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.

What is portfolio and Portfolio Management?

It is a combination of various assets/securities of investment to minimize risk and maximizes the returns. Portfolio management is the selection of such securities that would fit in well with the asset preferences, needs and choices of the investor.

TYPES OF SECURITIES
(a) (b) (c) Negotiable securities Securities that are transferable Yield variable income or fixed income Bonds, debentures, equity shares etc.

Non-negotiable securities (a) non-transferable (b) Schemes Post-offices, banks, companies, etc.

NEGOTIABLE SECURITIES
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

INVESTMENT OBJECTIVES

Liquidity
Age Need for Regular Income

Risk Tolerance
Tax Liability

Human Life Cycle Disciplined Planning

Income Phase I Phase II
Childs Marriage Childs Education Housing

Phase III

Having a Financial Goal is primary to starting a Investment Plan.

Child birth Marriage 22 yrs 38 yrs Over 25 - 30 yrs

Birth & Education

22 yrs

Earning Years

Retirement
60 yrs

Age

INVESTMENT AVENUES
High
H i g h

Equity Growth Funds Index Balance Funds Funds

Dont Invest here

R I S K

Income Funds RETURN

Aggressive Stance High

Liquid Fund

Comp FD

Sedate Zone

P.O.

Optimal
L o w

## the size of the circle denotes the level of liquidity

INVESTMENT INSTRUMENTS
1. PUBLIC PROVIDENT FUND 2. NATIONAL SAVINGS CERTIFICATE (NSC) 3. 8% SAVINIGS BONDS

4. POST OFFICE MONTHLY INCOME SCHEME

5. SENIOR CITIZEN SAVING SCHEME 6. LIFE INSURANCE POLICIES 7. UNIT LINKED INSURANCE POLICY 8. EQITY SHARES OF LISTED COMPANIES

INVESTMENT INSTRUMENTS
9. MUTUAL FUNDS 10. EQUITY LINKED SAVING SCHEME (ELSS) 11. TERM DEPOSITS WITH BANKS 12. SAVINGS DEPOSITS WITH BANKS 13. FIXED DEPOSITS WITH COMPANIES 14. JEWELLERY, GOLD & PRECIOUS METALS 15. IMMOVABLE PROPERTY 16. PAINTINGS

PUBLIC PROVIDENT FUND

Very Safe Investment Not so liquid. Investment remains locked for 15 years

8% interest per year. Compounded Annually Amount Invested is eligible for deduction under section 80C Interest is exempt under section 10. No TDS from interest. No tax when money is received back

NATIONAL SAVINGS CERTIFICATE

Very Safe. Unless the Government goes bankrupt and defaults, there is no chance of losing money Life is six years but can be transferred after one year. Return is 8% per annum compounded half yearly. Encashment is not possible till end of three years. Thereafter, premature encashment is permitted at a discounted rate of interest. Amount invested is eligible for deduction under section 80C. Interest is taxable but no TDS. No tax on reinvestment

8% SAVING BONDS
Very Safe. Unless the Government goes bankrupt and defaults, there is no chance of losing money Life is six years. 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.

No tax on reinvestment

POST OFFICE MONTHLY INCOME SCHEME

Very Safe. Unless the Government goes bankrupt and defaults, there is no chance of losing money. Life is six years. Can be withdrawn at any time after one year at discounted rates.

8% per annum interest payable monthly. In addition, bonus of 10% is payable on maturity only on accounts opened upto 13th February, 2006.
Interest is fully taxable. No TDS from interest. No tax on reinvestment.

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

SHARES
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. Short Tem Capital Gains Tax is charged @ 10% Long Tem Capital Gains Tax is exempt from tax

MUTUAL FUNDS
Substantial risk as the NAV of units fluctuate from time to time and are market driven In most cases, very liquid. Can be withdrawn at any time subject to exit load which varies from scheme to scheme. Maximum scope for capital appreciation which would differ from one fund/scheme/plan to another Dividend is exempt from tax under Section 10. However, 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

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. Can be withdrawn at any time after 3 years. Maximum scope for capital appreciation which would differ from one fund to another

Amount invested is eligible deduction under Section 80C

for

FIXED DEPOSITS WITH BANKS

Quite safe. Unless the bank goes bankrupt and defaults, there is no chance of losing your money Not very liquid. The tenure of the FD would be a fixed period of not less than five years with a scheduled bank No capital appreciation. Only accumulation of interest which gets compounded every year in case of cumulative deposits. Amount invested is eligible for deduction under Section 80C Interest is fully taxable. TDS from interest in excess of Rs 10,000 per annum. No tax on reinvestment.

BANK FIXED DEPOSITS

30 Days ABN AMRO CITI BANK PNB HSBC HDFC BOB INDIAN BANK ICICI IDBI UTI 3.00% 3.00% 3.00% 3.75% 3.00% 3.75% 2.75% 3.00% 3.25% 180 Days 4.00% 6.00% 5.50% 4.50% 4.50% 5.50% 4.00% 5.25% 5.50% 1 Year 5.00% 7.25% 6.50% 5.00% 5.75% 7.00% 7.25% 7.00% 7.25% 7.50% 3 Year 7.00% 7.00% 7.50% 6.25% 6.00% 5.50% 6.00% 7.75% 7.50% 7.25% 5 Year 7.00% 7.00% 7.00% 6.25% 6.00% 7.00% 7.50% 8.25% 7.50% 7.25%

3.00%

4.50%

COMPANY FIXED DEPOSITS

Not very safe. Deposits are unsecured and if the company goes bankrupt, the depositor would get last priority in terms of settlement of dues. Liquidity depends on company and its policies. In many cases, can be liquidated at any time but subject to loss of interest. No capital appreciation. Only accumulation of interest which gets compounded every year in case of cumulative deposits. Interest is fully taxable. TDS from interest in excess of Rs 5,000 per annum. No tax on reinvestment.

JEWELLERY, GOLD & PRECIOUS METALS

Gold is considered to be a safe investment. However, jewellery and precious stones are generally not viewed from the point of view of investments Not a very liquid investment. Making charges becomes a sunk cost. However, now there is option of buying paper gold in exchange traded funds (ETF). No tax benefits. Capital gains tax needs to be paid on sale.

REAL ESTATE
House property and land have traditionally been perceived to be safe investments. However, in India, 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. Tax benefits on repayment of housing loan under Section 80C and 24B

Capital Gains Tax applicable on sale.

Rent is taxable under the head Income from House Property.

PAINTINGS
The market for paintings is a nascent market in India. At present, it is very small and from that point of view, and also in view of the fact that art is very subjective, the safety of investment in Art cannot be accurately predicted

Returns are not very predictable. It would depend on the trends prevailing and on the popularity of the artist which may keep on changing from time to time.

Capital Gains Tax is applicable on sale of art pieces.

INVESTMENT VS SPECULATION

INVESTMENTS
LONG TERM MODERATE RETURNS

SPECULATION
SHORT TERM HIGH RETURNS HIGH RISK BORROWED FUNDS USED USES TECHNICAL ANALYSIS

DIVERSIFIED RISK
OWN FUNDS USED

USES FUNDAMENTAL ANALYSIS

DISCIPLINED INVESTMENT PLANNING

Derivatives & Equity Mutual Funds Income Funds & Real Estate GOI Relief Bonds Bank Fixed Deposits
Aggressive Assets

Serious Assets

Sacred Assets

MAXIMIZE RETURNS, MINIMIZE RISKS

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. Securities available for the first time. Issuer may be brand new company or old company. Securities absorb new funds. After the issue securities are traded in the secondary market.

 The new issue market represent the primary market where new securities share or bonds that have never been previously issued., are offered. Both the new companies and the existing ones can raise capital on the new issue market. Primary market is the one in which the company approaches investors to raise capital.

 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.

Features of primary market

It does not include long term loans from financial institutions. 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 .

 Origination Underwriters Distribution

Placement of the issue

Offer Through Prospectus general information,
capital structure, management, promoters, Terms and

conditions ,financial information etc

Public issue

Rights issue
Private placements Preferential allotment

Book building: Offering shares to investors in which the issue price is not fixed, determined through a bidding process. Right Issue: Selling securities in the primary market by issuing right to existing shareholders. Private Placement: Sale of securities to a limited no of sophisticated investors such as financial institutions, mutual fund, venture capital funds, banks & so on.

Preferential Allotment: Given mainly to promoters or friendly investors. Select investors at a price which may not be the prevailing market price. Preferential basis for certain categories.

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, they also serves as brokers & dealers. Investors are informed of new issues through a prospectus with SEBI guidelines. Informs public through announcements in newspapers, Etc. Application forms through brokers. Subscriptions open for 3-7 days.

Pricing of Issues
On the basis of net asset value per share , fresh capital and profit earning capacity AT PREMIUM AT PAR AT DISCOUNT

Factors to be considered by the investors.

Promoters credibility Efficiency of management Project details Product and Financial Data Auditors report Investor service Statutory clearance

Investors protection in Primary market.

Project appraisal. Underwriting Disclosures in Prospectus Clearance by stock exchange Investor awareness Safety nets Punitive actions Promoters stake

Secondary Market
Outstanding securities are traded in secondary market. The investors can buy & sell securities also known as stock market / stock exchange.
Debt instruments like bonds & debentures are also traded. It promotes capital formation, effects growth of economy.

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.

Regulatory Framework
Ministry of Finance. SEBI Securities Exchange board of India Governing Body

Stock Exchanges
There are 23 stock exchange recognized under securities contract act 1956 OTCEI , NSE and BSE other 20 exchanges

Qualification of a Member of Stock Exchange

Min age 21 years. Indian Citizen Not a bankrupt. Not convicted of fraud. Not defaulter of stock exchange Min qualification is Graduation and SEBI test.

The BROKER
A broker has to be registered with recognized stock exchange has to apply to the SEBI for registration. The broker has to abide by the code of conduct of SEBI. The code of conduct prevents the malpractices, manipulation and gives other statutory requirements.

Broker and Investor

Broker should provide adequate information about stocks. Provide suggestions. Confirm the purchase/sale of securities. Provide price quotes. Have adequate experiences. Have contact with other stock exchange. Arrange finance for clients

Buying and selling Shares

Investor has to locate registered broker or a sub broker. Choice to be placed with broker. Broker executes the order. Confirm the delivery, brokerage to the clients. Sends the information msg.

SHARE GROUPS
A category shares (Specified) These are selected on the basis of equity, market capitalization and public holding. It has good track record and a dividend paying company. B1 category shares Actively Traded securities. B category shares rest company shares.

Settlement system
Fixed settlement system settlement cycle Monday to Friday (BSE) and Wednesday to Tuesday (NSE). Rolling Settlement system settlement takes place n days (usually 1,2,3 or 5) after trading day. This is known as T + n

Online Trading
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
Listing refers to the admission of the security of a public limited company on a recognized stock exchange for trading. Listing of securities is undertaken with the primary objective of providing marketability, liquidity and transferability to securities. 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. Listing on multiple stock exchange. No of shareholders. Articles of Association. Cost of Public Issue. Advertisement. Min subscription.

Listing Procedure.
Preliminary discussion. Article of Association approval. Draft prospectus approval. Listing application. Listing agreement. Listing fee.

Stock Market Indices

These are the barometers of the stock market. The indices gives a broad outline of the market movement and represent the market examples BSE sensex ,BSE 200 ,NSE nifty.

Differences between the indices.

The number of component stocks. The composition of stocks. The weights assigned. Base year.

The Centre for Monitoring Indian Economy maintains the index.

SEBI ROLE IN PRIMARY MARKET

Entry norms. Promoters contribution. Disclosure. Book Building. Allocation of shares. Market Intermediaries.

SEBI and Secondary market

Governing Board. Infrastructure. Settlement and clearing. Debt market segment. Price stabilization. Delisting. 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.

THE PURPOSE AND AIM OF SEBI.

Regulating the stock markets & other securities market, stock brokers & other intermediaries, collective investment schemes and substantial acquisition of shares & takeover of companies. Prohibiting insider trading in securities, fraud and Unfair trade practices in securities market. Promoting investors education and training.

SEBI Guidelines: Some important steps taken by SEBI

Regular Inspection of stock Exchanges. Measures introduced to reform the Primary market like standard of disclosure of procedural norms for issues, advertisement norms so that customers are not mislead. Certain eligilibility norms were introduced for registration of stock brokers and sub brokers. The directive given to the stock Exchanges to broad base their governing boards to become truly self regulatory organization. Merchant bankers to be authorized by SEBI.

conti..
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. Mandatory for brokers to maintain separate accounts for clients and themselves. The Banker to the issue brought under purvies of SEBI. Book Building Method has been modified.

conti..
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. Development of database (MAPIN database) about market participants and investors which allows SEBI to give unique identification number to all participants in the market.

conti..
For regulating the mutual funds they have to be managed by AMC (Asset Management Company) and supervised by the board of trustees. Features are : offer document , Disclosure of indicative returns, Advertisement code, prescription of minimum amount to be raised by the scheme. SEBI has dispensed with the requirement to the issue shares with a fixed par value of Rs.10 and Rs.100 has given freedom to companies to determine the par value of shares issued by them.

Final Outcome : Major improvements are as follows.

Dematerialization of shares. Screen Based Trading. All securities to be traded on Exchanges. Trading cycles shortened to a day and trades to be settled in 2 working days. Corporate Governance has improved a lot. Confidence of FII has increased. Freedom to issue securities at market determined prices. Integration of Indian market with global market.