SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT SUMMARIES Investment and Securities:- Financial Investment is the allocation of funds to assets and securities after considering their return and risk features. Investor plans for a long horizon after considering the fundamental factors and assumes moderate risk. Speculators are interested in short term gains and their buying and selling are based on the market price movement. The main objective of the rational investors are maximizing returns and minimizing risks. Safety of the principal, tradability and liquidity are his subsidiary objectives. The investor should have the knowledge about the economy, the company and the market structure. Equity shares have the right to receive dividend and residual claim. Sweat equity is issued to employees or directors at a discount for their contributions in technical know-how or other specified area. Right shares are issued to the existing shareholders art a price, on the pro-data basis. 1
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SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
SUMMARIES
Investment and Securities:-
Financial Investment is the allocation of funds to assets and securities after
considering their return and risk features.
Investor plans for a long horizon after considering the fundamental factors and
assumes moderate risk.
Speculators are interested in short term gains and their buying and selling are based
on the market price movement.
The main objective of the rational investors are maximizing returns and minimizing
risks. Safety of the principal, tradability and liquidity are his subsidiary objectives.
The investor should have the knowledge about the economy, the company and the
market structure.
Equity shares have the right to receive dividend and residual claim.
Sweat equity is issued to employees or directors at a discount for their contributions
in technical know-how or other specified area.
Right shares are issued to the existing shareholders art a price, on the pro-data basis.
Bonus shares are issued to the existing shareholders freely in addition to the dividend
from the company’s reserves.
Preference stocks have fixed dividends but have a perpetual liability on the
companies.
Investment Alternatives:-
Investment alternatives are many in number. They are negotiable financial securities
and non-negotiable financial investments. Equity offers high return with high risk.
Bonds provide steady and fixed flow of income. The Securities are issued by
Government are secured investments. Treasury bills carry a very low rate of interest.
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Commercial paper has short-term maturity and is favoured by companies and
institutional investors.
Certificate of deposit’s denomination is high and the interest rate is also high.
Banks’ deposits are safe form of investment. At present accounts like maxi cash
saving, quantum optima, in 1 account and cluster accounts are offered.
The age old post-office deposit pays higher interest rate. Post office monthly income
scheme’s annualized yield is higher.
NBFC deposits offer high rate of interest. The risk associated with them also is high.
RBI has laid down several rules to regulate them.
Public provident scheme is the post office scheme with the early withdrawal facilities.
In NSS, the main advantage is the deferred tax payment. Withdrawal of entire
amount in single period results in heavy taxation.
Investment in National Saving Certificate provides tax exemption under section 80L.
Life insurance provides wide variety life and accident cover. Deductions are allowed
under section 80 DD.
Mutual Funds collect funds from investors and invest in equities or money market as
specified by the schemes.
Gold and silver are the real asset form of investment. The appreciation of gold prices
is rather very low in the past few years.
Real estate is a lucrative form of investment with high capital appreciation.
Knowledge about arts and antiques is the essential pre-requisite for investment in arts
and antiques.
New Issue Market:-
In the MIM stocks are offered for the first time. The function and the organization of
the new issue market is different from the secondary market.
In the new issue, the lead managers manage the issue, the underwriters assure to take
up the unsubscribed portion according to his commitment for a commission and the
bankers take up the responsibility of collecting the application form and money.
Advising agencies promote the new issue through new advertising. Financial
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institutions and underwriters lend them loans to the company. Government agencies
regulate the issue.
The new issues are offered through prospectus. The prospectus is drafted according
to SEBI guidelines disclosing the needed information to the vesting public.
In the bought out deal banks or a company buy the promoter’s shares and they offer
them to the public at a later date. This reduces the cost of raising funds.
Private placement means placing of the issue with financial institutions. They sell
shares to the investors at a suitable price.
Right issue means the allotment of shares to the previous shareholders at a pro-ratio
basis.
Book-building involves firm allotment of the instrument to a syndicate created by the
lead managers. The book runner manages the issue.
Norms are given by SEBI to price the issue. Proportionate allotment method is
adopted in the allocation of shares.
Project appraisal, disclosure in the prospectus and clearance of the prospectus by the
stock exchanges protect the investors in the primary market along with the active role
played by the SEBI.
The Secondary Market:-
Outstanding securities are traded in the secondary market.
Stock exchanges are regulated by the Ministry of Finance, SEBI and the governing
board of the stock exchange.
Share groups are divided into A, B1 and B group shares.
Rolling settlements has been introduced.
Trading can be carried out online.
Value at risk based margin is introduced.
Listing of Securities:-
Listing means admission of a public company stocks to be traded on the stock
exchange.
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To be listed on the stock exchange there should be minimum issued capital and
number of share holders. The minimum issued capital size differs from one stock
exchange to another.
To get listed, the company has to apply to the stock exchange. Its articles of
Association should be approved. The draft prospectus also should be approved by the
SEBI and concerned stock exchange.
Separate norms have been prescribed for the listing of shares.
Delisting may be done compulsorily by the stock exchanges for the reasons like
nonpayment of listing free and other. Voluntary delisting by the companies is
permitted in cases like sickness or closure or thin trading.
Stock Exchanges:-
The oldest stock exchange BSE is having screen based trading. Price and volume
surveillance is carried out effectively.
NSE provides screen base, transparent and order driven system. In terms of volumes
and trade NSE stands as a premier stock exchange in India.
The aim of ISE is to co-operate the trade of the regional stock exchanges.
OTCEI was established with the purpose of providing a fair trade platform for the
shares of the small cap companies. But later for the survival, companies with
medium and large capital base are permitted to trade in OTCEI.
The NSDL keeps investors’ securities in the electronic form and settlements are
carried out though book entry.
SEBI – Securities and Exchange Board of India:-
SEBI was formulated with the aim of protecting the investors, promoting and
regulating the securities market. It is vested with wide range of powers to discharge
its functions.
In the primary market SEBI Hs tightened the entry norms, laid down rules for
promoters’ contribution.
The draft prospectus has been modified to provide adequate disclosure to the
investors. Book building has been introduced. The allocations of shares have to be
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done within 30 days of the closure of subscription. The fund based and fee based
activities of the merchant bankers are segregated.
In the secondary market electronic trading is necessary for getting recognition for a
new stock exchange. Weekly settlements are introduced. Rolling settlement methods
is introduced in the dematerialized form. FIIs are allowed to invest in the Indian debt
market. Price filters and margins are introduced to reduce the price volatility.
Brokers have to get registration. Brokers have to submit their audited balance sheet.
SEBI has the right to inspect the broker’s books and can take disciplinary action.
To regulate the mutual funds’ disclosure norms standard offer document is prescribed
by SEBI. Investment and management of Mutual Funds are regulated.
SEBI (Foreign Institutional Investors) Regulation 1995 has laid down regulations for
the registration of FIIs, custodians, preferential allotment and investment limits.
Risk:-
Risk is measured by the variability of return. Risk has two components, systematic
and unsystematic risk.
Systematic risk affects the market as a whole. Tangible event like Pokaran blast and
intangible event like Investor’s psychology affect the entire stock market which is
known as market risk.
Interest rate risk is the variation in return caused by the changes in the market interest
rate.
Purchasing power risk is caused by inflation. Information reduces the real rate of
return earned from the securities.
Unsystematic risk is unique to the particular industry or company. This is classified
into business risk and financial risk.
Business risk is caused by the operating environment of the business. This may be
caused by the internal factors like fluctuations in sales or personnel management or
external factors like government policies, rules and regulations.
Financial risk emerges from the debt component of the capital structure.
A careful analysis of the past, planning and diversification of the investment can
moderate the effects of the various risk factors.
Statistically standard deviation and beta estimation help to quantify the risk.
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Fundamental Analysis:-
Fundamental Analysis is the study of economic factors, industrial environment and
the factors related to the company.
The state of the economy determines the growth of gross domestic product and
investment opportunities.
An economy with favourable savings, investments, stable prices, balance of payments
and infrastructure facilities provides a best environment for common stock
investment.
The leading coincidental and lagging indicators help to forecast the economic growth.
A rising stock market indicates a strong economy ahead.
Industrial growth follows a pattern. Buying of shares beyond the pioneering stage
and selling of shares before the stagnation stage are ideal for the investors.
The cost structure, research and development and the government policies regarding
the industries influence the growth and profitability of the industries. SWOT analysis
reveals the real status of the industry.
The competitive edge of the company could be measured with the company’s market
share, growth and stability of its annual sales.
The financial statements of the company reveal the needed information for the
investor to make investment decision.
The financial health of the company could be analysed with the fund flow and cash
flow statements. The ratio analysis helps the investor to study the individual
parameters like profitability, liquidity, leverage and the value of the stock.
Technical Analysis:-
The technical analysis studies the behaviour of the price of the stock to determine the
future price of the stock.
Stock price movements are divided into three: the primary Tmovement, the secondary
movement and the daily fluctuations.
A primary trend may be a bull market moving in a study upward direction, or a bear
market steadily dropping.
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A secondary trend or secondary reaction is the movement of the market contrary to
the primary trend.
Support level is the barrier for further decline. It provides a base for an up move.
The resistance level is the level in which advances are temporarily stopped and the
sellers overcome the demand.
Volume of the trade confirms the trend. Fall of volume with the rise in price
indicates trend reversal and vice-versa.
Breadth of the market is the net number of stocks advancing versus both those
declining in the market. If the A/D line slopes downward while sensex is rising, it
gives a bearish signal and vice-versa.
Moving averages are used as a technical indicator. It smoothens out the short term
fluctuations, helpful in comparing the stock price movement with the index
movement and discovering the trend.
Oscillators show the market or scrip momentum to find out the overbought and
oversold conditions of the market or scrip. Relative strength index and rate of change
index are the commonly used oscillators.
Charts are the major analytical tools used in technical analysis. Points and figure
chart is one-dimensional chart drawn to predict the extent and direction of the price
movement. Ordinary bar charts generate numerous patterns. These patterns indicate
the trend and the trend reversals.
Efficient Market Theory:-
The market efficiency is the accuracy and the quickness in which the price reflects the
market related information.
In the weak form of market, current prices reflect all the information found in the past
prices and traded volumes. Filter rule, runs test and serial correlation are adopted to
find out the market efficiency.
In the semi-strong form of market, all the publicly available information is reflected
by the security prices.
In the strong form of market, all the information is fully reflected by the stock prices.
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The low P/E effect, small firm effect and weekend effect are cited as some of the
inefficiencies of the market.
Options and Futures:-
An option is a contract between two investors that provides the buyer the right (but
not the obligation) to sell or buy the specified asset from the other investors at the
predetermined price within a specified period.
The call option gives the investor the right to buy (not the obligation) from the option
writer at the specified price at any time during the specified period.
A put option gives the buyer the right to sell a specified number of stocks of a
company to the option writer at a specified price at any time during the specified
period.
The values of the call and put options affected by the prices of the underlying stocks,
the striking price of the stock and the option period.
The black-Scholes theory says that the option price is determined by the market price
of the stock, the exercise price, the life of the option the risk free rate and the risk of
the common stock. The last two factors are assumed to be constant over the option’s
life.
The stock index features are the futures contracts made on the major stock market
indices. It is an obligation and not an option.
Portfolio-Marcowitz Model:-
Morkowitz developed algorithms to minimise portfolio risk. Diversification reduces
the unsystematic risk component of the portfolio.
The level of risk exposure is measured with the help of the standard deviation of the
returns. The expected return is the weighted sum of the expected return of the
portfolio, the weights being the probabilities of their occurrence.
If securities with less than perfect positive correlation between their price movements
are combined risk can be reduced considerably. The risk would be nil or the standard
deviation would be zero of two securities have perfect negative correlation. Risk
cannot be reduced if the securities have perfect positive correlation.
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Many portfolios may be attainable. But some portfolios are attractive because they
give more return for the same level of risk or same return with lesser level of risk.
These portfolios form the efficient frontier.
Utility curves of the investor decide the most efficient portfolio.
In the levered portfolio, investor is permitted to borrow and lend. Risk free assets are
also added with risky assets and it would minimise risk.
The Sharpe Index Model:-
The Sharpe model is based on the security’s return relationship with the index return.
Beta is the deciding factor in measuring the systematic risk. The systematic and
unsystematic can be computed with the Sharpe model.
Using the Sharpe model, portfolio return and risk can be computed easily, compared
to the Markwitz model.
Capital Asset Pricing Model: - (CAPM)
The CAPM is based on specific assumption. The investor could borrow or lend any
amount of money at risk less rate of interest.
All investors hold only the market portfolio and the riskless securities.
Market portfolio consists of the investments in all securities of the market. The
proportion invested in each security is equal to the percentage of the total market
capitalization represented by the security.
The capital market line represents the relationship between the expected return and
standard deviation of the portfolio.
The risk of the security is indicated by its covariance with the market portfolio.
Security market line shows the linear relationship between the expected returns and
beats of the securities.
The objective of the asset pricing model is to identify the equilibrium asset price for
expected return and risk. If the asset prices are not equal, there is a scope for
arbitrage.
An arbitrage portfolio is constructed without any additional financial commitment.
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Investors indulge in arbitrage, moving the price upwards if securities are held in short
position, till the elimination of the arbitrage possibilities.
The factor sensitivity in arbitrage model indicates the responsiveness of a security’s
return to a particular factor.
Portfolio Evaluation:-
Portfolio evaluation is carried out to assess the risk and return of the different
portfolios.
Mutual funds pool together the funds from investors by selling units and invest them
in different types of securities.
Closed-end funds are open for a specific period for subscription. The open-ended
funds units are available continuously.
Sharpe index is a measure of risk premium related to the total risk.
Treynor index measures the funds’ performance in relation to the market
performance.
Jenson index compares the actual or realized return of the portfolio with the
calculated or predicted return. Better performance of the fund depends on the
predictive ability of the managerial personnel of the fund.
Portfolio revision:-
Passive management of funds consists of indexing of the stocks to be purchased.
In active managements funds are allocated to buy active stocks in the market.
Aggressive portfolio consists of more of common stocks while conservative
portfolio consists more of bonds or debentures.
Portfolios are revised with the help of formulae plans.
In the rupee cost averaging techniques, varying amount of shares are bought at
regular intervals. This is time diversification of the portfolio.
According to the constant rupee plan constant amount of fund is maintained for
the shares. The shifting of funds from aggressive to conservative portfolio or
vice-versa occurs according price fluctuations.
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In the variable ratio plan, the proportions of funds on aggressive and conservative
portfolios change according to the varying levels of security market prices.
In an equity swap two parties agree to make payments to each other based on the
stock market price and interest rate.
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UNIVERSITY QUESTIONS ASND ANSWERS 2 MARKS EACH
Define an investment.
Investment means conversion of cash or money into monetary asset or a claim on future
money for a return. Purchases of asset like shares and securities can either for investment
or speculate or both. Investment is long term in nature.
What is a Security Analysis?
It is a process of analyzing the individual securities and the market as a whole and
estimating the risk and return expected from each of the investments with a view to
identifying undervalued securities for buying and overvalued securities for selling. It
includes Market analysis, industry analysis, and company analysis.
What is the meaning of Company analysis?
Company analysis is a study of the variables that influence the future of the firm both
qualitatively and quantitatively. In the company analysis the investor assimilates the
several bits of information relate to the company and evaluate the present and future
values of the stock. The risk and return associated with the purchase of stock is analysed
to take better investment decision.
How is technical Analysis different from Fundamental Analysis in investment
management?
The fundamental analysis believes in the intrinsic value of a share. But technical analysis
makes a forecast of a demand and supply factors operating in a market and their
discussions centre around the short run shifts in these factors.
How charts interpreted in technical analysis?
The line and bar charts and point and figure charts are analysed in the following:-
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1. Head and shoulders top are supposed to have two shoulders, left and right and
a head.
2. The Left shoulder is seen during the time when there is a bull in the trading
market followed by heavy purchases.
3. Right shoulder prices rises moderately.
4. Head-Heavy purchases in the market.
Confirmation: This is indicated by drawing a line which is tangent to the left and
right shoulders.
Explain the term Portfolio.
It is a pool of different securities in one basket or investors like to invest in a group or
different collections of securities. Such a group of securities is called portfolio.
What is arbitrage pricing theory?
The arbitrage pricing theory is an equilibrium theory of the relationship between security
expected returns and relevant security attributes.
Define debt market.
It is a market where debt instruments are available.
State the criteria for evaluation of portfolio.
Return: investors always expect a good rate of return from their investment.
Risk: Risk of holding securities is related with the probability of actual return becoming
less than the expected return.
Safety: The selected investment avenue should be under the legal and regulatory
framework.
Liquidity: - Marketability of the investment provides liquidity to the investment.
Hedge against inflation: - Since there is inflation in almost all the economy, the rate of
return should ensure a cover against the inflation.
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What is a speculation?
Speculation means taking up the business risk in the hope of getting short term gain.
Speculation essentially involves buying and selling activities with the expectation of
getting profit from the price fluctuations. Speculators willing to take high risk.
List any two characteristics of common stock.
Equity shares are commonly referred to common stock or ordinary shares. Ordinary
shareholders have residual claim on a company’s income and assets. They are legal
owners.
Distinguish between IPO and FPO.
IPO stands for Initial Public Offer and FPO stands for Follow on Public Offer.
Any company, let say for instance, the Power Finance Corporation needs money to lend
funds to power producers in India. It offers shares to the general public and financial
institutions like mutual funds and qualified institutional buyers in a given range (say
between Rs 73 and Rs 85) referred to as the price band. An IPO lets a company sells its
shares to the public and get money in return. It is so called because it is the first time that
a company sells its shares to the public. The IPO market is also referred to as the primary
market in some parlance.
A company that is already listed on the stock exchanges cal also approach investors for
funds. If Infosys tomorrow comes with another public offer it will then be an FPO as
Infosys is already a listed company. Normally, FPOs are offered at a discount to the
existing market price of that company. This is to make a particular issue attractive for the
potential investors.
Gambling:-
Gambling is an act of creating artificial and unnecessary risks for expected increased
return. A gamble is a very short term investment based on rumours and hunches.
Gambling is undertaken just for thrill and excitement. In short, gambling involves
acceptance of exordinary risks even without a thorough knowledge about them for
pecuniary gains. Horse racing, playing cards, lottery etc., are typical examples.
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Capital Market:-
Capital market is a market for financial assets which have a long maturity period. Capital
market may be divided into:-
Government security market.
Industrial security market.
Long term loan market which is further subdivided into-
Term loan market,
Mortgage market and
Market for financial guaranties.
New issue market:-
Securities available for the first time are offered through the primary securities market.
The issue may either be a new company or an existing company. In the new issue market,
issuing houses, investment brokers and underwriters take up the responsibility of selling
the stock to the public.
Underwriting:-
Underwriting refers to the guarantee for ensuring the marketability of an issue. It is an
agreement under which the underwriter promises to subscribe to a specified number of
shares or debentures in the event of public not subscribing to the issue. If the issue is
fully subscribed, the liability of the underwriter does not arise.
Offer for sale:-
While sale through prospectus is a direct method, the offer for sale is an indirect method
of floating new shares. Under this method, securities are offered to public through
intermediaries such as issue houses and brokers. Two stages are involved in the sale of
securities. First, the issuing company issues securities to issuing houses and brokers at a
fixed price. Secondly, the intermediaries resell the securities to the ultimate investors at a
higher price. The profit charged by the issue houses in known as “turn” or “spread”.
This method is advantages to the issuing company as it is relieved from the burden of
printing and advertising prospectus.
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Placement:-
Under this method, the issue is placed with limited number of financial institutions,
corporate bodies and noteworthy individuals. These intermediaries, purchases the shares
and sell them to investors at a later date at a suitable price. Placement gives a number of
advantages. First, there is no need for underwriting arrangements, as the placement itself
amounts to underwriting. Secondly, private placement securities are sold to financial
institutions like UTI, Mutual Funds, Insurance companies, merchant banking subsidiaries
of reputed commercial banks. As these institutions are popular among the investing
public, securities can be easily sold to them. Thirdly, this method is suitable when the
issuing company is small in size.
Right Issue:-
Shares of existing companies which are already listed in the stock exchange are sold
through right issue. Under right issue, the shares are first offered to the existing share
holders. These shares are called right shares. The rights themselves are transferable and
saleable in the market by the shareholders who are entitled to buy right shares. Under
section 81 of the Companies act , a company which issues new shares either after two
years of its formation or after one year of first issue of shares, which ever is earlier has to
first offer them to the existing shareholders.
Bonus Issue:-
A method of marketing the securities of a company by converting its accumulated
reserves and surplus profit, it takes the form of ‘bonus issue method’. Bonus issue
merely implies capitalization of existing reserves and surplus of a company. The issue of
bonus shares is subject to certain rules and regulations. The issue does not in any way
affect the resources base of the enterprise. It saves the company enormously of the
hassles of capital issue.
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Initial Public Offer (IPO):-
The public issue made by a corporate entity for the first time in its life is called ‘IPO’.
Under this method of marketing, securities are issued to successful applicants on the basis
of the orders placed by them, through their brokers.
When a company whose stock is not publicly traded wants to offer that stock to
the general public, it takes the form of Initial Public Offer. The job of selling the stock is
entrusted to a popular intermediary, the underwriter. An underwriter is invariably an
investment banking company. He agrees to pay the issuer a certain price for a minimum
number of shares, and then resells those shares to buyers, who are often the clients of the
underwriting firm. The underwriters charge a fee for their services.
Book-building:-
A method of marketing the shares of a company whereby the quantum and the price of
the securities to be issued will be decided on the basis of the ‘bids’ received from the
prospective shareholders by the lead merchants bankers, is known as “book-building
method”. Under the book-building method, share prices are determined on the basis of
real demand for the shares at various price levels in the market. For discovering the price
at which issue to be made, bids are invited from prospective investors from which the
demand at various price levels is noted. The merchant bankers undertake full
responsibility for the issue. The initial minimum size of issue through book-building
route was fixed at Rs 100 Crores, however, from 9.12.1996, issues of any size are
permitted.
Bought-out Deals:-
A method of marketing of securities of a body corporate whereby the promoters of an
unlisted company make an outright sale of a chunk of equity shares to a single sponsor or
the lead sponsor, is known as ‘bought-out deals’.
Prospectus:-
A document that contains information relating to the various aspects of the issuing
company, besides other details of the issue is called ‘prospectus’. The document is
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circulated to the public. The general details include the company’s name and address of
its registered office, the name and address of the company’s directors, manager,
managing director, directors, company secretary , legal advisors, auditors, bankers
brokers etc.,, the date of opening and closing of subscription list, contents of articles the
names and addresses of the underwriters, the amount underwritten and the underwriting
commission, material details regarding the project, i.e., location, plant and machinery,
collaboration, performance guarantee, infrastructure facilities, etc. nature of products,
marketing set-up, export potential and obligation, past performance and future prospects,
management perception regarding risk factor, credit rating obtained from any other
recognized rating agency, a statement regarding the fact that the company will make an
application to specified stock exchange for listing its securities and so on.
Employees Stock Option:- ESOP
A method of marketing the securities of a company whereby its employees are
encouraged to take up shares and subscribe to it is known as stock option. It is a
voluntary scheme on the part of the company to encourage employees’ participation in
the company. The scheme also offers an incentive to employees to stay in the company.
The scheme is particularly useful in the case of companies whose business activity is
dominantly based on the talent of the employees, as in the case of software industry. The
scheme helps retain the most productive employees in an industry, which is known for its
constant churning of personnel.
Pricing of issues:-
While fixing an appropriate price, the relevant guidelines for capital issues given by SEBI
from time to time must be considered. Companies, themselves in consultation with the
merchant bankers, do the pricing of issues. While fixing a price for the security issue, the
following factors should be considered:
Qualitative factors, which include the prospects of the industry, track record of the
promoters, the competitive advantage the company has in making the best use of the
business opportunities, and growth of the company as compared to the industry etc.,
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Quantitative factors, which include the earnings per share, book value, the average
market price for 2 to 3 years, dividend payment, record, the profit margins, the composite
industry price earnings ratio and the future prospects of the company, etc. with the
abolition of the office of the Controller of Capital Issues, companies can adopt free
pricing.
NEAT and BOLT:-
The Bombay on-line trading system (BOLT) is CMC’s on-line trading system for trading
in stocks. The system is operational at Bombay Stock Exchange.
BSE on-line trading system (BOLT)
National Exchange for Automated Trading (NEAT). NSE terminal.
P/E ratio:-
The reciprocal of the earnings yield is called the Price-earnings Ratio (P/E) Thus:
Market value per share
Price Earning Ratio =-----------------------------
Earnings per share
Intrinsic Value of Security:-
The actual value of the company or an asset based on an underlying perception of its true
value including all aspects of the business, in terms of both tangible and intangible
factors. This value may or may not be the same as the current market value. Value
indicators use a variety of analytical techniques in order to estimate the intrinsic value of
securities in hopes of finding investments where the true value of the investment exceeds
its current market value.
Intrinsic value of share = Normalized EPS X Expected P/E ratio
Cash dividend / EPS
Expected P/E ratio = -------------------------
Discount rate-Growth rate
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Oscillators:-
Oscillators indicate the market momentum or scrip momentum. Oscillator indicators
have a range, for example between zero and 100 and signal periods where the security is
overbought (near 100) or over sold (near zero). Non bounded indicators still form buy
and sell signals along with displaying strength or weakness, but they vary in the way they
do this. Signaling the trend reversal, rise or decline in the movement.
Breadth of the Market:-
A technical analysis theory that predicts the strength of the market according to the
number of stocks that advance or decline in a particular trading day. The breadth of
market indicator is used to gauge the number of stocks advancing and declining for the
day. If the breadth indicator is strong, this theory predicts that the market will be rising
vice versa.
Open-ended funds:-
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value related prices after deduction of exit
load, if any which are declared on a daily basis. The key feature of open-ended schemes
is liquidity.
What are the different stages in industry life cycle?
The industry life cycle has four well defined stages and they are:-
- Pioneering stage
- Rapid growth stage
- Maturity and stabilizing stage
- Declining Stage.
What is bullish trend in a market?
The securities price trend may either increasing or decreasing. When the market exhibits
the increasing trend, it is called bull market.
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What are the assumptions used in technical analysis?
-The market value of the scrip is determined by the intersection of supply and demand.
-The market discounts everything.
-The market always moves in trend, except for minor deviations.
-Followed by the historical fact, any layman can understand the market move.
What are the objectives of the Mutual Fund scheme?
1. Professional Management
2. Diversification
3. convenient administration
4. Return potential
5. Low costs
6. Liquidity
7. Flexibility
8. Choice of Schemes
9. Well Regulated
What are the features of preference shares?
Preference shareholders have a claim on assets and income prior to ordinary
shares.
The dividend rate is fixed in the case of preference shares. Preference shares may
be issued with cumulative rights.
Both redeemable and irredeemable preference shares can be issued in India.
Redeemable preference shares can have maturity period while irredeemable are
perpetual.
Preference shares can be convertible.
What do you understand by fundamental approach to security analysis?
Fundamental analysis is a method of security valuation which involves examining the
company’s financials and operations, especially sales, earnings, growth potential, assets,
debt, management, products and competition. Fundamental analysis takes into
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consideration only those variables that are directly related to the company itself, rather
than the overall state of the market or technical analysis data.
Explain three types of trends in stock prices?
Trend is the direction of price movement. The share prices can either increase or fall or
remain flat. The three directions of share price movements called as rising, falling and
flat trend. In other words bullish, bearish and flat trend.
What do you infer from the moving average theory of technical analysis?
A moving average is the average price of a security over a set amount of time. By
plotting a security’s average price, the price movement is smoothed out. Once the day-to-
day fluctuations are removed, traders are better able to identify the true trend and increase
the probability that it will work in their favour. Moving averages can be used to quickly
identify whether a security is moving in an uptrend or a downtrend depending on the
direction of the moving average.
What index fund?
In order to track the return performance of markets, market indices of a sub-set of trading
stock is created. The CNX Nifty is one such index of 50 large and liquid stocks. If a
fund manager creates an equity fund, which will invest in the Nifty stocks, in the same
proportion as in the index, he is creating an index fund. This strategy is also called
passive fund management. The cost of this strategy is lower and the fund performance
virtually tracks the market index. An index fund provides and ideal exposure to equity
markets, without the investor having to bear the risks and costs arising form the market
views that a fund manager may be.
What is the difference between SML and CML:-
SML- Security Market Line is a useful tool in determining whether an asset being
considered for a portfolio offers a reasonable expected return for risk. Individual
securities are plotted on the SML graph. If the security’s risk versus expected return is
plotted above the SML, it is undervalued because the investor can expect a greater return
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for the inherent risk. A security plotted below the SML is overvalued because the
investor would be accepting less return for the amount of risk assumed.
CML-Capital Market Line used in the capital asset pricing model to illustrate the rates of
return for efficient portfolios depending on the risk-free rate of return and the level of risk
(standard deviation)for a particular portfolio.
The CML is considered to be superior to the efficient frontier since it takes into account
the inclusion of a risk-free asset in the portfolio. The CAPM demonstrates that the
market portfolio is essentially the efficient frontier. This is achieved visually through the
Security market line.
What is the meaning of the company analysis?
Company analysis is a study of those variables which influence the future of the
company, both qualitatively and quantitatively. Company analysis involves a scrutiny of
the company’s financial aspects with a view to identifying its strength, weaknesses and
future business prospects. Further, it is a method of assessing the competitive position,
earning and efficiency of the company and the future prospects of the shareholders of the
company
What is insider trading?
Trading in a company’s share by a connected person having non-public and price
sensitive information such as expansion plans, financial results and take-over bids, by
virtue of his association, with the company is called insider-trading.
What is a market lot?
A market lot is the minimum number of shares of a particular security that must be
transacted on the exchange. In demat scrip’s; the market lot is fixed at one single share.
What is an odd lot?
The numbers of shares that are less than the market lot are known as odd-lots. Under the
scrip-based delivery system, these shares are normally traded at a discount to the
prevailing price for the marketable lot.
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What is an over- the-counter trading?
Trading on those stocks, which are not listed on a stock exchange.
Describe price rigging.
When a person or persons acting in concert with each other collude to artificially increase
or decrease the price of a security, the process is called price rigging.
What is dematerialsation of shares?
Dematerialization is the process through which shares held in electronic form in
depository are converted back into physical form.
Describe screen based trading.
When buying/ or selling of securities is done using computers and matching of trades is
done by the computer, the process is called screen-based trading.
What is settlement?
It refers to the scrip-base netting of trades by a broker after the trading period is over.
What is a spot transfer of shares?
The instruction given by a registered holder of shares to the company to stop the transfer
of shares as a result of theft or loss is known as spot transfer.
What is a trade and settlement guarantee in trading?
Trade guarantee is the guarantee provided by the clearing corporation for all trades that
are executed on the exchange. In contrast, the settlement guarantee, guarantees the
settlement of trade after multilateral netting.
What is trading for delivery?
Trading for delivery is the trading conducted with an intention to deliver shares as
opposed to a position that is squared off within the settlement.
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What is a book building issue?
In a book building issue, the issuer appoints lead managers who collect bids with in a
indicated fixed band from prospective investors. A common price is then arrived at for
offloading shares, enabling better pricing with a wide institutional investor base.
What is a green-shoe option?
A green shoe-option or an over-allotment option, which is sometimes a part of an
underwriting agreement, which allows the underwriter to purchase and sell additional
shares if the market’s demand for the share is greater than originally expected.
Describe margin trading?
Margin trading allows investors to buy a stock by paying a part of the transaction value
with the rest being financed by the broker.
What is stock split?
A proportionate increase in the number of outstanding shares by splitting the face value
in a desired ratio is called stock split. For example, a share of face Rs 100 may be split
into10 shares of Rs 10 each.
What is Net Asset Value?
The performance of a particular scheme of mutual fund is denoted by Net Asset Value.
Mutual funds invest the money collected from the investors in securities market. In
simple words, NAV is the market value of the securities held by the scheme. Since
market value of securities changes every day, NAV of a scheme also varies on a day-to-
day basis. The NAV per unit is the market value of securities of a scheme divided by the
total number of units of the scheme on any particular date. For example, if the market
value of the securities of a mutual fund scheme is Rs 200 Lakhs and the mutual fund has
issued 10 Lakhs units of Rs 10 each to the investors, then the NAV per unit of the fund is
Rs20. NAV is required to be disclosed by the mutual funds on a regular basis-daily or
weekly-depending on the type of scheme.
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What is open-ended fund/scheme?
An open ended fund or scheme is one that available for subscription and repurchase on a
continuous basis. These schemes do not have affixed maturity period. Investors can
conveniently buy and sell units at NAV related prices after deduction of exit load, if any
which are declared on a daily basis. The key feature of open-ended schemes is liquidity.
What is Close-ended Fund/Scheme?
A close-ended fund or scheme has stipulated maturity periode.g.5-7 years. The fund is
open for subscription only during a specified period at the time of the launch of the
scheme. Investors can invest in the scheme at the time of initial public issue. In order to
provide an exit route to the investors, some close-ended funds given an option of selling
back to the units to the mutual funds through periodic repurchase at NAV related prices.
These mutual funds schemes disclose NAV generally on a weekly basis.
What is Income / Debt oriented Scheme?
The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of fluctuations in
equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of changes in interest rates in the
country. If the interest rate falls, NAVs of such funds are likely to increase in the short
term and vice versa. However, long term investors may not bother about these
fluctuations.
What is Gilt Fund?
These funds invest exclusively in government securities. Government securities have no
fault risk. NAVs of this scheme also fluctuate due to change in interest rates and other
economic factors as is the case with income or debt oriented schemes.
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What is an IPO?
IPO stands for Initial Public Offering. Any company, let say for instance, the POWER
Finance Corporation needs money to lend funds to power projects in India. It offers
shares to general public and financial institutions like mutual funds and qualified buyers
in given range (say between Rs 73 and Rs 85) referred to as the price band. An IPO lets a
company sell its hares to the public and get money in return. It is so called because it is
the first time that a company sells its share to the public. The IPO market is also referred
to as the primary market in some parlance.
What is an FPO?
Not to be confused with IPO, Fpo stands for follow on public offer. A Company that is
already listed on the stock exchanges can also approach investors for funds. If Infosys
tomorrow comes with another public offer it will be an FPO as Infosys is already a listed
company: Normally, FPOs are offered at a discount to the existing market price of that
company. This is to make a particular issue attractive for the potential investors.