Unit I Investment

• Overview of Capital Market: Market of securities, Stock Exchange and

New Issue Markets - their nature, structure, functioning and
limitations; Trading of securities: equity and debentures/ bonds.
Securities trading - Types of orders, margin trading, clearing and
settlement procedures. Regularity systems for equity market , Type of
investors, Aim & Approaches of Security analysis.
MARKET OF SECURITIES

• A platform where financial instruments such as stocks, bonds,

debentures, and derivatives are bought and sold.
• It allows companies to raise capital by issuing securities, and investors
to purchase these securities.
• The securities market is primarily regulated by the Securities and
Exchange Board of India (SEBI), which ensures transparency, investor
protection, and the orderly functioning of the market.
The securities market is divided into two major segments:
1. Primary Market (New Issue Market)
2. Secondary Market (Stock Market):
Primary Market (New Issue Market):
In the primary market, securities are issued for the first time by
companies to raise capital. Investors directly buy these securities from the
issuer.
Example:
SBI Cards and Payment Services IPO (2020): SBI Cards issued shares in its
Initial Public Offering (IPO) to raise ₹10,340 crore. Investors who
participated in the IPO directly purchased shares from the company.
Nykaa IPO (2021): The Indian cosmetics and fashion e-commerce
company Nykaa issued shares in its IPO and raised approximately ₹5,352
crore. Investors who subscribed to the IPO received shares directly from
the company.
Secondary Market (Stock Market):
The secondary market is where previously issued securities are traded
between investors. Two major stock exchanges in India—the National
Stock Exchange (NSE) and the Bombay Stock Exchange (BSE)—serve as
platforms for this trade.
Example:
Infosys Shares: After Infosys issued shares in the primary market, they
began trading on the NSE and BSE. Investors regularly trade Infosys
shares on these exchanges.
Components of the Securities
Market
• Equity Market
• Debt Market
• Derivatives Market
• Mutual Funds
• Foreign Exchange (Forex) Market
• Equity Market:
This is where ownership shares are bought and sold. Investors can gain
dividends or capital appreciation from these investments.
• Debt Market:
The debt market is where bonds and debentures are traded.
Companies and governments issue these securities to borrow money
from investors in return for periodic interest payments. Example:
Indian Government Bonds: The Government of India issues bonds like
the 10-year Government Bond, which investors buy for stable returns.
• Derivatives Market:
In this market, investors trade financial contracts whose value is derived from
underlying assets such as stocks, indices, currencies, or commodities. Example:
Nifty 50 Futures: Investors trade contracts predicting future movements of the
Nifty 50 index, helping manage risk or speculate on market direction.
• Mutual Funds:
Mutual funds pool money from various investors to invest in a diversified
portfolio of stocks, bonds, or other securities. Investors buy units of mutual
funds, which represent a portion of the total portfolio. Example: SBI Bluechip
Fund: This mutual fund invests in large-cap companies listed on the NSE and
BSE, and investors can buy units of the fund as part of their portfolio.
• Foreign Exchange (Forex) Market:
The Forex market involves trading currencies and is a part of the
securities market that allows investors to hedge risks or speculate on
currency movements. Example: An Indian exporter buys US Dollars
(USD) to hedge against future fluctuations in the INR-USD exchange
rate.
Benefits of the Securities Market
Capital Raising: Companies raise funds by issuing securities, which they use for expansion, working
capital, and other operational needs.
Liquidity: Investors can easily buy and sell securities, ensuring their investments are not locked and
can be quickly converted to cash if needed.
Investment Opportunities: The securities market provides numerous options, such as stocks,
bonds, mutual funds, and derivatives, allowing investors to diversify their portfolios. Example: An
investor may invest in a Tata Consultancy Services (TCS) stock for potential capital appreciation and
government bonds for steady income.
Price Discovery: Securities markets help in the price discovery of financial instruments by reflecting
the demand and supply dynamics in real-time.
Economic Growth: A well-functioning securities market promotes investment and innovation,
leading to overall economic growth. Example: The NSE and BSE facilitate investments in major
companies like Bharti Airtel, contributing to job creation and industrial development in India.
Stock Exchange (Secondary Market)

Nature

• The stock exchange is a regulated marketplace where existing

(previously issued) securities, such as equities (shares) and debt
instruments (bonds, debentures), are bought and sold by investors.
• India's two primary stock exchanges are the Bombay Stock Exchange
(BSE) and the National Stock Exchange (NSE).
Structure:

• BSE: Asia's oldest stock exchange, BSE was established in 1875 and
has a total of 5,309 listed stocks on BSE as of January 24, 2024 .
• NSE: Established in 1992, the NSE is India's largest stock exchange by
trading volume and market capitalization. There are 2,266 stocks
listed on the NSE.
Functioning

Listing of Securities: Companies list their shares or debt instruments on the stock
exchange after fulfilling regulatory requirements. For example, Reliance Industries,
Infosys, and Tata Consultancy Services (TCS) are listed on both BSE and NSE.
Trading of Securities: Investors buy and sell securities through stockbrokers, with
trades happening electronically through platforms like NSE's NIFTY and BSE's SENSEX.
Price Discovery: Stock prices fluctuate based on supply and demand, market
sentiment, and company performance. For example, news of quarterly earnings from
HDFC Bank or Infosys can influence stock prices.
Settlement: Once a trade is executed, the settlement process takes place. In India, the
T+1 system is followed, meaning that trade settlements are completed within two
business days.
An example of market manipulation in the Indian context is the Satyam
Computer Services scandal in 2009, also known as "India's Enron." In this
case, the company's founder and then-chairman, Ramalinga Raju, manipulated
financial statements and inflated profits to deceive investors and artificially
boost the stock price of Satyam on the Indian stock exchanges. This led to
significant misrepresentation of the company's financial health, which
attracted numerous investors based on false information.
When Raju eventually admitted to the fraud, Satyam's stock plummeted by
over 70%, wiping out billions of dollars in market value and causing huge
losses to investors. The incident raised serious concerns about corporate
governance, auditing practices, and insider trading in India.
Harshad Mehta stock market scam of 1992, where Mehta manipulated
stock prices by illegally obtaining funds from banks and investing them
in the stock market. This led to a sharp rise in stock prices, followed by
a market crash when the scam was exposed, causing massive losses to
retail investors and shaking the trust in India's financial markets.
Speculation: Stock exchanges can sometimes attract excessive
speculation, leading to artificial price movements that may not reflect a
company’s true value.
Reliance Power IPO in 2008

At the time, the Reliance Power initial public offering (IPO) was one of
the most highly anticipated events in the Indian market, with retail and
institutional investors showing immense interest due to the company's
association with the Reliance Group, which had a strong reputation.
The IPO attracted massive speculation, with the stock being highly
overvalued even before it started trading. The IPO was oversubscribed
by around 73 times, reflecting the speculative frenzy around the stock.
However, once Reliance Power was listed on the stock exchanges, the
stock price dropped dramatically—plummeting by nearly 17% on the
first day of trading and continuing to fall in the following months.
This sharp decline in stock price was a result of excessive speculation
and overvaluation, which did not reflect the company's actual business
fundamentals, leading to significant losses for investors who had
invested at the peak of the hype. The incident highlighted how
speculative bubbles could inflate stock prices artificially and then burst,
leaving investors with substantial losses.
New Issue Market (Primary
Market)
Nature
The new issue market, also known as the primary market, is where
companies raise capital for the first time by issuing new securities to
investors. Companies use this market to issue shares, bonds, or
debentures to fund expansion, pay off debt, or finance projects.
Structure
Initial Public Offering (IPO): In the primary market, companies issue
securities directly to the public for the first time through an IPO. Example:
Zomato IPO (2021) was a landmark issue, raising ₹9,375 crore.
Follow-on Public Offering (FPO): Companies that are already listed may
issue additional shares to the public through an FPO. Example: Tata Steel
FPO (2018) raised additional funds by offering more shares to existing
shareholders and new investors.
Private Placements: Companies can issue securities to a select group of
investors (such as institutional investors) rather than the general public.
Functioning
Issue of Prospectus: A company intending to raise capital through the primary
market releases a prospectus, providing detailed information about its
financials, business model, and the terms of the securities issue.
Underwriting: Investment banks or financial institutions often act as
underwriters, guaranteeing the sale of the issue. They purchase any unsold
shares if the issue is not fully subscribed.
Allotment: Once investors subscribe to the issue, the company allots the
securities. In cases of oversubscription, shares are allotted on a proportionate
basis.
Listing on Stock Exchange: After securities are sold in the primary market, they
are listed on the stock exchange for trading in the secondary market. Example:
LIC IPO (2022), India’s largest IPO, raised ₹21,000 crore and was subsequently
listed on the BSE and NSE.
Limitations

High Risk for Investors: Companies entering the market through an IPO
may be untested, and investors face higher risks compared to investing
in established companies. Example: Some IPOs, like Paytm (2021), saw
a sharp decline in share value shortly after listing, leading to significant
losses for initial investors.
Underpricing or Overpricing: IPOs are often underpriced to ensure
their success, potentially reducing the gains for the issuing company.
Conversely, overpricing can lead to underperformance post-listing.
An example of underpricing in an IPO is the Coal India Limited IPO in 2010. Coal India, a state-owned
enterprise, launched its IPO, which became one of the largest in Indian history at the time. The IPO was priced
at ₹245 per share and was significantly oversubscribed by institutional and retail investors, showing strong
demand.
When Coal India shares were listed on the stock exchange, the stock price surged by over 40% on the first day
of trading, closing at around ₹342 per share. This large increase in the share price on the first day suggested
that the IPO was underpriced, as the company could have potentially raised more capital if the shares were
initially priced higher. While this benefited investors, it reduced the potential gains for Coal India.
An example of overpricing is the Paytm IPO in 2021. Paytm, India's leading digital payments company,
launched its IPO with a high valuation, pricing its shares at ₹2,150. However, after its listing, the stock price
fell by more than 27% on the first day of trading, closing at ₹1,564. The overpricing of the IPO led to
significant underperformance post-listing, resulting in heavy losses for many investors. The market sentiment
was that the stock was overvalued, which led to a sharp correction after its debut. This case highlighted the
risks of overpricing in IPOs, especially when the market perception does not align with the company's
valuation.
Trading of Securities
1. Trading of Equity (Shares):
Equity represents ownership in a company, and shareholders benefit
from dividends and capital gains when the company's value increases.
Mechanism: Equities are traded on the secondary market (BSE and
NSE). Investors place buy and sell orders through stockbrokers.
Example: Infosys shares can be bought or sold on the NSE or BSE. Share
prices fluctuate daily based on company performance, industry trends,
and market sentiment.
Trading of Debentures and Bonds
Debentures and bonds are debt instruments issued by companies or the
government to raise long-term capital. Unlike equity, bondholders do not
own a part of the company but receive interest payments.
Government Bonds: The Government of India issues bonds, such as 10-
Year Government Bonds, to finance infrastructure projects.
Corporate Bonds: Companies like Tata Motors or Reliance Industries
issue corporate bonds or debentures to raise funds.
Mechanism: These are traded in the debt segment of the secondary
market. Bonds can be bought and sold through stock exchanges or in the
over-the-counter (OTC) market. Example: An investor may buy Tata
Motors Debentures listed on the NSE, earning fixed interest over a
specified term.
The Over-the-Counter (OTC) market in India refers to a decentralized market where securities, commodities,
or financial instruments are traded directly between two parties, without the supervision of an exchange. In
contrast to stock exchanges, OTC markets are less regulated, and trades are usually carried out through a
network of dealers, brokers, or financial institutions. OTC markets are typically used for trading instruments
like bonds, derivatives, unlisted stocks, and government securities.
Examples of OTC Market in India:
Government Securities (G-Secs) Market: In India, government securities (such as treasury bills and bonds)
are often traded in the OTC market. Large financial institutions, banks, and institutional investors conduct
these transactions directly with each other, without the involvement of a stock exchange. The Negotiated
Dealing System (NDS) platform, launched by the Reserve Bank of India (RBI), facilitates OTC trading in
government securities.
Corporate Bonds: Many corporate bonds and debt instruments are traded over-the-counter in India,
particularly those issued by large corporations and financial institutions. These instruments are generally
traded directly between institutional investors, such as mutual funds, insurance companies, and banks. For
example, bonds issued by companies like Tata Sons, HDFC, and Reliance Industries are often traded in the
OTC market.
Unlisted Stocks: Companies that are not listed on formal exchanges, such as Muthoot
Finance or Tata Sky, have their shares traded in the OTC market. These transactions
are handled through brokers or financial institutions without going through a
traditional stock exchange like the BSE or NSE.
Forex Market: India's foreign exchange (forex) market operates largely in the OTC
space. Currency derivatives, spot trades, and forward contracts between banks,
companies, and other institutional players happen directly, outside any exchange, with
the involvement of authorized dealers or brokers.
OTC Exchange of India (OTCEI): While the OTCEI was set up as an organized OTC
market in the 1990s to allow smaller companies to raise funds, it struggled to gain
traction and was shut down in 2015. Despite its closure, the initiative was an example
of an attempt to formalize OTC trading in equity and debt securities in India.
Limitations in Trading

Liquidity: Bonds and debentures may suffer from lower liquidity than
equities, making it harder to buy or sell them quickly.

Interest Rate Risk: Bond prices are sensitive to changes in interest

rates. When interest rates rise, bond prices typically fall, affecting the
return on investment.
Suppose you bought a 10-year government bond in India with a fixed coupon rate of 6%.
This means you will receive 6% interest every year for 10 years.
Now, imagine the Reserve Bank of India (RBI) raises interest rates, and new bonds are
issued with a higher coupon rate of 7%.
Impact:
Because new bonds are offering 7% interest, your old bond with a 6% interest rate
becomes less attractive. To sell your bond, you'll have to offer it at a lower price to make it
competitive with the new higher-interest bonds. As a result, the price of your bond falls.
In short:
Interest rates go up → New bonds offer higher returns.
Old bond prices go down → Investors prefer new bonds with higher rates, making older
ones less valuable.
Securities trading - Types of orders
Securities Trading involves the buying and selling of financial
instruments like stocks, bonds, and derivatives on stock exchanges such
as the Bombay Stock Exchange (BSE) and the National Stock Exchange
(NSE).
An order in securities trading is an instruction given by an investor to
buy or sell a particular security. In India, these orders can be placed on
the NSE and BSE through brokers or trading platforms.
A. Market Order
A market order is an instruction to buy or sell a security immediately at
the current market price. Example: An investor wanting to buy Reliance
Industries shares can place a market order. If the current price is
₹2,500, the order will execute at this price (or close to it).
B. Limit Order
A limit order allows the investor to specify the maximum price they are
willing to pay when buying or the minimum price they are willing to
accept when selling. Example: An investor may place a limit order to
buy Tata Motors shares at ₹600, meaning the trade will only be
executed if the stock price drops to ₹600 or below.
C. Stop-Loss Order
A stop-loss order is used to limit potential losses by automatically selling a security when it reaches a
predetermined price. Example: If an investor holds HDFC Bank shares bought at ₹1,700 and wishes to
limit losses, they can place a stop-loss order at ₹1,650. If the price falls to ₹1,650, the shares will be sold
to prevent further losses.
D. Stop-Limit Order
A stop-limit order combines features of both stop-loss and limit orders. Once the stop price is triggered,
the order becomes a limit order and is executed at the limit price or better. Example: An investor holds
Infosys shares and sets a stop-limit order with a stop price of ₹1,450 and a limit price of ₹1,440. If the
stock hits ₹1,450, the order will become a limit order to sell at ₹1,440 or better.
E. Good-till-Cancelled (GTC) Order
A GTC order remains active until the order is executed or canceled by the investor. Example: An investor
can place a GTC limit order to buy ICICI Bank shares at ₹900. This order will remain valid until the stock
reaches this price or the investor cancels it.
Margin Trading

Margin trading allows investors to buy securities by borrowing funds

from their broker, using the purchased securities as collateral. This
enables investors to take larger positions than they could with their
own capital. The Securities and Exchange Board of India (SEBI)
regulates margin trading in India, ensuring risk management.
Mechanism of Margin Trading
Investors can buy securities by paying only a part of the total purchase price, known as the
margin. The rest of the money is borrowed from the broker.
SEBI mandates a minimum initial margin and a maintenance margin. If the value of the securities
falls and the margin requirement is not met, the broker can issue a margin call, asking the investor
to deposit additional funds or liquidate the position.
Example of Margin Trading:
An investor wants to buy 100 shares of Infosys at ₹1,450 each, for a total cost of ₹1,45,000. With
margin trading, the investor may only need to pay ₹72,500 (50% margin), while the broker
finances the remaining ₹72,500.
If the price of Infosys rises to ₹1,600, the investor can sell the shares and make a profit on the total
value, not just the amount they initially invested.
However, if the price falls to ₹1,300, and the margin requirement is breached, the broker may
issue a margin call, requiring the investor to add funds.
Risks of Margin Trading
• Amplified Losses: While margin trading can amplify gains, it can also
magnify losses, as investors are exposed to a larger position than they
could afford with their own funds.
• Margin Call: If the value of the security drops significantly, investors
may be forced to either deposit more funds or sell the securities at a
loss.
Clearing and Settlement Procedures
• After a trade is executed on an exchange, it must go through the clearing and settlement process,
ensuring the smooth transfer of securities and funds between the buyer and seller. In India, the
National Securities Clearing Corporation Limited (NSCCL) for NSE and Indian Clearing Corporation
Limited (ICCL) for BSE handle this process. Traditionally, Indian exchanges followed a T+2 settlement
cycle, meaning trades were settled two business days after execution. This was shortened to T+1 in
January 2023 starting in a phased manner from January 2022.

• The market is now moving to same-day settlement of trades, within a year of fully implementing the
T+1 cycle. ‘

T+0 settlement offers a paradigm shift – trades are settled on the same business day they are
executed, and the sellers will receive the money on the same day the trade is executed.

Clearing Process:
• After a trade is executed, the clearing house steps in as an intermediary between the buyer and
seller. The clearing house guarantees the trade, reducing counterparty risk.
• The clearing house verifies the buyer and seller’s details and ensures that the buyer has sufficient
funds and the seller has the necessary securities.
Delivery vs. Intraday Trading

Delivery Trading: In this method, the buyer takes actual delivery of the
shares, meaning they own them and can hold them indefinitely.
Intraday Trading: In contrast, intraday trades must be squared off
(bought and sold) within the same day, without actual delivery of
shares.
Regulatory Systems for Equity Markets
India's equity markets are regulated by a comprehensive framework
designed to ensure transparency, fairness, and investor protection. The
regulatory system is spearheaded by several key institutions, including
the Securities and Exchange Board of India (SEBI), Reserve Bank of
India (RBI), Ministry of Finance, and Stock Exchanges like the National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE). These
institutions are responsible for formulating rules, monitoring market
activities, and taking enforcement actions when necessary.
Securities and Exchange Board of India (SEBI)

Securities and Exchange Board of India (SEBI)

Role of SEBI
• SEBI is the primary regulator of the equity markets in India. Its main objectives are:
• Protecting investor interests
• Promoting fair and efficient markets
• Regulating market participants, such as brokers, mutual funds, and other
intermediaries
• Ensuring transparency and curbing market manipulation
• SEBI has broad authority to regulate equity markets, including issuing guidelines for
Initial Public Offerings (IPOs), corporate governance, trading practices, and
ensuring the timely disclosure of material information by publicly listed companies.
Key SEBI Regulations in Equity Markets
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: This requires listed
companies to disclose important financial and operational information promptly, ensuring
transparency. Example: When Infosys announces its quarterly earnings or makes key corporate
decisions like appointing new executives, they are required to notify both SEBI and the stock
exchanges.
SEBI (Prohibition of Insider Trading) Regulations, 2015: SEBI’s insider trading rules prevent
trading on the basis of material non-public information. Example: If a senior official of Reliance
Industries trades shares based on upcoming financial results that have not yet been made public,
it would be a violation of SEBI’s insider trading regulations, leading to penalties or prosecution.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: This governs the process
of raising capital in the equity markets, such as through IPOs. Example: When Zomato went
public in July 2021, its IPO followed SEBI's capital raising guidelines, ensuring that investors were
well-informed about the company’s financial health and business model.
Reserve Bank of India (RBI)

While the RBI primarily focuses on regulating the banking sector and monetary policy, it also plays
a crucial role in the equity markets, especially with respect to foreign investment and capital flows.
Key Roles of RBI in Equity Markets:
Foreign Institutional Investors (FII) and Foreign Portfolio Investors (FPI): The RBI regulates the
entry and participation of foreign investors in Indian equity markets. Foreign investments are
crucial for market liquidity, and the RBI issues guidelines on the amount and terms of investments
by FPIs and FIIs. Example: The Foreign Exchange Management Act (FEMA), regulated by RBI,
governs how FIIs and FPIs can participate in equity markets. In January 2020, RBI allowed higher
foreign ownership limits in sectors like defense and telecommunications, which led to significant
foreign investments in companies like Bharti Airtel and HDFC Bank.
Control over Banking Sector Exposure: RBI also regulates how much banks can invest in equity
markets and prevents over-exposure to stock market risks. Example: The RBI's prudential norms
limit the exposure of banks to equity markets, helping manage risk and ensuring that banks don't
face undue stress due to stock market volatility.
Ministry of Finance
The Ministry of Finance is responsible for formulating the government's policies on capital markets,
taxation, and related economic issues. Its key functions include drafting laws that impact equity
markets and overseeing SEBI’s functioning.
Key Roles of the Ministry of Finance:
Taxation of Equity Investments: The government decides the taxation regime for equity
investments, including Capital Gains Tax. The ministry has adjusted the Long-Term Capital Gains
(LTCG) and Short-Term Capital Gains (STCG) tax rates to optimize investor participation while
balancing revenue needs. Example: In the 2018 Union Budget, the Ministry of Finance reintroduced
a 10% LTCG tax on gains over ₹1 lakh on the sale of equity shares after a year, affecting long-term
investors.
Disinvestment and IPOs of Public Sector Enterprises: The Ministry also plays a key role in public
offerings of state-owned enterprises (PSUs). Example: The IPO of Life Insurance Corporation of
India (LIC) in 2022 was managed by the Ministry of Finance as part of the government’s
disinvestment strategy.
Stock Exchanges (BSE & NSE)

BSE and NSE are India's major stock exchanges and have their own set of regulations in
addition to those of SEBI. They monitor the day-to-day trading activities and ensure smooth
market operations.
Key Roles of Stock Exchanges:
Market Surveillance: The exchanges are responsible for monitoring unusual price movements
and insider trading activities. They work closely with SEBI to prevent market manipulation.
Example: In 2020, NSE halted trading for 45 minutes when the index dropped sharply,
triggering the circuit breaker mechanism to prevent a crash.
Clearing and Settlement: Exchanges also oversee the settlement of trades through their
respective clearinghouses — the National Securities Clearing Corporation Limited (NSCCL) for
NSE and the Indian Clearing Corporation Limited (ICCL) for BSE. Example: When an investor
buys shares of Tata Consultancy Services (TCS), the trade is settled on a T+2 basis, meaning
the shares and funds are transferred within two working days after the trade date.
Depositories (NSDL & CDSL)

The National Securities Depository Limited (NSDL) and the Central

Depository Services (India) Limited (CDSL) are the two key depositories that
hold and maintain investors’ securities in an electronic (Demat) format.
Role of Depositories:
• Dematerialization of Shares: Investors no longer receive physical share
certificates; instead, shares are held in Demat accounts, simplifying the
trading process and reducing fraud. Example: A retail investor holding HDFC
Bank shares can open a Demat account with NSDL or CDSL to hold their
shares securely. When they sell these shares, the depositories handle the
electronic transfer of ownership.
• Corporate Actions: Depositories also manage events like dividends, stock
splits, rights issues, etc. Example: If Infosys announces a bonus issue of
shares, NSDL/CDSL ensures that the additional shares are credited to eligible
investors’ Demat accounts.
Regulatory Challenges and Limitations
Despite the robust regulatory framework, India's equity markets face several
challenges:
• Market Manipulation: Despite stringent SEBI regulations, there are instances of
pump and dump schemes where stock prices are artificially inflated to lure investors,
only to be sold off later.
• Example: In 2021, SEBI penalized multiple brokers and traders for artificially inflating prices of
penny stocks like Vikas WSP.
• Investor Education: Retail investors often lack the financial literacy to understand
complex products like derivatives or leveraged trading, leading to poor investment
decisions.
• Slow Judicial Process: While SEBI can impose penalties, the appeals process in Indian
courts is slow, which delays the resolution of market manipulation and insider trading
cases.
Type of investors

1. Retail Investors
Retail investors are individual investors who buy and sell securities for
personal accounts, often in smaller quantities. They invest in stocks,
bonds, mutual funds, or other investment vehicles to meet their personal
financial goals, such as retirement planning, children's education, or
wealth creation.
Characteristics:
• Small-scale investment amounts.
• Typically have a lower risk appetite.
• More likely to be influenced by market sentiment and news.
• Often participate in Initial Public Offerings (IPOs).
• Institutional Investors
Institutional investors are organizations or entities that invest substantial amounts
of capital into the stock market. These include mutual funds, pension funds,
insurance companies, banks, and hedge funds. Their investments can significantly
impact market prices due to the large volumes of securities they trade.
Types of Institutional Investors:
• Mutual Funds: These funds pool money from various investors to invest in
diversified portfolios of securities.
• Insurance Companies: Invest premiums collected from policyholders into various
financial instruments.
• Pension Funds: Manage large sums of money set aside for employees’ retirement.
Foreign Institutional Investors (FIIs) / Foreign Portfolio Investors (FPIs)
They are non-Indian entities that invest in Indian equity markets. They
play a crucial role in providing liquidity and driving market trends in
India.
Characteristics:
• Large investment volumes.
• Subject to RBI and SEBI regulations.
• A significant presence in the Indian markets, making them key drivers
of market volatility.
• Domestic Institutional Investors (DIIs)
They are Indian financial institutions, including banks, insurance
companies, pension funds, and mutual funds, that invest in the Indian
stock market. DIIs provide a counterbalance to foreign investors and
help stabilize markets.
Example:
When FIIs pulled out of the Indian markets in March 2020 due to the
global pandemic, DIIs like LIC and HDFC Mutual Fund stepped in,
buying significant shares to prevent the market from falling further. This
intervention helped stabilize the market, preventing a larger crash.
High Net-Worth Individuals (HNIs)
They are wealthy individuals who invest significant amounts of money in the market. While they
are still classified as retail investors, their capital and risk appetite are much larger compared to
the average retail investor.
Characteristics:
• Significant capital investments.
• Often participate in private placements and Qualified Institutional Placements (QIPs).
• Invest in stocks, bonds, real estate, and venture capital.
Example:
HNIs often participate in IPOs through the Non-Institutional Investor (NII) category. In the Nykaa
IPO of 2021, many HNIs made large investments, applying for shares worth crores, hoping to
benefit from the company's strong growth prospects in the beauty and personal care sector.
Speculators
They are investors who engage in short-term, high-risk trading with the aim of making
quick profits. They often trade in derivatives like futures and options, betting on price
movements in specific stocks or indices.
Characteristics:
• High risk appetite.
• Frequent trading with a focus on short-term gains.
• Often engage in margin trading or leveraged investments.
• Example:
• Speculators may trade in Nifty 50 options or futures contracts, aiming to profit from
the daily or weekly fluctuations in the index. They may also invest in volatile stocks
like Adani Enterprises or Vedanta to capitalize on sharp price movements.
Value Investors
Value investors are those who invest in companies that are
undervalued by the market but have strong fundamentals. These
investors believe that the market will eventually recognize the true
worth of the company, leading to capital appreciation over time.
Example:
Famed investor Rakesh Jhunjhunwala was known as a value investor
who bought large stakes in companies like Titan and Lupin when they
were undervalued and held them over the long term, profiting from
their eventual growth and stock price appreciation.
Angel Investors and Venture Capitalists
Angel investors and venture capitalists invest in early-stage startups,
often providing the capital required for a company to grow in exchange
for equity. These investors take on significant risks, as startups are often
unproven and may fail.
Example:
In the Indian startup ecosystem, angel investors like Ratan Tata and
venture capital firms like Sequoia Capital India have invested in
companies like Ola, Flipkart, and Byju’s, backing these companies at an
early stage before they became market leaders.
Socially Responsible Investors (SRI)
They focus on companies that meet specific ethical, social, or
environmental criteria. They prefer to invest in firms that follow
sustainable practices and contribute to the welfare of society.
Example:
Many SRIs in India are focusing on the renewable energy sector,
investing in companies like Tata Power and Suzlon Energy, which are
involved in green energy initiatives. Mutual funds like SBI Magnum ESG
Fund also cater to investors seeking companies with strong
environmental, social, and governance (ESG) practices.
Aim of Security Analysis

Determine the Intrinsic Value: The primary goal is to estimate the true or intrinsic value of a security,
which helps investors decide whether to buy, hold, or sell. Example: Analyzing Reliance Industries stock by
reviewing its balance sheet, revenue growth, and future expansion plans to determine its intrinsic value.
Assess Risk and Return: Security analysis helps investors gauge the risk associated with a security and its
potential return, enabling them to choose investments aligned with their risk tolerance. Example:
Evaluating the risk associated with investing in Adani Group stocks post-2022 controversies, considering
political risks, regulatory scrutiny, and future earnings prospects.
Make Informed Investment Decisions: Security analysis provides insights that support investment
decisions, whether for short-term trading or long-term investing. Example: Based on analysis, an investor
might decide to invest in HDFC Bank for long-term growth due to its stable earnings and leadership in the
Indian banking sector.
Minimize Investment Losses: By performing detailed analysis, investors can avoid poorly performing stocks
or exit before significant losses. Example: Analyzing debt-heavy companies like Vodafone Idea to assess
whether their financial health can lead to potential losses in the long term.
Approaches to Security Analysis

Fundamental Analysis
It involves evaluating a company's financial health, its business model, and
macroeconomic factors. It looks at qualitative and quantitative factors to estimate the
intrinsic value of a security. Investors compare this intrinsic value to the current market
price to determine whether a stock is undervalued or overvalued.
Key Components:
• Financial Statements: Income statements, balance sheets, and cash flow statements are
analyzed to evaluate profitability, solvency, and liquidity.
• Company Performance Metrics: Ratios like Price-to-Earnings (P/E), Price-to-Book (P/B),
Debt-to-Equity, and Return on Equity (ROE) are studied.
• Industry and Economic Analysis: Examining the industry’s future prospects,
competition, and macroeconomic factors such as GDP growth, inflation, and interest
rates.
Advantages:
• Focuses on long-term value creation.
• Helps identify fundamentally strong companies that may offer high
returns in the future.
Limitations:
• Time-consuming as it requires in-depth research.
• Long-term focus may not suit short-term traders.
Technical Analysis
It is based on studying historical price movements and trading volumes. It
assumes that all relevant information about a security is already reflected in its
price and focuses on identifying trends, patterns, and market sentiment using
charts and technical indicators.
Key Components:
• Price Trends: Identifying trends like uptrends, downtrends, or sideways
movements.
• Chart Patterns: Analyzing patterns like head and shoulders, double
top/bottom, or triangle patterns.
• Technical Indicators: Using indicators like Moving Averages, Relative Strength
Index (RSI), and Bollinger Bands to time buy and sell decisions.
Advantages:
• Ideal for short-term traders who rely on market timing.
• Provides actionable insights based on historical price movements.
Limitations:
• Does not consider the intrinsic value of the company.
• Price movements can sometimes be unpredictable due to external
shocks or events.
Quantitative Analysis
It uses mathematical models, statistics, and algorithms to evaluate
securities. It often involves analyzing historical data, such as earnings
reports, stock prices, and other metrics, to make investment decisions.
Advantages:
• Data-driven approach reduces emotional bias.
• Can identify patterns that may not be visible through other methods.
Limitations:
• Heavily reliant on historical data and may not account for sudden
market changes.
Behavioral Finance
It explores the psychological aspects of investing, recognizing that
investors are not always rational and their emotions can lead to market
inefficiencies. This approach seeks to understand how cognitive biases,
emotions, and crowd psychology affect security prices.
Example in Indian Context:
In 2020, during the COVID-19 pandemic, many investors in India
exhibited herding behavior, leading to panic selling in the early months
of the crisis. However, this was followed by a sharp market rebound,
showing that psychological factors can lead to irrational decision-
making.
List of major stock market scandals
• Enron Scandal (USA, 2001)
• Bernie Madoff Ponzi Scheme (USA, 2008)
• Satyam Scandal (India, 2009)
• Libor Scandal (Global, 2012)
• Pump and Dump Schemes (Global)
• Wirecard Scandal (Germany, 2020)
• Volkswagen Emissions Scandal (Global, 2015)
• Harshad Mehta Scam (India, 1992)
• Galleon Group Insider Trading Scandal (USA, 2009)
• Nick Leeson and Barings Bank Collapse (UK, 1995)
• China’s Luckin Coffee Fraud (China, 2020)
• The SEC vs. Martha Stewart (USA, 2004)
• MF Global Collapse (USA, 2011)
• Robinhood and GameStop Short Squeeze (USA, 2021)
• 1MDB Scandal (Malaysia, 2015)
Crisis in Stock Market
• The Panic of 1907
• Wall Street Crash of 1929 (Great Depression)
• Black Monday (1987)
• Asian Financial Crisis (1997)
• Dot-com Bubble (2000-2002)
• Global Financial Crisis (2008)
• European Sovereign Debt Crisis (2010-2012)
• 2015-2016 Chinese Stock Market Crash
• COVID-19 Crash (2020)
• 2022 Bear Market