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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
SUMMARIES Investment and Securities: Financial Investment is the allocation of funds to assets and securities after considering their return and risk features. Investor plans for a long horizon after considering the fundamental factors and assumes moderate risk. Speculators are interested in short term gains and their buying and selling are based on the market price movement. The main objective of the rational investors are maximizing returns and minimizing risks. Safety of the principal, tradability and liquidity are his subsidiary objectives. The investor should have the knowledge about the economy, the company and the market structure. Equity shares have the right to receive dividend and residual claim. Sweat equity is issued to employees or directors at a discount for their contributions in technical know-how or other specified area. Right shares are issued to the existing shareholders art a price, on the pro-data basis. Bonus shares are issued to the existing shareholders freely in addition to the dividend from the company’s reserves. Preference stocks have fixed dividends but have a perpetual liability on the companies. Investment Alternatives: Investment alternatives are many in number. They are negotiable financial securities and non-negotiable financial investments. Equity offers high return with high risk. Bonds provide steady and fixed flow of income. The Securities are issued by Government are secured investments. Treasury bills carry a very low rate of interest.
2 Commercial paper has short-term maturity and is favoured by companies and institutional investors. Certificate of deposit’s denomination is high and the interest rate is also high. Banks’ deposits are safe form of investment. At present accounts like maxi cash saving, quantum optima, in 1 account and cluster accounts are offered. The age old post-office deposit pays higher interest rate. Post office monthly income scheme’s annualized yield is higher. NBFC deposits offer high rate of interest. The risk associated with them also is high. RBI has laid down several rules to regulate them. Public provident scheme is the post office scheme with the early withdrawal facilities. In NSS, the main advantage is the deferred tax payment. Withdrawal of entire amount in single period results in heavy taxation. Investment in National Saving Certificate provides tax exemption under section 80L. Life insurance provides wide variety life and accident cover. Deductions are allowed under section 80 DD. Mutual Funds collect funds from investors and invest in equities or money market as specified by the schemes. Gold and silver are the real asset form of investment. The appreciation of gold prices is rather very low in the past few years. Real estate is a lucrative form of investment with high capital appreciation. Knowledge about arts and antiques is the essential pre-requisite for investment in arts and antiques. New Issue Market: In the MIM stocks are offered for the first time. The function and the organization of the new issue market is different from the secondary market. In the new issue, the lead managers manage the issue, the underwriters assure to take up the unsubscribed portion according to his commitment for a commission and the bankers take up the responsibility of collecting the application form and money. Advising agencies promote the new issue through new advertising. Financial
3 institutions and underwriters lend them loans to the company. Government agencies regulate the issue. The new issues are offered through prospectus. The prospectus is drafted according to SEBI guidelines disclosing the needed information to the vesting public. In the bought out deal banks or a company buy the promoter’s shares and they offer them to the public at a later date. This reduces the cost of raising funds. Private placement means placing of the issue with financial institutions. They sell shares to the investors at a suitable price. Right issue means the allotment of shares to the previous shareholders at a pro-ratio basis. Book-building involves firm allotment of the instrument to a syndicate created by the lead managers. The book runner manages the issue. Norms are given by SEBI to price the issue. Proportionate allotment method is adopted in the allocation of shares. Project appraisal, disclosure in the prospectus and clearance of the prospectus by the stock exchanges protect the investors in the primary market along with the active role played by the SEBI. The Secondary Market: Outstanding securities are traded in the secondary market. Stock exchanges are regulated by the Ministry of Finance, SEBI and the governing board of the stock exchange. Share groups are divided into A, B1 and B group shares. Rolling settlements has been introduced. Trading can be carried out online. Value at risk based margin is introduced.
Listing of Securities: Listing means admission of a public company stocks to be traded on the stock exchange.
the company has to apply to the stock exchange. Its articles of Association should be approved. The NSDL keeps investors’ securities in the electronic form and settlements are carried out though book entry. Separate norms have been prescribed for the listing of shares. transparent and order driven system. But later for the survival. In the primary market SEBI Hs tightened the entry norms. Delisting may be done compulsorily by the stock exchanges for the reasons like nonpayment of listing free and other. laid down rules for promoters’ contribution. promoting and regulating the securities market. NSE provides screen base.4 To be listed on the stock exchange there should be minimum issued capital and number of share holders. The draft prospectus also should be approved by the . The aim of ISE is to co-operate the trade of the regional stock exchanges. companies with medium and large capital base are permitted to trade in OTCEI. In terms of volumes and trade NSE stands as a premier stock exchange in India. It is vested with wide range of powers to discharge its functions. SEBI – Securities and Exchange Board of India: SEBI was formulated with the aim of protecting the investors. Voluntary delisting by the companies is permitted in cases like sickness or closure or thin trading. The minimum issued capital size differs from one stock exchange to another. Stock Exchanges: The oldest stock exchange BSE is having screen based trading. To get listed. OTCEI was established with the purpose of providing a fair trade platform for the shares of the small cap companies. Price and volume surveillance is carried out effectively. SEBI and concerned stock exchange.
custodians. Brokers have to get registration. . Purchasing power risk is caused by inflation. Unsystematic risk is unique to the particular industry or company. SEBI (Foreign Institutional Investors) Regulation 1995 has laid down regulations for the registration of FIIs. Systematic risk affects the market as a whole. Financial risk emerges from the debt component of the capital structure. To regulate the mutual funds’ disclosure norms standard offer document is prescribed by SEBI. Investment and management of Mutual Funds are regulated. Rolling settlement methods is introduced in the dematerialized form. The allocations of shares have to be done within 30 days of the closure of subscription. The fund based and fee based activities of the merchant bankers are segregated. SEBI has the right to inspect the broker’s books and can take disciplinary action. In the secondary market electronic trading is necessary for getting recognition for a new stock exchange. Risk: Risk is measured by the variability of return. Price filters and margins are introduced to reduce the price volatility. Risk has two components. This is classified into business risk and financial risk. Book building has been introduced. Interest rate risk is the variation in return caused by the changes in the market interest rate. systematic and unsystematic risk. Business risk is caused by the operating environment of the business. Brokers have to submit their audited balance sheet. preferential allotment and investment limits. Weekly settlements are introduced. Information reduces the real rate of return earned from the securities. This may be caused by the internal factors like fluctuations in sales or personnel management or external factors like government policies. rules and regulations. FIIs are allowed to invest in the Indian debt market.5 The draft prospectus has been modified to provide adequate disclosure to the investors. Tangible event like Pokaran blast and intangible event like Investor’s psychology affect the entire stock market which is known as market risk.
Fundamental Analysis is the study of economic factors. Fundamental Analysis: . growth and stability of its annual sales. Technical Analysis: The technical analysis studies the behaviour of the price of the stock to determine the future price of the stock. liquidity. planning and diversification of the investment can moderate the effects of the various risk factors.6 A careful analysis of the past. Statistically standard deviation and beta estimation help to quantify the risk. The competitive edge of the company could be measured with the company’s market share. The financial health of the company could be analysed with the fund flow and cash flow statements. Industrial growth follows a pattern. leverage and the value of the stock. balance of payments and infrastructure facilities provides a best environment for common stock investment. A rising stock market indicates a strong economy ahead. investments. An economy with favourable savings. The financial statements of the company reveal the needed information for the investor to make investment decision. SWOT analysis reveals the real status of the industry. The ratio analysis helps the investor to study the individual parameters like profitability. The leading coincidental and lagging indicators help to forecast the economic growth. The cost structure. stable prices. industrial environment and the factors related to the company. The state of the economy determines the growth of gross domestic product and investment opportunities. research and development and the government policies regarding the industries influence the growth and profitability of the industries. Buying of shares beyond the pioneering stage and selling of shares before the stagnation stage are ideal for the investors.
Oscillators show the market or scrip momentum to find out the overbought and oversold conditions of the market or scrip. Ordinary bar charts generate numerous patterns. In the weak form of market. runs test and serial correlation are adopted to find out the market efficiency. A primary trend may be a bull market moving in a study upward direction. A secondary trend or secondary reaction is the movement of the market contrary to the primary trend. current prices reflect all the information found in the past prices and traded volumes. It smoothens out the short term fluctuations. It provides a base for an up move. Charts are the major analytical tools used in technical analysis. Moving averages are used as a technical indicator. the secondary movement and the daily fluctuations. or a bear market steadily dropping. Points and figure chart is one-dimensional chart drawn to predict the extent and direction of the price movement. These patterns indicate the trend and the trend reversals. Efficient Market Theory: The market efficiency is the accuracy and the quickness in which the price reflects the market related information. it gives a bearish signal and vice-versa. The resistance level is the level in which advances are temporarily stopped and the sellers overcome the demand. If the A/D line slopes downward while sensex is rising.7 Stock price movements are divided into three: the primary Tmovement. Fall of volume with the rise in price . helpful in comparing the stock price movement with the index movement and discovering the trend. Volume of the trade confirms the trend. Filter rule. Breadth of the market is the net number of stocks advancing versus both those declining in the market. Support level is the barrier for further decline. Relative strength index and rate of change index are the commonly used oscillators. indicates trend reversal and vice-versa.
the exercise price. all the information is fully reflected by the stock prices. In the strong form of market. The values of the call and put options affected by the prices of the underlying stocks. the life of the option the risk free rate and the risk of the common stock. Portfolio-Marcowitz Model: Morkowitz developed algorithms to minimise portfolio risk. The level of risk exposure is measured with the help of the standard deviation of the returns. The black-Scholes theory says that the option price is determined by the market price of the stock. The call option gives the investor the right to buy (not the obligation) from the option writer at the specified price at any time during the specified period. The stock index features are the futures contracts made on the major stock market indices. The expected return is the weighted sum of the expected return of the portfolio. The low P/E effect. It is an obligation and not an option. the weights being the probabilities of their occurrence. all the publicly available information is reflected by the security prices.8 In the semi-strong form of market. The last two factors are assumed to be constant over the option’s life. Diversification reduces the unsystematic risk component of the portfolio. small firm effect and weekend effect are cited as some of the inefficiencies of the market. . Options and Futures: An option is a contract between two investors that provides the buyer the right (but not the obligation) to sell or buy the specified asset from the other investors at the predetermined price within a specified period. the striking price of the stock and the option period. A put option gives the buyer the right to sell a specified number of stocks of a company to the option writer at a specified price at any time during the specified period.
The investor could borrow or lend any amount of money at risk less rate of interest. The systematic and unsystematic can be computed with the Sharpe model. . Risk free assets are also added with risky assets and it would minimise risk. Utility curves of the investor decide the most efficient portfolio. investor is permitted to borrow and lend. Many portfolios may be attainable.9 If securities with less than perfect positive correlation between their price movements are combined risk can be reduced considerably. portfolio return and risk can be computed easily. The capital market line represents the relationship between the expected return and standard deviation of the portfolio.(CAPM) The CAPM is based on specific assumption. In the levered portfolio. Using the Sharpe model. Security market line shows the linear relationship between the expected returns and beats of the securities. The risk would be nil or the standard deviation would be zero of two securities have perfect negative correlation. All investors hold only the market portfolio and the riskless securities. These portfolios form the efficient frontier. Beta is the deciding factor in measuring the systematic risk. The proportion invested in each security is equal to the percentage of the total market capitalization represented by the security. But some portfolios are attractive because they give more return for the same level of risk or same return with lesser level of risk. Market portfolio consists of the investments in all securities of the market. compared to the Markwitz model. Capital Asset Pricing Model: . The risk of the security is indicated by its covariance with the market portfolio. Risk cannot be reduced if the securities have perfect positive correlation. The Sharpe Index Model: The Sharpe model is based on the security’s return relationship with the index return.
Better performance of the fund depends on the predictive ability of the managerial personnel of the fund. Portfolio revision: Passive management of funds consists of indexing of the stocks to be purchased. Portfolios are revised with the help of formulae plans. Sharpe index is a measure of risk premium related to the total risk. till the elimination of the arbitrage possibilities. If the asset prices are not equal.10 The objective of the asset pricing model is to identify the equilibrium asset price for expected return and risk. . moving the price upwards if securities are held in short position. Mutual funds pool together the funds from investors by selling units and invest them in different types of securities. Treynor index measures the funds’ performance in relation to the market performance. Jenson index compares the actual or realized return of the portfolio with the calculated or predicted return. Investors indulge in arbitrage. The factor sensitivity in arbitrage model indicates the responsiveness of a security’s return to a particular factor. The open-ended funds units are available continuously. Portfolio Evaluation: Portfolio evaluation is carried out to assess the risk and return of the different portfolios. Aggressive portfolio consists of more of common stocks while conservative portfolio consists more of bonds or debentures. Closed-end funds are open for a specific period for subscription. there is a scope for arbitrage. An arbitrage portfolio is constructed without any additional financial commitment. In active managements funds are allocated to buy active stocks in the market.
11 In the rupee cost averaging techniques. In an equity swap two parties agree to make payments to each other based on the stock market price and interest rate. . varying amount of shares are bought at regular intervals. the proportions of funds on aggressive and conservative portfolios change according to the varying levels of security market prices. This is time diversification of the portfolio. According to the constant rupee plan constant amount of fund is maintained for the shares. The shifting of funds from aggressive to conservative portfolio or vice-versa occurs according price fluctuations. In the variable ratio plan.
It includes Market analysis. industry analysis. How is technical Analysis different from Fundamental Analysis in investment management? . Purchases of asset like shares and securities can either for investment or speculate or both. The risk and return associated with the purchase of stock is analysed to take better investment decision. What is the meaning of Company analysis? Company analysis is a study of the variables that influence the future of the firm both qualitatively and quantitatively. and company analysis.12 UNIVERSITY QUESTIONS ASND ANSWERS 2 MARKS EACH Define an investment. In the company analysis the investor assimilates the several bits of information relate to the company and evaluate the present and future values of the stock. What is a Security Analysis? It is a process of analyzing the individual securities and the market as a whole and estimating the risk and return expected from each of the investments with a view to identifying undervalued securities for buying and overvalued securities for selling. Investment is long term in nature. Investment means conversion of cash or money into monetary asset or a claim on future money for a return.
The Left shoulder is seen during the time when there is a bull in the trading market followed by heavy purchases. left and right and a head. Head-Heavy purchases in the market. 3. Return: investors always expect a good rate of return from their investment. What is arbitrage pricing theory? The arbitrage pricing theory is an equilibrium theory of the relationship between security expected returns and relevant security attributes. . Right shoulder prices rises moderately. State the criteria for evaluation of portfolio. Head and shoulders top are supposed to have two shoulders. Risk: Risk of holding securities is related with the probability of actual return becoming less than the expected return. How charts interpreted in technical analysis? The line and bar charts and point and figure charts are analysed in the following:1. But technical analysis makes a forecast of a demand and supply factors operating in a market and their discussions centre around the short run shifts in these factors.13 The fundamental analysis believes in the intrinsic value of a share. It is a pool of different securities in one basket or investors like to invest in a group or different collections of securities. 4. Explain the term Portfolio. Such a group of securities is called portfolio. Define debt market. Confirmation: This is indicated by drawing a line which is tangent to the left and right shoulders. It is a market where debt instruments are available. 2.
If Infosys tomorrow comes with another public offer it will then be an FPO as Infosys is already a listed company. Any company. A company that is already listed on the stock exchanges cal also approach investors for funds. Speculators willing to take high risk. .14 Safety: The selected investment avenue should be under the legal and regulatory framework. List any two characteristics of common stock. IPO stands for Initial Public Offer and FPO stands for Follow on Public Offer. the Power Finance Corporation needs money to lend funds to power producers in India. This is to make a particular issue attractive for the potential investors. Distinguish between IPO and FPO. It is so called because it is the first time that a company sells its shares to the public. the rate of return should ensure a cover against the inflation. Normally. Speculation essentially involves buying and selling activities with the expectation of getting profit from the price fluctuations.Since there is inflation in almost all the economy. What is a speculation? Speculation means taking up the business risk in the hope of getting short term gain. Equity shares are commonly referred to common stock or ordinary shares. Ordinary shareholders have residual claim on a company’s income and assets. FPOs are offered at a discount to the existing market price of that company. The IPO market is also referred to as the primary market in some parlance. let say for instance. They are legal owners. Hedge against inflation: .Marketability of the investment provides liquidity to the investment. Liquidity: . It offers shares to the general public and financial institutions like mutual funds and qualified institutional buyers in a given range (say between Rs 73 and Rs 85) referred to as the price band. An IPO lets a company sells its shares to the public and get money in return.
Mortgage market and Market for financial guaranties. Underwriting:Underwriting refers to the guarantee for ensuring the marketability of an issue. Capital Market:Capital market is a market for financial assets which have a long maturity period. gambling involves acceptance of exordinary risks even without a thorough knowledge about them for pecuniary gains. Long term loan market which is further subdivided intoTerm loan market. the liability of the underwriter does not arise. issuing houses. In the new issue market. Offer for sale:- .. lottery etc. playing cards. If the issue is fully subscribed.15 Gambling:Gambling is an act of creating artificial and unnecessary risks for expected increased return. investment brokers and underwriters take up the responsibility of selling the stock to the public. New issue market:Securities available for the first time are offered through the primary securities market. Gambling is undertaken just for thrill and excitement. It is an agreement under which the underwriter promises to subscribe to a specified number of shares or debentures in the event of public not subscribing to the issue. are typical examples. Horse racing. Capital market may be divided into: Government security market. The issue may either be a new company or an existing company. In short. Industrial security market. A gamble is a very short term investment based on rumours and hunches.
there is no need for underwriting arrangements. This method is advantages to the issuing company as it is relieved from the burden of printing and advertising prospectus. the shares are first offered to the existing share holders. Mutual Funds. Insurance companies. purchases the shares and sell them to investors at a later date at a suitable price. Bonus Issue:A method of marketing the securities of a company by converting its accumulated reserves and surplus profit. As these institutions are popular among the investing public. the offer for sale is an indirect method of floating new shares. Two stages are involved in the sale of securities. Secondly. The profit charged by the issue houses in known as “turn” or “spread”. Placement:Under this method. Right Issue:Shares of existing companies which are already listed in the stock exchange are sold through right issue. First. the issue is placed with limited number of financial institutions. Thirdly. Under section 81 of the Companies act . a company which issues new shares either after two years of its formation or after one year of first issue of shares. this method is suitable when the issuing company is small in size. it takes the form of ‘bonus issue method’. The rights themselves are transferable and saleable in the market by the shareholders who are entitled to buy right shares. securities can be easily sold to them. corporate bodies and noteworthy individuals. as the placement itself amounts to underwriting. the intermediaries resell the securities to the ultimate investors at a higher price. Secondly. the issuing company issues securities to issuing houses and brokers at a fixed price. merchant banking subsidiaries of reputed commercial banks. Under right issue. private placement securities are sold to financial institutions like UTI. securities are offered to public through intermediaries such as issue houses and brokers. Under this method. Placement gives a number of advantages. These shares are called right shares. These intermediaries. First. which ever is earlier has to first offer them to the existing shareholders. Bonus issue .16 While sale through prospectus is a direct method.
bids are invited from prospective investors from which the demand at various price levels is noted. Book-building:A method of marketing the shares of a company whereby the quantum and the price of the securities to be issued will be decided on the basis of the ‘bids’ received from the prospective shareholders by the lead merchants bankers. securities are issued to successful applicants on the basis of the orders placed by them. The underwriters charge a fee for their services. it takes the form of Initial Public Offer. He agrees to pay the issuer a certain price for a minimum number of shares. the underwriter. The job of selling the stock is entrusted to a popular intermediary. The initial minimum size of issue through book-building route was fixed at Rs 100 Crores. Under this method of marketing. issues of any size are permitted. It saves the company enormously of the hassles of capital issue.12. who are often the clients of the underwriting firm. is known as “book-building method”. The issue of bonus shares is subject to certain rules and regulations.1996. The merchant bankers undertake full responsibility for the issue. When a company whose stock is not publicly traded wants to offer that stock to the general public. Initial Public Offer (IPO):The public issue made by a corporate entity for the first time in its life is called ‘IPO’. Under the book-building method. and then resells those shares to buyers. The issue does not in any way affect the resources base of the enterprise.17 merely implies capitalization of existing reserves and surplus of a company. An underwriter is invariably an investment banking company. share prices are determined on the basis of real demand for the shares at various price levels in the market. through their brokers. For discovering the price at which issue to be made. from 9. . however.
location. is known as ‘bought-out deals’. contents of articles the names and addresses of the underwriters. i. directors. the name and address of the company’s directors. bankers brokers etc. Prospectus:A document that contains information relating to the various aspects of the issuing company. Pricing of issues:- . besides other details of the issue is called ‘prospectus’. The general details include the company’s name and address of its registered office.e. Employees Stock Option:. export potential and obligation. legal advisors. collaboration. The scheme helps retain the most productive employees in an industry.. infrastructure facilities. The scheme is particularly useful in the case of companies whose business activity is dominantly based on the talent of the employees. nature of products. It is a voluntary scheme on the part of the company to encourage employees’ participation in the company. company secretary . material details regarding the project. etc. the amount underwritten and the underwriting commission. management perception regarding risk factor. managing director.18 Bought-out Deals:A method of marketing of securities of a body corporate whereby the promoters of an unlisted company make an outright sale of a chunk of equity shares to a single sponsor or the lead sponsor. performance guarantee. credit rating obtained from any other recognized rating agency. marketing set-up. The document is circulated to the public. auditors.ESOP A method of marketing the securities of a company whereby its employees are encouraged to take up shares and subscribe to it is known as stock option.. The scheme also offers an incentive to employees to stay in the company. as in the case of software industry. past performance and future prospects. a statement regarding the fact that the company will make an application to specified stock exchange for listing its securities and so on. which is known for its constant churning of personnel. plant and machinery.. the date of opening and closing of subscription list. manager.
NEAT and BOLT:The Bombay on-line trading system (BOLT) is CMC’s on-line trading system for trading in stocks. which include the earnings per share. record. P/E ratio:The reciprocal of the earnings yield is called the Price-earnings Ratio (P/E) Thus: Market value per share Price Earning Ratio =----------------------------Earnings per share Intrinsic Value of Security:The actual value of the company or an asset based on an underlying perception of its true value including all aspects of the business. BSE on-line trading system (BOLT) National Exchange for Automated Trading (NEAT). etc. track record of the promoters. the profit margins. the following factors should be considered: Qualitative factors. The system is operational at Bombay Stock Exchange. book value. and growth of the company as compared to the industry etc. This value may or may not be the same as the current market value. Companies. NSE terminal. in terms of both tangible and intangible factors. the relevant guidelines for capital issues given by SEBI from time to time must be considered. themselves in consultation with the merchant bankers.19 While fixing an appropriate price. dividend payment. with the abolition of the office of the Controller of Capital Issues. Quantitative factors. the average market price for 2 to 3 years. do the pricing of issues. the composite industry price earnings ratio and the future prospects of the company.. the competitive advantage the company has in making the best use of the business opportunities. which include the prospects of the industry. companies can adopt free pricing. Value indicators use a variety of analytical techniques in order to estimate the intrinsic value of . While fixing a price for the security issue.
Oscillator indicators have a range. for example between zero and 100 and signal periods where the security is overbought (near 100) or over sold (near zero). Non bounded indicators still form buy and sell signals along with displaying strength or weakness. These schemes do not have a fixed maturity period. but they vary in the way they do this. if any which are declared on a daily basis. Intrinsic value of share = Normalized EPS X Expected P/E ratio Cash dividend / EPS Expected P/E ratio = ------------------------Discount rate-Growth rate Oscillators:Oscillators indicate the market momentum or scrip momentum.20 securities in hopes of finding investments where the true value of the investment exceeds its current market value. rise or decline in the movement. Breadth of the Market:A technical analysis theory that predicts the strength of the market according to the number of stocks that advance or decline in a particular trading day. Investors can conveniently buy and sell units at Net Asset Value related prices after deduction of exit load. The key feature of open-ended schemes is liquidity. this theory predicts that the market will be rising vice versa. Signaling the trend reversal. The breadth of market indicator is used to gauge the number of stocks advancing and declining for the day. Open-ended funds:An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. What are the different stages in industry life cycle? The industry life cycle has four well defined stages and they are:- . If the breadth indicator is strong.
. Well Regulated What are the features of preference shares? Preference shareholders have a claim on assets and income prior to ordinary shares. any layman can understand the market move. it is called bull market. The dividend rate is fixed in the case of preference shares. -The market discounts everything. Liquidity 7. What is bullish trend in a market? The securities price trend may either increasing or decreasing. Return potential 5. -The market always moves in trend. Flexibility 8. When the market exhibits the increasing trend. convenient administration 4. except for minor deviations.21 Pioneering stage Rapid growth stage Maturity and stabilizing stage Declining Stage. Professional Management 2. Low costs 6. Diversification 3. Preference shares may be issued with cumulative rights. -Followed by the historical fact. What are the assumptions used in technical analysis? -The market value of the scrip is determined by the intersection of supply and demand. Choice of Schemes 9. What are the objectives of the Mutual Fund scheme? 1.
The share prices can either increase or fall or remain flat. assets. The three directions of share price movements called as rising.22 Both redeemable and irredeemable preference shares can be issued in India. What index fund? In order to track the return performance of markets. bearish and flat trend. If a fund manager creates an equity fund. Redeemable preference shares can have maturity period while irredeemable are perpetual. earnings. In other words bullish. especially sales. The cost of this strategy is lower and the fund performance . The CNX Nifty is one such index of 50 large and liquid stocks. debt. By plotting a security’s average price. market indices of a sub-set of trading stock is created. which will invest in the Nifty stocks. products and competition. he is creating an index fund. What do you infer from the moving average theory of technical analysis? A moving average is the average price of a security over a set amount of time. the price movement is smoothed out. This strategy is also called passive fund management. What do you understand by fundamental approach to security analysis? Fundamental analysis is a method of security valuation which involves examining the company’s financials and operations. Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. Fundamental analysis takes into consideration only those variables that are directly related to the company itself. growth potential. in the same proportion as in the index. Once the day-today fluctuations are removed. Explain three types of trends in stock prices? Trend is the direction of price movement. Preference shares can be convertible. management. traders are better able to identify the true trend and increase the probability that it will work in their favour. rather than the overall state of the market or technical analysis data. falling and flat trend.
Company analysis involves a scrutiny of the company’s financial aspects with a view to identifying its strength. it is a method of assessing the competitive position. What is the meaning of the company analysis? Company analysis is a study of those variables which influence the future of the company. CML-Capital Market Line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending on the risk-free rate of return and the level of risk (standard deviation)for a particular portfolio. weaknesses and future business prospects. financial results and take-over bids. by virtue of his association. without the investor having to bear the risks and costs arising form the market views that a fund manager may be. This is achieved visually through the Security market line. both qualitatively and quantitatively. A security plotted below the SML is overvalued because the investor would be accepting less return for the amount of risk assumed. What is the difference between SML and CML:SML. it is undervalued because the investor can expect a greater return for the inherent risk. earning and efficiency of the company and the future prospects of the shareholders of the company What is insider trading? Trading in a company’s share by a connected person having non-public and price sensitive information such as expansion plans. An index fund provides and ideal exposure to equity markets.23 virtually tracks the market index.Security Market Line is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return for risk. Further. The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-free asset in the portfolio. Individual securities are plotted on the SML graph. The CAPM demonstrates that the market portfolio is essentially the efficient frontier. with the company is called insider-trading. If the security’s risk versus expected return is plotted above the SML. What is a market lot? .
What is an over. When buying/ or selling of securities is done using computers and matching of trades is done by the computer. What is dematerialsation of shares? Dematerialization is the process through which shares held in electronic form in depository are converted back into physical form. When a person or persons acting in concert with each other collude to artificially increase or decrease the price of a security. these shares are normally traded at a discount to the prevailing price for the marketable lot. What is an odd lot? The numbers of shares that are less than the market lot are known as odd-lots. Under the scrip-based delivery system. What is a spot transfer of shares? The instruction given by a registered holder of shares to the company to stop the transfer of shares as a result of theft or loss is known as spot transfer. In demat scrip’s. the process is called screen-based trading. which are not listed on a stock exchange. Describe price rigging. the process is called price rigging.24 A market lot is the minimum number of shares of a particular security that must be transacted on the exchange.the-counter trading? Trading on those stocks. the market lot is fixed at one single share. What is settlement? It refers to the scrip-base netting of trades by a broker after the trading period is over. Describe screen based trading. What is a trade and settlement guarantee in trading? .
What is a green-shoe option? A green shoe-option or an over-allotment option. What is stock split? A proportionate increase in the number of outstanding shares by splitting the face value in a desired ratio is called stock split. In contrast. which is sometimes a part of an underwriting agreement. What is a book building issue? In a book building issue. What is Net Asset Value? The performance of a particular scheme of mutual fund is denoted by Net Asset Value. which allows the underwriter to purchase and sell additional shares if the market’s demand for the share is greater than originally expected. For example. the settlement guarantee. enabling better pricing with a wide institutional investor base.25 Trade guarantee is the guarantee provided by the clearing corporation for all trades that are executed on the exchange. a share of face Rs 100 may be split into10 shares of Rs 10 each. . Describe margin trading? Margin trading allows investors to buy a stock by paying a part of the transaction value with the rest being financed by the broker. A common price is then arrived at for offloading shares. guarantees the settlement of trade after multilateral netting. the issuer appoints lead managers who collect bids with in a indicated fixed band from prospective investors. What is trading for delivery? Trading for delivery is the trading conducted with an intention to deliver shares as opposed to a position that is squared off within the settlement.
Since market value of securities changes every day. if the market value of the securities of a mutual fund scheme is Rs 200 Lakhs and the mutual fund has issued 10 Lakhs units of Rs 10 each to the investors. What is open-ended fund/scheme? An open ended fund or scheme is one that available for subscription and repurchase on a continuous basis. For example. Such schemes generally invest in fixed income securities such as bonds. However.5-7 years. Such funds are less risky compared to equity schemes. NAV is the market value of the securities held by the scheme. These schemes do not have affixed maturity period. if any which are declared on a daily basis. In order to provide an exit route to the investors. In simple words. NAV is required to be disclosed by the mutual funds on a regular basis-daily or weekly-depending on the type of scheme.26 Mutual funds invest the money collected from the investors in securities market. What is Income / Debt oriented Scheme? The aim of income funds is to provide regular and steady income to investors. The fund is open for subscription only during a specified period at the time of the launch of the scheme. Investors can conveniently buy and sell units at NAV related prices after deduction of exit load. NAV of a scheme also varies on a day-today basis. The key feature of open-ended schemes is liquidity. then the NAV per unit of the fund is Rs20. What is Close-ended Fund/Scheme? A close-ended fund or scheme has stipulated maturity periode. The NAVs of such funds are affected because of changes in interest rates in the . Government securities and money market instruments. opportunities of capital appreciation are also limited in such funds. These mutual funds schemes disclose NAV generally on a weekly basis. The NAV per unit is the market value of securities of a scheme divided by the total number of units of the scheme on any particular date.g. These funds are not affected because of fluctuations in equity markets. some close-ended funds given an option of selling back to the units to the mutual funds through periodic repurchase at NAV related prices. corporate debentures. Investors can invest in the scheme at the time of initial public issue.
A Company that is already listed on the stock exchanges can also approach investors for funds. However. long term investors may not bother about these What is an IPO? IPO stands for Initial Public Offering. If Infosys tomorrow comes with another public offer it will be an FPO as Infosys is already a listed company: Normally. What is Gilt Fund? These funds invest exclusively in government securities. Fpo stands for follow on public offer. let say for instance. the POWER Finance Corporation needs money to lend funds to power projects in India. If the interest rate falls.27 country. _______________________________________________________________________ _ . fluctuations. NAVs of this scheme also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. It offers shares to general public and financial institutions like mutual funds and qualified buyers in given range (say between Rs 73 and Rs 85) referred to as the price band. What is an FPO? Not to be confused with IPO. Any company. This is to make a particular issue attractive for the potential investors. The IPO market is also referred to as the primary market in some parlance. NAVs of such funds are likely to increase in the short term and vice versa. It is so called because it is the first time that a company sells its share to the public. FPOs are offered at a discount to the existing market price of that company. An IPO lets a company sell its hares to the public and get money in return. Government securities have no fault risk.
28 . Cash in hand. silver and valuables. Financial corporate securities: a) Equity shares b) Preference shares c) Debentures d) Bonds e) Warrants 2. cash at bank. 1. 3. Non security investments consist of: a) Investment in business and goods b) Mortgages c) Real estate d) Gold. Government and other investment. and Government bonds. post office savings. . 16 MARKS EACH Investment avenues can be broadly categorized into the following: A. Describe the wide array of investment avenues. Direct investment avenues: 1. UNIVERSITY QUESTION AND ANSWERS . Bank.
Discuss. Mutual Funds 4. However. Types of indexes Most of the commonly followed stock market indexes are of the following two types: Price weighted index and Market capitalization weighted index. As a benchmark portfolio performance 3. the observed prices yield contaminated information and actually worsen an index. Hence. If the stock is illiquid. Insurance 2.29 B. A market index is very important for its use: 1. Going from 50 stocks to 100 stocks gives very little reduction in risk. 2. Going from 10 stocks to 20 stocks gives a sharp reduction in risk. The more serious problem lies in the stocks that we take into an index when it is broadened. Provident fund 3. Brief explanation of the above is required. it should be well diversified and yet highly liquid. Pension fund. . It should represent the market. Indirect investment avenues: 1. there is little to gain by diversifying beyond a point. A good stock market index is one which captures the behavior of the overall equity market. A stock market index is a statistic used to track changes in the average value of a list of companies which are traded in a particular stock market. Other trust companies 6. A well diversified index is more representative of the market/economy. “Stock market indices are the barometer of Indian Economy”. As an underlying in derivative instruments like index futures and 4. there are diminishing returns to diversification n. UTI units 5. Movements of the index should represents the obtained by ‘Typical’ portfolio in the country. In passive fund management by index funds. As a barometer for market behaviour 2. Index Construction Issues A good index is a trade off between diversification and liquidity.
2000 vide circular dated November 29. each constituent stock in the index affects the index value in proportion to the market value of all the outstanding shares. Etc. 3. Example:. the base index = 1000 and the index value works out to be 1002 Capital market capitalization Index= __________________________ X Base value Base market capitalization Current Market capitalization= Sum of (Current market price outstanding shares) of all securities in the index.. trading turnover.Below we can see that each stock affects the index value in the proportion to the market value of all the outstanding shares. This index forms the underlying for a lot of index based products like index funds and index futures. Securities and Exchange Board of India has amended the Disclosure AND Investor Protection Guidelines. The highlights of the amendments are: Fast Track Issues (FTIs): Listed companies satisfying specified requirements can make Fast Track Issues through Follow-on Public Offerings and Right Issues. include minimum market capitalization of public holding. 2007. Base market capitalization = sum of (market price issue size) all securities as on base date. Market capitalization weighted index: In this type of index. inter alia. The eligibility criteria for the purpose.30 Price weighted index: In a price weighted index each stock is given weight proportional to its stock price. In the present example. track record of compliance with listing requirements and investor grievance redressal. Hence. the equity price is weighted by the market capitalization of the company (share price Number of outstanding shares). . What are the recent measures taken by the SEBI to protect the investors? SEBI amends Disclosure and Investor Protection (DIP) guidelines.
provided that such discount does not exceed 10 % of the price at which securities are issued to other categories or public. For this purpose . Presently. 00. The minimum application value in IDR issues has been reduced to Rs 20. applicants in public and rights issues are required to disclose their PAN/GIR in the application form only if they are making an application for a value exceeding Rs 50. Deletion of the chapter on Guidelines for Issue of Capital by Designated Financial Institutions (DFIs):- .000/-. retail individual shareholder has been defined to mean a shareholder (i) whose shareholding is of value not exceeding Rs 1. and (ii) who makes application or bids in a public issue for value not exceeding Rs 1. Discount in Issue Price:Companies making public issues are permitted to issue securities to retail individual investors/retail individual shareholders at a discounted price. are holding shares worth up to Rs 50. irrespective of the value of application.000/-.31 Issue of Indian Depository Receipts:The guidelines have been amended to enable all categories of investors to apply for IDR issues subject to at least 50 % of the issue being subscribed by Qualified Institutional Buyers (QIBs). Presently.000/-.on the day immediately preceding the record date. Quoting of PAN Mandatory: Quoting of PAN in application forms for public/rights issues has been made mandatory. listed companies making public issues can make reservation on competitive basis for its existing shareholders who as on the record date . only QIBs can apply in an issue of IDRs.000/-. Further.00.000/.00.000 from Rs 2. Reservation of share holders in listed companies:Application by shareholders of listed companies under the reserved quota has been restricted to retail individual shareholders. there is no limit on the value of the application made by such shareholders. Presently.
Presently.32 The special dispensations given to DFIs have been removed by deleting the chapter on guidelines for Issue of Capital by DFIs from SEBI (DIP) Guidelines. The company seeking for listing on the respective stock exchange has to comply with all the rules and regulations given by the stock exchange. The issued securities are traded in secondary market offering liquidity to the stock at a fair price. In new issues market the user can be considered as a manufacturer. exercise control over the primary market. DFIs operationally compete on equal footing with private entities and DFIs. SEBI has introduced separate guidelines in 1992 for primary issuances by DFIs. it involves buying and selling of securities on the stock exchange through its members. to place companies/corporations/institutions engaged mainly in financing of developmental activities and playing a catalytic role in the infrastructure development of the country on a different footing. as a concept. investment bankers act as the channel of distribution for the new issues. It is a market where scrip’s are traded. . The stock exchanges through their listing requirements. which have become redundant or in respect of which. Relationship between Primary market and Secondary market:The new issue market cannot function without the secondary market. These issues may be of new type or the security used in the past. Primary market: . SEBI has also made certain miscellaneous amendments either to delete certain provisions. there have been requests for exemption on regular basis. Apart from the above. may have outlived its utility. These secondary markets also referred to as stock markets. Secondary market: . The issue may be a new company or an existing company market.Stocks are available for first time is offered through new issue market. The secondary market or stock market provides liquidity for the issue of securities. The issuing houses.the capital apart from the primary market also includes the secondary market where existing issues are traded. 4. “Primary and Secondary markets are complementary to each other but their organizational set up are different” Comment.
An embryonic industry environment A growth industry environment A shakeout industry environment A mature industry environment A declining industry environment INTRODUCTION STAGE In the introduction stage of the life cycle. It may be a small entrepreneurial company or a proven company which used research and development funds and expertise to develop something new. Some analysts even add an embryonic stage before introduction. The marketability and the capital appreciation provided in the stock market are the major factors that attract the investing public towards the stock market. it is difficult to select companies for investment because the survival rate is unknown. thus beginning a new industry.33 The primary market provides a direct link between the prospective investors and the company. GROWTH RATE STAGE . By providing liquidity and safety. the firm may be alone in the industry. we can identify five industry environments. At the introduction stage. In this situation. it provides an indirect link between the savers and the company. the stock market encourages the public to subscribe to the new issues. 5. Using the industry life cycle model. unique product offering has been developed and patented. Perhaps a new. each linked to a distinct stage of an industry’s evolution. Marketing refers to new product offerings in a new industry as “question marks” because the success of the product and the life of the industry is unproven and unknown. an industry in its infancy. In which phase of the life cycle. Thus. investments in an industry are most attractive? INDUSTRY LIFE CYCLE The model is a useful tool for analyzing the effects of an industry’s evolution on competitive forces. Discuss the concept of an industry life cycle by describing each of its four phases.
plant and equipment to facilitate the growth required by the market demands. between growth and maturity. called expansion. In this stage the growth rate is more than the industries average growth rate. If the product innovation has not kept pace with other competitors. While sales are expanding and earnings are growing from these” cash cows” products. MATURITY As the industry approaches maturity. Production improvements. Marketing often refers to products at the growth stage as “stars”. Mergers and consolidations will also be the norm as firms try other strategies to continue to be . Technology. causing the plotted curve to trend downward. Thus the growth stage requires funds to launch a newly focused marketing campaign as well as funds for continued investment in property. Profits may continue to rise. automatio9n and linking suppliers and customers in a tight supply chain are also methods to improve efficiency. indicating slowing growth. sales suffers and the life cycle experiences a decline. the industry life cycle curve becomes noticeably flatter. However. the rate of sales expansion is typically equal to the growth rate of the economy. In this phase. which may encourage economies of scale and facilitate development of a line-flow layout for production efficiency. Some experts have labeled an additional stage. DECLINE Declines are almost inevitable in an industry. In fact. The goal of marketing efforts at this stage is to differentiate a firm’s offerings from other competitor within the industry.34 The growth stage also requires a significant amount of capital for the firm. the rate has slowed from the growth stage. Management efficiency can help to prolong the maturity stage of the life cycle. large shakeout in the industry as competitors who did not leave during the maturity stage now exit the industry. like just-in-time methods and lean manufacturing can result in extra profits. or if new innovations or technological changes have caused the industry to become obsolete. Yet some firms will remain to compete in the smaller market. Investors have to closely monitor the events that take place in the maturity stage of the industry. however. sales are decreasing at an accelerating rate. There is usually another. the industry is experiencing more product standardization at this stage.
Investment decisions are made based on this fundamental information relative to other opportunities.35 competitive or grow through acquisition and/or diversification. this form of analysis usually results in longer-term investments and is considered to be more conservative approach. fundamentalists attempt to quantify the current value of a stock by gathering data relating to general industry outlook. Of course. earnings. not the price movements themselves. when these assignments are faulty the result is a tendency to maintain a losing position longer than necessary. historical patterns of sales. 6. In this stage it is better to avoid investing in the shares of the low growth industry even in the boon period. In theory. the fundamentalist who can make accurate projections and who chooses quality securities when they are undervalued and sells them when they are overvalued can reap substantial profits. Technical Analysis:- Technical Analysis is based on the following three principles: . concerns itself with attempting to identify patterns in past price movements. market shares. At a high level. dividends. For the most part. Investment in the shares of these type of leads to erosion of capital. on the other hand. Much of the work of the fundamentalist involves accurately projecting earnings going forward and the factors affecting earnings. Technical analysis. Fundamental analysis utilizes a much wider range of information than does technical analysis and relies on traditional financial statement analysis. How does technical analysis different from the fundamental analysis? There are two primary schools of thought regarding security analysis –fundamental and technical analysis. Fundamental Analysis generally refers to the study of the economic factors underlying the price movement of securities or commodities. Fundamental Analysis:- Both consider macro economic trends to differing degrees but emphasize the use of firm specific micro economic data. overall market conditions. Using this data they then try to assign a future value to the stock by interpretation and projection. The difference between the current and future values reflects the fundamentalist’s assessment of the stock’s potential as an investment opportunity. corporate financial strength. etc.
Gann angles and the like. The technical analysis generally concentrates on the study of historical price and volume data to detect future trends. these trends tend to persist. a subjective issue. The purpose of technical analysis is to detect the trend or momentum of a stock early so that a good entry or exit point can be selected. charting is the main approach for technical analysis. . interpreting a chart or an indicator is at least in part. technical analysis aims to improve the timing of your investments.36 • • • Everything relevant to the value of a company’s stock is discounted and reflected in share price. Chartists refer to line studies such as trend lines. Traditionally. Trends sometimes appear in share price moves and when once started. Capital Asset Pricing Model:The Capital Asset Pricing Model reflects the market for different financial assets. triangles. and to compensate investors for the risk of the assets. when it is held with a perfectly diversified portfolio. Whereas fundamental analysis allows you to make an informed determination of a company’s current share valuation. Technicians employ technical indicators which usually are variations of common statistical methods such as ordinary least-square regression. Activity in the market repeats. exponential moving averages. etc. While the chartist embraces a more visual approach to the analysis. However. Explain the CAPM theory and its validity in the Indian stock market. the technician uses a more quantitative approach and often employs sophisticated statistical methods. The model suggests that asset prices will adjust to achieve the precise return. the accuracy is still limited since many trading patterns and some correlative information are not visible or not perceptible directly. Even if you have the knowledge and experience to understand what a chart is telling you. 7. speed resistance lines. Within the rank of technical analysis there are two factions-chartists and technicians.
the high beta stocks fluctuate even more. using the formula E(R) =r+ERP (beta). they want a high mean. the expected rate of return on a stock. The risk free interest rate is usually based on one or other of the government treasuries. No taxes or transactions costs are involved. beta is defined as the covariance of the returns of the stock and the market divided by the variance of the returns of the market. Portfolios with the highest returns for a given level of risk are known as Mean-variance Efficient frontier (MVE). His idea was based on the assumptions that stock returns are normally distributed and that people like returns but not risks. weekly or monthly historical data. If the beta is negative. where r is the risk free interest rate and ERP is the Equity Risk Premium for the overall market portfolio. risk is defined using the concept of beta. It is calculated using daily. however the market fluctuates. Investments are limited to traded financial assets. then there is a tendency for the stock also to go up (or down) by the same percentage multiplied by beta. It is the ratio of the movements of an individual stock relative to the movements of the overall market portfolio. . Securities are completely divisible. In the CAPM. Markowitz in 1952 proposed a model. Investors maximize expected utility of the portfolios over a single period planning horizon. Investors have homogeneous expectations. Stock with a beta greater than 1 are considered riskier. taken over a year or more. Statistically. Investors are rational mean-variance optimizers. CAPM Assumptions • • • • • • • • Investors are risk averse. Hence. If the stock market goes up (or down) by a particular percentage. low standard deviation portfolio.37 By showing how increasing the diversification lowers portfolio’s standard deviation and variance. it is assumed a predictor of future market behavior. There exists Perfect Competition (individual investors are price takers). the tendency of the stock is to move in the direction opposite to that of the market. Once beta is calculated. CAPM computes E(R).
37. Stock A with a beta of 1. and an ERP of 5. may freely price its equity shares or any securities convertible at a latter date into equity shares. 8. Differential Pricing Any unlisted company or a listed company making a public issue of equity shares or securities convertible at a later date into equity shares.54%.5 (1. may issue such securities to the an .85.Consider. a risk free return r = 5%.5.85) = 15. may freely price its equity shares and any security convertible into equity at a later date. The Expected Return on stock A = 5 + 5.37) = 12. extra money is invested in stock with a high beta.5 (1. consider Stock B with a beta of 1. offered through a public or rights issue. What are the SEBI guidelines on pricing of a security? SEBI Guidelines on Pricing by Companies Issuing Securities: The companies eligible to make public issue can freely price their equity shares or any security convertible at a later date into equity shares in the following case: Public/Rights Issue by Listed Companies A listed company whose equity shares are listed on a stock exchange.38 Let us consider an example:.17%. Initial Public issue by Banks The banks (whether public sector or private sector) may freely price their issue of equity shares or any securities convertible at a later date into equity shares subject to approval by RBI. Infra Structure Company An eligible infrastructure company shall be free to price its equity shares subject to the compliance with the disclosure norms as specified by SEBI from time to time. the expected return is 5 + 5. Therefore. On the other hand. Public Issue by Unlisted Companies An unlisted company eligible to make a public issue and desirous of getting its securities on a recognized stock exchange pursuant to a public issue.
39 applicant in the firm allotment category at a price different from the price at which the security is being offered to the applicants in the firm allotment category is higher than the price at which securities are offered to public. Price Band Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the offer documents filed with the Board and actual p[rice can be determined at a later date before filing of the offer document with the ROCs Payment of Discounts/Commissions etc No payment, direct or indirect in the nature of a discount, commission, allowance or other wise shall be made either by the issuer company or the promoters in any public issue, to the persons who have received firm allotment in such public issue.
9. Discuss the factors considered in EIC Framework. (Economic, Industrial and Company) Economic Analysis The level of economic activity has an impact on investment in many way. versa. The economic Factors are: Gross domestic Product Savings and Investment Inflation Interest rate Budget Tax structure and Balance of payment etc. If the economy grows rapidly, the industry can also expected to show rapid growth and vice
Company Analysis. In the company analysis the investor assimilates the several bits of information relate to the company and evaluate the present and future values of the stock. The risk and return associated with the purchase of the stock is analyzed to take better investment decision. The company can be analyzed by two ways;
40 The Financial Analysis Management position and competitive edge analysis. The financial analysis includes the following: Analysis of income statement Analysis of balance sheet Analysis of cash flow statement /funds. Non financial analysis includes the strength, weakness, opportunity and threat (SWOT) of the company. The company’s market share, growth of the shares, stability of sales and its advantages, capital structure etc. Industry Analysis An industry is a group of firms that have similar technological structure of production and produce similar products. These industries can be classified on the basis of business cycles i.e., classified according to their reactions to the different phases on the business cycle. Industry Life Cycle This model is a useful tool for analyzing the effects of an industry’s evolution on competitive forces. Using the industry lifecycle model, we can identify five industry environments, each linked to a distinct stage of an industry’s evolution: An embryonic industry environment A growth industry environment A shakeout industry environment A declining industry environment
10. What are the different types of charts used by technical analyst? A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock’s price movement over a one year period, where each point on the graph represents the closing price for each day the stock is traded. Chart Types Line chart Bar chart Candle stick chart
41 Point and figure chart. Line Chart The most basic of the four charts is the Line chart because it represents only the closing prices over a set of time. The line is formed by connecting the closing prices over the time frame. Line chart do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts. Bar Chart The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represents each data point. The chart is made up of a series of vertical lines that represents the high and low for the trading period, along with the closing price. The close and open are represented on the vertical line by horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if the left dash (open)is lower than the right dash(close)then the bar will be shaded black, representing an up period for the stock, which means it has gained value. A bar that is colored red signals that the stock has gone down in value over that period. When that is the case, the dash on the right (close) is lower than the dash on the left (open). Candle Stick charts The Candlestick chart is similar to a bar chart, but it differs in the way that is visually constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the period’s trading range. The difference comes in the formation of a wide bar one the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. A major problem with the candlestick color configuration, however, is that different sites use different standards.
The investment alternatives range from financial securities to traditional non security investments. which can distort trader’s views of the price trends. The negotiable securities are transferable. debentures. bonds. The financial securities may be negotiable or nonnegotiable. or insignificant price movements. The investors with limited funds can invest in the mutual funds and can have the benefits of the stock market and money market investments as specified by the particular fund.42 Point and Figure charts The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. These types of charts also try to neutralize the skewing effect that time has on chart analysis. equity shares are variable securities. in the stock. The knowledge about the investment avenues enables the investor to choose investment intelligently. It is of recent origin in India. Within the short span of the time. government securities. As an investment advisor what features would you suggest being included in the investment bunch of a client? Explain the features briefly. Like. The Advantages of Mutual Funds are: 1. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. several financial institutions and banks have floated varieties of mutual funds. The negotiable may yield variable income from fixed income. Profession management: You avail of the services of experienced and skilled professionals who are backed by a dedicated investment research team which analysis the performance and prospects of companies and selects suitable investments to achieve the objectives of the scheme. 11. . Mutual fund is another investment alternate. There are variety of investment avenues are open to the investors to suit their needs and nature. The point and figure chart removes the noise. The required level of return and the risk tolerance level decide the choice of the investor. Indra vikas patra and money market securities yield fixed income.11.
you can systematically invest or withdraw funds according to your needs and convenience. Low Costs: Mutual funds are a relatively less expensive way to invest compared to directly investing in the capital equity markets because the benefits of scale in brokerage. You achieve this diversification through a Mutual Fund with far less money than you can do on your own. Mutual fund saves your time and makes investing easy and convenient. Diversification: Mutual Fund invests in a number of companies across the broad cross section of the industries and sectors. you can get your money back promptly at net asset value related prices from the mutual fund itself. 7. regular withdrawal plans and dividend reinvestment plans. . 5. 6. Transparency: You get regular information on the value of your investment in addition to the disclosure on the specific investments made by your scheme. you can sell your units on a stock exchange at the prevailing market price or avail of the facility of direct repurchase in NAV related prices which some close ended and interval schemes offer you periodically. Flexibility: Through features such as regular investment plans. Liquidity: In open-ended scheme. 4. 3. delayed payments and unnecessary follow up with brokers and companies. custodial and other fees translate into lower costs for investors. 8. Convenient administration: Investing in a Mutual Fund reduces paper work and helps you to avoid many problems such as bad deliveries.43 2. the proportion invested in each class of assets and the fund manager’s investment strategy and outlook. This diversification reduces the risk because seldom do all stocks decline at the same time and in the same proportion. With close –ended schemes. Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected securities. Return Potential: Over a medium to long term.
“Security analysis requires as first step the sources of information on the basis of which analysis is made”. They are gold. property and antiques. financial position. mutual fund scheme can help you meet your financial goals. 12. risk tolerance and return expectations. There are a wide variety of Mutual Fund schemes that cater to your needs. Different Investment avenues: Financial securities/Equity/Non-convertible debentures/Bank deposits/Provident funds/Mutual funds/ real assets/Real estate Gold: Silver. Choice of Schemes: Mutual funds offer a family of schemes to suit your varying needs over a lifetime. arts. Whether as the foundation of your investment programs or as a supplement. The operations of mutual funds are regularly monitored by SEBI. The real estate always finds a place in the portfolio. silver. These demand/supply pressures depend upon the available . These are all non-financial instruments. 10. Objectives of Investors: Income Appreciation of capital Safety Liquidity Hedge against inflation.44 9. Well Regulated: All mutual funds are registered with SEBI and they function within the provisions of strict regulations designed to protect the interests of ‘Investors’. What are different types of information used for security analysis? The security market is a perfect action market where demand/supply pressures determine the price. what ever your age.
BSE and .. Annual reports etc. OCBs etc. monsoon. installed capacity. OTCEI provide detail about listed companies in the web sites. the Week etc. The BSE.45 money and the flow of information. output and employment and for investment in the domestic market by FFIs. market share of major units. also foreign political affairs. Fortune India. RBI bulletins. war etc.. NSE. competing units. Agricultural output. Stock market information: Financial dailies. the market analysis and estimate of intrinsic value around which he market price revolves. Government policies etc. Economic Times. Company Information: Corporate data. affect our market. Besides. The information are Newspapers like India Today. stock exchange publications.. international demand for export. Dalal Street Stock Exchange publications etc. annual reports. It is in this context that source of information become relevant. Kothari’s Economic and industry guide of India gives vrelevant financial information about the public limited companies. inflation. Types of InformationInternational affairs: International factors.. money supply. labour problems and government policy towards the industry are all relevant factors to be considered in the investment decision making. Far east economic review. The sources are Business India. We refer the source of information from some foreign Journals like London Economist. The economic events like financial Express. import competing products. inputs and capital goods abroad. which influence domestic income. separate new bulletins issued by NSE.. Investment related magazine published by stock exchanges. Outlook. capacity utilization. would also need an analysis of the flow of information.. Industry Information’s: Market demand. Business Today. World Bank and Asian development bank Publish their own survey reports periodicals etc. National Affairs: GDPs.
Registrars: Their functions are next to merchant bankers in importance. Players in the New Issue Market: The players in the new issue market are many and the most important are the following: 1. co-managers and are responsible to the company and SEBI. Primary market consists of the new issues market in which new securities are sold by public limited companies through public issues of debts or equity and financing through venture capitalists. their cheques. This is a primary market offering.46 OTCEI providing information regarding the changes that takes place in the stock market. The venture capital firm (a new financial intermediary which emerged in eighties) provides substantial amount of capital mostly through equity purchases and occasionally through debt offerings to help growth-oriented firms to develop and succeed. stock invests etc. 2. classify and computerize them. Who are the key players involved in the new issues market? The first stage is when the company initially issues the security directly from its treasury at a predetermined offering price. . They collect applications for new issues. It is referred to as the Initial Public Offer (IPO). 13.. They are the issue managers. They take all policy decisions for and behalf of the company regarding the new issues and coordinate the various agencies and give “due diligence” Certificate to the SEBI regarding the true disclosures as required by law and SEBI guidelines. SEBI news letters gives the changes rules and regulations regarding the activities of stock market. Merchant Bankers: Their functions and working are crucial to new issue market. They also make allotments in consultation with the regional stock exchange regarding norms in the event of oversubscription and before a public representative.
Underwriters and Brokers: Underwriters may be financial institutions. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. 4. chartists took for these patterns to identify trading opportunities. Comment. Brokers along with their network of sub-brokers market the new issues by their own circulars. 14. or a sign of future price movements. the third of which was that in technical analysis..47 3. While the former collects the subscriptions in cash. and that these patters signal a certain high probability move in a stock. Printers.. Collecting and Coordinating Bankers: Collecting and coordinating bankers may be the same or different. CHART PATTERNS A chart pattern is a distinct formation on a stock chart that creates a trading signal. cheques. The idea is that patterns are seen many times. mutual funds. history repeats itself. sending the application forms and follow up recommendations. we talked about the three assumptions of technical analysis. 5. they have to make good the shortfalls by their own subscriptions. stock invests etc. Based on the historic trend of a chart pattern setting up a certain price movement. etc. banks. who in turn keep the company informed. The theory behind chart patterns is based on this assumption. Head and Shoulders: . and undertake to mobilize the subscriptions as agreed to. “Chart patterns are helpful in predicting the stock price movement”. In the first section of the tutorial. advertising agencies and mailing agencies: are the other organizations involved in the new issue market operation. the later collects the information on subscription and coordinates the collection work and monitors the same to the registrars and merchant bankers. brokers.
There is a wide ranging time frame for this type of pattern.48 This is one of the most popular and reliable chart patterns in technical analysis. Once the price movement pushes above the resistant lines formed in the handle. also known as inverse head and shoulders (shown on the right) is the lesser known of the two. Head and shoulder a bottom. which is preceded by an upward trend. Double Tops and Bottoms This chart pattern is another well known patter that signals a trend reversal-it is considered to be one of the most reliable and is commonly used. These patterns are . Refer the figure deployed below: There are two versions of the Head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. but is used to signal a reversal in a downtrend. with the span ranging from several months to more than a year. Head and shoulders is a reversal chart pattern that when formed. signals that the security is likely to move against the previous trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security’s price. Cup and Handle A cup and Handle chart is a bullish continuation patter in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed this price pattern forms what looks like a cup. the upward trend can continue.
After two unsuccessful attempts at pushing the price higher. the security enters a new trend and heads upward.49 formed after a sustained trend and signal to chartist that the trend is about to reverse. but has found support each time. the trend reverses and the price heads lower. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In the case of a double bottom (shown on the right). while the bottom trend line is upward sloping. This pattern is often used to signal intermediate and long term trend reversals. In an ascending triangle. are the symmetrical triangle.The price movement has twice tried to move above a certain price level. Refer the above figure: . This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. The three types of triangles. the upper trend line is flat. These chart patterns are considered to last anywhere from a couple of weeks to several months. The symmetrical triangle shown below is a pattern in which two trend lines converge toward each other. ascending and descending triangle. After the second bounce off of the support. Triangles Triangles are some of the most well known chart patterns used in technical analysis. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. which vary in construct and implication. the price movement has tried to go lower twice. .
the lower trend line is flat and the upper trend line is descending.50 In the descending triangle. This is generally seen as a bearish pattern where chartists look for a downside breakout. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. Flag and Pennant These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. The patterns are generally thought to last from one to three .
Gaps generally show that something of significance has happened in the security. the trend is expected to continue when the price moves above the upper trend line. These are not as prevalent in charts as head and shoulders and double tops and bottoms. In both cases. Gap price movements can be found on bar charts and candlestick charts but will not be found on point and figure or basic line charts. much like what is seen in a symmetrical triangle. shows a channel pattern. there will be a large gap one the chart between these periods. on the other hand. The middle section on the flag pattern. Triple Top and Bottoms Triple Top and Triple Bottoms are another type of reversal chart pattern in chart analysis. It is observed from the figure that there is little difference between a pennant and a flag. These two chart patterns are formed when the price movement tests a level of support or resistance three times and is unable to break through. Confusion can form with triple tops and . the middle section is characterized by converging trend lines. In a pennant. if the trading range in one period is between Rs 25 and Rs 30 and the next trading period opens at Rs 40. but they act in a similar fashion. For example. Gaps A gap in a chart is an empty space between a trading period and the following trading periods. The main difference between these price movements can be seen in the middle section of the chart pattern. this signals a reversal of the prior trend.51 weeks. with no convergence between the trend lines. such as a better –than-expected earnings announcement.
. Consider the many assumptions that underline the model. thus leading to different pricing of the same assets. thus inducing investors to choose portfolios with tax favored assets. thus adding transaction costs. the pattern will look like a double top bottom. What are the basic assumptions of CAPM? adopting CAPM model in the portfolio management? The CAPM model explains how the expected rates of return are calculated and how various assets can be evaluated according to CAPM. some investments would hover below and above the line-with transaction costs discouraging obvious swaps. If not.4) different investors(individual versus pension plans) are taxed differently. Since the CAPM calculation deals with both internal and external risks. Assumptions of CAPM The CAPM is simple and elegant. After the first two support/resistance tests are formed in the price movement. which could lead a chartist to enter a reversal position too soon. taxable versus-deferred) are taxed differently. thus affecting their pricing of investments. Perhaps the capital market line is really a band whose width reflects trading costs.52 bottoms during the formation of the pattern because they can look similar to the other chart pattern. 3) different returns(dividends versus capital gains. capital assets pricing model is often perceived as a much better appraisal tool than the Net Present Value model which utilizes only one discount rate for all investments and completely disregards their varying risk levels. 15. Zero Taxes: The CAPM assumes investment trading s tax free and returns are What are the advantages of unaffected by taxes. Are they valid? Zero transactions costs. The CAPM assumes trading is costless so investments are priced to all fall on the capital market line. But we know that many investments (such as acquiring a small business) involve significant transaction cost. Yet we know this to be false: 1) Many investment transactions are subject to capital gain taxes. 2) Taxes reduce expected returns for many investors.
standard deviation does not measure risk when returns are not evenly distributed around the mean (non-bell curve). non-institutional investors. it may be that the capital market line is a fuzzy amalgamation of many different investor’s capital market lines. Again. ( Even if investors could sell asset short-by selling an asset she does not own. . But we know that investors face other risks.fixed returns may be devalued by future inflation. But we know that there is a massive trading of stocks and bonds by investors with different expectations.000% over 10 Years) that greatly exceed losing companies ‘negative returns (which are capped at a 100% loss).53 Homogenous investor expectations: The CAPM assumes invests have the same beliefs about expected returns and risks of available investments. This uneven distribution describes our stock markets where winning companies. But we know even Treasury bills have various risks: reinvestment risk-investors may have investment horizons beyond the T-bill maturity date. thus profiting from price declines-this method of reducing portfolio risk has costs and assumes unlimited shortselling ability). like Dell and Walmart. and buying it back later.the purchasing power of fixed returns may diminish compared to that of other currencies. inflation risk-returns may be devalued but future inflation. Borrowing at risk-free rate: The CAPM assumes investors can borrow money at riskfree rates to increase the proportion of risky assets in their portfolio. Beta as full measure of risk: The CAPM assumes that risk is measured by the volatility (standard deviation) of an asset’s systematic risk. Moreover. we would predict that the capital market line should become kinked downward for riskier portfolios (b>1) to reflect the higher cost of risk-free borrowing compared to risk-free lending. currency risk. and liquidity risk. have positive returns (35. We know that this is not true for smaller. We also know that investors have different risk preferences.. inflation risk.investors in need of funds or wishing to change their portfolio’s risk profile may be unable to readily sell at current market prices. of various maturities and sufficient quantities to allow for portfolio risk adjustments. relative to the volatility (standard deviation) of the market as a whole. Available risk-free assets: The CAPM assumes the existence of zero-risk securities. In fact.
54 16. health in the following manner: 1. Financial ratios are calculated from the balance sheet and profit and loss account. understanding. Valuation ratio Dividend ratio-DR Earning per share-EPS Price earning ratio-P/E (Have to explain with the formulas) Ratio summaries the data for easy Financial ratios reflect the financial . Liquidity ratios Current ratio Quick/acid test ratio 2. Return on investment ratio-ROI 6. comparation and interpretation. The relationship can be either expressed in percentile or as a quotient. Turnover ratio Inventory turnover ratio Receivable turn over ratio Fixed asset turnover ratio Total asset turnover ratio 3. How does ratio analysis reflect the financial health of a company? The ratio analysis is the most powerful tool of the financial analysis. Leverage ratio Debt to asset ratio-D/A Debt to equity ratio-D/E 4. Profit margin ratio Gross profit ratio-GP Net profit ratio-NP Return on asets ratio-ROA Return on equity ratio-ROE 5. Financial ratio provides numerical relations between two relevant financial data.
. globalization and financial reforms through liberalization on domestic economic policies and foreign exchange policies.55 17. Trade policy was also liberalized to allow freely exports and imports subject to a small negative list. Foreign direct investment is permitted up to 51% of equity in 34 selected areas and automatic approvals are granted up to the permitted levels and in selected industrial sectors for foreign technology and foreign investments by the secretariat for industrial approvals and Foreign Investment Promotion Board. In the area of capital reforms. namely. which made far-reaching recommendations for banking sector and non banking financial sector to improve the flexibility and operational efficiency of the markets and the institutions. Rupee was made convertible on trade account in March 1993 and on current account in March 1994. was allowed for investment in the capital market and rupee was allowed to float with the RBI fixing the reference rate for its deals in Dollar Vs Rupee. vesting of CCI powers in the SEBI and freeing operations in the capital market with the SEBI as the supervisory and Regulatory authority. privatization. All quantitative restrictions were abolished and discretionary controls and most of the licensing requirements were dispensed with the EXIM policy for the Eighth plan period 1992-1997. the Narashimhan Committee emphasized the need for strengthening the SEBI powers. as part of the structural reforms comprising industrial deregulations. Narashimhan Committee:A high level committee on the financial system with Sri M>Narashimhan as the Chairman was set up in 1991. The capital market reforms were initiated in 1991. . There was a further liberalization on FERA regulations since 1992 with the result that free inflow of funds by FIIs and FFIs etc. The major recommendations are being im0plemented in the direction of deregulation and liberalization of the policies. banks and financial institutions. Discuss the major reforms in the Indian Capital Market.
stocks and debentures and then diversification is carried out. Within the given frame work of Then based on the objectives. Registrars. Mutual Funds are brought under the control of the SEBI first in 1992 and Venture capital funds latter in 1995. Finally portfolio weights are assigned to securities like bonds. securities are selected. constraints. the SEBI Act was passed in March 1992 vesting legal powers on SEBI to act as regulatory authority on the stock and capital markets in India and also for all the intermediaries such as merchant bankers. bonds and money market instruments. Explain the different stages involved in Portfolio Management. Finally relative portfolio weights are assigned to securities like bonds. 18. Portfolio is a combination of securities such as Stocks. . The investor has to assess the major risk categories that he or she is trying to minimize. The process of combining the securities so as to obtain optimum return with minimum risk is called portfolio construction. Compromise on risk and non-risk factors has to be carried out. Before formulating the objectives. and debentures and then diversification is carried out. objectives are formulated. After that. Brokers. There are two major approaches traditionally followed to construct portfolio: Determining the objectives of the portfolio Selection of securities to be included in the portfolio Normally.56 As per the recommendations. the constraints of the investor should be analyzed.. the risk and return of the securities should be studied. this is carried out in four to six steps. All these funds are kept open to the foreign and private sectors since 1992 and not necessarily to the public financial institutions. stocks. underwriters etc.
Even among the stocks. At the same time. Liquidity: . then funds should be invested in high quality short term debt maturity issues such as money market funds.Another serious constraints to be considered by the investor is the safety of the principal value at the time of liquidation. inflation may erode the purchasing power. Investing in bonds and debentures is safer than investing in the stocks. the investor may like to offset the effect of the inflation and so.57 Analysis of constraints: .The constraints normally discussed are: Income needs / liquidity / time horizon / safety / tax considerations and the temperament. Safety of the principal:. Investing money in the unregistered finance companies may not provide adequate safety . Income needs: The income needs depend on the need for income in constant rupees and current rupees.Liquidity need of the investment is highly individualistic of the investor. commercial papers and shares that are widely traded. needs income in constant rupees. The need for income in current rupees arises from the investor’s need to meet all or part of the living expenses. the money should be invested in regularly traded com0panies of longstanding. If the investor prefers to have high liquidity.
Temperament:.The temperament of the investor himself poses a constraint on framing his investment objectives. The first stage is early career situation. The return that the investor requires and the degree of risk he is willing to take depend upon the constraints. The objectives of portfolio range from income to capital appreciation. who may not be willing to undertake higher level of risk even for higher level of return. the time horizon puts restrictions on the investment decision.58 Time horizon:-. Here. Thus. The other stage of the time horizon is the mid-career individual. The common objectives are stated below: Current Income Growth in Income Investment in government securities and bonds and NSC avoid taxation. The capital appreciation is taxed under the head “capital gains” only when the investors sell the securities and realize the gain. The stages of the life cycle determine the nature of the investment. Individual’s risk and return preferences are often described in terms of his” lifecycle”. The risk neutral investors match the return and the risk. While some investors are risk averse. Some investors are risk lovers or takers who would like to take up higher risk even for low return. He need stable income and once he retires. Determination of objectives Portfolios have the common objectives of financing present and future expenditures from a large pool of assets. This tax is then at a confessional rate depending on the period for which the asset has been held before being sold. At this stage his assets are larger than his liabilities.For income tax purpose. The final stage is the late career or the retirement stage. This constraint makes the investor to include the items which will reduce the . the size of income he needs from investment also increases. interest and dividends are taxed under the head “income from other sources”. This varies from individual to individual. tax. Time horizon is the investment – planning period of the individuals. the time horizon of the investment is very much limited. Tax consideration:.
On the other hand. if market indices raise but few stocks hit new highs. But it is not possible to achieve all the four objectives simultaneously. Selection of Portfolio: The selection of portfolio depends on the various objectives of the investor. Objectives and asset mix Growth of asset and asset mix Capital appreciation and asset mix Safety of principal and asset mix Risk and return analysis 19. Volume: Volume analysis is an important part of technical analysis. If the investor aims at capital appreciation. information is provided on the 52 week high and low prices for each stock. The selections of portfolio under different objectives are dealt subsequently. accompanied rising prices. it is considered even bullish. Thus. Explain the following technical indicators: i) New highs and lows ii) Volume iii) Short interest ratio iv) Put/call ratio New highs and lows: As part of stock market reporting. technical analysis view this as a sign of trouble. he should include risky securities where there is an equal likelihood of losing the capital. there is a conflict among the objectives. nobody would like to lose his investment. Technical analysts consider the market as bullish when a significant number of stocks hit the 52 week high each day. Other things being equal a high trading volume is considered a bullish sign.59 Capital Appreciation Preservation of Capital The investor in general would like to achieve all the four objectives. If heavy volumes are .
The technical analyst considers a high short interest ratio as a sing of bullishness. Explain the Dow Theory. covering at least four years in its market.60 Short-interest ratio: The short interest in a security is simply the number of shares that have been sold short but not yet bought back. Investors sell short when they expect the prices to fall. they considered as a sell signal. The market is always considered as having three movements all going at the time. To draw a trend line. wave in zigzag manner. Put/call ratio: The put/call ratio is defined as: Number of puts purchased / Number of calls purchased Speculators buy calls when they are bullish and buy puts when they are bearish. The second is the short swing. The Dow Theory is perhaps the oldest and best known theory of technical analysis. For the contrary technical analysts. These three types of trends are compared to tide. the technical analyst should have at least two tops . they considered as buy signal. running from two weeks to a month or more. When the put/call ratio falls. 20. Graph The trend lines are straight lines drawn connecting either the tops or bottoms of the share price movement. The first is the narrow movement from day to day. the third is the main movement. So when the short interest ratio is high it means that most investors expect the price to fall. when there is a rise in the put/cat ratio.
61 or bottoms. . The above drawn graph shows the trend lines: Flat trend line and falling trend line.
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