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Portfolio manager means any person who enters into a contract or arrangement with a client.
Pursuant to such arrangement he advises the client or undertakes on behalf of such client
management or administration of portfolio of securities or invests or manages the client’s

A discretionary portfolio manager means a portfolio manager who exercises or may under a
contract relating to portfolio management,exercise any degree of discretion in respect of the
investment or management of portfolio of the portfolio securities or the funds of the client, as
the case may be.

He shall independently or individually manage the funds of each client in accordance with the
needs of the client in a manner which does not resemble the mutual fund
A non discretionary portfolio manager shall manage the funds in accordance with the directions
of the client. A portfolio manager by virtue of his knowledge, background and experience is
expected to study the various avenues available for profitable investment and advise his client
to enable the latter to maximize the return on his investment and at the same time safeguard
the funds invested


I. Effective investment planning for the investment in securities by considering

o Fiscal, financial and monetary policies of the Govt. of India and the Reserve
bank of india

o Industrial and economic environment and its impact on industry. Prospect in

terms of prospective technological changes, competition in the market, capacity
utilization with industry and demand prospects etc.

II.Constant Review of Investment: It requires to review the investment in securities

and to continue the selling and purchasing of investment in more profitable manner.
For this purpose they have to carry the following analysis:

a) To assess the quality of the management of the companies in which investment has
been made or proposed to be made.
b) To assess the financial and trend analysis of companies Balance Sheet and Profit
and Loss Accounts to identify the optimum capital structure and better performance for
the purpose of withholding the investment from poor companies

c) To analyze the security market and its trend in continuous basis to arrive at a
conclusion as to whether the securities already in possession should be disinvested and
new securities be purchased. If so the timing for investment or dis-investment is also

various types of portfolio management: 

1. Investment Management 
2. It Portfolio Management 
3. Project Portfolio Management

1.Investment management is the professional management of various securities

(shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for
the benefit of the investors. Investors may be institutions (insurance companies, pension
funds, corporations etc.) or private investors (both directly via investment contracts and
more commonly via collective investment schemes e.g. mutual funds or Exchange
Traded funds.

The term asset management is often used to refer to the investment management of
collective investments,(not necessarily) whilst the more generic fund management may
refer to all forms of institutional investment as well as investment management for
private investors. Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often refer to their
services as wealth management or portfolio management often within the context of so-
called "private banking.

2.IT PORTFOLIO MANAGEMENT : IT portfolio management is the application

of systematic management to large classes of items managed by enterprise Information
Technology (IT) capabilities. Examples of IT portfolios would be planned initiatives, projects, and
ongoing IT services (such as application support). The promise of IT portfolio management is the
quantification of previously mysterious IT efforts, enabling measurement and objective
evaluation of investment scenarios.
The concept is analogous to financial portfolio management, but there are significant
differences. IT investments are not liquid, like stocks and bonds (although investment
portfolios may also include illiquid assets), and are measured using both financial and
non-financial yardsticks (for example, a balanced scorecard approach); a purely financial
view is not sufficient.
At its most mature, IT Portfolio management is accomplished through the creation of two

1.Application Portfolio - Management of this portfolio focuses on comparing

spending on established systems based upon their relative value to the organization. The
comparison can be based upon the level of contribution in terms of IT investment’s
profitability. Additionally, this comparison can also be based upon the non-tangible
factors such as organizations’ level of experience with a certain technology, users’
familiar and infrastructure, and external forces such as emergence of new technologies
and obsolesce of old ones.

2. Project Portfolio - This type of portfolio management specially address the issues
with spending on the development of innovative capabilities in terms of potential ROI
and reducing investment overlaps in situations where reorganization or acquisition occurs.
The management issues with the second type of portfolio management can be judged in
terms of data cleanliness, maintenance savings, suitability of resulting solution and the
relative value of new investments to replace these projects.

3.PROJECT PORTFOLIO MANAGEMENT: Project portfolio management

organizes a series of projects into a single portfolio consisting of reports that capture project
objectives, costs, timelines, accomplishments, resources, risks and other critical factors.
Executives can then regularly review entire portfolios, spread resources appropriately and adjust
projects to produce the highest departmental returns. Project management is the discipline
of planning, organizing and managing resources to bring about the successful completion
of specific project goals and objectives. A project is a finite endeavor (having specific start
and completion dates) undertaken to create a unique product or service which brings about
beneficial change or added value. This finite characteristic of projects stands in contrast
to processes, or operations, which are permanent or semi-permanent functional work to
repetitively produce the same product or service. In practice, the management of these two
systems is often found to be quite different, and as such requires the development of
distinct technical skills .

SELECTION OF INVESTMENT: Having defined the objectives of the

investment, the next decision is to decide the kind of investment to be selected. The
decision what to buy has to be seen in the context of the following:-

a) There is a wide variety of investments available in market i.e. Equity shares,

preference share, debentures, convertible bond, Govt. securities and bond, capital units
etc. Out of these what types of securities to be purchased.

b) What should be the proportion of investment in fixed interest dividend securities and
variable dividend bearing securities? The fixed one ensures a definite return and thus a
lower risk but the return is usually not as higher as that from the variable dividend bearing

c) If the investment is decided in shares or debentures, then the industries showing a

potential in growth should be taken in first line. Industry-wise-analysis is important since
various industries are not at the same level from the investment point of view. It is
important to recognize that at a particular point of time, a particular industry may have a
better growth potential than other industries. For example, there was a time when jute
industry was in great favour because of its growth potential and high profitability, the
industry is no longer at this point of time as a growth oriented industry.

d) Once industries with high growth potential have been identified, the next step is to
select the particular companies, in whose shares or securities investments are to be made

One of the first decisions that an investment manager faces is to identify the industries
which have a high growth potential. Two approaches are suggested in this regard. They
a) Statistical Analysis of Past Performance: A statistical analysis of the immediate past
performance of the share price indices of various industries and changes there in related
to the general price index of shares of all industries should be made. The Reserve Bank of
India index numbers of security prices published every month in its bulletin may be taken
to represent the behaviour of share prices of various industries in the last few years. The
related changes in the price index of each industryy as compared with the changes in the
average price index of the shares of all industries would show those industries which are
having a higher growth potential in the past few years. It may be noted that an Industry
may not be remaining a growth Industry for all the time. So he shall now have to make an
assessment of the various Industries keeping in view the present potentiality also to
finalize the list of Industries in which he will try to spread his investment.
b) Assessing the Intrinsic Value of an Industry/Company: After an investment
manager has identified statistically the industries in the share of whichs show interest, he
would assess the various factors which influence the value of a particular share. These
factors generally relate to the strengths and weaknesses of the company under
consideration, Characteristics of the industry within which the company fails and the
national and international economic scene. It is the job of the investment manager to
examine and weigh the various factors and judge the quality of the share or the security
under consideration.
This approach is known as the intrinsic value approach. The major objective of the
analysis is to determine the relative quality and the quantity of the security and to decide
whether or not is security is good at current markets prices. In this, both qualitative and
quantitative factors are to be considered.

B.INDUSTRY ANALYSIS First of all, an assessment will have to be made

regarding all the conditions and factors relating to demand of the particular product, cost
structure of the industry and other economic and Government constraints on the same. As
we have discussed earlier, an appraisal of the particular industry’s prospect is essential and
the basic profitability of any company is dependent upon the economic prospect of the
industry to which it belongs. The following factors may particularly be kept in mind while
assessing to factors relating to an industry.
Demand and Supply Pattern for the Industries Products and Its Growth
Potential: The main important aspect is to see the likely demand of the products of the
industry and the gap between demand and supply. This would reflect the future growth
prospects of the industry. In order to know the future volume and the value of the output in the
next ten years or so, the investment manager will have to rely on the various demand forecasts
made by various agencies like the planning commission, Chambers of Commerce and
institutions like NCAER, etc. The management expert identifies fives stages in the life of an
industry. These are “Introduction, development, rapid growth, maturity and decline”. If an
industry has already reached the maturity or decline stage, its future demand potential is not to
be too high.

Profitability: It is a vital consideration for the investors as profit is the measure of

performance and a source of earning for him. So the cost structure of the industry as related to
its sale price is an important consideration. In India there are many industries which have a
growth potential on account of good demand position. The other point to be considered is the
ratio analysis, especially return on investment, gross profit and net profit ratio of the existing
companies in the industry. This would give him an idea about the profitability of the industry
as a whole.

Particular Characteristics of the Industry: Each industry has its own characteristics,
which must be studied in depth in order to understand their impact on the working of the
industry. Because the industry having a fast changing technology become obsolete at a faster
rate. Similarly, many industries are characterized by high rate of profits and losses in alternate
years. Such fluctuations in earnings must be carefully examined.

Labour Management Relations in the Industry: The state of labour-management

relationship in the particular industry also has a great deal of influence on the future
profitability of the industry. The investment manager should, therefore, see whether the
industry under analysis has been maintaining a cordial relationship between labour and

(C) COMPANY ANALYSIS: To select a company for investment purpose a number of

qualitative factors have to be seen. Before purchasing the shares of the company, relevant
information must be collected and properly analyzed. An illustrative list of factors which help
the analyst in taking the investment decision is given below. However, it must be emphasized
that the past performance and information is relevant only to the extent it indicates the future
trends. Hence, the investment manager has to visualize the performance of the company in
future by analyzing its past performance.
1) Size and Ranking: A rough idea regarding the size and ranking of the company within the
economy, in general, and the industry, in particular, would help the invest manager in assessing
the risk associated with the company. In this regard the net capital employed, the net profits,
the return on investment and the sales volume of the company under consideration may be
compared with similar data of other company in the same industry group. It may also be useful
to assess the position of the company in terms of technical knowhow, research and development
activity and price leadership.

2) Growth Record: The growth in sales, net income, net capital employed and earnings per
share of the company in the past few years must be examined. The following three growth
indicators may be particularly looked in to
(a) Price earnings ratio,
(b) Percentage growth rate of earnings per annum and
(c) Percentage growth rate of net block of the company.
The price earnings ratio is an important indicator for the investment manager since it shows
the number the times the earnings per share are covered by the market price of a share.
Theoretically, this ratio should be same for two companies with similar features. However, this
is not so in practice due to many factors.

Hence, by a comparison of this ratio pertaining to different companies the investment manager
can have an idea about the image of the company and can determine whether the share is under-
priced or over-priced. An evaluation of future growth prospects of the company should be
carefully made. This requires the analysis of the existing capacities and their utilization,
proposed expansion and diversification plans and the nature of the company’s technology

FINANCIAL ANALYSIS: An analysis of financial for the past few years would help the
investment manager in understanding the financial solvency and liquidity, the efficiency with
which the funds are used, the profitability, the operating efficiency and operating leverages of
the company. For this purpose certain fundamental ratios have to be calculated. From the
investment point of view, the most important figures are earnings per share, price earnings
ratios, yield, book value and the intrinsic value of the share. The five elements may be
calculated for the past ten years or so and compared with similar ratios computed from the
financial accounts of other companies in the industry and with the average ratios of the industry
as a whole. The yield and the asset backing of a share are important considerations in a decision
regarding whether the particular market price of the share is proper or not. Various other ratios
to measure profitability, operating efficiency and turnover efficiency of the company may also
be calculated .The return on owner’s investment, capital turnover ratio and the cost structure
ratios may also be worked out. To examine the financial solvency or liquidity of the company,
the investment manager may work out current ratio etc.
1. Quality of Management: This is an intangible factor. Yet it has a very important
bearing on the value of the shares. Every investment manager knows that the shares of
certain business houses command a higher premium than those of similar companies
managed by other business houses. This is because of the quality of management, the
confidence that the investors have in a particular business house, its policy vis-à-vis its
relationship with the investors, dividend and financial performance of it.

2. Location and labour management relations: The locations of the company’s

manufacturing facilities determine its economic viability which depends on the
availability of crucial inputs like power, skilled labour and raw materials etc. Nearness
to market is also a factor to be considered. In the past few years, the investment manager
has begun looking into the state of labour management relations in the company under
consideration and the area where it is located.

3. Pattern of Existing Stock Holding: An analysis of the pattern of the existing

stock holdings of the company would also be relevant. This would show the stake of
various parties associated with the company. An interesting case in this regard is that
of the Punjab National Bank in which the L.I.C. and other financial institutions had
substantial holdings. When the bank was nationalized, the residual company proposed
a scheme whereby those shareholders, who wish to opt out, could receive a certain amount
as compensation

4. Marketability of the Shares: Another important consideration for an investment

manager is the marketability of the shares of the company. Mere listing of the share on
the stock exchange does not automatically mean that the share can be sold or purchased
at will. There are many shares which remain inactive for long periods with no
transactions being affected. To purchase or sell such scrips is a difficult task. In this
regard, dispersal of share holding with special reference to the extent of public holding
should be seen. The other relevant factors are the speculative interest in the particular

Fundamental analysis thus is basically an examination of the economics and

financial aspects of a company with the aim of estimating future earnings and dividend
prospect. It included an analysis of the macro economic and political factors which will
have an impact on the performance of the firm. After having analyzed all the relevant
information about the company and its relative strength vis-à-vis other firm in the
industry, the investor is expected to decide whether he should buy or sell the securities
TIMING OF PURCHASES:- The timing of dealings in the securities, specially shares is
of crucial importance, because after correctly identifying the companies one may lose money
if the timing is bad due to wide fluctuation in the price of shares of that companies. The decision
regarding timing of purchases is particularly difficult because of certain psychological factors.
It is obvious that if a person wishes to make any gains, he should buy cheap and sell dear, i.e.
buy when the share are selling at a low price and sell when they are at a higher price.

But in practical it is a difficult task. When the prices are rising in the market i.e. there is bull
phase, everybody joins in buying without any delay because every day the prices touch a new
high. Later when the bear face starts, prices tumble down every day and everybody starts
counting the losses. The ordinary investor regretted such situation by thinking why he did not
sell his shares in previous day and ultimately sell at a lower price. This kind of investment
decision is entirely devoid of any sense of timing

In short we can conclude by saying that Investment management is a complex

activity which may be broken down into the following steps:

1) Specification Of Investment Objectives And Constraints : The typical objectives sought

by investors are current income, capital appreciation, and safety of principle. The relative
importance of these objectives should be specified further the constraints arising from
liquidity, time horizon, tax and special circumstances must be identified

2) Choice Of The Asset Mix : The most important decision in portfolio management is the
asset mix decision very broadly; this is concerned with the proportions of ‘stocks’ (equity
shares and units/shares of equity-oriented mutual funds) and ‘bonds’ in the portfolio. The
appropriate ‘stock-bond’ .

Technique’s Of Portfolio Management: As of now the under noted technique of

portfolio management: are in vogue in our country.

1) Equity Portfolio: It is influenced by internal and external factors the internal factors
affect the inner working of the company’s growth plans are analyzed with referenced to
Balance sheet, profit & loss a/c (account) of the company. Among the external factor are
changes in the government policies, Trade cycle’s, Political stability etc.

2) Equity Stock Analysis: Under this method the probable future value of a share of a
company is determined it can be done by ratio’s of earning per share and price earning
ratio of the company.


The following points must be considered by portfolio managers while analyzing

the securities.

1) Nature of the industry and its product: Long term trends of industries, competition within, and
outside the industry, Technical changes, labour relations, sensitivity, to Trade cycle.
2) Industrial analysis of prospective earnings, cash flows, working capital, dividends, etc.

3) Ratio analysis: Ratios such as debt equity ratio, current ratio, net worth, profit earnings
ratio, returns on investment, are worked out to decide the future decisions.

The wise principle of portfolio management suggests that “Buy when the
market is low or BEARISH, and sell when the market is rising or BULLISH”. Stock market
operation can be analyzed by:
a) Fundamental approach: - Based on intrinsic value of shares.
b) Technical approach: - Based on Dow Jone’s Theory, Random Walk Theory, etc. Prices are
based upon demand and supply of the market.
 Objectives are maximization of wealth and minimization of risk.

 Diversification reduces risk and volatility.

There are different kinds of Debt Instruments available in India

such as;
Below given are the important debt instruments available in india

 Bonds
 Certificates of Deposit
 Commercial Papers
 Debentures
 FD
 G - Secs (Government Securities)
 National savings Certificate (NSC)

A Bond is simply an 'IOU' in which an investor agrees to lend money to a company or
government in exchange for a predetermined interest rate. If a business wants to expand, one
of its options is to borrow money from individual investors. The company issues bonds at
different interest rates and sells them to the public. Investors purchase them with the
understanding that the company will pay back their original principal with some interest that
is due by a set date (this is known as the "maturity"). The interest a bondholder earns depends
on the strength of the corporation.

A debenture is similar to a bond except the securitization conditions are different. A debenture
is generally unsecured in the sense that there are no liens or pledges on specific assets. It is
defined as a certificate of agreement of loans which is given under the company's stamp and
carries an undertaking that the debenture holder will get a fixed return (fixed on the basis of
interest rates) and the principal amount whenever the debenture matures.

In finance, a debenture is a long-term debt instrument used by governments and large

companies to obtain funds. The advantage of debentures to the issuer is they leave specific
assets burden free, and thereby leave them open for subsequent financing. Debentures are
generally freely transferrable by the debenture holder. Debenture holders have no voting rights
and the interest given to them is a charge against profit.
Commercial Papers
Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. It was introduced in India in 1990 with a view to enable highly rated corporate
borrowers/ to diversify their sources of short-term borrowings and to provide an additional
instrument to investors. Subsequently, primary dealers and satellite dealers were also permitted
to issue CP to enable them to meet their short-term funding requirements for their operations.
CP can be issued in denominations of Rs.5 lakh or multiples thereof. Amount invested by a
single investor should not be less than Rs.5 lakh (face value). It will be issued foe a duration
of 30/45/60/90/120/180/270/364 days. Only a scheduled bank can act as an Issuing and Paying
Agent IPA for issuance of CP.

Certificate of Deposit
A certificate of deposit or CD is a time deposit, a financial product commonly offered to
consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts
in that they are insured and thus virtually risk-free; they are "money in the bank". They are
different from savings accounts in that the CD has a specific, fixed term (often 3 months, 6
months, or 1 to 5 years), and, usually, a fixed interest rate. It is intended that the CD be held
until maturity, at which time the money may be withdrawn together with the accrued interest.
Eligibility to issue CD

 Scheduled commercial banks excluding Regional Rural Banks (RRBs) andLocal Area
 All-India Financial Institutions that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.

Who can subscribe

CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-
Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis which
should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the
secondary market.


 The maturity period of CDs issued by banks should be not less than 7 days and not
more than one year.
 The FIs can issue CDs for a period not less than 1 year and not exceeding 3 years
from the date of issuance

Reserve Requirements Banks have to maintain the appropriate reserve requirements, i.e., cash
reserve ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs
An investor can participate in varous schemes floated by mutual fund instead of buying equity
shares. In mutual fund investment in equity shares and fixed income securities.
there are three type of mutual fund schemes
1.growth schemes
2.income schemes
3.balanced schemes

It is just like fixed income securities earn a fixed return. However , unlike fixed income
sequrities they are negotiable or transferable.
They are –
1. Bank deposits
2. Company deposits
3. Public deposits


1.employee provident fund scheme back policy
3.whole life policy
4.premium back term insurance policy

1. Gold and silver
2. Precious stones
3. Art objects

Whose value are derived from the value of underlying asset. They are futures and options.

RISK – RETURN ANALYSIS RISK ON PORTFOLIO : The expected returns from

individual securities carry some degree of risk. Risk on the portfolio is different from the risk
on individual securities. The risk is reflected in the variability of the returns from zero to
infinity. Risk of the individual assets or a portfolio is measured by the variance of its return.
The expected return depends on the probability of the returns and their weighted contribution
to the risk of the portfolio. These are two measures of risk in this context one is the absolute
deviation and other standard deviation. Most investors invest in a portfolio of assets, because
as to spread risk by not putting all eggs in same basket.

1.Interest Rate Risk:

This arises due to the variability in the interest rates from time to time. A change in the interest
rate establishes an inverse relationship in the price of the security i.e. price of the security tends
to move inversely with change in rate of interest, long term securities show greater variability
in the price with respect to interest rate changes than short term securities.

2.purchasing Power Risk: It is also known as inflation risk also emanates from the very
fact that inflation affects the purchasing power adversely. Nominal return contains both the real
return component and an inflation premium in a transaction involving risk of the above type to
compensate for inflation over an investment holding period. Inflation rates vary over time and
investors are caught unaware when rate of inflation changes unexpectedly causing erosion in
the value of realized rate of return and expected return.

Purchasing power risk is more in inflationary conditions especially in respect of bonds and
fixed income securities. It is not desirable to invest in such securities during inflationary
periods. Purchasing power risk is however, less in flexible income securities like equity shares

3.Business Risk: Business risk emanates from sale and purchase of securities affected by
business cycles, technological changes etc. Business cycles affect all types of securities i.e.
there is cheerful movement in boom due to bullish trend in stock prices whereas bearish trend
in depression brings down fall in the prices of all types of securities during depression due to
decline in their market price.

4.Financial Risk: It arises due to changes in the capital structure of the company. It is also
known as leveraged risk and expressed in terms of debt-equity ratio. Excess of risk vis-à-vis
equity in the capital structure indicates that the company is highly geared. Although a leveraged
company’s earnings per share are more but dependence on borrowings exposes it to risk of
winding up for its inability to honor its commitments towards lender or creditors. The risk is
known as leveraged or financial risk of which investors should be aware and portfolio managers
should be very careful.

5.Systematic Risk or Market Related Risk: Systematic risks affected from the entire market
are (the problems, raw material availability, tax policy or government policy, inflation risk,
interest risk and financial risk). It is managed by the use of Beta of different company shares.

6.Unsystematic Risks: The unsystematic risks are mismanagement, increasing inventory,

wrong financial policy, defective marketing etc. this is diversifiable or avoidable because it is
possible to eliminate or diversify away this component of risk to a considerable extent by
investing in a large portfolio of securities. The unsystematic risk stems from inefficiency
magnitude of those factors different form one company
 base of the Pyramid – The foundation of the pyramid represents the strongest
portion, which supports everything above it. This area should consist of investments
that are low in risk and have foreseeable returns. It is the largest area and comprises the
bulk of your assets.
 Middle Portion – This area should be made up of medium-risk investments that offer
a stable return while still allowing for capital appreciation. Although riskier than the
assets creating the base, these investments should still be relatively safe.
 Summit – Reserved specifically for high-risk investments, this is the smallest area of
the pyramid (portfolio) and should consist of money you can lose without any serious
repercussions. Furthermore, money in the summit should be fairly disposable so you
don't have to sell prematurely in instance
The Bottom Line

Not all investors are created equal. While some prefer less risk, other investors prefer even
more risk than those who have a larger net worth. This diversity leads to the beauty of the
investment pyramid. Those who want more risk in their portfolios can increase the size of the
summit by decreasing the other two sections, and those wanting less risk can increase the size
of the base. The pyramid representing your portfolio should be customized to your risk


All investment has some risk. Investment in shares of companies has its own risk or
uncertainty; these risks arise out of variability of yields and uncertainty of appreciation or
depreciation of share prices, losses of liquidity etc .risk over time can be represented by the
variance of the returns while the return over time is capital appreciation plus payout, divided
by the purchase price.

Normally, the higher the risk that the investor takes, the higher is the return. There is, however,
a risk less return on capital of about 12% which is the bank, rate charged by the R.B.I or long
term, yielded on government securities at around 13% to 14%. This risk less return refers to
lack of variability of return and no uncertainty in the repayment .

Risk-return is subject to variation and the objectives of the portfolio manager are to reduce that
variability and thus reduce the risk by choosing an appropriate portfolio. Traditional approach
advocates that one security holds the better, it is according to the modern approach
diversification should not be quantity that should be related to the quality of scripts which leads
to quality of portfolio. Experience has shown that beyond the certain securities by adding more
securities expensive.
RETURNS ON PORTFOLIO: Each security in a portfolio contributes return in the
proportion of its investments in security. Thus the portfolio expected return is the weighted
average of the expected return, from each of the securities, with weights representing the
proportions share of the security in the total investment. Why does an investor have so many
securities in his portfolio? If the security ABC gives the maximum return why not he invests
in that security all his funds and thus maximize return? The answer to this questions lie in the
investor’s perception of risk attached to investments, his objectives of income, safety etc



The DOW JONES THEORY is probably the most popular theory regarding the behavior of
stock market prices. The theory derives its name from Charles H. Dow, who established the
Dow Jones & Co. and was the first editor of the Wall Street Journal – a leading publication on
financial and economic matters in the U.S.A. Although Dow never gave a proper shape to the
theory, ideas have been expanded and articulated by many of his successors. The Dow Jones
theory classifies the movement of the prices on the share market into three major categories:
1. Primary Movements,
2. Secondary Movements and
3. Daily Fluctuations.

1) Primary Movements: They reflect the trend of the stock market and last from one year to
three years, or sometimes even more. If the long range behavior of market prices is seen, it will
be observed that the share markets go through definite phases where the prices are consistently
rising or falling. These phases are known as bull and bear phases.
During a bull phase, the basic trend is that of rise in prices. Graph 1 above shows the behavior
of stock market prices in bull phase. You would notice from the graph that although the prices
fall after each rise, the basic trend is that of rising prices. As can be seen from the graph that
each trough prices reach, is at a higher level than the earlier one. Similarly, each peak that the
prices reach is on a higher level than the earlier one. Thus 3 is higher than 1 and 2 is higher
than 1. This means that prices do not rise consistently even in a bull phase. They rise for some
time and after each rise, they fall. However, the falls are of a lower magnitude then earlier. As
a result, prices reach higher levels with each rise. Once the prices have risen very high, the bear
phase in bound to start i.e., price