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1.1 Background of the Study

Business enterprises in India, as in every other country, are closely linked with the financial markets, capital market and institutions. Saving pool provide funds for investment in industry, trade and service organization, the financial intermediaries, and financial instrument or securities which facilitate transfer of funds, all together enable the financial system an integral part of the economic system. The money and capital markets are two inter-related constituents of the financial sector. The reforms and regulations in financial sector have continued to be of great significance with the changing perspective of business environment.

1.2 Indian Money Market

The nationalized and private sector, commercial banks constitute the core of the modern sector of the Indian money market. The co-operative banks, foreign banks and the Reserve Bank of India are the other constituents of this sector. By all accounts the modern sector is fairly well organized and integrated. But taken as a whole, the Indian money market does not satisfy the criteria of a developed money market. It is not fully integrated since the indigenous bankers are outside the purview of control of the Reserve Bank of India. Besides, the money market suffered from several deficiencies like the Treasury bill market continuing to remain undeveloped, failure of all measured aimed at developing the commercial bill market due to the popularity of the cash credit system, and the absence of a rational interest rate structure.

1.3 Investment Management

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. Literally, the word means the "action of putting something in to somewhere else" In finance, investment is buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Types of financial investments include shares, other equity investment, and bonds (including

bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses. Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

1.4 Personal Finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation. In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment. The most basic economic laws say, that prices rise when demand exceeds over supply. This is just as true for money as for onions. The price of money is the interest rate. When prices are rising and the demand for credit is high, a hike in interest rates can rebalance the supply demands seesaw. At higher rates, lenders will lend more while borrowers tighten their bells. The twin effects kill two birds with one stone. Right now, inflation is climbing the Consumer Price Index has risen from 5% in April 2006 to 6.9 % in December 2006 (see page 52). Bank credit has risen by over 30% in 2006 over 2005, and that was on the back of 30% rise in 2005. Bank deposits

grew only 15.7% last year. Interest rates have risen steadily since early 2004.m banks need more deposits and the RBI wants to control inflation. In January 2004, when inflation was 4%, banks were offering 5.25% to depositors. By early January 2007, fixed deposit (FDs) had moved into the 9% zone and some banks were accepting 5 year and even 10 year deposits at effective yields of 9.31%. On 31 January, the RBI nudged rates up once again with a 0.25% hike of a key policy rate. The message is clear and banks are likely to hike FD rates again. What should an investor do? When rates, rise, the value of loans made at previous, lower rates are depreciated. This causes losses to debt mutual funds (and often, banks as well). Indeed, debt mutual have struggled to deliver returns since 2005. Rising interest rates can also trigger stock market collapse though that hasnt happened. Yet, but the stock market is highly valued and it would be foolhardy to expect it to continue climbing forever. So the humble FD may be a genuine investment option. Bear in mind though, that FDs might not beat inflation in the long run. The real return of a debt instrument is positive only if the interest rate is higher than inflation. A glance at historic returns versus historic inflation levels shows that inflation often outruns FD rates. But FDs may work over shorter time periods. If inflation settles close to current levels (7%) or drops, then 9% is a handsome pre-tax return and the returns would be even juicier for senior citizens. There is a tax rebate under Section 80C of the I.T. Act 1961 on the principal although the interest received is taxable. One of the basic rules in investment of stock markets guru Warren Buffet is to be fearful when others are greedy and greedy when others are fearful. Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation, economic status, education and family background. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The problem of surplus gives rise to the question of where to invest. In the past, investment avenues were limited to real assets, schemes of the post office and banks. At present, a wide variety of investment avenues are open to the investors to suit their needs and nature.


2 .1 Objectives of the Project

The main objectives of this Project report can be listed as hereunder:

2.1.1 Primary Objective

Definitions about Investment and Speculation To analyze the Indian capital markets and the genesis of Investment in Capital Market and the reasons behind it popularity. To study the constituents and participants of the Indian capital market. The proposed study will define the following market segment like Primary Market, Secondary Market, Derivative Mkt. and, Commodity Mkt. To devise an ideal investment plan for investing in the capital market. The factors that will be used to devise the plan are: Brief Overview of Company Role of SEBI Defining the right time for Buy and Sell Three basic principle should kept in mind before investment How to analysis the profitable opportunities in Capital market How to Invest in IPO and Mutual Fund Tips of successful investment

2.1.2 Secondary Objective

To list down the various stock exchanges in Indian & international Market To define the basic terminologies in Money market trading.(Bulls & Bear, Demat A/c., IPO, Bid & Ask rate, Listing of Companies, etc) To enlist the procedure and steps for dealing in stock markets To enlist the risks involved in investing in the capital markets and the ways to avoid them.

2.2 Research Methodology

The manner in which a study is conducted is the basic plan that guides the project. With respect to this, the building blocks of the research may be explained as under.

2.2.1 Type of Research

The objectives of the project study necessitated the design of the research to be Conclusive and Descriptive. This is instrumental in providing information for the evaluation of particular courses of action. Descriptive research is inevitable so far as the characteristics of housing loans of three banks have to be studied, so as to attempt an industry perception.

2.2.2 Data Collection Approach

The plank on which the study rests is information, which was procured as a judicious mix of both secondary data and primary sources of data. Secondary Data Already published data formed the launch pad for the study. This included: Books on Investment Management Periodicals (magazines, journals) Official reports on Indian capital Market The World Wide Web for Information or the Internet

Primary Data Data was collected specifically for the research need at hand. This included: Interviews and idea of people with informed about the subject of the project. This included officials of the three selected brokerage firms and the customers who have invested in capital markets. A structured, undisguised questionnaire.

Sampling Design
Sampling Element: Three Broking Firms in New Delhi Population: People who have invested in the capital markets and the people who want to invest in the capital markets. Sampling Methodology: The probability-based approach of random sampling will be adopted, in order to give adequate coverage to all possible types of customers. Sample Size: A sample size of 75 was taken. Sampling Extent: The procedure of sampling was restricted to the South Delhi region.

2.3 Limitation
Obstacles are an inherent part of all endeavors, and success is about seeing them through. Capital market is a dynamic sector in the country; the time period of the study will be insufficient to conduct an exhaustive insight. With regards to strategic concerns, officials of the selected brokerage firms never reveal certain information. A lack of understanding of certain technical areas on the Capital markets was a limitation. Volatility was beyond the expectation due to uncertainty involved in market Investment planning may be influenced because of speculation


3.1 Capital Market:

The capital market (securities markets) is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. Financial regulators, such as the RBI and SEBI, oversee the capital markets in their respective countries to ensure that investors are protected against fraud. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded. Primary Market: The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Secondary Market: The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. Alternatively, secondary market can refer to the market for any kind of used goods. The market that exists in a new security just after the new issue, is often referred to as the aftermarket. Once a newly issued stock is listed on a stock exchange, investors and speculators can easily trade on the exchange, as market makers provide bids and offers in the new stock.

3.2 The Indian Financial System:

The Indian financial system can also be broadly classified into the formal (organized) financial system and the informal (unorganized) financial system. The formal financial system comes under the purview of the Ministry of Finance (MOF), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and other regulatory bodies. The informal financial system consists of: Individual moneylenders such as neighbors, relatives, landlords, traders, storeowners, and so on. Groups of persons operating as "funds" or "associations." These groups function under a system of their own rules. These groups use names such as "fixed fund," "association," "saving club," and so on. Partnership firms consisting of local brokers, pawnbrokers, and non-bank financial intermediaries such as finance, investment, and chit-fund companies. In India, the spread of banking in rural areas has helped in enlarging the scope of the formal financial system.

3.3 Securities and Exchange Board of India (SEBI)

It is a board (autonomous body) created by the Government of India in 1988 and given statutory form in 1992 with the SEBI Act 1992 with its head office at Mumbai. It is chaired by Mr. M. Damodaran a respected turnaround civil servant credited with turning around large public sector companies from near death scenarios including the famous Unit Trust of India. The Board comprises whole time members and outside members (representing the finance ministry, RBI and experts). The present members are Mr. G Anantharaman, Dr. TC Nair and Mr. VK Chopra. Below the Board, headed by the Chairman, the staff/officers of the organization are led by Executive Directors. The present EDs are Mr. RK Nair, Ms. Usha Narayanan and Mr. Sandeep P Parekh. Also Mr. MS Ray is an Officer on Special Duty (equivalent to an ED). The organizational structure of SEBI can be found under the SEBI website by clicking on the RTI Act 2005 at the top. Sebi has three functions rolled into one body: quasi-legislative, quasi-judicial and quasi-executive. It drafts rules in its legislative capacity, it conducts enquiries and enforcement action in its executive function and it passes rulings and orders in its judicial capacity. Though this makes it very powerful, there is an appeals process to create accountability. There is a Securities Appellate Tribunal which is a three member tribunal and is presently headed by a former high court judge - Mr. Justice NK Sodhi. A second appeal lies directly to the Supreme Court directly (where important questions of law arise).SEBI has had a mixed history in terms of its success as a regulator. Though it has pushed systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless), it lacked the legal expertise, till recently, needed to sustain prosecutions/enforcement actions. It has recently been announced that it is going to the top law campuses to recruit talent and has found reasonable success there.

3.4 Components of the Formal Financial System

The formal financial system consists of four segments or components. These are: financial institutions, financial markets, financial instruments, and financial services.

Financial Institutions
Financial institutions are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient manner. Financial institutions can be classified as banking and non-banking financial institutions. Banking institutions are creators of credit while non-banking financial institutions are purveyors of credit. While the liabilities of banks are part of the money supply, this may not be true of non-banking financial institutions. In India, non- banking financial institutions, namely, the Developmental Financial Institutions (DFIs) and Non-Banking Financial Companies (NBFCs) as well as housing finance companies (HFCs) are the major institutional purveyors of credit. Financial institutions can also be classified as term-finance institutions such as the Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Financial Corporation of India (IFCI), Small Industries Development Bank of India (SIDBI) @d Industrial Investment Bank of India (IIBI). Financial institutions can be specialized finance institutions like the Export Import Bank of India (EXIM), Tourism Finance Corporation of India (TFCI), ICICI Venture, Infrastructure Development Finance Company (IDFC), and sectorial such as the financial institutions National Bank for Agricultural and Rural Development (NABARD) and National Housing Bank (NHB). Investment institutions in the business of mutual funds (UTI, Public Sector and Private Sector Mutual Funds) and insurance activity (LIC, GIC and its subsidiaries) are classified as financial institutions. There are state-Level financial institutions such as the State Financial Corporations (SFCs) and State Industrial Development Corporations (SIDCs) which are owned and managed by the State governments. In the post-reforms era, their role and nature of activity have undergone tremendous change.

Financial Markets
Financial Markets are a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands and requirements interact to set a price for such claims. The main organized financial markets in India are the money market and capital market. The first is a market for short-term securities while the second is a market for long-term securities, that is, securities having a maturity period of one year or more. Financial markets are also classified as primary and secondary markets. While the primary market deals in new issues, the secondary market is meant for trading in outstanding or existing securities. There are two components of the secondary market: Over the Counter (OTC) market and the Exchange traded market. The government securities market is an OTC market. In an OTC market, spot trades are negotiated and traded for immediate delivery and payment while in the Exchange traded market, trading takes place over a trading cycle in stock exchanges. Recently, the derivates market-exchange traded has come into existence.

Financial Instruments
Financial instrument is a claim against a person or an institution for the payment at a future date a sum of money and/or a periodic payment in the form of interest or dividend. The term 'and/ or' implies that either of the payments will be sufficient but both of them may be promised. Financial securities may be primary or secondary securities. Primary securities are also termed as direct securities as they are directly issued by the ultimate borrowers of funds to the ultimate savers. Examples of primary or direct securities include equity shares and debentures. Secondary securities are also referred to as indirect securities, as they are issued by the financial intermediaries to the ultimate savers. Bank deposits, mutual fund units, and insurance policies are secondary securities.

Security Market

Equity Market

Debt Market

Derivative Market

Govt. Security Market

Corporate Debt Market

Money Market

Option Market

Future Market

Financial instruments differ in terms of marketability, liquidity, reversibility, type of options, return, risk and transaction costs. Financial instruments help the financial markets and the financial intermediaries to perform the important role of channelizing funds from lenders to borrowers.

Financial Services
Financial intermediaries provide key financial services such as merchant banking, leasing, hire purchase, credit-rating, and so on. Financial services rendered by the financial intermediaries bridge the gap between lack of knowledge on the part of investors and increasing sophistication of financial instruments and markets. These financial services are vital for creation of firms, industrial expansion, and economic growth. Before investors lend money, they need to be reassured that it is safe to exchange securities for funds. This reassurance is provided by the financial regulator who regulates the conduct of the market, and intermediaries to protect the investors' interests. The Reserve Bank of India regulates the money market and Securities and Exchange Board of India (SEBI) regulates capital market. Interaction among the Components These four sub-systems do not function in isolation. They are interdependent and interact continuously with each other. Their interaction leads to the development of a smoothly functioning financial system. Financial institutions or intermediaries mobilize savings by issuing different types of financial instruments which are traded in financial markets. To facilitate the credit allocation process, they acquire specialization and render specialized financial services. Financial intermediaries have

close links with the financial markets in the economy. Financial institutions acquire, hold, and trade financial securities which not only help in the credit-allocation process but also make the financial markets larger, more liquid, stable, and diversified. Financial intermediaries rely on financial markets to raise funds whenever they are in need of some. This increases the competition between financial markets and financial intermediaries for attracting investors and borrowers. The development of newsophisticated markets has led to the development of complex securities and complex portfolios. The evaluation of these complex securities, portfolios, and strategies requires financial expertise which financial intermediaries provide through financial services. Financial markets have also made an impact on the functioning of financial intermediaries such as banks and financial institutions. The latter are, today, radically changed entities as the bulk of the service fees and non-interest income that they derive is directly or indirectly linked to financial market-related activities. Moreover, liquid and broad markets make financial instruments a more attractive avenue for savings, and financial services may encourage further savings if the net returns to investors are raised or increased.

Functions of the Financial System

A good financial system serves in the following ways. One of the important functions of a financial system is to link the savers and investors and thereby help in mobilizing and allocating the savings efficiently and effectively. By acting as an efficient conduit for allocation of resources, it permits continuous up gradation of technologies for promoting growth on a sustained basis. A financial system not only helps in selecting projects to be funded but also inspires the operators to monitor the performance of the investment. It provides a payment mechanism for the exchange of goods and services and transfers economic resources through time and across geographic regions and industries. One of the most important functions of a financial system is to achieve optimum allocation of risk bearing. It limits, pools, and trades the risks involved in mobilizing savings and allocating credit. An efficient financial system aims at containing risk within acceptable limits and reducing the cost of gathering and analyzing information to assist operators in taking decisions carefully. It makes available price-related information, which is a valuable assistance to those who need to take economic and financial decisions. A financial system minimizes situations where the information is asymmetric and likely to affect motivations among operators or when one party has the information and the other party does not. It provides financial services such as insurance and pension and offers portfolio adjustment facilities. A financial system helps in the creation of a financial structure that lowers the cost of transactions. This has a beneficial influence on the rate of return to savers. It also reduces the cost of borrowing. Thus, the system generates an impulse among the people to save more. A well-functioning financial system helps in promoting the process of financial deepening and broadening. Financial deepening refers to an increase of financial assets as a percentage of the Gross Domestic Product (GDP). Financial broadening refers to building an increasing number and a variety of participants and instruments.

Financial System Designs A financial system is a vertical arrangement of a well-integrated chain of financial markets and financial institutions for providing financial intermediation. Different designs of financial systems are found in different countries. The structure of the economy, its pattern of evolution, and political, technical and cultural differences affect the design (type) of financial system. Two prominent polar designs can be identified among the variety that exists. At one extreme is the bank- dominated system, such as in Germany, where a few large banks playa dominant role and the stock market is not important. At the other extreme is the market-dominated financial system, as in the US, where financial markets play an important role while the banking industry is much less concentrated. In bank-based financial systems, banks playa pivotal role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and providing risk-management facilities. In market- based financial systems, the securities markets share center stage with banks in mobilizing the society's savings to firms, exerting corporate control, and easing risk management. The other major industrial countries fall in between these two extremes.

3.5 Market Review


NASDAQ Stock Exchange: To be listed on the NASDAQ a company must have issued at least 1.25 million shares of stock worth at least $70 million and must have earned more than $11 million over the last three years. New York Stock Exchange: To be listed on the New York Stock Exchange (NYSE), for example, a company must have issued at least a million shares of stock worth $100 million and must have earned more than $10 million over the last three years. The Dow Jones Industrial Average DJI, also called the DJIA, Dow 30, or informally the Dow industrials, the Dow Jones or The Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. It is the oldest continuing U.S. market index, aside from the Dow Jones Transportation Average, which Dow also created. S&P 500: The S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill. S&P 500 is used in reference not only to the index but also to the 500 actual companies whose stocks are included in the index. Nikkei 225: Nikkei 225 is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. It has been calculated daily by the Nihon Keizai Shimbun (Nikkei) newspaper since 1971. It is a price-weighted average (the unit is Yen), and the components are reviewed once a year.

3.6 Investment Alternatives

While some plans accrue short term profits some are long term deposits. The first step towards investing in Indian market is to evaluate individual requirements for cash, competence to undertake involved risks and the amount of returns that the investor is expecting. Below are most common Investment Options in India which assure safe and satisfactory returns. INVESTMENT

Financial Assets

Real Estate
Gold Silver Previous objects Painting /Art Land / Building Machinery/Equipment etc

Marketable Financial Assets.

Treasury Bills C.D. C.P. Repo Govt. Fixed Insurance bond Govt. Securities Debenture Equity Shares Mutual Fund Pref

Nonmarketable Financial Assets

Bank Deposit Post Office KVP NSC NSS Company Deposit EPF/PPF LIC

Non marketable Financial Assets: A good portion of financial assets is represented by non-marketable financial assets. These can be classified into the following broad categories. Bank deposits Post office deposits Company deposits Provident deposits/EPF LIC NSC NSS fund KVP

Equity Shares: Equity shares represent ownership capital. As an equity shareholder, you have an ownership stake in the company. This essentially means that you have a residual interest in income and wealth. Perhaps the most romantic among various investment avenues, equity shares are classified into the following brand categories by stock market analysis. Blue chip shares Growth shares Income shares Cyclical shares Speculative shares Bonds: Bonds or debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified into the following categories; Government securities. Savings bonds Government agency securities. PSU bonds Debentures of private sector companies Preference shares Money Market Instruments: Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments. The important money market instruments are: Treasury bills Commercial paper Certificates of deposit

Mutual Funds: A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:

Mutual Fund Operation Flow Chart The mutual fund industry is a fast growing segment of the Indian Financial Market and it provides a variety of schemes to suit the needs and risk return profile of different categories of investors who are kept completely informed regularly through periodical reports and statutory disclosures. Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

Schemes can be classified by way of their stated investment objective such as Growth Fund, Balanced Fund, and Income Fund etc. Life Insurance: In a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice, and the assured sum, the benefit. The important types of insurance policies in India are : Endowment assurance policy Money back policy Whole life policy Term assurance policy Real Estate: For the bulk of the investors the most important asset in their portfolio is a residential house. In addition to a residential house, the more affluent investors are likely to be interested in the following types of real estate: Agricultural land Semi urban land Commercial property

Precious Object: Precious objects are items that are generally small in size but highly valuable in monetary terms. Some important precious objects are ; Gold and silver Precious stones Art objects Financial Derivatives: A financial derivative is an instrument whose value is derived, from the value of an underlying asset. It may be viewed as a side bet on the asset. Derivatives, as the basic definition of the word implies, are a synthetic by-product created or derived from the value of the underlying asset, be it a real asset, such as gold wheat or oil, or a financial asset, such as a stock, stock index, bond or foreign currency. Derivative Market

Future Market Future Contract Say One month Two month Three month

Option Market

Call Option
Premium will change at the time of buying No Risk

Put Option
Premium will change at the time of sells No Risk

Forwards A forward contract, as it occurs in both forward and futures markets, always involves a contract initiated at one time; performance in accordance with the terms of the contract occurs at one time; performance in accordance with the terms of the contract occurs at a subsequent time. Further, the type of forward contracting to be considered here always involves an exchange of one asset for another. The price at which the exchange occurs is set at the time of the initial contracting. Actual payment and delivery of the good occur later. So defined, almost everyone has engaged in some kind of forward contract. Futures A futures contract is a type of forward contract with highly standardized and closely specified contract terms. As in all forward contracts, futures contract calls for the exchange of some good at a future date for cash, with the payment for the good to occur at that future date. The purchaser of a futures contract undertakes to receive delivery of the good and pay for it while the seller of futures promises to deliver the good and receive payment. The price of the good is determined at the initial time of contracting. Option Option contracts confer the right but not the obligation to buy in the case of a call or sell, in the case of a put a specified quantity of an asset at a predetermined price on or before a specified future date option contract would expire if it is not in the best interest of the option owner to exercise. Swaps Swaps generally trade in the OTC market but there is monitoring of this market segment, which is now the largest segment of the derivatives market as provided by the international swap dealers associations (ISDA) and the Bank of international settlements (BIS) Swaps which are agreement between two parties to exchange cash flows in the future according to a prearranged formula. In case of popular interest rate swap, one party agrees to pay a series of fixed cash flows in exchange for a sequence of variable cost.When compared to global derivatives markets Indian derivative markets are still in the nascent stage.

The major exchanges and the derivative products traded in India: Bombay Stock Exchange (BSE) National Stock Exchange OF India Ltd (NSE) National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Ltd (MCX) National Multi Commodity Exchange of India Ltd (NMCE)

Investment Attributes
For evaluating an investment avenue, the following attributes are relevant. Rate of return Risk Safety Profitability Purchasing power risk Maturity

Marketability Tax shelter Convenience Rate of Return: The rate of return on an investment for a period (which is usually a period of one year) is defined as follows: Rate of return = Annual income + (Ending price Beginning price) Beginning price To illustrate, consider the following information about a certain equity share. Price at the beginning of the year Dividend paid towards the end to the year : Rs. 60.00 : Rs. 2.40

Price at the end of the year The rate of return of this share is calculated as follows: 2.40 + (66.0-60.00) = 0.14 or 14 percent 60.00 Yield

: Rs. 66.00

In general, yield is the annual rate of return for any investment and is expressed as a percentage. With stocks, yield can refer to the rate of income generated from a stock in the form of regular dividends. This is often represented in percentage form, calculated as the annual dividend payments divided by the stock's current share price. Investors can use yield to measure the performance of their investments and compare it to the yield on other investments or securities. Higher risk securities generally offer higher expected yields as compensation for the additional risk incurred through ownership of the security. Investors looking to generate income or cash flow streams from equity investments commonly look for stocks that pay high dividend yields, in other words, stocks that provide a relatively large amount of annual cash dividends for a relatively low share price. Annual income (interest or dividends) divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. This measure is not an accurate reflection of the actual return that an investor will receive in all cases because bond and stock prices are constantly changing due to market factors.

Capital Appreciation: Its the rise in the market price of an asset. Capital appreciation is one of two major ways for investors to profit from an investment in a company. The other is through dividend income.

Risk in investment is defined as the variability that is likely to occur in future cash flows from an investment. The greater variability of these cash flows indicates greater risk. Type of Risk Internal Rate of Business Risk Financial Risk Management Risk Liquidity Risk Return Risk Market risk Inflation Risk Default Risk

The rate of return from investments like equity shares, real estate, and gold can vary rather widely. The risk of investment refers to the variability of its rate of return: How much does individual outcomes deviate form the expected value? A simple measure of dispersion is the range of values, which is simply the difference between the highest and the lowest values. Other measures commonly used in finance are as follows: Variance : This is the mean of the squares of deviations of individual returns around their average values Standard deviation : Beta : This is the square root of variance This reflects how volatile the return from an investment is, in response to market swings. Risk = Actual Return Expected Returns Condition: If, Actual Return = Expected Return = Risk Free Investment If, Actual Return > or < Expected Return is risky investment

Marketability: An investment is highly marketable or liquid if: (a) it can be transacted quickly: (b) the transaction cost is low; and (c) the price change between two successive transactions is negligible. The liquidity of a market may be judged in terms of its depth, breadth, and resilience. Depth refers to the existence of buy as well as sells orders around the current market price. Breadth implies the presence of such orders in substantial volume. Resilience means that new orders emerge in response to price changes. Generally, equity shares of large, well established companies enjoy high marketability and equity shares of small companies in their formative years have low marketability. High marketability is a desirable characteristic and low marketability is an undesirable one. How does one evaluate the marketability of an investment like a provident fund deposit which is non-marketable by its very nature? In such a case, the relevant questions of ask is: can withdrawals be made or loans be taken against the deposit? Such as investment may be regarded as highly marketable if any of the following conditions are satisfied: A substantial portion of the accumulated balance can be withdrawn without significant penalty; A loan (representing a significant portion of the accumulated balance) can be raised at a rate of interest that is only slightly higher than the rate of interest earned on the investment itself.

Tax Shelter: Some investments provide tax benefits; others do not. Tax benefits are of the following three kinds. Initial Tax Benefit: An initial tax benefit refers to the tax relief enjoyed at the time of making the investment. For example, when you make a deposit in a Public Provident Fund Account, you get a tax benefit under Section 80 C of the Income Tax Act. Continuing Tax Benefit: A continuing tax benefits represent the tax shield associated with the periodic returns form the investment. For example, dividend income and income from certain other sources are tax exempts, upto a certain limit, in the hands of the recipient. Terminal Tax Benefits: A terminal tax benefit refers to relief from taxation when an investment is realized or liquidated. For example, a withdrawal from a Public Provident Fund Account is not subject to tax. Convenience: Convenience broadly refers to the ease with which the investment can be made and looked after. Put differently, the questions that we ask to judge convenience are: Can the investment be made readily? Can the investment be looked after easily?

The degree of convenience associated with investments varies widely. At one end of the spectrum is the deposit in a savings bank account that can be made readily and that does not require any maintenance effort. At the other end of the spectrum is the purchase of a property that may involved a lot of procedural and legal hassles at the time of acquisitions and a great deal of maintenance effort subsequently.

How do various Investment Avenues Compare?

A summary evaluation of these investment avenues in terms of key investment attributes is given in Exhibit below. It must be emphasized that within each investment category individual assets display some variations. Exhibit: Summary Evaluation of Various Investment Avenues
Return Current yield Equity Shares Non convertible Debentures Equity Schemes Debt Schemes Moderate Low Low High No tax on Very high dividends Bank deposits Public provident fund Residential Gold Silver Moderate and Nil Moderate Moderate Negligible Average Low Average Moderate Nil Nil Moderate Negligible Nil High Average Nil Section 80 benefit High Nil Fair Average C Very high Very high Low High High High High Very high Low Capital appreciation High Negligible High Low Fairly high Average High Nil High High Risk Marketability Liquidity / Tax shelter Convenienc e


Important Things Every Investor Should Know

What is a company?
A company is a form of business organization. It is basically an association of individuals called shareholders who get together for the purpose of running a particular business. A company is managed by a board of directors, which consists mostly of elected representatives of the shareholders. The money that a company raises for starting and running its business is called capital. This is initially raised from the shareholders who jointly own the company. The amount so raised is called the equity capital of the company. Companies also raise capital by borrowing from the public, banks and other financial institutions. They raise money from the public either through fixed deposits or by selling debentures. The people who buy debentures are called debenture holders. Debenture holders are creditors of the company because the company owes them money whereas shareholders are owners of the company. Market Segment Large caps Mid caps Small caps Market Capitalization Above Rs 35 bn Below Rs 35 bn Below Rs 6 bn

Liabilities and rights of shareholders

A company has an independent legal existence of its own, quite distinct from that of its shareholders. This means that a company can, without in anyway involving its shareholders, enter into contracts, buy, sell and own property, engage in litigation, or incur debts. A shareholder cannot be held personally responsible or liable for the actions of a company, or any of its directors or employees. The liability of the shareholder to his company is limited to the value of the share he holds in the company. This is a purely financial liability which is fully discharged when the shares are bought it ceases to exist after that. This means that if you buy 100 shares of face value Rs. 10 each in XYZ Ltd., then your financial liability to the company is Rs.

1,000 which is fully discharged by you on the purchase of these shares. Thereafter, if XYZ Ltd. becomes bankrupt and goes into liquidation, the worst that can possibly happen to you is that the price of your shares may fall to zero and you may not be able to recover your initial investment of Rs. 1,000. Under no circumstances can you be asked to pay any additional money to XYZ Ltd. or to its creditors. This is the essence of the concept of "limited liability". All companies are required by law to use the word "Limited" (or its common abbreviation "Ltd.") after their names to show that the financial liability of its shareholders is limited. So when you buy shares in a company, you can do so with full confidence that you will not be incurring unlimited or unforeseen financial liabilities, or getting involved with the company's financial and legal problems in any other way. As a shareholder you can transfer your ownership rights by selling your shares to others. Shares are movable property which can be bought, sold, gifted, bequeathed or transferred in any other manner permitted by law. Since the company has an independent existence of its own, it is not affected by any changes in its owners. Initially when a company is formed, shares in the company can be bought at their face value by making payments directly to the company. This is how companies raise their initial financial capital. Thereafter, the company is not affected by any subsequent transactions in which its shares are bought and sold in the stock exchanges. For example, if a Rs. 10 share of a company is sold in the stock market at Rs 3,000 each, it does not mean that the company is now 300 times richer. All it means is that buyers of its shares consider that the company has a bright future and its shares are worth the high price they are paying for it.

Public limited and private limited companies

There are two types of companies, public limited and private limited. It is mandatory for a private limited company to end its name with the words "private limited", while a public limited company simply ends its name with the word "limited". When we talk of investment in shares, we are actually referring to investment in shares of public limited companies. The shares of private limited companies are neither quoted on the stock exchange, nor are they freely available for sale. In fact, private limited companies are expressly prohibited from selling their shares to the

public. On the other hand, shares of public limited companies are widely held by the public and are normally freely available for sale and purchase on the stock exchange.

Register of members
Shareholders are often also referred to as members of the company. Every company is required to maintain a register of members where the names, addresses and other relevant particulars of its shareholders and their shareholdings are recorded. Nowadays this information is also maintained by the two depositories: the NSDL (National Securities Depository Ltd.) and the CSDL (Central Securities Depository Ltd.). This makes it easier for the depositories to service the shareholders with respect to dividends, rights and bonus shares. In fact, most listed companies have now transferred their shares to the depositories who, in turn, keep a record of the shareholders and their particulars.

Annual report
Every company prepares an annual report on its functioning and accounts and sends it to each of its shareholders well before the date fixed for the company's annual general body meeting. The annual report comprises the: 1) Directors' Report. 2) Auditors' Report, and 3) A Fully-audited Balance Sheet and Profit and Loss Account of the company for the previous year. The annual report is one of the most important and useful documents for a shareholder and a prospective investor. The directors' report gives information on the general condition of the company's business, its future prospects, proposals regarding declaration of dividends, allocation to reserves and other information having a bearing on the finances and operations of the company. The auditors' report informs the shareholders whether the, accounts of the company give a "true and fair" view of the state of the company's finances at the close of the company's accounting year, and of the profits made by the company during the year.

3.7 Preference shares and equity shares

There are two categories of shares:
1) Preference shares, and 2) Equity shares. Preference shares give a fixed rate of dividend, which is currently around 6 to 8 per cent per annum. Preferential shares give a right to their holders to receive dividends and repayment of capital in case the company is wound up in preference to equity shareholders. Companies which make losses are sometimes not in a position to pay any dividends to their preference shareholders. To provide for such an eventuality, companies" issue what are called cumulative preference shares. Unpaid dividends on these shares do not lapse, but are allowed to accumulate till the company is in a position to clear all the arrears of accumulated dividends. A company cannot pay any dividends to its equity shareholders until all such arrears of accumulated preference dividends have been paid. This gives added security to preference shareholders by assuring them of their fixed dividend, irrespective of the extent of losses which the company may incur. The share capital of a company is not refunded to the shareholder so long as the company is in existence. However, an exception is usually made in the case of holders of redeemable preference shares as their share capital can be refunded, or "redeemed" from the company after a certain fixed period of time. Equity shares, on the other hand, don't carry a fixed rate of dividend. In fact, equity shareholders cannot claim dividends as a matter of right. Since equity shareholders are the owners of the company, they are entitled to all the residual profits and accumulated reserves of the company after all its obligations to its creditors and preference shareholders have been met. Equity shareholders form a bulk of the shareholders of a company. They exercise full voting power on all important matters affecting the company. When a company makes large profits, the lion's share goes to its equity shareholders. Conversely, when profits go down it is the equity shareholders who have to bear the brunt and are often deprived of even a modest dividend.

In growing and expanding companies, an equity shareholder gets a much higher rate of return on his investment than does a preference shareholder. The latter gets only his fixed rate of dividend, whereas the former gets the double benefit of substantial capital appreciation, plus higher dividends. His shareholding also expands with the addition of rights and bonus shares. A preference shareholder does not get the benefits of capital appreciation on his investment. Thus an equity shareholder bears higher risks than the preference shareholder and, in return, is rewarded with higher profits. Finally, it is the equity shareholder who experiences the excitement and thrills of stock market investment.

Rights shares
Companies often require additional funds for their working capital, or for their expansion and diversification programmes. They sometimes raise these funds by the sale of additional equity shares on a "rights basis" to its shareholders. Such shares are called "rights shares" because the company's shareholders have a prior right to buy these shares by virtue of their existing shareholding. The number of rights shares offered to each shareholder is directly proportionate to the number of equity shares he owns. Rights shares could either be offered at par, or at a premium. When such shares are offered for sale at their face value, they are said to be offered at par, and when the sale price is higher, they are said to be offered at a premium. Premium is the difference between the issue price of a share and its face value. In order to make the issue attractive, the price of rights shares is invariably fixed at a level below the prevailing market price of the company's share. The issue of rights shares increases the equity capital of the company but does not dilute an existing shareholder's proportionate ownership in the company, if he subscribes to his rights entitlement in full.

Bonus shares
Companies do not generally distribute their entire profits to the shareholders as dividends. A fairly large part of the profit is retained and added on to what is commonly called the reserves of the company. As the name indicates, reserves are back-up funds which a company keeps for meeting unforeseen increases in ex-

penditure, and for financing its future expansion or diversification programmes. Over the years, most profit-making companies build up large reserves. There is also a sizeable increase in their assets, sales and volume of business. When such growth takes place, companies often find that their equity capital is too small compared to the expanded size of their business operations. It is not advantageous for companies to operate a continuously expanding business on a narrow capital base. Therefore, in order to expand their equity capital they capitalize a part of their reserves by issuing bonus shares to their shareholders. Bonus shares, as the name suggests, are issued free to existing shareholders in proportion to the number of shares held by them. It is essentially a book transfer by which a sum of money equal to the value of the bonus shares is transferred from the reserves to the equity capital in the company's books of accounts. The issue of bonus shares enlarges a shareholder's shareholding without any dilution in his proportionate ownership of the company. The issue of bonus shares almost always leads to a fall in the market price of a share. This does not, however, adversely affect the shareholder because such a fall in the market price is more than offset by the increase in the size of his shareholding. To illustrate how this happens, let us assume that you own 100 shares in XYZ Ltd. when it issues bonus shares in the ratio of 1:1. Let us also assume the market price to be Rs. 50 per share prior to the bonus issue. With the issue of bonus shares, your shareholding doubles to 200 shares. At the same time, the market price of the shares would probably fall to Rs. 25 per share. Even though the price has fallen, you do not lose because the value of your shareholding remains at Rs. 5.000. The fall in price from Rs. 50 to Rs. 25 per share is fully compensated by the increase in your shareholding from 100 to 200 shares. Actually, share prices generally do not fall in the same proportion in which bonus shares, are issued. In this case, the ex-bonus price of XYZ shares would probably fall to around Rs. 27 per share. Companies usually continue to pay the same rate of dividend after the issue of bonus shares as they were paying prior to the issue. This benefits the shareholder because he gets the same rate of dividend on a larger shareholding.

3.8 The stock exchange

The stock exchange is basically a marketplace for shares and securities. That is why it is also called a stock market. Just like any other market, it brings together the potential buyers and sellers of securities. The term "security" is a broad, generic term covering equity shares, preference shares, debentures and bonds issued by government, semigovernment and local authorities. For all practical purposes now there are only two nation-wide stock exchanges in India: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Unlike other markets, however, you are not permitted to buy or sell shares directly in a stock exchange. According to the stock exchange rules you have to do so through a licensed member of the stock exchange called a stockbroker; or through his registered sub-broker. The stockbroker is authorized to buy and sell shares on behalf of others on a commission basis. This commission, or fee, is called brokerage. The brokerage rates are fixed by the stock exchanges. The maximum brokerage allowed by the stock exchanges can be verified from their web sites. At the time of writing, the maximum brokerage permitted was 2.5 per cent of the transaction value. Trading in recognized stock exchanges in India is confined only to listed securities. Companies have to list their securities with one or more stock exchanges in order to make them eligible for trading. Listing is not a statutory obligation for public limited companies but most of them prefer to get their securities listed because of the numerous advantages and benefits of doing so. Listing not only gives easy marketability and liquidity to a share, but trading in it is subject to the regulation and control of the stock exchanges authorities. As such, listed securities enjoy greater confidence among investors.

Reading daily market quotations

The prices at which shares are transacted on the stock markets get wide coverage in daily newspapers. Financial newspapers, like The Economic Times, Business Standard, The Financial Express, and The Hindu Business Line, of course, give a more comprehensive and detailed coverage. Stock market quotations in a financial newspaper will typically give you the following information: 1) Name of the company;

2) Separate set of quotations for BSE and NSE; 3) BSE code number assigned to the company; 4) Closing price of the previous day; 5) Opening price of the previous day; 6) High and low prices of the previous day; 7) Value of shares traded; 8) Number of trades that took place in the share; 9) Volume of shares traded; 10) Current P/E ratio; and 11) High/low prices of the year, or the past 52-weeks. It is quite easy to read these quotations since almost all these newspapers provide easy-to-understand explanatory notes.

Multinational companies (MNCs)

As an investor you would frequently come across the term MNC -in newspapers and magazines. MNC is an abbreviation which stands for multinational companies which were earlier also known as FERA companies when the erstwhile Foreign Exchange Regulation Act (FERA) was in force. FERA put a number of restrictions on the operations of companies owned and controlled by foreigners. An MNC is a company in which foreigners held more than 40 per cent of its equity capital. Now, however, such restrictions on foreign holdings in Indian companies have been removed. Many MNCs have foreign holdings going up to 80 per cent.

Blue chips
This is another frequently used term though there is no standard definition of what a blue chip is. It is a term that is loosely used for companies that are sound investments in every respect. Companies that are large in size, technologically advanced, have professional management of a high caliber, and have built up a reputation for growth, regular payment of high dividends, and integrity in business dealings would normally qualify to be labeled as blue chips. However, no two investors would ever agree on

where to draw the line separating blue chip companies from the others. It all finally boils down to subjective and personal preferences.

Bulls and bears

Most stock exchange speculators can be broadly grouped into two categories: 1) Bull 2) Bear A bull is a speculator who takes an optimistic view of the future. He expects the price of a particular share to rise in the immediate future and, accordingly, buys shares at their current price in the hope of selling them later at a higher price. He is a speculator because he buys with the short-term objective of making quick profits out of price fluctuations. When a lot of bull activity dominates the stock market there is a general all-round rise in share prices. Such a market is commonly referred to as a bull market. Bull market thus is a term used to describe a rising market. A bear, on the other hand, is a speculator who takes a pessimistic view of the future. He expects share prices to fall in the immediate future and seeks to make money by selling shares now in the hope of being able to buy them later at lower prices. Usually, he sells shares which he doesn't possess and expects that he can buy them later for delivery to the buyer. In stock market parlance, this is referred to as short selling. A bear is also a speculator because he hopes to make quick profits by taking advantage of a short-term fall in prices. A bear market is one which is characterized by a lot of bear activity. It is a term which is commonly used to describe a falling market.

Buyback of shares
Buyback of shares is a term that refers to a situation where a company buys back its own shares with its own capital. A buyback of shares reduces the equity capital of a company. This happens because the shares bought back from the market are extinguished and cease to exist. The Company's Act debars the company from reissuing these shares again. As a result, not only does the equity capital reduce, but also the floating stock of the company's shares in the market shrinks to a lower level.

Consequently the earnings per share (EPS) go up because the same amount of net post-tax earnings (as before the buyback) gets spread over the reduced equity capital. As a consequence, the shares of the company get a better discounting, or P/E multiple, on the bourses and their price appreciates to a level that is considerably higher than the pre-buyback level. Sometimes the buyback announcement indicates the company management's belief that the market has undervalued its shares and that they deserve a higher price. Such cases too result in a significant appreciation in the price of the company's shares, as a result of the great confidence in the value of its shares shown by its management. Sometimes, company managements buy back their shares with a view to reducing the public holding in their company, as a step towards de-listing of their shares from the stock exchanges. When this happens, it usually has a dampening effect on the price of a company's shares. However, as a saving grace, shareholders do get ample opportunity to exit the company at better-than-market prices. The buyback of shares by a company is usually announced at rates, which are higher, sometimes considerably higher, than their current quoted prices on the market. This gives investors an opportunity to make a windfall profit that they would not have got on the stock exchange under normal circumstances.

Stock splits
A stock split is completely different from a bonus issue of shares. A bonus issue of shares results in an increase in the equity capital of a company because through a book entry money is transferred from its reserves to its equity capital. In a stock split, the existing shares of the company are simply split into shares which have a smaller face value, or par value. Stock splits do not in any way increase or reduce the company's equity capital. For example, let us take the stock split of XYZ Company whose shares have a par value of Rs. 10 per share. Suppose the company splits its Rs. 10 share into five shares with a par value of Rs. 2 each. If the pre-split price of the share was Rs. 5,000 and the stock is split five for one, then, theoretically speaking, the price of the new (split) share should be Rs. 1,000. The company's net assets or equity capital does not undergo any increase or decrease. A stock split benefits the investor because the share

becomes cheaper in price. This invariably results in attracting more buyers with a, consequent increase in liquidity and a proportionately higher post-split price. It has therefore been observed that the post-split price of the share that undergoes a stock split does not fall to its proportionate level compared to its pre-split price. Take the case of Wipro whose shares with a par value of Rs. 10 per share were split into five shares with a par value of Rs. 2 each on 15 October 1999. Its pre-split price (after adjusting for the split) was around Rs. 1,284 per share, which, by 31 December 1999 had risen to Rs. 2,522 per share.

Dematerialization of shares
Dematerialization, as the name suggests, is a term used for conversion of shares from their physical form (physical share certificates) to the dematerialized or electronic form. After dematerialization, shares cease to exist in their physical, i.e. material, form. This conversion is done by the depository which also keeps custody of dematerialized shares on behalf of shareholders. There are two depositories in India; the GSDL (Central Securities Depository Limited) and the NSDL (National Securities Depository Limited). The CSDL acts as a depository for BSE, whereas the NSDL acts as a depository for the NSE. To best understand what a depository is and how it functions, think of it as a bank. For all intents and purposes a depository is a securities bank which holds shares and bonds in the electronic form on behalf of its deposit holders just as your money held in normal bank is reflected as an entry in your pass book. It issues account holding statements and account transaction statements to its depositors in the same way that a bank does. A depository provides services to investors through its agents called Depository Participants (DPs). These DPs are mostly banks, financial institutions and brokers. Dealing with a depository participant in depositing and withdrawing your Demat shares (an abbreviated form of dematerialized shares) is quite similar to operating a bank account. Locating a depository participant in your city is not a major problem. The best course of action is to deal with the same DP as does your broker. This will make your share transactions easier and speedier. Also, in case any problem arises it would be easier for you and your broker to solve it since you would both be dealing with the same DP.

Dematerialization of shares with a DP involves a simple procedure. After opening a Demat account with a DP, all you have to do is to surrender your physical share certificates, after cancelling them, to the DP along with a Demat Request Form (DRF). In the DRF you will be required to fill in all particulars of your shares, such as their folio numbers, distinctive numbers, share certificate numbers, etc. The DP then sends the DRF to the company, or its registrars and transfer agents, for conversion of the share certificates to their dematerialized, or electronic, form. After conversion they are credited to your account with the DP. This whole process of dematerialization normally takes about one month or so. For the detailed procedure of opening and operating a Demat account and how to operate it, it would be advisable to consult your DP. Re-materialization Re-materialization is the reverse of dematerialization. It means converting shares held in the demat form back into physical share certificates. You have the complete freedom to re-convert your shares from the demat form to the physical form whenever you want. All you need to do is to request your DP for re-materialization of your shares. Your DP will forward your request to the depository. The depository will, in turn, intimate the concerned company, or its registrars and share transfer agents, who will send the required share certificates, bearing new folio numbers and distinctive numbers, back to you.

Advantages of dematerialization The biggest advantage is that when you buy demat shares, you can rest assured that there is no risk of their being fake, forged or stolen shares as it sometimes happens with shares held in the physical form. Moreover, in the case of demat shares you need not worry about bad deliveries. In the case of demat shares there is also no stamp duty on transfer of shares. Neither is there a complicated transfer form to fill up. As a result, an investor not only saves money but is also freed from the tedious and repetitive paperwork which invariably accompanies the buying and selling of shares in the physical form. The stock exchanges have now discarded the earlier concept of

marketable lots, small lots, and odd lots. This became possible only because of dematerialization of shares. Now even one share, no matter how small the denomination or how low the share price, can be bought or sold easily on the exchange. Demat is a big advantage for the small investor as it enables him to buy high-priced shares in small quantities which were earlier often out of his reach because a marketable lot of high-priced shares would usually involve a fairly large sum of money. Equally, demat enables the small investor to sell his odd lots and small lots of shares at market prices.

On-line trading
The earlier outcry system of auctions in the trading ring has now been replaced by the BOLT and NEAT systems. The BSE on-line trading system is called BOLT, whereas, the NSE has a similar system called NEAT. The purpose of these on-line trading systems is to provide an automated, computerized, all-India network platform for trading instantaneously, in real time. Through the BOLT and NEAT systems brokers can now enter orders on behalf of their clients from computer terminals installed in their offices instead of physically assembling in the trading ring. Trading is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. On-line trading has numerous advantages over the earlier system. Any investor/trader, who has access to a computer terminal which is hooked on to the BOLT or NEAT systems, is now placed on an equal footing with his counterpart in Mumbai. He does not suffer from any disadvantage arising from his geographical location. Fundamental Analysis Fundamental analysis is a term used to describe the approach some investors adopt for taking investment decisions. Persons who follow this approach are called fundamentalists. They try to estimate the intrinsic worth of a company's share by studying its sales, earnings, profits, dividends, management proficiency, and a host of other economic factors that have a bearing on the company's profitability and business prospects. They try to estimate what the price of a particular company's share ought to be, and consider this price to be its intrinsic, or true, value. This is called the intrinsic price of the share because it reflects its inherent worth and value. They then use it to judge whether the company's shares are currently over-priced or under-priced in the

stock market. The fundamentalist makes his money by buying under-priced shares and selling them when they later become over-priced.

Technical Analysis
Technical analysis is another type of investment analysis commonly used for making buying and selling decisions in the stock market. It is an attempt to predict the future price of a particular share on the basis of a study of its price movements in the past. Technical analysts use charts and graphs for keeping a record of share price movements, which is why they are often referred to as chartists. They believe that a study of share price charts and graphs will reveal regular and recurrent patterns of price behavior, which are likely to be repeated in the future. They use this knowledge to predict future price movements. After determining what future price movements are going to be like, they make money by appropriately timing their buying and selling of shares. Technical analysts usually ignore all fundamental data, such as sales, earnings, profits, dividends, business prospects of the company, etc. They believe that these factors have already been taken into account by the market and are fully reflected in the current market price of a share. By its very nature, technical analysis is particularly suitable for speculators and short-term traders in shares. It is difficult to take a long-term view on the basis of technical analysis. On the other hand, fundamental analysis is more useful for long-term investors. Since this book has been written for investors and not speculators, its overwhelming emphasis is on fundamental analysis.

Stock market indices

The main purpose of a stock market index is to provide a means for measuring the overall trends in share prices in the market. The stock market index is like an instrument that tracks the overall behavior of the stock market. It is basically an average of a carefully selected portfolio that represents, or almost represents, the whole market. The shares selected for inclusion in the index generally have a high floating stock which is held by the public, high market capitalization, high trading

volumes, and high liquidity. The index is useful in that it gives you a quick fix on the market. If you want to know whether the market has gone up or down, or what the level of the market was one year ago, or five years ago, then all you have to do is to look at the movement of the index. You don't have to look at the price movements of each and every share listed on the market. The index, thus, represents the market. The most widely used stock market index in India is the BSE Sensitive Index, popularly known as Sensex. The BSE Sensitive Index was constructed in 1986, with 1978-79 as its base year. The value of Sensex in the base year was taken to be 100. Sensex is composed of 30 scrips selected on the basis of their size and daily trading volumes. Scrips are given weightage on the basis of their market capitalization (number of equity shares multiplied by their share price). The index is therefore extremely sensitive to changes in the share prices of the larger companies. The other widely used index in India is the S&P CNX Nifty Index, popularly known as Nifty. This is the main index of the National Stock Exchange. The Nifty is composed of 50 stocks representing over 20 sectors of the economy, thus making it more broadbased and diversified than the Sensex. Nifty stocks account for 65 to 70 per cent of the traded volumes on NSE. The shares comprising the Sensex and Nifty are listed in Appendix E. However, it must be remembered that the composition of the indices is changed quite frequently to reflect changes in the market capitalization and volume of trading..

Investment versus Speculation

While it is difficult to draw the line of distinction between investment and speculation, it is possible to broadly distinguish the characteristics of an investor from those of a speculator as follows. Investor Planning horizon Speculator

An investor has a relatively A speculator has a very longer planning horizon. His short planning horizon. His

holding period is usually at holding may be a few days least one year. Risk disposition to a few months.

An investor is normally not A speculator is ordinarily willing to assume more than willing to assume high risk. moderate risk. Rarely does he knowingly assume high risk.

Return expectation

An investor usually seeks a A speculator looks for a modest rate of return which is high rate of return in commensurate with the limited exchange for the high risk risk assumed by him borne by him.

Basis for decisions

An investor attaches greater A speculator relies more on significance to fundamental hearsay, technical charts, factors and attempts a careful and market psychology. evaluation of the prospects of the firm


Typically an investor uses his A own funds and borrowed funds.

speculator to can

normally borrowings, be very

eschews resorts which

substantial, to supplement his personal resources.

Gambling Gambling is fundamentally different from speculation and investment in the following respects: Compared to investment and speculation, the result of gambling is known more quickly. The outcome of a roll of dice or the turn of a card is known almost immediately. Rational people gamble for fun, not for income.

Gambling does not involve a bet on an economic activity. It is based on risk that is created artificially.

Gambling creates risk without providing any commensurate economic return.

3.9 Portfolio Management Process

The Processes on Demand portfolio management process is a best practice for management of the projects and programs of the portfolio. Investment management (or portfolio management) is a complex activity, which may be broken down into the following steps: Specification of Investment Objectives and Constraints: The typical objectives sought by investors are current income, capital appreciation, and safety of principal. The relative important of these objectives should be specified. Further, the constraints arising from liquidity, time horizon, tax, and special circumstances must be identified. Choice of the Asset Mix: The most important decision in portfolio management is the asset mix decision. Very broadly, this is concerned with the proportions of stocks (equity shares and units / shares of equity oriented mutual funds) and bonds (fixed income investment vehicles in general) in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor. Formulation of Portfolio Strategy: Once a certain asset mix is chosen, as appropriate portfolio strategy has to be a hammered out. Two broad choices are available: an active portfolio strategy or a passive portfolio strategy. An active portfolio strategy strives to earn superior risk adjusted returned by resorting to market timing, or sector rotation, or security selection, or some combination of these. A passive portfolio strategy, on the other hand, involves holding a broadly diversified portfolio and maintaining a pre determined level of risk exposure. Selection of Securities: Generally, investors pursue an active stance with respect to security selection. For stock selection, investors commonly go by fundamental

analysis and / or technical analysis. The factors that are considered in selecting bonds (or fixed income instruments) are yield to maturity, credit rating, term, to maturity, tax shelter, and liquidity. Portfolio Execution: This is the phase of portfolio management which is concerned with implementing the portfolio plan by buying and / or selling specified securities in given amounts. Though often glossed over in portfolio management discussions, this is an important practical step that has a bearing on investment results. Portfolio Revision: The value of portfolio as well as its composition the relative proportions of stock and bond components may change as stocks and bonds fluctuate. Of course, the fluctuation in stocks is often the dominant factor underlying this change. In response to such changes, periodic rebalancing of the portfolio is required. This primarily involves a shift from stocks to bonds or vice versa. In addition, it may call for sector rotation as well as security switches. Performance Evaluation: The performance of a portfolio should be evaluated periodically. The key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio return is commensurate with its risk exposure. Such a review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis.


The stock market is thronged by investors pursuing diverse investment strategies which may be subsumed under four broad approaches. 1) Fundamental approach 2) Psychological approach 3) Academic approach 4) Eclectic approach

Common errors in investment management

Investors appear to be prone to the following errors in managing their investments. 1) Inadequate comprehension of return and risk. 2) Vaguely formulated investment policy 3) Nave extrapolation of the past 4) Cursory decision making 5) Simultaneous switching 6) Misplaced love for cheap stocks 7) Over-diversification and under-diversification 8) Buying shares of familiar companies 9) Wrong attitude toward losses and profits 10) Tendency to speculate

Investing In Equity Shares

Equity capital represents ownership capital. Equity shareholders collectively own the company. They bear the risk and enjoy the rewards of ownership. Of all the form of securities, equity shares appear to be most romantic. While fixed income investment

avenues may be more important to most of the investor, equity shares seem to capture their interest the most. The potential rewards and penalties associated with equity shares make them an interesting, even exciting, proposition. No wonder, equity investment is a favorites topic of conversation in parties and get together. Terminology The amount of capital that a company can issue as per its memorandum represents the authorized capital. The amount offered by the company to the investors is called the issued capital. That part of the issued capital that has been subscribed to by the investors is called the paid-up capital. Typically, the issued, subscribed, and paid-up capitals are the same. The par value is stated in the memorandum and written on the share scrip. The par value of equity shares is generally Rs 10 (the most popular denomination) or Rs 100. Infrequently, one comes across par values like Re1, Rs 5, Rs 40, and Rs 1,000. The issue price is the price at which the equity share is issued. When the issue price exceeds the par value, the difference is referred to as the share premium. Not that the issue price cannot be, ordinarily, lower than the par value.

The book value of an equity share is equal to: Paid-up equity capital + Reserves and Surplus Number of outstanding equity shares Quite naturally, the book value of an equity share tends to increase as the ratio of reserves and surplus to the paid up equity capital increases. The market value of an equity share is the price at which it is traded in the market. The price can be easily established for a company that it listed on the stock market and actively traded. For a company that is listed on the stock market but traded very infrequently, it is difficult to obtain a reliable market quotation. For a company that is not listed on the stock market, one can merely conjecture as to what its market price would be if it were traded.

Stock Market Classification of Equity Shares In stock market parlance, it is customary to classify equity shares as follows: Blue chip shares Shares of large, well-established, and financially strong companies with an impressive record of earnings and dividends. Growth Shares Shares of companies that have a fairly entrenched position in a growing market and which enjoy an above average rate of growth as well as profitability. Income shares Shares of companies that have fairly stable operations, relatively limited growth opportunities, and high dividend payout ratios. Cyclical Shares Shares of companies that have a pronounced cyclicality in their operations. Defensive Shares Shares of companies that are relatively unaffected by the ups and downs in general business conditions. Speculative Shares Shares that tend of fluctuate widely because there is a lot of speculative trading in them.

Note that the above classification is only indicative. It should not be regarded as rigid and straitjacketed. Often you cant pigeonhole a share exclusively in a single category. In fact, many shares may fall into two (or even more) categories. OBSTACLES IN THE WAY OF AN ANALYST Inadequacies or Incorrectness of Data: An analyst has to often wrestle with inadequate or incorrect data. While deliberate falsification of data may be rare, subtle misrepresentation and concealment are common. Often, an experienced and skilled analyst may be able to detect such ploys and cope with them. However, in some instances, he too is likely to be misled by them into drawing wrong conclusion.

Future Uncertainties: Future changes are largely unpredictable; more so when the economic and business environment is buffeted by frequent winds of charge. In an environment characterized by discontinuities, the past record is a poor guide to future performance. Irrational Market Behaviors: The market itself presents a major obstacle to the analyst. On account of neglect or prejudice, under valuations may persist for extended periods; likewise, overvaluations arising from unjustified optimism and misplaced enthusiasm may endure for unreasonable lengths of time. The slow correction of under or overvaluation poses a threat to the analyst. Before the market eventually reflects the values establishment by the analyst new forces may emerge. As Benjamin Graham put it : The particular danger to the analyst is that, because of such delay, new determining factors many supervene before the market price adjusts itself to the value as he found it.

Guidelines For Aggressive Equity Investors

Aggressive equity investors play the equity game actively and vigorously. They spend more time and effort in managing their portfolio than their conservative counterparts. They are inclined to take greater risks, albeit in a calculated manner, to earn superior rates of return. They seem to relish the thrill and adventure of playing the equity game. In addition to the general guidelines for investment, aggressive equity investors should also bear in mind the following guidelines especially relevant for them. 1) Focus on investments you understand and play your own game. 2) Monitor the environment with keenness. 3) Scout for 'special' situations in the secondary market. 4) Pay heed to growth shares. 5) Beware of the games operators play. 6) Anticipate earnings ahead of the market. 7) Leverage your portfolio when you are

8) Take swift corrective action.

Guidelines for Conservative Equity Investors

Conservative equity investors seek to minimize investment risk as well as the time and effort devoted to portfolio management. What they want is peace of mind, not the adventure of aggressive investment. Satisfied with a reasonable return, they do not deliberately strive for spectacular gains. In addition to the general guidelines for investment, conservative equity investors should also bear in mind the following guidelines especially applicable to them. 1) Avoid certain kinds of shares 2) Apply stiff screening criteria 3) Look for relatively safe opportunities in the primary market. 4) Participate in the schemes of mutual funds 5) Join a suitable portfolio management scheme 6) Consult an investment advisor 7) Refrain from short-term switch hitting Avoid Certain Kinds of Shares Experience suggests that the following kinds of shares are not suitable for conservative investors. Shares of Unlisted companies There are more than 10,000 public limited companies in India. Only about 7000 of these are listed on the stock exchanges, the rest are not. Don't buy shares of unlisted companies. There 'is no organized market for them and there is no reliable way of assessing their market price. How does one find out whether a share is listed or not? It is very simple: a listed share is included in the quotation list of the stock exchanges where it is listed; an unlisted share is not included in the quotation list. Inactively Traded Shares Listing does not ensure liquidity. A major bane of the Indian equity investors is that many listed shares are not actively traded. You should avoid such shares. To find out whether a share is actively traded or not, look at the frequency with which it has been traded in the last three

months or so. If it is traded less than once in a week, it may be regarded as an inactively traded share. Manipulated Shares Some business groups resort to manipulation of the shares of their companies. This mostly is in the form of market support to boost share prices, particularly before a public issue or rights issue. It can take other forms as well. Besides manipulating share prices, such groups also resort to 'creative accounting' meant to enhance reported profit artificially. As a general guideline, avoid such manipulated shares. Cornered Shares Stock market operators engage in cornering operations from time to time. While such shares may excite aggressive investors, conservative investors, as a rule, should scrupulously avoid such shares. Apply Stiff Screening Criteria The conservative investor should consider only those shares in the secondary market, which satisfy stiff requirements. The screening criteria recommend are as follows: Size The Company should not be very small. Its turnover should preferably be greater than Rs 10 crore and its equity base larger than Rs 2 crore. Competitive Position The Company must have a reasonably strong competitive position. It should enjoy a respectable share of the market. Better still, it should have a market share that is growing. Industry Prospects The prospects of the industry to which the company belongs must be above average. It should certainly not be an industry that is stagnating or declining. Price-earnings Ratio The price-earnings ratio of the company must not be very high. As a general guideline, one has to be very cautious if the price-earnings ratio is more than 15 and or significantly higher than the industry average. Dividend and Bonus Record The Company should have a reasonably good track record of dividend payment and bonus shares.


Age: Under 30 36 30-40 14 41-50 10 51-60 12 60 or over 3




13% 19%

Under 30




60 or over

Your current annual take-home income is: Under Rs100,000 Between Rs100,000 and 12 Rs200,000 45 Between Rs200,000 and Rs400,000 12 6 Over Rs400,000

Over Rs400,000

Between Rs200,000 and Rs400,000


Between Rs100,000 and Rs200,000


Under Rs100,000


You are financially responsible for (exclude dependents who can be supported by your spouse's income) Only yourself Other person in your household besides 8 yourself 24 Between 2 and 3 other persons besides yourself 31 Between 4 and 5 other persons besides yourself 12

Between 4 and 5 other persons besides yourself


Between 2 and 3 other persons besides yourself


Other person in your household besides yourself


Only yourself

8 0 5 10 15 20 25 30 35

Your current job/career/business: Is not dependable Is secure Doesnt matter because you expect a large inheritance/hav e enough 18 41 wealth already 8 Doesnt matter because you expect to change your career path soon 6

45 41 40 35 30 25 20 15 10 5 0
Is not dependable Is secure Doesnt m atter Doesnt m atter because you because you expect a large expect to change inheritance/have your career path enough w ealth soon already


8 6

Excluding your house, your savings inclusive of employment benefits, add up to: Nothing Less than six months' take 0 home pay 11 Between 6-15 months' take home pay 12 Between 15-36 months' take home pay 6 More than 36 months' take home pay 46

50 45 40 35 30 25 20 15 10 5 0 0 Nothing



12 6

Less than six months' take home pay

Betw een 6-15 months' take home pay

Betw een 15-36 months' take home pay

More than 36 months' take home pay

What is the status of your accommodation? Those who own a house, choose from last two options only. I stay with my parents/ spouse 15 I live in company accommodation. 6 I live in an apartment that I have rented. 18 I own a house but am saving to buy a better house. 12 I own as good a house that I would ever want to. 24

30 25 20 15 10

24 15 18 12 6
I live in company accommodation. I own as good a house that I would ever want to.

5 0

I stay with my parents/ spouse

I own a house but am saving to buy a better house.

I live in an apartment that I have rented.

How would you describe your overall income status? Just about manage to make ends meet; no monthly savings 0 My PF and other employment benefits are my only source of savings 18 I put aside at least 10% of my take-home salary every month in savings 31 10 I save more than 30% of my take-home salary every month My income from my wealth more than adequately provides for my cost of living 16

My income from my wealth more than adequately provides for my cost of living

16 10

I put aside at least 10% of my takehome salary every month in savings



Just about manage to make ends meet; no monthly savings

0 0 5 10 15 20 25 30 35

What is your practice on saving money? I don't believe in saving I'd like to save, but my expenses and other financial commitments do not permit 0 me to 16 35 22 I try to save whenever and wherever possible I save 15 percent or more of my take-home salary without exception

I save 15 percent or more of my take-home salary without exception


I try to save whenever and wherever possible


I'd like to save, but my expenses and other financial commitments do not permit me to


I don't believe in saving0

Which of the following statements would best describe your level of knowledge as an investor? I don't understand investment terminology at all I am a proficient investor who's able to explain concepts such as EVA, beta 0 and hedging 4 I know how to identify and invest in mutual funds and secondary market debentures 12 I understand investment principles and trade shares in the secondary market 16 I am not very familiar with investment options and financial planning 43

50 45 40 35 30 25 20 15 10 5 0


I don't understand investment terminology at all

I am a proficient investor w ho's able to explain concepts such as EVA, beta and hedging

I know how to identify and invest in mutual funds and secondary market debentures

I understand investment principles and trade shares in the secondary market I am not very familiar w ith investment options and financial planning

After you have made an investment, your feeling on the decision is: Excited 4 Satisfied 63 Doubtful 8 Sorry 0

70 63 60 50 40 30 20 10 4 0
Excited Satisfied Doubtful

8 0

You are offered a job by a company with a bright future. Which compensation option would you choose? A 3-year job guarantee An upfront bonus of Rs1,00,000 A 10% pay increase on your salary of Rs 4,00,000 Employee stock options with a current value of Rs1, 00,000 and prospects for 8 0 58 further appreciation 19

60 50 40 30 20 10 0
A 3-year job guarantee


19 8 0
An upfront bonus of Rs1,00,000 A 10% pay Em ployee stock increase on your options w ith a salary of Rs current value of 4,00,000 Rs1, 00,000 and prospects for further appreciation

How would you `honestly' describe yourself as a risk-taker? Reckless Willing to take evaluated 6 risks 36 13 Careful Low risk taking capability 15 Extremely averse to risk 5

40 35 30 25 20 15 10 5



15 5

0 Reckless Willing to take evaluated risks Careful Low risk taking capability

Extremely averse to risk

Which would best describe your awareness about finance? A. I read most of the business and investment magazines and watch business updates on television daily B. I read a financial newspaper daily and regularly read at least one specialized business 8 magazine 12 4 11 40 C. I read the finance section of the daily newspaper everyday D. I often look up the market prices of my shares in the newspaper E. I never read the finance section of the newspaper

40 30 20 10 0 12 8 4



In how many years from now will you have saved up for all your future financial commitments and needs? Less than 3 years 8 3 to 6 years. 10 6 to 10 years. 12 More than 10 years. 45

45 40 35 30 25 20 15 10 5 0 Less than 3 years 3 to 6 years. 6 to 10 years.




More than 10 years.

What is your approach to making a financial decision? Take a random decision 24 Lose sleep over the issue 4 Seek friendly advice. 8 Take an educated guess. 9 Analyze the various options. 30

35 30 25 20 15 10 5 0 Take a random decision

30 24

Lose sleep over the issue

Seek friendly advice.

Take an educated guess. Analyze the various options.

You invest Rs1, 00,000 in a share that goes down by 8% the next day. You. A. Average your cost by investing another Rs1, 00,000 at a lower price 6 B. Do not bother because you had done enough research on the company 7 15 C. Book your loss and invest in fixed deposits or bonds D. Hold on till the share comes back to your cost price and sell it 46

50 40 30 20 10 0 6


15 7

When you suffer a financial loss, what are your feelings? I think it has happened because it was my destiny I blame myself I take it as a personal failure I view it as a hurdle that one needs to cross I almost never suffer losses, because I stick to investments that do not depreciate in 6 12 2 6 principal value 49

60 50 40 30 49 20 10 0 6
I think it has happened because it w as my destiny

I blame myself

I take it as a personal failure

I view it as a hurdle I almost never suffer that one needs to losses, because I cross stick to investments that do not depreciate in principal value

The survey was conducted in Delhi and NCR. The number of respondents who were surveyed were 75. The respondents belonged to different age groups and professions. It was gathered form the survey that there is a very little awareness about investing in share markets and very few people were fully conversant with the technicalities of the stock markets. More over very few people were aversive of taking risks in their investments and were mostly looking for safer investment avenues. The respondents mentioned that investments in stock markets can be a judicious decision that requires lot of technical analysis and can be a pure gamble and it depends on the investor to either take calculative risk or take no risk at all. Very few people were aware of the capital appreciation on their investments and they just invested for the purpose of saving rather than increasing the money value of capital.


5.1 Conclusion
Investing in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their occupation, economic status, education and family background. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The problem of surplus gives rise to the question of where to invest. For an investor the main investment objectives are increasing the rate of return & reducing the risk other objectives like safety, liquidity & hedge against inflation can be considered as subsidiary objectives. While investing in stock market the first step is to assess a company from a qualitative standpoint and determining whether you should invest in it are as important as looking at sales and earnings. This strategy may be one of the simplest, but it is also one of the most effective ways to evaluate a potential investment. Moreover growth investors are concerned with growth. The guiding principle of growth investing is to look for companies that keep reinvesting into themselves to produce new products and technology. Even though the stocks might be expensive in the present, growth investors believe that expanding top and bottom lines will ensure an investment pays off in the long run. Lastly the Technical analysis is unlike any other stock picking strategy--it has its own set of concepts, and it relies on a completely different set of criteria than any strategy employing fundamental analysis. However, regardless of its analytical approach, mastering technical analysis requires discipline and savvy, just like any other strategy.

5.2 Recommendations
As a passive investor I am not well versed with investing in share market myself but after interaction with many avid investors and investment management firms I found some golden rules for investing in stock markets and thus I am putting them as a part of recommendation for all the investors looking for investment in share markets.

Stock Trading Strategy

Being able to make the correct stock picks is a must if you wish to be successful trading stocks. Failure to choose the right stock to trade in the first place will make selling it back for a profit an uphill, if not losing, battle. Asking the right questions about a stock before you invest your money is essential to any good stock trading strategy.

Five steps to Making Good Stock Picks

There are five basic steps to any intelligent stock trading system. First, you need to ask yourself, "What does the company do and just how well is it doing it? Get to know the company's business and then track its performance. Check also to see how their competition is faring. "How well did the stock price perform in the past?" Find and track the stock's price history and find out when investors determined when it was the best (or worst) time to buy and sell the stock in the past. Just as importantly, ask yourself "How will it do in the future?" Although the future is not our to see, trying to get an estimation of how well the stock will perform in the future will determine how well you do. Find out from others what their opinions on the future climate of the stock might be and go from there. Along the same lines, you need to ask, "How good is the stock compared to others? Shopping for value stocks is no different that shopping for value goods at your local supermarket. Weigh the stock against other stocks within - and without - the sector you are investing in. Comparing makes the best purchase. Lastly, ask yourself, "Am I overlooking any other vital information that could affect my stock pick?" Do brokers like the stock? Do they have information that you don't have which could affect your decision? Also, try to catch up on any recent information about the company, including organizational changes in the works or new product or service improvements or changes.

Guide to Stock Picking Strategies

Here, we examine some of the most popular strategies for finding good stocks (or at least avoiding bad ones). In other words, we'll explore the art of stock picking-selecting stocks based on a certain set of criteria, with the aim of achieving a rate of return that is greater than the market's overall average. Before exploring the vast world of stock picking methodologies, we should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks. This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock picking as an art rather than a science. There are a few reasons for this: Lets start by delving into one of the most basic and crucial aspects of stock picking: fundamental analysis.

Fundamental Analysis (Quantitative Factors)

Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a clich. The goal of analyzing a company's fundamentals is to find a stock's 'intrinsic value. If the intrinsic value is more than the current share price, your analysis is showing that the stock is worth more than its price and that it makes sense to buy the stock. Qualitative Analysis Fundamental analysis has a very wide scope. Valuing a company involves not only crunching numbers and predicting cash flows but also looking at the general, more subjective qualities of a company. Here we will look at how the analysis of qualitative factors is used for picking a stock. Management: The backbone of any successful company is strong management. To assess the strength of management, investors can simply ask the standard five W's: who, where, what, when, and why. Who?

Do some research, and find out that is running the company. Among other things, you should know who the company's CEO, CFO, COO, and CIO are. Then you can move onto the next question. Where? You need to find out where these people come from, specifically, there educational and employment backgrounds. Ask yourself if these backgrounds make the people suitable for directing the company in its industry What and When? What is the management philosophy? In other words, in what style do these people intend to manage the company? Some managers are more personable, promoting an open, transparent, and flexible way of running the business. Other management philosophies are more rigid and less adaptable, valuing policy and established logic above all in the decision-making process. Why? A final factor to investigate is why these people have become managers. Look at the manager's employment history, and try to see if these reasons are clear. Does this person have the qualities you believe are needed to make someone a good manager for this company?

Know What a Company Does and How it Makes Money? A second important factor to consider when analyzing a company's qualitative factors is its product(s) or service(s). How does this company make money? Knowing how a company's activities will be profitable is fundamental to determining the worth of an investment.

Aside from having a general understanding of what a company does, you should analyze the characteristics of its industry, such as its growth potential. A mediocre company in a great industry can provide a solid return, while a mediocre company in a poor industry will likely take a bite out of your portfolio.

Value Investing
Value investing is one of the best-known stock picking methods. Keep in mind that these are guidelines, not hard-and-fast rules: Share price should be no more than 2/3 of intrinsic worth. Look at companies with P/E ratios at the lowest 10% of all equity securities. PEG should be less than 1. Stock price should be no more than tangible book value. There should be no more debt than equity (i.e. D/E ratio < 1).

Growth Investing
In the late 1990s, when technology companies were flourishing, growth-investing techniques yielded unprecedented returns for investors. But before any investor jumps onto the growth investing bandwagon, he or she should realize that this strategy comes with substantial risks and is not for everyone. The best way to define growth investing is to contrast it to value investing.

GARP Investing
The GARP strategy is a combination of both value and growth investing: it looks for companies that are somewhat undervalued and have solid sustainable growth potential. Below is a diagram illustrating how the GARP-preferred levels of price and growth compare to the levels sought by value and growth investors;

Income Investing
Income investing, which aims to pick companies that provide a steady stream of income, is perhaps one of the most straightforward stock picking strategies.

While investment consultants speak about technical and fundamental analysis, there are few who combine both to the best effect. C = Current Quarterly Earnings A = Annual Earnings N=New S = Supply of Stock L = Leader I = Institutional Ownership M= Market Direction

Technical Analysis
Technical analysis is the polar opposite of fundamental analysis, which is the basis of every method explored so far in this tutorial. Technical analysts, or technicians, select stocks by analyzing statistics generated by past market activity, prices, and volumes. Sometimes also known as chartists, technical analysts look at the past charts of prices and different indicators to make inferences about the future movement of a stock's price.

Khan MY (1997) Financial Services - Tata McGraw Hills. Malhotra Naresh (2002) Marketing Research - Prentice Hall of India. Kotler Philip (2002) Marketing Management - Prentice Hall of India. Michael Violano (2001) Retail Banking Resources & Technologies.

Love Lock Christopher (2001) Service Marketing Pearson Education Asia. Bhole LM, Financial Institutions and Markets - Tata McGraw Hills. Investment Management by Avadhani.V.A. Introduction to Futures and Options Markets by John C Hull; Prentice hall Statistical Methods by S.P.Gupta Business Research Methods by Donald R. Cooper & Pamela S. Schindler

Web sites
www.karvy.com www.nseindia.com www.bseindia.com www.rbi.org www.sebi.gov.in www.mcxindia.com www.ncdex.com www.nmce.com www.inlandrevenue.gov.uk www.bis.org www.financewise.com


Name: Age:

Under 30 30-40 41-50 51-60

60 or over

What is your current annual take-home income?

Under Rs100, 000 Between Rs100, 000 and Rs200, 000 Between Rs200, 000 and Rs400, 000

Over Rs400, 000

You are financially responsible for (exclude dependents who can be supported by your spouse's income)

Only yourself Other person in your household besides yourself Between 2 and 3 other persons besides yourself

Between 4 and 5 other persons besides yourself

Your current job/career/business:

Is not dependable Is secure Doesnt matter because you expect a large inheritance/have enough wealth already

Doesnt matter because you expect to change your career path soon

Excluding your house, your savings inclusive of employment benefits, add up to:

Nothing Less than six months' take home pay. Between 6-15 months' take home pay. Between 15-36 months' take home pay.

More than 36 months' take home pay

What is the status of your accommodation? Those who own a house, choose from last two options only.

I stay with my parents/ spouse. I live in company accommodation. I live in an apartment that I have rented. I own a house but am saving to buy a better house.

I own as good a house that I would ever want to.

How would you describe your overall income status?

Just about manage to make ends meet; no monthly savings My PF and other employment benefits are my only source of savings I put aside at least 10% of my take-home salary every month in savings I save more than 30% of my take-home salary every month

My income from my wealth more than adequately provides for my cost of living

What is your practice on saving money? I don't believe in saving I'd like to save, but my expenses and other financial commitments do not permit me to I try to save whenever and wherever possible I save 15 percent or more of my take-home salary without exception Which of the following statements would best describe your level of knowledge as an investor? I don't understand investment terminology at all. I am a proficient investor who's able to explain concepts such as EVA, beta and hedging. I know how to identify and invest in mutual funds and secondary market debentures. I understand investment principles and trade shares in the secondary market. I am not very familiar with investment options and financial planning. After you have made an investment, your feeling on the decision is: Excited Satisfied Doubtful Sorry

You are offered a job by a company with a bright future. Which compensation option would you choose? A 3-year job guarantee An upfront bonus of Rs1, 00,000 A 10% pay increase on your salary of Rs4, 00,000 Employee stock options with a current value of Rs1, 00,000 and prospects for further appreciation 1) How would you `honestly' describe yourself as a risk-taker? Reckless Willing to take evaluated risks Careful Low risk taking capability Extremely averse to risk 2) Which would best describe your awareness about finance? I read most of the business and investment magazines and watch business updates on television daily. I read a financial newspaper daily and regularly read at least one specialized business magazine. I read the finance section of the daily newspaper everyday. I often look up the market prices of my shares in the newspaper. I never read the finance section of the newspaper

3) In how many years from now will you have saved up for all your future financial commitments and needs? Less than 3 years 3 to 6 years. 6 to 10 years. More than 10 years.

4) What is your approach to making a financial decision?

Take a random decision Lose sleep over the issue Seek friendly advice. Take an educated guess. Analyze the various options.

5) You invest Rs1, 00,000 in a share that goes down by 8% the next day. You. Average your cost by investing another Rs1, 00,000 at a lower price Do not bother because you had done enough research on the company Book your loss and invest in fixed deposits or bonds Hold on till the share comes back to your cost price and sell it 6) When you suffer a financial loss, what are your feelings? I think it has happened because it was my destiny. I blame myself. I take it as a personal failure. I view it as a hurdle that one needs to cross. I almost never suffer losses, because I stick to investments that do not depreciate in principal value