Professional Documents
Culture Documents
EDITION
BASIC COMBO
(TECHNICAL +
FUNDAMENTAL)
Study Material
BASIC COMBO COURSE INDEX
A E
Annual Report ---------------------------------------------------------------- 53
Earning Per Share
Annual Report Statement ------------------------------------------------- 69
EPS --------------------------------------------------------------------------- 57
Authorized Share Capital ---------------------------------------------------- 4
EBIDTA -------------------------------------------------------------------------- 63
Economic Moat --------------------------------------------------------------- 73
B Engulfing Patterns ----------------------------------------------------------- 37
Enterprise Value
Balance Sheet ---------------------------------------------------------------- 53 EV 64
BAR CHART -------------------------------------------------------------------- 27 Equity and Preferential Shares -------------------------------------------- 4
Bearish Engulfing ------------------------------------------------------------ 38 Example of IPOs -------------------------------------------------------------- 21
Bearish Harami --------------------------------------------------------------- 40
BOND ----------------------------------------------------------------------------- 6
F
Book Value -------------------------------------------------------------------- 59
Bullish and Bearish candlesticks ----------------------------------------- 31
Face Value ---------------------------------------------------------------------- 58
Bullish Engulfing ------------------------------------------------------------- 37
FACEVALUE --------------------------------------------------------------------- 8
Bullish Harami ---------------------------------------------------------------- 39
FPO --------------------------------------------------------------------------- 6, 50
Fundamental Analysis ------------------------------------------------------ 51
C Futures and Options --------------------------------------------------------- 10
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BASIC COMBO COURSE INDEX
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2019 BASIC COMBO COURSE
BEGINNER’S MODULE
Some Basic And Primary Notes On Economics:
Before starting discussions on stock market trade let us go through the conceptual thoughts on economics
as we know that the subject, its laws, activities and applications have direct correlation and implications
and influences in the stock market or capital markets trade as well.
Whenever we use to travel in the public vehicle or spent time in coffee shop we listen people are
discussing different topics, but it’s hardly the topics on physics, chemistry or any specific subject which is
studied. Rather it could see that their discussions are related with generally two basic subjects – politics
and economics. We would have the opportunity to discuss on later one as how it influences our everyday
life and directly related with stock market trade.
There are many conceptual thoughts and derived definitions on economics so on by many noted
economists as they studied and researched in the different arena on this vast and regularly modified
subject. it’s a continuous study process. It could easily understandable that the demand is unlimited but
our wealth and resources are limited. So it’s our societal and main objective to satisfy unlimited demand by
the limited wealth and resources. Wealth and resources includes the physical and natural resources like
water, land, forest etc. We live in a world of limited resources, and economics helps us to take decision
how to use these limited inputs to satisfy our never-ending list of wants and needs. Economics is also a
large field with a rich history that's been explored and examined by hundreds of influential people, ranging
from philosophers to politicians.
In short, economics is the abstract science which deals with demand, supply and distribution and to choose
the best possible way of utilization of wealth and resources to satisfy our needs and wants for the
betterment of human society and mankind.
Gross Domestic Product (GDP),Gross National Product & Per Capita Income:
The total market value of the goods and services produced in a country within a certain time period is
known as a gross domestic product (GDP). It is the most widely used measure of the size of a nation’s
economy. It includes only purchases of newly produced goods and services and does not include sale or
resale of
Goods produced in previous periods. The transfer of payments made by the government such as
unemployment, retirement, and welfare benefits are not economic output and are not included in the
calculation of GDP.
The values used in calculating GDP are the market values of final goods and services—that is, the
value of the vehicle engine that TOYOTA makes is not explicitly included in GDP; their value is
included in the final prices of vehicles that use the engines. Similarly, the value of a rembrandt
painting that sells for 15 million EUROS is not included in the computation of GDP, as it was not
produced during the period.
The goods and services provided by government are covered in GDP even though they are not
explicitly priced in markets. For instance, the services provided by police or the judiciary, and goods
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such as highways, dams and infrastructure improvements, are included because these goods and
services are not sold at market prices, GNP vs GDP is valued at their cost to the government.
Gross domestic product stands for the monetary measure of all the finished goods and services
produced within a country’s borders in a specific time period. Though GDP is usually calculated on
an annual basis, or it can be calculated on a quarterly basis as well.
GDP = c + i + g + (x – m)
Where,
G= government spending
GROSS NATIONAL PRODUCT (GNP) stands for an estimate of total measure of all the final products and
services produced out in a given period by the means of production owned by the country’s residents. GNP
is usually calculated by taking the sum of individual consumption expenditures, private domestic
investment, government expenditure, net exports and any income earned by residents from overseas
investments, minus income earned within the domestic economy by foreign residents. Net exports
represent the difference between what a country exports minus any imports of goods and services.
GNP= GDP + NR – NP
Where,
The aggregate of all the goods and the services generated within the of the country’s geographical
limits is known as GDP and the aggregate of all the goods and services generated by the citizens of
the country is known as gnp.
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GDP considers the production of products within the boundaries of the country. And on the other
hand, GNP measures the production of products by the companies, industries and all other firms
owned by the country’s residents.
The fundamentals for calculating the GDP is the location, while GNP is based on citizenship.
With the case GDP, the calculation of productivity is done on a country’s scale while we talk about
GNP, its calculation is the productivity on an international level.
GDP focuses on calculating domestic production, but gnp only considers on the production by the
individuals, firms, and corporations, of the country.
GDP measures the strength of a country domestic economy. On the other hand, the GNP measured
how the residents are contributing towards the country’s economy.
PER CAPITA INCOME (PCI) or Average Income measures the average income earned per person in a
country in a specified year. It is calculated by dividing the country's total income by its total population.
Per-capita income of India is estimated to have risen by 10 per cent to rs 10,534 a month during the
financial year ended march 2019, government data on national income showed that in 2017-18, the
monthly per-capita income had stood at Rs 9,580.
The per-capita income is a crude indicator of the prosperity of a country. The gross national income (GNI)
at current prices is estimated at RS 188.17 lakh crore during 2018-19, as compared to rs 169.10 lakh crore
during 2017-18, rising by 11.3 per cent. India's gross domestic product is estimated to have slowed to a
five-year low of 5.8 per cent in the last quarter of fiscal ended march 2018-19, mainly due to poor show in
the farm and manufacturing sectors.
Factors Of Production:
Economics is a subject which is studied, researched and implemented in policy making whereas the word
economy reveals us the state or conditions may be of an individual, firm, industry or a country. A good
economy is the reflection or output of good governance. Now economical activity and transactions carried
out by the industry, trade and commerce, business enterprises among the population happened in a
speedy and meaningful manner and deliver maximum utility in a developed country as well as in a
developed economy rather than any developing or underdeveloped one.
Hence, business enterprises mix in the economy categorized generally in three types - proprietorship,
partnership and limited concern(limited by shares or limited by liability) and they participate in production
and trading and contribute to the “gross domestic product” in the country’s economy as a whole.
Irrespective of the nature of business, any business enterprises do require four “factors of production”,
namely – land, labour, capital and organization. Without which production or trading process or activity
cannot be carried out. On the consideration part land, labour, capital and organization get rent, wages,
interest and profits respectively in return.
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We here limit our discussion on capital only. Capital comprises of human and physical capital both. Such as
a good company inevitably means that the company is under good management, some efficient human
beings. Now capital is an important factor for any business enterprises to form or set up a new business,
expansion program, capex plan or take over every activity management or promoters undertake.
Authorized Share Capital & Paid Up Share Capital: as per the Indian companies act 1956, at the time of
incorporation/formation of any company promoters has to submit their “memorandum of association”
along with other documents to the “registrar of companies”, where they have to reveal clearly about
capital clause, means authorized capital the business out of the six main clauses.Apart from promoter’s
contribution, company use to arrange residual part of capital by taking loans, issuing debentures or by
diluting stake by issuing share. So authorized share capital can be noted as -
1. it is the maximum amount of the capital for which shares can be issued by the company to
shareholders.
2. The authorized capital is mentioned in the memorandum of association of the company under
heading of “capital clause”. It is even decided prior to incorporation of the company.
3. The authorized capital can be increased at any time in future by following necessary steps as
required by law.
For example: If XYZ PVT LTD has an authorized capital Rs. 20 lakhs and shares issued up to an amount of
rs.15 lakhs to shareholders, it means XYZ PVT LTD has issued the shares not in excess of the maximum limit
i.e. Authorized capital of the company and also has option in future to issue more shares amounting to rs.5
lakhs without raising the authorized share capital
However, if XYZ PVT LTD has issued shares of an amount of rs.25 lakhs to shareholders with same
authorized capital of Rs 20 lakhs, it means company has issued in excess of the maximum limit and hence it
is not allowed under law. To do so, first the process of increasing authorized share capital has to carry out
and then issue of shares to shareholders can be done.
Paid up share capitalize a amount of money for which shares of the company were issued to the
shareholders and payment was made by the shareholders.
1. At any point of time, paid up capital will be less than or equal to authorized share capital and the
company cannot issue shares beyond the authorized share capital of the company.
2. With the companies’ amendment act 2015, there is no minimum requirement of paid up capital of
the company. That means now company can be formed with even rs.1000 as paid up capital.
In case of any change in the authorized and paid up share capital, registrar of companies (roc) needs to be
updated with. The details will be recorded in the company’s master data of MCA and will be available for
public to view the data.
Equity and Preferential Shares, Debentures & Bonds:
Equity comes from the word equal. Equity shares represent the ownership of a company and capital raised by
the issue of such shares is known as ownership capital or owner’s funds. They are the foundation for the
creation of a company. Equity shares are also known as ordinary shares. They are the form of fractional or part
ownership in which the shareholder, as a fractional owner, takes the maximum business risk. The holders of
equity shares are members of the company and have voting rights. Equity shares are the vital source for raising
long-term capital.
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Preference shares are the shares which promise the holder a fixed dividend, whose payment takes priority
over that of ordinary share dividends. Capital raised by the issue of preference shares is called preference
share capital.
The preference shareholders are in superior position over equity shareholders in two ways: first, receiving a
fixed rate of dividend, out of the profits of the company, before any dividend is declared for equity
shareholder and second, receiving their capital after the claims of the company’s creditors have been
settled, at the time of liquidation. In short, the preference shareholders have a preferential claim over
dividend and repayment of capital as compared to equity shareholders. Preference shareholders generally do
not enjoy any voting rights. Preference shares are of four types.
Here our focus would be on equity shares as preference shares are not traded in stock exchanges rather the
preference share holders have to wait for company’s buy back or convertibility option announcement to
liquidate their shares whereas equity share holders can directly sell their holding shares in the stock market
through brokers.
Dividends are payable only at the discretion of the directors and only out of profit after tax, to that extent,
these resemble equity shares. Preference resemble debentures as both bear fixed rate of return to the holder.
Thus, preference shares have some characteristics of both equity shares and debentures.
DEBENTURES are financial instruments through which companies can raise debt. They are basically documents
that evidence the existence of a debt in a company’s name. Companies issue debentures extensively because
debt capital is cheaper to raise. Let’s take a look at the various types of debentures companies can issue.
The definition of debentures under companies act, 2013 says companies cannot issue debentures carrying
voting rights. Apart from this, there are no other specific restrictions. Hence, companies are free to issue many
other types of debentures.
We can classify types of debentures in the following five categories: security, convertibility, permeance,
negotiability, and priority.
Based on security
Secured debentures
Unsecured debentures
Based on convertibility
Convertible debentures
Non-convertible debentures
Based on permeance
Redeemable debentures
Irredeemable debentures
Based on negotiability
Registered debentures
Bearer debentures
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Based on priority
BOND is a fixed income instrument that represents a loan made by an investor to a borrower typically
corporate, semi government or government entity. It is also a debenture like instrument generally issued
by the government holding company promised to pay a certain interest rate with a fixed maturity date.
Unlike the dividend income from equity shares, the purchaser of debentures or bonds gets a fixed interest
income from the issuing company and with a fixed maturity date. Equity shares can be liquidated in stock
market by selling it or through buy back option, if company announces but at the maturity date debentures
and bonds can be liquidated by the issuer company.
Stock market segments – Primary & Secondary, IPO, FPO & Rights issue:
Market is a place of potential buyers and sellers and it has transformed in many cases from physical to
digital trade as time moves on and obviously with technological development. Like other markets, the
tradable products in stock markets are shares or Securities, Debentures, ETF, Bonds etc.
The stock market refers to public markets that exist for issuing, buying and selling stocks that trade on a
stock exchange or over-the-counter and it is a marketplace where securities and ownership stakes in
organizations and companies are bought, sold, traded, and issued.
As a share of a company is called as stock or securities, this market is called as stock or securities market.
Registered companies come here to raise funds or capital for their business needs, so it’s called as capital
market. The price of companies shares move up and down and the market participants use to speculate to
buy or sell for earning expectations; the market is also called as speculative market.
Now stock markets, should better termed as stock exchanges are the association of qualified members
with well defined acts, rules and regulations, arrange to facilitate the trades and settlement process under
the regulatory authority, “securities and exchange board of India” (SEBI).out of many stock exchanges
(many regional exchanges has been closed),with national and regional level presence, Bombay stock
exchange- BSE (established in 1875, Asia’s first stock Exchange) and national stock exchange – NSE
(established in 1992, begun operation in 1994 and largest turnover) have national presence.Two large and
popular stock exchanges in India are national stock exchange (NSE) and Bombay stock exchange (BSE).to
get listed on the stock exchange, the companies must meet the basic requirements and guidelines. Further,
over the counter (OTC) is a place where unlisted stocks can be bought or sold.
Securities exchange board of India (SEBI) was established in April 12, 1988 to regulate the functions of
securities market. SEBI promotes orderly development in the stock market. SEBI was set up with the main
idea to keep a check on malpractices and protect the interest of investors. After the amendment of 1999,
collective investment schemes were brought under SEBI except NIDHI companies, chit funds and
cooperatives. Members of SEBI board consist of the chairman who is nominated by union government of
India. Two members, i.e., officers from union finance ministry. One member from the RESERVE BANK OF
INDIA. The remaining five members are nominated by union government of India, out of them at least
three shall be whole-time members.
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PRIMARY CAPITAL MARKETS referswhen a company publicly sells new stocks and bonds for the first time,
it does so in the primary capital market. This market is also called the new issues market which is done
either through public issues or private placement. In many cases, the new issue takes the form of an initial
public offering (IPO). When investors purchase securities on the primary capital market, the company that
offers the securities hires an underwriting firm to review it and create a prospectus outlining the price and
other details of the securities to be issued. As per the companies act, 1956, an issue becomes public if it
results in allotment of securities to more than 50 persons which means that an issue resulting in allotment
to less than 50 persons is called private placement. In the primary market there are generally two types of
issuers who issue securities – the corporate sector issue mainly equity (shares, debentures etc.) And debt
instruments where the government sector (both central and state) issue debt securities (dated securities,
treasury bills).
And must wait until their filings are approved before they can go public. All issues on the primary market
are subject to strict regulation. Companies must file statements with the securities and exchange board of
India (SEBI) and other securities agencies
SECONDARY CAPITAL MARKETS is where securities are traded after the company has sold its offering on
the primary market. It is also referred to as the stock market. Bombay stock exchange (BSE), national stock
exchange (NSE), and Calcutta stock exchange (CSE) are secondary markets. It refers to a market where
securities are traded after completion of initial public offer in the primary market and getting listed on the
stock exchange. Secondary market comprises of the debt antiquity markets and majority of trading
ishappened in this market and settlement is done in (t+2) trading cycle period.
This market is operated through two segments, the exchange traded market and the over – the – counter
(OTCEI) market. OTCEI are informal market where trades are negotiated and most of the trades in
government securities are executed in this market. Here all the spot trades where securities are traded for
immediate delivery and payment. The exchanges do not provide this kind of spot trades.
Small investors have a much better chance of trading securities on the secondary market since they are
excluded from IPO. Anyone can purchase securities on the secondary market as long as they are willing to
pay the asking price per share.
A broker typically purchases the securities on behalf of an investor in the secondary market. Unlike the
primary market, where prices are set before an IPO takes place, prices on the secondary market fluctuate
with demand. Investors will also have to pay a commission to the broker for carrying out the trade.
The volume of securities traded varies from day to day, as supply and demand for the security fluctuates.
This also has a big effect on the security's price. The secondary market has two different categories: the
auction and the dealer markets.
Key features
The new issue of stocks and bonds such as IPOs are issued on the primary capital market.
Companies that wish to raise equity will offer securities to large investors on the primary market at
a set price.
Once a security has traded on the primary market, it will then open up for trade to smaller investors
on the secondary market.
Stock exchanges like the BSE, NSE, and CSE are secondary markets.
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Whenever a company comes first time to raise funds or augment capital from the market
Whenever a company comes with open offer first time to raise funds or augment capital by selling their
shares from the market, it becomes public and this offer is known as “Initial Public Offer” (IPO). IPO is
offered to the
Public after submission of requisite documents and getting permission from SEBI with issue size,unit
price, time period etc. IPO offer price, company can charge at premium, at par or at a discount
(maximum discount must not exceed more than 10% of the face value of the stock). Now the
company’s share gets listed in the exchange as per their selection and comes for trade in the secondary
market. It can be called NEW ISSUE MARKET between the company directly and public and institutions.
Once IPO is completed, the shares of the company is traded in secondary market in exchanges,
company can further come with another offer after certain period to open market to raise further
funds or capital for their business needs and it’s called FOLLOW-ON PUBLIC OFFER. Here company has
to fix a lower price for their offered shares comparing their price trading on the exchanges. Otherwise
FPO issue may not be subscribed.
Rights Issue is that kind of offer from company side only to their existing share holders to raise capital.
Some added value like offering of PCD (partly convertible debentures) or lower price for rights offer to
attract existing share holders of the company, is common practice in this kind of issue done by the
issuing company.
Facevalue is the value printed on the certificate of a share bond, or other financial instrument or
document of the company or concern issued and it is the issue price of the share during the first time
issue of the company to the public and is fixed .Facevalue is also called par value and can be found in
the share certificate. Facevalue is not calculated. It is determined when the shares are issued by the
company depending on the capital the company wishes to raise. Market value is of a share is deferent
and calculated by dividing the company's worth by the number of shares it has issued. Now numerically
face value of different shares traded in the exchanges is seen from rupee 1/- , 2/-, 5/-, 10/-, 20/-, 50/-
100/- . Hence if a company issued rs.100/- as face value in their IPO, may opt to go for split in facevalue
in lower denominations as they decide in future to increase liquidity of their traded shares in secondary
market.
It can be noted here that a large number of companies used to have varying face values. For example, a
number of companies based in Ahmadabad used to have a face value of Rs 125 while the face value of
tata steel used to be Rs 75. The ministry of finance therefore issued in February 1981 a guideline that
denomination of equity shares be fixed uniformly at Rs 10 and that the denomination of the then
existing shares other than Rs 10 be converted into denomination of Rs 10. In January 1983, it was,
however, clarified that
Denomination of shares of Rs 100 need not be changed to denomination of Rs 10. In other words,
shares of all companies were required to be in denominations of Rs 10 or Rs 100 only. Ever so; several
companies converted the denomination of shares of Rs 100 into that of Rs 10 on the ground that it
generated better liquidity, as also a higher value for the shares.
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started as – in, next third character denotes “E” for equity, “F” for mutual funds, “B” for bonds and like
ways. In India market, the task of issuing ISIN for various securities has been assigned by SEBI to the
national securities depository limited (NSDL). For those government securities, the allotment of the
ISIN code is regulated by the reserve bank of India. Examples are below-
The NSDL was established in august 1996, under the depositories act, 1996.
INTERNATIONAL COMMODITIES IDENTIFICATION NUMBER - ICIN is given but subject to their different lot
size, expiry and exchanges it may differ for same item.
At post trading activity and for settlement the trade, shares as well as securities are use to deliver to the
buyer by broker where the client or buyer maintain his account.in the earlier days, purchased shares were
delivered in physical certificate as it was then traded in paper certificates along with transfer deeds duly
filled and signed by sellers and no stipulated time frame was there.
So that for smooth and risk-alleviation settlement purpose, under”The Depositories Act, 1996”,
“NATIONAL SECURITIES DEPOSITORIES LTD.” (NSDL) an Indian central securities depository based
in Mumbai was established on 8 November 1996 as the first electronic securities depository in India with
national coverage and then “CENTRAL DEPOSITORY SERVICES LTD.” (CDSL) was set up in February 1999
which is both government registered depositories and is used to hold various securities like stocks, shares,
money, property etc in an electronic form instead of paper or physical certificates.
The word ‘DEMAT’ comes from ‘dematerialization’. These two parent concerns are the custodians of all
dematerialized securities and many entities, firms, companies provide this DEMAT services to their
thousands of respective clients are called as “Depository Participants” or DP.
It is usually the members of stock exchanges or brokers provide DEMET services with trading facility to
their respective clients to save time and minimize risk in settlement of trades as because whenever a client
sells his shares he is liable to pay the required quantity of sold shares to his broker within very next day
otherwise the trade won’t be settled and the shares would go for auction which may incur losses to the
client.
Any individual person, firm or company intend to trade in the share as well as securities market, preciously
in the secondary market, has to open a trading and DEMAT account with a SEBI registered broker. It has
submit his/their identity proof, address proof, bank details, photo along with duly filed and signed specific
application form, available with broker. It normally takes 3 / 4 days to open the account with broker by
generating an “unique client code”. After paying margin money, clients are entitled and ready to trade in
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the stock exchanges through broker. By using trading code client can trade in the market and when share
or securities are purchased, the same is delivered to the client’s DEMAT account on t+2 settlement period
mode but subject to that there are no short delivery from the seller’s part.
Whenever the client buys shares he is liable to pay the bill or amount to his broker and in case of sale of
shares, its client’s obligation to provide required shares to his broker and gets the amount. Broker will
charge his brokerage for this transaction made through him.
Capital market system in SBTS screen has four types – normal market which consists of various books and
orders are separated as regular lot, special term, negotiated and stop loss orders. Odd lot markets used for
limited physical market. Ret debt market facility in NSE terminal is used for transactions in retail debt
market session and auction market are initiated by the exchange on behalf of their trading members for
settlement related reason as well as to balance their buy – sell position for the same trading session to
avoid short sale position. Every trading day is called trading session by numerical figure.
Now market phases are of four types – opening, open phase, market close and SURCON (Surveillance and
Control).
Hence we limit our discussion in normal market. It consists of mainly cash and derivative segment trade.
Now trading time in screen based trading system (SBTS) or exchange terminal for equity has set by
exchanges from 9.15 am to 3.30 pm Monday to Friday except scheduled holidays. A special trading session
nearly for 45 minutes opens on MUHURAT trading day which is happened on DEWALI occasion every year.
In normal market during trading time any member or client can buy or sell any quantity of his preferred
stock by placing order and subject to match his ordered price and quantity.
CASH is a segment in the stock market. It is when someone buys some shares and pay full cash for it within
t+2 days of trade date where “t” denotes the day of transaction. It just means that the trades
are cash settled. This type of market is also known as the spot market since transactions are settled on the
spot. As there are different assets class to invest like stocks and securities, gold real estate etc. People can
pay the price and becomes owner of that asset as he chooses. So here ownership is transferred against full
price or consideration amount paid to the seller immediately and the buyer can possess and hold as per his
choice. For example, someone can buy 100 shares of SBI or Infosys by paying full price to the seller through
his broker at any time on a trading session. Here that share like SBI or Infosys is treated as an asset which
he bought.
But in case of DERIVATIVES, the value is derived from one underlying equity or other securities and
indicates that it has no independent value. So it needs an underlying asset to derive its value which may be
an equity (share), interest rate, currency or commodity. Basically derivatives are the contracts live for a
specified period of time and non-deliverable in nature. They become expired at a pre-fixed date apart from
few commodity derivatives. The word derivatives are better understandable like ways – if milk is an asset
(or share) then butter, cheese are the derivatives of milk. So price movement in the price of SBI or Infosys
in cash market, also reflect in their derivative values respectively in a similar direction.
Derivatives are more risky trade than any cash market stock. It should be noted here that all the shares
listed and traded in cash market segment are not included in derivatives segment. Derivatives segment
trade commenced on June 2000 in Indian market.
In the stock market, derivatives are commonly traded in two segments. These are future and options.
Futures and Options (f & o) trading is the trading in derivatives where the 'contracts' for the underlying
asset are bought and sold. A 'futures' is a contract to buy or sell an underlying asset at a fixed price at a
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specific time. This underlying asset could be a stock issued by the company, currency, gold etc. So trades in
future and option markets are simply buy or sell of a contract at real-time price quote based on the
movement of the price of a specific underlying asset in the exchange. In Indian market for equity
derivatives are expired and settled at the last Thursday closing rate of the month where someone has
taken position. In Indian exchanges settlement in derivatives are done on “t + 1” cycle period as its not
deliverable.
For example, if someone thinks that the price of SBI will move up, he can buy future contract of SBI or buy
a call option. If his assumption would right the future rate of SBI would move higher and he could made
profit by selling SBI future at a higher price than he bought earlier. In the same context he could also buy a
call option and make a profit by selling the option at a higher premium as the price of SBI has moved in
upward direction but this increase in option premium is influenced with the time decay or factor. At an
early date of the month the premium of option of an underlying asset (here SBI) remains higher and it
gradually comes at a lower premium with time decay of the said month.
Derivatives trade
|
|
_______________________________________________________
| |
v v
trade in future trade in option
(can be bought) |
(can be sold) ________________________________|________
| |
v v
call option put option
(can be bought) (can be bought)
(can be sold) (can be sold)
Unlike the cash market trades, trades in derivatives market are placed and executed with a pre-fixed lot
size (have to place order or trade minimum one lot) by the exchange. Shares in the derivatives list and their
respective lot sizes are governed and scheduled by the exchange time to time as per their different
parameters of individual stock. For example, lot sizes of SBI and Infosys are 3000 and 1200 shares
respectively. Whereas one can buy one quantity of SBI share in cash market.
In derivatives market, future and option can be bought or sold. But it’s not prudent in selling an option
either call or put, because in that cases profits become limited but risk becomes unlimited.
Stock exchanges in India has introduced a nationwide online fully automated screen based trading system
(SBTS) where it enables market participants, irrespective their geographical locations, to execute trades by
placing orders from members without revealing their identity and thus providing equal access to
everybody. With the technological development it is now become more easier to participate in trade from
anywhere by logging on your account through a computer system or even from a mobile having internet
connectivity.
Whenever a member or client decides to trade and place order in the terminal, the order is readily open to
all the participants. As soon as it matches with placed ordered quantity and price in the screen, the order is
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executed and a trade confirmation report is shown in the screen. At the end of that particular trading
session, the buyer and seller are both obliged to pay the bill and provide the required quantity of shares
sold respectively to their brokers each and the clearing and settlement process starts. Here seller will get
the amount and buyer will receive shares. In cash market segment total process is completed by ‘t+2’ cycle
period where ‘t’ denotes the day of transaction. It should be noted here that in derivatives segment,
settlement is done by the exchanges in ‘t+1’ cycle period as these are non-deliverable trades unlike cash
segment.
In this total process of operation in clearing and settlement, there involves many concerns or entity with
their specific role to act the entire clearing and settlement smooth, hustle free and in time. They are
brokers or members of the exchanges, depository participants, clearing agencies, custodians and
regulatory authority.
Transaction Cycle
Placing Order
Trade Execution
Clearing of Trades
Settlement of Trades
Funds / Secrities
Decision to Trade
hence if a seller fails to deliver the required quantity of shares to his broker what he `has sold in the
market is termed as short sale. As those quantities of shares has purchased by one or more buyer(s), he or
they won’t get their shares either part or in full quantity though he or they have paid the amount of bill to
the brokers and this is called as short delivery. It implies that itis obligatory after delivery trade to check
whether the purchased shares in full quantity are being delivered to the buyer’s demat or beneficiary
account by ‘t+2’ settlement cycle.
In such cases auction trade is happened to settle the respective trade on‘t+5’ cycle period and buyers do
receive additional amount occurred due to auction of that particular shares and respective quantity by the
exchange. Auction trades IARE initiated by the exchange on behalf of trading members or brokers for
settlement related reasons like shortages, bad deliveries and objections. Auctions are of two types –
external and internal. But it is now common practice of brokers to deliver the shorts by their own to the
buyer.Here the fixation of price in auction is based on close out mechanism and upon that a short seller is
penalized. Close out price will be at the highest price prevailing in the exchange from the day of trading till
the auction day or 20% above the official closing price on the auction day, whichever is higher.
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Formerly, in April 1988 the SEBI was constituted as the regulator of capital markets in India under a
resolution of the government of India and in 12 April 1992 as a non-statutory body securities and exchange
board of India (SEBI) were first established for regulating the securities market. For regulating the
securities market and it became an autonomous body by the government of India on 12 may 1992 and
given statutory powers in 1992 with SEBI act 1992under section 3 passed by the Indian parliament. Among
the various functions of SEBI, the distinguished parts are to protect the interests of investors in securities
market. To promote the development of securities market. To regulate the business in stock exchanges
and any other securities markets. SEBI is the regulatory authority of equity, currency derivatives and
commodities markets as well as exchanges in India
The remaining five members are nominated by the union government of India; out of them at least
three shall be whole-time members.
After the amendment of 1999, collective investment schemes were brought under sebi except nidhis, chit
funds and cooperatives.
Sebi has been vested to exercise their distinctive functions with the following powers:
Inspect the books of accounts and call for periodical returns from recognized securities exchanges.
Compel certain companies to list their shares in one or more securities exchanges.
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DAY - 1
1. Introduction of Investment:
i) Why Investment is required? (Mainly to control the Inflation Rate)
Income has its two proportion,i.e. Income =consumption + savings (I=C+S) and Savings is Identical
to Investment (S=I). Now Investment is made for differed future Income. Which helps us to combat
the Inflation as rising Inflation devalues the money and eats out the real purchasing power of
money as well as the real Income. As the time moves on, the value of currency, legal tender gets
depreciated and thus to augment purchasing capacity its essential to save a part of Income and so
regular Investment.
ii) What are the Financial Instruments, where middleclass invests their hard earned money? (Bank,
LIC, PPF, Mutual Funds, Gold & Equity Market)
Common people of the society are the Middleclass (In Capital Markets termed as Retail sector)
people. They are the main market participants and forces drive the economy.In Income or Earnings
prospect, they have options either salary or business income and any of the changes in economic
policy or so, micro or macro level they face major impact as their income level influenced. Soits
their hard-earned income unlike the Creamy-layer of the society. Now their Income part, called
Savings, they can invest in the different Financial Instruments available in the market like Bank
deposit, Insurance for the solution of unforeseen and unexpected events, thus like Public Provident
Funds and next to the different asset classes like Gold and Equity . Investment is related with Risk
and it differs among many financial products.
Bank deposition is treated as safe, fixed and regular way of income and carries very lower Risk
.People earn Interest here. Now which is subject to the regular revision and measure taken by the
Central Bank of the country, Reserve Bank of India by changing their Repo, Reverse Repo rate or
Statutory Liquidity Ratio, Cash Reserve Ratios? CRR and SLR are the basic tools in the economy
which manages inflation and flow of money in the country. RBI control bank capacity of lending
through CRR and SLR.These changes by RBI directly impact the Interest rates of the commercial
Banks of the country and thus affect the Interest Income of the Depositor. In the Long run and
Medium run scenario the graph reflects a clear downtrend in Interest rate means that Interest
gradually comes lower over the period. Interest rates are in reciprocal relationship with Inflation.
Though its not out of place to be noted here that all the Deposition in Commercial Banks are
insured by the Deposit Insurance and Credit Guarantee Corporation. But DICGC insures
all bank deposits, such as saving, fixed, current, Recurring deposit for up to the limit of Rs. 100,000
of each deposits Account in a bank. Each depositor in a bank is insured up to a maximum of
1,00,000 (Rupees One Lakh) for both principal and interest amount held by him in the same right
and same capacity as on the date of liquidation/cancellation of bank's license or the date on which
the scheme of amalgamation/merger/reconstruction comes into force. So Bank Deposition also
carries a risk.
Life Insurance requires premium to be paid at regular intervals to avail the protection or risk cover.
The amount of risk cover provided by a policy is called the sum assured under the policy. This sum
assured is paid on the event of death or maturity depending on the type of life insurance purchased
i.e. whether it is a plain term plan or a term plus savings plan. Premium paid for a life insurance
policy also gets you tax benefits under section 80C. It is also an EEE scheme subject to certain
condition. Though there has introduced in the market ULIP or Equity Linked products but Insurance
is for protection to keep the livelihood or a system ongoing in the event of unexpected and
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unforeseen happenings in future and it may not be the instrument of capital growth or
appreciation.
Public Provident Fund (PPF) is an investor and tax-saver's favorite long-term debt scheme which is
under the aegis of the government. A minimum of Rs.500 and a maximum of Rs 1.50 lakh can be
deposited in a PPF account in a single financial year. This deposit amount is also deductible from
taxable income under section 80C of the Income Tax Act. As PPF is an EEE scheme, contribution,
interest and maturity amount, all three are tax free.Its also served to the nation, basically lower to
middle level Income group of the society, after certain period a fixed rate Income ruled by
Government is received but not enough to combat inflation in the market. This product is also
taken by the people as legitimate future protection.
Among different asset classes, Investment in Gold and Equity (Stocks) yields more better
appreciation and huge returns with a comparable higher risk than any other Investments. But if it
taken long run period in consideration, decades after decades, investment in these asset classes has
been given huge and enormous returns on investment and capital growth as historicallydepicted.
For example, During1966 – 1968, the price of 11.664 gm Gold was Rs. 170 approximately and now
the price is quoting only for 10 gm around Rs. 38,000 nearly. In the equity market if one would have
Invested in Wipro (An IT and Ites stock) Rs. 10,000 (That time Wipro sold their shares in Rs. 100
each with face value Rs. 100 ,i.e. at par in IPO), now the value of that investment becomes more
than Rs. 400 Crores. An enormous and unbelievable returns. This happened due to prolonged and
sustained growth of the company business, split of face value in their share and free bonus shares
offered every three or four yearsinterval to their share holders. So it can be achieved a huge returns
unlike any investment in the world subject to alleviation of higher risk and other factors, simply
because of the factors like growth in population, technological development, changing habits and
preferences and increasing demands , needs and wants in a higher progression.
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Note: The Hyderabad Securities and Enterprises Ltd (erstwhile Hyderabad Stock Exchange),
Coimbatore Stock Exchange Ltd, Saurashtra Kutch Stock Exchange Ltd ,Mangalore Stock Exchange,
Inter-Connected Stock Exchange of India Ltd, Cochin Stock Exchange Ltd, Bangalore Stock Exchange
Ltd , Ludhiana Stock exchange Ltd, Gauhati Stock Exchange Ltd, Bhubaneswar Stock Exchange Ltd,
Jaipur Stock Exchange Ltd, OTC Exchange of India , Pune Stock Exchange Ltd, Madras Stock
Exchange Ltd, U.P.Stock Exchange Ltd, Madhya Pradesh Stock Exchange Ltd, Vadodara Stock
Exchange Ltd, Delhi Stock Exchange Ltd and Ahmedabad Stock Exchange Ltd have been granted exit
by SEBI vide orders dated January 25, 2013, April 3, 2013, April 5, 2013, March 3, 2014, December
08, 2014, December 23, 2014, December 26, 2014, December 30, 2014, January 27, 2015, February
09, 2015, March 23, 2015, March 31, 2015 ,April 13, 2015, May 14, 2015, June 09, 2015, November
09, 2015, January 23, 2017 and April 02, 2018 respectively.
3.How NSE & BSE works?
Out of many Stock Exchanges (Many Regional Exchanges have been closed) with national and
regional level presence, Bombay Stock Exchange – BSE (Established in 1875, Asia’s first Stock
Exchange) and National Stock Exchange – NSE (Established in 1992, begun operation in 1994 and
have largest Turnover) have national presence. To get listed in the Stock Exchanges, the companies
must meet the basis requirements and guidelines and come with their Initial Public Offer (IPO).
These are also called as Secondary markets. Trading time starts on 9.15 am and closes at 3.30pm
from Monday to Friday except scheduled Holidays and Market participants buy or sell their shares
in earning expectations on online terminal. The prices of the shares of the listed
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companies move up or down owing to Demand-Supply constraint as the buyers and sellers putting
their Bids and Offers respectively. Whenever it matches the price – quantity of a specific share any
point of time, Trade being execute. Every trading day is a Trading Session having a specific
number.Its never disclosed the identity of buyers and sellers in this trading platform. Tradable
products in NSE and BSE are Cash and Derivatives.
i) What is SENSEX & NIFTY? (in Short – We will cover in details during Fundamental)
The Main INDEX in BSE is SENSEX and NSE is called NIFTY. There are thousands of shares are listed
in BSE and NSE. Amongst them the shares of 30 companies are chosen by BSE and 50 companies
are chosen by NSE, based on some technical parameters, giving weight age and keeping view on the
equal distribution in construction of the said INDEX whether for SENSEX or NIFTY. The companies
are chosen from all segments like IT, Pharmacy, Banking, Auto, OIL, OMCs, Power etc.
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exchange Board of India (SEBI) was first established for regulating the securities market. for
regulating the securities market and It became an autonomous body by The Government of India
on 12 may 1992 and given statutory powers in 1992 with SEBI Act 1992 under section 3 passed by
the Indian Parliament. Among the various functions of SEBI, the distinguished parts are To protect
the interests of investors in securities market. To promote the development of securities market.
To regulate the business in stock exchanges and any other securities markets. SEBI is the regulatory
authority of equity, currency derivatives and commodities markets as well as exchanges in India
The SEBI is managed by its members, which consists of following:
The chairman who is nominated by the Union Government of India.
Two members, i.e., Officers from Union Finance Ministry.
One member from the Reserve Bank of India.
The remaining five members are nominated by the Union Government of India; out of them at least
three shall be whole-time members.
After the amendment of 1999, collective investment schemes were brought under SEBI
except nidhis, chit funds and cooperatives.
SEBI has been vested to exercise their distinctive functions with the following powers:
To approve by−laws of Securities exchanges.
To require the Securities exchange to amend their by−laws.
Inspect the books of accounts and call for periodical returns from recognized Securities exchanges.
Inspect the books of accounts of financial intermediaries.
Compel certain companies to list their shares in one or more Securities exchanges.
Registration of Brokers and sub-brokers.
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government sector (both central and state) issue debt securities (dated securities, treasury
bills).And must wait until their filings are approved before they can go public. All issues on the primary
market are subject to strict regulation. Companies must file statements with the Securities and Exchange
board of India (SEBI) and other securities agencies.
Secondary Capital Market is where securities are traded after the company has sold its offering on
the primary market. It is also referred to as the stock market. Bombay Stock Exchange (BSE),
National Stock Exchange (NSE), and Calcutta Stock Exchange (CSE) are secondary markets. it refers
to a market where securities are traded after completion of initial public offer in the primary
market and getting listed on the stock exchange. Secondary market comprises of the debt and
equity markets and majority of trading is happened in this market and settlement is done in (t+2)
trading cycle period.
This market is operated through two segments, the exchange traded market and the over – the –
counter (otcei) market. otcei are informal market where trades are negotiated and most of the
trades in government securities are executed in this market. Here all the spot trades where
securities are traded for immediate delivery and payment. the exchanges do not provide this kind
of spot trades.
Small investors have a much better chance of trading securities on the secondary market since they
are excluded from IPO. Anyone can purchase securities on the secondary market as long as they are
willing to pay the asking price per share
ii) What is the Difference between Primary Market & Secondary Market?
KEY features:
The new issue of stocks and bonds such as IPOs are issued on the primary capital market.
Companies that wish to raise equity will offer securities to large investors on the primary market at
a set price.
Once a security has traded on the primary market, it will then open up for trade to smaller investors
on the secondary market.
Stock exchanges like the BSE, NSE, and CSE are secondary markets.
Whenever a company comes first time to raise funds or augment capital from the market.
In the Primary Market price of Securities is offered by the Issuing Company which is Fixed but In
Secondary Market the price of Securitas changeable, so can buy or sell at different prices.
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iv) Give Real Example of IPOs (Advanced Enzyme, HDFC Life,D’Mart, MGLetc)
Open Issue Jul 20, 2016 - Jul 22, 2016 |Issue Type : Book Built
Issue IPO
Face Value ₹10 Per Equity Share Issue Price: ₹880 - ₹896 Per Equity Share
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Issue Open Mar 8, 2017 - Mar 10, 2017 | Issue Type : Book Built
Issue IPO
Face Value ₹10 Per Equity Share Issue Price :₹295 - ₹299 Per Equity Share
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Whereas some of the commercial Banks in the market gives for their customer “all in one” service
or 3 in 1 account service, i.e.Savings – Trading – Demat Account service. If someone opens a
Savings account with the bank, can choose to open a Trading and Demat Account also intends to
participate in Trading in Share or Securities market. The benefits of this kind of 3 in 1 accounts as
follows:
1. Customer has to maintain a Savings account with the Bank and if he takes delivery of purchased
shares, only the bill amount is debited automatically from his Savings account after particular
Trading session, whereas he has to pay the bill amount by himself (his obligation) to Broker on the
very next day.
2. If he squares off his position, no amount to be paid and can earned statutory Saving Account
Interest whereas Broking firms do not give any Interest to their Clients against the margin amount
lying with the Broker.
3. In case of selling Delivery stocks, it’s automatically transferred the amount to the Customers’
Savings account but in normal practice clients have to mail or give request to transfer the amount
to his Broker.
4. 3 in 1 account is more hustle-free, save time, earn additional interest in Savings account and ease
for post trade Clearing and settlement.
Technical analysis is a methodology that makes buy and sell decisions using market statistics. It
primarily involves studying charts showing the trading history and statistics for whatever security is
being analyzed. Technical analysis differs from fundamental analysis in that the stock's price and
volume are the only inputs. The core assumption is that all known fundamentals are factored into
price, thus there is no need to pay close attention to them. Technical analysts do not attempt to
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measure a security's intrinsic value, but, instead, use stock charts to identify patterns and trends
that suggest what a stock will do in the future.
The most popular forms of technical analysis are simple moving averages, support and resistance,
trend lines, and momentum-based indicators.
Out of many parameters to understand the price – volume movement in chartical presentations
some steps are as follows:
1. Understand Dow's theories behind technical analysis. ...
2. Look for quick results. ...
3.Read charts to spot price trends. ...
4.Understand the concepts of support and resistance. ...
5.Pay attention to the volume of trades. ...
6.Use moving averages to filter out minor price fluctuations.
KEY POINTS:
Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic
value of a stock.
Technical analysis differs from fundamental analysis in that the stock's price and volume are the
only inputs.
Both methods are used for research and forecasting future trends in stock prices.
DAY - 2
7. What is Technical Analysis? Who uses this?
Technical Analysis can be defined as the analysis of securities disciplined for forecasting the
direction of prices through the study of past market data, primarily price and volume. Itis the
forecasting of future financial price movements based on the analysis of past price movements.
Technical analysis can help the traders to anticipate what is probably to happen in the prices of
Securities over time. There are different and wide varieties of Charts in Technical analysis used that
interpret the price in future.
Technical analysts widely use these market indicators of many sorts, some of which are
mathematical transformations of price, often including up and down volume, advance/decline data
and other inputs. These indicators are used to help assess whether an asset is trending, and if it is,
its probability of its direction and of continuation. Technicians also look for relationships between
price/volume indices and market indicators. Examples include the Relative Strength Index, and
MACD. Other avenues of study include correlations between changes in options (implied volatility)
and put/call ratios with price. Also important are sentiment indicators such as Put/Call ratios,
bull/bear ratios, short interest and Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for example,
candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches, yet
many traders combine elements from more than one technique. Some technical analysts use
subjective judgment to decide which pattern(s) a particular instrument reflects at a given time, and
what the interpretation of that pattern should be. Others employ a strictly mechanical or
systematic approach to pattern identification and interpretation. Technical analysis is frequently
contrasted with fundamental analysis, the study of economic factors that influence. In short the
essence pf Technical Analysis lies in –
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The sixth tenet of Dow Theory contends that a trend remains in effect until there is a clear sign that
the trend has reversed. Much like Newton's first law of motion, an object in motion tends to move
in a single direction until a force disrupts that movement. Similarly, the market will continue to
move in a primary direction until a force, such as a change in business conditions, is strong enough
to change the direction of this primary move.
A reversal in the primary trend is signaled when the market is unable to create another successive
peak and trough in the direction of the primary trend. For an uptrend, a reversal would be signaled
by an inability to reach a new high followed by the inability to reach a higher low. In this situation,
the market has gone from a period of successively higher highs and lows to successively lower highs
and lows, which are the components of a downward primary trend.
The reversal of a downward primary trend occurs when the market no longer falls to lower lows
and highs. This happens when the market establishes a peak that is higher than the previous peak,
followed by a trough that is higher than the previous trough, which are the components of an
upward trend.
10. Different Types of Charts:
There are mainly four types of Charts which help us the movement of the price and these are as
follows :
Line Chart: Line chart is a simple chart which connects the closing price values with line
segments. Line Chart
BAR CHART
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Candlestick Charts :
Candlestick charts are of its Japanese origin and similar to OHLC, candlesticks widen and fill the
interval between the open and close prices to emphasize the open/close relationship. In the West,
often black or red candle bodies represent a close lower than the open, while white, green or blue
candles represent a close higher than the open price. Candlestick charts are most commonly used
type of financial chart for tracking the movement of securities. They have their origins in the
centuries-old Japanese rice trade and have made their way into modern day price charting.
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(Blue trend lines represent increasing prices. Red lines represent decreasing prices and here it does
not consider open and close prices.
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It is said that Japanese were in use of technical analysis to trade rice in the 17th century. But
according to Steve Nison,candlestick charting came later and probably began sometime after 1850.
Candlesticks are so named because the rectangular shape and lines on either sides end resemble a
candle with wicks. Each candlestick usually represents one day’s worth of price data about a stock.
Over time, the candlesticks group into recognizable patterns that investors can use to make buying
and selling decisions.
Candlesticks are graphical representations of price movements for a given period of time. They are
commonly formed by the opening, high, low, and closing prices of a financial instrument. Each
candlestick represents one day’s worth of price data about a stock through four pieces of
information: the Opening price, the Closing price, the high price, and the low price. The color of the
central rectangle (called the real body) tells investors whether the opening price or the closing price
was higher.
This chart shows price on the right (vertical) axis, and time on the bottom (horizontal) axis.
Moreover, the chart is made of bars that have little lines stemming from the top and the bottom;
these are known as candles. The candle conveys four pieces of information:
1. The open price 3. The high price
2. The close price 4. The low price
A black or filled candlestick means the closing price for the period or trading session was less than
the opening price; hence, it is Bearish and indicates selling pressure. Meanwhile, a white or hollow
candlestick means that the closing price was greater than the opening price. This is Bullish and
shows buying pressure. The lines at both ends of a candlestick are called Shadows, and they show
the entire range of price action for the day, from low to high. The upper shadow shows the stock’s
highest price for the day, and the lower shadow shows the lowest price for the day. The filled or
hollow portion of the candle is known as the body or real body, and can be long, normal, or short
depending on its proportion to the lines above or below it.
The lines above and below, known as shadows, tails, or wicks represent the high and low price
ranges within a specified time period. However, not all candlesticks have shadows.
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high and low of the day. Prices open near the low and close near the high. Considered
a Bullish pattern.
Big Black Candle Has an unusually long black body with a wide range between high and low.
Prices open near the high and close near the low. Considered aBearish pattern.
DAY - 3
ii) Hammer :
A hammer is a type of bullish reversal candlestick pattern, made up of just one candle, found in
price charts. The candle looks like a hammer, as it has a long lower WICK and a short body at the
top of the candlestick with little or no upper wick.
It is a candlestick with a small body (a small range from open to close), a long wick protruding
below the body, and little to no wick above. In this respect it is very similar to a dragonfly doji; the
primary difference is that a dragonfly doji will have essentially no body, meaning the open and
close prices are equal.
When a hammer appears at the bottom of a downtrend, its long wick implies an unsuccessful effort
by bears to push price down, and a corresponding effort by bulls to step in and push price back up
quickly before the period closed. As such, a hammer candlestick in the context of a downtrend
suggests the potential exhaustion of the downtrend and the onset of a bullish reversal. The
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“neckline,” often determined by the high of the previous bar, is the level that price must hit on the
next candlestick in order to confirm the hammer’s reversal signal.
In order for a candle to be a valid hammer most traders say the lower wick must be two times
greater than the size of the body portion of the candle, and the body of the candle must be at the
upper end of the trading range. If a black body is formed in an upside-down hammer position. It is
considered as a bottom reversal signal that needs confirmation on the next trading day.
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It is often the first sign that the uptrend is exhausting, and bears are stepping in to create a
reversal. For the reversal signal to be confirmed, the consequent bearish bar should reach the
“neckline” established by the open of the bullish bar on the other side of the hanging man.
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price at the level of the previous bar’s open can act as confirmation or an entry point. Often,
shooting stars are further characterized by a gap between the previous bar’s close and the
relatively higher open of the shooting star.
Shooting Star is a black or a white candlestick that has a small body, a long upper shadow and a
little or no lower tail. Considered a bearish pattern in an uptrend.
DAY - 4
vi) Doji :
This candlestick patterns suggest indecisiveness, neither for Bullish nor Bearish action. It is formed
when opening and closing prices are virtually the same. The doji is the smallest and simplest of
all candlesticks, making it very easy to spot. First, the open and close of the candlestick must be at
(or near) the same price level, so that the doji either lacks a body or has a very tiny body. Second,
there must be an upper shadow, a lower shadow, or both. The length of shadows can vary.
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It is considered thatdoji candlesticks are usually components of many candlestick patterns as below
:
.
The “Dragonfly” and “Gravestone” doji imply, respectively, that sellers and buyers controlled the
market for most of the trading period, but then the opposite group managed to push price back to
the open before the close. While tradition and long-legged dojis are reflective of indecision and
stalling, gravestone and dragonfly are generally clearer, stronger indicators that a force is stepping
in to push the market in the direction of the wick and away from the body. In this respect,
gravestone and dragonfly dojis are similar to hammer and hanging man patterns.
vii) Spinning Top:
Spinning tops are also a sign of indecision in the price because the long upper and lower shadows
do not result in a meaningful change in price between the open and close. Virtually a black or a
white candlestick is formed with a small body. The size of shadows can vary with a short body
found in the middle of two long wicks. It is interpreted as a neutral pattern but gains more
importance when it is part of other formations. Sometimes spinning tops may signal a significant
trend change. A spinning top that occurs at the top of an uptrend could be a sign that bulls are
losing their control and the trend may reverse. Similarly, a spinning top at the bottom of
a downtrend could signal that bears are losing control and bulls may take the reins.
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Support and resistance are the movement of the price of a security will tend to stop and reverse at
certain predetermined price levels. A support level means the price is more likely to bounce off this
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level rather than break through it. However, once the price has passed this level, it is likely to
continue dropping until it finds another support level. Similarly a Resistance level is the opposite of
a support level. Where the price tends to find resistance as it is going up. This means the price is
more likely to bounce off this level rather than break through it. However, once the price has
passed this level, it is likely that it will continue rising until it finds another resistance level.
Support and resistance levels can be identified by trend lines – Upper and Lower Trend lines. Some
traders believe in using Pivot Point calculations. Which is more often a support/resistance level is
"tested" (touched and bounced off by price), the more significance given to that specific level.
There are various methods of determining support and resistance levels. If a stock price is moving
between support and resistance levels, then a basic investment strategy commonly used by traders,
is to buy a stock at support and sell at resistance, then short at resistance and cover the short at
support level.
Midpoint calculations:
M1= (S2+S1)/2
M2= (S1+PP)/2
M3 = (R1+PP)/2
M4 = (R2+R1)/2
DAY - 5
13. Introduction to Multiple Candlestick Pattern:
Engulfing Patterns:
i) Bullish Engulfing –
The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occurring at the
bottom of a downtrend. In this pattern, the real body of a bearish candle (the range from open to
close) is encompassed by the body of a consequent bullish candle. This indicates an increase in
activity from both bears and bulls, and a shift of overall market sentiment towards bullishness.
Bullishness The pattern consists of two Candlesticks:
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v) Bearish Harami –
Itis consisted of an unusually large white body followed by a small back body (contained within
large white body). It is considered as a bearish pattern when preceded by an uptrend.
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trend respectively. Now if we look at price action in market through charts, we will find that no
price movement happens in a straight line.
Suppose we are looking at a broader uptrend represented as primary move, we may find
intermediate corrections represented as secondary trend and minor counter moves among the
secondary moves represented as minor trend. This is how the market behaves generally in both the
up and the down trends.
Market Trends
Often an up- trend is represented in the form of a sequence of higher highs and higher lows.
Similarly a downtrend is represented as a sequence of lower lows and lower highs. A trend is said to
reverse when the sequence is broken.
Trend Reversal
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DAY – 6
Relative Strength Index (RSI) –
The Relative Strength Index (RSI) is a technical indicator that was developed by J. Welles Wilder
and published in 1978 which depicts to chart the current and historical strength or weakness of a
stock or market, based on the closing prices of a recent trading period. The indicator should not be
confused with relative strength.
The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional
price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum
as the ratio of higher closes to lower closes. Stocks which have had more or stronger positive
changes have a higher RSI than stocks which have had more or stronger negative changes.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high
and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for
alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and
10—occur less frequently but indicate stronger momentum.
It is a technical momentum indicator that compares the magnitude of recent gains to recent losses
in an attempt to determine overbought and oversold positions of a stock.
Formula: RSI = 100 –(100/1 + RS)whereRS = Average of x days' up closes / Average of x days'
down closes.
The RSI ranges from 0 to 100. A stock is deemed to be overbought once the RSI approaches the 70
level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if
the RSI approaches 30,it is an indication that the asset may be getting oversold and therefore likely
to become undervalued.
RSI Chart
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Volume Analysis
On Balance Volume:
On Balance Volume (OBV) developed by Joseph Granville and introduced in his 1963
book Granville's New Key to Stock Market Profits that measures buying and selling pressure as a
cumulative indicator, adding volume on up days and subtracting it on down days. OBV was It was
one of the first indicators to measure positive and negative volume flow. Chartists can look for
divergences between OBV and price to predict price movements or use OBV to confirm price
trends.
Calculation of the On Balance Volume (OBV) line is simply a running total of positive and negative
volume. A period's volume is positive when the close is above the prior close and is negative when
the close is below the prior close, such as –
IF THE CLOSING PRICE IS ABOVE THE PRIOR CLOSE PRICE THEN:
CURRENT OBV = PREVIOUS OVB + CURRENT VOLUME
IF THE CLOSING PRICE IS BELOW THE PRIOR CLOSE PRICE THEN:
CURRENT OVB =PREVIOUS OBV -CURRENT VOLUME
IF THE CLOSING PRICE EQUALS THE PRIOR CLOSE PRICE THEN:
CURRENT OBV = PREVIOUS OBV (NO CHANGE)
Illustrations :
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simply the average price over the specified period. The average is called "moving" because it is
plotted on the chart bar by bar, forming a line that moves along the chart as the average value
changes. SMA is simply the Mean, or Average of the stock price over the specified period , and it is
calculated for different time periods like 5 , 10, 20, 50,100, 150 or 200 days .The simple moving
average formula is the average closing price of a security over the last "x" periods. Let's look at
a simple moving average example with Microsoft. The last five closing prices and their
summation for Wipro Ltd. are:
238.45+232.40+236.85+242.90+244.25 = 1194.85
simply to calculate the simple moving average formula, its to divide the total of the closing
prices by the number of periods.
5-day SMA 0f Wipro Ltd. = 1194.85 /5 = 238.97
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SMA Crossing SMA is another common trading signal. When a short period SMA crosses above a
long period SMA,Itmay time to go long and may want to go short when the short-term SMA crosses
back below the long-term SMA.
DAY - 7
i) What is Market Capitalization?
Market Cap is the short for Market capitalization. it is calculated by multiplying a company's shares
outstanding by the current market price of one share. Here, outstanding shares include stock
owned by the public as well as restricted shares owned by the company's officials and employees.
Market capitalization to show the size of a company and it is important because company size is a basic
determinant of various characteristics in which investors are interested, including risk. It is also easy to
calculate. A company with 20 million shares selling at Rs.100 a share would have a market cap of Rs. 2
billion.
KEY POINTS :
Market capitalization is the total Rupee value of all outstanding shares of a company.
Market cap is used to size up corporations and understand their aggregate market value.
Companies may be categorized as large-, mid-, or small-cap.
Blue chip companies are large-cap or mega-cap stocks, while the very smalls are micro-caps.
ii) What is Large Cap, Mid Cap & Small Cap Stocks?
Any company in Indian stock market can be classified in one of the following categories:
1. Large Cap
2. Mid Cap
3. Small Cap
Though there is no hard and fast way rule or criteria to define the classification of the companies
based on the market capitalization. In different financial websites, the range of market cap may
vary for different capitalization. However, in general, here is the commonly accepted classification
of companies based on the market capitalization in Indian stock market.
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The above table is based on the latest circular by SEBI (Dec 2018).
This can be better understood as per below explaination of two companies ,namely, MRF Ltd. &
HDFC Bank :
MRF Ltd.
Rs 29,635 C
Market Capitalization
rores
HDFC Bank
270,95,42,
Total Number of outstanding shares
308
Rs 4,30,532
Market Capitalization
Crores
From the above table we can notice that the market capitalization of HDFC bank is around 15 times
than that of MRF. Hence, HDFC bank is a much bigger company than MRF.
The skyrocketing share price of MRF is insignificant when we compare the total number of
outstanding shares of MRF with HDFC bank.
In short, the share price cannot decide the size of a company. It’s the market capitalization which is
used to classify the companies based on size.
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The Main INDEX in BSE is SENSEX and NSE is called NIFTY. There are thousands of shares are listed
in BSE and NSE. Amongst them the shares of 30 companies are chosen by BSE and 50 companies
are chosen by NSE, based on some technical parameters, given weight age and keeping view on the
equal distribution in construction of the said Indexes whether for SENSEX or NIFTY.The companies
are chosen from all segments like IT, Pharmacy, Banking, Auto, OIL, OMCsand Power etc.
Full form of NIFTY is National Stock Exchange Fifty and launched in 1 April, 1996.The base period
for the Nifty index is November 3, 1995. The base value of the index has been set at 1000, and a
base capital of Rs 2.06 trillion. It represents the weighted average of 50 Indian company stocks in
24 sectors. Nifty is owned and managed by India Index Services and Products (IISL), which is a
wholly owned subsidiary of the NSE Strategic Investment Corporation Limited. Nifty is based in
market capitalization, it basically a market capitalization weighted index. It involves total market
capitalization of company weighted by its effect over the index. So, the firm with higher market
capitalization will make more difference to the index as compared to a smaller market cap
company.
Whereas Full Form of SENSEX is “Sensitive Index” and it is the main Index of BSE. It was `first
published in 1986. The base value of Sensex is 100 and the base year is 1978-79. It is the market
weighted stock index of 30 companies that are selected on the basis of financial soundness and
performance. Usually, large and well-established companies that are representatives of the various
industrial sectors are chosen.
In the selection of Stocks to calculate Nifty & Sensex these criteria are followed:
Listing History – The company should have at leastone year listing history in BSE.
Track Record – Company should have good track record.
Trading Frequency – Company stocks should have traded on every trading day for last
one year.
Market Capitalization – Company should have more than 0.5% of total market capitalization of BSE
Index and it should be one amongst 100 market capitalization on BSE.
Leader in Industry – Company should have a laeding position in the Industry, it represents.
Hence it is essential to know few things before calculation of Nifty:-
· 1995 is taken as base year
· Base Value is 1000
· Nifty 50 takes into consideration 50 stocks of 24 various sectors that are actively traded in the
market.
Let us understand the calculation
Market Capitalization: = Outstanding Shares x Market Price Per Share
· Free Float Market Capitalization = Outstanding Shares x Price x IWF (Investible Weight Factor)
· Index Value = Current Market Value / Base Market Capital x Base Index Value (1000)
Nifty comprises of 3 stocks A,B and C
Assume A has 1,000 shares. Promoters hold 200 and the rest 800 are available for active trading
and hence are free-floating. B has 2,000 shares. Its promoters hold 1000. Rest 1000 are free-
floating C has 3000 shares, its promoters holds 1500 shares and 1500 are available for active
trading.
Say price of A is Rs.10 and that of B is Rs.20, Price of C is 35
A’s total market capitalization = 1,000 x Rs.10 = Rs.10,000
Free-float market cap = 800 x Rs.10 = Rs.8,000.
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SENSEX = (sum of free float market cap of 30 major companies of BSE) X Index value in 1978-
79 / Market cap value in 1978-79.
Assume that ,Company ‘X’ has 10000 outstanding shares out of which only 5000 are available for
trading in open market. Market price of share is Rs.100. Company ‘Y’ has 5000 outstanding shares
out of which 2000 shares are held by promoters and remaining 3000 are free float shares
(open market shares). Market price of share is Rs.10.
Calculation of Market Capitalization:
Stock Issued Stocks Market price Market Cap.
X 10000 100 1000000
Y 5000 50 250000
Calculation of Free Float market capitalization
Stock Open Market Stocks Market price Market Cap.
X 5000 100 500000
Y 2000 50 100000
Hence, Sum of free float market cap of company X and company Y is 500000+100000 = 600000.
Assume market cap during 1978-79 is 500000
Now by Applying formula: Sensex = 600000*100/500000 = 120
The same method is used to calculate NSE nifty but includes two major changes.
1. Base year is 1995 and base value (index value) is 1000
2. Nifty represents stocks of 50 major companies of NSE.
iv) What is Contract Note?
Contract note is the legal valid document or record of any transaction (buy or sell) executed on a
stock exchange through a stockbroker. It serves as the confirmation of trade executed on a
particular trading day on a stock exchange issued by a broker and delivered to its client who
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hasexecuted the particular trade. Contract note contents the key details of a particular transaction
together with the date, time, price, quantity traded etc. It also includes a Reference Number which
can be used to cross-check the details of the transaction with the stock exchanges. A valid contract
note should have the following details in a structured format
v) What is FPO?
Once Initial Public Offer (IPO) is completed, the shares of the company is traded in secondary
market in exchanges, company can further come with another offer after certain period in open
market to raise further funds or capital for their business needs and it’s called Follow-on Public
Offer (FPO). Here company has to fix a lower price for their offered shares comparing their price
trading on the exchanges ,otherwise FPO Issue may not be subscribed.
vi) How a Company Formation (Pvt Ltd) done with Authorized Capital?
As per The Indian companies act 1956, at the time of Incorporation/Formation of any company
promoters has to submit their “Memorandum of Association” along with other documents to the
“Registrar of Companies”, where they have to reveal clearly about capital clause, means Authorized
Capital the business out of the six main clauses. Apart from promoter’s contribution, company use
to arrange residual part of capital by taking loans, issuing debentures or by diluting stake by issuing
share. So Authorized share capital can be noted as -
1. It is the maximum amount of the capital for which shares can be issued by the Company to
shareholders.
2. The Authorized capital is mentioned in the Memorandum of Association of the Company under
heading of “Capital Clause”. It is even decided prior to incorporation of the Company.
3. The Authorized capital can be increased at any time in future by following necessary steps as
required by law.
For example: If XYZ PVT Ltd has an authorized capital Rs. 20 lakhs and shares issued upto an amount
of Rs.15 Lakhs to shareholders, it means XYZ Pvt Ltd has issued the shares not in excess of the
maximum limit ie. Authorized capital of the Company and also has option in future to issue more
shares amounting to Rs.5 lakhs without raising the authorized share capital
However, if XYZ Pvt Ltd has issued shares of an amount of Rs.25 Lakhs to shareholders with same
authorized capital of Rs 20 Lakhs, it means Company has issued in excess of the maximum limit and
hence it is not allowed under law. To do so, first the process of increasing authorized share capital
has to carry out and then issue of shares to shareholders can be done.
Paid up share capital is a amount of money for which shares of the Company were issued to the
shareholders and payment was made by the shareholders.
4. At any point of time, paid up capital will be less than or equal to authorized share capital and the
Company cannot issue shares beyond the authorized share capital of the Company.
5. With the Companies Amendment Act 2015, there is no minimum requirement of Paid up capital of
the Company. That means now Company can be formed with even Rs.1000 as paid up capital.
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In case of any change in the Authorized and Paid up share capital, Registrar of Companies
(ROC) needs to be updated with. The details will be recorded in the Companies Master Data of MCA
and will be available for public to view the data.
vii) What is OFS? How this PVT LTD company Issues IPOs, FPOs & OFS?
An offer-for-sale is different from an IPO and an FPO in the sense that an OFS does not result in
fresh raising of funds. In an OFS, an existing shareholder dilutes their stake through the primary
market.
An OFS only results in a transfer of ownership from one shareholder to another and does not
increase the share capital of the company. Some companies combine their IPO with OFS to give
partial exit to promoters and to private equity (PE) investors. The issue of Narayana Hrudayalaya
launched 2 years was one of the examples of an IPO and an OFS combined.
How are the 3 products procedurally different?
There are some key differences that one needs to understand among the three offers:
In case of an IPO, not much is known about the company unless it is already established. For
example, when TCS came out with an IPO in 2004, it was already an internationally acclaimed
name. However, most IPOs are from smaller companies which will be looking at a listing for greater
visibility. In case of an FPO or even case of an OFS, the company in question is normally already a
well-established company that is leveraging on its brand.
In the last few years, the most popular form of OFS has been by the PSU companies where the
government has chosen to reduce its holding via the primary market. In most cases, companies are
already established and well respected in the market. The government has been heavily relying on
the OFS route for divesting its stake in PSUs. For the fiscal year 2017-18 the government had set a
disinvestment target of Rs.72,000 crore but is likely to end at around Rs.100,000 crore. For fiscal
year 2018-19, the target for divestment is Rs.80,000 crore.
Since an OFS does not involve the raising of fresh capital and is purely a change of ownership, the
regulatory compliance is much lower than in case of IPOs and FPOs. While IPOs and FPOs are kept
open for 3-5 days, an OFS is normally wrapped up in just 1 day.
The key point to remember here is that an IPO and an FPO are EPS dilutive whereas an OFS is not
EPS dilutive. The most important contribution of IPOs, FPOs and OFS is that it ensures a consistent
supply of quality paper coming into the market and this ensures that equity markets do not run the
risk of too much liquidity chasing limited quality paper.
Introduction of Fundamental Analysis:
i) Sub-parts of Fundamental Analysis
Fundamental Analysis is a method of evaluating a security by attempting to measure its intrinsic
value by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts attempt to study everything that can affect the security’s value, including
macroeconomic factors (like the overall economy and industry conditions) and individual specific
factors (like the financial condition and management of the company).It is a technique that
attempts to determine a security’s value by focusing on underlying factors that affect a company's
actual business and its future prospects. On a broader scope, you can perform fundamental
analysis on industries or the economy as a whole. The term simply refers to the analysis of the
economic well-being of a financial entity as opposed to only its price movements. Fundamental
analysis serves to answer questions, such as:
# Is the company’s revenue growing?
# Isthat company actually making a profit?
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FIRST Economic Analysis to access the general Economic indicators economic situation of the nation
SECON Industry Analysis to assess the prospects of industry life cycle analysis, various industry
groupings competitive analysis of industries etc.
THIRD Company Analysis to analyze the Financial Analysis of Financial aspects and Non-financial
aspects Sales, Profitability, EPS etc of a company to determine analysis of Non-financialwhether to
buy, sell or hold aspects: management,the shares of a companycorporate image, productquality
etc.
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how the industry works will give an investor a deeper understanding of a company's financial
health.
Quantitative Meets Qualitative: Neither qualitative nor quantitative analysis is inherently better
than the other. Instead, many analysts consider qualitative factors in conjunction with the hard,
quantitative factors. Take the MRFLtd. , for example. When examining its stock, an analyst might
look at the stock’s annual dividend payout, earnings per share, P/E ratio and many other
quantitative factors. However, no analysis of MRF Ltd. would be completed without taking into
account its brand recognition. Anybody can start a company in manufacturing oftiers of two or four
wheelervehicles but few companies in the market are recognized by millions of people. It’s tough to
put your finger on exactly what the MRF brand is worth, but you can be sure that it’s an essential
ingredient contributing to the company’s ongoing success.
ii) What is an Annual Report published by any limited company? (In Brief)
It is mandatory for all companies registered under MCA, Ministry of Corporate Affairs to submit
their annual report to MCA every year, prepare for the Accounting period ended by 31st March.
However, it is not mandatory for Private Limited companies or Unlisted Public Limited companies to
publish the annual report in their website for public access.
They can prepare the annual report and circulate to their members or shareholders through other
channels.
Annual report contains the Board of Directors Report, The Auditors Report, the financials including
the Balance Sheet, Profit & Loss, Cash Flow (optional for few), Notes to Accounts, Significant
accounting policies. It is mandatory for each and every Company to prepare it.
P/L Statement:
A profit and loss account is a financial statement which shows a company’s revenue and expenses
over a particular Accounting period of time, typically either one month or consolidated months
over a year. These figures show whether company business has made a profit or a loss over that
time period. The profit and loss account is also known as a P&L report, an income statement, a
statement of operation, a statement of financial results, or an income and expense statement. This
Statement represents the profitability of a business revealing total income and expenses.
Balance Sheet:
The Balance Sheet of a company is utmost important report and is divided into three main
segments – assets (often divided into current assets and fixed assets), liabilities, and shareholder
equity or retained earnings (known as capital and reserves in cash flow). The later is also known as
the ‘book value’, and is the difference between assets and liabilities. it represents what’s left after
all of a company’s debts have been paid off. It’s also a pretty good reflection of how strong a
company is financially. As expected from its name, a balance sheet has to balance. The sum of all
the assets a company has must be equal to the sum of all liabilities plus capital and reserves.
The balance sheet represents a record of a company's assets, liabilities and equity at a particular
point in time. The balance sheet is named by the fact that a business's financial structure balances
in the following manner: Assets = Liabilities + Shareholders' Equity
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Capital or Equity- This is the amount invested by the Shareholders and called as Book value.
Importance of Balance Sheet
Balance sheet analysis can reveal a lot of important information about a company’s performance.
Importance of balance sheet is listed below:
It is an important tool used by the investors, creditors and other stakeholders to understand the
financial health of an entity.
The growth of an organization can be known by comparing the balance sheet of different years.
It is an essential document required to be submitted to the bank to obtain a business loan.
Stakeholders can understand the business performance and liquidity position of the entity.
Ability to undertake expansion projects and meet unforeseen expenses can be determined by
analyzing a company’s balance sheet
If the company is funding its operations with profit or debt can be known.
The statement of cash flow shows three main categories of cash inflows and cash outflows, namely:
operating, investing and financing activities. (a) Operating activities are the principal revenue
generating activities of the enterprise. (b) Investing activities include the acquisition and disposal of
long-term assets and other investments not included in cash equivalents. (c) Financing activities are
activities that result in change in the size and composition of the owner’s capital (including
Preference share capital in the case of a company) and borrowings of the enterprise.
There are three types of activities through which cash flow of a business is generated and can be
classifying as -
a. Operating activities
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b. Investing activities
c. Financing activities
DAY - 8
A. : Basics of Fundamental Analysis / Jargons used in Stock Market:
i) What is Revenue, Expenditure and Profit?
Revenue is the income generated from normal business like sale of products, operations and
includes discounts and deductions for returned merchandise. It is the Top line or gross income
figure from which costs are subtracted to determine net income. Revenue is calculated by
multiplying the number of a product sold by the sales amount using the formula:
Revenue = Units of Products Sold x Unit Price. Simply,Revenue is the money brought into a
company by its business activities and it is also known as sales, as in the price-to-sales ratio - an
alternative to the price-to-earnings ratio that uses revenue in the denominator.
In case of definition,Revenue Expenditure is a cost that is charged to expense as soon as the
cost is incurred. By doing so, a business is using the matching principle to link the expense
incurred to revenues generated in the same reporting period. This yields the most accurate
income statement results. In other words, it is the amount that is spent for an expense that will be
matched immediately with the revenues reported on the current period's income statement. There
are two types of revenue expenditure:
Maintaining a revenue generating asset: This includes repair and maintenance expenses,
because they are incurred to support current operations, and do not extend the life of an asset
or improve it.
Generating revenue: This is all day-to-day expenses needed to operate a business, such as
sales salaries, rent, office supplies, and utilities.
Here is noted differences with Capital Expenditure.A Capital Expenditure is an amount spent
to acquire or significantly improve the capacity or capabilities of a long-term asset such as
equipment or buildings. Usually the cost is recorded in a balance sheet account that is reported
under the heading of Property, Plant and Equipment. The asset's cost (except for the cost of land)
will then be allocated to depreciation expense over the useful life of the asset. The amount of each
period's depreciation expense is also credited to the contra-asset account Accumulated
Depreciation.
Examples of capital expenditures include the amounts spent to acquire or significantly improve
assets such as land, buildings, equipment, furnishings, fixtures, vehicles. The total amount spent on
capital expenditures during an accounting year is reported under investment activities on the
statement of cash flows.
Profit, typically called Net Profit or the Bottom Line, is the amount of income that remains after
accounting for all expenses, debts, additional income streams and operating costs. It is a financial
advantage, benefit and gain, especially the difference between the amount earned and the amount
spent in buying, operating, or producing something. So profit is simply the difference between
Revenue and Cost.
ii) What is PBT (Profit before Tax)?
Profit Before Tax (PBT) measures a company's operating and non-operating profits before taxes are
considered. It is the same as Earnings beforeTaxes(EBT)and simply, Revenue minus Expenses that
equals Earnings. Profit before tax accounts for all the profits that a company generates, whether
through continuing operations or non-operating activities. It’s also known as “Earnings before Tax
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(EBT)” or “Pre-Tax Profit”. The PBT calculation was invented to deal with the constantly changing
tax expense. It provides company owners and investors with a good idea of just how much profit a
company is making. EBT is exclusively listed on the income statement – a financial document that
lists all the company’s expenses and revenues. It is usually the third-to-last item on the income
statement. The resulting figure is usually listed on a company's income statement right
before taxes are listed. For example, take a look at the income statement for Company XYZ:
Sales Revenue Expenses Earnings Before Tax Income Tax Expenses Net Income
So here Profit before Tax is= Revenue – Expenses (Exclusive of the Tax Expenses)
= 1,000,000 - 850,000 = Rs.150,000 while net income is Rs.100,000.
Operating Expenses:
Salaries (10,000)
Rent (10,000)
Utilities (5,000)
Depreciation (5,000)
TotalOperating 30,000
Expenses (-)
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Calculation Dividing net profit after Dividing its net earnings by the total
tax by the total number of shares, which include the
outstanding ordinary convertible securities in addition to
shares ordinary stock
This calculation of basic and diluted EPS is helpful to the investors to know the company’s worth,
profitability and performance. Investors are very much interested to know these two figures
because if there is a huge difference between these EPS, then they are reluctant to buy the shares
of the company, as the dilution may decrease the per share price.
vi) What is Face Value , Market Value & Book Value of a Stock?
Face Value is the issue price of the share during the first time issue (Initial Public Offer or whenever
the Issuing Company comes in the Primary market to raise funds or capital) of the company to the
public and will be fixed (Say for Re. 1, or Rs.2, 5, 10, 20, 50 or 100). It is the initial cost of the share
fixed by the company. Face Value, also referred to as par value or nominal value, is the value shown
on the face of a security certificate, including currency, never changes. Face value is the real value
of a share while the share price you see is the premium that buyers are paying for it .If a share price
is Rs. 100 and fv is Rs.10 it means value of your share is Rs.10 but they are paying Rs.90 extra as
premium to own that share . It is significant because another bigger company may have fv of Rs. 2
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and trading at Rs. 800,which will feel its cheaper but it’s not because though it’s at Rs.800 butfv is 2
.when shares of fv Rs. 10 will split into shares of fv Rs. 2 holders of that share will get 5 shares for
every Rs 10 fv share held on record date.
For stocks, the face value is the original cost of the stock, as listed on the certificate. But for
investing in bonds, it is the amount paid to the holder at maturity, which is usually Rs.1,000. The
face value for bonds is often referred to as "par value" or simply "par." face value (par value) is the
amount paid to a bondholder at the maturity date, as long as the bond issuer doesn't default.
However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest
rates are higher than the bond's coupon rate, then the bond is sold at a discount (below par).
Conversely, if interest rates are lower than the bond's coupon rate, the bond is sold at
a premium (above par). While face value of a bond provides for a guaranteed return, the face value
of a stock is generally a poor indicator of actual worth.
The Market Value of stock however increases or decreases based on company's performance and
demand & supply of the share in secondary market. Market Value usually never goes below Face
Value. Market value is the value at which the share is traded on the listed stock exchange. It
represents the company’s worth.
Book Value, in literal terms, means the value of the share in the company’s books. It reveals the
amount per share, the shareholders can get if the company is liquidated and its assets are sold off
to pay the liabilities. In other words, it is the Net worth of the company. Thus, book value is
calculated using the following two formulas:
Book value per share =( total assets – total liabilities ) / total number of shares issued by the company.
Or
Book value per share =( Equity share capital + reserves and surplus ) / total number of shares issued by
the company
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For Example, If the current market price of the share of a company is Rs 120 and it is giving a
dividend of Rs 12, then the dividend yield will be 10%. It totally depends on the investor whether he
wants to invest in a high or a low dividend yielding company.
x) What is DEPRECIATION?
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life
and is used to account for declines in value. Businesses depreciate long-term assets for both tax
and accounting purposes. In accounting terms, depreciation is defined as the reduction of recorded
cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.
An example of fixed assets are buildings, furniture, office equipment, machinery etc.. A land is the
only exception which cannot be depreciated as the value of land appreciates with time.
Depreciation allows a portion of the cost of a fixed asset to the revenue generated by the fixed
asset. This is mandatory under the matching principle as revenues are recorded with their
associated expenses in the accounting period when the asset is in use. This helps in getting a
complete picture of the revenue generation transaction.
An example of Depreciation – If a delivery truck is purchased a company with a cost of Rs. 100,000
and the expected usage of the truck are 5 years, the business might depreciate the asset under
depreciation expense as Rs. 20,000 every year for a period of 5 years.
There three methods commonly used to calculate depreciation. They are:
Straight line method
Unit of production method
Double-declining balance method
Three main inputs are required to calculate depreciation:
1. Useful life – this is the time period over which the organization considers the fixed asset to be
productive. Beyond its useful life, the fixed asset is no longer cost-effective to continue the
operation of the asset.
2. Salvage value – Post the useful life of the fixed asset, the company may consider selling it at a
reduced amount. This is known as the salvage value of the asset.
3. The cost of the asset – this includes taxes, shipping, and preparation/setup expenses.
Unit of production method needs the number of units used during production. Let’s take a look at
each type of Depreciation method in detail.
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Annual Depreciation expense = (Asset cost – Residual Value) / Useful life of the asset
Example – Suppose a manufacturing company purchases a machinery for Rs. 100,000 the useful life
of the machinery are 10 years and the residual value of the machinery is Rs. 20,000
Annual Depreciation expense = (100,000-20,000) / 10 = Rs. 8,000
Thus the company can take Rs. 8000 as the depreciation expense every year over the next ten
years as shown in depreciation table below.
Example: ABC company purchases a printing press to print flyers for Rs. 40,000 with a useful life of
1,80,000 units and residual value of Rs. 4000. It prints 4000 flyers.
So the total Depreciation expense is Rs. 800 which is accounted. Once the per unit depreciation is
found out, it can be applied to future output runs.
3) Double declining method
This is one of the two common methods a company uses to account for the expenses of a fixed
asset. This is an accelerated depreciation method. As the name suggests, it counts expense twice as
much as the book value of the asset every year.
The formula is:
Depreciation = 2 * Straight line depreciation percent * book value at the beginning of the
accounting period
Book value = Cost of the asset – accumulated depreciation
Accumulated depreciation is the total depreciation of the fixed asset accumulated up to a specified
time.
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Example: On April 1, 2012, company X purchased equipment for Rs. 100,000. This is expected to
have 5 useful life years. The salvage value is Rs. 14,000. Company X considers depreciation expense
for the nearest whole month. Calculate the depreciation expenses for 2012, 2013, 2014 using a
declining balance method.
Useful life = 5
Straight line depreciation percent = 1/5 = 0.2 or 20% per year
Depreciation rate = 20% * 2 = 40% per year
Depreciation for the year 2012 = Rs. 100,000 * 40% * 9/12 = Rs. 30,000
Depreciation for the year 2013 = (Rs. 100,000-Rs. 30,000) * 40% * 12/12 = Rs. 28,000
Depreciation for the year 2014 = (Rs. 100,000 – Rs. 30,000 – Rs. 28,000) * 40% * 9/12 = Rs. 16,800
Depreciation for 2016 is Rs. 1,120 to keep the book value same as salvage value.
Rs. 15,120 – Rs. 14,000 = Rs. 1,120 (At this point the depreciation should stop).
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For example, Company XYZ Ltd. has a one year rental agreement where the first two months are
free and the company pays Rs.3,000/month the last ten months of the lease. If rent is recorded
based on what is paid, the company would not have rent expense the first two months of the
contract. For items such as rent that is a contracted amount, we want to spread it out evenly
throughout the year. This allows us to clearly see where expenses are changing and can assist in
analysis. To find out what we amortize each month, first we need to find out the total expense over
the life of the contract:
Rs. 3,000 x 10 months = Rs.30,000
So each month we will want to expense Rs.2,500 for rent (Rs.30,000/12 months). The difference
between this expense and our actual cash payment is amortization.
DAY – 9:
A. : Basics of Fundamental Analysis / Jargons used in Stock Market:
i) What is EBIDTA?
The word EBITDA stands for the Earnings before Interest, Taxes, Depreciation and Amortization. It
basically helps someone to compare the efficiency of the firm with its competitors or peers in the
market. EBITDA helps the investors to get idea of how the company is doing financially and portrays
how much cash a young company generates before paying its debts.It is also important to consider
in the case of acquisition targets.
EBITDA formula is calculated by deducting all expenses except interest, taxes, depreciation, and
amortization from net income.
Example:
Here is an example and calculation of both the adjusted EBITDA and margin for XYZ Enterprise.
At the end of the year, XYZ Enterprise has earned Rs.100,000 in total revenues and incurred the
following expenses. (All Figures are in Rupees)
Salaries: 25,000
Rent: 10,000
Utilities: 4,000
Cost of Goods Sold: 35,000
Interest: 5,000
Depreciation:15,000
Taxes: 3,000
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_____________
Total 97,000_
Net income of the firm at the end of the year equalsRs.(100,000 – 97,000)= Rs.3,000.Hence EBITDA
is calculated as below:
EBITDA = Rs.(3,000+5,000+3,000+15,000) =Rs. 26,000
Here the taxes, depreciation and interest are added back into the net income for the year showing
the amount of earnings of XYZ Enterprises was able to generate to cover his interest and tax
payments at the end of the year.
Alternatively, it can also calculate EBITDA by subtracting out all expenses other than
interest, taxes, and depreciation as below:
EBITDA = Rs.{100,000 – (25,000+10,000+4,000+35,000)} = Rs.26,000
And EBITDA Margin = 26,000 / 100,000 X 100 = 26%
This EBITDA margin ratio reveals that every Rupee,the firm generates in revenues results in 26
cents of profits before all taxes and interest is paid. This percentage can be used to compare the
firm’s efficiency and profitability to other peer competitor companies in the market.
ii) What is Enterprise Value (EV)?
Enterprise Value (EV) is a measure of a company’s total value. It looks at the entire market value
rather than just the Equity Value, so all ownership interests and asset claims from both debt and
equity are included. EV can be thought of as the effective cost of buying a company or the
theoretical price of a target company (before a takeover premium is considered).
The simple formula for Enterprise Value (EV) is:
EV = Market Capitalization + Market Value of Debt – Cash and Equivalents
The extended formula is:
EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash
and Equivalents
Example : Assume that a company XYZ Limited has the following financial information:
Shares Outstanding: 2,000,000
Current Share Price: Rs. 3
Total Debt: Rs.3,000,000
Total Cash: Rs.1,000,000
Therefore, given
Market capitalization = 2,000,000 * Rs.3 = Rs.6,000,000
Preferred stock = Rs.0
Outstanding debt = Rs.3,000,000
Minority interest = Rs.0
Cash and cash equivalents = Rs.1,000,000
Based on the above formula, calculation of the enterprise value of XYZ Limited can be as follows:
Enterprise value Equation = Market capitalization + Preferred stock + Outstanding debt +
Minority interest – Cash and cash equivalents
Enterprise value = Rs.6,000,000 + Rs.0 + Rs.3,000,000 + Rs.0 – Rs.1,000,000
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These are questions that banks will be asking when they’re looking to loan funds to the business
and have asked to see the statement, and they are the questions that investors will ask when they
are considering the viability of investing in a business.
Notable investor and founder of Desktop.com, Francis Gaskins once said: “People will just walk
away if they don’t have a healthy income statement.”
DAY 10:
A. How to Analyze Balance Sheet Statement:
A balance sheet is one of three financial documents that every investor should check when
researching a company to invest in a balance sheet is a financial statement that shows you three
things about a company:
Assets: Assets part reveals how much the company owes. An asset is anything of value the
company has. This includes cash, investments and tangible objects. Companies divide their assets
into two categories: current assets and long-term assets.
Current assets are things that the company can convert into cash within one year. This includes
cash, investments like stocks or bonds, prepaid expenses and physical inventory. A balance sheet
will break down the value of each type of current asset.
Long-term assets are tangible assets that the company uses over the long term. Examples are
property, buildings, furniture, vehicles, equipment and machinery. Note that some companies refer
to these as “Noncurrent assets” or “Fixed assets.”
Liabilities: This part shows how much the company owes. Liabilities are any money that a business
owes. They cover bills for supplies, rent, utilities, company salaries, loans or deferred taxes. Just like
assets, there are two types of liabilities: current liabilities, which a company owes within the next
year, and long-term liabilities, which the company must pay anytime beyond one year from now.
Shareholders’ equity: What’s left when you subtract liabilities from assets? Equity is the capital
that has been invested by the owners of the company and other shareholders. Companies often
issue shares in different public offerings at different times. Some companies have all their shares
owned by the promoters, while other companies have their shares purchased by large sections of
the general public and freely traded in the capital and derivative markets.
The numbers are split up into preferred stock and common stock, telling the management what the
rights of the different shareholders are and what the liabilities of the company will be in the event
of winding up. These numbers also tell them how much dividend they will have to pay and what the
voting rights of members are during an annual general meeting. Furthermore, they look at the
retained earnings so that they know how much investment has been channeled back in the
company.
Ratios Analysis: Based upon the accounting data, a company Balance Sheet as well as the health of
the company is judged by analysis of different important Ratios. So that the company’s financial
position, its compared situation with its peer competitors in the market, how tryst worthy for the
Investor, all these reveals by these Ratios analysis parts of the Balance Sheet. After knowing all the
terms of balance sheet now all are ready to analyze and judge actual position of company through
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balance sheet. With the help of below stated ratios it can easily get an idea about company’s
financial position.
Current Ratio is a measure to know how much liquidity a company has, the formula for calculating
a company’s current ratio is:
Current Ratio = (Current Assets/ Current Liabilities)
Quick Ratio, because of above, it pays to check quick ratio. The formula for calculating a company’s
current ratio is:
Quick Ratio = (Current Assets – Inventory)/Current Liabilities
Market Capitalization is the value of all the shares of stock currently outstanding plus any long
term debt or preferred shares that the company has issued. The reason you add long-term debt
and preferred shares to the market capitalization is because if you were to buy the company, not
only would you have to pay the current market price but you would also have to incur the
responsibility for the debt as well.
Market Capitalization = Current Stock Price * Shares Outstanding + Long Term Debt/ Preferred
Stock
Price-to-Book Ratio by using the aggregate market capitalization of the company divided by the
current shareholder’s equity. You have to also use Enterprise Value, which is market capitalization
minus cash and equivalents plus debt. The reason you subtract cash and equivalents from market
capitalization is because if someone were to actually buy the company, they would get all the cash
the company currently has, meaning it would effectively be deducted from the cost after the
transaction was closed. The Enterprise Value (EV) to Shareholder’s Equity (SE) looks like this, then;
EV = Market Capitalization + Market Value of Debt – Cash and Equivalents
Days Sales Outstanding is a measure of how many days’ worth of sales the current accounts
receivable (A/R) represents. It is a way of transforming the accounts receivable number into a
handy metric that can be compared with other companies in the same industry to determine how
company is managing its receivable collection better. To figure out DSO, you first have to figure
out Accounts Receivable Turnover. This is:
Accounts Receivable Turnover= Net Credit Sales/ Average Accounts Receivable.
This ratio tells you how many times in a year a company turns its accounts receivable. By “Turn” we
mean the number of times it completely clears all of the outstanding credit. For this number,
HIGHER is better. To turn this number into days sales outstanding, you do the following:
DSO = (Accounts Receivable/Credit Sales) * Number of Days
Inventory Turnover Ratio, Inventory management actually is bottleneck for growth if it is not
efficient enough, tying up a lot of working capital that could be better used elsewhere. If you can
find out a company’s DSO and Inventory turns relative to its peers, you will have an incredible view
into how well the company can fund its own growth going forward, allowing you to make better
investments.
The formula for inventory turnover:
Inventory turnover = Cost of Goods Sold/ Average Inventory
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Return on Equity, measures the rate of return for ownership interest (shareholders’ equity)
of common stockowners. It measures the efficiency of a firm at generating profits from each unit of
shareholder equity. The ROE is useful for comparing the profitability of a company to that of other
firms in the same industry.
The formula for Return on Equity :
ROE= Net Income/Shareholder Equity
Return on Investment, measure, per period, rates of return on money invested in an economic
entity in order to decide whether or not to undertake an investment. The project with best ROI is
prioritized. As a performance measure, ROI is used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments.
The Return on Investment Formula:
ROI = (Gain from Investment – Cost of Investment)/ Cost of Investment
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turnoverlevel, which can indicate the presence of excess inventory. The same comparison can
be applied to accounts receivable. Or, the fixed asset total can be compared to sales to derive
a fixed asset turnover measure, which is then compared to best-in-class companies in the
same industry to see if the fixed asset investment is too high.
In short, the purpose of the balance sheet is basically to reveal the financial status of an
organization, but users may focus on different information within the statement, depending on
their own needs.
The annual report has many sections that contain useful information about the company. One has
to be careful while going through the annual report as there is a very thin line between the facts
presented by the company and the marketing content that the company wants you to read.
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It is to be noted here that, no two annual reports are the same; they are all made to suite the
company’s requirement keeping in perspective the industry they operate in. However, some of the
sections in the annual report are common across annual reports.
‘Management Statement’ and ‘Management Discussion & Analysis’ are quite important. In the
‘Management Statement’ (sometimes called the Chairman’s Message), the investor gets a
perspective of how the man sitting right on top is thinking about his business. The content here is
usually broad based and gives a sense on how the business is positioned.
‘Management Discussion & Analysis’ the annual report includes a series of other reports such as –
Human Resources report, R&D report, Technology report etc. Each of these reports are important
in the context of the industry the company operates in. In fact some of the details related to the
‘Qualitative aspects’ can be found in these two sections of the AR.
Finally, the last section of the AR contains the financial statements of the company. As you would
agree, the financial statements are perhaps one of the most important aspects of an Annual Report.
There are three financial statements that the company will present namely:
1. The Profit and Loss statement
2. The Balance Sheet and
3. The Cash flow statement
We will understand each of these statements in detail over the next few chapters. However at this
stage it is important to understand that the financial statements come in two forms -
1. Standalone financial statement or simply standalone numbers and
2. consolidated financial statement or simply consolidated numbers
To understand the difference between standalone and consolidated numbers, we need to
understand the structure of a company.
Typically, a well established company has many subsidiaries. These companies also act as a holding
company for several other well established companies. To help it understandable this better, It has
taken here the example of CRISIL Limited’s shareholding structure. It can find the same in CRISIL’s
annual report. As It known, CRISIL is an Indian company with a major focus on corporate credit
rating services.
CRISIL itself fully owns (100% shareholding) another company called ‘Irevna’.
Keeping the above in perspective, think about this hypothetical situation. Assume, for the financial
year 2014, CRISIL makes a loss of Rs.1000 Crs and Irevna, its 100% subsidiary makes a profit of
Rs.700 Crs. What do you would be the overall profitability of CRISIL?
Well, this is quite simple – CRISIL on its own made a loss of Rs.1000 Crs, but its subsidiary Irevna
made a profit of Rs.700 Crs, hence the overall P&L of CRISIL is (Rs.1000 Crs) + Rs.700 Crs = (Rs.300
Crs).
Thanks to its subsidiary, CRISIL’s loss is reduced to Rs.300 Crs as opposed to a massive loss of
Rs.1000 Crs. Another way to look at it is, CRISIL on a standalone basis made a loss of Rs.1000 Crs,
but on a consolidated basis made a loss of Rs.300 Crs.
Hence, Standalone Financial statements represent the standalone numbers/ financials of the
company itself and do not include the financials of its subsidiaries. However the consolidated
numbers includes the companies (i.e. standalone financials) and its subsidiaries financial
statements.
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Soit’s preferable to look through the consolidated financial statements as it gives a better
representation of the company’s financial position.
DAY 11:
A. Management Analysis :
i) How to Analyze any Management
If we quote, the leader of Berkshire Hathaway, and one of the most successful Investor ,Warren
Buffet emphasizes the importance of evaluating the people running the business. He said- “Charlie
and I look for companies that have … able and trustworthy management”
Company’s management is responsible for creating value for shareholders and to run company in
the interest of the shareholders. So Management analysis is the most important parameter
while analyzing a company.
Though there are no dedicated guidelines for evaluating the company’s management but above-
mentioned points will provide us with some idea of analyzing a company.
Let’s understand what each of these parameters tries to find out.
Corporate Governance – How sound the corporate governance practices of a company are?
Corporate Governance signifies a set of processes or laws that affects the way a company is
directed and controlled. The corporate governance practices of a company are analyzed by taking in
to consideration details such as composition of the board of directors, quality of independence,
remuneration paid to the board of directors, etc.
Board Credentials – Is the management team equipped in terms of the skills required to run a
company?
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Management credentials refer to the skill sets (qualification, experience, etc.) that the management
team of a company possesses. Relevance of qualification and experience is looked at in this case.
Promoters’ holding – Is it in the substantial interest of the promoter to run a company
successfully?
Promoters’ holding refers to the stake that the promoters hold in the capital of a company. A very
low promoter stake can indicate reducing control and interest of promoters in the operations of the
company; they might exit at any point of time. A very high promoter stake on the other hand could
mean that promoters might overlook minority shareholders interests while taking decisions.
Another key criterion that we look at is share pledging by promoters. Often overlooked, pledging
has led to the downfall of many companies. Read more about share pledging here.
Transparency – Is a company’s management transparent in sharing its business dealings and
financials with investors?
The next parameter we try to assess is how transparent is a company with respect to disclosure of
important and necessary information. We look at how comprehensive is the information provided
in various media releases such as footnotes and disclosures, management discussion and analysis,
Chairman’s speech, quarterly results and conference calls. Further, we also look at how honest and
forthcoming the management is with respect to its performance.
Integrity – Is the management of a company trustworthy?
Integrity refers to the application of honest and fair business practices. Here we look if the
management is involved in scams, frauds, other doubtful practices etc which would be a warning
sign.
PAST EXECUTION SKILLS -Wheather management has completed the pending projects and
increased its expansion is the best way to check its focus on the business.
It’s important to read past annual reports, read conference calls done by the management to know
about its approach towards its business.
These were some of the points which I check before going ahead and buying shares of the
company. I hope it has helped you in some or the other way.
RETURN GENERATED IN THE PAST -This is an important responsibility of the management. How
much money is invested in the company for its expansion and how much return it has generated
in the past.
ROIC is the best indicator to check the ability of the management. Preferably, I look for a company
which has generated an ROIC of more than 18% in past 7-10 years.
Stock buyback and insider buying - Insider buying is often looked as a positive sign since they
know something which other normal investors do not.
However, the focus should be on how long the management holds shares.
The same logic goes for buyback as well and the most likely answer by the management would be
that the buyback is a logical use of company’s resources.
However, if a company is truly undervalued, a buyback would increase shareholder’s value.
Amount of debt - Management and debt often go hand in hand.Good management and debt can
create shareholder’s wealth while bad management and debt may have a devastating effect and
have a tendency to destroy the shareholder’s money.
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One should be very suspicious of the firm that has a high leverage on its books for their line of
business. For instance, the firm that operates in highly cyclical and capital-intensive business
shouldn’t carry a big debt load since it may lead to inherent volatility in the business.
Length of tenure -The length of tenure, the CEO and the top management has been associated and
serving the company serves as an important indicator.
This is one of the important investment criteria for Warren Buffett to look for stable managements
who stick to their business for the long term.
You can refer to Management Discussion and Analysis (MD&A), to get the most of the management
details.
In addition to Management Discussion and Analysis (MD&A), you can also refer to company’s latest
investor presentation and the press release.
ii) What is Economic Moat? (in brief)
The term economic moat, popularized by Warren Buffett, refers to a business' ability to maintain
competitive advantages over its competitors in order to protect its long-term profits and market
share from competing firms.An economic moat is a competitive advantage that is difficult to copy
or emulate, thereby creating a barrier to competition from other firms. Common economic moats
include patents, brand identity, technology, buying power and operational efficiency.
Essentially, the wider the economic moat, the larger and more sustainable the competitive
advantage of a firm.
An intangible asset, such as a company crafting a well-known brand name (Nike), pricing
power edge (Apple), cost advantages (Walmart), making it costly for customers to switch products
(cell phone companies), efficient scale, and network effects are all advantages that businesses can
utilize to create a wide economic moat.
KEY POINTS :
An economic moat is a distinct advantage a company has over its competitors which allows it to
protect its market share and profitability.
It is often an advantage that is difficult to mimic or duplicate (brand identity, patents) and thus
creates an effective barrier against competition from other firms.
The most obvious financial characteristics that companies with a wide economic moat have is
that they usually generate large amounts of free cash flow and have a track record of strong
returns.
B. Ratio Analysis :
Important Profitability Ratios& Valuation Ratios:
Debt to Equity
The debt-to-equity ratio measures the relationship between the amount of capital that has been
borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity). Debt is the
amount which is receivable from the company.Generally, as a firm’s debt-to-equity ratio increases,
it becomes riskier A lower debt-to-equity number means that a company is using less leverage and
has a stronger equity position.
Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)
As a thumb of rule, companies with a debt-to-equity ratio more than 1 are risky and should be
considered carefully before investing.
Operating Profit Margin
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The operating margin ratio, also known as the operating profit margin, is the profitability ratio that
measures what percentage of total revenues is made up by operating income.
The formula is for calculating operating margin is:
Operating Margin = Operating Earnings / Revenue
Income Statement for Company XYZ Ltd.
(All figures are in Rupees)
Revenue 1,000,000
Cost of Goods Sold 500,000
Labour 300,000
General & Admin Expenses 50,000
Operating Earnings 150,000
By applying above formula , it can calculate that Company XYZ's operating margin is:
Operating Margin = Rs.150,000 / Rs.1,000,000 = 0.15 or 15%
This means that for every Re.1 in sales, Company XYZ makes Re.0.15 as Operating Marnings or
Earnings.
Return On Equity (ROE)
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders
equity. ROE measures a corporation’s profitability by revealing how much profit a company
generates with the money shareholders has invested. In other words, ROE tells you how good a
company is at rewarding its shareholders for their investment.
Return on Equity =Net Income/Average Stockholder Equity
As a thumb rule, it should always invest in a company with ROE greater than 20% for at least last 3
years. A yearly increase in ROE is also a good sign.
Current Ratio
The current ratio is a key financial ratio for evaluating a company’s liquidity. It measures the
proportion of current assets available to cover current liabilities. It is a company’s ability to pay its
short-term liabilities with its short-term assets. If the ratio is over 1.0, the firm has more short-term
assets than short-term debts. But if the current ratio is less than 1.0, the opposite is true and the
company could be vulnerable
Current Ratio = (Current Assets)/(Current Liabilities)
As a thumb rule, it should always invest in a company with a current ratio greater than 1.
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BASIC COMBO COURSE INDEX
A E
Annual Report ---------------------------------------------------------------- 53
Earning Per Share
Annual Report Statement ------------------------------------------------- 69
EPS --------------------------------------------------------------------------- 57
Authorized Share Capital ---------------------------------------------------- 4
EBIDTA -------------------------------------------------------------------------- 63
Economic Moat --------------------------------------------------------------- 73
B Engulfing Patterns ----------------------------------------------------------- 37
Enterprise Value
Balance Sheet ---------------------------------------------------------------- 53 EV 64
BAR CHART -------------------------------------------------------------------- 27 Equity and Preferential Shares -------------------------------------------- 4
Bearish Engulfing ------------------------------------------------------------ 38 Example of IPOs -------------------------------------------------------------- 21
Bearish Harami --------------------------------------------------------------- 40
BOND ----------------------------------------------------------------------------- 6
F
Book Value -------------------------------------------------------------------- 59
Bullish and Bearish candlesticks ----------------------------------------- 31
Face Value ---------------------------------------------------------------------- 58
Bullish Engulfing ------------------------------------------------------------- 37
FACEVALUE --------------------------------------------------------------------- 8
Bullish Harami ---------------------------------------------------------------- 39
FPO --------------------------------------------------------------------------- 6, 50
Fundamental Analysis ------------------------------------------------------ 51
C Futures and Options --------------------------------------------------------- 10
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