INTRODUCTION TO

INVESTMENT

INTRODUCTION
Security analysis is a pre-requisite for making Investment activity involves
investments. In the present day financial markets, investment the use of funds or savings
has become complicated. One makes investments for a return for acquisition of assets &
higher that beats current inflation rate or current rate of further creation of assets
return on different investment avenues or even in an
investment bank. In the finance field, it is a common knowledge that money or finance is
scarce and that investors try to maximise their return. But the finance theory states that the
return is higher, if the risk is also higher. Return and risk go together and they have a trade
off. The art of investment is to see that the return is maximised with the minimum of risk,
which is inherent in investments. If the investor keeps his money in a bank in savings
account, he takes the least risk, as the money is safe and he will get back when he wants it.
But he runs the risk that the return in real terms, adjusted for inflation is negative or small
and even if positive, it may not come up to his expectations or needs.

INVESTMENTS: MEANING, TYPES AND CHARACTERISTICS

Financial markets have the basic function of mobilising the investments needed by
corporate entities. They also act as market- places for investors who are attracted by the
returns offered by the investment opportunities in the market. In this context, there is a need
to understand the meaning of investment and the motives of investment.
Investment may be defined as an activity that commits funds in any financial/physical
form in the present with an expectation of receiving additional return in the future . The
expectation brings with it a probabiHty that the quantum of return may vary from a minimum
to a maximum. This possibiHty of variation in the actual return is known as investment risk.
Thus, every investment involves a return and risk.
 SECURITY ANALYSIS AND PORTFOLIO MANAGEME~l'
INTRODUCTION TO INVESTMENT ~
cc- () f _:,
rifici nl"' incthin nm f r the prospect of ga· .
n d . f 1n1n ~
. . tnirnt i~ the rt:' . - . 0 lvc the u c of fun
C

r a mgs or acquisit·io g (b) General i~ves~menl: Genera l in ve tment refers to . a money commitment of some
Tl111 , tnH'-
-, tnn•strnen :1 ,n,
I c11v11 ' I t f f d
, ,·tincnt is an cmp ) men o un s on asse ts Will
n Gf ort. But m this no ra te of return is involved, nor is a fin ancial return or capital
,omcthing f,1ter. •1tion of a. c:cts. 1n, 1::, . 1· 1 lh1:1 growth expected.
- ~·ts. cl,·. fu rther . crt- e or l-1p1·111 , ':tnpre
r
ia t n.
· ~ cif c,,rnin~ 1nco 111
1
• ,.. rn c1dditi nal monetary value fro m the mod e o f invesh-... For exa m_ple'. ~ con;'mitmcnt of money lo b uy a new ca r is certainly an investment
e:x"'-'l°i:S to i::1 Ab k d ·t . fi . u11ent
1.
J llll
An inn~ tor c,1~ · ~ iw-ic,1I or fi n,m ci:11 as ets. _a1~ ' . epos1 is_a nancial asset. th from an md1v1dual s point of view.
t1 1 could be in the fo rm P 1 , i :ti ~1- - t. Im eshnent acttv1ty 1s recogmsed when an as .~ (r.) Busines~ investment: B~si~ess inve: tment_ refers to tangible asse ts like machinery
i.1rc1,,se of gold would 1~ a P
pu · - ..
,:n: ~ 1

· 1cn11on 1 1: ,, ' 1
0
.. exp cted fund flow or an appreciation in value set ts an d eq~1pments ~~ bu1ld1~g and mtang1ble asse ts like copyrights or patents and
_.1 sed w1tl1 an tJ1
puruia.
'
. ,rr, rl fi . .· d .
. -,~tlllt'llf is t1,c wrrrnt co1111111t111c11f o11 1111 s 01 n pe110 . of t1111e in
•

go~dw~ll. The dec1s1on for investment is also known as capital budgeting decision,
. le word. ,111 111, (.
In sunr
.
/7 ' f "111 i, that ll'ill co111pc11sntc the mvestor or:
fi Orde
r
which 1s regarded as one of the key decisions. So, in simple words, it is the money
fti dcriz~· n.ft//urc . c1;1• £! .I ' '. put in a private bu siness.
(n) Sncriftmi co11s11111ptio11; (d) Financ~al i~vestment: Financial in:,restment refers to purchasing securities or any
(b) Loss of p11rd1nsi11g pL 1wcr; mid other fm ano al asse ts from the capital marke t or money market or purchasing real
(c) T/,c unccrtni11 ty im•ol cd i11 tlze fu tu re flow of fu11d s (risk to tl1e investor's funds). properties with high market liquidity for example, gold, silver, real properties, and
precious items. Financial investments are investment in stocks, bonds and many
other types of security investments. Indirect fin ancial investments can also be done
DEFINITIONS with the help of mediators or third parties, such as pension fund s, mutual funds,
co1:'mercial banks, and insurance companies.
"Sacrificing of certain present value for some uncertain future value."
Financial Investment can be further classified as:
-Sharpe/Alexander
(i) Investment in terms of Personal Finance: According to personal finance theories,
"Purchase of a financial asset that produces a yield that is proportional to the ri k
assumed over some future investment period." -F. Amli~g an investment is the implementation of money for buying shares or mutual funds
or purchasing an asset with the involvement of the factor of capital risk.
"Investment is a commitment / employment of funds made in the expectation of son,
positive rate of return. If the investment is properly undertaken, the returns w·~ (ii) Investment in terms of Real Estate: According to real estate theories, investment is
commensurate with the risk than the investor assumes." ·• referred to money utilized for buyin g property for the purpose of ownership or
-Donald E. Fischer and Ronald J.Jordan leasing. Also in this case, the factor of capital risk is involved.
"An investment operation is one which, upon thorough analysis promises safety f (iii) Investment in terms of Commercial Real Estate: It involves real estate investment
principal and an adequate return. Operations not meeting these requirements a~e in properties for commercial purposes such as renting or using for business purpose.
speculative." -By Graham and Qadd's Security Analysis (iv) Investment in terms of Residential Real Estate: This is the most basic type of real
estate investment, which involves buying of houses as real estate properties.
CONCEPTS OF INVESTMENT
There are basically four concepts of investment:
NEED FOR INVESTMENT OR REASON FOR INVESTMENT
(a) Economic investment / concept - an economist's definition of investment. One of the most compelling reasons for a person to invest is the prospect of not having
to work for entire life. By investing the money, investor may get his money to generate more
(b) Gen~ral investment / concept - which is used by "the man on the street"/ general money by earning interest on what he put away or by buying and selling assets that increase
pubhc.
in value . Whether investor invests in stocks, bonds, mutual fund s, options and futures,
(c) Bu s iness inve stm ent / concept - which is used by businessmen/ business world. precious metals, real estate, in his own small business or any combination thereof, the objective
(d) Financial investment / concept - that used in financial sense. is the same to make investment that w ill generate more cash for him in the future.
(a) Economic investment· Econo · · . . Following are the factors that h ave made investment decisions important:
It th · mic mvestment is an economist's definition of investment.
means e purchase of capital d hich 1. Inflation: To survive in this world, one needs to beat inflation. One way to cover any
future prod ~ goo s, w are not consumed but instead used in devaluation in the money due to inflation is investment. By investing t~e s~ving_s, one
ucuon. 1t means the net add. f t h
consists of goods and se . th i ions O t e economy's capital stock which can increase their basic earnings, which helps to overcome and survive inflation.
services. rvices at are used in th e prod uction
· of other goods an d 2. Retirement: No one knows whether the pension system will survive the coming
d ecades. Due to this uncertainty and the reality of inflation that force the person to
Examples of this type of investments are t . .
or bridge and intangible l'k angible goods hke construction of a factory plan for their retirement. One need only to open the newspaper to find out about 3
i e money spent on on-job training.
 SECURITY ANALYSIS AND PORTFOLIO MANAGEMENl'
[ 1.s J
INTRODUCTION TO INVESTMENT
company th at is freezing pensions or a new bill th.1t wiJI cul gove rnment payouts. fn Speculation
Basis
Investment
these uncertain times, investing can be a tool to help investo r carve out a so lid Path Sr.
to reti rement. No. Speculation is more risky a~ a
3. ~row investor's money: Investing their mo;iey c.1n all~w inves tor to grow it. Most Investment is less risky as an investor specu la tor is willing to assume high
4. Risky
investment vehicles, such as stocks, certificates of deposit, or bonds, offer returns on is only willing to take up mod~r~te risks. Usually he buys volatile_ issues
their money over a long term. Thi s re turn allows the ir money to build, crea ting risk. Us u a lly, he buys se c~nt1 es (meaning wide price fluctuation) or
issued by established compames.
wealth over time. lower grade securities.
4. Rea~ financial goals: Investing can help the inves tors to_ rea ch big fin_ancial goals. ation is m a de on purely
Investment is m ade on fu n d amen tals Sp e cul
If their money is earning a higher rate of return tJian sav_m~s accou~t, mv~s t0 r Will 5. Base
of the company. trading.
be earning more money both o ve r the long term a 11d. witJ~m a faSler period. This
Investor is a creditor of the Speculator is a n owner of the
return on their investments can be used toward major fm~ncial g_o als, _sucl1 as buying 6. Type of s pecula tion.
a home, buying a car, starting ovm business, or putting their children through contract investment.
A speculator is usually inter:sted
college. An investor is interested in long-
7. Period I in short-term holdings, holding a
5. Tax minimization: An investor may pursue certain investrn_ents in or~er to ad?pt tax Duration term holding of a security he buys.
security for maybe a couple of days,
minimization as part of his or her in, estment strategy. A highly - paid ex_ecutive, for The minimum holding period is one
weeks, or months.
exa mple, may want to seek investments with favourable tax treatment m order to year.
A speculator might make tens or
lessen his or her overall income tax burden. 8. Change in An investor might rebalance his or even hundreds of operations a day
portfolio her portfolio only rarel y when
and spend much time imagining
DIFFERENCE BETWEEN INVESTMENT AND SPECULATION conditions change.
meanin gful information in the
It is well impossible to define tJ,e term speculation with any _precisio~. Inve~tment and random w alk of markets.
speculation are somewhat different and ye t similar because speculation 1.c!qmres an mvestment A speculator is primarily interested
9. Return An investor is interested in current
and investments are at least somewhat speculative. in price appreciation. Current
expectation return in the form of interest income income in the form of interest or
Investment usually invoi ves putting money into an asset which is not necessarily marketable or dividend as well as possibilities of
in the short run in order to enjoy a series of returns the investment is expected to yield. On capital appreciation. Thus, an div idends is considered insigni-
the other hand, speculation is usually a shorter run phenomenon. Speculators tend to buy investor expects a moderate rate of ficant. Thus, he expects a high rate
assets with the expectation that a profit can be earned from a subsequent price change and sale. return in exchange for moderate risk of return in exchange for the risk
Accordingly, they buy marketable assets which they do not plan to own for very long. -
4--- ·-
assumed. assumed
Probabl_Y th_e best way to distinguish between investment and speculation is on following 10. Changes Investment is based on changes of Speculation is based on changes of
grounds which is clear from table given below: of value value. price.
DIFFERENCE or price
Sr. Basis 11. Decision An investor's decision to buy is A specula tor's d ecision is the desire
Investment Speculation
No. arrived at through careful analysis to buy is usually based on intui-
of the past performance and future tion, rumours, charts, or market
1. Meaning !nvestment is a process where Speculation is like gambling. It prospects of the issuing company analysis which concerns itself with
mveS t or put his money after a involves a lot of risk and investor and the industry it is in. The analysis the ana lysis of the stock market
thorough research i.e. fundamental may be performed by the investor or itself.
can lose his money heavily.
& technical of the company. It is by someone he believes in.
much safer.
Nature 12. Nature of An investor uses his own money/ A speculator usually borrows
2. Investment is long term in nature.
Speculation is short term in funds funds to buy securities. money from brokerage firms using
nature. his securities as collateral. The
3. Aims Investment aims at . purpose is to either semi-investors
normal I income and Specul f10 ·
cap'tal ong t~nn capital growth i.e a n aims only at short or semi-speculators in different
1 appreaation. ' · term trade - gains through buying degrees .
i - - - - - J . - - - - - - L_ _ _. ·~--------Lan_d~se=ll=in~g:_._ _ _ _ _ _ _ _j
 SECURITY ANALYSIS AND PORTFOLIO MANAGEMENl
Speculation
@ Speculation INTRODUCTION TO INVESTMENT
Investment Investment
1 o.,sis
Sr. Basis
No. ta ls/sent i- 0 l_.'.:~j_M_a_r_k_e_t-~T_a_k_e__
wh_a_t_m__
ar_k_e_t_o_ff_e_rs- ------~T-ry __o-:th_e_r_s_ _ _---1
--to_ s_te_a_l_fr_o_m
Da cd on
lundamen• lmcstment i b• don fund••' ntals Sp culation is based ~ Sr,
. cnhmcn1 . No,
13. Investment is about getting what Speculation is about trying to get

ments
Strategy The s tratc•v of investin g is The , 1rategy of spccu la ti 23, market offers you. more by doing more in believing
countercycl,ca!. that you can beat the market.
. cycl ic.ii. • o n i5
14. nvc tm nt ,. 0 rahonally
1 . ba cd on ti ,e Speculation is purely b ase d on 24, Wasted Less (buys and hot d s). M ore (b uy an d seII an d repea t) ·
know Jed ge f p• st sh ,re price hope ,a t , e future price will 11~e work f nvestment isa bout doing Jeastsince 5 p ecu Ia Ii on is about doin g the
beh · F cl k wicdge it I 1e r thnn on a
high er11 rath e you let the companies or industries mo s t (uncons ciously) and it is
ts. Base of 1I po SI e to compute
O
t , e pro a 1 , wo,k for you by owning a piece of more involvi ng because you keep
decision of future return. thei r businesses. chasing the price movement. You
. . cl\1l?bulr. •rom su 1 ,no b b·i'·ty tangible. ' nythin g
1
Jnve tment requires an investor to Speculation is usually based need to keep buying and selling to
do so me work before hand and wild rumou~s and unsubstanHat~~ generate profit.
16. Concept d ci ions are made based on known hearsays •wh,ch
. cannot be checked
e ly 25.
26, Complexity Simple.
System Growing (like a Ii ving organ« Complexero-sum (to m ake
or ess ii person
one works).s gam
·g·ure. for a :pw;
'~\
nccuracy. • ot
Undoubt Iha~
easie, d creatuce) ovec time. · zis another person's
I ( Joss) remains
' ·
,nves men
1 1 ul
15 o.,e
1 tends to constant or shrinking over tune.
facl Ond fl Normally, investor invests only his Speculators may invest borrowed
Leverage own funds and avoids bocrowed funds and create leverage positions
what one sows. reap 27
funds. Inve s tors do not create to make more money.
10
True investors can sleep soundly at Speculation is l_ik e ly to lea d leverage position.
17. Comfort night since they have a fairly good many sleepless mgh_ts and anx;ous
of sleep idea of the possible ex tent of their days since its resu lt _,s so uncertain. DIFFERENCE BETWEEN INVESTMENT AND GAMBLING
los ,md gain beforehand . Besides, Th e speculator will h ave to be
Investment can also to be distinguished from gambling. Examples of gambling are horse
since they are investing for the Jong always on th e alert to take th
term, they can focget about short n.ecessary quick action to catch th: race, cacd games, lottecies, and so on. Gambling involves high risk not oniy for high returns
but also for the associated excitement. Gambling is unplanned and unscientific, without the
term movements and ignore the right moment.
kno_"'.ledge of the nature of the risk involved. II is surrounded by uncertainty and a gambling
market most of the time. The time horizon is short. decoS1on ts taken on unfounded market tips and rumours. In gambling, artificial and unnecessary
It has a longer time horizon.
18. Time in risks are created for increasing the returns.
horizon . Investment is an attempt to carefully plan, evaluate and allocate funds to various
Tries to strike a balance between risk Assumes n higher risk
Relation· mvestment outlets t_hat _offer_safety of principal and expected returns over a long period of
19. undertaken and the expected anticipation of higher return.
ship time. Hence, gambling 1s quite the opposite of investment.
return . Probably the best way to distinguish between investment and gambling is on following
~:,~:'.ult in consistent or regular Is expected to deliver quick returns
20. Returns grounds which 1s clear from table given below:
Gambling
Value generation Investment
21. Source of facturing products through manu · Price
and ro"idin . movement which is mostly Sr. Basis
income services. p · g influenced by the psychology of the No. Gambling is unplanned and
market. Investment is an attempt to carefully
Meaning unscientific, "vithout the knowledge
High 1. plan, evaluate, and allocate funds to
22. Risk Lower (more stable) of the nature of the high risk
Investment is has lower risk but S~eculation is challenging, has various investment outlets that offer involved but also for the associated
neeld more capital to generate more higher risk but requires less capit~I. safety of principal and expected re-
excitement.
va ue. turns over a long penod of time.
l

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 vsIS AND PORTFOLIO MANAGE ....
f 1.9 J

'
SECURITY ANA L ,.. 1:;~l INTRODUCTION TO INVESTMENT
Gambling Gambling
Investment
Sr. Basis
Investment
Sr. Basis No.
Investment tries to strike a Gambling is risky and not possible
No. To stake or risk money 0 Relation-
urchase 15. balance between risk undertaken and to balance between risk and
To put money
. .
to use, tib·ng
Y Poffering
. anything of value, on the out r
ship
2. Objective of something involving chan:~l'l1e the expected return. returns.
or expenruture, m some ,.,
profitable returns. To play at any In investment, emotions such as In gambling, emotions such as
16. Role of greed and fear play no role. greed and fear play a role.
game of chance for stakes. . Gambling is a bad
. thing as is not ~ Emotions
investing is a good thing as is wi?ely clearly ma k mg a pos· . Inves ting will generally have an Gambling generally has a negative
. G blin it1v. Outcome
3. Status regarded as the engine that dnv~s contribution. am ~ does tend ' 17. expected positive net outcome expected outcome.
t money tn help local _econom'.es, but al to
capitalism. It ten d s to pu th t (assuming an informed investor who
the hands of those with e mo~ usually brings with it w so appropriately analyses the
promising and productive uses for it, documented unpleasant side effe:· investment).
and drives the economy gradually up- Investment is regulated but Gambling is either illegal or very
18. Regula- encouraged. tightly controlled in most
ward. . sufficient Gambling requires little or tions
Investment requires research to be conducted. no jurisdictions.
4. Research
research to be conducted.. roach .
In gambling, an unsystem . Investing has economic utility. Gambling does not have economic
19. Utility utility.
In investment, a systematic app approa ch 1s. bemg
. t a ken. ati,
5. Approach
is being taken.. . . t motivated . . . . . . .
Gambling activity 1s s1gruficantl Investing has positive expected Gambling has negative returns.
20. Returns
Investment actJVJt)'
. is no
t or compul- •
motivate d b y entertainment
· ) returns.
6. Motivation Gambling can be addictive and
solely by entertauunen .
compu 1s10n 01
Investing is healthy.
21. Nature
sion Gambling is entertainment. destructive.

Purpose
Investing is business. Gambling is not for specific goak In Investment, the amount of In Gambling, the amotmt of risk is
7. 22. Amount
Investing is saving for specific goals, risk if limited. high.
8. Goal of Risk
such as retirement as a planned Gambling focuses on immediate
23. Focus Investing is long-term process.
strategy of wealth-building for outcomes.
specific fuhtre goals. Investing is based on skill and Gambling is based on luck and
Investors are risk-averse, as investors Gamblers are risk-seekers. 24. Base
9. Risk knowledge and requires the use of a emotions.
tend to avoid risk unless adequately system based on research.
compensated for taking it.
Gambling is an immediate event a 25. Time Made with a larger time horizon. Made at the spur of the moment.
Process Investing is a continuous process;
10. series of events as a specific act a Horizon
of deployment of capital in search of or
series of acts, centred aroum 26. Activity Investment is planned activity and Gambling is unplanned
continually increasing net worth.
immediate gratification. can result in consistent or regular impulsive action
odds an returns.
11. Circum- In investment, the odds are In gambling, the Economic In investment, a net positive In gambling, no net economic effect
unfavourable. 27.
stances favourable. economic effect results. results.
effect
12. Behaviour In investment, the behaviour is risk- In gambling the behaviour is r~l Investing: Gambling:
28. Characte-
averse. see king. "~y activity in which money is put
ristics "An_y activity in which money is put
13. Activity lnve~tment is the activity i.e. is Gambling is the activity is ' at n~k for the purpose of making a at nsk for the purpose of makina0 a
ongomg at1<l done as part of a long- discrete event or series of discrel profit, and which is characterized by profit, and which is characterized by
term plan events not done as part of a lofl! some or most of the following (in some ~r most of the following (in
tem1 plan ~pproximately descending order of approxunately descending order of
14. rmportance): sufficient research has importance): little or no research has
Ownership ?wnership of something tanPibl . Ownership of something tan~
involved. o· e is
is not involved.
 ~
5 9 5
SECURITY ANALYSIS AND PORTFOLIO MANAGl:1"1t~l

,;:::r:.::;.--a-si:---r------;J;:n::::veslmcnt
Gambling
- -
INTRODUCTION TO INVESTMENT

1
2 3
4
5
[i.11]

Gambling activi~y i_s

No. Specu la tion is ~sually tailored to suit md1-
been con-ducted; th e odds Inves tment is usually a unplanned and impul-
been conducted; tJ1e odds are favour- unfavorable; the behavior is }lte 6. Activity vid ual needs.
• planned activity.
able· the behaviour is risk-,werse; n te I tis~ sive activity.
' · b emg
· tn ken·' seeking; ankunsys m~tic approa~;/ Either creation of
systematic approad1 is is being ta en; emotirn1s such "'I Exchange between a
risk/reward .$itua-
emotions such as greed and fear play greed and. fear play a role; the acliils existent risk before the buyer and a sell e r of
Risk nature In th
no role; the acti vit) is ongoing an~ ity is a discrete event or series
done as part of a long-term plan, discrete events not done_ a~ part of f
;·I 7. bet. The bet creates e existing situations that
tions (busi ness crea-
tion) or more often
bet. en tail a risk and a po-
the activity is not motivated s~lcl~ long-term plan; the activity is . ij exchange of s uch
ten ti al reward.
by entertainment or compulsioi~, nificantly motivated by entert s_,g. situations.
. a,n
ownership of something tangible _is men! or comp uJ s10n; ownership · Some probability tools Odds usually un-
"bl .
im olved; a net positive economic something tang, e is not involv d Of Some probability tool s
8. Probabi- mi ght be applied but known in som e types
no net economic effect results." e ; might be a pplied and
effect results. " lilies the bas is is a gene ral of gambling.
sufficient resea rch to be
uncertainty.
COMPARATIVE DIFFERENCE BETWEEN INVESTMENT, conducted Very short as a spur
SPECUlA TION AND GAMBLING Short term usually.
9. Time Long term of moment
horizon
Sr. Types> Economic I financial Leisure, hobby.
No. Traits Social en- Economy, business
10. fluctuations and li-
Financial vironment financing.
quidity
Investment Speculation Gambling Fun, gree d, fear or
11. Psycholo- Savings, long term safety, Greed, fear, challenge, addiction. In so me
1 2 3 4 5
gical drive challenge, economic cu- curiosity, status or
addiction. cases (ca rd play)
1. Meaning Investment is an attempt Speculation is associ- Gambling is un. riosity. challenge/co mpeti-
to carefully plan, evalu- ated with buying low planned and unscien- tion/ mind training.
ate, and allocate funds to and selling high with tific, without the Don' t provide eco-
various investment out- the hope of making knowledge of the na- 12. Economic More. Less.
nomic outcome.
lets that offer safety of large capital gains. ture of the high risk outcome
principal and e).-pected re- involved but also for
turns over a long period the associated excite- TYPES OF INVESTORS
of time. ment. Types of investors:-
2. "A person whose principal concern in the purchase of a security
Objective Investing is business and Speculation aims only Gambling is an enter- (a) Cautious
is the minimizing of risk, compared to the speculator who is prepa red
saved for specific goals. at short term trade- tainment and not (b) Emotional
to accept calculated risk in the hope of making better-than-ave~age
gains through buying saved for any goal. profits, or the 'gambler' who is prepared to take even. gr~ater nsks. (c) Technical
and selling. (d) Busy
More generally it refers to people who invest money m investment
3. Time In vestment made with Speculation has a Gambling made at the (e) Causal
Period products."
a larger time horizon. short time horizon. spur of the moment. (f) Informed
4. Risk Thus, an investor is an individual who makes investments. An
Investment tries to strike Speculation assumes a Gambling is risky (g) Passive
investor can act on behalf of others, for example, stock brokers or
a balance between risk higher risk in anticipa- (h) Active
and not possible to mutual fund managers make investments for others or else an investor
undertaken and the ex- tion of higher return.
pected return. balance risk vs re· can make investments for one's own personal account.
turns.
5. Returns s Following are the various types of Investor:
Inve tment can result in Speculation is expected Gambling is un·
consistent or regular re- to deliver quick re- I I. • Cautious Investors: Cautious Investors are , ery conservative; this type of investor
turns. panned or impu s1ve has a need for financial security and will avoid high-risk ventures as well as listening
turns. action.
to professional advicE, preferring to conduct their own financial affairs. They don't like
 rut< I t-OLIQ MA
_._,._u".1. 1 , ARALT :u.;;> 141'1U
NJ\Q~ [1.13]
to lose even small amounts of money and never rush into investments ~t~ d Jess of a
f . I il 1\VI T
ESTMENT · k tolerance an
mancia opportunities a great deal of thought. ays &i~ JNTRODUCTJON TO JNV . individuals have a high-r~s own abilities. Once they
previous wealt_h c~t1on~1:~eeed to fee \ in c?ntr~l of t~~~r risk tolerance red~ce\!{
11
• ErnoHonal Investors: Emotional Investors nrc easily attracted to fashionabl .
or 'I10 t' ti' ps, t h ese mvestors
· act with their heart an d no t th e1r
· I1ead. A Wh'
e •nvestni
need for secunty. e~trol of an investment s1h:1aho~~rs feel they a re re~uon~ their
feeling leads their decisions and they have great difficulty disengagin . ' 111 Ot / ' feel they are losing co d d in control, these inv~s I d with the running o
i~vestments or cutting losses~ They have an unreasonnble belief that thin: fro_ri, ~ . I involve an
being active y likely to get persona
lly mvo ve d
their adviso r oes.
They are
. .
nght in the end and often put their trust in luck or 'providence' to safes w,i1 cllt Active investors ar~ more believe they know more than£ their investment portfolio in
financial assets. 8llt1rd 1~ financial affai rs, l an I ~~ maintenance of those pa~tsdo personal success.
less likely to d~ ega ~ have experience or have a
• Technical Investors: Technical Investors are hard facts - numbers - lead th · which they believe I ey
. . Th IS h,
investor to active trading based on price movements. ey are screen. , ~
sometimes obsession, but their diligence can be rewarded if they spot tren~:t,nl1 ELEMENTS OF INVESTMENTS
may also have a tendency to 'need' and buy the latest technology as they are · 1\ ents are as follows: return on them.
looking for some edge. ill l\-1 The Elements of Investm 11 financial instruments in order to ea:rn includes both
• Busy Investors: Busy Investors need to be involved "'.ith the markets; it gives t (a) Return: tnvesto~s bur ~~:~s the reward to the in:est:s. :.~:ease or decrease of
a buzz when they check the latest price movements, which may be several tinies ht The return on uwes m ·t 1 gain or losses, which anses y
They have to keep buying and selling - on rumours, on overheard gossip, f a d1 current income and cap1 a t In case
the security pnc· e· • bility of returns on an investmen. .•
mass of newspapers and magazines they collect. Any titbit of information t~oll'i I
glean is imbued with significance and a cause to take financial action. ey Q (b) Risk: Risk is the chanche of !~s= : : : ~ :~~~ss. It may be loss of_intepr:::bl~~vi:! ~:
investment, t ere . k and return are mse al
• ~a~u~J Investors: Casual Investors are a laid-ba~k attitude to i~vestrnent; thei of every f . vestment. However, ns . k . not precise statistic
md1v1duals are often hardworking and involved with work or family. They te d
believe that once an investment is made it will take care of itself, and that a goo~ .
1 ~~r~~:~ a:a~~~:: t~rm and it is ~:a;u;!l:v~~~~t ;oc~:s should be considered
term. However, the risk can be quanh ie .
or a profession is the way to make real money. They easily forget that they /
1 in terms of both risk and return. . t It offers several different courses of
investment assets and rarely check on their financial affairs. And, though they ~ t t factor in uwestmen . f ll 'buy and
leave the _running of their investments to professional advisors, they haven't been: (c) Time: Time is an impor an ttitude of the investor who o ows a d
contact with them for years. action. Time perio_d depends on th~~ sis believes that conditions may change an
hold' policy. As time moves on, y d risk for each investment.
• Informed Investors: Informed Investors use information from a variety of sources an
investors may revaluate expected returns an b nsidered while making an
keep an ongoing watch on their investments, the markets and the economy. The . . . · portant factor to e co . h
listen carefully to financial opinions and expert assessments, and will only go aga~ (d) Liquidity: Liqu1d1ty is a 1so im . . of an investment to be converted mto cas
market fashion, as a contrarian, after weighing up all the pros and cons. They ar, investment. Liquidity refers to the ability . back any time. Therefore, the
d when required. The investor wants ~s money
financially confident and have faith in their decisions, knowing that knowledge ai, as an 'd r 'd'ty to the mvestor.
experience will always win out to give them long-term profits. investment should provi e iqm 1 . f the investments.
h ld t the benefit of tax exemption rom
• Passive Investors: Passive Investors are characterised as individuals who have becom (e) Tax Saving: The investors s ou ge . ti. to the investor. The ta>
. . t hich provide tax exemp on .
wealthy passively - by inheriting, by a professional career or by risking the moneyo There are certam mvestmen s w . t Therefore the investors shou1c
. the return on mvestmen . ,
others rather than their own money. To these investors security is more importan saving investments mcreases . . order to maximize the retun
than risk. For these individuals it's important to hang on to their money. Passili also think of saving income tax and mvest money m
investors make good clients because they tend to trust their financial advisor and an on investment.
more likely to delegat_e the_ run~~g of their financial affairs. And because they are risl
averse, they tend to hke d1vers1fied portfolios of investments in quality companies cr T'VPES OF INVESTMENT
~n~estm~nt products. However, they can _believe that an investment is more risky thar . ht types of investments which are discussed as below:
1t 1s which ma):' keep them out of potentially lucrative opportunities. Passive investor: There are ma inI y e1g
In t ent is also known as Govemmer
are also more h~ely to need th e_ approval of others and are unlikely to take a first stef 1. Autonomous Investment: Autonomous ve~ ~ level which means even if tr
into unknown mvestment territory by being a contrarian. investment that remains constant irrespective o _mc~e 'n fers to the investme1
• Active Investors: According to Barnwell, Active Investors are those who have achieve; income is low the autonomous investment remains e same. re Tl
made on ho~ses, roads, public buildings and other parts of Infrastructure.
significant wealth, ?r earned well, during their own lifetim Th J'kely tt
take risks in investmg because they have previous experiene~e otr~~g ~ thei i:~::s Government normally makes such a type of investment.
 INTRODUCTION TO INVESTMENT

CLASSIFICATION OF INVESTMENT
The ab vc staled lypcs f inv ·slm nt , n b cl.i s ifi •cl in diff rent methods:
1. Phy i al in vestment.
2. Financial investment.
3. Ma rketable .:: nd non- ma rketabl in veslm nt.
Unplanned 4. Transferab le and non- transferab le.
5. Ownership investment.
6. Lendin g investm ent.
t· Induced lnveshl\ent is positively related to th .
d Investmen . e tnc:o 7. Cash equivalent.
2. In duc_e ·al le, els of income entrepreneurs are induced to invest me le
Th at t ' at 1uo, C ti" d" .
·ah le\"el of income, onsump on expen 1ture increases th·18
tnore anc1 v\ 8. Others.
10 1
rersa. At_a .u, e~tn,ent of capital goods, in order to produce mora co leads t"~ 1. Physical Investment: Physical inves tm ents are tangibl e asse ts like: motorcars,
increase I.I'\ m :, ,-. nsuiner "
. . 1 Investment: However, the money used for purchasing ex·18 t' go% aeroplanes, ships, buildings, plant and machinery etc. which are used for fu rther
3· ~mana:.nts such as old bonds, old shares, etc., cannot be conside ding finantj production or sometime not used fo r fu rther production.
stru
~ tmment It is a mere transfer of a financial asset from one indivi·dre as fina0} Examples of tangible physical assets which are used fo r furth er production are:
1m e · . . ua 1 to ' 1
,
buildings, plant and machinery etc.
In
financial investment, money invested for buymg of new shares and b anatht:
.. . l onds ,
as debentureS have a positive impact on emp oyment level, production d as we Examples of tangible physical assets which are not used for further production are:
an ec0 ' gold, silver ornaments, motor cars etc.
gro" th. nCl

. Real Investment: Real investment in new machine tools, plant a d . 2. Financial Investment: Financial investments are those investments which are used for
4 . . n equ1prn production or consumption of goods and services or further crea tion of assets.
purchased factory bu ildings, etc. increases employment, production d e%
growth ot· th e nation. · Th us rea1 investment
· has a direct impact O an econ 0ni" Examples are: NSS certificates, bonds, shares etc.
generation, economic growth, etc. n employrner, 3. Marketable and Non-Marketable Investment: Marketable in estments are those
5. Planned Investment: Investment made with a plan in several sectors investments which are listed on the stock exchanges and can be converted in to cash
0f th
in a short time. Examples are: Shares, bonds and other instruments issued by
with specific objectives is called as Planned or Intended Investment. e economi
government or companies.
Planned Investment can also be called as Intended Investment b • Non - marketable investments are those which cannot be brought or sold in the open
hil akin . ecause an invest
w e m , g investment makes a concrete plan of his investment. ~ market in the stock exchanges and are difficult to be converted into cash immediately.
6. Unplanned Investment: Investment done without any planning is called as " Examples are: bank deposits, provident funds, insurance schemes etc.
Unplanned or Unintended Investment. ~• 4. Transferable and Non - Transferable Investments: Transferable investments are those
In unplanned type of investment, investors make investment randomly without ma~ in which instruments can be transfered in the name of others or can be sold or
an\ c~~~rete plans. Hen_ce it can also be called as Unintended Investment. Under t~
exchanged for cash or kind. Examples are: shares, bonds.
typ. inve strnent,_ t~e investor may not consider the specific ob1'ectives while makino Non- transferable investments are those which cannot be transferred. Examples are:
an investment dec1smn. 0
NSCs, Insurance certificates etc.
7. Gross Investment· Gross Inv t 5. Ownership Investments: Ownership investments are what come to mind for most
creation of new c~ ·t l e~ ment means the total amount of money spent fo1 people when the word "investment" is batted around. Ownership investments are the
. P1 a assets like Plant and Machinery, Factory Building etc. most volatile and profitable class of investment. Examples are: Stocks (all traded securities,
It 1s the total ex d · tu '
8 N pen l re made on new capital assets in a period. from futures to currency swaps), Business (The money put into starting and running
. et Investment: Net Investment is Gross l . . a business is an investment. Bill Gates, founder of Microsoft and one of the world's
(Depreciation) during a per· d f ti nvestment less (minus) Capital Consumption richest men, is a prime example.), Ren/ Estate Houses, apartments or other dwellings
It to o me, usually a year.
must be noted that a part of the investm . . that you buy to rent out or repair and resell are investments.), Precio11s Objects (Gold,
asset or for replacing a worn-out ·t l ent is meant for depreciation of the cap1t~ Da Vinci paintings and a signed LeBron James jersey).
net investment. capt a asset. Hence it must be deducted to arriveal
 ~~
...., AN,lLy5IS AND PORTFOLIO MAN AG •

~
st
,.;.] SECUR••• E~! INTRODUCTION TO INVESTMENT
. . vestments nlloW you to be the bank. The ~l & without delay. Investment sa fely is gauged through the re putation _e ablish ed
6 Lending Jnvest:JJlcnts: Lend111g in t n..,d return less as a resul.t. A b0Ydtcnc1 I the borrower of fund s. A highly re pu ted and successful ~orpo r~tc e nhty assu«s_ t
· tc Jo;ver ns. k· tI,an o,vnership
· investn1en s • •· . d h"l n i
ount 0 , er a certain peno , w I e during th " •~ r1 investors of their initial capital. For example, investmen t IS consid ered safe e_s pecially
by a eompany will pay a set am double or triple in vnlue, paying far more e "~1 when it is made in securities issued by the go vernm ent of a d eveloped na11on,
period the stock of a eompany c';{' b krupt in which case bond holder th,, 4. Tax Benefit/ Concessions: Tax planning is very impo rtant function in . in_v es tment
bond - or it can lose heavily an k~lo I;;, ofte~ gets nothing. Examples ,5 Uss,11
O~I)' management. An investor wants to protect present income from taxes. ThiS IS a vahd
still get their money and the stoc ,o • re : \ consideration no matter what his income lev e l is .
investments that are as good 5, Stability of Income: An investor must conside r s tability of return- lf the s tability of
savings Account, Bonds. ,,
7. Cash Equivalent Investments: These are_ . cash. Examples are: M as '"I • return is stressed, capital growth and diversification will be restricted.
which means they're easy to con,ert back ,nto oney Mark' 6, Growth of Capital: Capital growth is an important element in th e inv es tment
Funds- .. be classified on vanous
. ground • management. Investor constantly seeks 'growth stock'. The ideal 'grow th s tock' is the
.
8, Others: Th• investments
. d •or secunbes
· t can .
of .,.,atunty .
income payments ind·s .such a1i1\o, right issue in the right industry bought at the right tiJne.
issuing au~,onty, enonunabon, enn '" ' ' IV1du 7, Concealability: To be safe from social disorders, government confiscation, or unacceptable
composite degree of liquidity etc. levels of taxation, property must be concealable and leave no record of income received
from its use or sale. Gold and precious stones have long been es teemed for these
CHARACTERISTICS OF INVESTMENT purposes because they combine high value with small bulk and are readily transferable.
8, Legality: All investments should be approved by Jaw. Law relating to minors, estates,
The following are the main characteristics of investments:
0 trusts, shares and insurance should be studied. IDegal serurities w ill bring out many
1. Return: All investments are characterized by the expectation Characteristics problems from the investor. One way of being free frcm care is to invest in securities
of a return. In fact, investments are made with the primary Investment: 1
like unit trust of India or Life Insurance Corporation. The management of securities
objective of deriving a return- The return may be received in • Return. IS the~ left to the_ c~re of_the trust th~t di".ersifies the investments acca rding to safety,
the form of yield plus capital appreciation. The difference • Risk. stability and liquidity with the cons1derabon of their investment policy. The identity
between the sale price & the purchase price is capital • Safety of l~gal securilles and investment in such serurities will also help the investor in
appreciation. The dividend or interest received from the • Tax Ibenefit.
investment is the yield. Different types of investmt:nts promise st b"Ith avoiding many problems.
· ~!~~~~,::;tanrble securities have many times lost their value, due to price level
~~=s~~
different rates of return. The return from an investment • a ity of income
depends upon the nature of investment, the maturity period • Grow of capital 9
their w:alth 1_awt or_bsloaal collapse. _Some investors prefer to keep a part of
Legality.
& • hoS of other factors. The purpose for which the investment •• Concealability m angt e properties like building, machin d l d ·
t
1s pu o use inf) uences, to a large extent, the expectation of
returnt tof the investors. Investment in high growth potential • Tangibility. 0
owever, be considered that tan 'ble
hdirect satisfaction of possessiong,or ;,:';fe;;;. _ _ ery an an - It 15,
does not yield an mcome apart from the

sectors w~uld certainly increase such expectations. The longer • Purchasing P ••r •
10. comm,tment
Purchasing Power
of 1 Y·. 5 ince
Stabil't
01rrent funds
an investment
' th. th b' . .
1 1 .
near Y a ' a y s m olves the
the matunty penod, the longer is the duration for which the stability.
~nvestor parts with the value of the investment. Hence, the __•_L_iq_u_id_i_ty_.___ ,1
funds, the purchasing power ~';"th i::
o Jective of receiving greater amounts of future
For maintaining purchasing pow:, st~:~-~d should be considered by the investor.
m_vestc,~ would expect a higher return from such investments. (1) the degree of price level infl ti th i , investors should carefully study:
a on ey expect
2. Risk: Risk is inherent
in repayment any investmentf ·. The nsk
of capitalin non- . may relate to loss of capital, deli
investments iike gove..,;ment ~;rm:t o& ~terest, or variability of returns. While,,. (2) the possibilities
. . . . th e investment
of gain and 1oss m . , ail bl
the hm,tabons imposed b av a e to them,
more risky. The risk of inves:O~t ~s ' ank depos,ts are almost risk less, others " (3)
11. Liquidity: An investrn t . y ~erso~al and family considerations.
• The !onger the matur1·ty . d epends on the following factors:- & wit . h out loss of time
en ,iswhich
sai'd t1s easily sal ~abl e, or marketable without loss of m
• Th 1 per10 ' the longer 1s
. th e nsk
. d · o possess li ·d· 5 . oney
e ower the credit worthiness of th b . · epos1ts, bank depos•·ts, p ·O • d ep0S1ts
. NSC NSS qm ity. ome investment,..·' like company
• The risk varies with the , e orrower, the higher is the risk. ~strument like preference shares & deb...;tur etc, are not marketable. Some investment
like
J'k dequity shares carry nature riskinvestment. In vestments m
higher of . ownership securi~. ~o:ru.:~;ases & hence their liquidity is ne 1tb';;: tarketable, but there are no buyers
1
e ebentures and bonds. compared to investments in debt instrunie~ . anges are easily marketable ~ u S:. th qmty shares of companies listed on
An investor generally prefers Ii uidi g - e stock exchanges.
3 · Safety:
I f The safety of an investment
· . . . ~ fo~ hisofinvestment,
reh1rn with minimum risk or qmm1m1zation safety
. . of. hisoffund
risk & max1m1zation s, a good
oss o moneyEvery . · Safety 1s
or time . another
impliesfeatu
the certa·~ty of return of capital witho~
~
investments. return.
investor ex pects to get backres
hi which. an investors
• desire for
5 capital on maturity without I~
I ~ SECU
RITY ANALYSIS AND PORTFOLIO MANI\
G~t.,
~ t~
SCOPE OF INVESTMENT . .
. h · t that clears tI,e scope of investment. .
Following are t e pom rt , securities c1t rcc1sonable prices.
. b , a portfolio of qua 1 )
1. An investor U) s . If . 111 returns that are average for th e i
2 An investor eit I,er con,en .. ts h1mse w1rities with superior. r turns. nvest'\
· , the best value CCLI
type, or 1ocus on . ·r s with a strong track record.
f I1. 15 . de up of ecun 1e
3. The port o 0 ma . ..,sonable projections of profits that are n t
• ·1=. I . rchase wit1l re.. o o
4. He can 1ust1,J' 11s pu f sud, ventures. ~I
·th tl e historical returns 0
tune w1 , . . because the price has faJlen so the yield has risen
5. An investor buys ~ecunbes tive investments. He has substantial reason to t0.i
point that is superior to altema I b st 6eJ1~
tl1 at the investment won't complete Y go u · ,. .
6. An investor buys because he no tices the stock is traamg at a pnce below funda lnent
valuations. I · th ·
.
7. An mvestor sells because O f deteriorating fundarnenta
• s m e investment.
. tl,ere only for their converuence, he may choose to sel) if
8. mvestment
~arket quo,tatiksons
oo abare surdly expensive' or to buy when he sees the opposite, but o}u
1
than that investor ignores volatility. . .
9. An investor keeps a close watching on those who m~age their. mveHstments, look& ,
for pm d ence, Iogi·cal. capital ailocation
. and conservative
. d' ~xpansion.
h t · e would
h rat
not invest witl, a high profile celebnty managmg 1rector t a promises uge gr
0111
wit11 a series of rapid takeovers.
1o. Tax efficiencv is important, and an investor takes after - tax returns into accoll!
when weighing up various options.

OBJECTIVES OF INVESTMENT
A. Primary objectives
Following are the various main objectives of the investment:
1. Maximizing the returns: The basic objective for making investment for all investor
is to earn more and more return. Profit can be realized in either or both of the way
i.e. capital appreciation and yield. The investor wants maximization of regular retun
or capital appreciation also.
2. Safety: Wlul~ no investment option is completely safe, there are products that an
preferre.d by ~vestors who are risk averse. Some individuals invest with an objectin
of ~eepmg their money safe, irrespective of the rate of return they receive on thci
capital. Such near-safe products · 1 d fix d d · ·
bonds, etc. · me u e e eposits, savmgs accounts, governmei

3. Growth: While safety is an important ob'ective f . . • f ther

invest to receive capital g . • hich J or many investors, a ma1onty o
ams, w . th means that theY wan t th e mveste
grow. There are several options · d amo unt h
stocks, mutual funds, gold, prop~~t, eco%arket. t~at offer this benefit. These inclu~1 1

capital gains attract taxes, the perce~;a e rod~hes, et.c. It is important to note th;
years of investment. g 0 which vanes according to the number t
 . uu• . rs lf\l:1\: ,1 "' n v 1 "-lllg Pop I ·•111 b -,~.
tcd in cnt yr:1 . I d f LI .:tli ' '
tic in'' · f f\:tird11 en urcd t 1 n c or balanc d 0 n. p "ti~
)II I ,her (1 'I)' hn\lC e in t!J p 911 INTRODUCTION TO INVESTMENT
" fl,;11 cr nt1n nd I I\ cv1 -r □tion is one of crucial factor , . 'v~Sl"' l:t "Ii\
;i ~ • "n n .0 n: ,a, ' . , . s in ·111:1 1\ ~i1
lsion in a p rson s savings l'h any
1
Some or lh in lrum nls nv. ilablc nr orporatc tock, provident fund, li fe insurance,
f'' r lifl' l RJICS Of 1'J •at• f compu • f . · er ~!J
l, 1
· fixed <lepo ·its ct .
Jnc~Jjng dcfllent I in the form o mvestments Wh ·e <ltQ vl.ltit~
2 1 h
· · 1rvcJuCC· on I 1· in ttr co~•n 1eductions in personal incorne p c h 1:1 1 ilti()~ 1' FACTORS INFLUENCING I VEST
II~ 1,·i~ - ou\\e1
. ti r IJ"
b ' ff1::ring tin unit trust certificates; U.nit ·1· or
f . -1.01cn d 1 b
~)(.:i! •nk~d ·•1p1
iti b \
\
E T
do""' i N•I ,n, L • certificates, eve opment onds in ~. ~ i lnvestment refers to investment of physica l a s , financial as ts and marketable assets.
. tJ~ Jcaue ti n□l ~:wrng , Post Off s1.ir~~ "\~1 Legal safeguards, stable currency, existence of finan cial instiluti ns to encourage savings and
in . lill , n::i •~~ c~
lif-r i)15tt r, " etc. · anoth ~tri 1 forms of business organization factors are influcnc •d to investo r lo invest money in different
.• , nll f . terest rates 1s er aspect wh·1 ~~
dq • ' 11 - 1 vcl o in b ch i investment avenues.
t RJICS: n,r e Interest rates vary etween one inves s nee~
lnteJt'd ·nn stmcnt plan. ·sky and safe investment, they rn lnient a"ssij~ Factors influencing investment
1
- un ma i , vaf) between ffered n .
by the investments. Tl1ese aspectay al so cliff
1
,,q <1n( - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - .
:~rent benefit schem_es oany amount. A high rate of interest s must be ~r d1,
Legat
1..~f re actually aUocatrnlgt for investment. The investor has to i ...rnlay not bC()~idt Safeguard
v . a the out e f . . .., ic Ude . e lh
k fuv unn., . tments. Stability o interest 1s as important •n his er.
-• ,..;..,d- of mves
\ t:r,u tu1 •
as teee,v . . Pom ·,,
1
- Of · terest. nga1
ra m . h become a continuous problem since the '
• . Inflation as . 1ast ct
t Ln.flation... 0 rices, several problems a~e assoaated coupled With a ec~de. In Forms of Business Factors Stab le
) JIS of nsmfo p funds are invested, erosion of the resource will h falhng s1,.~ Organisation influencing Cu rrency
0 [ lhino Be ore · . ch . f . ave to .._ "11\~ Investment
. ored· . der to make the nght 01ce o investments. The ;,.., ~cart
rol15lde m or . hi h f . ._. iVestor . eit
which cives him a g rate o return m the form f . 'N1l1 1,,.
arch an ou tl et o . . o tnte ··n
- d due to inflation. He will also 11ave to Judge wheth rest to~.
anv ecrease . . . . er the . "'
. rill be continuous or there 1s a likelihood of irregularity C tnter Existence of
re tum " . 1 hi . . ouplect . 111 Financial
ratr of interest, he will have tdo finfd anfou~ et_ wal ch _will ensure safety of \v p1fu h Institutions to
Besides hioh rate of interest an sa ety o prmap an investor also ha t nnti! Encourage savings
o . d s o ahv
in mind the taxation angle. The interest earne through investm ay1\
unduly increase his taxation · bur den. Oh t erw1se, · th e benefit derived froent .shoulu
. • •
1

m mtere 1 Following are the various factors that influence the investment:
be compensate db y an mcrease m taxation.
1. Legal safeguards
5. lncome: Another reason why investment decisions have assumed import .
2. Stable currency
general increase in employment opportunities in India. After independen:~:~
states _of de~elopment in ~e country a number of new organisations and se~,, 3. Existence of financial institutions to encourage savings
cam~ into being. The banking recruitment services, the Indian adrni.r1i<;trative seri. 4. Form of business organisation
public ~~r enterprises, tourism, hotels, education are some examples. The employm 1. Legal Safeguards: A stable government bring an adequate legal sa feguard tha\
opportunities ga·,_e rise to both male and female working force. Mo're incorn;s 1 encourages accumulation of savings and investments. Investors will be \ illing tc
more a enues of mvestme t h ' l d .. . .
to d. n a\ e e to the ability and w1llmgness of workingf invest their funds. They want the assurance and protection of their property right:
save an invest their funds.
from the government. 1n India, the in es tor hm e the dual advantage:
6. lm,estment Channels· The .
th
economic acti\'ity h · d grow _and development of the country leading to gri: • Free enterprise
1
Apart from puttin as _ed to t~e introduction of a vast array of investment ou~ • Government control
h g as, e savings · • . ,;
ave the choice of . in savmg banks where interest is low, mie-, India is a mixed economy. It encourages the combination of the public sector whid
u,.e most suitable cha vanety of instru ments. The question to reason out 1s· whi&
I Which med' is controlled by the government and private ector leit free to operate with _a hope t
return) Th • anne?
. · e tn\ es tor in hi h .
·11 •
Ia WI gwe a balanced arnwth an s a ·
d t bilih
achieve the benefits of both sociali tic and capitalist forms of government without an
mix behveen high rate fs c o1ce of investment will have to tryo and achieve a pr~ disadvantages.
o return and t • 1·· 1 of l'1
s iiuihty of return to reap the bene 1 5
'1:w
~ swept by waves of ophmi m and pc <>m. •. m wh ,ch
SECURITY ANALYSIS AND PORTFOUo MANA
. Gl:f1t~
m lo •llemate. 11,o psy h I NVESTMENT I j 1.25 I
approach has been described vivid ly o the 'cas tle in-their' theory by Burton Cc olog;c CNTRODUCTION TO I . . the s tate of the market psych~ ogy. ·a· are
1
Those who subscribe to lhc p yd1 log1c:i- l opproa cl or u1e, castles-in-the- .•,fvf aIk;(lill1 • Do te ch mca
· I analysis lo assess . lyses to d e terrrune
. w hich secun es
1
.
generally use some form o f tccl1n1c.1l . concerned with •llr th eoh..
nno Iys1.s w I1 .c h is Combine fun d amen ta I and .lcchmcad1 ana o rth di s pos .ing o f· t'
1
·mtemal macket data, wHh a v;ew lo dove Iopmg · tra di ng rues
I ••med
· a Sh1d y 01
at P<ofit wo,th buymg,• wo, th h o ldin g, an w ive zeal in 'beating
· the marke -
The basic pn,OU e of technical onalysi i !hat then, an, certain pei-sistent ""d ·n,•kiog R pect ma,ket prices and do n ot show excess f tu often necessirates the
patterns
I of price movements, which ca n be discerned by analysing market data ~eC\Jtr-; 11 ~ • es h f t that the search for a higher level re rn
O
ana Iysts u e a variety of tool like bar cl1art, pomt. an d fi1gure chart movi . • ech· n1c;i1
. r, • Accept .t e acf a hi gher level o f n.s k.
• bneadth of market analysis, etc.
ana ys,s, ' ng av e,,g, assu mpti on o I: TIO
3. AcadeOUc Approach, Om the last five decades o, so, the academic cornrn . SHORT ANSWER QU S
s~died various aspects of the capital market, particularly in the advanced Unity hils
with the help of fairly sophisticated methods of investigation. While there countries,
unresolved is ues and controversies stemming from studies pointing - ar~ many 1 .
Mention the two primary o b"ectives
J of •investment
d. ·
irections, there appea rs to be substantial support for the following letn d1ffere111 · . t· of an investment programme.
2 Outline the basic charactens ,cs .
~arkets _are rea onably efficient in reacting quickly and rationally to t~ets. Stock
3.· Distinguish between .rnves t·rng and speculation.
.
mformati~n. Hence, stock pi-ices reflect intrinsic value fairly well. Put d ~f flow of
4. Distinguish between investment and gambling.
M~ket pnce Intrinsic ~alue ~tock price behaviour corresponds to a rand~ ferently:
=,

Titis ~eans that successive pnce changes are independent. As a result rn walk. 5. What is the need of investment?
behav_ wur c~ot be used to predict future price behaviour. In the ca it pa st Price 6. What is capital appreciation?
15 1
lhere a pos tive relationship between risk and return. More specificall ~ al rnarket, 7. Discuss the types of investment?
retum from a security is linearly related to its systematic risk. Stock ~c ~
expected
~o;responds to a random walk. This means that successive price ~ ehaviour LONG ANSWER QUESTIO
bm hep~dent. As a result, past price behaviour cannot be used to predictcfuanges are
e aVJour In the ca ·ta1 k th · lure p ·
return M. . p1 mar .et, ere is a positive relationship between . nee 1. Investment and speculation are somewhat d .ff
I eren t a nd yet similar in certain respect.
syste,,;atic"~s~ecificaJ]y, the expected return from a securily is linearly relat:'.:\o~ Explain . h
4. Eclectic Approach• Th cJ cti. 2. As an investment consultant, what features would you ~uggest to be incl uded in t e
• · e e e c approach draws on all th thr - investment bunch of a client? Explain these features bnefly -
discussed above. The basic premises of the eclectic appro:ch : di/f?eunt approaches 3. What factors might an individual take into account in determining his or her investment
(a) Fundamental anal . . . as o ows: policy?
Hteve,, since the~!:."U::~~':'.,;::::i;:;s~~andar'!'; and benchmarks. 4. Distinguish between Investing and Speculating. Is it Possible to incorporate Investment
and Speculation within the same security? Explain with Examples.
re Janee on fundamental analysi·s should be . ament analysis, exclusive
refinement and complexity in fundamental ~~01d_ed. Equally important, excessive s. What is Gambling? Differentiate an investor from speculator.
(b) Technical analysis is useful . b . ys1s must be viewed with caution. 6. What do you mean by investment. Discuss the reason for investment and how it is
an~ the relative strengths of: ~~ac:Uy gaugmg the prevailing mood of investors different from gambling?

~: ~.::s:;:s~:::ry
regarded
unp«dic/l,(y :~e!~:~li::s~~;tev~r,
lOlportant, complicated techrti aJ
sma,
the mOod
chnical md1cators can
7. What is investment ? Explain the various objectives of investment?
8. Why do people invest? Explain the characteristics and objectives of investment based
on types of investors?
U
a;:~.~~:s.;~;;,"c;,": 11,:::t:~~I
as suspect because they oft
usefulness.
c systems should ordinarily be
n~::;~ of imagination rather
indicates tATL" . • uggests, nor as speculati
. ••nue it is charact . d
s weJJ ordered as the
ve as the ps ch 1 .
to react reasonably eff . ense by some inefficiencie d _Y o ogi~al approach •••
despite many instan iciently and rationally to th fl s an imperfections, it seems
ces of mis . d e ow of inf .
correlation betw~ ~ . k price securities th ormation. Likewise
~=, n s and , ere appea t b ,
approach are as foUows: return. The operational im l~s ? e a fairly strong
• Conduct fund amental analysis P Cations of the eclectic
to establish certain
value ,anchors.
L2.2J
r-----,r=-=-=-=-=-=-=-=-~::;---s_e_c_u__R.=ITY~~A~N~A:L~Y~S=I=S~A:N:D~P:O:R~T=FO:LI:o~M~A~N
Investor's Goal
AG~,-,~fi't

INVESTMENT MANAGEMENT PROCESS

.. framework of Investment Policy
Table 21·
Jnvesfor Goals The specific goa ls of the particular portfolfo and the purpose of. the
investment policy sta tement (JPS) a rc red uced to black and white.
Investment Security Investment Specific qualita tiv e restrict ions or constraints on appropriate
Objectives Portfolio
Analysis Construction Portfolio Preferences investment choices should be clearly s la ted to proceed to the next
and Policy Portfolio
(Technical and (Selectivity, Revision step.
Fundamental Evaluation
Timing and
analysis) Diversification) Portfolio Assets The current rupee value of investa ble assets, as well as assu n:iptions
regarding future additions to and reductions from the portfolio over
the ensuing (e.g., 3, 5, and 10) P years should be laid down.
Time Horizon How long can the portfolio are committed to a specific investme.'1t
policy? This question should be answered.
Risk and Return Objectives The investment returns necessary to mee t portfolio goals anc..l the
Return
and Expectations overall return objecti ve for invested assets (e.g., 3% over consumer
price index) are to be stated.
both risk and return The inv tm t li h ul
which could infI . . es en po cy s o d also state other important constrain Risk ToJerance The investor's tolerance for risk and volatility of returns should be
uence the investment man t c · ·s mentioned.
needs for the investor projected . tmag~en: onstrams can include any liquidity
and preferences of inve~tor. The inv::ente;;t . o~on, as ~ell as ?ther ~que needs Appropriate Asset allocation targets based on risk tolerances, correlation, time
Projected time horizo b h onzon IS the penod of time for investments. Asset Classes horizon, and other constraints are the areas falling under the category.
n may e s art, long or even indefinite. This indicates the asse t classes that should be considered for
The formulation of investment policy . . investment and how much of the portfolio should be invested in
reqmres:-
(a) Determination of investibJe wealth. each asset class. After making thorough preparation of the steps we
(b) Determination of portfolio objectives. have seen, the assets to be inducted in the portfolio have to be
scrutinised through the market, industry and company analysis.
(c) Identification of potential investment assets.
2. Analysis and Evaluation of Investment Vehicles: When the investment policy is set
{d) Consideration of attributes of investment assets. up, investor's objectives defined and the potential categories of financial assets for
{e) Allocation of wealth to asset categories. inclusion in the investment portfolio identified, the available investment types can be
Setting of investment ob1"ectives t . di "d al . analyzed. This step involves examining several relevant types of investment vehicles
. current and future fin
th etr ·al orb"m • Vl u investors is based on the assessment of and the individual vehicles inside these groups. For example, if the common stock was
de pen d s on w h at sum todayana o 1ectives. The required rate of return for investment identified as investment vehicle relevant for investor, the analysis will be concentrated
can b . d
at the end 0 f th . e investe and how much investor needs to have to the common stock as an investment. The one purpose of such analysis and evaluation
e investment horizon w· hin . . is to identify those investment vehicles that currently appear to be mispriced. There
inves tments . . IS g to earn higher mcome on his I her
"f ·t . I invfesto~ must assess the level of risk he /she should take and to dea·d are many different approaches how to make such analysis. Most frequently two forms
1. 1 ts re evant or him or not Th • . . e of analysis are used:
investor. This stage of . . e mvestment pol1cy can mclude the tax status of the
investment management co cl d "th th . .. . (a) Technical analysis.
the potential categories of finan .al , . n u es w1 e identification of
a assets 1or J · · th • (b) Fundamental analysis.
The identification of the potential t . _ me uswn m e investment portfolio.
amount of investable funds and . ca egones is based on the investment objectives Technical_ analysis involves the analysis of market prices in an attempt to predict
A s an example, for the investo, mvestment horizon and t . ,
"th I ax status of the mvestor. future pnce movements for the particular financial asset traded on the market. This
. r w1 ow tolerance of . k
appropnate type of investment. ns common stock will be not analysis examines the trends of his torical prices and is based on the assumption that
In addition to communic h. h . these trends or patterns repeat themselves in the future.
· a ng t e investor' J
investment policy statement normally will inc:u ong-term_ goals and objectives, the Fundamental analysis in its simplest form is focused on the evaluation of intrinsic
de the pomts as shown in Table 2.1. value ?f the financial asset. This valuation is based on the assumption that intrinsic
value 1s the present value of future flows from particular investment. By comparison
 ~ SECURITY ANALYSIS AND PDRTFDLJD '1ANAG
2. Never invesl in somcll1ing one docs no1 under 1., nd: I' 1 r Lyn h of Pid lily ~,,
of lhc mos1 successfu l fund manag rs vcr, and h . .,id he 11 v •r lou hcd <>nyr~' •, 2. 7
could nol describe on one she •I of p,, p •r wi lh , crnyon. nc will be on, '''i IN VESTMENT MANAGEMENT PROCESS Vt' ,•n ra t •d mor. tha n 50
himself rf he lose money on som lhing ,,n J annol xplaio why. So, s lick 1,/:2' , .
on unrenli.. li c os'J umptHJnn. . I.ll!, l.in ,_., l'1ln( of, ,lod:
1-c,r •nt y •aha g
r!,. Howev •r, i·1 d --;n't
'- ·tsm ea n
should know and always do hi arch. h,11
P,., rent returns d unng · th . ,,urcn' l bu ll run1- ·o d r ,,( retu rn from the ·s tock marr, · (
" ~one !ihould always •xpc t th • .,•·amc r.m
that . . . t for th • long term, a · or
3. Take informed dcds ion; Prop r r ar h hould alw,,ys be undcrlak n before ·
lhc mo~cy. But lhal is rar ly don . In v lor. n rally go by lh • name of a •:: "• 13 I( markets arc volatile, be paticn : • t Wh •n m v ~ tom mvc.,
l I gy Pem •mbcr that, his tonca . lly.' a m a rke t
or lhc industry U, y b long lo. Thi i ·, how vcr, nol lh righl way of PUiiin,
mon ey into th e mark I. 11 ri,
~ . r lirem •nl, slick w;1h the;, ;nveslm •nt s , a c . • .
slowdown is often fo llowed by recovery. . A impo rtant event ha ppening
14. Monitor rigorously: We are ,vm? I' · , in a gon ou r fina ncial ma rk •Is. Hence ?n .• nSo
lobal village. ny c •ds ne
to
4, Do nol pul all egg in one bas kcl; To minimiz lhc risks and boo.si polcn lial re,
. art o f th , world has an impact . th d esired cha nges rn it. , o
invcslor shou ld invcs1 in differe nt produ I lyp •s, gcogmphicol reg ions, osser /
and indus try ectors. a, ~::.,~;'ni/y monao, their porlfoHo and keep •ff;c;;n:c
can't , evicw his portfoHo due -'~
mus t rcvi •w their portfolio al leas t once.a ~c·ashould take: the help of a good (rna ncia
S. lnvcsl only s urplus fund : If investor wan1s lo ,.,kc ri k in o vololilc marker time cons traint or lack of knowledge, the ~ th t If h . can't even d o tha t, lhen stock
U1cn see w }1el/icr h hos surplus funds which h con afford lo lose. II is no1 nccc";
•a planner or someone who is ca pable ofh doing ./
inves ting is not for him . Be tt er put t e mon c
in
safe or k-ss- ris ky in'itrumcn ls.
1/ial h wrll lose money in lhe pres nl sc nario. Hi invcs lmcnls can give him ho
gain loo in lhc monlhs lo com . Bui no one can be hundred percent sure. n,
SHORT ANSWER QUESTIO
swhy
urpluhe will s.
s fund have lo lake risk. No n cd lo , ay lhol invcsl only if one arc flush •0·
1. Explain the process Of Investment undertaken by the investor.
6. Inves t rcgula,ly: By allowing invcslor lo invesl a specific amounl at specific inlero,
2. What are the golden rules of investm ent?
depending on whal makes sen e lo him, periodic inveslmenls ca n make advan1og,
the market and by inves ting oft en throughout the year, one can make the most
m arket highs and avoid being hit loo hard by the lows. :_;L:;O~N~G~A:-::N~S;:::;Wm:'ERii'rQiiuiiE~S:TTTiI00NNSS-
7. Dividend reinves tment is vital: Pa tient portfolio builders should focus on firm s w;
"No Investment Decisions are m~de h tvarious
calculating
stepsrisinvolv
k." Doed you ag r~e? As a~
a s trong compe titi ve adva ntage and a good reason why clients want to pay for th, 1 • Investment Manager of a firm, discusswitt hou
e in the ,nvestmen
goods or ervic s. Thi confers the pricing power that enables companies to genera decision making process.
cash and Fay the divid end that really get th e savings to tot up over time. There a 2. Explain the various stages of Investment.
m any fund s dedicated to such firms, too.
8. Focus on value, not price: One wou ld not enter a resta urant and buy a pizza regardh-
of whether it cost ~ ~
300, i 400, 500 or more. He would use his judgement to dccic •••
what is good value, and th e sa me di scipline mus t apply to financial invcstmcn1
Se vera l s imple metrics, in the context of growth, risk and quality, will help him 1
d ecide w hc- th er a valuation is cheap, expensive or about right.
9. Invest for the long term : Even inves tment experts do not always succeed in predictin
market movements and the bes t tim e to buy. l3y investing today, one should wide
th eir investment horizon and inves t for longer period that will increase the chance r
growth.

10. Create a broad portfolio: Diversification of portfolio across asset classes and instrumen/
is the key factor to earn optimum returns on investments with minimum risk. Levt
of diversifica tion depends on each investor's risk taking capacity.
11. Go for invcslmcnls lhat offer lax benefits: Besides doing high returnable investmen~
one s hould invest in products that offer ta x benefits, s uch as those that general
rnp ital ga ins and dividend s rather th an in products that generate interes t income.
12. Hav_c realistic expectations: There's nothing wrong with hoping for the 'best' fro,
th e m w stm ent , but one could be heading for trouble if his financial goals arc ba~
 UES/A E

INTRODUCTION
"To invest successfully over a lifetime one does not req_uire a stra_tospheric IQ, unusu~I
business insights or seaside information. What's needed 1s a sound •~tellectual framewo. ~
for making a decision and the ability to keep emotions from corroding that frame work
- Warren Buffet

"The more you sweat in peace time; the less you ble~d Inv est m ent means the
in the war" This famous quote is applicable for all aspects m con version of money into
the life of an individual. If an individual does not in vest his claims on money and use of
money and think that there will be no need of money in his fu nds for product ive and
contended life, then one day suddenly he will be in a pathetic income earning assets.
situation where he needs money emergently. Hence, inves ting
is an important activity to survive in the dynamic and competitive world.
Now-a-days a wide range of investment opportunities are available to the mvesto r. The e
are primarily bank deposits, corporate deposits, bonds, units of mutu al funds, instrnmen ls
under National Savmgs Schemes, pension plans, · insura nce policies, equity sha res e tc. All
these instruments compete with each other for the a ttraction of investors. Each instrume nt
has its own return, risk, liquidi ty and safety profile. The profiles of households differ dependmg
upon the income-savmg ratio, age of the household's head, number of depend ent e tc. The
investors tend to match their needs w ith the fea tures of the mstrument ava ilable for mvestmen t.
They do have varying degrees of preferences for savings vehicles. Every investor tends to keep
some cash balance and maintain a certam amount in the form of bank deposit to mee t his/
her transaction and precautionary need s. In the case of sa laried people, contrib utions to
Employees Provident Fund become compulsory. Life Insurance is widely preferred to meet
situations arising out of untimely dea ths of the bread ea rner. Besides these needs, the surplus
income (savings) awaits investm ent in alternati ve fi nanci al a se ts. In vestor ha ve to take
decisions relating to their mvestment in competing assets/ avenues.
 AN ALYSIS AND PORTFOUO MAN~,., - -
SECURITY -a~t.t~I

[TI] TMENT ~ INVESTMENT AVENUES/ALTERNATIVES . . 3.3

MEANING Of INVES . . . h resent with the hope of deriv· b t d .th the help of followmg d1agrnm .
Further classification of lnvestmen_t can e prescn e w, h.ch may be classified as shown
In stment mvo . Ives making of a· samfice m t
d facetse PTh e two most important fe h'.ng
a,ure fti[l1,us ' an investor
·b· 3 1 has a wide array of inves tment avenu es, w J
vc t has many mearungs an ' . ·w an now give a simple s Ofln the ExhJ it • ·
1
efits Investmen .. d future benefit. e c Yet a b
1
.benestmen • d fi
a re current sacnfice an I·nvestmen t as "postponed consumption" . IA,h
•v e t
1 Exhibit 3.1 Investment Avenues
mv . . o f investment. We'fi cant ke ne
definition f whereas th e ben.I
place in th e present and is certain INVESTMENTI ALTERNATIVES

Po' t·p.onefuture
consumption, sacn ce aTherefore,
and are uncertain. -es . k an d expected return rom the investrn •nt~l
ns .----------.!f:.._
t ______7 l
occur m ·
the hvo key deterrmnan
ts of investment process.
uisition of some assets. It also n,
♦
(A)tnveslment ;,
(BJ ln ,eSlment ;n
Phys;ca!Assets
As refereed to earlier investment refers to ~c~se of funds for productive •nd ••ns flnanc;atAssets 4
conversion of money into claims on money afnfunds for productive purposes, for 'nco ..----..l!L-___________7i r
I e it means the use o
earning asse~s. nI essenc ' . . f
. f
1·taJ or capital gam, or or
fu sectJ
rther Prod ~.
+ d ♦
·
some objectives 1·ke mco
· me• appreciation
. . o cap rin profits. ,,
lJN
Securitized
lnveSlment
Non- Securitize
Investment Gol
d s ·1
i
, ver Real Esta te
o ;a mond
1
of goods and services with the obJectives of secu g -__,]•~----,-------,,

INVESTMENT ACTIVITY ~ i •
(ACQUISITION OF ASSETS) 1. FINANCIAL ASSETS Fixed Equity Money Market
income In struments
♦
SAVER i + i i i i i i +
CASH Preference Bonds Government Trade Banker's Short dated Commerc ial Zero
HOUSE, LAND Securities Bills Acceptance Government Papers
shares Coupon
BECOMES BUILDING, FLATS Securities Bonds
BANK DEPOSITS . - - - - - - - - - -7 BY ACOU IA ING
P.F., UC SCHEMES
INVESTOR
L-----.r----'THEASSETS
GOLD, SILVER, AMD i
Bank
i i
OTHER METALS Post Office Small Saving Mutual Funds Othe rs/LIC
Depos its Sc hem es Certificates
PENSION SCHEMES 3. MARKETABLE ASSETS
P.0.CERTIFICATES CONSUMER
(A) Investment in Financial Assets
AND DEPOSITS SHARES, BONDS, GOVT. DURABLES . Investment in financial asse ts consis ts of:
SECURITIES, ETC . 1. Securitized Investment
M.F. SCHEMES, 2. Non-Securitized Investment
UTI UNITS ETC
1. Securitized Investment
The term 'securities' is used in the broades t sense, consisting of those papers th a t are
quoted and are transferable. Securitized inves tment are divid ed into three categories:
STOCK AND CAPITAL MARKETS (a) Fixed Income Securities

✓
Fixed income securities contains a promise to p ay a s tated rate of inte res t for a d efined
period and then to repay the principal at a given dale of maturity.
NEW ISSUES Therefore, their primary role in an inves tment portfolio is to provide continuity of
STOCK MARKET income tmder aJI reasonably conceivable conditions.
~I=N~V-=~---:------------~~~-----------
ESTMENT ALTERNATIVES/INVESTMENT AVENUES
Thus, the fixed income secu rities include those securitie on w hich ra te of return are
fixed. Fixed income securities include,
Two basic investment avenues are;
(A) Irwestment in Financial Assets (i) Preference Shares
(8) Investment in Physical Assets Preference shares are a hybrid security. They have ome features of bonds and some of
equity shares. Preference dividends are specified like bonds. This has to be d one beca use they
 /B SECURITY ANALYSIS AND PORTFOLIO MA NAG

rank _prior to equity s hare for dividends. Preference s hares .1rc

less nsky tha n equity because tJ1eir dividends are spedficd ,1 nd
Pre~erence shares are
carry Prefer,}~c. JNVESTME
which
~,.,tI
.. NT AVENUES/ALTERNATIVES
,W' S may b red c m d
.
- 3.5]
[

ft r n fi x d p e ri o d o r e arli _rat
11h c r a bl re fe re n ce s hares pro vid e
80 51
a ll arrears mus t paid before equity holde rs get dividends. They dri_g ~;!n~s a~o athfie Payrrie: ti.' down in Sccfti ohn ~p:ny- Thus, Section 80(1), R ·d_c e md ab . p A r ticl es, iss u e pre fe re nce
I nm ,v ixed r ·•t ti1 e option o l c co , ·f so a uthon s y J
limited by shares may, 1
t
are, nowever, more risky than bonds because the alter c, as to repayment ate ,' t . f th compa n y.
• . • of c t 0
that a compa ny d t the opt ion o c II t
pnon 1y in payment and liquidation. Types: ap,4 sh:res which are to be redceme a . . rovides th a t a co mpa n y sh a ~o
th
In simple words, Preference shares a rc those whid 1 carry 1. Cumulative. (viii) Irredeemable Preferencew~~;r:s;e !~t~he~nii~~~~~ble o r r ed e m a bl e a fte r e ex piry
preferential rights as to the payment of di vidend at a fixed rilte 2. Non-cumulative. issue preference sha res d f its issue.
O
and as to repayment of capital. 3. Participating . of a period of 20 years from th e ate h right o f a fix d d ivid en d even
T f p f f h t 1·mportant 4. Non-particip t· Shares· These s h a res carry t e
ypes o re erence Shares: Some o I e mos ' a Ing. (ix) Guaranteed Preferenk ce r insufficient profits . .
types of preference shares of a company a re as follows: 5. Convertible. if the company ma es no O chara cteristics of b o th e qui ty
.
(1) I ·s 6. Non-convert 1"b/ p ference s h ares have th e bl nJ w h e n
Cumulative Preference Shares: A preference s , are 1 e. F t res of Preference Shares: re . .d d preference shares is p aya e O Y
·d f d. ·dend 7. Redeemable. ea u ·ty shares d.iVJ en on
sa1 to be cumulative vlhen the arrears o JVJ d debentures. Like equ • ' B d f Directors
are cumulative and such arrears are paid before paying 8. Irredeemable. shares an profits and at the discretion of the oar o th t.th ate of dividend is fi xed
. · d
any d 1v1 dend to equity sharehol ers. uppo
s se a 9 Guaranteed
· ·
there a re
h res are similar to e en
d b tur s in the sense a
e .
e r
. hts The efore pre fe r e n ce s h a res
company has 10,000 8% preference shares of '( 100 . Prefere:~e s~:reholders do not generally enjoy vobng ng · r '
earn. The di vidends for 2016 and 2017 have not been paid so far. The directors b and prefer':n f fin cing.
O
they can pay the dividend to equity shareholders for the year 20l8 must pay the e~ are a hyb nd form an have the foUowing characteristics: .
dividends of t 2 40 000 i.e. for the year 2016, 2017 and 2018 before makin p The preference shares h . ·ty over equity s h ar e h old e rs m the
' ' • t1 2018 g a1 f hareholder as pnon hich
payment of dividend to equity shareholders ior 1e year · 1 Dividends: A pre ere.nee s . f. d nlil< the common s to ckh o lde r w
.. . . f d . . d ds but the rate is D<e u e fix d b th
(u) Non-Cumulative Preference Shares: In the case of non-cumulative preference sh payment O _ivi en f d . . d d of preference shares is usually e Y e
O
the dividend is only payable out of the net profits of each year. If there are 110 p a~i varies. In India, _the _rate iv; en s hareholders usually get cumul a ti ve rate o f
0
in any yea r, the arrears of dividend cannot be daimed in the subsequent yea rs. 1~U controller of capi_ta~ issues . Pre ;rence s does not pay a dividend it p a} s in the
dividend on the preference shares is not paid by the company during a particu( dividend so that if_11:1 one year h:v~o:p~:rity over equity shares.
year, it lapses. Preference shares are presumed to be cumulative unless expr next year. These divide nd s also p .gh t O O t in the
described as non-cumulative. essI Right of Vote: The preference shareholders in India do not have a n t e . th
... ) p · · · 2· • f and their dividends are usually fixed but m e
( 111 artJc1pating Preference Shares: Partidpating preference shares are those sh annual general meeting O a company th f hareholder
I · h ·l d · dd. • . . .
w 11e are en tit e m a 1hon to preference d1V1dend at a fixed rate to parti · an. event of non-payment o f cti ·d d for two years or more
VJ en
e pre erence s
1 1
the bal_ance of profits wi~- eq~ty shareholders after they get a fixed' rate of li ~ :; can vote. Voting may be, in the form of show of han_ds o_r ballot.
~nn tt~;':~~pa~es. The tarhfafating preference shares may also have the right to sha; 3. Right on Assets: The preference shareholders have a similar nght to that of bhondhold~rs
us asses o hie company on its winding up. Such a right may ! on the assets of the firm At the time of liquidation, the preference shares ave a pnor
. expressly_ ~rovided in the memorandum or articles of association of the companr right to that of the eq~ity shareholders but the payment and the face v alu of th e
(1 v) Noln-tPartif~1pdating Preference Shares: Non- participating preference sl,ares are enh't/. preference shareholders are paid only after the rights of the bondholders and othe r
on Y O a. tXe rate of div·d
shares 1 en d an d d o not share in tl1e surplus profits. The preferenoe creditors are met. Their rights, therefore, come last amongst th e ere di tors b u t b e f ore
c are presumed to be non part' . f I
memorandum O th ..: - icipa mg, un ess expressly p rovided in th the preference shareholders.
r e aruc1es or the terms of issu . .
(v) Convertible Preference Sh . C . e. 4. Par Value: The preference share usually has a par value or face value or denomination
equity shares as per the :res. onvertible_~reference shares may be converted in! by whidi it is valued. This par value can also be changed by the corporate shareholders.
preference shares are those sehrma s a ndhichconditions of their issue. Thus Convertib! In India, the preference shares have only a par value but in US.A and U.K., it is a practice
"t . , res w ca b . ,
a cer am penod. n e converted mto equity shares withl to have a stated value also which can be changed from the par value at a later date.
(vi) Non-Converfbl p • . . . .
sl . 1 e reference Shares· N 5. Refuement of Debt through Sm.king Fund: A company usually retires its preference
1
o1res
to pa)' which are ~o t convertible into · eqon-. convertibl e pref,erence shares are tho~ h
s ares wit · h ti h I
1e e p of a special fund created for the purpose. This fund is called the
' ment of cap,tal · th uity s 11ares but h th ·nk fu d
ihese are those . m e event of Jiquidatio f ave e preferential rigl1! s1 ' mg n . A sum of money is annually set apart in this fund and is used to retire
1
(vii) Rcdeemabl P w iid, do not carry the right n t° th e co?1pa~y or otherwise. Thus the preference shares when they become due. This is specia lly so in case of redeemable
by it ortid e . referenc~ Shares: A comp , ,,. ~- conversion into equity shares. shares. If no right of redemption is given the preference s hares are usually redeemable.
es issue pre/e1e h an\ •ALllll~d by h . . i • •
nee s ares whid, are red s ares, may 1f so authonz~ 6. Pre- Emptive Right: The preference shareholders like the equity shareholders have a
eemable as per the provisions !Ji~ right of receiving further issues from the company before it is advertised or offered to
 ~ ........ , -•= "'"'u t-"URTFOLIO l'1
U,e other member of the public. TI1is right g ives il a spc ial re cmblan ANAGt;'1t, NATIVES 3.7
hareholders.
11
It also gives a n additio nnl right ab ve the right of bondhcc lo lhe e INVESTMENT AVENUES/ALTER . th main di advantages o f th e
t o f ur t·L er I. s ues 1 .s n chanc g i 11 to s h ~ r holder lo re eive the bcn Olde f' rs. I\ q~ . . ., .. dvantagcs of Pre f crcnce Sh a r .· Fo ll owin g a r
0 0 • "'"
f th f TI . c Its f ' 11 d
e . inn. u makes the volue of prd r nc shores highe r than that of O gr01 reference shares: h to be pajd at a fix ed rate a_n
In India, however, the prefcrenc hnre are not pre fe rred and equity sh lhc bohp
L • d Obligation· Dividend on prefer ence ha r . ter in case of cumulati ve
to b e o f Jug • h
er va Iue than both pr fe rence s to ck an d b on d s. arcs con1;r· 1. F1xc · . h a rc · The burd en 1s grea .
1

b f ny dividend is paid on equity f d . .d d have to be paid.

7· C onverhb1hty: . •. The preference hares are u ually non- convertible uni . e ore a
preference shares on wh, .ch accum ulated arrea r o ,v, en Ca tious and conservative
.
stated in clause jnserted at tJ1c time of i suing of these shares. The
· Iits, privilege
· ·
:iss 01
hct\v L" ·t d AppeaJ: Bold investors do not like preferen c~ . hares
2. •m• e
l · d\r to a ttract sufficient
n or on preference sh a res.
men ti on th e ng nnd the converh'bTt t th e rate of conve
I • y asJ:>ec ,
ausc . shOt investors prefer debentures an d government . .securities.
- f dividend
the number of share offered at the time of conversion and put in • 8 "'on a . t a company may have to offer a higher rate O • • d f rence
document with the trustees-in-charge. The convertibility clause gives th Pociat 11 mves o,s, h ings of the company a,e high, fixed dJVJden on P:;', e "ght
shareholders
tJ. a share in the growth of the company. Also, it is rated at a he· Phrefcr('r 3. Low Return: When t e eati_m Preference sharehold ers gene rally do not h ave e n
1an non-convertible preference shares. •g er va1 s h ares .becomes
. . unattrac
th ve.
sperity of the company.
.
8. Hybnd: The preference stock is a hybrid between a bond and a common t to partiopate • ht p ference shares generally do not carry v o tin g ri gh ts · Asda result,
m e pro ontrol
already stated, it resembles both these types of stock. Valued as a bond it ha s 0 ck. , 4. No Voting Rig s: Id re helpless and have no say in the m anagemen t an c
I
c .:um . on the a e ts of the firm and is almost m . th e pos1·n· on o f creditor. Ass a gtca pre fe rence shareho ers are .
stockholder, it is entitled to rights of dividend. At tJ1e time of liquidation aJco~i'l\ of the company. f d ble preference shares migh t have con tnbuted
h . h ls given only a fter the bondholder 1s . satis. f1ed . Th.1s feature of a p sof It .h,
t e ng s. Fear of Re demp ti on.. The holders o ell re eema
. d of fund s. But the company m ay r efund
stock gives it an added value over bond and stability of income over cornrn~e erer 1
finance when the company was ba Y mt~is favourable. Despite the fact tha t they
Advantages of Preference Shares: TI1e advantages of preference shares are: n SIG( th eir· mone y whenever. the ·ts money
hour ofmar
need,e they are shown th e d oor un cerem o ruously.
1
1. Appeal to Cautious Investors: Preference shares can be easily . sold to investors stood by the d company m
bl . p eference dividend is not tax deductiibl e an d h ence it is cos tlier
prefe r reasonable safety of their capital and want a regular and fixed return ~f 6. Not tax de ucta e. r
O
2. No Obligation for Dividends: A company is not bound to pay dividend on prefen it than a debenture.
s hares if its profits in a particular year are insufficient. It can postpone the divi~en( (ii) Bonds . de.fin d pe •od and then to
in case of cumulative preference shares also. No fixed burden is created on its finan~ Bond contains a promise to pay a stated rate of interest for. a e .ti nin a firm. They
3. No Interference: Generally, preference shares do not c~rry voting . .
nghts. Therefore,e repay the prmc1~al
. . -
at a given d a te ofth maturity.
b dh Ider Bonds are asernor
to pay seCtm
specified ra teesof inte res t dunng
.
company can raise capital wjthout dilution of control. Eqwty shareholders retain exdusi, represent a prorruse by a company to e on ~ th . cipal sum on the m a turi ty. Da te of
control over the company. Hence, do not affect the decision making of the compan) a stated time period annually and th e ~etum ~ f e t~d Bonds are o f many kind s. The
4. Trading on Equity: The rate of . dividend on preference shares is fixed. Therefore, Wil ~a tu r it Y is. also
b dcalled
. d thet date
the of retiremen
terms o a Oand· features each bond b ears. Bon ds
and conditions
. . . . .d th b fi f d"
the n se m its earnings, the company can prov1 e e ene ts o tra mg on eqw1y 1 . . difference m on s IS ue o
b d. tin . h d according to their repayment proVIS1ons, . . type o f secun•ty Pled ooed ' and
the equity shareholders. So, issue of preference shares increases the earnings of equi ~ay ef is tu ~ty ,;d technical factors.
1 I Id · · h I · b fi time o ma n .
s 1are 10 ers, 1.e. 1t as a everagmg ene t. . f fund t the corporate sector. They are usually an 1Ssue
Bonds are an important source o s o . . . ts
5. No Charge on Assets: Preference shares do not create any mortgage or charge on ~ f t debt of a corporate organisation. Since no one individual can fulfil tl_'e reqmre ~ e n
1
assets of the company. The company can keep its fixed assets free for raising loans r of thongfirmerm the·r loan is issued in parts of small denominations and sold to m ve tors m the
futu o e s, 1
re. form of bonds.
6. Flexibility: A company can issue redeemable preference shares for a fixed period. Th The Bond Indenture: The bond indenture is a legal instrument incorporating an agreement
capital can be repaid when it is no longer required in business. There is no dange between the corporation which issues bonds, the bondholder who lends money and th e
of over-capitalisation and the capital structure remains elastic. trustee whlch is either the commercial bank or trust company and represents the bondholder.
7
. Variety: Different types of preference shares can be issued depending on the needs o Thus, three parties are involved - the company, bondholders and the truS tee.
investors. Participating preference shares or convertible preference shares may be i~s~t>: The bondholders acquire their bonds and automatically accept the indenture. The role of
to attr.1ct bold and enterprising investors. Thus, the earnings per share of ex1still/ the trustee is mainly coordination between the company and the bondholders.
preferences shareholders are not diluted if fresh preference shares are issued. A single trustee represents all the bondholders and gives information on legal and
~refe~cncc l~ares can be made more popular by giving special rights and privileges s~d financial problems. He is also a link between the company and bondholders. The company
a s avoting
at ~ights, nght of conversion into equity shares, right of shares in profits and redemptJ()' does not directly enter into an agreement with each of the bondholders.
premium.
 ITY ANALYSIS AND PORTFOLIO "1"
SEC UR ~N~Q

The inden ture consists of:

~~ r 3.9 I
INVESTMENT AVENUES/ALTERNATIVES d t th trus tee by the
. d d sea l and presente O e
(a) The rate of inter t or coup n rnte. bondholders in writing and sign u~ er r formaliti es is not consider ed
(b) Authorisation of i ue. company. A simple promi se to pay without th e prope
(c) The speci men copy of a bond. as a pledge of security. d . d ture They are
• I • th e bon in en ·
(d) The Trustee' certificate. (g) Covenants: Covenants a rc protect ive c ~~:~~~l~ers through the trustees. Through
ag reemen ts between the company_and _th e th e bondholders. The company agrees
(e) The pledged property a secu rity. th ese agreements the compa ny _bind ~ itse lf to om e rotection to bondholders.
(f) End orsement. to control its operations a nd m th is way offe r~ s _ h p t f dividend to be
Sometimes a co mpany makes an agreement to limit t e amoun o .
(g) Registration. paid to it/equity sha reholders. Other covenants prot~ct the bond.holders by ensu nng
(h) Restri cti ons. a mL111mum cash balance to be main tai ned by the firm .
(i) Agreements. Types of Bonds: Bonds can be further classified ~n f~llowing grounds: .
(j) Remedies when problems occur between trustee a nd bo nd holder.
1 · Serial
•
Bonds· Serial bonds a re issued by an orgaruzahon There are var1o~s types
• · · d Th'1 15
· done to enable bonds such as Senal, S111k-
(k) All lega l tennin ologies for purposes of clarity. w1th different matu nty ates. _s _ . er ing fund, Mortgage, Regis-
(I) In case of conversion the rights of bondholders. the company to retire the bonds m instal lments rath tered, Debenture , Income,
th an all togeth er, serial bonds usua lly d o not have th_e adjustment, collateral,
(m) In case of redemption of the ri ghts of bondholders. call fea ture and th e company reti res th e debt when it equipment trust, supple-
Features of Bond: Following are the various characteristics that bonds have: becomes payable on the matu rity d ate. S~ch b~nds are mental credi_t, convertible,
useful to those cornpanjes that wish to retire their bonds non-convertible, redee _~ -
(a) Maturities: Maturities vary widely. Bonds are usually grouped by the· able, irredeemable, part1c1-
Ir Olah in series.
cl asses. '1 pating, warrant, foreign,
2. Sinking fund Bonds: Sometimes, a n organization deep discount, zero interest,
(b) Interest Payments: The rate of interest to be paid to bondholder and th .
payment is recorded in the bond as well as in the indenture. Interest rate is
1
a~s!
~
plans the issue of its bonds in such a :'ay th at ~:re inflation linked, fixed, flex-
is no burden on the company at the time of retiring ible, perpetual, subordinate,
the coupon rate. Interest on bond may be made by cheque or coupon. It sh Cl
bonds. Trus has the advantage of using the fund s as climate, war, bearer, junk,
paid regularly by iss uing authority. Bond interest is usually paid semi-a::'' well as retiring them without any excessive liquidity angle, callable, term, corpo-
though annu al payments are also popular. ~ rate, yankee, option, easy
problems. The company sets apart an amount annually
exit.
(c) Repayment of Principal: Bonds ar~ issued in denominations o~ minimum f for retirement of bonds. The a nnual installment is
~ 500, and t 1,000 and of values as high as ~ 5,000 and ~ 10,000. Fmancial insftu• usually fixed and put in a sinking fund through the trustees. The trustee uses his
1
are known to buy corporate bonds bearing higher values. The value of bond IS- Q' cliscretion in investing these funds. He may use th e fund through the trustees. The
the fo_ce value, par value or maturity value. The face value of the bond represeni trustee uses his discretion in investing these funds. H e may use the fund to call the
promise t~ rep~y ~he amount to the ~ondholder at t~~ end of the specified perio; bonds every year or purchase bonds from them at a discount. Sinking fund bonds are
return their principal amount on a fi xed date spec1f1ed earlier. commonly used as a measure of industrial financing.
(d) Call: Bonds ha ve a add itional fea ture of call which is a privilege to issuing com 3. Mortgage or Secured Bonds: A mortgage bond is a promise by the bond issuing
lo re-purchase bonds at a slightly higher price above the par value. The bondh! authority to pledge real property as adclitional security. U the company does not pay its
should b: awa re of_ the call fea ture before he makes an investment in bonds. He bondholders the interest or the principal, when it falls du e, the bond.holders have the
protect _himself by in ves ting in bonds of shorter durations. Although there 1·5 ~- 1
right to sell the security and get back their dues. Mortgage bonds may be of three types:
fluctu ati · · t Jill
b . ons _m m eres t rate for shorter durations, a ten year period is considere; (i) Open - End Mortgage: It means that a corpora tion und er the mortgage may issue
e a .g.ood life of a bond from the point of view of the bondholders. additional bonds. But the open - end mortgage indenture usually provides that
(e) Specified Time Period· Th t' 'f' . the ~orporation ~an issue more bonds only if the ea rnings or additional security
date of · e ime speci ied m the bond is called the maturity dai
' repayment of principal amount Th . . obtamed by sellmg the new securities m eet certain tests of earnings and asset
to the requirement 0 f d . · e matunty date of bonds vary accordir coverage.
ea 1 organization · J fr
maturity, medium term between 1.e., ong term om 20 years to 100 j!
5-10 yea rs and short term bonds maturity is ~ (ii) Close - End Mortgage: It means the company agrees to issue at one time a stated
4 years.
amount of bonds. After these bonds have been issued no more may be issued
(f) Pledge of Security: The issuin co . ~der the mortgage. Addjtional bonds may be sold but they rank as junior to the
by offering some secur·t l'kg mpany sometimes
1 Y I e property Th promises to pay to the bondhoi first mortgage b~nds. In other words, the original issue has priority on claims
· e PIed ge of security is a promise
· t0 and may not be issued beyond the specified amount of the issue.
~ SECURITY ANALYSIS AND PORTFOUo MAN
~ A(i~
(iii) Limited Open - End Mortgage: ln limited open - end mortgage, the . '11
provides that corporation may is ue a stated amount of bonds over a tidl'I)
1
INVESTMENT AVENUES/ AlTERNATIVES
13.11 I
years in series. Peli°d~ (a) Guaranteed Bonds: Guaranteed bonds are issu ed as bonds seCUied by th e issuing
4. Registered Bonds: Registered bonds offer an additional security by a sa fe any Sometimes a company
company and they are guarantee d b y ano th er comp · ' d f th
attached to them. A registered bond protects the owner from loss of Pri ~ va1 takes assets throu gh a lease. The leas ing company guarantees the bon ° d e
bo~dholder's bond numbers, name, address and type of bo_nd are ente~~Pa_l. ;; bond issuing company regarding interest and principal amount due on bon s.
register of the issuing company. l11e bondholder has to comply with the finn· f cl 1n (b) Joint Bonds: Joint bonds are guaranteed bonds secured jointly_ by tw? or more
. . . t t . s Or-,,., II
at th e time of transfer of bonds. While rece1vmg m eres , registered b · '"illi~
usually get their payment by cheque. The main advantage of registered a
if the_bond is misplaced or lost the bondholder does not suffer loss ~n~ is*'.
t1
dho1d
companies. These bonds are issued when two or more comparues are m need of
finance and decide to raise the funds together through bonds. ft serves the purpose
of the company as well as the investor. The company raises ~~ at reduced cosl
unregistered bonds. However, registered bonds do not offer security of ~11 ke U The investor has the additional security of another corporations pl edge.
maturity. Pl"JncjPaJ
(c) Assumed Bonds: assumed bond~ are issues in respect of a company that has been
5. Debenture Bonds: Debentures in the USA are considered to be slightly diff ' acquired by another by way of merger or as a resu lt of the _re-organization_ In
bonds. Debenture bonds are issued by those companies who have an ex erent f1( taking over the property of the original issuer the debts of the 1SSUer are assumed
. b ce11e t ,.
ra tin g ut do not have security in the form of assets to pledge to the b n er~ by the successor company. For example, company X decides t? m_e rge into company
The debenture holders are creditors of the firm and receive the fuU rateo:d~olde: Y. X's issue of bonds prior to merger then become the obligation of company Y
whether the company makes a profit or not. In India, debentures can be . f lrlter1 when merger is affected . These are called assumed bonds as company Y did not
1
~e specific permission of the controUer of capital issues. Debentures can be ~;u e_d Wil originally issue them but as a result of merger the debt was passed on to them.
kinds such as registered, convertible, non-convertible, redeemable non- d1ffe1e The bondholder is more secured as his bonds due to merger get the security of
and participating etc. ' redeernabi both companies X and Y.
6 11. Convertible Bonds: Convertible Bond is the right given to a bondholder to buy a bond
• Income Bonds: Income bonds are bonds on which the payment of interest •
only t~ the extent of ~rrent e~gs. If earnings are sufficient to pay 0 ~ rnandator at the time of issue and later exchange it for equity shares of the same company. This
of the mterest that portion usually IS required to be paid but if the Y_ a P0rti~ gives the bondholder a future promise by the issuing company to share the growth in
to pa , th ' corporatio · capital of the company. The price of the convertible bond to a great extent depends on
) e unearned balance out of its cash resources, it is of course fr n IS ab1
Income bonds are not offered for sale as new financing but a f ee _to do ~ the price of equity shares. The bond price increases if the price of equity shares rises or
reorganizati . . . re o ten iss vice versa. The investor prefers to buy bonds rather than equity shares because the risk
on or recapitalization to replace other securities. Ued tr
7 in bonds is lower than equity but it is higher than non-convemble bonds. Therefore,
· ~dt~e:'t B_o~ds: ~djustment ?ands are issued in the reorganization of co . a convertible bond is between an equity issue and a non-convertible bond.
e ·t Th I difficulties .. In practically all cases, interest is payable only "f lllp~ e
8 P rrru . ey are a leading type of income bond. i eanung 12. Non-Convertible Bonds: Most bonds are of the non-convertible type. These securities
promise a fixed periodic interest paymen t over a predetermined period of time and the
. C~llatera1 Trust Bonds: A coUateral trust bond is issued ener
:"!:d:,~~ :e;;•;::~~ ;,~;:nt :d~b:~:ar/The ;!1Ka:~~1;i°i,';~~~
typical example of such bo d . h ty pany which issues Lhe bonds 1
return of your principal at the time of expiration. The interest is usually a percentage
of the face value, or original issuance price, of the bond. A five-year bond with a
t 1,000 face value and 10 percent interest will pay 10 percent of t 1,000, or ~ 100 per
n s is w en a parent . .
~:n
collateral bonds by pledging securities of ·t
are generaUy in the form of intangible s i s
have a priority charge on the sh becun es
co~p~y reqwres funds; it issu~
:s1d1ary company. The coUater
e shares or bonds. These bond
year, to the bondholder. At the end of the fifth year, the bondholder will receive his
~ l,~00 ba~ and ~e bond will expire, which means it will cease to exist. Bonds carry
a wide vanety of interest rates and expiration dates. onconvertible debentures are
ares or ands which unsecured bonds that cannot be converted to company equity or s tock. onconvertible
9. Equipment Trust Bonds· In th U are used as coUaterals.
h · · e SA a t · J :eben~~es usually have higher interest rates than convertible debentures. A fixed
t e is~ue of bonds with equipment lik, yp1_ca example of equipment trust bonds i
submitted t tru e machinery as se ·ty Th epo:51t is_ an arrangement with a bank where a depositor places money in the bank
and 1s paJd a regular fixed profit.
to sell the :quip::; ::s;a~o~~ i:~~tif~d s~rially. ~ : ~s~::f~r~::::; 13 · Rede_emab!e Bonds: A redeemable debenture is a bond which has been issued for a
10. Supplemental Credit B d . o ers m case of default.
their bonds ?n s. When additional pl d · cert~ penod on _the expiry of which its holder will be repaid the amount thereof with
Such bonds :e categ?~sed as supplemental b e ge is -~aranteed to the bondholde~ or without premmm.
re classified as: Y an additional non- specific guarantee 14
(a) Guaranteed bonds (b . • ~edeemable Bonds: A bond without the aforesaid redemption period is said to be
· ) Joint bonds. medeemable debentures. Toes~ may be repaid either in the event of the wind.in -u
(c) Assumed bonds. of th e company or the happerung of certain specified uncertain or contingent e~enJ
r:;-:;:;:-,
=i SECURITY ,.,. ALvsrs . .
di!
11ND pDRTFOLIO M

, ., pos1hon,.
. .
I ue pa rt1cipar
in
"""•t~ t1
IJt
-
/ LTERNATIVESTh " an th e ir principa ,s •
11
[
3. 1 J
1.-. ~
. t th a t ·15 n ormally
~.7

15. Participating Bonds: Companies with poor er lso p " rt,·c1·pa tc 1·n ea rn · •ng b JNVESTMENT AVENUES A I · · creascd by th e ciu:ange
l11ey have a guaranteed ra te of intcrc t bul rna) 'd1aracte ristic of increas dg lip 11
·n· I f d B of thi very c e di ~ serve to minimi ze inflntion ris k.
,· n ,• nfl "t,·on over a period. The bondhold er ge
nd
,s m a n inte res t payrn e n th
ds with common s tockh 0 IdersVielriil l t
dd ona speci
awithI increa ie pe rcentage.
sed earnings, these arcecau c
unpopular ; rbt0h"ernselves. Jess than c,
a reg ul nr bo . B d the inte res t re m••·ns fi xed throughout · et
company who prefer to keep all earnings O d var·r ant bond E I fixed Rate Bonds: ln Fixed Rate o n S, . t fixed ra te bonds ar e resiS ail
lso ca e , < s. •ch b 21 • tenure o f the bond . Qwing to a constant ,nte rcst ra e,
ti ht 11 u to changes and flu ctuations in e . . . ·tt The rate
16. Warrant Bonds: Bonds with warrants ar~ a to tlie bondhold e r to pay a s 6 °tict 1 • • th m a rke t
O f bond s rate of ,nte rest ,s not wn en.
one warrant attached to it and gives ,. ng h s '[his right is given f srr; nd th .
price and exchange the bonds for eq u!ty s ta~ne ·., legal document withotrha lillJ1, 22 Floating Rate Bo s: ln ese types k, d'fons a nd keeps o n changing
. d f . U II . ·od is pu J ,, . e t ' . fl tu t acco rdin g to th e mar e t con t • fl tin
perm o time. sua . y a time pen chance to the investor to sh "'1 of inte rest uc a es . th d s interest rate is always oa g
Warrant bonds like conve rtible bonds offer
growth of the company, but converhble bon
:s
are more popular than Warr:" ioI
nt "1,,
according to the m a rke t fluctu ahons. In
Perpetual
like inte rest, Bondsc
ba nk Bonds
° er wor '
rates. w ith no m aturity dates are caUed perpe tua I b on d s. H o Jders
23.
Warrant Bonds may be: d by the investor (a) to sell the of pe rpe tu al bonds e njoy inte res t thr oug h ou t · . .
(a) Detachable Warrants, These are use d (b) to buy stock at an option W••, 24. Subordinated Bondsc Bonds which a re given less pnonty a~::_omt pdarbed dtos olnthe~a:~:~
during price increase in the market, a n Pnc, ' of the com an in cases of a close down a re called subo ruu ,a e on . - .
to be sold at market value. 1· d I h 11·qu1·dah·on,psuybordinated bond s a re criven less importance as compared to senior
. li tly more comp 1cate . t as to se nd o-
(b) Non - Detachable Bonds:_ This is s g_I1 . an option. The warrant is det to bonds which are p ai d first.
company's trustee a t the rune of exerasmg ached b 25. Bearer Bonds, Bearer Bonds do not carry the name of the bond h older ":'d anyon e
th gets nd
the trus tee and sent to the investor.
. . di b f eign companies but for Indian in who possesses the bond certifica te can aim
cl th e amoun t• If th e b ond certificate.
17. Fomgn Bonds, Bonds rose m In a Y or A . vesto, 1 stolen or misplaced by the bond holde r, anyone else with the paper can dalm e bo
I amount.
he called as a foreign bond. A foreign bond, for ~xamp e, an mencan bond °' 26. War Bond: Wa r Bonds a re issued by any government to raise fund s in cases of war.
· Indi b verv attractive to investors because: ,
27. Climate Bonds: Oimate Bonds a re iss u ed by any government to raise funds w hen the
Japanese b on d m a may e •1
(a) The dollar yield is much higher than the rupee. coUJ1try concerned faces any adverse changes in climatic conditions.
(b) Deposits in dollars are considered a good investment. 28. Junk Bonds: A junk bond, also known as a "high-yield bond" o r "speculati e bond,"
is a bond ra ted "BB" or lower beca use of its high default risk. Junk bonds typically offer
(c) Risk on the portfolio is diversified.
However, foreign bonds are not very frequent issues and an average investor has l'f interest rates three to four percentage points higher than safer government issues.
little information available on these issues. These bonds also suffer from the disadvan~ 29. Angel Bonds: Angel bonds are inves tment-grade bonds th a t pay a lower interest rate
because of the issuing company's high credit rating . Angel bonds are the opposite of
of currency fluctuations. falJen angels, which are bonds that have been given a "junk" ratin 0cr and are therefore
18. Deep Discount Bonds: A bond that is selling at a discount from par value and l
a coupon rate significantly less than the prevailing rates of fixed income securi' much more risky.
with a similar risk profile. They are usually Jong term bonds whkh attract inves: 30. Term Bonds: Term bonds are bonds from the same issue that share the same m a turi ty
because there is minimal risk that these will be called before the time of maturity. Th dates. _Term bonds that have a call feature can be redeemed at an earlier date than the
a re re? eemed at the end of 5 years with specified maturity value and the investor Cll: other is~ued bonds. A _call feature, or call provision, is an agreement that bond issuers
hot~ it for 25 yea rs. These are generally issued by the public financial instituti' make ~ 1th buyers. This agreement is called an "indenture," \\ hich is the chedule and
India. oru the pnce of redemptions, plus the maturity dates.
19. Zero Interest
also do Bonds:
not carry c are the bond: for w hi ch th ere 1s
anyThese . no coupon payment , call featu
Some 1hi and munici pa1 b on d s are examples of term bond s that h ave 10-year
corporate
interest but is traded at ao~pon :~te of mtereSt_ A debt security that does not i at specifi:e~messbmfeansththebissuder of the bond can redeem it at a predetermined price
is redeemed foe its full fac eepl iscAount, re nd ermg profit at maturity when the oo e ore e on matures.
e va ue. zero . t b . at
A term bond . is the opposite of a serial bond , w hich h as variou s maturity s chedules
lower than its face value with th f m erest ond 1s a bond bought at a pn
bonds are sold at a disc~unt frome ~;\~alu~ repaid at the time of maturity. Th regu 1ar intervals until the issue is retired.
long term usually IO to 15 years d f atunty value. Zero interest bonds vary l 31. ~aJ~bl~ Bonds:. Callable bonds, also known as " re deema ble bonds ,, can b e redeemed
20. Inflation Linked B d . c. an or short term less than one year t[e b~n1~s~se::.;~~~ to maturity. Usually, a premium is paid to the, bond owner when
against inflatio on s. Inflation linked bond .
n. ln such type of bonds their _s ~re bonds that provide protedJ
pnncipals are linked to infla tion, 11'~
 ■----------
L3.1s_J
NALYSIS AND PORTFOUO Ml\"'
SECURITY A . ~~t
r:;--;;i . . . tcrcst rates. If interest rates hc1 ~ti
~ · decline 1n an fi < Ve ., , JNVEsTMENT AVENU!:S/ ALTERNATIVES . adc on half year Y r ·
I st
a·n cause of a ca 11 1s a .
1
•11 likely want to re nancc th· 'J t'q
11,e ma company
since
i . .
first , sue
d the bond , ' w1 b d •s cl i,
will call its current on s and rei l'b1 i
(iii) The interes t payment is ·ty mis redeemed at (ao va Iu e. f vaJue and
(iv) On maturity t h e sectm . d t di count to the ac
lower rate. In this case, the company ss11l' ' d Th ecuritics are ,s uc a d d at face value
. b ds to save money. . r-. (ii) Zero Coupon Bon s: ese s . d t be low fac va lu " and re me
lower-interest on . b ds i·u ta it can issue stock. Large redeemed at the par i.e. they are issue a f of ze ro coupon bonds a re:
an)' can issue on . th 1· . corp0 d . The saLient eatu r
JZ. Corporate Bon ds: A comp • - 1 debt u,ey can ,ssue, e •mil is wt, ra~ features of Zero Coupon Bon s.
have a lot of flexibility as to how muc 1 orporate bond has a maturity of le <ltQ.,,~r ' ·t· ·s fixed
market w1
·u bear. Gene rally
• '
a short-term c . th
d Jong term ts more an 12 year
ss th ,
ijl'l 1 (a) The tenure of these secur1 ies I • • •
· ediate is five to 12 years an s. 1 (b) No interest is paid on these secunbes. f . ·p al is m a d e in installment
years, mterm . hi her yields because there is a hi h
Corporate bonds are d,aractcnzed t,y / The upside is that they can also er is1 t 1
... ) Partly Paid Stock: In these sectJ.n es,
( Ill f .
•ti the paym ent o pnno

a comp_any defa~ting th ~ a gove:~:;a~se of ~e risk the investor must ta~ the 0

rt, over a given period O tune. . f tu s of partly paid s tock are:
rewarding fixed~mcom~ m~eStrnen . portant. The higher the quality, the le n.} p "d St O ck The salient ea re
Features of Partly aJ • d the principal amount is paid
company's credit. quality 1s very 101 Owe rl 1
. (i) These types of securities a re issue? at face va ue an
interest rate the investor receives. . th in installment over a period of bme. .
nds ·ty is fixed at the tune of .ISS'Jance an d
Variations on corporate bonds include convertible bo ' which e holder can co th
into stock and callable bonds, which allow the company to redeem an issue p} ~ (ii) The rate of inte rest and ten~e of e serun
I •~
does not change till m atunty.
maturity. (iii) His interest p ayment is made on half yearly rest.
33. Yankee Bonds: If bonds are raise~ in U.S.A.,_ they are called y ankee bonds and if ~
(iv) These a re red eemed at par on m aturity. · · h variable interest rate, which. .
are raised in Japan, they are called Samurai Bonds. 15
(iv) Floating Rate Bonds: These types o f serunbes ave a
34. Option Bonds: These bonds may be cumulative or_ non-cumul~tive as per the 0
nds calculated as a fixed percentage over a b enchmark rate.
of the holder of the bonds. 1':1 the ca~e of cumulative bo ' m!erest is accurnuia
Features of floating Rate Bonds: The salient features of floating rate bonds are:
and is payable only on maturity. But, m the case of non-cumulative bond, the inteI
is paid perioclicaUy. This option has to be exercised by the prospective investor a/; (i) These are issued at the face value.
time of investment. (ii) The interest rate is fixed as a percentage over a predefined benchmark rate. The
35. Easy Exit Bond: As the name indicates, this bond enables the small investors to e benchmark rate may be a bank rate, Treasury bill rate etc.
the bond at any time after 18 months of its issue and thereby paving a way f:Q 11 (iii) The interest payment is made on half yearly rests.
easy exit. It has a maturity period of 10 years with a call option any time after 5
Recently tl1e IL'BI has issued this type of bond with a face value of 5000 pe/~ ~ (iv) The security is redeemed at par on maturity, which is fixed.
(v) Capital Indexed Bonds: These securities carry an interest rate, which is calculated as
(iii) Government Securities (G-Secs) a fixed percentage over the wholesale price index.
Government securities or gilts are sovereign securities, which are issued by the Reser Features of Capital Indexed Bonds: The salient features of capital inde~ ed bonds are:
Bank of !11dia (RBI) on behalf of the Government of India (GOI). The GOI uses these nm (a) These securities are issued at face value.
to meet its exrenditure commitments. (b) The interest rate changes according to the change in the wi,olesale price index,
~es of Government Securities: Government securities can be classified as followin as the interest rate is fixed as a percentage over the whole ale price index.
(I) ~ated Securities: These securities generally carry a fixed (c) The maturity of these securities is fixed and the interest is paya ble on h alf yea rly
interestI rate and have a fixed matur1'ty . d . For Government securities ~ rates.
' peno gilts are sovereign secu·
~xamp_e an, 11.40% GOI 2018 G-sec. In this case 1140 (d) The principal redemption is linked to the wholesale price index.
ties, which are issued by Iii
is the mterest rate and it is mah1ring in the yea; 2ois. Reserve Bank of India (RBI) Invest in Government Securities: Entities registered in India including :
Features of Dated Se "ti on behalf of the Gover
dated secu ·t· cun es: The salient features of (a) Banks
• n 1es are: ment of India (GOI).
The various types of Goverrr (b) Financial Institutions
(i)
.. ll1ese are issued at the face va Iue. ment Securities are dat,! (c) Primary Dealers
(11) ll1e rate of interest and t securities, zero coupo'
fixed at the time of . enure of the security is (d) Partnership firms
till maturity. issuance and does not change bonds, partly paid stocl
floating rate bonds and ca · (e) Mutual Funds
tal indexed bonds.
 SECURITY ANAL YSI5 Al'WU r ..... n •• "''-A.U ""A"'~c I
~ t~1
(f) Foreign lns titution al Inves tor . 1 VES d like ly
UES/ALTERNATI th ir s tr n g th a n
(g) State Governments INVESTMENT AVEN . h "res on the b asi of . d as-
ets classify s ... b s or cu tcgo nz ·
(h) Provident fund s The to ck ma rk h s may e known a
e On this basis the s a re 2. incom e s ha re ;
(i) Trusts in vaJu ·
1. blu e chip sha res; 4 . d e fe ns ive s h a res;
(j) Resea rch Organiza tions
3. cycl ical sha res; 6. s pecu lative s hares;
(k) Nepa l Rashtra Bank
5 g rowth s ha res; d a bove.
And, Indi vidu als ca n in vest in government securities. . . f sh a res presenre
7 Per.ny sha res. kn of aU the cate gon es o t community. But
Advantages of Investing in Government Securities: . . · It ·s th e best ' own the inves trr. en ch ·p
1. Blue chip shares: i l bes t-known firms among in mos t cas es blue J
1. M_i~mal Default Risk: The i:nain adva n!ag_e of in~es~~! ~~Z-Secs is that the, . These sha res repre:ent t ,e I this category of share, because on definition of Blue
mm1mal default risk, as the instrument .,s is 5 ued Y e11 it is difficult to define ~xac~e exa mpl es of the ~ s . On e _co;mof divided p ayments.
2. _Long-t~rm Debt: G-Secs especial!~ da ted _securities~ offer inveS tors the opPortu . shares are presented using any h as Jong contmuous hist ry than for 100 years.
mvest m very long-term debt (at times with maturity over 20 years), Which is lln,~ Chip Company is that thi:a~o;fustory of dividend payrn_ents mo_re business for some
not available from the priva te sector. 5
1!( For example, Coca Cola e oun er successful comparue: ~~ ecific investment
3. ~iquidity: Although some issues of G-secs tend to be il1iquid, there is adequate Ji . But it doesn't ~eanclith_~t ~s :an't ;e categorized as '~Jue chips d m :;;,t -:eet the criterion
decades and paying thv1 e;er side many high quality shares o firms recommend for
m most other issues. %di
environment. From_ _de od history, It is a practice that brokerage high quality ones in
Disadvantages of Investing in Govenu.1ent Securities: The main dfaadvantage of . of uninterrupted d1V1 en . . th r t of blue chip share as .
in G-sec is the sa me as in the case of investing in any other debt instrument i.e. inv~~ thei- clients - individua l investors el JS_ f information about the firm.
, . b d on the ana ys1s o th f of
of higher interest rates and inffotion. Poss,biJi their understand.mg, ase . of which are mainly in e orm
1. Tax Benefits by Investing in Government Securities: There is no tax ded 2. Income shares: These are the shar~s, the_ e~g:onsidered a conservative, d~enda~le
source and the investor can avail tax benefit u/s BOC. Ucted , dividend income, as opposed to capital gam.. Well-established corporations wi th
investment, suitable to supl:'leme~t. other m~~i::ually consid e red income s hare. In
2. Minimum amount for Investing in Government Securities: The minimum a consistent record of paymg d1v1dends a t hi toricall have paid a Iarger-than-
for investin~ in G-secs varies depending on the primary dealer. For example ~rnoiJ.' addition income shares usually are those tha s d " .dY ds to their s h areholders
?£ IDBI Capital markets, which are primary dealers, the minimum amount fo .' lil rai , f h .
average percentag~ o t e1r n e mco .
t . me after taxes as iv1 en
h . h The common examples of income
m G-secs is ? 10,000. r inves~
and the payout ratio for these companies are ig . . ti com anies electric
(b) Equity shares are the shares of public utilities, s uch as tel ecomrn uruca on P '
companies, etc. . th d
On equity shares, U1 ere is no fixed ra te of di vidend. First of all dividend . 3 Cyclical shares: These are the securities that go up and down in valu e "~
th be ~en
pr F re~ce share, after that dividend is paid on equity shares. Equity share are ~:re ~akid o · of business and economy, nsmg · · faster m· th e peno · d s of ra pidJ}' improV1J1g us1ness
comparison lo bonds and preference shares. re ns yr . . . .
conditions and sliding very noticeably when business conditions detenorate. Dunng
f In other _wo rd s, equity shares are the main source of a recession they do poorly. The term cyclical does not imply that these shar~s are more
man ce of n firm. It is issued to the eneral . . r=----:--------- predictable than other categories. They are cyclical because they follmv b~sm~ss cycle.
harchold crs do not enjoy any preferen~ial ri pubJ_ic. Egmty Equity shareholders are thf
lo repnyment of cnpital and di vidend Tl ghts with_ regard real owners of the company. The examples of cyclical shares can be industrial chemicals, construcbon industry,
r ~ id ual income of the comp an) b t h iey _are entitled to They have control over the automobile producers, etc.
on trol the affai rs of the bu:i ', u ~ ey en1oy the right to company. They bear the rist 4. Defensive shares (synonymous - protective shares): These a re those which are opposite
: -olle ti v ly are the owners of t~ess an all the shareholders of the business at tht to cyclical shares. These shares shift Httle in price movements and are very rarely of
. . . e company. winding up of the company.
O n hqu1dahon of company th Equity capital can be paid interest to speculators. The defensive s hares have low Betas a nd thus are assigned to
I
Jf c.1pital only after satisfying cl '. esef s iareholders get refund only a~er every claim has the shares with lower risk. Held by long-term investors seeking stability, these shares
aims o credito b
;h are I10 Id e r . The investors in these s rs and preference een settled. Types of frequently withstand selling pressure in a falling market. The best examples of defensive
n ome a we ll as of U1eir share hares _ha ve the risk of equity share: shares are food companies, tobacco and alcohol companies and utilities . Other defensive
· ·
·. p • t opprl'C1nlton ·
m the value ofmone)'
tllei · Bes1d es lllcome
· the , • New issue. pr~ducts include cosmetics, drugs, and health ca re products. They continue to sell
how~ good rc -ults then the valu f thr shares. If tl1e comp } • Bonus issue. their products regardless of changes in macroeconomic indicators.
. ,. e o e e sh any
1e mark· ' I an d. investors earn profits b . ares appreciates in • Right issue.
y selling U1eir h0 Id· 5. Growth ~h~es (synonymous - performance shares): These are s hares of corporations
mgs. • Sweat issue . whose exJsting and projected earnings a re s ufficiently pos itive to indicate an appreciable
 ::::,c\.UKJ. I ' Anll'\I.' ~ · - •.. - - . - .. . . ---~u I.I
. '"1/\~ . .
and constant increase in the shar 's mt1rk t wilue ov r th e extended 1. ~~t d •ff ,re nt pe rs p ,ct iv
rate of increase in market vn lu e for these s hnr is lnrgc r lhnn th ose of1111~ P(, . TAVENUES/ALTERNATIVES . h e jc; loo cf at fr~1rn •t 1·t - Compa ny cJ n d
I In . 0 f I
s ,are. come shares pay out n rcbtivcly high pcrccntngc O I1icir earn in °~t c ~ Ir•
f 111 ~, a..1vesTMEN 1• Equity s ;:i r 1< 1n a . fo r a
·t share fnv c trncn · , rn .:ii·o r anh l c; d ' ff •re nt rn ~a nin g
but th h . t 't gs ~ ,~ B efils of Equ• y I Lh re a re two Id h.:iVL' • t:
· grow s ares do not. Instead the compa ny rcinvcs s I s earn ing . '~ cl1 '
tm ' . ti 1r,1 \
en
d'ffcrcnl stri c
k holders. Broa d y,t about cq u•·ty capital w u
mves ent opportunities thal ure expected lo in crease ,e va lu e of op •by • I So c1ny statemen '
th f U . I the r,, I e<;tor Ang c. , A
ere
bJ" ore,
I ie value of lhe firm's share. Many firms d f ,a ve It ·tnever pnid a d1\' . f1r~ company
nv - an d an in ves tor. of Jo n g-te rm fin a n ce. · t
pu icy state they have no plans lo do so. Dy c au I seems these 'ldl\ d tages of company: . aJ· It is a good s u rce. . rfe-ti rn an d SO, I
growth shares, because a share that pays no dividend and does not inc Should A van T rm and Permanent Captt k
the equi ty cilpital du n.ng J J
would not be a very attractive investmen t. Though the analysts and threase 11 (a) Long- e is not required to p~y-bac c.~ d burd en
l'ttl kn no ,..,.._e
~
· . e e~ 1
company of capital. ppo
investors. U1emselves spend the time trying to discover . I e- own groiv1hll{1' is a permanent source
.
. Unlike preference s h a re s , equity
. . dsharone these
su s ha' res t. s ubject to et
· Speculative shares: These are the shares issued by relatively new firrns ~ - (b) No fixed Bui d en. beca use t.he di v id en f d " cto rs. They m ay n o t g
6 f . I f" . I of ny's resources, f th board o ire . f safety
manc1a . status
. and by firms witli less than average h I . strength . Sp u~1,
manc1a on .thebTty compa of . an d the intention o fitse Thus, th ey pr ovide a cushio n °
profits
11
b Y d e fin 1tion, involves
. a short time horizon, andf t e specu aHve . kl shares are lheQJ1• availa
h d. .dend even w h en company has pro · . . t to
h ave a potential to make U1eir owners a lot o. k money S qmc Y. At th e sa 0t, t e instJV1
unfavoura ble development h the n.ght to tran.5fe r his mtef res t.he
thhoug I1, they carry an unusually high degree of ns . ome ana1ysts consid er spIlle aga T nsferab1hty: . . Th e owner of sharesthatasthe 1ssui.ng . . corpo ratio n trans ·viJ ees rs w ill
s ares to be a most risky gro•vth shares. However, some new established t eC\i. (c) Free ra Th buyer shou ld ensure . . h ts and o lhe r pn ~g
companies Uiat paid no dividends and had short history would probably b echnoi, someone_ else. 1·t5 ebooks so that dividend_s, ~o_hdnt nhgas the ri gh t to sell his shares,f
. e cons ownership on Ith h the md1v1 u d t0 the la ck o
7 p a spe cul ative raU1er than a growth share. . ~ accrue to the new owner. d. A in ougthe sha res o f m any corpora ti ons ue
all b usinesses a re non
· enny shares: These are )ow-priced issues, often highly speculative selJ· there is little or no tra mg quity shares of many 5IIl
. ff d bl ' ing a1 b For this reason, e
sm all pnce a share. Thus, such shares could be a or a e even for the in , interested uyers. • ·t
small amounts of money. \estors liquid and difficult to market. . d t oe of inves tment in e qui ty s hares is ~
. he Growth: The maior a van ao th 0 f co mpany profits o e r e
The categones of the shares presented above are not really . mutuall}' exclu .
s1ve ' (d) Share
bTt in !
11 to mcrease Ul va
. Jue by sharin o-
o in the grow
examples
5 · ·1
show,
b th some blue chip shares at the same
b hme can be an me ~
inc0 ·-~ a
long runY · al t n o change on th e asse ts
F
1m1 ar 1y, o . cyclical and defensive shares can .e income shares. ·
(e) Credit Worthiness: . 1ssuance of equity . sh arethcapit f crea
ce on es the secun. ty o f J·ts fixed
eatures of Eqmty Shares: The main features of egmty share are: of the company. A company can raise fur er i.nan
(a) Residual
• . Claim
fi on Income:
. . After paying. interest, tax, preference divid end assets. . 1• •d t 0 be the nsk . ca pi·tal • A co mpany can tra de on
remammg pro t can be distributed to eqmty share holder. ' (f) Risk Capital: Equity capita is sai · . . .
(b) R 'd al · · · b d · d O n the risk of eqwty .capital.
es1 u Chum on Asset: While repaying capital also equity shareholders st d eqwty m a peno s . . d h d oe au ainst inflation Lhough
( ) R' ht C . an ) H d . t Inflation- The equity share is a goo e o o . .15 b" th
c tg to ontrol: Eqmty shareholders have the right to control the affairs of the ' (g . e ge agams · f th d clinino purchas ino po w e r as it s u Ject to . e
(d) V ti Ri h . ' it does not fully compensate or e e t:J o d b le s attractive
0 ng _g ts:. Voting rights are available to equity share holders. money-rate risk. But, when interest rates are high, shares ten to e '
(e) Pre-~~phve Rights: This right of equity shareholders makes the compan I and prices tend to be depressed. . . d . th
add1honal equity h t · · . Y oc · t art from d1V1den 15 e
bl" s ares o ex1stmg equity holders before it is offered to gen (h) Capital Gain: The other source of return on lil esbnen ~p,
pu ic. capital gains. Gains which arise due to rise in marke t pnce of Lhe sha_re.
(f) ~imit Liability: The liability of equity shareholders is limited to the extent oU (i) Rights Shares: Whenever companies require further cnpital for e~ pans10n
nd 0etc, Lhe~
0
mveStrnent and it arises in case of equity capital. tend to issue 'rights shares'. By issuing such shares, ownersh ip a ~ 1:trol
(g) Nature: They are permanent in nature. existing shareholders is preserved and the investor receive in\ estment pnonty over
(h) Owners: Equity sharehold other general investors.
the highest risk. ers are the actual owners of the company and theyf (j) Bonus Shares: At times, companies decide to iss ue bonu shares to its s h a reholders.
(i) Transferability: Equ ·ty h It is also a type of dividend. Bonus sha res a re free shares given to existin g shareholders
f d . i s ares are .transfe ra bl e, 1.e.
. ownership . of equity shares car and many a times they are given in lieu of divi d en d s.
tr ans erre with or with t
') o· "d d
1v1 en : Divide d ou consideration to oth · er person. (k) Liquidity: The shares of the compan which are listed on s tock exchanges h ave
(J
Equity shareholde: cioaynaobtle to _equity shareholders is f benefit of any time liquidit)'· The hares can ha ve very ea ily transfer O\ovnership.
get fixed rate of dividend. an appropriation o F~
 SECURITY ANALYSIS AND PORTFOLIO MANAGEt-,E
Advantages to Investors:
(a) Dividend: An investor is enti tled to r ceivc dividend from th e compnny. II is 0
.
ti,e t wo mam sources of return on hi. investment.
nl' 1
'
(b) Limited Liability: Liability of harcholdcr or invc to r i limited lo the exten t of
investment made. If the company goc into lo _c , share of lo s ove r and above
capital investment would not be borne by the investor.
(c) Tax Advantages: Equity share al O offer tax adv.1ntage to the investor. The l<1r
yield on equity shares r ult from on incrcn c in principnl or cnpita l gai ns, wh~~;
are taxed at lower rate than other incomes in most of the co untries.
(d) Stock_ Split: Stock split means splitting a hare into parts. An investo r shou ld ~
ben_efited by this as by spli tting of hare, th e per-share price reduces in the tn<1rk(•
which eventually increases the tradability of sha re. At the end, stock split resu lts i
J,Jgher volumes with more number of investors lead ing to high liquidity of the shar:
(e) Claim over Assets and Income: An investor of equity share is the owner of th
company and so is the owner of the assets of that company. He enjoys share in tht
incoi:n~s of the company. He \.viii receive some part of that income in cash in the fo~
of d1v1dend and remaining capital is reinvested in the company.
(f) Exercise Control: By investing in the company, the shareholder gets c ,mership ir
t~e co~pany and thereby he can exercise control. In official terms, he gets votin,
nghts m the company. · variation. ft is always very difficult to book profits from th e m arket. On th e contrary,
(g) More l~come: Equi_ty shareholders are the residual claimant of _the profits_ after meetinl
all the fixed comrrutments. The company may add to the profits by trading on eq uity
Thus, equity capital may get divid end at high in boom period.
(h) Capital Profits: The market value of equity shares fluctuates directly with the profit5
of the company and thei r rea l value based on the net worth of th e assets of the
company. An appreciation in the net worth of the company's assets will increase the
market value of equity shares. It brings capital appreciation in their investments.
(i) An Attraction of Persons having Limited Income: Equity shares are mostly of lower
denomination and persons of limited recourses can purd,ase these shares.
(j) Other Advantages: It appeals most to the speculators. Their prices in security market
are more fluctuating.
. Disadvai:itages of Equity Share Investment: Following are the various disadvantages of
equity share investment:
Disadvantages lo Company:
(a. ~i~~end: The dividend wruch a shareholder receives is neither fixed nor controllable
f im. The management of the company deddes how much dividend should be
given.
(b) Dilution in Control· E h I O f . it is h di
existing . h.· · ac sa e equity shares dilutes the voting power of the
equity s areholders and ext d th ·
shareholders E • h · en s e votmg or controlling power to the new
power in fe; h~~~ty ~ are~ are transferable and may bring about centralization of
and management o:· ertam groups of eq~ity shareholders may manipulate control
detrimental to the • !company by controlling the majority holdings which may be
m erest of the company.
>
'°4l
JNVESTMENT AVENUES/ALTERNATIVES
f 3.21]
(c) Trading on Equity nol Pos iblc: ff equity share a lone a r i s ued, the co mpa ny
cannot trad e on equity.
(d) Over- Cap1la· J'1za t',on: E·xces 1ve · ue o f eq uity
· iss · s ha rcs may r s u It 1·n ove r-capita li zation.
l~
1
Dividend per share is low in that conditi on which advc rs ly affects the psycho 1ogy
~ of the in vestors. ft is difficult to cure.
(e) Lack of fle xibility ln Capital Structure: Equity shar s ca nnot be pnid _back during
the lifetime of the company. This characteri ti c cre.ites inflex ibility in c., p,tal structure
of th e company.
(0 High Cost: It costs more to fin ance with equity share than wi th o th r ecu riti ~s as
the selling cos ts and underwriting co mmis ion are paid at a higher rat on the I s ue
of these sha res.
(g) Speculation: Equity shares of good compan ies are subject to hectic sp culat-ion in the
stock market. Their prices fluctuate frequ entl y which are not in th inte re t of the
company.
(h) High Risk: Equity share investment is a ri sky share compa red to any other inves tme nt
like debts etc. The money is inves ted base d on the fai th a n in vc to r ha in the
company. The re is no collateral security attached wi th it.
(i) Fluctuation in Market Price: The mark t price of any equity s hare has a wide
there are equa l chances of losses.
Disadvantages to Investors: Equity sha res have the following disadva ntages to th e
investors:
(a) Uncertain and Irregular Income: The dividend on eq uity s hares is subject to avaj(ability
of profits and intention of the Board of Directors and hence the income is quite
irregular and uncertain. They may get no dividend even there arc sufficient profits.
(b) Cap~tal Loss during Depression Period: During recession or depression periods, the
profits of the company come down a nd consequently the ra te of dividend also com-s
down. Due to low rate of dividend and certain other facto rs the market va lue of
equity shares goes down resu lting in a capital Joss to the investors.
(c) Loss on Liquidation: In case, the company goes into liquidation, eq ui ty sha re hold e rs
are the worst :uf~ers. ~ey a re paid in the last only if a ny surplu i avaj lab l after
every other claim mcludmg the claim of preference shareholders is se ttled. It i evident
fro~ the advant~ges and disadvantages of eq uity share capital di cu ed above that
th e issue 0 ~ equity share capital is a mus t for a company, yet it hould not solely
de pe nd on it. In order to make its capital structu re fl exible, it hould raise funds from
ot11er sources also.
(d) Limited Control· An eq ·ty · t · •
·. ~11 mves or is a small mves tor of the company. Therefore,
. ar Y ~ossible to impact decision of the company using the voting rights.
(e) Residual Claim· An equity h h Id h ·
th . . . _s are o e r as a residual claim over both the assets and
alle ~:~rms~·at~~omlde "':h1<:111sd abvaj lable lo equity shareholders is after the payment of
< o ers viz. e enture holders etc.
~~~i~~;~:;; :et~:eg::%top~;tic.o~ qui
lo~gty-tehrm finance of ~ joint
0
stock J:;;a :/~~~~s~=~e~~
s ares may be issued
 ANALYSIS AND PORTFOLIO ~
SECURITY At-41\Q r;-::; j
11,c
nctuill cash inflow rna ~~t !.3:23
· d1'fferent ways but in all ca~e ' < y not ~t · I VES d b
by a company m ~ 18<! VESTMENT AVENUES/ALTERNATI . t 1956, s hare iss ue Y
bonus issue) . d' cu sed below: f1 JN d' s f on 79A of th e Compa n y's Ac' d tion other than
.f f ·ty i suec; h,n c been I 4. Sweat Issue: Accor mg to ec i . t disco unt or for consi era . II tu al
TI,e d1f erent types o eqrn
1. New Issue: A company issues prospec tusa -
u;;. 't'ng the general pub!'
\s collected by the ;~ to Subs, .
shares. Generally, in case of new is ues, n,on,d calls. The prospectus lllpa11y i~1~
a company to its e mployees o r directors a a ( t iss ue is to re tain the mte e~ d
;ash are known as sweat iss ue. The purpose o s_wca an be made if it is authonz~
property and knowhow of th e compa~.i'· Sw~a t t s ue :em ed by Issu e of Sweet Equity
than one installment- known ilS nllotment n1f nwney payable on suchcontairis ~ in a general meeting by s pecia l resolution. rt is a so go
O
regarding the date of payment and .imot'.nt to its authorized C"p't allotn,~dlt Regulations, 2002, of th e SEBI. f re d within 3 years
ff t the public up . " 1 al, tl, ' ~I . 5 t ·ty sha res cannot be trans e r
calls. A company can o er o . e istrar of Comparnes and Wit ''l&h1 .' Advantages of Sweat Issue: wea eq u1 . I floata ti o n costs a nd brokerage.
requires the filing of prospectus with the R g I ligible registered rn h the ~ 11 from the date of their allotment. It does not mvo ve . d a t concessiona l rates,
and Exchange Board of India (SEBI) throug 1 e . hi erchant baCIJ Disadvantage of Sweat Issue: As sweat equity s hares a re iss u e
means getting somet ng ext ~~
2. Bonus Issue: Bonus in the general sense • d f f ra in · the company loses financially.
1
to normal. In busin:ss, bonus shares are th e sl_rnres .fssue ree ohcost, by a cadd,,
EBI . 'dehnes, 1 a company as 5 ff1 orri (c) Money Market Instruments
to its exis_ting sh~reholders. As per S . gw -istin shareholders in ll cien1 ~. • .bl for borrows and lenders to come
reserves it can issue bonus shares to its ex d g fts/ rese . proportio/rr{ A money market is a mechanis m that makes it poss1 e fu d It meets the s hort-term
number of equity shares held out of accumulate pro t. rve_s in order to ~. together. Essentially, ii refers to a m~drketLifor_cLi s_htyortft~::h to nth:· lend e rs . A money market
. be issued only if the Articles of A capi re uirements of the borrowers and prov1 es qui o c k t does not
~e profit/reserves. _Bo~us sld1ares can ssoeiatj~ . ihe market in which short-term fund s are borrowed a nd lent. The money mar e hich
e company perrmts it to o so. ' d1seal i·n cash or money but in trade bills, prorru _·ssory notes and government papers, w are
Ad vantage of Bonus Issues: From tI1e cOmp 'any's point . . of. view~ .as b onus iss drawn for short periods. These short-term bills are kn own as near mon ey·
not involve any outflow of cash, it will not affect the !Jqu1d1ty position of the co Uei Types of Money Market Instruments: The major short-term credit instruments dealt
Shareholders, on the other hand, get bonus shares free of cost; their stake ~I'< with in a money market include:
10 1
company increases. (a) Trade Bills: These are bills exchange arising out of bonafide commercial transactions.
Disadvantages of Bonus Issues: Issue of bonus shares decreases the existi They include both inland bills and foreign bills.
return and thereby reduces the market prihce of shares of th e company.
bonus shares decreases the earnings per s are.
Th:\::~ 1
(b) Banker's Acceptance: These are bills of exchange accepted by commercial banks on
behalf of their customers. The fact that a bank of repute accepts a bill increases its
3. Rights Issue: According to Section 81 of the Company's ~ct, 1956, rights iss ·. creditworthiness, which, in tum, means that these can easily be discounted.
subsequent issue of shares by an existing company to its existing shareh Oule ~- (c) Treasury Bills (T-Bills) : Treasury bills are short-term money market instruments,
pro~orhon . to their holding. Right sI,ares c?n b~ issue . d b y a company on! de.n which are issued by RBI on behalf of the GOI. The GOI uses these funds to meet its
Articles of Association of the company permits. Rights shares are generally l il_i short-term financial requirements of the government. There are hvo types of treasury
the existing shareholders at a price below the current market price, i.e. at a conoceserf( bills namely (i) ordinary or regular and (ii) adhoc treasury bills popularly known as
rate, an d they have the options either to exercise the right or to sell the . s10fu 'adhocs'.
another person. Issue of rights shares is governed by the guidelines of SEBI rig , O:dinary treasury bills are issued to the pubLic, banks and other financial institutions
central government. and, ~ 1th ~ view to raising resources for the Central Government to meet its short term
fmanc1al needs. Adhoc treasury bills are issued in favour of the RBI only. They are
Rights shares provide s?me monetary_ b~nefits to the existing shareholders as i
not sold through tender or auction. They can be purchased by the RBI only. Ad.hoes
get shares at a concessional rate-this 1s known as value of right h' h
computed as: w IC cai are no~ mar~et~ble in lr:di~ but holders of these bills can sell them back to 364 days
ondly. Fmar:icial mtermedianes can park their temporary surpluses in these instruments
Valueb of right = Cum right market price of a share - Issue an earn mcome.
N um er of old shares + 1 price of a new sh.r
F~atures of Treasury Bills: The salient features on T-Bills a re:
Advantages of Rights Issue: Ri I1t .
existing shareholders Floatat' g s issues do not affect the controlling pow5 (1) Thdese arde zero coupon bonds, which are issued at discount to face value and
re eerne at par. are
i.ncurred by the comp.any· u· n1' _ikon _cos,ts, brokerage and commission expenses ar11
' 1 e m t 1e p bl' 1 · s
benefits as shares are issued t0 ti u IC s ue. Shareholders get some mon~ ~'.'.) No tax i~ deducted at source and there is minimal default risk.
iem at conces · J (111) The maximum tenure of these securities is one year
Disadvantages of Right I siona rates.
t' I d . . s ssue: If a shareh 0 Id f ·1
s ipu ate _hme, his wealth will dee . er a, s to exercise his rights within: (d) Short-dated Government Securities· These . ~ . .
at concess1onal rate. !me. The company loses cash as shares are isr for short periods. Long-term oveni:me an: _secunties ISsued by the government
sometimes included in this c~tegory. nt secunties that are nearing maturity are also
 I ........ I - ..... u
(c) Commcrcinl Pnpcrs: These nre hort-tcrm unsecured sccuriti . t.t~Pi~Q
er ditworthy lnrgc companies. Commercial papers are rcgulatedesb issued t [ 3,25]
Fcnlures: 111c mnin fcntures of commercial papers are: y Rnr. by ~ JNVESTMENT AVENUES/ALTERNATIVES . . t o f the investments are
(i) Only tho e compnnie nrc allowed to issue commercial pape rs
worth of ~ 10 crorc or more.
.
Which L
inves::tf~~ :01:~~~;s
forms of financi al asse ts that are available to
'lliquid but are generally accepted as good collate
from banks- It indudes:

'lij i I
1
(ii) The minimum size of an issue is t 25 lac and the size of ca c,
1 Co 1 I. Bank Deposit
111
should not be lcs than ~ 5 lacs. 111erCi II. Post office Scheme
(iii) Their maturity period ranges between 90 to 180 days. aJ~ III. Small Saving Certificate

Advantages: The main advantages of commercinl papers are:

rv. Mutu al Funds
v. Others- Public Deposits, UC Schemes
(i) It is a d,eaper source of short-term finance as compared to bank
(ii) It is a u eful source of fin ance during pe riod of tight bank cred · credit J. Bank Deposits eo Je cannot save
5
L" . . It, Bank d eposits se rve different purposes for different pehople. otrmem · ~onfe The purpose
mutations: 11,e limita tions of commercial papers are: · · th bank only when they ave ex a ·
regularly; they deposit money m e a want to depos it money in
(i) It can be u ed only by large and financially sound companies. of deposit then is to keep money safe for future needs. Some m y . with interest so as
r as Jong as possible to ea rn interest or to accumulate savings . d ·t
(ii) Commercial papers cannot be redeemed before maturity date even . a bank fo . d S mostly busmess men, epos1
to buy a flat, or to meet hospital expenses m ol age, e tc. ?me, . t f the deposits.
firm has surplus funds. if the ~ all their income from sales in a bank account and pay all bus iness _expe~es ou o osit
(iii) '.',tfatu~ity ~ate ~f coi:111:1er~al papers cannot be extended even is th . ~
Keeping in view these differences, banks offer the facility of operung ~1ffe rent types ~f dep
is facmg finanaal difficulties. e 155lling accounts by people to suit their purpose and convenience. On the basis of purpose ey serve,
1
bank deposit accounts may be d assified as follows:
(f) Zero Coupon Bonds: These securities are issued at discount to the f
redeemed at the par i.e. they are issued at below face value and redeem ;ce
Value (a) Savings Bank Account.
F tur
ea es o
f Z
ero Coupon Bonds: l11e salient features of zero coup
e at fac '
b
nd
e~,(b) Current Deposit Account.
(i) The tenure of these securities is fixed . on s att ° (c) Fixed Deposit Account.
(d) Recurring Deposit Account.
(ii) No interest is paid on these securities.
(a) Savings Bank Account: U a person has limited incom·e and wants to save money for
New Instruments Introduced: future needs, the Saving Bank Account is most suited for his purpose. This type of
(i) Non-Convertible Debentures account can be opened with a minimum initial d eposi t that varies from bank to bank.
Money can be deposited any time in this account. Withdrawals can be made either
(ii) Zero IntereS t Fully Convertible Debentures
by signing a withdrawal form or by iss uing a cheque or by u s ing A TM card.
(iii) Fully Convertible Cumulative Preference Shares Normally banks put some restriction on the number of withdrawal from this account.
(iv) Fully Convertible Bonds with Interest Interest is allowed on the balance of deposit in the account. The rate of interest on
(v) Discount Bonds savings bank account varies from bank to bank and also changes from time to time.
A minimum balance has to be maintained in the account as prescribed by the bank.
(vi) Deep Discount Bonds.
Features:
Issuer of Money M ar ke I I nstruments: Issuers of mone . 1. It is for saving purposes.
(i) Government of Ind' d Y market mstruments a;:
.. ia an other sovereign bodies 2. Any individual either single or jointly can open a savings account.
~'.'.) Banks and development financial institutions 3. Most of the salaried persons, pensioners and students use savings account.
(111) Public Sector Undertakings. .
4. The advantage of having savings account is bank pay interest for the savings.
(iv) Private Sector Compan·1es.
5. The saving account holder is allowed to withdraw money from the account as and
(v) Government or quasi when required.
-government Olvned
(2) Non-Securitized Invest non-corporate entities. 6. 'Ire rate of interest ranges from 4% to 6% per annum in India.
ments
In India, the household sector' . 7. There is no restriction on the number and amount of deposits.
P rop orti on o f I·ts total investme n t m
. fis mvestme n t m· non secu ·ty f
nancial assets Th n orms constitutes a ~ 8. But withdrawals are subjected to certain restrictions.
· ere are a large number of non-secur. 9. Some banks recommend maintaining a minimum amount to keep it functioning.
Q.2~(b ) Curre nt
. e there
sschools,
me
Deposit Account:
colleges,
d h
SECURITY

·taJs. have
an. _ospi on . number
are restnct1ons
.
ANALYSIS
Big businessmen,
to
m"ke payment

f of
t sUitable or
Cl

withdrawa
them.
ANU JIORTFOLto

through tJ e· hotts \
companies

s rom
They need
. B k
savings bank
to have
1

an a ac~
"1,\~

trttJ . I~

Basis
-■■------------

I f and instj bc1 ~~~~ ~~~~~~~~~~~~;~;;~;;;;

t1\q
1
TMENT AVENUES/ ALTERNATIVES
. _ _ _ _ ___0

7 Current Acco
unt

ttk a, r~N~VtE~Sc~=~=~~:~:S~a;v~i;n;,;A~c~c;o:u;n;t;;-;;~~rl~~~~~~~;:;;~:c;:;;d<;,;~1-
-s. t c
counts don't
~:; ~:==~==~=} ~
r::;-:;:;l

tha t type of account is 1no made any 11 umber of hmes. an s . open Cl.Jtrcc% ~I ,' No, t earn aroun
d Usually the curren a
whidi witlldrawal can oe ' · t this account a 1so requires ce t . ettt I i _ The saving accoun s . Ind" earn interests.
for them Like savings bank accotlun , count On thjs deposit bank d r a1n t'tii ~ 5, Interest 3.5% interest at. present Ln lat~~
· . 1,·1 ning ,e ac · . Oes ~1 Income 11 ow deregu
amount of deposit w 1 e ope ti countholder pays certam amou not h This interest rate ts d fi
Ratl ,er ,e ac · Id nt e,., ra1 d b nks themselves e ne
interest on tl1e b a Iances. . nee of the account110 ers ba k «ch L. in In ia, so a would
. F the conven1e . . n s ,~ wl1at rate of interes t they
operational charge. or_ , s of the balance of deposit. 1111s facility . a!s0 ,· have overdraft
n ts m exces d is '- •I pay to their customers. Current accounts usiness to
withdrawa I o f amou . e specific customers an up to '%1 h o overdraft
overdraft facility. It is allowed to_ ~~~~,e bank concerned. a Certain; Overdraft Saving accounts ave n ·ty that h e lps the b
fa cil I d to non
subject to previous agreement wit 6· facility. "thout hurdl es u e
run wi d sho rt
. b
ava1 1a • 1
· t· ty of funds an
Features: . . s Jinn, compnnrcs, · pu. blzc
· en tcrpnses
· etc term deficits.
1· It is mainly for busmess pe1so11 , -, . gs and ts there are no
· . tm ,t or savm • d a In current accoun ,
i
· s

~
used for tl1e purpose of mves e, Usually, saving accounts nee minimum balance requirements.
t 1· ,,id de,,osits. Minimum
• ,1..
2. These deposits are u ,e mos 1q r
3. There are no limits for number of transactions or tl,e amount of transactions in a
7.
Balance minimum balance in the banks to
keep the account active.
.
4. There is no interest pmd on amoun
service charges, on such accounts.
t held in the account, banks ch
.
arges Q: (c) Fixed Deposit Account (also kno~ as
want to save money for long penod. If m
Te= i;
y
De osit Account): Many a ti.me people
de osited in savings b ~ accoun!,
/ is de osited in a fixed deposit
5. The current accounts do not have any fixed matunty as these are on continuous1 banks allow a lower rate of interest. The_refore\ :~~ higher ~ate. This type of d ~posit
account (also known as FD) to earn an mteres f edfied period. This penod of
accounts.
account allows deposit to be made of an amount or a sp during which no wi thdrawal
Difference between Saving Account and Current Account
deposit may range from 15 days to three years or more h the amount before its
s. Basis Saving Account Current Account is allowed. However, on reque_st, the del:'ositor: ~ e:~=t was acreed upon. The
No.
1. Objectives The objective of a savings bank
account is to enable tl,e customer
The objective of the cu 111
accounts is to provide fle)i
- maturity. In that case, banks gwe lower _mteres an
interest on fixed deposit account can be Wl_tlidrawn at certain m
end of the period, the deposit may be W1thdrawn o_r rene:-ved for a
Banks also grant loan on tl,e security of fixed deposit receipt.
. . tervals of ti.me. At the
further eriod.
P

save his/ her liquid assets and also
earn money on that saving.
2. Preference The savings banks accounts are
preferred by individuals and
provide liquidity for private and
small businesses sometimes.
3. Number of Usually saving accounts have
transactions low transactions.
4. Personal Handling savings accounts involve
handling
personal handling of assets
payment methods to the busm
Features:
people and entities. Thesepaym 1. In Fixed Deposit Account (also known as FD Account), a particular sum of monetJ
methods include sp«
is deposited in a bank for specific period of time.
arrangements such a overdi
facility, accommodation 2. It's one time deposit and one time take away (withdraw) account. The money deposited
standing orders, direct deb in this account cannot be witlidrawn before the expiry of period.
offset mortgage facility. 3. The depositor can ask for closing the fixed deposit prematurely, in case of need, by
paying a penalty. The penalty amount varies with banks.
The current account is basic .
transactional account whicn 4. A high interest rate is paid on fixed deposits. The rate of interest paid for fixed deposit
preferred by business people. varies according to amount, period and also from bank to bank.
(d) Recurring Deposit Account (also known as RD): This type of account is suitable for
those who can save regularly and expect to earn a fair return on the deposits over
Current accounts have I~
a period of time. While opening tl,e account a person has to agree to deposit a fixed
transactions. amount once in a month for a certain period. The total deposit along with the
Current accounts are aimeJ interest therein is payable on maturity. However, the depositor can also be allowed
make the account holder frei !o close ~he account_ before its maturity and get back the money along with the
personal handling of liquid f,Jfl interest till th.tt penod. The account can be opened by a person individually or
 SECURITY ANALYSIS AND PORTFOLIO MANAG
1111----
. e"'f~ ENT AVENUES/ALTERNATIVES . bank acco unts.
. h by the mrnrdian in the name of a minor. The rate of . I JNVEST M . . , f current and av ings ' . d it ed
·ointl)' w1tl1 anot er, or o-' . b kd . in1 Mcney ca n b, dcposilcrl at any trm c i_n _th ca e _o d nl nc , and m on ey I e po
J e de osits is higher than that on a snv1~gs an epos1t but !owe er~ O
allowed on th d p fixed deposit for the sa me penod. r I~ (c) the ca e of fi xed depos it acco unt'. rt rs d cpc~c; it Y _
the rate allowe on a 1 ln ery month in the case of recurring depoc;1t account. 11 . t ·res/ rate is denrlcd
. D •t Accounts may be of different types d epending on the p CV d .t ) 1 /1/ L •
Recurnng epos1 f 11 t1rt1. d) Interes t is pa id on bank deposits (except current ep::~et .s ituation. The co~ pc r.1 t1;e
•.
under Iymg e
th deposit ·
Some of tl,ese are as o ows: " -I ( b tire r<Bl fro m tim e to tim e as per the mo ney m . a red to co mm e rcwl bnn s.
f A uni (also known as Money Box Scheme): Small savers r·1 b;nks off~r ne_a:fy one perfcfentdhig~-~~1! n~~gr~;/ ~~~;, s~o:ic, (no rrn nlly o ne p e r cent).
5
(a) Home . a tel cdcopoc;it money under this schem e. For regular savings, thn nd Even senior citizens a re o ere a I ' f th d e pos it pe riod is less
conven1en o e - . , " 6•
.d fe or box (Gull ak) to the depositor. TI1e sa,e or box cannot be op r, l . nth ly basi However, I h r idity
prov1 es a sa , . . 1,· • II en~ ( e) Interest is paid on q uarter y o_r six _mo . . Bank de p os its h ave hi g iq u .
by the depositor, who can put money m 1t regu 1a~ 1y, w ~c11 1s co ected by lh 90 d;iys th e in teres t 1s pa id o n maturity. . . ts
tI, an ' , . f fxed d epo 1t rece1p •
bank 's representati, e al intervals and the amo~nt 1s credited to the depo ito, Banks even give loa n o n the security o I f bank depos its:
account. The deposits carry a nominal rate of interest. < h ·ous adva n tages o
f Bank Deposits: Following a re t e va n
Advantages o . 'd'ty
(b) Cumulative-cum-Sickness Deposit Account: Regular deposits made _in this ty~ 1 Investment is reasonably saf e and secured wi th adequ a te hqw I •• regula r m a nne r.
of account serve tJ1e purpose of having money to meet la_rge_expenses '.n case thC'r . h . t t m ad e a nd that too in a
_ Banks offer reasonable return on t e inves men
is sudden illness or other unforeseen expenses. A certain fixed sum 1s deposit1, 2
at regu lar intervals in this account. The accumulated deposits over tim e alon 3 Banks offer loan f acility against the inves tm ents m a d e. . . d . I a nd quick.
. d . b k . ves tm ent are lirrute , s1mp e
with interest can be used for payment of medical experises, hospital charges, 4 _ Procedures and formalities in volve m a n in . '

(cl Home Construction Deposit Scheme/Saving Account: This is also a type . S· Bank s offer various services and facilities to their cus. t om e rs . b k d os1·ts ·
· )' ·1 ti ns of a n ep ·
recurring deposit account in whid1 money can b~ deposited regularly ei~her /1 "mitations of Bank Deposits: Following a re the va rio u s urn a o
LI • a red to other avenues
the purchase or construction of a flat or ~ouse 1~ future. The rate of mter.
offered on the deposit in this case is relatively higher than in other recurrir 1. Th e rate of return in the case of bank inves tment 1s low as comp
deposi t accounts. of in vestment. . . ai.ns t the present
2 . The return on investment is not a d equate even to g1Ve protection ag
Features: inflation rate in the country.
1. Recurring deposit account or RD account is_ open~d by those who want to sa, 3. Capital apprecia tion is not possible in bank investment.
certain amotm! of money regularly for a certam penod of time and earn a highe
interest rate. II. Post Office Scheme
2. In RD account a fixed amount is deposited every month for a specified period and th It includes the following:
total amount is repaid with interest at the end of the particular fixed period. (a) Various accounts offered by post office.
3. Th> period of deposit is minimum six months and maximum ten years. (b) Various saving and tax saving instruments offe red by pos t office.
4. Th> interest rates vary for different plans based on the amount one save and tJv (a) Various Accounts offered by Post Office
period of time and also on banks.
It includes the follo w ing:
5. No withdrawals are allowed from the RD account. However, the bank may allo1
1. Post-Office Saving Account : The pos t-offi~e savings account can be opened minimum
dosing the account before the maturity period.
of i 50 and maxinlum of i 1,00,000 by an individual. Howeve r, for joint acco unt the
6. These accounts can be opened in single or joint names. Banks are also providing tlif upper limit is ~ 2,00,000/-, but there is no limit for group, insti tution a l or official
nomination facility to the RD account holders. capacity account.
Important Features of Bank Deposit Account is as Follows: Withdrawal from the account is by cheques and there is no restriction on withdrawals,
(a) Any individual (of major age) can open a bank account by following simple procedtm. unlike in a commercial bank. Accounts having minimum balance of t 200 during
An ~ccountholder is trea ted as bank customer and all normal ban.kin facilities and April- September and October-March qualify for six monthly prize draws in the next
services are offered to him A bank . g January and July.
. 1 . · account may be smgJe or joint nomination facilin
is a so given to accounthoJders. · The interest is tax free and is 1/2 per cent more than tha t offere d on sa vings bank
(b) Deposits in the banks are safe and secured Th . account by commercia l banks.
and conditions of the bank · ey can be withdrawn as per the terms
2. Post ?ffi_c e Recurring Deposit: The scheme cove rs free life insurance cover after receiving
· account. The benefit of d · ·
available to bank depositors. epos1t insurance scheme is aJS(I contnbuhons for 24 months on account of d enomination of ~ 5, t 10, t 15 or t 20.
 SECURITY ANALYSIS AND PORTFOLIO "1A -
~ .. . "'~Q t~ _..
~ d ositor after a minimum penod of two NATIVES
In the event of death of the e~ heir or nominee wi1J get the full Ill Years, f I TMENT AVENUES/ALTER
date of opening the accou;t, t -~or's age was between 8 and 53 years aturity ~ti~, xNVES A t ust
the account provided the epol~~ during the first two years and the a;nd th~,i~,
been no withdr~wals
current at the ttme of
o~e~~{:.u
·1 ble for an extended period of depo .
count
.
tl~:
•
• T~~;
• Hm
r dults jointly
undivided family
.
. in the d e n ominations
certificates are availabl~ .rn lirnit on the pu:cha Jue of a certificaL
s':!
the t100, tSOO,
of the certi~c~te~

The benefit of cover is not ava1 a SJt beyo~A National Soavmf no 000. There is no_m c1 x1mu Presently, .rnatun ty_f~a te of any other
. ~ ~1000, f500 an . ' •ficates is s ,x year~- of a cert1 ica . . s is not
years. . . Time Deposit is an mvestment option that Period of matun_ty ~f ce~h n60.10. Maturity value h.rnent of the certifi.c~te re b a
3·
Post Office Time Deposit: A t rly and is available through post-offj Paysq, f noo denomination is. te rate. Premature encasf the holde r(s), £orfe1tu y
ounded c1ar e , . ces a i o . · at proporaona f death o
interest rates comp · f• 'tal appreciation m t1,e sense that m er~ denominahon is d' unt in the case 0
country. They are suitable or capt oney 8r0i, permissible except a~ a ~s~~ a court of Jaw. . tax but deemed to
a pre-determined rate. 1 d e and when or ere is liable to Ulcorne · ves ted and
. tions where returns are commensur Pe g the certificates every year . 1 on the amount in . e
Unlike certain other mv~stmlen~0 ~. Ti~e Deposits reh.:rn a lower, but atfe \vii) Interest accru~d o~ d Income tax rebate is availab e amended from time to hl':1 .
risks the rate of growth is aso g1, saer, g, have been reinves e . . 88 of Income Tax Act, as ,;....-.it fixed vide secbon
, i . g under sechon t arned as per .L.il1 u
in investment. interest accrum ailable on the interes e
Therefore Time Deposits are one of the better ways to get a relatively high in Income Tax relief is also ;~ed from time to time, d b erson in
' . The only condition is that they are bound for some specif,· ~ 80L Income Tax, as ame Th certifi' cates can be purchase Th y P....... aturity
rate for savings. . D • Th b 1 c~ . C rf ficates· ese · t ,...00 e u.o
of time The investors can borrow against a Time epos1t. e a ance in accoun1 3 10 Years Social Secunty e ITh Wnlum investment amount 15 :::, . ded annually.
· I · . of 18 45 years e m f · t rest is compoun f
be pledged as a security for a oan. the age group . - t .' 10 years and the rate O m e d section 80-L 0
Th t ffce monthly · · d of these mstrumen sis · um of t 7000 un er f th
4. Post Office Monthly Income Scheme: _e pas -o '. ~come scheme~ pen~ t ualifies for deduction up to a rnaxIDl ature after 3 years o e
provides for monthly payment of interest income to mvesto_rs. It is meant for in%
who want to invest a lump-sum amount initially and earn mterest on a monthlro
The mteres i A t These certificates can be enchased prem
the Inc~me ~ c . of the death of the certificate holder ~:fore ~p~ al heir/nominee
. of 2 years from

for their livelihood. The scheme is, therefore, a boon for retired persons. date of issfUE~- c~~ee to non-natural causes (excepting sUiode), I e efgthe certificates.
the date o issue al t 3 runes the face va ue o ·
(b) Various saving and tax saving instruments offered by post office are entitled to receive an amount egu o .f. tes are available in
'f" (VIII Issue)· Such cert1 ica . .
4 National Saving Cerh icates . d =F 10000 The interest on it 15
It includes the following: • denonunattons
· · f
o , ~ 100, < 500, < 1000 ' t 5000
. . an , ·
d premature encashment 1s .
1. National Savings Scheme: In addition to the above post-office deposit scheme, van 6
compounded half-yearly. The term o~ deposit _is !'ea~~e ualifies from tax rebate
National Savings Schemes have been introduced from time to time to mobilise pi; not generally possible. The amount mveste~ m this s . q xem t from tax up to
savings for financing the economic development plans. of 20% up to a maximum of t 50,000. The interest accrued is e p . al S ving
TI1ese schemes have bee'l very popular in view of tax benefits enjoyed by them. Ur, t 7000 under sec. 88 and is paid back at the time of maturity. The _ atl~n a
commercial bank schemes, these schemes are uniform all over the country. certificates can be purchased from the Post Office can be pledged as secunty for loan
Ag~in, the interest is paid on completed years no payment being admissible for bro' and provide nomination faci lity.
periods of a year. Premature encashment is discouraged. Some of the schemes s. Twelve Years National Saving Annuity Certificates: This scheme provides a retirement
offe_r~d through the State Bank of India /nationalised banks. The national san plan. The rate of interest is the same as in NSCI Issue, though ~e manner o~ pa~ent
certificates sold through S.B.I are designated as "Bank Series". of interest is different. The annuity certificates are available only in higher
Unlike ·1 bl e for a II th e NaLr,.,l denominations of < 3200 and t 6400. The deposits amount can be made either in lump
• commercial
ch bank$ schemes' nomination
· fac1·1·t ·
1 y 1s ava1 a
sum or in periodic installments spread over a period of two yea rs. From the 61st
Savings
F h S emes.f Accounts . can also be trans f erre d from one Post OffICe · to an()[i·
urt er, many o these savings certificates can b d . dI month onwards, the depositor starts receiving a monthly annuity (t 50 for certificates
guarantee. e PIe ged as secunty, towar s of ? 3200 and < 100 for certificates of t 6400) for seven Years at the end of which the
2. National Saving Certificates: National Savin .. . holder gets ? 4320 and ? 8640 respectively.
is a time-tested tax saving instrument th t g ~ertificates, popularly known as 1\ In case of any default in payment of insta1lment, either the period is extended by one
a combines adequ t tu 'th hi h ,&
National Saving Certificate can b a e re ms w1 g - year, till the installment have been paid, or the defaulter installment are paid in a lump
e purchased by the fO II .
• An adult in his/her own name O b · owmg: ~um along with simple interest at a fixed percent per annum. The amount deposited
r on ehalf of a mm· or 1s also refunded, if required during the Period of deferment with simple interest. The
• A minor
payments received in respect of these certificates are liable to income tax.
r:;-:;:;i
~
SEC
URITY ANALYSIS AND PORTFOLto '1
.
c r1vailnble at post offices and
l\t-4"
Q~a.
11••---------
•
6. Kisan V1kas atras: uci
p s I instruments ar ( h. ·t
. d t JO 000. The ma m Y period h
· can b .,~
<' b T AVENUES/ALTERNATl
VES
f o u tsta ndin g
loa n, if a ny
in denominations of ~ 1000, ~000 a~ble Tl;e interest payable on Kisa ne~. is 6/~ Ii, JNVESTMEN . receding year of withdrawa l less a m o unt o
but premature: encashmcnt is possr . rki'l s ~i ), immediate p . d the Income-tax
d II b t is t;-ixablc. ijl hiche ver 1s less. xempt1o n un er d from
compounde annua y u_ ' ts are avnilable at post offices and ca,, t1 w de osits in a PPP c1ccount a rc qu alifi c~ fo r ~;F \ccou nt is full y e xempt: court.
7. Indira Vikas Patras: These ms rrumen .c Jndira Vikas Patras is i lOO be Pur 11. The (SP tion 80 _ C). The balance a mo unt in a t d fro m a ttachm e n t fro m th .h
by any person. Minimum investment m and ti,(' C\ Actw e\h Tax The PPF nccount is a lso cxe mp e of PPF acco unt wit
. 1· . 'ei the en c • ·s p a id in th e case . I tax free.
maximum 1m1I. . ti ns of t 200 500 100 d inte rest a t 8% pe r a nnum J • th PP F acco un t is a s o
. . I t ity dcnomina o , ' 0 and 12. A compoun . t t accumul a te d in e H 0 w ever
These are available 111 t ,c ma ur I
c The jnitial amount is doubJ ~ Si) effect from 1-3-2003. The 111 e res c t ca n be w ith d rawn . • '
U1e investor has to pay half the face v.1 u . ture ed in 9y, i, turity the credit bala nce in th e PPF a•:co~n con tinu ed fo r thre e s u cces~1ve
and these: patras cannot be encased prema .d d 11 . i ), 13. ~ntl:aoptio~ of th e subscribe r, the _acco unt _.~n t ed e p os Hs . Du rin g the ex te n ~1<?ns
. . p tr ·s compoun e annua y, JS payabJ a , . f fi rs each w ith or w1 ou b. t to the condition
The interest on Indira V1kas a as I like bearer-bonds and I e on l'lla, block period s o v e yea k , e w ithdrawa ls p e r y ea r, s u 1ec d 60 p e rce nt
only and is taxable. These instruments are ience hav '1' the account holde r can ma e ond . _ yea r bl ock d oes n o t excee
C~ t J mount withdra w n urmg a 5 . .
carefully preserved. . ch ' that the to a a h dit of the account a t the begmnmg .
8. 15 Years Public Provident Fund Account: Uncier tlus s eme, ~eposits can b of the balance to t e ere t·
in lumpsum or in 12 installments, minimum of f 500/- and maximum of ~ l si ~- Special Advantages of PPF Accoun . ·t is reduced by o ne p e r cent w ith
a financial year. These deposits qualify for inco~e tax_ rebate _under Se~.. 88-of l.T ~ 1. Reasonably attractive inte rest ra te e ve n w he n J
Withdrawal is permissible every year from 7th fmancial year, loan facility is a : 1
effect from 1-3-2003. . d fr ·n com e tax a nd wealth
from 3rd financial year. Va1/1
. Income from PPF A/c mteres p ay
(' t m ent) 1s exe mpte om 1
2
PPF is one attractive tax sheltered investment scheme for middle class and tax.
· I ·
persons. It is even useful to businessmen a~ d l11_g ,er income earning people. Thef
· S ala, d in PPF. ·
3 . Tax exemption on investment m a e . fre ven t w ithdrawal s .
scheme is very popular among the margmal mcome tax payers. The scherne1 4 Withdrawal facility at certain intervals w hich also a voids : ch a s
·111 tro d uce d 111
· 1969 • ·
5 It is useful as a provision for old age, or as prov1s10 · · n for ce rta in expen ses s u
The features of PPF scl1eme are as noted below: · marriage of a son/daughter, purchase of fl a t, e tc.
fr the court. This give security to
1. PPF account may be opened at any branch of the SBI or its subsidiaries 6 . PPF account is exempted from atta chm e nt om
Specified branches of nationalised banks. PPF account can be opened even in /1 family members /dependents.
office on the same terms and conditions. Sud1 account can be opened 1
individual.
b/ Limitations of PPF Account:
11 d ·
1. Low liquidity as one withdrawal is a o w e m a year.
2. Only one ncc!:lunt can be opened i.n the name of a person.
2. The PPF account is for a period of 15 years w hich is a very long p e riod.
3. T(/1e PPF acccunt. is f)or a period of 15 years but can be extended for more 5JI In spite of limitations, PPF is an attractiv.e a venue for inves tme nt in the case of Tax
1ve years at a tnne at the desire of the depositor.
Payers/Salaried class/Businessmen/Profess1onals
4. The _~cpositor is expected to make a minimum deposit of t 500 every year. 9. Deposit Scheme for Retiring Govt. Employees 1988: Thi s s che m e P: ~ ts o nly one
addit_,on, money can b~ deposited once in every month. (A minimum de osit i account which can be opened by retired centra l/s tate Govt. e mployee m its own name
year 1s ~ 500 and maximum is i l,S0,000/-) P
or jointly with the response. The account can be open ed wi thin three months fro~
5. The PPF acco•.mt is not tra f bl b the date of receiving the retirements be ne fits with a minimum of < 1000/- and ~n
L . d . . ns era e, ut nomination facility is available.
6 . oan 1s a m1ss1ble from the th• d L multiple thereof can be withdrawn after the expiry of 3 years from the date of deposit.
e nd of two years preceding. ir year. oan amount is limited to 25 % of a!I
Only one withdrawal in multiples of< 1000/- can be made in a ca le nda r y e a r. Premature
7. Fresh loan is not allowed 1 . encashment can be made after one year from the date of d e pos it but be fore the expiry
w 1en previous lo · d'
8. Interest is charged at th an or interest thereof is outstan r of 3 years in which case the interest on the amount so withdra wn will be payable
. e rate of 1% if 'd . .
ou_tstan d mg loan after 36 months. prepai w1thm 36 months and at 6%ont from the date of deposit upto the date of withdraw al. The excess inte rest paid will be
9. "."1~hdrawal is permissibl f adjusted at the time of such withdrawal.
hm1ted to ·10 e rom seventh f • 10. Deposit Scheme for Retiring Employees of Public Sector Companies, 1991: To provide
one a financial year. mancial year from the year of ope~
10. Amount of withdr,n, 1 . the benefits to the retiring employees of public sector companies, the deposit scheme
precedin ' va is limited to so o for retiring govt. employees-1989 was introduced in 1991 for the public sector companies
g year less amount of outstand· Yo of balance at the end of the fou' retiring employees.
mg loan or SO% of balance at the enJ
 Major Post Saving Schemes
Sr.
No.
I Schemes I Interest Rates I Tenure Investment
Dominations and
Salient Features Income Tax
Concessions ~
- Limits
1. I Post office 14%p.a for indi-1 No sp ecific or Min.: t 50 • Cheque facility avail-1 Exempt under Sec.
saving vidual or joint ac- fix tenure
Max.: ~ lLakh for in- able. 10 (15) (ii)
account count.
dividual and 2lakhl • Interest is completely
for joint accounts. tax free.
• One account can be
opened in one post office
2. Post Offi ce/ Interest rates are as 5 years and Minimum INR 10/-1 •
Recurring De- follows:- can be re- per month or any One withdrawal upto Qualifying for de-
50% of the balance al- duction under Sec.
posit 6. 9% per annum newed for an- amount in multiples lowed after one year.
( quarterly com- other 5 years. of INR 5/-. No maxi- 1 • Full maturity value al- SOL within limit of
pounded) mum limit. t 13,000.
lowed on R. D. Ac-
On maturity INR counts restricted to
10/- account fetches that of INR. 50/- de-
INR746.53. Can be nomination in case of
continued for an- death of depositor sub-
other 5 years on ject to fulfilment of cer-
year to year basis. tain conditions.
• Any number of ac-
counts can be opened
3.
P?st Offic_e' Interest rates are as Period I Minimum INR 200/-1 •
in any post office.
Time Deposit follows:- 1ft year a/c. Long term accounts
and in multiple Qualifying for de-
Rate could be closed after
2nd thereof. No maximum or.e year at discount. duction under Sec.
6.6%
3rd limit. • Accounts can also be 80L within limit of
6.7% r 13,000.
6.9% 5th closed after 6 months
but before 1 y ear for no C
7.4%
interes t.
,.,r
0
• Inte rest p ayable annu-
a lly but ca l c ula t e d
q u a r l e r l_F .
- A ,·7 • •
------ - , .-.1
----, r1• h
- ---
.,_- ~ ._ . ,· . , .:..--

Sr. I Schemes
I
Interest Rates I Tenure Investment 1 Salient Features Income ·rax 2<
No.

4. I Post Office
(2017-18)

Interest rates are as Maturity

Dominations and
limits

In multiples of INR\ • Any number of a~- Qualifyin.g for de-

\ Concessions
m
~
l
Monthly follows:- period is 5 1500/- counts can be_opene~ m duction lmder Sec. -I
Income years from any pos~ office _sub1ect SOL within limit of >
7.3 % per annum Maximum invest- to maximum mvest- <
Scheme payable monthly. 1.12.2011. ment limit is INR 4.5 ment limit by adding , 13,000 m
lakhs in single ac- balance in all accounts. ~
count and INR 91 • Can be prematurely en- rn
lakhs in joint account. cashed nfter one year '
but before 3 yea rs at the ~
discount of 2% of the ~
deposit and aft er 3 ::i:,
years at the discount of ~
1% of the deposit. (D is- ;:1
count means deduction <
fro m the deposit.). rn
• A bonus of 5% on prin-
cipal amount is admis-
sible on maturity
5. National Sav-1 7.6% 4 yeilrs Min:100 • Do not offer any pre- Investment , nd in-
ma tu re wi th drnwal come cor_npkte_ly
in gs Scheme Max. No limi t .. . exe mpt smce d1s-
fac 1hty except m case, con t·mued
of the scheme holder s Unner1
sel.': t·10n o-:i
C'..:- of
death . the lncome 'T,1\. Act.

10 I tvtin: ~ 100 • can be purchased by lhc Ta:-.. rd id under

6. National Sav- NSC YIU lS- 1 S il nd
in g Ce rli fi- SUES.SO% yea rs. Max: No im,
r 'l • An ud ul t in hi s/ her section ROC Income
. own nume or on behalf rr\ ,"\\.,
cales NSC IX ISSUE 8.8% NSC is uvai \able 1n of a minor
the denominations ol • A minor
U-e rnn, Z 500, • A trnsl
Z lOOO, < 5000 ,rnd • Two ad ults jointly
( lO, ODO. • Hindu undivided f,,mily.
.. \ntercsl ;lCcrucd on the
cerlifo:.i les cv erv yeM
is li,1blc lo incoi11~ ta-...; ~
but dee med lo h ave l<>
been reinvested. v,
Sr. Sc.hemcs Interest Rates Tenure Investment Salient Features lncomc Tax
No. (2017-18) Dominations and
Limits
Concessions @1
7. 10 Years So- Compounded 10 years Nlin: 500 • These certificates can The interest quali-
be end1ased prema\Ure fies for ded·..iction
cial Security after 3 years of the date
Certificates of issue. In case of the up to a maximum
death of the certificate of t 7000 under sec-
holder before expiry of tion 80-L of the In-
2 years from the date come Tax Act.
of issue due to non-
natural caui:es (except-
in~ suicide), the legal
heir/nominee are enti-
tled to receive an
amount equal to 3

I
times the face value of tn
the certificates. m
n
8. National Sav- The interest on it is The term of \Min: 100.
ing Certifi- compounded half- deposit is 6 Max: No limit.
• Certificates are avail- The amount in-
able in denominations vested in this
,,
C:

cates (VIII Is- yearly. years of ~ 100, ~ 500, ~ 1000, scheme qualifies ~
sue) ~ 5000 and ~ l 0000. from tax rebate of >
20% up to a maxi- z
• Can be purchased
mum of ~ 50,000. >
from the Post Office can The interest ac- ~
be pledged as security crued is exempt ...u:
VI

for loan and provide from tax up to ~ :r,

I
9. I Twelve Years The rate of interest\ 12 years.
National Sav- is the same as in only in higher de-
. ti
plan. .
nomination facility

·
f ~ 3200 • Dep, ,sits amount can
7000 under sec. 88

NSAC are available • Provides a retirement I No Exemption.

2
C
't
0
_,
;ti

ing Annuity NSCI lssue nomma ons O be made eitl1er in lump 0

"T1

Certificates and ~ 6400. s um or in p eriodi c r

,..
installments s prea d 0
ove ra period of two
yec"! r S.
• ,;:,~;,_....;~, n:~:{. . ~ ;~7c;!;rc:,~;::_:1
Sr. I Schemes Interest Rates Tenure Investment
~'"" "_,... -'"

Salient Features
,.,._.. -- -
-,. ,._.

Income "fax """z

,
No. I- (2017-18) \ \ Dominations and Concessions <
m
limits II\

10. I Kisan Vikas, 7.7% (compounded)\ 9 years

Patras 5 Months
I Available in denomi{
nations of ~ 1,000,
Certificate can be No
transfe rred from one
""'~m
z
-i
5000, 10,000 and person to another and >
~50,000 . Minimum from one post office to <
m
deposit ~ 1000/- and another. z
C:
no maximum limit. • Certificate can be en- m
II\
cashed after 2 & 1/2 ......
years from the date of >
~
issue. ,,
m

11. I Indira Vikas 113.43%

Patras pounded)
(com-, 5 years
6 months
IMin: ~ 100.
Max: No Limit. 1·
Are ava i\ ab\e in the No
maturit y denomin a-
z
>
;\
tions of ~ 200, 500, 1000 <
m
and ~ 5000. II\
• These instruments are
\ike be.irer-bonds .ind

I
hence have to be care-
fully preserved.

Minimum \NR. 500/· Interest is completely tax·\Deposits quo\Hy for

12. 115 Years Pub-1 Interest rotes ore as 15 years Ma ximum lNR .
free. deduction from in-
lie Provident follow s:-
1,50,000/- in .i fimm- Withdraw.il is permissi- come under Sec.80C
Fund Account 7.6% per nnnum blc eve ry ye.:i r fro m 7th of lT Act.
cinl ye.:ir.
(compounded
Deposits can be made fin nncin l yc:u from the
yea rly).
in lump-sum or in 12 ycn r of opening account.
inst.lllmcnts. Lo.:in fnc i\it y :wni\.lb\c
(rom 3rd finnncia\ year.

• Per mits on\y one nc· 1 -

Min. of ~ 1000
13. I Deposit 7% per ann um 3 ycnrs collnt wh ich cn n be
Scheme for payable half yenrly opened by retired cen-
on 30 111 Jun e and lrn \/slntc Govt. em-
Retiring

J\
Govt. Em- 3pt December ployc~ in its own nomc \
or jointly wilh thl.! re-
ployees 1988
sponse.
 >< trl

~ .§ ENT AVENUES/ALTERNATIVES
(lJ t f)

E ~ 1NVESTM · I des. NSC is

0 u I saving Certificate: It inc u . uJ a rl known as ,
u c; III• smal . . . N tional Saving Ce rtifi ca tes, pop wi~ hi gh s afe ty.
c; 0
-u National Saving Cer_tificates. t ~hat combines ad equate re turns
t x saving mstrumen . .
time-teste d a ch d by th e followin g.
a · Certificate can be pur ase
Natjonal Savmg b h lf of a minor

----- • An aduJt in his/her own name or on e a .

• A minor
• A trust
• Two adults jointly
....::; indu undivided family . . f the ~100 t 500, t 1000,
• H . th d onunabons o ' , . d
'lJ . al Saving certificates are available m e en ch of th e ce rtifica tes. Pe no
~ Nation . • lirrut on the pur ase f t 100
l/)
000 and ? 10 000. There is no max1mum . value of a certificate o
~/maturity of ~ertificates is six _years. Pres;:tJ~~r:t~~tyof any other d en o mina tion is at
denomination is ~ 160.10. Maturity ~ue of the certificates is not permissible ex cept a t a
• • proportio~atteh. rate. ~~e;e::r:t~:sholJ::(s), forfeiture by a pledge and when o rdere d by a
"O discount m e case
.... §
@ trl court of law. .. . . liable to income tax but d eemed to h a ve
C:
;;i O
....

~
'..C
~ ra ·~
r::: .!!l

.s
...J
.§
Interest accrued on the certificates every year is
been reinvested. Income tax rebate is availabl~ ~n
under section 88 of Income Tax Act, as amen e
fr:!=~~
. ..
. t d and interest accruing
~:~ ~come Tax relief is also
Tax as amended
available on the interest earned as per limit fixed VIde section 80L Income ,
- E:0 from time to time.
Cl
IV. Mutual Funds
Mutual fund is a financial intermediary which collects savings of the people f?r secured
and profitable investment. The main function of mutu~- fund is to ~o~ilize the savings of the
....fJl general public and invest them in stock market secunties. The entire income of mutual ~ d
ra is distributed among the investors in proportion to their invesbnents. Expenses for managing
(lJ
~ the fund are charged to the fund, like mutual funds in India are registered as trusts under the
..... Indian Trust Act. The trustees are appointed and they look after the management of the trust.
N
They decide the investment policy and give the benefit of professional investment through the
mutual funds. These funds are managed by financial and professional experts. The savings
collected from small investors are invested in a safe, secured and profitable manner. Therefore,
it is said that mutual fund is a boon to the small investors.
Mutual funds have introduced many schemes for attracting investors and also for collecting
their savings. Such schemes include open ended schemes which are open to the investors for
all the time. They can buy or sell the units whenever they desire. Such schemes are Regular
Income Schemes, Recurring Income Schemes, Cumulative Growth Schemes, etc. There are
fJl
QJ
close-ended schemes in which there is a lock in period of three to five years and investors
E cannot buy or sell the investment during that period. Such schemes are Dhanshree 1989, of
QJ
.= LIC mutual fund. Magnum Regular Income Scheme 1987, of SBI mutual fund.
'-'
(J)
Basically, there are four schemes by which mutual funds collect money from the investors
such as:
~ 0 1. Growth Schemes.
I.I) 2: 2. Income Schemes.
3. Balanced Schemes. 4. Tax Saving Schemes.
 .... ua\.uuu: .:Jl.11t::m1::i,: 111 ca -~ ur 111Lu111e ::.u ,1:1111:::. u1e 111vestors
investments.
3. Balanced Schemes: Balanced sd,em es are the combination of
GrowU, and Incom e sd1e m e .
4. Tax Saving Scheme: Tax aving sd1eme is designed to save inc
in the marke t.
· objectives are
There are different types of investors and their
mutual funds h ave s tarted different schemes in order to suit the ob· a 1~o diffe
Jecnves ten,
Mutual funds are popular investments because of low risk a.nct . of the· n1 investment. Some of them are:
liqu!dity in case of open-ended sd1emes and some of the schemes 'pr l~gh retu S(l ·,
are mcome schemes which provide regular income to U1e investors. T~Vide ta)( s tr\s.i,
funds is fast growing in India. The number of sud1 funds is increasin e P0 pu1a/"1n
support from the in esting class. Investors prefer to give their savi g a.nct is ge~t ~,
the safety of their funds and also for securing U1e benefits of divern?i to _rnuiu n&i
ftmds take appropriate investment decisions and handover the benefitt f ect 1nves~1~-
to the investors. 0 ProfitabJ _e~
e tn11 4. Mjd-Cap
Now days, investors are creating their mutual fund portfolios on th . '
of mutual funds i.e. ins tead of categorizing the mutual funds in d •ff e basis of~
above) in~restors mainly focus on the following categories which simpl~ ~rent types (1
schemes itself explains the risk factor associated with the particular to llnderstan ~
. ca egory. 0l 6. Balanced Funds: Balanced funds are also known as hybrid fund, buying a combination
1. Equity Mutual Funds: These funds invest a maximum part f
equities holdings. The structure of the fund may vary different tr ~ -eir co~t
and the fund m anager 's outlook on different stocks. The E . 1fferen1 ~
classified depending upon their investment objective, as follow~~ity Fundsar:
(i) Diversified Equity Funds (Large Cap)
(ii) Mid-Cap Funds
(iii) Small Cap Funds
(iv) Sector Specific Funds
(v) Tax Savings Funds (ELSS)
(vi) Thematic Funds
!~u:z ~~~~::~: ::tr:~ant for a longer time horizon, thus Equity funds raru
" <lcc ·•,~
get re&ttla 0 tdi
. lig i
1
t 11) 0\
~()~e INVESTMENT AVENUES/ ALTERNATIVES
both th I 3. Balanced Funds: As th e name suggest th ey, are a mi x of both equ ity_an~ deb~ fu nd s.
ese 8\ They invest in both equities and fi xed income secu riti es, which are m h~e ~•th pre-
0 rne tel}( · defined investment objective of the scheme. These schemes aim to provide mve5tors
¼h·1 with the best of both the world s. Equity part provid es growth and the d ebt part
\ provides stability in retu rns.
Types of Mutual Fund Investment in Inclia: There are varieties of fund s available for
1. Closed-End Funds: A closed-end mutu al fund bears a number of shares whi ch are
issued to the public by an initial public offering (IPO).
2. Open-End Funds: Open end funds are managed by mutual fund houses for raising
money from sharehold ers and they invest in a group of assets.
3. Large Cap Funds: Large cap funds are those mutual funds, which look for capital
appreciation by way of investing in blue chip stocks.
Funds: Mid cap funds invest in small/medium sized companies, but wi th no
proper definition of classifying a company.
5. Equity Funds: Equity mutual funds, also known as stock mutual funds invest pooled
amounts of money in public company stocks.
of common stock, preferred stock, bonds, and short-term bonds.
7. Growth Funds: Growth fund s are mutual funds that targe t at capital appreciation by
investing in growth stocks.
8. Exchange Traded Funds: Exchange Traded Funds (ETFs) are a basket of securities
being traded on an exchange, just similar to that of a stock. They are not like the
conventional mutual funds.
9. Sector Funds: These funds are funds that restrict the investments to a specific segment
or sector.
10. Index Funds: An index fund aims to replicate the actions of an index of a specific
financial market.
V. Others
It includes:

2. Debt Mutual Funds· The ob· . Life Insurance

Government authoriti~s . t Jechve 0 ~ these funds is to invest in debt ~
of the major issuers of ~;~~a ea comparne~, ba~s and financial institutions are
The Life Insurance Corporation of India popularly known as " LIC of Indi a" was
incorporated on September 1, 1956 by nationalizing 245 lndian as well as foreign companies.
ensure low risk and pro 'd P ~1rs._ By mvestmg in debt instruments, these1
st It is the largest life insurance company in India and also the cotmtry's largest investor. It is
classified as: vi e a e mcome to the investors. Debt funds aref.
fully owned by the Government of India and headquarter is Mumbai.
(i) Gilt Funds·
The US Life Office Management Association Inc (LOMA) defines a life insurance policy
(ii) Income Funds as follows: "A policy under which the insurance company promises to pay a benefit upon the
(iii) MIPs death of the person who is insured."
(iv) Short Term Plans Life insurance is a contract for payment of a sum of money to the person who is insured
with the insurance company on the happening of even insUied against. Generally, it is a
(v) liquid Funds
contract between the insurance company and the insured for a number of years. Though the
 SECURITY ANALYSIS AND PORTFOLIO MANAG1; p
13.42 I . i·f · cc policy i
. . t1~~l
c vcrng • of n sk, o f late, the poli cy p~ 5TMENT AVENUES/ ALTERNATIVES
. · of taking a I e msuron . 1 • . 11r t 1,.\/E . . .
pnmary aim .' . f an inve tment. The ;,nnunl bonu. ,,vl11c, I accruing lo lh e ~~~ rn e rou s n s ks--fallm g hea lth, finan cia l los , accid ent • nd ev n fatalities . It is req uir d
·th nu .
~~,J~~ ~::a:~e~:~a~d into n sub tnntinl amount over a p riod of time. Po11,l ~~1
followin g points:
Life insurance is a contract that pledge payment
. th ·
o: an amount to th~ pe r~on assured
f ti e event in ured aga in t. 11,e contract ts valid for Pa (,,
due t~i) Protection : Inves tor ~ced life insurance to b • there a nd protect the people they love,
making s ure th at their family has a mean lo lo 1-: afte r i If aft r they a re gon e. It
his nominee) on e 11apperung O 1 Yrr is a thoughtful business concept des igned to protect th economic va lu e of a human
of the insured amount during Life for the benefi t of those financially depend ent on the m .
(i) 11,e date of mah.1rity, or (ii) Retirement: Life insurance makes sure th a t they have regula r inco m e a ft e r th e.y
(ii) Specified dates at periodic intervals, or retire and helps th em in ma intainin g stand a rd of Ji vi ng. It can ens ure that their
(iii) Unfortunate death, if it occurs earlier. postretirement years are spent in peace a nd comfort.
Advantages of Life Insurance: TI1e important advantages of life insurance are: (iii) Savings and Investments: Insura nce is a means to Save and Inves t. Thei r pe rio?ic
premiums are like Savin gs and they are assured of a lum p sum amount on m a h:1nty.
(i) Protection: TI1e contract for life insurance provides for the payment of an an, 0
A policy ca n come in ha nd y at th e time of th e ir child 's educa tion o r ma rri age.
on the date of maturity or on the death of policy holder, whichever is earlier. "Thu
1 Besides, it can be used as s uppl ementa l retirement in come.
life insurance provides a protection against risk of early death. If a person dies bef~
the maturity of the policy, the insurance corporation undertakes to pay the assu~ (iv) Tax Benefits: Life insurance is one of the bes t tax saving options today. Their tax ca n
sum to the representative of the deceased. be saved twice on a life insurance policy-once w hen they pay their premiums a nd
once when they receive ma turity benefi ts . Mon ey saved is m oney earned.
(ii) Facility for Savings: Life insurance contract facilitates mobilization of savings fro
among the investors. 11,e insured pay the premium in easy installments such ; (v) Myths of Insurance: It includ es the following:
monthly, quarterly, half yearly or yearly. To ensure convenience to the salaried claS\ • Insurance is just meant for savin g tax.
the insurance company offers the salary savings scheme. Provision for easy paymer, • Insurance does not give good re turns.
of premium encourages people to take insurance cover.
• Insurance products a re not fl exible.
(iii) Liquidity: The investment in the form of insurance policy is considered to be liqu\
(vi) Indemnity: Legal principle that s pecifies an insured shouJd not coUect m o re than the
as it can be surrendered with the insurance company at a pre determined val ll(
depending upon the amount of insurance premium paid so far. However, such . actual cash value of a loss but should be res tored to a pproximately the same finan cia l
surrender of policy with the insurance company results in loss to the policy holde; position as existed befo re the loss.
~other advantage is that a policy holder can avail a loan against the policy from t~ (vii) Premium: Premium is the consideration that the poli cyho ld er h as to p ay in o rd e r
msu.rance mmpany. The interest charged by the company for such a loan is nomin~ to. secure the_benefits offered by the ins urance policy. It can be looked upon as th e
(iv) Tax Benefits: The assesses who are liable to pay income tax can reduce their t pnce of the insurance policy. It may be a one-time payment o r p eriodical p aym ent
liabili ty b~ making inves~ents in the form of insurance policies. The premium pai~ (Mo~thly Quarte rly, H_a lf yearly, Yearly). A defauJt in premium can end a n ge r the
by the policy holder qualifies for rebate from income tax under section 88. Moreov 1 continuance of the policy. U that happens, the policy wiJJ be treated as lapsed and
the _am?~t deposited ~der an ~wty plan of the Life Insurance Corporation ~'. the expected benefits.
the mdJVJdual tax payer 1s deductible from gross total income, subject to a maxim 1 (viii) Claims: A claim i~ the demand that the insurer should redeem the promi e m a d e in
ci ~ 10, 000. Ull
th~ contract. ~e insurer has then to perform his pa rt of the co ntract i.e. se ttl e the
Disadvantages of life Insurance: Following are the main disadvantages of the life insurance claun~, after satisfying him self that all th e conditions and requirements fo r se ttlement
I. Current cash flow reduced; of claim have been complied with.
2. Low yield; (ix) Agen~: An insurance company re prese nta tive licensed by the s tate, who solicits,
3· N~ed. to have insurable interest at the inception of life insurance policy; negotiates or effects contracts of insurance, and pro vide ervice to the policyholder
for the insurer.
4· Illiquid (at least in the short term);
(x) Others: It includes:
5. Lack of flexibility; and
(a) Personal Needs:
6. Acceptance of purchase dependent upon d
un erwriting decision of the insurer. (i) Dependants living expenses.
Why We Need Insurance (ii) Final (end of life) ex penses.
Life insurance is a contact by wh· h . (iii) Educational fund s.
uncertainties by paying a pre . ic i~veSlor can protect himself against specific
m1um over a penod · Sin ce ea ch o f t h em during their life faces (iv) Retirement income.
 t v J Mortgage re poy mcnr 1u11u.
(vi) Eme rgenci es fund .
(vii) Disability income. INVESTMENT AVENUES/ ALTERNATIVES I 3.4s I
(b) Business Needs: 6. Universal Life Insurance: This is bas ica ll y a life in,; ur,1nce contr.ict w ith th e fo ll owi ng
special fea tures:
(i) Key persons.
(1) It is subjec t to a fl ex ibl e premium;
(ii) Busines owne rs . (2) It has an adjus table benefit;
(iii) Partnerships. (3) The expenses an d other charges are dis closed to a purcha e r;
(iv) Employ ee benefits. (4) It accumulates a cash va lue; and
Types of Policies: There are different types of Life lnsurance Plans in the (5) It se p a ra tes a nd di scl oses to th e poli cy h old e r (unbundlcs) the p ure co t o f
are discussed as below: rnarket protecti on, the in ves tment ea rnings, and the company expenses.
1
1. Term Insurance Policy: This poli':)' i~ pure ris_k cover ':ith _the insured a Objective of LIC:
be paid only if the policy holder dies m the penod of policy hme. The · Tnoun 1. Spread life insurance widely in particul ar to the rura l a reas to socially and econo":'ically
policy is to protect the policy holder's family in case of death. For exttention 1~ backward class. This is don e wi th a view to reach all ilie insurable pe rsons m the
who takes term policy of ~ 500000 for 20 years, 1'fl,e d.ies bf
e ore 20 years rnpJe
th , a~ country to provide them adequ ate fin ancia l cover agains t death at a reasonable co t.
will get U1e insured amount. If he survives after 20 years then he Wil] en his11 2. To maximi ze mobiliza tion of people's savings by m aking insurance linked .ivings
amount from U1e insurance company. It is the reason why term policie not g~ adequately attractive.
. bl f . . s are
cost. So, Utis type of policy is not smta e or savmgs or investment. Ve~ 3. Bearing in mind, the primary obliga tion to its poli cyholders, who e money h old in
2. Whole Life Policy: As U,e name itself says, the policy holder has to pay th trust, the inves tible ftmd to be deployed to the bes t ad vantaae of the in\· to r as well
for whole life till his death. This policy doesn't address any other needs fe Pret as U,e national priorities and the obliga tions of attracti ve returns.
holder. Because of iliese reasons Utis kind of policy is not very popular .he~
O 1
4. To conduct business with utmos t economy and kee ping in mind th a t th e m o ney
company not suggesting to take this policy. or Insur, belongs to the policyholders.
3. Endowment Policy: It is ilie most popular Life Insurance Plans among oth 5. It acts as a trustee of the insured public in its individu al and collective ca p aci ties.
policies. This policy combines risk cover with Uie savings and investment. Ife;h~'Ff 6. To meet ilie various life insurance need of the community that would a rise in the
hold~r dies _during the policy time, he will get the assur~d amount. Even if he s:~ changing social and economic environment.
he ,~1U receive the assured amount. 11,e advantage of tlus policy is if the poli ~ 7. It ensures that all people working in the corporation are involved to the be t o f their
1
surv1~es ~fter ilie completion of policy tenure, he receives assured amount plus aid. capability in furthering the interests of the insured public by prO\;ciing efficient service
ben_efits like B_o nus, etc. In this kind. ~f policy, poli<J hol?er receives huge a: with courtesy.
while_ completing the tenure. In addition to tl1e basic policy, insurers offer van
Promote amongst all agents and employees of ilie corporation a _ense o f p a rticipation,
benefits such as double endowment and marriage/ education endowment pl •
pride and job satisfaction through discharge of ilieir duties w iili dedicatio n towards a chievement
co st of such a policy is slightly higher but worth its value. al1l.
of corporate objective.
4
· ~oney_ Back Policy: Money Back Policy .is to provide money on U,e occasions ,· Insurance Plans in UC: The follo wing insurance plans are on offer. They provide the
~t: ~~: ~ol~er need:' for his personal life. The occasions may be marriage, educt. most suitable options tha t can fit custome r's requirement.
oiicy hol~ew1dl! bebpfa1d back to the policy holder with fue specified duration. I
P r ies e ore the policy term tl1 • . • Children Plans: Plans for Handicapped Dep.?ndents
A portion of u, . , e sum assured will be given to lus fa:
e sum assured is pa),able at 1 . 1 . Jeeevan Anurag Jeevan Aad har
of the sum assured is payable. regu ar mterva s. On survival the remar.
CDA Endowment Vesting at 21 Jeevan Vish was
5. Annuities and Pension· A . .
contract is an insurance ·p t annu~ty is ~ series of periodic payments. An anJ-
CDA Endowment Vesting at 18
Jeevan Kishore
Endowment Assurance Plans
The Endo wment Assurance Policy
pa~ U,e purd1aser of annii;;'(aun ~r which t~e annuity provider (insurer) agrel Child Career Plan
a fixed period or during ) nnu1tant) a senes of regular periodical paymen~ The Endowment Assurance Policy Limited
the · d someone's life ti I . t• Child Fortune Plus Payment
insure a stipulated s f me. n an annuity, U,e insurer agrees o,
protect against risk as w~~ ~s mon~y periodically. The purpose of an annui~f
Marriage Endowment or Educational Jeevan Mitra (Double Cover Endowment
Annuity Plan Plan)
mtl~r~1als. Over the years ins prolv1de money in the form of pension at r~f Jeevan Chhaya
po 1c1es in O d ' urers lave add d • • · surJ Jeevan Mitra (Triple Cover Endowment
· r er to address spe -6 e various features to baslC in Child future Plan
a c needs of Plan)
a cross section of people.
 ~
[?. i] SEICUIUI • ~••· · - · - · •••Ul!Q "~• - - - - - - - -- ffici ent to
====~-----=-----------rwwth~o;ileeiLJi~fe;,:Pii:laain~s~-
4 ,,~"• ...... ues/ALTERNATIVES ood cove r s u but
The Whole Life p 1· 11ES1""""T """" . and th ir s pou se a g o lideS critica lly,
Jeevan Anand ~1
tr< ontdbuting to the earm~ gs, ({' the;,ple took at life insuranc~ ~150 th• reason [hey
New Janraksha Plan The Whole Life p Iicy° spou se c . f i\y in times of cns,s. any P . "tical times. Thl5 "
Jeevan Amrlt The Whole Life Policy
o icy _- U~lted roted th eir a;.i ancial suppo rt one can ex pe~t in en
91 ~
is th<! onl y in ftcr ea r to avail its se rvice. I" are:
~~ ~~%
Joint Life Plan Jeevan Anand S1ri e Pa,
0
Jeevan Sathi Jeevan Tarang ~ay pFr:;.~~;,:a~a~:do:inantly affect ;nvestors :~\ i
: u ; ;a; men lS the{ ot~ ~drit~
' they are the prernJum they a re rno re P lity
Decreasing Term Assurance To cover
Term Assurance Plans 1- Ag<' Th• you;ger . Thi;
is because the older they g '. 1 tting as p er [he m o rta
Two year Temporary Assur premium ten to n s~-p le An ins urance compan y d oes th15 so
Home Loan Payment 0
The Convertible Term Assur rice pIi than the younger pe . "[hus th•
Mortgage Redemption Money cha r t a vailable to them. d th t wom e n folk s 11ve . n- that' o f a
IO n ge r tha n• d rn ethafl
Anmol Jeevan- 1 °1'1ce P The s tudi es has revea Ie a 1 n th e highe r 51 e ·f th y
Pension Plans
Jeevan Nidhi
Amulya Jeevan -1 ~
2- sex: .
pre mium o
f a m an's life insurance policy is a waysf o
ch have J·us tified early d ea th o m a.n
b eca u se of s tressful lt e e

Jeevan Akshay-VI Plans for High Worth Individu ~~d,man theThe resear of es
pressure .
being the. bread wmner~: t~f their poli cy w ill d efinitely be hit
New Jeevan Ohara-I
Jeevan Shree-1 ells
occupation, If investors are a hlo_t, t~~•mJ,e msurance compani es _charge th~rr;heir
New Jeevan Suraksha-I Jeevan Pramukh 3. because their job in volves hig n s . h, working in a lo N n sk zon e s
. the risk If they a re a teacher t ey are
Group Scheme Unit Linked Plans covering
prelTUum will be · tower. f ll ed b y age and sex which .
Group Term Insurance Schemes Market PIUS -I Health, Health is often the most unportant f:tor, o h~,:;'th will h ave to p ay a very
Group Term Insurance Scheme in Lieu of Profit Plus 4. affects their life insurance policy. Someone w,h eJ.;',o;aises the ra tes for life inSU ~ance
EDU Fortune Plus hi h premium, or even be u,uns urable. Poor . are like ly to p ay pre moums
Group Leave Encashment Scheme glicy because it decreases the number of years m ves to rs
Money Plus-I
Group Mortgage Redemption Assurance
po
and increases the n.sk of paymg · a cl aun
· e_ar l Y· . b .d vill obviously b e on
Child Fortune Plus Lifestyle, If they \ead a lavish life then their pre~um. toth e pal e v and lifestyle, they
Scheme
Special Plans 5· the higher side. To enable the;r benefioary to maontru.n e sarn gr
Gratuity Plus
Golden Jubilee Plan have to cover themself exponentiall y.
Group critical Illness Rider
New Bima Gold Special Plan
Money Back Plans
Jeevan Varsha
Bima Nivesh 2005
publicThe oeposits
companies Act prnvides that companies can accept deposits directly::::: [he!~
1 bli
h a~
Jeevan Sarai s mode of raising fund s h· as
· become popular
c · the
in Act 1990s, b eca
anyusecannot
the acce pt
cred e pos1·ts
The Money Back Pollcy-20 years
The Money Back Pollcy-25 years
Jeevan Surabhi-15 Years
Jeevan Madhur
Health Plus
become costlier. As p er prov,swns of the omparues
Thi , a comp
for a period of less than 6 months and more than 36 months-_ However, depoe,ls up
.
of the paid up capital and free reserves can be accepted for a m1nimum p e nod of three
:::on~
lOo/.
. .
Jeevan Surabhl-20 Years Social Security Scheme for meeting short-term requirements. Again, a company cannot accept or ren ew deposits tn
Jeevan Surabhl-25 Years Janashree Bima Yojna (JBY) excess of 35% of its paid up capital and free reserves.
Siksha Sahayog Yojana In order to meet, temporary financial needs, companies accept deposits from the in~estors.
Blma Dachat
Such deposits are called public deposits or company fixed depos its and are popular parhcularly
_Special Money Back Plan for women Aam Admi Bima Yojana among the middle class investors. All most all companies collect crores of rupees throu!,h s uch
Jeevan Bhartl-1 deposits. Companies were offering attractive interes t rates previously. However, the interest

FAC~ORS AFFECTING LIFE INSURANCE POLICY rates are now reduced considerably.
At present, the interest rate offered is 9 to 12 per cent. On maturity, the depositor has to
L1f_e Insurance policy is a contract between th . return the deposit receipt (duly discharged) to the company and the company pays back the
e policy holder. The ob1·ective of b . e insurance company and the insu~ deposit amount. The depositor can renew his deposit for further p eriod of one to three years at
th
· uymg a best J"fI ·
inveStors a_dequately so that in case of their e_ insurance policy in India is to his option. Many companies are now supplementing their fixed deposit scheme by cumulative time
the sa'.11e hfe~tyle. The death benefit can als/~ath, their beneficiary still manages to main: deposit scheme tmder w hich the deposited amount along wi th interest is paid b ack in lumpsum
~f their _eamn~gs. But nevertheless, buyin elp P~Y ~ff debts or overcome the contribul on maturity. Companies, now, appoint managers (collecting agents) to their fixed deposit schemes.
,1ppropnately is absolutely dependent on ~ a good hfe insurance poli coverin their nt The managers are usually reputed share brokers. They help companies in collecting the depos its
to them ,md what they want to em. They have to b cy g ·
lhdr ~oat should be to cove, cover. If they are the on!
th emself adeqtiat Y bread wmner in the farrulY
' eIY or if th ere are other members like· •''
~
e very _clear about what_o and also look after the administrative work in connection with such deposits .
r;-;;-1
~
.
SECU"'"'' -

•th private sec

tor companies, even public sector
t1 • k' con,
"'"t~~A 111•••-----
,Q
~.49.J
At present, along w1 . . order to meet ,elf wor mg C<lpital Pani I
t id1 deposits in . neect es a
utilities
,Jar also
and accep st .
used extensively b Y the .compani
. duees.to the following Adv '· 11,·,, ¾1 I NVEST14ENT AVENUES/ ALTERNATIVES
· phys·1cal "'ssets such as
popt The' popularity f pu blic .deposits ,s
bl asily and quickly, provided the c an tag es: . I investment
J in Physical Assets the investment in "
O
(a) u _,c
. deposits are ava1 1a e e ornPan 1
Yon· Another popular investment avenue is 2. Silver
P bl 1 Gold 4. Real Esta te
confidence. . . is sint le and cheaper than obtaining loa '\
(b) Tius method of finanobnl~ d po;;ts attractive and agreeable to c ns fron, ·
banks.. This makes pu ,c e on,P•ni es ''Ia ~, 3. Diamonds
1. Gold
Gold is one of the mos t valuable assets in any economy. It ha s been_ u sed in India
depositors. . trade on e uity ~d ,
,;marilY as a form of saving by the housewives. Although it is said to a ppreaa te many tJmes
(c) Public deposits enable the companies to q and pay high l
pet in India it is more of a sense of security and a fixed asset rather than for the u se of sa le
on equity shares. . . . .
(d) The depositors receive interest on thetr depos_1ts. This rate is higher t ~'' Oi ~r for the purchase of making profit or income on this investment. Gold may be called •. h e dge
againSt inflation or a well or reservoir for future use or substitu le for the rupees whi ch are
rate offered by banks. The interest is paid. regularly ~y reputecthan
d also.tin co the•It used as a means of transfer or exchange. Gold to the investor in recent yea r s has been
(e) The formalities to be completed for epos, g money are easy and si tlip'I
no deduction of tax at source where mt~reSl does not exceed a partjrnpJe. i ;mportant mainly because of rise in prices due to inflation. It has been used more for s p e culation
rather than for a long-term investment and for quick profits. Gold may b e invested U1to, either
(f) The risk involved is also limited partJcularly when money is de CUl_ 0 a, 11
1
in the form of gold shares which are banned in India, gold coins, gold bars and gold jewellery.
1
reputed company P s11,, (a) Gold Coins: In India, gold coins are not available now. But there are old coins of

~~
l11e following Table 1 should give the clear picture relating to the inv ' 1800 to 1895 of the time of King George and Queen Elizabeth- In the United States,
decisions in various financial market instruments. eSlor's the United States treasury has a number of new gold coins. In south east and Midd le
Table 1: Summary Evaluation of Various Investment Ave East countries gold coins are issued. Gold coins can also be used as a form of
~;;,:;;::=:71----;;;-:-;::::----r-;;::-;--.-:-'.-;---;---~-;:::--""'"'.:"'---"~u.es jeweUery. Some ~vestors prefer to trade them in the form of coins only- They use
1
Investment Return Risk Marke- Tax shelter them for re-shaping and moulding to form new jewelleries. Other investors use them
options Return Capital liquidity tability (from nience m ~e form of lockets, rings and earnings. A thirty four gram 24 carat gold coin is
Yield appre- income availabl_e ~t th~ rate of ~ 6,300. This was available for only ~ 2,000 as far back as 1975.
ciation tax act) Appreaation m gold is, therefore, very rapid.
High High Fairly Section High (b) ~old dB;rs: Gold bars _also_ are not considered legal ownership in India. But in the
Equity
rute tatesf of. Amen ca it has been legal to hold and make gold bars Hold bars
Shares High 80 L benefit
compensate or inflation b u t 1·t 1s · an unproductive . asset and is risky ·
Non High Negligible Low Average Nil High
Convertible Goldstandards
(c) The Jewellery:used Goldin jeweUery
Indi is a me th O d O f shaping . pure gold into . ornaments.
Equity Low High High High Section 80 L Very hign ? 124 for 10 grams in!960 ~ "';; ~S1.rnlly 9 ·2 carets. The price of gold has risen from
Schemes benefit it touched to ~ 2000 Thi' ~ 7 ' it was ~ 565, in l980 it was t 1765 and in 1984
Debt High Low Low High No tax on the last 20 years which : s _ows thadt the price of gold has been increasing durino
Very hi~ .t h b as mcrease almost twenty fold F t:h.i . o
Schemes
dividends I as een a great asset but it has been f . rom s point of view,
Bank Moderate Nil Negligible High the opposite direction with the t f ound that rate of return of gold moves in
Deposits Section 80 L Very hi~ th t f ra e o return of common t O cks Thi
benefit e ra e o return of common stocks . hi h s · s means that if
Public Nil High Nil gold ch_anges erratically, sometimes •:ha~ l th:nretum of gold is low. The price of
Provident
Fund
Average Section 88
benefit
Very hign
econom'.c and environmental
mte_mational money markets and th d .
conditions ft ~s aid also ~qually dependent
so sensitive to the speculation of
on the
life
Insurance
Nil Moderate Nil Average Section 88 Very hign
While gold is cheap in Middle East c:u ~m~d and supply conditions in a country
Policies f Gold is the oldest currency in the world n es ,t was expensive in India in the eighties:
benefit
Residential Moderate .
or a vanety of reasons: and is coveted across continents and cu Itures
Moderate Negligible Low
House
High Fair (I) M~int~ins Long Term Value: Market .
Gold and Nil Moderate mamtamed its Ion term I cycles have their ups and downs b
Average
Silver Average Nil Average endures. Gold hasg demon:~~~dp~t~e;acupa:etyn~es
o store rise and fall bu't o~\J~i'~v:as
may value for centu . o
nes. ys
'
vsis AND ,,v,<, ULJ.u l'-11\N • • • - - --
secuRITV ANAL . . .. · ,• I\Q~~ ----
~ ,,. ' ll' or •L()IHll lll I IS i ~. Iii t [3.51]
~ . I 'til', li,.;l' " ' . . t' r\''
. .) f,. , __ .,; , .. Durin~ timt'~ ol (,l ,lll ll · .· , . t, lrnls ,rnd l'l(lltl l l's, hut in 11,1.h
( 11 - ,1 , "'r'S'· ' . 1·• , c11rr,•11t1l:;, I is nol il 1·1.1 t,,·1·1 . ,1y I ~
· . -• • irl\'l'~tnwn b IM o t ;, 11 ( ' 1,11-
,, .•
t,
llt'1•,1l l\'t' ,. 11 1 011
,ffr t ,m the v,1111 ' l f ht> • ·
I1I 1, 1) go I1 · •
1
•
ri sk < I b' ·1m 11n g \\lortlil l't~~
•llv '
>pp(1~1 1l' t.: • l ' no t run '1 . t•s~ i
. I 11 'fl \ It l l , ti,.
or ·orpor, II n ;-im "'
um', f ( tl :i l'\'l'tllS. . (
l l in tl' flll !'i
fl'•' roods ' nd s 'rvi '!s
. · ll1ll
...) 111 nnNorr Ht'd~·: h' v;ilm' >f g t '
(111 , · th , p11r h.is mg P "'•r of 111, ny ' i1,
", , . , . bl t:ihle whercn:,; lit
buy, ha: remain d rc mnr,.:n , s , te
h, · g'ncr;i llv clc lined. te I th portfo lio ngnin •t n
' · . . . · ,,tmen ls h'1Ppr< r . d' Uc:tuill'
(it) Effctil't' Dil'trsificr: Dive~ ,m · <l ._ 11 l'XL •ll 'Ill p rl,o 110 aversifier b 1
. . I . t b ' ol r:,; n dk ~c~ m n r • v ·ry
the \·:t.lu' fan) . mgl':1. ~ ·- · f rhcri nv'. tmenl ,n - y ono .•~
· d ndcnt 1 ' o rn1cr
pcrf rmnn t"nd_ t mO\ c ,n F _ ti i both tnn i•ib lc nnd 1· . Q(),
. • · . Id i nn n. ct ,nI ° 19Llrd
(v) Bot!, Ttwg,lJlc mid L1q1mf. 0 . 'cl r omp.iny s h.ir s a nd bond s ~ ~'
1
rea l c-tat e whid1 i t. n, ''bl e but not rqur ' · ~v,,ic,L1 ,
• Sour c o( Hous ing finan e.
liquid but not t;rn<>iblc.
• F ;:i tur s of Hou ing fo in nnc
2. Silver ·1 • Guid line for buying a Oat.
. b kilograms in India. S1 vcr mny be owned .
Sih er i s Id in the fom1 of weag11t y . vellery This like go ld h in! • Commercinl Prop rty.
. . 1 b I plates trays or Je' · ' , as b
form of corns, uten als, gasses, O\\ s, • ' old a lso kee s . . l\1 • Agricultural Lnnd.
hedoe durino inflation. TI1e price of silver although less t1~an g . f P on rising in
t:> b • d fr m the pomt of view o u se, a rc iln • Suburban Land .
ame way a gold. Sil ver utensils an trays, 0 f h . cxcellt
po e ion but it is difficult to re-sell them and get the value O t e mves~e nts. At lhe , • Time s ha re in ;:i holiday re ort.
of resale of these in estments the silversmith takes away th e expenses of polish a nd no11 •5il • Unimprove d Land.
whid1 i u ed in shaping these beautiful vessels. As a result, _the inveS tor is able to gel ;
• Improved rea l Es ta te.
60% of the val ue of silver. In India, it is considered a good mve s tment to shape sil ver ~
• N ew and used residenti a l property.
coins and to buy them during Diwali. Silver key chains and jewellery are also kept for u
for re-sale purposes in future. Silver coins give a higher return in the form of Vil lue. Sill· • Vacation homes.
bars are also legal and can be used for selling. The sale price of silver bars is the price recor Other Income-Producing Real Estate s uch as:
for pure silver. The price of silver and gold is quoted daily in the stock exchange list. • Office Buildings
3. Diamonds • Shopping Centres
~iam~nds pUich~sed in raw form and through a wholesaler may be the bes t inves~ • Industrial or Comme rcia l Prope rtie
potential. Smee ~lie pnce of diamonds keep on increasing in the same way as the price of cl. Advantages of Real Estate Inves tment:
l~ey have good rnveshnent value. TI1e price of diamond increases as the diamond caret bec!rri 1. Potential for High Return: The pot ntial for hi h return in real talc e, is ts d uc, in
higher. I~ gold 1~ gra ms is the measure, silver is sold in kilograms, diamond is va lued r part to the frequent u se of financial leverage. Financin l le era c is the u c o f borrow d
ca rets. Diamond 1s to be 1'udged · t f · h ·
. . m erms o we1g I, size, shape and lustre. In India u1 funds, as in a long-te rm mortgage, to try t increa e the rate of r tum th at a n be
in vestor must be cautious to buy diamonds b ch . '
diamond according to his 0 , . d ecause ea Jeweller decides the valu e of ~- earned on the inves tme nt. When the cos t of bo rrowing i le s t h a n what can be
-vn JU gement. The investor must b c. l h 1 • earned on the investment, it is co nsidered 'fa ourable' le rage, but wh n the rever
It is an extremely risky form of . e caren1 t at 1e 1s not cl1ealtt
mveshnent because to a 1 is true, it is considered 'unfavourable' leve rage.
based on judgement. The mark d . . . ' arge extent the value of diamond !
e up retail pnce 15 als 0 . ,
s h ou Id· b e done only through pro~ . . ' very 111gh. Investing in diamolli 2. Potential Tax Advantage: There a re potential ta, advantages in rea l e tate. First, for
b
for c1 num er O f years. lmmedi t ess1ona 1 advice and h
. . . w en an investor has money to hd personal use residential prope rty, the re i the opportunity to deduct inte r st pa id.
H 0 I :I' d. a e acqu1s1tion and sal Of d '
L rng_a iam~_nd for some years will giv ·t e . iamond will not fetch price ir.aeai There may a lso be a d eduction for property t, es. If the property is income producing,
for earning proltt. e I an appreaation It is u d b I to,' other expenses m ay be d eductible as vve ll, such as d epreciation, ins urance, and repairs.
· se y money specu a
3. Hedge against Inflation: Some consider rea l estate as a good h edge aga inst inflation .
 ~.s2] or , (11 II r Sl'I
[Till
4. Positive Cash flow: Good C]Uillil nt, n·•,t
produce a po iii, e ca h flow. . 'n rl•J L111 ,, I ,,,n, I
. d -ti ,,.
I E t I Jnve'ilntclll- ., r urtinn t'• er u,. ·
Disadvantages of Rea sae , liinil d 111:1rkct.1bility in r 1
. . Tl . , • ,.,l:r,1 11 ca e I , fulfilh•
J. Limited Marketa bi lit}: ,ere is c ,rl)')· s ult' (de Jf w' .:t
d 1 . . f Ihe prop
on the nature an CJ h n . of liquidity, in tlrnt there is
2. Lack o L1qm· •d't ~
I y: TI , ere i •;ii'- n· lil .~ • orig ina l va I ue, especia lly 1' f no
. gllilr
f . off nt 11~ It ~~ I fund -.f rr .. d t in
flius1
~
the property can b· c d '-P c Fund: In vestment upt <1,00,000 in un it of
n1'.,ftitu al m. u_ '" u 5 h rn~- (EL55) an d
· a s hort P n.od f tin,e.
w,t· Iun · ·h· a J investment o f ten is
9 . Section 10(23D); popularly kno wn cs Equity Link ed Sa·11nn
. l , large rni ·
3. Large Initial lm estment: A r )Jb' ) required 1
approved by th e board a re eligible for deduction und r th i • c · licy quali i ~
real estate. . k b .
"d ed high ns ✓ ecause 1t is fi x d _ LIC's Pension Plan, The premium paid /or LfCs ew Jeev n Suro<·h
4. High Risk: R JI estate is often cons• er c in loei 10 for deduction upto a limit of <1,00,000 in a yea r . 1
character. hr~ In addition, deduction of U0,000 is available u/s 80CCF of the Income T x Act. 1 %
. ..... Re form Act of 1986 elim ·
5. Elimination of Tax Advantage: n,e iax mated ""1 toward s the amount inves ted in the Infrastructure Bond which will be of Lo a T rm in nature.
I ting to real estate. " ¾~
pre, iousl) -available tax ad, antages re a · 1 ri

INVESTMENTS SUITABLE FOR YOUNG PEOPLE

TAX SAVING INVESTMENTS
There are certain schemes introduced for the purpose of tax saving. The Younger adults a re able to be more aggressive and risky with thei inves · na . _
provide income tax benefits to the investors who invest m th_ese schemes. Under;: '<I, than older adults. The suitab_Ie investments depend largely upon p ersona in,·estmcnt ob;ec v ,
of the Income Tax Act, 1961, the following schemes are eligible for_ tax saving. Th~~ risk tolerance and time honzon. If one "".ants to build wealth, stocks are a aood •:ay to do
Act, 20!0 prGvides tax exemption upto t J,00,000 for the mvestments m the foll . 'f1 so because even though they carry more nsk, they also carry more Iona - term r e ,,a,d . Bond
Lif In . .d b owing • ~ and savings accounts, on the other hand, provide more secure form o in · tin~ l:,ut a a
• e _ surance Premium: Life insurai:ice prenuum pai _ Y a_ person on his lj much lower potential returns.
1
this life
the of spouse
section. or on life
Maximum of any of
premium child
20%of of
thatthe
person
policy1s amount
entitled for
can<led ucao,
. fe~
• , an o_ld rule of thumb that one shou_ld s ub tract his/her age from
Theres O
50to know the
deduction. be al!o'<I percentage of thei! portfolio tha t should be kept m stocks. For example, if a ;ear ,
. _ he should keep72 ¼, of his portfolio in stocks and the rest in other instrumen uch as bond
· Public Prov,dent Fund; lnvesbnent made by an individual towards the e and savings accounts. This is because stocks are more volatile and can fluctua more casilv
2 Provident fo'.'d set up by ~e government under the Public Provident Fu:/ 15 th st
' WJ th th e market ":' more able _financial_ instruments s uch as bond or vin account ,
1968 IS qualified for deduction upto a maximum of 'I' 1,50,000 in a Sd, However, one must mvest m a vanety of different instrumen ts to ensure tha he h a,·e ace
3. Post Office Sa . D . year. to cash as well as long-term growth options The various m · ve- tment
vmgs eposits: Any sum deposited in a 10 0 · are:
under the Post Office Savings Bank Rules b . . . y~ar _r 15 year am 1. Stocks / share.
upto a limit of ~ 1,00,000.
1959 . ort term investments i.e. certificate of deposits.
y an md1v1dual is entitled for deduc 2 Sh
4. National Savings Certificate (NSC)· A . 3. Emergency funds i.e., RD or savm· a
Sa · c - . · mount invested by · d" "d . accounts.
vmgs erti6 cate issued by post office is ti" I an In IVI ual m Nali: 4. Retirement savings like LIC o
5 . . en t ed for ded ti
· Unit Linked Insurance Plan (ULIP)· uc on. 5. Tax saving instruments etc.
1 t
participating in the Unit Linked Insur · ;veS ments made by an individual
deduction upto an amount of ~ 1,00,:ein of Unit l:n Trust of India are entitl~ CONCLUSION

~
6. Deposits in_ National Housing Bank: An ~ear.
of60,000
the National Housing Bank is
in a year. · entitled
Y sum
forinvested
deduc/" · h ome loan account ,r marketable
There and
are aliquid
large while oth o f mvestment.
number · avenue for in India. Some of tho rn a re
" upto an overall Ii characteristics hich . ers are more nsk and 1 :tf Ri k and -
10
7. Repayment of Housing Loan: Pay w an mvestor has to face and hand! . rehun a re th major
· t JI ment not The · · ·
ms a ment or repayment of housin g loan taken
exceedin mvestor
for th g t 1,00,000 in respect cl l preferences, needs has
andtoability
chooseto~.:,::i,avenues
ro from among the m dep nding on his object:i
e purpose of a residential~1 ~vestors to know the degree of risk on ~:~1:1mttnJm nsk and maximize the returns. To enab~=
1em. m s 1m nts er dit rating · no\ compulsoryc for
· is
 [Iill
es-rMENT AVENUES/ ALTERNATIVES Conve-
1N\/ Ri sk Marke- Tax
Rate of Ra te of Inves t- Ben e fit nience
-S:--['roduct menl tabHity
Annual Capital
NO· Jncom e Apprc- Term
ciation Ave-
Average Average Ni l
i-- Nil Ave rage Long rage
8
Gold/
silver/
Very
Long ETF Long Average Yes
Low High Nil High high
1 Equity public
LoW low 9
provident
share Long
Low Med-
2. Preference Average Average Nil
fund
Medium- Medium Hi gh
0
1-Iigh Yes ium
Share Medium· LoW 10 company Fixed Long
3 Non-con- Average Low Fixed
Long High
vertible Deposits Average Yes
Average Long Nil
Deben- 11 Provident Nil
Low Yes Low High
tures Low fund Yes
Low Long Lo w Nil Medium- Low-nil Average
4 Capital Low Bank (partially)
12 low
Gain fixed
Bonds . F
Non Secunty orm
of Jnvestntent Avenues deposits
-, . ::~ ._

Average Long High Average Yes SHOR QUESTIO s :a•-,. . ...-

~·_; ~.r. _.....
. ,.

1 Unit Nil
Linked
1. Distinguish between real and financial assets
insurance
2. Differentiate bonds and debentures
plan ULIP Average Yes High
Low - Low - Monthly Low 3. Serial bond
2 SIP (Depends
High 4. Zero Coupon Bonds.
High on type of s. sweat Equ ity
scheme) 6. Discuss the guaranteed , joint and assumed bonds.
Nil High 7. What kind of investments are suitable for young people and why?
Low Flexible Low High
3 Debt High
Mutual LONG ANSWER QUESTIONS
Fund
Equity Lo w High Medium- Medium- High Yes High
4 1. Why should an investor include non-security forms of investment in his portfolio? Outl ine
Mutua l Long High the various investment avenues in the Indian Money Market .
Fund 2. Discuss the different kinds of long term investment opportunities available for corporate
5 Real Low High Long Average Low Limited Low investors with their pros and cons.
Estate 3. Explain the different types of investment alternatives available for a common investor
Life Nil Low Long Nil with moderate risk taking capabil ities?
6 Average Yes High 4. What do you mean by investment avenues? Discuss the different avenues/ alternatives
insurance
plan available to an investor?
Low High 5. Discuss in detail the scope of investment?
7 Real Long Low. 6. What is investment? Discuss its various alternatives available in India in the era of
Average - High
Estate Average globalization, make a comparison chart of those on the basis of risk and return
Invest-
parameter?
ment
Trust •••
 Chapter 4
INVESTMENT
PHILOSOPHY

INTRODUCTION
An investment philosophy is a coherent way of thinking Investor's general tolerance
ibout markets, how they work (and sometimes do not) and for risk in investments,
he types of mistakes that they believe consistently underlie whether it is conservative,
nvestor behaviour. moderate, or aggressive,
Investment philosophy vs . Investment strategy: An given the investor's financial
nvestrnent strategy is much narrower. It is a way of putting goals.
nto practice an investment philosophy.
In brief: An investment philosophy is a set of core beliefs that they can go back to in
Jrder to generate new strategies when old ones do not work.

MEANING
The overall set of principles or strategies that guide an investor. E amples include
fundamental, technical, value, growth and contrarian.
In simple words, an investment philosophy is one's set of core beliefs that help in
generating strategies while making investments. It can also be defined a a person's investment
strategy that anticipates specific returns and risks and contains tactics for accomplishing the
investment goals. An individual who records his strategy and tactics in writing can avoid
inconsistent investment decision.
Investment philosophy is primarily influenced by risk tolerance, the amount of uncertainty
an investor is willing to accept in exchange for potentially higher rewards.
Examples of Investment Philosophies, or Styles, include:
1. Value Investing: Seeking relatively undervalued stocks and believing they will
eventually produce strong returns.
 • secuRITY ANALYSIS AND PORTFOLto ~I\ - - - - - --
r-;-:;7 ·( ·ng cornpn n .ic with tro ng can . ~~Q.
~ . . Jdenl1 y1 11ngs 1•
5t
F ndamentals Jnve ing. . mpani tha t hr1v promising en, , . Pro~ [ 4.3]
2. u . ·n ,nto co . crg 111 I\ JNVfSTMENT PHILOISOPHY
G owth Investing: Buy1 _g_ rowtl1 pol nt,a 1. g Pr{" '
3. r h Id prom1 ,ng . ,J~ NEED OF AN INVESTME T PHILOSOPHY
services rhat o . . Looking for companies that adher ·
'ble 1nvest1ng. c to ce An investment phi_losophy_ embodies a certain style r a t of core principles ~nde rtJ ken
Socfallv-Respon 5• . 1;i ndards. rtili, b ;:1n investor. Cho~s m? a~ in vestment philosophy is an important task. A n inves tm e nt
4. ' . I bu inc r .,
moral and/or crhicJ . . st market data to look for hallrn k " 1,iJosophy may be md1cat1ve of va riou s person a l a nd professiona l att ributes. Thu s, . an
• . Ex mtmng pn . . ar v·1
s. Technical JnvesLing. n b , and sell dec1s1011s. suil/ p ~vestmen t philosophy of a more aggressive inves tor may tole ra te s ubs tantial risk by focu~i~g
. • 'I) to make U) • a~ ~n Jijgh growth s tocks, while a conservati_ve investor might instead be inter~s ted _in sta b1JJty
in trading activt ' . . estment decisions in direct oppositi a.nd Jong-term rewards. Although each investo r m ay be guided by a unique in ves tment
t · . Making inv on t
6. Contrarian lnves ,ng. buying). o lhe Jijlosophy, there ~re _s~ve ral ~ell estab lished investment mod els frequently employed by both
. hen others are r,.
11
majority ( e mg "' . b t value Regardless of the investment str fnstitutional and md1v1du a l inves tors.
JI . tfog IS a OU • ateg An appropriate investment phjJosophy prevents one from switching from s tra tegy to
In_ general, a m~es tliat are mispriced • that is, their shares are price Y, in~~ strategy, wruc~ can lead ~o changes in the inves tment portfolio, resulting in high trans~ctions
~
~re -~mg to buy buk m~ rence between the traditional "growth" and "valu ?elo~, i costs and paymg more m taxes . It helps in developing a strategy that is a ppropnate to
mtnns1c value. The ey e e inv~. investors objectives, risk avers ion and personal characteris tics. Thus, it is necessa ry to form
. .. ~r
the source of m1spnang. 1 a portfolio that performs well in the market.
In case of "growth investing", the market undoerestimates a com_p~y's growth If investors do not have an investment philosophy, they will find themselves:
0
For example, it might price-in annual gr~wth at 20¼ for~ yearS, while m _reality it ~ !ti 1. Lacking a rudder or a core se t of beliefs, they w ill be easy prey for charlatans and
30% for 10 years. If they recognize such incorrect assumption, they have discovered 11\i pretenders, with each one claiming to have found the m agic strategy that beats the
investment opportunity. a grr,, market.
2. ~wit~hing from ~trategy to strategy, they will have to change their portfolio, resulting
In case of "vaJue investing", the market often overestimates problems/risks . For ex
m high transactions costs and they will pay more in taxes.
the market expects a company to go bankrupt but it recovers and returns to p ro fi tab'a)'~,
11 3. With. a strategy that may not be appropriate for them, given their objectives, risk
they recognize that other investors mistake temporary problems for permanent O bl t avers10n and personal characte~istics. In addition to having a portfolio that under
out of proportion, they have discovered a value investment opportunity. r ow ~, performs the market, they are likely to find themself with an ulcer or worse.
To make the picture more complete, consider the following matrix:
DEVELOPING AN INVESTMENT PHILOSOPHY
Key Factor Step 1: Understand the fundamentals of risk and valuation.
Step 2: Develop a point of view about how markets work and where they might break
Growth Risk down.
Over- Step 3: Find the philosophy that provides the best fit for them, gi en their
u estimates Bubble shorting
Value investing • Risk aversion • Time Horizon
~
Ill
:& Under- • Portfolio Size • Tax Status
estimates Growth investing
Vulnerability shorting FINDING AN INVESTMENT PHILOSOPHY
-- _J Term Momentum Contrarian Opportunistic
Bubble shorting is the .
th . mirror strateg f
e excessive optimism of th Y o Growth I Short term Technical momentum in- Technical contrarian Pure a rbitrage in de-
f t1 . e crowd (gr h . nvesfin
rom 1e insufficient optimism) 8 bbl owt investing, g, an attempt to profit & (days to a few
o· · · u e sho ti • respecti I dicators - Buy stocks indicator - mutual rivatives and fixed in-
g mg against the hyped-up crowd . . r ng is one of th ve y, is an attempt to P~ weeks)
Vul . . is quite an . e tough based upon trend lines fund holding , short come markets. Tehnical
nerabd1ty Shorting · th .
1s e mirror experience est strategies to exec/ and high trading volume. intere t. The e can be demand indicators -
f th · t ·
rom e insufficient caution of th . s rategy of Va1 Information trading: Buy- for indi idual stocks or Patterns in prices such
from tl1e excessive caution) V e cr~~d (value inves . ue lnvestin ing after positive news for overall marke t. as head and shoulders.
it req uires sopltisticati f . ulner~b1hty shorting is ting, respective} g,_ an attempt top~
on rom an investor. a great and . Y, •s an attempt to pri (earnings and divdend
quite p ro f·1tabie strategy,t announcements, acquisi-

-- tion announcements)
 SEC
URITY ANALYSIS AND PORTFot
to~ p
-
-;74
■4 ~~A
~ Contranan
•
O
.,~t [4.s J
=~~==i:--:-~M~o;m~e;n~tt~in~~~7i~~~~~~~~I/N
Term
1

elative strength: Buy

Nfarket timing, based N PPorttt '1is
car iltb·
. 1\
..t't/ESTMENT PHILOISOPHY
J,.. 11. T mak • th e
Choo ing an inves tment philosophy is , I th • h •art of ucccc,c;fu l i~ve t : ~;tc;y fo r th m
=\Jrdium term R
·r w months to tocks thnt have gone t
1p upon normal PE or tunitios, llta Pn
norm.1
I
range o
f . t
m er- counted·
"' r, o,·
u1.11,,
•
ic

hr1~,
.
?,o,c~,
tho ug h, they need to look within before th •y look ut id e. Th
tho! matches both their pe rsona li ty nnd th ·ir n · •ds.
·n tl·, e las t few mont h · est rntes. I n f ormation · 's ,,t is oneTheir cho ice of philosophy w ill also be affect d by wh;it th '~ b 11. ve a b u t m adrkets and
~ co upl e of l funds c/ 0 b the ir
formation trading: Buy · f S l'tj ' Y ·t
i'Cnrs) l.n 'ti trading: Buymg a ter arbitra
1 1
Pl'r ' ·nvcs tO rs ond how they wo rk (or do not). Since their beli ef arc likely to b affecte
h c to follow ut ·
bad news (buying a ties: c ge opp'lJJ,, expene
•
Sm,,",11 c.ap s tocks "' 1 • nces they will evolve over time and their investm nt s tratcg1 ' av
8 uy 1· or '
Substantial insider buy- week after ba d eammgs •
stocks 1lg 1I
ing reports and holding for arbitrag/ 11 d ~:i, INVESTMENT STRATEGY
a few months) [nvestment stra tegy is a strategy used by financial a na lysts whi.ch co ~prises of n\les,
r •es procedures and behaviours which are d esigned to give ins tru ction to investo r t? se ect
.
Term Pass1ve grow . 1
th ·nvesn·ng·• Passive value invest- • Active gro po 10 ;tfoLio on the basis of his needs. Inves tors w hil e investing their fund s have d iffe rent
~ong Wth·
:se, era! years)
Buying stocks where ing: Buy stocks with Take stakes _IJJvt>~ b' po the tives in their mind. They make investment on the basis o f some strategy w hil . e other invests
growth trades at a reason- low PE, PBV or . PS growth corn :~ s~ ::~ut having any strategy. Many investors are risk takers while som e are nsk averse.
able price (PEG ratios). ratios. Contranan vate equjty P llies ,
value investing: Buy- capital . and,. ' Types of Strategies: .
invesnn •cti
ing losers or stocks ist value i... g) ~ 1 . No Strategy: Sheep is the category assigned to the investors w ho in vest funds ' 1tho~t
., 1Vestin having any s trategy. They invest in the securities on the basis of so meones
with Jots of bad news. stocks in p ti
oorJy recommendations or blind folded rely on newspaper ads.
aged comp . ~-
anies 2. Active vs. Passive: Active strategies are an attempt taken by investors to outperfor:rr1
push for chan l
ge. benchmark indexes. They usually believe themselves on better edge than others w hil e
passive strategies include the plan of bu_vi~\s and holding of the securities, thereby
::H00SING AN INVESTMENT PHILOSOPHY reducing the transaction costs.
• To choose an inv:s~ent philosophy, investors first need to understand h . 3. Momentum Trading: Some inves tors invest in the securities on the basis of their past
personal characteristics and financial characteristics, as well as their b li f t eir OI performance. But this is a risky venture and may not always work. As the market
markets work (or fail). e e s about Jt situation and circumstances change with the economic and political factor -
• An investment philosophy that does not match h 4. Buy and Hold: Under this strategy, an investor will buy the securitie of the company
markets will ultimately fail. t eir needs or their views aoo and ho]d them for long period. It is, basically, a long term in e trnent trategy in
which an investor is expected to yield high return in future. An in e tor w ill buy the
funds when the prices are less and hold them for indefinite period and earn profit by
rHE RIGHT INVESTMENT PHILOSOPHY selling them at profit when the price rises.
S!ngle Best Strategy: Investors can choose . 5. Indexing: Indexing is the process of investing the funds in sm all proportions. Indexing
hus, ~f they are a long-term investor who b r the investors strategy that best suits th11 can be active or passive. It is active when the index is used to enter and the exit the
pa s1ve value investing strategy. e ieves that markets overreact, they may ad~ market quickly and it is passive when the secu rities are held for long period.
Combination of strate .es· Th 6. Value vs. Growth: Growth investment s tra tegy is the po]icie in w hich an investor
·turns. In creatin th· gt . . ey can adopt a combinati
g · is combined strategy th h on of strategies to maximize the is interested in growth potential of company. An inves to r will inve t fund s in companies
• The h Id ' ey s ouJd keep · . wi~ high capitJI appreciation. Whereas Value investment trategy is the stra tegy in
b Y ~ ou not mix strategies that k m nund the foJlowing cavetc
ehav1our over the sam . ma e contradicto which an investor compares the intrinsic value of s hare with market va lu e. He
would not b e periods. Thus a st t ry assumptions about mar1· invests funds in the company when he belie\ es thJt the ecurities a re undervalued.
e compatibl . h str ' ra egy Of b . .
announcements Th fi e wit a ategy of buying t uymg on relative strenf
· e rst
Iowly whereas the latter is strategy · b s ocks aft · r Growth Investment Strategy
. •_s ased upon the er very negative eaJ1lJII/
• When investors . conditioned on market assumption that markets )ear Growth investing is not a new concept in in ves tment dictionary. Normally investor
econdn ~1x strategies, they should overreaction. when wants to invest their funds in any company they will track the past record of that
ry trntegies. Thus if ti separate th
should know which strat~gy ,:et.YII hdave .to make choicese· dominant strategy from ~ com1:any. The company which shows the hig hest track record for las t few years, basically
ommate· in te- . ,u considered for 3 years wilJ attract growth im estors.
.. us of mvestments, u•
..........

~
. k triker , th ey will in v . t in the con,p '"'l'i~,.,'I~ ......----
arc n s ,

Even sonic
gro"' u To eve
_ io
.0,c tors wI10
i ks In or e
(or firS ,nn d rcsearc •
.k ,caring
d r to find out th g rowth fund s it . . ilni(.ls ~,
r/ three wee . h Sometimes, U,c mJr
k 1 sentiments
Le vi j an " nd y our fncnd
.
.
' is not 'nil i,,'lr1
.ire I
als o lika so ' 0 n,""iQ'I,1
11 sn11ENT PHILOISOPHY th ~
.,vez Activist• Growth Investing, Unde r th i in v . s ting not , nly th • pos ition ofO ' bu si.n ess
aJwJ}'~ i; ..,pte: t 1·fI )l1Jt1 h edenic1nd
1
' ' of the con un,er wiU r spo nd accordi'nc th at br ~r'~ • i consid e red but apc1rt from th at the jou rn ey ic; also •vc1 lua tccl . As mo t f th • gr w th
.
for ftex "'ronsidcnng
· tr "• ti ' in tl,at ca tI,e mar ke t s en t·tments are g gly· Supij~d nd
companies start their bus iness on s m all sc, I , but b •fo re going for pu b l.,c th e y w ill
J
rnarkct ~II~ c i:very thre _
we.I< '"' r's senllOlc.n
".1°~,;
. t· This .1s
re.:i one will buy hares of Levis CompOod '"d I\
any b(.11n
. S() 11
establish the m to take the benefits o f su ch pos ition. It involves ve ntu re capita l _a
• • • g. It means providing equity fin a nce to s m a II an d rt· •ky proJE:!Cts
0 11 private equity investin
5 "th
co(15tlnle fund s or investing. .k t b y growtl1 tocks arc known as gI ~ in exchange of some be nefits o f sh a re of owne rs hip of fim, etc.
1
J gro1 tho e who h ,e o t . . . grown .
,r investors . . kdmique m which an investor focuses on ca . invest ._,a1ue Investment Strategy
11 gro1\ft, JO\ · •esting 1 .:i• k . • p t f L J pita[ L ' Or~ v
·call}' I
out the con1p~nie which show the signs o growth either th rouapPtn _1
The concept of Value investing w as g ive n by Benjnm in Graha m, a ls o known as f a th e r
bJSl ' will troce
The} rice earning
. ra tios d' t·
price to boo , ratios. e er ync 1, did for growth
f g, ,, v~• of value investing. According to him, a n investo r w ill b u y the secu ri ties only w h e n t_h e
10
by
or rrofits
investing P scnaldl com~,nies
or in
While un ergo o o
whichinvesting,
arowth 1
shows t 1egrowth
h
some investor
Jrec 10ns investing
. tJ
o growth/"d builtin
ornpa .
;i
~
market value of the security is lesser tha n the intrins ic va lue. H e s tates that the ma rket pnce
of a sect1rity is determined by demand and s upply of the secu ri ty which is the root cau se o f
1

~
1
Mage ofan.how the mar ke is aJuing their growl potentia 1 ra ,er than existing in,,,t~
basis . n1es ·,rational behaviour of the cons umer. As some times th e in vesto r buys th e s tock d u to
11 I I ~ompetition or greed and sometimes due to s udde n fall in m a rket, und e r panic si tu atio n h e
starts selling the securities. But the value investors w ill take the advantage of b o th th e
Liabilities situations- He will take the advantage of marke t irrationali ty and b u y the stock w h en the
Assets
prices are Jess than intrinsic value and sell them at future d a te and m ake sufficien t revenue
Fixed Claim on cash fl
Existing Investments Assets in Place Little or No role in manows from the same.
Generate ca,c;hflows today Debt Fixed Maturity agernent Another investor Warren Buffet, was also in favour of va lue investing. His principle
Includes long lived (fixed) and behind the same is to buy the stocks at cheaper rates to earn revenue. Acco rding to him, lots
short-lived (working capital Tax Deductide
of research is required to find out the under-priced stoi:!'s. Once they a re traced , it takes long
assets .
time for their price to rise. This buys and hold technique of the investor will help him to fetch
Residual Claim on cash 11 ows
Expected Value that will be Growth Assets Equity . 'f' unreasonable returns.
S 1gn11cant Role in manage
created by future investment Perpetual Lives ment DIFFERENCE BETWEEN VALUE INVESTING AND GROWTH INVESTING
Growth Investing
Basis Value Investing
Value investing is an inves tment Gro w th in vest in g is an
Meaning
DIFFERENT STRANDS OF GROWTH INVESTING philosophy where stocks are selected inves bnen t tyle and philosophy
that trade for less than their intrinsic that is fo cused on th growth
l11ere a_re two different strands of growth investing: values. of a n in estor ' capita l.
1. Passive growth investing lonths -Years
Time Years
2. Activists growth investing Selecting stocks that are assumed to Selecting s to ck of companies
Strategy
1. ,~assive· Growth Investing·· l11e mos·t comma · be trading below intrinsic value. tha t h we high ex pected growth
nvesting in companies which sho II n version of passive growili investil/ rate.
Th e next t · w sma growth · · tJ
when th s ep is to invest in Initial Public Off . 1.e .. m 1e form of capitaliza· Ch a r a cteri e d , ith high P/E
conve t·e stock prices will rise after the off . enngs with the motive to earn rehr P/E Ratio Examine company fundamental s
n 1onal gro,vth investing
. strate • enngs
. · Lastly
c , th • I1tage 1s
. e we1g . gwen
. tol such as ROE, earnings, P/ E to ratios .
• Strategies of other . c g1es m which evaluation of· estimate a company's worth.
then, companies who are invol d . . . Rapid earnings growth.
• St . t . ve m this buying process is asses: Growth Relatively slow earnings growth .
ra eg1es of buyin hi . High dividend yield. Low or no dividend yield.
Dividend yield
After evaluati g gh pnce earning stocks
stocks but th ng ~e above two strategies are assessed. Sales growth Sluggish sales growth. Rapid sales growth.
e pnce sho u Id b e reasonable.
a new strate gy is
. framed for buying gro' High price-to-book ratio.
Price to Book Ratio Low price-to-book ratio.
 ~
r.;-;;7 ,,~ ~~ Ill-
--.----

TYPE s OF INVESTORS . .
. e. ind1v1duaJ
.
(retail) and i . E--w-,_.E ..T PHILOJSOPHY . . m e ta xc Lh at mu.s t ultim ate ly
b "' paid. It's
ey
. vestor J. • • d" .d nst1tu1· V ;:, ■ '" d a nd mon
di two types o f in . vcstor is an m JVJ uaJ or 'on JN d al with capital g.:11ns an in:o h ve accec; to advi r
There are broa y I thcr an in t 1 'ch pl iln in ill I rnust e h t individu al inv. tors .,
·1 h. viii remain same w ,e be differen w 11 ays a Vital Slit~i'· \ ·rnportant, therefore, t . a k' with taxable po rtfoli os.
phi osop ies ,. . f the t,vo can role i 'o~ , rs experienced m woT mg
objectives and constraints o ti d~c.' ! manage rf m?
. tment philosophy. ----------- ~ Individual Investors Underpe or . und rperfo rm:
mves WhY do th reasons due to which individu a l in vestors . realize th at they
foUowing are e . On 'biJity is that individ ual uwesto r n- peculative
1
1. Asyn11ne~~ :::~~o:sadve~~;~ when tr~din g a ~d t::t.drn:~:~:r;om y ne e d t~
0
Institutional are at an including liquidity needs, reba lancing, a n At times inves to rs may need ill
Individual reasons e stocks to save or sell s tocks_ to consume. ffs. O c~asionally, inve ~ors_ ,.:
pubrcr::,:e their portfolios to manage n sk-re_tum tr:-1toWhen face d v1ith thjs liqwd1ly,
re a losses to minimize their tax I . trade with othe rs

Depository
Bank Pension
Funds
Investment C
and
ornpa 1.
nes
w:;;oc!:Voe:~at:X
re
management ne~ds,
. ht be better informed . It is, however,
re tail inv:~r~~t~:o;~;:n:Ie non-speculative
Insurance
Company Institutions Mutual Funds who mig .th th ual turnover rate. d
trading needs w1 e ann I . 1 ru~h turnover ra t s a n
nfid explain the re atJVe y o th t the
Overconfidence: Overco enc~ can f . unt of evidence indicates a .
1. INDIVIDUAL INVESTORS: . . 2. oor performance of individual_ mv~stors a_ ~ a~~verconfidence are co rrelated_ W1 th
1 known as retail mvestors or small invest hetter-than-average and overestimation v~ebthes o 'd ce that miscalibration is Jinked
b y investors . While eakevlink
1 en
. Individual inv~stors are ahsobuv and sell sec.irities for their personal acors. ~Q1 higher levels o f tra d mg
·
. . ht be partial} exp I runea · · bv
.J
mvestors are those mvestors w O I • •
count
I ((
to trading is weaker, investors suspect ~s ":'e mlg ·
for another company or orgaruzation. the current inability to measure miscahbration well. . . f . d"vidual
They are the individuals and small groups who invest in the equity market lor1 I ti for the excessl\ e tradino O m 1
3. Sensation Seeking: A noncomp~tingthextptr~~ o\ entertainment and appeals to people
short-term or long-term gains. investors is the simple observabon a a mg 1 •
who enjoy sensation-seeking activities such as gambling.
Features of Individual Investors
Following are the various features of individual investors:
F miliarity- There is debate about whether individu al investor: pos _e
4. ~ormatiorntl advantage about companies that are close to ,. here th y live or in_ tt
tl/:
1. Small Groups: They are the indivi dua1s an d sma 11 groups w h o invest in the, industry of employment. Some scho Iars argue th a t m · div:idu al. in\.i e. tor •are. doe er
market for either short-term or Jong-term gains. informed about the prospects of companies close to w here the live o r u:1 lh~u m ustry
of employment and that this information advantage lead to supenor inve tment
2. Risk Taking: Their risk-taking ability is very Jess. b the'-' are
performance. Others argue individuals overin est in the e t c · ecau .1 c
3. Small Portion of the Total Volumes: They constitute a very small portion of ~ familiar to them, leading to under diversification and average or even bel~, - par
volumes generated on the stock exchange. This is true in the case of almosti returns. The performance implication of investing in geoer~prucally or occu pationall y
stO
ck exchanges in th e world. Hence, they do not dominate much of the stock n; familiar stocks is the subject of ongoing debate. Howev r, m e to r O en ight th e e
4 · Financial Planning: Their financial plannin d . ft · stocks in their equity portfolios wruch have potentia llv import, nt implications for
1 t ,h g an management 1s not very e110t , J

eas v. en compared to their counterpart. diversification.

5. Knowledge: La.:k of knowled 0 f h
times, they depend h ge. t e stock markets is an age-old problem I 2. INSTITUTIONAL INVESTORS
. on t e news m the rn k t
111 st0 cks. Nowadays, man
· · al n·
f ar e or tips from technical an ysts .1 They invest the money hold by them on the behalf of the other individuals. Pension
0 I
counterparts, which can be ~ - t iern are seen copying the moves of theui funds, mutual funds and life insurance companies are the main p laye r in securitie markets
own st0 ck portfolio based on ~~a~tro~s for them. Instead, they should prepaI! in both the USA and the UK. The growing dominance of in titutional in estors \vithin the
beat short-term volatility in t1 eir nsk taking ability and invest for the ]ong•lt financial system makes their role fundamental in interna tional quity market .
6 P f ie markets
· er ormance Pressure: lliey h · Institutional investors act as highly specialis d in es tor on beha lf of others. For example,
counterparts ave lesser £ d ~· . • • l I 1 ·
· per onnance pressure as compare manf peop 1e w1ll have a pension from their emp oyer. T 1e mp o e r g ives t hat p er on's
7· Tax-~~emption: lndivid . pension contributions to a pension fund. The fund will bu y shares in a company or ome
1
qu alified plans and mos~~ investors do not b fi tatt other financial product. TI1e pension fund is an institutional in ve tor.
oundations and ene t from the tax-exempt 5 . 1
endowments . enjoy. The individual !JI
 ..,ALYSIS AND PORTFOLIO '"'-'\~
SECURITY A~ a. -■--------
~
~Institutional investors make fi nanlfaal
r::-:;;;i . k t pos iblc, as they buy und s I ~tt
mar c e I (L
"~~ .,VESTMENT PHILOISOPHY .
.,;-:;-
1_4:1:1J
. d n our beha · 1~ . . . 1 til they die. Mo t
shares and bonds issue o employee reti res, they receive a propo rti on of their final sa ary ~ ctan has
f Institutional Investors . characteristics if insH . of 1hese schemes a_re no longer avaHabl , to ne w inve ·tor . A hfe expe nsi':;'n for
Features O . the vnnous . flltior,ill increased, the pot 1ust does not stretch far enough to pay o ut th fuJI pc
Following are the points that c1ear. volume, institutions get a better trad i~~ so many people for so long .
D e to high trading
. • ·
1. Diversification: .u . le b direct ho 1d·ngs
1 ·. . .
e Of1,
1
•
2. Defined contr1bubon • •
pension: .
Defined . .
contnbut1on ·
pens1~ns ~ean
that a lthough
' eme,
and return then 1s po ib Y t'O hold high nsk_ and high ret-ur . employees and employers contribute in the same way as in a final sa lary sch th .
Long-Term liabilities: They are _able n,ey are not subject to runs unW:
111s1~ the employee does nol know how much income they w;JI actually gel from e~
2· such as shares and financial op~ons. liabilities. · 'bai pension. The a.mount will depend not only on how much they h a ve contnbute
have to matd, their assets a nd ,eir of investment due to the foUowin but also on how well the money has been invested.
3. Size: Economies of scale lower costs g te~Sr~ Savings/Life insurance: Saving insurance (insurance against risk of dea·th, and a lso
(a) Sha ring skills of expert managers. . wer commission char ' fl, fonn of saving) and non life (car, house insurance). Insurance companies take regular
f transactions giving Jo ges. payments of money from lots of people, m th e form of prerruums. These pre miu.rns
(b) Larger vo 1~mes ~ h es of stocks, such as block trades. create a pot of money which, when invested, creates the reserves that can be paid out
(c) Ability to mves~ in large s ~r vestors by pooling individual risks, fr to people if the insured even t occurs (for exa mple an accident, loss, critical illness or
(d) Ability to offer insurance t'O in t bonds). om luo1 death).
• I · k (goverrunen
(options) to ow ns _, to invest in large liquid assets so they
tJII
c. Mutual funds (unit trusts): It is that form of saving which are vehides _ •
fo r pooling
4. Liquidity Preference: TI,ey prt:.t~r . . contrast to commercial banks h can di1, of assets to get a better risk/return trade payoff. Individual investors choose th e type
their risk at any give., time. nus JS m w O are c~1 of asset they invest in and are free to buy or sell at current maiket prices (e.g. fidelity
in holding illiquid assets. . ( al , , investments).
~~::~□,·o.:dTh;~:ea;;s~:~!
t better information an yst s 1orecasts) th
5. ~o process publicly available information~ indi1i D. Fund Managers: Fund Managers invest people's savings in securities (shares anb d
bonds). Banks and insurance companies often have their ow n investment arms, ut
there are also many independent fund managers. They manage funds provided by
6. Others: lots of private individuals or by other institutional investors, such as insurance
(i) Institutional investors handle huge amounts of money.
companies and pension funds.
(ii) They have a powerful influence in the city and provide companies with th
they need to expand and compete in the market place. e~ Most fund management companies sell 'units' in the funds they manage - hence the
funds are called 'unit trusts'. People buy these units, each of which represents a small fraction
(iii) Because they buy and sell so many shares, they play a large part in detel'lll: of the value of a fund. The money is invested as part of the total p ot. When individuals ,vi.sh
which listed companies will stay solvent, and which wm go under.
to take their money back out of the scheme, they sell their units in return for the same fraction
(iv) Institutional investors have a lot of influence in the management of indiif of the fund, whether it has gone up or down.
companies or corporations because, as shareholders, they are entitled to exe
Institutional investors (other than fund managers) inves t in a whole range of things:
voting rights in a company.
government _bo~ds, corpora~e bonds, shares in leading companies, private equ i ty funds,
(v) There_ ~re three types. of institutional investors, depending on the source off pr~pe~, denva~ves, currenaes, commodities, cash and other thinos. They do this to minim.ise
~ nd5 · msu~an~e, penswns and savings. All three handle the savinas of indivi~ their nsk - making sure they do not have all their eggs in one basket.
d irect1y or md1rectly. o
F~d managers administer funds which specialise in different kinds of investments. These
Main Types of Institutional Investors have different levels of risk, and different points a t w hich they bring income to savers.
Following are the various types f . . . in One parti~a_r category of funds is labelled hedge funds. These specialise in high-risk
A p . fun o mstituhonal investors·
. ens1on ds: Pension fu d · . ves_tme_nts, traditionaJJy futures and forwards and options but now include a whole host of
defined benefit (final salary>°; encompass two different types of pension sett imaginatively named (and even more imaginatively concei ed) investments.
there are certain types of s e_mes and defined contribution schemes In bothG
to invest legally. It inv olmodre_ in which pension
· fund. s are nd·1 H~dge funds have become very popular in recent } ears, and now account for ·a very hioh
ve mnskyp investment
. proportion of activity within the inves tment m arkets - on some d ays, half the total transactio~
1
. ponsors and members for future o: i~g and investment of funds contribult'i are conducted by hedge funds.
1. Defined benefit: Define _P ns1ons. Thus, it includes:
company and its d benefit (or final . i~~ the In ~he UK institutional sector features very large life insurers and pension funds, while
employees contrib•·• ' salary) pensions are those IIlWM US 1s domjnated by pension funds and mutual funds.
•.ut' regularly to a pension fund.
 sEcu~1TY ,u,,.Lvs;~~~TION . ....,,~Q,~~►
r;,iil NATURE OF R :1fl! gu.i rnntccs
[§]
~ G AND by the insr sTMENT PHILOISOPHV
RIN th rt: • · f r 1 · llLJr iN"E or ffE REN C E BETW EE N I ND IVID UAL ANO I NSTITUTI ONAL I NVEST ORS
RISK BEA rf ' in ,r,,ncc,
C,

, proportio n o ma salary) 'on1

ion scheme- nnd , c , i cqunl to t,1 ,d they nrc regul a ted qu·· 'l1ii~r..·1 Jnstit utfo naJ
Individual
I defined re 05 ion schcnlt.: ).:r, lplC)', :l l •te s1 ··-- - - ~ Bas is
n (" 1, thr Us.5 pcm , ri k of ;1n •ons and mu tua l fun ds l7 Mttl' 5 r.
fi c,{i return " 'C'., .
,t: tl •.nstitution 1tself lx,.,rs mt: i- ntribut1on . pen 1 . ·
f re you retire, you ge t a v e 'n~ - ~ - ~ ~ - - - ---__'.--l-----------:-::::::711~
1 . 'l NO·
-- · fn div idu a l in ves to rs wh o bu y and In s titu t iona l investo rs gc n c ~a Y
thJI ,c , t,~ nt in dcfin - ' just be o cry fl) ~ . Meanin g · ti a l
GuJrantc~s are i) -stock nHukd collnp c ~d,1, 1 se ll sec uri ties fo r th e ir pe rso n a l inves t for o he r p ~opte. lnsbtu o n
Jrs all the nsk. If the p::i nies m o re b o nds, re fl ecnn acco unt, a n d n ot fo r a noth e r in vestmen a re us ually hand led b y
be - . cc cotn • d t . . g li b· co mpany or orga niza tion. It is als o a d viso rs o r cons ultants.
pension. uitie , 111suran do as tl1cy . o no reqmre liquid <l ,1 ,1
Pension fu nds hold more~ than households. . ' ns in asse t composition. asS\!~• k now n as a "Reta il in ves tor" or
. h Id 1e- dep -1 · •0 11 van abO 1 "s m all inves tor" .
Ali insti tu b~n ~
dail) spending. ,2rc
are )arge cross-sect•
. fu ds have 4% hqu• I
. 'd 'ty and 0% in loan , w h e reas C
erniany1 Definition They are the indi vid uals and small
They are the banks, financ:_ia l ~n.:-
2. groups w ho in ves t in th e e q u ity ices firms, diffe ren finanoal 1ns h -
For e ·ample, UK pension n '
d ... 30101 in Joans. m a rke t fo r e ithe r s h or t-term or tu tions, a nd mutual fund com p a -
0% liquidity an .) NSTITUTIONAL INVESl long- te rm gains. ni es, w hi ch make heavy investmen ts
GROWTH OF I . . . 0~ in th e s tock maTkets generally fo r a
REASONS FOR w th of inshtuhonal m \estors prolonged period of time.
. s for t)1e gro . \Vhic~
Followino are the van ous reason ·d and demand side: '
.
0
, ds i.e. supply 51 e Risk TheiI risk-taking abili ty is very less. Their risk taking capacity is fa r m o re
categonsed on ti, 0 groun . d tJ,e following: 3. than that of th eir counterpart. Tha t
. . It indu es is w hy we see many of them p_ur-
(a) Supply Side Reasons · . of scale force reduction in transaclj
. f ale· Economies onst chas ing fallin g s tocks o r hol din g
1. Econouues o 5 c ·akina them beneficial to investors. stocks eve.n in the phase o f a bear
mana oaernent costs m . o lin . They have the a b·1· 1 1ty to d.1versify ri k m arke t.
,c.: ti d Risk Poo g. s ,1
2. Diversmca on an . . ky outcomes for investors. ' They mos tly co n trol and di rect the
meaning that they proVJde 1ess ns . . . 4. Stock Th ey con s titute a ve ry s m a ll
. . d t relief on pens10n contnbuhons etc. exchange port ion of the to t a l vo lum es stock m a rke ts a c ross th e wo rld .
3. Fiscal Benefits: It mclu es ax ge ne ra ted on th e stock exchange. They can either be the domestic o nes
ation of markets and portfolios, enable b
4. Recent Developments: Dere gul f, This is true in the case of almost all o r th e fo r ei g n ones who hav e
ruversification and more competition. the s tock exchanges in the w orld. sou ght the requisi te permjssions to
New instruments, ability to use derivatives such as futures and options / altelllll H ence, they do not domina te much invest in m a rkets of various co un-
products such as bank deposits are unattractive. of the stock m arket. tries.
5. Planning Their fin a nci a l pl a nnin g a nd Their financial p lanning an d man-
(b) Demand Side Reasons: It includes tl,e following:
and mana- management is not ve ry effi cient, agement is very sophis tica ted and
1. Demographic Aspects: Existing fall in birth rates and rise in life expectai gement at leas t w hen compa red to their p erfect. Tha t is \ h y; it h a s been
(example in UK life expectancy increases from 72 years, 1970 to 78 years oM counterp a rt. observed that they h ave alwa y s made
2000) effects on the high savings group. m ore money.
2. Prospective Population Ageing: These factors suggest that a larger proportioo 6. Lack of Lack o f know le d ge o f the s tock Unlike their co unterpa rts, they h a ve
indi viduals will need to save for their retirement than in the past. knowledge markets is an a ge-old problem. their own talented resea rch teams,
M any times, they d ep end o n the which conduct a thorou gh s tock re-
3. Pressures on Public Pension Systems: Public pensions are usually paid dirt\'!
n ews in the m a rke t or tips fro m sea rch befo re in vesting.
curre,t workers . from publ'c 1 taxes. Because of agemg . population and greater i technical analysts to trade in s tocks.
ex pectancy, investors would . expect nses · m• public pension e xp enditures, 11'•t
Now ad ays, m an y of them axe seen
canno t be fi nanced without very hi gh taxes. copy ing the moves of their la rge
TI1is has coincided with reforms in . . . count e r-parts, w hich ca n b e
cut the benefits of public . public pensmns, such as annuities, wluch i J disastrous for them. Ins tead , they
pensions This · t l a
m urn eads to incre ases in deman
1

private pensions and other f · should prepare the ir own s tock

orms of iru,tttutional investors. portfolio based on their risk taking
----- SECURITY ANA
LYSIS AND PORTFOLIO "1A
------- ~~Q~~ ,
Institutional
►
t\ MENT pHILOISOPHY
Jr4\/ES~ a higher degree of liquidity and/or stability. Typically, a Conservative inveS r
t0
0
Sr. \narily seeks to minimize risk and loss of prin cipa l.
LN~o.l---+:;;::--:;:iin. ;;;,ifo1r the
abiJitt' and mves
• J
Iong-tethrrn
I t·1·1ty in e
t rm vo a,
~us Conservative Portfolio is designed to provide stabWty and protection fro~l?
0
55

to beat short- e to in~estors who either have a short time horizon and/or a primary go~ ~ av~ me~
potential losses. The stability of this portfolio comes at th e expense of achieving gh
markets. f .,.,ance They have a Jot of p
per or, .. erfo Jong-term profits.
They have lesser d to their pressure, as they have th rlliah,
7. perfor-
mance pressure as compare of the masses with them e lli0ri: Conservative Portfolio
pressure counterparts. need to give the prornis~:11.q ~ Conservative Portfolio

on investment to maint . re~~ ~ • E ~ uities

standard in the industry_a,n lh~ ~ c Frxed Income
t benefit Institutional investors b . Allocation by asset class :
Individual investors do no . .
that institutions . ~ng1
8. Tax en1oy and av . ~t~ 30% Equities
exemption from the tax-exempt status t 15 % - Large-Cap
nd mos benefits of tax - emption. a,1 I~ 5% - Mid-Cap
qualified plans a t
foundations and en
. TI1e m
°
d w-men s
. di vt'dual investor must
5% - Small-Cap
5% - International
en1oy. . 70% Fixed Income
. ·ta1 · and income
deal with cap, g~!IlS 'd 55 % Guaranteed lnvestm ent Co ntracts
taxes that must ultimately be pru ·
It's important, therefore, th at 15 % Bonds
individual investors have access to
advisors and money managers 2 . Moderately Conservative: A Moderately Conservative investor val ue_s_ principal
preservation, but is comfortable accepting a small degree of risk an~ v~la_tility to seek
experienced in working with some degree of appreciation. This investor desires greater liquiclity, 1s willing to accept
taxable portfolios. lower returns, and is willing to accept minimal losses.
Thus, Moderate-Conservative Portfolio primarily attempts to avoid s hort-term loss,
INVESTMENT PHILOSOPHIES OF THE COMMON INVESTO~ but still seeks somewhat higher profits over the long term. To achieve higher potential
profits some fluctuations in investment value are to be expected.
The common investor's investment philosophies are:
3. Moderate: A Moderate investor values reducing risks and enhancing returns equally.
1. Conservative.
This investor is willing to accept modest risks to seek higher long-term returns. A
2. Moderate. Moderate investor may endure a short-term loss of principal and lower degree of
3. Aggressive. liquidity in exchange for long-term appreciation.
Thus, Moderate Portfolio is designed for those who are equally concerned with risk
Moderately
Aggressive and return. This portfolio is intended to provide profits that are expected to outpace
Conservative Moderate inflation over the long term. Those investing in this portfolio should be comfortable
with fluctuations in the portfolio's value and occas ional short-term loss.

Moderate Portfolio Allocation by asset class :

65% Equities
25% - Large-cap
15% - Mid-cap
Moderately
conservative Moderately 15% - Small-cap
growth Aggressive 10% - International

1. C~ns_ervative Investment Philosophy: A • Equities 35% Fixed Income

pnnapal over seeking appreciation. Tius in Conservative inv t rotecti: c Fixed Income 20% Guaranteed Investment Contracts
.. ,vestor is c es or va1ues p
Ornfortable accepting lower retll' 15% Bonds

-
 ANALYSIS AND PORTFOLto
secu,urY
. vcstor values• hig. her Iong,fe,-,..._
,
'1~'1
~~
[4.17]
wt.h 1n
@] II . A Moderate Gr~ This inves tor is comfort able .. ,, tt ..-rp.4ENT PHJLOISOPHY d extrerne price
1,.,vE:,' £ . t h rt errn loss an
4. Moderate Grow 1. on iderable fl 1<.
1
-term appreciation. The M With i u,
is wi lli~g to _<1cc;~~a~gc (o r se J<ing ~~~e rm losses of principal in °d~ta1
nuctuat1~ns 1.7,. c to cndur large r l~·quidity is a secondary concc C')(chal)~ r,
> .
portfolio .
rnus t be cornfortabl . with experiencing requ •n s o -
_1-, ngcs to a
u,a .
ch ·eve high profits over the long term .
J .
hort In vesto rs have to take risks that a r ' appro
pn·a te o rea
ch their fjnarlcial
f their i.nvesunents-
investor 1s wi mg
potential of higher long- term
ret11rns- 1
__________
rn to
a>(
I}~ , -n,us, 1n s , . . . d
. •sk tolerance is the,r abili ty to ea 1 w1
-th ch
a ng
es in thP values o
- . . . vest:xnents,
aJs. -n,e,r n . ch I a11ce for ns " rn rn .
go . estment philosophy is their general approa to o . oals they wan to achieve.
Growth in vestor.
. . A Mo er
s. Moderately Aggressive. . ·iy va Ju es
d ately Moderately Aggressive Portt
Olfo
'
.~ ·Jt~:
J,eu ,er J
conservative, moderate, or aggressive, given the finanaaJ g
• • k d
ll
e genera y re
wa rd ed with
· · s tor p nm ari 1· w ) Conservative Investors: They accept very IJttJe ns an ar d amount of current
Aggress ive in ve . s and is wil ing
higher long-term retur:n Th. investor (a relatively low rates of re turn fo_r see~g the goals of a mot e;~t to Jose any of the
to accept significant nsk. is are more . come and preservation of capital which means they_do n~ • . curities isstJed
m y th ey have inves ted Conservative inves tors typ1caJJy rnves. rn se
believes 1,jgher long-te~ rettJ~~cipal. A rnon e · · bill t nd bonds
importa nt than protect1J1g P t r may by the government, including Treasury s, no es, a · .
• ; 11 ves o . th . f, tures of conservabve
Mod e ra tely Aggressive _ f vour of Features of Conservative Investors: Foilowmg a re e mam ea
,n a
endure la rge Iosse S returns . investors:
otentiall y hig her long-term to a t low rates of retum-
P concern (i) Investors accept very Ii tt Je ris k an d gener ally ge
Liquidity may not b e. a
Moderately Aggressive rnveS t0 r. . . (ii) The investor is a ris k averter. .
Thus Moderate-Aggressive
. ' d •d nsiderable we
is
. Portfolioalth L------------ (iii) Th e investor's goals are moderate curren t income and preservation of capltal-
(iv) The investor avoids losses and tries to hold investments that ha" e gains often for
des1gne to prov1 e co with intermediate to long time h .
accu mulation (profits) _to invesbtors mfortable with higher than avera on~onq long p eriod of time.
· tin · this portfolio must e co ge Pnce d (v) Most investors approaching retirement o r planning to withdra v m o i:ey from
:~espot:n~al short-term losses to achieve the des_ire_d. higher profits. ' their investments in the near future are conservative in in estr:nent philosophy.
6. Aggressive: An Aggressive investor va_lues max~~z~g returns and is Wil~ (vi) Tactically , they might consider selling investments w hen they give a reasonable
accep t substantial risk. This investor believes m~~mg long-term returns ~'
return .
important than protecting principal._ ~ ~ggress1ve investor may endure ex~·
(vii) They consider investing in obligations issued by the government, high quality,
volatili ty and sigruficant losses. L1qmdity is generally not a concern to an Aggie
corporate bonds/stock, balanced mutual funds, and certificates of d e posit.
investor.
TI1u s, Aggressive Portfolio seeks substantial wealth accumulation (profits) and its pr
(viii) They tend to spread their fund among a large number of inves tment alternatives.
goa l is intend ed for investors who have a Jong time horizon. Those who invest fr (ix) The main goal with a conservati ve portfolio is to protect the principal alue of
your portfolio. As s uch, these models are often referred to as capital preservation
portfolios.
• i::,e1erm,n1ng An Appropriate Asset Aflocallon
(x) Conservative mod e l portfolio generally allocates a large percent of the total portfolio
.: .
-.
.
.
. . ,~
to lower - risk securities such as fixed income and money market securities.
(b) Moderate I~v~stors: They seek capital gain through low and steady growth in the
Merrill Lynch Asset Allocation Models value of theu mvestments along with some current income (money to spend in the
Conservative Moderately . present.) They only ~llo~ ~ small amount of risk of losing money. toderate investors
Conservative Moderate Moderately
~re co~fo~tabl: ~unng nsmg and falling market conditions. Moderate investors seek
Aggressive Aggressive
2~ 10% 5%
mvesting m d1 v1dend paying common s tock , grm th and income mutual funds
corporate bonds, government bonds, and real estate. '

91, fg F~atures of Moderate Investors: Following are the main features of moderate investors:
(1) They invite only a fair a mount of risk of capital loss.
(ii) Most moderate investors h ave n o immediate n eed for funds and h
later years. ave funds for
(iii) 11iey a re comforta ble during rising and falling market conditi" ons.
~
secuRITY ANALYSIS AND PORTFOL
I . Io 1'1l\ti .......--
~ Jr in c trn nt w 1 n pnce hav . ~~,
~ ~
. . d Aggres ive
(iv) Their tact:1~ rn~u eds se ;;'gzs%and preadin inves hncnt risen by •""es-rti1ENT pHILOISOPHY Mod era te
urchasing ,f pnces rop nd s all'lonls," Conservati
P
choices. . . . .
• d " 1·d nd pay ing qu1ty stock. g I ---5 r. oasis ___J___ -------1-----------i--------:--:~1
1 ~------:- Se lling invest me nts Selling in v tm n when Lon g t rm a nd s hort
v They considerd h"inveshng
I rtin corporate bon d s, government bond
' growth .ind
when price rise 15% p ri ce rise is 25% pu rchas- te rm tactics.
( ) mutual fun s, 1g 1 qua 1 s and 1i\ 1 8 . 'fact1cs ing inves tm e n ts whe n
.
. t . The " ant very high returns and accept a h. ,,,

~
(c) Aggressive 1nves ors. "d . f g in common stocks of n tgh lev I ~, pri ce fa ll is 25%
These investors con I er ,nvcs 111 . ew or f ' Sp read s fun ds a m o n g Does not ,li vers ity rnuch-
companies, high-yielding junk bonds, and aggressive growth mutual rl•g,¾I Spreads fund s among
oiversi- large numb er of in ves t-
Featwes of Aggressive Investors: Following are the main features ofllAl'lds. ' 9 la rge numb e r of ment al ternatives.
inv es tment alte rn a -
investors: &i:r, · /jcation
tives. Di vi d end p ay in g equi ty Equity s hares o f n ew fast
(i) This philosophy has a goal of earning high returns by accepting hi '
Government b o nd s, s h a res, g rowth in co m e !9'0 tNing co mpanies, high
(ii) Such investors are risk seekers and seek capital gains. gh ~\ 10. Avenues high qu a lity corpo - mutu al fund s, high qual- y ieldin g junk b onds .
of inve- rate bonds, balanced
(iii) They may opt for Jong - term and short- term tactics. stn1ent
ity co rpo ra te bo nds, gov-
mutual fund s, ce rtifi- e rnmen t bonds, rea l es-
(iv) They consider investing in equity stock of new fast growing co .
yielding junk bonds, aggressive growth mutual funds, puts etc. mp"llies, cate deposits. tate.
(v) Aggressive portfolio mainly consists of equities, so these portfoli ,
to fluctuate widely. os Value
SHORT A
Difference in the Basic Investment Philosophies
1. Differentiate between values vs. Growth investing.
Conservative Moderate
Sr. Basis 2 . Differentiate between · conservative and moderate strategy.
No. 3. Difference between institutional and individual strategy.
1. Meaning .k
Conservative investors Moderate investors are Aggressive investo 11
4. What are the various types of strategies?
are
t ns Th averse inves- ready to accept a fair to earn high returs ~1
s. Why investors do needs investment philosophy?
ors. ns· keyand
less accept· very amount of risk, so these are rea d Y to acceptrns,hii
so invest investors invest in divi- ''5
in safe investments dend paying equity stock risk. They generally irn
like bonds and other growth and income mu'. m eqwty stock of newi
fixed mcome securities. tual funds, high quality growing
yieldin_ companies,
g junk bonds,;;. 1 . Discuss the various investment philosophies of common investors?
corporate bonds, govern- gress1ve growth rnu~1J • Explain conservative strategy by differentiate between aggressi ve strategy?
2
men
F . t bonds and real estate· fund s, puts etc.
2. Extent of Little Risk. a1: amount of risk of High Ri k
Risk
3. Level of Low level
capita] loss.
Slow and steady grow th High return.
s .
•••
in value.
return
4. Current Moderate current Seek slow capital .
income income and some current. gams
5. Goal Capital preservation income.
Asset accumulati"on
6. Risk Capital appreciation
Risk averter Moderate risk taker
tolerance Risk seeker.
7. Invest- Long term No immect ·

-
ment
- -period
- - - L________
funds.
L___~
iate need for
Long term and shor
term.
> p

RISK AND RETURN

INTRODUCTION
Investors have many motives for investing. Some Risk implies the extent to
f which any chosen action or
nvestors invest in order to gain a sense o power or prestige. an inaction that may lead to
[he control of corporate empires, thus, is an important motive. a loss or some unwanted
~or most investors, however, the prime interest in investments outcome.
·5 largely to earn a return on their money. However, selecting _
:tocks exclusively on the basis of maximization of return is not enough. The most investors
lo not place available funds into the one, two, or even three stocks promising the greatest
etums suggests that other factors must be considered besides return in the selection process.
nvestors not only like return, they dislike risk.
To facilitate the job of analysing securities and portfolios within a return-risk context,
1ne must begin with a clear understanding of what risk and return are, what creates them,
nd how these should be measured. In fact, one should find the answer to the following two
uestions while taking investment decisions: (1) what securities should be held, and (2) how
1any rupees should be allocated to each. These decisions are normally made in two steps.
irst, estimates are made of the reh1rn and risk associated with available securities over a
>rward holding period. This step is known as security analysis. Second, return-risk E.stimates
tust be compared in order to decide how to allocate available funds among these securities
n a continuing basis. This step comprises portfolio analysis, selection, and management. In
tct, security analysis provides the necessary inputs for analysing and selecting portfolios.

"1EANING OF RISK
Risk can be defined as the probability that the expected return from the security will not
aterialize. Every investment involves uncertainties that make future investment returns risk-
·one. Uncertainties could be due to the political, economic and industry factors.
 SIS ANU ..,,_ .. .......... v 1'1A
ANALY ~/\Q ,.....-
secURJlY ·nvcs tmc nt lccision . Tcchnic<1 \

[3J .
I
l :-irl o( .tn ces of the decision th a t i lly ~
t , .tre an intcgrn ·lie n cqucn to s itu ation s where th e s lo ~~I.
1st< AND RETURN I I
s.3
fl C ditworlhincss of the is uer· ·me . . .
Ri ,k and unccrt,1h~nn) where the Pd sfi,,n d to npply e u sed interchangeably Ptobal~ 4. re d't h · ~cu nti c; of government and s mi government
- situa o II} c · ty ar · UJI bodies are more ~re I wort y t~an tho - i 'iUed by th' corp ra te cto r and much les
be defined as a rt aint ' is gcncr~ k nnd unccrtn1~ ri ation s in re turn of inco ni th th
are known.
cannot be. estt
~~:-ted. Howe\'cr, ns d that bring in vi:k is a lso influe nce d by e:· 1~~
F
c:ed of the dern~n, and interest. ble and broadly affect the i tel'J)a1
secure a rc odscCm c u~organ,sed ·ctor like indigenous banke
or Private Lt . o mpanies. ,
shroffs chit funds,
,

Risk is .~ ; : to risk are r;~ are uncon!r~I ~ue to interna l_ en~ronment ;ves~
forces contn ·derati n E.,xtemnl ' ternatic risk. Risk as unsystematic nsk. a fi~
5. M aturi ty Pe riod or the length of in vestm€.'Ilt: The la rge r the period, the more risky is
the investment normall y.
6. A.mo~t of i_nves~e~t: The ~gher . lhe amount invested in any secu rity the larger is
internal : : 1 risks are caU:<1du)clrv are referred to_ ted with the securities market the nsk, w hiJe a JUdioous mi x of mves tmen in small quantities may be less risky.
These ex rticular ll1 " ... J • ssoc1a th • as
those affecting a. pa . -<fo·ersifiable and ,~ a onsidera t;ons of e p~~es .of aJI seeu ~,_ii 7 _ Method of investment, namely, secured by collaterdl o r not.
Systematic nsk ,s ~on lio·c.11 and lega c ssme on all securities m such a l'J ti d
· 1 01cal, Po ' ' · t put pre . · w 8. Terms of leTi ing su~ as periodicity of servicing, redem p tion periods, etc.
the economic, SOCIO?.:, .f these factors is o ti t the economy is moving towards p ay1 9. National and International factors such as change in pol itical s tru ctures.
Th effect o . d ' te 1a ras ,
the ~nomy. e rities will rise and in ,ca . dustry. It does not af_fect an. average . ~ 10 . Natura l ca la mities s uch as acts of god, etc.
the pnces of all sa--u_ . . e to a finn or in trike irregular d1sorgarused ,.,.., tnv~1
ti risk is uruqu • I bour s , •11 ana DIFFERE NCE BETWEEN RJSK AND RETURN
Unsyste.ma c _ used bv factors like a are independent of the price ,.,., g~
ti risk JS ca J Th factors . •· ,er1..
Unsystema c
Ii · and consumer P
references etc. ese
oblems o
f both systematic and unsysternati ~ .lq/
. c ns\ ~:..o:..·-4-__B_a_s_i_s_ _ ______R_i_s_k _ _ _ _ _-+-_____R_e_t_u rn_ _=-----i
1
po a~, . th securities market. The pr
ope.rating m e - . .th basic raw ma
terials as well as m consumer goods ind '
. th . . ll5t- ~ Meaning Ri sk can be defin ed as the The r eturn on in est.ments in
inh rent in industries dealing wi d not dependent m e1r pnces on th ' probability that the expected financial assets takes the form of
e goosare dth k. e~
Industries producing consum:r . de d on the consumers an e . ind of pr return from the security will not clivid end and/or interest income
market Their sales, profits and stock pneces ~ a high degree o~ unsyste~atic risk. Ex %
materialize. and appreciation in the price of
that they manufacture. Consequently, th ft~ephones. Other indus~es su~plymg basic nee~
of such industries are foodstuffs, toys, an t atic risk inherent m the mdustry. The e]J the asset held
th blems of unsys em • ''lf( 2. Forces
to consumers also have e pro . d t as suitable examples portraying unsystematic The main forces contributing to Returns are the gains o r losses
. d tries IDa}' be pamte ou . . risk are price and interest from a security in a particu lar
and power m_ us . . ks can be further classified. Systen:iatic ~sk covers in~
st period and are usually quoted as
Systematic and unsy ematic ns ti. . k contains business and finanaal risk etc E
· k, k t risk etc and unsystema c ns · · k Th · 11 a percentage.
:dusmar ;d its sh~eholders face both systematic and unsy stema~c ns : e syste~ 3•
. try results fr om overall mar ke t influences and the unsystematic portion results!:- Types Risks are of two types: systematic Return can be realized return and
portion • · k b ..
company and industry influences. Systematic and unsystematic ns can e subd1v1ded 1 and unsystematic expected return.
analysed separately. 4. Measurement Risk can b e measured through It can be measu red through
b e h avioural methods a n d traclitional and modem methods
DEFINITIONS quantitative or stastical methods. such as estimated yield, actual yield,
central tendency, clispera tion etc.
"Existence of volatility in occurrence of an expected incident is called risk. Higherth 5. Objective
unpredictability, greater is the risk. Risk may or may not involve money. The degree, The objecti ve of ri sk is to The objective of return is to
risk depends upon the features of assets, investment instruments, mode of investme~ minimize it. maximize it.
etc." -Dictionary meaniq
"Risk is the chance of future loss that can be foreseen." -John J. Hamp~ DIFFERENCE BETIVEEN SYSTEMATIC RISK AND UNSYSTEMATIC RISK
Sr.No. Basis
CAµSES OF RISK Systematic risk Unsystema tic. risk
1. Meaning S ys tem atic risk is non- The variability in a secu ri ty's total
A number of factors which can cause risk . th .
. .
10
e investment era a r e·· diversifiable and is as ociated returns not rel a ted to overall
I. Wrong deas1on of what to invest
· ·
m. with the securities market. market variability is called the
2. Wrong timing of investment may cause hi h .
Variability in a security's total non-systematic (non-ma rket) risk.
3. Nature of the instruments invested h g er nsk and less returns.
b d i.: f . . say, t e catego f . h. returns that is directly associated on-systematic risk is speciiic to
on s, c1 ut unds; N1dh1s, benefit f d ry o assets like corporates alt
. d un s with overall move ment in the
~norgaruse sector. Some instruments b · re 1g y risky as they are 1.n'•
etc a h . hl an industry or the company
general m arket or economy is
nsky, due to their certainty of paymen~s of an~ d_eposits or P.o:
Certificates areI
called sys tematic risk.
individua ll y.
principal and interest.
@ ----.- -- ........ rvt(TfOLto ,.,~l, ~

I::::::::..,----:::---:--~ r;---SS;y;st~e;m~a~t~i~c~r~i;skk--7,--DU ·
1 ~~ ............

':
15
B .:_
IL:S~r~-~N~o:_·j__~a~s: ~-t==:-;~~~~~~~~~~IL~:::::
d
nsy t
Systema tic risks are ex te rna l ris ks Un sy s te ni a r c .na11c
8 1
tis~
. 'l ~i.·,
p.JSI<
l~~~~---:::=========:::;------
AND RETURN
....
- -- - ----~1
- - - - -- - ---,

which a re uncontro II a bl e a n d n.s k s w hi c hi c ri sk s il te .

2. Influence Type s of Ri sk in Finance
broadly a (., t
-1ect tne •
mves . rna l cnvir a re <" ri.ses in,eh.
Im e n ts. infe
onrne t d ·1
t Iiose a ffcc r n of u, un sys tematic Risk . .
. 1ng il fj I systematic Risk
indu s try " Pan-\ lab le by an orga nisation
-Controllable by an organisatton
lt11 -Un con trol - ,1icro in natu re
Syste matic ri ~k cove rs inte res t Un s y s tem a ti c . 1 - Maero in nature
3. Types b . ri sk
risk, ma rke t ri sk e tc. u smess and fin . con
anc1"1 . Ii~
Factors
Systema tic factors are influe nced Unsyste m a tic fact nsk~ Purcha si ng Po we r/
Financial Risk/
4. by factors such a s s e curiti es uy like la bour sto~ks are ca,. Inflation ary Ris k
Cred i Risk

market as well as the economic, d 1sorga . n e 1. "

ni s ed ' rre&ii, Demand Asset Exposu re
sociological, politica l, and leg a l policies, and Tnanagell\~ In flation Liqu idity Rate
Risk Risk Risk
cons idera tions of the prices of all preferences. consu
securities in the economy. Funding
Cost In flatio n Liqu idity Recove ry
Influences The systematic portion results The unsystematic portion resi.1 Risk Rate L ega l
5. Ris k
from overall market influences. f rom company and . -~ Ris Risk
1nd
influences. us1\
P oli tical
Examples of such industries are The electricity and Risk
6. Examples
• d ustnes
foodstuffs, toys, and telephones. m . may be pointed Powe
. bl ou1
su1ta e examples portra .1
unsystematic risk. y, Sover1gn
Ris
7. Terms Systematic risk is also known as Unsystematic risk is also kno,,
market risk or un-diversifiable as specific risk, diversifiable ril
risk because no amount of or residual risk because this ril Settlem en t
Ris
diversification can reduce this can be diversified away 11
risk. investing in more than o
company because each compan; Volatility Risk
is different. ·
8. Pertaining Systematic risks are pertaining to . oeneral (marke t) component a nd a
Unsystematic risks are pertainirj Dividing total risk into its two com ponents, a o .
the outside environment in to the system of self which mq t ti risk and Tota I R 1s k
(issuer) component, we. h ave sys e1:1"~ . ~
which a system (company) is happen anytime. Risk itself meare non-systematic risk, w hich are additive.
bound to work. unwanted situations ari~ Total Risk = General Risk + Specific Risk .F-
without giving you any notice.
= Market Risk + Issuer Risk
a:
TYPES OF INVESTMENT RISK = Systematic Risk
In finance, different types of risk can b I .fi + Non -Systematic Risk
e c assi ed under two main groups, viz., Uns ystematic Risk
(A) Systematic Risk

I
Types of Risk
it is also kno w n a s m a r k e t r 1
· sk. o, r un -
diversifiable risk. Va riability in a sea~nty s to t~~
Systematic Risk Systematic Risk
returns that is directly associated with ove ra_
- Uncontrollable by an organ isation Unsystematic Risk movements in the ge neral m arke t or economy 15 No. of securities
- Maero In nature
- C~ntrollable by an organisation called systematic risk. Virhially all securities have
- Micro In nature

L
 7 fllSt<AND RETURN [ s.7 ]
Systematic Risk Unsystemauc I 1) r,1arket Risk
- Uncontrollable by an organisation . . e by Non.
- Control/ab! a SYst ( 'Jl,c varia · b'l't . a secun·tY's returns re ultmg
1 1Y m · from flu hrnlion in the agg regate mar ket
- Macro in nature 8 llia1
- Mrcro in nature n org anisar, le~ . wn as mar k e t ns
· k · M ar k et ns
• k ·~s s~melunes
· us •d yn nym usly with ystematic · n·s k •
0n. 111 1s 1010curities are ex posed to market nsk including·
+ i ~I~ .
• Recession
Markel Risk Interest Purchasing
Power Risk • Wars
Rate Risk • structural changes in the economy
t • Tax Jaw Changes
i l • Changes in Consumer Preferences.
Price Risk Reinvestment
Risk The types of market risk are depicted from following diagram:

Market Risk
Regulation Business Bull Bear Management Default
Risk Risk International
Risk Risk Risk Risk liquidily

i
l Risk
Relative Directional
Exchange rate Risk 1
Country Risk
Absolute
Risk Risk Risk

~ome_syst~matic risk because systematic risk dire Types of Market Price: Following are the various types of market price:
inflation nsks. Systematic risk is attributable to b~~~de:ompasses interest rate, market
(a) Absolute Risk: Absolute risk is without any content. For e.g., if a coin is tossed,
In other words, systematic risk is th . . aero factors affecting all securi: there is fifty percentage chance of getting a head and vice-versa.
market segment. Also referred ~. uncertainty inherent to the entir
a stock's price. Volatili . to as volatility, systematic risk is the d t e market ore . (b) Relative Risk: Relative risk is the assessment or evaluation of risk at different I vel
of your investment r;~:ra ;easure of risk because it refers to the beha at
o-da~, fluctuatiom: of business functions. For e.g. a relative-risk from a foreign exchan e fluctuation may
be higher if the maximum sales accounted by an organization are of xport ales.
U1e reason why peo le an the reason for this behaviour B v10ur, or temperam
more unstable the ~ can make money from stocks, volatilit .. ecaus~ market movemen11 (c) Directional Risks: Directional risks are those risks where the lo ari e from a n
change in either di:;;~~ent the more chance there is thit I:t ess:lnl tial fo~ returns, and 6 exposure to the particular asse ts of a market. For e.g. an inve tor holding ome
In · WI experience a drarnt shares experience a loss when the market price of tho e _hare fall down .
terest rates, recession and . (d) Non-Directional Risk: Non-Directional risk arises where th method of trc1 ding is
nffect the entire mark t wars all represent s
mitigated only by b .e. and cannot be avoided thro houdr_ces of systematic risk because Iii not consistently followed by the h·ader. For e.g. the dealer will buy and eU the hare
'ff emg hedged · ug 1ver51'fi cation.
· Systematic risk canl simultaneously to mitigate the risk
D1 erent typ f
es O systematic · k (e) Basis Risk: Basis risk is due to the possibility of lo arising from impe rfectly matched
ns are explained
as under: risks. For e.g. the risks which are in off ettin° po itions in two related but non-
identical markets.
Systematic Risk (f) Volatility Risk: Volatility risk is of a change in the price of ecu rities a a result of
- Uncontrollable b a . changes in the volatility of a risk-factor. For e. 0 • it applie to the portfolios of
- Maero in nature y n organisation derivative instrnments, where the volatilit f it underlyin ° i a mc1jor influence of
prices.
(l) Interest Rate Risk
Interest
Rate Risk There are four types of movements in pric s of stocks in the ~arket. ~e _e may b termed
as (a) long term, (b) cyclical (bull or bear market), (c) intermediate or with~ tI:1e cycle, and
(d) short term. The prices of all securities rise or fall depending on the change m mtere t rates.
 Sfl,UI'• . .
- .. ,o
r;-;l
~
. ,
1t S r
et-u rn resulting fro m cha nges II)
.
'1
t.f"l, P
, e va riability in a secur_ yk s uch d1ange gene rJ lly nffcct sec l~1 e lev \
Therefore, 11
. f ed to as interes . t rate n s ·
' .
· I •
·ccs 010 ve 111ve rse y to inte rest
llrir <.1 !
IC's i or ND RETURN
[ S.9]
rates 1s re err . ual security pn . rates '1v~t \ JSI< A
. other things being eq '
is,
t P of inte rest-rate n s k a re dep· t
R' k- The y 5 iced
· \1
,
~ Non-systematic Ris~ , . .. .
Types of Interest Rate is . a11d 11 cs>ri nbility in a security S to tal returns not related to ov ra il m arke t vanabtl ity IS
sied f he v~on-systematic/ Unsyste matic (non-ma rket) ris k. No n-sys tematic risk is s pecific t_o
Interest Rate Risk 1 ca lled th ~y or the company ind ivid ually. This risk is unique to a particular security and is
an in_d usd with such fac tors as business and financi al risk as well as liquidity risk.
socrate . . . T
as ther words, Unsystemati c n sk 1s due to the influ ence of interna l focto rs prev~ t mg
Reinvestment . [n °
organization. Such factors are normally controll able from an organJzation's pomt of
Pr ice Rate Risk withiJl ~ a micro in n ature as it affects only a particu lar orga nization. It can be planned , so
Risk vieW~~~et: sa ry actions can be taken by the orga niza tion to mitigate (reduce the effect of) the risk.
t},at U ysternatic Risk is also kn own as "specific risk," "d iversifiable risk" or "residua l ris k,"
. ns of uncertain ty comes w ith the company or ind ustry you inves t in a nd can be
Interest ra te risk is of two types: . . .
t~~
th 15 tyJ~hroug h dive rsification. For exa mple, news that is specific to a small number of s tocks,
(a) Price Risk: Pri ce risk arises du~ t~. theor~: J~1~~h!~e the price of lh reduce udden s trike by the employees of a company you have sha res in, is considered to be
commodity, investment etc. may ec me . re. e11 such ass . .
• trn t Rate Risk: Reinvestment rate nsk results from the fact s stern at1c n sk.
1

(b) R emves en 't b • s that h un y The types of unsystematic risk a re d epicted in fo Uowing ruagra m:
or dividend earned from an investment can e reinvested with th I eir,
. e sarn •
return as it was acquired earlier. er1
Unsystematic Risk
(3) Purchasing Power Risk - Controllable by an organ is aiton
A factor affecting all securities is purchasing power risk, also known a . - Micro in nature
With uncertain inflation, the real (inflation- adjusted) return involves risk evens I.;nfl~tioi,
th
return is safe. This risk is related to interest rate risk, since interest rates ge en~
• Business Risk/ * * Financ ial Risk/
inflation increases, because lenders demand additional inflation premiums to / eral!y ti Operatio nal Risk
Liquidity Risk Credit Ris k
the loss of purchasing power. ompell.la)
*Note In Context of types of risk in finan ce, bu si ne ss risk and liqu idity risk are same.
In other words, it is so, since it emanates (originates) from the fact that it affe t **Note . In Context of types of risk in finance , financ ial risk and cred it risk are sa me
power adversely. It is not desirable to invest in securities during an inflatio
nary penod cs a_purcri
The types of power or inflationary risk are depicted from fol1owing di' agram: · Different types of non-systematic risks are explained as under:
1. Business or liquidity risk,
Purchasing Power Risk/Inflationary Risk 2. Financial or credit risk and
3. Operational risk.
(1) Business Risk
Demand Inflation Risk
Cost inflation Risk Business risk is also known as liquiruty risk. It is so, since it emanates (origin a tes) fro m
1· Demand inflation risk and the sale and purchase of securities affected by business cycles, technological changes, e tc. The
2. Cost inflation risk. risk of doing business in a p a rticular indus try or en vironment i called b usi ness risk. For
example, as one of the largest steel producers, U.S. Steel faces unique problems.
TI1e meaning of demand and . .
cost inflation • k . The types of business or iiquidity risk are d ep icted and listed below:
1. Demand Inflation Risk· D . ns IS as follows:
• emand inf] ti
result from an excess of demand o a on risk arises due to increase in price i,!
the demand and h ver supply It ' '
occ h ence cannot expand · occurs when supply fails to co~' Business Risk/Liquidity Risk
2 C ~r; ; ~n pr~duction factors are und:nymor~. In other words, demand inJ]I
. os n ahon Risk: Cost inflation . r maximum utilization
of goods and services It · nsk arises du ·
production inflates th~ fi~:t~ally caused by hi \to sustained increase in . the ( Asset Liquidity Funding Liquid ity
pnce of finish d g er production cost. A high O} Risk Risk
e goods
consumed by people.
 secuRITY AN"._, ....... .., .. _ . "'"' FOLto t-,
~ _ uidity risk is due to los es arising fro ~~It p
~ . 'd't Risk: Asset hq th ·r carrying va lue when ~eed ed . p Ill a11 , I RJSI< AND RETURN [ 5.11]
1 Asset L1qu1 • y t at or nea r, e1 I or C' o '~ah
. sell or pledge asses . n ' their book va ue. . . ·(), a~ti recovery rate of the fund s lend •red (given) as a loan to th customers by banks, non -
sser value tha . 1. uidity n sk exists for not hav· banking fina nci al compani es (N BFC), etc.
at a e I . . k· Funding iq . F h tng a
. L'quid1ty rus . . t on ame. or e.g. w en corn . n ac (c) sovereign Risk: So~ereign risk is associated with the government. Here, a goverrune~t
2. fun~ng / nds to make a paymen tn1tn,C'ti ~l\11 is un abl e to meet its loan obli ga ti ons, reneging (to b reak a promise) on loans it
suffJC1ent- u t ful filled. \ gu arantees, etc.
customers are no ,
d't Risk · (d) Settlement ~ sk: Settl ement risk exists when counterparty do 5 not deliver a security
( 2) Financial or ere • d't risk It arises due to change in th or its valu e m cash as per the agreement of trade or business.
vn as ere 1 • • f h e cap·
. ancial risk is also kmo, mainly comprises o t ree ways by Ital
Fin ~ . ca ital structllre Which 1 l) operational Risk
of the organization. _The These are as follows: ~~ ( Operational risks are .the business process risks arises du e to human errors. This ris k will
sourced for the proiects. ·t l
change from industry to industry. It occurs d ue to breakdowns in the internal procedures,
1 Owned funds. For e.g. share cap• a .
le po)jcies and systems.
· d F g loan funds. peop , . . .
2 Borrowed fun s. or e. · The types of operational n sk are depicted and listed below.
· serve and surplus.
3. Retained earnings. For e.g. re .
other words, Credit or Default Risk is the nsk ~at a com~an~ or individu
ln th tr tual interest or principal on its debt obligations. This ~ 1,
unable to pay e con ac
. . ·cu1
d · th · tf Ii
m to investors who hold hon s m err por o os. Govern... ~
tJPe
15 of parti ar conce th 1 ••u.11en1 0
. 11 th . d by the federal government, have e east amount of defa I ,
espea a y ose 15sue . h uI ~
the lowest returns, while corporate bonds tend to have the hig est am~unt of defau11 ~ Model Peop le Legal
also higher interest rates. Bonds with a lower chances of default_ are considered to be inv~ Risk Ris k Risk
grade, while bonds with higher chances of default are cons_idered _to be junk bonds,
rating services, such as Moody's, allows investors to determme which bonds is inves~
1. Model Risk: Model risk is involved in using various models to value financial securities.
grade and which bonds are junk. It is due to probability of loss resulting from the weaknesses in the financial-model
The types of financial or credit risk are depicted and listed below. used in assessing and managing a risk.
2. People Risk: People risk arises when people do not follow the organization's procedures,
Financial Risk/Credit Risk practices and/or rules. That is, they deviate fro m their expected behaviour.
3. Legal Risk: Legal risk arises when parties are not lawfully competent to enter an
agreement among them. Furthermore, this relates to the regula tory-risk, whe re a
transaction could conflict with a government policy or p articuJar legis lation (law )
might be amended in the future with retrospective effect.
Exchange Recovery
Rate Risk
Credit Non-Directional Sovereign Settlement 4. Political Risk: Political risk also referred to as Country risk, is an important risk fo r
Rate Risk Event Risk Risk Risk Risk investors today. With more inves tors investing internationally, both directly and
indirectly, the political and therefore economic stability and viabili ty of a country's
(a) Exchange Rate Risk: Exchan e rate ris . . economy need to be considered. Thus, it occurs due to changes in governmen t p oli cies.
form of financial risk that ? fr k is also called as exposure rate nsk. II.
Such changes may have an unfavourable impact on an investor. It is especially prevalent
anses om a p0 t 'al
0 f one country's currency in r ti. enti change seen in the exchan~ in the third-world countries.
F . eIa on to anoth ·n
or e.g. investors or businesses f . . er country's currency and Vll'f"
across national
. borders or if th hace 1t eithe h
r w en they have assets or ope~ OTHERS:
' ey ave loans b . (1)J1f
~n other words, all investors wh O . . or orrowings in a foreign , 1. Regulation Risk: Some investments can be relatively attractive to other investments
investm t invest mtem ti 1,~ because of certain regulations or tax laws that give them an advantage of some kind.
. · en . arena face the prospect of . a onal]y in today's increasing l ~
foreign gains back to th . uncertamty in th th conve' Municipal bonds, for example, pay interest that is exempt from local, state and federal
eu own currency e returns after e
taxation. As a result of that specific tax exemption, municipals can price bonds to yield
(b) Recovery Rate Risk: Recovery rate . k ..
a lower interest rate since the net after-tax yield may still make them attractive to
analysis. The recovery rate is normal~ n:~ ~:en n~glected aspect of a crfO~
investors.
be evaluated. For e.g. the
....___
-r;-;-:;7
sECU~
,
ITV ANAL VSIS
I
ANU
. 6·1 ·
PURTFOLt
, c- fro lll t 1e Vilrl.l I 1ty in (I
o t.t"~A
.,~~
....---
~ Market Risk: This n skdn~1eM mnrkc t forces. i c r11 il tkt, ~
ND RETURN
[ 5.13]
2 Bull-Bear . bull nn I ,(
• Jh' g from altern ating n ii;tently from a low point ti . i, ,tJSI< A dditiona l fa ctors tha t influ ence actual return s are a fo llows:
resu n . fnirlY co I I , 11s l sornc a .
it)' index n ses ' ket end s w , en l ,e market ind · 1P1v~ jaxes: Different ty~es of in vestments ar ta xed cliff 7cntl y. The typ of acco u nt _an
• When secur k t The bull r,,nr e~ rcil h' tdI• (a) . stment is held m and a tax payer's tax bracket also affect the a mount by which
d bull mar e · c l' ,,
is caII e a d trend. Sa 1nve
xes diminish investment re turns. For exa mple, the interest paid on mun1ap?
· · l bo nd
and starts a downwar . k t declines, this downwJrd trend . ~ ~a estrnents is gene rally not ta xa ble, and ga ins on investmen held in a reh re men t
. I the mar e rs
. d during w I11c , ca11l'd :~aunt like an IRA or 401(k) are not taxab le un til the money is withdrawn.
• The perJO , a
market. II said and done, is m ad e of p eople h • F es: inves tors pay brokera ge fees to buy and sell certain inves tmen . They aJso p ay
. k M aITement, a d · • W o
Management R1s : an o . •stake or a poor ec1s10n. Erro ilre ~ (b) m:nagement fees. These fees diminish inves tment returns.
3• I f ,akmg a n,1 . f" rs fll ad r,
fallible and capab e O n • . vested in their irms. e~ · Compounding: The frequ ency w ith w hich your investment returns a re reinve ted
harm those w 1,o in )' (c) d able to earn additional returns can s ignifican tly impact your to a l re turns. ~e
management can . f u·,vestment's total risk that result f
· th t 0 rhon o an s ro 111 :ore frequently earnings are compounded, the better wilJ be overall return. Daily
4. Default Risk; It is ~ P t1 . estment. For example, when a cornpa cnat
compounding is better than annu al compounding.
in the financi al integnty of ,e mv from bankruptcy or closer to it th ny tha1 1
·u further away
i/
, ese h •
securitie; moves_e1 _,er it will be reflected in the market price of its secuc ·angr, aAEASUREMENT OF RISK
the firm s finanoal mtegr ~ t rs experience, as a result of changes . fl tic-s l ,.. ,
variability of return t_hat ~ves ;e invested, is their default risk. in the()~ The risk involved in investment depends on va rious fa ctors su ch as:
wort1liness of a firm m which Y f · h The length of th e matunty · per10 · d - Ianger maturi ty peri o d s rmpa
· rt grea t er risk to
5 Industry Risk: An industry may be viewe d as group o co~pan~es t at compete\ 1. investments.
rod 1nd st 15 th
· each other to market a homogeneous P uct. u ry nsk at portion 01 The credit-worthiness of the issuer of securities - the ability of the borrower to make
. vestment's total variability of retum caused by events that affect the produc•·'
m L.l ,
2. periodical interest payments and pay back the principal amount will impart s afety to
firms that make up an industry. the investment and this reduces risk.
6. Liquidity Risk: Liquidity risk is the risk associated wi th th e particular secona, 3 _ The nature of the instrument or security also determines the risk. Generally, go eTIUJ1ent
market in which a security trades. An_inv_estmen_t that c~n ~e bought or sold guid securities and fixed deposits with banks tend to be risk.less or least risk-y; corporate
and without significant price concess10n 1s considered hqmd. The more uncertal• debt instruments like debentures tend to be riskier than go emment bon d and
about the time element and the price concession, the greater the liquidity risks. · ownership instruments like equity shares tend to be the riskiest. The relative ranking
7. Country Risk: Country Risk refers to the risk that a country won't be able to ho of instruments by risk is once again connected to the safety of the inve tment.
its financial commitments. When a country defaults on its obligations it can harna 4. Equity shares are considered to be the most risky inves tmen t on accoun t of th e
performance of aU other financial instruments in that country as well as other coun~i variability of the rates of returns and also because the residual risk of bankrup tcy h as
it has relations with. Country risk applies to stocks, bonds, mutual funds, optit to be borne by the equity holders.
and ~tures th~t are issued within a particular country. This type of risk is most o/: 5. The liquidity of an investment also determines the risk involved in that in estment.
seen m emerging markets or countries that have a severe deficit. Liquidity of an asset refers to its quick saleability without a lo_ or , ith a minimum
8· Foreign-Exchange Risk: When investing in foreigr, countries you must considert of loss.
foct that currency exchange rates can change th . f h II F011,.. 6. In addition to the aforesaid factors, there are also various others such as the econo mic,
Excl1ange nsk . applies . to all financial instru et pnce
th o t . e asset as we th• ~· 1n d ustry an d f'1rm spe cifi' c factors that affect the n·s k an m · vestment.
. · men s at are m a currency o er •
your d ome 5 tic currency. As an example, if you are a r 'd t f A . a and in1t Another major factor determining the investment decision is the ra te of re turn e, p ected
in some Canad'a c
I n 5 t oc k m
· Cana d'1an dollars even 'f th esi en ° menc ·. tes r bY th e investor. · Th e rate of return expected by the inves tor consists o f the 1e · Id an d capital
·
. · e s1,are value appr~cta d,; appreciation.
1
may lose money if the Canadian dollar de ' .
. preciates m relation to the American o1,
9. Interest Rate Risk: Interest Rate Risk is the risk . . JI' There are various methods for measurement of risk a follow:
as a result of a change in inter t th at an investment's value will ch V . . . .
d" ck es rates. This risk aH t h f bonds rn,' 1 • . olatd1ty: Volatility may be described a s the ran 0 e of movement (or pnce fluctu a tion)
1
irect Y t ,an 1 st0 s. ec s t e va ueI O
from the expected level of rehim. For example, the more a stock goes up and down
10. Political Risk: Political Risk represents the f . . in price, the more volatile that stock is.
will uddenly change its policies. Tius is a in~cial risk that a country's govenUlr. 2. Standard Deviation: The risk can be measured with an absolute measure of dispersion,
Jack foreign investment. rnaior reason why developing counl~ or vana · b ility. The most commonly used measure o f d ispers1on · over some period of
 SECURITY ANALYSIS AND PORTFOLt ■-----
[ S.14 J
. . 'd 1 m eas ures th e devi a tion
O Ji"~
~C
~ L.----

years is the sta nd ard d e vrnh o n, w 1u . a nd is a relia bl of eilch '\ ND RE'fURN

from the a rithmetic m ean of U1e ob e rv.i t_,o ns d e m easure Ob~ flJS~ '4 I ,Asset Pricing Model {CAPM) . PM inve rs can
because all the informa tion in o samp le is use · . Of v~,1•, capita es the concept of Be ta to _link ri s~ with return. _L!smg CA • '
O
f the total nsk of an as CAPM_us ttJm trade off invo l ved m any mv tm ent d ci 100 · . e of
The standard d eviation is a m easure rt-folios re tu se t or a the n s k re . . k It 5 h 0 i s h v✓ the pnc .
captures the to ta l variability in the assets 0 ~ po a re ro O t rnf whatever fLPotl(, assess . m easure of n on -d ive rs ifia bl e risk (Sys t rna ,c Ri _). J lati n of B tel ,s
· ..; is ti,e squ o var·1 'le ~ Be ta 15 a d to chan ges in th e m a rket pric s. The equation for ca cu
tha t variability. The s ta nd ard d ev1a uon .. ance. Ir..
t ome what fa miliar with the s 't- ·ty respon s
Inves tors and analysts s hould be at leas s . . fr . tJdy Of a sect..Jfl Ri = a +/Ji Rm
11
distributions. Since tl1e re turn a n inveS t0 r Wltl e~~aJ : : investing is not~
0 _ Es ti.rn a ted re turn on i s tock
must be es tima ted. An investor may expecttl ,et] . . rn on a Part;l'lll klr~ Ri -
b t ·n tru 1 1Js JS on 1y a "poi t ar a = Ex p ecte d re turn w h en market return is zero
to be 10% for th e coming year u 1 f st d d d . ti n estini ":
formul as of measuring risk witli the h elp O an ar evia on are: at1• _ B ta m easuring stock's sens itivi ty to the m a rket index
/J1 - e
2 = Re turn on m arket index
SD =(a)= .ji[Ri - E(r) J x pi o define th r quired
_Rm the Be ta concept, the ca p itaJ as~e t pri~g _model will help higher should b the
a = Standa rd Deviation Us1.Ilg ·ty Normall y the higher 1s the nsk investor take, the
on a secun . . . . f CAP is
rett.Jl11 th rwise inves tors avoi d nsk. The equabon or
Ri = Rate of Return as o e
return, Ri = Rf + /Ji (Rm - Rf)
E (r) = Expected rate of return
Pi = Probability Where,
3. Beta: Beta (ft) is a measure of the systematic risk of a s~curity th~t cannot be Ri = Required return
through diversification. Beta is a relative measure of nsk- the nsk of an in a_i\ Rf = Risk free return
stock r~Ja~ ve to the market portfolio of_ all stocks. For ex~ple, a security Wi:';i /Ji = Measure of sys tematic risk which is non-diver sif:iable
of 1.5 indicates that, on average, secunty returns are 1.5 times as volatile asa
1 Rm = Average market re turn
returns, both up and down.
Thus, it is used to describe the relationship between the stock's reh,lm and m
Rf= Risk free return
index's returns. If the regression line is at an exact 45° angle, beta will be ~ For example, let's assume risk free re turn is 12% as the treasure Bill rate or Bank rate and
+1.0.Beta may be positive or negative. Beta measures risk satisfactorily for di~ market return is expected to vary wi th the fJ chosen. Let us take fJ as 12 and expected market
efficient portfolios but not inefficient portfolios. Beta is a satisfactory mea: return is 18%, then the return on the s tock i is as follow:
portfolios because risk other than reflected by beta is diversified. Ri = 12% + 1.2 (0.18 - 0.12)
4. Alpha: The _distance between the inter-section and the horizontal axis is callff = 0.12 + 1.2 (0.06) = 0.192 or,
alpha. The size of the alpha exhibits the stock's unsystematic return and its ai· = 19.2%
r~tum indepen?ent of the market's return. If alpha gives a positive value it is akt
If the investor is risk taking type and chooses as Beta of 1. , then the expected retu rn
~1gn but alphas expected value is zero. The belief of many of the investors ~
investors are that they can find stocks with positive alphas and have a proc will be higher as shown below :
re turn. ~t mu~t be recalled, however, that in an efficient market positive alpha a Ri = 0.12 + 1.8 (0.18 - 0.12)
b~ predicted m advan~e. The portfolio theory also maintains that the al ha oH = 0.12 + 1.8 (0.18 - 0.12)
will average out to O m a properly diversified portfolio. P
= 0.12 + 1.8 (0.06)
5. Rho (o): The important factor besides alpha and bet · Rh Rh - th i
· h· h d
coe ffi aent w 1c
· .
escnbes the dispersion of th
ab is o.. o ((p) JS e com: = 0.228 or 22.8%
line. The correlation coefficient expresses correl ; o ~ervations around the regre
i and j. The correlation coefficient would be :
security is accompanied by an upward
ti .
etween two stocks, for ~t
· if an upward movement w
RETURN
movement of th . C I!
d ownward movement of one security is follow d . ano er security. onv Introduction
1
by another security. If the movement of tw et m ~e same direction, i.e., do 11~
coefficient correlation wiU be negative and woo lsdocksh is not in the same directi11 th P~o~le want to maximjze expected re turns s ubje ct to their tole rance for risk. Return is
betw een th e movements o f th e two stocks thu s ow - 1·0 • If there was no re1au•11 c e pr11_1apal reward in the investme nt proces s, and it provides the basis to investors in
e correlation coefficient would be' ompanng alternative investments. Mea suring his torical returns allow s investors to a ssess
~
.
SECURITY ANALYSIS AND PDRTFOLIO "1Ati~G .
· 1 ,·r1111ntion o( future, unk,10 ~t.itL
. d re 1um and exwn re 1ltrn '')
how well they hnve done, nnd ,t plnys n p.irt. Ill t ,e.. e,,ts rea 1,ze
r- ,,,st< A
r
r4D RfTURN
f Pt - P1 - 1I
n = C 1pital ga in yi •Id
often use two terms rcgnrding rch.1m from Ill\ c 1met ' , Pec1ec1 \ \•11 I 1- )
• . t 5 ea rned (or could hav, 6 11 tetu
1
Rcnl1ud rchmt ,s after thC' foct rdurn t 1n w;1 h c ee 1
. R_OR = CL'.rrcnt Yield + apilal Gain Yi Id
t
Renlized return is the n t actual return e.lmcd by the inveS Or over t e holding l'~t~fl.j
· d Peri ·~1 or . The following information gjven for a
E~aJllP 1e. . corporate bond .
refers to the actual rch.1m over me p:i t peno . OcJ. 1 . f the bond at the begmning of th e year =
. . for some future period lt 90
fa71ected rehmr refers to tJ1 anhc1pated return d Tl · lllay b ~~o .
. f the bond at the end of the year = t 9.5 40
tJ1at all im estment decisi ns are made in the light of expecte re turn. , e expected e t'iot~ pr1ce o · ·
estimated on the basis of ach.1al returns in the p.i t per!ods. The returns in the pas/ et~~\ t received for the year = ~ 13.50
Jnteres
provide good basis for estimation of prospective behaviour. Pe~Odi te the rate of return.
t CoJllPu
In simple words, fa71rcfrd rcfum is the return from an asset t~,at inveS ors anticipa Solution: The rat e of re turn can be computed as fo ll ows:
will earn over some future period. It is a predicted return, a nd it may or may not Oc(ur.· le lhl'i
Ra te of Re turn (Rt) It + [Pt- pt il
pt -!
Meaning of Return
13.50 + [95.40- 90]
Return is the amount or rate of produce' proceeds, profits which
d . . to an econ
accrues Ra te of Re turn (Rt)
~gent from an un~ert~g or investment. It is a re,,~ar~ for an a motivatmg force 6/lli t 90
mvestment, the obJective of which is usually to max1m1ze return. hi = 21 % per annum
The return of 21 % consists of 15% current yield and 6% capital gain yield
Determinants of Return
Three major determinants of the rate of return expected by the investor are:
RETURN OF PORTFOLIO (TWO ASSETS)
(i) The time preference risk-free real rate.
The expected return from a portfolio of two or more ecurities equal to the wei hied
(ii) The expected rate of inflation
average of the expected returns from the individual securities.
(iii) The risk associated with the investment, which is unique to the investment.
~ (Rp) = wA (RA) + Ws (Rs)
Required Return = Risk-free real rate + Inflation premium + Risk Premium
I (Rp) = Expected return from a portfolio of two securities
Component of Return WA = proportion of funds invested in Security A
The rate of return from an investment consists of the two: W 8 = Proportion of funds inves ted in Security B
(i) Yield: The interest or dividend received is called yield. RA = Expected return of Security A
(ii) ~apital A~preciation_: ~e difference between the sale price and the purchased · Rs= Expected return of Security B
1s the capital appreaation. pnci
WA+ Ws = 1
Formula:
Example: A Ltd.'s share gives a return of 20% and B ltd.'s share gi es 32% return.
It+[Pt-P1 d Mr. Gotha invested 25% in A Ltd.'s share and 75% of B Ltd.'s shares. What would be the
Rate of Return (Rt)
P1-1 expected return of the portfolio?
Rt = Rate of return per time period't'
Solution: Portfolio Return = .25 (20) + .75 (32) = 29%
It = Income for the period't'
Pt = Price at the end of time period't' TYPES OF RETURN
P 1_1 = Initial price, i.e., price at the beginning of th e penod't'
.
l. Internal Rate of Return: The internal rate of retu rn (IRR) is the ra te of discount which
The above equation can be split into two components:
It [Pt - P. ] makes the present value of all the revenues (cash flows) from the investment equal to
Rate of Return (Rt) = - + 1-1 the total cost of that investment. This is also known as the yield or yield rate.
P1-l pt-I
2· Bond Rate: It is the interest rate received on the face value or the par value of the
-It- = Curren t yield
· bond. If a company or the government issues a IO-year bond with ? 100 as face value
Where, Pt-1 and lS per cent rate of interest, it would be described as 15 per cent bond.
 -rY ANALYSIS AND PORTFOLto -
SECURI , '11\~i~ ~
§ .
Hcturn iH not na s,mpl '. , on •rr ;in it ·, Q ~t
3 Rcnliscd nnd ~xpcctcd Return., noc:; 1/y exp' t ~d, and ,l m, y or rn;iy ,, , Pp,.,,,1 P ,tETURN
1
· ,. • sc ii is not gunrnntccd, ii 18 1· pr •d i I d, dc:,iircd whi h i HllbJ't• . (JI Ii,, , ,, ,, 1st< 11'4 b ' /.inc. bctwr:,:n th r: d ••, iff! for tht.:
uecau · t' ·pn t •c: , d c 1 fr, ''•1/ 1 ,.. f • th· a . ,h ' bl t
l
T ,us •xpectcd return is an .in ,c, • I ·s i1 t1wJ/y earn' . l111c ,. ,,, de-of ,n. I · ri ik and th e h,g,,e ,t po•,1,1 • r·urn.
I
Rcnliscd re turn, on t 1 o ic •
ti r )l nnc ' ,. ,
. criod yi •Id (I-IPY) n, 'ilHUr 'fl I/
''1 tr.i
,,, 1owc"' p . . .
owJJb
{'r e c nt ation o
f n. k r
, - {ctu rn
JI ld'ng Period Ycild Return: J1old1nt~nf, period in whi h lh e a fl11 •1 .', lr,1~1 craph_,c, Th e figur . b •l ow r •p r ,,;,:nu, th.
4. ,· o 'an inves tmen t during n givdc n 'not mcnn tha t th sc urity ls n1' li1:1d /'1. 1<c1ation ~h•~· ,tw , •n rH·~ and r •turn.
rorn • d I t HP ocs 1'1 , • Uall y n ,, ·onsh1p of m a rk •t Jin •.'n . c1 · l th
investo r. It is to be not· t HI . b rhc inves t r. 1c _on cpt of Hpy . 1si,1r1 . r ,Jat • , cs : re urn _P ·r
the gain or loss is a tunlly r ;il,s c~., yd return o r . lim a tmg the f ulur ' '.H ilpp/, ,, '(he _s ~~cquir ·d by all ,n v ·s tors. _H,ghly R~c;.k-
. mcn• •suring, the rcn ,z
w 1,ct I1cr one 1s · 11 1..1n it of. nvcs
r turn 1'•:\ s tors wou ld h ave a st , ►p •r l ,n •✓ and v,cc-
f II , . 1 ( SC Jn
be calcu la te d ns o ows. civcd + price cha nge over lhc hoJu · "ve ·
Any cnsh pnymcnt r c h d (b . •ng P<.-r' versa, O<:gr~<: o Ai~~
HPY :::, •. . twhid1thcn sctis purc asc
Pncc n d ·
cgmningpricc) i,~
• JSI<-
RETURN RELATIONSHIP OF L-------------
. . . Maturity (YfM): Re e mption y,c.ld is the inu ·
10
R ENT STOCKS
s. Redemption Yield or Yield_ , tor will receive from a bond purchased at th '.ca~~ , r,Jff;~E::R~:__:__:~~------------------;-::::::;-- - - 7
promised rnle o f return an ,nvc . c %, Un~ecured
k • I I Id till maturity. · Preference Loan~
mar cl prrc anc ie Average annual appreciation or deprcciati Bonds Equ i y Sha re::;
Annaul lntere5t +~::.,::E..:.---~-'--;-----....:__~ and deb entures Share:;
YfM = - - - - - ~ Redemption or face value
Gov ernm ent
. . . d . Id is the ratio of per s hare expected dividend Risk { Secu rities
6. Dividend Yield: D1v1dcn y1e · s, 101, Premium
current market price of the share. .
. . ~ . . Id •s the ratio of expected carnmgs per share of lh
7. Earnings Yield: Eakrnmg~ y1ef tJ~e share The dividend yield and ea rnings yield
to the current ma r ct prrce o ' : . tJ f f d' 'd d . . . Orr
;hi
differ if the firm distributes all net earnmgs m ,e orm O JVt en s 1.e. if It praC!l:!
100 per cent di·,idend payout ratio.
8. Nominal and Real Return: While the nominal ret:urn dis !he rheturn in_no~inal ruPt
the real return is equal to the nominal return adJuste ,or c anges rn prices i.e. ~
of inflation.
Ris'
9. Gross and Net Yield: While gross yield refers to the yield realized by the invl'I': L - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
before paying ta xes, the net yield is what remains with him after paying the taxes.Th The above figure shows that different types of investmen ts have differe nt degrees of risk
:,et yield can be calculated as follows: and the required rate of return. The government securities h ave rate of re turn eq u al to the
Net Yield = Gross Yield (1 - Tax Rate) risk free rate. As the risk increases, the required rate of re turn also i.1creases. Equity s h ares
have maximum risk (with reference to revenue re turn as well as the ca pital gain / loss), so the
RISK-RETURN RELATIONSHIP required rate of return is also highest. Risk-return line in the figure s hows th a t higher the
risk, more is required rate of return of the inves tment. The ris k return line a lso explains that
. TI1e o?jecti~e of n~aximizing reh._1m can be pursued only at the cost of incurring ru, the required return comprises of two elements:
rrsk. !he financial 1f1iar~ets offer a whid~ range of assets from very safe to very risky.\~ (i) Minimum return in terms of risk free ra te of return.
selectmg the asset or mvestment, t e mvestor has t0 'd •I . ..
the risk involved. The empirical evidence sh , ' consi er both its return potentia ~- (u) Risk premium depending upon the degree of risk attached with the inveshnent.
O\\ s that generall th · h · h correlai.r Th ·
between risk and return over longer period of time Th c •~ ere is a 18 . . e fust element i.e., the minimum return in terms of risk - fre e ra te of return comprises
that high risk is rewarded with high return, and I .· . e ~ecunties are generally priced . of two components: (i)The Rea] Rate of Return, and (ii) The Inflation Factor. The real ra te of
low re turn. TI11s· re Jations
• lup
· is· k nown as risk-return
ow nskt 1s caceomparue · d by a corresponJ:i retu m _1·s th e pure return and an investor requires it to part with the money. As it is reat its
The risk and return are directly variable, i.e., ~ade-off. , ;::~; 1.5 determined b~for~ incorporati~~ in!lation in ~he calculation. The_ r~al rat~ is a_lso
produce higher return. an investment with hiaher risk shtn: f mined before cons1denng any speaf1c nsk of the rnvestme nt. Any antiapated inflation
0
Low levels of uncertainty (low risk) ar . /ct~r- mu st b~ ad?ed to the real rate of return to arrive a t the required rate of return (before
I Jvels of uncertainty (high risk) are associate: as~ocated With l
le! W1th high
. rns W ?
atly considering risk). This is rightly called the risk-free rate of return. The risk - free r a te
~w potential retu _ · i 0 return may be defined s .
potential returns. The nsk•ff a .
 rrY ANALYSIS ANO ,...URTFOLto --~-
SECUR R t ) x (1 + Inflati ~~~~Qt ~
- (1 + Re.ii a e on Rate) , ~~L
~ ,c """ RET
URN I S.21 J
Risk - fr ee
Rate of Return -
.
onent, 1.e.,
u1e Ri k p re mium depends up on the degrI
.
,ij5
a... 0 ve ,g R R f
. .
t· ure shows that as risk increases from B1 to Bll the ex pected return a ls o increases
· k · · I
H ,er the otl1er com P ~ Au . ately from 1 to 2 or a n s -neutral inves tor, (ii) mo re than pro po rhonate y
. O\;e, "ththe investment. ~, ') proportt;::' for risk-averse investor and (iii) less than proportionately from Rsto Ru for ris k-
assooate WI K PREMIUM (• (11 IZ:J to
st0
r It may be noted that the increase in expected return fo r a risk-a ver se investor
RSION AND RIS ~er iJlve : 5 k _ seeker investor.
RISK AVE -~ t degree of risk. The govemrnent
6
,01ore thaJl n
Diffe t types of inHs tments bear ~Jk efdefault or of income Variation on ond~~ iS s" AND RETURN TRADE OFF
_drend as riskless. TI1ere is no ns , o degree of risk. One way of quant·ty'heS<.) .. 1' "
are cons, ere other • 1 in i>, f'> J f fin J • k
0 th
er securities ha\ e some or the e,-.rnected rate as compnsing of _g ~I · t fu_ndamenta tenet o ance iterature is that there is a trade-off between ns
However, • t express "• . b
required/expected rate of re~m is ~ b the ir1' estor. This can e expressed as , s~,~.
a n '- , '[he (JlOS 1 ti h· · th
The risk-return re a . ons 1p requires at the re turn on a security s ou
h Id b
e
th pens sation for nsk bearing Y 1
01!0,.· and return- te with its rislciness. If the capital markets are ope rationally efficient, then all
plus e com •. ...l'Tlensura .d . . . . . d
r = JRF + a cOJ.J".. sets should provt e a rate or return that IS consistent with the n sks assoaate
l:IJlent as d. 1 . . . . - . k
r = Required Rate of Return in;5 the(Jl. The risk and return are uect y variable, 1.e., an investment w1th higher n s
Where, lRF = Risk free Rate of Return w1 uJd produce higher return.
sho risk/return trade-off could easily be caUed the "ability-to-sleep-at-night tesL" While
c: = Risk Premium . The le can handle the equivalent of financial skydj ving without batting an eye, others
. . st ires for a given degree of nsk? Investor
How much pre.n:uum an m, e ?r r~:r They may be classified into 3 groups rn~y some:;:;:~ to climb the financial ladder without a secure harness. Deciciing what amount of
with respect of the nsk-retum relatIOns P· as fo• are t~ tor can take while remaining comfortable with their investments is very important.
. 01·d risk however, may be ready to tak . ·sk uwes
(a) Risk - A verse: These investors a\ ' e nsk a rt In the investing world, the dictionary definition of risk is the p ossibili ty that an
cr extra risk is commensurate.
return av ail abl e for takin o . trnent's actual return will be different than expected. Technically, this is m easured in
(b) Risk _ Seekers: These investors . are rea dy to take risk even if the retu rn ior
, , J.IlVeS
• tics by standar
d d . .
evtation. ft!S n: k
means
that risk is not sufficient enough. statiS .bill. f I .
. estor ha-.re the poss1 ty o osmg some, Risk/Return Tradeoff
(c) Risk-Neutrals: These investors require just a sufficient return for ~aking risk. Thev, :Cveven alJ, of their original investment.
neither extra return for a given risk nor are ready to take extra nsk for a given·~ Low levels of uncertainty (low risk)
It may be noted that investors have different attitudes towards risk and return, neve~ are associated with low potential returns.
all investors are predominantly risk averse and only the degree of avers~ness may diHer.'. High levels of uncertainty (high risk) are = Higher Risk
risk-return perspective of different types of investors has been shown m following figi;: associated with high potential returns. The ~ High Potentjaf Return
risk/return is the balance between the desire a:
RISK RETURN PREFERENCES FOR INVESTORS
for the lowest possible risk and the highest
possible return. This is demonstrated
graphically in the chart below. A higher
standard deviation means a higher risk and Standard Deviation (or Risk)
higher possible return.
=
-=
a,
A3 A common misconception is that higher risk equals greater return. The risk/return tra de-
a:
'O
R2 off tells us that the higher risk gives us the possibility of higher returns. There are no guarantees.
~
u R1 Just as risk means higher potential returns, it also means higher potential losses.
Cl)
a.
w
>< As Risk -Seeker
As RELATIONSHIP BETWEEN RISK AND RETURN
IAF
. To know relationship between risk and return ma) be main topic of any investor because
~vestor _is always interest (zest) to get high return at low risk. But if he succeeds to quantify
1
e relationship and its direction, he can manage his investment with better way.
re Our aim to discuss this concept is to explain what type of relationship behveen risk and
turn may happen.
I

j
L...----'
· k nct re1111 .. ·· ·
Relationship between ns il . . or deer a c ri k o n r lur 11 ~~ ~()lh ,, -,~ ■---~- L5-2~_J
other. We measure the effect of incre_as d r turn. 111 vt-s1
' '~"'''I~ ....--
• I • of n sk an
is the main type of relations 1.1p l'lil•~I .
·1' ~1st<
AND RETURN,
ISK / ETU R
elatlonshlp Model \ \/ESTMENT ALTERNATIVES A FFECT THE
Risk-Return R
RELATIVE J~DE OFF
1 Hign
High Risk
COMFORT ZONE
....
LOW Risk
LOW Return
High Risk
High Return
►
1' trn ent a lte rn a ti ves

ty pes
0 in
differ to bo th return and ri sk. Following tabl e c; urnrnarizes major
1nvfe~ ves tme nts ,rnd the ir re turn/ ri sk characle ri ~lics
INVESTMENT ALTERNATI VES AND RETUR /R ISK CO SIDERA
no 1
LOW Return
... .... Total Liqui d jty I nflation
........ sr. Return Ri s k Risk
.... .......
-~
0
No- ----+---f----t----1f-~~+-~~-f-~-
one - -7
~a.. Low None High
Cl) Cl)
1. s avings o r none
0 0
0 C: account, FDs ·one
:::,
en ._
Cl)
L ow Hi gh Hi gh Very lov-•
~ Governme nt Lo w
Cl) 2.
,cc s ecurities one
.....
..... A ve rage Average Average Average J. one 1
..... small Sa ving
3.
Low L _ _ _ _...1-_ _ _ _,.__ _ _ ___,__ _ _....._ schemes
Low Average Average Low Avera 0 -
High Grade Ave rage
Low H· 4.
- - - - - - - - Return _ _ _ _ _ _ _ _ _ 19h corpora te and
municipal
1. Direct Relationship between Risk and Return b0nds
Hi g h Very Lov A erage Low Averag
(A) High Risk - High Return: According to this type of relationshi . . 5. Balanced
mutual funds Low
take more risk, he will get more reward. So, he invested million p~if tni· Lo ·w Average
High grade High Very Low Averaoe
of loss is million dollars. Suppose, he is earning 10% return. It' lt me¾ 6.
common Low
is Lakh but he invests more million, it means his risk of loss of means,~
stocks,
Now, he will get Lakh return. money~l growth funds
(B) ~ow Risk - Low Return: It is also direct relationship between risk 7. Real estate Very Hig h Average High Low LO\
mvestor decreases investment, it means, he is decreasing 1 · • k and ~ High A 'era e
.
time, hi s return will also decrease. us ns of '"''
""\
1
Speculative High Average High High Hioh HiJh
8. ~

stocks and
2. Negative Relationship behveen Risk and Return
bonds
(A) High Risk Low Retu . 5 · •
etti h' h m. omehme, investor increases investment am.t 9. Options and Very Very Low Hi h Very
g ng ig return but with · · futures Hi o h
nature of that p • t Th _mcreasmg return, he faces low return bee J High Hig h A erage
ro1ec . ere is no benef1t t .
Suppose, there are . . o increase investment in sud!
1 00 000 1
bought 50% of total ' ;t . ottene~ m which investor will earn the prizeil SHORT ANSWER
· . 10 enes. But 1f he b 7501 . . .
at mcreasmg of risk his ' . uy 10 of lotteries, pnzes "~II s:
(B) L ru , return will decrease 1. Yield-to-maturity.
ow sk High Return• .
he can earn high • return· F There are some projects, · if investor invest low · 2 • What is risk free rate of return?
needs
.
ti ·
115 money in em · or example G
' ov · o India needs money becau.~-
t f 3 • What is meant by portfolio risk?
investment If . ergency a nd G . . . . i''
•h · investor grab th· ovt. is g1vmg hwh return · 4 • Explain the process of calculating the portfolio return .
lug return o hi is opporturu . o 1
rarely Th
· ey are
n s small risk of lo
ai1 ss o
f
mo
ty and invest his money, he
B • · \\
s. Market Risk.
· exception rath h ney. ut such opportunities Ci.
er t an a rule.
 V• LJ'-••••- J,...,~-•••-••- ••- •· - -- -
7. How is expected return calculated?

NSWER QUESTIO
1. Define Risk. What are different types of risks? Explain the methods
2. How would you measure Market Risk, Business Risk, Interest Rate ~f r-/s~s
Risk? Risk a ~d

3. What is the risk of a Portfolio? Under what conditions c~n the P0rtfo1; 0 risk l'lcJ 1
4. Explain the term investment and risk? State how investment and are "1i ,
Discuss various types of risk Involved in Investment. risk are ~,~,
5. What are the factors that determine returns? Describe the various rneth rei,.
returns? Ods of l'tJ ~

INT ODUCTI0 TO
6. Define risk and distinguish between systematic and un-systematic . ed. 1

7 - Exp Iam
. the concept of Systematic R1s . I·t ca 11·mg Systematicrisk?
. k?. Wh Y rs .
8. ~plain the Characteristics of Investment. Elucidate if there will be a t''Sk?
Risk and Return in Investments. rade-off ~ SECURITY A ALYSIS

•••
INTRODUCTION
curity analysis is a pre-requisite for making Security analysi s is the first
Se
,_.....ents In the present day fi·na..rici al mar k ets, investment
· Pa r t of the i n v estment
jnvesw, · . decis ion process which
has become complicated. One mbakesk mv~stmthents for a re~m involves a systematjc analysis
higher than what he can get y eepmg e money m a of risk and return portfolio of
commercial or cooperative bank or even in an investment individual securities.
bank- In the finance field, it is a common knowledge that .
money or finance is scarce and that investors try to maximise their return. ~ut the finance
theory states that the return is higher, if the risk is also higher. Return and nsk go together
and they have a trade off. Most of the investments are risky to some degree. The art of
investment is to see that the return is maximised with the minimum of risk, which is inherent
in investments. Ii the investor keeps his money in a bank in savings account, he takes the
least risk, as the money is safe and he will get back when he \\ ants it. But he runs the risk
that the return in real terms, adjusted for inflation is negative or mall and e en if positive,
it may not come up to his expectations or needs.
. In the above discussion, we concentrated on the , ord ' In estment'. But for making
~vestment, we need to make security analysis. It then becomes nece sary to define properly
investment and security analysis at the outset.
The ultimate decision is to made in the investment are:
1. What securities should be held?
2. How much money should be allocated to each?
These decisions are made in two steps:
1. Risk an_d return of available securities over a holding period are estimated based on
the projected prices and dividend streams.

L
 - r--;-:;7
~
d turn stimntes
SECU
Rln' ANALYSIS AND PORlF

. ._ ccuritics ar' combined " d

of vnrrou. •
' .
d
( inv tm e nt s an then a ll
L n c
0Lto
~~~.,~,
ol'l1p ,~,
,....--

N TO SECURITY ANALYSIS
[YD
quival e nt
2. Risk an re suitable P rtfolro o . oc<1ti11 ~r~d . ~ool.lcTJO the current receipt o f v.:t lu c . S curiti cs thu s re prese nt th cas h
to make a bes t - tinuin" bn ,s. g flJn i1 Jr,I 1 turn for
e~e
tll ·
securiti es on a con . ... ,, ... I)' j a nd the econd step c d1/\ e in re other pe rson.
• I ccurr 1 ' " " 0111 1 {tilLl_r cd f rortl .:in
n,e first step is rel ated ,, rt, Prises o ·, I
. 1·f ,ec N Of SECURITY ANALYSIS
..,-tion and managemcnt · f r econo mic r e. Every b ody n, r h_
t'f ,
.::fJNITIO . h . ves tor has to
se 1~L pnrt o ou . ake
Jn\'e tment deci sion ar i1 1· ,e Some are able to reap more Proft s SIJch ' O.., .aper inves tm e nt involving both ri s k and re turn, t e in
ak1ng
pr th . . k d re turn ch a ra c e n
t ·s ti es
. d'fferent conte ·ts at diff rent rn .Attempt s hould, therefore, be n, ' s lhro d~ for m f h aJternative avenues of in ves tm ent- eir n s a n . trnents
•~1 ·1~ other simplv lo es their money. cl c,·sion can be made in order to . ade lo lJlJ&f1 ~• a study O t e·ectio n o r expectation of the ri sk a nd return of the a lte rn a ti ve in veds turn
" ,1 , d . estm ents e . . f11al:e
in,p nq ' per proJ · f f th e ris k an re
and know the way soun rn v Tl investment dec1s1on-making is 'd J11ake pr 0
~ove lh tr1 . He h as to tun e the expectations to hi s pre e rences o . . d ti1e
of making profit through them. u1 s, aJ1d r consideration. . estment choice. The process of analysing the individu al secuntie~ an .
an ll)·'Po ec~•
ti~ ifl e proper inv if J • l 1t s w 1tlt a v 1ffl.V
th
probing fur er. · in nature should \ L J11aking a d es timating the risk and return expected from each o t 1e mves me, t d
. being conhnuous atten, . for ,,et ns a u,!toled an lued securities for buying and overvalued secunt1es • • fi 11 • is both an ar nn
k
Imestment decision-ma mg Pt sy5 or se mg
ted in the literature. These are: tern1~ ,11a'" . 11• 1111 erva .
'g. . · what is called secunhJ analysis.
.
Broadly approaches are sugges '\ to ;de11ti/Y
. and t1'115 is . · tion of
a science • in both traditional sense and modem sense invol ves the proJeC
A. fundamental Analysis. ·ty Ana 1ys1s . d tim ting the
Seet.1~1 d earnings flows, forecast of the s hare price in the future an es a .
B. Tedmical Ana lysis. ftlttlre dividen 'for secu rity based on the foreca s t of earnings or di vidends. Thus, secu n ty
C. Efficient Market Hypothesis. · value O a d 1 aJ f a sha r e and
jJltrins~c . ditional sense is essentially an ana lysis of the fun am e nta v ue o
111
ariaJysis t 7:r the future through the calculation of its intrinsic ~ orth of _the sh~e- _ Io~er:11
MEANING OF SECURITY ANALYSIS its fo:ecas sis relies on the fundamental analysis of the secunty, leading to 1ts mt_nn5 c
1

I
Investment is commitment of funds in the expectation of some positive sectJTity and a y risk-return analysis depending on the variability of th e returns, covanance,
th an a 1so If · al · · based on
These funds are to be used by another part)~ user of fund, for productive act/~te of r~ ,...,or of funds and the projections of the future returns. the secunty an ysl5 15 _

giving an advance or loan or contributing to the equjty (ownership capital) 0 vity. It Qi 1 safety t factors of the company, then the forecast of the share price has to take into
I
of a corporate or non-corporate business unit. In other words, investment me r debt c. , fu n clame_neavitably the trends and the scenario in the economy, in the ind ustry to which the
?f cash or_ money into a monetary asset or a claim on future money for a retu ans co~v , account yll1 belongs and fina1Iy the s tre ngths and weaknesses of th e company I· tse lf- 1· t s
1s for ~avmg, parting with saving or liquidity and lastly for taking a risk ~vlhis ret;: companment promoters' track record, financial results, projections of expans;on, diversification ,
manage ' · th
uncertain ty abo~t the actual return, time of waiting and cost of getting back fu olvillg f nning etc. All these studies are only a part of the total security analysis that e
Ja
of funds, and nsk of the variability of the return. nd5, ~ investor should aim at.
tax P
. .Investment in capital market is made in various financial instrume t hi
cla1IDs on money Th · trum . n s, W ch a , FEATURES OF SECURITY ANALYSIS
Th · ese ms_ . ents may be of vanous cat~gories with different ch ~'
ese are a 11 called securities in the market arlance In a 1 aractem ·
Contracts Regulation Act (1956) h d fin d thp .. egaJ sense also, the Secun· Following are the main features of the secu rity analysis:
b ' as e e e secunty as · cl · f h ~
ands, debentures or any other marketabl .. 1:11 us1ve o s ares, scrips, Stl\i l. Security analysis is concerned with analysing the security to know w heth e r they a re
of a company or body corporate th G e secunties of a like nature or of any deben1u:,
II · h , e ovemment and ·G , valuable or not.
a ng ts and interests in them - 1 d ' sem1 - ovemment body etc. It indul
of the bodies, ?rganisations or ;~ ~:!r:rrants, and l~yal~ coupons etc., issued by r 2. It emphasizes on the projection of future prices and dividends.
Index are also included as securitie . th ent. The denvahves of securities and Securr 3. The analysis of the securities is concerned with two principal prop rties inherent in
s m e above defi 'ti .
In the strict sense of th ru on m 1998. securities i.e. risk and return.
method of borrow · e word, a security is an i
cor o mg or lending or a source nstrument of promissory note or 4. It helps in decision making for investment as with the analysis of risk and return;
P ra!e body or non-corporate body p · of :on tributing to the funds needed by one can understand the behaviour of market and security prices.
a promissory note of a . . . . nvate security f . .
private securities n md1v1dual or firm and !>iv ~r example is also a security as df
or even secur·r f . o· es nse to 1 · /
I
OBJECTIVES OF SECURITY ANALYSIS
partnerships or firms I th
. . ,
ies O private compani
nc, constitute 1 1ty 1s po
a c aim on money. But su
capital market and do o t e exte~t that their marketab'el~ o~ promissory notes of individull
. f•
---~--~~----__!
{manc1 al mstruments that h b part of the secu .1 or or rul, are not part o u•
Following are th e mam · o b'1echves
· o f t h e security analysis:
ave een created to rep n y analysis. In nutshell securities ~ 1· To es ti mate t h e nsk
· and return related to a security.
resent a 1 . , .
egal obligation to pay a surn r 2. To identify th e un d erva Iued secunhes. . to buy or overvalued securities to sell.
 @] secuiu' • -··--. -·- ""u Po11l~0 _...........--- 0

3. best
To analyze
possiblethesecurity
prospects
forofinveStinenl.
nd
economy, i ustry and company "''.1hlta
a,. \ ~ ~ ECURJTV ANALYSIS , the rn acr level
4. To forecast the future earnings and dividends
d along With th e p • '~tv~J1
1
-r-rflooLICflO,.
,..
-ro s
t the m acro level. Th e ana lys is of the · the pas t o ~
s ta te o f the h
e c~~ o,
- ~~ p
a e rfo:rrni11g in tt, e

~
.
5. To analyze the stock market trends to un erstand Pat
the market rice Of '
II, 1 rporates
cotJJltrY a
. t d to pe rfo rm m
the performan ce of the econom~ lflfu
ture.
,
alyst rnu s t
5
6. To £ind out the intrinSic value of Ithe. secunty
. to de with
I th a view to t 1e,,. •1 \
•ke b d~ i<':ent and hoW it ,s expec ed
pr
.
al sis· After con uctJng an O f the .econo
analys is of r:nY, ti:e
s indus trJ e5 ·
i.ndus trY
. tic
The ultimate objective of security ana ys,s ,s. ve 0 P. eoretical ~)/ , !PdustrY /U1. Yus ~ectors o f the econom y in terms vari ouwi th s imilar charactert
the value of financial instruments to compare with the pnces quoted lllod,1, \\ Z- 1o0k into v:~~ous group of co mpan ies. Tha t ,s, comp aru es bases on which groupJJ'lg 51
these theoretical models security analysts try to look for undervalued "1 lhe ¾1 ,
~
is a homog d d • to one indus trial group. There ar e ,nany
' th t t d 011
esent aniese can 1
ch 1 fundal!lental an al Y ·s i.S
Undervalued situations' where theoretical value is higher than the pror erva1 ""~,
Ued can be divi m be done-
the opportunity to invest in instruments a ~re expec e to have abov et~, "'''k of comPy .AJ1 a1 ys1s. al 0 in t t_oth
u• thir d elem• ent of EIC fapproa
•• ,n...e Th
s the re a t:1· onshiP b etween
Overvalued situations, where theoretic• va ue 1s be Iow th e current
I I are expected to fall. market vai'".;.,•
•-a,, •, 3_ coinPaJl alysis. In company an al ysis, the oc . P . d ustr}' changes- e
opportunity to sell instruments whose prices the and an
companY expenses o f the finn and the econorruc and e m
e.,~ revenue~ mponents of company analysis are:
tw 0 rnaJor
. . co Analysis: Financial analysis includes:
(i) r,nancta 1
APPROACHES TO SECURITY ANALYSIS (a) Assets Value vs. Ea~g Val u e
(b) Quantitative Analysis.
There are three approaches to security analysis:
(c) Ratio Analysis. . . . . . t in e valu a ting
A. Fundamental Analysis. ii) Non-Financial Analysis: Non:finan o al ana lysis. ,s also unpo~ ~ b e o btaine d by
h worth of a company for m vesting m secunbes. This co . th clia
B. Technical Analysis. ( t .':tiering and analyzing informa tion abo ut companies, publish e d Ul _ e rn~ si~
C. Efficient Market Hypothesis. lbe stock exchange director, annual reports and prosp ectus- o n-finan°al an Y
A. FUNDAMENTAL ANALYSIS includes internal factors as well as external factors .
. In the fund amental approach an attempt is made to anal z ·
eff:Jr; s. TECHNICAL ANALYSIS
:~c~~t~
basic. factors that affect the risk-return of the securities. The vano_us fund~ Technical analysis involves a study of marke t-generated d ata like prices and volumes to
that on p_er~eives as mispriced in the stock market. The as~ere ". lo id~ , determine the future direction of price movement. Technical analysis analyses int_e m al rna_rket
,. a
\ _mtrinsic value' are different and their mar!.t
' tinvestor
;.~,ts •~:
e market pnce of security and the ric . . tif
to detect such discrepancy· The moment such prov1
. umption mU,;
by ,ts fundamental fao.,I
for atl:~•.'
data with the help of charts and graphs. Technical analysis is a method of evaluating s ecunbes
by analyzing the statistics generated by m arke t acti vity, such as p ast prices and volume.
· a d es an
· opportunity
· . Technical analysts do not attempt to measure a securi ty's intrins ic valu e, but instea d use
o mvest or disinvest is made. escnption IS identified; a~
charts and other tools to identify patterns that can suggest future a ctivity U nlike fundamental
The price prevaiHng in market is called " . ,, analysts, technical analysts don't care whether a stock is undervalued. The only thing that
fund am:nt~ls is called "intrinsic value" (IV). market pnce (MP) and the one jusli&, matters is a security's past trading d ata and w h a t infonna tion this d a ta can provide about
Cntena for Selecting an Investment: where the security might move in the future.
1. If IV > MP, buy th e security.
· Basic Technical Assumptions: The basic technical assumptions are:
2· If IV < MP, selJ the security. (il The Market Discounts Everything: A major criticism of technical analysis is that
3· If JV = MP, no action. it only considers pnce movement, ignoring the fund a menta l factors of the company.
The fundamental factors mentioned Howev~r, technical analysis assumes that, at an given time, a s tock's price reflects
company or all . some of thi s. Tlms, Fundamental
above may
A relate to the economy or indu.~ everything that has or could affect the company-including fundamental factors
1. Economic Analysis pproach includ es th.ree an alyS'·i5: . in Tren d s.. In te chni caJ analys ·is, pnce
Ir
(ii) Price Moves • movements a re believed to follow
·
2. Industry Analysis . e nd s. ~ s means th~t after a trend has been es tablished, the future price movement
3. Company Analysis
:~:," /il<ely to be m the same direction as the trend than to be against it. Most
1. Eco_n?mic Analysis: In actual pracf ... a strategies are based on this assumption.
dec1s1ons of individuals and the insti~c;, analyst must hn) is that hist
History Ten d s to Repeat Itself: Another important postulate in technical anal .
country. It becomes essenti2I, therefo;ns made
e, to undin the have noticed
economy set-upthat jnves:
of a p~ ory tends to repeat itself, mainly in terms of price movement· Th e repetitive
-~sis
erstand the star economY011

6
---
ooucr JON TO SECURITY ANALYSIS

l~ffl r/ E rnti o [fil

• . 'dend payout rntio
• D 1Vl
• NeWS about the economy
• rolilical news.
t.rend5. NT MARKET THEORY . . . d' Strong-form EMH: The stron g fo rm EMH
C EFFICIE . in which security pnces a Just rapidl 3 'fhC . f bl" I . contends th t t k
. II ·nformat1on rom pu ic anc private sources Th a soc prices full reflect
• I rket is one f . ·t· fl y to
fficitnt cJpitJ ma ti current prices o secu n 1es re ect all inf the- ~he I weak form and the se mi -strong form EMH. e strong form EMH extends both
An e i d therefore, .1e . f tJ t ff· . orn-i . iltri
. . fomiution an , d t ,d the meaning o 1e erms c 1c1en1 ca . ati 011 "a1
of ne11 rn "d to un ers aJ d tr P1ta1 ilh..·
ritv. Analyst net . of its importance an con ovcrsy assoc· 111ark~~1
the srcu . h . otliesis becau e . . •atect \ . 1ana t4CLUSION
efficient mJrket P k I b Efficient: As noted earli er, m an efficient Vtth it CO . .
. ;inr1lys1s 1s
d .h
concerne wit ana lysing the ..
Why Should Capital ~Ila r 'te U~e infusion of new information, and the cfaPita! mai Se cunty ot' 'ft refers to the analys .is of securities fro secuthrities . to kn ow w hether they are
. d·ust rapid y o . T b b I I re Ore r~e1
security pnce a I 11 ,ailable information. o e a so ute y correct ti . ClJrre , ble or n · · · Th e bas1c. purpose ofm e pomt of view of pnces,
·
security prices fully reflecfft_ ~ at\market Although the idea of an efficient c'a _11s is reret~
1/alua f 1•ndividual securities. . retu rn
· ks o . . . security analys· 1·5 t f·
~ · 1•nf0 ational e ·10en · h . 'Pltal tea and fl ~ . ) ie of a secu rity with a view to take buy/sell deci . · ts o md out the
to as an :11' d al)'St often fail to consider w y capital markets should lllarket.
1·ntrins1cnty _va tana lysis: s1on. There are three ap proaches
relatirely stra1ghtfonvar ' an . be eff . is secu . • .
1eient
What set of assump b.0 ns imply an efficient capital market? to 1
d mental ana ys1s 1s an ana 1ys1s that starts with th t d
. .. d ·mportant premise of an efficient market requires that a fun a and then works do wn from indu t e s u y of factors rela ted to
1 An uuba1 an 1 d .. 1arge n II economy s ry groups to specifi · .
· f fi t aximizino participan ts analyze an va 1ue securities, each inde umber overa . establishing basic standards and benchmarks but should I b c co_mpanie~. It is
o pro m o Pendent! helpful in · ties associated with it. no e entirely relied on
the others. Y01 to uncertain
due . - ct ·
2_ A second assumption is that new information regarding securities co Tec hnical analysis • usesd m h1cators or. tools .
li ke bar charts po· t
' m s an
d fi
gu re char!s
market in a random fashion, and timing of one announcement is generally . rndes 10 the . average analysis an ot er technical indicators to val ue the secu ·tt· It h I '
10 epend rnovrng d f · d n es. e ps to
of others. ent gauge the prevailing moo hi
o investors an the relative strengths of supply d
- . d .
df
eman orces.
. e reliance on t s ana 1ys1s 1s not a v1sable du e to unpred i'ctable d f.
3. The third assumption is especially crucial: profit maximizing investors adjust . Excess1v . . _ moo o mvestors.
prices rapidly to reflect the effect of new information. secunry Efficient market hypothesis believes that mfonnation is quickly and effici ently inco d
. . . h . rpora Ie
Alternative Efficient Market Hypotheses (EMH): There are three types of effi . into asset prices at anr poi~t m hme, ~o- t at old mfonnation cannot be used to fo retell future
market hypotheses: c1en1 price mo~~ments. It 1s ne1th~r as eff1c1ent as the _efficient market th~ory sug~ests that all
ortumhes to make superior returns are exploited nor as speculative and mefficient as
1. Weak-fomi H.IB: The weak form EMH assumes that current stock prices full n ~;chnical analysis indicates that there is no need to make rational choices to make returns.
all secun·ty market information,
· m · cl ud"mg: . reuect
• Historical sequence of prices
• Rates of Return
SHORT ANSWER QUESTIONS
• Trading volume data 1. What are the two major types of information necessary for security ana lysis
• Other market generated information. 2. Define the efficient market hypothesis.
This hypotheses implies that p t t f
should have no rel ti. h. a_s ra es O return and other historical market data LONG ANSWER QUESTIONS
a ans tp with futu
should be independent). re rates of return (that is, rates of return
2. Semi Strong-form EMH· Th . 1. Security analysis requires as first step the sources of information on the b~sis of whl_ch
1
rapidly to lhe release of all e us:i: i~trong-f?rm asse~ts that security. price~ adjust analysis is made. What are different types of information used for security analysis?
reflect all public inforrnati -h, . formation, that 1s, current secunty prices full 2. Denne the Efficient Market Hypoth esis in each of its three form s. What are its
form hypotheses becau; ~-h e se;i st rong-form hypotheses encompasses the weak , Implications?
~ypotheses such as stock e_ mar ,et information considered by the weak form 3
• Explain EMH in its various forms and state Its assumptions and uses.
information. Public inform~f rr ce~,--r~tc of return and trading volume, is public 4
E . . ton 311)() includ II h . • What are the two major types of Information necessary for securi ty analysis?
• amings and dividend cs a non market information sue as.
announcements
Ill
 FUNDAMENTAL
ANALYSIS

INTRODUCTION
ndamental analysis is the examination of the Fundamental Analysis is a
F~ forces that affect the well being of the economy, method of evaluating a
underlymg ps and companies. As with most analysis, the security by attempting to
0 measure its intrinsic value
indu5_~ 0~ e:elop a forecast of future price movement and
15 through combining economic,
goal_ fr it. At the company level, fundamental analysis industry and company
Profit - volve
om examinabon . o f fi nancia
. l d ata, management,
analysis and by examining
may 10 concept and competition.
business · · A t th.e m
· d ustry Ieve,I th ere related economic, financial
i ht be an examination of supply and demand forces of the and other qualitative and
;!ducts. For the national economy, fundamental analysis quantitative factors.
might focus on economic data to assess the present and future
growth of the economy.
To forecast future stock prices, fundamental analysis combines economic, industry, and
company analysis to derive a stock's fair value called intrinsic value. If fair value is not equal
to the current stock price, fundamental analysts believe that the stock is either over or under
valued. As the current market price will ultimately gravitate towards fair value, the fair value
should be estimated to decide whether to buy the security or not. By believing that prices do
not accurately reflect all available information, fundamental analysts look to capitalize on
perceived price discrepancies .
. In the fundamental approach an attempt is made to analyze various fundamental or
basic factors that affect the risk-return of the securities. The effort here is to identify those
~cur~e~ that on perceives as mispriced in the stock market. The assumption in this case is
'in~ t ~ market price' of security and the price is justified by its fundamental factors called
nsic value' are different and their market place provides an opportunity for a discerning
 SECURIT
·n,c
y ANALYSIS AND PORTFOLIO

nH>rnenl su
. .
ch .i dcs rnpt1on is · I
l'-1,\~
1't:~
. ic entifi c\l· \
r t4fNTA
ftJr4D" -
L ANAL VSIS
. h"
7.3
the top down inves to r _s tarts is o r h •r ana lys is with g loba l, c no mic. including
r:;-:;1 I di. crcp,1nry. . ij llc't , r1,u s, . tc rn .i ti o n a l a n d n a ti o n al eco nomi c indica tors s uch as GDP g rowth rates
~ _ 10 dell,c1s11C'·, ma d'c. -~----- ----~- i\ , lJO thin
. int e rest ra t es, exc h a nge ra t s, pro d uct1v1ty
.. , nd ene rgy p rice. Then, the'
invc~tor d•, invcsl t. . f];itton, h . d t - I .
. ., t or 1• ,n es to r ,..viii go for t e in- us ry. a na ys is and at las t for lhe compa ny analys is wh ich
to in1 t: 5
in" fin a nci a l s ta te m e nt ra ti o, cash fl ow analysis etc.
I nting a security by .ittcrnptin . c1ud eS
MEA NING . ,·, n mcthod ofointeva
AnJlfSI .
u, .
. f'nnncial
C, I (
- . . g lo
and other qualitative ~ llieij 1
- - unc1 ~,,
,n Top Down Approach
ndomcntaI ' . . , rcl;i!cd econ d every thing th a t can affect th e s 9ua111 , Econ omic An a lysi s
Fu •a011n1n!j to stu y d . ecur· Iii,
intrinsic v;iluc b}: e:, .,n;ilysts attcm~t, he over.i ll eco no my a n mdu st ry con/~'s ~ai' i
ric1ors- Fund;imcnt omic fa ctors (hke I . 1 condition and m a nage me nt of corn lho11s1
. ' I din•· n,;i crocc0n (!'ke the finnnoa Pa11ies) •, Indu stry An a lysis
1nCu O ciliC foc10r5 l .
indil"idu,,l spe ENTAL ANALYSIS i
Of FUNDA~ . Compa ny Ana lysis
OBJECTIVES . f fund amenta l analysis:
·ou objcct1vcs o . Up Approach: In the bottom - up a pproa ch, the in ves tor s tarts his or her
Followin"o ;ire the va n .
.
of nat1ona1
economy beca use eco n_om1c activity
- d 1. affe 2- Botto~ with company a nalys is th e n goes for industry a nd at las t for eco nomic
dict the direction . d ,d expectation an u ttmate ly secur· ty rts 1 r,alys ts . . I • . . • .
I To pre t ~tt1tu cs a1, - I p. ' a . that is with n a t1on a or tnte rn at 1o n a l eco no mi c indi cators. Bottom up
· fit inves or " . f . nc~
corporate pro 1 , .
nce ch anges
by studying t11e orces ope rating in lh ''
. d . e o a nalys
. is · h h
hy gives m ax imum we1g t to t e company i.e. a bottom up investor considers
To estimate the to ck P -iliar to indu stri es an companies. 1/e • t,1lo~op d I
Phe financi a l health, p_ro ucts,. su PP Y. a n d d e_mand,_ a nd o ther aspects of a company,s
-7 · as we 11 as •nfluences
I pen
I · t
economY, . d . ht securities for t 1e inves ment. t f ance over a given p e nod of hme. Usmg this app roach, the portfolio manager
3. To select Lhe right ttme an ng er orm
P attention to the economy as a whole, or to the p rospects of the industry a
pay Iess . .
PHASES OF FUNDAMENTAL ANALYSIS cornpany is in.
THREE In many cases, bottom up inves ting d oes not a tte mpt to make a clear distinction
. . olves t],ree phases which are as below :
The f-.mdamental anaJ ys1s mv . between growth and value s tocks. Top-down app roach is better approach.
. f tl1 macro-economic environment and deve lopments (Econo
1. Understan d mg o e Bottom Up Approach
Analvsis) Company Analysis
1
2_ Anal;rzing Lhe prospects of the inrlustry to which tl <:! firm be longs (Industry Analy~
3. Assessing Lhe projected performance of the company (Company Anal ysis) i
The three phase examination of fundamental analysis is also ca~led as an EiC (Economi- Indu s try Analysis
Industry-Company analysis) framework or a top-down approach or 1t can be CIE (Compan1. i
Industry- Economy analysis) framework or a Bottom- up approach.
Economic Analysis

APPROACHES OF FUNDAMENTAL ANALYSIS The price prevailing in marke t is called " m arke t price" (MP) and the one justified by its
--~-....--~-~----, fundamentals is called "intrinsic valu e" (rY).
There are hvo approaches of Fundamental Analysis:
Criteri:i for Selecting an Investment:
1. Top down Approach.
2. Bottom up Approach. I. If rv > MP, buy the security.
1
· Top Do~ App~oach: Here the financial analyst first makes forecasts for the economi 2. If IV < MP, sell the security.
then for mdustnes and final! , f . ,L.
3. If IV = MP, no action.
f orecas ts f or t he economy -)andor · companies. The industry forecasts are based onIii
u,
111
forecasts for both th . d turn, th e company forecasts are based on The fundamental factor~ mentioned above may rela te to the economy or industry or
e m ustry and ti · d Ill
groups are compared against th . , e economy. Also in this approach, in us - company or all some of this. Thus, Fundamental Approach is a three phase analysis of:
0
companies. Usuall)' compa . er induS ry groups and companies aga inst 0th~
t
, mes are com d • h• 1. Economic Analysis
example, a telecom operator (S . ) pare with others in the sa me group.
t .
no to an oil company. pice would be compared to another telecom op erJni 2- Industry Analysis
3· Company Analysis
~ SECURITY ,m ... -. - - -....., l'1
AN~(l ,,...
FUNDAMENTAL ANALYSIS ~~,
~ eNTA
L ANALYSIS I7.5
I
[0 pHASES Of
Tools an flJ~
..io.Ar,t
•d o n
th e s ha re in the future a5 al c;o th e future pri ce of th h
d 1
• • e s are.
Th
esc va 1ues can
Pai bP c s tim a ted a n not pr ·c fict ·d w ith ce rt a int y· Th ese va I ues are prim . .
a ril y
0 n1Y : d by th e perform a nce o the co mpany whi ch 1·n tu . . fl d b h
mine . . rn I m uence y t e
deter ce of the indus try lo whi ch the company belongs and th •
, the general economic rr,;in . f h e genera 1 economi c
er for . _ o liti ca l scena ri o o t e cou nt ry.
To occc s .
. of the na!Jon.
P
anJ .,··oCJO p
silua11on f
Indu s try life cy
assess th e pros p~ct s o ..
C ompe t1hve c1e a
anaty . flat " . ,At<NfSSES Of FUNDAMEN~AL ANALYSIS
tndustr}' To. . du try groupings. • S Js 0 f . 181~
Second
Ani1ly i
various in tries ct-c. 10d ,
~~
WC; C strain ts: Fund a me nta l a na lys is m ay offer excell ent insights b t ·t
,r'rne on . . r . , u I can b e.
1 e the Financia 1 and Analy s is of Finan . 1. , 1 din a rily tim e co ns umin g . im e-cons umin g models often produce va luations
C1aj
To ana Y of a Sales, Profitability asPeq . ex trao;e contra dicto ry to th e current pri ce pre vailing on securities marke t.
. ancial aspects
Third Non· f in
determine whet er
h A na Iys1s o Non-fi.na , . EPs ei s.
. f tha t a S 'fi · V I . ·
ustry I Comp_any pec1 c. a uat1on te~hn19ues vary depending on the indu stry
company lo f nc1a1 t
to buy, sell or hold the shares o management, corpo as!{~,..
rate 1· -i: z. Ind d s p e cifics of each compa ny. For thi s reason, a different technique and model
product quality etc. 1llag,, group ~n d for diffe re nt indus tri es and different companies. Th.is can get quite time
a company. . require th f ch
is surning and limit e amount o resear th at can be performed. A subscription
con d rnodel rnay work great for a n 1ntem et Service Provider (1SP), but is not likely
ADVANTAGES STRENGTHS OF FUNDAMENTAL ANALVs1s base h best model to va lu e an o il company.
to be t e . .
. d antages of the fundamental analysis: . fvity: Fair value 1s b ased on assumphons. Any changes to growth or multiplier
Following are the vanous a v . . 3, SubJec ~ions can greatly alter the u ltimate va lu ation. Fundamental analysts a re generallv
. F ndamental analysis is good for long term investments b assump . . . I . ,
T
1 long-Term ren s. ud d' I ased on f this and use sens1hv1ty a na ys1s to present a base-case valuation, a best-case
· d The ability to identify and pre 1ct ong-term economi c, demog . aware o I . H
long-term tren s. . . d h 1 . raph1~ . n and a worst-case va u ahon. owever, even on a worst case most models
technological or consumer tr~nds can benefit investors an e ps m picking the rigm vaJua tIO . h h nl . . ,
are a, 'most always bullis , t e o y ques hon rs how much so.
industry groups or compames. . J st Bias: The majority of the inform a tion that goes into the an alysis comes from
2 VaJue Spotting: Sound fundamental analysis will help identify companies th 4· Anh \:mpany itself. Compani es e mploy in ves tor rela ti ons managers specificall y to
· represent a good value. Some of the most legendary investo_rs th~ for long-term an: ~a~dle the analyst communi ty _ai:'d re lease infom_1ation. The analysts becau e of thei r
value. Fundamental analysis can help uncover the .
comparues with valuable assets,I relationship with company offioa ls can show biasness.
strong balance sheet, stable earnings, and staymg power.
3. Business Acumen: One of the most obvious, but less tangible rewards of fundamenl.l IMPORTANCE OF FUNDAMENTAL ANALYSIS
analysis is the development of a thorough understanding of the business. After su~
painstaking research md analysis, an investor will be familiar with the key revenue An investor who w ould like to be rational and scientific in his investment activity has
and profit drivers behind a company. Earnings and earnings expectations can be to evaluate Jot of information about the p ast pe rformance and the expected future performan ce
potent drivers of equity prices. A good understanding can help investors avoia of companies, industries and the economy as a whole before taking investment decision. Each
companies that are prone to shortfalls a.nd identify those that continue to deliver. share is assumed to have an economic wo rth based o n its present and futur e earni ng capacity.
4 This is called its intrinsic value or fund am enta l va lue. The purpose of fundamental analysis
· Value ~rivers: In addition to understanding the business, fundamental analys~
allows mvestors to develop an understanding of the key value drivers within lhe is to evaluate the present and future ea rning capacity of a sha re based on the economy,
:rnpany. I, st_ock's price is heavily influenced by the industry group. By studying industry and company fundamentals and the reby assess the intrinsic value of the share. The
ar:~rt.P ~(mt v~tois c~ better position themselves to identify opportunities that investor can then compare the intrinsic value of the sha re with the prevailing market price
(oil) non ncys . eel (), ow.•nsk (utilities), growth oriented (computer) value driven lo arrive at an investment decision. If the market price of the share is lower than its intrinsic
, c1JCa consumer staples) 1· I ( ' value, the investor would decide to buy the share as it is underpriced . The price of such a
5 Kn • . ' eye ica transportation) etc.
. . owing Who is Who: Stocks move . share is expected to move up in future to match with its intrinsic value.
investors can better categ . as a group. Knowing a company's business,
make a huge ilifference inonzle _stocks within their relevant industry group that can . On the contrary, when the market price of a share is higher than its intrinsic value, ii
. t 1 . re ative valuati Th . h ~ perceived to be overpriced. The market price of such a share is ex pected to come d~~vn in
is o se I it subsequently at a hi her . ons. e primary motive of buying a s art
expected . Thu s, dividends and ~ic pnce. In many cases, dividends are also to ~ tur~ and hence, the investor would decide to sell such a share. Fundamental analysis th us
shares. Consequently, an invest~r :oc~~nges _constitute the return from investing Ill prov1~es an analytical framework for rational inves tment decision-making. Fundamental
be interested to know the dividend to be ~alys1s insists that no one should purchase or sell a share on the basis of tips and rumours.
e fundamental approach calls upon t~e inves tor to make his buy or sell decision on the

A
 TY ANALysIS AND PORTFOLIO t-, , ANALYSIS
A~~ ~~ ~
~
SECURI
. bout the company, the indu st G~~t ..ip,\r,1f: ts with th e ove ra ll eco nomy and the ~
iJr- ,ri,a . t star nies. As par t o f th e ana Iys1.s process n ·1works do wn f .
~ d . d anr1lysis of the inform~t,on °as in informed investing. ry lo ~h· ~ f . . ro m industry groups
~rlier• jfiC c~rr,patative. Indu st ry g roups a re co rnpar: d I is _important to reme mber that all
basis of a eta, 1e ' . nom)'· This resu ich e10 s eeation is .rest other compa ni.es. Us ua ll y, co mpani e agains t other . d
mpany belongs, and the eco I b· le but it should be approached . I~
P . m ustry groups and
co . I . c;in be vn un ' I t 't . . \.V1tL
Th f ndamental ana ys1s ' . ell-side ana ys ' I is important ,1 c iflfor~nieS ag~e analyst s ~ould t_ake into accou nt all ~h:r~h:~:pared_ wi th othe rs in the
et u re reading research written by a s !·, ave personal biases, and ev lo bl' f%111, ,or1'P O'rotlP· cial s tages m the mvestment decisions. conshtuents, which form
If ana 1ys s a · Everyone ery alli.
with the analyst behind ~he rep?rt. on with this, and the research can still ana1Y111,1, ii11'e v lJtl t crU
of bias. There 1s nothing wr g k the record of an analyst befor . be of ¾ , ·f1 ferent ----:-:-.:::::::-::::::~~----------------
some sor1 · . an and trac }eases of a company o ff er good inf e Ju...... ~r d INVESTMENT DECISION MAKING PROCESS
1 e Learn what the ratings me, ''' Pin~ ,.,
va ~~sion Corporate statements and press ref ~cepticism to separate the facts trrn atio/11
~~;)' should be read with a heallh Y degrlee re an important PR tool for comp r?rn lhe · ~.
O Industry Risk and Return
, h
Press releases don t appen Y a
b ccident· t , ey a
d ·ru . an1es I I~
t the important 1 ormahon and ign · nves
Analys is of a security
should become skilled readers to wee ou ------ ore the h~

REASONS _F_O
_~R -=FUNDAMENTAL ANALYSIS ,
. balance sheet, the income statement and th
1
1. Fundamental analysis probes t_,e ·t 1 estate SHORT ANSWER QUESTIONS
of sources and used of working capi a · .
. . the examination of the underlymg forces that
~
2. Fundamental analysis is . d stria! sectors and companies. As with rn affect ~
interests of the economy, m u h futu e ost anal) ·n E.I.C. Approach.
1, EJ<P Ia1
the goal is to derive a forecast for t e r · . ~1 What do you understand by fundamental approach to security analysis?
the company's balance sheet to determine the val 2,
3. Some ana 1ysjs an~1y: y the stock at a price lower than the liquidation v~e of l\
colmpany_ an try o duto the valuation of the net assets of the company a ue Or i
a ow pnce compare .
LONG ANSWER QUESTIONS
4. Other fundamental analysts focus on the expecte~ ~~~e ?rnings of the cornp~
O
and try to buy the stock at a low price compare e uture earnings (Low ~ • What is fundamental analysis? What are the approaches of fundamental analysis?
Price -Earnings ratio). 1
l, State the meaning, rationale, procedure and limitations- of fundamental analysis?
s. Industry groups are compared aga~nst other industry ~roups and. companies agairs
• Explain the salient features you will take into account while doing fundamental analysis.
other companies. Usually, comparues are compared with others m the same grou• 3
~
6. Stocks move as a group. By understanding c?mpa1:y's busines~, investors can her~
position themselves to categorise stocks w1thm their relevant mdustry group. Ill
7. Fundamental analysis is good for long term.
8. Fundamental analysis will help identify companies that represent good value.
9. Fundamental analysis is the development of a thorough understanding of the busin6'
There are several steps associated with fundamental analysis. The investor must taker
examination of the current and future overall health of the economy as a whole inve1
must ?tt:mpt to determine the short, medium and long term directions and level of inte ·
rates. fhis may be done through interest rate forecasting. Interest rate forecasting is a popuh
~ool of_fundame~t~I analysis in Europe and the US Authorities rather than the market forct
m India are dec1dmg the interest rate.
As understanding
. of the 10
· d us t ry sector mvolved
· •
mcluding · of Ihe
the matunty
an d any eye1ica1 effects that th e overa II economy have, on it, is also necessary.

GENERAL STEPS TO FUNDAMENTAL EVALUATION

. Even though th ere is
• no one clea t · the o~
an mvestor might proceed Tu· r cu method, a breakdown is presented in . . .
· 1s method e mp 1oys a top-down approach which
. was d1s(ll~~
 ECONOMIC
ANALYSIS

1NTRODUCTION
tual practice, you must have noticed that investment The performance of the
In ac f individuals and the institutions made in the company depends on the
decisions o
rn set-up of a particular country. It becomes essential, performance of the economy .
econof Y to understand the star economy of that country at
there ore, . o f th e state o f the economy at the macro level incorporates the
cro level. The analysis
the rna
nnance of the economy m · th e pas t, h ow 1t· 1s
· per form.mg
· · the present and how it is
m
perfo . fu
expected to perform m ture.
In other words, the performance of the company depends on the performance of the
economy. lf the economy is booming, incomes rise, demand for goods increases and hence the
industries and companies in general tend to be prosperous. On the other hand, if the economy
is in recession, the performance of the company will be generally bad. Investors are concerned
with those variables in the economy which affect the performance of the company in which
they tend to invest. Study of these economic variables would give an idea about future
corporate earnings and payment of dividends and interest to investors.

MACRO ECONOMIC ANALYSIS

The analysis of the following factors indicates the trends in macroeconomic changes that
affect the risk and return on investment:
(i) Growth Rate of Gross Domestic Product: The gross domestic product is a measure
of the total production of final goods and services in the economy during a specified
period usually a year. The growth rate of GDP is the most important indicato~ of
the performance of the economy. The higher the growth rate of GDP, other thmgs
being equal, the more favourable it is for the stock market.
 SE CUIU I 1 ,... • . . . . .• uqc, t-.,~
f' rowth rntc r pre nl the ave ~~Q~ ANALYSIS @J
tc· Thi.: GO g of the economy, viz. the r'-'ge ()f ~ ,or.iot-1lC tc profit ability and a\t;o I ad to a d I' . .
8 3
'
th Rn · t r serv1 t~
'al Gr 0 "' rin ipn 1 1 cctor. c:es ~ ,. t cor~o ra. estor ' both of whi ch hav a f c in i_
n the discou nt rat applied by
•') todusIn three P · ulturJ ½ 'II\ equity in v . . avou rable impact on tock pri ces.
(It tes of the nnd th ' n n . r role in the indu strial sect Clii1 .00 . The effect of infl ation on the corporat
ra , ector, ' I )' n nH.\JO 1 t H or but ·1 ') 111fla t1 · • b f e s ctor t nd to be uneven While
indusll') - pnnics p n • I ngricultura sec or. ence sto '- ()n\ (VI t ·n indu stries may ene 1t, oth rs t nd to suffer I d t . h . ·
Pub
!id)' list d c~n,
service
'eel r nnd t ,c
• l ector.
' They look at
. Tl h'
the overall ind tnil/
c"'
llstr· ~~l
a cer a1 f their prod ucts and which d . n us ne t at enioy a stro ng
111.irket o~·t On the other hand ind ~ ~ot ~ome under the purview of price control
role in I1,e on the industr1c, different industries. 1e igher the gr la\ &toii. rnaY bene If . ·ce control tend t'o I us nes ave a weak and which come und er the
focu es more owth rntcs of . equal, the more favourabl e . ~\v\h r "-'~ . urvieW o pn ose.
s well as the gr th r things being It is fo a1~1i P of Payments, Forex Reserves and E h
a . I ,ector, o t lh \ . . Balance . . ' xc ange Rate : Balance of Pay ment
st (vitl Qef'c·it == Balance of Trade Def1c1t (Impo rts minus expor ) 8 • 'bl , l' k
indu nt a ~
marke · unts or
f about a quarter of the Indian
ec:
\ 1 . a1ance on ,.mV1S1 e 1e
. and in te res t ra tes (payment on accou t f · · 'bl • •
. 1.Aonsoons,
. Agriculture acco . d'rect with industry. H ence, the in 0 n%~
d. t and in l b . . . creas i a
wun sm ' . . . ° n mv1s1 es mmus receipt on
acco U nt of inv1s1bles). + Balance on account of ca pital account ( Repa ymen t on accoun t
'
(iit) in t linkages, irec significant earing m industrial e or d ·, fI
impo~n ltural production has a_ s using agricultural raw tnate . Plroducr' of Joan s minus receipt o oans)
of agncu Companie f d b ria s 10ii A balance of pay ments deficit depletes the forex reserves of the country and has an
ate performance. . are directly af ecte y the chang . as in11. t
corpor . nculture ff . d d . es 1n ri adve rse impact on the exchange rate; on the other hand a balance of paymen ts
1,mu inputs to ag . tend to be a ecte ue to indir agntlil
supp) .o Other companies a1s0 . . ect link '. surplus augm ents the force reserves of the coun try and has a favou rable impact on
production. . parts dynamism to the industrial sect ag~. the exchange rate.
d monsoons im b d or and b
A spell of goo d an . . a streak of a monsoons casts its sh d ~flt..
ck ket Likewise, a ow ·i .. . C acity Utilisation: An index designed to measure changes in the level of output
to the sto mar
. d strial sector an
d the stock market.
l ·
ov~ (v111) ap · I
in the industna sec. or O
t f th
~ econo~ y.
Th · ·
e mdex 1s grouped by both products
m u t lay an important ro e m most economies . (consumer goods, ~u~mess equ1~~-ent, intermed iate goods, and materials) and industry
(iv) Fiscal Defi O·t·• Govemmen 1 p budget as wel l as th e s ta t e b u d gets prep' lnc\ud·,
(manufacturing, mmmg, and utilities). The industrial sector of the economy repTesents
. omy Toe centra . d d f" ared
Indian econ · . enues expenditures an e 1C1t or surplu - only about 20% of GDP, ~ecau~e _changes in _GDP are heavily concentrated in the
rovides infonnation on rev , f . d' s. •ndustrial sector, changes m this mdex prov1de useful information on the current
P enues come more rom m irect taxes such as
In lndi a, governmentadl rev from direct taxes sueh as mcorne .
tax. The b
excise ~rowth of G_DP. lnfo:mation on !he overall level of resource utilization in the
d custom duty an 1ess . . . . t U1k~ economy which may m h1m provide:
an
government expenditure s go toward adm1mstration, m erest payment, defenCl • Information on the likely future course of inflation.
subsidies etc.
• Greater utilization will tend to increase inflation.
If Govemmen t Expe ndl'ture > Government Revenues then - Deficit
If Government Revenues > Government Expenditure then - Surplus (ix) Unemployment: The unemployment rate represents the percentage of employable
individuals who are actively looking fo r work within the coun ty. Unemployment
Investment analyst examines the government bud?et to assess how it is likil; has been a persistent problem in industrial economies during economic lowdowns
impact on the stock market. They generally classify favourable and unfav~1 over the last 200 years and is therefore used as a primary ind icator of the health of
influences as follows: ·1 an economy. In most cases, statistics are based on the number of people claiming
t.• .
unemployment benefits. A certain level of unemplo) ment is considered to be
I Elements I Favourable · Unfavourable unavoidable due to:
"
1. Structural changes in an economy.
Budget A reasonably balanced budget A budget with a high s~~
or deficit 2. Workers who are voluntary switching jobs.
level of debt A level of debt which can be A level of debt which is diffii This unavoidable level of unemployment is called the natural level of unemployment.
serviced comfortably to service (x) Institutional lending: A positive increase by institutional investors gives impetus to
Tax structure industrial grow th which in tum increases the consumption from the primary sector
A tax structure which provides A tax structure which proiil! therefore leading to overall growth. Similarly, a negative growth in the institutional
incentive for stock market disincentive for stock ma~
investment investors creates effect vice versa.
investment.
(xi) Productivity of Factors of Production: A positive increase in the productivity of
(v) Interest Rate· A nse 1 · t d 31sol,' factor of production increase the overall profitability hence leading to the development
to an increas·e • th nd' m ereS t rates depresses corporate profitability an hi·~ ~ of the economy and which automatically has positive impact on the stock market.
m e 1scount t 1· b h f w u•
an adverse impact O t k . ra e app 1ed by equity investors, ot O unr~
n s oc pnces. On the other hand, a fall in interest rates
 RITV ANALYSIS AND PORTFOLt
secu o ..,I\
§ . indus trinl wngcs impr?ves th e Purc1 . ~~Q~~ r,,iALysIS r.;-;-,
(xii) lndustri.il W.igc : lnc_r ,1 c in the (cmnnd fnctor lend in g to ccono111 ~<1 s1n~ h t
M\ 'f1
r40r,11C ~ h eco no mi c growth declines and the re is . ~
indu strial Inbour ':rnd in ( r ati , tock mnr k' et · ic gr ol\·tL .:CO p1,.,nse, tte·ve 1· mpact o n th e s tock ma rk,,t Th an _economic s lowdown. Thus, it
~
11

hn s n po I I\
·r , out] ok or ,c · bl
• St bilil)': A s ta · e eco no mi c - Pol · .
· '1 1
•!,
1 " · rec(-ss1on I' ·
i, as negab comes pess imis ti c about th e ma rket A ft . 5 1P5 into depressio n. The
. . I d Economic n Tl t bl b it1 ct1 1 inves tor e . . .
h re inves to r s ta rts 1t in ves ts and which . er it recovery
. pe n.o d h as been
( "') Status of Pohhc.i .in 1 . cd growth. 1c s a e ut Ion ~riv
x 111, f f , :mdb.i,111 bl . • g te 1r1, s ta rted w ~he s tock marke t. is automa tICally results a positive
is necessa ry or s IC,lC )_ ' .
1 ,rowth. Such s ta e po 11c1cs Cil n be rn, t• \ . act on .
olicies nrc nc1.: d cd for 111 d ustn.i g
. d economic . an d .
po l'f ica I f·nctors lnt1d e ori1Cr11,,,. 1rriP Economic Indicators and Th ei r
P I il
.. I
a stabl e pohtic.i . )'
tcm ex t t<; a n
· ·1
r.
cut long te rm po 1c1 es w 11ch Will
I. re \.y II y ~
~ lirik !\
Different r mpact on Stock Ma rk ets
---- Econontlc Indicators
stnbl e govcm mcnt ' ill have c c.ir ')' c1 nd indu s try. An invcstn,e nt 6l' coridu 1·1 ~NO _ 1
mpact on Stock Market
of th e tcconon , . . . <1 11 ~1 C1v
goo d pe r formnncc . . I f ctor and its impact on Lnves tni ' h t f, r sr-~~p
I 'ght of Lh1 cruc1a a l'r, t d can
afford to o c s1 ~ hnolog ical innovations lea d to ini eci1ir1~1, Vi". _ Growth
- Fa vou rable
(xiv) Technological ln~~vatioidis:_ cc vement in the agricultural product· P_roverri, · Decline
· d · I ductw1t)' a n 1mpro . . 1V1h, l1 11 - Unfavourabl e
m u Ina pro · •ch in turn improve m mves tn, ent ·,. ,~.. ·
d. omic grow l11 w 111 • sc '% Industrial Sector
lea mg to econ . . ti e bus in esses which have positively . enario 1 2,
result into more mves tor in , irnPac1 o/ Growth
- Favou rable
s tock market. .. . I, Decline
. . . A · f sh·uctural fac1hty 1s an econorny - Unfa vou rable
(xv) Infrastructural Fac1hhes: n in ra bl Good infrastructure faci!'n a1so affec~ Monsoon
stock ma rket favourably or unfa voura Y· . . . . 1 es have I, 3.
. h Good
impact on t e stoc k mar ket because good . mfrastructure . fac1ht1es requ . ired · Posi " - Favourable
owth and d evelopment of industries and compames etc .. Banking, in 1or~, Bad
5urar~ - Unfavourable
gr . .
telecommunication, transport an d goo d power sectors . . results
. into th e develo
Fiscal deficits
of the econom)' and which automatjcally has positive impact on the stock p~~
Surplus
and Industrial Policies of the Government: Econ~mic and indu, il\a~ - Favourable
(xvi) Economic .
Deficit
policies of an economy also affect the stock m~rket. If the~ ~re !1beral in nature: - Unfavourable
fi e ible, it will result in more investment which has poSitive impact on the llrij Interest rates
5.
market or vice versa. Low - Fa vourable
(xvii) Tax Structure: Tax structure of an economy_ als~ affects t~e stock m_arket. If the ~ High - Unfa vourable
exemptions and subsidies has been given, it will result mto more mvestors in ~
6, Accumulation of inventories
business whid1 have positive impact on the stock market.
- Increase
(xviii) Saving and Investment: That portion of GDP which is saved and invested is call,i - Favourable under inflation
saving and in vestments. Saving and investments are directly related for the groiit - Decrease
- Unfavourable under deflation
of an economy. Growth in an economy requires investment, which in turn, requrr~ 7. Balance of Payment
a considerable amount of domestic savings. More savings results into more investmeni Positive
which means more production, more demand and supply, better prices in the fulur, - Favourable
and consequently, higher business profits and a positive outlook for the stock mar(d Negative - Unfavourable
(xix) Foreign Investment: Foreign direct investment includes the equity share capil2 8. Employment
reinvested ea rnings of fo reign companies, intercompany debt transactions, short arl Increase - Favourable
long term loans, financial leasing, trade credits, investment made by foreign investoo Decrease - Unfavourable
etc. FD! helps in the upgrading of technology, skills and managerial capabilitiesarii 9.
bring mu?~
need ed capital into the economy. TI1ey also help in providing employmw
Economy
opportumhes. lnflow of capital helps the economy grow and has a position impact Boom - Favourable
on the s tock ma rkets. Thus, it will result into benefit for the investors. - Recession - Unfavourable
(xx) Stage of the Business Cycle· TI1ere are four ph f b . · an econom1 10.
• : c· ases o usmess eye1e 111 : Industrial Wages
as boom, recession, depression and recovery D • b . d econom)' 1
at its peak and growth of an industry and c. urmg .a hioom peno , _an ecord hi~ Increase - Favourable
turno ver and profits, which has positive i·m omtpanyth1s gh. Comparul esthr reces~~ Decrease
pac on e stock market. n e - Unfavourable
 ustrial Policies ~ t ~ll ,\Np.LVSIS I 8 7 I
· and Ind
Econorn1c Favo urable \
f
,o"'of-1IC
oiff1J
5
jon Indexes.· Th e d 'iff us1on
· ·index ts
t one total measure and it •
.
· a method w . . ..
hich combmes the different
· .
11, _ Stable Unfavourable 3· • tors in ° gives weak es s a d 5 t
ifl&ca . of data . The diffu sion index is also n
th f ·
reng o a particular
_ Un tabl e tiD"e se ri es . . . . caJI d a census or a composi e index.
. d Investments . Model Bwldmg: This lS a mathematical d . .
savings an - Favourable EconolJll' d of the economy. 1n·15 l hn. an sta heal application to forecas
12. _ tncrec1se 4. e future tren . ec tque can be used by trained technicians
- Unfavourable th . used to draw out relati on between ..., 0 or .
_ Dccreil e d it 15 · d . b more vanables. The teumique is
an rria ke one indepen ent v an . a le and independe·n t vana. bl e an d to draw out a
Employment Opportunities to . hip between these vanables. The answer of dr . these . . .
13, - Favourable 1at:1on5 . . awing relationships is to
- More re a forecast of direction as well as magnitude.
- Unfavourable
- Less get rtunistic Model Building: This method is the most . d 1 d .
Strength of Rupee in Forex Market 5. oppo sting method. This is also sectoral analysis of Gross w~ e YI upse d ectconomd,cl
14. - Favourable foreca d h . 1 auona ro u . o e
- Strong .J:ng This rnetho u ses t e national accounting data lo be bl t f f
Buil uu · · . d I . fl . a e o orecast or a
- Unfavourable future short-tez:n pen_o . t is a eXlble ~d reliable method of forecasting. The method
- \,Veak
of forecasting 15 to find out the t~ta1 income and the total demand fo r the foTecast
15. Tax Structure . d . To this. .are added the . envuonment. .conditions of poli~cal tabili'ty, econonuc
•
- Favourable peno u s
- Flexible and fiscaJ poliaes of the government, polices relating to tax and in erest rates. This
- Unfavourable rnust be added to_ gross domestic investment, government purchases of goods in
- Rigid
FOi services, cons~ption expenses and net exports. ~ e forecast has to be broken down
16.
- Favourable first by an estimate of the government sector which is to be divided again in O State
More
- Unfavourable Government and Central_Governme~t expenses. The gross private domestic investment
Less
is to be calculated by ad~g the busm~s expenses fo r plan, construction and equi pment
li. Housing Construction Activity changes in the level of business. The third sector which is to be la.1<en is the consumption
Increase in activity - Favourable sector relating to the personal consumption factoT. This sector is U::,7.Jally divided into
Decrease in activity - Unfavourable components of durable goods, non-durable goods and services. When da a has been
taken of all these sectors these are added up to get the fo recas• for the Gross ational
18. Personal Disposable Income
Product.
Increase - Favourable
Decrease - Unfavourable SIGNIFICANCE OF ECONOMIC ANALYSIS
FORECASTING TECHNIQUES An analyst must spend a little time probing the forces operating in the overall economy,
as well as influences peculiar to industries analyst is concerned with. It is so significant that
There are basically five economic forecasting techniques: a failure to examine overall economic influences is a naive error of assumincr0 that individual
companies follow their own private paths in a vacuum, which actually does not happen.
1. Surveys: It is a method of short term forecasting. It is broadly used to connr
future course of events in the economy. The method to do this is approximate ' ·.. It is important to predict the course of the national ernnomy becau_.~ of following points:
it is based on beliefs, notions and future budgeting of the government. It, howr- 1. It has been discovered that half the variability in the stock prices is explained by the
broadly indicates the future of events in the economy. movement of the overall economy.
2. Performance of the markets and the particular stocks is positively related to overall
2. ~co_n omic Indicators: It gives indication of the economic process through eye
economic performance.
timmgs. These projections are a method of getting indications of the future re!i-
to business depressions and business prosperity. This method although hli ' 3. Without a positive and healthy economic environment, corporations will find it difficuJt
to flourish over time. The future growth and prospects of industries and companies
a_dv~ntages of giving the future indications of the economy is not an exact meth.--.:
always tied to developments and growth in specific economic activities.
fm~mg_out the economic acfr, ity. It gives results approximately and is at t-6
4 · Economic activity affects corporate profits. An outlook of sagging economic growth
estimation of the future of the economic cond·ti·1 ans.
can lead to lower corporate profits as profits are based on key economic factors.
L---J
i
I ts.ts
en ender inv
5. Lower gro" th ra te can d ,"'vin
t r p j mi m and '
towards inve tments an "
6. Lower rates of sa, in dandl in vl
tower e .:uri ty pric an t iu purpose of economic analysis? Discu- s th
t IS th e . "' e te hnlqu= of
j.
w ti a
do yo
u mean by leading and lagginr ;,,dica
ors of th"' econ
= .,economic. anal t sis?
ECONOMIC INDICATORS wtiat the macro econ omic facto rs viould you . - omy · Give 2 EYamples.
z. .,.t are
lfJtl'-' . .,
consider before rnar i g .
in ,es en
. th d I ·c fo I rs di cu cd above, the re a re other si .
Besides e em gTap 11 . . gn1fica 3· de Cl•51on · om ic fact ors wo u Id you is mos in ere- "'d .
. . Th • bl t1 nt p diet the fu ture of fi nanaa 1 or economic I nt l"' econ . con d ::, in fo ecas . .,
indicators. e van a e 1< . • • T d . rends . ~'.11k .,ir,at . estiga t ing ma1 or sumer urable - go d I ing " you we e a
economic ind icators. l11e_e indica tors are omettme . idenh te a~ lcadmg, coi11cide,,1Qis ca11~·, ' v• st ,nv s sa es for ne· •
• anal Y u mean by economic ana lysis? V/ha fa _ ".I vea r ?
indicators and thei r help i often ugh t in fo reca ting an d m aking an analysis of hi Q~dlq , wtiat ~o? yo o, s mu::; be considered l eco o ic
. .t . . t e J.1, S· anal ysis .
The indicators are selected on the fo 11 owmg en en a. ec0r11 ••
• Economic sil!Tlificance
• Statistical adequaC)
• Timing Confo rmity Ill
1. Lead.ino Indicators: The leading indicators help in assessing the fu h.
o . . h . th •ure co
action. Thus, it indi cates that w hat is going. to ap~en in e economy. Theu~,
indexes of an econom) relate to a country's fiscal policy, monetary polin, I~
. . - 1, stack i
and state o f the capital m arket, labour pro d uchv1ty, consumer acti v'ity p· ~
. . . and ·
national p roduct. H ence, they provide help to the investor to predict the path gtc~
econom). of ~
2. Coincidental Indicators: The coincidental indicators are the economic facto
. rs re\2 .
to employment position in a country and other gross national product fact :
fi ors si,
as. th~ state of . in~ustrial . pr?duction, ~orpora~e p:o _ts and whole~a1e and prod •
p nce index. Comadenta1 mdicators unlike leading mdicators do not mdicate the fu ...
of the economy but present a fairly accurate picture of the current state of the econ ·
hence; it indicates the present position and state of the economy.
3. lagging Indicators: The change in coincidental indicators make the lagging indicate~
tum. Lagging indicators are identified with consumer price index, capital ex~
and commercial paper rates. So, it is an event which happens after the correspondit
economic cause occurs and hence confirms long-term trends, but they do not pre-k
them.
The leading, coincidental and lagging factors are useful insight into the economy's rurr~
and future position. It is also important for an investor from the point of view of asses.Ii:;
long- term investment.

SHORT ANSWER QUESTIONS

1. What do you mean by economic forecasting?
2. How is the economic growth related to stock prices?
3. What do you mean by economic indicators?
 '

INDUSTRY
ANALYSIS

INTRODUCTION
After conducting an _analysis of the economy, the An industry is a homogene-
t must look into vanous sectors of the economy in ous group of companies. In-
analys f various m . d ustnes.
. Ind us try ana1ys1s
. .ts a type of dustry ana lysis is requ ired
terms O • because risk and return of
. research that focuses on the status of an indus try each and every ind ustry is
busine 55 . . .
or an industrial sector. It mcludes a review of an industry's different.
recent performance, its current status and outlook for the
future. Industry analysis is required because risk and return of each and every industry
is different.

MEANING Of INDUSTRY
The industry has been defined as a homogeneous group of people doing a similar kind
of activity or similar work. But industry broadly covers all the economic activity happening
in a country to bring growth. A broad concept of industry would include all the factors of
production, transportation, trading activity and public utilities.
. 5?, in simple words, an industry is a homogeneous group of companies. That is, companies
Wilh Similar characteristic can be djvided into one industrial group. There are many bases on
which grouping
· o f companies can be done.
An industry is a group of.firms producing one hjpe of product witlr slight differences but with greater
scope for stabilization.
 ANALYSIS
sf~JAL
r,PLI 31 I Scale Indu stry: A small scale indu st . [!TI
J z Sfll . ry does not exceed 1 crore except
· ach1ne
rrtn respect
IS
th at in Which investment in
of . P1ant and
Characterislics f11' . ry h""-nd tools, drugs and pharmaceuticals a d certain speci fied items unde
of firm in i,osie 'n enhanced to ~ 5 crore. n sport good, where this in vestm r
has bee . ent
an industry
• 111 Size Industry: Medium size industry .
MedtU . . f ts that in which .
3. chiMry 1s m excess o SSI limit and u t investment in plant
and rna P O ~ 10 crore.
ScaJe Industry: Large scale industry is th t . .
Similar trade
4. Large_ ry in excess of t 10 crore. a in which inves tment in plant and
and services f11achif1e
. tor eased Classification
Propr1e ..
9, . . dustries are classified on the basis of ow hi
II1 thiS, in ners P pattern which are discussed
CLASSIFICATION Of INDUSTRIES
as below: . te Sector Industry: The private sector industry th t .
·
Industry can be classified on an any grounds which are clear fro 1 pnva . f . a m which the ·
15 t
· tirely by the pnvate or ore1gn companies The hi mves ment
is .en te players an d government h as given
. ·
full freedom to t P here lies with the
owners
Classification of Industries pnva .
nvate p 1ayers. se up any number of firms
by anY P
! P blic Sector Industry: The public sector industry is tha t in ~ hich th . . .
♦
Size
+
Proprietor + + 2 u . v e investment 1s
Use of Output Input . done entirely by. the gov~rnment and pnvate players are not allowed to invest and set
Wise Based Product
Based Based
firms in pubbc sector industry. For example arms and ammuruti t .
up ' - ons, a om.ic energy
etc.
ro enterprise asic
man scale apital Goods ~ OWth 3_ Joint Sector Industry: Joint Sec_tor Industry is that industry in which both the private
ediu size
Larg e scale ITT termedlary
Consumer Goods
t~~Clic
Defensive
players and the government (either state or central or both) are allowed to invest. In
this, both make investment and compete with each other. For example, insurance,
banking, telecom etc.

c. on the Basis of Use of Output

Private sector
Agro In this, industries can be classified on the basis of the use of the final product by the
Public sector Forest customers which are discussed below:
Jo int sector Marine
Metal 1. Basic Industry: Basic industry or core industry is an industry where the output or
Chemical final product of one industry is used as basic input such as steel, power, gas, coal etc.
by the other industries.

The above shown classification helps the investor to analyse the industry to findow 2. Capital Goods Industry: Capital goods industry is an industry where the fina l products
whether it is profitable to make an investment or not. are capital goods such as plant and machinery which are used by other industries for
A. Size - Wise Classification further production of goods and services.
3. Intermediary Industry: The firm in this industry produce goods which are used as
The industry can be I ·t· d al cl
operation T chn' 11 c assi ie as small, medium or large on the basis of its sc e raw material and ancillary products by the other industries. For example, cycle parts
· e ica Y scale of o ti b furthd
'. as under:pera on means the amount of investment. It can e
classified on four basis industry, industry manufacturing automobile parts etc.
1. Micro Enterprise· A · . . . I t anJ 4· Consumer Goods Industry: Consumer goods industry
· 1·s th at which produces goods
machin , d · micro enterprise 1s an enterprise where investment m Pan d
an services used for final consumption by t e consumer5· For example, FMCG, food
. . h
ery oes not exceed ~ 25 lakh.
processing industries etc.
 secuRn, ~, ......... --- · ·· -- • - ·"" ,

s
D, InP
ut eased
type of 1npu ' .
..
. t u ed the m d u tn s can be cl ass·1r-
. · 'C'd il .
~ftJAL
,~oLJ ofT'l Pa"Y·
ANALYSIS
It is in this cont •x t th a t th well divcrsif1 d
nny becJ usc w hil e the demand for
50
r;;---;-,
~
• company lo form a bet er than
0n
the basis of the . s ar th o e w hi ch u se ag ri cu ltura l prod ~ f()llr d 111c c rodu d co n:i:; reasin g. Si mil a rl y, th e input prices me/ roducts may be declining, that
,, iJlgfe ~ fT'l aY be d'u ct li ne, leading to differ nt margins an~n ~?st f~~ ors would vary from
e industn e , . Ll cls >1,1
Agro Based: 11,es le Suga r, Tea indu s try. ilr, ta~, .
1. f or cxamp ' h' h f lli· 3 f otner. e to pro a ,versified company is a be ler
or input. . d •e are those w 1c u se o res t bas d i,, {o dtlct _IJJ1 esto r·
Th e m us 1n e p ,
forest Based: es mple Pape r indu stry, Rubbe r etc. todlJq pro fof ,nv
2. ·at or input. For exa ' h' h . \ ai tJe 1 pICATORS IN ANALYSIS
rn atcn . d s tri es are those w ,c u se m a rine based r.,
B sed· These m u Prod
3, Marine a . · ut For exa mple, Fishery. llq~a ~f( J:l'I t is free to choose his or her own indicators lo a
1
. th
ateri al or ll1P · h' h I Ir '[he an~:wever, m any commonly adopt th e folio ·1ing fac o~:.yzing e prosp-2ctus of
rn . d ,stri es are those w JC u se m e ta s as raw 1,
I B sed· These m , . . . d . lilate .
4. Meta a · · d Jewellery, Alumm1um m u s tnes. tial 0 jndustrY· ance Factors: Performance factors like:
For exa mple, Gems an . . r Ir,~ ~Jl . (j) perform
. d·
8 ase ·
These industri es are those w hich u se chemical as • pas t Sa les
5· Chemical . . d • raw
·
input. For exa mp , ·
le Ink manufacturing m u s tn es . ma~ .: , • p ast Ea rnings
. JUJlent Factors: Environment factors like:
E. Product Based •') Envuo
(11 ·tud e o f government
On th e basis of th e final product manu fa ctured, the industry can be ca tegorised
. • Ath
ai • Labour co nditi ons
• Steel industry
• Co mpe titi ve con ditions
• Cement industry
• Technological p rogress
• Sofh-•.1 are industry
... tcome Factors: Outcome factors lime:
• Automobile industry (111) 0 U .
• Industry s hare pnces
• Pharmaceutical etc.
• Strengths and weaknesses
F. On the Basis of Business Cycle • Opportunities and threats
It can be classified as:
So the industry analysis s h o uld take into account the following factors amono others
0
(i) Growth Industry: This is an industry that is ex pected to grow consistently and • as infl;encing the performance o f the company, whose shares are O be analyzed:
growth may exceed the average grow th of the economy. For exa mple IT ·· d . "'
Biotechnology. ' 111 us:-, 1. The Past Performance of the Industry: Past sales and past earnino- for certain years
may be analyzed to forec~ t fu ture earnings. The cost tructure o the industry may
(ii) Cyclical Indus~: In this category of the industry, the firm s included are thoset:, also be analyzed to look into the leverages of the industry.
move closely with the rate o( industrial growth of the economy and fl uctu ate cyclic.::~ 2. The Performance of the Product and Technology of th e lndustry: If the analysts feel
as the economy fluctuates. For example, Consumer durabl es. that the demand for the prod u ct for a p articular indu try would soon vanish, no
(iii) ~efensive Industry: It is a grouping that includes firm s, w hich move steadilr 1c investment is made in tha t industry. In the age of rapid technological obsolence, the
t e economy and less than the average decline of the economy in a cyclical do1,~tuc degree of permanence h as become an important consideration in the industry analysis.
For example, Consumer non-durables.
3. Role of Government in the Industry: Investor should try to assess the probable role
At any point of time th b . .
called 5 1 • . d . ' ere may e mdustnes which are on the upswing of the Clci of government. Will it res tra in the ind ustry's growth? \ ill it provide financial or
1111s i111e 111 ustnes and th hi h . . . ·.
there are some grO\ th . d . ose w c are on the decline called sunset 111dustnes. In Ind:! other support? For example, in India, till a fe w years ago, the impact of several
st
TI,e engineering, pe~0 ~n ~ r;es like electronics and computers which are the key indu,iric electronic items was restricted but allowed at a later stage which has severally affected
like diamonds eng· ~nuca s and capital goods industries are in core sector. Few industr'c the Indian manufacturers.
, meenrtg etc are . th ,.
decadent industries At . m e export sector. Jute and cotton textiles are trr Government polices affect the industries d irectlv. Factors like tax subsidies an d tax
· present, telecommu · r c'
examples of sunrise industries. rnca ions, computer software, energy are so. holid~ys, regulations and pricing policy, En try ~d exit barriers set by governmen t
As refer to earlier performance of a ·l't and liberalization of licensing mus t b e analyzed. Government policies on environment
on the ex ternal factors of the ' con:'pany has been found to depend broadly up toJJ nd
a pollution control standards a ffect various ind ustries.
of input
· 11·ke proper lab economy and ind us t ry. Th e externalities depend upon ava•·1abili1·. 4
, our, water power a d . · d ;lll · labour Conditions: These are re lated to the industry and are influenced by environmenta l
' · n interrela tions be tween the economy, in u · factor. labour scenario in a p a rticul a r industry is very important. The numbe r of
 ..... - - . . . "'~(Q
~
~
. t'ng mode ha an impact on labou r p t.,f\~~,. NALYSIS ' •
d their opera ' . d h'1g I1 fix
. d c.:i rod -.tL JALA . E . ~
trade unions an .
I kO uts resu 1t in
los of production an
I d
. llcti \l'
• Pilul I lly ~
.,
1.1s1,i . e-Cycle Stages. ver indu stry passes throu h . ~
c
strikes and oc
. I d 11 d unsk11le a o
• d I b ur mus t be an<1 yzc · n~s. · ~tt,,,_
I\~ ·,1._ •"'" dtistrY
JJ1
Lie
can
id entified as follows:
h . .. I /
g different stages in its lifetime.
of skil e a t· For any indu try to urvi ve co rnper . ~11,f, ff1ge5 . Stage: In t c m1t1a first stage of .
1 011 1
5 Research and Oe\leloplmen · duct and production process rnu st h iri ti ' es' eert.Jlg d any industry th d
· . I rket t 1e pro ' 6e c ~ti fl, ·) pjofl logy is n ew an yet to reach the stag f ' e pro uct as well as
intemationa ma
depends on R&D. ,e e 11 ·penditurc on R&D shou 1d be s tudi ed °rnp~I' rlti,1
6efore i1,v1, ,
epren , d
0
(• jtS tech.no eurs are required to enter these ind: _perfection. It is the time when
1s 1r1 es The ind t
· vestment in indu st ry. .. triijki~ ~ entr . ,
1
growth onente and offering a lot of · . . us ry seems to be
m .. d·tions in the Market: The competitive condition . ~• pr
orri s1J1g,
is characte rized by introduction of a
op por:.tunities lo make f
pro it.
6. Compehti\lde C~ ;allowing questions in mind: s in lhQi ·5 stage new product d
be analyse WI ~du, fh.! cycle that encourages new product introducti ' an an upt~end in
( ) Whether ere ts th . barrier to entry or threat of ent.ry of new fir~ .
• · ..s 1n L
~. bU siness
· . asing rate. Compe n· hon · 1•s generated by th ons. Demand keep son growing .
a t t an industry put pressure on pnces and profit t11e i incre, e entry of n fi
New entran s o . . of ei( . ndu at an portunities. The rul e of survival 0 r the firtt t . ew rms to grab the
1<et op · · 'I es is applkabl d
Of etition among existing players 1s another dirnensi 15
1ing ~ 1 mar ature death while stronger one survi ves t e an weaker firms
(b) Exthr·tentt co:;tion the margins are bound to decrease. Indus~~- In cci5e ~ face prem o grow and expand.
oa comp . , · . . k . fies h . of rnple, 10-15 years ago, th e IT industry was in the . . .
. ·th· rate face this situation as firms see expansion at the rival' civ,ng 1. for exha e who had invested in this indu stry at th t /1oneenng stage tn 1ndia
grow . . s mark !1,., and t os a ime have reaped hi gher
(c) Wh ther there is a substitute product which can replace the . et lh~
returns. .
A ~!ability of a substitute product definitely affects the price cha given Prlld ·
rgeable •r°lli'- ~' ·on Stage: After the intense competition in the . .
vai
customer and hence affects pro f'it margm. .
(ii) Expa.11s1r companies survive and then these companies pc10neel~dng stag~, only the
7 Inter - Linkages with Other Industries: In the industry analysis, the int
1
5 tronge .
this is charactenzed by the hectic .activity of firms
°
on I ate their positi
. . th . on.
. and inter-linkages of one industry wit. h oth er m
. d ustnes
, s h ould be c erdep
. enctir 'fhus, - surviving e pionee ring
. . d d onside The market continues to grow but slowly offering ste d d
example the position of auto-ancillary mdustry epen s on the positio red. f)i stage. . h ' a Y an s 1ow growth
, f . d d
industry. Similarly, the demand o cement m ustry epends on the infras e~,n of th in sales of the indus~. It IS ~ ~ ase of consolidation wherein companies establishes
budget of the government. O'\Jcb;: bl e policies relating to d1v1dends and investments The pos·a· . .
dura . . .. · 1 on continues unttl
f ·t margin· declines due to fierce competition. Investment in thes . .
8. Cost Structure and Profitability: The cost structure affects the cost of produ . pro 1 • e companies JS 1ess
risky but offer higher returns.
profitability of the firm. Cost structure of the industry in terms of fixed andction_~~
costs must be analyzed. Factors like inventory turnover and asset turnover vaillri for example, computer hardware, fashion, colour televisio n, ~aint industry,
analrze~- -w hic~ is an indication of capacity ut~liz~t_ion of an industry. An:~;b automobiles industries etc. are in the expansion stage in India.
Profitab1hty ratios helps us understand the profitability of the industry. · r.
(iii) Stabilization Stage: Sl~~ly and ~adually, every industry matures. The growth rate
9. Nature of the Product and Demand: The products produced by industries are demana- slows down and the ability of the mdustry to sustain itself vanishes. This stage shows
by consumers and other industries. An investor must analyze the condition of ; signs of slow progress and also prospects of decay. New companies rarely enter these
feeder industry as well as the end user industry to assess the demand for indus~ industries and the existing one faces difficulties to maintain. o investor should enter
goods. 1~ ca~e of c~nsumer goods industry, a change in consumer preferena a stagrtating industry. Rather, the existing holding should be disposed off.
technological innovations and substitute products affect the demand .
For example, during eighties and nineties, two industries namely Woollen Knitting
IO. ~apa~ity Installed and Utilised: The demand for industrial products in the econom
1 Yam and Black and white TV have faced stagrtation. Moped (ungeared hvo wheeler
~ estin:ated by the Planning Commission and the government, and the unitsar,
auto) had already stagnated much before that.
given licensed capacity on the basis of these estimates. If the demand is risinp
e~pected and the market is good for the product, the utilisation of capacity will ~ (iv) Decay Stage: From stagnation stage, the industry gradually enters into the decline
higher. If, howev_er, the quality of the product is poor, competition is high and fufit stage. An industry reaches this stage when it fails to detect the death signal and
are other _const~~mts to the availability of inputs and there are labour problems, 11:t ~mplement- proactively or reactively-appropriate strategies. Obsolescence manifests
the capac11' utilisation will be low and profitability will be poor.
itself, affecting a decline in sales, profit, dividends and share prices. Change in consumer
,ANALYTICAL FRAMEWORK preferences, introduction of new products, change in customs or other compulsions
may be responsible for the decline of an industry.
We ~ave identified various tac_tors and questions relating to industry analysis. Now,,11 ind stFor example, with the development of highly technical and digital cameras, the
shall consider the frameworks within which the analysi·s b · d
may e carne ou.
t
r1d-wide. w/
ry_ for the manually operated real size negative film camera industry is decaying
 p.r,rt-. -
s1rtJAL
[ The Stage the Industry Llfecycle s'4"LI NlJf AcTURJNG:

Industry Life Cycle

,o (i)~Afa cilitiCS.es of sea le
r:conorn1 .
Process and Feature (ii) ·ty Utilisation
Size New Product and
Adaptation
Harvest capaCl . .
Technology Adoption (iii) prod uch v1 ty.
Decline u1bour
(i") • f cturing costs
ty1anu a
Abandon (v) terial availability
JZ w rna
(viJ a log}' of process
.. fechJlO
(VII) N RESOURCES:
J-JVMA
(0) Leadership
Introduction (i) ment capabilities
!v'fartage
(ii)
Worker attitudes
DA Time (iii) kill development
(iv) S tural f]exi b·1·
1 1ty
(V) 5tfUC
Industrial Relations
·(vi)
Although the industry life cycle theory appears to be very simple, it is no so.
Proper identification of the life cycle stage is difficult. The internal analysis I!\ Pra · swoT ANALYSIS FOR THE INDUSTRY
periodically to evaluat: strengths and we~knesses either by inside company e~:be
outside consultants. This can be done by using a form such as the on shown in th f ijv~ industry analysis need not be sta ti~ and based on historical fa cts only. The co verage of
e ollO\
table: t sis should be broadened to include the expected risk of the indu stry. Risk •
the ana 1y d . b·t· . . . is
STRENGTHS WEAKNESSES ANALYSIS d in terms of expecte vana 1 1ty m return. Business mk of an indus1-rt1 as reflect d
measure . . . . . . .. J , e
in the total profit ~f t~e industry ~s well as th~ profit ~f the md'.VIdu~ firm, emanates from
Factor Performance Importance several factors. This nsk pattern 1s reflected m the difference m pnce behaviour at stock
Neutral ; . Minor Major · High MediUIII exchanges.
(A) MARKETING : The movement in marke~ price of equity shares belonging to different industries may
differ in direction as well as m degree. In order to assess and predict the behaviour and
(i) Popularity and regard
performance of an industry and to identify the relevant factors, SWOT analysis should be
(ii) Relative market share made for the given industry. This analysis consists of the assessment and evaluation of
(iii) Quality image Strength, Weakness, Opportunities and Threats to an industry. Out of these four facets of
(iv) Service reputation SWOT, first two i.e., Strength and Weaknesses are internal to an industry and the other
two i.e., Opportunities and Threats are external to an industry. For example, low elasticity
(v) Distribution costs
of demand for the product is strength, but price control imposed by the government is a
(vi) Sales force weakness.
(vii) Market location • Strength: Strength of an industry refers to its capacity and comparative advantage in
(B) FINANCE: the economy. Other elements that may add to the strength of an industry are: high
(i) Cost of Capital quality products, good customer service, restriction on entry of competitive product
etc.
(ii) Funds availability
For example, the existing research and development facilities and the greater depende~ce
(iii) Financial Stability
?n allopathic drugs are two elements contributing to the strength of pharmaceutical
(iv) Profitability Industry in India.
 to u 1c:: .... J .. •- ·-- - ·- · - -~ ... 111 n1tatio ··"\Qt~ ,..,..,.. .... -
s· weaJ<n•SS stT)
refers,n,vay from meeting its
.
target. ns in th . '\
e 1n.1 . factor for new entr ~
weaJ<n" · th• kindu cture facility, rail-road links etc. •o ,,sffl JAL company 1s· a maior 9,11
1~
• h'ch
I keep of infrastru are Wea1. 0" . g a . f I anl!; The .
w I~ ;tarnn panies, economies o sea e, customer SIVitdt . capital required startin
11 ,pfe, Lac 111 •
. 1.nd1a. . !'\tie ss Of ew corn main barriers for entrants. tng costs, resis tance of . . g
for exa ;,,dustry •• 5 refers to the expectation of favourabJ ,~ J1 s are existing
·srn u• tun1tte aJ . b e Situ I C player . Power of Buyers: Buyers are a cornp ~·t·
touri ·res: Oppor 'f' d by a trend an, ys1s or y a pattern of ch 'l tio j11111g . d b tt . . ell tve force Th
Opp ortun1 J )' be idenh ie angitit> nfor v,rg• ;upenor an e er service and induce rival a . ey can bargain fo,
"~
5t
• · du r;,. It 111a Id d' d. ci cons,. z, price cut1, they can depress the profitability of supp? mong ~0 '.11petitors. If they are
rfu , ters. Bargamin
ll'l f ence5·
re er 1 •ng pre ference from go to 1amon Jewellery ha s roll
1 po"'.' when - g power of buyers
P . ,,1, ,, c1ian£ d·aniond industry. 6 ght,
For om . for the I • • o, r is hJg)i chasing power is relatively large to the sell
Its pur er.
ortunil1cs an unfavourable situation that has a potent· 1 l
• ·t hing costs are low.
opp ts 1 efers to • h tal t Its sWI C .
. 11 reats r . d try Threats may a1so come m t e shape of end
nu-ea .. of an m us . new OPr a~~ir • It poses strong threat to. backward. integration.
the ""' i,nce Odoq'
industry. 'b l'sation of import policy in India, import of Ch· 11
• . ·n Power of Suppliers: Supphecs can exert competitive fo . .
F c:cm11ple, after h. dera triest.' . l tnese g 3 aargaJnt gn raise prices, lower quality and curtail the rce tn an industry
or d many m us in India sue 1 as toys etc. Oodsk-~ , h y ca range of free •
as t e p0 werful suppliers can affect the profitability of lh b . services they
t1,reatene . I of Industries - PORTER'S FIVE FORCES MODEL f Pave
rovide.
. Profit Potenha or Ind strong bargaining power when- e uyer mdus try. Suppliers
~~ ~
c • •

h suppliers dominate the industry and there are ma b

Analysis ode! is a framework for industry analysis and busin • A few . ny uyers
Toe porter
five force m d .
. 1p ter in 1979. It uses concepts to etermme the cornpetjf . at~
ess str There are no substitutes for the product supplied .
t
by M1chae or
developmenb'lit . Thi s framewor k 1s . fl uencect bytvefi tnteltl1~.·
. m • The SWI•tching cost of buyers is high.
1 , and attrac ti'veness of an industry. Ve fo
and profita ) f
which are clear rom following diagram: re~ • If supp liers pose a threat of forward integration.
m ong Existing Players: Firms in an industry compete on the bas· f .
Rivalry a . . . 1s o pnce,
PORTER'S FIVE FORCES MODEL . Promotions, serv1ees
4. .uahty, . . etc. A firms attempt
. to improve its competitive pos1•n.·on
qrovo kes retaliatory action
. from others. This can affect the profitability of industry.
Potential tvalry tends to be high when -
entrants
• Th en U mber of competitors . is large.
Threat of new entrants • Few firms are capable of engaging in competitive battle.

Bargaining power r-------:-:-:-----i Bargaining power • Industry growth is sluggish forcing the firms to acquire a larger market share.
of suppliers Industry competitors of buyers ,------, • The level of fixed cost are high forcing the firms to achieve higher capacity utilization.
Suppliers r - - - - - - r I Rivalry among existing r - - - - - - , Buyers
players • The industry has high exit barriers.
5 Th at from the Substitutes: All firms in an industry face competition from industries
Threat of substitutes · pr;ucing substitute's products. Substitute product may limit the profit potential of
the industry. The threat of substitute products is high when-
Substitutes • The price performance tradeoffs offered by substitutes is attractive.
• The switching costs for buyer is low.
Five forces shaping competition and determining profitability in industry • The substitute products are produced by industry earning superior profits.
Imphcations
. . to the Investor: This
. approa ch 1s
. use fuI tO the
· analyst . as it ?' h
cnves insights,
POSTER'S FIVE FORCES MODE't not apparent merits and demerits of investment m. a given
. m
• d ustry at a o·
!7,ven time. What I e
investor has to do is
O
1· Th reat f New Entrants: The entry of new
· · eases. ther
companies in the market mer (i) Collect relevant data to identify the industry life cycle stage.
co r · .
. mp, •hon and reduces profitability. The entry and exit barriers or a part1cu
f . i,1a (ii) Forecast the probable life period of the stage.
1ndustr)' d 'd h d gulatton
eci e t e number of new entrants. GovP.rnment rules an re (iii) Decide whether to buy, hold or sell.

•
~ NDUSTRY ANALYSIS
,
QUES OF I . .
TECHNI rt term) fo r evalu ating industry f
term an - actors
The techniques .(1 ong Th : are: are b .
. th foll owing sections. . •• It is the process wherebv th ~"- WOT analysis for any indus ry of yo .
rn e · AnJ 1 t • • e anaJ ' 0
ut S u c 0 1~P
d Use and Re . on determine the demand for the out Yst Oi . carrl h factors that ha ve the mos sig ific:c ·
E
1. n . l th ta or tha I . In lh"JS process Put of , l· ·n t e e o .I
tempts to d1a e demand ana ) sis. th th1,- .• z. e,cpl 01 life cycle exhibits ~he status of e i du 5 try a d . e u~ (s e;; , gs.
at , nd-u d 5 f ' e 1· 1: rndustr"( f investors. Elucidate ? 11
9 ' "=:S e d e O e • '/
Th is is also known a_ tha exp1a.u:n• the deman d . o me lik
o the fact
. ors ar
nv~!r •. .
.. 3· d exit or .
to unco\·er the fa d and fo r the pro uct, e disposable 1. e fr-'\J.1 \ an ..,ample of an industry you feel has P ..•
· · the em • . nco a as an industry t o ·invest ·rn. V/hy have :,,,I0 le CO 1po- ·•u· ,e co itio 5 Oi yo,u
n e,..
Givect·on
,
owerful in e, 1a1run . . f demand and per capita 1 income. 1 me!',~ ... ,. , se 1ected ► · - •
P . . el ct1an· o . . . n Ord r ,, :;.. . sele
I
f ur factors cons ider to be the mos i D _.
•
1::, " c s, 'f?
consurnpbon, pnre a:: • d tati t1cal techniques h ke regres . er > ·. • 55 0 O ? l I a-- . ·
affect deman , 'd tify h . s1on a 1:.. oiscu ·ndustries . ;.>;,>r2 1s1 g
the fac or ha t used- These he1~ 1 : n t e important fa na11,:, · S· ·ff rent 1 •
correlation ha\·e often been re of their lirrutabons. ctorSi\•, · ~ d1 e
What do y
ou mean by industry ana lysis? \//ha · facto 5
st be co s· ~~red i s•ru _, rel
, . e shoul be a\,·a . :i.;..
Ho,,e\er, on
2. Inp~t Output Analr~ ~
detail Input o anal)
. .
~ry
ah' is helps in understandmg dem and
use.fuJ technique_ that reflects the
1
fl:
Ysis in g;-:--
, •mdudinu intermediate steps in the p od of go-.rj. :·
6- ana 1ysis?

. thro h th., econom,, o . r Uctj 0 i ,

sernces
th
uo :_.i
ds proct==i om
fr · the raw matenal stage through to co
fl nsumpr ,,.
n P:·
as e ~oo . ected . the input output table that re ects the pattern f ir ~- Ill
informabon tS refl th ~ stacre of consumption of final goods. This isodconsutr;-..
at all stag~, no• at e It migh~ also indicate the growth or decline of .onde to~
any changing attems. . lil Us ·
ih rate of different mdustry should be forecasted by ·
3 Growth Rate: The gro,, . d fu consic·
· . ·ca1 d On the ~owth rate is estimate , ture values of earn;n <::
histon ata. ce o . ch . f . .."'1gs Or"
ma\' be foreca::,-t. Since the growth _rate tS 51:1 an 1rnbport31:t actor m detenninin,;
• . _ • onl)· its size but its duration .must e estimated. Sometimes ~
stock pnces, n 0 _ . , P<"'-
expire, competition ,,,;th in an industry becom~s more aggressive because foreign~
begin to compete, economically depressed penods occur or other factors ca USe gro-.~
rate to drop.

CONCLUSION
The earnings potential and riskiness of a firm are linked to the prospects of the ind12
to which it belongs. The prospects of various industries, in tum are largely influenced br:-:
developmen of macro economy. The macro economy is the overall economic environmc.::
which all firms operate. The key variables describe the state of macro economy are- CT.;
sa\'ings and in\'estments, industrial growth rate etc. Many economists believe that::
development ~f_alrnost every industry may be analyzed in terms of its life cycle. The systmz:
stu~)- of speafic features and characteristics are also important for making the investrr.c:
deas1ons.

SHORT ANSWER QUESTIONS

1. Why i~ industry analysis important?
2. What 1s SWOT analysis?
3. Defin e th,. industry l'f
. - , e cycle stages.
4. What 1s an industry?
 COfVIPANY
ANALYSIS

1NTRODUCTION -
third element of the EIC approach to fundamental At the fi na l stage of
~e- the company analysis. In the earlier chapters, the tundamenta l ana lys is, the
alys!S is .
an . analysis and industry analysis have attempted to investor ana ly ses t he
econonuctheir impact on t h e earrungs
· o f a company. Sales of compan y. In compa ny
show ·.n dustries (automo b 1· 1es e t c. ) move m · h th e analysis, th e analyst tries to
· lin e wit
some 1 forecast the future
business cycles while of others (food etc.). do not. We have
discussed the relevance of economy and industry analysis and the manner in which it is
conducted. In this chapter, we will discuss the company level analysis. In company level
analysis, the focus point is the relationship between revenues and expenses of the furn and
the economic and industry changes.

In the company analysis the investment analyst collect all the information related to the
company and evaluates the present and future value of the stock. In this analysis, all the
facto~s affecting the earnings of a particular company are considered. The risk and return
assoaated with the purchase of a stock is analyzed to take a better investment decisions. The
valdu?tion process depends upon the investor ability to elicit information from the relationship
an inter-relati ons hi P among the company related variables. Up-to date 1·ruormation
· 1s· reqwre
· d
on the statu 5 d . . . · · ·
will be an trends m the economy, particular industries and firms. Success m mvestmg
largely dependent on:
• Disc
d
·
Th .ISovenng new and credible information rapidly and in more details
. l
°
· th en th ers d 0 ·
. . I
epends upon the analyst ability to develop a system that coup es ongma

•
 f forming 'P ctation about the Pro · '"ti~Qt
§ thoughts) a
nd unique ways o variou public and private source:Pec1, fot . \
thi purpo e L of irir 'nd,· . ,11NALVSIS .. 7
compan '. For
alyzed.
.
111 0 a to a cerium the relevance of .
Ot~ ' Ii,,,Q
~
•1 ~N" f Sales: Stab,1, ty of sales will pro 'd @]
an, . r judgem , k info , ,or-tP 51abilitr o I Stnbi lity in sal s wi ll all ow f v, be stable earning f . 10.3
• Applying super; udg ment depends upon ones . nowlectge •nct /~'lio, 1 • equa . I f . or etter f or a fin,, h
d J, bei ng Aggregate sa es o va rious industries v inanciaJ plannin , ot er _things
cision at han · J I of analysis to the data, the mvestor for1n )(PQrie lr1 ll f plant., sa le should have sa me Pultern a th ary in their deg g and Utilisa ~on
e
applying . us tooI sthe alternatives
va no r
ava1·1 a bl e to l11m.
. 'lilt ates eipnc,
1 ' '- II~ ocorrtPcanYIs t needs to be noted here is that s at of th e .ndustry.r e of stab'! ty and
. d ement abou . . '<1,1 !
and JU g . tl e internal and extemal information need to b ••, . g t 1a ffi . saIes are d 1 11
ne tlun the operating e a ency of the plant and I . ei"'ndent on two .
. d . ' 1d events made pu bl'1c b y fi rms concerning th e. SllJct·ied.
For compan)' 'analyst 0 n, mely, before the market competiti veness ca he input constraints. other rna1or
;,,1t,m1ntio11 cons1s
P'J V
~
• ts of ata an
. f mation sour
f' . . e1r op
ces generated internally by a irm are its financial stat erillioh1 e111J
. d epen d en tl y ou ts1'd e tl1e cornp erne nts. t'Is·'hf~
~, ,ors, t1I ese also
f,1c111Yse TING POLICIES n be concluded. One needs to
rinciple m or ' . those generated m an oUN
f in/ormation are any, 11, , ,
so11ras o t to internal sources. ey Pt~;~ 1
ACC nalys
t start analysis of company, analyst sh Id
. f ou see it
supplemen . . t nh 1 'IJ1 a, r
.f. ket and economic env1ronmen may e ance the p f · P Before a lty interpretation o corporate earnings d s accounting poU . .,.,_
The speet IC mar . . I fi ' .. er orl'l)
·sk of fau ·ng or selling stock. The accounting van~nti consequent bad judgaees. i nere
. d of time; it 1s ultimately t 1e rm s own capab1hties th t . ~nee a rt keept Id h . a ons in r ment in
company for a penolong period of time. For this reason the firm in the sa a ~tit iudgof_a js ' nasing, . y i terns cou c ange earnings to a grea t eporting cost exp
formance over a . . th b me tnct eI~ ,c dinar
P"d extraor policies are: extent so f
• rne o the accounting, ense,
per to one another to ascertain. which one 1s e est performer, . i.e. wh·tch f Ush,.
~
comnared ·•y ar
d tperforms its competitors. To ana1yse a company, ratio analys ~oations orn;ory Pricing: Due to change in prices, the value of the .

~.,
' "'1
1 1
U1e most! yanuseodu tools . Ratios are popular because they are easily understoo1sdare
frequent andtheni~,"~ J, In" • during an operating penod. Several methods f . Inventory rnay change
computed with ease. , greatly d · These are:
develope . o inventory Pricing have been
.
S t or market va lue methods 1n which case i .
. e a large number of ratios may be calculated the individual should seJ t
b stmesuited to his or her specific . . purpose. Thi s se lection . w1·11 depend on the type ec ftho. se t~ (i) Cavera
. os ge cost of inventory or the market price · nventory is Priced at lower of
are
and the e objective interest of the nwestigator
. . . th e f'1rm.
m o II1dUst,,.
•1 ( IFO i e. first in first out method in which the invent . .
ii) FI ' . d th t f d . ory IS pnced at th
FACTORS 1 t purchases an e cos o goo s first acquired are d' . e cost of
as or last m
... LIFO . fust
. out method 1.s iust
. opposite of the aFIFO Justed IJ1 cost of sales.
rneth

~
A. MARKETING (w) f inventory is on basis of first purchases and last purchas ~d. ~ere, cost
cost of sales.
o . es co t ad1usted in
Th m
The first variable that influences future earnings_ in terms of_ both quality and quan~ . ventory pricing method affects profitability and inve.ntorv co-ts - ts f th
is the marketing results of the firm m companson to mdustry. Tlus m tum 1s determine; ~ e
company as reported m · _ba Iance sheet. ln an inflationary
. . ·1
situation, , 1.e. asse o e
FIFO wiU reflect
the share of the company in the industry, growth of its sales and stability of sales. A eom""' higher profits because of mcrease m the carrying inventory co t whereas LIFO method
in strong competitive position will provide greater earnings with more certainty than ; will make the mventory costs only lustoncal cost and thus will under-evaluate the
company in a poor competitive position. The company with diversified activity should , assets of the company and will reflect lesser profits.
competitive in all areas of its production activity. 2
, Depreciation Methods: The depreciation for wear and tear of the machinery and so
1. Sales: The ntpee amount of annual sales and its share of market help to determU111 reduction in value of assets is provided as fixed expenses. The change in providing
company's relaLive competitive position within the industry and how successful it hli provision for depreciation will thus affect net income and also affect the valuation of
been in meeting competition, Here to rank the company, the companies shouM • the assets. Higher depreciation will reduce income and undervalue the fixed asse~ of
comparable in like product groups, Also size is an excellent guide to competiti" the firm. The three depreciation methods used are:
position. Leading companies are most likely to be leaders of future whereas small (i) Straight line Method: The depreciation amount for a particular item is constant
companies may not survive the competition. The selection criterion is to select lar~e over years till it has nil book va lue.
companies
country. to reduce business risk which trends to reduce variability of the yield of°' Iii) Sum of the year's digit: The depreciation amount is initially more and wilt reduce

2. Growth in Sales: The annual growth in sales is equally if not more important
the amount of sale in determining the competitive position of the company. Expan
r~ year to year. Its value is proportion to the balance life of the machinery.
!iii) Double Declining Balance: The depreciation amount is double in the yea, fot
I and double the straight line percentage in sub~equent years, thus proVJdtng a faS t
annual sales and adequate financing firm will be in a better position to earn mon_)
~
rate of depreciation. .
w , ereas iSIZe
growth of sales protects firm from economic fluctuations, growth m
· rofits. · ales '~1115
0

3· N n- Operating Income: Non- operatin° income . sud1 as d'vidend

1 income,
• h Id
rnterest,
etc.,5 generally
1
occur to the firms. To avoid
tJ error
. . dge ment
Of JU . thesef mcomes
sonss such
ou
be tuct ·ed. In certain accounting penod,
. the non·op eratin"ti mcome or rea
 :,ii;..,. ... •·- - '-l\J t.11\
14r-,_ Th
f f. ·ed n t of th company, niny f ~~Q~i. ~ 1,-t ·ngs per Shore: e terrn rash flo . r,;;-;:-,
I
. or os
es due to sa le o ,xfor while nna. Iysmg
. bl , There ,
. l
I1e conip n fc- ct thn ·it~)
an,, " Iv ,o~' C ,h E•"'' lion that remains after all cash w IS Used to descnb h ~
~
0
~ gains , apprcctn ) · • tio • !\t~
11 a~t r\ 6- ',n opcr> •ned by adding non- rash expeO:' Penses have been e e <ash gen,,. , d
1
0 f the compan) b mdy ed. . . .
· come
hould also 1 .1 providmg for the prov1s1on of
)' w 11 e . corp
a11r
'l
~ow is11 obtatthe preference shares dividend Caes hsuch as deprecia ttou tracted. Th.e cash 1
,,o ....,inus . b · s earn· n to the f.
in over. The Co~pan Moreover, certain retunds or demands of "tot, la teS u t1'ons divid ed y number of equity h 1ngs per share Pro 11 after
.J. Tax carrytaken full prov1s101~. ti· c current year profit allocation. TJ ~rE'\,ialJ \ tat1r1'1#0 pera
th Y give an estim • ate o f discretion s fuares · Cash arnin are .the c~sh now-
t have , a· t d in . lb'l'l)' as well as tot a assets and l e aph , ,Yi 1
no· ht l,rnve been a JU S e roftta e c,use e ary nds ove, Which gs are Significant
11
1 net 111 ,.,rflh 111
1 b< trol. management ha,
m,g . .
prov is ton will affect tie P
. .dence of corpora tc tax and tax carryover should b "'"'th "'••
e a11a1 Oftl con ND pOLICY
am . The ma . y~d •~
comp . . considerahon.
taken mto at~
pJIIJl)f the cases it is observed that the management .
p, ,nost of se the dividends only when they expect th tries_ lo have a stabled" .d
c PROFITABILITY . ti are buying the right to future ear . !fl d iftcrea 'd ds in future.
,,oI1~1
'"" aflate of div1 en
ey Will be able l . iv1 end
o maintain the
• secunty, ,ey th f th . n1ngs I
When investor buys a unt stability and grow o ese earnings Paru; "'~I\ r,g11er r STRUCTURE
. terested in income amo . . d Investors usually select those companj Ul~rly11 tu Jf.AL ,.
• c>P the equity holders mvestment can be magn·fi d .
:s. ~
are mnt and when they will be rece1ve~e earning will follow the growth of saJ es that ~••
a;:::~ and growing sales as
th
f b7; _the relationship between the sales and ¾
s n the assumption that the pro ita liti_ nship of expenses and sales, one needs tarnings, ~,)
~• 'f}le rettlrn ofinn ancing instead of equity financing. This u 1 e f bfi'! using financial leverage
debt . hich . . se o nanciaJ ct·
md1cate the extent t h'
'
1 using italisation rahos w 1verage rnay be
mely gross pro 1t margm, net profit marg· y ~
o T tudy the re a 10 f' . o stud ·~ ·e 501 dbycap
e f h
O f debt or pre erence s ares.
Th ese ratios are als o wf1ch the f f'
remain 1nn inances its
d constant. o s . · .,
f the profitability ratios, na , h in, eat'l ,. 01ea use O re erred as debt rati
tren s o . d earnings per s are. ''111! .,,ets by e Shares: The preference share capital has nev b . os.
power, return on eqmty "'.' Profit Margin is operating income divided b """ p ferenc f er een a sicm; ~ t
1. reP It is used as source o capital in the tight rnone k o<u.u can source of
1. Gross Profit Ma'.gm: Gross fit margin will indicate the increase in opera~••·" 0
increasing trend m gross pro . g inco,
ca ital. . t use of preference sh ares leads to some degr Y mar f .et. From . shar eh oId ers
•ew pom, ee o 1everage tn fina Th
because of reduction in operating expenses. . VI impact upon equity capital is not as great as that of debt b nee. e
Jeveragd~vidends are not tax deductible. A high degree of fecause the preference
. . . Net Profit Margin is the net profit after tax represented as percen , share
2. Net Profit Margin.' d Thi shall normally have the same trend as the Gross Piao, . al 1tructure tends . .
to create mstability. .
by leading to a pre
higherence
d shares in . the
of sale for a peno . s 1 . hi t l f rofu cap1t s . h if th . egree of eanungs
. ti. on in the eqwty s ares e earnmgs of the company nuctu t On
Margm . and represen ts d'rr ectly investors gain re b ahons thp ofi sa ,es1o the I firm. 1he _ vana . . h . a e. e other
Profit margm . attemp ts to make a comparison etween ed rm s Ieve . of sales and.i,, effect occurs on ~~g per eqwt_y s are m the special case of convertible preference
fi b
overall pro ta 1·lity aft er deducting all expenses,
• Thicosts ·an· taxes. ful · t gives
k' a pictureQ shares. The poss1b1lity of con~ers10n of a preference share into equity shares might
ch al
ea s es rupee as a Pe rcentage of a net profit. . s ratio
h 1s use m f ma mg
· a foreoi dilute the earnings of ~e eq_wty shares. The pref~rence shares should be used only
while. se1ecting · eqw·ty share"~- It helps in assessmg
. . t e damountb fo prnf1t per !\ii'r-« when it enhances the finan□aJ strength and earrungs of the company.
value. lf th e ne t profit margin . moves up, it 1s cons1dere to e avourable. 2_ Debt: Debt has an important role in long -term financing of firms. It has advantage
3. Earrung· power: Eanun'g power is the earning of the company . net fiof taxes,· me-. of low cost of capital, because interest is tax deductible for the shareholders and has
as a percentage of total assets. Thus earning power 1s ?r~ss pro t ~argm on sale a good return for investors to make good market acceptability. The leverage impact of
times the ratio of sales to total assets. To study the vanahon of ea~g po\\'er, (l', debt can be highly beneficial to the equity shareholders. However, at the time of
needs to study both gross profit margin and sales to total assets ratio.
recession this gives a great deal of instability in earnings per share and can lead to
4. Return on Equity: Rt!turn on Equity is the most important ratio to _ det~rminet1Y bankruptcy. Therefore, it is important to limit the debt to a reasonable level depending
intrinsic value of the security. This will help to an idea to the investor if his expectr! on the firm's earning limit and its fixed assets.
level of return can be met by the firm. If the return increases from ye~r to year,n
reflects the positive performance of the firm from the point of view of mve5trnenl (i) Earning Limit of Debt: The amount of earnings is one way of determining whether
debt is excessive. This is a measure of absolute probability. The hvo ratios used for
5. Earnings per Share: Earnings per Share are the ratio of firm's total earnings,_net ~ this are:
taxes minus the preference dividend over the number of equity shares. This ra~
reflects the profit earned by each share. This is because it is calculated on the bas~ Number of times fixed charges earned, i.e., the ratio of net income after taxes to
the number of shares outstanding in a firm. It enables comparison the term cash . the interest liability of the debt.
is used to describe the cash generated from operation that remains after all cas 1 N
umber of times fixed and contingent . expenses su ch as preferred dividend th
expenses
another. have been subtracted. The cash flow is obtained between one share ar.
1
reqwrements,
. interest, etc, earned 1.e.,
. the ra ti' o Of net income after taxes to e
fixed and contingent expenses.
~
~
. Debt: The .is cl limit of the deb t stntes lh~~,u ~l\~~Q ,.ALYSJ:5
els Limit of f d bl to the fi xed as ct of the company f' lherl.' t~t
rA'~""ne JeveI pany
(iil /1.SS onablc limit o c d d to be below 0.5 i.e. Debt shouict ·or
reos . is recommcn e
thjs ratio ti an Equity.
rather less ,
NCIAL AN ALYSIS ..
ioi 'h,,,.,J\
not In ll~tr r I
Otl.' lh '·\'
<lti
n,,
f/~
i.,
cO 0
A

p.s a
•ng eq
to ano ther d iffers in i effcc d

corn
moves towa rds a fu ll cap _cpc nd ing upon the
ual will ha ve a smaller effe ct up
t,ei . 1 Expenditure: Future ea rn ing depend
aq ty a g·
•:en increase in
on earning.
pr t ~
~
operating ra te.
output. 0th .
er things
'
f, FINA . th liquidity and solvency positions of the co 5
,, capita ew corporate fund s wisely and on the ability of th
l the financial analys'.ds, ~ good for investment unless it has a g rnPari y ilte ,.. est n 10 manage th e mana
ood r. . ~~a iJ1" . al fund s is referred to as capi tal exp d. e old effi cien Th _gernent to
o
n
N company can
be cons• ere
the curren
1
t financi al position, t 1e current asse ts its
1
. " corn fi ~
' '-lttetit l'ri t
1
of caP'~re profitability of the company. ; '~'.•· This serves as a !ide mves1rnen1 ~
sition. To assess . b'lities and cash flow ana ys1s need to be c . Positio t)•r,·
po . 'th current 11a 1 arr ed t) a , the /uen capital equipment and sa les and futu~e •hve and definite reJatio o determ_ine
relationship W1 • ent ratio is the ratio of current assets lo 1 Gtit. r~, b•tv'e roved to around _100%, the finn cannot : rnmgs. Once the operao::'lup_ ex15~
t Ratio• The curr f CUrrent I has JJ11P plant. A better indica tion of capital Xpand Without more g e~ficiency
1. Curren · to determine the ability o a company to pay 't i<lbiJ
h I 5 the company
on le ~
21 . • s sh it1l1 the new f'-<penditu · exJX>nd1ture i
eP ful f a company to have a : ratio to adequately . al expendjture and the existing fixed assets re ts the relationshi ..__ or
~
It ay be use or . th f' , b' . cover . rtii d ca pit • P ~hveen
m . th rrent ratio the better 1s e trm s a 1hty to Pay h •ts liaL· NAGEMENT
The rugher e cu . ti' 1..: s ort-t uil1~
. bl tO have a• very high current• ra o as t1us would . . etrn dtt{ .
is not adv1sa e • • I.nd1cat tf, r,tAl most factor one should consider whe .
. t . low profit- yielding assets. The impact on the firm Will b e tao ..,-,.. sing e · . n investing ·
mvestmen m . . . . . e Unfav 11,e . its management. Having estab]jshed th -~ a company and one f
Q 'ck Acid Test Ratio: It is also known as liquidity ratio. It is a rat· O\Jr i ked, 1s . . ) . e competitive .. o ten
2. w or . . h . Io of 1 overloO . dustry (or industries, qualitati ve company aJ . POS1tion of a corn
b li . 'dated into cash m a relatively s orter time to the current . as~~~ • its !I1 ,,-J an ys1s turns Pany
can e qm f' . th h 1•abiliti { ~\lithiJl ality of a companJ s management. It is upon the ali next to an evaJuatfo
an idea of cash position of the irm m e s ort run. Generally 1· . es ill
~
. of the qu ent that the future of the company rests S qu ty, competence and vision nf
gihv:d be 1.0. if a firm's sales are stable., it may reflect a lower liqu -'ct ·•qu,cti~ agem • ome experts b Li o
SO I J~Qij ti>< JllOll 's management may be the single most important inf! e eve that the quality
3_ Collection Period: It is a ratio of receivables to sales represented in terins of 0· of cornpanali success. A company can have strong financi al t . uence on its future profitability
d over . bl f s atements for ex
of days of sales. This ratio indicates the cash management and the credit Poli nu an all bureaucratic and mcapa e o responding quickly to chan . ' . amp Ie, and yet be
firm. 'Y of over anagement quality, the analyst must understand h gmg hustness cond itions. To
4 Inventory Turnover: Inventory Turnover is a ratio of sales to inventory d assess Ill starting with a definition.
involves, w at the work of management
· on the inventory management of the fi rm. an refl~ A good, competent management can make a company .
s. Working Capital T~mover:_ This is the ratio of net_ sales to net :'orking capitzj t agement can destroy a thri · grow
vmg company. Indian corporat his while a weak, tne
· ffi aent
·
man . .
here an able and V1s1onary management has worked wonders fo e tory has
. many ex_amp 1es
reflects on the working capital management of the firm. These ratios are sicm;~
determining the ability of the company to finance sale growth. A declininge,• u.ucar:1-
ratior: wrices. Sunil Mittal of Bharti Airtel, Deepak Parekh of HDFC is l r ,comchparues and theu stock
indicate the need for a more efficient use of a previously invested capital. A ratio~ P
management of the companies · h eaded by strong leadership
' he\, hSU dexamples where th e
is too high would reflect that more working capital was needed. significant wealth for the investors. as eIpe companies create
G. OPERATING EFFICIENCY In India, management can be broadly divided into two types:

The operating efficiency and the earnings of the company are directly influenced bjr !. Family management: Family management companies are those that have at the helm
company's operating characteristic. A company that is constantly expanding its phy£a a member of the owner or controlling family. The chairman or the chi~' ti.
ffi · all a execu . ve
facilities and continues to operate at full capacity is more likely to produce profits and earn, o cer is ~su y a member of the controlling family and the boa.rd of Directors are
in the future. A company that is expanding and maintaining a high operating rate with a~ peopled either by member of the famjly or their friends and associates. The advantage
of such compani · th l al f
break - even point will be a profitable company. A company with the stable operating raid es ISown.
e oy ty amily members would have to the company which
they consider their
have more stable revenues; income from sales is the result of efficient use of capital a% 2
combined with raw material, labour and management. For growth of sales, the capit~~ • Professional management: Professionally managed companies are those that are
base should expand preferably from funds generated internally through company's reputalkt m~aged by professionals who are employees of the company. In such companies, the
1. Operating Rate: The operating efficiency can be judged from the utilisation of b chief executive officer often does not even have a financial stake in the company. The
professional m · · J
plant capacity also known as the operating rate. The higher the operating rate_ ~ anager is a career employee and he remains at the seat of power so ong
higher the earning per share. Moreover, a change in operating rate of a companyIii as he meets •the company's business targets. One disadvantage of professionally managed
compani
.. es is that the professional manager may leave the company for better pay and
perquisites offered by another company.
-
~
FRAM EwoRK Of
coMPA N
SECURl'fY
y ANALYSIS_______
f company
ANALYSIS AND PORTFOLIO t.t

analysis arc:
l\t-41\Qt
'1t~)

,o~p~
r,l'i fit
~ALySIS
MPs = EPS X P/E rati o
E rario ;s an ;mpmtant '.•Uo frequently used b a .
~
~
'
major componcnts .
O
. 1 analysts . includes: v,e Pl O f an equHy shace. It os h equently "Po,t { nalyst on detem,; 0 ; lhe
value qu oted in the inves tm ent community.
widely e in the fin ancial press
0 8 and
1l1c two
• I Ana
tysis: F1nancia
v 3Jue·. 11,c asset value of a securit·y is' dete . n Rule:
(i) Financiat Earning ·f tl e firm d educting the claims off' tl'tli nl"
Value vs. lue o , , I f" ltl'l"i's ., ~ vedsJO . th th"
(a) Asses h 1·quidating va set value of t 1e trm over lh eredt' . er the P/E ratio, o er mgs remainjng the sa .
. ting l e I • • g net as d b e O\Jt i r,r
esuma . the rema1mn . usually estimate y consu1tar ~land • value
f-{igh o f an equjty share. me, higher would be the
and allocattng ssel value ts ion lvith in,1
.hares of stock. 11,e a . assets values and/or : the P/E ratio, other things remaining th
s . , appraises . Lower o f an equity share.
• value e sam e, lower would be th e
• A specialist "'ho . book value of the firm. . .
t who gives h . . . Analysis: Based m ~e financial data available in inco
An accountan alysis focus t eir attention on th
• . Investment an b h e tren (c) jtat:JO ce sheets relevant ratios may be calculated and me statement and
.
Earnings Analysis : t d factors like dividends, . onus
I b li s ares, right share d1 1,, balan
fin ano
·aJ soundness of a company. analyzed to appraise the
.
earrungs and the re a e ket value O f the share. It 1s e eved h that the appr s, all!
apprea· •ation of the mar
's perfonnanc e are market price per s are (MPS) "''
"~d 0 Pti.i~
eal'tti .
s. No. Inclicator
Ratios
indices for a company n~ (A) Liquidity
(i) Current Ratio
per share (EPS) . .dend on Preference Shares
N t Profit - 0 IVI
(ii) Liquid Ratio
EPS = e Number of Equity Shares (B) Solvency
(i) Debt-€quity Ratio
This approach helps us to provide a measure of fu
..
15
(b) Quantitative AnalyS - d uantitative factors. The methods common! tu~ (ii) Return on In vestment
value of equity share base on q y~
(ili) Profit Margin
d this approach are: d th
un er
. ted Method·• Dividend discounte me al od
f . is based 0n fr (C) Profitability (iv) Fixed assets to totaJ as.sets
Dividend D1scoun . stment is the present v ue o its future reh,-
. th alue of an mve hi ...,1~1 (i) Gross profit margin
premise that e v
The present value cal~ate y d b discounting the future returns, w ch are divid~
(ii) Net Profit Margin
in the formula, thus, is In growth case the formula will be: (iii) Return on Investment
The Zero-grow th C.as e·· zero- '
(iv) Earnings per share
D1
V =- (v) Dividend yield ratio
K
v = Value of Share (vi) P/E Ratio
01 = Dividend per share (ii) Non-Financial Analysis: Non-financial analysis is also important in evaluating the
K = Required rate of return . . worth of a company for investing in securities. This could be obtained b gathering
and analyzing information about companies, published in the media, the stock
Constant Growth Case: Wh en d.IVI"dends grow in all future penods at a unifor.:
rate •g;, the formula will be: exchange, director annual reports and prospectus. Non-financial analysis includes
internal factors as well as external factors.
D1
V =-- (a) Internal Factors: Internal factors include analysis of the following factors:
K-g • History and business of the company
V = Value of Share • Top management team
0 1 = Dividend per share
• Collaboration agreements
K = Required rate of return • Product range
g = Growth Rate
• Future plans of expansion/diversification
Models Based on Price Ratio Analysis: According to this method, lhe prit:e ~
an equity share is calculated by the following formula: • Research & development
• Market standing-competition and market share
- • Corpor.1te soc1n
SECURITY
ANALYSIS AND PORTFOLIO ~
.
. . 't Industrial rela tions scenario and
. l r ,.;pon. 1b1h Y·
~N~Qt
t.i,~l
1
,
orA'
,.,,.1
or e .in
,.,.,.1,,tSIS rT1 operating sources and non opcraf
ra ted fro the earnings of a company:
e gefle effect on
. sales
[o
•ng sources. The followi f •
~

ng actors

Corporilte image etc. . ternnl (actors, the external environ

ti"v ge in
o,an •n cost
• . Be ides the e in . ll1ent t (o) ge J
(b) External f;ictors. surviv.il and jn,ilge. ~lijt~d o,an . rnetho d
(b) ciat1on
to the company I oePre f resources
• Stntutor) Contro s (C) oeptetion o ounting method.
• Government Policy d) r)' ace
( 111verito t cost of inventory
• Industry life cycle stage (e) ernen
izeptac . s + other expenses
• Business cycle stage (0 5
salar1e
v,1c1ge , and other taxes.
• Environmentalism (g ) flle tax
• Consumerism, etc. (ti) rncoertten t of Eamings: C
Nfeast1r Profit == Sales - ost of Goods Sold (COGS)
CIAL PERFORMANCE OF l1.1
EVALUATING THE FINA N
G~~
~
. .
EBITDA == Gross profit- Operating Expenses
COMPANY ~-~-----.:__--- - - : -~ - - - - -
pany is evaluated on the basis of qualitati
EBIT == EBITDA - (Depreciation and Amortization)
The financial performance of the com.I . . Ve factors
EBT == EBIT - Interest
any ana ys1s.
and quantitative factors are com P EAT == EBT - Tax

A Qualitative Factors ings per share): EPS gives the overall picture of th rf
EPS (Earn e pe ormance of the
• . . f th t affect the value of a company are: (a )
The qualitaave actors a I d . cornpanY•
. hich a company makes money. t escnbes com Net Income - Dividends on Preference Shar
1. Business Model: The way m wgeneration, nature of expenses, organization s~anys EPS == Average Outstanding Shares es
operations, mode of revenue Clute
and its sales and marketing effort. Earnings multiple): The price earnings ratio reflects th .
d capable management teams generate profits. Managem (b) PIE Multiple (Price
"llin t f f . e pnce
2 Management: Good an d I ent investors are w1 g o pa.y or every rup~e o earrung per share. It is calculated
· . h t t d obi·ectives of the company an create va ue for all th
should attam t e s a e . . e in retrospective or pr~spective manner. A bgh P/E ratio indjcates high Exfectations
stakeholders. The criterion used for manage~ent analysis is management discussion of the market regar~g the growth of the company's future earnings. Investors
and analysis, management ownership of eqmty stake. compare the P/E ratio of company to that of the industry and market.
3. Corpora te Govern ance: It refers to the set of systems and practices put in place by the . Market price per share
d f • · d af P/E ratio == . No. of time
company to ensure accountability, transparency an aimess m or er to s eguard the Earrungs per share
interest of all the stakeholders. Areas of corporate governance are
2. Financial Leverage: The degree of utilization of borrowed funds in a business is
(a) Structure of board of directors
known as the financial leverage. It involves the selection of appropriate financing mix,
(b) Financial and information transparency proportion of long term debt and equity capital (Net worth) i.e., capital structure of
(c) Stakeholders' rights a company. A high degree of financial leverage results in high interest payments. This
4. Corporate Culture: It refers to the collective beliefs, values, systems and processes of : will affect the net profits to equity holders.
the company. Every company has set of values and goals that help to define what the . . Total Debt
Financial Leverage = - - - - - - - -
business is about. The basis of corporate culture is expressed in terms of the policies Share holder's equity
and procedures adopted in the company's functioning.
Degree of Financial Leverage (DFL) % change in EPS
B. Quantitative Factors =
% change in EBIT
It includes:
Or
1· Eam_ings of th e company: Earnings decide its stock value in the market. Gro~ing
De EBIT
earnings result in high v I ti
a ua on o
f the stock. Earnings are operatirlg profits. Earnings gree of Financial Leverage (DFL) =
EBIT - Interest (EBT)
 -,#- . -
SEOJR.ITY AN LYSIS AND PORTfouo
lL"-eS
era e is
e
,'1'" ,.
cot''"'· fftlfit,,nod·
,. J F
aJ1
.. ~LysIS
d

f)O'"''
toss Account It hows th rofi
the Sales, expenses, and = d l_ass
It s-ho"
and Cash Flo--w Statement It sh .
OWs th SO
de bv
es tncurrt'd -
~
COmpanv d .
to opera e. . u
~
n

rating leve f a:11 d urces and . .

3. F·nancial Statements ap hcaoon of funds.
results in a • of I . .
alis1S investor in deternurung the financial
einOper: · tJ' t,el - ~e pie an alysis that are pe rfo rmed to asee . and p of the
JI ·olls siJl1 rtain the finan cial . . company.
= Change in . ,-Jfl_ are: . .
. -
le Cost)
f1 ~)
"-r
.:ve f 1 nanoa1 Statement: H ere d t f
parau d .th . . a a rom th
positi on of the

(olfl ts i.S compare w1 similar data from th . e cu rrent yea r·5 f1 .

1· tell1en . e Previeus year'5 fina nanaal
sta declin f
A .,a]ysis: It shows the grO\ th and ncia) statements.
rend ~· e o sale o· 6
2- 'f Size Statement Common size balan h ' pro l over the years.
- FC . . colJllilon
:,.
· t as a r--
f .._ i
. .
ce s ee shm ,
nPTcentage o toLaJ assets for assets and . \S each item in \.._,
each item U<Uance
_ ~ 1 ro:n ·tn·eness of a company can be assessed by ~:ilities- Co~on S1Z£ mco_me statement shows each item of as a f'ercenta e of total
1-
)ja sales- With common SIZe statements compariso €Xpen_<:.e as a percenta
cs: of net . es ns can be made between firms ef
,-r.
0 -
c;-,.~
-~~ 1 ,. market
.
share of annual sales helps• in detPnn;-:_
• • -•UUJUJ tg a coni:
djffere11t SIZJ · • • o
• , \•,i thin the ind ustry. If market share ~ high the compan P<:-y1 d flow Analys1S: It IS a statement of the sources d . _
~- full . . an applie2oon of funds.
~ . " rompetiti.on success~y. While assessmg the market shar! ~-i'.l ~ flow Analyst5: It shows cash inflow and outflo\ f
5. Ca5 h . .
..ny should also be co11S1dered.
..up7 ~~ v o a cnmpany durino the
tio .Analysis: Rabos summanze the data for easy unde:rstandin _ year.
of Sales: A company with rap1d growth in sales is better for shar 6. :erpretations of company financial + operation health. o- compansons and
,,. with stagnant growth rate. Investors pref~r a large company ~~i
financial Ratio Analysis:
is zbl:e O w ithstand the business cy cle. Grow th m sales results in gro.,,-th _t
(i) Liquidity Ratios (ability to meet short-term financial obliga tions)
~~ .
Stabrnty of Sales: A company with stable sales revenue will have more L•
(ii) Lev~ge Ratios (use of debt)
•
ezmings- \Vide variation in sales lead to variation in capacity utilization. Tur:~.: (iii) Turnover Ratios (asset management or efficie..,cy ratios)
in market share indicates a declining trend for the company even if the salfS ~ (iv) Profitability Ratios (Reflect profitability)
stable. Stability of shares should be compared to market share. --
(i) Liquidity Ratios: it includes:
• Production Efficiency: Production efficien~ means producing the maximum outp.: • Measure ability to pay maturing obligations
at minimum cost per unit of output. Tius measures how well the productio:
process is perfo rming. Increasing efficiency boosts the capacity of the busir6. Current assets
without any change in number of inputs employed. Production efficiency ena~ • Current ratio = Current liabilities
the firm to produce goods at a lower cost than competitors and generate lllOl? · A .d . Current assets - Inventories
profits. Production efficiency results in increase in profitability, Low operati<m • Quick ratio or a test ratio =
Current liabilities
costs, Optim um use of company resources, Enhanced competitiveness and maria
(ii) leverage or Debt Ratios: Measure extent to which firm uses debt to finance asset
share and superior return to th e inves tor.
investment (risk attribute)
Financial Analysis Total Debt
Debt-equity ratio =
~t inv~lves analyzing the financial statements of the company from various view paint> Equity (Net Worth)
The fmanaa l statements give the hi storical and current information of the company's operation, Total Debt to Total Assets Ratio
I li,.,tori ca l fin ancia l s tatements help to predict the future.
• Deb . (Current liabilities+ long - term debt)
"lhc fin ancia l statements of the com pany me
. l u d e: t to asset ratio =
Total assets
1· Balance _Sheet: It shows the status of a company's financial position at the end of tit
• 1nterest coverage ratio = EBIT
year. It is snapshot of company's Assets, Liabiliti~s and Equity.
Interest
~ secUR
ITV ANALYSIS AND PORTFOLlo
. . Measure effecti veness of ass t
~~N
/\tab,
RJltOS , c e ma ·it~ Net Profits
~ . [;{ficicncY Net sales nag'-'"' )
~ r Ratios r) = - - - - - - - ·• ,~~l Equity
0
(iiil rum ' '" •r (times per yea Average inventory
, 1tin10V~ Net Profits Sales
1nvcntof) ~ X T X Total Assets
Sales otal Assets -
er =
Total assets Equjty -
J"--cl tuJ110V Ra tio 1 Rati o 2 Ra .
10IJI - Sales average ho 3
Ratio 1 = NPM, Ratio 2 = TAT0 .
. asset tum
over = fixed assets Net , Ratio 3 = Equity
, f1,rd Net Credit Sales
tu111 over = Average Debtors ,,i.1ltiP1ief stern suggests that ROE (which dri ves stock . .
I ( fi JV' pont Sy ...,,ent and debt management. pnce) IS a functi on of
~ 00
Debtor . t ~~~• ~
• profits relative o sa es pro t margi I
.. Ratios: Me;1sures . n ratios) "' set J1l
(h•I profitability Gross profit (Sales - COCS) t!ol, as if\ Earnings
c<I' Growth Rate == Retention ratio X ROE
mal'Cln = Sales th
Gross pro fit · o-
• Operating profits (Gross Profit - OE) , Grow ·on Ra 11-0 == Retained earnings /Net Income·,
I{etenll
. profit Margin = Sales • ANCIAL RATIOS FOR EVALUATING PERFORM
, aperanng F FIN,... . ANCE
Net Profit (PAT) ~Sf O . 5 establish the numencal or quantitative relationshi be
, Net profit margin = Sales f jJ1aflda1 raho ent to ascertain strengths and weaknesses of a firmp tween two figures
6Jlllf1CI·al. statern
. and historical performance. It h elps various interestedas well. as its current
of a al n0s1t1on
• Rate of return ratios
Net Profit (PAT) ,,,nd r - rtain aspect o f a firm' . s perf ormance. F'manaal
.
ratios help in evalParties
tin lo make. an
Ill.:;- ation of ce . ys· ua g performance
, Return on Assets (ROA) = Total Assets ev.,u fOl)owrng wa .
thfOugh ting and Planning: The trend in costs, sales profi ts and th f
Net Profit 1. f 0 recas by computing
. . f . ' o er acts can be
ratios o re 1evant accounting figures of I t f . .
, Return on Equity (ROE) = Stockholder Equity 1cnown . h I f . as ew years. This
tren d
analysis with the
. .ti.
e p o ratios may be useful for forecastin d
g an p
lannin
· g
Excludes preferred stock balances future business activ1 es.
eting: Budget is an estimate of future activities on the basis of past expe .
(v) Valuation Ratios: 2 Budg . b d d fi nence.
, Earnings per share (EPS): · financial ratios help to estimate u gete gures. For example, sales budget may be
prepared with the help of analysis of past sales.
Net Income - Dividends on Preference Shares
• EPS = 3• Measurement of Operating Efficiency: Financial ratio analysis indicates the degree of
Average Outstanding Shares
efficiency in the management and utilisation of its assets. Different activity ratios
Markel price per share indicate the operational efficiency. In fact, solvency of a furn depends upon the sales
• PIE ratio = Earnings per share revenues generated by utilizing its assets.
. 'd d . .Id Annual dividend 4. Communication of Financial Information: Financial ratios are effective means of
• DtVJ en yie = - -----
Price per share communication and play a vital role in informing the position of and progress made
by the business concern to the owners or other parties.
• Dividend payout = Dividends Per Share (DPS) 5. Control of Performance and Cost Financial ratios may also be used for control of
Earnings Per Share (EPS) perfonnances of the different divisions or departments of an undertaking as well as
control of costs.
• Book value per share = Net worth 6• ln~e~-firm Comparison: Comparison of performance o~ ~wo ~r more firms r~veals
Number of shares efficient and inefficient firms, thereby enabling the ineffiaent firms lo adopt s~ilab~e
• Market price to Book Value( P/B ratio) = Market Price Per Share measures for improving their efficiency. The best way of inter-firm companson is
~o compare the relevant ratios of the organisation with the average ratios of lhe
Book Value Per Share industry.

1
_....-- RITY ANALYSIS AND PORTFoll ,-,AL-'(SIS _ _
sec U . . o t-1/\ti rfi /4 _ e Af1alys 1s:. Ratios .ir~ tool s of quilntitative . ~ 1
. . . Financi al raho analysis helps to ~~~~
O~pP.
1
.11tilat " . . ored while computmg the ratios F ana lysis only and ~
~ . of Liquidity Pos~:,o:•ying ability of a fi~m. Liquidity ::~~ss the Ii t~ C Qt.la re ign
,. tors a. rily mean soun
d 1· 'd
,qu, positi on when
. or exa rnple hi
, a gh current ratio
9ual1tative
-. tndicJltO~, , hort-term de / 1elp in credit anaJys1s by banks, c ?s inct · %1~ faCI necessa sisting of mostly obsolete items cu rrent asse ts include ,may
' f' ,itit,n ,.t ., . ~rm to pay an , red,tors lea,~ 111 ,,o to•1 "" con · a arge
1 '' h t ' . d
T l\' of the ' loans. ilnd ~h
1
·nven ssing: T e erm win ow-dressing'
.1t•1 , '1· ·r.-: (I( short-term I cy Position: Financial ratio analy . . o1~lr 1 -Dre h mea ns pr .
,ttl'P ,~ . rm So ven . sis is WirtdoW s in such a way ~o _s o~ a better position than w ese~ting the fin anci al
· . . of Long-le . capacity of a firm. Long-term solv ills0
1 dicJtlOn debt-paying d. ency ll~ 6, i~tef11ent rate of depreoahon 1s charged, an item f hat 11 actually is. If f
n h 1t,n -term the long-term ere 1tors, security Po* · Q1. s" )oW h .. o revenu , or
-,;s t e . oncem Io . anal lion 'IJ ·nstance, nditure etc. l e position of the concern m b e expense is treated as
· "' · ~r is a pnme c f a business. It 1s measured by th Ysts , rJf, \pita! e)(hpe t much better than what it is. Ratios com ayt de made to appea r in the
,rn111'1: . I owners o . . . e lev "nq '
c s ee . h fi . pu e from s ch b
rn.~n t •rnd potentta (j b"lity ra
h·os ,.vhich indicate the earning po,..
•ver erage;Ca t~.' balance ed for scanning t e nane1al position of th b . u alance sheet
,tn;durc and pro itla ~ shows the strength and weakness of a firrn _and oPer P1~1 t be us e us1ness
· . . Ratio ana ys1s . 1n th_j at n cann° . po· ce Level: Fixed assets show the posin·o t ·
t'ffiarnC)- fit bility: The management 1s always co
1
s tes0o..? s 111 . . n s atemen t t
• f Overall Pro a k h th ncernect , '4. chaJlge t reflect the changes m pnce level. Thus, it mak a c?st only. Hence,
. JndicJhon o . .1 , of the fim,. 11,ey want to now w e er the firrn ha with 7, does no es comparison diffi I
it ti·onshjp Must: Proper care should be taken t tud cut .
0, •rall rrofitabih )
•ts short-tenn as '
veil as long-term obligations to its credit
. ..
s the ab·i¾
ors to al Re Ia . h. o s y only s ch fi
h: meet 1 ·ts ,vners and secure optimum uti 11sation of th ' ensur ·1
11~ caus
8· ve a caus e-and-effect relabons 1p; otherwise ratios wi ll b . u gu res as
bl tum to , o "d d e ass ei . . on1Y e rrusleadin
rea.:a na e re 'bl . the ratios are cons1 ere together. ets of , ha unt for one Variable: Smee ratios accoun t f g.
firm This is poss1 e '1 a11 . . . . 1't • 5 Acco . .
, J{atJO 1 ays give correct picture smce several other va ri bl
or on1y one va · bl th
na e, ey
· S'ckness: A company 1s sick when 1t fails to gen 9
caJIJl ot a wnomic conditions, avail abill' ty of resources etc. should
.. a bes ksuch. Govern
. al of Corpora 1e i
10. Sign .
. .d. . . p
. d suffers a severe liqm 1ty cns1s. roper ratio anal . rofi1,..
erate p . menI
ntmuous basis an h . l ys1s c . ., olicy, eco . . e ept m mind while
a ro sickness in advance so t at time y measures can b an ~v, P reting rat10s.
signal of corpora Ie . e lake interp F" 'a] D
-preven t the occurrence · of such sickness.. . n to
seasona 1 Factors Affect manc1 d f
ata: Proper care must be take h . .
n w ben IIinterpreting
10. hng ratios caJculate or seasona 1 b·usmess.
.
For example an
. . • -making: Financial ratio anaJys1s helps to take decisions l'k counw• . . , um re a company
11 He.lps m 0 eas1on . . bank I • , e Whe1L. ac . :... c high inventory dunng ramy seasol" 2nd for the rest of y •ts .
• 1 ds on credit to a firm, whether oans will be made av . b "I:! rnaintau.., . ear I inventory
to supp )' goo . . . _ a, 1a leetc
. lif' - of Financial Statements: Financial ratio analysis makes . ]eve I be comes 25% of .the b. seasonal inventory level. Hence, liquidity ratios and .
d . mven 1ory
u. Slillp ,ca 110n · . . . 11 easyi , turnover ratio will gwe iase picture.
grasp the relationship behveen vanous items and helps m understanding the finana~
statements.
SHORi- ANSWER QUESTIONS
Limitations of Ratio Analysis
The technique of ratio analysis is a very u~eful device for m~g a study of the finana~ significance of ratio analysis .
health of a firm. But it has some limitations which must not be lost sight of before undertaking mean by Company Analysis?
ch IDillysis.
Some of these limitations are:
LONG ANSWER QUESTIONS
1. limitations of Financial Statements: Ratios are calculated from the information
recorded in the financial statements. But financial statements suffer from a number d
limitations and may, therefore, affect the quality of ratio analysis. 1. What :s the use of ratio analysis? How will you calculate intrinsic value of a share?
2. What do you mean by Company Analysis? What financial statements are helpful in
2. Historical Information: Financial statements provide historical information. They do understanding the company's prospects?
not reflect current conditions. Hence, ii is not useful in predicting the future.
3 3. How does ratio analysis reflect the financial health of a company?
· ~iffere~t Acco~ting Policies: Different accounting policies regarding val~ation_d 4
· A ratio spread amounts to buying a call option and selling two call options. The exerci~e
mventones, charging depreciation etc. make the accounting data and accounting rab05 Price of the option purchased is loss than that of th~ two options sold. How does th15
of two firms non-comparable. st
rategy differ from a more regular bull or bear spread?
4 5
· lack of Sta.nd ard of Comparison: No fixed standards can be laid down for ideal rati~ · (i) Explain some of the key ratios that you will be considering before inveSting in a
st
~or .~_ample, ament ratio is said to be ideal if current assets are twice the ~ ock. Can you depend only on these ratios for making the decision? (ii_)Discuss at that
sta9
~bilities. But this conclusion may not be justifiable in case of those concerns w~ e in the industrial cycle you would like to discover an industry. Ju 5t1 fy your dee s,on.
6
. ve adbecquate a.rrangements with their bankers for providing funds when lhey ~
11
' What are the methods adopted to analyse financial statements of th e company?
may perfect! I·d l I·f • an CUIJtl"
·abilities. Y ea current assets are equal to or slightly more th

•••
f
 TECHNICAL
ANA,Lvs,s

JNTRODUCTION
cth ods used to ana lyze securities a u make r;:~~-:--:-----
The. m . .
t decisions f a ll in . •re
, t o t wo very broad categories:
ifl'te~tmcntal ana lysis and techni ca l analysis, Fundam en tal !:;tu
funda mcn . h h t . . f
. , volves analyzing t c c a rac cnsacs o a company in
-naly&15 in T h . I I . '-
'dnrto C'6timatc its va lu e. ec ni ca ana ys1_s tar, a completely forec
~:f : ent approach; it doesn't care one bit about the "value" of trend
aW c~pany or a co_mmod ity. _Techni cia_ns (sometimes called cf mcrh
charli ts) arc only mlcrestcd m th e pn cc movements in the de
5 prices a
erm ine fu ure
market. D pile all the fancy and exotic tools it employs, technical direction of price movement
analysis rea lly just studies suppl y and demand in a market in
an attempt to determine what direction, or trend, will continue in the future. In other words,
technical analysis attempts to und erstand the emotions in the market by studying the mark.et
it£.clf, as opposed to its components. If analyst understands the benefits and limitations of
11:thnical analysis, it can give him a new set of tools or skiJls that will enable him to be a better
lradcr or investor.
_Thus, Fundamental analysis and Technica l analysis are the two main approaches ~o
security analysis. Technical analysis is frequently used as a supplement to fundamental analy515
ralhcr than as a !iubstitute to it. According Iv techni ca l analysis, the price of .51~k .depe nds
on demand and supply in the market place. It has little correlation with th e mtnnsic value.
n
Al! flna cial data and market information of a given stock is already reflected in its market
price: Technical analysts have developed tools and techniques to study paSt patterns ~caJd
predict futu re price.
anal . Technical analysis is basically the stu dY of th e markets
· only.. Techm. ts
st
and ~hs~ udy the technical characteristics which may be expected at mtharket _tumtmo~:V:~p
cir obJ'ecrive assessment. The previous turning
. pom . ts are studied wi a view

1
r t wou Id
-·.
help ,n
identification of major market t .,"ti~C.~1.o
. ·1ar ti ,ough not id entiops al'1d b.,~"'
i tent in ,m, .,, ctf,.i~L
~NI''- I - -

in trends in stock prices are caUSed

----...

-. 1
. (c'• th,1
1l rJ -tt•n~ • • bv an d arg
I ~e con cl ch .
t to correctly cat 1 anges in trend
Cal ()
teacr 11,ir ~ o,anges ly factors Whenever there . . Gi'?
6, d suPP 15 a shift in Lh ~
1<' J . rti J!e . . . n Jttcmp . and lak l(i11 . r,,
• '.l I':'· ct1
Hur:U·_ - tl ,!:-, I r
h 1rJin1ci:1 e ild . ''11t
,..all ~
an in demand and supply, no matter When e demand
.. ,·- n u~ 4;..,. shifts charts prepared spechlly to sho and why Lhe
i-~ 1- 0 ugh w market acti occur can be
l; ,m. tJ-tr _1-, rt trends tend to repea t themseJ on. ' detected
u,a ves. Patt
8 50ftle •ce movements and these patterns ern.s Which ar .
MEANING . . mctho o
d f evaluating securities by analyzing the st . .
1 T ch . I atisti
. record prt bout the future patterns. are USed by echni ; prOJ~ed by charts
·-JI ard ~ , a ast rices and vo ume. e ruca analysts do cs &Cl) f0 recasts a . . . ca anaJySJS for makin
. d f techrucal analys15 1s broadJy bas d g
Tt"-1\!U rti,•itv, uch a_ p I p but instead u e cl1arts and other tools to .dnot attel'l)era~ fiel O • e on three .
tw rnJt el J 'h•'s intrinsic va ue, ' et\tify Pt Ir f}le ket discounts everything. assumptions:
· ,is:u~ a · :un • ture activity. Pa14. / fhe mar
, I .m :-1,1R,'t'S-t fu
' .
any mves tment styles on the fundamental side lhn
' -.re ar
7
~ J.
price J1l
oves in trends.
.
Just there are ~ d rs Some rely on mart patterns; others use terk- e aJ.so th ~ z. tends to repeat itself.
Of technical tra e . f th l I '-'uuci1 . -~ History · . . .
it:f-erenl types ost use some combination o e :wo. n any case, techJti Lndica1r J 3- ---'arket OIScounts Everything: A major criti .
d ~arors, and ~ . nd volume data is what separates them from th . C'al at\;ih, ' 'f}le 1n . t . . ClSrn of 10rt. _ •ca1
i!I1 f rustoncal pnce a hn. 1 I ts d , e1r fund ,It\' 1. considers pnce mov~men, ignonng the fundarn "-uuu anaJysis is that i
dusin~use o . d tal analysts, tee ,ca ana ys on t care wh th al'l\er.,.,
~ Unlike fun amen ·ty tr d. e er a .."<;) onl:ever, technical analysIS assumes that, at an ·v en~l factors of the com an _t
1
counterparts. thi that matters is a seam s past a mg data and wh . stOcl . flo\ thing that has or could affect the compa~/ ~cltim_e, a stock's price re~J
_1 ed the only ng . . h • th at Inf ~
undervdl u - .d b t where the secunty rrug t move m e future. ol'lll.ltir.ti ev~Z·cal analysts believe that the com pan,,,s fu ·dm udmg fundamen al fact
·- data can proVJ e a ou . . Teuu•' d k J n amentals I ors.
this .. d. led towards predicting the pnce of a secunty. The price at wh·ch
515 Omic factors an mar et psychology, are all prir.....i . ' a ong with broader
Trdmical ana_lY ~dire; to be the one precise figure which synthesis, weighs and fin ; abuyerrrJ eeon .d
__ ..t to actually cons1 er
th f u::u into the strv-1,
ese actors separately. Ti.:. nl "'-"- remo in the
. J/ 7 settle a de.al is co11s1 ere ·ifi bl d . h
d . f al quantiifiable and non-quantr a e an 1s t e only figure that
a 1y e:tpres !1!%U • chnical th · llll!, 0 Y lea\·es 1 · 0
:cm • .
Jdar;, rahonal an 1rra 1011 ' counts.
se;~ vement, whim te eory views as a product Of th e ana )"SIS of price
-~cular stock in the markel
amopa.tu e supply and demand for

DEFINmON Price Moves in Trends: In technical analysis, price mO\·ements ar .

2- els. This means that after a trend has been established th fu e belie_ved to follow
ch . 1 approach to investing is essentially a reflection of the idea that .
"The t~ trenicads wh"ich are determined oy the changing attitudes of investors towPanrdces
~ore likely to be in the same direction as the trend
JS • • b
',1..:
u1an o
t lurebe pn~ mO\·ement
a«>amst iL I
move tn n · · d h I . If Th technical trading strateg1es are ased on this assumption. 0 os
variety of economic, moneta~, poh_t1cal an psyc o og1ca orces. e art of technicat1
analysis- for it is an art - is to 1dent1fy trend ch~nges a_t a? early stage and to maintain J. History Tedsnds To Rept ~tseat lfltself:ainl
.. An?ther important idea in technical analvsis is that
an investment posture until the weight of the evidence indicates that the trend has been history ten to repea 1 , m y m terms of price movemenL Th ti; .
. . e repe tive nature
reversed." -MartinJ. Pring of price movements 1s attnbuted to market psychology· ·m othe d k
• • c, , r wor s, mar et
Thus, the technical analysis provides a simplified and comprehensive picture of wha1 ~ participants tend to proVJde a cons1Stent reaction to similar market stimuli over time.
happening to the price of a security. Like a s~adow o_r reflection it shows the broad outlirt Technical analysis uses chart patterns to analyze market movements and understand
trends. Although many of these marts have been used for more than 100 years, they
of the whole situation and it actually works m practice.
are still believed to be relevant because they illustra te patterns in price mO\-ements that
often repeat themselves.
ASSUMPTIONS OF TECHNICAL ANALYSIS Beside these others can be:
1. The market value of a security is solely determined by the interaction of demand I. The market value of the scrip is determined by the interaction of demand and supply.
supply factors operating in the market.
2. Supply and demand is governed by numerous factors, both rational and irrational
2. The demand and supply factors of a security are surrounded by numerous faM These factors include economic variables relied by the fundamental analysis as well as
these factors are both rational as well as irrational. . ,arJ opinions, moods and guesses.
3. The security prices move in trends or waves whim can be both upward or dow~\s. 3
· As the market always moves in trends, analysis of past market data can be IL~ to
depending upon the sentiments, psymology and emotions of operators or tra e
predict future price behaviour.
4· The pr~sent t~ends are influenced by the past trends and the pro1ec · f1on of futuJf
Technical
stocks an al ys15 . ~".'•th hist on·ca1 tradin«>o data · This
• can be used on any secunty ·ca1 includes
anal ·sis
trends 1s possible by an analysis of past price trends. -~
· ' futures and commodities fixed-income secunlles, forex, etc. In fact, techri! . }
5· Exce Pt minor
· · ·
vanations, stock prices tend to move in trends w hi-L
u, continue to perst' IS more fr . , with commod1hes
. . and forex, where the parhopants are
for an appreciable length of time. Predo . equently associated
llUnantiy traders.
 [0J clfNIQUES Ot I C'-m~.l\-AL ANAL'<s1~'Q'\
~
~JCI'" d when an intermediate recovery, . I",;-:,
LS AND TE nd dmiques for doing technical anal . ft't4 ·s signalleprevious advance and the subsequ:~~~ pl~ices lo a level high
TOO " numero
u tool a fie important points of view:-
II ving our .
Ysis. 8;i S'
'c~I J ~et I • the ec Lne halts b . er than th
Then> I an: from the fo O\ c in prices of securities, it is refle t Y lfi o"' ,red ll1 reaction. a ove lhe lev,1 e One
. · d ne 1· chang .. c ect · 1 'A' tJ,e earlier
. "gist i ..eory refers to three movements as·.
oW -n.. recorded
J.nJl) . 1s n.
·ces: \\11en wr there
d deman d and supply of securities. 1
n the en 1

if1 111e D tuations that are random day-to-d .

I. ~" 10. "L-<;tor attirudc an t in price is a function of time. Thn ~n~,, ·iy flue ay wiggles
m ' - f 0 vemen " ong , vaJ movements or corrections that may •
Time.. Th degreedo greater m \\•ill be the price change that follows ·
1 er it ta~~
'
condary . 1as t for a few w
-
a n:wrs-il in tren . '
·1 of pnce . changes is reflected in the volurne f
. . o trilns · fr~ , 5e trends representing bull and bear ph eeks to some m hs
• \'ofom,o The ,no,ns, Y U an increase in pnce ts accompanied by a s 'Clio"' , primary
IJlOVe
ments are call e d·. ases of the rnarket.. ont .
-· ,:romp.my the ?1an?e. th I the change is not strong enough. mall cha ¾
" • 1·t implies a nge · 11>"' . Fluctuations (Minor Trends): The minor tr d
traJL<:.actwns,
Th . f . change is measured by determining Wh th 1,1. pa,Iy of their short duration and variations . en s.have little analytical
ahn, 0 pnce d . . e er
, Width: edqu
... 5 oss mos t sectors and in ustries or 1s concentrated in
·1 . f " change · 1,ecause tn arnp1 tude.
,.rv Movements (trends): The secondary tr d 1
value,
trend Ssprea acr ·ath of the market indicates the extent to Whi,..L e\v Secii . _It, S con d ~1 I d en acts as ..
tud of the w1 d .th '-11 Pri n¾ fb) • . ary trend. t en s to correct deviations fr . a restrammg lo.re
only.
have takenYplace m . th e market in accor ance . Wt a certain overall trends "'<ha, &l-\ the pnm . om its general bo . on
. Trends: The pnmary ~ends are the long ran e U.nda nes.
\ arious tools and te chni .
qu .es are used by technical analysts to predict the . ·
Pnce bena . (c) rnar e up or down (bull or bear markets).
friIJlk( g cycle th at carnes the entire
ran be broadly classified mto: "1~1.
1. Thrones . - 0 m,,, Elliott wave and Efficient .Market Theory. of Averages: The Dow Theory is buiJd upon the assertion
- Olarting, the basic tool of technical analysis, and
.J. ect • far e Indicators.
Typ<'
P~rorell•
.'- rend·1·to III
ove together. It employs two of the Dow Jones A
~
that measu,e,1 of stock
verages, which dear fr ~
fio (a) Dow-Jones Industrial Average .
1. VARIOUS THEORIES (b) Dow-Jo nes Transportation Average
...._oo THEORY Types of Market: There are three types of market·.
(a) Bull Market: If both the averages are rising .
c,, Do-,· rn=y is one of the oldest and most famous technical tools. The Dow TI,.,,,
...,, ·: "'<I Ir, Gtar!es Dow in 1900, which founded the Dow Jones company and w~ ~
a==,- : ce Wall 5'ree!. The basic principles of technical analysis Originate from this u,,,,, Dow Jones industrial Average ((?JIA)

is always considered as having three movements, all going at the sarn

is the naffDW movement from day to day. The second is the short SWing'
bro weeks to a month or more; the third is the main movement, coverin~
ears in its duration.n -Charles H.oow
10000
. :-,e _-;:"': f ~ -°""'5 lh2t stock behaviour is 90% psychological and I0% logic.,l.11 • A confirming DJIA breakde11m 9000
;E - :,:: o: =:c- ar:r,.-d which determines the way in which prices move and the mo1'e ran
· - ¥ - 5--' E:·- ;rr,..z__ _:., g the price and volume of transactions.
needed to change signal to sell 8000
7000
.,.- 11-~.- only df:SCribes the direction of market trends and does not attemp1 to Dow Jones Transportation Average (DJTA) 10000
_ . or £:Stimate either the duration or the size of such market treruk - 8000
-~-= =--·. J-r:· •·~ fr.- beha•,iour of the stock market as a barometer of business condition; 7000
6000
_, • • · - 2. "' • ;, I, ! •""5ting stoc:k prices themselves. It is assumed that most of~
·- ~ tying market trend, most of the times. 5000
t•De1118uy singal 4000
•' " !,J t<, a:-;ume,1 lo <ontinue in effect until such time as its revers~ has i,.
, .•.• J.. "":
~--;,_~• :-,j'
ca,; ~-¥<2.L
p iu:~ ~,., t , !lieer. a bull
<r•·c-,• Tri(:: I market is signalled when a secondary reaction dediri " ° +. Dow senSignal 3000
1
,•_"7 '(J: tz1.:
. ., tr, carry recorded
~-ict: the
a~rt t I during the earlier reaction and the dsubsequ
f a tear 2000
2007
op eve! of the preceding recovery. The en ° 2010 2011 2012 2013 20 14 2015
Fig. 11.1. Represents the Dow Theory.
 r4ALys1s
c>'-,. ---------
,~r4J NASDAO (Monthly ) ---
ff January 1980-Nove mb er 201 o

5,000

S4oo 1-Jan-BO 1·Jan-oo

l·Jan -10
Resistance
SJoo Fig. 11.4. Shows both bull and bear market
Su ort
O L-----=-:-:::::-:=--;;-;:~~~~~~~
2004 2005 2006 2007 2008 2009 201 O
2000 2001 2002 2003
S200
.•• Ill
(ritiCIS
of Dow Theory: Several criticisms are levelled against th
. . e 0 ow Theory·
. ot a theory but an interpretation of kno wn data A lh h ·
Fig. 11.2. Example of bull market trend. 1 It 1s n · eory s ould be able t0
· lain why a phenomenon occurs. No attempt was made by O his
exp th
to explain why e two averages s houId be able to fo recast futuow or ck
followers
.
The .1bove figure 11.2 shows that a bull market interrupted by reactions. . . re sIo · pnce .
2. It l·s not acceptable m its . foreca st. There was considerable lag b h th
. e veen e actual
turning points and those indicated by the forecast.
As at April 30
Comparing Secular Bear Marketes 2010
3_ It has poor predictive po"".er. According to Rosenberg, lhe Dow Theorv could not
300 forecast the bull market which had preceded the 1929 crash. It gave beans'h indication
I i r • i
o - -·- -··- ·- 1--· - ·--·r-··--:····-·· ·········r --· ··· ········ ········ in early 1926. The 3½ years which followed the forecast of Hamilton' editorials for the
-100 . -··- •- ~ --- ·••·•··- .!--· --·- -· ··! ·- ·-·.... ·-- ··- • .. 26-year period, from 1904 to 1929. Of the 90 recommendations, Hamilton made for a
i i l . i I change in attitude towards the market (55% were bullish, 1 % bearish and 29%
- 200 ·
I ; I i '
-300 ..•. doubtful) only 45 were correct. Such a result an investor may get by fli pping a coin.

,'."\.r- -- . ,. . .. .. . _ ·• -- · ~· · .. ; _ .. . l ." ....~ .._.j B. ELUOTT WAVE THEORY

One lheory that attempts to develop a rationale for a long-term pattern in the stock price
-600 -t--.;..__ _I _ ~ -- I : I ··1 movements is the Elliott Wave Principle (EWP), established in the 1930s by R.N. Eliott and
-700 - ·- .; ... L .. .... :- .... ·t- ·······:·· ·-···:··.... ... • •l · · . · · ·· •I ··__ ._ later popularized by Hamilton Bolton. The EWP states that major moves take place in fi ve
- 800 ---~-I - _J__
I
--- · ·-· •·· successive steps resembling tidal waves. In a major bull market, lhe first move is upwa rd, the
-9 00 - ! __ _ seco ntl downward, the third upward, the fourth downward and lhe fifth and final phase
0 2 4 6 20
8 10 12 14 16 18 upward. The waves have a reverse flow in a bear market.
Fig. 11.3. Bear market trend. • Wave description: Elliot wave theory (shown in figure 11 .5) describes the basic movement
mshare pnces.
· . • d'irecti On (going upward or
The above fi!?tlre 11 " ~h th . d0111\ward) In It states that there will be 5 waves mha given t·
..
ays can be descnbed as
0
.:> - ows at a bear market interrupted by recoveries. follow: · case of bull market (upward trend), t ese 1ves w
 ~Lvs
15
. . ~
~r-4L.
th
poiJ1l th at mo t mvc tors ar dnven by hys t • Th . ~
Jr,llc;\ ,rhis i cbtJ)' the stock which has very little nega tive ena. ey will come up
,,r 5· to
, 1~ .,,\•L' ',,:,. on . d At Lhis point, I e stock will move into one
. h news; ..conseq uen t! Y, th· e
,,, • of ,.....overprice . . or ,wo patterns .
. 1, I 1_ fl,cs , e wave's numbe r I, 3 and 5 are known as impulse wnves and are .
38 , Retracement i .11 t, f tt1csc, tJ ovemenl. Other two waves, number 2 and 4 are co ti' in the
of Move from (S) 1 t• ,.. t o b sic m . t Af th , rrec on waves and
,B ./ o (A ) ; 011 f Lhe a . n of basic movemen . . ter e completion of one set of ~
o d'rectIO . kn ABC . :, waves, the
1 1io11 the I a correct1on, own as correct1011 . In ABC correcli th h
Jitt ·11 t show ' . f th on, e s are
l'. 0 (11•ces rna)' vrJup/do'WTI in prepanng or ano er ~e t of ~vaves. Waves A and C will be
~"',f'l
=11:,..~ ,1,il eg direcAf
P~\
o do". n of bas ic mov~ment a_nd wave B will be in the same directfon as that of
uo the complehon of eight (5+3) waves, the full cycle is over, and a fr es h
ri~,11r,,-'fl••,1iC1.11tre11 d . y arise.
ter
bJ s ma
4\ 1oo .~Retracement t11e f ,vave R,KET THEORY
I so:· Rfeot~
of ~, ve r
(e;~;hl of Move from (4) to (5) C "to
· fflclf
rff t,'IA
f. anciaJ markets states that asset prices fully refl ect aJl available information
"',. E u,eOry of. i.n according ·
to th e theory, asse ts are pnce · d
lo perfection, investors will not
Afl1arkel. 51'."clscrepancies between price and intrinsic value to ea rn abnormal profits
(1) iJl ttie1 10 exp_Ioith uld be impossible for investors to earn returns that beat the market excep;
ab e tl 1t s o · k Th th ,
5 Corrective tie uen y, . h r investment ns · e eory was proposed by American economist and
Motive (Lettered) CoJ1..,~(11ing hig e e Fama in 1970. It has come under criticism lately for ignoring irrationality
(Numbered) Phase bY as.s te Eugen 'd b .
i,el Jaurea that can cause WI e gaps etween pnce and val ue for a long time.
Phase No . vestors
.,,,orig !fl . . cy is a very important concept
ket effiaen k ffi · I f ·
rv{ar
iµ •·
• manager. Mar et e c1ency, a n ormatron STRO NG-a ll
fo
r a portfol~o d from the Efficient Market
t derive . f .
concep . 50 ests that the pnce o a secunty
55
11YPothe t , g~ormation available about that
reflects all ~e an efficient market, no investor
~rity. So, i.n y special information that he can
· ess to an
ha5 ace ak an extra profit. In effect, if the markets
u.<e tom_ et then you can't beat the market.
are effiaen ' . . ..
An efficient market is one m ~h.ich s_ecunties Efficient
. eflect all available information. This.means Market
pnces r d . h k t . •
Fig, 11.s. Elliot Wave . 1 I
h every security trade m t e mar e 1s Hypothesis
~y valued given the available information. ' - - - - - - - - - - - - - - -
Wm 1: The stock price make initial move up~ards. This may be caused by a _relatively co There are a number of different definitions of what constitutes an efficient market
small number of people that all of the sudden (for vanety of reasons) feel that the preVJous pril'1 depending on what information is deemed to be available. .
of the stock was cheap and therefore it is worth buying and thus causing the price to go up. 1
The efficient market hypothesis (EMH) was formulated by Eugene Fama m_ 1970.
Wave 2: The stock is considered overvalued and enough investors who were in the : If the markets are perfectly efficient, then it does not make sense for the portfobo manafgers
original wave to consider that the stock was overvalued take profits. This causes the stock to : to pursue active investment strategies. · · mvestmen
The active · t s trateo£ies will actuaJ.ly underper orrn
go down. However, the stock will not make it to its previous lows. · compared to passive strategies because of the add1tiona . · l transa ction costs and fees · .
Wave 3: This may be the longest and strongest wave. More investors find out about the . . k t 1. rket tltat provides fair rehmt to its
st . Thus, in simple words, an efficient mar -e ~ a ma . kl d ccurately reflect tl,e
ock and they buy it for a higher and higher price. Th.is wave usually exceeds the tops created inuestors. 11,is is possible only when tl1e market 1s able to qu,c ~!:'. a
at the end of wave 1. . . . I . . kn ti as market e11•ciency.
txpec tations of investors in share pnces, t 115 15 ow
Wave 4: At this · · . • 'd --l
. . point, investors again take profits because the stock is again consi eJl'II It can be of two types· th b ·
expenswe. This wave tend 5 t0 be till · . f arket is determined on e as1s
bullish on the stock. weak because there are usually more investors that are 5 (a) Operational efficiency: Operational effiaency O a m d d r •es
of time taken to execute an order and number of ba e iven ·
 :,a;,._ .... - . . ---1.u "'1 r4f,.L. T ;;;,•-
r.:-7n1
~
..
tic1r,,tl d(t<·irnc ·
,. inrorm.ltiona\ efficiency of a market is d
r:1cy of the market to adjust itself i eiet"fl'\inl) ~~,
"lli"Qt.,.
1tC
..ijo\l, f,.
~r
re rational and behave in a
ves tors . an of returns : Inve tors must .b cost . eff ecttve
.
co
[D]
ll 11
l
(bl Jnforl11•'.. ·· i111c~s ,11H\ nc u • n telar cl llt\ 4. ff\ ti01jiatd,othal they will want lo invest rn c rational and abi°'Pe titive lllan .
b.1~i~ c,t :-" 1 'on lo 'h~ o? fl . h Oney wh e lo re ner for
inf~)n11,1tion. . Tr.iders who do not buy or sell on the basis . ~~'I
sets a . h relatively 111g returns). ere it is ne d cogni ze eff .
ils 5 wit c ed rnost (' ioent
Liqui,iity tr,ufcrs. ,. . of their individual fortune and liquidity if tesl)a il5set d Borrowing at same rate· Ev 1.e., in the
• 1.-·s but on the l,a I needs a rch . g art · ery inv t
,tn,1 ~ :-1- re li .and 'e11d•" t the same rate. cs or has a
d ,rs qll1c1· 5 i., . wing a ccess lo l d'1
trJ t: - · .J, .,. Trnders who buy or sell shares on the b . 1
~
· borro the investors: Prices must be effi . en ng and
tional tra 11 L r. · • . f as1s . ate fi , .. c1ent so th t
• l11/11n 11 a \ - of the market are t1e 1 m ormational tract of th rJotJV will cause a rm s secunties prices lo . a new inve f
d, and ana )' 15 . . . d ers h orOlJ 6, prodllcts the firm (i.e., buy its stock). nse and motivate in: ions and better
rescJr b . of differences in mtrms1c va 1ue an market val · • ney ll ~
invest on the a is ue of lhe SlJalJy ital to . estors to su
~ t\j~~
ca? t affect the policy: Taxes are assurned to hav . Pply
1 'fates no e no noticeable effect o .
DEFINITION · pali0'· n investment
• defined the efficient security market as, "Efficiency... mean
1 ,tftiS Of EffICIEN~ ~ARKET HYPOTHESIS
J.1mes Lonke ,ats functlon so that prices of securities react rapidly to nes t~e abi!ih.
- ·1 I mar -et O · ' · · w inf ·1 of
the lJP_1_3 _ , produce prices that are appropnate m terms of current kn Otniati fO suggested that 1t 1s useful to distingu• h 1hr
d1 ethoencv "I 11 • . tm t " owled Of\. e f arna is ee levels Of
. u _ . .. -be less likely to make unwise mves ens. ge, and Ellg~rt
m,·c:,IO~ "L11 . . rnarket efficiency.
Ln the ab ove Co ntext , what will happen
. . - ts that .market . makmg mechani·s .
· rn 1s , '{lieY are, forIIl efficiency: Prices reflect all information fo .
d Th are no pockets vvithholdmg information or mterested parties rn k' .tee and 1 Weak· und in the record of
unfettere . ere . . f l d d d a ing · vol urnes; ff. . p . past and
. b . •der infonnation by marupulation o supp y an eman l forces. The re W1l1 . llndue
(Tams )' ms1 . . . t l- _
. trong form e 1c1ency: nces reflect not only 11 .
o ents and malpractices or corruption etc. is no preva ent. Inform t· ue no I
monopo1v e1em
-coc;t)ess. In the normal course, capital
.
or money
fl
ows
.
mto areas
a ion fl
Which ow ~ 2. 5ern1-s .
d of past pnces d b a infonnati f
an vo umes ut also all other p blici . on ound in the
free an d -- . d compe ti' liveness.
· are recor . u Y ava ilable info .
pro fi1t:1 bl e t1u
m
·
5
tum depends on their effioency
.
an
. fl . fr
Money flo\ 1so
vs a fr
l'll(l!,t form efficiency: Pnces reflect all available inform ti . . rmation;
table to more profitable avenues if information ow is ee, fast and castles 1n 0111 3. 5tr0ng . . a on, public as well as rivate
Iess pro fi · have the same informa ti' on, w hich 1s · unmediately
· · s. n5Uch e vers10ns of EMH over time, based on Fama's arti' 1 P ·
ket Sc enario all investors will The thr e c es.
mar , . f' All . . re ecte<l
. th stock prices and nobody can gam extra pro its. mstruments m the mark t .
~ ~ ~
m e . . . f 1 b b d e \V11l 1Je
correctly priced, as all ti:1e available mformation is per ect y a sor e and any in~estor entenn
the market any time v,rill have the same advantage or returns. .
No excess profits are p . &
h . l f oss16le
in this scenario. As the demand and supply f orce~ are p Iaymg t eu ro e reely, the emergm Test for private information
Private inform at ion
prices are fair and move in a random mariner. P_nces ~f today are no more a function of th~
prices in the past as the day-to-day forces move m an mdepend_ent and rand~m manner. This
Event studies
conc:ept of randomness has led to the theory ~f Random Walk ~ _the determmation of prices. Public in formation
This Random Walk hypothesis is thus a speoal case of the Effioent Market Theory.
Weak Test for return prdictability Past Prices
ASSUMPTIONS / REQUIREMENTS
For the capital market efficiency theory to operate, the following assumptlons are made 1. Weak form of EMH
and a corollary is that investors will also be less likely to discover great bargains and thereby The week form of market holds that present stock market prices reflect all known
earn extraordinary high rates of return. The requirements for a securities market to be efficient information with respect to past stock prices, trends, and volumes. This form of theory is just
market are: the opposite of the technical analysis because according to it, the sequence of prices occurring
1. Information is free and quick to flow: Information must be discussed freely and historically does not have any value for predicting the future stocks prices. The technical
quickly across the nations so all investors can react to new information. analysts rely completely on charts and past behavior of prices of stocks.
2. All investors have the same access to information: Market prices are not slickly and _Three types of tests have been commonly employed to empirically verify_ the weak-form
absorb the market information quickly and the market respond:; to new t~chnology, effiaent market hypothesis: (a) serial correlation tests; (b) runs tests; and (c) filter rules tests.
new trends, changes in tastes, habits of consumers etc., efficiently and quickly. .
(a) Serial Correlation Test Serial Correlation is said to measure th e association of a
3. Transactions costs such as sales commissions on securities are ignored: Traosacti~ · of numbers which are separated by some constan t timE: period · One .way to test
senes ls th
costs, taxes and any bottlenecks are not there and not hampering the free forces for ran d omness in stock price changes 1s
• to Ioo k at th elf· serial correlations. e
market.
 ;:,1.w-• - - .. . . VLJo
. d rrc~latcd with the price change in t.,~~"~t- ANALYSIS --,
1
1.12 . , in onr rl
~no co . sonie
;>gligible, the pnce c11anges are con .d athe
,;~~
~~\' ~1e,al- sorne other interva l? For how · · •1
~
. . ch,11\~l . ns :i re nc d. I . s1 er cl r p
r nl"'- }-{'Nn:l,1110 - • . 1correlation stu 1es, emp oying diff e ta b ~t1r1,, 1''~ daM' or d after the announcement da t~ any Periods should
ch ,utl
su •• k nt. urnc
rou scrn b d
. -periods, have een con ucted to det
erent e -~
stack "<: r 11f fore an e. rf=turns be ~
indrrxnt d differe nt time - . ect serial s, d1rr lij/iy be t the excess returns, by period calculated
1inil'"f,1£S, an s also made by Fama to find out it price ch Correl ~t1,~, Jct.Ila e , around th
3 0 . the sample. The excess return - e il.flnounc
Run Te t: Ren Test ;"~tl,er price changes of the same sign. Run anges \ve <ltiri~ · ,,.,,, in is ca lcu ( t d ernent d
fiw erformance and risk. a e by ll1ak· a1e for each
f1,I to he i llo"·ed b/ n:mbers in the series and look into the research l'•st ig,,~• 1,~I1 ar1<et p mg adiu.strn
absolute ''.alue~ : Given a series of stock pnce changes, each Price (: n_ly the red
and negatJ\ e sig ~inus (-) if it represents a decrease. A run occurs ) 1d it r/ 0siti,,
t~: f11
cornPu
te the average and the standard e
rror of excess re
ent for
4. ess whether the e~cess returns around the turns across all fi
an increase or a the sign of two changes. When the sign of cha When n,tre8l11~ 5. p.,ss zero. To deterrrune whether the excess reannouncement date are . nns
difference between n begin. To test a series of price changes rot?e differs rtehls ~Q frotll different from zero, estimate the T ~ ms around the different
d- d a new ru . d h . Lncle • e d te are
en ::. an . that series 1s compare to see w ether It is st . Pendeh tu~ . statistic f announcem
a tudies are nuxed. Most event studies or each day TL ent
number of runs b mof runs in a purely ran d om senes . o f the same atistic. ' 'Ce· tk
aIly d'f ·~ vent s
e k t hypothesis. Several event studies h
support th . ine results f
e serni-strong fr ..0
fro the num er f. size l-.1 1fer
m carried out, employing the runs test o independence. The · . any SliJ eri1 111
ar e lidity of the semi. strong forrn efficient
, owever hav
k,
om effiaent
e cast their shad
ha, e ~gnifi t relationship between the returns of security in on Y did n ddi!:-s the ,;a . . ll1ar ets theory ow over
any s1 . can. r periods and made a concl us1on . th h e Per" 01 et"" I• study: In a portfolio study a portfor f ·
returns m pno
at t e security . 10d iltid '"
Prices fol( the r rtfo JO . . ' 10 o stocks h .
(b) o cteristic (low pnce earnings ratio or whatever) is avmg the observabl
random walk. . . 0 wed a
il Rules Test The use of charts 1s essentially a technique for f'J .
chara h ther it earns superior - ns . k-adjusted
. returns Screated. and tracked over ti e
(cl F ter . Al d I tenn ew e . teps mv I d . me
. rtant information from the urumportant. exan er and Farna d g out iL se d are as folJows:
stu o ve in a portfolio
lillpo
th •dea that price and volume data are suppose to te the entire st BI lltne taoL
d ll an s1e
yfine the variable (characteristic) on which firms ,...; 11 b
e • . . ck . Th ey applied filter ruJ need to'
ory we 1· De ·• w e .classified· The proposed
know to identify the important action m sto pnces. . estment strategy spe 11 s out the relevant variable Th
how well price changes pick up both trends and reverses which charti t es toS€t 111v not necessarily nurnenca
but . 1. · e variable must be observable,
charts do. If a stock moves up X per cent, buy it and hold it long; if its~ claim theu
itself by the same percentage, sell it and take a short position in it. en reverses 2 Classify firms into portfolios based upon the magni tud f .
· data on the variable for every firm in the defined uru·v e O th the vanable. Collect
2. Semi-Strong Form of EMH . . erse at e beginning _ f the
Period and use that information for classifying firms int diff 0

The semi strong form of the efficient market hypothesis centers on how ra .di 3 Compute the returns for eacl, portfolio on the returns f o erent portfolios.
ch £. .
efficiently market prices adjust to new publicly available information. In this state, th~ Yand . Portfolio for the testing
. penod . and calcuJate the return for each
or ea rtf lium m each .
re.fleets even those forms of informati~n
· which may_ b e c~ncernmg · th e announcement ofmfinns
arket . cl d d . th
that the stocks m u e m e portfolio are equally weighted. po o o, assunung
most recent earnings ~orecast an? adiustments which WIil hav~ t~ken _p~ace in the prices of
security. The investor m the senu-strong form of the market will find 1t impossible to earn a 4. Calculate the excess returns for each portfolio. The calculation of excess returns
return on the portfolio which is based on the publicly available information in excess of the earned by a portfolio calls for estimating the portfolio beta and determining the
return which may be said to be commensurate with the portfolio risk. Many empirical studies excess returns Assess whether the average excess returns are different across the
have been made on the semi-strong form of the efficient market hypothesis to study the portfolios. Several statistical tests are available to test whether the average excess
reaction of security prices to various types of information around the announcement timeof returns differ across these portfolios. Some of these tests are parametric and some
the information.
nonparametric. Many portfolio studies suggest that it is not possible to earn
Two studies commonly employed to test semi-strong form efficient market are event superior risk adjusted returns by trading on some observable characteristics.
study and portfolio study. However, several portfolio studies have documented inefficiencies and anomalies.
(a) fa-ent Study examines the market reactions to and the excess market returns around 3. Strong-Form of EMH
a specific information event like acquisition announcement or stock split. The key
steps involved in an event study are as follows: !he strong-form efficient market hypothesis holds that all available information, public
1 •p~•~te, _is_ reflected in the stock prices. The strong form _is conce'."'d wHh whethe, o,
- lclentify the event lo be studied and pinpoint the date on which the event was certain mtlividuals or groups of individuals possess inside mfo rmation which can be _used
7~
announced .
make above average profits. If the strong form of the efficient capital market hypo thes15 holds,
2. Collect returns data around the announcement date. In this context two iss~es ::i
and day is as good as any other day to buy any stock. "llus the moot "'"eme
have to be resolved: What should be the period for calculating returns wee y, lliat:ficient market hypothesis. Most of the research work has indicated th at the e ,aen
0: r;r
et hyPothesis in the strongest form does not hold good.
r.:-;;il
~ . and Anoma ,es
r ~~~~
-- ...,~ti p.L At,1u- ■ --- ~
~,,iJC osed a challenge to both the ch .
Mark
et Effic1encY h
•. tions l a
t appear to violate
.
the traditional vie
w of
t~~ 1t' 1.5 tJ,eor)' pr Weak Market Efficiency hold arti st school and ~
'(11 watl< 0 · . . s good h . the f 1.15
rr'- ,1 rc s1tu.1 'bl for careful investors to earn abnorrn lll<1rkC't of11 ajn supenor returns. S1mllarly 1 'f , c artist sch ll.ndarnenta i·
A110ma • • be poss• e I a retu C'ff' .11 d to g rand 001 f1 d 1
s1 sch
. g that it n1a)' rns. S ici~~ JI ~ iv - vahte not of rea 1 va1ue to gain supe . on, walk h n s its tools 001.
suggr t1n . , are: . . alliQ ~- of re al·ts toO Is. arethe study o f fund amen ta ls will nor not
retu
ms.
o1ds g d
Sin,iJarl .
~re n
oo , chartist h ot
kel ;inornalu::S R tio· Stock that are selling at pnce earnin \I'\ \
m.ir Price-Earnings a . . gs ratios th ~d5 \ot10\~1ngd insights into the company or b se~re better Y~•f randorn Walk~ OOI
• Low_ the market. . at il tQ ~~~ation an etter •nsider kn~:te7· unless additi~~~~
re]atl\ e to .. Stocks that have -pnce-to-sales ratios that lr1,1 -~or 5 ge are av -1
. S.1lcs Raho, .h I are I I ~es1or · he basic tool of technical analy . ai able 10
Low Pnce· . tJ same industry or wit t 1e overall rna k 0 wer 1~ jr,g, t . . . SIS
• . Other stocks tn 1e r et. Cor))PI!
with Iue Ratio: Stocks whose stock prices are less th at thei teq %· cl1"rt tiflg w,u 1-.;ch proVJdes visual assistance in def
.
.
ect1ng chan .
" Price-to Book va 11
cnar_ I analyst is somett~es ~a ed the Chartist bee ging pattern of ri
• Lo, r res
book values . d' 'd d ~ cti1/t tecltfl'ca and records of histoncal prices and v0 I ause of im parta p ce behaviour.
. y· Id· Stocks that pay high 1v1 en s relative to th . 11,e charts . umes t0 1·d . nee of this
" 11se
1
'gh O'VJdend 1e • . h e1r res Chartists believe that stock prices mov . . enn fy the tr d toot as
1
• Ht ·es· Stock of companies w ose market capita)· . Pe,tive h wetri·ceS· ~e the price movement continues along e in fai_rly persistent treendsand patterns
. Small compam .
pnces. . . Ne lected Stocks: Stocks followe
100 million gt es of institutional ownership
d b I IZation . sa ifl P 11a
y on y a few analysts is less¾' , bt1ill jner t , an opposing force due to demand-supply ch n path (up, down ~r
and/or st n if1 til it Jllee t e and trend go hand in hand when a
a certa1
-r
n The ·
5
. anges. Chartists also b ~ eways)
LS an

with low percen ag · . %

~erallY vo userns and also the price and vice-versa ma1or 'up' trend begins the: e,ve tha t
'th H' h Relative Strength: Stocks whose pnces have risen f g . increa · · o urne of
• Stocks w1 ,g aster rela~ trading ce of Chartism is the belief that share pric tr
the overall market Ve~ .,_,e essen b h . . es ace out p tt
11
' . n of investor e aVJour and It can be assumed th . a ems over time. Th
Effect Stock do better during January than during any other month reflec11O • f . · at history t d ese
• January . of the are a ck market. A certam pattern o activity that in th en s lo repea t itself
f th Week Stock of poorer dunng Monday than during othe d st
Year ill the o . rise to the same outcome should it reappea ~ p:t produced certain results is
• Day o e · r ays of the ~ely to give . . .. . . r m e future.
week. . and Pnce Charts. In the charting activ 1h , it is th .
pnces ·, , e prices of se · ·
Most of these anomalies appear to revolve around following themes: and shown in the graphs and charts. A security is traded t d'ff cun~es that are
1. Markets tend to overreact to news, both good and bad. plo~edcul r day Out of these different price quotations four prices a LI erent pnces on any
parb a · ' are re evant and important.
These are:
2_ Value investing is contrariaris in nature and is beneficial because markets overreact.
(i) Opening Price: This is the rate at which the first transaction tak f
3. The market consistently ignores certain stocks, especially small stocks. . . . . es PIace or the day.
(ii) ffighest Pnce: This IS the ~ghest rat~ for the day, at which a transaction has taken
place. It may be noted tha! simply a bid/ offer rate is not relevant; rather a transaction
CRITIQUE OF EMH must have been entered into.
Opinion is divided as to the validity of the EMH particularly in the strong form. In (iii) Lowest Price: This is the lowest rate for the day, at whi.:h a transaction has taken
weak form Random Walk hypothesis holds good, as per some studies. The semi stroni place. Difference between the highest and lowest traded price may be taken as the
form has found less support from the empirical studies. The perfect markets do not exist, price range for the day.
as the stocks as a rule do not sell at the best price based on intrinsic values. Many times, (iv) Closing Price: It is the rate at whkh the last transaction for the day is traded. Out
speculative fervor sentiment and expectations play a greater role on the stock prices ihan of the four prices, the dosing price is the most relevant for two reasons:
the fundamental factors.
(a) The stock indices for the day are calculated on the basis of dosing prices of the
. Similarly news does not spread evenly among all segments of the market and among~ constituent securities, and
investors. lnstitutional investors gain through market equity research and through econol!II( (b) ClosinB price for a particular day can be compared with the opening _price_ for
?f scale _a nd better expertise. But individual investors do not gain by speedy spread 01 .
that day or the dosing price for the prev10us day to •·den tify a trend m pnces.
mfonnation and th e absorption of the same by market. To gain superior advantage, there ii'lS
no adequ t ·d fr ' · There Generally, the closing prices are used for charting.
. th a e ev, ence om any of the empirical studies based on prices or information. .~:,
,s us a co tr , . ns u"' 2V · · I •
theo d'd n o~ersy on the validity of Efficient Market Theory. In real market operatio '_,1~ · arious Toots, Techniques and Indicators in Technical Ana ysis .
ry I not hnd support f . d the r~w V · . lysis can be classified
of this th eory. ' as port oho managers did not perform better base on · . anous tools, techniques charts and patterns used in technica1 ana
lllto three '
groups as shown in following table:

,
 ,,~r..vsis 7
c>J,,. , ont a l ti ck on th· v,: rtical lin,,
A41'1 ,t t,o ~~z price or level at which the ,,tc k
~ - sl'l 0. teS IJ'e x
iJ1dJ01 r.et c1osed-
of i11~ re 11 .7 shov~s that each pri ce bar ha -
~ figt} nts j.e., high, low, open and clo-,i:•
[otJf eJe~ : ,ilso ca lled 0 /ICL Ba r. Th!:
1
ric£· ft h wn on the left side and th • clcy..,i:,
Pric£ ~ : h~wn on the right side of the bar~
Ck,,~

Lr, H
ope; -~--
-- -
~i J~ = H :;· - Lr.
,,,

Price 15 ,hen shavm for successive periods

P
1ne$C bats Itv, in a ba r ch.art as shown .an fi gu re 11 t'..
s) r(!Sll .u.
(daY ts· The simplest form of chart is a line L-
. char · h d b . c11.irt as sh . .
(I,) tine re si mple grap s r~wn y plo hng the closin . onn in figu re 11.8. Li
cnartS ~ connecting the pornls thus plotted over a r![~cc of_t s '. on a ·vne
(ia)' a.fl_ e of the highs and lows of stock prices for h of_ h . line cha _Yta~-n
no r,ottC eac J)Cnod .
. d volume charts
.A- pna an . . le two -axis cha rt wilh Lim · on X-axis and pri
. chart L,, a b1mp
A i:rn«
. mav'--mcn "
,, of any bhare or any .in dex over
.
. <:<= on y
a period of tim" _ · axi, "'
. . can Ix: . •r
: .1nd pnce ·u: d,,1rt th . volum, of transactions fo r a day can al \hi,,,n
u.e · '!Fph. 1~.a ~~•d as !';ice - Volume Chart. In this chart, the volum~,_fx: ~h,r,,,/1.
•
t.~
¢A!
11 rn;iy IA' ca
' .nd. •dual histogram!l just
bcl h . . f .
ow t c pri ce rn ormahon.
e infc,r rnatir.ri .
d' l.zyed by I IVI
up ., of price and volume char which arc commonly used ar
Different 1y~• I.!:
t (b) Linc Chart
(a) Bar Ch ar
(cJ J'oint and figm •/ Gr;iph Chart (d) Ca ndlestick Cha rt
r Char1s· It is a simple ch;:irting tcr.hniquc. In this cha rt, prices are i d'
a) Ba · · . . Th n 1cal{-d
l vcrlical axis and the time on honzonla 1. I axis. eJ' market
'fh or price mo V('TTlt'Tlt fri,
' lI 1 •
a givc.1l sc1,•;ion (usually a day) 1s rcprc~ntcu on one rnc. e vertica l part of the 1;{
shows th. high and low prices at which the stock traded or the market mov(:(j_~ . .. . . .
1.2873 · --r·
. . . . .
' · ·r' • •-r- ·•
e f e I I
- • - r - • • r • • · •· • • • r • • ••· -
• • • t •
1.2873

...., ....,., -..., .... .,. .. . .. .,. .. ...... . .. .........,,. ....... 1.m2
t

.. . .. .. .. .. .. . .. 1.2831
I • f I t t I
,,.
EUAUSO H4 1.2852
La st Time : 29/06/2005 10:00:00 Open: 1.2050 High : 1.206 3 Low : 1.2031 Close 1.20
Tlmo : 03/05/2005 20 :00:00 Open : 1.2888 Hig h : 1.2917 Low : 1.2851 Close : 1.2888 Lett
1.2999 • • • • • , • , • • • • . 1.2999
1.2831 . . . .. .. . . .. 1.2810
• •• ...
t
••••-•••••• ► • • •••• • ~ •• er ••••••
f t t • I I I t
• •• - •••••••
t

: : : lfflf~:+:LLl::111: ·:: : :
f • f I f I f I I I I I , 1.2810 - \ - - 1 - - i - - + --+--+--'I---¼--..--+--+--+-..}
1
28/04 29/04 29/04 02/05 03/05 03105 04 05

Fig. 11.8. The following figure presents a typical line chart

h;t(::C[J.: JJt:r kfftJ j~i~

!lii1 ·( -1•-- i--- i-· ·f · rt1T··r ··rtJt·-·:- --(·1·
1·2031 r··1--· r ··I···r-··r· ·-i··-r ·· ~· f ... f --·:· ·· -:·
1.2810 .....-+--i--t--t--+- -i--..__ ,__ .- •-
(c) Point and Figure Chart (PFC): Though the point and figure chart is not as commonly
used as the other two charts, it differs from the others in concept and construction.
In PFC, there is no time scale and only price movements are plotted as shown in
figure 11.9. As a share price rises, a vertical column of crosses is plotted. ~en it f~ls,
a circle is plotted in the next column and this is continued downward while lhe_pnce
j
1.
2831

1.2810
continues lo fall. When it rises again a new vertical line of crosses is plotted m ~e
next column and so on. A point and figure chart that changes column on every pnce
re 1· 1 f ·ce changes of three
28104 29104 29/04 02/05 03/05 03105 04 105 versa 1s cumbersome and many show a reversa 1 on Y or pn
units or more (a unit of plot may be a price change of say one rupee).
Fig. 11.6. The following figure shows a Bar Chart.
18
, . . 1 idrntit , t11c rurun.: price De11aviour i - •.,/\~A
:.:.r I ds ,t ,s o ti n terth "~h.
~impk wor _ , i volum . H wcv r, ,ere arc some an"I '" S Gf tL ,,h.

''d,,~
n . . img nm . . d I I
i r prirc., tm d . •nore th' hrnmg an I 1c vo urne. lhis is b . '"' Yst "'ho ' Pa '')
11

. prices. nn
o p,151
the '
., l chnviour cnn b pre d',c tcd on tie
I bas,s. of asec1 on th, col) . \t 'I
th,t hiture pn«

J ,
Past Ptjc . Ptop '.\111
0
11/ ' \
1310
1305
0

800
0
gr:~g ~~g
0
0
1300
1295
1290
12as
12ao

l;g 8 11SQ
12]5
1210
1255
12so
1100 1255
2006 February March 12so
I --,_- 1245
''
May
05 Fig. 11.10. Showing candlesticks
Fig. 11.9. The following figure shows a point and figure

(d) Candlestick Chart: The candlestick chart is similar lo a bar chart hut 't d' High
High
way that it is vi ually constructed. Similar to the bar chart, th; «tnd;es/:rs iii U, High
Close Open High
a thin vertical line howing the period's trading range. The difference , ' ' S) ha, Close
1
formation of a \\ide bar on the vertical line, Which illustrates the differenrneb
0
s in the Op en
the open and dose. And, like . bar charts, candlesticks
. also rely heavily
lours to explain what has happened during the trading period. A major
on !he
ce etw~

Mth the candlestick colour configuration, however, 1s that different sites use differ,,
p:~ Open

Low
Low
Close
Op en
Clo se
Upday
tandards; thenelore, it is important to understand the candlestick configurotion ._ Down day Lo w Low
at the chart site you are Working with. There are two colour constructs for daysup Bar Chart Upday Downday
and one for days that the price falls. When the price of the stock is up and clo,s Candlestick Chart
Fig. 11,11,
above the Opening trade, the candlestick will usually be white or clea,_ Uthe stock
has traded down for the period, then the candlestick will usually be red or bia,\ Elements of Candle: There are three main r - - - - - - - - - - - - - ,
parts to a candlestick dear from figure 11.12:
depending on the site. If the stock's price has closed above the previous day's cl,.
but below
is used to the day's an
indicate open, the candlestick will be black or filled with the colour a.
up day.
, The first one is the "upper shadow". This Candlestick Basics
part puts an importance to three constants- Bullish Bearish
the bullish candle (dose), the bearish candle
In simple words, Candlesticks are a set of charts that are very effective in visualizml High High
price movements. CunenUy, there are two very basic candlesticks- Bullish •
The bullish candle occurs when the close is higher than the open. It is denoht
';':
nd 8 th~
(open), and the high of the da y. In
graphical representation, the upper shadow Close
._ Upper --+o
is portrayed by the vertical line between
the colours green or white. On the other hand, the bearish cand e app sho"
ensw en
l hor black"
the high of the day and the close or open. Open
)s;;;;-( ::::
open is higher
'In figure 11.10.than the close. Usually, it is denoted by either red
• The second part of a candlestick is the "real +- Lower --+
Low Shadow Lo w
body". The real body is simply the difference ~----:F;;:ig:-,"";7,72;-.--- j
between the open and close. It is the L _______;:,______ _
coloured portion of the candlestick. 11 1
'
 SECUl'U I I ,..,...,_ • - • - ~ • • - r u" I FOLJ:
. 0 t.,"ti ,,,_LYSIS
r.;-:;;;i ndlcstick is the opposite of th e first • h· 1'Qt'1 .r>-,'-,.are c1ear from following figure 1
~ 1 . d nrni n p,, rt of ~ cn· mportancc to the hi gh of the day th· is is lh ~~l ~'4• 114
. .
d f putting i b ' is Pc1 t ~ ··1
•
TI1t: t 11r
!",h,
1d0 11,.. lnstl'n d
· 11• , t of the ay.
°II is the vertical line etween the low 0 f lhe
< r is c ri..,
d {)tic~ ~t
if All i1iese
.-11 the 10 r . ci 1, t~"

I~~
11 I 1 J Ul)d ' ~
of"-'" or d o~c. di . TI,cre are various types of candles Which
il te d Shooting Star
ShJpes or types · of can cs. eser-
JI 13 n fo llow: '6~d .
figure · ~ 1~

fl
~ While Candle stick
I
'
Black Candlestick Long Lower Shadow

~
'
d
Long Upper Sha ow
Q
j
Hammer b Inverted Hammer

¢ Spinn ing Top (w) + Spinning Top (b) t Doji

f Long Leg Doji T Dragonfly Doji 1 Gravestone Doji '

t
I
ite candle
.

D Marubozu (w) I Marubozu (b) Thre e W

hite Soldiers

Fig. 11.13.
1. Normal Black Candle: When d_ose price is lower than open price.
2. Normal White Candle: When close price is higher than open price. Fig. 11.14.
3. Shaven Head Candle: When close price is highest for the day.
4. Shaven Bottom Candle: When close price is lowest for the day. u11.:te Candlestick: White Candles are bullish lines in candlestick d
1. J1•u .gnify th th cl . . . an candle volume
s. Spinning Tops Candle: When real body is small (may be white or black) charts They s1 at e osmg pnce 1s higher than operun · g . f tha
· pnce or · t time
6. Doji Lines: When there is no real body showing that open and close prices for the day are period.
same.
2. Black Candlestick: Black Candles or black candlesticks are bearish lines in candlestick
7. Hammer Candle: When open price is highest a~d is hammered down for a low level testing
during the day. Candle lines with long lower wick and no or very short upper wick forms and candle vol~e ch~rts. They signify that the closing price is lower than opening
Hammer and Hanging man patterns. price for that time penod.
8. Inverted Hammer: Shooting Star and inverted hammer are formed, when there is a long
upper wick with no or very short lower wick. 3. Long Lower Shadow: Long lower shadow of a candlestick indicates that the bears are
9. Long Upper shadow: Candlesticks with long upper shadows commonly occur when an uptrend losing power and bulls are gaining power in that time period.
is losing the strength.
10. Long Lower Shadow: Long lower shadows occur when the down trend is losing its stream.
4. Long Upper Shadow: Long upper shadow of a candlestick indicates that the buUs are
11. Spinning Tops: Long tails with a small body constitutes Spinning tops. They measure the losing power and bears are gaining power in that time period.
confusion in the minds of the mass traders.
5. Hammer: A Candlestick Hammer is a reversal candlesti ck pattern with long lower
12. Doji Line: When the body is missing, which happens when both opening and closi~_g a~e at the
same price, a doji line Is formed. They may be short legged dojis or long legged doJ1s with short shadow and no upper wick. They are bullish in nature.
wicks and long wicks. In a doji if the upper shadow is absent we get Dragonfly doji. If the lower 6
wick is absent we get Gravestone dojt. Dojis are a sign of indecisiveness and may mark a · Spinning Top: Spinning Top candlestick is a candlestick pattern wi th small real body.
beginning of explosive movements. They represent the areas of uncertainty.
13
· Morubozu: A candlestick with no wicks is called Marubozu. When opening & low and clos!ng
& high are at the same price, we get Bullish Marubozu and when opening & high and closing 7· DOJ•:
" DOJI.. candlestick is a candlestick pattern without
. a real bOdy· They represent the
& low are at the same price, they are called Bearish Marubozu . areas of uncertainty.
 SECURITY ANALYSIS AND PORTFOLto t., NALysJS -,
~
~ ··. Dragon
O)' DoJ'i candlestick is a candlestick P"' tt
. u ern
/\~"Qt,l..
. ,;,,~
feta'-
~~•
p.
the co
rnrnon price patterns are as f
. o11 ow: ~
, Dragonfly DoJI, 1 d w They represent the areas of uncertainty
'". d upper s ,a o . .
'-'V 1th
0 L11
~l 1'' 50111e of pS: Trend is a long - term ~rice pattern. 0 ~
tiodr an .. G vcstone Doji ca ndlestick is a candlestick Patt
ern .
a t~al ,rJtEN basic tendency of the pn ces can
6 . Ver a period
st e OoJI: adow
9. Gr,ive on
ra
They repre ent the areas of uncertainty \V Hh (Jl vea rs, the e identified as in of ?ne yea r to th
bod ' arid lower sIl . . . • . • . 0 llt a , d creasin ree
) Wh"t I . Ma rubozu White ca ndlestick 1s a white ca ndlestick . 1~. teen · n be d efin ed as the direction ;.... h' g or decreasing
Marubozu c. • . k '-'V 1th 1 d ca "' w 1ch th
10. .
They repre:.cn1
stron<' bullish trend m the mar ct.
o
Out sh
ad A tren d rnovement and downtrend is th e rnarket is .
war e dow rn oving U
lack: Manabozu Black candlestick is a black candlestick . (Jlvs. the ti P rn arket as measured by an average . nward rnove . p trend
l l Mani b ozu B '
1
' 5

. . \V1th f the . or ind rnent of

· n,cy rcprcscnt strong bearish trend m the market. Out shad or o than six months. Trend Imes are lines th ex over a peri od .stock Prices
volume· 11,ese arc hybrid crea ted by combining the feah 0
lvs. 1onger d them into the future. These lines ty ~t are drawn to id ~f lirne, usually
I 2. Can die . . . . ' •lites of af1 d
exten . . ·
t ms of declines. Sometimes, an intenn d
p1ca lly
connect the
enti fy SU "L
ks u 1 trends
I r's and Candlesltck charts. The effect of high volume 1s pictor· t 9uiv
c,a , . 1a 11 y e o1~ arid bo\: shown in figure 11.15. e iate trend that exf::d of ~dva nces
111 Phasize:
13. Shaven Head Candle: When close price is highest for the day. i
is seen - - - - - - - - - - - - - - - - s honzontally
14. Shaven Bottom Candle: When close price is lowest for the day.
15. Inverted Hammer: Shooting star and inverted hammer are formed W
45
long upper wick with no or ve ry short lower wick. · hen there .
1s
1
B. Price Pattern 40
TI1e price - volume charts can be used to analyse the patterns of price b h .
and Elliot Wave Theory concentrated on the analysis of price patterns. Identifica: aviotir. Do1y 35
trC'nd, secondary trend and minor fluctu ations (as in Dow Theory) was in fact th~o.n of ~rin,,.~
of price patterns over a time period. The pattern analysis emphasizes the tendenc ide~tification
30
movements in a particular direction or to repeat the same fo rmation over anJ ot th e Price
These patterns can be categorised to reflect a bullish or bearish trend ove r ye over aga~
ars. 25
In order to assess and forecast the share price movements, technical analysts b .
1
prices move in patterns which can be identified and standardised . These price patte~ ::e that Long-Term Trend
used to forecast: an~ 20

• End of bull/bear phase.

• Reversal of trend in prices.
• Direction of the new change.
Fig. 11.15. Upward Trend
• Confirmation of the new trend.
Types of trends: There are three types of trend:
Classified of Price Pattern 1. Up trends
Reversal Patterns Continuation 2. Downtrends
Bullish Bearish 3. Sideways/Horizontal Trends
1. Up Trend 1. Down Trend As the names implv h h .
1. Cup and Handle J'w en eac successive peak and trough is higher, it's referred to
2. Inverted Head and 2. Head and Shoulder 2. Triangles ~ an upward trend (Figure 11.16). If the peaks and troughs are getting lower, it's a
Shoulders 3. Double Tops o~v,ifrend (Figure 11.17). When there is little movement up or down in the peaks
3. Flag
3. Double Bottoms anal! troughS, it's a sideways or horizontal trend (Figu re 11.18). If analyst want to get
4. Triple Tops 4. Wedge
4. Triple Bottoms re Y technical h · h d
5. Resistance Level its O , e m1g t even say that a sideways trend is actually not a tren on
5. Gaps
5. Support Level Wn, but a lack of a well-defined trend in either direction. In any case, the market
6. Rounding bottom can really only trend in these three ways: up, down or nowhere.

1
 SECURITY ANALYSIS AND PORTFOLJo
. ~~~
~Ly5IS
---------
r

Fig. 11.18. Sideway trend chart

Ftg. 11 . 16. Upward trend chart trend lines encompass advances and declines b .. .

~-
0
ThU5,..... c Sometimes, it is useful to trap trends by dray ! IIUng successive tops and
·d of an upward or downward trend. These parall ~~~ 1 lin - on both the
51 eds from both the sides are called channels e es dnwm to encompass
tren s .
HEAD AND SHOULDERS PATTERN: The Head and Should .
(b) ost reliable and widely used of all reversal patterns. This patters ~a:ern IS by far the
mf an uptrend. 1his pattern ocrurs at the end of a bull marketm md _cates a reversal
o flankin . e an IS characterised
by two smaller advances g a higher advances just as the head lies in between
two shoulders.
In reality, the shoulders
. are not always symmetrical
. · This does not m · any way aJ ter
the signals proV1ded by the pattery,. The unportant requirement is that the shoulders
should be at lower levels than the head. The left shoulder is seen during the time
when there is a lull in the trading market followed by heavy purchases. The quiet
time in trading called lull is such to raise the price by pushing to a new peak. The
head faces with the time when there are heavy purchases in the market that it raises
it and then it falls back to indicate that it is far below the top of the left shoulder.
The right shoulder indicates that the price rises moderately by the activity in the
market but it does not rise in such a manner that it reaches higher than the top of
the head while it is reaching top, it begins to fall again and such a decline is
indicated. The formation is easily discernible once the right shoulder is formed. The
Fig. 11.17, Downward trend chart line that joins the points from where the final advance begins__ 1,and th
ends is called e
1:~ •
15 trated by
1 neckline. A trend reversal almost always occurs when the n~,e pene
SIDEWAY TREND: A sideway trend is characterised by stock prices trading in
the price line as shown in figure 11.19.
range where successive nPaks occur at the same level and successive troughs OC(1ll
h r- .
at l e same level. The two levels create parallel trend lines. Dunng t 5
hi time the The head and shoulders pattern may be formed over short period _of a fe; ;eeks 0
;

invcSlor should be extra careful and wait for more definite indicators of lhe futuJt taken even years to emerge 11,js pattern is the most reliable indicator o fef:,:
of be · , asuring the extent o
market movement. a ar market. The method aJso provides scope ior me
 Lysts

Shoulder

shou lder

I~ Fig. 11.20. Shows inverse head and shoulders

Neck Line . b akout into a bearish phase, once they penetrate the n=i,1:_ d
Pnces tt rem of the intervening
. reacti on. Th e measurino implicati'- '-"Ufle
. . rawn
. across
h do and shoulder f ormation.
the bo . If h o on 15 SJ.In.ilar as for
t e price line falls below the ~1.,,_
the ea . b ne'-"ll.fle bv a
.
distance equal to the distance . etween
. ·di ca ti.on .IS· to
the peak and the trough them
sell. Volume is found to be distinctly low at the econd top.
Therefore, a double_ tops app:ars ~vhen a sh~e hi_ts a ~gh, comes lower, again pulls
b ck but fails to hit the earlier high. So, pnce nse fails to breach the immediatelv
a ,

Fig. 11.19. A typical head and shoulder formation chart

fcJ hr.erted Head and Shoulders: As the name suggest, this pattern is the reverse of
22::i 2nd shoulder pattern as shmvn in figure 11.20. It occurs at the end of a
do-,•,,1ward trend and is consisting of three troughs or inverted humps (middle one
Breakout
h?mg deeper than the hvo others). A neckline may drawn by joining the tops o'. ~e
i:werted humps. When the prices breach the neckline, it indicates the start of a nsmg
trend which is dear from figure 11.20.

ln~se Head and Shoulders Top ([HST) formation is the inverse of the HST formatio11. Henct,
it reflects a bullish development. If the price rises above the neckline, a price rise is expecteJ.
Hence, it is signalling to buy.

d) Double Tops: The double top occurs as an uptrend is about to reverse itself. A double

~
top is formed when prices reach the previous high and react immediately, lhe 1"'0
!ughs reached being almost at the same level as shown b figure I 1.21. Two P'aks Double Top Chart Patten
comparable heights are seen, with a reaction forming a valley between them.

Fig. 11.21. Showing double top pattern

 CURITY ANALYSIS AND PORTFouo
Sf ~~~ ~,.LY5l~ -..........
1
~ WI en the price comes below the low ~Q~'1~ ,.it~I. ,. · resistance level (neckline) pattern .
. h,,,,1
111 co,n •s dnw•;rcn~
rd ll
starts. is quite possible that ,~;,'ev,1,,,, 'tJ
~ ftct4 t,reakS ~e le Top this pattern is also not th ISi corn plete and st ck ~
priM fi ·<· 0 downwo k . double top. Similarly to double t e l'tiil y b, 1~1l
t 1rlit•r nio~ , ,ftl:r first pea in ops, lh~r Q \"'1 Y '" '[rip
,\lir-e and Triple Bottom are reversal h
a easy tO .d I entify.
o ' ente . ~
rs in uptrend
II)' in pn~ ' ~ t'ria lll ,f'riple
1
Top
11 or the support. Stock tries to
c
break
art p
_a
It
ems When st k
.
r,,_ 1, t0 p, ol~o. 1 n bcnrisl, development, signaling I/rat Ilic . 1/ ~: • ce k . resista oc fails
tnp11 t , FM111ntia11 rt'prcsen s , - - - - - - - : Price is e resista ulti.ng in stoc to move in the reverse . nc~ or support f to break the
() , 1'/r 1< I ~Peqeq fl·Js res direction of th or 3 attenipts b
a· Top1 Top2 Top3
e ong°r.ng
· trend. ut
.f.1/1. , • A double bottom pattern . Stop ....,.._ la ,~
( ) Double Botton . Of double top and occurs -+__,~..__entry , r111
t I reverse n · In '
i~ j11 I I , d wntrend in prices. I eck nne ,
nt th l end of ll 1ol,e second decline
bottom, I is _.:_ Larget -....... eo1ri
dcnib c substan tiDlly more _vo ume, Stop tlec line
~upport_cd bie rice about to nse. The (Resistance)
indicnllng _t P 11 22 shows the double Fig. 11,22. Double T
following figure
f ation· me So. ti'mes ' the tops and Double Bottornop ;illd t
Bottom1 Bott
Support
b ltom orm t. found exactly at equal Triple Top Chart 3
Bottom2 om
bottoms ore_ sti 1~~ese provide valid reversal signals. Sometimes the patte Triple Bottom Chart
Fig,
levels, but tr· 1 bottoms. It must be th remembered . that longer ittms akesextend f 1I\J. 11.23. Triple Top and Tripi B
or ~
t iple tops or ip e .
r (b tt m) to appear and deeper e mtervenmg valley (peak) ottorn
second
will be top o o
the reversal. . tllore rel1 able rt and Resistance: You'll often hear technical
f A double bottom appears at the end of bearish trend and indicat (h) SuttlPP\etween the bulls and the bears, or the struggl anbea1twY5ls talk about the ongoing
There ore, . h h b II · es the 1. ba11 e (supply). This
. 1s
. reve al ed by th e prices a securitye Id een buye rs (demand) and
of a bull phase. It is quite possible t at t ere may e sma rally in price afters~~
~gm
also.
hs • double bottom. Similarly to double bottoms, there may be tripl b fil';l e, . se below
ers
(support).
Th . 5e om moves bo ( .
e support and resistance levels are th
:e declining trend or rising trend are expected lo lake a
d. ction. These levels are detemuned on the basis of past d ta
. a ve resistance)
1u::tt•
levcls at which
move m a reverse
Double Bottom Formation reflects a bullish development, signalling that the price is expectedlo risi ue below which
level . or ab ove w hi ch the price may not fall aor and - ... '",e th e
rise.help det""";_
(fl Triple Top: It is an extended versio~ hof(te D) ~ub!e T?p chart pattern as shown ~
figure 11.23, where stock creates a hig op1 urmg its uptrend but it is halted b
selling pressure and sto~ moves ~own until it finds a good support. As stock is ~ Resistance
in an uptrend, rises again and tnes to break t_he level of Top} but could not really 5

break the level thus creating Top2. Due to selling pressur_e st~ck fall s to the support 32.0
level and rises again and tries to break the top for the third time. Top3 is created at 31 .5
this level. As it tries to break this level third time, bulls give up and bears take control
31.0
and bring the stock down ·to the support level. If the stock breaks the support lel'cl
(Neckline) the pattern is complete and stock enters in downtrend and may resull in --'"tt'------~,_
Support
. . . . .,............,'--_ __.,,__r 30.5
heavy fall in price of the stock. Patience is the key for an investor to enter in this 30.0
stock due lo upward and downward movement of the stock. This stock remains
range bound for a while as it trades between two levels. 29.5
(g) Triple Bottom: Triple Bottom seems to be extended version of the Double Bottom 29.0
chart pattern as shown in figure 11.23. This is a bullish reversal pattern and worh 28.5
~xactly the opposite of Triple Top and signals reversal of downtrend. Stock trading
28.0
in downtrend is halted at a good support creating Bottoml. Stock rises from Bottom
level until sellers take control from the Resistance level dragging back the ock 10
st
sa~e level of Bottom 1 creating Bottom 2. As the support is strong enough ock rues
st
again
1 nd up2 to resistance level and falls for the third time to the same level as of BollOOI
a creating Bollom 3. When bears fail lo break the support for third time, ii~
control over the stock and Bulls take over and stock rises again. Once lhe st
Fig. 11.24.
11 _30
.\ ~ it
. d. ir If\
1, '·
. ,ni Fi~11n•
iill (1 11 •
11 ?-t ::.up
sECU
1
RITY ANALYSIS AND PORTFOLIO t.,
.
. .

·- ' b the blue arrows). es1stance on ti

·11 tr:itcd )'
~1.1rk•·t ,><_'' •:•',~.:-cl th,11 J stock or '
'
AtiAGE
port s the pncc level throu gh WI .
R . 11ch
il \ lo 1
l e Olh
market seld om surpasses (illustrat d !'r h rJt
, e by the"rtd.
c~
,
"1~~..
rt'~,.,rJ,'- Ii
t'/ILy51:,

5ell a
11 25 shows that if the share pri

tantly seem to come forwa rd to p

. .
111e figu_re . kf1own as res istance level. Th~e ters1stent1 y fail s to .
te•
,,el, tJ,1sch1ssed previously, but then saw the s hperhap~ becau nt e above a Cl:'rt .
r a . s are - a th· .
,v,'hO pl.l t the price they previously pa id. li kew·ise, a sPrices fall , toak the
Upport level .
(Si)
is Pnce peopl
a1n
_opportunity
e
,
i• th•' rn"" . .
t~d . toll"ers cons . revent the share pnts a price at Which
t, ; r ces dro .
· ··)
,rro"~ · · 1eve1 belo,v which the . market. 1s unlikely tof I fllrtne · t and resistance levels are import pping any
. rt /fVrl is the pnce 1 ·s one above whJCh the pnce level is unJ'k_a I. Ori lh or . ant tool •
Pp
A 511pt' d t11c rcsista11ce 1ei:e ~ wi th reference to recent history of pr' I ely to t' ~ fhe su . the course of pnces, and in makin s in confirmin
oth,·r iJn '1 ·•Is arc determine ices and '1<:. asung g appropriat . g a reversal .
n,r::c t1fo. ...e,from
t nc va lue to another. ker... forec d J-Iandle: A cup and handle chart is a bull' h ~ Pnce moves. ' tn
o . t t. t 'P , cup aJ1 d trend has p aused but will continu _1 continuation patt .
on chJngino . I vels are seen as impor an m erms of rnarket
d resistance e I I h Psy h (1) tne up~a\onfirrned . As it is clear fro m figure ~1 12n6an _upwa rd direct~rn tn which
n,,~ support an . and. Support and resistance eve s are t e levels at wh·c ology rTl is .ch . d . this . on once th
Jnd supply and_,~_em to buy the stock (in the case of a support) or sell it (in ich a lot Patte1<5
.,, a cup, w hi
h.r-e d
1s prece. ed by an upwa rd tr '
b l end Th
pnce pattern fo
h rmsth wha1
e
of traders nre w1 ing I trend Jines are broken, the supply and derna d the c.ise 100 . and is forrne y a genera ly downward/s1·d . e andle follows
1 auon . eways m e cup
of resistance). ~henh~ ::ck's movements is thought to have shifted, in: ~nd t~ forfll ce the pnce movement pushes above th . ovement in these .
. e On d . e resistanc 1· CUntv'
p ychology behind t d resistance ,viii Likely be established. hich ca5e pnc · the upwa rd tren can continue. There is a .d e mes formed . ·h
. levels of support an . . die, w1 e-rangin . mt e
nc\\ e eak rice of the stock 1s called the resista nce area R _ hafl f pattern, with the span ranging from several g time frame for th'
In other wo rd s, th ~ t p hich the stock or market rises and then falls. esist.irice type o months to more than
a year.
ts
O
level is the pric~ leve :end or a sideway trend. It is a price level to rephi~atedfy. Cup-with-Handle Chart Pattern
. Occu rs dunng an up
Th is h A this w ch ,.,_
atedly but cannot break throug . t level, selling . ie 0

market advances repe increases

which causes the price fall. . Cup
I h the previous low price of the stock. It is a price level t .
Support leve s ko;vps rice falls or bottom out repeatedly and then bounce upo Which _ _ _ _,-_Left C__.up_ _ _ _ _._,._
a slock or mar e . ch agaut - -+
stock increases as the pnce approa es a support 1eve!. The bu . P ivot% of
Deman d for lhc . f t k t· ·t fr y1ng Setup Left..,Cup
pressure or th e demand • supports the pnce o s oc preven m g I om goi ng Iower. Gain
%
~ _L
Supprt and Resistance Trading Channel . ll.
- - - - M id po int _ __,__
Microsoft (MSFT), 5 year, 1 Week interva l Price Chart) Cup of bas e
35 .97 1 Degin
35.01
34 .05
33.09 Base
32.13
E r------■■ia
Low
____ _ _ _ _ _ _ _ _ __Today
_:__ __
:,
31 .17 0
Re sistance Level >
30.21
29 .25
28 .29
Fig. 11.26.
27 .33
20 .37 lj) Triangles: Triangle or Coil Formation represents a pattern of uncertainty. Hence, it
25 .41 is difficult to predict which way the price will break out. Triangles are some of the
24 .45 mo~t well-known chart patterns used in technical analysis. The three types of t~angles,
23.49 which vary in construct and implication, are the symmetrical triangle, ascending and
22 .53 descending triangle. These chart patterns arc considered to last anywhere from a
21.57 couple of weeks to se vera l months.
Jul•J20:::-01~Ju-n,!20:-:-02:-J-ul,2oro-2-01
7
2-0-,--r---r---.---..--.......---.,..J
IC • 02 Jun -2003 Dtc•2 003 Jun -2004 11 0,.200 • l.hy•200~ 1, 11 . 2001 u,y-2 001 The symmetrical triangle is a pattern in which two trend lines converge tow~ rd ~ach
01h er. This pattern is neutral in that a breakout to the upside or downside 15 ~
Fig. 12 ' 25 • Resi stance & Support level trend chart confirmation of a trend in that direction. In an ascendi11g tria1tgle, th e upper tren
•
Sym me trical Triangle
32
31
30
29
28
27
26
25
24
23
22
21
20
Tradors will enter Into a
I ng position on a break 19
above lhe resistance '-.'
18
17
Fig. 11.28.

. A ap in a chart is an empty space between a tradin .d

(II Gaps. iriod. This occurs when there is a large dU!er.;c;:0 and the followmg
tradingtial trading periods. For example, if lhe trading range in pnces between two
Traders will enter into a
shot position on a break sequend $30 and the next trading period opens al $40, there willo _nebepenoid IS between
Ascending Triangle below the support
h ch
$25 anart between th ese tw o peno . d s. Gap pnce
. movements can b af arged gap on
Ie .ck ch b ·11 b e oun on bar
charts and candlesti arts ut WJ. not _e found on point and figure or basic line
charts. Gaps generally show that somethmg of significance has happened in the
Fig. 11.27. security, such as a better-than-expected earnings announcement.
( )Rounding Bottom: A rounding bottom, also referred to as a saucer bottom is a
line ~ Ont, while lhe bottom trend line is upward sloping. This is generally lhoughi m long-term reversal pattern that signals a shift from a downward trend 1 an u~ward
of as a bullish pnttem in which chartists look for an upside breakout. In a descending trend. Thisyears. 0
pattern 1s trad.1tionally thought to last anywhere from several months
to several
tria11glt•, the lower trend line is flat and the upper trend line is descending. This~
generally seen as a bearish pattern where chartists look for a downside breakout as
clear from figure 11.27.
24.0
(k) Wedge: llie wedge chart pnttem can be either a continuation or reversal pattern. II 23.5
is similar lo a symmetrical triangle except that the wedge pattern slants in an up1Vanl 23.0
22.5
or downward direction, while the symmetrical triangle generally shows a sideways
22.0
movement. TI1c other difference is that wedges tend to form over longer periods, 21 .5
usually between three and six months.
21.0
20.5
The fact lhat wedges are classified as bolh continuation and reversal patterns"' 20.0
make reading signals confusing. However, at the most basic level, a falling wedg, .' 19.5
bullish and a rising wedge is bearish. In Figure I 1.28, we have a falling wedge " 19.0
which two tre d 1· . . . . f h rice was to 18.5
. n mes are converging m a downward direction. I t e P , 18.0
n~ ubove the • . h"le a mo,e Rounding
~\ow the \ower
upper trend
tre d \' \me, 1t would form a continuation pattern, w 17 ,5
1 Bottom
n 1ne Would signal a ~versal pattern. 17.0

Fig. 11.29.
 URITY Al'II\Ll.n~ Nl'OU t'Ut(TFol
SEC lo t.,I\ r,ALY!:,J."'
, n looks similar to a cup and ~I\Q~"1
c>'I- A ,. AGE ANALVSIS
1
11,34 .
11111 d1n~• t•ci
t10n1 _.i,.irt p;itt.\r fi,•urc 11.29. The long-tern1 n t'"''dl e •1
-holl'n II o ti a Lrr\.' ~il ttl:'
t~l ~r,t p.vErv-- . ~
Jk .1::
!,, • trigger, sue I1 as 1e I1andle in ti of th· t~ b 1t' .rifl!G ethod of moving averages is als 11.35
A n t tht" h,111 nflrn1nt1on 11:' Clip rs p ~I JOY> . al ni d . h o used b
11ithl'" I -1,. c,i ,1 co to tr;ide. ilnd h~,,~"' r· tis11c While tren s in s are prices can b y technic l
i th<' ,1l 11 pittern I . .f. ~~ ,,
.in•1 . diifi<u • 1·on t)1pical y s1grn ies a pause after h· Qle (ll 111e ,taf 5t,ares.thn t the prices appea r to rnove re tshhidied for po:s.baln alysts for for .
k. ,t .1 formil I I t h w ich ,
111, 1.: p•nnant~: . e 11,ese two s 1or -term c art Patt lhi;:, ,,,ice5 oi,apP en alysis
' ca n h c I p un d er such ci rcurnsta
a er hap ha;:a rdlyI e paItems, somn1
eca.strn
· g
(n) Flags ... nd , ist tiJ..el)' to con11nu . . erns a Pr .he r 50 an • · 1d t . nces A and b "' rm s
I n there is a sharp pnce movement foll , re Cont· ev,flt .. p• oioY verage nderlying h1st~n~a a a. 1t is a sumrna . rnoving aver e _very Volatile
. trcnu f ,cd w ,e . th I owed b 111~ ss '\ 1ri11g ~ol'l o~ u rtions to a .mm1mum ~y eveni ng out iemeasure of Pric/ge rs a smoothed
pnCI? thil Jn' om TI,is pattern 1s en competed upon ya a1io..
...,rn.• • . mcnt. I anoth 8e11 ·,, ~I ,.,~ta .,1e d1sto . prices is clearly di sclosed wh flLrctuations . rnovernent Which
·J.. 11, .,,·:: price mo, e o d.,recti·on •as the move t 1at started the tre nd lner shar?era1 1,•
p,1 rt.,...1 1-1 d 1n · f . en rnovj n shar .
::r " ' -, 1 in theht s.,tomi::last f rom one to three weeks. · ~ PattelllsPri, f,Jt ce5 ·!lg tren . the average pnce o a secunty over ng averages1 e Pnces. Th
mtwemen
generJ th· , thou£ •_:_,;___ _ _ =========::::::--- are1 ~~J:,if1or111"averageructisa movin g avehrage the hme
I'

11u
1
const
.
span of th
measures t e average over the pre .
a set arno are used -n. e
unt of tirne.
e ave rag h
. 'nus, a
e as to i.. _ d
'fo erage v1ous 10 t . ~ eterrn·
0 viflg av the ave rage va 1ues ove r the previoLrs 20 radrng days 20 rned. A 10
,o ures b
JJY ue flleas d each day a new o _se rva ti on is included i
. . days a n so on.· Re
d a day
ar rnov1ng.
J1efl'o riod use , tant number of points are always bein n the calculation an~ :less of the
6Jl1e ped so a cons eel of securities stud ied and depictedg averaged. The movi ~g e oldest is
npe ' · resp . . on the gr h
dfllr~ed ou! in line cuts the ~ctual pnce hne of the security or ap • Whenever the es ~re
· u, averag
i•1-o:,.ue price ·gnal for the investors to sell the shares. Conv olf the market index frmovmg
•5 a s1 . . fr erse y wh h orn the
the actual pnce 1me om above, it is the ri ht . ' en t e moving
·wo
J .,0rn it 1
t,on . e cUts . . . g time to bu average
Price !iJl . g average analysis 1s quite a useful meth d . . Y shares.
n,e .
rnovin
when it is based on long-term approach H
° tn find ·
tng out the trend .
. prices . al . . · owever a p . sm
,ecunl)' . g average analysts ways mvanably provide signal t b 0 tnt of caution is in
order. Movmbegun These are neither lead indicators nor iunctu O ~y or sell, after the trend
Fig. 11.30. Flag and Pennants
~,·ersal ~as avera~es should therefore, be used only with ot~e ~o:ts for change in trends.
. . d from Figure 11.30, there is little difference between a penna t Jhe mo~dge true but mathematically inaccu rate information Th er tn chnica'.ors, othenvise these
As it 15 ear . n and a fla ProVl ' . · e te cal analysts can use
. . dilierence between these pnce movements can be seen in the m·ddl i rr,ay
wee types of moving . averages -Slillple, weighted
. . or exponenn·a1 .
fhe main h 'ddl . . e sectj
f th mart pattern. 1n a pennant, t e rru e section ts characterized by1 _on 1 Simple Moving Average (SMA): This lS the most comma thod
odelines much like what is seen in a symmetrical triangle. The middleconverging
tren · the moving average o f pnces.
· It sun
· ply takes the sum of all
n mef th USed to. calcul_a te
,
the flag pattern, on. the other hand, s h ows a ch ~el pattern, with no convergence
section on 0
e past dosmg pnces
between the trend lines. In both cast:5, the trend ts expected to continue when tl-f Notice how the short-term average (blue line)
price moves above the upper trend line. is more responsive than the
7.5
longer-term average (red li ne)
c. Price indicators
7.0
We have finished our look at some of the more popular chart patterns. You should now
be able to recognize each chart pattern as we)] the signal it can form for chartists. We will now 6.5
more on to other technical techniques and examine how they are used by technical traders
to gauge price movements. 6.0

Indicator analysis is a newer form of interpretation of price-volume charts. It is a math- 5.5

oriented e~amination of price and volume information over a given period through a se~
5.0
of ~lcu!atw_ns. The objective of this mathematical examination is to predict where and _m
which duectwn the price may move in near future. The indicator analysis attempts to e5lablish
a mathematical relationship of current price to past prices.
V · · d· assifiN
anous in icators have been used by technical analysts. These indicators can be cl

(a) Moving Averages.

(b) Relative Strength Index. Chart by Metastock

Fig. 11.31.
,:-;--:;.] . secu~• • ,. .. ~----- ··· ·- • ........ ,,. 0 LIO~
JV'
1

'4·"
·ch resp
ge- ThtS
,&I- "- averaage of ·od EMA
O
O ice
1 rises and · falls
· faster
·
~
nsiveness is one hof . the key factors of \vhy this •is th e
among many tee n1ca 1 trad ers. As it is clear from 1n .
than a f15-period S\1A. This slight
,
le!= . d ,nd dh•;des the result by the numbec f
o\·er th_e rirnfc pe~o ,p;e in a 10-day m.oving average, the las toJ prices lJ '1h,-.
•~•••
~cl t1'o
't seem like much, but ,1 ,s an unponant •ctor lo r,,, '""' oJ sin,,
32, a 15-P'"
vif1S 1aver
r11o,;no
1 · 0 esn
I 1,oon. or c,an , . . . 0 I . '<d . .,,
a cu to ethe< and then d;v,ded by JO. As yo~ can ~• m F,gm e I I c os,ng . •n ,
added,_ gt.he average Jess ,espons;ve to chang,ng pnces by ;nnea :31. a ''•dPr1,t, 't f•o-~ree!1ce ctd re rucnS· A erages.. Moving averages .<re USedI toIs;dentify rum,,1 eends
to ma1'e . In . t1 e numb f t· sing th ~r . lr, o» .,fe0 .. Aov-~ng vto se t u P support .and restStance
11.:ffe! il.l µ• · · eve . MOVing d averages can
~n·od s USt'U
---' ,
. then caJculahon. t creastng
h . , f th er
I o ,me pen·Od s i e nu i117,·t!.
, ,

~
=..-one o f the 1..= t wa)'S to ga uge the streng o e ong-term Iren d andn the CaJq,
= fllt\ ,,,
1
. c>"
v,es
·:,t rsals as
f ,.. ell as
wo·fy whe
·den
th a security ,s movmg m an upeen or a downeend
er ing average. Asbit is .clear
f the mov th from Figu
·ty .re .1133, when da
th,t ;1 "ill reve""· !he lik, ,°'•, ,I•I ,e'\J<ly '
0
. n o d the price is a ove ,1, e S<'eun o m •n "P"en .
,w,.- u,d;.;dua~ argue that the usefuln~ of thls type of avmge 1.5 .
. ;nt ;n the data seri es has the same impact on the result r lunitect
r,,; ;.,,i
. A 10 'I"'
£V "- o
., the ,lirecb
',l II-' Jillo ~,age
i.eadt.f'lg upw
i.5 ..1•war d slop
ingard
moving
an average with !he price b,,Jow can r,,, ""'1 lo signal
"'t"Qu.~ .,r " a\''°'a do\"''
" pc•·
,.,...,,rs •·
in the sequence. The critics argue recent datega,dJ "-· ',.J',
..,..~-
ch hi h that the
.gh most
. a . n,ess of ..,.1,.
is "',iV'O I)',
and' therefore' it should also have a h g· er we1
· ting. O
f 1rus type f cnt.. ore
· in,Po ·ier~ . ~ "er¢ d:.....,....----
1Joi' 11tif11
one of the mau> faciors reading. to t . e mvention . o .other forms of rnovi . ''si
•osn, ,,'4S he..
Ju
2. [ineM weighled Average, 1]us movmg average md,calor is the least a,~;"
ng 00
the wee ar.d is used '°. address the problem of the equal we; ht'.on,n, .,!<. 1
1 SMA (50)
wcighted moving average ,s caJculated by takmg the sum of all th g I05ng. n,, r ,
a rertain lim' period and multiplying them by• d F
the position of the edcata p0 · Pric./rn,t-.r
Lng
dniding by the sum o e num ber o f peno s. or example • . •nt •nd ·•
f th
.,-,ighted ,_-,rage, todays d osu>g _price is ~ultiplied by five; y~s:Cd: f: ve-day liO,,
so on until the firs< day m the penod range ,s reached. These numb ys by fou, "°'
1ogelher and dh<ded by the sum of the multipliers. ers "' then ''ded
3. Exponential Moving Averabe (EMA): This moving average cakulatio
t,cto, to place a higher weight on recent data points and is regar; ~ses a '"'Ooton
th <nUch . }
efficient than the linear weighted average. Having an understandin e0 fas
i5 no! generally required for most traders because most chartin: e ralrur."'
ca!cuJation for you. Th'
_mos! important thing lo remember abou,r;;ages do U,, Notice how the tre nd is up
movmg average IS that 1t as more responsive to new information rela t·,ve toexponentizj
the s1mp~
. when the price is above the moving
average . Con ve rsely, the trends is down
~ when the price is below.
22
21
20 Fig. 11.33.

Another method of determining momentum is to look at the order of a pair of

1T.oving averages. When a short-term average is above a longer-term average, the trend is
p. On the other hand, a long-term average above a shorter-term average signals a
downward movement in the trend. Moving average trend reversals are formed in two
main ways: when the price moves through a moving average and when it moves through
E,,.
t~orice how the exponential ~oving average crossovers. The first common signal is when Ihe price moves through'"
movin g average ;red line) unportant moving average. For example, when the price of a security that was in an
responds to price changes uptrend fall b 1 . . . · F" 11 34 it is a sign that the
laster than the simple moving ut s e ow a 50-penod moving average, hke in 1gure · ,
average (b lue line)
Pre nd may be reversing.
The olher signal of a trend reversal is when one moving average crosses throughboanolhth
ere.
or exam 1 . e crosses a ve
f
;.,iJ_ Pe, as you can see in Figure 11.35 if the 15-day moving averag
10 117 24 a 15 22 ""Udy m · ' · st 0
t t increase.
ovmg average, it is a positive sign that the price will ar
Fig. 11.32.
 n u t'URT 0

that th tr nd . ~
in a d I r v r i g F
ownward d' . r
Ir ct1on,

95
31
30
90

85
otJce ho the
trend reverses once
the price brea s below the important 80
moving average (shown by arrow)
2
23
Fig. 11.34.
Notice how the 200-day moving 22
average acts as a strong level of support
21

Fig. 11.36,

Notice how the short-term . average are a powerful tool for analyzing the trend in a 5eeurih, Th .
average crossing above MoVlil!rt and re i tance point and are very easy to use. The mo t comm•,. _ey proVJde
the long-term average -~ful supp . . on time fra.m
signal the beginning of I.) used when creating movmg a erage are the 200-day 100-day 50-<lay 0-d d
an uptrend . that aThre 200-day average is thought to b a good measure of ~ tradin 'year a 'iOO-day an lO-
dav. e f , ay average
or'a half a year, a 50-day averag~ o a quarter of a year, a 20-day avera e a month and lO-
O
ooth out some of the
~
32 da . average of two wee . ovmg average help technical trader
that ;5 found in day-to-day price movement , giving trader a dearer view th price
trend. O
30
(b) RELATIVE STRENGTH
28

26 The empirical evidence how that certain ecuritie p rform better than other securiti
111a given market nvironment and thi behaviour remain co tant over time. Relative
24 strmgth is the technical name given to uch curitie by the techni al analy because th
securitie have tabili and ar abl to withstand both depr ion and peak period . Investors
Fig. 11.35. shauld inve t in uch curiti 1 b cau e the e have c n tant trength in the market. The
If the period u d in th l 1 · d 35 this relativ~ trength anal · may b appli d to individual curitie or to whole industrie or
. ca cu anon are r latively hort for e ample 15 an , portfolio consi ting of tock and bond . Th relative tren th can be calculated by:
• 1gnalf a hort-term tr nd rev r al. On th oth r hand wh 'n hvo average with relatively
tlm rames cro ov r ( o d 200 ' hilt (i) leasunng the rate of r tum of curitie
. · An ther ma1or . way moan · , for xample), thi i u d to sugge ta long-term· tan~
5
(ti) Cla ifying curitie
It I t vmg a erag are u d i to id nti upport and r 15
no uncommon to a t k h . d rever5e (iii) Findin
n once it hi t th u t. at ha b n falling top its d line an a·or . g out the high average return of cun'ti'e
pport of a ma1or moving average. A move th rough a m1 (Iv) ustn· g the technique of ratio analy i to find out t he trength of an individua1
security.
 r,AL- !»-;:,, ~
,&I- A is that the. ' mark t price' of cu
tir 1• ca
,~~ fl iP tli called 'intrinsic value' are d'iff rent nty and th e · . ~
,41
ft ,,iptio I factor. eming investor to detect uch d' and their n.. Pknce • JU •fi d 1
;1)1" f'lta di c . . 1 crepan ·••ar et e bv
:J~rt'e ...., for a . ·on to inve t or disinvest is mad cy. The ll'ln- Pace I Prov d, 1
iii/' (U'l deCJSl . e. v111en1 Uch I es an
~"°~"ed;
Orr tltJV
a ,,.
f 1e chnical Analy 1s: Technical analy . .
SJS I a
a descnPti~
v11
•ide 11iJ1S o tatistics generated b market activ'ty method of
• ea_,10g the do not attempt to measure a ecu• ·tv' Uch as pa t epvaJuating CUriti
I ,,, 1 ts . n 's · . rice es
atla I al'la y tOols to identify patterns that can su , intrinsic vaJu b and Volurne
b} ;ca tJ,et ggest futu e, ut in ·
1e~ iil'ld o v·fference between Fundamental and T . re activity. lead use
JfP 1 -..------:-------- echnica}
cJ1 Fundamental naly i naly i

His per pective is long-term •

. in Hi
nature. H e 1s cons rvative in his OUtlook is h
O
approach. H e acts on ' What ~e is aggre iv ·term onented.
hould b '. 1 '. e. He ac on 'what

2,
oifference
between
He consider total gain from H
equity inve tment con ists of ~:o~
not distinguish betw
current
·ncome and
1 •
capital gams.
current yield by way of dividends H .nt .mcome and capital een
and long-term gains by way of e fi~ Intere ted in hor
cap1. tal appreaation.
. . pro ts.
-t:
Base of He forecasts tock price on the
Analysis basi of economic, indu try and He foreca t ecurit-u p . b
tud . •, nee y
company stati tics. The principal ymg patterns of SUPPiy of and
decision variable take the form dem~d . for ecuritie . Technical
of earning and dividends. He ~alys15 15 tudy of tock e change
make a judgment of the tock' informatio
value with a ri k-return.
4. Tools I He u e tool of financial
techniques analy i , ratio and tati tical He u e mainl y changes of
used foreca ting techniques. financial variable be ide some
quantitative tool such as charting
etc.
5. Relation hip Fundamental analy i believe
between Technical analysis a sume that
that the market is 90 percent the market i 90 percent
logical and logical and 10 percent p ychological and 10 percent
psychological p ychological.
logical.
6. Evaluation Fundamental analysi evaluate Technical analysis does not
the large number of fundamental evaluate the large number of
DIFFERENCE factor relating to the company, fundamental factors relating to the
the industry and the economy. company, the industry and the
economy, but the internal market
data is analyzed with the help of
charts and graphs.
 URITY ANA LY I AN D POR'TFOLto t.,

1 I vs h tri ... In al ,1
i. ~01 ' ,l)ll( s,
f sho
I() h n, I ' rm ,1p1 '< ling
Ort-t •r
nti, · · of
analy · .
m,ir r 1I
,, LI p I lS b
. If
11
at th hi~t0 •~
are ·l:r th ,,
anal w
for th e 11'
tech
re
h pp ,n in L1 •t ·
"Wh, l had hap 9ue 51
tundam nt I a tart , ith At th m t ba ic
Chart Iev I l'llilr
fi nancial the financial la analy t approaches 'a techni
tatem n th chart . a Curity n-
10. TlDle Fundamental analy i take a T chnica l anal y i ca b
r lativ 1, 1 ng-term approach to . fr n eu
Horizon a tim rune of weeks d 5ed
analvzin th mark t compared minutes, fund ame~ ta?sore
to t~chnical anal i often looks at data ov analysis
of years. er a nurnber
11. Trading Fundamental analy i i u ed to Technical analysis is use
er us make an inve tment. In ve tors trade. Trader buy a d for a
In e ting buy a et they believe ca n beli eve they can sell to ssets they
incre in value. omebOd
e1se at a greater price. Y
12. Qualitati e Qualitati e analysis of a Quantitative analysis used .
\' company' fundamental drivers (Charts) Th e quan titat'i~~
Quantitati e driven by factual numbers and perf~rmance of a compan ,
industry analy is secunty y
13. Information It i ba ed on the informa tion
It is based on the information
relating o economy, indu try and relating to price and volume of
SHORT ANSWE R QUESTIONS
the particular company , hich is th e t ran acti on in the capital
enerall , available in th e ma rket which is analy ed bv the t. What do you infer from the moving average theory of technical a a 5 5, faplain he
three types of trends in stock prices ?
publication of the go emment, techn ical analy ts to pr~dict
2. What are oscillators?
other a encie etc. beha iour.
H. Internal 3. Discuss the essence of Techn ica l Analysis.
It i ba. ed on information It is ba ed on information internal
e ternal al to market. 4. How do volume and breadth of market indicate the rend o e ar e'
to market.
1 . B ic 5, What do you mean by bar charting 7
ha i philo ophY in The ba ic philo ophy in technical
Philo oph amental analy i i that 6, Men 10n two objectives of Dow Theory.
analy i i that the hare prices
ha a real ,~·orth or wo how identifiable trend that ran
a real worth in near fu b plait d by inve tors by earl) G ANSWER QUESTIONS
or can beat th mar
1 . De i nin
·in an arli r de · · n.
It . d 1·
id ntification of change .

gned to answer - , hat It · design d t answer - "' cn

h
l.
2
~~:s
eir
th e var(ous types of charts used by chartist o predict ne pnces and volumes
analysis of ind ividua l stocks.
to inv t in? to in t in? • How would you use ROC to pred ict the stock pnce movement? mdly eluodate i ,
example.
 ecuRrN ANALY ND PORTl=o
llo 1.a
''IA.ti
d ct ng th stock prlc movemen , I\ t.\
n P be used to
de erm n the di
Co~
·••tn
rec ion l'1 ,
Of th

•••

◊ PORTFOLIO MANAGEME T
◊ THE CAPITAl ASSET PRICI G MODEL
◊ ARBITRAGE PRICING MODEL
◊ MARKOWITZ MODEl
◊ PORTFOLIO PERFORMANCE EVAlU TION
◊ PORTFOllO REVISION
◊ GlOBAl INVESTING
 PORT O o
MA AGEE

INTRODUCTION
In current sc~nario, most of_ the investor spend their Portfolio is a ool in . e
whole life in earrunchg anthd. spendmg ~oney. !heir currents hands of I ves·ors or
. e rarely, mat thes. errt consumption
rncom f . de rres. Sometime investing in ar ous inds of
th investors ave eu par o income while cutting down securities like shares soc s
th:ir e penditures and o~ other _side ~ey may pend more mutual f nds, bond; e c. '
than their income to atisfy theu de rres. These ituations
may lead to imbalances.
When the consumers' income is more than their consumption de ires m that c they
opt for saving their money to meet the future contmgencie . One of the technique of inve tin
the money is making portfolio of investment.
Portfolio is a tool in the hands of inve tor for inve ting in various kind: of securitie
like hares, tocks, mutual funds, bond etc. depending on the inve tor' income, budget and
convenient time frame. It is built up out of the income of the inve tors over a p riod of time
with the motive of managing the ri k-return preference . There are h o types of portfolio in
the market:
1. Market Portfolio: It i a collection of inve tments in
Types of Portfolios:
which every type of a et which i available in 1. Market Portfolio
financial market i included.
2 zero Invetsment Portfolio
2. Zero Investment Portfolio : Zero portfolio inve tm nt L - - - - - - - - -
i that in hich there i lower ri k or gain. It i al , ainly· by ecuritie that
f' . . . . of complete or m
inancial portfolio which compn e The e ortfoho- can be achieved by
cumulatively result in a net value of zero. . .P
purcha ing ecuritie and elling comparabl ecuntie .
 oi.JO
,. ~ ro rnanag r . !lowing p int h
ff '"ort o J ow th in,p
.~r Dran
J f'lc~t erJ•
1
tmenl Pl n : T inv t th
r · 8 t Jrt1a~ ecuriti i vef'/ chall nging ta;o~ey. in
J, pr pr nt pre ents the fin st plan to th .· roi ct
,,panagerl1 . g their id le cash which i a in~estor
n1
for ,n
ve l1J1
.r rnent an d a per the1r. incorncordingb
t
o
i,e1r requJbility to und rtake risk . e, Udget,
t JJ'ld a . .,
age . the ru k: lnve ting the amount .
'JJliZe . th 1evel of ri k inp wrong n ds
{ifll- . ads to increa P
2· . curit1 5 1nt reduce the ri ks and hence· ~r_tfolio 4· e,rsc, ali,ec
..,,311a
g me of lo to th mve .
tor while 1•
mm1n,iz
•
0 o
"' chance . nve tin h
tne .05 und r the expert guidance which g t e rnoney
tfoli rnay re ult · • 1n mos a
por the financial need : Portfolio rnana In tncrea ing PPTop
considehr
3• . money of general public after ~ders are th experts in th pro
t t e . erstandin h . ea fields 1
,rwe recommend the most appropnate inimitable . g t e1r financial ·
fir,a~ly risks involved. mvestrnent policy f nth d a d
(J'lirUrnurn . . or em \', u,
PORTFOUO MANAGEMENT al ized investment olutions: Every invest .
d d . k
broadl con i t of thrc teps·. Pl::i,.,~ ·
4. Pe
rsoJl
d"fferen
1
.
t financial nee s an requirements. So
1· d .
or in the
d . mar et has i
' un er this t k-'
~-
vn11 and
ment pr ce -.u11ng provide persona 1ze investment oluti ec,uuque th portf
, e)(ecuti rnandag~d requirements. ons to the mve tor a per o.1
on
and re, ¢5 U

or1orit1za11on Authorization Reporting osJ E:i-1"1'VES

'-' .. OF PORTFO LIO MANAGEMENT
and and and Sta teglc
Balancing Activation Review Change

Plan Execute Security of Principal investmen

Prepare Harvest

Consistency of returns
l and th £ rerno t t p in th of project management ~
p begms with i · · in objectives and constraml\ Capital Apprec1at1on
On the blish , guid · rm of an investment policy statement
Marketib11ity
mu t be \ruch will help in taking futur · trnent decisions.
2. Pr · ond tep ct management, the plan must be put in L1quid1ty
10 e plan th ari u a uld be orted out and the
0ivers1ficalion of Portfolio
d I ion can b mad on imp! rn nt th trat gic plan in an eff ctive manner.
. · ct · dback: In thi te m nit ring of ongoing portfolios Favorable Tax situation
d dback th performa f port · -v re evaluated and also
ari 'but d for the gro\ and f portfolio were a~o
n idered. OBJECTIVES OF PORTFOLIO MANAGEMENT

. . . h mone . the main objective i

PORTANCE FOR PORTFOUO MANAGEMENT I. Security of Principal Investment: While mve tin t ' y, the investing amount
tin

afety of the amount of every .mve tor. Safetv means protec

fr ent variations. Port fOLi 0
In a 1 ) mm' langtiage, the art f mana in an individual' inve tment i called :rt not onl from lo
·1
but al o afeguarding the rune from equ
lu m n ment. It i· a n d of an h ur a 1t inv Iv mana in mon Y und er the e\F

C
 RTFOLIO
oal and
al . Project
e properly
o, portfolio
· , th re are
of them are li ted F
q
01,·: . d C
It u e th op . a or revealing the q
1. !_, tr n th kn me Ir
_. It plian t , 'ard chan e. ad
retur s e c
Fr · and p
· lead turn ·
4. Prop r q · · ati n f dat can b p ible with the h Ip of portfolio manaoement
which r c ntr 11 d p nditure.
· · ancial portfolio . - Better con i t nt, pr ci d, and improved quality of data throu hout e enterprise
n thi would lead 6. Redundant and irr 1 ant m rrnation can be elimin t d hich ·n r move ome
°' th tock often ineffici n from currin .
Better n ntrat n trat gie which will help in achie ino- the ob'ective .
FOLIO MANAGEMENT . Benefit of c mp titiv advantage.
1, 9. it moti e i to incr a and tabilize the returns of the inve-tor O it is not at all
• 0
a detrimental factor to , ork.
ur n rtf lio manageme 10. Help in id n · ring and maintaining th appropnate . to k levels and proftle of key
ll r and on active bas application , capabilitie , programs, and initiati

a ent: . . nt i the contra t of acb.

f\ ·
I t
t th
h tl
al w1. th a fi ed portfolio d the inve tor'_ financial
need portfolio manager i a per on ' ·ho properly under pta~ his income and n ta in.,
and e pectations de igns a uitab]e inve trnent plan a
 M NT
lT
ollowing fo

r
. With .
h1 in t 111in
rs b 1
y kl'('p·
. . 'nR, Return ( )
nt I ri k r d
Lt tio 10%
n t put all h·1 n thro
ith littl irnp ggs in s~g 13%
act on "I'll II
Potenti~ 1 %
Ill 1 %
0.1
TFOUO MANAGER IV 0. 1
E pected return ( p )
r anal 1 of ell nt _ liquidi p ition, income, e p ctation ti 0
, rne horiz
al - t all ati n and tra 1 ction to m et th client's needs. on etc. dard deviation
b th pr ce of di ersification to elim· , iate un fhe tan
systematic tan dar
d deviation = a = / I.p(x - x)2
In e in \ ariou cunue after anal zing the market ituation and tr d
. en s. Alo, van.ance (VAR) i qual to the tandard deviation squared or ,
u-.
S. Put ef O to r duce the transaction co ts by minimizing the taxes, liquidit Return ( ) Probabili (p) Deviation from
et cost
e p cted return
PORTFOUO THEORY ( --)
10% 0.2
Portfolio mana ement, as discus d earlier, is a process -1
\ •hich compris of numb r of acti itie of inve trnent in varied Portfolio theory explains that II 13% 0.3 -0 003
a and oth r ecuritie . It i a complicated proce s and portfolio is constructed in 14%
such a wa y that it can be
in ol\'e fr quent and efficient crutin of activities. Portfolio molded as per the changing
III 0.1 o., oo-
i con tructed , hil keeping in mind the objective of conditions and requirements IV 1 °o 0. 1.7 1.1
inv tor , it pr er nc regarding risk and r turn, tax liability of the market. arian e 4."
and variou other constraint . Th portfolio i made in uch a way that it should be molded
a p r th changing condition of the mark t. In thi urplu in th hand of inve tor · tandard de iation (a) = ✓variance
properly allo at d and portf lio theor cone rn it lf w ith th principle governing such
allocation. = "4.5

\ hil formulating th portfolio th · · st b ascertained properly. Proper = 2.1

quantification of ri k in ol d in an . f risk which how that
to make appropriate deci io~ The tandard de iation i a tool u in portfolio to mea ure O the ri . If the same
t common · to u n pected returns. This greater the tandard de iation greater the pread, and finallf greater t that~, offer same
h
mel od i adopted to calculate ~h ri k as ociated with anolher ~ve tmen with I tandard
timat d it i t ad that provide the I
f ri k. Th m th c of more than one e\pected return th n th tandard de iation i compared. An mvestmd~ nd finally I • r th
de,·
. ,aon is cho n a I er the tandard deviation, e
ti
' • I r the prea
. , ·
·it h ct·tff r nt t th r tum ma vary dep nd mg ' upon the
k. Th point can b cleared with the help of following e amp e. 1

d
 U .ll I l"I. " 1-\NU PORTFQ
lo
turn

TOOLS IN PORTFOLIO MANAGEMENT

fan , tool are required in the proce of p ortfo lio cons truction. Following are the
ential feature of tho e to 1 :
• An organiz d method for appraisal of project .
• Required am unt of re ources.
• Und rtaking co t benefit anal i .
• Tirnel) progre and aluation report . While constructing the portfolio, the skill of portfolio manager hould be depicted from
~e selection of a et . So, variou typ s of a ets should be considered while inve ting in
• ppropriate communication t m, , hich will pro ide the required information.
flJrtfolio. Some of th m are li t d below:
• Tim l ' u of information a and h n it' r quired.
1. Cash and cash equi alents: The mo t liquid and highly redee~able fo~ of as.set
which form the part of portfolio is cash and ca h equivalen . It includes ~pie bank
PORTFOUO CONSTRUCTION depo it , ariou kind of negotiable instruments, short term bills, commeraal ~aperf
inve tor in mark t ant to ma i · · and minimize the risk factor etc. manager must ensure that the portfo)10 . wi·11 main· tam
· at least mall
. dportion
. future °
.its find
. m . advantages can be avai1e m
. cash or its equivalent form o that their .
a ith the in nt. o, o· uld r con tructed by the por~folio
. .1 d for a period of more than one
at the o ·ve of i r ac d portfolio construction proc 2. Bonds: A bond i an instrument of mdebtedne ue . unicipalities and
can ' c mpri of th f : , I • . • · d by the comparue, m . f
) ear. t 1s a long term proIDis ory note 1 1 ue . . t Various categones 0
J. ettin obj ti : Ev rv inve t r government to raise m oney and finance for vano~ proiechil. keeping in mind the
innt th mn v , ,ith .diffr nto bon ds " ere issued to the mve tor namely; can be issued w esecured and ..ui=~
. ality, Mot1,rPd
.... -

investor' tatus and other qualities like tax tatus, credit qu '
 u N ND R
..,
>rife 11 11
•l'i

'n own 't'-1

1
r •t , <>n' P 1
II I
!,1111)
·r 1l'lt1

rn o
ch <I

s ar
and cash
. Bond s equiva
3. Equities
4. Derivatives
5. Property
6. Overseas assets
d
portfoli . The portfolio
n t an a s t fo r invest' rnanger
bu in of the inv st g fund
t t the inv stors like~r. While
(a)
(b)
( ) · ·· · of fund in prop rty r ults in reduction of risk.
(d ) H · · ing capital for th bu in
( ) curity for loan purpos . Analysis of constrairts
p rtfolio will offer diver ification aero s equitie.
g int mati nal property in its horizons. However,
Deter mination of Ob1ect1ves
can allow inve tor to b nefit from the macro tre
while r ducing ov rall volatility.
Selection of Portfolio
APPROACHES OF PORTFOLIO CONSTRUCTION
b br adl cla ifi in to two ori nam ly; traditional theory
rding t · or is more concerned with two Bond and Common Sloe
ri t to a r with le risk element. There
d b tl · and h can al o enjoy th benefit of
1 t of div r ification and follow Assessment of risk and return
l in ification an inve tor will inve
d would b compen ated by
· to evalua
ri itional approa ch 1
th . t- b Sashidharan
Analysis and portfolio Managemen Y
~ lJRJTY AN AND PORT OLto

• Risk appetite: While selecting the a et for Risk-return trade off e plains
con tructing portfolio, a portfolio manager must that the returns are
ha e full knowledge about the ri k appetit of dependent on ns taken are
th in e tor. There follows the principle of ri k- safer as compared to
retum trad off which e plain that th return equ1t1es.
are d p ndent on risk taken i.e. hi her the ri k .
higher the return and lower the n · k IO\ •er the return. Whe~ever ~ m~e tor
underto k ome risk it is regarded a th e pnce · pa,'d by. him m antic1pahon
So ·ts of
. k _
return. This price dep nd upon th e n ctppe tite of an investor. , 1 ucce
basically dependent on the kill of portfolio manager.
 ,ffo~JO ~:wlh ., ,. . ~
pO •• ,th in mcom th n h mu . n in
U,y t V t
gr P
unt jnv t
•
m quity ma n, r rwn ~
t1rTl uir rn nt of an inv tor V y ton i t of :oUnt in tlta t r ~
ro~t m unt i inve t d in d
o,
Zt .
Ju t to
mount i to 100%9~1ty than ind ~Id be
inv t d p ndin " and
it J PP eci tion nd a t . avail th t in d b g Upon
ap . . e rn1x• Wh· a con vary f h
(b ital appr c1 hon, an inve tor . ii k . c io rorn Oto
carp of which it value appreciat mu ~ inve t i tng in rn1nd th
het te' lik land and h u prop h, W1th th pa nd in th obj Ch\e f
. d f . r., may p ag oft a . o
t th km o mv tments m rovid fa t irn . Inv With th
bu . tm t . .. ay lack . . r rate f lrnent
include mv en :' CUnties in tock in liqu1dit . o cap11a1 a in real
e uity up to 90-1001/o and rest for deb market. So, he~ Ano h r cla PPreaanon
q . . t. th por foli of t
S afety of Pnnc1pal and as et mix· G o rnay includ
· nerally
rincipal amount. Th mve tor ' every inv
P ·t hi b' . are termed . tor wan
t age of h e t . o J ctive was oiven
o· d ue imp 0 as n k-av er 10
. . to secu re his
J11ore of d bt mstruments e pecially h rtance. The . tor t ev .
ort term d b portfolio h ery
Rik and return analysis: Every inve t h' e t. ' , con
(d) . ~ and return as ociated with the portfo~~ ; ile inve ting fund
n ible risks. But in real world to achi Io. e expec higher re mus co ider the
po . k eve uffide t With rn,,,;_
to take more n a higher the ri k hi h . n amoun of retu ··..,uunun
ha h . k Th . g er will b th m an invest
ch a ed by ·
t e n .
· k li ·di
e nsk associated w·th
• 1
. e e profit. Ro+.,-11 .
an mve tm "'"-' is alwa}·
or
namely; 1I1tere t n , qw ty nsk, financial . k . ent ma) be of , L-:_
• tin
' h ns , market nsk any ""1d
etc. Before mve g e must properly analyze th . , purchasin power .
with that inve tment and al o mu t be dear w th ~vanous degree of nsk a SOci.a~d
accepted by him and after that he will inve t1 th e notion about the nurumum risk
e amount.
(e) Diversification: Aft r a e ing the risk and return th
tru ti . d' ifi
portfoli o cons c on 1 Iver ·cation of portfolio ln this
e next and th last t • th
. ep m e
are made in a variou clas e of a ets O that ~h proce the ~ve hnents
. 1 .ty . lim' d e e po ure to the n k of anv
partiCll ar am 1 1te . For example if an inve tor inve ts the fund in th~
hare of only one compariy, there are o many factor which \ ill affect growth of
that company. And unf~rtunately that company goe bankrupt; the inve tor might
c) election of Portfolio: Once an in tor has clear ides Selection of portfolio lo 100 p r c nt of the mve tment. But on other ide, if an inve tor owns hares in
about th bj b\ e now h move forwards toward depends upon the selection everal compani in diff rent ector of ociety, then the probability of all of those
th l ction of portfolio. ariou form th of objectives
compani going bankrupt at a ame time i very le . Diver ification help in reducing
part of portfolio. Tuer ma b quity, t k, bonds (a) Current income and the ri k of portfolio.
tc. I cb n of p rtfolio depend upon th 1 ction asset mix
?f obj cti\'e . The 1 ction of p rtfolio, hil k ping (b) Growth of income and There ar h o typ of risk a sociated with portfolio Types of nsk:
m mmd th variou obj cti i plain d b lo : asset mix namely; y tematic ri k and un y tematic ri k. (a) Systematic nsk
• Curr nt income and a et mi : If an in tor (c) Capital appreciation and • Systematic Ri k: Even after diver ification it' not (o) Unsystematic nsk
want uffic1 nt amount of curr nt income th n asset mix po ible to eliminate whole the ri k ome of lhe ri k db market influence
1
~ pr~porti n of . qui and d bt i that of 60 : 0 (d) Safety of principal and element prevail in the market which is ha ically cau d. Yje~~;ari k Fore ample:
~- ·, 60 o a~ount 1 m e t d in quity arid 40 % asset mix and that ri k is termed a::. sy tematic ri k or non- iver a ·
im t _ d m debt. Thi proportion ma ary change in interest rate, inflation rate, or ta rate. . d ··th a particular
a cording to the individual pr f renc . H r importan hould be gi en to cu~rent . k which is a oaate ", . .
' Unsystematic Risk. On other hand, th~ ns . . ation i known a unsy tematic n ·
m ome and tabilit) of incom and it growth b come the condary objectve . asset arid that can be aboli hed with diver jfjc
 mu compar ri and
th portfolio With low r~rn
• ri k .
in of ·
er ns .
vanance and

•
1.

industn -.

Selection of industries

Selection of companies in the industry

Determ ining the size of participation

2. Selection of company in an indu tr : Aft r selecting industr~, an in~estor has to

choo e th company within the indu try where h wants to mve~t his funds. For
e ample an inve tor want to invest in IT ector then he must _decide the compa~y
,. •hether it hould be ipro, Info y , Micro oft tc. Th selection of company will
dep nd upon the grm th, yield, earning and amount spent in R&D.
3. Determining the ize of participation: Her an inve tor decides the num~er of
hare of each lock lo be purcha d. Company i u fixed income
well a floating incom ecuriti . It' pur Iy n th di er tion of inv tor m ~ 1
ecurl~
ecurity he wi h to inve t. It is advi abl to in tor to div r ify its portfolio to
overcome the burden of uncertainti .
2. MODERN APPROACH
In 1952 0
. 'M. ar k. .witz, the fath r of modem p rtfolio th ory, d v lop d the ba ic
· principle
d hoW
of portfolio diver ification in a formal \ a ' in quantifi d term, which how why an
 1
p ibili
lh,1 lt1r
n tirly very in nt·
th "bility th,
h ving d

t prot ct
mn
(Jt t? pi I in
L' ' • • k
n . ma r
ving a folio inve ted in a
will lower th ri k of lo ing vm

Sy temauc
Risk
(Market R1s.)

Risk

NCE cRmERION Unsystematc

Risk
a· · in the pre-eminence of one (company R1s )
~ nunan~ m ans . Dominance rne
li r. \\ en h •o portfolio are. there havmg th e pre-eminans assessin
. ence Of ,,g
return but , :ith , aried risk or with ame level po rtf· oI10 on oth
er. one
different return, this is known a dominance.
sour Ce .. http·//www.
. mart401k.com
principl of trade off heh een risk and return. When there are
lio . · can b minimized b the under mentioned equation: two Portfolios SHARPE'S SING LE INDEX MODEL
ay = \ 'asa 2 + lPl +2 0Na wb aa ab aab) The inve tor of financial market would like to inve t the ~ - - - - - - - - -
model
E (R ) = ' ',E ( ) + ' bE (Rb) amount in the curitie which have low ri k but high return . 0 an
'h r . op = tandard deviation of portfolio Whi]e ke ping thi cone pt in mind, the Markowitz model i es e
good but, with the incr a e in numb r of ecuritie in the 9 any
\ = pr portion inve ted in each ecurity
portfolio an in tor ha to make lot of calculations in ord r ...___ _ _ _ _ _0_·_ _
a0 • standard deviation of ecurity a to get th fa ourable re ult .
a • tandard de, iation of curity b To reduc all th c mple itie , William harpe formulated
a • Covariance of curity r turn Thi mod l gav u an e timate of a ecurity' return a well th , lut o ind .. It_ giv
E (R, ) = E P ct d return of p rtfoli ' ingle value' to an in tor , ru.:h illu trate the d irability of indud~ an.' cun , m the
portfolio. Thi ' ingle value' i a ing the e. ce return; n in t r c_ ttin f~r the e tra
R = E P t d return of curity a
in tability f r holding a r' ki r a et. If an inve tor i im· tin in a n Y - runty th en he
& = E P ct d return f ecurity b mu t b comp n at d according! for takm · that t ra n.· mb licall\',
• e ce return to
TYPES OF RISK beta rati can b pl in d with th help of a formula:
A d1 cu d ri k M k . (RI - R r )
th ri k · I d ~ m ar °'
itz mod I i mea ur d b tandard deviation over the eman.
m u ed m thi mod I are: /3 1
 pri
t ,n I\ II ti\ 1 pri 1t i l

e c lcu ti n of Sh

Expected
tio (P) = St

. ancewalk.com/wp-content
mti ha, in
, \Vi,ere, t d Return (P) = The expected return of th
6 pee e e portfolio
d Deviation (P) = The standard deviation of th
5ta.J1dar R, = a·1 + /JRR
I M
+ e; e portfolio.
R, = Return on security i
ai = Alpha Coefficient a Constant term
= ~ ty el.it d ri .
. ,
5 return when market excess return is zero)
arian t th r tum of market index. (5ect1nty
= \ /3 i = Beta of the security

um RM = Return on market index

_ nsidered b , the Sharpe's Single Index Mod ei = Error Term
n e1 are:
t all the in,•e tor homogeneous.
f.dvan tages of Single Index Model:
the risk and r tum for each and every security a un.if There are few advantages of single index model which are given below:
orrn ho]ct·
p riod i5 en. tng l. It gives an easy method of constructing an optimum portfolio of tocks.
. Th .1 1• __:ncra ti.c returns in this model are independent across firms ·
2_It requires less amount of input than the input required by the 1ar owitz model.
sumpti n of Sharpe' ingle-inde model is that all the .
An th r mair. . f . co-vanati 3_There i significant differ~nce between the total risk of the entire optimal portfolio
· . , returns can be e plained b a smgle actor. This factor is called th . 0n calculated under Markowitz and Sharpe' Single Index Model and · ·avourable in
o ~
hence th nam " in 1e-mde model. " . also known as Sh arpe's Ratio. e 11ldex,
It IS
latter one.
TI, harp ratio · a risk-adju ted m~a ur of return _w hic~ is fr~quently utilized in 4. There is less number of calculations in thi model a compared to arkowitz
a _in th p r ormance of a portfolio. 1th the help of this ratio, an mvestor will able to model.
compare th p rformance of one portfolio ith that of other by making appropriate adjustments
for ri k factor. JENSON'S INDEX
There are number of pricing models that help a portfolio Jenson lnde s used o
H re, the performance of funds is valua ted on the basi of Sharpe's ratio. Sharpe's ratio meas re e encess return
1 defin d a a ratio·of returns nerated by the fund o er the risk free rate of return and the manager in taking inve tment deci ions and finally help in of funds e compared ith
total ri k a ociated \ rith it. assessing the performance of managers and in return ~he actual returns once a period
portfolios. The main two measures which help in evaluating of time
ccording to In e topedia:
the performance of portfolio are Jenson mea ure and Treynor L----------
Th harp ratio tell u \\ hether a portfolio' return are due to smart investment mea ure. d ·th ctual
d -.;ion or a re ult of e ce ri k. Although one portfolio or fund can reap higher returns 0 f fund when compare wi a .
Jen on index i u ed to measure the e ce retu~ . tandard while mea unng
th
~ ! P rs, it i nl ' a go d in e tm nt if th e high r r turn d not come with too much returns over the period of time. The curity market lme 15 edt a hao· the level of sy tematic
dditi nJI n J.... The greater a portfolio' harpe ratio, the b tter it ri k-adju ted performance this return. The actual return expected and surp Iu_ kgenerate • · k'
. d·usted accordingly a the n ier
h b n._ ne_gative harp ratio indicate that a ri k-1 t would perform better th an risk which i denoted by alpha. Here, the b ta rI 15 a l
cunt ' b mg ,inalyZ d " 5ecuritie are expected to ha e higher returns.
 m, k. l
1 lu, 11 11:0&.1
o~fr
, In"'
, n • , tiv •, ir z ro
n
, '
lt v•, h. nth
•I ,
------
in1tiJn,J
rp r r
12 2_)

r orm n ar highli
n n th fund again
itive intercept nd bnorm I p rfomi nc

Excess
f F rf rm n ~ Fund
Retu rn

r tum ,t mar
turn _ R1-. · turn) + (Mark t r turn _ Ri k
-fr • • t
reh.
'll l'rl))
ExcessMarket eu

= 17-
exce r turns from fund are hown on Y a i and e c r turns rom mar et on
= 10 ° r 0.1 a;<l~e~,
. regre ion line i formulated and po itive interc pt ( lop ) i hO\ ·n. This i an
aJ performance.
er achie ed alpha of 0.1, meaning that th abnorrn . .
e portfolio SCE ARIO 2: Market hnung
T
C 1: Excess
= 1 °o Fund
Return ...___une r
= 0
regr sslO
bt =1.4
ri k-fr " rat = 2
Jn n' alph =12-2-1.4X( -2) E cess r el et n

=10-1-lx =I

b t, = 1.0
J n n' alpha = 12 - 2 - 1.0 x ( - 2) = 10 - 1.0 x = 10 - 6 = 4

bt = O.

lph, a:12-2-0. x ( -2)

= lO -0
= 10- -t,., = .2
 r rtf lio
fr r t of r m
- lop of th char
, ind x i comp r d wi h
rri fr or Tm (Rm - RF)//3m

lpha Rm - Average marke return

/3 = Beta of market portfolio
Excess Market Retun
ntioned formula, Beta of mark t portfolio r:;:---:-:------
the ab rn b one. So, th denominator i alway a
In , tak n to h re i a measure of y tematic risk. It ·
l\ •t1 ~ B ta, . th b .
1, J . to on · ar ratio, except 1t u e ta m tead of
illuJb to th Sh . Ph. on which tate that it i a urned that
ililr d dev1a
_1fll andar . ll diver ified one.
u,e . t Lio l we .
tJ,e portfo , de me ure th return earn d m exce of a ·
r uru
Treynor. k a Inume d • It quantifies the reward-to-volatility ratio.
!flar et n 1 and /3 > O, we get a higher value from Tre
W}1erl rP > ! portf~lio for all the inve tor .
t a b tter . -
repre en 1 . A portfolio manager attained a return of a ' 1
for e am! ;_1 and the return acquired from marke · 14. ,
mea urernent
. k free a se t i 7%. With thi information calculate Tr 'I1 r
of an
Solution:
Rp = 15%
RF = 7%
/3p = 1.1
TREYNOR'S INDEX . R -Rf
Treynor raho = - p -P-
Another model in the field of portfolio management was developed by Jack L. Treynor, 13
common!· known as Tr nor' model. Thi mod I measure evaluated funds on the basis of
Tr \'Ilor Inde . Tre}nor index i defined a ratio of return produced by the fund over and Treynor' inde = (.15 -.07) I 1.1 = O.O 2 13 -% vith a b ta
above the ri k free rat of return at a given time p riod i. . risk amed in exces of what could Take another ca wh re ano ther partfOliO man ri r m • dde r intum
thiso ca . is:
hav been earned on an in trn nt that ha no div r ifiabl risk. It basically include return of. 1 and rate of ri k fr a t r mam • am · Th Tr 11 rm
on th~ curitie , hich are back d by the government for ample tr asury bills. The n k Here, Rp = 13.5%
h _re mclud · t matic risk and not the t t 1 ri k. Th t matic ri k which i associated
"1th tlu ind \ i rn a ur d b B ta (/3). RF = 7%
Thi i om tim I O kn be f3p = . 1
d riv~ with
. th h Ip of
' aa formula
own ' ahich
a ri ward
: to v I tility rati . Tr ynor's inde can
Tr ynor' ind , = (.135 -.07) / 0. 1 = 0.0 02 d the fir t portfolio manager on

Tre nor ratio == _P -Rf

R -----
a ri k-adjusted basis. Th
. r outperforme
Thi m an that the 2nd portfolio m:• tone an compare two por o:
tf Ii , p rforman
the bett r
r ul h ; ' . a aid that higher th Treyn~i' ;.'. ~- ified p rl
/3 p even though th y ha e diff r nt b ta . _t IThi inde i applicable to" e - J\e
P rformanc of th p rtfoli und r anal 1 •
 tu r i
d n
)f s

,, IJ- I
•aluat th

SHORT ANSWER QUESTIO

Excess SML
1, Discuss any two weakness of MARKOWm approach.
Fund
Return

...·.·. . LONG ANSWER QUESTIONS

. .
·n the modern approach in the construction of the portfolio 7
1 Exp Ial f I
1
2: What is Portfolio Theory? Explain the assumptions and pnnc1ples und rlylng the po o 0
theory 7

1.0 Beta
I l l

ource: hahid lohd., 1 a urin Portfoli P rf rman .

turn hind ar p ta i pl tt d on X axi . It
houl at t lio in whi h
d mly di tribut d above
and rit !in .

Comparing Treynor Measure and Sharpe Measure

in many
rm a ure
r u the
ant to all
 THE CAPITAL
ASSET PRICING ODEL

()ne of· the fumo h.t important thing to remember while inve ting fund -· m mar et .IS that
f · k Thi
the return l a nc on o ns . s explains that higher the risk an inve tor will take, the
higher the probable return be there to compensate an increased chance for I ot inve or.
One of the mo t important tools in the hand of finance profe· ·10nals to calculate the
expected return from an inve tment is the Capital et Pricing fodel. CAP. I calculat a
required return ba ed on a risk measurement.
The capital a t pricing model was developed by William harpe,_John Untne~ and !an
Mos in in mid 1960 that' why this model is also known as Sharpe- Linln"· . I m capital

as et pricing m del. Capital se pnc1ng model s

The CAP build on the ba e of Harry Markowitz used to ca culate he current
portfolio model. A already read, ill Markowitz model, an eparpected re urn of a
,cu lar security for a
. . ent of time and expe
mve tor elect at portfolio at one momrt · period of tune, . spec fie penod of t,me .
0
some return against the ame after ce ain_ al
anon in na. ture
the inve tors are ri k-aver e an d are r d \'ariance of
:0
they are more concerned ~bout ~he e~e: e partfolio.:
portfolio i.e. the ould like to mv . ·ven return and
• h aving
. _;.,...;rnum variance with gi
. ce .
uw=•· ·th given vartan . model The CAP ba ed on thi.
• ma imwn return v:1 o }alown a mean-va;:n~:lation bet\ e n the ri k and return
So, Markowitz model is alsth am afld h~\ t price are to clear the market of all
· of e • · t if a e
model provides an e ten 1Jn t b eff1oen ,
. rtf li that rnu
bY identifying a po o o
a sets.
 ~
ASSET PRICING MODEL
i ()
,,1~l- a rn d I that d rib
1
1~
0, • ~ d in th pri cing of ri ky hip
ri @}]
nd
thcll I N dr u
11 1 fJONS I CAPM
l!lJ,.tP .
,:, . ba d n c rtam a umption wh· h
~ \P 1 tc ar :
tor alway want to maxim12 the· .
[J1 d tr tncorn
1. e p
ct d r tum an tandard deviation
.
tor can borrow or lend unlimited
., In . amount at a
,,. ll irW tor who mve t the amount w·u h -fr
I ave horno
th market. g n.ous l:'-'P~Ct:Hin1r1c
to
ll financial a t which form part of portf 1·
-1. t an time at th market price and th o io are fully di\ . ibl
a ere are no re tri . Id
JI ecuritie ar available for every inve t th . ctio on
5, or at I trad d
0 transaction co t and taxes are involved. e in rnark
6.
There are many inve tors in the market 0
. the . ..
7. influence market price . ' activ1tie of f " III
o cann
done in two typ s of inve tments- risk fre
f in e tor to choo e the a sets. The e assets Pre defin d quantitie of all financial a ets d
e or the combination of bol rnay either . an no change can be d m that.
in 3 -_ or ris 9 1nve tor can mea ure nsk related to as ts 0 nl 6 th .
· future p riod . Y Y e vanance o
Ris free e th - in \ ·hich a fued amount Two types of ass
1. of r tum i e pect d , 'ith zero ri k. The most investment of funds ets for 10 _ 1nve tors are risk-aver e a they want more return with le
common e ample i trea ury bill or other 1. Risk free assets
mm nt seruri '· Zero risk do not mean the 2. Risky assets IMPORTANCE OF CAPM
comp I . ation of the ris but . ome ort
limin . of - - -. -- - - - -
~--~-~~--~~-
hich · una\'oidabl · nature, is there like change m market situati The importance of Capital a t pricing method can be explained belo :
ons etc.
e are th , ·her ther is no fixed amount of r turn is there and m 1. CAPM i a model for pricing the risk in al] curities and finall hel •
oreover ·k · . p an mv tor
the returns are dep dent on the efficiency level of market. Example hares, deb entu res to ~ e s the ~ as oaated with a portfolio and al O predict th e pected returns for
takmg such n ks.
et
To en ral idea behind C P 1 · that inve tor n d to be compensated in two way . 2. Thl method help in determining the market value inve tmen with J returns.
s 1.e.
tirn \'alu o m n : and ri .
RISKS IN CAPM
1. Time alue It i r pre nted b the ri k free rate (denot d by rf) of fo rmula
an · bu ount to inv tor for placing funds in any investment over Capital A et Pricing Model tart with the notion that individu I inv tment contains
of t of the · tor , ant c mp nsation quals to or more than two typ of ri k:
ma ,·ith ri k fr r turn a thj i minimum expectation one can
whi g hi fund .
1. Systematic Ri k: Sy ternatic ri are the market ri ks Systemat c risks are those
which cannot be diver ified in any way Thi rL k w ch cannot be d vers1f1ed
2· · Ev n_· · 1·n th t mu t e p ct ome k"md r pr ent the variation in an a et' value due to on o her and, unsystematic
m. Ba r and rati nal . If an in estor take I Inter t ns can be m t,gated with the
g n ral conomic uncertainty. For e amp e· ncrease 1n number of stocks
kind o omewhat m p n ation for that in rat th
r c ion and \ ar . The e are e ba i ty~ in the portfolto.
i:m f r ~m. Ri · ing th a ation required of ri' k hich er .mv tor mu t accept. while ' - - - - - - - - - - -
1m tor if h want to tak additional ri k. H i denoted a r Th y temati n.k
launching a new portfo 10 · e al the firm' profitabili .
·hich u uall; compare t ted r turn of th t to the market over n t only affect th quality of a product, but o
peri d ~ f tim ' 1th that f mark t pr mium. Th grid of e p cted return r· . R' k Un
.
t mat1c n
k are al o known a
,th th m Pa m th I vel f ri k. 2. Un-systematic is : - k e uritie and c
i pecific to m· d"1v1·dual to or
 p

~ tt k, in

'11
of risks
t r h Id bttt
it flu s man;
ctttar
tons
m 11:l.ain ca
thi y lts for
sternar
le
1mr' j nan in tm nt anct it
systern"tic

t the rL of the market goe up, th return of the

· hip can be hown by the capital market line. market
P int of view of inve tor and hi ecurity. It h
. ct·1v1·aual ecurity sThi
ows .th e
ms and the returns fr om the m
b 1 of Ra \.vi th Rm. Th lop of th line tha; rel st kinct
. a e Ra

d · normally termed a Beta coeEhcient

11 :
It me
. • a ure Higher
w how much the pnc of a particular tock ju
E peeled
the t ck market as a who! jump up and d ~p Returns
vn.
ol t · pany i to
th r value =
3
t d l t and Q)

ri a:
, the ',:J
0.7 1 value u
Q)

hi or can would
Q)
Q.

Id imply I <;lment). LU

m
 pJf .
,.... ,. k 11 · wn r ·
,

' '
. f
t
L nt p r oli wh n found w· h ·
.n · 1 ve1 of ns
·k I Ip
111C1t: ,turn f r given ' or converit •I
I ,.,t r Y, lo
fit.:
"Th ffid nt t consisting of a .
1 through the mark t portfolio
' a pomt
Er lin "
CML (Capital Market Linc)

t Opoortunitl

rr

a
The Capital Market Line

source·' Foundation of Finance by Alex Shapiro

The capital market line is illustrated above, with expected return .
. k . Th lin on ru
th y-axi and n on x-axis. e e show the relationship betw n th
~rn and the ri k of return for efficient portfolio of as e . The line dem
;e increa e in riskthe expected return al o increa e m ame propor ·0
figure demonstrate a the market portfolio and Rf is the n k free ra e
ourc : 111 CAP 1, Famrna Eugene, Fr nch Kenneth; Journal of Economic Perspectives

pl • at p int 'a' an in e tor e pects higher return so, he must accept higher INTERPRETATION OF CML
\' la T, an inve tor can ha e intermediate return followed by lower volatiUty.
1. Basically, CML i u ed for portfolio but ometime it i als ll:i d for individual
p · im , p ct here i the inve tment in risk free securities take
ecuritie .
d ri k ar added in the portfolio, the efficient set into
in g in · k fr curitie means th curities are loaned at risk free 2. In figure above, on vertical ax.is inve tment i done in ~ _fr ritie_. So, t tal
of th ame is Rf in th figure . It al o shows a portfolio having zero r turns should be equal to risk free returns and h re, n I!' zero.
3. Point M rn. the figure
. repre ent that tOtal returns • hould
k be equal to total mark t
returns and ri k hould be equal to total mar et ns . . th t th . k d
PITAL MARKET LINE 4.
I
r a b ond point comprise of everagthe p
d ortfoli which tate a e n an
nd return f market portfolio.
more than e m a
Th lin ar ffici nt t of capital as t pricing mod l i known capital market Line and return of th e portfoli O are d portfolio which tale that the
• of unlererage d f
ls th m thod which i u d to determine the b t p ition of ecuriti on the efficient 5. Area from point Rf to M comp_n eare I than or equal tu the ri k an return o
fr nh r. risk and return of the e portfoLio
market portfolio.
 N AND PORTF
URI
f in th i nt ----------

rt:tum n ,ttt ,nt F rtf Ii

rate fr tum.
tum n mark t p rt£ li .
tt tl\ r . . tf .
tandard J na . ti n f ffi 1 nt por oho.
• :i .. ati n of mark t portfolio.
tandard ' 1
1. denot d b . It i al o known a the Price of .
_t bne f rtf lio mu t b increa e if the stanctarct d ~sk. It
e t r tum o a p ev1ation
ne unit
1
=---

For emnple: . The price of a share of this company is f 175{]

Consider an IT busm . endth terpnseqm:valent of t 2000. The standard deviation cf the· After
. . ~ to 'lel ee f return
one ·,·ear 1t tJ ,r...th......... · k free ra te 15. 120,10 The expected rate o return on the market po tf
• • r oU
is Curren
. 20 o. and th ),
-tandard deVIa . ti' on of this rate is 15%. Compare this company With the asset0
on the capital mar t line.
olution:
Chen: r = 12% or 0.12
-,, f = 20% or 0.20
a 1 = 15°0 or 0.15 Expected S L Plot
Return
op = 40°!. or 0.40
E p led return · calcuJat d a :
r, 1-11
'P =r1+--ap
aM
= 0.12 + (0.20- 0.12) (0.40)
0.15
0.12 + 0.21
= = 0.33 or 33%
ctual p ted rat of r tum: Risk Free
Rate
r =(2000/17SO) - 1
=0.14 or 14% A,s -Beta
If \\e compar th ab value , th n '
m rk t !in . conclud that the entur li b low the capital
ometime the l p of S IL chang
required b an inve t r. ith the chan
 •fhi rn d l i b •d o unr
1
• m tirn it would b diffi
2
· B ta, which i t rm d a a m a ur
J.
tirn ·
od of

ite o th di advantage , CAPM

D P 'd 'fi . f I termed as
d help in 1 enti cation o a sets which
th
ffle ~ •u trat s efficient p rtfolios and 5e ar overvalu
1
tter CUnbe As
fr011·ch the actual and exp cted returns are equ Th · ~
i tu a·I ere elf
w ·ch means that the actual return is le 5 th h e
CML AND SML ·hi an t e expect
w dervalued the actual returns is more than th
be u.[1 f CAPM . e expected
'th the help o equation and investm ,
Security Market line W1 ent can be don a

It i. a graphical d mon tration of .

r turn of market risk anct

2. 1 . Mention any two assumptions used in capital Asse

Prid g e
2• What are the limitations of CAPM model?
3. Th graphs made define both eff· . 3, Explain briefly capital market line line.
. 1c1ent
portfolios as well as inefficient portfolios. 4, What 1s meant by security market line?
tandard d viation i The returns are shown on X-axis and b t
. y . ea
and r turns on Y-axis. coeffi aent on -axis.
ris r return for It demonstrate the risk or return for
individual stocks. 1. Explain how the efficient frontier is determined s ng a o
2. Under the CAPM, what ls the efficient set called 1 If there s
free Asset, w hat happens to the efficient set.
ADVANTAGES OF CAPM 3. What are the advantages and disadvantages of tJ e
Capital Asset Pricing Model? d ch
P 1 i v ' p pular method for calculating r quir d return, o ver u period of time.
4. What is efficient frontier? Explain about the cap,~al ;ea le~d~ge ~ e. o,c
F \ advantag of thi rn th d ar gi n b low:
portfolio, if borrowing rate is allowed to exceef d agram O does d1 r e
O 1
1. Thi m th d nl · a certainty where mo t of the 5. Explain the Security Market Line wi th th e help a
im v lio which h liminati n of unsystematic risk. Capital Market Line? , Selection Ho does Ma o ttz T eory h P
. h ry of Port,o1,o
2· 1~ 6. Discuss the Markowitz T eo
a · riv d r lati n hip b r quir d return and y tematic in planning an investor's portfo110
1
1 What are the advantages of adopting CAP
n ha t frequ nt mpir' arch and te ting. tions of CAPM
7. What are the basic assump ment?
model in the portfolio manage t n the st()( market.
· i r tin th f quity a ompared ~o ~: its val101 tz approach.
d. ta]. rati n ' 1 vel of Y temabc 8. Explain CAPM theory an d d under 1ar 1
determine
0
mar a wh 1 .
9 . Define efficient frontier a5

It i al" b nor m th d in term f pr •i :iin di count rate for u e in

i v Im nt • ppr, i al.
 A 8
PRICI

oouCTION
1"1:R o t pro
Jllinent belief of an inv . tor while in
1ne_tJ\ the return. , whole of th mv tment de
"'ill be_ n help in defining the appropriate meas
~bO . . .
fails to e plain the cro - ctional deviation
tema ti. e e planations of a t pricing and Arbitra
ative to the CAP . APT wa develop d by S e
Millu trat oint and ho at in an ·
d not be in r wh n o
beta (/3) ch . n an inv
•ario b. · d th value of
m b r r many
effe l pricing varianc .
Th p tion than th AP . Th
ptions are the follo ing:
I. lnYe tor ha
wealth ith m a uranc .
· Perfect capital mar t ar th re.
3
lnve tor have homogen ou e p ctati n .
C\uity return
factor is linearly r lat d to tematic
.
5· Th re
are amply huge curiti in m r t t pr d
 Return(%)
Re rn (

(A) 8)

_Q(handout ).pdf
Source: http://o1d.ba.m tu. du.tr/-ba4 14/Jid Chapt r - 01
t in w ll di • rsifi d p rtfoli r tum
In the mention d figur it arr th firm can 1 out Onl '
a functi yst m tic n k nd market equilibrium.
Y t mati ri k aff cts · mium fi r ho\ inv tment of fund in
Figur w 11 div r ifi d portf lio \ ·h re gu 8
ingle to k.
 N
0
l'

1 Pr uct
(1l fl ti n
(b) Jr1 '
I
I
lI1
I (C) nfid nc I of inve tor tc.
I (d) th r
I I mor th
---4-----,--- - Vh n
I I
I I
I
OUJ
o n.
and
yVh R
, J-1p1 · the b ta for fir t ri k factor

(0 ) (E (r1) - r1) = factor 'ti ·

n I v1ty for fir t . k
n fa
I 11 pP2 = beta for cond ri k factor
Expected Return(%)
ct r (E (r2) - r1) = factor ensitivity for d
turn econ ris fa 0
cl arly LUSION
~----
at th , pl t
r tum- b ta APT i ba d on a · ~d intuitive concept. The m .
multipl ource of 1 aJ o not re training as CAP
it aiJows having ample amount of information in their tock. Th
e there . fl . th. th
a\ rnod 1. The main _aw m 1s me od ! that an mve tori
th . k ourc but this concept was derued by academicians 0
th• nfO th view that more the beta , more the tati tical complica

dernen·t when comparison

are . 1aero s model have b en made, the
.
agains t the competing mode .
{E)

' h l
SHORT ANSWER QUESTIONS
(rp) =Ep ct d r tum of th portfolio. 1. What do you mean by risk less arbitrage opportunity ?
r = R r tum
2• Differentiate between APT and CAPM .
= E p t d r tum of mark t p rtfolio
- B ta f p rtf Ii
lis LONG ANSWER QUESTIONS
ur f mark t ri k.
. . 7 State its merits and demerits.
·
f Arbitrage Pncrng Theory th t
1. What are the basic assumptions o . I development of APT, do you thin? a
In 2 Based on the current theoretical and en:prn~~ the CAPM for individual investors .
• this approach offers a pra ctical alternative
b f r an im t r i t id ntify three items:
t a p, rticul, r curity.
1at d \'ith
k.
11 th fa t r . •••
 4RkOWtTz
(C} 0DEL
bl · indica ted a
Arbitrage opportunit
ho , ct d r turn place when the _Y takes
d line also prefers t o buy th investor
point B on that line from the market :h sec~ri~
d f3 h r is al o equal u nderpric e d and ere 1t 1s
S ecuri·t 1es
· i n the see th e
to 1. where it is overpr· market
ICed a d
ibl ? An " er to thi is earn profit according! y. n

upp
f II \ in

Beta Expected Return%

10

MEANING h is the combinati n

ht out b • tarkO\\itz_ and arpe, be mad in
dem p rtfolio theory, a b~o~ rtfolio. Combiilahon of
curities to get the mo t efficient Po
 [§]
<
rn

p ct d r tum = .5 X 11 .5 X =
14 17
p ct d r turn = .5 X 20 + .5 X 8 =
14
SSUMPTIO S AB var'.anc = .5 (11-14)2 + .5 (l 7-l-!) ==
2
XYZ vanance = .5 (20-14)2 + .5 ( ) ==
· und r 14 2 6
ral a lllllpti tand ard deviation = t Varianc == ✓ 9 ,,,,
ons.
tandard d viation == v Variance = f36 =3
in th 1r kn I dg all th fact b 6
ntinu u l mak up ri r retu,-,... a 0 ut AB and XY~ compani to have th ame e. p cted r turn of
·••S. rnuch ri kier than ABC tock, b cau , the standard d . . ·
TJ1 nt ha\ ea mm n goal. Thi i th a . ,t(ICk ttt r 3 Wh n AB r tum i high XYZ return i low andev1~tion of th
vo1dance d la e · , vice- , r
1 o return from _AB20~¾ thlfr
aJ11~ woulti_ d lb . % return from XYZ. Likewi h1
f r tum that th y can h.i yz return 1 o. a par cu ar mve tor hold only ABC or , z h
ac eve 11 ;o . th tim of bad p rformance.
lo e in
(d Suppo th inv tor hold two third of AB and one third of XYZ, th r tum
eir d n th :p cted rate of return of an inves._ calculated a follows:
() lluent. be
out th1: th ory that it , a u e~l. in ight to find out how the
corr lat d to each oth r. B ' cornbllllng the as ets in such a wa
Jo t rLk, ma. imum r turn could be brought out by th~
Rp = L XR
t=l

Rp = return on th portfolio
f)
t , ry inve tor assume that while making an investment, X 1 = proportion of total portfolio in\'e ted in
tmen in such a wa that he gets a maximum return and R1 = e pected return of curity l.
rround ri k.
Let u calculate the e pected return for the b th th po sibiliti .
that r at r or larger th return that h achieves on hi Po ibility 1 = 2/3 11 + 1/3 20 = 14
factor that urround him. On th contrary, when Po ibility 2 = 2/3 17 + 113 = 14
r tum can a o b p t d to be low. 1n both the ituati ns, tl1 inve tor tand. to gain if th \\ or t cu than b ' h ldin
h) Th either of th ecurity indi idually.
add inv tm nt to hi portfolio.
Holding two ecuriti may reduce the p rtfolio ri can b
In dev lo · · m de), Markm\ itz had giv n up th · ck p rtfoli and introduced calculated with th h Ip of the foll wing formula.
· · ·cati n. ngl curi~- portf lio would b if th inv tor i p rfectly .,
a = ,1 2ai2+-
2-ar+
~
2, 1 2(r1-., 2 a-\
v
that hi tati n of high t r \ •ould turn ut t b r al. In th world of P d ..
0 = p rtfolio . t ndard ,·iahon
of the ri k-.i er
to , b au ~ diver ific
in r w uld lik to join Mark witz rath r th an
n r due th ri k. Thi an b hown with the
~ = p r ntage of tot.ii p rtfol'. •alu in t k. I
ing iJlu tration. 2 = p rcentag of tota I P rtfOJ1 , alue in t

k of A 01 = tandard d viation ot -,tc -~

mpan\ and
pr b of curr n = tandard de\'iJti n of st -k -
02 d
n pr dur is li\• n in th tab) . ar giv n. r1 2
= c rr lation co- ff1 i nt of , I an , 2
 N 0
N M 114
t.t ~
§ ~
r1 portfolio
"n b, be found
·~ti
'nilltq. . X'. ~ a2~ - (r12 a1 a2 a12 ai2 - db ·1.0.
rrel ti n c - ff1c1 nt I I th n th (2 r12 a1a~\
Lt u 1-l (11-l) tlil? c · ho f IJ
II d ,vicJtion, th ~ th combination of two cu . . m II r nd rd d .
_.,
tJfll1.1rd than wh n e1th r of the s curity i t k nti provid I VJ bon to larg r
' 1 ) ( 17 - I ) (1 - 14)
l,f rclll rfl -1 < 3/6 i.e. -1 < + .5~ en Ion•. In OU r exam;! ,tandard deviation
• I I( s • /2 "" -1
the tandard deviation ratio is 4/6 and the c .
= -1 If ·tics i not profitable because orrelanon co- fficient.
R ectJfl +. , th combin lion
i di imil rity in th b h .
't of ' + 8 > 4/6 i.e. + 8 > .6 6
t n ab olute value but av 1or of v
ch X relativ I\]
le oh1ersification
. .,] mu an d y va t e to th s·rt1P
ea ur d by 61 and 62. ~ 0:gether a.s:
1
i portfolio ri k can be reduced by the simple t k' d .
t there 1 a perfect negati r exa.rn.pJ · t m of dive 'fi
t of a sets an mves or owns. The as et may fr r r cati n Portfolio m th
. th d' Ve corr l e, 1rollP f li • vary om st . a e
m e am irection. If th e a.u 0 11 & etirne the port o o may consist of securities of d.ff . to d1 t rent ty of ho d
curities and they tend to b e_ correlatio 5001 th tf 1· th I erent mdustri Wh n .
.. ' e in th n dded to e por o io, e total risk tends t0 d . en diff rent a ts
cuntie returns are indep sa.rne are a . d th . ecrea e In th
. enctente ,.,_ . rsrfication re uces e unsystematic risk or . . · ca of comm n to
upon the covariance between the tw · 1 11us, d,veadded in a portfolio of the inve tor the unsyu;1tque _ns~. Analy opin that if 1- 0 '
O
th ·ty securiti are . if h b , ematic n k can b d ced
a . ~ same time t e num er exceeds 15 additi .k re u to zero. But at
the . d ' ona 1 ns reductio b
an<l calculate th poitfolio ri k. Combination of two secu .ti diversification c~ot re uce systematic or un-diversifiable ri k. n cann t gain d. But
. b n es rect
e of po itive correlat10n exists etween them. In O Uces The naive kind of diver ification i known a · 1 ct· -~
ur case th . ·· Simp e 1ver 11ication [n th f
diversification, ecunties are selected at random and . · ec o imple
a 1. -------::-::-;--~-;----:- , e . . . no ana1ytical proc dure is d
op = J
12012 + X22a22 + 2X1 X2 (r120102) Total nsk ot the portfolio consists of ·
sy tematic and unsystematic risk and this total Up
= v(2/3h 9 + (l/3h x 36 + 2 x 2/3 x 113 <-1 x 3 x 6) Diversification and Protfolio
ri k is measured by the variance of the rate
= 4+4+() of return over time. Many tudie have
= vO shown that the systematic ri k forms one
quarter of the total risk.
The portfolio ruk i5 nil if the ecuritie are relate_d negatively. This indicates that the risk
can b eliminated if the ecurities are perfectly negatively correlated. The standard deviati The simple random diversification reduces
of the portfolio is · nsitive to (1) the proportion of funds devoted to each stock (2) t~: the total risk. The reason b hind this i that
tandard d viati n of each security and (3) co-variance between two stocks. the unsy tematic price fluctuation are not
The change in portfolio proportions can change the portfolio risk. Taking the same correlated with the market' v tematic
e ampl of ABC and Z tock, the portfolio tandard d viation is calculated for different fluctuation . The figure hows how the simple Mar et { otal Risk
diversification reduce the risk. The tandard Risk
proportion .
deviations of the portfolio are given in Y a i
10 15 20
z Portfolio Standard and th number of randomly elected portfolio 5
securitie in the axis. Number of Stocks
Deviation
100 0 3 The standard deviahon wa~ calculated or
66.66 each portfolio and plotted. A the portfolio iz incr a -.., the total ri k lin tart~ d.ec~ng.
33.3 0 It fl tt ft • • t B ond that limit fi<;k cannot be reduct:d. This indicates
0.0 50.0 a ns out a er a certain porn . ey . , , ected to reduce the portfolio'
1.5 that spreading out the a et beyond certain h:~el annot be e P
0
100 6 total ri k below the level of un-divedfiable n k.
 N
in • w II I •f
from th ~ ,

nti r fl tt ns a it go,

=
.;:?
Cl)
a:
-0
~
• •
0
Cl)
•
0.
><
UJ
• • •
• •
•
Lower • •
Expected •
Returns
Lower
EFFICIENT FRONTIER . Risk Ris kN olatility
Higher
Risk
. efficient frontier is intr duced by Harry ~ark?w1tz. and his associates in (Standard deviation )
This ncept . t him, it . defined as the et of portfolios m which each portfolio ha
year 1952. Accord.in rtt· li sub is with a higher expected return but the st d 8 source: www.smart401k.com
the feature that no othe:- po O O an ard
deviation of return ' ill remain arne. CA.PM can be explained with the help Investment Opp ortunities
. of the set of all portfolio that e pects
It cons1Sts . . the fr
highest
• return
b for different
. level 0 f of figure given below:
. d . _.J fficient portfolios. The effiaent onher can e combmed with an E(R)
fl5k an I termt'.u as e , . f 1· h · Here, portfolio risk is taken on X-axis
inve tor 's utility function to find the investors optimal port _o 10, t e portfolio having the
and expected return on Y-Axis. The curve,
maximum and highest return for the risk is accepted by the mvestor.
given in the figure marked abc, is known as
While fonning efficient frontier, e pected portfolio return is plotted _on :-axis and portfolio minimum variance frontier. It help in trace
ri k on -axis, each feasible combinahon of risky a t can be plotted m nsk-€xpected return combinations of expected return and risk for
ar a, and the compilation of all such feasible portfolio defines a section in this area. When portfolios of risky as et that m inimizes return
no options are available for holding a ri k-free as et, this region is the opportunity set and variance at different level of e pected return.
t rmed a the feasible et of portfolio i.e. the portfolio tho are actually attainable. The Rt
For e ample; at point 'a' an inve tor
o iti,·el loped 1.e. bottom-up lope; top boundary of thi region i a portion of a hyperbola
e pect higher r tum o, h e mu t accept
d is called the "efficient fronti r" and that slope i t rm d a fficient portfolio line.
higher volatility. t point T, an inve tor can
All portfolio on thi line have the mo t appropriat combination of securities which have interm diat return followed by lower
,. th b st po ible ri k/ retum ratio. All th portfolio how th minimum po sible ri k volatility. Point b ho ma imum e p cted
th b -t r turn to b achi v d b an in e tor.
return as here i th in e trnent in ri k fr
In.: , if ri .k-~ a t _is aJ o available, the opportunity ti larg r, and its upper boundary, securitie tak place. The more and m~re Source · Th e CAPM · Famma Eugene, ·
French
. J mal of Econom1c Perspectives
;ffiacnt f~nti r 1 a , tra1ght line gment manating from th rtical is at the value of the risk free ecuritie are added in the portfolio Kenneth; ou
• a,, t . -. return and tang nt to the ri kv-a ts nl . the efficient et into a traight line.
, -o y opportunity et.
 UR

1d
n

T ANSWER QUESTION
1. What ;5 an e 1c1ent p rtfolio
IO
2. What do ou meant b di ers, 1ed portfolio?
3. What do you mean b di ers1fication?

LONG ANSWER QUESTIONS

t. E plain the Mar ow1tz heory of portfolio construction.
2. Define Markowitz d versification? Expla in the statistical methods used by
model to obtain the ris · reduction. Markowitz
J. Briefly e plain Ma ow1tz portfolio selection model .

•••

MEANING OF PORTFOLIO MANAGEMENT

. . .. . of inre tmcnt in a -eb and
. tm ot many acti\t 0e. . ,.·.
Portfolio management i a proce con I ti 'tie and -v temattc ana 1' ,~.
CUritie . It is a dynamic and fle. ible concept and in\'ol\'e ac \1 ,
 16,2

anagement
ts of ortfolio
Elem ing task, and .
differ
ent

. stages in portfolio management

c Presentation
Sc ema ----------------,

Monitoring mvestor-related
mput factors

Portfo O pohc1es and Portfolio construction and

Strategies revision, Asset allocation Attainment of investor
portfolio opt1m1zation,
security selection
obJect1ves ==Evaluation
Performance
EVALUATION OF PORTFOLIO PERFORMA CE
,mplementalton and Measurement
execulton Th objectiv of portfolio management is maximizing return ·· · r quir
Cap tal mar et
E)pecta!tons a continuou r arch, appraisal and evaluation of capital mark ort olio.
Portfolio evaluation involve the proce of e amining whether p rtfolio
managem nt has b n achiev d or not. The portfolio evaluation is ormance
of portfolio.
Mon,tonng economic · · a th result
Portfolio manage and inve tment analy ts continuous .
Relevant econom,c and market input factors th 1r
of t · rmance. ability of the experts to outperfo nh pob~l·ty
6oc al polilical ector . attribut
.
and security exp d e p rti Th ba 1c of a good P rtf t a11 1
din . o
cons1dera1ton per mark t tr s corr ctly and make correct e pectati regar g ns
an .

Figure 16.1

r : }. . 1, •im nd D.L.Tutt tana •in Inv tm nt

. l of th iny j
, which will help
inv tm• .
 pfRfORM LUATIO
oL-10 f .
Jiff rniz r turn or a g1v n I v •I of ri
1
,0 n1il• . k th fund manag r through
tlie rrs . , .
folio ir,g ·
(i Th rat of r tur .
r tum v r ri k fre rat and
(ii)
.. t matic, un y t matic nd
(irt) . r 1dua) 11
Differential Return: icha l J n n ha d veto
2- ,1 dJU portfolio. Th ba ic p:
diff tual r_ tum of a portfolio
vieW ~rtfolio. By making thi c
inV tor ive rol . Inve tor mer ly b
f r th of ri k by borrowing or I %i
vecompo .. n f Return: it is worth m nt·
3. f l ti JO
horizon. provide u o re a ve p rformance of a portfoli
Jenson a t m a ur p rformance of a portfolio o
D c mpo · · o return i given by Fama' att
in term P f a_ri~k of portfolio. As pert
MEASURES OF PORTFOLIO PERFORMANCE r tun: of rtf ~1 ting of ri k _free return pl
prerruum ting of reward tor ri k bearin
The rewar ock lection i for the lectio
Fama' me based on total ri k, it f n the
p rtfolio return and capital market line (Ov per
y tematic a well a unsy tematic risk. o, the reward f
reward for y t matic ri k and reward for unsy tematic ris
4. djusted Portfolio Mea ure: Thi mea ure w
Leah odigliani. In thi measure, the given port
quantum ofri k fr ecuritie o that the risk of a
i equal to the ri k of the market inde (b n
portfolio i compared with the return of the mark
th p rtfolio. , return from the portfolio is the
portfolio and r tum on market inde . In other
mor than th return on market inde , the given
inde (b nchmark) and vice ver a.

an.i r mu t
· · d · ction to earn
r tum Prop r
"ted ri k and
 ..........

020 - 10 10
tA = =- 2
.0
p rtfoli ,
for 6 024-.10 J
Sts .o =~ = 1.r

St= 2 SC

Expected
S =1 ~
Return

A Sharpe's easure
• re ard to ,•ariability model. illiam Sharpe ~as attempted to get a sunun
~ed rfi rmance A method adopted by Sh~e is to rank all portfolios on ary Risk Free J
m u.re o . li pe
b · 0 e\'aluati n measur
_ ST ( 1,,,.mP' Jnde ). If one portfolio has more ST than anoth the
'""""r ,
e measure.
er, the Return l
first one · better pe ormer per Sharp .-r-~-r--+~~--,~.-----
012 34 5 6 7 8
Sharpe' Ind . e ~lain in the following way:
o(S.D.)
Ri-Rt
Sharpe' . ST==-
a Figure 16.2 Sharpe's Measures Portfolio Evaluation
1

\ 'h re ST is arpe' Inde . B, Treynor's measure ( Treynor's reward to volatility model)

Rt i \'era return from the portfolio In Treyon' m asure, the risk measure of tandard deviation, nam 1 , t al ri _f th por olio
R · ri kfreer tum is replaced by market r" k, measur d by B ta, which is not diver.-ifi b . Th qu h n can be
a1i the total ri k of the portfolio out as
It me ur total ri.k b~ tandard deviation. Reward is in the numerator as risk premium.
Total ri k is in th denominator ab tandard deviation off its return. We get a measure of portfolio's
total ri k and variability of r tum in relation to th risk pr mium which is the product of the
T n = Treynor' measur of evaluation
portfolio manag r' e p rtise. Thu , the Sharp 's Index measur the risk premiums of the portfolio
(_w h re the ri k premium i th e c of return r quir d by the inv stors for the assumption of Rn = R tum on the portfolio
n J.) r('lati\ e to th t tal amount of ri k in th portfolio }¼ = Ri k Fr e rat
. a ure f , t mati ri . . k.
illu trat d by following example: f3n =Bta of the portfolio a a m . . . Thi !in i th lea t quare
the con pt f CharJ
' temtic 1m . th 1· Th r gr 1. n 1·me
l
Treynor ba d on f ormu a on . d t · the lop of e 10 ·
th n k an 8 J 1
regression lin relating th return to
4% 10% tak the form of
24% % 10% Rp =a + p +e
in r th abm e fomrnla, we g t Rp = Return of p rtfolio
~~--~-~~__...- -
 Tr N

'J

l{i
z.

M .1 ur
cl

Port olio i not d

lion ndtur
Mod I It i l r w rd to v ri biltty
n1 J •I

Jensen's Measure
C,

thJI
adJU

hig
O'--- - - - - - - - - - - + X
Mar et Return
Rr Rft = a1+ ,81(R 11 - Rf)
R1 1 v rag r tum on p rtfolio J for th p riod 't'
Rft = Ri k fr rat of r tum for p riod 't'
Portfolio Return in
a1 = Int re pt of th graph, mea uring the for ca bn abili o th mana er
_Q 0. /31 = y t rnatic ri k mea ure
B 24°n 1.0 RMt = Av rag r tum on th mark t p rtfolio for th p ri 't'.
It i p ibl that a1= 0, which i n utral p rformanc or th am th to mar, t
For , TnA = 10 - .10 a1 > 0, it i up ri r p rformance over the mark t.
0.5
.10 a1 < 0, it i inf rior p rformanc
= 0.5 = 0.20 Th J n n' approach can b illu tration by an example.
are tout a
Th data n p rtfolio r ult , Beta of the portfolio and lar e
f 11 w!:---------r--------~---.--::-:~--i
Portfolio Portfolio Bet.1
Portfolio Return a
1.-
1
15%
o.
2 1.5
21 %
1.0
16°0
arket Inde
 N

. the sharper Index Model? How does it differ from a 0

1 , t p\ain that bu',' new securities and sell old holdings freq ol,os
., portfo\lOS managed more passivelv. Do you agree 1 1s 5 e
,,. h t are
t a re benchmark portfoli~s? H~w are they used o al a
3, What ~ manager? Discuss with suitable examples.
ortfo\lO . .
P . the Jensen index of portfoho index?
E~p1ain
4, arious measures of portfolio performance evalua o a d s e e I re ce
5 oiscuss
. v,reyon and Sharpe's performance Cdsure.
between .
the various methods of performance evalua ,on?
What are
6• e risk-ad justed return measures?
1 . wnat ar d"ffere ntial returns? How Jensen ra ,o measures
PPROPRIATE MEASURE OF PORTFOLIO 8 What are I
· portfolio. f a d re u of ma aged
d portfolios? Explain the calculation o ns
9. wnat are manage
ra1 measure of aluation of portfolio p rformanc have been portfolio.
. the procedure to assess the port oho performa ce.
dif er nt implication and it i quite po ible that the 10 ExpIam
.
various portfolio . , there is a need for the election of an

, · f portfolio performance mu t be elected on the

f th portfolio to be aluated. If only one portfolio
•••
ed "nth the ariability of the overall return and
r, if e eral portfolio ar to b compared then a
Alf:ha Fcctar, nay re usai.
ur gi en abo e are based on the ri k
r a ) rarain unchanged over investrrent
tor exp ct d ab om in the mark t. So,
ha higher b ta factor . On the other
, curiti with low r b ta ma b increa d. In
· beta · ul d it · uld be difficult to aluat th p rformance
INTRODUCTIO N
on tructed, it b c
ne monitor th
to mality. Sine the
,1 na~ure, change
111
w
·o .
~ V

ilnl Ii
mf r
ln t
entir man
;ind llind ,
fro uni\
f1 tment, it b th
• t t
d1c i star rrung th d olio
ri.;;k mig ang1: \ r a
nd
. ~ ~

fu ~
r ti 1~ e. enI for
F rtf , thin, \\ hich would
part l t ht!> h 'T
 foli,, t V ~
giv I
(

mpr · · ch nitii
lu variou within th
a inv tor' circu . Thj
d
rati ns n a p
urali n nd rn °rtfoli rtf
t irn o d for p rtfolio revi i n may ari
Portanuy
a li t d as:
·tors rn
fJl 1 vailability of addition l fund for inve tment:
· p int of run might feel th n ed to inv t mor . Th
. ts curiti . The objective f when an individual ha om additional mon y to m
0
•
1. .,
• • .
ma 1m1zmg th r turn f Portfo1 ·
. 10
or a g1v 2_ Change in inve tment goal : Sometime chan i mvesitmeint
m. Th pro of portfol'1 . en
. 1 0 rev1 sj revision in portfolio. D p nding on the ca h fl w, an mdi .......,,., ....... , ITIIVl,h, .,,..,
rti u arly true when activ 0n
goal, e entually giving n e to changes in th por f ho . _
d betw en bond and toctortfolio 1
3 _ Change in risk tolerate: Financial market is bj ct to n·sKSanc UJ1tcer1tamtv
on° iff rent indu trie through i rndarket 1
· th · d thr n Ush-. . might ell off ome of his a t owing to fluctuatio in
m u try ough company ·: J
owed, u e of mechanical formuJa plan 1Ys1s ·
ana 4. Alternative portfolio: Sometime, the need to liqui at a p
mad . rnay be fund for some alternative portfolio with the chan of mves!tment
· on refe chan e in original pattern of portfolio. Portfolio re . . s. Other : Th other valid reasons for portfolio re · ion
. O . . . . v1s1on, in the market do also exi t. There are thus numerou fa o
n srnp and bonds etc. This 1 due to changes in the market
market related and inve anent related.
mparu and the portfolio Beta. A change in interest rate will als
gh chan e in duration. 0 The portfolio need to be revi ed to accommodat th chan
Thu , the need for portfolio revi ion may arise from chan
Ch.cmg;~ the mix of securities in a portfolio is called as portfolio revision. Thus
the pro~ of a di ·on o more asse in an existing portfolio or changing the ratio of fund~ in the investor's po ition, namely his financial tatu and pre
im d · called as po · lio m · ion.

. ln oth r ~or~, the sale and purchase of assets in an existing portfolio over a certain period
of time to maxuruze returns and minimize risk is also called as Portfolio revision.
P~rtfo_lio r ,ision is not a casual process to be taken lightly and needs to be carried out with
care, saentificaUy and objective! so as to ensure optimality of the revised portfolio.
DEFINmoN
According to KE I , p 0 rtf0 l1 R .. .
Th .
1 may either
. b chan
· ·n , th 0 . .ev1 ion involves
. changing th exiting mix of securities.
proportion of Fu d . & g . e ecunties currently mclud d in the portfolio or by altering the
n s mve ted m th •cu ·ti Th p f · · · d
saJ of cu n·0·e. n s. us, ort oho rev1s1on leads to purcha e an
 A ALY

es of
men -
ts1on·
" an

Two different strategi

por:tfolio revision , narn!~ for
active revision strateg Y an
a passive revision strrte~~d

1. Active Revision Strategy

t in ol e frequent changes in an existing portfolio over a cert .
m r turns and nunimum risks. In simple words, Active portfolio rev·, ~in
. . . s1on
Portfolio analy I and portfolio selection. This strategy is based I. Th fir t assumption is that certain p rcentage of th investor' fund allocated to
al fa af ecling the conomy, m . d ustry an d company as also the
on
fixed income ecurities and common tocks. Like if mark t is at bottom more allocati n
d pply. Th~ ~e, . kill and resource ~eguired for implementing is provided to equity and less to debt.
• fr of trading 1 hkely to be much higher under active revision
r tra · n co t . Active Management is holding securities ba ed on II. If market moves higher the proportion of tocks in the portfolio may either d din or
r. rtfolio manag r who pursue active strategy with respect to remain constant.
all d rk t · . The manager may indulg in 'group rotations'. III. Stocks are bought and sold whenever there i a ignilicant chan in th price.
G an · inv nt in different industri s stocks depending on the IV. Investor should trictly follow th formula plan once cho en.
a1.; ar · ir fu erformanc .
V. Inve tor hould elect the securities that move along the market.
cti e Revi ion trategy help portfolio manager to ell and purchase securities on a
r gular b i for portfolio re · ion.
REASON S FOR FORMULA PLANS
2. Passive Revision Strategy ine the requirement of formula plans:
Following are the rea ons that determ t o-. ible u of fluctuations in the
P• ., tfoli o ffi · y and homogeneity of
1 1 . Form ula plans help an investor to make the b hp . ar le and II off when
ch e hare when t pnc
t, ~g j t portfolio i carried out financial market. One can pur a
mP d d ula plan . This formula market price are higher. d" ,·d hi fund into aggre ive and
I \ t g gi curitie m rb.et. · ve tor can ni th
2 1'th th h Ip of Formula plans an m fu d from one portfolio to o er.
r, ,i\
1
' m,1nc.1g m nt ref r t U, i at on tru ta portfoli that re mble · . d ea ily tran fer n
1 11
th • \t'r,1 l n1.u-J..( Ir tum.,, Pussivc rn nag a of holding aw II diver ified portfolio defensive portfolto an
 UR ANALY I NO P RTFOLJO t.,-'~
,Ii,,nsbh f tunJs th.11 .) Fr O REVISION
1,oLJ
t
1
h in' •st lf. ,o- tant Rupee Plan
ns1st Is urili 'S lh<1t d coos ~
(bl i I Lim ~• 1., n f lh m tp pul r rcommonl ~
1'1' hi plan, th inve t r co tru tw y u d f rmul
r tunds tr )m l gr i\
hmnula pl n.-. I, ht 1111"'· l~ l c n i ting of equity h re and th othp rtfoli , on o h of his plan
r' c, o rdf · alu
,i:f\".'~;~g
1 f bond and d b nture_. Th purpo ~f thi 'i" , g 1v po foJ,o co•: .
t:<111 th value of th aggre iv portfolio .P n
,, to 1~ p
0

h , '.. at h origin
es iv p rt fo Uo. As shares price fluc1-... cot tant . I am .
,gr .
tnc ilri When shar pnce ar increa in th lua e, t e val f
u o th aggr . ount inv Ied m .
11 ging, g, e total value of th . iv portfolio k p
cn,1 U dcr thi plan, the inve tor is effectively tr c • e aggr ,v portfolio incr a
n . f U d th ans1ernng funds fr .
defens1v port o o an ereby booking profit wh h om th aggr ive portf I'
to tJ,ef rred from the defensive portfolio to the aggres . en ~re pric ar increa mg. Fund o to
tra
ns cthe plan helps th mvestors
. s1ve portfolio wh h
to buy shares wh th . . en ar pri ar decre in
s are
fttl.15, . s a re high. en err pnce are low and II th h g.
tJ,eJ·r pric • • mw n
[n order to 1mplernent this plan, the investor has to d •ct th . .
th f f
ould make e trans er o funds to keep the rupee value ea e ae action. po m , ':e.
of the · wh n h
h.15 plan forces investor to sell when the price rises and ch ggr •v:
portfolio constant.
Th pur ase as the price fall
Th revision points have a significant effect on the returns of the • ·_
revision points may be pre determine as 10%, 15%, 20% etc. above or belomwvthesetoor._ginal
F?r u~tance, the
in the aggressive po o ~
· rt£ li if th ·· • n mv trnent
e rev1S1on_pomts are too dose, the number of transactions would
be more and the transaction cost would increase and reducing the benefits of revision point .
Example of constant rupee plans.
TYPES OF FO ULA PLANS
_:__.::_:.__-= =: _ _ _ = - - - - - - - ~ - -
Let u considered the investor who has t 1,00,000 for inve tment. The inv tor decide to
Formula plan repre nt an attempt to e ploit price fluctuations in the market and invest t 50,000 in aggressive portfolio of equity share and the remaining r 50,CXX) in defensive
·
th ma urc of profit to t1:e ~ve tor. They _make th e d eo~1on
· · on ..;~:- make
ll~Lgs of buying and seUin
~J.. portfolio of bond and debentures. The investor purchases 1,250 shares selling at { oper hare
ecunties automatic and ellIJUJlate the emotions surrounding the timmg of decisions Fo lg for hi aggre sive portfolio. The revision points are fixed as 20 % above or below th original
plan c nsis of pred termmed rules regarding . when to buy or sell and how much to buy · rmu a inve tment of t 50,000.
Th O
pr d termin d rule call for pecified actions when there are changes in the secu:i~~e~ 11 After the construction of the portfolios, the share price will fluctuate. H the price of the
markl.'l. Th f rmula plan sp cifi predet rmined rules for the transfer of funds from aggre • share increases to t 45, the value of the aggre sive portfolio increases to 56,250 (l,25(NS). ince
p hrttolio to th de nsi\· portfolio. The e rule enable the investor to automatically sell s~sive the revision points are fixed at 20% above or below the original inve tmmt, the inve tor will act
lh · ·
\\ n e1r pnc are n· mg
· an db u hares when th ir prices are falling. ares
only when the value of the aggressive portfolio increase to rupee 60,~ or fall _ ,~. If the
Th re are different formula plans for implementing pa sive portfolio revision. price of the share increase to rupee 4 or above, the value of the aggre ·1ve portfolio will e c. d
rupees 60,000. Suppo e the price of the hare increases to rupees 50, the valu of th aggr ive
portfolio will b rupee 62,500. The inve tor will ale hare worth ru 12,500 and transfer~
Formula plans pee
. b b . b
amount to the defensive portfolio Y uymg on s or rud f 12 500
' · . Th valu Thof thtotalaggr
value1ve
of
. .
and def ns1ve portfolios wo uld b
now e rupees ' SO 000 and
. 62 500 respecti-. Y·
1
' h nl l 000 har valued at
two portfolio will be 1, 12,500. The aggre sive portfolio now a O y '
rupees 50 per share. f th tfolio then be rupee
40 er hare The va 1ue o e por
Constant Ratio Plan Constant Rupee Plan Suppa the share price fall to rupees P Th· . tor now has to buy shares rupees
Rupee Cost
Averaging Plan
40,000 which i 20% less then original ~veSlmen\io t: ~::riginal level of rupee 50,000. 1:'e
Variable Ratio Plan
10 000 to bring the value of the aggre swe po_rtfo b llin bonds from the defensive portfolio.
' . will be raised Y g
money required for buying the hare and 52,500 (62,500 - 10,000). The
50 000
rtf Li
The two po o o WI '11 now have value of rupee '
tin to rupee 1,02,500. It may
be rernU d that the inve tor
total value of two portfolio aggrega g
 J AND PORTFOL O MANA

~ n 'illu
,tart ,J , ith rurx ' I'\
Tabl 1.

liO, O
1. 50,000 1,60,250
Nor Vis·ion
62, 00 1, 12,500
Portfolio
r Vi db
256
aJe of
shares
5,000 2, 00 1,07,500
1,0 0 No revision

1,2,0
50,000 52,500 1,02,500
purch Portfolio
~o hare revised by
purchase 0
250 shares
. . pom· t · - o abov or below ongm
•Rev1s10n · · al mv
· e anent·
.
When th nstant rupee valu plan is being impleme~ted, funds_ ~ be transferred frorn
on p rttolio. to th o ther, \: ·henever the alu of the aggressive portfolio mcreases then decline s
to th pr det rmin d le\ el .
d antage :
I. This plan is irnple and eas to und rstand.
2_ c n tant rup plan guide th in e tor as to purchase or sale of shares depending
up n th p rccntage change in pric of share .
3. Thi plan h Ip th in,· t r in incr asing the total value of the portfolio.
Di ad antage :
1. t k p the p rtfolio' alu con tant, it n ce si tates continuous attention of the
inv tor.
2. It r quir innurnerabl action to r adju t th p rtfolio' value.
3. Th r valuation p int pla d t cl tog th r cau e e ces ive costs that reduce
profit .

B. Constant Ratio Plan

TI1is i a \'t1riaf f t ru
g, in the 1m stor I t tw p - The purpose of this plan is
aggr •ssiv c1nd the d th hi v to keep this ratio constant
by readjusting the two port·
Thus, wnstJnt rnt10 plan a aintain t ratio folios when share prices flue·
b tw •n th1; aggru,si\'c an tiv portf ratio tuate from time to time.
 OR VI 0

I
I

I
r t O
r tio accord

ie of Variab le Ratio Plan

f
,cart1 P .
t t bl ratio plan St •
ho L r. b for .th ~ arnng price is 100
over · ' wi 10,000 in each ·
I p cialJy 1nto p or tion and th p rcentage f . porti
\'c]) tJ • o tock in th to
Wh k c reach s 10 , a portfolio . .
Example of Ru / Dollar cost veraging Plan r r e o rcentage to 70.06. As the t~dJu . trn _nt
d to bu , 1,0 w rth of particular stock f ha w olio adju trnent is tri pnce nses,
Let u
or four i~cr~:ck in th p tf ack to SO. ggered . Th ale of 52
quarter in a parti . 0
eraging plan (Ruppee) In the exam~le, the po~folio was adjusted for a 20 r
M.arket Unrealised ( so. Other adjus tment cnteria wouldprodu d"f• P cent drop and wh pnce med
Value Profit or
to ce I ,erent outcome .
Lo Table 3. Variable Ratio Plan
Shaff Value of Value of Total
1,000 1, 000 price stock defen ive
JO 0 100 portfolio
100 proportion
2. lJ 1,990 1,890 (100) 94.76 value
95
2, 90 3, 100 110 96 .45 100 10,000 10,000 20,0
3,9 0 4,400
96.67 50.00
420 99.S0 90 9,000
100 10,000 19,000 4 7
ock .price declined in the econd quarter but recov ered m
. 80 ,000 10,000 1 ,000
. 100
th thu ed m the fourth quarter. The table also shows th t th 80 12,640 5,400 1 I 0 70.0
a\' rage in ond, third and fourth quarter is less than the average market . e
per ha nefit of rup c t averaging plan. pnce
d antage:
90 14,220 5,400 19,620 -,'-·
100 15, 00 5,400 21,200 i -
1. Ru co t av raging utilize th market cycling movement in share prices to construct
a port olio at lo • co t.
2. Thi plan is particular! , beneficial to long t rm inve tors. 100 10,600 10, 00 1,200
Di ad antage :
The p ortfolio adju trnent ction of ( ixth column) may .
l . Under thi plan, th portfolio manag r unabl to d termine the period over which The variabl ratio plan ubj cts the inve tor to mor risk than th . But
fi ed inve tment can be mad . with accura t for ca t , the variabl ratio plan de i ned to ta t: of pric
2. Under thi plan, th r i a chanc f . . fluctuations than the constant ratio plan d
ft r th first inv tm nt period. o m1 mg out high r returns, by inve ting more
Advantage :
3. Th plan d not e11vi ag of fund fr m th portfolio in betw n. . a ·olatil iti re to r b Jan the portfolio
1. Thi plan i gen rail follow ed m
Variable Ratio Plan and take maximum advantag of th
I d i ed to t e great r advantage
ording to thi. plan at varyin 1 v l O
f . 2. But with accurat for ca ts, th \·ariabl rati p an
h n Wh , h . g market pn , th proportion of th tocks and h n~tant rati plan.
. n , er t e pn e of tock incr a th inve tor deer a th prop rtion of of price fluctua tion than t
 nst.int r"t'
t, I () I
l indi .:it rs 11 il 11
on th , ')
t ' tt

)Ii . . .
ar
1· · 1ita
1i cun
u th

ER QUESTIONS

portfolio revision.
3. E plain constan alue plan . INTROD UC~T I~O~ _
A grouping of in e tment a that f
SWER QUESTIONS from foreign marke rather than dome tic on
International (Global) Portfolio inv tinent.
1. at factors should e considered hile revising a portfolio? portfolio · d .ign d t~ gi· e the investor po
2. hat 1s portfolio re 1sion 7 hat factors necessitate the portfolio revision? emerging and international mar d provide
3. D scribe the major constraints in portfolio revision. Glo · ting i an in e ral part ot a
4. E plain the po lio re 1sion strateg es. to build an optimum po olio -
5. Distinguish b e n active management and passive management. th p alance between ris and return,
6. ha are ormula plans? Gt e various pes of formula plans? w tor to achi ve lonu - erm fin ·
important thing i rmine the be t
7. Co pa cons ant rupee alue plan and constant ratio plan.
rtf · are
8. ha rs aria I ratio plan? W a are its ad antages?
can R
9
• plain dollar- co a era 9 pla 1th ts benefits and limitations? cha F
etc .

•••
MEANING
 nd

ational capital flm are further driven by a divergence in population trends between
d d v loping countri . Mature, industrialized countries today are characterised by
· , significant need for private capital accumulation. The underlying demand
rther reinfo b th nee sary shift from pay- as - you - go pension
market b ge y th same token, developing countries
ng popuJ uir tent and high levels of investments in
r · tan ving in line ,,vith the aspirations of their impatient
v i ntiv for the growth of international markets for
en ecuriti in particular.

b e mor nducive to int mational portfolio

or hav on of th ir attractions. There
nal eco , th p ibility of hedging an
nd th ·ci · n · ceptional growth • ountri may impo e
. tor hould b aware that ome ~ out of a
d ant ational portfolio In addition to e change rate , m . d J-.\• inv tor from moving currency
n ov r · tm nt pr fe ional , both foreign currency contro I th at re tn t or e u,
1 · indu try, on h t e, tent th intuiti ely country.
< n I p rtfolio inve tm nt a ently ignificant.
 I)
of inv n ..
t()
f t (a f nd inv t pnm rily in foreign c m
<lnd c mpanie.
td lo
(bl Int rn tional fund
nct <lll the
r Provide (C) Regional or county fund inv t principally •
g. m comp ni
I g raphic r gion. ( uch a Europ or Latin Am n
. f Wer listed funds inv t n1y m emerging marke , while oth
ct th mark t .
atio arnount
tcr rnay h
difficulty finct· ave (d) International index fund try to track the r ults of a pa
mg a buyer
Inde funds differ from actively managed fund , who ma:
pani not pr vide investor with the re earch about the cornpanie .
. It m difficult l0 locate up-to-date w:1'e ~Pe International inve ting through mutual fund can reduce m
publi. ay not be m . Eng Ii h or local Ian
rrnation'
earlier. Mutual funds provide more diver ificabon than mo t inv to
d and in taking right decision. guage.
own- The fund manager al o houJd be familiar with international inv tin
ei legaJ remedi : If the investor ha a problem with their investrn to res arch foreign companie . The fund will handle currency c nve i
be abl to sue the compan · m. th e f ore1gn
. country. For example, if the
ent'
taxes, and is likely to understand the different operation of for ign
suc:ces5hlll\'" in foreign cour , in ·estor may not be able to collect on a foreign coun~
international inve anent , mutual fund that inve t international! • pr
a compan of that country. Investor may have to rely on whatever co ts than fund that inve t only in Indian to
are available in the company' home country.
2. American Depo it.ay Receipt: Another option that proVId a
. Different m..uke operations: - Foreign markets often operate differently from Indian or
get involved in international inve tment is the ADR. The term "AGR
ther em nm1 tradincr mar e . Fore ample, there may be different periods for clearance
depository receipt." With thi tool, an American financial institution pu
and ttl ment o curitie rransactions. Some foreign markets may not report stock
of share in a foreign company. The institution holds on to th har
trad qw y 5. / Indian markets. RuJes providing for the safekeeping of shares
held b custodian banks or depositorie may not be as well developed in some foreign stock that can be traded on American tock exchange . The hares r
marke , rith th risk that their hares may not be protected if the custodian has credit hares in the foreign corporation. Thi can be an excellent ay r m
pr bl ms r fails. involved in foreign investment. It eliminate a lot of the prob! 01- th
purchasing tock directly from a foreign company.
GLOBAL INVEfflNG STRATEGIES Th tocks of mo t foreign cornpanie that trade in th
Depositary Receipts (ADRs) i ued by G.S. dep itary ba .
1. It i a trategy that i not con trained by geography f . 1 _ r a tr cti n o a . hare. Tt •ou
2 Each DR repre ent on or more hare Of a or I t but u ime tor.
- It is a trategy that inv ts in companies who revenu are generated both inside and . . h f i n t " it r pr n - .. .
out 1de th country. own an DR you have the nght to obtain t e r : t DR corr pond to th price
u ually find it more con enient to own the DR. Th_ pnh1. ~ f DR to foreign company
· It i a trat gy that im· t in companie domiciled both in ide nd out id th country. I tt:l:l tor t t:
of th for ign tock in it home mark e t , a d"u ratio o
shar
ND ES1'1NG

u instru l
Of INTERNATIONAL I
anced Return Potential: By inve ting ov r a th .
1 nh . . t . 1 , I
portuni
• t inve t in dynamic m emahona compani that may
idian counterpart . International stocks and bond all han their
om of th b t-p rforming markets in th world. In inv t m
oc, and
bonds b n fit from bulli h markets over as.
_ Lower Volatility: Whil_e intema~onal ~nd generally ar
2
domestic funds, ~cludmg them m ~~u portfolio can p
potentially lowenng the overall volatility of th ir p rtfoli
International funds inve t exclusively in foreign compani ~t
both foreign and Indian companie and generally a olatil t ~
international fund . t Y
3. Tax Reduction: Many countrie (kn~wn as tax havens) of er to for ign
investor~. The favourab~e tax rate m an off hare country ar promote a
healthy mvestment environment that attracts outside · trv with
very few resources and a mall population, attracting im ·'er
economic activity. Simply put, offshore inve tment occu fonn
a corporation/company in a foreign country. The corp a h 11
for the investors' accounts, shielding them from the high uld be
incurred in their home country. Becau e the corporation local
operations, little or no taxi impo ed on the off hare corporati · com ·
also enjoy ta -e empt statu when they inve t in foreign ,m
investments through foreign corporation can hold a di tin •er m
investment as an individual.
· · hi of
4. Asset Protection: Off hare center are po nng own r P
· • thr 0 n individual , ealth
assets. Through trust , found ahons 0 1 ,. w ho
.d uai.:,
ownership can be transferred from 1e
. f e t to trans fer
are concerned about law Ult , or l~n ° t t outside of
a portion of their a ets from their on · ual are no
th ir home country. By making th - 'm
longer u eptibl to eizure r O . • be fit of ecrecy
h . . d'cti r th limentary n
5. Confidentialit : Man o_ff ore JUD 1 d tab trict corporate and banking
legislation. The e countne hav~ ~na~e th riou con. quence for the
confidentiality. If thi confidentiab I br
offending party. . . . r however, keeping mformation, uch
From the point of vi w f a high-pr fil in, e t~ ' h of a public company can ffer
t \ hile ac umulating ar
as the in e tor' identi , er
 ~~~ 1NVESTIN ~
. r fil tn ' t.,
c;&.oe"Li " ~c m rr ~
n Sl lts ~
. ult, 11"1ill () iyl
I t()nt1 · n day. If
' l lt'
V
rg h.•cJ t

an I t
cl 'rs
ll h ideration: or rn inve o lly
4.
ajar wh ther thi cone pt i afe c
cialJy
e country you should alway und rtake p
tn l'\t
.
1ssu g to mv trn nt. It i imp rtant that yo
tars man ur as et .
i.
tnark th Th more popular offshore co~tri. . have long prov n r cord of
ave be ave inv tm nt
. ti came portuniti . In fact, wealthy md1v1duals and multination J corp
l e are also ~~en practising offshore investing . hav Ion

r rate k p chan . Ri k: Like any other business or investment venture, off hor may be ri y. On n ed to
ong, and g1ng. s. tak the risk profile and risk parameters into consideration for any off hor inve anent
. . ornetirn . just as one would have.
ency m th e1gn c untry es 1t
r. where an
a form f shield again t global in£l. .
The pros and cons about global investing are for ~eneral u~. In real life, th:
conside:ation
r , co . differ from one investor to the other~. Thus, there will ~ ~ different t of optio applicable
•e trnent in a different currency and country oth ation. will
to di·ff erent investors. Times are changmg .very .fast and 1t 1s only natural to learn the lat t
. econ rmc
uainst a , or erung . c1·unate in your co er th::.........., trends and be t practices to manage global investing.
untry of
DISADVANTAGES SHORT ANSWER QUESTIO
FoU · \ arious disadvantage of international inve ting:
1. What are the main features of global investment?
1. un arenotch ap . Dep ndingon theindividual'sinvestrne
l. What is the scope of international investment?
iction that inve to. es, an offshore corporation may need to:
o hore corporation may mean teep legal fees, corporate or account 3. What are the different kinds of foreign investment?
nd in om c · tors are even required to own property (
untry in whi ve an offshore account or operate a holdin; LONG ANSWER QUESTIONS
r m ccounts r quire minimum investm nts of between
· lion. at mak mon y facilitating off hore investment .
1. Discuss in detail the factors which have contribute d for the success of international
ring ar in high d mand by the very wealthy and they charge
diversification? . . le to inves ors?
2 2 What are the global investment options ava1lab . t7
· Ta , ~•I ·ghtening: Ta •gen i lik T ar n't ignorant ofoff hor strategies. • nd ks of international rnvestmen
3 What are the benefits a ns re ·,ssued to investors'
Th Ym
but dd01 nonmore
r . hrmking om lraditi
d n danc . Th r ar till loopholes' • · ts? How they a t
4 What are Indian depository rece1p . d lim1tat1ons of holding Foreign D1rec
nos t. mt
. mational
. 1. anfor , gov rnm nt i tightening the • ·1
5. What is FOP Explain in deta, th e advantages an

_Fluctuation in th Rat : Th . . . . Investment?

1m sting in a for k . for mt rn honal mv tor
but al > on th h ign ~ar t \ ill d P n r tum in th for ign ul rket
l llrli 'nl

I r, 1 'n
v. Thu tht
s curit_, mar"- t
ch_ang~ r
d th r /gn _mv
or ign curr ncy and the local
th p rf rmanc of both the
•••
an reign cu inv ting in other countrie ,