CHAPTER-1

1.1 INTRODUCTION:

In today’s scenario there has been a major change i.e. economic prosperity all over. The entire
world is talking about the robust growth rates in this part of the world. The availability of huge
investible surplus is due to higher income levels and booming stock markets. The investors with
higher risk appetite want to experiment and try new and exotic products in the name of
diversification. This has resulted in emergence of new options within the same or fresh asset
classes. The common perception of investors is to buy when the market supports in uptrend and
not to invest in the falling time. They wait for the stabilization in the market. Markets have
personalities because investors have emotions. Markets are ultimately driven by people and stock
prices are what individuals make them out to be. People have a tendency to see their own actions
and decisions as totally rational, when the truth is they may not be.

1.2 HISTORY OF INDIAN EQUITY MARKET:

Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close
of 18th century when the East India Company used to transact loan securities. In the 1830s,
trading on corporate stocks and shares in Bank and Cotton presses took place in Bombay.
Though the trading was broad but the brokers were hardly half dozen during 1840 and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town
Hall of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1.
This banyan tree still stands in the Horniman Circle Park, Mumbai. In 1860, the exchange
flourished with 60 brokers. In fact the 'Share Mania' in India began with the American Civil
War broke and the cotton supply from the US to Europe stopped. Further the brokers
increased to 250. The informal group of stockbrokers organized themselves as the Native
Share and Stockbrokers Association which, in 1875, was formally organized as the
Bombay Stock Exchange (BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land on which
the BSE building now stands (at the intersection of Dalal Street, Bombay Samachar Marg
and Hammam Street in downtown Mumbai) was acquired, and a building was constructed
and occupied in 1930.Premchand Roychand was a leading stockbroker of that time, and he
assisted in setting out traditions, conventions, and procedures for the trading of stocks at
Bombay Stock Exchange and they are still being followed. Several stock broking firms in
Mumbai were family run enterprises, and were named after the heads of the family.

The following is the list of some of the initial members of the exchange, and who are still
running their respective business:

D.S. Prabhudas & Company (now known as DSP, and a joint venture partner with Merrill
Lynch)

 Jamnadas Morarjee (now known as JM)

 Champaklal Devidas (now called CIFCO Finance

In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act. The most decisive
period in the history of the BSE took place after 1992. In the aftermath of a major scandal with
market manipulation involving a BSE member named Harshad Mehta, BSE responded to calls
for reform with intransigence. The foot-dragging by the BSE helped radicalize the position of the
government, which encouraged the creation of the National Stock Exchange (NSE), which
created an electronic marketplace.

NSE started trading on 4 November 1994. Within less than a year, NSE turnover exceeded
the BSE. BSE rapidly automated, but it never caught up with NSE spot market turnover.
The second strategic failure at BSE came in the following two years. NSE embarked on the
launch of equity derivatives trading. BSE responded by political effort, with a friendly
SEBI chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE and
D. R. Mehta succeeded in delaying the onset of equity derivatives trading by roughly five
years. But this trading, and the accompanying shift of the spot market to rolling settlement,
did come along in 2000 and 2001 - helped by another major scandal at BSE involving the
then President Mr. Anand Rathi.

NSE scored nearly 100% market share in the runaway success of equity derivatives trading,
thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity
spot turnover and roughly 100% of equity derivatives turnover. Stock Exchange provides a
trading platform, where buyers and sellers can meet to transact in securities.
1.3 REGULATORS OF EQUITY MARKETS:

The different segments of the Indian Financial System (IFS) are monitored and controlled by
statutory bodies called Regulatory institutions. These Institutions have been given adequate
powers by legal acts or by acts of parliament to enable them to supervise the segments assigned
to them. It is the duty of the regulator to ensure that the players in the segment work within
recognized business parameters maintain sufficient levels of disclosure and transparency of
operations and do not act against national interests. At present, the IFS has two regulatory arms
i.e.

 Reserve Bank of India (For Banks and NBFCs)

 Security and Exchange Board of India (For Capital Markets)

1.4 THE RESERVE BANK OF INDIA:

Reserve Bank of India, the Central Bank of the country, is at the heart of the Indian Financial
and Monetary system. It was established on April 1, 1935 as a private shareholders' institution
under the Reserve Bank of India Act 1934. It was nationalized in January 1949, under the
Reserve Bank (Transfer to Public Ownership) of India Act, 1948. This act empowers the central
government, in consultation with the Governor of the Bank; to issue such directions to RBI as
might be considered necessary in the public interest. A Central Board of Directors with 20
members consisting of the Governor and the Deputy Governors governs RBI. The Governor and
the deputy Governors of the Bank are Government of India appointees.
1.5 Functions of the RBI:

 Maintaining financial stability to enable growth of sound Financial Institutions.

This should, in turn, enable monetary stability and allow economic units to carry
out their business with confidence.
 Maintaining monetary stability for growth and proper functioning of a mixed
economic system in the country.
 To maintain a stable payments and currency system and to facilitate safe and
efficient execution of financial transactions.
 To promote a stable financial structure of markets and systems and to help them
operate with optimum efficiency
 To regulate the money and credit supply in the economy to help maintain price
stability to a reasonable extent.

1.5.SECURITIES AND EXCHANGE BOARD OF INDIA:

The SEBI was established on April 12, 1988 through an administrative order, but it became
a statutory and really powerful organization only in 1992 when the Controller of Capital
Issues was abolished. Government of India (GOI) issued an ordinance on 30th Jan 1992
and pursuant to this ordinance SEBI was set up on 21st Feb 1992. The SEBI Act replaced
this ordinance on 4th April 1992.

The regulatory powers of the SEBI were increased through the Securities Laws
(Amendment) Ordinance of January 1995, which was subsequently replaced by an Act of
Parliament. SEBI is under the overall control of the Ministry of Finance. Its Head Office is
in Mumbai (formerly Bombay). It has since become a very important constituent of the
financial regulatory framework in India.
1.6 OBJECTIVE:

SEBI was constituted to protect the interests of investors in securities and to promote the
development of and to regulate the securities market through appropriate measures

Some of the measures include:

 Regulating the business in stock exchanges and any other securities markets.
 Registering and regulating the working of stockbrokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be associated with securities market in any manner.
 Registering and regulating the working of collective investment schemes, including
mutual funds.
 Promoting and regulating self-regulatory organizations.
 Prohibiting fraudulent and unfair trade practices in securities market.
 Promoting investor education and training of intermediaries in securities market.
 Prohibiting insider trading in securities.
 Regulating substantial acquisition of shares and take-over of companies.
1) Time Horizon

One of the most important factors for investors when choosing investments is how long their
money will remain invested. Investors with short time horizons usually prefer conservative
investments with less chance of going down in value to make sure their money is available
when they need it. Short time horizon investment goals such as saving for a down-payment may
call for a low-risk and low-return term deposit. Investors with longer time frames to meet their
goals may choose riskier investments, as there is a longer time for investments to recoup short-
term losses should they occur. A retirement plan for someone in her twenties has a longer time
horizon and may be better suited for investments with higher potential returns and risk.

2) Risk Tolerance
Risk tolerance refers to how comfortable an investor would be should the value of his investment
decline significantly. Higher risk investments also have the potential for higher returns, while
lower risk investments are more conservative and usually have lower returns. An investor with a
higher risk tolerance is willing to take the chance of losing money for the possibility of a
superior return on investment.

3) Investment Knowledge

An investor's experience and knowledge are important factors in her investment choices.
Novice investors may choose to rely on the advice of family, friends or an investment adviser
when selecting investments. More experienced investors often choose their own investments.
Understanding the risks involved and potential investment outcomes helps them decide if
stocks, bonds or other investments suit their portfolio.

4) Income and Net Worth

An individual's income and net worth are also important factors in making investment choices.
Purchasing certain equity investments, such as stock, often requires thousands of dollars of
capital, while you can purchase mutual funds with a few hundred dollars. New investment plans
for young investors with limited incomes often are set up with contributions of less than $100 a
month directed to a mutual fund composed of stocks and bonds of many different issuers.
Bonds, term deposits and guaranteed investment certificates usually have a minimum purchase
amount of at least $1,000. Investors with larger amounts of capital have access to a wider range
of investment choices, while new investors or those with a lower net worth have a limited
selection.

5) Past market trends

Sometimes history repeats itself; sometimes markets learn from their mistakes. You need to
understand how various asset classes have performed in the past before planning your finances

1.6 Financial markets

A financial market is a broad term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial
markets are typically defined by having transparent pricing, basic regulations on trading, costs
and fees, and market forces determining the prices of securities that trade.
Financial markets can be found in nearly every nation in the world. Investors have access to a
large number of financial markets and exchanges representing a vast array of financial products.
Some of these markets have always been open to private investors; others remained the exclusive
domain of major international banks and financial professionals until the very end of the
twentieth century.

A) Money markets:-

FINANCIAL MARKETS

MONEY CAPITAL
MARKETS MARKETS

EQUITY DEBT
It is a segment of the
financial
market in which financial instruments with high liquidity and very short maturities are traded. The
money market is used by participants as a means for borrowing and lending in the short term,
from several days to just under a year. Money market securities consist of negotiable certificates
of deposit (CDs), bankers’ acceptances, U.S. Treasury bills, commercial paper, municipal notes,
federal funds and repurchase agreements (repos).The money market is used by a wide array of
participants, from a company raising money by selling commercial paper into the market to an
investor purchasing CDs as a safe place to park money in the short term. The money market is
typically seen as a safe place to put money due the highly liquid nature of the securities and short
maturities, but there are risks in the market that any investor needs to be aware of including the
risk of default on securities such as commercial paper.

B) Capital markets:-

Capital Market is the market in which long term financial instruments, such as bonds, equities,
mutual funds and derivative instruments are traded. Capital Market serves as an alternative for a
company's capital resources and public investment. It also facilitates the infrastructures needed
for the selling and buying process and other related activities.

Capital Markets can be defined as “the activity of trading and offering securities to the
public, the activity of a public company with respect to securities it has issued, and the
activities of securities-related institutions and professions.”

Capital Market plays an important role in the economy of a country because it serves two
functions all at once.

1) Capital Market serves as an alternative for a company's capital resources. The

capital gained from the public offering can be used for the company's business
development, expansion, and so on
2) Capital Market serves as an alternative for public investment. People could invest
their money according to their preferred returns and risk characteristics of each
instrument.

Any government or corporation requires capital (funds) to finance its operations and to engage in
its own long-term investments. To do this, a company raises money through the sale of securities
- stocks and bonds in the company's name. These are bought and sold in the capital markets.

1.7 EQUITY MARKET

Equity market is one of the key sectors of financial markets where long term financial
instruments are traded. The purpose of equity instruments issued by corporations is to raise
funds for the firms. The provider of the funds is granted a residual claim on the company’s
income, and becomes one of the owners of the firm. For market participants equity
securities mean holding wealth as well as a source of new finance, and are of great
significance for savings and investment process in a market economy.

 Primary Market is the market for new securities issues and is facilitated by
underwriting groups. The companies sell their securities to the public directly to the
investors through the underwriters (normally investment banks for stock and bond
issuance). When the firm is issuing shares for the very first time, it is called Initial
Public Offering (IPO). New shares issued by firms whose shares are already
trading in the market are called seasoned or secondary issues. Issuing company
receives cash from the sale and uses it to expand or fund the operations. After the
initial sale, the securities trading will be conducted on the secondary market.
 Secondary market, also known as the aftermarket, is the market where the trading
of the previous issued securities is conducted. On a secondary market, an investor
buys securities from another investor instead of the issuer. It is important that the
secondary market provides liquidity and therefore provides continuous information
about the market price of the securities
 Stock market: Stock Market is a market where the trading of company stock, both
listed securities and unlisted takes place. It is different from stock exchange
because it includes all the national stock exchanges of the country. For example, we
use the term, "the stock market was up today" or "the stock market bubble."Stock
Exchanges are an organized market place, either corporation or mutual
organization, where members of the organization gather to trade company stocks or
other securities. The members may act either as agents for their customers, or as
principals for their own accounts. Stock exchanges also facilitates for the issue and
redemption of securities and other financial instruments including the payment of
income and dividends. The record keeping is central but trade is linked to such
 physical place because modern markets are computerized. The trade on an
exchange is only by members and stock broker do have a seat on the exchange.

A) Features of Equity Shares:

Equity shares have the following features:

(i) Equity share capital remains permanently with the company. It is returned only when the
company is wound up.

(ii) Equity shareholders have voting rights and elect the management of the company.

(iii) The rate of dividend on equity capital depends upon the availability of surplus funds.
There is no fixed rate of dividend on equity capital.

B) Advantages and disadvantages of equity:-

Sr. Advantages Disadvantages

no
1 Capital gains No fixed dividend

2 Limited liability High risk

3 Exercise control Fluctuation in

market
4 Claim over assets Limited control

5 Bonus shares Residual income

1.8 DEBT MARKET

Debt markets are used by both firms and governments to raise funds for long-term purposes,
though most investment by firms is financed by retained profits. Bonds are long-term borrowing
instruments for the issuer. Major issuers of bonds are governments and firms, which issue
corporate bonds Corporate as well as government bonds vary very considerably in terms of their
risk. Some corporate bonds are secured against assets of the company that issued them, whereas
other bonds are unsecured. Bonds secured on the assets of the issuing company are known as
debentures. Bonds that are not secured are referred to as loan stock. Banks are major issuers of
loan stock.

Retail trading in Central Government Securities commenced on January 16, 2003. The
transaction sizes in the Wholesale. Debt Market are so large that individual investors can’t
participate in it. So there is a separate market called the Retail Debt Market for individual
investors. But the retail investors don’t have much of a choice as far as investment in the Debt
Market is concerned. NSE has introduced a trading facility through which retail investors can
buy and sell government securities from different locations in the country through registered
NSE brokers in the same manner as they have been buying and selling equities. This market is
known as “Retail Debt Market”

This segment provides a trading platform for a wide range of Fixed Income securities that
includes Central government securities, Treasury Bills (T-bills), State Development Loans
(SDLs), bonds issued by Public Sector Undertakings (PSUs), Floating Rate Bonds (FRBs),
Zero Coupon Bonds (ZCBs), Index Bonds, Commercial Papers (CPs), Certificates of Deposit
(CDs), Corporate Debentures, SLR and non-SLR bonds issued by Financial Institutions (FIs),
bonds issued by Foreign Institutions and units of Mutual Funds (MFs).

The Commercial Banks and the Financial Institutions are the most prominent participants in the
Wholesale Debt Market in India. During the past few years, the investor base has been
widened to include Co-operative Banks, Investment Institution, Cash rich corporate, Non-
Banking Finance companies, Mutual Funds and High Net-worth Individuals.

A) Features of debt market:

Each debt instrument has three features: Maturity, coupon and principal.
 Maturity: Maturity of a bond refers to the date, on which the bond matures,
which is the date on which the borrower has agreed to repay the principal.
 Coupon: Coupon refers to the periodic interest payments that are made by the
borrower (who is also the issuer of the bond) to the lender
 Principal: Principal is the amount that has been borrowed, and is also called the
par value or face value of the bond.
 B) Advantages and disadvantages of debt:-

Sr. Advantages Disadvantages

no

1 Safety No control
2 Regular fixed No extra profits
income
3 High returns Business debt
obligation
4 Liquidity Repayment
5 Tax benefit Restricted cash
flows

1.9 Difference between equity and debt:-

PARAMETERS EQUITY DEBT

Capital Can go down Protected

Upside Upside is possible Generally,

no upside
Fixed interest Nothing is Present
payment guaranteed
Convertibility Equity cannot be Debt can
converted into debt be
converted
into equity
Statutory More statutory Less
procedures procedures to be statutory
followed for procedures
increasing equity to be
 followed
for
increasing
debt
Relationship Growth partner Lender-
borrower
Risk involved Relatively high Relatively
low
Repayment Typically, no Periodic
repayment
Collaterals Generally, Not Required
required

Management Common stock None.

influence holders have Unless
voting rights special
conditions
have been
agreed
Tax benefits Dividend is not tax Interest is
deductible tax
deductible

Market Capital market Credit

market
1.10 Debt vs. Equity:-

Generally, capital raised for new businesses takes one of two structures: debt or equity. Debt
capital is raised in the form of a loan or promissory note to be paid back at some point in the
future usually with interest. Conversely, equity is issued as stock in a company, representing a
form of ownership with no defined maturity date.

Investing in Debt:

In a debt financing,
there are two parties to
the transaction, the
debtor and the creditor.
In exchange for capital,
the company (debtor)
will issue a loan or
promissory note to the
investor (creditor). The
documents governing
and representing the
loan will outline the complete provisions of the transaction; however, there are a handful of key
terms investors should understand before investing in a debt product.

Principal: amount of capital originally invested in a debt product.

Interest rate: the percentage rate, usually quoted annually, at which interest is paid by the debtor
to the creditor while the loan is outstanding.

Interest: the cash paid to the creditor by the debtor until loan maturity calculated as (interest rate
÷ payment frequency) * outstanding principal balance.

Amortization: the act of paying the principal balance over time between the issuance of the loan
and loan maturity.Maturity: the date at which the outstanding principal balance must be paid and
returned to a creditor in full.Default: failure to make timely payments of principal or interest. An
attractive aspect of debt financing is current income generated through interest payments over
the life of the loan. Typically, interest is paid to creditors on a quarterly or monthly basis
providing cash flow to investors while the principal is outstanding. Principal can be amortized;
meaning paid in installments over the life of the loan, or paid in full at maturity, known as a
bullet maturity.

Investing in Equity:

When an investor makes an equity investment, he or she is issued shares in exchange for capital
and becomes a shareholder, or owner, of the company. There are two types of equity securities
routinely used in financing new businesses: preferred and common. As owners of a company,
both common and preferred shareholders have voting rights related to the board of directors,
ultimately influencing control over the company’s activities and direction. While the equity
portion of a publicly traded company’s capital structure will more heavily lean towards common,
venture capital investors typically utilize a preferred equity structure due to certain rights and
privileges afforded preferred shareholders, most notably a liquidation preference. Prior to
making an investment in preferred equity it’s important to understand the additional features
attached to preferred shares.

Dividends:

Preferred shareholders are typically entitled to a dividend, if and when declared by the board of
directors, before any dividends are paid to common shareholders. Dividends for preferred
shareholders are established at a percent of the principal, similar to an interest paying debt
product, usually between 4% and 10% annually.

Liquidation Preference:

A liquidation preference ensures that in the event of a liquidation or winding up of the company,
preferred shareholders receive back at least the original investment value and often times a
multiple thereof before any distributions are made to common shareholders. A liquidation
preference of 1x is typical, although a preference of 3x is not uncommon. In addition to a
multiple preference, some preferred equity structures include participating provisions whereby
preferred shareholders will receive a multiple of the original purchase price and then participate
ratably on an as-converted basis in the remaining proceeds of the liquidity event. As-converted
simply refers to the preferred shareholders participation if each preferred share was converted
into a common share.

Conversion Features:

Most always preferred shares are convertible into common shares at the option of the preferred
shareholder at a 1:1 conversion ratio. There are several instances where conversion into common
could be advantageous to a preferred shareholder including an acquisition of the company at a
value well exceeding the liquidation preferences, where common shareholders receive a greater
amount of the acquisition proceeds. Some preferred structures include automatic conversion
provisions where if the company is executing a Qualified Initial Public Offering above a certain
valuation threshold, preferred shares are converted into common to enable selling in the
secondary market following a public offering.

Pay-to-Play:

Pay-to-play provisions are used to incentivize early investors to participate in future financing
rounds. Essentially, if an investor subject to a pay-to-play provision does not participate in a
future financing round of the company, the investor could lose certain rights and privileges
associated with preferred stock. In a stricter construct, if an investor does not participate in his or
her pro rata participation in a future financing round, the preferred stock could be converted to
common. Pay-to-play provisions can be helpful to both entrepreneurs and investors.

Board of Directors:

In a preferred equity investment, investors will negotiate for the ability to join the board of
directors in order to influence company direction and serve as a proxy for preferred shareholders.
By taking a board seat, investors can actively monitor activities of the company, ensuring the
company’s actions are in the best interest of investors and employees.
While additional terms are found in a typical preferred equity financing, the few listed above
serve as the primary reasoning behind venture capital investors pursuing a preferred stock
structure when making an equity investment. As implied earlier, another advantage to preferred
stock is its seniority to common stock.

Common stock ranks as the lowest priority in a company’s capital structure, and consequently, is
often the class of stock held by company founders and employees. While common stockholders
are afforded certain voting rights, economic participation in the event of a liquidity event or
declaration of dividends is subordinate to creditor and preferred shareholder cash distributions.
Given its relative rank in the capital structure, common stockholders often assume the most risk
of any investor class in a given company, while potentially reaping the greatest rewards

While debt investments can provide a stable cash flow stream and security for investors,
participation in value expansion, and return on investment, is capped at the interest and principal
payments outlined in the financing documents. By taking on more risk as an equity investor, one
can economically participate in a company’s value creation activities providing an enhanced
return profile relative to a company’s debt offerings. Given this dynamic, several early stage
venture capital investors utilize a convertible note structure, a financial product that begins as a
debt instrument and converts into equity at a future date.
1.11 ECONOMIC ANALYSIS

The level of economic activity has an impact on investment in many ways. If the economy grows
rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of
economic activity is low, stock prices are low, and when the level of economic activity is high,
stock prices are high reflecting the prosperous outlook for sales and profits of the firms. The
analysis of macro economic environment is essential to understand the behavior of the stock
prices.

The commonly analyzed macro economic factors are as follows:

Gross Domestic Product (GDP): GDP indicates the rate of growth of the economy. It
represents the aggregate value of the goods and services produced in the economy. It consists of
personal consumption expenditure, gross private domestic investment and government
expenditure on goods and services and net exports of goods and services. The growth rate of
economy points out the prospects for the industrial sector and the return investors can expect
from investment in shares. The higher growth rate is more favorable to the stock market.

Savings and investment: It is obvious that growth requires investment which in turn requires
substantial amount of domestic savings. Stock market is a channel through which the savings are
made available to the corporate bodies. Savings are distributed over various assets like equity
shares, deposits, mutual funds, real estate and bullion. The savings and investment patterns of the
public affect the stock to a great extent.

Inflation: Along with the growth of GDP, if the inflation rate also increases, then the real growth
would be very little. The effects of inflation on capital markets are numerous. An increase in the
expected rate of inflation is expected to cause a nominal rise in interest rates. Also, it increases
uncertainty of future business and investment decisions. As inflation increases, it results in extra
costs to businesses, thereby squeezing their profit margins and leading to real declines in
profitability.

Interest rates: The interest rate affects the cost of financing to the firms. A decrease in interest
rate implies lower cost of finance for firms and more profitability. More money is available at a
lower interest rate for the brokers who are doing business with borrowed money. Availability of
cheap funds encourages speculation and rise in the price of shares.

Tax structure: Every year in March, the business community eagerly awaits the Government’s
announcement regarding the tax policy. Concessions and incentives given to a certain industry
encourage investment in that particular industry. Tax relief’s given to savings encourage savings.
The type of tax exemption has impact on the profitability of the industries.

Infrastructure facilities: Infrastructure facilities are essential for the growth of industrial and
agricultural sector. A wide network of communication system is a must for the growth of the
economy. Regular supply of power without any power cut would boost the production. Banking
and financial sectors also should be sound enough to provide adequate support to the industry.
Good infrastructure facilities affect the stock market favorably.

2. INDUSTRY ANALYSIS

An industry is a group of firms that have similar technological structure of production and
produce similar products and Industry analysis is a type of business research that focuses on the
status of an industry or an industrial sector (a broad industry classification, like
"manufacturing"). Irrespective of specific economic situations, some industries might be
expected to perform better, and share prices in these industries may not decline as much as in
other industries. This identification of economic and industry specific factors influencing share
prices will help investors to identify the shares that fit individual expectations

Industry Life Cycle: The industry life cycle theory is generally attributed to Julius Grodensky.
The life cycle of the industry is separated into four well defined stages.

 Pioneering stage: The prospective demand for the product is promising in this stage and
the technology of the product is low. The demand for the product attracts many producers
to produce the particular product. There would be severe competition and only fittest
companies survive this stage. The producers try to develop brand name, differentiate the
product and create a product image. In this situation, it is difficult to select companies for
investment because the survival rate is unknown.
 Rapid growth stage: This stage starts with the appearance of surviving firms from the
pioneering stage. The companies that have withstood the competition grow strongly in
market share and financial performance. The technology of the production would have
improved resulting in low cost of production and good quality products. The companies
have stable growth rate in this stage and they declare dividend to the shareholders. It is
advisable to invest in the shares of these companies.
 Maturity and stabilization stage: the growth rate tends to moderate and the rate of
growth would be more or less equal to the industrial growth rate or the gross domestic
product growth rate. Symptoms of obsolescence may appear in the technology. To keep
going, technological innovations in the production process and products should be
introduced. The investors have to closely monitor the events that take place in the
maturity stage of the industry.
 Decline stage: demand for the particular product and the earnings of the companies in the
industry decline. It is better to avoid investing in the shares of the low growth industry
even in the boom period. Investment in the shares of these types of companies leads to
erosion of capital.
Growth of the industry: The historical performance of the industry in terms of growth and
profitability should be analyzed. The past variability in return and growth in reaction to macro
economic factors provide an insight into the future.

Nature of competition: Nature of competition is an essential factor that determines the demand
for the particular product, its profitability and the price of the concerned company scrips. The
companies' ability to withstand the local as well as the multinational competition counts much. If
too many firms are present in the organized sector, the competition would be severe. The
competition would lead to a decline in the price of the product. The investor before investing in
the scrip of a company should analyze the market share of the particular company's product and
should compare it with the top five companies.

1.12 Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate on
currencies. Foreign exchange markets are made up of banks, commercial companies, central
banks, investment management firms, hedge funds, and retail forex brokers and investors. The
forex market is considered to be the largest financial market in the world. It is a worldwide
decentralized over-the-counter financial market for the trading of currencies. Because the
currency markets are large and liquid, they are believed to be the most efficient financial
markets. It is important to realize that the foreign exchange market is not a single exchange, but
is constructed of a global network of computers that connects participants from all parts of the
world.

Commodities Market

It is a physical or virtual marketplace for buying, selling and trading raw or primary products. For
investors' purposes there are currently about 50 major commodity markets worldwide that facilitate
investment trade in nearly 100 primary commodities. Commodities are split into two types: hard and soft
commodities. Hard commodities are typically natural resources that must be mined or extracted (gold,
rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn, wheat, coffee,
sugar, soybeans, pork, etc.)
1.13 INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be the fastest
growing and best among all the markets of the emerging economies. The history of Indian
capital markets dates back 200 years toward the end of the 18th century when India was under
the rule of the East India Company. The development of the capital market in India concentrated
around Mumbai where no less than 200 to 250 securities brokers were active during the second
half of the 19th century.

The financial market in India today is more developed than many other sectors because it was
organized long before with the securities exchanges of Mumbai, Ahmadabad and Kolkata were
established as early as the 19th century.

By the early 1960s the total number of securities exchanges in India rose to eight, including
Mumbai, Ahmadabad and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune.
Today there are 21 regional securities exchanges in India in addition to the centralized NSE
(National Stock Exchange) and OTCEI (Over the Counter Exchange of India).
However the stock markets in India remained stagnant due to stringent controls on the market
economy that allowed only a handful of monopolies to dominate their respective sectors. The
corporate sector wasn't allowed into many industry segments, which were dominated by the state
controlled public sector resulting in stagnation of the economy right up to the early 1990s.
Thereafter when the Indian economy began liberalizing and the controls began to be dismantled
or eased out; the securities markets witnessed a flurry of IPO’s that were launched. This resulted
in many new companies across different industry segments to come up with newer products and
services. A remarkable feature of the growth of the Indian economy in recent years has been the
role played by its securities markets in assisting and fuelling that growth with money rose within
the economy. This was in marked contrast to the initial phase of growth in many of the fast
growing economies of East Asia that witnessed huge doses of FDI (Foreign Direct Investment)
spurring growth in their initial days of market decontrol. During this phase in India much of the
organized sector has been affected by high growth as the financial markets played an all-
inclusive role in sustaining financial resource mobilization. Many PSUs (Public Sector
Undertakings) that decided to offload part of their equity were also helped by the well-organized
securities market in India.
The launch of the NSE (National Stock Exchange) and the OTCEI (Over the Counter Exchange
of India) during the mid 1990s by the government of India was meant to usher in an easier and
more transparent form of trading in securities. The NSE was conceived as the market for trading
in the securities of companies from the large-scale sector and the OTCEI for those from the
small-scale sector. While the NSE has not just done well to grow and evolve into the virtual
backbone of capital markets in India the OTCEI struggled and is yet to show any sign of growth
and development. The integration of IT into the capital market infrastructure has been
particularly smooth in India due to the country’s world class IT industry. This has pushed up the
operational efficiency of the Indian stock market to global standards and as a result the country
has been able to capitalize on its high growth and attract foreign capital like never before. The
regulating authority for capital markets in India is the SEBI (Securities and Exchange Board of
India). SEBI came into prominence in the 1990s after the capital markets experienced some
turbulence. It had to take drastic measures to plug many loopholes that were exploited by certain
market forces to advance their vested interests. After this initial phase of struggle SEBI has
grown in strength as the regulator of India’s capital markets and as one of the country’s most
important institutions.
 PORTFOLIO MANAGEMENT

INTRODUCTION

Stock exchange operations are peculiar in nature and most of the Investors feel insecure in
managing their investment on the stock market because it is difficult for an individual to identify
companies which have growth prospects for investment. Further due to volatile nature of the
markets, it requires constant reshuffling of portfolios to capitalize on the growth opportunities.
Even after identifying the growth oriented companies and their securities, the trading practices
are also complicated, making it a difficult task for investors to trade in all the exchange and
follow up on post trading formalities. Investors choose to hold groups of securities rather than
single security that offer the greater expected returns. They believe that a combination of
securities held together will give a beneficial result if they are grouped in a manner to secure
higher return after taking into consideration the risk element. That is why professional
investment advice through portfolio management service can help the investors to make an
intelligent and informed choice between alternative investments opportunities without the worry
of post trading hassles.

MEANING OF PORTFOLIO MANAGEMENT

Portfolio management in common parlance refers to the selection of securities and their
continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. This
however requires financial expertise in selecting the right mix of securities in changing market
conditions to get the best out of the stock market. In India, as well as in a number of western
countries, portfolio management service has assumed the role of a specialized service now a days
and a number of professional merchant bankers compete aggressively to provide the best to high
net worth clients, who have little time to manage their investments. The idea is catching on with
the boom in the capital market and an increasing number of people are inclined to make profits
out of their hard-earned savings.Portfolio management service is one of the merchant banking
activities recognized by Securities and Exchange Board of India (SEBI). The service can be
rendered either by merchant bankers or portfolio managers or discretionary portfolio manager as
define in clause (e) and (f) of Rule 2 of Securities and Exchange Board of India(Portfolio
Managers)Rules, 1993 and their functioning are guided by the SEBI.According to the definitions
as contained in the above clauses, a portfolio manager means any person who is pursuant to
contract or arrangement with a client, advises or directs or undertakes on behalf of the client
(whether as a discretionary portfolio manager or otherwise) the management or administration of
a portfolio of securities or the funds of the client, as the case may be. A merchant banker acting
as a Portfolio Manager shall also be bound by the rules and regulations as applicable to the
portfolio manager.Realizing the importance of portfolio management services, the SEBI has laid
down certain guidelines for the proper and professional conduct of portfolio management
services. As per guidelines only recognized merchant bankers registered with SEBI are
authorized to offer these services. Portfolio management or investment helps investors in
effective and efficient management of their investment to achieve this goal. The rapid growth of
capital markets in India has opened up new investment avenues for investors.The stock markets
have become attractive investment options for the common man. But the need is to be able to
effectively and efficiently manage investments in order to keep maximum returns with minimum
risk.Hence this is the study on “PORTFOLIO MANAGEMENT & INVESTMENT
DECISION” so as to examine the role, process and merits of effective investment management
and decision.

DEFINITIONS OF PORTFOLIO

1) Investor’sWords.com

A collection of investments (all) owned by the same individual or organization. These

investments often include stocks, which are investments in individual businesses; bonds, which
are investments in debt that are designed to earn interest; and mutual funds, which are
essentially pools of money from many investors that are invested by professionals or according
to indices.

2) Financial Dictionary and WikiAnswers.com

A collection of various company shares, fixed interest securities or money-market instruments.

People may talk grandly of 'running a portfolio' when they own a couple of shares but the
characteristic of a serious investment portfolio is diversity. It should show a spread of
investments to minimize risk - brokers and investment advisers warn against 'putting all your
eggs in one basket'.

3) YourDictionary.com

a) All the securities held for investment as by an individual, bank, investment company,
etc.
b) A list of such securities.

DEFINITIONS OF PORTFOLIO MANAGEMENT

1) Investor’swords.com

The process of managing the assets of a mutual fund, including choosing and monitoring
appropriate investments and allocating funds accordingly.

2) Investor Glossary

Determining the mix of assets to hold in a portfolio is referred to as portfolio management. A

fundamental aspect of portfolio management is choosing assets which are consistent with the
portfolio holder's investment objectives and risk tolerance. The ultimate goal of portfolio
management is to achieve the optimum return for a given level of risk. Investors must balance
risk and performance in making portfolio management decisions. Portfolio management
strategies may be either active or passive. An investor who prefers passive portfolio management
will likely choose to invest in low cost index funds with the goal of mirroring the market's
performance. An investor who prefers active portfolio management will choose managed funds
which have the potential to outperform the market. Investors are generally charged higher initial
fees and annual management fees for active portfolio management.
 3) Financial Dictionary

Managing a large single portfolio or being employed by its owner to do so. Portfolio
managers have the knowledge and skill which encourage people to put their investment
decisions in the hands of a professional (for a fee).

DEFINITION OF DISCRETIONARY PORTFOLIO MANAGEMENT

 BusinessDictionary.com

Investment account arrangement in which an investment manager makes the buy-sell decisions
without referring to the account owner (client) for every transaction. The manager, however,
must operate within the agreed upon limits to achieve the client's stated investment objectives.

DEFINITIONS OF PROJECT PORTFOLIO MANAGEMENT

1) Internet.com – Webopedia

PPM, short for project portfolio management, refers to a software package that enables
corporate and business users to organize a series of projects into a single portfolio that will
provide reports based on the various project objectives, costs, resources, risks and other pertinent
associations. Project portfolio management software allows the user, usually management or
executives within the company, to review the portfolio which will assist in making key financial
and business decisions for the projects.

2) Bitpipe.com
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. Also called as
Enterprise Project management and PPM
MEANING OF PORTFOLIO MANAGERS

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 funds.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.

SCOPE OF PORTFOLIO MANAGEMENT:

Portfolio management is an art of putting money in fairly safe, quite profitable and reasonably in
liquid form. An investor’s attempt to find the best combination of risk and return is the first and
usually the foremost goal. In choosing among different investment opportunities the following
aspects risk management should be considered:

a) The selection of a level or risk and return that reflects the investor’s tolerance for risk and
desire for return, i.e. personal preferences.
b) The management of investment alternatives to expand the set of opportunities available at
the investors acceptable risk level.

The very risk-averse investor might choose to invest in mutual funds. The more risk-tolerant
investor might choose shares, if they offer higher returns. Portfolio management in India is still in
its infancy. An investor has to choose a portfolio according to his preferences. The first preference
normally goes to the necessities and comforts like purchasing a house or domestic appliances. His
second preference goes to some contractual obligations such as life insurance or provident funds.
The third preference goes to make a provision for savings required for making day to day
payments. The next preference goes to short term investments such as UTI units and post office
deposits which provide easy liquidity. The last choice goes to investment in company shares and
debentures. There are number of choices and decisions to be taken on the basis of the attributes of
risk, return and tax benefits from these shares and debentures. The final decision is taken on the
basis of alternatives, attributes and investor preferences.

For most investors it is not possible to choose between managing one’s own portfolio. They
can hire a professional manager to do it. The professional managers provide a variety of services
including diversification, active portfolio management, liquid securities and performance of
duties associated with keeping track of investor’s money.

NEED FOR PORTFOLIO MANAGEMENT:

Portfolio management is a process encompassing many activities of investment in assets and

securities. It is a dynamic and flexible concept and involves regular and systematic analysis,
judgment and action. The objective of this service is to help the unknown and investors with the
expertise of professionals in investment portfolio management. It involves construction of a
portfolio based upon the investor’s objectives, constraints, preferences for risk and returns and tax
liability. The portfolio is reviewed and adjusted from time to time in tune with the market
conditions. The evaluation of portfolio is to be done in terms of targets set for risk and returns.
The changes in the portfolio are to be effected to meet the changing condition. Portfolio
construction refers to the allocation of surplus funds in hand among a variety of financial assets
open for investment. Portfolio theory concerns itself with the principles governing such
allocation. The modern view of investment is oriented more go towards the assembly of proper
combination of individual securities to form investment portfolio. A combination of securities
held together will give a beneficial result if they grouped in a manner to secure higher returns
after taking into consideration the risk elements. The modern theory is the view that by
diversification risk can be reduced. Diversification can be made by the investor either by having a
large number of shares of companies in different regions, in different industries or those
producing different types of product lines. Modern theory believes in the perspective of
combination of securities under constraints of risk and returns.
OBJECTIVES OF PORTFOLIO MANAGEMENT:

The major objectives of portfolio management are summarized as below:-

1) Security/Safety of Prinicpal: Security not only involves keeping the principal sum intact
but also keeping intact its purchasing power intact.
2) Stability of Income: So as to facilitate planning more accurately and systematically the
reinvestment consumption of income.
3) Capital Growth: This can be attained by reinvesting in growth securities or through
purchase of growth securities.
4) Marketability: i.e. is the case with which a security can be bought or sold. This is
essential for providing flexibility to investment portfolio.
5) Liquidity i.e Nearness To Money: It is desirable to investor so as to take advantage of
attractive opportunities upcoming in the market.
6) Diversification: The basic objective of building a portfolio is to reduce risk of loss of
capital and / or income by investing in various types of securities and over a wide range of
industries.
7) Favorable Tax Status: The effective yield an investor gets form his investment depends
on tax to which it is subject. By minimizing the tax burden, yield can be effectively
improved.
BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:

There are two basic principles for effective portfolio management which are given below:-

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

following factors-
a) Fiscal, financial and monetary policies of the Govt. of India and the
Reserve Bank of India.
b) 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 revealed.

TYPES OF PORTFOLIO MANAGEMENT

There are various types of portfolio management:

 Investment Management
 It Portfolio Management
 Project Portfolio Management
1. INVESMENT MANAGEMENT:

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". Fund manager (or investment adviser in the U.S.)
refers to both a firm that provides investment management services and an individual who directs
fund management decisions.

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 portfolios:

(i) 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’ familiarity with the
applications and infrastructure, and external forces such as emergence of new technologies
and obsolesce of old ones.

(ii) 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 and the adoption of separate management.

PORTFOLIO MANAGEMENT PROCESS:

(A) THERE ARE THREE MAJOR ACTIVITIES INVOLVED IN AN EFFICIENT

PORTFOLIO MANAGEMENT WHICH ARE AS FOLLOWS:-
a) Identification of assets or securities, allocation of investment and also identifying the
classes of assets for the purpose of investment.
b) They have to decide the major weights, proportion of different assets in the portfolio by
taking in to consideration the related risk factors.
c) Finally they select the security within the asset classes as identify.The above activities are
directed to achieve the sole purpose of maximizing return and minimizing risk on
investment. It is well known fact that portfolio manager balances the risk and return in a
portfolio investment. With higher risk higher return may be expected and vice versa.
(B) INVESTMENT DECISION:

Given a certain sum of funds, the investment decisions basically depend upon the following
factors:-
I. Objectives of Investment Portfolio: This is a crucial point which a Finance Manager must
consider. There can be many objectives of making an investment. The manager of a
provident fund portfolio has to look for security and may be satisfied with none too high a
return, where as an aggressive investment company be willing to take high risk in order to
have high capital appreciation. How the objectives can affect in investment decision can be
seen from the fact that the Unit Trust of India has two major schemes : Its “capital units”
are meant for those who wish to have a good capital appreciation and a moderate return,
where as the ordinary unit are meant to provide a steady return only. The investment
manager under both the scheme will invest the money of the Trust in different kinds of
shares and securities. So it is obvious that the objectives must be clearly defined before an
investment decision is taken.
II. 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 shares.
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.
FUNDAMENTAL ANALYSIS:

(A) FUNDAMENTAL ANALYSIS OF GROWTH ORIENTED COMPANIES:

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 are:

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 industry 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 which the
investors 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.

(i) 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 likely to be high.

(ii) 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.

(iii) 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.

(C) 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
management. Once the industry’s characteristics have been analyzed and certain industries
with growth potential identified, the next stage would be to undertake and analyze all the
factors which show the desirability of various companies within an industry group from
investment point of view.