Concept of Depositary receipt

The depositary receipt is a type of negotiable financial security that is

traded on a local stock exchange but represents a security, usually in
the form of equity, it is created when a foreign company wishes to list
its already publicly traded shares or debt securities on a foreign stock
exchange, it’s benefit include that it is the way to increase global
trade, which in turn can help increase not only volumes on local and
foreign markets but also the exchange of information, technology,
regulatory procedures as well as market transparency, The depositary
receipt investor and company can both benefit from investment
abroad.
Depositary receipts of the party, issued in the local securities
companies, custodians, there is the depositary bank in a foreign
country, securities underwriters and investors. According to the
different distribution or trading place, depositary receipts to be known
as different names, such as ADRs (American Depository Receipt,
ADR), European Depositary Receipts (European Depository Receipt,
EDR), Global Depositary Receipts (Global Depository Receipts,
GDR) Chinese Depositary Receipts (Chinese Depository Receipt,
CDR) and so on.

Advantages of the Depository System

The advantages of dematerialization of securities are as follows:

• Share certificates, on dematerialization, are cancelled and the

same will not be sent back to the investor. The shares,
represented by dematerialized share certificates are fungible
and, therefore, certificate numbers and distinctive numbers are
cancelled and become non-operative.
• It enables processing of share trading and transfers
electronically without involving share certificates and transfer
 deeds, thus eliminating the paper work involved in scrip-based
trading and share transfer system.
• Transfer of dematerialized securities is immediate and unlike in
the case of physical transfer where the change of ownership has
to be informed to the company in order to be registered as such,
in case of transfer in dematerialized form, beneficial ownership
will be transferred as soon as the shares are transferred from one
account to another.
• The investor is also relieved of problems like bad delivery, fake
certificates, shares under litigation, signature difference of
transferor and the like.
• There is no need to fill a transfer form for transfer of shares and
affix share transfer stamps.
• There is saving in time and cost on account of elimination of
posting of certificates.
• The threat of loss of certificates or fraudulent interception of
certificates in transit that causes anxiety to the investors, are
eliminated.

Disadvantages/Problems of the Depository System

Some disadvantages were about the depository system were known

beforehand. But since the advantages outweighed the shortcomings of
dematerialisation, the depository system was given the go-ahead.

• Lack of control: Trading in securities may become

uncontrolled in case of dematerialized securities.
• Need for greater supervision: It is incumbent upon the capital
market regulator to keep a close watch on the trading in
dematerialized securities and see to it that trading does not act as
a detriment to investors. The role of key market players in case
of dematerialized securities, such as stock brokers, needs to be
supervised as they have the capability of manipulating the
market.
• Complexity of the system: Multiple regulatory frameworks
have to be confirmed to, including the Depositories Act,
Regulations and the various Bye Laws of various depositories.
Additionally, agreements are entered at various levels in the
 process of dematerialization. These may cause anxiety to the
investor desirous of simplicity in terms of transactions in
dematerialized securities.

Besides the above mentioned disadvantages, some other problems

with the system have been discovered subsequently. With new
regulations people are finding more and more loopholes in the system.
Some examples of the malpractices and fraudulent activities that take
place are:

• Current regulations prohibit multiple bids or applications by a

single person. But investors open multiple demat accounts and
make multiple applications to subscribe to IPOs in the hope of
getting allotment of shares.
• Some listed companies had obtained duplicate shares after the
originals were pledged with banks and then sold the duplicates
in the secondary market to make a profit.
• Promoters of some companies dematerialised shares in excess of
the company’s issued capital.
• Certain investors pledged shares with banks and got the same
shares reissued as duplicates.
• There is an undue delay in the settlement of complaints by
investors against depository participants. This is because there is
no single body that is in charge of ensuring full compliance by
these companies.

Fundamental analysis

Fundamental analysis of a business involves analyzing its financial

statements and health, its management and competitive advantages,
and its competitors and markets. When applied to futures and forex, it
focuses on the overall state of the economy, interest rates, production,
earnings, and management. When analyzing a stock, futures contract,
or currency using fundamental analysis there are two basic
approaches one can use; bottom up analysis and top down analysis.[1]
The term is used to distinguish such analysis from other types of
investment analysis, such as quantitative analysis and technical
analysis.

Fundamental analysis is performed on historical and present data, but

with the goal of making financial forecasts. There are several possible
objectives:

• to conduct a company stock valuation and predict its probable

price evolution,
• to make a projection on its business performance,
• to evaluate its management and make internal business
decisions,
• to calculate its credit risk.

Two analytical models

When the objective of the analysis is to determine what stock to buy

and at what price, there are two basic methodologies

1. Fundamental analysis maintains that markets may misprice a

security in the short run but that the "correct" price will
eventually be reached. Profits can be made by trading the
mispriced security and then waiting for the market to recognize
its "mistake" and reprice the security.
2. Technical analysis maintains that all information is reflected
already in the stock price. Trends 'are your friend' and sentiment
changes predate and predict trend changes. Investors' emotional
responses to price movements lead to recognizable price chart
patterns. Technical analysis does not care what the 'value' of a
stock is. Their price predictions are only extrapolations from
historical price patterns.

Investors can use any or all of these different but somewhat

complementary methods for stock picking. For example many
fundamental investors use technical’s for deciding entry and exit
points. Many technical investors use fundamentals to limit their
universe of possible stock to 'good' companies.

The choice of stock analysis is determined by the investor's belief in

the different paradigms for "how the stock market works". See the
discussions at efficient-market hypothesis, random walk hypothesis,
capital asset pricing model, Fed model Theory of Equity Valuation,
Market-based valuation, and Behavioural finance.

Fundamental analysis includes:

1. Economic analysis
2. Industry analysis
3. Company analysis

On the basis of these three analyses the intrinsic value of the shares
are determined. This is considered as the true value of the share. If the
intrinsic value is higher than the market price it is recommended to
buy the share . If it is equal to market price hold the share and if it is
less than the market price sell the shares.

Use by different portfolio styles

Investors may use fundamental analysis within different portfolio

management styles.

• Buy and hold investors believe that latching onto good

businesses allows the investor's asset to grow with the business.
Fundamental analysis lets them find 'good' companies, so they
lower their risk and probability of wipe-out.
• Managers may use fundamental analysis to correctly value
'good' and 'bad' companies. Eventually 'bad' companies' stock
goes up and down, creating opportunities for profits.
• Managers may also consider the economic cycle in determining
whether conditions are 'right' to buy fundamentally suitable
companies.
• Contrarian investors distinguish "in the short run, the market
is a voting machine, not a weighing machine"[2]. Fundamental
 analysis allows you to make your own decision on value, and
ignore the market.
• Value investors restrict their attention to under-valued
companies, believing that 'it's hard to fall out of a ditch'. The
value comes from fundamental analysis.
• Managers may use fundamental analysis to determine future
growth rates for buying high priced growth stocks.
• Managers may also include fundamental factors along with
technical factors into computer models (quantitative analysis).

Top-down and bottom-up

Investors can use either a top-down or bottom-up approach.

• The top-down investor starts his analysis with global economics,

including both international and national economic indicators,
such as GDP growth rates, inflation, interest rates, exchange
rates, productivity, and energy prices. He narrows his search
down to regional/industry analysis of total sales, price levels, the
effects of competing products, foreign competition, and entry or
exit from the industry. Only then he narrows his search to the
best business in that area.
• The bottom-up investor starts with specific businesses,
regardless of their industry/region.

Procedures

The analysis of a business' health starts with financial statement

analysis that includes ratios. It looks at dividends paid, operating cash
flow, new equity issues and capital financing. The earnings estimates
and growth rate projections published widely by Thomson Reuters
and others can be considered either 'fundamental' (they are facts) or
'technical' (they are investor sentiment) based on your perception of
their validity.

The determined growth rates (of income and cash) and risk levels (to
determine the discount rate) are used in various valuation models. The
foremost is the discounted cash flow model, which calculates the
present value of the future
 • Dividends received by the investor, along with the eventual sale
price. (Gordon model)
• earnings of the company, or
• Cash flows of the company.

The amount of debt is also a major consideration in determining a

company's health. It can be quickly assessed using the debt to equity
ratio and the current ratio (current assets/current liabilities).

The simple model commonly used is the Price/Earnings ratio. Implicit

in this model of a perpetual annuity (Time value of money) is that the
'flip' of the P/E is the discount rate appropriate to the risk of the
business. The multiple accepted is adjusted for expected growth (that
is not built into the model).

Growth estimates are incorporated into the PEG ratio, but the math
does not hold up to analysis. Its validity depends on the length of time
you think the growth will continue. IGAR models can be used to
impute expected changes in growth from current P/E and historical
growth rates for the stocks relative to a comparison index.

Computer modelling of stock prices has now replaced much of the

subjective interpretation of fundamental data (along with technical
data) in the industry. Since about year 2000, with the power of
computers to crunch vast quantities of data, a new career has been
invented. At some funds (called Quant Funds) the manager's decisions
have been replaced by proprietary mathematical models.[

Stop-Loss
It is an order placed with a broker to buy or sell once the stock
reaches a certain price. A stop-loss is designed to limit an investor's
loss on a security position. Setting a stop-loss order for 10% below
the price at which you bought the stock will limit your loss to 10%.
For example, let's say you just purchased Microsoft (Nasdaq:MSFT)
at $20 per share. Right after buying the stock you enter a stop-loss
order for $18. This means that if the stock falls below $18, your
shares will then be sold at the prevailing market price.

Positives and Negatives

The advantage of a stop order is you don't have to monitor on a daily
basis how a stock is performing. This is especially handy when you
are on vacation or in a situation that prevents you from watching your
stocks for an extended period of time.

The disadvantage is that the stop price could be activated by a short-

term fluctuation in a stock's price. The key is picking a stop-loss
percentage that allows a stock to fluctuate day to day while preventing
as much downside risk as possible. Setting a 5% stop loss on a stock
that has a history of fluctuating 10% or more in a week is not the best
strategy. You'll most likely just lose money on the commissions
generated from the execution of your stop-loss orders.

There are no hard and fast rules for the level at which stops should be
placed. This totally depends on your individual investing style: an
active trader might use 5% while a long-term investor might choose
15% or more.

Another thing to keep in mind is that once your stop price is reached,
your stop order becomes a market order and the price at which you
sell may be much different from the stop price. This is especially true
in a fast-moving market where stock prices can change rapidly.

A last restriction with the stop-loss order is that many brokers do not
allow you to place a stop order on certain securities like OTC Bulletin
Board stocks or penny stocks.
Not Just for Preventing Losses
Stop-loss orders are traditionally thought of as a way to prevent losses
thus it's namesake. Another use of this tool, though, is to lock in
profits, in which case it is sometimes referred to as a "trailing stop".
Here, the stop-loss order is set at a percentage level below, not the
price at which you bought it, but the current market price. The price
of the stop loss adjusts as the stock price fluctuates. Remember, if a
stock goes up, what you have is an unrealized gain, which means you
don't have the cash in hand until you sell. Using a trailing stop allows
you to let profits run while at the same time guaranteeing at least
some realized capital gain.

Continuing with our Microsoft example from above, say you set a
trailing stop order for 10% below the current price, and the stock
skyrockets to $30 within a month. Your trailing-stop order would then
lock in at $27 per share ($30 - (10% x $30) = $27). This is the worst
price you would receive, so even if the stock takes an unexpected dip,
you won't be in the red. Of course, keep in mind the stop-loss order is
still a market order - it's simply stays dormant and is activated only
when the trigger price is reached -- so the price your sale actually
trades at may be slightly different than the specified trigger price.

Advantages of the Stop-Loss Order

First of all, the beauty of the stop-loss order is that it costs nothing to
implement. Your regular commission is charged only once the stop-
loss price has been reached and the stock must be sold. You can think
of it as a free insurance policy.

Most importantly, a stop loss allows decision making to be free from

any emotional influences. People tend to fall in love with
stocks, believing that if they give a stock another chance, it will come
around. This causes procrastination and delay, giving the stock yet
another chance. In the meantime, the losses mount....
No matter what type of investor you are, you should know why you
own a stock. A value investor's criteria will be different from that of
a growth investor, which will be different still from an active trader.
Any one strategy may work, but only if you stick to the strategy. This
also means that if you are a hardcore buy-and-hold investor, your
stop-loss orders are next to useless.

The point here is to be confident in your strategy and carry through

with your plan. Stop-loss orders can help you stay on track without
clouding your judgment with emotion.

Finally, it's important to realize that stop-loss orders do not guarantee

you'll make money in the stock market; you still have to make
intelligent investment decisions. If you don't, you'll lose just as much
money as you would without a stop loss, only at a much slower rate.

Conclusion
A stop-loss order is a simple tool, yet so many investors fail to use it.
Whether to prevent excessive losses or to lock in profits, nearly all
investing styles can benefit from this trade. Think of a stop loss as an
insurance policy: you hope you never have to use it, but it's good to
know you have the protection should you need it.

REST OF QUESTION DISCUSSED IN CLASS.