Summer Internship Report

Made by:Jenu Varghese .j

Acknowledgement

The project as we see today in its present form is an outcome of persistent efforts & a great deal of dedication & has drawn intellectual support from various sources, both within the organization & out of the organization. I would like to thank to all those who helped me in my endeavor in achieving something worthwhile and enduring. I have no words to express my gratitude to my industry guide Mr. Mukesh Goel for putting his trust on me and giving me an opportunity to work at Jyoti Portfolio Ltd. He was always there to guide me and solve my problems. His appreciation mixed with constructive advice not only made my work interesting but also laid a strong foundation for my project. Without his unfailing guidance, this report couldnt have been possible. It has been a great learning experience working under him.

I genuinely offer my sincere regards and heartfelt gratitude to Mrs. Shraddha Sharma, my faculty guide, for providing the valuable help and guidance at every step during the project. Last but definitely not the least, I am also thankful to my friends and family for their wholehearted cooperation and help at all stages of my endeavor. They have been a source of inspiration and knowledge to me during the making of the report.

Signature of the student

TABLE OF CONTENTS

Introduction Main Body Fundamental Analysis Technical Analysis Factors affecting stock market Golden rules of investing Derivatives Market A Study of Indian Individual Investors Behavior

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Introduction
As we are doing a finance course, I choose my area of internship as finance. I made up my mind to work at a broking firm because every aspect of finance revolves around stock market. I went to Jyoti Portfolio Ltd. with my curriculum vitae on 12th May 2010. They accepted me and my internship began from the very next day. I chose my title as Investment Analyst. An investment analyst analyses investment avenues and evaluates the same. They advise their clients on where to invest. This internship will give a start in my professional career. It will lay a foundation of knowledge and practical experience in my career.

Main Body
About the organization: Jyoti Portfolio Ltd is a firm that primarily provides broking services. It is owned and managed by Mr. Mukesh Goel. Its services include: Trading in equities Trading in commodities Trading in derivatives Mutual Funds IPOs Debentures/Bonds Provide market predictions/guidance

Hierarchy of the firm

Manager

Employee 1

Employee 2

Employee 3

Employee 4

Peon

Manager Mr. Mukesh Goel is the manager and makes all the decisions by himself. He is the top authority there. He is the one who started this firm and has invested all the capital. He operates on the NSE counter. At the end of the day, he clears all the transactions that took place. Employees 3 out of 4 employees sit at their desk with their respective computers and operate on the terminal. They execute orders on behalf of their clients. 1 employee handles the paper work and maintains accounts. There are four counters NSE, NSE/BSE, Futures/Options and Commodities. Peon He does all the travelling part as employees cant leave their counters. He collects cheques, does the bank work, etc. Besides, he makes tea for the entire staff and clients.

Fundamental Analysis

Fundamental analysis is the process of looking at a business at the basic or fundamental financial level. This type of analysis examines key ratios of a business to determine its financial health and gives you an idea of the value its stock. This type of analysis is mostly done by medium or long-term investors. It includes: Economic Analysis -analyzing economic conditions Industry Analysis -analyzing industry conditions Company Analysis -analyzing the company

Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock.

Basically, Fundamental Analysis is used to determine Whether a stock is underpriced or over priced What are the future prospects or future earnings of a company If an analyst concludes that a stock is under priced, he will buy them at that moment and sell in the near future. If a stock is overpriced, he wont buy it. Similarly if the future prospects of a company are good, he will buy them now as the price of that stock will rise in the near future.

Various Fundamental Analysis tools and techniqes

Ratio Analysis a) EPS (earning per share) It can be defined as the portion of a company's profit allocated to each outstanding share of
common stock. Earnings per share serves as an indicator of a company's profitability.

EPS = Net Earnings / Outstanding Shares

For example, companies A and B both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding. Which companys stock do should we own? Company A had earnings of $100 and 10 shares outstanding, which equals an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equals an EPS of 2 ($100 / 50 = 2). Thus company As stock is a better option to go for. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesnt tell you whether its a good stock to buy or what the market thinks of it. For that information, we need to look at some other ratios.

b. Price-to-earnings ratio : It is a valuation ratio of a company's current share price compared to its per-share earnings. Calculated as: P/E = Stock Price / EPS

For example, a company with a share price of $40 and an EPS of 8 would have a P/E of 5 ($40 / 8 = 5). The P/E gives us an idea of what the market is willing to pay for the companys earnings. The higher the P/E the more the market is willing to pay for the companys earnings. Some investors read a high P/E as an overpriced stock and that may be the case, however it can also indicate the market has high hopes for this stocks future and has bid up the price. Conversely, a low P/E may indicate a vote of no confidence by the market or it could mean this is a sleeper that the market has overlooked. Known as value stocks, many investors made their fortunes spotting these diamonds in the rough before the rest of the market discovered their true worth.

The P/E is the most popular way to compare the relative value of stocks based on earnings.

c. Projected earnings growth : Because the market is usually more concerned about the future than the present, it is always looking for some way to project out the future earnings of a company. This valuation technique has become more popular in recent years. PEG = P/E / (projected growth in earnings) Suppose Stock A has a p/e ratio of 15 and is expected to grow at 20%. Stock B has a p/e ratio of 30 and is expected to grow at 25%. The PEG ratio of stock A is 75% (15/20*100) and that of B is 120 % (30 /25*100). According to this ratio, stock A is a better option.

d. Price to book ratio: Value investors look for some other indicators besides earnings growth and so on. One of the metrics they look for is the Price to Book ratio or P/B. This measurement looks at the value the market places on the book value of the company. P/B = Share Price / Book Value per Share Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B to identify potential candidates.

e. Dividend payout ratio : The DPR measures what a company pays out to investors in the form of dividends. DPR = Dividends per Share / EPS For example, if a company paid out $1 per share in annual dividends and had $3 in EPS, the DPR would be 33%. ($1 / $3 = 33%) The real question is whether 33% is good or bad and that is subject to interpretation. Growing companies will typically retain more profits to fund growth and pay lower or no dividends. Companies that pay higher dividends may be in mature industries where there is little room for growth and paying higher dividends is the best use of profits.

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Either way, we must view the whole DPR issue in the context of the company and its industry. By itself, it tells us very little.

f. Dividend yield : This measurement tells what percentage return a company pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage than younger companies and their dividend history can be more consistent. Dividend Yield = annual dividend per share / stock's price per share For example, if a companys annual dividend is $1.50 and the stock trades at $25, the Dividend Yield is 6%. ($1.50 / $25 = 0.06)

g. Return on equity : Return on Equity (ROE) is one measure of how efficiently a company uses its assets to produce earnings. It compares companies in the same industry to get a better picture. ROE = Net Income after Tax / Shareholders equity While ROE is a useful measure, it does have some flaws that can give a false picture, so we can never rely on it alone. For example, if a company carries a large debt and raises funds through borrowing rather than issuing stock it will reduce its book value. A lower book value means youre dividing by a smaller number so the ROE is artificially higher. There are other situations such as taking write-downs, stock buy backs, or any other accounting slight of hand that reduces book value, which will produce a higher ROE without improving profits. It may also be more meaningful to look at the ROE over a period of the past five years, rather than one year to average out any abnormal numbers. ROE is a useful tool in identifying companies with a competitive advantage. All other things roughly equal, the company that can consistently squeeze out more profits with their assets, will be a better investment in the long run.

h. Price to sales ratio : We have a number of tools available when it comes to evaluating companies with earnings. That doesnt mean companies that dont have any earnings are bad investment. But one should approach companies with no history of actually making money with caution. The Internet boom of the late 1990s was a classic example of hundreds of companies coming to the market with no history of earning. In such a
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case, we can use price to sales ratio. This metric looks at the current stock price relative to the total sales per share. We can calculate the P/S by dividing the market cap of the stock by the total revenues of the company. We can also calculate the P/S by dividing the current stock price by the sales per share. P/S = Market Cap / Revenues or P/S = Stock Price / Sales Price Per Share Much like P/E, the P/S number reflects the value placed on sales by the market. The lower the P/S, the better the value, at least thats the conventional wisdom. However, this is definitely not a number one can use in isolation. When dealing with a young company, there are many questions to answer and the P/S supplies just one answer.

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Balance sheet valuation: Analyst often look at the balance sheet of the firm to get a handle o n some valuation measures. Three measures derived from the balance sheet are 1. Book Value- Book value per share is simply the net worth of the company(which is equal to the paid up equity capital plus reserves and surplus) divided by the number of outstanding equity shares. Example If net worth of Z ltd is 37 million and the no. of outstanding equity shares is 2 million, then the book value per share works out to be 37 million divided by 2 million which is equal to 18.50. This measure can be misleading as it is firmly rooted in the financial accounting which represents a objective measure of value. The accounting policies and conventions are characterized by great deal of subjectivity and arbitrariness. Besides these, historical balance sheet figures diverges the current economic value. 2. Liquidation Value- The liquidation value per share is equal to :

Value realized from liquidating all the assets of the firm

Amount to be paid to all the creditors and preference shares

Number of Outstanding Equity Shares

This method is more realistic than book value method. But it is very difficult to estimate what amounts would be realized from the sale of assets. And also the liquidation value doesnt represent the earnings.

3. Replacement Cost- Another balance sheet measure considered by analysts in valuing a firm is replacement cost of its assets less liabilities. The use of this measure is based on the premise that the market value of a firm cannot deviate too much from its replacement cost. The ratio of market price to replacement cost is called tobin q, after James Tobin a Nobel Laureate in economics. A major limitation of this concept is that organizational capital, a very valuable asset, is not shown on the balance sheet.

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Dividend Discount Model According to dividends discount model, the value of an equity share is equal to the present value of dividends expected from its ownership plus the present value of the sale price expected when the equity share is sold. Assumptions of the model i. ii. Dividends are paid annually The first dividend is received one year after the equity share is received

Single-period Valuation Model: It is a case where the investors expect to hold the equity shares for one year. The price of the equity share will be: P0 = D1 / (1 + r) + P1 / (1 + r) Where P0 = current price of the equity share D1 = expected dividend P1 = expected price of share 1 year hence r = required rate of return on equity Example X ltd. Equity shares expected dividend = Rs. 2 Expected future price of the share = Rs. 18 after 1 year. Required rate of return = 12 % Its current price will be: P0 = 2/ (1 + .12) + 18/( 1 + .12) = Rs. 17.86 Multi-period Valuation Model: Since equity shares have no maturity period, they expect to bring a dividend stream of infinite duration. P0 = D1 / (1 + r) + D2 / (1 + r)2 + D3 / (1 + r)3. + D/ (1+r) = Dt / (1 + r)t + Pn / (1 + r)n

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There are various modifications to these models a) Zero Growth Model In this, it is assumed that the dividend per share remains constant year after year b) Constant Growth Model (Gordon Model) It is one of them most popular models. It was originally proposed by Myron J. Gordon. It assumes that dividend per share grows at a constant rate (g).

c) H Model - The H model is a two-stage model for growth, but unlike the classical two-stage model, the growth rate in the initial growth phase is not constant but declines linearly over time to reach the stable growth rate in steady stage. This model was presented in Fuller and Hsia (1984) and is based upon the assumption that the earnings growth rate starts at a high initial rate (ga) and declines linearly over the extraordinary growth period (which is assumed to last 2H periods) to a stable growth rate (gn). It also assumes that the dividend payout and cost of equity are constant over time and are not affected by the shifting growth rates.

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Technical Analysis
Technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume. Technical analysts seek to identify price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants, balance days and cup and handle patterns. Technical analysis is frequently contrasted with fundamental analysis. Technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions. Users of technical analysis are most often called technicians or market technicians. Some prefer the term technical market analyst or simply market analyst. An older term, chartist, is sometimes used, but as the discipline has expanded and modernized the use of the term chartist has become less popular. Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, intermarket and intra-market price correlations, cycles or, classically, through recognition of chart patterns.

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Some Principles:

Market action discounts everything Based on the premise that all relevant information is already reflected by prices, pure technical analysts believe it is redundant to do fundamental analysis they say news and news events do not significantly influence price

Prices move in trends A market trend is a putative tendency of a financial market to move in a particular direction over time.These trends are classified as secular trends for long time frames, primary trends for medium time frames, and secondary trends lasting short times. The terms bull market and bear market describe upward and downward market trends respectively.

Some market trends Bull market: A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery. It is a win-win situation for the investors. Example- India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for about five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points

Bear market: A bear market is a general decline in the stock market over a period of time.[6] It is a transition from high investor optimism to widespread investor fear and pessimism. Example - A bear market followed the Wall Street Crash of 1929

Market top A market top (or market high) is usually not a dramatic event. The market has simply reached the highest point that it will, for some time (usually a few years). It is retroactively defined as

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market participants are not aware of it as it happens. A decline then follows, usually gradually at first and later with more rapidity. Example - The peak of the dot-com bubble (as measured by the NASDAQ-100) occurred on March 24, 2000. The index closed at 4,704.73 and has not since returned to that level.

Market bottom: A market bottom is a trend reversal, the end of a market downturn, and precedes the beginning of an upward moving trend (bull market). It is very difficult to identify a bottom (referred to by investors as "bottom picking") while it is occurring. The upturn following a decline is often short-lived and prices might resume their decline Example - A decline associated with the subprime mortgage crisis starting at 14164.41 on 9 October 2007 and caused a bottom of 6,440.08 on 9 March 2009.

History tends to repeat itself Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket" these are all examples of investor sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns will develop on a chart.

Technical analysis is not limited to charting, but it always considers price trends. For example, many technicians monitor surveys of investor sentiment. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse the premise being that if most investors are bullish they have already bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices will trend down, and is an example of contrarian trading.

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Some techniques of technical analysis-

Moving Averages: Moving averages are one of the oldest and most popular technical analysis tools. Nowadays we get moving averages readily available on most of the websites. Suppose if the stock price is above its 25 day moving average, it means that investor's current expectations (the current price of the stock) are higher than their average expectations over the last 25 days, and that investors are becoming increasingly bullish on this stock and result is that the stock price may go up. Conversely, if today's price is below then its 25 day moving average, it shows that current expectations are below average expectations over the last 25 days and this may bring stock price lower. The moving average is used to observe changes in prices. Investors typically buy when a stock price rises above its moving average and sell when the price falls below its moving average.

Line charts: A chart shown below is the Line chart is the simplest type of chart. As shown in the chart the single line represents the stocks closing price on each day. Dates are displayed along the bottom of the chart and prices are displayed on the side(s). Line charts are typically displayed using stocks closing prices.

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Candlestick charts A candlestick chart displays stocks open high, low, and closing price. These types of charts are the most popular type of all charts. As shown below the top of each vertical bar represents the highest price of the stock and the bottom of the bar represents the lowest price of the stock it reached on that day. A closing price (last price) is displayed on the right side of the bar. The red bar indicates that stock has closed lower then its open price and white bar indicates that the stock has closed above its open price. At the bottom we can see time frame.

Support and Resistance

Support and Resistance prices are very important in stock market and in technical analysis.

Support - The support level is considered when the stock is falling down. The support is the level at which the stock price gets support when the stock is falling down, and if the support breaks then that stock may witness further down movement. Resistance - The Resistance is taken into picture when stock price is moving up. The resistance level is the price at which stock price get stoppage and if this stoppage/resistance breaks then further upside is expected in that stock price.

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Generally, stocks comes to support and resistance points and get constant before further movement and further movement either down side or upside depends on buyers expectation and other technical aspects. The breaking of support and resistance levels can also be triggered by fundamental changes, and that is up to investor expectations (fundamental changes like changes in profits, expansion, takeover, management etc).

Indicators Indicators are used to predict or analyze future changes in stock price. There are hundreds of indicators. Some most widely used indicators are MACD (Moving Average Convergence Divergence) This is one of the widely used indicator. MACD stands for Moving Average Convergence Divergence. This indicator is based on moving averages Nowadays MACD is readily available on any web sites. The MACD is calculated by subtracting a long term moving average of a security's price from a short term moving average of its price. The result is that MACD is an indicator that goes above and below zero. How to trade on MACD indicator? Have a look on following chart of MACD Red line is short term moving average and blue line is long term moving average. When the short term moving average crosses above the long term moving average (as shown in following chart) in the upward direction, it means investor expectations are becoming bullish and there may be rise in stock price. As it is shown in following chart with green lines how price increases. When the short term moving average crosses below the long term moving average (as shown in following chart) in the downward direction, it means investor expectations are becoming bearish and there may be decrease in stock price. As it shown in following chart with red lines lines how orice decreases.

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Factors that affect stock market

Market sentiment: The price of the stock of a company is affected most of the time by the general market direction during a session. In a bull market, the stock price of most companies will rise and in a bear market the stock price of most companies will fall. One can gauge the market sentiment by looking at stock indexes or its future price movement. The stock indexes are S&P 500, Dow Jones Industrial Index, Nasdaq (USA), ASX100, ASX (Australia), Nikkei 225 (Japan), Euronext 100, Euronext 150 (Europe Union), DAX, TECDAX (Germany), FTSE 100, FTSE All Shares, FTSE Techmark (United Kingdom).

The performance of the industry: The performance of the sector or industry that the company is in also plays in part in determining the stock price of the company. Most of the times, the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions will generally affects the companies in the same industry the same way. Of course, there are exceptions to this. Sometimes, the stock price of a company will benefit from a piece of bad news in its competitor if the companies are competing for the same target market.

The earning results and earning guidance: The main objective of a company is to make profit. Therefore, investors and traders always assess a company based on its Earning Per Share (bottom line) and Revenue (top line) and its future earning potential. In US, companies generally report the earnings results every quarter-yearly. A company that achieves good earning results (EPS and Revenue) expects a boost in its share price and one that delivers poor earning result shall see a beating in its share price. Sometimes, besides reporting the EPS and Revenue for the past quarter, a company may also issue guidance (expected value) for the EPS and Revenue in coming quarter or coming years. This is also closely monitored by investors and is an important factor that will affect the company stock price.

Take-over or merger: In general, a company being taken-over is anticipated to get a stock price boost and the company taking over another company shall experience a drop in its share price. This is assuming that the company is being taken over at a premium, meaning it is being bought over at a higher price than its last traded stock price. Depends on the agreed term, a company can be bought over by cash or stock (of the acquirer) or a combination of the two. In some minority cases, the stock price of the acquirer may get a boost if it is perceived that the acquisition shall contribute to its earning or revenue in the near future.

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New product introduction to markets or introduction of an existing product to new markets: The introduction of new product to market is seen as a revenue enhancer for a company. This also applies to an existing product that breaks into new markets. Sometimes, the prospect of a new product introduction suffices to improve the stock price of a company, this is often observed in surges in stock prices of pharmaceuticals companies after the announcement of successful clinical trials, or FDA approvals for new drugs.

New major contracts or major Government Orders: A company that is able to obtain new major contracts or major government order is expected to see a bull run in its stock price. Those companies that fail in the contract bidding normally experience the fate of sell-off in its stocks.

Share buy-back: The act of share buy-back by a company will reduce the number of share available in the open market. Due to the law of supply and demand, a reduction in share available for trading in this case will cause a drop in supply, this will normally help increase the share price. Also, the continuing buying back of share of a company will also acts as a support for the share price that helps to maintain or increase the share price. The investors may also see the share buy-back by company as a confidence booster for them in the company itself. Therefore, share buy-back is quite often used as a tool to deliver value to the investors.

Dividend: After the announcement of a dividend. The stock price may increase by an amount close to the dividend per share value. However, the stock price may drop on the exdividend date by the dividend per share amount. This is because anyone buying a stock on or after the ex-dividend date are not entitled to the corresponding dividend payment.

Stock splits: Stock split in theory, should not have an impact to the stock price. However, it is generally observed that the stock price increases (after taking into account the increase in the number of share) after a stock split. Some attributed to the better affordability of the stock after stock split, some attributed this to the perception of cheap stock due to the lower stock price after the stock split. Some however believes that stock split has no real impact on the stock price (effective stock price, taking into account the change in number of shares), as the stock price will increase regardless of stock split.

Insider trading: Insiders include CEO, COO, CFO, Chairman, board directors etc, who has first hand information about the operations and the financial status of a company. Therefore, the buying or selling of stocks by these insiders may herald some good or bad news about the company. This is being watched closely by savvy stock investors/traders. However, do be
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aware that due to compensation package that comes in the form of stock or stock options, the insiders may sell their stocks/stock options to cash-in their compensation benefits. So in this case, it may not signal anything significant about the company. A savvy investor should know how to observe and filter out this piece of information from your investment or trading decisions.

Investment Gurus / Hedge Funds trading: The investment decision of highly revered investment gurus like Warren Buffett, George Soros, Carl Icahn are closely monitored by investors and therefore will move the market. Hedge fund stock buying and selling are another source of information regarding the flow of "smart money".

Analyst upgrade / downgrades: Analyst upgrade and downgrade to a stock may have positive or negative impact to the stock prices. However, one needs to be wary of the fact that quite often analysts' upgrades or downgrades happen "after" some important news about a company. For example following a extremely disappointing earning result, many analysts will likely to downgrade the company stock. So, it is very likely that by then the stock price of that company has already priced-in the poor earning result, and analyst downgrade may not have further impact to the stock price.

Addition/Removal to/from Stock Index: Stock Index Fund are those funds that invest in those company stocks that are included in a particular stock index (e.g. S&P 500, Nasdaq100, Dow Jones U.S. Large Cap etc.) . Therefore, an inclusion of a company stock to a stock index will generate buying interest in the stock for these stock index fund managers. The stock index fund managers will dispose of the stock that has been removed from the stock index.

News: When you get positive news about a company then it can increase the buying interest in the market. On the other hand, when there is a negative press release, it can ruin the prospect of a stock. In this case you should remember that news should not matter much but the overall performance of the company matters more. So, news is another factor affecting stock price.

Others: These include news about new technology, patent approval, war, natural disaster, product recalls and lawsuits that shall have positive and negative impact to the relevant company stocks. The health or mishap of a key leader in a company may also affect the stock price of the company.

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Some Golden Rules for Investors 1. Don't be greedy: Do keep in mind that it is not always that one would be able to buy a stock when it is as its lowest price and sell it when it is at its highest. Do not be greedy. Invest smartly, with some professional help and some study on your own. 2. Avoid 'hot tips': Stay away from 'experts'. There are a large number of so-called experts floating all around. Stay away from them. Our broker, neighbour, cousin or business journalist friend may suggest surefire picks. Success may not come as fast, as we are in unchartered territory. Use your own judgement. 3. Avoid trading/timing the market: Like in the previous point, don't try to time the market by betting on when the stock price will be highest or lowest. In most cases, such 'timing' leads to huge monetary losses and mental tension. 4. Avoid actions based on sentiments: Don't be emotionally attached to stocks: Some people, for sentimental reasons, tend to stick with certain stocks even though they might not bring them good value. 5. Don't panic if the market drops: Be patient and hold on to the scrip until some semblance of sanity prevails in the market. Don't rush to sell the stock. Hold onto your winners and sell your losers. Consult a professional and then act accordingly. 6. Stay invested, possibly continue to invest more: It is natural to book profits with the markets at higher levels. This should be done, but we suggest people should also stay invested in the equity markets. 7. Buy stocks if there is a 5-8 per cent drop in the market (in a Bull Market) : In a bull market, a 5-8 per cent drop in prices offers you a good opportunity to buy scrips. 8. Avoid checking the price of stocks or mutual funds after you've sold them: The grass on the other side will always seem greener and can rarely bring you happiness. 9. Diversify: At these record levels, there will be certain amount of risks. One should diversify a bit, looking at stocks, mutual funds, commodities and gold (for a longer-term). 10. Don't expect to be a millionaire overnight. Patience pays, so be realistic.

11. Distinguish between stocks for keeps and trading: When you buy a stock, be clear about your objective behind the purchase - whether you have bought the stock as an investment or a trading bet. Trading stocks are not bad as such. But they require you to work harder and act quicker. Buy with adequate margin of safety: That's where attractive purchase prices can help. As a matter of fact, selling stocks is no different from buying them. Keep a sufficient margin of safety when buying a stock and don't rely on making a good sale ever.
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12. Sell when value is realised: Some stocks may rise sooner than you may have anticipated. In a frenzied bull run, investors may see their target prices being met in a matter of days. Here time should not be of any consequence. If you feel that your investments are adequately valued, you should exit regardless of how long you have held them. There are times when stocks begin to quote at extraordinarily high levels within a short period after you have invested in them. Although investors are often advised to invest for the long term in equities, if you get extraordinarily high returns within a short span, it is wiser to get out, say experts. 13. If you realise a mistake, exit: Even while we are talking about selling stocks in a bull market, experts emphasise that if investors make mistakes, they should exit immediately even at a loss. If you realise your analysis was flawed or that you got carried away for any reason, it's good to get rid of a stock as soon as possible. Waiting for a better price at such instances may prove to be quite dangerous. 14. Try to invest in things you know . 15. Try to adopt a long-term perspective with regard to investing. 16. Know your risk: It is critical to understand where you stand and where you want to be. What level and amount of investment are you comfortable with, regardless of what market experts tell you? Therefore, take some time to evaluate your risk-bearing capacity. This is a golden rule that should be applied at almost all times. 17. Play safe, invest in a mutual fund: For those who are still not sure about their research, we suggest you invest through a mutual fund. The advantages would be the risks would be minimized and you would stay invested for a longer-term in equities. 18. Encash when stock prices dip: We reiterate it is important to bring some money home, when you have made profits in earlier times. 19. Don't blindly follow media reports on corporate developments, as they could be misleading. 19. Don't blindly imitate investment decisions of others who may have profited from their investment decisions. 20. Don't fall prey to promises of guaranteed return

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Derivatives Market A derivative is a financial instrument - or more simply, an agreement between two people or two parties - that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to - such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. Derivatives are usually broadly categorized by the:

relationship between the underlying and the derivative (e.g., forward, option, swap) type of underlying (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives or credit derivatives) market in which they trade (e.g., exchange-traded or over-the-counter) pay-off profile (Some derivatives have non-linear payoff diagrams due to embedded optionality)

Another arbitrary distinction is between:

vanilla derivatives (simple and more common) and exotic derivatives (more complicated and specialized)

Derivatives are used by investors to speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level) hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out arbitrage when the current buying price of an asset falls below the price specified in a futures contract to sell the asset.

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Types of derivatives markets: In broad terms, there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in the market:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008). Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counter-party risk, like an ordinary contract, since each counter-party relies on the other to perform. Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world's largest derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

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Common derivative contract types There are three major classes of derivatives: 1. Futures/Forwards are contracts to buy or sell an asset on or before a future date at a price specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold, whereas a forward contract is a non-standardized contract written by the parties themselves. 2. Options are contracts that give the owner the right, but not the obligation, to buy (in the case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the transaction. 3. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets. More complex derivatives can be created by combining the elements of these basic types. For example, the holder of a swaption has the right, but not the obligation, to enter into a swap on or before a specified future date.

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A Study of Indian Individual Investors Behavior

Indian investor today have to endure a sluggish economy, the steep market declines prompted by deteriorating revenues, alarming reports of scandals ranging from illegal corporate accounting practices like that of Satyam to insider trading to make investment decisions. Stock markets performance is not simply the result of intelligible characteristics but also due to the emotions that are still baffling to the analysts. Despite loads of information bombarding from all directions, it is not the cold calculations of financial wizards, or companys performance or widely accepted criterion of stock performance but the investors irrational emotions like overconfidence, fear, risk aversion, etc., seem to decisively drive and dictate the fortunes of the market. Indian investors are high income, well educated, salaried, independent in making investment decisions and conservative investors. From the empirical study it was found that irrespective of gender, most of the investors (41%) are found have low risk tolerance level and many others (34%) have high risk tolerance level rather than moderate risk tolerance level. Television is the media that is largely influencing the investors decisions. When the BSE Sensex was hovering around the 21000 levels in the month of January 2008, irrational exuberance was the order of the day. Then, few investors would have foreseen a fall of over 70% in the subsequent 12 months period. Expectedly, the exuberance has been forgotten and despondency has set in. The market is so volatile that its behavior is unpredictable. In the past couple of years, the movement of share prices exceeded all the limits and had gone remarkably low and high levels. These dramatic prices of the shares ruin the concept of intrinsic value and rational investment behavior. The traditional finance theories assume that investors are rational but they are unable to explain the behavior and pricing of the stock market completely. Indian Investors have to endure a sluggish economy, the steep market declines prompted by deteriorating revenues, including alarming reports of scandals like that of Satyam computers, ranging from illegal corporate accounting practices to insider trading etc to invest their money in the stock market. Whether or not Stock markets performance is simply the result of intelligible characteristics of the investor is the question that still baffles the analysts. Despite loads of information bombarding from all directions, it is not the cold calculations of financial wizards, company performance or widely accepted criterion of stock performance but the investors irrational emotions like overconfidence, fear, risk aversion, etc., seem to decisively driving and dictating the fortunes of the market is increasingly realized by the analysts.

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Need for the Study

Stock market has been subjected to speculations and inefficiencies, which are beached to the rationality of the investor. Traditional finance theory is based on the two assumptions. Firstly, investors make rational decisions; and secondly investors are unbiased in their predictions about future returns of the stock. However financial economist have now realized that the long held assumptions of traditional finance theory are wrong and found that investors can be irrational and make predictable errors about the return on investment on their investments. This empirical study on Individual Investors Behavior is an attempt to know the profile of the investor and also know the characteristics of the investors so as to know their preference with respect to their investments. The study also tries to unravel the influence of demographic factors like gender and age on risk tolerance level of the investor.

Objectives of the Study

(1) To develop a profile of sample Indian individual investor in terms of their demographics. (2) To identify the objective of investment plan of an Indian individual investor. (3) To know the preferred investment avenues of the Indian individual investor. (4) To know the extent of financial literacy of individual investors (5) To identify the preferred sources of information influencing investment decisions. (6) To know the risk tolerance level of the individual investor (7) To know the demographic factors (Gender and Age) of the investor and his/her risk tolerance level.

Sample Design Many investors were reluctant to divulge their investment details especially the amount of money invested so; referral sampling method is used for this empirical study. It has been carried out with a sample size of 150 investors. Analysis of the Survey Table 1 and Table 2 show the Demographics and other characteristics of the sample investors.
Table 1: Demographics of the Sample Investor. Parameter Gender Male Female Total Age (in years) Below 35 35-50 No. of Investors 120 30 150 Percentage 80 20 100

55 80
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36.7 53.3

51-60 60 and above Total Marital Status Unmarried Married Total Employment Status Salaried Self-Employed(Business) Retired Total Monthly Earnings (in Rs.) Up to Rs. 10000 Rs. 10001-20000 Rs. 20001-30000 Rs. 30000 and above Total Education Level Under Graduate Graduate Post Graduate & Above Total Financially Responsible Only yourself 1 person in addition to yourself 2-3 persons in addition to yourself 4-5 persons in addition to yourself More than 5 person besides yourself Total Occupation Accounts/Finance/Investment Professionals Others Total

10 5 150

06.7 03.3 100

33 117 150

22 78 100

98 43 9 150

65.3 28.7 06 100

0 6 35 109 150

0 04 23.3 72.7 100

15 65 70 150

10 43.3 46.6 100

18 16 53 49 14 150

12.0 10.7 35.3 32.7 09.3 100

65 58 27 150

43.3 38.7 18.0 100.0

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Interpretation Table 1 above shows, that 120 (80%) of the investors are men and the rest 30(20%) are females. Generally males bear the financial responsibility in Indian society, and therefore they have to make investment (and other) decisions to fulfill the financial obligations. When it comes to age, it was found that 36.7% are young and significant number (53.3%)of them are in the age group of 35 to 50. The marital status of 78% of the investors was found to be married and the rest are unmarried. This is because a married individual is considered to have dependents so relatively more invested and involved in making financial investments. Nearly 65% of the investors belong to the salaried class, 29% were business class and the rest were retired. It was found that 109(73%) of investors whose monthly earnings above rupees 30000 are interested in investments since these people have surplus amount due to which they are able to think of investments. 70(47%) of the individual investors covered in the study are postgraduates; 65(43%) investors are graduates and 15(10%) of the investors are undergraduates. From table 1, it is interesting to note that most investors (covered in the study) can be said to possess higher education (Bachelor Degree and above), and this factor will increase the reliability of conclusions drawn about the matters under investigation. 65(43%) of the investors covered in the study have been found to be in professions related to finance, accountancy, investment, banking, broking, and financial management etc and 58(39%) of the respondents are software engineers, architects, medical and dental practitioners, teachers, lawyers etc. 27(18%) of the respondents can be said to belong to 'non-accounting or nonfinancial' occupations and the other occupations.

Table 2: Other Characteristics of Sample Investor. Parameter Reading Behavior 4 or more sources 2 3 sources Only 1 source Total Investment Decisions are based Taken on own initiative Taken on own initiative but with help from an expert Made by expert on investors behalf Total Regularity of Investment Decisions Frequently Not so frequently Total Number of Investors 59 40 51 150 Percentage 39.3 26.7 34.0 100.0

111 27 12 150

74.0 18.0 08.0 100.0

89 61 150

59.3 40.7 100.0

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Interpretation: The study has attempted to enquire about other characteristics of investor such as the reading behavior of the Investors. From table 2, it is noteworthy to find that 59 (39%) of the investors read four or more sources, 40 (27%) of the investors read two to three sources, 51 (34%) of the investors only one source. One may infer from the figures of table 2 that most investors tend not to depend upon expert advice and help while making investment decisions. However, the majority of the investors 111 (74%) make investment decisions without the help and advice from experts; only 27 (18%) investors consult some experts, for advice in investment decisions. And 12 (8%) of the investors allow the expert to take decision on their behalf. Most of the investors 89 (59%) make investment decisions on a regular basis.

Objective of Investment Plan

When investor was queried about his/her objective behind any investment, given that all the available investment avenues available to him will assure safety, liquidity and tax benefit, the objective of investment plan of the investors is shown in the following table 3.

Table 3: Objectives of investment plan. Parameter Objective of investment Plan Capital Appreciation Balance of capital appreciation and current income Supplement to their current income Total Number of Investors 63 65 22 150 Percentage 42 43.3 14.7 100

Based on table 3, we can conclude that the investors objective of investment plan is capital appreciation or balance of capital appreciation and current income. It is clear that investors invest to accumulate wealth rather as an avenue to supplement their income.

Preferred Investment Avenues

Based on the quantity of risk, the investment avenues are classified as follows - Fixed Deposits/Bonds, Insurance schemes, Mutual Fund Schemes, Equities, Commodities and Real Estate. Investors were asked to choose preferred avenues.

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Table 4: Preferred Investment Avenues. Investment Avenues Fixed Deposits/ Bonds/PPF Insurance Schemes Mutual Fund Schemes Equities Commodities/ Derivatives Real Estate Total Percentage 26.7 23.3 18 20 10 2 100

From table 4, it can be concluded that the investors prefer FDs/Bonds/PPFs avenues than insurance schemes next to Equities and Mutual Funds. It was interesting to know that Indian individual investors still prefer to invest their surplus amount in risk free investment avenues next to insurances schemes. Table 4 confirms that Indian investors are conservative investors.

Financial literacy When investors were queried about their financial literacy i.e. their ability or knowledge about financial terms or aspects of investments, it was found that most of the investors are financial illiterates. And the responses are shown in table 5.

Table 5: Financial literacy. Parameters Financial Literates Financial Illiterates Total No. of People 56 94 150 Percentage 37.3 62.7 100.0

In spite of majority of the occupants (65) are from accounts and financial related jobs most of them astonishingly expressed ignorance about the mechanism of investments, and the dynamics of risk and returns.

Sources of Investment Information

When investors were asked to rank their various sources of investment information, the following Weighted Mean Values were obtained which are given in table 6.

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Table 6: Sources of investment information.

Sources of Investment Information News Paper/ Magazines Electronic Media (T.V) Peer group/ Friends Broker/ Financial Advisor Internet

No. of people who opt for 103 128 47 36 18

Most of the investors get their information related to investment through electronic media (TV- NDTV Profit, CNBC and some business news channels) next to print media (News paper/ Business news paper/ Magazines). This could be because Print/Electronic media is easy and readily accessible investment information when compared to the other sources of investment information.

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Findings The study reveals that male investors dominate the investment market in India. Most of the investors possess higher education like graduation and above. Majority of the Investors belong to accountancy and related employment, nonfinancial management and some other occupations are very few. Most investors read two or more sources of information to make investment decisions. The investors decisions are based on their own initiative. The investment habit was noted in a majority of the people who participated in the study. The objective of investment was either capital appreciation or balance of capital appreciation and current income. Investors prefer to park their funds in avenues like PPF/FD/Bonds next to Equities and Mutual Funds Scheme. Most of the investors get their information related to investment through electronic media (TV) next to print media (News paper/ Business news paper/ Magazines) Most of the investors are financial illiterates.

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Conclusion
The Present study has important implications for investment managers as it has come out with certain interesting facets of an individual investor. The individual investor still prefers to invest in financial products which give risk free returns. This confirms that Indian investors even if they are of high income, well educated, salaried, independent are conservative investors who prefer to play safe. The investment product designers can design products which can cater to the investors who are low risk tolerant and use TV as a marketing media as they seem to spend long time watching TVs.

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Bibliography
Google.com Investment Analysys and Portfilio Management - Prasannna Chandra About.com Wikipedia.org

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