Security Analysis and Investment

SECURITY ANALYSIS
AND
INVESTMENT
MANAGEMENT
Session: 2009-10 Course Teacher:

Batch: MBA (III Sem.) Mr. Ankit Saxena
INVESTMENT
 Investment involves Sacrifice of Current Savings for Expected
Future Benefits.
 Sacrifice is in the present and is certain.
 The Reward comes later and the amount of reward is
uncertain.
 Investment Decision involves two attributes viz. Risk and
Return.
 Investment may be Real (e.g. Land, Machinery etc.) and
Financial (e.g. Common Stocks and Bonds).
INVESTMENT PROCESS
1) Setting Investment Policy
2) Perform Security Analysis
a) Technical Analysis
b) Fundamental Analysis
3) Construct a Portfolio
4) Portfolio Revision
5) Portfolio Performance Evaluation
INVESTMENT ALTERNATIVES
Investment Alternatives
Non-Marketable
Equity Shares
Financial Assets
Money Market
Bonds
Instruments
Mutual Fund Schemes Life Insurance Policies
Real Estate Precious Objects
Financial Derivatives
INVESTMENT ATTRIBUTES
 Rate of Return
 Risk
 Marketability
 Tax Shelter
 Initial Tax Benefit
 Continuing Tax Benefit
 Terminal Tax Benefit
 Convenience
INVESTMENT VS. SPECULATION
Investor Speculator
Relatively Longer Planning Very Short Planning

Planning Horizon Horizon Horizon
Not willing to assume Willing to assume High

Risk Disposition more than Moderate Risk Risk
Seek a Modest Rate of Look for a High Rate of

Return Expectation Return Return
Greater significance to Rely more on Hearsay,
Basis for Decisions Fundamental Factors Technical Charts, and
Market Psychology
Uses his own fund and Resorts to borrowings, to
Leverage eschews borrowed funds supplement his personal
resources
COMMON ERRORS IN INVESTMENT MANAGEMENT
 Inadequate comprehension of Return and Risk

 Vaguely formulated Investment Policy
 Naïve Extrapolation of the Past
 Cursory Decision Making
 Simultaneous Switching
 Misplaced Love for Cheap Stocks
 Over-diversification and Under-diversification
 Buying Shares of familiar Companies
 Wrong Attitude towards Losses and Profits
 Tendency to Speculate
QUALITIES FOR SUCCESSFUL INVESTING
 Contrary Thinking
 Patience
 Composure
 Flexibility and Openness
 Decisiveness
STRUCTURE OF SECURITIES MARKET
PARTICIPANTS IN SECURITY
MARKET
 Regulators  Mutual Funds

 Stock Exchanges  Custodians
 Listed Securities  Registrars
 Depositories  Underwriters
 Brokers  Bankers to an Issue
 Foreign Institutional  Debenture Trustees

Investors  Venture Capital Funds
 Merchant Bankers  Credit Rating Agencies
 Primary Dealers
INVESTMENT APPROACHES
FUNDAMENTAL APPROACH
 Most Commonly advocated by the Professionals
 Intrinsic Value of Securities is considered
 BUY: Under-valued Securities (IV>MP)
 SELL: Over-valued Securities (IV<MP)

PSYCHOLOGICAL APPROACH
 Stock Prices are guided by emotions rather than reason.
 It is based on Technical Analysis.
 BUY: Optimism (Greed & Euphoria)
 SELL: Pessimism (fear & Despair)
 ‘Castles in the Air’

ACADEMIC APPROACH
 Stock Price behaviour corresponds a random walk.
 Past Price Behaviour can not be used to predict future.
 There is a positive relationship between Risk and Return.

ECLECTIC APPROACH
 Use Fundamental Analysis “To Establish Standards and

Benchmarks”
 Use Technical Analysis “To assess the state of Market
Psychology”
 Combine Fundamental and Technical Analysis for Security
Analysis
 Remember High Risk, High Return
 Respect Market Price
Stock Market Operations
FOUR ELEMENTS OF SECURITY
MARKET
Capital Market: An Introduction
 A Place where people buy and sell financial instruments

 A Mechanism to facilitate the exchange of financial assets.
Purpose of Stock Market
Classification
 On the Basis of Nature of Transactions

Primary (New Issue) Market
 Public Issue
 Right Issue
 Private Issue
 Preferential Issue
Secondary (Stock) Market
 Organized Stock Exchange
 Over the Counter (OTC) Market
 On the Basis of Duration of Transactions

Money Market (Less than One Year)
Capital Market (More than One Year)
Roles and Functions of Stock Exchanges
Provides a Market Place for purchase and Sale of Securities
Provides Linkage between Savings of Household Sector and

Investment in company.
Provides a Market Quotation of the prices of Shares and

Bonds
Principal Weakness of Indian Stock Market
Rampant Speculation
Insider Trading
Oligopolistic Market (Not Truly Competitive)
Limited Forward Trading
Outdated Share Trading System
Lack of a Single Market (No Inter-market Operations)
Problems of Interface between Primary and Secondary
Market
Inadequacy of Investors Services
Primary Equity Market
There are four ways in which a company may raise equity

capital in the primary market:
Public Issue
Right Issue
Private Placement
Preferential Allotment
(A) Public Issue
Sale of Securities to the public at large

Public issues in India are governed by provisions of
The Companies Act, 1956
SEBI Guidelines on Investors Protection
Listing Agreement between the Issuing Company and the
Stock Exchanges
Public Issue: Process
 Approval of Board of Directors

 Approval of Shareholders
 Appointment of Lead Manager and other Intermediaries like
Co-managers, advisors, underwriters, bankers, brokers, and
registrars
 Preparation and filing of draft prospectus with SEBI
 Application of Listing in Stock Exchange
 Filing of prospectus with the Registrar of Companies
 Promotion of Issue
Public Issue: Process (Contd..)
 Printing and Distribution of applications

 Statutory Announcement
 Collection of Applications
 Processing of Applications
 Determination of the liability of underwriters
 Finalization of Allotment
 Giving of demat credit (Dispatch of Share Certificates) and
Refund Orders
 Listing of the Issue
Stockinvest Scheme
When public issues get heavily over-subscribe;

A Large number of Investors lose interest on the
subscription money locked with the company,
While Issuing Company enjoys the benefit of float money.
SEBI has announced this Stockinvest Scheme to overcome
this problem.
Stockinvest Scheme “Eligibility “
Reserve Bank of India has restricted the use of stockinvests

to individual investors and mutual funds only.
Stockbrokers, Corporate Bodies, Banks, and Financial
Institutions are not allowed to apply through stockinvests.
A ceiling of Rs. 50,000 per individual per stockinvest has
been imposed by the banks.
Stockinvest Scheme Process
Finalization of Allotment and

Application of Stockinvest by
Claim by Registrar to Collecting
Investor to Bank
Banker
Issue of Stockinvest by Bank to Collecting Banker gives credit to

Investor Company’s A/c
Formal Allotment
Submission of Application Form &
(Allotment Advice or Return of
Stockinvests to Collecting banker
Application Form)
Collecting Bankers transmits to Intimation by Issuing Bank about

Registrar of Companies the release of lien
Book Building
A method of offering shares to investors in which the issue

price is not fixed in advance (as in case of Fixed Price Offer)
Issue Price is determined through a bidding process.
Thus, Pricing reflects revealed demand and contemporary
market conditions.
(B) Right Issue
Selling securities in the primary market by issuing rights to the existing

shareholders.
A “Letter of Offer” along with a composite application form consisting
of four forms (A, B, C, & D) is sent to shareholders.
Form A : Acceptance of Rights & Application for Additional Shares
Form B : To Renounce the rights in favour of someone else.
Form C : Application by the Renouncee
Form D : To make a request for split forms.
NOTE: The Composite application form must be mailed to the company

within a stipulated period (i.e. normally 30 days)
(C) Private Placement
Sale of Securities to a limited number of sophisticated investors

such as financial institutions, mutual funds, venture capital funds,
banks and so on.
Identity of investors in not known when the offer document

(popularly known as Information Memorandum)
(D) Preferential Allotment
An issue of equity by a listed company to selected investors at a price

may or may not be related to the prevailing market price.
For example, Issue to Promoters or Friendly investors to ward off the
threat of takeover.
Price should be at Higher of the average of Weekly High and Low of
Closing Prices of the shares during Six months before relevant date; OR
during the two weeks period before the relevant date.
Trading of Securities in Secondary Market
Two ways of organizing the Trading Activity:

 Open Outcry System (Till 1994 in India)
 Screen-based System
 Enhances the Informational Efficiency of the market as more
participants trade at a faster speed
 Permits the market participants to get a full view of the market, which
increases their confidence in the market
 Establishes transparent Audit Trails.
Open Electronic Limit Order Book (ELOB)

Settlement
Traditionally, it was by Physical Delivery.

Now transactions are settled mainly through Electronic Delivery
facilitated by depositories (The Depositories Act, 1996)
 National Securities Depository Limited (NSDL) {set up in 1996}
 Central Securities Depositories Limited (CSDL)
Shift to Rolling Settlement

Transaction Cost
Trading Cost
 Brokerage Cost
 Market Impact Cost (i.e. Difference between the actual transaction price
and the “ideal price”)
 Securities Transaction Cost (i.e. a levy on securities transactions)

Clearing Cost
Settlement Cost
Regulatory Framework of Securities Market
Legislations Scope
(1) The SEBI Act, 1992 Investor s’ Protection

Security Market Regulation
(2) The Companies Act, 1956 Issue, Allotment, & Transfer of Shares;
Public Disclosure
(3) The Securities Contracts Regulation of Transactions in Securities

(Regulation) Act, 1956
Listing of Securities on Stock Exchanges
(4) The Depositories Act, 1996 Electronic Maintenance and Transfer of

Ownership of Demat Securities

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SECURITY ANALYSIS

Session: 2009-10 Course Teacher:

Mutual Fund Schemes Life Insurance Policies

Real Estate Precious Objects

Relatively Longer Planning Very Short Planning

Not willing to assume Willing to assume High

Seek a Modest Rate of Look for a High Rate of

 Inadequate comprehension of Return and Risk

 Regulators  Mutual Funds

 Listed Securities  Registrars

 Brokers  Bankers to an Issue

 Foreign Institutional  Debenture Trustees

 Most Commonly advocated by the Professionals

 Intrinsic Value of Securities is considered

 BUY: Under-valued Securities (IV>MP)

 SELL: Over-valued Securities (IV<MP)

 Stock Prices are guided by emotions rather than reason.

 It is based on Technical Analysis.

 BUY: Optimism (Greed & Euphoria)

 SELL: Pessimism (fear & Despair)

 ‘Castles in the Air’

 Stock Price behaviour corresponds a random walk.

 Past Price Behaviour can not be used to predict future.

 There is a positive relationship between Risk and Return.

 Use Fundamental Analysis “To Establish Standards and

 A Place where people buy and sell financial instruments

 On the Basis of Nature of Transactions

 On the Basis of Duration of Transactions

Provides a Market Place for purchase and Sale of Securities

Provides Linkage between Savings of Household Sector and

Provides a Market Quotation of the prices of Shares and

There are four ways in which a company may raise equity

Sale of Securities to the public at large

 Approval of Board of Directors

 Printing and Distribution of applications

When public issues get heavily over-subscribe;

Reserve Bank of India has restricted the use of stockinvests

Finalization of Allotment and

Issue of Stockinvest by Bank to Collecting Banker gives credit to

Collecting Bankers transmits to Intimation by Issuing Bank about

A method of offering shares to investors in which the issue

Selling securities in the primary market by issuing rights to the existing

NOTE: The Composite application form must be mailed to the company

Sale of Securities to a limited number of sophisticated investors

Identity of investors in not known when the offer document

An issue of equity by a listed company to selected investors at a price

Two ways of organizing the Trading Activity:

Open Electronic Limit Order Book (ELOB)

Traditionally, it was by Physical Delivery.

Shift to Rolling Settlement

 Securities Transaction Cost (i.e. a levy on securities transactions)

(1) The SEBI Act, 1992 Investor s’ Protection

(3) The Securities Contracts Regulation of Transactions in Securities

(4) The Depositories Act, 1996 Electronic Maintenance and Transfer of

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