IAPM Module 1- Introduction.pptx

SRI KRISHNA COLLEGE OF TECHNOLOGY
SCHOOL OF MANAGEMENT
22PMBE001 – INVESTMENT ANALYSIS
AND PORTFOLIO MANAGEMENT
Mr. SARAVANAN
ASSISTANT PROFESSOR

1.1: Investment
• Investment is the employment of funds on assets with the aim of
earning income or capital appreciation.
• Commitment of funds made in the expectation of some positive rate
of return.
Investment has two attributes namely time and risk.
• Possibility of variation in the actual return is known as investment
risk.
• Financial investment is the allocation of money to assets that are
expected to yield some gain over a period of time. It is an exchange
of financial claims such as stocks and bonds for money. They are
expected to yield returns and experience capital growth over the
years.
Safety for principal
Return
Risk

Financial and Economic Meaning
 Financial Meaning: Investment is the commitment of a person’s
funds to derive future income in the form of interest, dividend,
premiums, pension benefits or appreciation in the value of their
capital. (Financial Assets)
 Economic Meaning: Investment means the net additions to the
economy’s capital stock which consists of goods and services
that are used in the production of other goods and services.

Characteristics & Objectives
Characteristics objectives
Return Maximixzation of return
Risk Minimisation of risk
Liquidity Hedge against inflation
Safety

Characteristics
• Return – form of yield plus capital appreciation.
• Risk – Possibility of variation in the actual return.
• Safety – Return of capital without loss of money or
time.
• Liquidity – Easily saleable or marketable.

Objectives
• Maximization of Return
• Minimization of Risk
• Hedge against Inflation
Low Risk – Government Securities
Medium Risk – Debentures & Preference Shares
High Risk – Equity Shares

1.2: Securities Market
• 1602 - The Dutch East India company - Amsterdam Stock
Exchange.
• Stock – Stock is a part ownership of company
• It provides a share of the company in return for the capital
invested.
For example, if a company has a total of 1,00,000 shares and you
buy 1 share of the company, you have 1/1,00,000th ownership of the
company.

Stock Exchange
• A stock exchange is a market where the exchange of stocks and
other financial instruments are facilitated.
• The exchange provides services to stock brokers and traders to
buy or sell stocks
• Companies who are interested to generate capital from the public
get listed on the stock exchange.
• The companies have to fulfill the documentation and fee
requirements to get listed in the exchange so that their shares are
available to the general public to buy and sell.
• Most of the trading in the Stock Markets of India takes place
through its two main stock exchanges: the National stock
exchange (NSE) and Bombay stock exchange (BSE)

Types of stock market
a. Primary Market
• This is where companies issue their securities for the first time. It is the place
where the securities are created and the initial public offering (IPO) of the
company is made available to the people for the first time.
• The company has to adhere to the guidelines and procedures laid by the
exchange and the Regulatory body, i.e. the Securities Exchange Board of
India (SEBI)

Types of stock market
b. Secondary market
• The is what people usually refer to when they talk about the markets or “Stock
Markets”. It is the electronic platform where the buying and selling of shares and
other financial instruments takes place.
• An important feature of the secondary market is that the investors trade
amongst themselves.
• This means that if you are buying 1000 shares of ITC, some other investor is
selling 1000 shares of ITC.

How the stock market works?
• Open electronic limit order book – Trading
• The best buy orders are matched with the best sell orders and are
given priority on the basis of Time, Price and Quantity.
• The orders from retail investors have to be placed to their brokers
who act as a middlemen in the exchange and facilitate the trades.

Settlement cycle and Trading hours
• The Equity spot markets in India follows a T + 2 rolling settlement
cycle.
• This means that a trade taking place on a tuesday gets settled on
thursday.
• All the trading in the Indian Stock Exchanges in the equity and
derivatives segment takes place between 9.15 A.M. to 3.30 P.M.
The Currency Derivatives segment is open from 9.00 P.M.to 5.00
P.M.

Stock market indices
• An Index is a the basket of securities of an exchange which
measures the value of a section of the stock market. It is like a
barometer to measure the economic health of the country.
• The prominent Indices of the Indian Stock Market are the Sensex
and the Nifty. The Nifty is the index of the National Stock
Exchange (NSE). It consists of 50 shares listed on the NSE.
• It represents about 62% of its free-float market capitalisation.
• It was created in the year 1996 and contains the time series data
from July 1990 onwards.
• On the other hand, the Sensex is the index of the Bombay Stock
Exchange (BSE). It includes 30 stocks and represents about 45%
of its free-float market capitalisation.

Trading and Operational Mechanism
of stock Exchange
• About BSE (Bombay Stock Exchange)
• BSE is the oldest stock exchange of Asia established way back in 1875
and is located in the Dalal Street, Mumbai. Some of the features of BSE
are as follows:
• Till 2016 BSE had a market Capitalization of INR. 154.01 Lakh crore
• It has 5,749 listing of companies ranging from small capitalization to large
capitalization companies.
• It is also called as BSE 30 or simply SENSEX
• It is the 12th largest stock exchange in the world and claims to be the
fastest stock exchange in the world with a median trading speed of 6
micro seconds.

National Stock Exchange
• NSE is the most influential stock exchange in India, the reason
being that it provides derivatives trading apart from the normal
shares trading. Salient features of NSE are as follows:
• NSE has a market Capitalization of more than US$1.41 trillion.
• It is the 10th largest Stock Exchange in India.
• It is also called as NSE 50 or Nifty.
• It provides trading in equity, derivatives and debt.

Mechanism of Trading
• In order to induce more transparency and efficiency in the trading
system, NSE and BSE introduced nationwide online fully
automated “Screen Based Trading System”. The trading platform
used by BSE is called BOLT-Bombay Online Trading. The order of
investors is placed on the basis of time and price basis.
• Recently BSE has launched new software for trading called BEST
(BSE Electronic Smart Trader). It can be downloaded directly from
Android play store and an investor can enjoy zero transaction
charges for 6 months on cross currency derivatives.

Mechanism
1. Find a broker
2. Opening account with broker
3. Placing the order
4. Execution of the order
5. Preparation of contract notes
6. Contract settlement

Types of order
• Buy order
• Sell order
• Limit order
• Stop loss order
• Fixed price order
• Market order
• Discretionary order
• Cancel order
• Day order
• Good till day order

Depositories
• Depository participants work as an intermediary between listed
companies and shareholders.
• The securities exchange of India is responsible for the registration,
regulation and inspection of the depository.
• Two depositories in India
a. NSDL (National Securities Depositories Limited)
b. CDSL (Central Depositories Services Limited)

Structure of Stock market
• SEBI
• NSE and BSE
• Depository of NSE (NSDL) and BSE (CDSL)
• Depository participants (DP)
• Client or investors

Cont..
• Depository Participant (DP) is described as an Agent (law) of the
depository. They are the intermediaries between the depository
and the investors. The relationship between the DPs and the
depository is governed by an agreement made between the two
under the Depositories Act.
• A DP is an entity who is registered as Depository Participant with
SEBI under the sub section 1A of Section 12 of the SEBI’s Act. As
per the provisions of this Act, a DP can offer depository-related
services only after obtaining a certificate of registration from SEBI.

CDSL and NSDL
• Central Depositories Services India Ltd. (CDSL) and National
Securities Depository Ltd. (NSDL) are both government registered
share depositories in India.
• Share depositories hold shares in an electronic form.
• In earlier days where share trading was available only in offline
modes, shares were held in the form of physical paper certificates.
• CDSL and NSDL are to shares what banks are to cash and fixed
deposits. Banks help you to keep your cash in electronic form as
opposed to physical cash in your almirahs and share depositories
help you in storing shares in a dematerialised form.
• NSDL is the depository for NSE and CDSL is BSE’s depository.
CDSL was established in 1999 and NSDL was established in
1996.

Difference
• Stock exchange
• Promoters (NSDL-UTI, NSE and IDBI bank; CDSL-BSE)
• Establishment years (CDSL- 1999; NSDL- 1996)
• Demat account number format (CDSL-16 numeric digits; NSDL-14
numeric and 2 alpha numeric)
• Number of Depository participants registered CDSL-592; NSDL-
278 DP)

How do depository work
• Depository interacts with its clients or investors through its agents, called
Depository Participants normally known as DPs.
• For any investor or client, to avail the services provided by the Depository,
has to open Depository account, known as Demat A/c, with any of the DPs.
• Demat account
• A Demat account or dematerialised account converts the shares from the
paper form into an electronic form. They are similar to pass books offered
by the banks where you have opened an account. You can easily buy or
sell shares of different companies using your Demat account. All the
transactions are entered into it akin to the bank passbook.

Accounts maintenance
1. Beneficiary account
2. Clearing member account
3. Intermediary account

Dematerialization Process
1. Filling of demat request form and giving physical share
certificates to the depository participant
2. DP contacts the Depository and updates them about the request
of the investor.
3. DP submits all these documents to the Registrar of the
concerned issuer company.
4. Registrar confirms the request.
5. Registrar dematerialises the certificates and documents.
6. Registrar after having done the updation of certificates informs
the Depository.
7. Depository does updation of its accounts and informs DP.
8. Finally demat account is updated by the DP

Advantages of trading through a
demat account
• A Demat Account promises security in transactions, timely delivery
of shares, reduced fraudulent transactions.
• As the paper use is limited in the process so costs associated are
reduced greatly and the cost per transaction is also lowered than
physical trading.
• The process has provided mobility and ease of working from
anywhere.
• In addition investors can invest in IPO’s, ETF’s of gold and carry
out trading at huge volumes that was not possible earlier.

Risk and Return
• Download historical stock price of Infosys, TCS, Wipro for last
three years (from Jan 2018 till Jan 2021). Find out risk and return
using spreadsheet

 The actual return he receives from a stock may vary from his expected
return and the risk is expressed in terms of variability of return.
 Risk consists of two components, the systematic risk and unsystematic
risk.
 The systematic risk is caused by factors external to the particular
company and the uncontrollable by the company. The systematic risk
affects the market as a whole.
 In the case of unsystematic risk the factors are specific, unique and
related to the particular company or industry.
RISK

Risk
Systematic risk
Market risk
Interest rate risk
Purchasing power risk
Unsystematic risk
Business risk Financial risk

a. Holding period return – It is also called as one
period rate of return. This holding period return
can be calculated daily or monthly or annually.
HPR=Price gain or loss + Coupon interest rate
Price at the beginning
HPR=(100+100)/900=0.22 or 22%
An investor Rajesh purchased a bond at a price of
Rs.900 with Rs.100 as coupon payment and sold it
at Rs.1000. What is his holding period return?
Bond Return

Yield to maturity is the rate of return, which an investor
can expect to earn if the bond is held till maturity.
Y= C+(P or D/Years to maturity)
(P0+F)/2
Y=Yield to maturity
C=Coupon interest rate
P or D = Premium or Discount
P0= Present Value
F = Face Value
b. Yield to Maturity

Standard Deviation
• Tool for assessing risk associated with particular investment
• It tells you how much the fund's return can deviate from the
historical mean return of the scheme. The higher the SD, higher
will be the fluctuations in the returns.

Practice problem
• Assume that there is a bond on the market
priced at Rs.850 and with face value of
Rs.1000. Coupon rate is Rs.150, the bond
will reach maturity in 7 years. Calculate
Yield till maturity of the bond
• Y= C+(F-P0)/Years to maturity)
• (P0+F)/2
• Y=Yield to maturity
• C=Coupon interest rate
• P or D = Premium or Discount
• P0= Present Value
• F = Face Value
=150+(150)/7
(1000+850)/2
=0.185 or 18.5%

Stock return includes both current income and capital gain
caused by the appreciation of the price.
The income and capital gain are expressed as a percentage
of money invested in the beginning.
Capital Gain is the difference between buying and selling
price
Stock Return

Practice problem
• Suppose you bought 100 shares of India cements company at the
rate of Rs.225. Par value of each share is Rs.10
• Total investment =100*225=rs.22500
• During the year, India cements company paid dividend at 25%.
• Dividend per share at par value =0.25*10=Rs.2.50
• Dividend=(Dividend rate*Par value)* Number of shares
Dividend income=2.50*100=Rs.250
Suppose the price of the share at the end of the year is Rs.267.50
Capital gain=(selling price –Purchase price)* No. of shares
Capital gain=(267.50-225)*100=Rs.4250
Total return =Dividend income + Capital gain=250+4250=Rs.4500

Assume investor purchase 60 shares of GALEXO Smithkline. If
share price on April 23rd 2020 was Rs.1448.50 and 23/4/2021 price
is Rs.1466.35. Dividend of this company is Rs.20 per share. What
is the rate of return?
Dividend per share Rs.20
Dividend income=20*60=Rs.1200
Capital gain=(SP-PP)*No. of shares=(1466.35-
1448.50)*60=Rs.1071
Total Gain =1200+1071=Rs.2271
Rate of return=Total gain / cost per
share=2271/1448.50=1.5678=156.78%

• Impact of corporate action announcement on stock price of XYZ Ltd.
• Calculate risk and return before announcement
• Calculate risk and return after announcement
• Find out the impact
• Select 5 or 10 companies from BSE or NSE
• Corporate action announcement
Dividend
Stock split (No. of shares will be increased and price of the share will
be decreased)
Merger or acquisition
Right issue – Company going to issue the shares to the existing
shareholders based on the proportion of their investment

Return Probability P * R
10% 0.1 =0.1*0.1=0.01
11% 0.2 =0.11*0.2=0.022
12% 0.4 =0.12*0.4=0.048
13% 0.2 =0.13*0.2=0.026
14% 0.1 =0.14*0.1=0.014
Expected Return =0.12 or 12%
Find out the expected rate of return

Other forms of return
• Relative return
It is the difference between absolute return achieved by the
investment and the return achieved by the benchmark.
• Inflation adjusted return
- Also called real rate of return
- Inflation-adjusted return reveals the return on investment after
removing the effects of inflation.
- Inflation adjusted return=[(1+Return)/(1+inflation rate)]-1

Types of securities
• A security is a financial instrument, typically any financial asset that
can be traded.
a. Equity securities
b. Debt securities
c. Derivatives

Equity securities
• Equity almost always refers to stocks and a share of ownership in
a company (which is possessed by the shareholder).
• Equity securities usually generate regular earnings for
shareholders in the form of dividends. An equity security does,
however, rise and fall in value in accord with the financial markets
and the company’s fortunes.

Debt securities
• Debt securities differ from equity securities in an important way; they
involve borrowed money and the selling of a security. They are issued by
an individual, company, or government and sold to another party for a
certain amount, with a promise of repayment plus interest.
• They include a fixed amount (that must be repaid), a specified rate of
interest, and a maturity date (the date when the total amount of the
security must be paid by).
• Bonds, promissory notes), and treasury bills are all examples of debt
securities. They all are agreements made between two parties for an
amount to be borrowed and paid back – with interest – at a previously-
established time.

Derivatives
• Security value is based on an underlying asset that is then
purchased and repaid, with the price, interest, and maturity date all
specified at the time of the initial transaction.
• The individual selling the derivative doesn’t need to own the
underlying asset outright. The seller can simply pay the buyer back
with enough cash to purchase the underlying asset or by offering
another derivative that satisfies the debt owed on the first.
• A derivative often derives its value from commodities such as gas
or precious metals such as gold and silver. Currencies are another
underlying asset a derivative can be structured on, as well as
interest rates, Treasury notes, bonds, and stocks.

Capital Asset pricing Model
• Capital asset pricing model or CAPM is a specialised model used
in business finance to determine the relationship between the
expected dividends and the risk associated with investing in
particular equity.
• Assessing the capital asset pricing model requires a proper
understanding of systematic and unsystematic risks.
• CAPM deals with systematic risks

CAPM formula
CAPM formula is given by
• Ra = Rf + Be x (Rm – Rf)
The different factors of this equation are –
• Ra = Expected dividend from investment
• Rf = Risk-free rate
• Be = Beta factor of the underlying transaction
• (Rm – Rf) = Current market risk premium

Beta
• Risk associated with investment is lower than present condition
Beta<1
Risk equals to market condition Beta=1
Risk exceeds market condition Beta>1
Beta helps to identify volatility or risk
Standard deviation – Identify risk of individual security
Beta – Risk of security with reference to market risk

Problem for discussion
• Investor wants to buy the share Rs.367, annual return 4%, beta factor
1.1; risk free premium 3%, market appreciation 7% annually. Find out
expected dividend
Ra=Rf+B(Rm-Rf)
Rf=4%; B=1.1; Rm-7%; Rf(risk premium)-3%
=0.04+1.1(0.07-0.03)
Ra=0.084 or 8.4%
Buy the stock Rs.500, annual rate of return 8%; beta 0.8; risk free rate
5%; market appreciation 8%. Find out the expected rate of return
Ra=Rf+B(Rm-Rf)
Rf=0.08; B=0.8; Rm=0.08; Rf(risk premium)=0.05
Ra=0.08+0.8(0.08-0.05)=0.104 or 10.4%

Security Analysis and
Portfolio
Management

Introduction
• Security Analysis Examining the risk-return
characteristics of individual securities. Fundamental
Analysis and technical Analysis.
• Portfolio Management : Investment in Group of
Securities and optimally combining securities into
portfolios.

Investment - Meaning
 Investment is the employment of funds on
assets with the aim of earning income or capital
appreciation.
 Commitment of funds made in the expectation
of some positive rate of return.
 Investment has two attributes namely time and
risk.
 Possibility of variation in the actual return is
known as investment risk.
 Financial investment is the allocation of money
to assets that are expected to yield some gain
over a period of time. It is an exchange of
financial claims such as stocks and bonds for

Decision process
• Identify the problem
• Gather relevant information
• Develop as many alternatives as possible
• Analyse and select the best alternatives
• Implement the selected alternatives
• Follow up of results

Decision Process
Investment
process
Investment
policy
Investable
fund
Objectives
knowledge
analysis
Market
Industry
company
Valuation
Intrinsic value
Future value
Portfolio
construction
Diversification
Selection &
allocation
Portfolio
evaluation
Appraisal
Revision

Types of Investors
 Investors may be individuals and institutions.
 Individual investors operate alongside institutional
investors in the investment arena.
 Their characteristics are different.
 Individual investors are large in numbers but their
investable resources are comparatively smaller.
 There are two types of investors, retail investors
and institutional investors:

Institutional investor
 Venture capital and private equity funds, which serve as investment
collectives on behalf of individuals, companies, pension plans,
insurance reserves, or other funds.
 Businesses that make investments, either directly or via a captive fund
 Investment trusts, including real estate investment trusts
 Mutual funds, hedge funds, and other funds, ownership of which may
or may not be publicly traded (these funds typically pool money raised
from their owner-subscribers to invest in securities)
 Sovereign wealth funds

Investment Alternatives
The problem of surplus gives rise to the question of where to
invest.
In the past, investment avenues were limited to real assets,
scheme of the post office and banks.
At present, a wide variety of investment avenues are open to the
investors to suit their needs and nature.
A knowledge about the different avenues enables the investors to
choose investment intelligently.
The required level of return and the risk tolerance level decide the
choice of the investor.

 The investment alternatives ranges from financial securities to
non-security investments.
i) Negotiable securities
ii) Non- negotiable securities
iii) Mutual funds
iv) Real assets

Choice and Evaluation
 Investment evaluation techniques. They can be distinguished into
two groups
 Static Method: They focus especially on monitoring of cash benefits.
They don’t include a risk factor and take the time into account only
in a limited extent.
 Dynamic Method: They take into account the time and risk factor

Risk
 The actual return he receives from a stock may vary from his
expected return and the risk is expressed in terms of variability of
return.
 Risk consists of two components, the systematic risk and
unsystematic risk.
 The systematic risk is caused by factors external to the particular
company and the uncontrollable by the company.
 The systematic risk affects the market as a whole. In the case of
unsystematic risk the factors are specific, unique and related to
the particular company or industry.

Risk
Systematic risk
Market risk
Interest rate risk
Purchasing power risk
Unsystematic risk
Business risk
Internal
business risk
External
business risk
Financial risk

UNIT 1
 Investment -Meaning, Nature and Scope
 Decision Process
 Financial and Economic Meaning
 Characteristics and Objectives
 Types of Investors
 Investment Alternatives
 Choice and Evaluation
 Risk and Return Concepts

IAPM Module 1- Introduction.pptx

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IAPM Module 1- Introduction.pptx