Security Analysis & Portfolio

Management

PULC MBA Students

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 Investment
-It refers to the deployment of funds in
- i) financial assets or
- ii) real assets
- with a view to get some return or to get
capital appreciation.

Return / Capital appreciation?

1.Bought shares for Rs. 100, sold at Rs. 110.
2.Bought shares for Rs. 100, Still holding with a value of Rs. 120.

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 Investments:
Financial assets:
• Equity shares
• Preference shares
• Share warrants
• ADRs
• GDRs
• Units of mutual funds
• Debentures
• Debt securities
• Commercial papers
• Loans given and deposits with companies and banks
• Post office savings certificates.
• Provident Fund investment (PF)
• Insurance policies.

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 Investments:
Real Assets:

• Real estate
• Gold
• Silver
• Diamonds
• Art pieces
• Stamps
• coins

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 Objectives of Investments:

• To get return for the investment in the form of dividend,

interest, capital gain and capital appreciation.
• To get the advantage of liquidity associated with returns.
• To have the benefit of hedge against inflation.
• To safeguard the funds from various threats.
• To get tax advantage like deductions and exemptions from
income.
• To create collateral security for future needs.

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 Speculation:
• Speculation is a short term investment.

• In speculation the speculator makes use of the fluctuations in

the movement of price of an asset.

• There are two main categories of speculators in stock market

namely bulls and bears.

• Bulls are the speculators who will buy securities at a lower price and sell it at a
higher price within a day or with in a short period.

• Bears are the speculators who will sell a security at a higher price which they do
not own and buy the same with in the day.

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 Gambling:

• Gambling is also an employment of funds in…

a game or chance.

• In gambling there is no buying and selling activity involved.

The amount paid in gambling is treated as charge or fees
towards a particular event.

• eg. Card game, horse race crossword puzzle etc.

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 Investment Vs Speculation:

• Risk – Lower / Higher

• Return – Stable / Uncertain
• Period – Long / Short term
• Position – Owner / May or may not be owner
• Basis – fundamental analysis /
rumours, tips and technical analysis
• Tax Benefit – May get / can not get
• Use of funds – Own funds / borrowed funds

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 Investment Process:

• Finding out the investment objective of the person.

• Creating fund for investment.
• Determining the time of need for the investment.
• Gathering information about various investment
alternatives.
• Analysing all the investment alternatives.
• Selection of suitable investment alternatives known as
portfolio construction.
• Portfolio investment.
• Evaluation of portfolio investment.

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 Types of Risk:
Factors influencing the risk
1. Systematic risk:
I) Market risk:
II) Interest rate risk:
III) Inflation risk:

2. Unsystematic risk:
I) Business risk:
Fluctuations in sales, R&D, Personnel mgt., Fixed cost,
II) Financial risk:
Capital Structure of the company- Debt – Equity ratio.

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 Stock Exchanges in India

• 1 NSE
• 2 BSE
• 3 Calcutta
• 4 Uttar Pradesh
• 5 Ahmedabad
• 6 Delhi
• 7 Pune
• 8 Ludhiana
• 9 Bangalore
• 10 ICSE
• 11 Madras
• 12 Madhya Pradesh
• 13 Vadodara
• 14 OTCEI
• 15 Gauhati
• 16 Cochin
• 17 Bhubaneshwar
• 18 Coimbatore
• 19 Jaipur
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 Primary market / New issue market
• The primary market is a market for new issues i.e. a market for
fresh capital.

• The primary market provides the channel for sale of new securities.

• Primary market provides opportunity to issuers of securities;

government as well as corporates, to raise resources to meet their
requirements of investment and/or discharge some obligation.

• They may issue the securities at face value, or at a

discount/premium and these securities may take a variety of forms
such as equity, debt etc.

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 DIFFERENT KINDS OF ISSUES
1. Public Issue
When an issue / offer of securities is made to new investors
for becoming part of shareholders’ family of the issue it is
called a public issue.
Public issue can be further classified into Initial public offer
(IPO) and Further public offer (FPO).
e-IPOs: Issuing capital to public through the on-line system of
the stock exchanges.
2. Rights Issue
3. Bonus Issue
4. Private Placement

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 PRICING OF AN ISSUE
• Fixed Price Issue: When the issuer at the outset
decides the issue price and mentions it in the Offer
Document, it is commonly known as Fixed price
issue.

• Book built Issue: When the price of an issue is

discovered on the basis of demand received from the
prospective investors at various price levels, it is
called Book Built issue’.

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 BOOK BUILDING

• Book building is a process of price discovery.

• The issuer discloses a price band or floor price

before opening of the issue of the securities offered.

• On the basis of the demands received at various

price levels within the price band specified by the
issuer, Book Running Lead Manager (BRLM) in close
consultation with the issuer arrives at a price at
which the security offered by the issuer, can be
issued.

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 Price Band
• The price band is a range of price within which
investors can bid.
• The spread between the floor and the cap of the
price band should not be more than 20%. 100 – 120.
or 500 – 600.
• The price band can be revised. If revised, the bidding
period shall be extended for a further period of three
days,…
• subject to the total bidding period not exceeding
thirteen days.

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 Regulators of Securities Market
The responsibility for regulating the
securities market is shared by
1. Department of Economic Affairs (DEA),
2. Ministry of Corporate Affairs (MCA),
3. Reserve Bank of India (RBI) and
4. SEBI.

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 Regulatory framework
At present, the five main Acts governing the securities markets are:
1. The SEBI Act, 1992;

2. The Companies Act, 1956,

which sets out the code of conduct for the corporate sector in relation to issuance, allotment
and transfer of securities,
and disclosures to be made in public issues;

3. The Securities Contracts (Regulation) Act, 1956,

which provides for regulation of transactions in securities through control over stock
exchanges

4. The Depositories Act, 1996

which provides for electronic maintenance and transfer of ownership of demat shares and

5. Prevention of Money Laundering Act, 2002.

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 Recent developments in Indian Securities Markets
1. Demutualization of Stock Exchanges
Hyderabad Stock Exchange, failed to demutualise by the due date and has therefore been
de-recognized.
Saurashtra Kutch Stock exchange, Mangalore Stock exchange and Magadh Stock exchange
have been de-recognized for various irregularities/non compliances
2. Corporate Bond Markets – Acceptance of the report.
3. Foreign investment in stock exchanges(49%)
FDI-26%, FII-23%.
4. National Institute of Securities Markets (NISM)
5. Securities Contracts (Regulation) Amendment Act, 2007
6. PAN as the sole identification number
7. IPO grading. from May 1, 2007
8. Real Estate Mutual Funds
9. New derivative products.
10. Short selling for all classes of investors.
11. Addition in Investor Protection and Education Fund (IPEF)
12. Direct Market Access
13. Cross Margining
14. ASBA- Applications supported by Blocked amount.
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 Equity Stock Analysis
1. Fundamental Analysis 2. Technical Analysis.

Fundamental Analysis - Objectives

• To determine prospective benefits from investment in a security.

• To know the under priced and over priced securities.

• Not for making speculative profit. But to make profit on investment.

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 Fundamental Analysis

Company Analysis
Industry Analysis
Economic Analysis

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 Economic Analysis
1. Study on the economic trends,
– Growth in GDP, Employment, Corporate profits, per-capita income, BOP,
Money supply
2. Study on the economic polices,
Plan priorities, monetery polices, EXIM policies,
Industrial policy etc.
3. Relationship between economic trends and economic polices.
4. World economic trends and their impact on Indian Economy.

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 Industry Analysis
1. Growth in GNP for various industries.
2. Implication of plan priorities for various industries.
3. Implications of industrial policy on various industries.
4. Input – output analysis of an industry.
5. Dependence of raw materials
6. Dependence of other factors.
7. Business cycle position of the industry.
8. Demand for the products and services of the industry.
9. Competitive advantage of the industry.

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 Company analysis
1. Company’s market share
2. Cost structure of the company
3. Break even analysis
4. Production efficiencies
5. Fund flow analysis
6. Profitability analysis
7. Trend analysis of book value per share
8. Growth in dividend
9. Estimation of EPS
10. Estimation of PE ratio
11. Quality of management

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 Technical Analysis
• Meaning
• Assumptions
• Trend
• Support and Resistance
• Chart Types
• Chart Patterns
• Moving Averages
• Indicators and Oscillators

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 Technical Analysis
• It is the method of evaluating securities by analysing the statistics generated by market
activity.
• It is a charting technique. A chart is a graphical representation of series of prices over a set
time frame.
Chart Types – Line, Bar, Candlestick, Point and figure
1. Line Chart
- Representing only closing prices
- Connects the closing prices
- No High Price, Low price, Opening price.

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2. Bar Chart
• Popular Chart
• High Price - Top of the vertical line.
• Low Price - Bottom of the vertical line .
• Closing Price – Right side of the bar.
• Opening price – Left side of the bar.

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3. Candle stick Chart
• Called Japanese Candle
• Wick & Body, White and Black
• Wick - High Price & Low Price
• White – Open price is lower than closing price
• Black – Open price is higher than closing price

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4. Point and Figure Chart
• Point & Figure charts are independent of time .
• An X represents an up move.
• An O represents a down move.
• The Box Size is the number of points needed to make an X or O.
• The Reversal is the price change needed to recognize a change in direction.

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 Who?

Warren Edward Buffett (born August 30, 1930) is an American investor

, businessman, and philanthropist.
He is one of the most successful investors in the world,
the primary shareholder and CEO of Berkshire Hathaway.
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 Trend
• In technical analysis, it is the movement of the highs and lows that constitutes a
trend
• an uptrend is classified as a series of higher highs and lower lows, while a
downtrend is one of higher lows and lower highs.

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 Trendlines
• A trendline is a simple charting technique that adds a line to a
chart to represent the trend in the market or a stock.

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  Bulls and the Bears,
Support and Resistance
• Struggle between buyers (demand) and sellers (supply).
• This is revealed by the prices a security seldom moves above (resistance) or below (support).

• Support is the price level through which a stock or market seldom falls (illustrated by the blue
arrows).
• Resistance, on the other hand, is the price level that a stock or market seldom surpasses
(illustrated by the red arrows).

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 Support & Resistance
How does it happen?
• These support and resistance levels are seen as important in terms of
market psychology and supply and demand.
• Support level is the level at which a lot of traders are willing to buy the
stock or buy it.
• Resistance level is the level at which a lot of traders are willing to sell the
stock or sell it
• When these trend-lines are broken, the supply and demand and the
psychology behind the stock's movements is thought to have shifted, in
which case new levels of support and resistance will likely be established.

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 Technical Analysis
1. Dow Theory
• This theory was first stated by Charles Dow
1. Primary Trend
– Called “the tide” by Dow, this is the trend that defines the long-term direction (up to several years).
Others have called this a “secular” bull or bear market.
2. Secondary Trend
– Called “the waves” by Dow, this is shorter-term departures from the primary trend (weeks to months)
3. Minor Trend
– Not significant in Dow Theory ( Day to day fluctuations)

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 2. Elliot Wave Principle
• R.N. Elliot formulated this idea in a series of articles in Financial World in 1939.
• Elliot believed that the market has a rhythmic regularity that can be used to predict future prices.
• The Elliot Wave Principle is based on a repeating 5-wave cycle, and each cycle is made up of similar
shorter-term cycles

B
A
C
3

4
1

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 Head and Shoulders 
• Most Popular
• the security is likely to move against the previous trend

Head and Shoulder Inverted Head and Shoulder

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 Cup and Handle
• It is a bullish continuation pattern
• Once the price movement pushes above the resistance lines formed in the handle, the
upward trend can continue.
• There is a wide ranging time frame for this type of pattern, with the span ranging
from several months to more than a year.

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 Double Tops and Bottoms
• This chart pattern is another well-known pattern that signals a trend
reversal.
• These patterns are formed after a sustained trend and signal to chartists
that the trend is about to reverse.
• The pattern is created when a price movement tests support or resistance
levels twice and is unable to break through.

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 Triple Tops and Bottoms
• It is a Type of reversal chart pattern
• These two chart patterns are formed when the price
movement tests a level of support or resistance three times
and is unable to break through; this signals a reversal of the
prior trend.

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 Triangles
Three types of triangles
1. Symmetrical triangle, - Next movement at any direction.
2. Ascending and - Next movement is Bullish
3. Descending triangle - Next movement is Bearish

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 Flag and Pennant
• In a pennant, the middle section is characterized by converging trend
lines, much like what is seen in a symmetrical triangle.
• The middle section on the flag pattern, on the other hand, shows a
channel pattern, with no convergence between the trend lines.
• In both cases, the trend is expected to continue when the price moves
above the upper trend line.

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 Wedge
• It is similar to a symmetrical triangle except that the wedge pattern slants
in an upward or downward direction, while the symmetrical triangle
generally shows a sideways movement.
• Longer Period - Usually between three and six months.
• A falling wedge is bullish and a rising wedge is bearish.

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If you have subscribed in 100 shares of ____company with a face
value of Rs. 100 in 1980…
In 1981 company declared 1:1 bonus = you have 200 shares
In 1985 company declared 1:1 bonus = you have 400 shares
In 1986 company split the share to Rs. 10 = you have 4,000 shares
In 1987 company declared 1:1 bonus = you have 8,000 shares
In 1989 company declared 1:1 bonus = you have 16,000 shares
In 1992 company declared 1:1 bonus = you have 32,000 shares
In 1995 company declared 1:1 bonus = you have 64,000 shares
In 1997 company declared 1:2 bonus = you have 1,92,000 shares
In 1999 company split the share to Rs. 2 = you have 9,60,000 shares
In 2004 company declared 1:2 bonus = you have 28,80,000 shares
In 2005 company declared 1:1 bonus = you have 57,60,000 shares

57, 60, 000 X 686 = 395 Crore (Rs.395,13,60,000)

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 Moving Averages
1.Simple moving average (SMA)
• Helps technical traders track the trends.
• Average price of a security….
• Calculated by taking the arithmetic mean of a given set of
values.
• The most common time periods used in moving averages are
15, 20, 30, 50, 100 and 200 days.

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 SMA

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 2.Exponential Moving Average
• Higher weight on recent data points

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 3. Linear Weighted Average
• Calculated by taking the sum of all the closing
prices over a certain time period and
multiplying them by the position of the data
point and then dividing by the sum of the
number of periods.

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 Uses of Moving Averages
1. Identifying trends

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2. To know the momentum

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3. To know the support level

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4. To know the resistance level

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5. To know the stop loss level

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 Moving Average Convergence
Divergence (MACD)
• calculated by subtracting a 26-day exponential
moving average from a 12-day EMA.
• Positive – Upward Trend
• Negative – Downward trend

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 Indicators
• Indicators are calculations based on the price
and the volume of a security
• There are two main types of indicators:
leading and lagging.
• A leading indicator precedes price
movements, giving them a predictive quality,
while a lagging indicator is a confirmation tool
because it follows price movement.

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 Oscillator
• An oscillator is a technical analysis indicator
that varies over time within a band (above
and below a center line, or between set
levels). Oscillators are used to discover short-
term overbought or oversold conditions.
• Common oscillators are MACD, ROC, RSI, CCI.

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 Valuation of Securities
• It is the process of determining the current worth of
an asset or company.
Intrinsic value
• The actual value of a company or an asset based on an underlying
perception of its true value including all aspects of the business, in
terms of both tangible and intangible factors

Book Value
• Value receivable by the shareholders if the company is liquidated.

BVPS

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 Return on investment
Total return
• The gain or loss of a security in a particular period. The return consists of
the income and the capital gains relative on an investment. It is usually
quoted as a percentage(%).

Inflation-Adjusted Return

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 Average return
Year Buy Sell Return
• 1 500 400 -20%
• 2 ---- 500 +25%
• Average Return ?

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 Derivatives
• Derivative is a product whose value is derived from
the value of one or more basic variables.

Underlying asset Derivative product

Index Nifty, CNX IT
Stocks TCS, Infosys

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 Types of Derivatives
• Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at
today's pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures
contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts.

Options: 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.

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 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.
• Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of
nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years.
Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets.
Equity index options are a form of basket options.

Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a
forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

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 Futures
• A financial contract obligating the buyer to purchase an asset
(or the seller to sell an asset), such as a physical commodity or
a financial instrument, at a predetermined future date and
price.
• Examples….. Booking a car! Movie?

• The futures markets are characterized by the ability to use

very high leverage relative to stock markets.

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 Futures Trading
• Agreement between two parties
• A promise to deliver a specific asset
• On (or before) a specific future date (Expiry date)
• For a predetermined price

Mr.X buys TCS Mr. Y Sells TCS

Day 1 [email protected]=Rs.1.6L [email protected]=Rs.1.6L
Value Margin Rs.32,000 Margin Rs.32,000
Day 2 [email protected]=1.58L [email protected]=1.58L
Value Rs. 2000 Rs. 2000
Day 3 200@810=Rs.1.62L 200@810=Rs.1.62L
Value Rs. 4,000 Rs. 4,000
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 Futures terminology
• Spot price: TCS Rs.795
• Futures price: TCS Rs. 800
• Contract cycle: Month
• Expiry date: 29th April 2010
• Contract size:[email protected]=Rs. 1.6L
• Initial margin: Rs. 32,000
• Marking To Market: Rs. 2,000/4,000
• Cost of carry:Rs.5
• Contract Description:
• FUTSTK TCS 29APR2010
• Futures payoff

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 Application of futures
• Hedgers – Speculators – Arbitageurs
TCS Equity TCS Futures
Initial price Rs.795 Rs.800

Initial investment for Rs.1,59,000 Rs. 32,000

200 shares only margin
Squaring up price Rs. 820 Rs.825

Net gain [email protected]=Rs.5,000 [email protected]=Rs.5,000

Return on investment 3.1% 15.6%

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 Options
Option is ..
• Right to buy or sell
• But not an obligation (for the buyer)
• Stated quantity
• On or before stated date (Expiry date)
• Stated price(Strike Price)

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 Options to understand
• Honda car JAZZ is being launched
• Price is Rs. 5 Lakhs.
• You can book the car by paying Rs.20,000
• By booking the car, what you have bought?
• Right to buy the car
• When car is ready can they make it compulsory to take the
delivery of the car?
• No. Buyer has no obligation to buy the car
• Can you compel the company to sell the car?
• Yes. Seller has the obligation to sell the car.

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 Option buyer and seller
• Will you buy the car for Rs. 5 Lakh when the
current market price of the car is…
• Rs.5.5 Lakh
• Rs.4.3 Lakh
• 5 Lakh
• 4.9L

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 Options terminology
• Option premium
• Strike price
• Expiry date
• Open interest
• In the money
• At the money
• Out the money

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 Efficient Market Hypothesis - EMH
• An investment theory that states it is impossible to
"beat the market" because stock market efficiency
causes existing share prices to always incorporate
and reflect all relevant information.

• According to the EMH, stocks always trade at their

fair value on stock exchanges, making it impossible
for investors to either purchase undervalued stocks
or sell stocks for inflated prices.

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 Weak Form Efficiency

• Stock market prices reflect all known

information with respect to past stock prices,
trends, and volumes.
• Opposite to technical analysis.

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 Semi-Strong Form Efficiency

• Prices reflect not only all information found in

the record of past prices and volumes but also
all other publicly available information.

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 Strong Form Efficiency

• The strongest version of market efficiency.

• It states all information in a market, whether
public or private, is accounted for in a stock
price.
• Not even insider information could give an
investor the advantage.

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 Random Walk Theory

• The theory that stock price changes have the

same distribution and are independent of
each other, 
• so the past movement or trend of a stock
price or market cannot be used to predict its
future movement.

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