security analysis and investment management

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security analysis and investment management

  1. 1. Vipin k, Asst Prof. VJIM 1
  2. 2. Syllabus 1. Investment Environment 2. Security analysis (2,3,4 & 5) *Securities market *Risk & return *Fundamental analysis *Technical analysis 3. Derivatives (portfolio protection) (6) 4. Mutual funds (7) Vipin k, Asst Prof. VJIM 2
  3. 3. Warren Buffett Most successful investor of the 20th century Vipin k, Asst Prof. VJIM 3
  4. 4. INVESTMENT • • • • • • • • Meaning Characteristics Objectives Investment & Speculation Investment & Gambling Types of investors Investment process Investment alternatives Vipin k, Asst Prof. VJIM 4
  5. 5. INVESTMENT Employment of fund on assets with the aim of earning income or capital appreciation. Financial activity by people with savings. “commitment of funds made in the expectation of some positive rate of return” Vipin k, Asst Prof. VJIM 5
  6. 6. Financial & Economic meaning Financial : Commitment of person’s fund to derive future income in the form of interest , dividend , pension benefit or appreciation in the value of their capital. eg:- purchase of shares, debentures, post office savings certificates etc….. These investment generate financial assets Vipin k, Asst Prof. VJIM 6
  7. 7. Economic: Net additions to the economy’s capital stock – goods & services that are used in the production of other goods and services. eg:- new constructions, plant & machinery, inventories etc….. These investment generate physical assets. Vipin k, Asst Prof. VJIM 7
  8. 8. Vipin k, Asst Prof. VJIM 8
  9. 9. & Vipin k, Asst Prof. VJIM 9
  10. 10. Assets which are tangible or physical in nature Real Assets Real Estates Other tangible Assets Vipin k, Asst Prof. VJIM 10
  11. 11. Residential land, building, apartments, farm land etc Vipin k, Asst Prof. VJIM 11
  12. 12. 2. Other tangible Assets :- Precious metals like gold, silver, platinum. Precious stones like diamonds, colored stones. Antiques Vipin k, Asst Prof. VJIM 12
  13. 13. An intangible asset that derives value because of a contractual claim. eg:- Stock, bonds, bank deposits etc. Vipin k, Asst Prof. VJIM 13
  14. 14. Characteristics Investment  Return  Risk  Liquidity  Safety  Contribution to capital formation. Vipin k, Asst Prof. VJIM 14
  15. 15. Objectives …  Maximization of Return  Minimization of Risk  Tax minimization  Liquidity Vipin k, Asst Prof. VJIM 15
  16. 16. Objectives …  Maximization of Return  Minimization of Risk  Tax minimization  Liquidity Vipin k, Asst Prof. VJIM 16
  17. 17. o Buying & selling of securities within a very short period of time (less than one year) o Speculator o Need capital gain only eg:- a person who buy a security at 9’o clock & sell at 9:30 for the quick gain (may be loss) Vipin k, Asst Prof. VJIM 17
  18. 18. Bases Investment Speculation 1. Risk assumed low to High always high 2. objective Regular return + capital gain capital gain 3. Time period long term Always short term 4. Funds His own fund 5. Nature of return Consistent & long term Vipin k, Asst Prof. VJIM Use borrowed fund to supplement his own fund Quick & short term 18
  19. 19.  Taking high risk not only for high return but also for thrill & excitement.  Unscientific & unplanned  Based on tips & rumors eg:- horse race, lotteries, card games etc Vipin k, Asst Prof. VJIM 19
  20. 20. Investment Vs Bases Investment 1. Nature Carefully planned & scientific 2. Risk & return Risk match with return 3. Motive For regular income & capital For thrill & excitement gain 4. Period Long term Very short term 5. Action Detailed analysis Based on tips & rumors Vipin k, Asst Prof. VJIM Gambling Unplanned &unscientific Taking high risk for high return 20
  21. 21. Vipin k, Asst Prof. VJIM 21
  22. 22.  Large in number  Investible resources are smaller  Lacks extensive evaluation & analysis eg:- Mr. A purchases the shares of X limited. Vipin k, Asst Prof. VJIM 22
  23. 23.  Organization with surplus fund who engage in investment activities.  Fewer in numbers  Investible resources are much larger.  Professional approach eg:- mutual fund, insurance companies etc Vipin k, Asst Prof. VJIM 23
  24. 24. 1 2 3 4 5 • Framing investment Policy • Investment / security Analysis • Valuation • Portfolio Construction • Portfolio Evaluation Vipin k, Asst Prof. VJIM 24
  25. 25. 1. Framing investment Policy:i. Investible funds ii. Objectives iii. knowledge Vipin k, Asst Prof. VJIM 25
  26. 26. 2. Investment / security Analysis:i. Market analysis ii. Industry analysis iii. Company analysis Vipin k, Asst Prof. VJIM 26
  27. 27. 3. Valuation:Intrinsic value Future value Vipin k, Asst Prof. VJIM 27
  28. 28. 4. Portfolio Construction:i. Diversification a) Debt & Equity diversification b) Industry diversification c) Company diversification ii. Selection Vipin k, Asst Prof. VJIM 28
  29. 29. 5. Portfolio Evaluation:i. Appraisal ii. Revision Vipin k, Asst Prof. VJIM 29
  30. 30. Vipin k, Asst Prof. VJIM 30
  31. 31. Equity Shares Deposits Bonds & Debentures Money market Instruments Mutual Funds Insurance Products Retirement Products Government savings Schemes Precious objects Real estates Financial Derivatives Vipin k, Asst Prof. VJIM 31
  32. 32. Stock market analysts classify equity shares are:  Blue chip shares  Growth shares  Income shares  Cyclical shares  Defensive shares  Speculative shares Vipin k, Asst Prof. VJIM 32
  33. 33. Bank deposits Post office deposits Company fixed deposits Vipin k, Asst Prof. VJIM 33
  34. 34. Government securities PSU bonds Debenture of private sector companies Vipin k, Asst Prof. VJIM 34
  35. 35. Treasury Bills Certificate of deposits Commercial paper Vipin k, Asst Prof. VJIM 35
  36. 36. Types of insurance plan  Term assurance plan Traditional investment linked plan Unit-Linked Insurance Plans (ULIPS) Vipin k, Asst Prof. VJIM 36
  37. 37. 1. Mandatory retirement schemes i. Employees’ Provident Fund(EPF) scheme ii. Employees’ Pension schemes (EPS) iii. New pension schemes 2. Voluntary retirement schemes Vipin k, Asst Prof. VJIM 37
  38. 38. Vipin k, Asst Prof. VJIM 38
  39. 39. • Agricultural land, semi-urban land , commercial property etc Vipin k, Asst Prof. VJIM 39
  40. 40. Invest in three broad categories of financial assets ie stocks, bond & cash Three broad categories of mutual fund schemes: a) Equities scheme b) Hybrid scheme c) Debt scheme Vipin k, Asst Prof. VJIM 40
  41. 41. • Futures and • options Vipin k, Asst Prof. VJIM 41
  42. 42. Tax sheltered savings scheme • Public provident fund scheme • National savings scheme • National savings certificate Vipin k, Asst Prof. VJIM 42
  43. 43. MODULE - II Vipin k, Asst Prof. VJIM 43
  44. 44. Vipin k, Asst Prof. VJIM 44
  45. 45. Vipin k, Asst Prof. VJIM 45
  46. 46. SEBI Bhavan, Mumbai Headquarters Vipin k, Asst Prof. VJIM 46
  47. 47. • • • • • • • Securities market Primary market Secondary market Listing, trading & settlement Important international stock exchanges Depositories Stock market indices- BSE SENSEX, NIFTY etc Vipin k, Asst Prof. VJIM 47
  48. 48. Market for equity, debt and derivatives. Securities Market Equity Market Government Securities Market Derivatives Market Debt Market Corporate debt Market Money Market Vipin k, Asst Prof. VJIM Options Market Futures Market 48
  49. 49.  Regulators – CLB, RBI, SEBI etc..  Stock exchanges  Depositories  Brokers  Underwriters  Listed securities  Credit rating agencies etc…….. Vipin k, Asst Prof. VJIM 49
  50. 50. PRIMARY MARKET & SECONDARY MARKET Vipin k, Asst Prof. VJIM 50
  51. 51. PRIMARY MARKET The market where new securities are issued Market in which shares, debentures and other securities are sold for the first time for collecting long-term capital. NEW ISSUE MARKET Vipin k, Asst Prof. VJIM 51
  52. 52. Modernize the plant, machinery and buildings, for extending business, and for setting up new business unit etc………. Vipin k, Asst Prof. VJIM 52
  53. 53. Identify the LOGO Vipin k, Asst Prof. VJIM 53
  54. 54. Vipin k, Asst Prof. VJIM 54
  55. 55. FUNCTIONS OF PRIMARY MARKET Vipin k, Asst Prof. VJIM 55
  56. 56. • Introduction of the basic idea of issuing securities and related spread work before the actual issue of the securities. • Analysis of economic condition, investment climate etc • Assessing the feasibility of the project, technical, economic, financial etc should be conducted. Vipin k, Asst Prof. VJIM 56
  57. 57. 1. Time of floating the issue 2. Type of issue- Equity, preference etc 3. Price of the issue – at par or premium, (discount) Vipin k, Asst Prof. VJIM 57
  58. 58. • The act of assuring the sale of shares or debenture even before offering to the public. • Underwriters Eg:- LIC,ICICI,IDBI etc…… Vipin k, Asst Prof. VJIM 58
  59. 59. • Final sale of securities to prospective investors. • Function is carried out by brokers, sub-brokers Vipin k, Asst Prof. VJIM 59
  60. 60. 1) Equity shares 2) Preference shares 3) Debentures 4) Bonds Vipin k, Asst Prof. VJIM 60
  61. 61. 1.Equity shares Shares do not carry any preferential right in respect of dividend or repayment of capital. Rate of dividend on equity shares is not fixed. Equity shareholders are the ultimate owners of the company. Vipin k, Asst Prof. VJIM 61
  62. 62. CLASSIFICATION OF EQUITY SHARES 1.BLUE CHIP SHARES • Share issued by blue chip companies • Price of shares of blue chip companies is high. 2.GROWTH SHARES • Share issued by growing companies. • Expand their business by reinvesting their earnings in profitable channels. • Growing higher than the industrial growth Vipin k, Asst Prof. VJIM 62
  63. 63. 3.INCOME SHARES Companies are not going to reinvest their earnings for future expansion. These companies distribute the entire earnings as dividend. 4.CYCLICAL SHARES If the value of the shares are fluctuating due to cyclical fluctuations in the market. 5.SPECULATIVE SHARES Risky class of shares. It requires special technical expertise & deep knowledge of market movement to deal in them Vipin k, Asst Prof. VJIM 63
  64. 64. Vipin k, Asst Prof. VJIM 64
  65. 65. Identify the logo Vipin k, Asst Prof. VJIM 65
  66. 66. Tokyo Stock Exchange Vipin k, Asst Prof. VJIM 66
  67. 67. Vipin k, Asst Prof. VJIM 67
  68. 68. Vipin k, Asst Prof. VJIM 68
  69. 69. Vipin k, Asst Prof. VJIM 69
  70. 70. Secondary market Market for already issued securities Securities includes equity shares, preference shares etc.. Also called stock exchange Vipin k, Asst Prof. VJIM 70
  71. 71. • Securities Contract Regulation Act 1956 define stock exchanges as, " an association, organisation or body of individuals whether incorporated or not, established for the purpose of assisting, regulating & controlling business in buying, selling & dealing in securities” Vipin k, Asst Prof. VJIM 71
  72. 72. Functions of stock exchanges • Ready market • Liquidity & marketability of securities • Fair price determination • Sources of long term fund • Reflection of business cycle • Promotion of investment • Flow of capital to profitable venture Vipin k, Asst Prof. VJIM 72
  73. 73. Difference between primary & secondary market Dealing Physical existence period Vipin k, Asst Prof. VJIM 73
  74. 74. Control over secondary market Control is exercised through three important process 1) Recognition of stock exchange 2) Listing of securities 3) Registration of stock brokers Vipin k, Asst Prof. VJIM 74
  75. 75. 1.Recognition of stock exchange According to SCRA 1956 only recognized stock exchanges can function in the country. In India it is done by Central Government Any stock exchanges requires recognition under SEBI Act has to submit an application in prescribed manner to the Central Government. Vipin k, Asst Prof. VJIM 75
  76. 76. 2.Listing of securities Enrolment of a name of company in an official list maintained in the stock exchange. Vipin k, Asst Prof. VJIM 76
  77. 77. 3.Registration of stock brokers • A commission agent who transact business in securities on behalf of his client who are non member of stock exchange. • To deal in recognized stock exchanges the broker should register his name as a broker with the SEBI Vipin k, Asst Prof. VJIM 77
  78. 78. • Stock exchange transactions are made either for the purpose of investment or speculation. • The volume of speculative transaction far exceed that of investment transaction on a stock exchange. Vipin k, Asst Prof. VJIM 78
  79. 79. Speculation is necessary to ensure sufficient volume and continuity of business in the stock exchange. Vipin k, Asst Prof. VJIM 79
  80. 80. Vipin k, Asst Prof. VJIM 80
  81. 81. Is a speculator who buys shares in the expectation of selling it at a higher price. Vipin k, Asst Prof. VJIM 81
  82. 82. Sells securities in the expectation of a fall in their prices in future. Vipin k, Asst Prof. VJIM 82
  83. 83. Neither buys nor sells but applies for subscription to the new issues expecting that he can sell them later at a premium. Vipin k, Asst Prof. VJIM 83
  84. 84. Vipin k, Asst Prof. VJIM 84
  85. 85. • Admission of the security of a public limited company on a recognized stock exchange for trading. • Marketability, liquidity & transferability Vipin k, Asst Prof. VJIM 85
  86. 86. • Section:73 of the companies Act states that any company intending to offer shares or debentures to the public through the issue of prospectus should make an application to one or more recognized stock exchanges for permission to be traded in the respective stock exchange. Vipin k, Asst Prof. VJIM 86
  87. 87. • Liquidity • Trading platform • Fair price for securities • Protect the investors • Wide publicity • Transferability Vipin k, Asst Prof. VJIM 87
  88. 88. • Information to competitors • Subject to various regulatory measures of the stock exchanges & SEBI • Speculation • Listing fees Vipin k, Asst Prof. VJIM 88
  89. 89. Vipin k, Asst Prof. VJIM 89
  90. 90. • Trading in stock exchanges takes place in two phases: 1. The member brokers execute their buying or selling orders on behalf of their client. 2. The securities and cash are exchanged ( with the help of clearing houses and depositories). Vipin k, Asst Prof. VJIM 90
  91. 91. • Floor Trading ( open outcry system) • Screen–based system Vipin k, Asst Prof. VJIM 91
  92. 92. • Trading took place through an open outcry system on trading floor or ring of the exchange during official trading hours. Vipin k, Asst Prof. VJIM 92
  93. 93. • The trading ring is replaced by the computer screen and distant participants can trade with each other through a computer network. • A large number of participants, geographically separated, can trade simultaneously. Vipin k, Asst Prof. VJIM 93
  94. 94. • Enhance 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 . Vipin k, Asst Prof. VJIM 94
  95. 95. • Till 1994, trading on the stock market in India was based on the open outcry system with the establishment of National Stock Exchange in 1994, India entered the era of screen based trading. Vipin k, Asst Prof. VJIM 95
  96. 96. • The kind of screen-based trading system adopted in India is referred to as the open electronic limit order book (ELOB) market system. Vipin k, Asst Prof. VJIM 96
  97. 97. Features ELOB 1. Buyers and sellers place their order on the computer. These order may be limit order or market orders. Vipin k, Asst Prof. VJIM 97
  98. 98. (a) Limit order Pre-specifies the price limit. eg:- a limit order to buy at a price of Rs.100 means the trader want to buy at a price not greater than Rs.100. a limit order to sell at a price of Rs. 150 means that the trader want to sell at a price not less than Rs.150 Vipin k, Asst Prof. VJIM 98
  99. 99. (b) Market orders an order to buy or sell at the best prevailing price. A market order to sell will be executed at the highest bid price where as a market order to buy will be executed at the lowest ask price. Vipin k, Asst Prof. VJIM 99
  100. 100. 2. The limit order book, i.e. the list of unmatched limit orders is displayed on the screen. It is open for inspection to all traders. 3. The computer constantly tries to match different orders. Matching is done on Price-Time priority. ( price is given preference over time in the process of matching) Vipin k, Asst Prof. VJIM 100
  101. 101. • Traditionally trades were settled by physical delivery. • Securities had to physical move from the seller to the seller’s broker, from the seller’s broker to the buyer’s broker and from the buyer’s broker to the buyer. • Takes too much time. Vipin k, Asst Prof. VJIM 101
  102. 102. Depositories • An institution which dematerializes physical certificates and effects transfer of ownership by electronic book entries. • National Securities Depositories Ltd (NSDL) India’s first depository, was set up in 1996. • SEBI has made dematerialized trading compulsory for all the stock exchanges in the country. Vipin k, Asst Prof. VJIM 102
  103. 103.  Settlement process involving delivery of securities and payment of cash is carried out through a separate agency known as the clearing house which functions in each stock exchange.  Member –brokers who buy securities will have to pay cash to the clearing houses and receives the securities from clearing houses. Vipin k, Asst Prof. VJIM 103
  104. 104. Account period settlement  Rolling settlement Vipin k, Asst Prof. VJIM 104
  105. 105. Account period settlement • Purchase and sales during an account period could be settled at the end of account period on a net basis. • Eg:- if ‘A’ bought 100 shares of Infosys on BSE on Monday at Rs.5000 a share and sold 95 shares of Infosys at 5050 on Friday of that week, ‘A’ were required to take delivery for only 5 shares by paying 20250 at the end of account period. Vipin k, Asst Prof. VJIM 105
  106. 106. Account period settlement On BSE the account period was Monday to Friday & on the NSE the account period was Wednesday to Tuesday Vipin k, Asst Prof. VJIM 106
  107. 107. Rolling settlement • Under rolling settlement, all trades executed on a trading day are settled X days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and ‘X’ is the number of business days after trade date on which settlement takes place. • The rolling settlement has started on T+2 basis in India, implying that the outstanding positions at the end of the day ‘T’ are compulsorily settled 2 days after the trade Vipin k, Asst Prof. VJIM 107
  108. 108. • The stock exchanges now follow a settlement procedure known as Compulsory Rolling Settlement (CRS). As mandated by SEBI Vipin k, Asst Prof. VJIM 108
  109. 109. Compulsory Rolling Settlement • All transactions in all groups of securities in the Equity segment and Fixed Income securities listed on BSE are required to be settled on T+2 basis (w.e.f. from April 1, 2003). The settlement calendar, which indicates the dates of the various settlement related activities, is drawn by Vipin k, Asst Prof. VJIM 109
  110. 110. Vipin k, Asst Prof. VJIM 110
  111. 111. A centralized market for buying and selling of stocks where the price is determined through supply demand mechanism. Vipin k, Asst Prof. VJIM 111
  112. 112. • Stock exchanges in a country have been organized in various forms: 1. voluntary non-profit making associations. 2. public limited company 3. company limited by guarantee Vipin k, Asst Prof. VJIM 112
  113. 113. • In India the earliest stock exchanges were organized as voluntary non-profit making association of persons. • Later on, stock exchanges organized as companies. Vipin k, Asst Prof. VJIM began to 113
  114. 114. Vipin k, Asst Prof. VJIM 114
  115. 115. Vipin k, Asst Prof. VJIM 115
  116. 116. Vipin k, Asst Prof. VJIM 116
  117. 117. • Oldest stock exchange in Asia • Established in 1875 • “Native shares and Stock Broker’s Association” • In march 1995, BSE has introduced BOLT (BSE Online Trading) • Working time 9.30 am to 3.30 pm • More than 5000 companies are listed. Vipin k, Asst Prof. VJIM 117
  118. 118. [ BSE ] • Located on Dalal street, Mumbai, Maharashtra. • 11 th largest stock exchange in the world by market capitalization as of 31/12/12. • World’s No.1 exchange in terms of listed members. • Provide depository services through CDSL Vipin k, Asst Prof. VJIM 118
  119. 119. • BSE ‘s popular Equity Index- S & P BSE SENSEX ( Formerly SENSEX). • On Tuesday, 19 February 2013, BSE has extended into strategic partnership with S & P Dow Jowes Indices and the SENSEX has been renamed as “S & P BSE SENSEX” Vipin k, Asst Prof. VJIM 119
  120. 120. STOCK INDEX OR STOCK MARKET INDEX • Method of measuring the value of section of the stock market. • Computed from the prices of selected stocks. • Tool used by the investors & financial managers to describe the market. eg:- S&P BSE SENSEX, S&P CNX NIFTY Index, BSE 500, S&P CNX Nifty Junior, TOPIX(Tokyo Stock Price Index), etc Vipin k, Asst Prof. VJIM 120
  121. 121. • Calculated since 1986. • Index composed of 30 stocks. • Initially based on total market capitalization. • 2003 onwards free float market capitalization. • Base value for calculating SENSEX is 100 (1978-79) • Calculated for every 15 seconds. Vipin k, Asst Prof. VJIM 121
  122. 122. Value of all the shares available for public trading excluding:  Promoters equity, holding by founders, directors.  Holding by FDI route  Holding by private corporate.  Government holdings  Equity holdings by employees welfare trust  Equity held by associate/group companies. Vipin k, Asst Prof. VJIM 122
  123. 123. • Listing history • Trading frequency • Historical records • Industry/sector they belong etc…. Vipin k, Asst Prof. VJIM 123
  124. 124. Formula for calculating SENSEX SENSEX = Sum of free float market capitalization of 30 stocks x Index factor Index factor = 100 / market capitalization in 1978-79 where 100 is the index value during 1978-79 Vipin k, Asst Prof. VJIM 124
  125. 125. Vipin k, Asst Prof. VJIM 125
  126. 126. • Setup in November 1992 • India’s first fully automated electronic exchange [NEAT] • National Exchange for Automated Trading[NEAT] • Started functioning in June 1994. • 1635 companies are listed as of July 2013 Vipin k, Asst Prof. VJIM 126
  127. 127. • Index is built by Indian Index Service Product Ltd [IIST] and Credit Rating Information Service of India Ltd [CRISIL] • CRISIL has strategic alliance between S&P Rating services. • Hence the Index is named as S&P Vipin k, Asst Prof. VJIM 127
  128. 128. • NIFTY reflects the price movements of 50 stocks. • Base date selected for NIFTY is November 3,1995. • Base value of NIFTY -1000 • Earlier calculation based on full market Vipin k, Asst Prof. VJIM 128
  129. 129. NIFTY = Sum of free float market capitalization of 50 stocks x Index factor Index factor = 1000 / market capitalization in 1995 where 1000 is the index value during 1995 Vipin k, Asst Prof. VJIM 129
  130. 130. Vipin k, Asst Prof. VJIM 130
  131. 131.  TSE is the third largest stock exchange all over the world and first largest stock exchange among the Asian countries.  Established in the year 1878.  More than 2,000 companies are listed in Tokyo Stock Exchange.  Market functions between 9.00 am and 3.00 pm. Vipin k, Asst Prof. VJIM 131
  132. 132. • The Tokyo Stock Exchange, which is called Tōshō or TSE for short, is a stock exchange located in Tokyo, Japan. • Third largest stock exchange in the world by aggregate market capitalization of its listed companies. Vipin k, Asst Prof. VJIM 132
  133. 133. • NASDAQ stands for National Association of Securities Dealers Automated Quotations. • stock exchange was constituted in the year of 1971. • Headquarters at New York. • Market functions between 9.30 am and 4.00pm Vipin k, Asst Prof. VJIM 133
  134. 134. • Second largest stock exchange in North America Vipin k, Asst Prof. VJIM 134
  135. 135. • Stock exchange based in new york city. • Largest equity based exchange in the world • About 2,800 companies are listed on the NYSE. Vipin k, Asst Prof. VJIM 135
  136. 136. • one of the world’s oldest stock exchanges and can trace its history back more than 300 years. • located in the City of London in the United Kingdom • Established in the year of 1801. • Nearly 3,000 companies from 70 different countries are listed. • Trading occurs between 8.00 am to 4.30 pm. Vipin k, Asst Prof. VJIM 136
  137. 137. Vipin k, Asst Prof. VJIM 137
  138. 138. • Largest stock exchange in China. • Initially It was named Association of Brokers, Hong Kong in 1891 but later it was renamed as Hong Kong stock exchange in 1914. • Functions between 9.15 am and 4.00 pm. • Nearly 1,470 companies listed in this exchange. Vipin k, Asst Prof. VJIM 138
  139. 139. • Asia's second largest stock exchange in terms of market capitalization behind the Tokyo Stock Exchange. Vipin k, Asst Prof. VJIM 139
  140. 140. • Stock exchange of Germany located at Frankfurt. • Nearly 765 companies listed in the market. • Formed in the year of 1994. • Market functions between 8.00 am and 10.00 pm. • largest of Germany’s seven stock exchanges. Vipin k, Asst Prof. VJIM 140
  141. 141. Vipin k, Asst Prof. VJIM 141
  142. 142. • price discovery method • The company doesn't fix up a particular price for the shares, but instead gives a price range Vipin k, Asst Prof. VJIM 142
  143. 143. • The issue price is not fixed in advance. • Determined by the offer of potential investors about the price which they are willing to pay for the issue. Vipin k, Asst Prof. VJIM 143
  144. 144. • The price of the security is determined as the weighted average at which the majority of the investors are willing to buy the security. • Under book building process, the issue prices of security is determined by the demand & supply forces in the capital Vipin k, Asst Prof. VJIM 144
  145. 145. • When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. • Based on the demand and supply of the shares, the final price is fixed Vipin k, Asst Prof. VJIM 145
  146. 146. • The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. • The price at which the shares are allotted is known as cut off price Vipin k, Asst Prof. VJIM 146
  147. 147. Issuing companies can select any of the following method: a) 100% of the offer to the public through the book building b) 75% of the offer through the book building & 25% through the fixed price method at the price determined through book building. c) 90% of the offer through the book building & 10% through the fixed price method. Vipin k, Asst Prof. VJIM 147
  148. 148. 1. The main difference between the book building method and the fixed price method is that in the former, the issue price is not decided initially. 2. The investors have to bid for the shares within the price range given and based on the demand and supply of the shares, the issue price is fixed. On the other hand, in the fixed price method, the price start. is decided right at the Vipin k, Asst Prof. VJIM 148
  149. 149. BOOK BUILDING VS FIXED PRICE 3. In fixed price, Investors cannot choose the price, but must buy the shares at the price decided by the company. Vipin k, Asst Prof. VJIM 149
  150. 150. Book building Process: • • • • • • • • • • The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'. The Issuer specifies the number of securities to be issued and the price band for the bids. The Issuer also appoints syndicate members with whom orders are to be placed by the investors. The syndicate members input the orders into an 'electronic book'. This process is called 'bidding' and is similar to open auction. The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band. Bids can be revised by the bidders before the book closes. On the close of the book building period, the book runners evaluate the bids on the basis of the demand at various price levels. The book runners and the Issuer decide the final price at which the securities shall be issued. Generally, the number of shares are fixed, the issue size gets frozen based on the final price per share. Allocation of securities is made to the successful bidders. The rest get refund orders. Vipin k, Asst Prof. VJIM 150
  151. 151. Vipin k, Asst Prof. VJIM 151
  152. 152. Components of investment return Vipin k, Asst Prof. VJIM 152
  153. 153. • Period cash flow. • eg:- dividend or interest generated by investment. • Measured as the period income in relation to the beginning price of the investment. • May be +ve or zero Vipin k, Asst Prof. VJIM 153
  154. 154. • It reflects the price changes • Price appreciation or depreciation • May be +ve,-ve or zero Vipin k, Asst Prof. VJIM 154
  155. 155. Total return = Current Return + Capital Return Vipin k, Asst Prof. VJIM 155
  156. 156. Vipin k, Asst Prof. VJIM 156
  157. 157. • Return likely to expect from the investment. • Weighted average of all possible returns multiplying their respective probabilities. • ( If things are uncertain) Vipin k, Asst Prof. VJIM 157
  158. 158. • If the possible return denoted by Xi, and the related probabilities as P(xi). Expected return represented as . = ∑Xi P(Xi) Vipin k, Asst Prof. VJIM 158
  159. 159. • If things are certain E(Ri) = D1+(P1-P0) P0 D1 = Expected dividend P1 = Stock price at the end P0 = Current market price Vipin k, Asst Prof. VJIM 159
  160. 160. Vipin k, Asst Prof. VJIM 160
  161. 161. Vipin k, Asst Prof. VJIM 161
  162. 162. Defining Risk Possibility of incurring losses in a financial transaction. What rate of return do you expect on your investment this year? What rate will you actually earn? Vipin k, Asst Prof. VJIM 162
  163. 163. Defining Risk • An investment whose return are fairly stable is considered to be a low-risk investment. • An investment whose return fluctuate significantly is considered to be a high risk investment. Vipin k, Asst Prof. VJIM 163
  164. 164. Vipin k, Asst Prof. VJIM 164
  165. 165. Vipin k, Asst Prof. VJIM 165
  166. 166. • Risk arises from uncontrollable factors. • Affects entire market(macro in nature) • Occurrences of certain event can affect all companies, firms at the same time. • Also called uncontrollable risk or un- diversifiable risk. • Eg:- economic condition, political situation etc Vipin k, Asst Prof. VJIM 166
  167. 167. SYSTEMATIC RISK • Risk that caused by external factors such as economic, political and sociological conditions. • Risk arises due to external factors they are beyond the control of the company affected, and hence are uncontrollable or referred to as undiversifiable risk. Vipin k, Asst Prof. VJIM 167
  168. 168. Vipin k, Asst Prof. VJIM 168
  169. 169. • Variations in return caused by the volatility of the stock market is referred to as the market risk. • Occurs due to the reactions of investors in the stock market • Either upward or downward • Upward –bullish trend • Downward – bearish trend the movement can easily seen with indices like BSE SENSEX, NSE index etc. Vipin k, Asst Prof. VJIM 169
  170. 170. • Referred as stock variability due to changes in investors attitude and expectations. • At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. • Investors reaction towards tangible and intangible events is the chief cause for Market risk. Vipin k, Asst Prof. VJIM 170
  171. 171. For e.g.  Investors perception towards Mergers and acquisitions  Dividends declaration  Bulk buying and selling by FII  Institutional investors  and other economic issues like government policy etc., Vipin k, Asst Prof. VJIM 171
  172. 172. • Variability in securities return resulting from changes in the level of interest rate. • It is the risk caused by the variations in the market interest rate. • Affects debt securities like debentures, bonds. • Extensive use of borrowed fund in the stock market. Vipin k, Asst Prof. VJIM 172
  173. 173. Causes of interest rate risk are: • Changes in the Government’s monitory policy • Changes in the interest rate of treasury bills • Changes in the interest rates of Government Bonds. Etc………….. Vipin k, Asst Prof. VJIM 173
  174. 174. • Variations in return are caused by the loss of purchasing power of the currency. • Purchasing Power Risk is the chance that changing price levels (inflation or deflation) will adversely affect investment returns. • Inflation is the reason behind the loss of purchasing power. • Inflation may be – Demand-Pull or Cost-Push inflation Vipin k, Asst Prof. VJIM 174
  175. 175. Demand-Pull Inflation When demand is increasing but supply cannot be increased, the price of the goods increases there by forcing out some of the excess demand and bringing the demand and supply into equilibrium. Cost-Push inflation When the cost of production increases prices of the product will also increase Vipin k, Asst Prof. VJIM 175
  176. 176. B. UNSYSTEMATIC RISK • Unsystematic risk is due to the influence of internal factors prevailing within an organization. • Such factors are normally controllable from an organization's point of view • It is a micro in nature as it affects only a particular organization • It is avoidable through diversification ( Diversifiable Risk) • Eg:- managerial inefficiency, labor problems etc…. Vipin k, Asst Prof. VJIM 176
  177. 177. • Sources – Operating environment of the company & Financing pattern adopted by the company Vipin k, Asst Prof. VJIM 177
  178. 178. Vipin k, Asst Prof. VJIM 178
  179. 179. • Risk caused by the operating environment of the business. • Risk associated with a particular company or industry. • Business risk can be caused by changes in a company’s sales due to operating problems, such as a strike, technical obsolescence etc…….. • Risk arising from the inability to maintain its competitive edge and growth or stability of earnings. Vipin k, Asst Prof. VJIM 179
  180. 180. Variability in EPS due to the presents of debt in the capital structure of a company. Associated with the capital structure of the company. Vipin k, Asst Prof. VJIM 180
  181. 181. Systematic Risk + Unsystematic Risk Vipin k, Asst Prof. VJIM 181
  182. 182. STD DEV OF PORTFOLIO RETURN Unsystematic risk Total Risk Systematic risk NUMBER OF SECURITIES IN THE PORTFOLIO Vipin k, Asst Prof. VJIM 182
  183. 183. STD DEV OF PORTFOLIO RETURN Unsystematic risk Total Risk Systematic risk NUMBER OF SECURITIES IN THE PORTFOLIO Vipin k, Asst Prof. VJIM 183
  184. 184. Vipin k, Asst Prof. VJIM 184
  185. 185. • Detailed analysis of fundamental factors affecting the performance of the companies. • Analysis used to evaluate the present and future earnings capacity of shares based on economy, industry and company fundamentals. Vipin k, Asst Prof. VJIM 185
  186. 186. • Fundamental analysis studies the basic facts affecting a stock’s value. financial statements, industry reports, and economic factors Vipin k, Asst Prof. VJIM 186
  187. 187. Assessing the intrinsic value of shares Comparing the intrinsic value with current market price and makes decision. Vipin k, Asst Prof. VJIM 187
  188. 188. • Intrinsic value refers to the actual value of a company or stock determined through fundamental analysis without reference to its market value. • Frequently called fundamental value. • It is ordinarily calculated by summing the future income generated by the asset, and discounting it to the present value. Vipin k, Asst Prof. VJIM 188
  189. 189. • An investor can compare the intrinsic value of share with the prevailing market price to arrive at an investment decision. • The market price of the share is lower than its intrinsic value the investor would decide to buy the share as it is under price. • The market price of the share is higher than its intrinsic value, it is perceived to be overpriced. Investor would sell such shares. Vipin k, Asst Prof. VJIM 189
  190. 190. Vipin k, Asst Prof. VJIM 190
  191. 191. EIC Vipin k, Asst Prof. VJIM 191
  192. 192. Vipin k, Asst Prof. VJIM 192
  193. 193. • Performance of a company depends on the performance of economy. • When the economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high. • Essential to understand the behavior of stock Vipin k, Asst Prof. VJIM 193 prices.
  194. 194. Key economic variable that an investor must consider as a part of fundamental analysis are: • • • • Growth rate of national income Inflation Interest Government revenue, expenditure and deficit • Exchange rate • Infrastructure • Economy and political stability etc…… Vipin k, Asst Prof. VJIM 194
  195. 195. • An evaluation of relative strengths and weakness of particular industries. • Performance of companies will depends up on the state of industry to which they belong. • If the industry grow company also grow & vice versa Vipin k, Asst Prof. VJIM 195
  196. 196. Vipin k, Asst Prof. VJIM 196
  197. 197. Factors to be considered : • Growth of the industry • Cost structure and profitability • Nature of the product • Nature of the competition • Government policy • Research and development etc………. Vipin k, Asst Prof. VJIM 197
  198. 198. • Final stage of fundamental analysis. • Deals with the estimation of return and risk of individual shares. • Information regarding companies : Internal and External Vipin k, Asst Prof. VJIM 198
  199. 199. • Internal information consists of data and events made public by companies concerning their operation. • Internal information sources: annual report to shareholders, the company’s financial statements etc… • External informationVipin k, Asst Prof. VJIM generated 199
  200. 200. Analysis of financial statements • Comparative financial statements • Trend analysis • Fund flow analysis • Cash flow analysis • Ratio analysis etc………. Vipin k, Asst Prof. VJIM 200
  201. 201. Ratio analysis • Liquidity ratios – Current ratio, quick ratio • Leverage ratios – Debt-equity ratio, debt to asset ratio • Profitability ratios – Gross profit ratio, net profit ratio Vipin k, Asst Prof. VJIM 201
  202. 202. Vipin k, Asst Prof. VJIM 202
  203. 203. Vipin k, Asst Prof. VJIM 203
  204. 204. Meaning: • Study of market generated data like price and volume to determine the future direction of price movement. • A study of past or historical price and volume movement so as to predict the future stocks price behavior. • Forecasting techniques that utilize historical share price data. Vipin k, Asst Prof. VJIM 204
  205. 205. • Technical analysts believe that past patterns of market action will recur in the future and that past patterns can be used for predictive purposes. • Some of the tools used by chartists to measure supply and demand and to forecast security prices are the Dow theory chart, odd-lot theory, confidence index, breadth-of-market indicators, relative-strength analysis, and trading-volume data. Vipin k, Asst Prof. VJIM 205
  206. 206. Assumptions/basic principles/premises of technical analysis  Market prices are determined by the interactions of supply and demand forces.  Supply and demand are influenced by variety of factors, both rational and irrational. Includes fundamentals as well as psychological factors.  Shift in demand & supply bring about changes in trends.  Shift in demand & supply detected with the help of charts of market action.  Analysis of past market data can be used to predict the future price behavior. Vipin k, Asst Prof. VJIM 206
  207. 207. Vipin k, Asst Prof. VJIM 207
  208. 208. Vipin k, Asst Prof. VJIM 208
  209. 209. Vipin k, Asst Prof. VJIM 209
  210. 210. Vipin k, Asst Prof. VJIM 210
  211. 211. • Charles .H. Dow • Editor of wall street journal, in USA • Popularly known as Theory of Technical analysis Vipin k, Asst Prof. VJIM 211
  212. 212. According to Charles .H. Dow • “ The market is always considered as having three movements, all going at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement covering at least four years in its duration” Vipin k, Asst Prof. VJIM 212
  213. 213. • The Dow theory is used to indicate reversals and trends in the market as a whole or in individual securities. • According to the theory, there are three movements going on in the markets at all times: 1. daily fluctuations (the narrow movement from day-to-day) 2. secondary movements (short-run movements over two weeks to a month or more) 3. primary trends, major movements covering at least four years in duration Vipin k, Asst Prof. VJIM 213
  214. 214. • Dow formulated a hypothesis is that the stock market does not move on a random basis but is influenced by three distinctive cyclical trends that guides its direction. 1) Primary / main movements 2) Secondary reaction / correction movement 3) Minor / narrow movements Vipin k, Asst Prof. VJIM 214
  215. 215. According to Dow theory • Price movements in the market can be identified by means of line chart. • In the line chart, closing price of shares or the closing value of the market index may be plotted against the corresponding trading day. • The charts helps in identifying the primary, secondary and minor movements. Vipin k, Asst Prof. VJIM 215
  216. 216. * Primary or main movements /trend • Long range cycle that carries the entire market up or down long term trend in the market. * Secondary reaction or correction movement/trend • These are the opposite direction to the primary movements • Only for a short period • Eg:- when the market is moving upward continuously, this upward movement will be interrupted by downward movement of short duration. Vipin k, Asst Prof. VJIM 216
  217. 217. Vipin k, Asst Prof. VJIM 217
  218. 218. Minor or Narrow movements/trend  Day today fluctuations in the market  Not significant & have no analytical value  Very short duration Vipin k, Asst Prof. VJIM 218
  219. 219. • Primary movements – Tides • Secondary/ correction movements – Waves • Minor/ Narrow movements – Ripples Vipin k, Asst Prof. VJIM 219
  220. 220. • Trend is the direction of movement. • Share price can either increase, decrease or remain in flat. • The three directions : Vipin k, Asst Prof. VJIM 220
  221. 221. • Share price do not rise or fall in a straight line. • Every rise or fall in price experience a counter moves • Share price move in a zigzag manner. Vipin k, Asst Prof. VJIM 221
  222. 222. Trend lines • Straight line drawn connecting either the top or bottom of the price movement • To draw a trend line, the technical analyst should have at lest two tops or bottoms. Vipin k, Asst Prof. VJIM 222
  223. 223. (1) Rising/up trend Vipin k, Asst Prof. VJIM 223
  224. 224. (2) Falling/down trend Vipin k, Asst Prof. VJIM 224
  225. 225. (3) Flat trend Vipin k, Asst Prof. VJIM 225
  226. 226. Trend Reversal • Changes in the direction of trend is referred to as trend reversal. • A share that exhibits a rising trend may start to move narrowly or fall after some times, this change in the direction of movement represent trend reversal. • Technical analyst tries to identify the trend reversal at an early stage so as to trade profitably. Vipin k, Asst Prof. VJIM 226
  227. 227. • When the trend begins to rise the technical analyst would recommend purchase of the shares. • When the trend begins to fall, sale is indicated. • During a flat trend the investor should stay away from the market. Vipin k, Asst Prof. VJIM 227
  228. 228. Trend Reversal Vipin k, Asst Prof. VJIM 228
  229. 229. • Ralph Elliot • Theory was formulated in 1934 • After analyzing 75 years of stock market price movements and charts. • According to this theory – market movement was quite orderly and followed a patter of waves. Vipin k, Asst Prof. VJIM 229
  230. 230. According to this theory • The market moves in waves (A wave is a movement of the stock price from one change in the direction to the next change in the same direction. Depending on the demand & supply pressure waves are generated) Vipin k, Asst Prof. VJIM 230
  231. 231. Vipin k, Asst Prof. VJIM 231
  232. 232. According to this theory • A movement in a particular direction can be represented by five distinctive waves. • Of these five waves, three waves are in the direction of the movement & are called impulse waves. • Two waves are against the direction of the movement & are termed as corrective waves or reaction waves Vipin k, Asst Prof. VJIM 232
  233. 233. Graph Vipin k, Asst Prof. VJIM 233
  234. 234. Graph Vipin k, Asst Prof. VJIM 234
  235. 235. Graph Vipin k, Asst Prof. VJIM 235
  236. 236. • Waves 1,3 & 5 are the impulsive waves • 2 & 4 are the corrective waves • The wave 1 is upwards and wave 2 correct the wave 1. • Waves 3 & 5 are impulsive and 4 corrects wave 3 Vipin k, Asst Prof. VJIM 236
  237. 237. • Correction involves correcting the earlier rise • Wave 2 would correct the rise of wave 1 • Wave 4 would correct the rise of wave 3 & after the completion of wave 5, there would come a correction which would be labeled ABC • This correction would be in three waves in which the waves ‘A & C’ will be against the trend and wave ‘B’ will be along the trend. Vipin k, Asst Prof. VJIM 237
  238. 238. • The ABC correction following the fifth wave would correct the entire rise from the starting of wave 1 to the end of the fifth wave. • One complete cycle consist of waves made up of two distinctive phases, bullish & bearish. One full cycle of waves is completed after the termination of 8 waves movement, there will be a fresh cycle started. • The theory is used for predicting the future price changes & in deciding the timing of investment. Vipin k, Asst Prof. VJIM 238
  239. 239. Support and Level • Support and resistance define natural boundaries for rising and falling prices. Vipin k, Asst Prof. VJIM 239
  240. 240. Vipin k, Asst Prof. VJIM 240
  241. 241. Support Level • Level that the technical analyst believes a stock price will not fall below. Some times called “Floor”. Vipin k, Asst Prof. VJIM 241
  242. 242. Resistance Level • Opposite of support level. • Technical analyst believe that stock price will not exceed. Vipin k, Asst Prof. VJIM 242
  243. 243. Breakout • The security price moves out of the previous trading range (breaching the resistance or support level) Vipin k, Asst Prof. VJIM 243
  244. 244. • Term used to study the advance and decline that have occurred in the stock market. • Advance means – Number of shares whose prices have increased from the previous day’s trading. • Decline means – Number of shares whose prices have fallen from the previous day’s trading. • The net difference between the number of stock advanced & declined during the same period is the breadth of the market. Vipin k, Asst Prof. VJIM • A cumulative index of net differences measure the market 244
  245. 245. Day advance decline Net Breadth 21-02-12 1486 774 712 712 22-02-12 1310 966 344 1056 23-02-12 898 1225 -327 729 24-02-12 1108 1091 17 746 25-02-12 931 1279 -348 398 Vipin k, Asst Prof. VJIM 245
  246. 246. Vipin k, Asst Prof. VJIM 246
  247. 247. • Line Chart • Bar Charts • Candlestick Charts Vipin k, Asst Prof. VJIM 247
  248. 248. Line Chart  The most basic of the four charts – because it represents only the closing prices over a set period of time.  The line is formed by connecting the closing prices over the time frame.  Do not provide visual information of the trading range for the individual points such as the high, low and opening prices.  The closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts. Vipin k, Asst Prof. VJIM 248
  249. 249. Line Chart Vipin k, Asst Prof. VJIM 249
  250. 250. Bar Charts • The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the closing price. • The close and open are represented on the vertical line by a horizontal dash. • The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. • Conversely, the close is represented by the dash on the right. Vipin k, Asst Prof. VJIM 250
  251. 251. Bar Charts • Generally, if the left dash (open) is lower than the right dash (close) then the bar will be shaded black, representing an up period for the stock, which means it has gained value. • A bar that is colored red signals that the stock has gone down in value over that period. When this is the case, the dash on the right (close) is lower than the dash on the left (open). Vipin k, Asst Prof. VJIM 251
  252. 252. Bar Charts Vipin k, Asst Prof. VJIM 252
  253. 253. Candlestick Charts • Similar to a bar chart, but it differs in the way that it is visually constructed. • The difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close. And, like bar charts, candlesticks also rely heavily on the use of colors to explain what has happened during the trading period. • There are two color constructs for days up and one for days that the price falls. • When the price of the stock is up and closes above the opening trade, the candlestick will usually be white or clear. • If the stock has traded down for the period, then the candlestick will usually be red or black, depending on the site. • If the stock's price has closed above the previous day's close but below the day's open, the candlestick will be black or filled with the color that is used to indicate an up day Vipin k, Asst Prof. VJIM 253
  254. 254. Candlestick Charts Vipin k, Asst Prof. VJIM 254
  255. 255. • Mathematical indicators calculated with the help of the closing price data. • Helps to identify overbought and over sold conditions of the scrip. • Helps to identify possibility of trend reversal. Vipin k, Asst Prof. VJIM 255
  256. 256. • RSI (Relative Strength Index) • ROC (Rate of Change Indicator) • MACD (Moving Average Convergence/Divergence) Vipin k, Asst Prof. VJIM 256
  257. 257. (Relative Strength Index) RSI = 100 – 100 (1+RS) RS = Average gain per day Average loss per day Vipin k, Asst Prof. VJIM 257
  258. 258. • Most commonly used time period for the calculation of RSI is 14 days. • RSI value ranging from 0 – 100 • RSI value above 70 are considered to denote overbought condition. • RSI value below 30 considered to denote oversold condition. Vipin k, Asst Prof. VJIM 258
  259. 259. Vipin k, Asst Prof. VJIM 259
  260. 260. ROC (Rate of Change Indicator) • ROC measures the rate of change of the current price as compared to the price a certain number of days or weeks back. • ROC = Current price price ‘n’ period ago Vipin k, Asst Prof. VJIM - 1 260
  261. 261. ROC (Rate of Change Indicator) • Value may be +ve,-ve or zero • When the ROC line is above the zero line, the price is rising & when it is below zero line ,the price is falling. Vipin k, Asst Prof. VJIM 261
  262. 262. MACD (Moving Average Convergence Divergence) • Short term & long term exponential moving average are calculated with the help of closing price data. • A 12 day & 48 day exponential moving average are popular combination • Difference between short term & long term EMA represent MACD Vipin k, Asst Prof. VJIM 262
  263. 263. MACD (Moving Average Convergence Divergence) Vipin k, Asst Prof. VJIM 263
  264. 264. MACD (Moving Average Convergence Divergence) • MACD line (blue line): difference between the 12 and 26 days EMAs • signal (red line): 9 day EMA of the blue line • histogram (bar graph): difference between the blue and red lines Mathematically: • MACD = [stockPrices,12]EMA - [stockPrices,26]EMA • signal = [MACD,9]EMA • histogram = MACD – signal Vipin k, Asst Prof. VJIM 264
  265. 265. • Shares are generally sold in a lot of hundreds • Shares are sold in smaller lots fewer than 100 are called odd lot. • Buyers & sellers of odd lots are called odd lotters. • Odd lot purchases to odd lot sales ( purchase %) is the odd lot index. ( Odd lot purchases divided by odd lot sales) • Increases the odd lot purchases results in an increase in the index.(selling leads to fall the index) Vipin k, Asst Prof. VJIM 265
  266. 266. • Basic assumption of technical analyst is that price trends occur in an orderly manner & not random. • Random walk theory gained popularity in 1973 when Burton Malkiel wrote "A Random Walk Down Wall Street", a book that is now regarded as an investment classic. • Theory that states that the past movement or direction of the price of a stock or overall market cannot be used to predict its future movement. Vipin k, Asst Prof. VJIM 266
  267. 267. • Random walk theory states that market price evolve at random and do not follow any regular pattern. • According to this theory future stock price are completely independent of past stock prices. • The Random Walk Hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted by analyzing the past stock prices. Vipin k, Asst Prof. VJIM 267
  268. 268.  Market is supreme and no investor or group can influence it.  Stock price discount all information quickly.  Markets are efficient and that the flow of information is free and unbiased.  All investors have free access to the same information and nobody has superior knowledge or expertise.  Market quickly adjusts itself to any deviations from equilibrium level due to the operations of free forces of demand and supply. Vipin k, Asst or insider information.  Nobody has better knowledge Prof. VJIM 268
  269. 269. • Hypothesis states that the capital market is efficient in processing information. • Efficient capital market is one in which security prices equal their intrinsic value at all time, and where most securities are correctly priced. • According to Elton and Gruber,” when some one refers to efficient capital markets, they mean that securities prices fully reflect all available information” Vipin k, Asst Prof. VJIM 269
  270. 270. Forms of market efficiency • There are three forms of the efficient market hypothesis • The "Weak" form asserts that all past market prices and data are fully reflected in securities prices. In other words, technical analysis is of no use. • The "Semi strong" form asserts that all publicly available information is fully reflected in securities prices. In other words, fundamental analysis is of no use. • The "Strong" form asserts that all information is fully reflected in securities prices. In other words, even insider information is of no use. Vipin k, Asst Prof. VJIM 270
  271. 271. • In this diagram, the circles represent the amount of All historical prices and returns information that each form of the S tro n g F o rm EMH includes. • Note that the weak form covers S em i-S tro n g the least amount of information, and the strong form covers all W eak F o rm information. • Also note that each successive form includes the previous ones. All information, public and private Vipin k, Asst Prof. VJIM All public information 271
  272. 272. • Information is free and quick to flow • All investors have the same access to information. • Every investor has access to lending and borrowing at the same rate. • Market absorbs the information quickly and the market responds to new technology, new trends, change the tastes, etc efficiently and quickly. • Investors are rational and behave in a cost effective competitive manner for optimization of returns Vipin k, Asst Prof. VJIM 272
  273. 273. Vipin k, Asst Prof. VJIM 273
  274. 274. In the financial marketplace some instruments are regarded as fundamentals, while others are regarded as derivatives. Financial Marketplace Derivatives Fundamentals Vipin k, Asst Prof. VJIM 274
  275. 275. Financial Marketplace Derivatives Fundamentals • Futures • Forwards • Options • Swaps • Stocks • Bonds • Etc. Vipin k, Asst Prof. VJIM 275
  276. 276. Options Futures Futures The value of the derivative instrument is DERIVED from the underlying security Forwards Swaps Swaps Underlying instrument such as a commodity, a stock, a bond, anotherAsst Prof. VJIM derivative etc.. Vipin k, 276
  277. 277. What do derivatives do?  Derivatives attempt either to minimize the loss arising from adverse price movements of the underlying asset Or maximize the profits arising out of favorable price fluctuation.  Derivatives derive their value from the underlying asset they are called as derivatives. Vipin k, Asst Prof. VJIM 277
  278. 278. Options An option is the right, not the obligation to buy or sell something on a specified date at a specified price. In the securities market, an option is a contract between two parties to buy or sell specified number of shares at a later date for an agreed price. Three parties are involved in the option trading, 1. The option seller 2. The option Buyer 3. Broker Vipin k, Asst Prof. VJIM 278
  279. 279. •Call option •Put option Vipin k, Asst Prof. VJIM 279
  280. 280. • When an option grants the buyer the right to purchase the underlying assets/stock from the seller a particular quantity at a specified price within a specified expiration date. • An option contract giving the owner the right to buy a specified amount of an underlying security at a specified price within a specified time. Vipin k, Asst Prof. VJIM 280
  281. 281. • A call option gives you the right to buy within a specified time period at a specified price. • The owner of the option pays a cash premium to the option seller in exchange for the right to buy. Vipin k, Asst Prof. VJIM 281
  282. 282. Eg:An investor buys a call option to purchase 100 SBI shares Strike price Current stock price Price of an option to buy one share The initial investment Rs.320 per share Rs.310 per share Rs.20 100x Rs.20=2000 Outcome: assume at the expiration of the option, SBI share price is Rs.350. At this time option is exercised for a gain of (Rs.350-320)x100=Rs3000. When the initial cost is taken, the net gain is Rs3000-Rs.2000=Rs.1000 Vipin k, Asst Prof. VJIM 282
  283. 283. • An option contract giving the owner the right to sell a specified amount of an underlying security at a specified price within a specified time. Vipin k, Asst Prof. VJIM 283
  284. 284. • A put option gives you the right to sell within a specified time period at a specified price. • It is not necessary to own the asset before acquiring the right to sell it. Vipin k, Asst Prof. VJIM 284
  285. 285. An investor Purchases a put option to sell100 SBI shares Strike price Current stock price Price of put option to sell one share The initial investment Rs.320 per share Rs.310 per share Rs.15 100x Rs.15=1500 • Outcome: at the expiration of the option, SBI share price is Rs300.at this time, the investor buy 100 SBI shares at Rs.300 and then sell at Rs320 to the option buyer to realize Rs20 per share, being Rs2000 in total. • When initial cost is taken, net gain is Rs2000Rs1500=500 Vipin k, Asst Prof. VJIM 285
  286. 286. Vipin k, Asst Prof. VJIM 286
  287. 287. Call Option ATM Exercise Price = Market Price ITM Exercise Price < Market Price OTM Exercise Price > Market Price PUT OPTION ATM Exercise Price = Market Price ITM Exercise Price > Market Price OTM Exercise Price < Market Price Vipin k, Asst Prof. VJIM 287
  288. 288. The European kind of option is the one which can be exercised by the buyer on the expiration day only & not anytime before that. An American style option is the one which can be exercised by the buyer on or before the expiration date, i.e. anytime between the day of purchase of the option and the day of its expiry. Vipin k, Asst Prof. VJIM 288
  289. 289. • The fixed price at which the option holder can buy and/ or sell the underling asset is called exercise price or strike price. Vipin k, Asst Prof. VJIM 289
  290. 290. Premium is the price paid by the buyer to the seller to acquire the right to buy or sell. It is the total cost of an option. Vipin k, Asst Prof. VJIM 290
  291. 291. • The date on which the option expires is known as Expiration Date. Vipin k, Asst Prof. VJIM 291
  292. 292. Vipin k, Asst Prof. VJIM 292
  293. 293. Vipin k, Asst Prof. VJIM 293
  294. 294. • Initially developed in 1973 by two academicians, Fisher Black & Myron Scholes. • Designed to price European options. Vipin k, Asst Prof. VJIM 294
  295. 295. • The call option is the European option • The stock price is continuous and is distributed normally • There are no transaction costs and taxes • Stock trading is continuous • The short term risk free interest rate R is constant • The stock pays no dividend Vipin k, Asst Prof. VJIM 295
  296. 296. C S N (d1 ) ln( S / K ) Ke R d1 d2 rt ( N (d 2 ) 2 / 2) t t d1 t Vipin k, Asst Prof. VJIM 296
  297. 297. • Variable definitions: C = theoretical call premium/value of the call option S = current stock price t = time in years until option expiration K = option striking price R = risk-free interest rate Vipin k, Asst Prof. VJIM 297
  298. 298. Variable definitions: N(d1) , N(d2) = value of the cumulative normal density function. In(S/K)= is the natural logarithm = standard deviation of stock returns e = base of natural logarithm (2.7183) Vipin k, Asst Prof. VJIM 298
  299. 299. Vipin k, Asst Prof. VJIM 299
  300. 300. Mutual Fund • A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. • Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. • These investors buy units of a particular Mutual Fund scheme that has a defined investment objective and strategy. • The money collected is invested by the fund manager in different types of securities. These could range from shares to debentures to money market instruments, depending upon the scheme’s stated objectives. • The income earned through these investments and the capital appreciation realized by the scheme are shared by its unit holders in proportion to the number of units owned by them. Vipin k, Asst Prof. VJIM 300
  301. 301. Vipin k, Asst Prof. VJIM 301
  302. 302. Mutual Funds • What are the advantages of Mutual Fund Investing? – Diversification • While owning a single stock or bond is very risky, owning a mutual fund which holds numerous securities can reduce risk significantly – Professional management • Picking your own stocks and bonds to put in your portfolio and beating your benchmarks is difficult and time consuming. Hiring a mutual fund to make those decisions for you can be beneficial and save time
  303. 303. Mutual Funds • Minimal transaction costs – Buying individual stocks and bonds is expensive in terms of transactions costs. Mutual funds enjoy economies of scale in purchases and sales due to size • Liquidity – Buying and selling individual stocks and bonds takes time. Money from open-end mutual funds can be received in two business days • Flexibility – Individual stocks and bonds are not flexible. With many mutual funds, you have more flexibility and can often write checks on your account
  304. 304. Mutual Funds (continued) • Low cost – “No-load” mutual funds are sold without a sales charge and are redeemed without a charge as well Vipin k, Asst Prof. VJIM 304
  305. 305. Mutual Funds (continued) • In addition, they may include: – Automatic investment and withdrawal plans – Automatic reinvestment of interest, dividends, and capital gains – Wiring and funds express options – Phone switching – Easy establishment of retirement plans – Check writing – Bookkeeping and help with taxes Vipin k, Asst Prof. VJIM 305
  306. 306. Mutual Funds (continued) • What are the disadvantages of Mutual Fund Investing? – Risk of lower-than-market performance • From 1986-2011, the average annual returns of actively managed stock funds underperformed the return of the S&P 500 stock index. Not all mutual funds outperform their benchmarks, and taxes take a significant part of investor returns Vipin k, Asst Prof. VJIM 306
  307. 307. Mutual Funds (continued) – High costs • Unless analyzed carefully, management and other fees can be significant. Vipin k, Asst Prof. VJIM 307
  308. 308. Mutual Funds (continued) • Other Risks – Mutual funds are subject to both market and stock related risks, particularly in concentrated portfolios • Inability to plan taxes – Mutual funds pass through 95% of all capital gains and dividends to the shareholders • Even if you do not sell your mutual fund, you can have a significant tax bill each year if your mutual fund trades often and has dividends, interest or capital gains – It is difficult to plan for taxes when the tax decision is taken by the portfolio manager, not you Vipin k, Asst Prof. VJIM 308
  309. 309. Asset Management Company (AMC) • A Company registered with SEBI, which takes investment/divestment decisions for the mutual fund, and manages the assets of the mutual fund. Vipin k, Asst Prof. VJIM 309
  310. 310. Asset Management Company [AMC] • An asset management company is a company registered under the Companies Act, 1956. The Sponsor creates the asset management company and this is the entity, which manages the funds of the mutual fund (trust). • The mutual fund pays a small fee to the AMC for management of its fund. The AMC acts under the supervision of Trustees and is subject to the regulations of SEBI. Vipin k, Asst Prof. VJIM 310
  311. 311. Mutual Fund Operation Flow Chart Vipin k, Asst Prof. VJIM 311
  312. 312. Organisation of a Mutual Fund Vipin k, Asst Prof. VJIM 312
  313. 313. Advantages of Mutual Funds • Professional Management • Diversification • Convenient Administration • Return Potential • Low Costs • Liquidity • Transparency • Flexibility • Choice of schemes • Tax benefits • Well regulated Vipin k, Asst Prof. VJIM 313
  314. 314. Types of Mutual Fund Schemes • Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. • The figure in the next slide gives an overview into the existing types of schemes in the Industry. Vipin k, Asst Prof. VJIM 314
  315. 315. Types of Schemes • By Structure – – Close Ended Schemes – • Open Ended Schemes Interval Schemes By Investment Objectives – – Income Schemes – Balance Schemes – • Growth Schemes Money Market Schemes Other Schemes – • Tax Saving Schemes Special Schemes – Index Schemes – Sector Specific Schemes Vipin k, Asst Prof. VJIM 315
  316. 316. Frequently Used Terms • Net Asset Value (NAV) • Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. • • Sale Price • Repurchase Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load. Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price. Vipin k, Asst Prof. VJIM 316

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