SAPM (SPU).pptx

SECURITIES ANALYSES
&
PORTFOLIO MANAGEMENT
Dr. Ashish Siddiqui,
SPU-MBA
COMPILED BY DR. ASHISH SIDDIQUI

INTRODUCTION

INTRODUCTION
For most of your life, you will be earning and spending money.
Rarely, though, will your current money income exactly balance with your
consumption desires.
 Sometimes, you may have more money than you want to spend; at other
times, you may want to purchase more than you can afford based on your
current income.
 These imbalances will lead you either to borrow or to save to maximize the
long-run benefits from your income
When current income exceeds current consumption desires, people tend to
save the excess, and they can do any of several things with these savings.
One possibility is to put the money under a mattress or bury it in the
backyard until some future time when consumption desires exceed current
income.
When they retrieve their savings from the mattress or backyard, they have
the same amount they saved. COMPILED BY DR. ASHISH SIDDIQUI

INTRODUCTION…
Another possibility is that they can give up the immediate
possession of these savings for a future larger amount of money that
will be available for future consumption.
 This trade-off of present consumption for a higher level of future
consumption is the reason for saving. What you do with the savings
to make them increase over time is investment.
Those who give up immediate possession of savings (that is, defer
consumption) expect to receive in the future a greater amount than
they gave up.
Conversely, those who consume more than their current income
(that is, borrow) must be willing to pay back in the future more than
they borrowed.

INTRODUCTION....
The rate of exchange between future consumption (future dollars)
and current consumption (current dollars) is the pure rate of interest.
Both people’s willingness to pay this difference for borrowed funds
and their desire to receive a surplus on their savings (that is, some
rate of return) give rise to an interest rate referred to as the pure time
value of money.
This interest rate is established in the capital market by a
comparison of the supply of excess income available (savings) to be
invested and the demand for excess consumption (borrowing) at a
given time.
If you can exchange INR 100 of certain income today for INR 104 of
certain income one year from today, then the pure rate of exchange
on a risk-free investment (that is, the time value of money) is said to

WHAT IS INVESTMENT?....
Investment is the current commitment of money for a period of time
in order to derive future payments that will compensate the investor
for;
(1) the time the funds are committed,
 (2) the expected rate of inflation during this time period,
 and (3) the uncertainty of future payments.
The “investor” can be an individual, a government, a pension fund,
or a corporation.
 Similarly, this definition includes all types of investments, including
investments by corporations in plant and equipment and investments
by individuals in stocks, bonds, commodities, or real estate.

INVESTMENT VERSUS
SPECULATION

GAMBLING
Gambling is fundamentally different from speculation and investment
in the following respects:
Compared to investment and speculation, the result of gambling is
known more quickly.
The outcome of a roll of dice or the turn of a card is known almost
immediately.
 Rational people gamble for fun, not for income.
Gambling does not involve a bet on an economic activity.
It is based on risk that is created artificially.
Gambling creates risk without providing any commensurate economic
return. COMPILED BY DR. ASHISH SIDDIQUI

INVESTMENT ALTERNATIVES
A bewildering Range of investment alternatives is available.
They fall into two broad categories, viz.,
Financial assets and real assets.
Financial assets are paper (or electronic) claims on some issuer
such as the government or a corporate body.
The important financial assets are equity shares, corporate
debentures, government securities, deposits with banks, mutual
fund shares, insurance policies, and derivative instruments.

Real assets are represented by tangible assets like residential
house, commercial property, agricultural farm, gold, precious
stones, and art objects.
As the economy advances, the relative importance of financial
assets tends to increase.
Of course, by and large the two forms of investments are
complementary and not competitive.

NON-MARKETABLE FINANCIAL ASSETS

NON-MARKETABLE FINANCIAL ASSETS
Employees’ Provident Fund or EPF
The Employees’ Provident Fund or EPF is a popular savings scheme that has been
introduced by the EPFO under the supervision of the Government of India.
The employee and employer each contribute 12% of the employee's basic salary
and dearness allowance towards EPF. The current rate of interest on EPF deposits
is 8.15% p.a.
 The accrued interest on the EPF is tax-free and can be withdrawn without paying for
the same. Employees avail of a lump-sum amount on their retirement, which is
inclusive of the accrued interest.
Individuals can apply to avail of various online services of EPF India by accessing
the official portal. The EPF online portal is a user-friendly platform that ensures the
flow of services is transparent, efficient, and hassle-free.

MARKETABLE FINANCIAL ASSETS
Equity Shares
Equity shares represent ownership capital.
As an equity shareholder, you have an ownership stake in the
company.
This essentially means that you have a residual interest in income
and wealth.
Perhaps the most romantic among various investment avenues,
equity shares are classified into the following broad categories by
stock market analysts
Blue chip, growth shares, income share, cyclical shares and
speculative shares.

Equity Shares-types
Growth stocks are associated with those organisations that will most likely grow
at an exceptional rate, trumping the average pace. These companies do not pay
dividends usually, but instead, their equity shares provide staggering capital
gains to investors. These types of equity shares are suitable for investors with a
high-risk aptitude.
Value stock-These are shares that trade at a price lower than its intrinsic value.
Thence, these types of shares are primarily suitable for value investors who
anticipate the market to quickly catch up, resulting in a share price appreciation
of such stocks
An income share is a type of share offered by a dual purpose fund (income or
capital appreciation) that appreciates very little but gives the shareholder all the
fund’s net income in cash.
Income shares are sought by investors who want a steady income stream rather
than capital appreciation (increased share value).
The opposite of income shares are accumulation shares, which provide little
income but are likely to appreciate. COMPILED BY DR. ASHISH SIDDIQUI

Equity Shares-types
Cyclical Stocks are the type of equity stocks whose price is affected
by macroeconomic or systematic changes in the overall economy of
the country.
In any economy, these kinds of stocks rise and fall with the
economic/business cycle.
A good example can be of Automobile stocks, banking stocks etc.

Bonds-Represent fixed interest bearing securities.
Government securities
Savings bonds
Government agency securities
PSU bonds
Debentures of private sector companies
Preference shares

Money Market Instruments
Debt instruments which have a maturity of less than one year at the
time of issue are called money market instruments.
I. Treasury bills
II. Commercial paper
III. Certificates of deposit

MONEY MARKET INSTRUMENTS
TREASURY BILLS
When the government seeks to raise funds on the financial market, it issues
two types of debt instruments: treasury bills and government bonds.
Treasury bills are issued when the government has an immediate need for
funds. The interest rate on these bills is established by market forces; they
are issued solely by the central government.
But financial institutions are usually the ones who invest the most in them.
Beyond investment products, they play a crucial role in the financial market.
The RBI receives treasury bills from banks in exchange for money from repo
operations. They can also store it to satisfy their Statutory Liquid Ratio (SLR)
requirements.
Therefore, Treasury Bills are a vital monetary instrument used by the Reserve
Bank of India. It assists RBI in regulating the economy’s total money supply
and in raising funds.

Types of Treasury Bills
14-Day T-Bill
These bills mature fourteen days after the date of issuance. They are
auctioned off on Wednesday, and payment is made the following week on
Friday. The auction is held weekly. These bills are sold in multiples of one
lakh rupees, and the minimum investment is also one lakh rupees.
91-Day T-Bill
These bills reach maturity 91 days from the date of issuance. They are
auctioned off on Wednesday, and payment is made the following week on
Friday. Each week, they are auctioned off. These bills are sold in multiples of
Rs.10,000, and the minimum investment amount is Rs.10,000.

182 Day T-Bill
These bills reach maturity 182 days after the date of
issuance. They are auctioned on Wednesday, and
payment is due the following week on Friday, when
the term expires. They are sold at auction every
other week. These bills are sold in multiples of
Rs.10,000, and the minimum investment amount is
Rs.10,000.

364-Day T-Bill
These bills reach maturity 364 days after their date of issuance. They
are auctioned on Wednesday, and payment is due the following week
on Friday, when the term expires. They are sold at auction every other
week. These bills are sold in multiples of Rs.10,000, and the
minimum investment amount is Rs.10,000.

CERTIFICATES OF DEPOSITS (CDS)
 Certificates of deposits (CDs) represent short term deposits which
are transferable from one party to another.
Banks and financial institutions are the major issuers of CDs.
The principal investors in CDs are banks, financial institutions,
corporates, and mutual funds. CDs are issued in bearer or registered
form.
They generally have a maturity of 3 months to 1 year.
CDs carry a certain interest rate.

COMMERCIAL PAPER
Commercial Paper (CP) is an unsecured money market instrument
issued in the form of a promissory note which was introduced in the
year 1990 with a view to enable highly rated corporate borrowers to
diversify their sources of short-term borrowings and to provide an
additional instrument to investors.
Commercial paper is a type of unsecured, short-term debt
instrument issued by corporations that are commonly used to finance
payroll, accounts payable, and inventories, as well as meet other
short-term liabilities.
Maturities on commercial paper typically last a few days and rarely
exceed 270 days.
Commercial paper is typically issued at a discount from face value,
reflecting market interest rates at the time. COMPILED BY DR. ASHISH SIDDIQUI

COMMERCIAL PAPER
The term repo is used as an abbreviation for Repurchase Agreement
or Ready Forward. A repo has a simultaneous SALE and repurchase
agreement
A repo works as follows. Party A needs short-term funds and Party B
wants to make a short-term investment. Party A sells securities to
Party B at a certain price and simultaneously agrees to repurchase the
same after a specified time at a slightly higher price.
The difference between the sale price and the repurchase price
represents the interest cost to Party A and conversely the interest
income for party B.
A reverse repo is the opposite of a repo it involves an initial purchase
of an asset followed by a sale. It is a safe and convenient form of
short-term investment. COMPILED BY DR. ASHISH SIDDIQUI

Mutual Funds/proxy Investment- Instead of directly
buying equity shares and/or fixed income
instruments, you can participate in various schemes
floated by mutual funds which, in turn, invest in equity
shares and fixed income securities
Life Insurance
In a broad sense, life insurance may be viewed as an
investment. Insurance premiums represent the
sacrifice and the assured sum, the benefit.

REAL ASSETS
Real assets are tangible or physical in nature.
The major types of real assets are as follows:
A. Real Estate
 Residential house
Commercial property
Urban and semi-urban land n Agricultural farm
Time share in a holiday resort
B. Precious Metals n Gold n Silver C. Precious Stones n Diamonds n
Others

Precious Objects-
Precious Objects- Precious objects are items that are generally small
in size but highly valuable in monetary terms.
The important precious objects are:
Gold and silver ,Precious stones and
Art Objects and Collectibles
Paintings
Sculptures
Antiques
Others

FINANCIAL DERIVATIVES
A derivative is an instrument whose value depends on the value of some
underlying asset.
The commonly used assets are stocks, bonds, currencies, commodities and
market indices.
The value of the underlying assets keeps changing according to market
conditions.
The basic principle behind entering into derivative contracts is to earn
profits by speculating on the value of the underlying asset in future.
Imagine that the market price of an equity share may go up or down. You
may suffer a loss owing to a fall in the stock value.
In this situation, you may enter a derivative contract either to make gains by
placing an accurate bet. Or simply cushion yourself from the losses in the
spot market where the stock is being traded. COMPILED BY DR. ASHISH SIDDIQUI

DIFFERENT TYPES OF
DERIVATIVE CONTRACTS
Options:
Options are derivative contracts that give the buyer a right to
buy/sell the underlying asset at the specified price during a certain
period of time.
The buyer is not under any obligation to exercise the option.
The option seller is known as the option writer. The specified price is
known as the strike price.
You can exercise American options at any time before the expiry of
the option period.
European options, however, can be exercised only on the date of the
expiration date.

DIFFERENT TYPES OF
Futures:
Futures are standardized contracts that allow the holder to buy/sell
the asset at an agreed price at the specified date.
The parties to the futures contract are under an obligation to
perform the contract. These contracts are traded on the stock
exchange.
The value of future contracts is marked to market every day.
It means that the contract value is adjusted according to market
movements till the expiration date.

DIFFERENT TYPES OF
Forwards:
Forwards are like futures contracts wherein the holder is under an
obligation to perform the contract.
But forwards are unstandardised and not traded on stock exchanges.
These are available over-the-counter and are not marked-to-market.
These can be customised to suit the requirements of the parties to
the contract.
Over the counter

DIFFERENT TYPES OF
Swaps:
Swaps are derivative contracts wherein two parties exchange their financial
obligations.
The cash flows are based on a notional principal amount agreed between
both parties without exchange of principal.
The amount of cash flows is based on a rate of interest.
One cash flow is generally fixed and the other changes on the basis of a
benchmark interest rate.
Interest rate swaps are the most commonly used category.
Swaps are not traded on stock exchanges and are over-the-counter
contracts between businesses or financial institutions.

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