SCHOOL OF BUSINESS AND MANAGEMENT

Security Analysis and Portfolio Management( SAPM)-

Module 1.1
Introduction: The Investment Background
The Investment Environment

Faculty: Dr. Nisha Shankar

MISSION VISION CORE VALUES
CHRIST is a nurturing ground for an individual’s holistic development to Excellence and Service Faith in God | Moral Uprightness
make effective contribution to the society in a dynamic environment Love of Fellow Beings
Social Responsibility | Pursuit of Excellence
 CHRIST
Deemed to be University

INVESTMENT AND SECURITIES

● Investment is the employment of funds on assets with the aim of earning income. This calls for
sacrifice on the part of the investor
● Sacrifice to be borne is certain but the return is uncertain in the future. The risk is taken to reap
some rewards in the future.
● Two aspects to be kept in mind is Time and risk. Investment is a commitment either to buy a
house, buy some securities/stock and both these require time and certain amount of risk taking.

Excellence and Service

 CHRIST
Deemed to be University

Real Assets Vs Financial Assets

● Real assets
● Value-generating physical assets that your business owns
● The material wealth of a society is determined ultimately by the productive capacity of its
economy, which is a function of the real assets of the economy: the land, buildings, knowledge,
and machines that are used to produce goods and the workers whose skills are necessary to use
those resources

Excellence and Service

 CHRIST
Deemed to be University

Real Assets Vs Financial Assets

● Financial Assets
● Financial assets are tangible assets that you can quickly convert into cash.
● These are tangible or liquid assets that actually represent claims on the underlying value of the
other types of assets such as real estate and properties.
● Stocks, bonds, cash reserves, bank deposits, trade receivables, and shares are all common
examples of financial assets.
● Financial assets, like stocks or bonds, contribute to the productive capacity of the economy
indirectly, because they allow for separation of the ownership and management of the firm and
facilitate the transfer of funds to enterprise with attractive investment opportunities. Financial
assets are claims to the income generated by real assets

Excellence and Service

 CHRIST
Deemed to be University

Real Assets Vs Financial Assets- Differences

● Real investments are not as liquid as financial investments, which means you can’t convert real
assets into cash as quickly as you could convert financial assets into cash
● Another difference between real investment and financial investment is that real investments –
such as owning a building – can be less valuable over time, whereas cash flows generated by
financial assets experience constant growth
● Real assets produce goods and services, whereas financial assets define the allocation of
income or wealth among investors
● They are distinguished operationally by the balance sheets of individuals and firms in the
economy. Whereas real assets appear only on the asset side of the balance sheet, financial assets
always appear on both sides of the balance sheet.
● Financial assets are created and destroyed in the ordinary course of doing business. E.g. when
a loan is paid off, both the creditor’s claim and the debtor’s obligation cease to exist. In
contrast, real assets are destroyed only by accident or by wearing out over time.

Excellence and Service

 CHRIST
Deemed to be University

Financial markets and the economy

● 1. Smoothing consumption: “Store” (e.g. by stocks or bonds) your wealth in financial assets
in high earnings periods, sell these assets to provide funds for your consumption in low
earnings periods (say, after retirement).
● 2. Allocation of risk: virtually all real assets involve some risk (so do financial assets). If a
person is uncertain about the future of GM, he can choose to buy GM’s stock if he is more risk-
tolerant, or he can buy GM’s bonds, if he is more conservative.
● 3. Separation of ownership and management: Let professional managers manage the firm.
Owners can easily sell the stocks of the firm if they don’t like the incumbent management team
or “police” the managers through board of directors (“stick”) or use compensation plans tie the
income of managers to the success of the firm (“carrot”). In some cases, other firms may
acquire the firm if they observe the firm is underperforming (market discipline).

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Financial markets are segmented into money markets and capital markets.
● 1. Money market instruments (they are called cash equivalents, or just cash for short) include
short-term, marketable, liquid, low-risk debt securities.
● 2. Capital markets include longer-term and riskier securities. The capital market are subdivided
into four segments: longer-term bond markets, equity markets, and the derivative markets for
options and futures.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Money Market:
1. T-bills:
● Short term borrowing by Government.
● Investors buy the bills at a discount from the stated maturity value and get the face value at the
bill’s maturity.
● T-bills with initial maturities of 14 days,91 days ,182 days and 364 days.
● Issued by RBI on behalf of Government through auctions ( Wednesdays)
● Issued for a minimum amount of Rs.25000 and in multiples of Rs 25000 thereafter
● Eligible participants to invest are the banks, insurance companies like LIC, GIC, NABARD
and UTI, corporates and Foreign Institutional Investors (FII).
.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● 2. CD:
● Certificate of deposit are short term borrowing instruments of Commercial banks and
Financial institutions
● In India, the RBI permitted banks to issue CDs from June, 1989.
● Ranging-Minimum 7 days to Max 1year-Banks
● Max 3 years for RBI approved Financial Institutions
● Negotiable instruments
● CD’s are issued at a discount to the face value but redeemed at Par at the bill’s maturity.
● CD’s are issued at a denomination of Rs. 1 lakh and in multiples of Rs. 1 lakh thereafter
● The investors are generally joint stock companies, institutions, high net-worth
individuals or any other funds.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● 3.Commercial Paper
● In India, CP made its appearance from January 1990,
● Private limited Companies issue CP. CP is a short-term unsecured promissory note
● It is issued by well-established joint stock companies to raise working capital
● Negotiable
● Unsecured Fixed income instrument
● Maturity- 7 days to maximum 1 year from the date of issue.
● Entities issuing CP has to obtain Rating from RBI approved Credit Rating agency- Credit rating should be
obtained from any of the credit rating agencies like CRISIL, ICRA, CARE or Fitch. The rating should not be
less than P2 from CRISIL and A2 from ICRA. Minimum rating A2 or equivalent indicating “ adequate safety”
● Issuer-tangible net worth of Rs.4 crore
● Minimum investment is Rs.5 lakhs and in multiples thereafter
● Issued at discount and redeemed at par
● The buyers of CPs are other joint stock companies, public sector companies and corporations, banks, non-
corporate bodies, non-resident Indians (NRIs) and foreign institutional investors

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● 4. Call Money Market, Notice & Term Money Market

● Lending and borrowing happens for 1 day
● Also known as Interbank Call Money Market / Overnight Market
Notice Money Market
● Lending and borrowing for a period exceeding 1 day but matures in 14 days
Term Money
● Lending and borrowing for a period exceeding 14 days wherein the maturity needs to
be mentioned at the time of transaction ( not more than 1year)

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

5. CBLO (Collateralized Borrowing and Lending Obligation):

A CBLO is one of the money market instruments available in electronic book entry form
They are approved and developed by RBI and Clearing Corporation of India (CCIL) in 2003.
The maturity period ranges from one day to ninety days. As per RBI guidelines this can also be extended up to
one year.
It is an online trading system where major participants in the lender side are mutual funds and insurance
companies. In case of borrowers the major participants are nationalized banks, primary dealers and non-
financial companies.
● The dealing systems available are:
● 1. Indian Financial Network (INFINET) – This is a closed group formed by the members of the
Negotiated Dealing System (NDS), who gen­erally have an account with RBI.
● 2. Internet gateway – This enables the dealing system for those entities which do not maintain a Current
account with RBI.
● Entities like banks, financial institutions, primary dealers, mutual funds and co-operative banks who are
members of NDS can participate in CBLO transactions.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● 6. Repos or Repurchase Agreements:

● It is a short term borrowing where one party who sells the security agrees to repurchase
it in future.
● The securities for Repo transaction are government approved
● securities like treasury Bills, and Central/State Government securities.
● For the seller the transaction is a repo as he agrees to repurchase it at a specified date
and rate.
● Whereas for the buyer it is a reverse repo as he agrees to buy the security now and sells
it in future.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Bond Market
● The bond market—often called the debt market or credit market—is a financial
marketplace where investors can trade in government-issued and corporate-
issued debt securities
● Types
● Corporate Bonds
● Companies issue corporate bonds to raise money for reasons, such as financing
current operations, expanding product lines, or opening up new manufacturing
facilities.
● Corporate bonds usually describe longer-term debt instruments that provide a
maturity of at least one year.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Government Bonds
● National-issued government bonds entice buyers by paying out the face value
listed on the bond certificate, on the agreed maturity date, while also issuing
periodic interest payments along the way. This characteristic makes government
bonds attractive to conservative investors.
● Municipal Bonds
● Municipal bonds—commonly abbreviated as "muni" bonds—are locally issued
by states, cities, special-purpose districts, public utility districts, school districts,
publicly-owned airports and seaports, and other government-owned entities who
seek to raise cash to fund various projects.
● Their interest income is exempt from federal income taxation.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Mortgage-Backed Bonds
● These issues, which consist of pooled mortgages on real estate properties, are locked in
by the pledge of particular collateralized assets. They pay monthly, quarterly, or semi-
annual interest.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● Equity securities:
● 1. Common stock: also known as equity securities or equities, represent ownership
shares in a corporation. Each share of common stock entitles its owner to one vote on
any matters of corporate governance that are put to a vote at the corporation’s annual
meeting and to a share in the financial benefits of ownership.

Excellence and Service

 CHRIST
Deemed to be University

Asset Classes &Financial Instruments

● 2. Preferred stock:has features similar to both equity and debt

● a. Like a bond, it promises to pay to its holder a fixed amount of income each
year and it does not convey voting power regarding the management of the firm.
● b. It is an equity investment, however. The firm retains discretion to make the
dividend payments to the preferred stockholders; it has no contractual obligation
to make those dividends. Instead, preferred dividends are usually cumulative;
that is, unpaid dividends cumulative and must be paid in full before any
dividends may be paid to holders of common stock. In contrast, the firm does
have a contractual obligation to make the interest payments on the debt. Failure
to make these payments sets off corporate bankruptcy proceedings.

Excellence and Service

 CHRIST
Deemed to be University

Clients /Players of the financial system

● 1. Household sector:
● a. Tax concerns: people in different tax brackets need different financial assets with different
tax characteristics.
● b. Risk concerns: Differences in risk tolerance create demand for assets with a variety of risk-
return combination.

Excellence and Service

 CHRIST
Deemed to be University

Clients /Players of the financial system

● Business sector:
● Business is more concerned about how to finance their investments, through debt or equity
either privately or publicly. Business issuing securities to the public have several objectives.
● First, they want to get the best price possible for their securities.
● Second, they want to market the issues to the public at the lowest possible cost.

Excellence and Service

 CHRIST
Deemed to be University

Clients /Players of the financial system

● 3. Government sector:
● Governments cannot sell equity shares.
● They are restricted to borrowing to raise funds when tax revenues are not sufficient to cover
expenditures.
● A special role of the government is in regulating the financial environment

Excellence and Service

 CHRIST
Deemed to be University

Clients /Players of the financial system

● Financial Intermediaries
○ Investment Companies
○ Banks
○ Insurance companies
○ Credit unions
● Investment Bankers
○ Perform specialized services for businesses
○ Markets in the primary market

Excellence and Service

 CHRIST
Deemed to be University

Financial System-Structure & Design

● Indian Financial System

● Financial Markets Financial Institutions

Financial Assets/Instruments

Excellence and Service

 CHRIST
Deemed to be University

Thank You
Q&A

Excellence and Service