INVESTMENT ANALYSIS

&
PORTFOLIO MANAGEMENT

Lecture # 5
Dr. Shahid A. Zia
 When we go to stock market we need to
have an account with a broker.
• Trading or investment in a stock market is
a direct form of investments.
• Trading or investments through mutual
fund is indirect form of investment.

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In direct form of investment, to do
business in the stock market, we open an
account with brokers. Although we are
trading directly in the stock market but we
need to have an account with member of
stock exchange.

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 Regulations

The requirement of the regulations is that

all transactions are done through banking
channels.

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Cash transactions are not allowed which
means channelizing of money is
paramount. Tracking is also significant.

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 Types of Accounts
Different accounts in stock brokerage firms:
• Cash Accounts
• Margin Accounts
• CFS Investments Accounts

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 Types of Accounts

• Cash Account (Type 1)

• Margin Account (Type 2)

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 Cash Accounts (Type 1)
Cash accounts are normally used when
you want to buy shares and hold them for
long time.
• Investing in stock market is a long term
investment.
• Long term means more than 1 year.
• You invest in money market for short term
which is less than 1 year, it can be 1 day.
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 Margin Accounts (Type 2)
• A portion of the share cost can be borrowed from
the brokerage firm
• When you borrow funds you must pay a cost i.e.
markup.
• Margin call
- When account equity deteriorates too far, the
investor may get a margin call –
It requires either:
i) The deposit of additional funds
or
ii) The sale of some security positions and sell a
part of shares to off-set the requirement 9
 CFS Accounts
Investors place funds to be borrowed by financee.

The securities are pledged with the financier and in

case financee does not roll it over or payback the
amount borrowed, the risk rests with the financier.

Then the shares become the ownership and liability

of financier. The rates are determined through
electronic supply / demand mechanism.

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Borrowing and Lending process is every
day process that happens only in
exchanges through brokers or members.

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 The claim of profitability on buying or
selling depends on supply and demand
mechanism.
• If people need more money, then interest
rate will go up.
• If demand is not more than supply, then
markup is less which is good for borrowing
people.
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 Buying Power
Buying Power is a measure of how much more
can be spent for securities without having to put
up with extra cash with a 50% initial margin

buying power =equity-debt balance

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 Buying Power

• You can buy first and sell later, which is

simple.
• You can sell first and buy later, is another
interesting phenomenon.

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 Selling Short (SS)
Rationale: SS are bearish towards the
market. SS sell first and buy later.
•There are regulatory constraints in different
parts of the world, where may be short
selling is not allowed.
•Locally short selling is not permitted in the
regular market but short selling is permitted
in the future market.
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Regular Market and Future Market
A Regular Market is a current market in
which all buying and selling is on cash or
margin.

A Future Market is about trading in the

future.
Future is a form of derivative.

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 Derivative Investment

In derivative market, you can sell in future.

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• Criticisms:
1. In favor, margin trading encompasses
two activities i.e. buying on margin and
selling short.
2. Those who are against say that it
destabilizes markets, manipulation and
squeezing cornering.
• Mechanics of a Short Sale: The SS has
an eventual obligation to replace the
borrowed shares and dividends.
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• Short against the box:
You can always give delivery of shares
instead of covering back the shares. It is a
type of Hedge Mechanism.

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 Trading Fee
Trading fee is the income which is the
source of revenue for members or brokers.
• The Costs of Trading
• The Commission Structure
• Full-Service Brokers
• Discount Brokers
• Electronic Brokers

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 Trading Fee
• Brokers receive a commission for executing
customer trades
• Some firms are full-service firms:
– Provide extensive research and advice.
• Others are discount firms:
– Provide few other services but executing orders.

Many firms also provide the facility of making trades via

a home computer. It is a viable option. All facilities are
available to good brokers like research & web page.

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 Internet Trading
Internet Trading is another big option that
you need to use because of:
• Time value for money.
• To read for distances that are too great to
travel.

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 Commission
Commission will vary from broker to broker.
• Charges are high in cash accounts.
• Charges are low in trading accounts.

You have it in printed form. It is a very

clear and transparent. Not a big issue any
more because of computerization.

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 Valuation
Evaluating what you need to buy. At this
stage:
• We will be analyzing stock.
• Fundamental analysis.
• Technical analysis.

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 Valuation Philosophies
• Investors’ Understanding of Risk
Premiums.
• The Time Value of Money.
• Focus on financial strength, stability &
certainty.
• Finances of company and its internal
strengths.
• The Importance of Cash Flow.
• Cash inflows are higher than cash
outflows, so the profit is generated. 25
 Valuation Philosophies
• The Tax Factor.
• Look at companies tax status.Whether it is
exempted from tax or whether it has to pay
a lot of tax.

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 EIC Analysis

• Economic Analysis
• Industry Analysis
• Company Analysis

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 EIC Analysis
It is a pyramid analysis.
• Economic analysis at the base of pyramid.
• Middle of pyramid is Industry.
When you purchases the shares of industry
than you evaluate:
 Industry norms
 Averages
 Rate of Returns
 Yields
 Earnings per Share
• On the top there is Company where you are
going to invested.
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