SECURITY ANALYSIS AND INVESTMENT MANAGEMENT
What is investment?
• It means conversion of cash or money into a monetary asset or a claim on future money for a return. It means parting ones fund to be used by another party for productive activity.
What is security?
• Securities provides a claim on an asset & any future cash flows that asset may generate. • Securities includes shares, bonds, debentures, preference shares etc. issued by company & government. • Classified on the basis of returns & issue.
• Portfolio management is the selection of such securities that would fit in well with the asset preferences.
.What is portfolio and Portfolio Management?
• It is a combination of various assets/securities of investment to minimize risk and maximizes the returns. needs and choices of the investor.
equity shares etc.TYPES OF SECURITIES
• (a) (b) (c) Negotiable securities Securities that are transferable Yield variable income or fixed income Bonds. debentures. companies.
• Non-negotiable securities (a) non-transferable (b) Schemes Post-offices. etc.
• Variable Income Securities (a) Income shares (b) Cyclical shares • Fixed Income Securities (a) Preference shares (b) Debentures (c) Govt. securities
• Money market securities (a) Treasury bills (b) Commercial papers (c) Certificate of deposit
THE FINANCIAL INSTRUMENTS
Age Need for Regular Income
Birth & Education
.Human Life Cycle – Disciplined Planning
Income Phase I Phase II
Child’s Marriage Child’s Education Housing
Having a Financial Goal is primary to starting a Investment Plan.
Child birth Marriage 22 yrs 38 yrs Over 25 .
L o w
## the size of the circle denotes the level of liquidity
H i g h
Equity Growth Funds Index Balance Funds Funds
Don’t Invest here
R I S K
Income Funds RETURN
Aggressive Stance High
POST OFFICE MONTHLY INCOME SCHEME
5. PUBLIC PROVIDENT FUND 2.INVESTMENT INSTRUMENTS
1. 8% SAVINIGS BONDS
4. EQITY SHARES OF LISTED COMPANIES
. LIFE INSURANCE POLICIES 7. UNIT LINKED INSURANCE POLICY 8. SENIOR CITIZEN SAVING SCHEME 6. NATIONAL SAVINGS CERTIFICATE (NSC) 3.
MUTUAL FUNDS 10.INVESTMENT INSTRUMENTS
9. GOLD & PRECIOUS METALS 15. JEWELLERY. FIXED DEPOSITS WITH COMPANIES 14. PAINTINGS
. EQUITY LINKED SAVING SCHEME (ELSS) 11. TERM DEPOSITS WITH BANKS 12. IMMOVABLE PROPERTY 16. SAVINGS DEPOSITS WITH BANKS 13.
PUBLIC PROVIDENT FUND
Very Safe Investment Not so liquid. No tax when money is received back
. No TDS from interest. Compounded Annually Amount Invested is eligible for deduction under section 80C Interest is exempt under section 10. Investment remains locked for 15 years
8% interest per year.
NATIONAL SAVINGS CERTIFICATE
Very Safe. Return is 8% per annum compounded half yearly. Amount invested is eligible for deduction under section 80C. there is no chance of losing money Life is six years but can be transferred after one year. Encashment is not possible till end of three years. Interest is taxable but no TDS. Unless the Government goes bankrupt and defaults. premature encashment is permitted at a discounted rate of interest. No tax on reinvestment
Unless the Government goes bankrupt and defaults.8% SAVING BONDS
No tax on reinvestment
. Very illiquid. Not transferable and not encashable before end of six years. ROI is 8% per annum No tax benefits
Interest is fully taxable. TDS applicable. there is no chance of losing money Life is six years.
No TDS from interest.
Interest is fully taxable. No tax on reinvestment. Unless the Government goes bankrupt and defaults. Can be withdrawn at any time after one year at discounted rates. In addition.POST OFFICE MONTHLY INCOME SCHEME
Very Safe. bonus of 10% is payable on maturity only on accounts opened upto 13th February. 2006.
8% per annum interest payable monthly. Life is six years. there is no chance of losing money.
SENIOR CITIZEN SAVING SCHEME
Very Safe. Unless the Government goes bankrupt and defaults, there is no chance of losing money Life is five years. Can be withdrawn at any time after one year at discounted rates.
9% per annum interest payable quarterly.
No tax benefits
Interest is fully taxable. No TDS from interest. No tax on reinvestment
LIFE INSURANCE POLICY
Quite safe. None of the insurance companies have defaulted till date Loan against policy allowed by many companies
Not strictly an option for generating income. It is more of a safety net for future. Amount paid as premium is eligible for deduction under section 80C
Amount received back on maturity of policy including the accumulated bonus is exempted from tax
UNIT LINKED INSURANCE PLAN
Quite safe. None of the insurance companies have defaulted till date Since part of the money is invested in stock markets, there is market related risk of NAV going down
Amount paid as premium is eligible for deduction under section 80C
Amount received back on maturity of policy including the accumulated bonus is subject to the laws applicable to capital gains
Short Tem Capital Gains Tax is charged @ 10% Long Tem Capital Gains Tax is exempt from tax
Substantial risk as the prices of shares fluctuate from time to time and are market driven Very liquid. Can be sold on stock exchanges any time and the sale proceeds would be received within a few days Maximum scope for capital appreciation which would differ from one company to another Dividend is exempt from tax under Section 10.
Substantial risk as the NAV of units fluctuate from time to time and are market driven In most cases. Can be withdrawn at any time subject to exit load which varies from scheme to scheme. dividend distribution tax is levied on Mutual Fund companies Short Tem Capital Gains Tax is charged @ 10% Long Tem Capital Gains Tax is exempt from tax
. Maximum scope for capital appreciation which would differ from one fund/scheme/plan to another Dividend is exempt from tax under Section 10. very liquid. However.
Maximum scope for capital appreciation which would differ from one fund to another
Amount invested is eligible deduction under Section 80C
. Can be withdrawn at any time after 3 years.EQUITY LINKED SAVING SCHEME
Substantial risk as the NAV of units fluctuate from time to time and are market driven Lock-in period of 3 years.
No tax on reinvestment.000 per annum. there is no chance of losing your money Not very liquid. TDS from interest in excess of Rs 10. Amount invested is eligible for deduction under Section 80C Interest is fully taxable.
.FIXED DEPOSITS WITH BANKS
Quite safe. Only accumulation of interest which gets compounded every year in case of cumulative deposits. The tenure of the FD would be a fixed period of not less than five years with a scheduled bank No capital appreciation. Unless the bank goes bankrupt and defaults.
25% 180 Days 4.75% 7.50% 6.25%
3.50% 8.00% 7.25% 7.25% 6.00% 7.25% 5.00% 7.25% 7.25% 5 Year 7.50% 1 Year 5.75% 3.BANK FIXED DEPOSITS
30 Days ABN AMRO CITI BANK PNB HSBC HDFC BOB INDIAN BANK ICICI IDBI UTI 3.75% 7.25% 6.75% 3.50% 3 Year 7.00% 6.00% 6.50%
.50% 4.25% 7.25% 6.00% 3.00% 7.50% 4.00% 3.00% 5.00% 5.00% 7.50% 5.50% 7.00% 5.50% 5.50% 7.00% 5.00% 3.75% 2.00% 7.00% 7.50% 4.50% 6.00% 3.00% 7.00%
4.00% 7.00% 7.00% 3.
No tax on reinvestment. the depositor would get last priority in terms of settlement of dues. In many cases. TDS from interest in excess of Rs 5. No capital appreciation. Liquidity depends on company and it‟s policies.000 per annum. Only accumulation of interest which gets compounded every year in case of cumulative deposits. Deposits are unsecured and if the company goes bankrupt.COMPANY FIXED DEPOSITS
Not very safe. can be liquidated at any time but subject to loss of interest.
. Interest is fully taxable.
Making charges becomes a sunk cost. However.
.JEWELLERY. Capital gains tax needs to be paid on sale. GOLD & PRECIOUS METALS
Gold is considered to be a safe investment. However. No tax benefits. jewellery and precious stones are generally not viewed from the point of view of investments Not a very liquid investment. now there is option of buying paper gold in exchange traded funds (ETF).
Tax benefits on repayment of housing loan under Section 80C and 24B
Capital Gains Tax applicable on sale. However.REAL ESTATE
House property and land have traditionally been perceived to be safe investments. in India.
Rent is taxable under the head “Income from House Property”.
. there is often a doubt about the validity of the title deed Not very liquid asset. Transfer of land and house property is a lengthy and complicated process.
the safety of investment in Art cannot be accurately predicted
Returns are not very predictable.
Capital Gains Tax is applicable on sale of art pieces.
. It would depend on the trends prevailing and on the popularity of the artist which may keep on changing from time to time. At present. and also in view of the fact that art is very subjective.PAINTINGS
The market for paintings is a nascent market in India. it is very small and from that point of view.
INVESTMENT VS SPECULATION
LONG TERM MODERATE RETURNS
SHORT TERM HIGH RETURNS HIGH RISK BORROWED FUNDS USED USES TECHNICAL ANALYSIS
OWN FUNDS USED
USES FUNDAMENTAL ANALYSIS
DISCIPLINED INVESTMENT PLANNING
Derivatives & Equity Mutual Funds Income Funds & Real Estate GOI Relief Bonds Bank Fixed Deposits
MAXIMIZE RETURNS. MINIMIZE RISKS
• Securities absorb new funds. • Issuer may be brand new company or old company.
. • Securities available for the first time.Primary Market
• The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities to raise resources to meet their requirements of investment. • After the issue securities are traded in the secondary market.
. • Primary market is the one in which the company approaches investors to raise capital. are offered. • Both the new companies and the existing ones can raise capital on the new issue market.
.• The new issue market represent the primary market where new securities – share or bonds that have never been previously issued.
• Primary market concern new long term capital
• Securities are sold for the first time in this
market • Securities are issued directly to investors • Securities are issued by companies for setting new business and for expanding or
modernizing existing business.
• It facilitates capital formation in the economy • Funds generated in this market are utilized for
th e purchase of fixed assets
• It is the process of going public .Features of primary market
• It does not include long term loans from financial institutions.
• Origination • Underwriters • Distribution
financial information etc
• Public issue
• Rights issue
• Private placements • Preferential allotment
. management. promoters.
capital structure.Placement of the issue
• Offer Through Prospectus – general information. Terms and
mutual fund. Right Issue: • Selling securities in the primary market by issuing right to existing shareholders. venture capital funds.
. determined through a bidding process. Private Placement: • Sale of securities to a limited no of sophisticated investors such as financial institutions.Book building: • Offering shares to investors in which the issue price is not fixed. banks & so on.
Preferential Allotment: • Given mainly to promoters or friendly investors. • Preferential basis for certain categories.
. • Select investors at a price which may not be the prevailing market price.
• • • • • • •
Merchant Bankers Under writers Banker to an issue Registrars to an issue and transfer agents Debentures trustees Brokers to issue Portfolio consultants
Buying New Issue:
• Securities are issued by the investment banker. Etc. • Investors are informed of new issues through a prospectus with SEBI guidelines. • Subscriptions open for 3-7 days. they also serves as brokers & dealers.
. • Application forms through brokers. • Informs public through announcements in newspapers.
fresh capital and profit earning capacity • AT PREMIUM • AT PAR • AT DISCOUNT
.Pricing of Issues
• On the basis of net asset value per share .
• • • • • • • Promoters credibility Efficiency of management Project details Product and Financial Data Auditor‟s report Investor service Statutory clearance
.Factors to be considered by the investors.
Underwriting Disclosures in Prospectus Clearance by stock exchange Investor awareness Safety nets Punitive actions Promoters stake
• • • • • • • • Project appraisal.Investors protection in Primary market.
– Debt instruments like bonds & debentures are also traded. The investors can buy & sell securities also known as stock market / stock exchange. effects growth of economy.Secondary Market
Outstanding securities are traded in secondary market.
. – It promotes capital formation.
.Functions of stock exchange
• • • • • • • Maintain active trading Fixation of price Ensure safe and fair dealing Aids in financing the industry Dissemination of the information Performance inducer Self regulating organisation.
• SEBI – Securities Exchange board of India • Governing Body
• Ministry of Finance.
• There are 23 stock exchange recognized under securities contract act 1956 OTCEI . NSE and BSE other 20 exchanges
Not defaulter of stock exchange Min qualification is Graduation and SEBI test. Not convicted of fraud. Indian Citizen Not a bankrupt.Qualification of a Member of Stock Exchange
• • • • • • Min age 21 years.
. manipulation and gives other statutory requirements. The broker has to abide by the code of conduct of SEBI. The code of conduct prevents the malpractices.The BROKER
• A broker has to be registered with recognized stock exchange has to apply to the SEBI for registration.
• Provide suggestions. • Provide price quotes.Broker and Investor
• Broker should provide adequate information about stocks. • Have adequate experiences. • Have contact with other stock exchange. • Arrange finance for clients
. • Confirm the purchase/sale of securities.
Buying and selling Shares
• Investor has to locate registered broker or a sub broker. • Broker executes the order. • Choice to be placed with broker.
. • Sends the information msg. brokerage to the clients. • Confirm the delivery.
market capitalization and public holding. • „B1‟ category shares – Actively Traded securities.
. • „B „ category shares – rest company shares.SHARE GROUPS
• „A‟ category shares (Specified) – These are selected on the basis of equity. It has good track record and a dividend paying company.
3 or 5) after trading day. This is known as T + n
• Fixed settlement system – settlement cycle Monday to Friday (BSE) and Wednesday to Tuesday (NSE). • Rolling Settlement system – settlement takes place „n‟ days (usually 1.
• The SEBI committee on internet based securities trading services has allowed the net to be used as ORDER ROUTING SYSTEM(ORS) through registered stock brokers on behalf of their clients for the execution of transaction.
Listing of securities is undertaken with the primary objective of providing marketability. liquidity and transferability to securities.Listing of securities
• Listing refers to the admission of the security of a public limited company on a recognized stock exchange for trading.
. Any company intended to offer shares to a public through the issue of prospectus should make an application to one or more recognized stock exchange for permission to be traded in one or more stock exchanges.
Qualifications for Listing
• • • • • • • • Minimum issued capital Payment of excess application money. Cost of Public Issue.
. Min subscription. No of shareholders. Articles of Association. Advertisement. Listing on multiple stock exchange.
Article of Association approval.
• • • • • • Preliminary discussion.Listing Procedure. Listing fee. Draft prospectus approval.
. Listing agreement. Listing application.
Stock Market Indices
• These are the barometers of the stock market.NSE nifty.BSE – 200 .
. The indices gives a broad outline of the market movement and represent the market examples BSE sensex .
Base year. The composition of stocks.
.Differences between the indices.
The Centre for Monitoring Indian Economy maintains the index. The weights assigned.
• • • • The number of component stocks.
Book Building. Allocation of shares. Market Intermediaries. Promoters contribution. Disclosure.SEBI ROLE IN PRIMARY MARKET
• • • • • • Entry norms.
Settlement and clearing. Delisting. Price stabilization. Debt market segment.SEBI and Secondary market
• • • • • • • Governing Board. Infrastructure. Brokers and SEBI.
.Detailed SEBI Guidelines related to Capital Issues
SEBI (Securities and Exchange Board of India) was set up in 1988 was given statutory recognition in 1992 on recommendations of Narasimham Committee.
fraud and Unfair trade practices in securities market.
• Regulating the stock markets & other securities market. stock brokers & other intermediaries.
. • Promoting investors education and training. collective investment schemes and substantial acquisition of shares & takeover of companies.THE PURPOSE AND AIM OF SEBI. • Prohibiting insider trading in securities.
Merchant bankers to be authorized by SEBI. advertisement norms so that customers are not mislead. Measures introduced to reform the Primary market like standard of disclosure of procedural norms for issues.SEBI Guidelines: Some important steps taken by SEBI
• • Regular Inspection of stock Exchanges. The directive given to the stock Exchanges to broad base their governing boards to become truly self regulatory organization. Certain eligilibility norms were introduced for registration of stock brokers and sub brokers.
conti……. Mandatory for brokers to maintain separate accounts for clients and themselves.
• • Insider Trading prohibited to maintain the market integrity.. Separate guidelines were issued for other financial institutions for disclosure and investment protection regarding their raising of funds from the market. „Book Building Method‟ has been modified.
• • •
. The „Banker to the issue‟ brought under purvies of SEBI.
• Establishment of a Central Listing Authority to centralize the listing function which earlier done at stock exchange level. • SEBI introduced compulsory rolling settlement (T+2 system).
. • Infrastructural Development – increased automation and electronic practices should be adopted.conti……. • Development of database (MAPIN database) about market participants and investors which allows SEBI to give unique identification number to all participants in the market..
• For regulating the mutual funds they have to be managed by AMC (Asset Management Company) and supervised by the board of trustees.100 has given freedom to companies to determine the par value of shares issued by them. Advertisement code.. Features are : offer document .10 and Rs.
. SEBI has dispensed with the requirement to the issue shares with a fixed par value of Rs. prescription of minimum amount to be raised by the scheme.conti……. Disclosure of indicative returns.
Confidence of FII has increased. Trading cycles shortened to a day and trades to be settled in 2 working days. Screen Based Trading.
• • • • • • • • Dematerialization of shares. Integration of Indian market with global market. Corporate Governance has improved a lot.Final Outcome : Major improvements are as follows. Freedom to issue securities at market determined prices. All securities to be traded on Exchanges.