SECURITY ANALYSIS & PORTFOLIO

MANAGEMENT
UNIT 1
 UNIT – I INVESTMENT SETTING

Financial and economic meaning of Investment –

Characteristics and objectives of Investment – Types
of Investment – Investment alternatives – Choice and
Evaluation – Risk and return concepts.
Security
 It is a tradable financial instruments like debt ,
equity
Security Analysis
 It is a analysis of financial instruments (fundament
and technical)
Portfolio
 Collection of financial assets , it may be held with
individual or financial institutions
Portfolio Management
 Portfolio management is all about SWOT in the
choice of debt and equity
Investment
“Investment is a commitment of funds made in the
expectation of some positive rate of return”
Financial meaning of Investment
 It means the commitment of a person’s funds to
derive future income in the form of interest,
dividend , premiums , pension benefits
Eg: shares , debentures , insurance , post office saving
Economic meaning of Investment
 It means the net additional to the economy's capital
stock which consists of goods and services that are
used in the production of other goods and services
Eg: New Constructions , plant and machinery ,
inventories
 Characteristics of Investment
Return Risk
Safety Liquidity
Tax Benefit Purchasing power
Capital Growth Stability of Income

1.Return
 On a security refers to the total gain or loss to the
investor over a period. The dividend or interest
received from the investment is the yield
2.Risk
 The possibility of suffering or loss. It is related to loss
of capital , delay in repayment , non payment of
interest , variability of returns
3.Safety
 The safety of an investment implies the certainty of
return of capital without loss of money or time
4.Liquidity (Easily Convert into cash)
 An investment which is easily saleable or
marketable without loss of money and without loss
of time
5.Tax Benefits
 Some investment provide tax benefits , other do not
(Initial Tax Benefits , Continuing Tax Benefits , Terminal
Tax Benefits)
6. Purchasing power
 It refers to the buying capacity of investment in
market
7. Capital Growth
 It refers to appreciation of investment. Investors
and advisers are seeking growth stock in the right
industry and bought at the right time
8. Stability of Income
 It refers to constant return from an investment
Objectives of Investment
1.Maximize Current Income
 This objective emphasizes on current yield over
other factors
2.Preservation of Capital
 It means declines in the overall value of the portfolio
is within tolerable limits
3.Long term Capital Growth
 The investor do not need current investment income
to meet their living expenses
4.Aggressive Capital Growth
 It seeks maximum capital growth and implies
making riskier investment
5.Tax Benefits
 Some investments are Tax free or Tax sheltered
benefits
6.Maximisation of return and Minimization of risk
Need and Importance of Investment
1.Longer Life Expectancy
Retire between the ages of 56 to 60
2.To Save Tax
Savings by tax payer (PF , LI, MF )
3.To Earn Interest
4.Fear of Inflation
5.Future need expectation
Children’s Higher education , marriage , house
6.Income
 Speculation
“Speculation is the purchase or sale of anything in the
hope of profit from anticipated change in price”
Investments Vs Speculation
Basis of Investment Speculation
Distinction
Planning An Investor has a relatively Very short planning
Horizon longer planning horizons horizon
Risk Not willing to take high risk Normally willing to take
disposition high risk
Return Only expect limited return Expect high rate of return
Expectation with limited risk with high risk
Leverage They use his own funds and Majority to use borrowed
avoid borrow funds funds
Decision Follow fundamental factors Using market psychology
making
 Gambling
“It is an act of creating artificial and unnecessary risks
for expected increased returns”
Investment Vs Gambling
Basis of Investment Gambling
Distinction
Duration Long time More quickly

Purpose People invest for income not Gamble for fun not for
for fun income
Risk taking Risk takers as well as risk Mainly a risk takers
Capacity avoiders
Legal It was done within four It is not regulated by
aspect corners of Law any Law
 Investment Alternatives/Types
Financial Form Non Financial Form
Security/Marketable Non Security / Non
Financial assets Mak Financial assets

Equity Shares Bank deposits

Preference Shares Mutual Funds

Debentures Insurance

Derivatives Money Market

Instruments
Real Estate Precious Objects
Other Deposit
Residential Gold & Silver
house

Commercial Art Objects

Property

Agri Land

Holiday resort
1.FINANCIAL FORMS OF INVESTMENT
A)SECURITY/MARKETABLE FINANCIAL ASSETS
1.EQUITY SHARES
 The holders of equity shares are the real owners of the company
 Equity share holders get dividends if the company earns profits
Features of Equity Shares
1.Permanent capital
 There is no maturity for equity share capital
2.Right to Dividend
 The equity shareholders are paid dividends out of profits earned by
the company
3.Control
 Equity shareholders are the real owners of the company, they have
the voting right power
4.Limited Liability
 Liability of the shareholders is limited to the price of shares
5.Pre-emptive Right
 The existing shareholders have a right to purchase new shares
2.PREFERENCE SHARES
 Dividend on these shares is to be paid prior to any
dividend on equity shares
 Preference shares are to be redeemed before any
payment is made to the equity shareholders at the
time of liquidation
Features of Preference Shares
1.Maturity
 Preference shares are may be redeemable or
irredeemable
2.Fixed Dividend
 Its carry a fixed rate of dividend , say 7 to 9%
3.Control
 Not a owner of the company
4.Claim on Assets
 At the time of liquidation, preference shares have a
preference in the repayment of capital
3.DEBENTURES OR BONDS
 Debentures or Bonds are financial securities issued by companies
to raise long-term loans from the public
 They are generally redeemable after the stipulated period
 Its carry fixed rate of interest which is payable periodically – say
half yearly or quarterly
Features of Debentures
1.Maturity
 Debentures are to be repaid after the stipulated period , say 5 years
of 7 years
2.Fixed rate of Interest
 Debentures carry a fixed rate of interest
3.Charges on Assets
 Debentures are generally secured
4.Tax Deductibility of Interest
 It is allowed as a deduction in the computation of income tax
5.Control
 They are lenders- not to have voting rights
4.DERIVATIVES
“A contract which derives its value from the
prices or index of prices to underlying
securities “
Types
1. Forwards Contract
2.Futures Contract
3.Swaps
4.Options
B. Non-Security / Non Marketable Financial Assets
1.Bank Deposit
 Opening a bank account and depositing money in it
can make a bank deposit
Types
1.Current Accounts
 Mainly used by businessmen
 No limits for number of transactions
 No interest is paid by bank
2.Fixed Deposit / Term Deposit
 Periods from 7 days to 10 years
 Closing 1% penalty
 Interest will paid by the bank
3.Savings Bank Account
To promote the habit saving among the
people
Bank will pay interest 4.5 % pa
Connect with ATM and internet
4.Recurring Deposits
To save small amount every month
Maturity 6 to 120 months
2.Other Deposits
1)Post Office Deposit
a. Savings Deposits
 50k to 1 lac , interest 5.5 to 6%
 Tax free
b. Fixed Deposit
 1 to 5 years , 8 to 10.5 %
c. Recurring Deposit
 Up to 5 years monthly savings
 Fixed amount of Rs,5 or multiple of Rs,5 for 60
months
 Interest 10.5%
2.Public Provident Fund
 Monthly installments Rs,100 to 60k pa
 Cumulative interest 11%
 Maturity 15 years
3.National Savings Scheme
 Tax free
 Interest 10% pa
 Multiples of Rs,100 till 40k pa
4.Kisan Vikas Patra
 Denomination of 1000 , 5000 , 10000 will double in 6
years
 Compound interest 12.25%
 Maturity 2 years
5.Employee Provident Fund Scheme
3.Insurance
To reduce or eliminate risk of loss to life and
property
Insurance
Life General
Endowment Whole Life Fire
Health
Automobile
1.Life Insurance
 Amount of policy paid either death or maturity
 LIC has a monopoly
2.General Insurance
 Loss is indemnified
4.Money Market Instruments
 Maturity less than 1 year
 Issued by Government , Financial institutions ,
Banks
 Highly liquid and have negligible risk
a) Treasury Bills
 Represent Government of India
 Maturity 91 days to 364 days
 Sold on an auction basis every week
b) Commercial Paper
 Short term unsecured promissory note
 Maturity 90 to 180 days
 Sold at discount rate
5.Mutual Funds
 Professionally managed
 Collect the money from various investors and Invest it in
stocks , bonds , short term money market instruments

Mutual funds

Equity Schemes Debt Schemes

Growth schemes Income schemes

Index schemes Gilt schemes

Sector schemes Money market schemes

Balanced schemes
2.Non Financial Forms of Investment
A. Real Estate
 Tangible Assets
1.Residential House
 Rental savings and capital appreciation
 Loans are available
2.Commercial Property
 Buying office or shop space in a commercial
complex
 Regular rental income
 Capital appreciation
3.Agricultural Land
 Income not taxable
 Loans are available
 Living in a farmhouse
4.Holiday Resort
B. Precious Objects
1.Gold & Silver
 Good hedges against inflation
 Highly liquid
 High degree of monetary value
2.Art Objects ( Paintings , Antiques )
 Require skill , taste , creativity , talent and
imagination
Risk Concept
 The possibility of suffering or loss
 The possibility that the actual return may not be
same as expected
Causes of Risks
 Wrong Decision
 Wrong timing
 Nature of Investments
 Maturity period
 Amount of Investment
 National and international factors
 Nature of Industry
Types / Classification / Sources of Risks
Risk

Systematic Unsystematic
Risk Risk

Market Interest Purchasing

Risk Risk Risk

Business Financial
Risk Risk

Internal External
Risk Risk
1.Systematic Risk
Uncontrollable risk
Associated with Economic , Sociological ,
Political and legal considerations
a. Market Risk
 It will affect the stock market in tangible and
intangible events
 Tangible – earthquake , war , political
uncertainty and fall in currency
 Intangible – Market psychology
b. Interest Rate Risk
It will affect the price of bonds , debentures
and stocks
Caused of interest rate -government monitory
policy and interest rates of T-bill and
government bonds
c. Purchasing power risk
Inflation is the reason behind the loss of
purchasing power
2.Unsystematic Risk
 Controllable risk
 Technology changes , availability of raw materials
, labor problems , change in consumer preference
a. Business Risk
 Poor earnings and failure results
 It affect bonds and stock holders due to unable
pay of dividend and interest
(i) Internal Risk (ii) External Risk
b. Financial Risk
 Unable to meet financial obligations
 Higher proportion of debt increase
Managing Risk
Avoidance of Risk
Prevention of Risk
Retention of Risk
Transfer of Risk
Return Concept
 The objective of any investor to maximize
expected returns from his investments
 Return is the motivating force and inspiring the
investors
Types
1.Realized Returns
 Returns that was
Eg: Bank Deposit (10%)
2.Expected Return
 The return from an asset that investors expect to
earn over some future period
 It may or may not occur
Components of Return
1.Current return
Dividend or interest
2.Capital Return
Price change called the capital return

Total Return = Current return + Capital return

Evaluation of Investments
1.Mutual Fund
Net Asset Value (NAV) performance of specific
scheme
Daily changes
2.Shares
EPS help in deciding shares investment
EPS= Net income / Total number of shares
3.Debentures / Bonds
Par value , coupon rate and maturity date are
key factors to determining the yield of bond
4.Ways to value Real Property
a) Market Approach
 Compare the value of property with similar
property sold in the same area
b) Cost Approach
 Take into account labor costs and construction
material prices that may be requires to replace
the existing structure with a similar one
c) Income Approach
 Operating expenses , insurance costs ,
maintenance costs
Different methods in measurement of
risks
Assigning risk allowance
r=i+p+b+f+m+o
r=rate of return
i=real interest rate
p=purchasing power risk allowance
b=business risk allowance
f=financial risk allowance
m=market risk allowance
o=allowance for other risk
Different methods in measurement of
risks-cont
Returns(%) likelihood
7 1 chance in 20
8 2 chance in 20
9 4 chance in 20
10 6 chance in 20
11 4 chance in 20
12 2 chance in 20
13 1 chance in 20
Different methods in measurement of
risks-cont..,
Returns(%) probability

7 .05
8 .10
9 .20
10 .30
11 .20
12 .10
13 05
Different methods in measurement of
risks-cont
RETURN(%)(1) PROBABILTY (2) (3)=(1)X(2)
7 .05 .35

8 .10 .80

9 .20 1.80
10 .30 3.00

11 .20 2.20
12 .10 1.20

13 .05 .65

TOTAL 1.00 10.00%

 Standard deviation method
X ltd(stock) Y ltd(stock)
10
13
18 10
2 12
21 14
11
9

Total 60 60

Arithmetic mean=60/5=12
 Stocks of X and y ltd
Return( X ltd Weighted Return y ltd Weighted average
1) probabilit average (1) probability( return
y(2) return 2)
8 0.15 1.20

9 0.20 1.80

10 0.30 3.00 9 0.30 2.70

11 0.20 2.20 10 0.40 4.00

12 0.15 1.80 11 0.30 3.30

 Return on investment
• Return is the return from an asset that
investors anticipate over a future period.
 Components of investment
1.Periodic cash receipt on the investment
Ex-The form of interest or dividend.

2.Changes in the price of asset or capital gain or

loss.
Ex-The difference between purchase price & sale
price.
 Factors determining the return on
investment
1.Price of the stock
2.Type of the stock
3.Issue price of the stock
4.Reserve for dividend
5.Future projects of the company
6.Goodwill of the company
7.Govt rules and regulations
 Measurement of return
Yield =return on investment capital gains
1.Estmated yield=expected cash income
Current price of asset

2.Actual yield= cash income

Amount invested
 Measurement of return-cont..,
i)Bonds
a)Coupon rate-6% on a bond of Rs.100 as face
value.
b)Current yield=Annual coupon price
Purchase price
An investor buys a 7 year bond at Rs.700 and
carries Rs.100 worth coupons per year and its
par value is Rs.1000,
=100/700x100=14.29%
 Measurement of return-cont..,
3.Holding period yield or one period of return
Yield=capital gain or loss coupon rate/purchase
price of bond

4.Yield to maturity-it is the discount rate which

equates the present value of a bond’s cash
flows to the bond’s current market price.
 Unit-II
UNIT – II SECURITIES MARKETS

Financial Market - Segments – Types - -

Participants in financial Market – Regulatory
Environment, Primary Market – Methods of
floating new issues, Book building – Role of
primary market – Regulation of primary market,
Stock exchanges in India – BSE, OTCEI , NSE, ISE,
and Regulations of stock exchanges – Trading
system in stock exchanges –SEBI.