LEEWAY

SIXTH SEMESTER BBA LLB

INVESTMENT MANAGEMENT
CREATED BY
AJITH.V [BBA LLB 5th YEAR]
RATHULDEV.S [BBA LLB 5th YEAR]

POWERED BY
UDSF UNIT COMMITTEE
MCT COLLEGE OF LEGAL STUDIES MALAPPURAM
12 MARK

DERIVATIVES
 Derivatives are financial contracts whose value is dependent on an underlying asset or group of assets. 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.
 According to the Securities Contract Regulation Act, (1956) the term “derivative” includes:
o A security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security;
o A contract which derives its value from the prices, or index of prices, of underlying securities.

Types of Derivative Contracts

Derivatives comprise four basic contracts namely Forwards, Futures, Options and Swaps.

Forward Contracts
 These are promises to deliver an asset at a pre- determined date in future at a predetermined price. Forwards
are highly popular on currencies and interest rates.
 The contracts are traded over the counter (i.e. outside the stock exchanges, directly between the two parties)
and are customized according to the needs of the parties.
 Since these contracts do not fall under the purview of rules and regulations of an exchange, they generally
suffer from counterparty risk i.e. the risk that one of the parties to the contract may not fulfill his or her
obligation.
 A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of
the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain
specified future date for a certain specified price.
 The other party assumes a short position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the
contract.
 The forward contracts are normally traded outside the exchanges.

Futures Contracts:
 A futures contract is an agreement between two parties to buy or sell an asset at a certain time in future at a
certain price. These are basically exchange traded, standardized contracts.
 The exchange stands guarantee to all transactions and counterparty risk islargely eliminated. The buyers of
futures contracts are considered having a long position whereas the sellers are considered to be having a
short position.
 It should be noted that this is similar to any asset market where anybody who buys is long and the one who
sells in short.
 Futures contracts are available on variety of commodities, currencies, interest rates, stocks and other
tradable assets. They are highly popular on stock indices, interest rates and foreign exchange.
 It is a standardized contract with standard underlying instrument, a standard quantity and quality of the
underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and
a standard timing of such settlement.

Options Contracts
 Options give the buyer (holder) a right but not an obligation to buy or sell an asset in future. Options are of
two types - calls and puts.
 Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a
given price on or before a given future date.
 Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given
price on or before a given date.
 One can buy and sell each of the contracts. When one buys an option he is said to be having a long position
and when one sells he is said to be having a short position.
 The buyer has a right to buy (call options) or sell (put options) the asset from / to the seller of the option but
he may or may not exercise this right.
 In case the buyer of the option does exercise his right, the seller of the option must fulfill whatever is his
obligation (for a call option the seller has to deliver the asset to the buyer of the option and for a put option
the seller has to receive the asset from the buyer of the option).
 An option can be exercised at the expiry of the contract period (which is known as European option
contract) or anytime up to the expiry of the contract period (termed as American option contract).

1. Call options

 Calls give the buyer the right, but not the obligation, to buy the underlying asset at the strike price
specified in the option contract.
 Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they
believe it will decrease.

2. Put options

 Puts give the buyer the right, but not the obligation, to sell the underlying asset at the strike price
specified in the contract.
 The writer (seller) of the put option is obligated to buy the asset if the put buyer exercises their option.
Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they
believe it will increase.

Swaps
 Swaps are private agreements between two parties to exchange cash flows in the future according to a
prearranged formula. They can be regarded as portfolios of forward contracts.
 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.
 The two commonly used swaps are:
• Interest rate swaps: These entail swapping only the interest related cash flows between the Parties in
the same currency
• Currency swaps: These entail swapping both principal and interest between the parties, with the cash
flows in one direction being in a different currency than those in the opposite direction

Technical Analysis

 Unlike fundamental analysis, which attempts to evaluate a security's value based on business results such as
sales and earnings, technical analysis focuses on the study of price and volume.
 Technical analysis tools are used to scrutinize the ways supply and demand for a security will affect changes
in price, volume, and implied volatility.
 Technical analysis is often used to generate short-term trading signals from various charting tools, but can
also help improve the evaluation of a security's strength or weakness relative to the broader market or one of
its sectors. This information helps analysts improve their overall valuation estimate.
 Technical analysis can be used on any security with historical trading data. This includes
stocks, futures, commodities, fixed-income, currencies, and other securities
 In fact, technical analysis is far more prevalent in commodities and forex markets where traders focus on
short-term price movements.
 Technical analysts have also developed numerous types of trading systems to help them forecast and trade
on price movements.
 Some indicators are focused primarily on identifying the current market trend, including support and
resistance areas, while others are focused on determining the strength of a trend and the likelihood of its
continuation.
 Commonly used technical indicators and charting patterns include trendlines, channels, moving averages,
and momentum indicators.
 In general, technical analysts look at the following broad types of indicators:
o Price trends
o Chart patterns
o Volume and momentum indicators
o Oscillators
o Moving averages
o Support and resistance levels

FUNDAMENTAL ANALYSIS

 Fundamental analysis is really a logical and systematic approach to estimating the future dividends and
share price it is based on the basic premise that share price is determined by a number of fundamental
factors relating to the economy, industry and company.
 In other words fundamental analysis means a detailed analysis of the fundamental factors affecting the
performance of companies.
 Each share is assumed to have an economic worth based on its present and future earning capacity .this is
called its intrinsic value or fundamental value.
 The purpose of fundamental analysis is to evaluate the present and future earning capacity of a share based
on the economy, industry and company fundamentals and thereby assess the intrinsic value of the share
 The investor can compare the intrinsic value of the share with the prevailing market price to arrive at an
investment decision.
 If the market price of the share is lower than its intrinsic value, the investor would decide to buy the share as
it is underpriced. The price of such share is expected to move up in the future to match with its intrinsic
value.
 Fundamental analysis thus involves three components:
o 1. Economic analysis
o 2. Industry analysis
o 3. Company analysis

Economy analysis
The performance of a company depends on the performance of the economy. Let us look some of the key
economic variables that an investor must monitor as part of his fundamental analysis.
Growth rate of national income
The rate of growth of the national economy is an important variable to be considered by an investor.GNP (gross
national product), NNP (net national product), GDP (gross domestic product)are the different measures of the
total income or total economic output as a whole.
Inflation
Inflation leads to erosion of purchasing power in the hands of consumers, this will result in lower the demand of
products Inflation prevailing in the economy has considerable impact on the performance of companies. Higher
rate of inflation will upset business plans.
Interest rates
Interest rates determine the cost and availability of credit for companies operating in an economy. a low interest
rate stimulates investment by making credit available easily and cheaply.
Government revenue, expenditure and deficits
Government is the largest investor and spender of money, the trend in government revenue and expenditure and
deficit have a significant impact on the performance of industries and companies’ expenditure by the
government stimulates the economy by creating jobs and generating demand.
Exchange rates
The performance and profitability of industries and companies that are major importers or exporters are
considerably affected the exchange rates of the rupee against major currencies of the world. a depreciation of
the rupee improves the competitive position of Indian products in the foreign markets ,thereby stimulating
exports
Infrastructure
The development of an economy depends very much on the infrastructure available. The availability of
infrastructure facilities such as power, transportation, and communication systems affects the performance of
companies bad infrastructure lead to inefficiencies, lower productivity, wastage and delays.
Monsoon
The Indian economy is essentially an agrarian economy and agriculture forms a very important sector of the
Indian economy. The performance of agriculture to a very extent depends on the monsoon; the adequacy of the
monsoon determines the success or failure of the agricultural activities in India.

Industry analysis
 An industry ultimately invests his money in the securities of one or more specific companies, each company
can be characterized as belonging to an industry.
 The performance of companies would therefore ,be influenced by the fortunes of the industry to which it
belongs. an industry “as a group of firms producing reasonably similar products which serve the same needs
of common set of buyers.”
Industry life cycle
The industry life cycle theory is generally attributed to Julius grodinsky. According to the industry life cycle
theory ,the life of an industry can be segregated into to the pioneering stage the expansion stage, the stagnation
stage, and the decay stage .this kind of segregation is extremely useful to an investor because the profitability of
an industry depends upon its stage of growth.
Industry characteristics
In an industry analysis there are a number of key characteristics that should be considered by the analyst.
Demand supply gap
The demand for the product usually trends to change at a steady rate, where as the capacity to produce the
product tends to change at irregular intervals, depending upon the installation of additional production capacity.
As result an industry is likely to experience under supply and over supply of capacity at different times.
Competitive conditions in the industry
The level of competition among various companies in an industry is determined by certain competitive forces.
These competitive forces are: barriers to entry, the threat of substitution, bargaining power of the suppliers and
the rivalry among competitors.
Permanence
Permanence is the phenomenon related to the products and the technology used by the industry. if an analyst
feels that the need for a particular industry will vanish in a short period ,or that the rapid technological changes
would render the products obsolete within short period of time, it would be foolish to invest such industry.
Labour conditions
In our country the labour unions are very power full .if the labour in a particular industry is rebellious and is
inclined to resort to strikes frequently, the prospects of that industry cannot become bright.
Supply of raw materials
This is also one of the important factor determine the profitability of an industry. Some industry may have no
difficulty in obtaining the major raw materials as they may be indigenously available in plenty.

Company analysis
 Company analysis is the final stage of fundamental analysis. The economy analysis provides the investor a
broad outline of the prospects of growth in the economy, the industry analysis helps the investor to select
the industry in which investment would be rewarding.
 Now he has to decide the company in which he should invest his money. Company analysis provides answer
to this question.
 In company analysis, the analyst tries to forecast the future earnings of the company because there is a
strong evidence that the earnings have a direct and powerful effect upon share prices.
 The level, trend and stability of earnings of a company, however depend upon a number of factors
concerning the operations of the company.

Financial statements
 The financial statements of a company help to assess the profitability and financial health of the company.
The two basic financial statements provided by a company are the balance sheet and the profit and loss
account.
 The balance sheet indicates the position of the company on a particular date, namely the last day of the
accounting year.
 The profit and loss account, also called income statement, reveals the revenue earned, the cost incurred and
the resulting profit and loss of the company for one accounting year.
Analysis of financial statements
 Financial ratios are most extensively used to evaluate the financial performance of the company, it also help
to assess the whether the financial performance and financial strengths are improving or deteriorating, ratios
can be used for comparative analysis either with other firms in the industry through a cross sectional
analysis or a time series analysis.

Other variables
The future prospects of the company would also depend upon the number of other factors some of which is
given below:
1. Company’s market share
2. Capacity utilization
3. Modernisation and expansion plans
4. Order book position
5. Availability of raw material

Security Analysis

 Security analysis refers to the method of analyzing the value of securities like shares and other instruments
to assess the total value of business which will be useful for investors to make decisions.
 Security analysis is typically divided into fundamental analysis, which relies upon the examination of
fundamental business factors such as financial statements, and technical analysis, which focuses upon price
trends and momentum.
 Another form of security analysis is technical analysis which uses graphs and diagrams for price prediction
securities
 There are three methods to analyze the value of securities – fundamental, technical, and quantitative
analysis.

Fundamental Analysis

 This type of security analysis is an evaluation procedure of securities where the major goal is to calculate
the intrinsic value of a stock.
 It studies the fundamental factors that effects stock’s intrinsic value like profitability statement & position
statements of a company, managerial performance and future outlook, present industrial conditions, and the
overall economy.

Technical Analysis

 This type of security analysis is a price forecasting technique that considers only historical prices, trading
volumes, and industry trends to predict the future performance of the security.
 It studies stock charts by applying various indicators (like MACD, Bollinger Bands, etc.), assuming every
fundamental input has been factored into the price.

Quantitative Analysis

 This type of security analysis is a supporting methodology for both fundamental and technical analysis,
which evaluates the historical performance of the stock through calculations of basic financial ratios, e.g.,
 Earnings Per Share (EPS), Return on Investments (ROI), or complex valuations like discounted cash flows
(DCF).

Why Analyze Securities?

The basic target of every individual is to increase its Net Worth by investing its earnings into various financial
instruments, i.e., the creation of money using the money. Security analysis helps people achieve their ultimate
goal, as discussed below:

 Returns
o The primary objective of the investment is to earn returns in the form of capital appreciation as well
as yield.

 Capital Gain
o Capital Gain or appreciation is the difference between the sale price and purchase price.

 Yield
o It is the return received in the form of interest or dividend.
o Return = Capital Gain + Yield

 Risk
o It is the probability of losing the principal capital invested. Security analysis avoids risks and ensures
the safety of capital, also creates opportunities to outperform the market.

 Safety of Capital
o The capital invested with proper analysis; avoids chances to lose both interest and capital. Invest in
less risky debt instruments like bonds.
 Inflation
o Inflation kills one’s purchasing power. Inflation over time causes you to buy a smaller percentage of
good for every dollar you own.
o Proper investments provide you hedge against inflation. Prefer common stocks or commodities over
bonds.

 Risk-Return relationship
o The higher the potential return of an investment, the higher will be the risk. But the higher risk
doesn’t guarantee higher returns.

 Diversification
o “just don’t put all your eggs in one basket,” i.e., do not invest your whole capital in a single asset or
asset class but allocate your capital in a variety of financial instruments and create a pool of assets
called a portfolio.
o The goal is to reduce the risk of volatility in a particular asset.

National Stock Exchange of India

 National Stock Exchange (NSE) is stock exchange located in Mumbai, India. National Stock Exchange
(NSE) was established in the mid 1990s as a demutualised electronic exchange.
 NSE provides a modern, fully automated screen-based trading system, with over two lakh trading terminals,
through which investors in every nook and corner of India can trade.
 NSE has played a critical role in reforming the Indian securities market and in bringing unparalleled
transparency, efficiency and market integrity.
 The National Stock Exchange of India was incorporated in 1992 and recognized as a stock exchange in
1993, at a time when PV Narasimha Rao was the Prime Minister of India and Dr. Manmohan Singh was the
finance minister. It was set up to bring in transparency in the markets.
 Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most
significant stock exchanges in India, and between them are responsible for the vast majority of share
transactions.
 NSE's flagship index, the CNX NIFTY 50, is used extensively by investors in India and around the world to
take exposure to the Indian equities market.
 NSE was started by a clutch of leading Indian financial institutions. It offers trading, clearing and settlement
services in equity, debt and equity derivatives.
 It is India's largest exchange, globally in cash market trades, in currency trading and index options.
 NSE has diversified shareholding. There are many domestic and global institutions and companies that hold
stake in the exchange.

Operations of NSE

 The NSE fulfils its functions of exchange listings, settlement services, trading services, indices, technology
solutions, market data feeds and financial education offerings efficiently and effectively. Its unrelenting
work has increased the reliability and performance of the financial system.
 The NSE has trading in not just the debt and equity market, but also has trading in derivatives. In the year
2011, NSE launched derivative contracts on the S&P 500 and the Dow Jones Industrial Average indices.
 NSE has also contributed significantly to the financial literacy in the country by conducting several
campaigns and programmes through government and university tie-ups.
 One of the latest initiatives of NSE is the NSE EMERGE. It ensures that small and medium scale enterprises
as well as start-ups get listed on the NSE without an IPO. It is a good platform to connect the investors with
these emerging enterprises.
 To establish a trading facility for debt, equity, and other asset classes accessible to investors across the
nation.
 To act as a communication network providing investors an equal opportunity to participate in the trading
system.
 To meet the global standards set for financial exchange markets.
 To provide a shorter trade settlement period and enable the book-entry settlement system

OTC Exchange of India

 OTC Exchange of India (OTCEI) also known as Over-the-Counter Exchange of India based in Mumbai,
Maharashtra. It is the first exchange for small companies.
 It is the first screen based nationwide stock exchange in India. It was set up to access hightechnology
enterprising promoters in raising finance for new product development in a cost effective manner and to
provide transparent and efficient trading system to the investors.
 OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of India,
the Industrial Development Bank of India, the Industrial Finance Corporation of India and others and is a
recognized stock exchange under the SCR Act.
 OTC Exchange Of India was founded in 1990 under the Companies Act 1956 and got recognized by the
Securities Contracts Regulation Act, 1956 as a stock exchange.

SEBI

 The listed companies or public limited companies issuing right shares by 31st July 2020 and intending to
send notices to the shareholders, may do so in any other mode other than registered post, speed post or
courier and is not considered a violation of SEBI circular.
 SEBI plays an important role in regulating all the players operating in the Indian capital market. It attempts
to protect the interest of investors and aims at developing the capital markets by enforcing various rules and
regulations.
 SEBI is a statutory regulatory body established on the 12th of April, 1992. It monitors and regulates the
Indian capital and securities market while ensuring to protect the interests of the investors, formulating
regulations and guidelines. The head office of SEBI is at Bandra Kurla Complex, Mumbai.
 SEBI has a corporate framework comprising of various departments each managed by a department head.
There are about 20 departments under SEBI.
 Some of these departments are corporation finance, economic and policy analysis, debt and hybrid
securities, enforcement, human resources, investment management, commodity derivatives market
regulation, legal affairs, and more.
 The hierarchical structure of SEBI consists of the following members:

 The chairman of SEBI is nominated by the Union Government of India.

 Two officers from the Union Finance Ministry will be a part of this structure.
 One member will be appointed from the Reserve Bank of India.
Five other members will be nominated by the Union Government of India.

Functions of SEBI

 SEBI is primarily set up to protect the interests of investors in the securities market.
 It promotes the development of the securities market and regulates the business.
  SEBI provides a platform for stockbrokers, sub-brokers, portfolio managers, investment advisers, share
transfer agents, bankers, merchant bankers, trustees of trust deeds, registrars, underwriters, and other
associated people to register and regulate work.
 It regulates the operations of depositories, participants, custodians of securities, foreign portfolio
investors, and credit rating agencies.
 It prohibits insider trading, i.e. fraudulent and unfair trade practices related to the securities market.
 It ensures that investors are educated on the intermediaries of securities markets.
 It monitors substantial acquisitions of shares and take-over of companies.
 SEBI takes care of research and development to ensure the securities market is efficient at all times.

Approaches to Investment analysis

The Fundamental Approach:

 The Fundamental Approach is an attempt to identify overvalued and undervalued securities. The assumption
for undervalued stock is that the market will eventually recognize its error and price will be driven up
toward true value.

 Overvalued stocks are identified so that they can be avoided, sold or sold short. The investor should select
stocks based on an economic analysis, industry analysis and company analysis.

Technical Approach:

 The Technical Approach centres around plotting the price movement of the stock and drawing inferences
from the price movement in the market.
 The technicians believe that stock market history will repeat itself. Charts of past prices, especially those
which contain predictive patterns can give signals towards the course of future prices.
 The emphasis is laid on capital gains or price appreciation in the short run.
 The technicians believe that the stock market activity is simultaneously making different movements.
Primarily it makes the long-term movement called the bull or bear market.
 The secondary trend is usually for short-terms and may last from a week to several weeks or months.
 Technical analysis is based on the assumption that the value of a stock is dependent on demand and supply
factors.
 This theory discards the fundamentalist approach to intrinsic value. Changes in the price movements
represent shifts in supply and demand balance.
 Supply and demand factors are influenced by rational forces and certain irrational factors like guesses,
hunches, moods and opinions.
 The technicians’ tools are expressed in the form of charts which compare the price and volume
relationships

Efficient Market Theory:

 The Efficient Market Theory is based on the efficiency of the capital markets. It believes that market is
efficient and the information about individual stocks is available in the markets.
 There is proper dissemination of information in the markets: this leads to continuous information on price
changes. Also the prices of stock between one time and another are independent of each other and so it is
difficult for any investor to predict future prices.
 Each investor has equal information about the stock market and prices of each security. It is, therefore,
assumed that no investor can continuously make profits on stock prices. Therefore, securities will proved
similar returns at the same risk level.
 The Modern Portfolio Management is based on the ‘random walk model’ which is generally studied through
the Efficient Market Hypothesis (EMH). The EMH has three forms: weak, semi-strong and strong. This
means that the market is weakly efficient, fairly efficient or strongly efficient as transmitters of information.

MUTUAL FUNDS
 A mutual fund is a professionally managed type of collective investment scheme that pools money from
many investors and invests it in stocks, bonds, short-term money market instruments and other securities.
 Mutual funds have a fund manager who invests the money on behalf of the investors by buying / selling
stocks, bonds etc.
 An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of
investing in securities such as stocks, bonds, money market instruments and similar assets.
 Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital
gains and income for the fund's investors.
 A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its
prospectus.
 Mutual fund investments in stocks, bonds and other instruments require considerable expertise and constant
supervision, to allow an investor to take the right decisions.
 Small investors usually do not have the necessary expertise and time to undertake any study that can
facilitate informed decisions.
 While this is the predominant reason for the popularity of mutual funds, there are many other benefits that
make mutual funds appealing.

ADVANTAGES OF MUTUAL FUNDS

Diversification Benefits
 Diversified investment improves the risk return profile of the portfolio. Optimal diversification has
limitations due to low liquidity among small investors.
 The large corpus of a mutual fund as compared to individual investments makes optimal diversification
possible.
Low Transaction Costs:
 Mutual fund transactions are generally very large. These large volumes attract lower brokerage commissions
and other costs as compared to smaller volumes of the transactions that individual investors enter into.
 The brokers quote a lower rate of commission due to two reasons. The first is competition for the
institutional investors business.
 The second reason is that the overhead cost of executing a trade does not differ much for large and small
orders.
Availability of Various Schemes
 There are four basic types of mutual funds: equity, bond, hybrid and money market. Equity funds
concentrate their investments in stocks.
 Similarly bond funds primarily invest in bonds and other securities. Equity, bond and hybrid funds are
called long-term funds.
Professional Management
 Management of a portfolio involves continuous monitoring of various securities and innumerable economic
variables that may affect a portfolio's performance.
 This requires a lot of time and effort on part of the investors along with in-depth knowledge of the
functioning of the financial markets.
Liquidity
 Liquidating a portfolio is not always easy. There may not be a liquid market for all securities held. In case
only a part of the portfolio is required to be liquidated, it may not be possible to see all the securities
forming a part of the portfolio in the same proportion as they are represented in the portfolio; investing in
mutual funds can solve these problems.
Returns
 In India dividend received by investors is tax-free. This enhances the yield on mutual funds marginally as
compared to income from other investment options.
 Also in case of long-term capital gains, the investor benefits from indexation and lower capital gain tax.
Flexibility
 Features of a MF scheme such as regular investment plan, regular withdrawal plans and dividend
reinvestment plan allows investors to systematically invest or withdraw funds according to the needs and
convenience.

Disadvantages of Mutual funds

No Insurance: Mutual funds, although regulated by the government, are not insured against losses. That means
that despite the risk-reducing diversification benefits provided by mutual funds, losses can occur, and it is
possible (although extremely unlikely) that you could even lose your entire investment.
Dilution: Although diversification reduces the amount of risk involved in investing in mutual funds, it can also
be a disadvantage due to dilution. For example, if a single security held by a mutual fund doubles in value, the
mutual fund itself would not double in value because that security is only one small part of the fund’s holdings.
Fees and Expenses: Most mutual funds charge management and operating fees that pay for the fund’s
management expenses (usually around 1.0% to 1.5% per year for actively managed funds). In addition, some
mutual funds charge high sales commissions, 12b-1 fees, and redemption fees.
Poor Performance: Returns on a mutual fund are by no means guaranteed. In fact, on average, around 75% of
all mutual funds fail to beat the major market indexes, like the S&P 500, and a growing number of critics now
question whether or not professional money managers have better stock-picking capabilities than the average
investor.
Loss of Control: The managers of mutual funds make all of the decisions about which securities to buy and sell
and when to do so. This can make it difficult for you when trying to manage your portfolio.

Classification of Mutual Funds

Open-End Mutual Fund

 An Open-ended Mutual funds are those funds in which the company can issue always more outstanding
shares. It can help to add on the net assets of the company.
 These types of funds do not have a fixed maturity period. Investors can buy and sell units of these funds
at Net Asset Value (NAV) related prices which are published on a daily basis. Open-end schemes are
more liquid in nature.
Close-End Mutual Fund
 Close Ended mutual fund or generally termed as traded mutual fund is the one that can be bought and sold
like a normal share. In it, the number of shares always stays fixed.
 These funds also have commission which brokers get since the shares of these funds are traded over the
counter, like the shares are traded. Close-ended funds has a stipulated maturity period like 5-7 years.
Growth Funds
These type funds are those which invest in the stocks of well-established, blue chip companies. Dividends and
steady income are not only goal of these types of funds. But, hey are focussed on increasing in capital gains.
Growth and Income funds
These type of mutual funds are focussed on increased capital gains and steady income. Less volatile than
Aggressive Growth funds.
Equity Funds
These funds allow an investor to own a portion of the company that they have invested in, its like having shares
of a certain company. Stocks that have proven historically to bethe best investment. Also which have already
outperformed all other types of investments in long term, but the risk is high.
Balanced Funds
Balanced mutual funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced mutual
funds aim to conserve investors’ initial investment, to pay an income and to aid in the long-term growth of both
the principle and the income.
Fixed-Income Funds
Fixed-income mutual funds are safer than equity funds, but as always, do not yield as high returns as the latter
do. These types of mutual funds are geared towards the investor who is approaching old age and doesn’t have
many earning years left.

Risk Measures?

 Risk measures are statistical measures that are historical predictors of investment risk and volatility, and
they are also major components in modern portfolio theory (MPT).
 MPT is a standard financial and academic methodology for assessing the performance of a stock or a stock
fund as compared to its benchmark index.
 There are five principal risk measures, and each measure provides a unique way to assess the risk present in
investments that are under consideration.
 The five measures include the alpha, beta, R-squared, standard deviation, and Sharpe ratio. Risk measures
can be used individually or together to perform a risk assessment.
 When comparing two potential investments, it is wise to compare like for like to determine which
investment holds the most risk.
 In finance, risk is the probability that actual results will differ from expected results. The concept of “risk
and return” is that riskier assets should have higher expected returns to compensate investors for the higher
volatility and increased risk.

Risk Measures

Alpha

 Alpha measures risk relative to the market or a selected benchmark index. For example, if the S&P 500 has
been deemed the benchmark for a particular fund, the activity of the fund would be compared to that
experienced by the selected index.
 If the fund outperforms the benchmark, it is said to have a positive alpha. If the fund falls below the
performance of the benchmark, it is considered to have a negative alpha.

Beta

 Beta measures the volatility or systemic risk of a fund in comparison to the market or the selected
benchmark index. A beta of one indicates the fund is expected to move in conjunction with the benchmark.
 Betas below one are considered less volatile than the benchmark, while those over one are considered more
volatile than the benchmark.

R-Squared

 R-Squared measures the percentage of an investment's movement attributable to movements in its

benchmark index. An R-squared value represents the correlation between the examined investment and its
associated benchmark.
 For example, an R-squared value of 95 would be considered to have a high correlation, while an R-squared
value of 50 may be considered low.

Standard Deviation

 Standard deviation is a method of measuring data dispersion in regards to the mean value of the dataset and
provides a measurement regarding an investment’s volatility.
 As it relates to investments, the standard deviation measures how much return on investment is deviating
from the expected normal or average returns.

Sharpe Ratio

 The Sharpe ratio measures performance as adjusted by the associated risks. This is done by removing the
rate of return on a risk-free investment, such as a U.S. Treasury Bond, from the experienced rate of return.
 This is then divided by the associated investment’s standard deviation and serves as an indicator of whether
an investment's return is due to wise investing or due to the assumption of excess risk.

Systematic Risk

 By the term ‘systematic risk’, we mean the variation in the returns on securities, arising due to
macroeconomic factors of business such as social, political or economic factors.
 Such fluctuations are related to the changes in the return of the entire market. Systematic risk is caused by
the changes in government policy, the act of nature such as natural disaster, changes in the nation’s
economy, international economic components, etc.
 The risk may result in the fall of the value of investments over a period. It is divided into three categories,
that are explained as under:

 Interest risk: Risk caused by the fluctuation in the rate or interest from time to time and affects interest-
bearing securities like bonds and debentures.
 Inflation risk: Alternatively known as purchasing power risk as it adversely affects the purchasing
power of an individual. Such risk arises due to a rise in the cost of production, the rise in wages, etc.
 Market risk: The risk influences the prices of a share, i.e. the prices will rise or fall consistently over a
period along with other shares of the market.

Definition of Unsystematic Risk

 The risk arising due to the fluctuations in returns of a company’s security due to the micro-economic
factors, i.e. factors existing in the organization, is known as unsystematic risk.
 The factors that cause such risk relates to a particular security of a company or industry so influences a
particular organization only.
 The risk can be avoided by the organization if necessary actions are taken in this regard. It has been divided
into two category business risk and financial risk, explained as under:

 Business risk: Risk inherent to the securities, is the company may or may not perform well. The risk
when a company performs below average is known as a business risk. There are some factors that cause
business risks like changes in government policies, the rise in competition, change in consumer taste and
preferences, development of substitute products, technological changes, etc.
 Financial risk: Alternatively known as leveraged risk. When there is a change in the capital structure of
the company, it amounts to a financial risk. The debt – equity ratio is the expression of such risk.
INSTRUMENTS TRADED IN INDIAN MARKET

 Indian stock market is one investment avenue where investors get a lot of opportunities. The long-term
investors invest their money in the market to create wealth for the future.
 Whereas the short term investors indulge in intraday trading and make quick gains.
 Therefore, before investing in the Indian stock market you must do good research and understand the basics
of the stock market.
 The Indian stock market is mainly popular for trading and investing in equities. Not many people are aware
of the fact that there are also various types of financial instruments that are traded on the stock exchange.
 In this article, you will learn about the different financial instruments traded in stock market.

Equities / Shares / Stocks

 Equities are the most popular financial product on the stock exchanges. People across the globe invest in the
equity market and look for creating huge wealth for them in the future.
 It would not be wrong to say that the stock market is one of the most common investment options among the
people. When you purchase the shares of the company, you become a partial owner of the company and
known as its shareholder.

Derivatives

 Derivatives are another popular financial instruments that are traded on the Indian stock exchanges. A
derivative is a financial instrument that derives its value from an underlying asset or a group of assets.
 The underlying asset can be stocks, currencies, interest rates, etc. Among the derivatives, futures and
options contracts are the most popular financial instruments traded on the stock exchange.
 A futures contract is a contract in which there is an obligation to purchase or sell an asset at a predetermined
price on a future date. These contracts must be delivered at a predetermined price.

Mutual Funds

 Mutual funds are financial instruments that collect money from a pool of investors and invest in various
securities.
 The different investment venues for mutual funds include equities, bond markets, money market instruments
and other options available in the market.
 The fund managers manage the mutual fund portfolio and it is up to him to maximize returns of the
investors by generating long term capital gains for them.
 You can purchase mutual funds through the stock exchanges. By investing in mutual funds you will get
units in return and the profits on those units will be distributed among the unit holders in the proportion of
the units held.

Mutual Funds

 Mutual funds are financial instruments that collect money from a pool of investors and invest in various
securities.
 The different investment venues for mutual funds include equities, bond markets, money market instruments
and other options available in the market.
 The fund managers manage the mutual fund portfolio and it is up to him to maximize returns of the
investors by generating long term capital gains for them.
 You can purchase mutual funds through the stock exchanges. By investing in mutual funds you will get
units in return and the profits on those units will be distributed among the unit holders in the proportion of
the units held.

Online trading

Trading with the help of computer having internet connection and online trading account is called Online Stock
Trading. Basically people use online stock trading who want to trade themselves.

Essentials of online trading

 Online trading account - You have to open an online trading account with any of the bank or financial
trading system like ICICIdirect.com, 5paisa.com, Stockkhan.com etc.
 There will be nominal annual charges. These charges vary from bank to bank but should not be more than
Rs.1000.
 A computer with internet connection or can do trading in internet cafe.
 After successfully opening the online account you will receive the username and password with the help
of which you can login in online trading system and trade yourself.
 The trading system executive (with whom you opened trading account) will help you initially about how to
use the online trading system.
 Once you get familiar with the system then you can trade yourself at your home or in the internet cafe.
 Nowadays you can get internet enabled on your cell (which is called GPRS) whose speed will be sufficient
to do trading and also the charges of GPRS are very nominal.

Advantages of Online Trading

 No need to depend on any broker or anybody else to place the order or to square off the order. In short you
are the boss of yourself to do trading of stocks.
 Its reliable, convenient and you can take your own decisions yourself by actual selling or analyzing the
market on the computer screen instead of calling broker all the time and getting news about the market.
 Its not possible or practical for a broker to update you about each and every news about the market or any
news which will influence or affect the stock market. Because he may be having many other customers like
you and even if he updates you by that time the news have been affected the concerned sector or stock.
 So if you are doing online trading yourself, then you may save yourself from big disaster. You will get
news and updates on various websites and also on your online trading system and most of the information
will be free of cost.
 By doing online trading yourself, you can see and judge where market (or your stock) is heading by seeing
different graphs online yourself, which is not possible if you’re trading through broker.
 Some online trading systems have graphs integrated in their system, so your job is to just add those graphs
and check the status of current market (or stock)

Disadvantages of Online Trading

 In online trading system you may face problem of disconnection to internet due to which you will not be
able to login to your online trading system and hence you can’t do trading yourself. At such critical times
you have to call trading system executive and do trading or square off your transactions.
 If may face other problems such as electricity cut-off, PC problem etc during online trading then
immediately you have to contact your trading system executive and place orders or do trading.

Financial Investment
Investment is nothing but goods or commodities purchased today to be used in future or at the times of crisis. An
individual must plan his future well to ensure happiness for himself as well as his immediate family members.
Consuming everything today and saving nothing for the future is foolish. Not everyday is a bed of roses, you never know
what your future has in store for you.

A financial investment is an asset that you put money into with the hope that it will grow or appreciate into a
larger sum of money. The idea is that you can later sell it at a higher price or earn money on it while you own it.
You may be looking to grow something over the next year, such as saving up for a car, or over the next 30
years, such as saving for retirement.

How you invest these dollars can be very different. How much time you have on your side is often a key thing
to consider when making a financial investment. The more time you have, the more risk you can usually take.
The more risk you take, the more potential for making more money! It is important to note that there is also an
economic definition of financial investments that deals with how businesses invest in products, equipment,
factories, employees, and inventories. This lesson will focus on the finance definition of financial investment.
Let's look at a few key terms worth knowing when it comes to financial investments.

Types of Financial Investment

An individual can invest in any of the following:

 Mutual Funds
 Fixed Deposits
 Bonds
 Stock
 Equities
 Real Estate (Residential/Commercial Property)

5 MARK

Benefits of Depository System

 Depository System to investors

1. A depository ensures that only pre-verified assets with good title are traded. Therefore, an
investor is always assured of assets with good title. Moreover, the problems of bad deliveries and
all the risks associated with physical certificates, such as loss, theft, mutilation etc. are avoided.
2. Electronic transaction of securities saves time. Time spent on preparation of share certificates
and transfer deed are avoided.
3. Electronic transactions reduces the settlement time.
4. Instant transfer of securities enables the investor to get dividend, right and bonus without delay.
5. Transaction costs are reduced as transfers in electronic form are exempt from stamp duty.
6. There is no problem of odd lots as the marketable lot in depository is fixed as one share.
 Depository System to Company
1. The depository system enables the company management to maintain and update information
about shareholding pattern of the company. The company is able to know the particulars of
beneficial owners and their holdings periodically.
2. The issue cost gets drastically reduced because of dematerialisation of securities.
3. Paperless trading is a boon for the company management.
 4. Distribution of cash corporate benefits (dividends) and non-cash corporate benefits (rights and
bonus) will be quicker as the ownership can be easily identified.
 Depository System to capital market
1. As the trading, clearing and settlement mechanism are automated and inter-linked with the
depository, the capital market is more transparent.
2. Use of computers and improved communication technology in the depository system has made
capital market activities efficient.
3. Investors repose a high degree of confidence in the capital market.
4. Use of depository system attracts foreign investors.

Primary and Secondary Markets

 The word "market" can have many different meanings, but it is used most often as a catch-all term to denote
both the primary market and the secondary market.
 In fact, "primary market" and "secondary market" are both distinct terms; the primary market refers to the
market where securities are created, while the secondary market is one in which they are traded among
investors.

The Primary Market

 The primary market is where securities are created. It's in this market that firms sell (float) new stocks
and bonds to the public for the first time.
 An initial public offering, or IPO, is an example of a primary market. These trades provide an
opportunity for investors to buy securities from the bank that did the initial underwriting for a particular
stock. An IPO occurs when a private company issues stock to the public for the first time.

Secondary Market

 For buying equities, the secondary market is commonly referred to as the "stock market." This includes the
New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world. The defining
characteristic of the secondary market is that investors trade among themselves.
 That is, in the secondary market, investors trade previously issued securities without the issuing companies'
involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another
investor who owns shares in Amazon. Amazon is not directly involved with the transaction.
 secondary market can be further broken down into two specialized categories:

Auction Markets

 In the auction market, all individuals and institutions that want to trade securities congregate in one area
and announce the prices at which they are willing to buy and sell.
 These are referred to as bid and ask prices. The idea is that an efficient market should prevail by
bringing together all parties and having them publicly declare their prices.

Dealer Markets

 In contrast, a dealer market does not require parties to converge in a central location. Rather, participants
in the market are joined through electronic networks.
 The dealers hold an inventory of security, then stand ready to buy or sell with market participants. These
dealers earn profits through the spread between the prices at which they buy and sell securities.
Investment and Speculation

 Investment refers to the acquisition of the asset, in the expectation of generating income. In a wider sense, it
refers to the sacrifice of present money or other resources for the benefits that will arise in future. The two
main element of investment is time and risk
 Investments are majorly divided into two categories i.e. fixed income investment and variable income
investment.
 In fixed income investment there is a pre-specified rate of return like bonds, preference shares, provident
fund and fixed deposits while in variable income investment, the return is not fixed like equity shares or
property.
 Speculation is a trading activity that involves engaging in a risky financial transaction, in expectation of
making enormous profits, from fluctuations in the market value of financial assets.
 In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset by the probability
of significant profit. Although, the risk is taken by speculators is properly analysed and calculated.
 Speculation ca be seen in markets where the high fluctuations in the price of securities such as the market
for stocks, bonds, derivatives, currency, commodity futures, etc.

Types of Speculators

1. Bull

A Bull is a speculator who anticipates rise in the price of securities. He buys securities with a view to sell
them in future at a higher price and thereby earns profits. In case the prices of securities fall, he loses. He has
the option to carry forward the transaction to the next settlement by paying a charge termed, ‘contango’.

2. Bear

A Bear is a speculator, who anticipates fall in the price of securities. He sells- securities for future delivery.
He sells securities which he does not possess with the hope to buy the securities at a lower price before the date
of delivery. In India, a bear is also known as mandiwala.

3. Stag

A stag is bullish in nature. A stag applies for securities of a new company with the idea of selling them at a
premium after allotment. His profit is the excess of the price at which he sells his allotment over the amount
paid by him while applying. He expects that the prices of securities that he applies for would increase.

4. Lame duck

This refers to the condition of a bear who is not able to meet his commitments. A bear sell securities which
he does not hold, with the expectation that prices are going to fall. His intention is to buy them at a lower price
later and profit from the difference

Money Market?

 The money market refers to trading in very short-term debt investments. At the wholesale level, it involves
large-volume trades between institutions and traders.
 At the retail level, it includes money market mutual funds bought by individual investors and money market
accounts opened by bank customers.
 The money market is one of the pillars of the global financial system. It involves overnight swaps of vast
amounts of money between banks and the U.S. government.
 The majority of money market transactions are wholesale transactions that take place between financial
institutions and companies.
 Individuals can invest in the money market by buying money market funds, short-term certificates of
deposit (CDs), municipal notes, or U.S. Treasury bills.
 For individual investors, the money market has retail locations, including local banks and the U.S.
government's TreasuryDirect website. Brokers are another avenue for investing in the money market.

objectives of the money market:

1. Providing borrowers such as individual investors, government, etc. with short-term funds at a reasonable
price. Lenders will also have the advantage of liquidity as the securities in the money market are short-
term.
2. It also enables lenders to turn their idle funds into an effective investment. In this way, both the lender
and borrower are at a benefit.
3. RBI regulates the money market. Therefore, in turn, helps to regulate the level of liquidity in the
economy.
4. Since most organizations are short on their working capital requirements. The money market helps such
organizations to have the necessary funds to meet their working capital requirements.
5. It is an important source of finance for the government sector for both national and international trade.
And hence, provides an opportunity for the banks to park their surplus funds.

Money Market Instruments in India

1. Treasury Bills

 T-bills are one of the most popular money market instruments. They have varying short-term maturities.
The Government of India issues it at a discount for 14 days to 364 days.
 These instruments are issued at a discount and repaid at par at the time of maturity. Also, a company, firm,
or person can purchase TB’s. And are issued in lots of Rs. 25,000 for 14 days & 91 days and Rs. 1,00,000
for 364 days.

 Factors that Affect Treasury Bill Prices

Monetary Policy

 The Federal Reserve’s monetary policy is likely to affect the T-bill price. T-bill interest rates tend to
move closer to the interest rate set by the Fed, known as the Fed(eral) Funds rate.
 However, a rise in the Federal Funds rate tends to attract investment in other debt securities, resulting in
a drop in the T-bill interest rate (due to lower demand).

Maturity Period

The maturity period of a T-bill affects its price. For example, a one-year T-bill typically comes with a
higher rate of return than a three-month T-bill. The explanation for this is that longer maturities mean
additional risk for investors.
Risk Tolerance

 An investor’s risk tolerance levels also affect the price of a T-bill. When the U.S. economy is going
through an expansion and other debt securities are offering a higher return, T-bills are less attractive and
will, therefore, be priced lower.
 However, when the markets and the economy are volatile and other debt securities are considered
riskier, T-bills command a higher price for their “safe haven” quality.

Inflation

The price of T-bills can also be affected by the prevailing rate of inflation. For example, if the inflation
rate stands at 5% and the T-bill discount rate is 3%, it becomes uneconomical to invest in T-bills since
the real rate of return will be a loss. The effect of this is that there is less demand for T-bills, and their
prices will drop.

2. Commercial Bills

 Commercial bills, also a money market instrument, works more like the bill of exchange. Businesses issue
them to meet their short-term money requirements.
 These instruments provide much better liquidity. As the same can be transferred from one person to another
in case of immediate cash requirements.

3. Certificate of Deposit

 Certificate of deposit or CD’s is a negotiable term deposit accepted by commercial banks. It is usually
issued through a promissory note.
 CD’s can be issued to individuals, corporations, trusts, etc. Also, the CD’s can be issued by scheduled
commercial banks at a discount. And the duration of these varies between 3 months to 1 year. The same,
when issued by a financial institution, is issued for a minimum of 1 year and a maximum of 3 years.

4. Commercial Paper

 Corporates issue CP’s to meet their short-term working capital requirements. Hence serves as an alternative
to borrowing from a bank. Also, the period of commercial paper ranges from 15 days to 1 year.
 The Reserve Bank of India lays down the policies related to the issue of CP’s. As a result, a company
requires RBI‘s prior approval to issue a CP in the market. Also, CP has to be issued at a discount to face
value. And the market decides the discount rate.
 Denomination and the size of CP:
 Minimum size – Rs. 25 lakhs
 Maximum size – 100% of the issuer’s working capital

5. Call Money

 It is a segment of the market where scheduled commercial banks lend or borrow on short notice (say a
period of 14 days). In order to manage day-to-day cash flows.
 The interest rates in the market are market-driven and hence highly sensitive to demand and supply. Also,
the interest rates have been known to fluctuate by a large % at certain times.
Capital Markets

 Capital markets are where savers come to invest their capital in long term investments such as corporate
debt, equity-backed securities, and government bonds.
 In other words, savers – those with capital – come to invest and those who need capital come to borrow. So
businesses come to the capital markets in order to borrow money to finance a new infrastructure project they
are undertaking – these are known as corporate bonds.

Call Money Market

 CMM is the market for very short-term loans most probably – one-day loans traded by banks. Borrowers
and lenders in the CMM are mainly banks themselves.
 Banks can access CMM to meet their reserve requirements or to cover a sudden shortfall in cash on any
particular day. Besides this, banks also borrow to meet the CRR and SLR requirements.
 Since the CMM is dominated by banks, it is otherwise called as interbank call money market. Interest rate
are reached through auction and it is called call rate.
 Main feature of the call money market is that the banks themselves are the borrowers and lenders.
Participants in the call money market are banks and related entities specified by the RBI.
 Hence, the call money market is known as interbank call money market. Surplus banks will give loans to
other banks. Deficit banks that need funds will purchase it.

Instruments Used in a Capital Market

1. Securities

 Securities are generally classified into ownership securities and creditorship securities. Equity shares and
preference shares are ownership securities.
 They are also known as capital stock. Creditorship securities are bonds, debentures etc. They are referred to
as debt capital.

2. Equity Shares:

 Equity Shares are the ordinary shares of a limited company. It is an instrument, a contract, which guarantees
a residual interest in the assets of an enterprise after deducting all its liabilities- including dividends on
preference shares.
 Equity shares constitute the ownership capital of a company. Equity holders are the legal owners of a
company.

3. Preference Shares:

The Companies Act (Sec, 85), 1956 describes preference shares as those which Carry a preferential right to
payment of dividend during the life time of the company and Carry a preferential right for repayment of capital
in the event of winding up of the company.
4. Debentures:

 Debenture is an instrument under seal evidencing debt. The essence of debenture is admission of
indebtedness. It is a debt instrument issued by a company with a promise to pay interest and repay the
principal on maturity.
 Debenture holders are creditors of the company. Sec 2 (12) of the Companies Act, 1956 states that
debenture includes debenture stock, bonds and other securities of a company.

5. Bonds:

 Bonds are debt instruments that are issued by companies/governments to raise funds for financing their
capital requirements.
 By purchasing a bond, an investor lends money for a fixed period of time at a predetermined interest
(coupon) rate. Bonds have a fixed face value, which is the amount to be returned to the investor upon
maturity of the bond.

Functions of Capital Markets

1. Capital Formation

In capital markets, there are people who have no immediate need for cash – investors – and those who need
cash – debtors. The capital markets allow unused capital to be invested and employed instead of sitting by idle.

2. Ease of Access and Exit

In today’s day and age, capital markets have become increasingly accessible, with investors able to trade off
their mobiles. The advancement of technology has made capital markets almost universally available.

3. Economic Growth

By facilitating a market place for borrowers and lenders, the capital market creates a more efficient flow of
capital. Businesses that need a corporate loan can come to the capital market, apply, and get it issued by an
underwriter. Alternatively, it can sell some of its company onto the stock exchange in return for capital.

4. Liquidity of Capital

Capital markets allow those who have capital, to invest it. In return, they have ownership of a bond or equity.
However, they are unable to buy a car, food, or other assets with a bond certificate – which is why it may be
necessary to liquidate these.

5. Return on Investment

In capital markets there are enough financial instruments to suit any type of investors, whether they want a high
level of risk or a low level of risk – there is something for everyone

Functions of Stock Exchange

1. Ensure Liquidity of Capital:

The stock exchanges provide a place where shares and stock are converted into cash. The exchanges provide a
ready market where buyers and sellers are always available and those who are in need of hard cash can sell their
holdings.

2. Continuous Market for Securities:

The stock exchanges provide a ready market for securities. The securities once listed continue to be traded at
the exchanges irrespective of the fact that owners go on changing.

3. Evaluation of Securities:

The investors can evaluate the worth of their holdings from the prices quoted at different exchanges for those
securities. The securities are quoted under the free atmosphere of demand and supply and the prices are set on
the basis of free market.

4. Listing of Securities:

Only listed securities can be purchased at stock exchanges. Every company desirous of listing its securities will
apply to the exchange authorities. The listing is allowed only after a critical examination of capital structure,
management and prospects of the company.

FINANCIAL DERIVATIVES

 Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator
or commodity, and through which specific financial risks can be traded in financial markets in their own
right. Transactions in financial derivatives should be treated as separate transactions rather than as integral
parts of the value of underlying transactions to which they may be linked.
 The value of a financial derivative derives from the price of an underlying item, such as an asset or index.
Unlike debt instruments, no principal amount is advanced to be repaid and no investment income accrues.
 Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage
between markets, and speculation.
 Financial derivatives enable parties to trade specific financial risks -- such as interest rate risk, currency,
equity and commodity price risk, and credit risk, etc – to other entities who are more willing, or better
suited, to take or manage these risks, typically, but not always, without trading in a primary asset or
commodity.

Portfolio Management?

 Portfolio management is the art and science of selecting and overseeing a group of investments that meet the
long-term financial objectives and risk tolerance of a client, a company, or an institution.
 Passive management is a set-it-and-forget-it long-term strategy. It may involve investing in one or more
exchange-traded (ETF) index funds. This is commonly referred to as indexing or index investing. Those
who build Indexed portfolios may use modern portfolio theory (MPT) to help optimize the mix.
 Active management involves attempting to beat the performance of an index by actively buying and selling
individual stocks and other assets. Closed-end funds are generally actively managed. Active managers may
use any of a wide range of quantitative or qualitative models to aid in their evaluations of potential
investments.
 Portfolio management involves building and overseeing a selection of investments that will meet the long-
term financial goals and risk tolerance of an investor.