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Security Analysis
And
Portfolio Management

Module No.1: Introduction to Investments (12 hours)

Introduction- Investment process, Criteria for Investment, types of
Investors, Investment, Speculation and Gambling. Elements of
Investment, Investment Avenues, Factors influencing selection of
investment alternatives.
Security Market- Introduction, functions, Secondary Market
Operations. Stock Exchanges in India, Security Exchange Board of
India, Government Securities Market, Corporate Debt Market and
Money Market Instruments.
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Sacrifice Something now for the

“________
Prospect of Gaining Something Later”

Introduction
 It involves commitment of funds made with an expectation
of some Positive Returns.
 The essential ingredient/fact of investment is the Expectation
of Return.
 The expected returns are realized only in the future, and
it may be More or Less than the Returns Realized.
 Such a possibility of fluctuation or variation in the actual
return is the risk associated with an investment.
 Thus, RISK and RETURN are the key factors of any
investment.
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Definitions
Investment refers to the “Purchase of a financial asset that
produces a yield that is proportionate to the risk assumed over
some future investment period”
- F. Fleming

“Investment is a sacrifice of certain present value for some

uncertain future value”
- Sharpe

4 - Dimensions or Attributes of an Investment

•Time
•Today’s Sacrifice
•Risk
•Prospective (Future) Gain
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Concepts of Investment
Economic Investment
Business Investment
Financial Investment

Economic Investment
 In economics parlance (Jargon), investment refers to the
net additions to the capital stock of an economy,
production of other goods such as …Buildings, Railroads,
Flyovers, Factories etc.,
Business Investment
 Business investment implies money to be held or to be put
in a private business.
For instance, If a person commences a new business by
investing Rs.5,00,000/-, it will be said that his
investment in business amount to Rs.5,00,000/-.
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Financial Investment
 It refers to investing money into various securities such as
 Shares
 Debentures
 Real Estate
 Mutual Funds
 Insurance
 Precious Objects

Objectives
• To Maximize Returns
Primary • To Minimize the Risk

• To Hedge against Inflation

• To avail Tax Benefits
Secondary • To have regularity in Income
• To provide Safety for funds
• Diversification
• Marketability
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• To Maximize Returns
• Rate of return could be defined as the total income the investor receives
during the holding period stated as a percentage of the purchase price at the
beginning of the holding period.
End period value – Beginning period value + Dividend
Return = X 100
Beginning period value
• If it is a stock, the investor gets the dividend as well as the capital
appreciation as returns.
Capital appreciation & Dividend
Return = X 100
Purchase Price

• To Minimize the Risk

In investment whose rate of return varies widely from

period is risky than whose return that does not change
much.
Every investor likes to reduce the risk of his
investment by proper combination of different
securities.
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• To Hedge against Inflation

• To avail Tax Benefits

What’s
on your
Mind
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• To have regularity in Income

By investing in Fixed Income Securities like

Debentures / Bonds, Preference shares or Fixed
Deposits in Banks

An Investor can plan for having regular income

• To provide Safety for funds

• Protection against Loss
• Full Safety to the money invested
• Investment Alternatives which is free from the Default Risk

• Default risk : means non repayment of principle and interest

Example : Bank deposits, government bonds, Treasury bills,

Non-convertible debentures, Equity shares and
deposits with the non-banking financial companies.
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Investment Process

Investment Policy:
The Government or the Investor before proceeding into investment
formulates the policy for the systematic functioning. The essential ingredients
of the policy are:

Investible Funds:
 The entire investment procedure revolves around the availability of
investible funds.
 The funds may be generated through savings or from borrowings.
 If the funds are borrowed, the investor has to be Extra Careful in the
selection of investment alternatives. The return should be Higher
than the Interest he pays.
Cont…
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Objectives:
 The risk taker’s objective is to earn high rate of return in the form of
capital appreciation, whereas
 The Primary Objective of the Risk Averse is the safety of the
principle.

Knowledge:
 The knowledge about the investment alternatives and markets plays a
key role in the policy formulation.
 The investment alternatives range from security to real estate.
 The risk and return associated with investment alternatives differ from
each other.
Cont…

 Investment in equity is high yielding but has more risk than the fixed
income securities.

 The tax sheltered schemes offer tax benefits to the investors.

 The investor should be aware of the stock market structure and the
functions of the brokers. The mode of operation varies among BSE,
NSE, and OTCEI. Brokerage charges are also different. The
knowledge about the stock exchanges enables him to trade the stock
intelligently.
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Security Analysis:
After formulating the investment policy, the securities have to be
scrutinized through the following:
Market Analysis:
 The stock market mirrors the general economic scenario. The growth
in gross domestic product (6.4%) Expected (7% by IMF in 2024) and
inflation (4.83% in 2024) are reflected in the stock prices.
 The recession in the economy results in a bear market.
 The stock prices may be fluctuating in the short run but in the long
run they move in trends (i.e.) either upwards or downwards.
 The investor can fix his entry and exit points through technical
analysis.
Cont…

Industry Analysis:

The industries that contribute to the output of the major segments of

the economy vary in their growth rates and their overall contribution to
economic activity; some industries grow faster than the GDP and are
expected to continue in their growth.

Company Analysis:
 The purpose of company analysis is to help the investors to make
better decisions.
 The company’s earnings, profitability, operating efficiency,
capital structure and management have to be screened.
 These factors have direct bearing on the stock prices and the return
of the investors.
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Valuation:
Intrinsic Value:
 It helps the investor to determine the return and risk expected from an
investment in the common stock.
 The stock market analysts have developed many advanced models to
value the shares. The real worth of the share is compared with the
market prices and then the investment decisions are made.
 True value including all aspects of the business, in terms of both
tangible and intangible factors.
Future Value:
Future value of the securities could be estimated by using a simple
statistical technique like trend analysis. The analysis of the historical
behaviour of the price enables the investor to predict the future value.

Portfolio Construction:
A portfolio is a combination of securities. The portfolio is constructed in
such a manner to meet the investor’s goals and objectives. The investor tries
to attain maximum return with minimum risk. Towards this end he
diversifies his portfolio and allocates funds among the securities.

Diversification:
The main objective of diversification is the reduction of risk in the loss
of capital and income. A diversified portfolio is comparatively less risky than
holding a single portfolio. There are several ways to diversity the portfolio.
 Debt & Equity Diversification
 Industry Diversification
 Company Diversification Cont…
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Selection & Allocation:

Based on the diversification level, industry and company analyses

the securities have to be selected. Funds are allocated for the selected
securities. Selection of securities and the allocation of funds and seals
the construction of portfolio.

Portfolio Evaluation:
The portfolio has to be managed efficiently. The efficient management
calls for evaluation of the portfolio. This process consists of portfolio
appraisal and revision.

Appraisal:
The return and risk performance of the security vary from time to time.
The variability in returns of the securities is measured and compared. The
developments in the economy, industry and relevant companies from which
the stocks are brought have to be appraised. The appraisal warns the loss and
steps can be taken to avoid such losses.

Cont…
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Revision:

Revision depends on the results of the appraisal. The low yielding

securities with high risk are replaced with high yielding securities with
low risk factor. To keep the return at a particular level necessitates the
investor to revise the components of the portfolio periodically.

Types of Investors :

Investors fall broadly into to categories:

Individual Institutional
Investor Investor
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Individual investors:
o Individual investors are large in number.
o Investible recourses available with them are low.
o They lack the skills required to carry out extensive analysis and evaluation
before investing.
o They may manage their own investments without investment managers,
directly investing through a brokerage account, bank savings account,
government savings bonds or certificates of deposits. If they do, utilize
investment managers for investing in pooled investment vehicles such as
mutual funds.
Cont…

o They do not have enough time and resources to engage in such an

analysis to find out the intrinsic worth of investments.

o They have a difficult time while determining their portfolio.

o Investment selection becomes almost a hit and run mechanism for them.

o They depend on other sources of information within their reach to

arrive at investment decision.
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Institutional investors:
o They are the institutions / organizations with surplus funds who indulge
themselves in investment activities. Example: Mutual funds, NBFCs,
Insurance companies etc.,
o They are fewer in number compared to individual investors.
o They engage professionals to carry out critical analysis and evaluation of
wide investment avenues available.
o They carry out their investment activity on a realistic and systematic
manner.
o They have a great advantage over the average individual investor in
managing their investment portfolio.

Investment Vs Speculation
• Investment :
• It is the employment of funds on assets with the aim of
Earning Income or Capital Appreciation .
• Investment has two attributes namely Time and Risk .

• Speculation :
• It means taking up the business risk in the hope of getting
Short Term Gain .
• Speculation essentially involves Buying and Selling
activities with the expectation of getting profit from the
price fluctuations.
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INVESTOR SPECULATOR

Plans for a longer time horizon. His

Time Plans for a very short period. holding
holding period may be from one year to
Horizon few years period varies from few days to months

Risk Assumes moderate risk Willing to undertake high risk

Likes to have moderate rate of return Like to have high returns for assuming
Return
associated with limited risk high risk
Considers fundamental factors and
Considers inside information, here says
Decision evaluates the performance of the
market behaviour.
company regularly.
Uses his own funds and avoids Uses borrowed funds to supplement his
Funds
borrowed funds personal resources.
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Features of Investment Avenues

Return /
Capital Liquidity /
Particulars Risk Current Tax Benefit
Appreciation Marketability
Yield
Equity Shares High Low High High High
Debentures Low High Very Low Very low Nil
Bank Deposit Low Low Nil High Nil
Public Provident Fund Nil Nil Low Low Moderate
Life Insurance Policies Nil Nil Low Low Moderate
High in Changes according
Real Estate Low Low Moderate
Long-term to rules
High in
Gold and Silver Low Nil Moderate Nil
Long-term
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Major Players in Secondary Market:

• Commission Broker • Arbitrager
• Jobber • Bulls
• Floor Broker • Bears
• Taraniwalla • Stag
• Odd Lot Dealer • Wolves
• Budliwalla • Lame Ducks
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The Money Market

• Exchange of short-term instruments—less than one year
• Highly Liquid, Minimal risk (Negligible Risk)
• Treasury Bills
• Certificate of Deposits
• Commercial Papers
• Repos & Reserve Repos
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Treasury Bills
• These are the most important instrument in money market.
• Short term instruments of Union Government.
• The period starts from 14 days, 91 days, 182 days and 364 days (i.e)
less than one year.
• These bills are sold on auction basis by the RBI.
• It is issued at discount & redeemed at par.
• They are highly liquid & offer assured return to the investors.

Certificate of Deposits
• It is a negotiable money market instruments.
• They are issued by scheduled commercial banks excluding regional rural
bank and local area bank.
• The major investors in COD are banks, FIs , corporations and Mutual funds.
• It is of short term and it can be easily transferred from one person to another.
• It is issued at discount & redeemed at par, Maturity period is from 3 months
to less than one year.
• Liquidity & marketability are the hallmark of COD’s.
• Higher rate of interest securities.
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Commercial Papers
• It is a short term promissory notes issued by leading, credit worthy &
highly rated corporation. (NSDL – National Security Depository Limited)
• These are mostly issued to finance current transactions & seasonal &
interim needs for the funds.
• Any person like banks, companies & NRI’s can invest in commercial
papers.
• Maturity period is 90 to 180 days.
• Issued at discount & redeemed at par.
• It is considered as highly safe & liquid instruments.

Repos & Reserve Repos

• Repo means repurchase agreement (or) ready forward.
• It is a transaction in which one party sells a security to another party
simultaneously agreeing to repurchase it in future at a predertmined
price, date & time.
• Repos are collateralized loans. They reduce counter party risk.
• It is considered to be a good hedge tool, as the repurchase price is
locked in at the time of sale itself.
•Example:
A bank sells government bonds to another institution with the agreement to buy them back in a few
days at a slightly higher price.
•Example:
The institution that bought the government bonds in the previous example is now viewed as doing a
reverse repo, as they are lending money to the bank.
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Difference Between Money & Capital Market

Money market Capital market
Money market deals with short-term funding. Capital market deals with long-term funding.
In India, the capital market is regulated and
In India, the money market is regulated and
controlled by Securities and Exchange board
controlled by Reserve bank of India.
of India.
Money market is a highly liquid market. Capital market is not a liquid market.
Capital market is a retail debt and equity
Money market is a wholesale debt market.
market.
Capital market instruments are more risky
Money market instruments are less risky than
than money market instruments and the
the capital market instruments and the returns
returns on them are higher than money
on them are lower than capital market.
market.