DECISION MAKING The stock market is thronged by investors pursuing diverse investment strategies which may be subsumed under four broad approaches. While fixed income investment . 1) Fundamental approach 2) Psychological approach 3) Academic approach 4) Eclectic approach  Common errors in investment management Investors appear to be prone to the following errors in managing their investments. Equity shareholders collectively own the company.

avenues may be more important to most of the investor, equity shares seem to capture their interest the most. The potential rewards and penalties associated with equity shares make them an interesting, even exciting, proposition. No wonder, equity investment is a favorite’s topic of conversation in parties and get – together. Terminology The amount of capital that a company can issue as per its memorandum represents the authorized capital. The amount offered by the company to the investors is called the issued capital. That part of the issued capital that has been subscribed to by the investors is called the paid-up capital. Typically, the issued, subscribed, and paid-up capitals are the same. The par value is stated in the memorandum and written on the share scrip. The par value of equity shares is generally Rs 10 (the most popular denomination) or Rs 100. Infrequently, one comes across par values like Re1, Rs 5, Rs 40, and Rs 1,000. The issue price is the price at which the equity share is issued. When the issue price exceeds the par value, the difference is referred to as the share premium. Not that the issue price cannot be, ordinarily, lower than the par value.

The book value of an equity share is equal to: Paid-up equity capital + Reserves and Surplus Number of outstanding equity shares Quite naturally, the book value of an equity share tends to increase as the ratio of reserves and surplus to the paid – up equity capital increases. The market value of an equity share is the price at which it is traded in the market. The price can be easily established for a company that it listed on the stock market and actively traded. For a company that is listed on the stock market but traded very infrequently, it is difficult to obtain a reliable market quotation. For a company that is not listed on the stock market, one can merely conjecture as to what its market price would be if it were traded.

Stock Market Classification of Equity Shares In stock market parlance, it is customary to classify equity shares as follows: Blue – chip shares Shares of large, well-established, and financially strong companies with an impressive record of earnings and dividends. Growth Shares Shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability. Income shares Shares of companies that have fairly stable operations, relatively limited growth opportunities, and high dividend payout ratios. Cyclical Shares Shares of companies that have a pronounced cyclicality in their operations. Defensive Shares Shares of companies that are relatively unaffected by the ups and downs in general business conditions. Speculative Shares Shares that tend of fluctuate widely because there is a lot of speculative trading in them.

Note that the above classification is only indicative. It should not be regarded as rigid and straitjacketed. Often you can’t pigeonhole a share exclusively in a single category. In fact, many shares may fall into two (or even more) categories.  OBSTACLES IN THE WAY OF AN ANALYST Inadequacies or Incorrectness of Data: An analyst has to often wrestle with inadequate or incorrect data. While deliberate falsification of data may be rare, subtle misrepresentation and concealment are common. Often, an experienced and skilled analyst may be able to detect such ploys and cope with them. However, in some instances, he too is likely to be misled by them into drawing wrong conclusion.

Future Uncertainties: Future changes are largely unpredictable; more so when the economic and business environment is buffeted by frequent winds of charge. In an environment characterized by discontinuities, the past record is a poor guide to future performance. Irrational Market Behaviors: The market itself presents a major obstacle to the analyst. On account of neglect or prejudice, under valuations may persist for extended periods; likewise, overvaluations arising from unjustified optimism and misplaced enthusiasm may endure for unreasonable lengths of time. The slow correction of under or overvaluation poses a threat to the analyst. Before the market eventually reflects the values establishment by the analyst new forces may emerge. As Benjamin Graham put it : “The particular danger to the analyst is that, because of such delay, new determining factors many supervene before the market price adjusts itself to the value as he found it.”

 Guidelines For Aggressive Equity Investors
Aggressive equity investors play the equity game actively and vigorously. They spend more time and effort in managing their portfolio than their conservative counterparts. They are inclined to take greater risks, albeit in a calculated manner, to earn superior rates of return. They seem to relish the thrill and adventure of playing the equity game. In addition to the general guidelines for investment, aggressive equity investors should also bear in mind the following guidelines especially relevant for them. 1) Focus on investments you understand and play your own game. 2) Monitor the environment with keenness. 3) Scout for 'special' situations in the secondary market. 4) Pay heed to growth shares. 5) Beware of the games operators play. 6) Anticipate earnings ahead of the market. 7) Leverage your portfolio when you are

Inactively Traded Shares Listing does not ensure liquidity. 1) Avoid certain kinds of shares 2) Apply stiff screening criteria 3) Look for relatively safe opportunities in the primary market. an unlisted share is not included in the quotation list. A major bane of the Indian equity investors is that many listed shares are not actively traded. conservative equity investors should also bear in mind the following guidelines especially applicable to them. In addition to the general guidelines for investment. not the adventure of aggressive investment. 4) Participate in the schemes of mutual funds 5) Join a suitable portfolio management scheme 6) Consult an investment advisor 7) Refrain from short-term switch hitting Avoid Certain Kinds of Shares Experience suggests that the following kinds of shares are not suitable for conservative investors. You should avoid such shares. Only about 7000 of these are listed on the stock exchanges. look at the frequency with which it has been traded in the last three . Guidelines for Conservative Equity Investors Conservative equity investors seek to minimize investment risk as well as the time and effort devoted to portfolio management. Don't buy shares of unlisted companies. What they want is peace of mind. they do not deliberately strive for spectacular gains.8) Take swift corrective action. How does one find out whether a share is listed or not? It is very simple: a listed share is included in the quotation list of the stock exchanges where it is listed. To find out whether a share is actively traded or not. There 'is no organized market for them and there is no reliable way of assessing their market price.000 public limited companies in India. Shares of Unlisted companies There are more than 10. Satisfied with a reasonable return. the rest are not.

It should enjoy a respectable share of the market. conservative investors. one has to be very cautious if the price-earnings ratio is more than 15 and or significantly higher than the industry average. Competitive Position The Company must have a reasonably strong competitive position. it may be regarded as an inactively traded share. it should have a market share that is growing. particularly before a public issue or rights issue. Besides manipulating share prices. This mostly is in the form of market support to boost share prices. As a general guideline. which satisfy stiff requirements. If it is traded less than once in a week. avoid such manipulated shares. Industry Prospects The prospects of the industry to which the company belongs must be above average.months or so. . should scrupulously avoid such shares. Cornered Shares Stock market operators engage in cornering operations from time to time. Price-earnings Ratio The price-earnings ratio of the company must not be very high. Apply Stiff Screening Criteria The conservative investor should consider only those shares in the secondary market. While such shares may excite aggressive investors. such groups also resort to 'creative accounting' meant to enhance reported profit artificially. The screening criteria recommend are as follows: Size The Company should not be very small. Its turnover should preferably be greater than Rs 10 crore and its equity base larger than Rs 2 crore. It can take other forms as well. as a rule. Dividend and Bonus Record The Company should have a reasonably good track record of dividend payment and bonus shares. It should certainly not be an industry that is stagnating or declining. Better still. Manipulated Shares Some business groups resort to manipulation of the shares of their companies. As a general guideline.

CHAPTER IV FINDING AND ANALSYIS .

SURVEY FINDING Age: Under 30 36 30-40 14 41-50 10 51-60 12 60 or over 3 16% 4% 48% 13% 19% Under 30 30-40 41-50 51-60 60 or over .

000 and Rs200.000 Between Rs100.000 12 Between Rs100.000 Over Rs400.000 12 .000 6 Between Rs200.000 and Rs400.000 12 6 Over Rs400.000 45 Between Rs200.Your current annual take-home income is: Under Rs100.000 and 12 Rs200.000 and Rs400.000 45 Under Rs100.

You are financially responsible for (exclude dependents who can be supported by your spouse's income) Only yourself Other person in your household besides 8 yourself 24 Between 2 and 3 other persons besides yourself 31 Between 4 and 5 other persons besides yourself 12 Between 4 and 5 other persons besides yourself 12 Between 2 and 3 other persons besides yourself 31 Other person in your household besides yourself 24 Only yourself 8 0 5 10 15 20 25 30 35 .

Your current job/career/business: Is not dependable Is secure Doesn’t matter because you expect a large inheritance/hav e enough 18 41 wealth already 8 Doesn’t matter because you expect to change your career path soon 6 45 41 40 35 30 25 20 15 10 5 0 Is not dependable Is secure Doesn’t m atter Doesn’t m atter because you because you expect a large expect to change inheritance/have your career path enough w ealth soon already 18 8 6 .

your savings inclusive of employment benefits. add up to: Nothing Less than six months' take 0 home pay 11 Between 6-15 months' take home pay 12 Between 15-36 months' take home pay 6 More than 36 months' take home pay 46 50 45 40 35 30 25 20 15 10 5 0 0 Nothing 46 11 12 6 Less than six months' take home pay Betw een 6-15 months' take home pay Betw een 15-36 months' take home pay More than 36 months' take home pay .Excluding your house.

I own as good a house that I would ever want to. 6 I live in an apartment that I have rented.What is the status of your accommodation? Those who own a house. 18 I own a house but am saving to buy a better house. I live in an apartment that I have rented. . I stay with my parents/ spouse 15 I live in company accommodation. 24 30 25 20 15 10 24 15 18 12 6 I live in company accommodation. 5 0 I stay with my parents/ spouse I own a house but am saving to buy a better house. choose from last two options only. 12 I own as good a house that I would ever want to.

no monthly savings 0 0 5 10 15 20 25 30 35 .How would you describe your overall income status? Just about manage to make ends meet. no monthly savings 0 My PF and other employment benefits are my only source of savings 18 I put aside at least 10% of my take-home salary every month in savings 31 10 I save more than 30% of my take-home salary every month My income from my wealth more than adequately provides for my cost of living 16 My income from my wealth more than adequately provides for my cost of living 16 10 I put aside at least 10% of my takehome salary every month in savings 31 18 Just about manage to make ends meet.

What is your practice on saving money? I don't believe in saving I'd like to save. but my expenses and other financial commitments do not permit me to 16 I don't believe in saving0 . but my expenses and other financial commitments do not permit 0 me to 16 35 22 I try to save whenever and wherever possible I save 15 percent or more of my take-home salary without exception I save 15 percent or more of my take-home salary without exception 22 I try to save whenever and wherever possible 35 I'd like to save.

Which of the following statements would best describe your level of knowledge as an investor? I don't understand investment terminology at all I am a proficient investor who's able to explain concepts such as EVA, beta 0 and hedging 4 I know how to identify and invest in mutual funds and secondary market debentures 12 I understand investment principles and trade shares in the secondary market 16 I am not very familiar with investment options and financial planning 43

50 45 40 35 30 25 20 15 10 5 0

43

0
I don't understand investment terminology at all

4
I am a proficient investor w ho's able to explain concepts such as EVA, beta and hedging

12
I know how to identify and invest in mutual funds and secondary market debentures

16
I understand investment principles and trade shares in the secondary market I am not very familiar w ith investment options and financial planning

After you have made an investment, your feeling on the decision is: Excited 4 Satisfied 63 Doubtful 8 Sorry 0

70 63 60 50 40 30 20 10 4 0
Excited Satisfied Doubtful

8 0
Sorry

You are offered a job by a company with a bright future. Which compensation option would you choose? A 3-year job guarantee An upfront bonus of Rs1,00,000 A 10% pay increase on your salary of Rs 4,00,000 Employee stock options with a current value of Rs1, 00,000 and prospects for 8 0 58 further appreciation 19

60 50 40 30 20 10 0
A 3-year job guarantee

58

19 8 0
An upfront bonus of Rs1,00,000 A 10% pay Em ployee stock increase on your options w ith a salary of Rs current value of 4,00,000 Rs1, 00,000 and prospects for further appreciation

How would you `honestly' describe yourself as a risk-taker? Reckless Willing to take evaluated 6 risks 36 13 Careful Low risk taking capability 15 Extremely averse to risk 5 40 35 30 25 20 15 10 5 36 13 15 5 6 0 Reckless Willing to take evaluated risks Careful Low risk taking capability Extremely averse to risk .

Which would best describe your awareness about finance? A. I read the finance section of the daily newspaper everyday D. I never read the finance section of the newspaper 40 30 20 10 0 12 8 4 A B C D 40 11 E . I read a financial newspaper daily and regularly read at least one specialized business 8 magazine 12 4 11 40 C. I often look up the market prices of my shares in the newspaper E. I read most of the business and investment magazines and watch business updates on television daily B.

10 6 to 10 years. 12 More than 10 years. 6 to 10 years.In how many years from now will you have saved up for all your future financial commitments and needs? Less than 3 years 8 3 to 6 years. 45 45 40 35 30 25 20 15 10 5 0 Less than 3 years 3 to 6 years. 45 8 10 12 More than 10 years. .

Analyze the various options. 9 Take an educated guess. 30 35 30 25 20 15 10 5 0 Take a random decision 30 24 4 Lose sleep over the issue 8 Seek friendly advice. 8 Take an educated guess. . 9 Analyze the various options.What is your approach to making a financial decision? Take a random decision 24 Lose sleep over the issue 4 Seek friendly advice.

Hold on till the share comes back to your cost price and sell it 46 50 40 30 20 10 0 6 A 46 15 7 B C D . Book your loss and invest in fixed deposits or bonds D. 00. You. 00. Average your cost by investing another Rs1. Do not bother because you had done enough research on the company 7 15 C.You invest Rs1. A.000 at a lower price 6 B.000 in a share that goes down by 8% the next day.

what are your feelings? I think it has happened because it was my destiny I blame myself I take it as a personal failure I view it as a hurdle that one needs to cross I almost never suffer losses. because I stick to investments that do not depreciate in 6 12 2 6 principal value 49 60 50 40 30 49 20 10 0 6 I think it has happened because it w as my destiny 12 I blame myself 2 I take it as a personal failure 6 I view it as a hurdle I almost never suffer that one needs to losses.When you suffer a financial loss. because I cross stick to investments that do not depreciate in principal value .

 It was gathered form the survey that there is a very little awareness about investing in share markets and very few people were fully conversant with the technicalities of the stock markets.  More over very few people were aversive of taking risks in their investments and were mostly looking for safer investment avenues. The number of respondents who were surveyed were 75.  The respondents mentioned that investments in stock markets can be a judicious decision that requires lot of technical analysis and can be a pure gamble and it depends on the investor to either take calculative risk or take no risk at all.  The respondents belonged to different age groups and professions. .  Very few people were aware of the capital appreciation on their investments and they just invested for the purpose of saving rather than increasing the money value of capital.SURVEY ANALYSIS  The survey was conducted in Delhi and NCR.

CHAPTER V CONCLUSION AND RECOMMENDATION .

When a person has more money than he requires for current consumption.1 Conclusion Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation. regardless of its analytical approach. However. The guiding principle of growth investing is to look for companies that keep reinvesting into themselves to produce new products and technology. This strategy may be one of the simplest. liquidity & hedge against inflation can be considered as subsidiary objectives. For an investor the main investment objectives are increasing the rate of return & reducing the risk other objectives like safety. While investing in stock market the first step is to assess a company from a qualitative standpoint and determining whether you should invest in it are as important as looking at sales and earnings. economic status. but it is also one of the most effective ways to evaluate a potential investment.5. Moreover growth investors are concerned with growth. The problem of surplus gives rise to the question of where to invest. Even though the stocks might be expensive in the present. growth investors believe that expanding top and bottom lines will ensure an investment pays off in the long run. Lastly the Technical analysis is unlike any other stock picking strategy--it has its own set of concepts. he would be coined as a potential investor. just like any other strategy. and it relies on a completely different set of criteria than any strategy employing fundamental analysis. education and family background. mastering technical analysis requires discipline and savvy. .

 Five steps to Making Good Stock Picks There are five basic steps to any intelligent stock trading system. battle. Lastly. ask yourself. you need to ask yourself. ask yourself "How will it do in the future?" Although the future is not our to see. Find out from others what their opinions on the future climate of the stock might be and go from there. "How good is the stock compared to others? Shopping for value stocks is no different that shopping for value goods at your local supermarket. "What does the company do and just how well is it doing it? Get to know the company's business and then track its performance. "Am I overlooking any other vital information that could affect my stock pick?" Do brokers like the stock? Do they have information that you don't have which could affect your decision? Also. "How well did the stock price perform in the past?" Find and track the stock's price history and find out when investors determined when it was the best (or worst) time to buy and sell the stock in the past. Just as importantly. including organizational changes in the works or new product or service improvements or changes. try to catch up on any recent information about the company. Comparing makes the best purchase. Failure to choose the right stock to trade in the first place will make selling it back for a profit an uphill. First. if not losing. Asking the right questions about a stock before you invest your money is essential to any good stock trading strategy. you need to ask. Check also to see how their competition is faring. trying to get an estimation of how well the stock will perform in the future will determine how well you do.and without .  Stock Trading Strategy Being able to make the correct stock picks is a must if you wish to be successful trading stocks. . Weigh the stock against other stocks within . Along the same lines.5.the sector you are investing in.2 Recommendations As a passive investor I am not well versed with investing in share market myself but after interaction with many avid investors and investment management firms I found some golden rules for investing in stock markets and thus I am putting them as a part of recommendation for all the investors looking for investment in share markets.

Valuing a company involves not only crunching numbers and predicting cash flows but also looking at the general. investors can simply ask the standard five W's: who. will guarantee success. If the intrinsic value is more than the current share price. Who? . and why. when. Management: The backbone of any successful company is strong management. what. Here we will look at how the analysis of qualitative factors is used for picking a stock. once followed. Qualitative Analysis Fundamental analysis has a very wide scope. we'll explore the art of stock picking-selecting stocks based on a certain set of criteria.  Fundamental Analysis (Quantitative Factors) Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a cliché. In other words. Guide to Stock Picking Strategies Here. we should address a few misconceptions. There are a few reasons for this: Let’s start by delving into one of the most basic and crucial aspects of stock picking: fundamental analysis. This doesn't mean you can't expand your wealth through the stock market. There is no foolproof system for picking stocks. your analysis is showing that the stock is worth more than its price and that it makes sense to buy the stock. with the aim of achieving a rate of return that is greater than the market's overall average. Before exploring the vast world of stock picking methodologies. where. To assess the strength of management. Many investors new to the stock-picking scene believe that there is some infallible strategy that. more subjective qualities of a company. we examine some of the most popular strategies for finding good stocks (or at least avoiding bad ones). It's just better to think of stock picking as an art rather than a science. The goal of analyzing a company's fundamentals is to find a stock's 'intrinsic value’.

Look at the manager's employment history. Other management philosophies are more rigid and less adaptable. and try to see if these reasons are clear. How does this company make money? Knowing how a company's activities will be profitable is fundamental to determining the worth of an investment. Why? A final factor to investigate is why these people have become managers. such as its growth potential. while a mediocre company in a poor industry will likely take a bite out of your portfolio. specifically. you should know who the company's CEO. CFO. Ask yourself if these backgrounds make the people suitable for directing the company in its industry What and When? What is the management philosophy? In other words. transparent. and find out that is running the company.Do some research. Where? You need to find out where these people come from. Does this person have the qualities you believe are needed to make someone a good manager for this company? Know What a Company Does and How it Makes Money? A second important factor to consider when analyzing a company's qualitative factors is its product(s) or service(s). . A mediocre company in a great industry can provide a solid return. and CIO are. in what style do these people intend to manage the company? Some managers are more personable. and flexible way of running the business. valuing policy and established logic above all in the decision-making process. Among other things. promoting an open. you should analyze the characteristics of its industry. COO. Then you can move onto the next question. there educational and employment backgrounds.  Industry/Competition Aside from having a general understanding of what a company does.

when technology companies were flourishing.  Stock price should be no more than tangible book value. Below is a diagram illustrating how the GARP-preferred levels of price and growth compare to the levels sought by value and growth investors.  PEG should be less than 1. growth-investing techniques yielded unprecedented returns for investors. he or she should realize that this strategy comes with substantial risks and is not for everyone.e. But before any investor jumps onto the growth investing bandwagon.  GARP Investing The GARP strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and have solid sustainable growth potential. . Value Investing Value investing is one of the best-known stock picking methods.  Look at companies with P/E ratios at the lowest 10% of all equity securities. Keep in mind that these are guidelines. The best way to define growth investing is to contrast it to value investing. not hard-and-fast rules:  Share price should be no more than 2/3 of intrinsic worth. D/E ratio < 1).  Growth Investing In the late 1990s.  There should be no more debt than equity (i.

 “Michael Violano (2001) Retail Banking Resources & Technologies”. Sometimes also known as chartists. prices. Income Investing Income investing.  “Malhotra Naresh (2002) Marketing Research . . BIBLIOGRAPHY  “Khan MY (1997) – Financial Services .Tata McGraw Hills”. Technical analysts. there are few who combine both to the best effect. C = Current Quarterly Earnings A = Annual Earnings N=New S = Supply of Stock L = Leader I = Institutional Ownership M= Market Direction  Technical Analysis Technical analysis is the polar opposite of fundamental analysis. which is the basis of every method explored so far in this tutorial. technical analysts look at the past charts of prices and different indicators to make inferences about the future movement of a stock's price. select stocks by analyzing statistics generated by past market activity. and volumes. or technicians.Prentice Hall of India”. which aims to pick companies that provide a steady stream of income.Prentice Hall of India”. is perhaps one of the most straightforward stock picking strategies.  “Kotler Philip (2002) Marketing Management .  CANSLIM While investment consultants speak about technical and fundamental analysis.

uk  www.  Investment Management by Avadhani.org  www.com  www.A.gov. Cooper & Pamela S.sebi.Tata McGraw Hills”.org  www.inlandrevenue.Gupta  Business Research Methods by Donald R.gov. Prentice hall  Statistical Methods by S.V.in  www. Financial Institutions and Markets .com  www.karvy.nmce.ncdex.com  www.rbi.mcxindia.com .financewise.nseindia.P.com  www.com  www.bis. Schindler Web sites  www. “Love Lock Christopher (2001) – Service Marketing Pearson Education Asia”.  Introduction to Futures and Options Markets by John C Hull.  “Bhole LM.bseindia.com  www.

ANNEXURE .

QUESTIONNAIRE Name: Age: .

Under 30 30-40 41-50 51-60     .

60 or over  .

What is your current annual take-home income? .

000 Between Rs100. 000 Between Rs200. 000    .Under Rs100. 000 and Rs400. 000 and Rs200.

000  .Over Rs400.

You are financially responsible for (exclude dependents who can be supported by your spouse's income) .

Only yourself Other person in your household besides yourself Between 2 and 3 other persons besides yourself    .

Between 4 and 5 other persons besides yourself  .

Your current job/career/business: .

Is not dependable Is secure Doesn’t matter because you expect a large inheritance/have enough wealth already    .

Doesn’t matter because you expect to change your career path soon  .

add up to: . your savings inclusive of employment benefits.Excluding your house.

Between 15-36 months' take home pay. Between 6-15 months' take home pay.Nothing Less than six months' take home pay.     .

More than 36 months' take home pay  .

. choose from last two options only.What is the status of your accommodation? Those who own a house.

I own a house but am saving to buy a better house.     . I live in an apartment that I have rented. I live in company accommodation.I stay with my parents/ spouse.

 .I own as good a house that I would ever want to.

How would you describe your overall income status? .

Just about manage to make ends meet. no monthly savings My PF and other employment benefits are my only source of savings I put aside at least 10% of my take-home salary every month in savings I save more than 30% of my take-home salary every month     .

I know how to identify and invest in mutual funds and secondary market debentures. I am not very familiar with investment options and financial planning. After you have made an investment. but my expenses and other financial commitments do not permit me to I try to save whenever and wherever possible I save 15 percent or more of my take-home salary without exception Which of the following statements would best describe your level of knowledge as an investor? I don't understand investment terminology at all. beta and hedging. I am a proficient investor who's able to explain concepts such as EVA. I understand investment principles and trade shares in the secondary market.My income from my wealth more than adequately provides for my cost of living  What is your practice on saving money? I don't believe in saving I'd like to save. your feeling on the decision is: Excited Satisfied Doubtful Sorry              .

Which compensation option would you choose? A 3-year job guarantee An upfront bonus of Rs1. I read a financial newspaper daily and regularly read at least one specialized business magazine. 6 to 10 years.000 A 10% pay increase on your salary of Rs4.You are offered a job by a company with a bright future.     4) What is your approach to making a financial decision? . More than 10 years. I never read the finance section of the newspaper               3) In how many years from now will you have saved up for all your future financial commitments and needs? Less than 3 years 3 to 6 years. 00. I read the finance section of the daily newspaper everyday.000 Employee stock options with a current value of Rs1. 00. I often look up the market prices of my shares in the newspaper. 00.000 and prospects for further appreciation 1) How would you `honestly' describe yourself as a risk-taker? Reckless Willing to take evaluated risks Careful Low risk taking capability Extremely averse to risk 2) Which would best describe your awareness about finance? I read most of the business and investment magazines and watch business updates on television daily.

00. I blame myself. Analyze the various options. 00. Take an educated guess.000 in a share that goes down by 8% the next day. I almost never suffer losses. I view it as a hurdle that one needs to cross. because I stick to investments that do not depreciate in principal value          .Take a random decision Lose sleep over the issue Seek friendly advice. what are your feelings? I think it has happened because it was my destiny.      5) You invest Rs1. Average your cost by investing another Rs1.000 at a lower price Do not bother because you had done enough research on the company Book your loss and invest in fixed deposits or bonds Hold on till the share comes back to your cost price and sell it 6) When you suffer a financial loss. I take it as a personal failure. You.

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