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Concept of Return
Return refers the amount of total monetary benefits a investors
receive from a security.
Return of a financial security consists two component-periodical
cash payments received at specified time intervals. And market
appreciation/depreciation of the security value over the
investment time period.
Ri
Ri
( Pt Pt 1 ) Div
Pt 1
Return Calculation
Reliance Ind.
Time
Opening Price
Closing Price
May-07
1752.0
1760.0
Div.
10.0
(1760 1752) 10
Ri
100 1.07%
1752
It indicates that Reliance Ind. has offered 1.07% return to the investor on 7th of
May.
The Annualized return will be 1.07X365=390.55%.
Historical Return
Historical return is that return which has been offered by the
security to the investors during the past.
Historical return of a security is used to analysis of risk and
return prospectus of that security. For example sensex
has offered -23.02 percent return in 2001, whereas in
2007 sensex has offered 56.13 percent return.
Year
2001
-23.02
2002
-27.26
2003
84.283
2004
19.638
2005
48.421
2006
36.86
2007
56.13
Absolute Return
Absolute return refers the gross return which is
realized by the investor.
For example on 1 Jan 2010 the price of Infosys
stock was 1500 and it was 2500 on 30 June
2010.
So the absolute return is Rs 1000 (2500-1500).
And the relative return will be 66.7% (1000/1500).
prices
Total Risk
Systematic Risk
Unsystematic Risk
Market Risk
Business Risk
Financial Risk
Forex Risk
Systematic Risk
Market RiskMarket risk refers to that portion of total variability in the
return caused by factors affecting the whole market.
Economic, political and sociological changes are sources
of this type risk.
Systematic Risk..cont.
Interest Rate RiskInterest rate risk is associated with fluctuations in rate of
return caused by variation in general interest rate.
Interest rate risk is becoming prominent as not only
domestic interest rate but also interest rate prevailing in
the international market can cause volatility in the stock
market.
Unsystematic Risk
Business RiskBusiness risk, emerges because of operating conditions,
variability in business conditions, dividend decisions etc.
2
(
R
R
)
n XR X R
n X X
2
i R 2 X
Where, R is average return of the security,
average return of the stock.
is the
Coefficient of variation
Coefficient of variation measures how much variation in the
rate of return of a security comes due to variation in rate
of return of market index like sensex.
All the stocks are the part of the stock market. When there
will be any fluctuations in the rate of return of market
index like sensex, correspondingly fluctuations will occur
in the rate of return of the stock return.
C.V .
XR
( X R
2
Financial Market
Financial Market is the market from where short and long term financial
resources are raised. Financial market is divided in two sub marketscapital market and money market.
Capital market is that segment of money market from where long term
capital is raised from the investors by issuing the different financial
securities such as bonds, common equity shares and preference
shares.
Money market on the other hand is that segment of the market from
where short term capital is raised from the investors by issuing the
securities such as treasury bills, certificate of deposits, commercial
papers etc.
Capital
Market
Long Term
Loan
Money
Market
Stock
Market
Primary
Market
Organized
Banking
Sector
Secondary
Market
Unorganized
Banking
Sector
Call Money
Market
Sub
Markets
Treasury
Bills
Certificate
of Deposits
Commercial
Papers
PrimaryMarket
Primary Market is the market where a company issue its common
shares very first time to the investors through the any method given
below.
Public Issue through Prospectus (IPO)
Private Placement
Company
Right Issue
Book Building
Stock Option
Investors
Secondary Market
Secondary
Market
Primary
Market
Investors
BSE
&
NSE
Investors
Company
Agreed Price
Stock Brokers
Investors
Placement of Securities
Under this system the shares are acquired by the issuing houses directly
from the issuing company at an agreed price, and then these are placed
only to selected investors.
Bank
Merchant Bank
Company
Agreed
Price
Institutional Investors
Broker
Parent Co.
Individual Investor-X
Individual Investor-Y
Individual Investor-Z
Advantages-
Disadvantages-
1. Economical
1. Concentration of power.
Right Issue
Right issue involves issuing of shares by an existing
company to its existing shareholders in proportion to the
number of shares already held by them.
Bank (10%)
Merchant Bank (25%)
Institutional Investors (20%)
Company
Existing Share
Holders
Book Building
Book building is a process wherein company hire some merchant
banker or issuer house which further invites bids from investors
between a range of share price.
Company
Stock Brokers
Or
Merchant Banker
Investors
Bonus Shares
Issue of bonus shares does not result in raising of fresh capital. It is
process of conversion of dividends, and other reserves into share
capital.
Bank (10%)
Merchant Bank (25%)
Institutional Investors (20%)
Company
Existing Share
Holders
Stock Options
Stock option is a process wherein company
issue its shares only to its top executives.
Finance Manager
Marketing Manager
Company
HR Manager
Labour Union
Board of Directors
Money Market
Call money market is important segment of money market
from where borrowing and lending is done for a short time
period ranging from overnight to fortnight.
Call Moneywhen money is lent or borrowed for overnight.
Notice Moneywhen money is lent or borrowed more that one day
and upto fourteen days.
Treasury Bills
Treasury bills are the promissory notes or a kind of
financial bill issued by RBI on behave of central
government with discount for a fixed period, not
extending beyond one year.
TBs are issued with a promise to pay the amount stated
therein to the bearer of the instruments.
TBs are issued on discount basis.
Periodicity of TBs14 days TBs, 91 days TBs, 182 days TBs, 364
days TBs.
Commercial Papers
Commercial papers are debt instruments
issued by corporates for raising short term
resources from the money market. CPs
are unsecured debts-no provision is made
behind the CPs.
Corporates having approval from RBI are
eligible to issue CPs.
CPs are issued on interest/discount basis.
Certificates of Deposits
A certificate of deposit is a marketable document
of title to a time deposit for a specified period.
CDs is a receipt given to the depositor by a bank
or any other institution entitled to issue CD.
A CD is issued at a discount and it is negotiable
instrument.
Euro Market/International
Market
Euro market refers raising capital from international market
by issuing the financial securities denominated in the
foreign currencies.
These financial securities which are denominated in the
foreign currency are commonly called euro issue. Some
of the euro issues are:
ADR (American Depository Receipt)
European Depository Receipt)
Global Depository Receipt)
Foreign bonds
Euro bonds
I. Foreign Bonds-
Infosys Tec.
(Foreign Co.)
US Dollar denominated
Bonds
Foreign Bonds
US Market
(Investors)
Euro Bonds
US Market
(Investors)
Dividends in Re.
US Market
International
Bank
NYSE
Re/$
Dividends in US Dollar
Depositories
US Investors
Dividends in Re.
London Market
London St.
Mkt
International
Bank
Re/
Dividends in pounds
Depositories
U.K. Investors