1. Define Investment?

An investment is an asset or item acquired with the goal of generating income or

appreciation. In finance, an investment is a monetary asset purchased with the idea that the
asset will provide income in the future or will later be sold at a higher price for a profit

2. Attributes of investment
 Rate of Return
 Marketability
 Risk
 Tax shelter
 Capital Growth
 Purchasing power stability
 Stability of Income

3. Investment Process
 Set investment policy
 Perform security analysis
 Construct a Portfolio
 Portfolio revision
 Evaluate performance

4. Types of Mutual Funds

 Open-ended Scheme
 Close-ended Scheme
 Equity Fund
 Debt Fund
 Load Funds
 No load Funds
 Hybrid Funds
 Liquid Funds
 Fund of Funds
 5. INVESTMENT ALTERNATIVES

Financial form/Assets Non-financial form/ Real Assets

Marketable Non-Marketable Real-Estate Precious Objects

Equity Shares Fixed deposits Residential house Gold &Silver

Preference Share Gilt edged securities Commercial property Precious Stones

Debenture Post office deposits Agricultural land Art Objects

Bonds Company provident fund Sub urban land

Convertible Securities Public provident fund Holiday resort

Hybrid Securities Mutual funds

Financial Derivatives Insurance

Other deposits

Money market instruments

6. Difference between Systematic Risk Vs Unsystematic Risk

BASIS FOR SYSTEMATIC RISK UNSYSTEMATIC RISK

COMPARISON

1. Meaning Systematic risk refers to the Unsystematic risk refers to the risk
hazard which is associated with associated with a particular
the market or market segment as a security, company or industry.
whole.

2. Nature Uncontrollable Controllable

3. Factors External factors Internal factors

4. Affects Large number of securities in the Only particular company.

market.

5. Types Interest risk, market risk and Business risk and financial risk
purchasing power risk.

6. Protection Asset allocation Portfolio diversification

 7. Different between Investment and Speculation

BASIC DIFFERENCE INVESTMENT SPECULATION

1. Meaning The investment of money
2. Types of contracts Investor is a creditor of the
investment
3. Length commitment In the case of investment the
length of commitment is a
long term
4. Source of income The source of income is
earning from the enterprise
5. Quantity of risk Quantity of is the low
6. Stability of income Income is very stable
7. Psychological attitude Investor’s psychological
of participants attitude is a caution and
conservative
8. Reasons for purchase It is scientific analysis of
intrinsic worth
A massage expressing an
opinion based on incomplete
evidence
Speculator is an owner of the
speculation
In the case of speculation the
length of commitment is a
short term only
The source income is
fluctuated and changes in
market price
Quantity of risk is the high
Income is uncertain and
erratic
Speculator psychological
attitude is a daring and
careless
It is unscientific analysis of
intrinsic worth

8. What is a 'Rights Issue’?

A right offering is a group of rights offered to existing shareholders to purchase additional

stock shares, known as subscription warrants, in proportion to their existing holdings. In a
rights offering, the subscription price at which each share may be purchased is generally
discounted relative to the current market price. Rights are often transferable, allowing the
holder to sell them in the open market.

9. What is 'Book Building'?

Book building is the process by which an underwriter attempts to determine the price to place
a securities offering, such as an initial public offering (IPO), based on demand from
institutional investors. An underwriter builds a book by accepting orders from fund managers,
indicating the number of shares they desire and the price they are willing to pay.
 10. What is 'Underwriting'?

Underwriting is the process by which investment bankers raise investment capital from
investors on behalf of corporations and governments that are issuing either equity or debt
securities. The word "underwriter" originated from the practice of having each risk-taker
write his name under the total amount of risk he was willing to accept at a specified premium.

11. What is 'Underwriter'?

An underwriter is any party that evaluates and assumes another party's risk for a fee, such as
a commission, premium, spread or interest. Underwriters operate in many aspects of the
financial world, including the mortgage industry, insurance industry, equity markets, and
common types of debt securities.

12. What is 'Behavioral Finance'?

Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories

to explain stock market anomalies, such as severe rises or falls in stock price. The purpose is
to identify and understand why people make certain financial choices.

13. Methods of raising funds

 Issue of share
 Issue of debentures
 Loan from financial institutions
 Loan from commercial banks
 Public deposits
 Reinvestment of profits

14. Factors to be considered to enter the primary market

 Economic factor
 Social and cultural factor
 Political and legal factor
 Market attractiveness
 Capabilities of the company
 15. Major participants in securities market
 Stock exchange
 Mutual funds
 Listed securities
 Depositories
 Brokers
 Foreign institutional investor’s
 Merchant bankers
 Primary dealers
 Custodians
 Registrars
 Underwriters
 Venture capital funds
 Credit rating agencies

16. Types of bonds

 Premium bonds
 Discount bonds
 Convertible bonds
 Mortgage bonds
 Yield bonds
 Fixed income bonds
 Government bonds
 Corporate bonds
 Municipal bonds

17. Random walk theory

The theorey that stock price changes have the same distribution and are independent of each
other so the past movement or trend of stock price or market cannot be used to predict its
future movement

under this theorey there is an equal chance that a stock price will either rise or false from
current levels
 18. Role of underwriter

underwunderwriters are best known for the role that they play in initial public offerings (
IPOs). IPOs are when a company decides to sell equity on the stock market for the first time.
They sell their own stock on the market and in the process, raise money through selling
equity.

 Under writing spread

 underwriting risk
 if bonds sell below the price underwriter takes a loss
 underwriter act as intermediaries b/w issuer and investor providing for an effient of
capital

19. Factors to be considered while entering into a primary market

1. Prompters creditability

2. efficiency of the management

3.Project detail

4.product

5.financial data

6.Litigation

7.risk factor

8. Auditors report

9.statutory clearance

10.investors services

20. Mutual fund v/s SIP

Mutual fund is a financial instrument which pools your and other investor’s money in stock
market. Whereas a sip is an option of investing a fixed sum in a mutual fund scheme on a
regular interval
 21. CAPM model

The capital asset pricing model is a model that describes the relationship between systematic
risk and expected return for assets, particularly stocks. CAPM is widely used throughout
finance for the pricing of risky securities, generating expected returns for assets given the risk
of those assets and calculating costs of capital.

22. Assumption of CAPM

 Investors are wealth maximizers who select investments based on expected return and
standard deviation.
 Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
 There are no restrictions on short sales (selling securities that you don't yet own) of
any financial asset.
 All investors have the same expectations related to the market.
 All financial assets are fully divisible (you can buy and sell as much or as little as you
like) and can be sold at any time at the market price.
 There are no transaction costs.
 There are no taxes.
 No investor's activities can influence market prices.
 The quantities of all financial assets are given and fixed.

23. Modern Portfolio Model

A hypothesis put forth by Harry Markowitz in his paper "Portfolio Selection," (published in
1952 by the Journal of Finance) is an investment theory based on the idea that risk-averse
investors can construct portfolios to optimize or maximize expected return based on a given
level of market risk, emphasizing that risk is an inherent part of higher reward. It is one of the
most important and influential economic theories dealing with finance and investment
24. MPT Assumptions
 Modern Portfolio Theory relies on the following assumptions and fundamentals that
are the key concepts upon which it has been constructed:
 For buying and selling securities there are no transaction costs. There is no spread
between bidding and asking prices. No tax is paid, its only risk that plays a part in
determining which securities an investor will buy.
 An investor has a chance to take any position of any size and in any security. The
market liquidity is infinite and no one can move the market. So that nothing can stop
the investor from taking positions of any size in any security.
 While making investment decisions the investor does not consider taxes and is
indifferent towards receiving dividends or capital gains.
 Investors are generally rational and risk adverse. They are completely aware of all the
risk contained in investment and actually take positions based on the risk
determination demanding a higher return for accepting greater volatility.
 The risk-return relationships are viewed over the same time horizon. Both long term
speculator and short-term speculator share the same motivations, profit target and
time horizon.
 Investors share identical views on risk measurement. All the investors are provided by
information and their sale or purchase depends on an identical assessment of the
investment and all have the same expectations from the investment. A seller will be
motivated to make a sale only because another security has a level of volatility that
corresponds to his desired return. A buyer will buy because this security has a level of
risk that corresponds to the return he wants.
 Investors seek to control risk only by the diversification of their holdings.
 In the market all assets can be bought and sold including human capital.
 Politics and investor psychology have no influence on market.
 The risk of portfolio depends directly on the instability of returns from the given
portfolio.
 An investor gives preference to the increase of utilization.
 An investor either maximizes his return for the minimum risk or maximizes his
portfolio return for a given level of risk.
 Analysis is based on a single period model of investment.
 25. Dow Theory and assumptions
 Charles Dow proposed three basic underlying assumptions or tenets upon which his
theory of market price analysis is based.
 Note that the very nature of an assumption means that such proposed market behavior
does not necessarily hold true under all market conditions.
 Such assumptions are not facts but are instead simplifications to the actual market
reality faced by traders that tend to hold true and can be used to create theoretical
implications that can in turn be used to base trading decisions on.
 Basically, these tenets should ideally be considered to be general and simplifying
principles that seem to apply in many cases when reviewing market behavior in which
human psychology plays a substantial part in determining prices. With that key point
noted, a discussion of these three key

26. Dow Theory assumption can proceed, and they are as follows

Market prices evolve in three forms simultaneously. – The first among these fundamental
tenets in Dow Theory is that movements observed in a market price tend to develop in three
forms that occur simultaneously, although not in a random fashion. These forms are called
the primary, secondary and minor price movements. Having an awareness of the existence of
these forms means that they can be employed by a trader to first define what the present form
is, and to then trade in concert with market trend while it is developing.

 Price discounts all. – The second key component of the Dow Theory tenet is
commonly expressed with the simple phrase: “Price discounts all.” What this means
is that the market price at which a balance of buyers and sellers exists in equilibrium
has been determined, in theory, by the net overall effect of all of the information
currently available to market participants that seems relevant to that price. Such
information might include fundamental economic data, news stories, geopolitical
events, and any other information that might be considered by the market to be
relevant to its current evaluation of the price, including the emotional state of traders
and the risk of rare events occurring, such as natural disasters.
 This important assumption notably tends to break down briefly while new information
is being assimilated by the market, such as immediately after the release of a major
 economic number that differs substantially from what was expected by the consensus
of market analysts.
 Once the new information has been reflected in the market price or “discounted”, it
again tends to reflect the current state of knowledge and sentiment among market
participants.
 History repeats itself. – The third and final major tenet of Dow Theory can be
expressed briefly as: “History repeats itself”. The implication of this assumption is
that traders can use techniques that have worked well in the past for market
forecasting to estimate the level of market prices in the future. Market price
movements have been closely studied over the events of the past century or so, and
that information is readily available to traders for them to draw upon when
considering the likely impact of future events.
 This tenet might break down when an event occurs that has no recent historical
precedent and for which the previous market impact is therefore not available to be
studied and applied to the present event for predictive purposes.

27. Step by step portfolio planning process

There are few things more important and more daunting than creating a long-term investment
strategy that can enable an individual to invest with confidence and with clarity about his or
her future. Constructing an investment portfolio requires a deliberate and precise portfolio-
planning process that follows five essential steps.

Step 1: Assess Current Financial Situation and Goals

Planning for the future requires having a clear understanding of an investor’s current situation
in relation to where they want to be. That requires a thorough assessment of current assets,
liabilities, cash flow and investments in light of the investor's most important goals. Goals
need to be clearly defined and quantified so that the assessment can identify any gaps
between the current investment strategy and the stated goals. This step needs to include a
frank discussion about the investor’s values, beliefs and priorities, all of which set the course
for developing an investment strategy.

Step 2: Establish Investment Objectives

Establishing investment objectives centers on identifying the investor’s risk-return profile.
Determining how much risk that an investor is willing and able to assume, and how much
volatility that the investor can withstand, is key to formulating a portfolio strategy that can
deliver the required returns with an acceptable level of risk. Once an acceptable risk-return
profile is developed, benchmarks can be established for tracking the portfolio’s performance.
Tracking the portfolio’s performance against benchmarks allows smaller adjustments to be
made along the way.

Step 3: Determine Asset Allocation

Using the risk-return profile, an investor can develop an asset allocation strategy. Selecting
from various asset classes and investment options, the investor can allocate assets in a way
that achieves optimum diversification while targeting the expected returns. The investor can
also assign percentages to various asset classes, including stocks, bonds, cash and alternative
investments, based on an acceptable range of volatility for the portfolio. The asset allocation
strategy is based on a snapshot of the investor’s current situation and goals, and is usually
adjusted as life changes occur. For example, the closer an investor gets to his or her
retirement target date, the more the allocation may change to reflect less tolerance for
volatility and risk.

Step 4: Select Investment Options

Individual investments are selected based on the parameters of the asset allocation strategy.
The specific investment type selected depends in large part on the investor’s preference for
active or passive management. An actively managed portfolio might include individual stocks
and bonds if there are sufficient assets to achieve optimum diversification, which is typically
over $1 million in assets. Smaller portfolios can achieve the proper diversification through
professionally managed funds, such as mutual funds or with exchange-traded funds. An
investor might construct a passively managed portfolio with index funds selected from the
various asset classes and economic sectors.

Step 5: Monitor, Measure and Rebalance

After implementing a portfolio plan, the management process begins. This includes
monitoring the investments and measuring the portfolio’s performance relative to the
benchmarks. It is necessary to report investment performance at regular intervals, typically
quarterly, and to review the portfolio plan annually. Once a year, the investor’s situation and
goals get a review to determine if there have been any significant changes. The portfolio
review then determines if the allocation is still on target to track the investor’s risk-reward
profile. If it is not, then the portfolio can be rebalanced, selling investments that have reached
their targets, and buying investments that offer greater upside potential.

When investing for lifelong goals, the portfolio planning process never stops. As investors
move through their life stages, changes may occur, such as job changes, births, divorce,
deaths or shrinking time horizons, which may require adjustments to their goals, risk-reward
profiles or asset allocations. As changes occur, or as market or economic conditions dictate,
the portfolio planning process begins anew, following each of the five steps to ensure that the
right investment strategy is in place.

28. Derivatatives

an arrangement or product (such as a future, option, or warrant) whose value derives from
and is dependent on the value of an underlying asset, such as a commodity, currency, or
security.

29. Future

Contracts for assets (especially commodities or shares) bought at agreed prices but delivered
and paid for later.

30. Option

A right to buy or sell a particular thing at a specified price within a set time.

31. The main uses of derivatives

HEDGING
SPECULATION
ARBITRAGE
 32. Bonds

A bond is a debt investment in which an investor loans money to an entity which borrows the
funds for a defined period of time at a variable or fixed interest rate.

33. What is Capital Market line –CML?

The capital market line (CML), in the capital asset pricing model (CAPM), depicts the trade-
off between risk and return for efficient portfolios. It is a theoretical concept that represents
all the portfolios that optimally combine the risk-free rate of return and the market portfolio
of risky assets. Under CAPM, all investors will choose a position on the capital market line,
in equilibrium, by borrowing or lending at the risk-free rate, since this maximizes return for a
given level of risk.

34. What is the Security Market Line –SML?

The security market line (SML) is a line drawn on a chart that serves as a graphical
representation of the capital asset pricing model (CAPM), which shows different levels of
systematic, or market, risk of various marketable securities plotted against the expected return
of the entire market at a given point in time. Also known as the "characteristic line," the SML
is a visual of the capital asset pricing model (CAPM), where the x-axis of the chart represents
risk in terms of beta, and the y-axis of the chart represents expected return. The market risk
premium of a given security is determined by where it is plotted on the chart in relation to the
SML.
 35. Technical analysis

Financial analysis that uses patterns in market data to identify trends and make predictions.

Principles of technical analysis:

When forming prices, all the factors that somehow may influence their formation are taken
into account. All these aspects are necessarily taken into account by the market, and initially
included in the exchange value.

 Price moves according to some trends-

 Price changes are not random, but they move according to certain patterns.
 All price movements tend to repeat-
 Price fluctuations may reflect the current market sentiment.

36. Fundamental analysis

Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic

value, by examining related economic, financial, and other qualitative and quantitative
factors.

37. Principles of Fundamental analysis

The expected growth rate-

Simply put, the expected growth rate of a company translates into a higher stock valuation.
However, the growth rate is never consistent and as the years roll by, a company finds it
difficult to grow at the same rate.

The time period of this constant growth is also an important factor that cannot be neglected –
a company growing at 9% for 10 years will be more valued than a company growing at the
same rate for 5 years, provided all other parameters are equal.

Rule 1 :A rational investor should be willing to pay a higher price for a share the larger the
growth rate of dividends and earnings.
Corollary to Rule 1 :A rational investor should be willing to pay a higher price for a share the
longer an extraordinary growth rate is expected to last.

When translated in Price-Earnings (P/E) multiples instead of stock price, it is found that a
high P/E ratio is associated with high growth rates of companies.

The expected dividend pay-out-

If all things are equal, a higher dividend payout translates into a higher value of a stock. What
is to be noted here is that a higher dividend does not necessarily translate into a rich value of
the stock – for example, a company could pay dividends but have a poor growth rate, such a
company would not be a good value buy.

Rule 2: A rational investor should be willing to pay a higher price for a share, other things
being equal, the larger the proportion of a company’s earnings that is paid out in cash
dividends.

The degree of risk-

Risk plays an important role in stock valuation. Stocks of large cap firms are less risky;
anything which is less riskly is more in demand from risk-averse investors and so stocks of
large-cap firms go for more premium than small cap companies.

Risk could be defined as the degree by which the price of the stock swings relative to the
market – the more this swing, the more riskier the stock.

Rule 3 :A rational (and risk averse) investor should be willing to pay a higher price for a
share, other things being equal, the less risky the company’s stock.

The level of market interest rates-

Before you invest in stocks, you would look elsewhere to see whether you can get risk-free
returns of the same percentage that your stock is offering. If it does, why would you invest in
the stock which carries some degree of risk at all?

So for an investor to be lured to invest in a stock, there should not exist another avenue which
offers a higher rate of return.

If fixed-income instruments were to offer low interest rates, everyone would invest in the
stock market to get more returns.
Conversely, if the returns from some debt instrument is more than what the stock market has
to offer, investors will pull out their monies from the market and invest into debt.

Rule 4 :A rational investor should be willing to pay a higher price for a share, other things
being equal, the lower the interest rates.

38. Major stock market participants

Stock Exchange: A stock exchange is an organized marketplace that brings all the investors
or traders together. It facilitates the sale and purchase of stocks by different buyers and
sellers. Most of the trading in Indian stock market takes place on BSE and NSE. These stock
exchanges enforce strict rules and regulations that listed companies and trading participants
must follow.

Listed Companies: Also known as issuers, these are the companies whose shares are traded
on the stock exchange. All the listed companies go through Initial Public Offering (IPO) and
register themselves with the stock exchange after abiding by all the prescribed regulations.

Stock Brokers: Stock brokers are licensed by the Securities and Exchange Board of India and
are entitled to trade at the stock exchange. They act as the middlemen or agents between the
sellers and the buyers of stocks in the stock market. For providing these broking services,
they receive buying or selling commission from their clients.

Investors: Investors are also called stockholders or shareholders. These are the people who
own the shares of companies that are listed on the stock exchange. They are entitled to
receive dividends and other benefits due to shareholders.

Clearing House: Clearing Houses are wholly owned subsidiaries of Securities and Exchange
Board of India. They are formed to ensure the orderly settlement of trades executed on
various stock exchanges. Clearing Houses settle the funds and transfer shares based on
everyday transactions between sellers and buyers.

Transfer Agents: Transfer Agents record changes of ownership of shares. They provide the
listed companies with a list of its security holders. Transfer agents are also responsible for
cancelling or issuing of certificates and distribute dividends.

Settlement Banks: The settlement banks perform the function of accepting the deposit of
funds for payment of stocks bought by an investor or confirm payment of funds when due.
These banks debit or credit the investor’s account during settlement and also report balances
and other information as may be required.

Depository: A depository refers to an organization or an institution that assists in the trading

of securities. This institution also holds securities in electronic form or in dematerialized
form. One of the major functions of the depositories is to transfer the ownership of shares
from one investor’s account to another when a trade takes place.

Thus, every stock market participant has a specific role to play in the proper and smooth
functioning of the stock market. All of these participants are some or the other way
interlinked to each other and must abide by the guidelines set by Securities and Exchange
Board of India.

39. Macroeconomic Factor

Macroeconomic factors are events or situations that affect the economy on a broader level,
influencing the economic outcome of large groups of people on a national or regional level.
Macroeconomic factors are economic output, unemployment, inflation, savings, and
investments, and they are key indicators of economic performance that are closely monitored
by governments, businesses and consumers.

40. Micro economic Factor

Microeconomics factors refers to the more company-specific economic factors. This includes
things like your specific industry or niche, changes in tax policy, price changes your
competitors make, and the general supply and demand.

41. Trading and settlement cycle

Settlement of securities is a business process whereby securities or interests in securities are

delivered, usually against (in simultaneous exchange for) payment of money, to fulfill
contractual obligations, such as those arising under securities trades.

Traditional (physical) settlement:

Prior to modern financial market technologies and methods such as depositories and
securities held in electronic form, securities settlement involved the physical movement of
paper instruments, or certificates and transfer forms. Payment was usually made by paper
cheque upon receipt by the registrar or transfer agent of properly negotiated certificates and
other requisite documents. Physical settlement securities still exist in modern markets today
mostly for private (restricted or unregistered) securities as opposed to those of publicly
(exchange) traded securities; however, payment of money today is typically made via
electronic funds transfer (in the U.S., a bank wire transfer made through the Federal Reserve's
Fedwire system). Physical/paper settlement involves higher risks, inasmuch as paper
instruments, certificates, and transfer forms are subject to risks electronic media are not, such
as loss, theft, clerical errors, and forgery (see indirect holding system).

The U.S. securities markets experienced what became known as "the paper crunch," as
settlement delays threatened to disrupt the operations of the securities markets which led to
the formation of electronic settlement via a Central Securities Depository, specifically the
Depository Trust Company (DTC), and ultimately its parent, the Depository Trust & Clearing
Corporation. In the United Kingdom, the weakness of paper-based settlement was exposed by
a programme of privatisation of nationalised industries in the 1980s, and the Big Bang of
1986 led to an explosion in the volume of trades, and settlement delays became significant. In
the market crash of 1987, many investors sought to limit their losses by selling their
securities, but found that the failure of timely settlement left them exposed.

Modern (Electronic) settlement:

The electronic settlement system came about largely as a result of Clearance and Settlement
Systems in the World's Securities Markets, a major report in 1989 by the Washington-based
think tank, the Group of Thirty. This report made nine recommendations with a view to
achieving more efficient settlement. This was followed up in 2003 with a report, Clearing and
Settlement: A Plan of Action, with 20 recommendations.

In an electronic settlement system, electronic settlement takes place between participants. If a

non-participant wishes to settle its interests, it must do so through a participant acting as a
custodian. The interests of participants are recorded by credit entries in securities accounts
maintained in their names by the operator of the system. It permits both quick and efficient
settlement by removing the need for paperwork, and the simultaneous delivery of securities
with the payment of a corresponding cash sum (called delivery versus payment, or DVP) in
the agreed upon currency