Unit 1

Introduction to Investment and Securities

1. Introduction to Securities
Financing or investment instruments (some negotiable, others not) bought and sold in financial
markets, such as bonds, debentures, notes, options, shares (stocks), and warrants. See
also security.
Securities are broadly categorized into debt securities (such as banknotes, bondsand debentures)
and equity securities, e.g., common stocks; and derivative contracts, such
as forwards, futures, options and swaps.
Security
Piece of paper that proves ownership of stocks, bonds, and other investments.
security
1. An instrument that, for a stock, shows ownership in a firm; for a bond, indicates a creditor
relationship with a firm or with a federal, state, or local government; or signifies other rights to
ownership.
2. Collateral used to guarantee repayment of a debt.
Security - Traditionally, a security was a physical document, such as stock or bond certificate,
that represented your investment in that stock or bond.
But with the advent of electronic recordkeeping, paper certificates have increasingly been
replaced by electronic documentation.
In current general usage, the term security refers to the stock, bond, or other investment product
itself rather than to evidence of ownership.
An instrument representing ownership (stocks), a debt agreement (bonds), or the rights to
ownership (derivatives) in a corporation or another entity.
A financial asset including any note, stock, treasury stock, bond, debenture, certificate of interest
or participation in any profit- sharing agreement or in a firm.
A security is essentially a contract that can be assigned a value and sold, or any investment made
with the expectation of a profit.
Investments
Investment is nothing but employment of funds with the aim of achieving additional income or
growth in value.
The quality of investment is that it involves waiting for reward. The reward comes as return
under risk.
An investment is a commitment of funds made in the expectation of some positive rate of
return.
Factors favorable for/ affecting Securities/ Investments /Securities/ Investments Analysis
a) World affairs

The various happenings around the world affects the investments decisions of the
investor. For example: The September 11th incident in United States affects the
investments of various people around the world.
b) Domestic Economic and Political Factors
The economic affairs or political factors of a particular region affect the
investments in the particular region. For example: If a new economic policy has been
introduced in a country means that will affect the investment of the particular country. If
the political situation changes in a country that will also affects the investments.
c) Industry Information
The status of a particular industry affects the investments. For example: The Down
flow in the Information Technology industry affected lot of investors. That means lot of
investors drops their idea of investments in securities.
d) Company Information
The status of a particular company will affects the investments in the whole industry.
For example: if there is a big loss in the very big automobile company will affect the
investments going through the particular industry.
e) Security Market
The happenings of a security market will affect the investments of the public. For
example: few years before Bombay Stock Exchange (BSE) was affected by the Harshath
Metha case. At that time the investors afraid to invest in stock markets.
f) Data on related markets
The comparative data of various markets will affect the investments.
g) Other Incidents
Sometimes the investments will be affects because of the individual persons
related to the particular companies or markets. For example: The death of Mr. Thirubai
Ambani of Reliance Groups affects the investments and the stock markets. Problem in
Gujarat in the past months also affects the investments.

2. Types of Securities
Types of Securities / Investment Avenues
Investment avenues are nothing but the various alternative sources or avenues
available to the investors for investing their funds. It can be also called as modes
of investments.

Investor
Investor

Financial
Financial Assets
Assets

1.
1. Cash
Cash
2.
2. Banks
Banks Deposits
Deposits
3.
3. P.F,LIC
P.F,LIC
Schemes
Schemes

Marketable
Marketable Assets
Assets

Physical
Physical Assets
Assets

1.
1. Shares,
Shares, Bonds,
Bonds,
Govt.
Govt. Securities,
Securities,
etc.
etc.
2.
2. Mutual
Mutual Funds
Funds
3.
UTI
3. UTI Units
Units

1.
1. House,
House, Land,
Land,
Buildings,
Buildings, Flats
Flats
2.
2. Gold,
Gold, Silver
Silver and
and
Other
Metals
Other Metals
3.
3. Consumer
Consumer
Durables
Durables

Stock
Stock &
& Capital
Capital Markets
Markets
New
New Issues
Issues

Stock
Stock Market
Market

Investments can be classified into two categories.

1. Financial Securities
2. Non- Securitised Financial Assets
1. Financial Securities
These securities are also called as Stock or Capital Market Securities.
These Securities are negotiable securities. The Value can be change.
Normally the trade for these securities takes place in stock markets.
a.
b.
c.
d.
e.
f.
g.

Equity Shares
Preference Shares
Convertible Debentures
Non- Convertible Debentures
Public Sector Units Bonds
Saving Certificates
Money Market Securities

a. Equity Shares

For easier collection of money from public the capital of a

company should be divided into various parts. Such parts of capital
are called as shares.
The shareholders are the owners of the company. The share
certificates represents the ownership of the shareholders.
a.1.

Blue-chip Shares
These are the shares of large, well established, financially strong
companies who have an impressive track record and which
actively traded and which are actively traded in a stock exchange.
For Example:
TATA Iron and Steel Company Limited (TISCO)

a.2.

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.
For Example:
Shares of Hindustan Aluminum Limited may be regarded
as growth shares.

a.3.

Income Shares
Shares of companies that have fairly stable operations with
relatively limited growth opportunities.
For Example:
Shares of power supply companies and Tea companies.

a.4.

Defensive Shares
Shares of companies that are relatively unaffected by the ups and
downs in general business conditions.
For Example:
Shares of Food and Beverages companies.

a.5.

Cyclical Shares
Shares of companies that have a pronounced cyclicality in their
operations.
For Example:
Shares of Shipping Companies.

a.6.

Speculative Shares
Shares that tend to fluctuate mainly because there is a lot of
speculative trading. These shares periodically catch the fancy of
bull and bear operators who may resort to big speculative trading.

Peter Lynchs Classification of Shares

i.

Slow Growers
Large and ageing companies that are expected to grow slightly
faster than the gross national product.

ii.

Stalwarts
Giant companies that are faster than slow growers but are not agile
(quick) climbers.

iii.

Fast Growers
Small, aggressive new enterprises that grow at 20 to 25 percent a
year.

iv.

Cyclicals
Companies whose sales and profits rise and fall in a regular, tough
not completely predictable, fashion.

v.

Turnarounds
Companies which are steeped in accumulated losses but which
show signs of recovery.

b. Preference Shares
Preference shares is the share in which the shareholder has the
preference to get dividends and other benefits in preference. It also
carry fixed rate of dividend.
c. Convertible Bond / Debenture
Convertible bond or debentures are compulsorily or optionally
converted into equity shares in future period. It can be converted under
the conversion ratio, conversion time, conversion price and conversion
(stock) value.
d. Non- Convertible Bond / Debenture
These types of debentures cannot be convertible. The debenture holder
will get the interest regularly till end.
e. Saving Certificates
These are the instruments issued by the Post Offices. They are the part
of small saving schemes. The important saving certificates are:
Indira Vikas Patras
Kisan Vikas Patras
f. Money Market Securities
These are also debt instruments with very short period of maturity.
Treasury Bills
-Short term instrument
-Issued by central Govt.

-Maturity period of 6 months

-issued at a discount and repaid at par.
Commercial Papers
-Short term unsecured promissory notes
-Issued by firms which enjoy fairly high Credit
rating
-Maturity period is 180 days
-issued at discount value and redeemed at its face
value.
Non-Securitized Financial Assets
a. Deposits
1. Bank Deposits
2. Post Office Deposits
3. Company Deposits
4. Monthly Income Scheme of the Post Office
b. Tax Sheltered Saving Scheme
1. Employee Provident Fund
2. Public Provident Fund
3. National Saving Scheme
4. Jeevan Dhara Policy
c. Insurances
1. Life Insurance
2. Whole Life Policy
3. Limited Payment Life Policy
4. Endowment Assurance Policy

3. Investment Process
Financial Assets that Investors purchase hoping to earn a high rate of return.

The Investment Process

Investing is a process composed of many elements. Unfortunately, many investors simply skip
some of the elements because of lack of education or simple naivete. Web sites, books, and
advisors that deal with investing in the stock market, but don't address the other critical elements
of the process only exacerbate the problem. Many so called "Investment" books and web sites
probably should be renamed with the term "stock selection" or "stock picking" because they
either briefly address or skip entirely critical elements of the process. In fact, stock selection is
likely to be one of the least important elements of investing for many investors. The following
summary and links are intended to assist investors in understanding the investment process and
achieving their goals in an efficient manner.
1. Determine financial condition, goals and risk tolerance.
a. What are you worth? How much are you saving/ spending?
b. What are your goals? How much and when?
c. How much risk are you willing to take to reach your goals?
d. Should you be handling your own investments?
2. Determine the appropriate asset allocation
3. Select investment vehicles and implement strategy

a. Taxable or tax free

b. Active or passive
c. Mutual funds, individual securities, or others
d. Market timing
4. Monitor portfolio, reevaluate goals and constraints and rebalance
a. Rank performance
b. Reevaluate goals and constraints
c. Rebalance portfolio
5. Document your results

1. Determine financial condition, goals and risk tolerance.

a.

What
are
you
worth?
How
much
are
you
saving?
Before you can begin planning to invest you should attempt to determine exactly where you
stand financially. An income statement will give you an idea of how much money is coming in or
going out on a regular basis.

b.

What
are
your
goals?
How
much
and
when?
Before an appropriate investment program can be established, careful consideration should be
given to the investor's specific objectives and constraints. Objectives are goals defined in terms
of return requirements and risk tolerance. Constraints are limitations, such as liquidity, time
horizon, taxes, and legal or regulatory matters, imposed on the portfolio management process.
Preferences are constraints that are self-imposed and may be unique. Do you have specific
income requirements or minimum rates of return? Is there a minimum value that must be
maintained? Are there specific future liabilities? There are various tools available for estimating
your savings potential and required rate of return to meet specific targets. If you're goals are too
high you may want to rethink you're objectives.
c.

How much risk are you willing to take to reach your goals?
Are you willing to accept volatility to achieve higher returns? Investing should be viewed as a
process of making sure that you never have so much risk that your standard of living can be
impaired by a negative surprise. There are many interactive tools (risk tolerance and asset
allocation tools) you can use to help determine your risk tolerance. Don't be surprised if you get
different results from different tools, there are no absolutely correct answers based on the limited
information you can supply.
d.

Should
you
be
handling
your
own
investments?
At this stage in the process you should ask yourself several questions. First, do you know
enough about investing (asset allocation, portfolio management, diversification, etc.) to handle
your own investments? Follow-ups to that question might be: have you done well with your
investments in the past; and, would others who know you and are educated in investments agree
with your opinion that you know what your doing? If the answer is no, you should either seek an
advisor who is qualified to invest your money, or become educated. If the answer is yes, you may
want to test yourself to determine whether you really do know as much about investing as you
think you do.
If you aren't well educated but you enjoy investing, you should ask yourself whether you are
willing to accept lower returns and higher risk than you might get by using a qualified advisor.
It's not a bad idea to take a serious look in the mirror and ask yourself whether you would hire
the person you looking at (as if you were a stranger) knowing how much experience and
education in investments, finance, and portfolio theory you have. Your investment decisions and
actions can have a major impact on your financial future and they should not be taken lightly.

2. Determine the appropriate asset allocation.

Asset allocation is the most important part of the investment process because it will likely
determine the majority of both risk and return for your portfolio. Here are some calculators that
will recommend an asset allocation of stocks, bonds, and cash for your portfolio based on your
inputs. Some recommend allocations to other assets (international assets, real estate, etc.) that
you should also consider for a portion of your funds. Don't be surprised if you get different

results from different tools. There are no absolutely correct answers based on the limited
information you can supply.
As Charles Ellis points out "The priority objective in investment management is to control
risk." Generally, the more risk averse you are, the more you should diversify. The best allocation
of assets will depend on the expected returns, volatility, and correlation between assets. The
objective is to achieve the highest return given an acceptable level of risk, or alternatively to
assume the minimum risk required to achieve a specific amount.
3. Select the investment vehicles and implement strategy.
Having determined the asset allocation, you can select the vehicles for investing in those asset
classes. If you have chosen to use an advisor, they should handle the implementation of investing
your money. You should attempt to keep your expenses as low as possible since expenses come
directly out of your returns.
a. Taxable or tax free.
At this point you should evaluate tax free and tax advantaged investment vehicles. If you're
eligible and you can accept the limitations you should evaluate investing through IRA's, 401K's,
and other vehicles that will eliminate or reduce the tax bite.
b. Active or passive.
Another important decision to make at this point is one that some investors unfortunately
don't evaluate thoroughly. It is the decision to invest actively or passively. Passive investing (or
indexing) involves purchasing diversified portfolios of all the securities in an asset class. Active
investing involves overweighting securities and sectors within an asset class believed to be
undervalued and underweighting securities and sectors believed to be overvalued. Purchasing a
security, a stock for example, is effectively an active investment that can be measured against the
performance of the stock market itself. When compared to a passive investment in a stock index,
the purchase of an individual stock can be viewed as a combination of an asset allocation to
stocks and an active investment in that stock with the belief that it will outperform the stock
index. If you purchased a stock that was up 100% from the beginning of 1995 to the end of 1997
you actually underperformed the market (the S&P 500 was up 125% over the three year period).
You can be right on your asset allocation and wrong in your active security selection and viceversa.
Arguments can be made for both active and passive investing but a much larger percentage of
institutional investors choose to invest passively than do individual investors. The arguments for
passive investing include reduced costs, tax efficiency, and the fact that historically, passive
funds outperform a majority of active funds. The arguments for active investing are that there
are Anomalies in securities markets that can be exploited to outperform passive investments and

the fact that some investors and managers have outperformed passive investing for long periods
of time.
The active versus passive decision does not have to be a one or the other decision. In fact, a
common strategy is to invest passively in asset classes considered to be very efficient, and invest
actively in asset classes considered to be less efficient. Investors can also combine the two by
investing part of a portfolio passively and another part actively (for example you can invest half
of your stock allocation in an index fund and the other half in active funds). Investors can also
invest actively in sectors in a passive manner. For example, you can invest in an index fund of
small stocks if you think small stocks will outperform large stocks, or you can invest in a passive
country fund if you believe a particular country will outperform the rest of the world.
c. Mutual funds, individual securities, or others.
In many cases the simplest way to invest in Stocks (domestic and International), Bonds,
and Real Estate is through Mutual Funds and/or ETFs. A major advantage of mutual funds is that
they provide diversification within the asset class. Stocks, bonds, and Real Estate Investment
Trusts can also be purchased individually through Stock Brokers. Private funds are primarily
used
by
institutional
investors
to
invest
in Venture
Capital and Alternative investments. Tangibles can be purchased through various sources.
d. Market timing.
Active strategies typically involve both security selection and timing the market (buying and
selling) based on the belief that securities and markets are over or undervalued. While there are
some individuals and firms that have been successful in market timing over certain periods, most
studies show that attempts to time the markets are counterproductive.
"No one on Wall Street has ever figured out how to time stocks' swings perfectly. Most people, in
fact, fail miserably at timing."
"In 30 years in this business, I do not know anybody who has done it successfully and
consistently, nor anybody who knows anybody who has done it successfully and consistently.
Indeed, my impression is that trying to do market timing is likely, not only not to add value to
your investment program, but to be counterproductive."
4. Monitor your portfolio, reevaluate goals and constraints and rebalance.
a. Rank performance.
The portfolio and all variables should be monitored and valued continuously but specific time
periods should be chosen to evaluate the performance of a portfolio and reevaluate goals and
constraints. The specific time period for evaluation must be determined by each investor. At that
time you can compare your returns against your Benchmarks to determine whether your active

decisions have resulted in returns better than the market. If they haven't it may be time to
reevaluate your strategy. It's also a good idea to determine whether your portfolio has fluctuated
more or less than you had expected and to adjust your expectations and portfolio accordingly.
b. Reevaluating goals and constraints.
Goals and constraints should also be reevaluated on a regular basis and whenever unique
circumstances or events occur that may affect your investments.
c. Rebalance portfolio.
Price increases/decreases, dividends, income payments, inflows and outflows of cash as well
as other events will naturally cause the asset allocation of the portfolio to fluctuate. For instance,
a rising stock market can cause a portfolio's allocation in stocks to rise above predetermined
ranges. Therefore its helpful to have a regular schedule for rebalancing the portfolio.
5. Document results.
You should always maintain appropriate documentation and records of your investments for
tax purposes and future use. Intuit is a great software programs that can greatly simplify your
record keeping. Hopefully, at this point (or when you are ready to retire) you've achieved your
financial goals and the only thing left to do is "live happily ever after."

4. Primary and Secondary Markets

Capital Markets
Capital market
The capital market is the market for long-term loans and equity capital. Companies and the
government can raise funds for long-term investments via the capital market. The capital market
includes the stock market, the bond market, and the primary market.
Securities trading on organized capital markets is monitored by the government; new issues are
approved by authorities of financial supervision and monitored by participating banks. Thus,
organized capital markets are able to guarantee sound investment opportunities.

The capital market can be contrasted with other financial markets such as the money market
which deals in short term liquid assets, and futures markets which deals in commodities
contracts.
Capital markets and securities transactions are regulated by the Capital Markets division of the
Department of Economic Affairs.
2.02: The Indian Financial system is regulated and supervised by two government ag
encies under the Ministry of Finance - They are:
(a) The Reserve Bank of India [RBI] and
(b) The Securities Exchange Board of India [SEBI]
All parts of the financial system are interconnected with one another and the jurisdictions of the
RBI and the SEBI overlap in many fields.

Securities and Exchange Board of India

Stock Exchanges of India

Capital markets can be classified in to two.

Primary market
Market in which new issues of a security are sold to initial buyers.
This is the market in which you are allotted the securities by the issuer of securities in the
public/rights issue.
For Fixed-price issues: you are required to submit the amount payable on making the
application along with your application form to the collecting Bank.
For Book-built issues : you can make a bid by submitting a completed Bid-cum-Application
Form and the Bid amount at any of the Bid Collection Centres of the syndicate members.
The primary market is the financial market for the initial issue and placement of securities.
Unlike in the secondary market, no organized stock exchanges are necessary. An organization
that need funds contacts their investment banker who typically assembles a syndicate of
securities dealers that will sell the new stock issue.
Securities dealers see this as the wholesale part of their business. This process of selling the new
stock issues to prospective investors in the primary market is called underwriteing. The securites
that they sell are called initial public offerings (IPOs). Dealers usually earn a commission that is
built into the price of the security offering, that is, it is not apparant unless you read the
prospectus in detail.

This is contrasted with the retail part of the business, which is acting as an intermediary between
buyers and sellers of securities in the secondary market.

SECONDARY MARKET
Market in which previously issued securities are traded.
This is the market where you buy or sell securities in exchanges through brokers/sub-brokers.
Settlement guarantee is ensured for transactions on stock exchanges
If you do not get money/securities for whatsoever reason, then there is an institutional
arrangement to settle your claims in the exchange.
If the broker defaults investors can seek protection from the Investor Protection Fund of the
Exchanges.
The Secondary Market is the financial market for trading of already issued securities. In the
secondary market, securities are sold by and transferred from one investor to another. It is
therefore important that the secondary market be highly liquid and transparent. The eligibility of
shares and bonds for trading in the secondary market is regulated through financial supervisory
authorities and the rules of the market place in question, which could be a stock exchange.
Stock brokers see the secondary market as the retail part of their business. They are dealing with
many clients and many relatively small transactions. This can be contrasted with the primary
market in initial public offerings which can be seen as the wholesale side of their business.

Stock market/Exchange
Buyers and sellers meet in one central location to conduct trades.
A stock market is a market for the trading of publicly held company stocks or shares and
associated financial instruments (including stock options, convertibles and stock index futures).
Traditionally such markets were open-outcry where trading occurred on the floor of an exchange.
These days increasingly the markets are cyber-markets with buying and selling occurring via
online real-time matching of orders placed by buyers and sellers.
Many years ago, worldwide, buyers and sellers were individual investors and businessmen.
These days markets have generally become "institutionalized"; that is, buyers and sellers are
largely institutions whether pension funds, insurance companies, mutual funds or banks. This rise
of the institutional investor has brought growing professionalism to all aspects of the markets.

The movements of the prices in a market or section of a market are captured in price indices
called Stock Market Indices, of which there are many, e.g., the Standard and Poors Indices and
the Financial Times Indices. Such indices are usually market-capitalisation weighted.
There are stock markets in most developed economies, with the world's biggest markets being in
the USA, Japan, the UK, and Europe. There are global stock-market indices that, because they
delineate the global universe of stock opportunities, shape the choices and distribution of funds
of institutional investors. The character of markets around the world varies, for example with the
majority of the shares in the Japanese market being closely held (by financial companies and
industrial corporations) compared with the structures of ownership in the USA or the UK.
Stock Exchanges are the place where buying and selling of shares and other instruments taken
place. These are the places where shares are exchanged from one person to another.
Stock Exchanges in India
In India the stock exchange structure is the three tier structure.
1. National Stock Exchange(NSE)
2. Regional Stock Exchanges
3. Over the Counter Exchange of India(OTCEI)
Regional Stock Exchanges
Regional Stock Exchanges are the exchanges which are situated in various
regions. For Example Madras Stock Exchanges, Bombay Stock Exchanges, etc.
There are 21 Regional Stock Exchanges in India, including BSE and MSE.
Over the Counter Exchange of India(OTCEI)
There is no separate place for the transactions of shares. That means transactions
taken place over the counter.
The control of stock exchanges in India
The Stock Exchanges in India are controlled by a board called Securities and
Exchanges Board of India after 1993.
The Hierarchy of the Stock Exchanges management goes like this
Ministry of Finance
Department of Economic affairs
Stock Exchange Division
Controlled by SEBI
Regulated by Securities Contract Act

The Securities Act of 1933

Register with the Securities Exchange Commission (SEC).
-SEC has 20 days to review.
SEC may ask for more information.
The firm can not solicit buyers during the review period but can advertise
Distribute a preliminary prospectus (red herring).
Advertise in the financial press (tombstone advertisements).
Securities Exchange Act of 1934
Established the SEC.
Exchanges must register with SEC.
Company information must be available to the public.
Insider trading is regulated.
List of Stock Exchanges in India

1. Ahmedabad Stock Exchange Association Ltd.

2. Bangalore Stock Exchange
3. Bhubaneshwar Stock Exchange Association
4. Calcutta Stock Exchange
5. Cochin Stock Exchnage Ltd.
6. Coimbatore Stock Exchange
7. Delhi Stock Exchange Association
8. Guwahati Stock Exchange Ltd.
9. Hyberabad Stock Exchange Ltd.
10. Jaipur Stock Exchange Ltd

11. Kanara Stock Exchange Ltd

12. Ludhiana Stock Exchange Association Ltd
13. Madras Stock Exchange
14. Madhya Pradesh Stock Exchange Ltd.
15. Mangalore Stock Exchange Limited
16. Meerut Stock Exchange Ltd.
17. Mumbai Stock Exchange
18. Pune Stock Exchange Ltd.
19. Saurashtra Kutch Stock Exchange Ltd.
20. Uttar Pradesh Stock Exchange Association Ltd.
21. Vadodara Stock Exchange Ltd.
22. National Stock Exchange of India
23. OTC Exchange of India
Addresses of the Stock Exchanges
Ahmedabad Stock Exchange Association Ltd.
Manek Chowk
Ahmedabad 380 001, India
Bangalore Stock Exchange
Stock Exchange Towers
No 51 1st Cross, J C Road
Bangalore 560 027, India
Phone: 91-80-299-5233/5225
Bhubaneshwar Stock Exchange Association
217 Budhraja Building
Jharpara Cuttak Road
Bhubaneshwar 751 006, India
Calcutta Stock Exchange
7 Lyins Range
Calcutta 700 001, India
Phone: 91-33-20-6957
Fax: 91-33-20-2514
Cochin Stock Exchnage Ltd.
Exchange House
38/1431 Kaloor Road Extension
Ernakulum, Kochi-682035,, India
Coimbatore Stock Exchange
Chamber Towers
8/732 Avinashi Road
Coimbatore 641 018, India

Delhi Stock Exchange Association

3 & 4/4B Asaf Ali Road
West Plaza, I.G. Stadium
New Delhi 110 002, India
Phone: 91-11-335-2951
Fax: 91-11-332-6182
Guwahati Stock Exchange Ltd.
Saraf Building Annexe
A.T. Road
Guwahati 781 001, India
Hyberabad Stock Exchange Ltd.
Bank Street
Hyderabad 500 001, India
Jaipur Stock Exchange Ltd
Rajasthan Chamber Bhawan
M.I. Road
Jaipur 302 003, India
Kanara Stock Exchange Ltd
4th Floor, Rambhavan Complex
Kodialbail
Mangalore 575 003, India
Ludhiana Stock Exchange Association Ltd
Lajpat Rai Market, Clock Tower
Ludhiana 141 008, India
Madras Stock Exchange
11 Second Line Beach
Exchange Building
Madras 600 004, India
Phone: 91-44-512-237
Fax: 91-44-514-897
Madhya Pradesh Stock Exchange Ltd.
67, Bada Sarafa
Indore 452 002, India
Mangalore Stock Exchange Limited
4th Floor, Rambhavan Complex
Mangalore 575 003, Karnataka, India
Phone: 91-824-440813/440851
Fax: 91-824-21491

Meerut Stock Exchange Ltd.

Kingsway Building
345 Bombay Bazar
Meerut Cantonment 250 001, India
Mumbai Stock Exchange
Phiroze Jeejeebhoy Towers
Dalal Street
Mumbai 400 001, India
Phone: 91-22-265-5860
Fax: 91-22-265-8121
Pune Stock Exchange Ltd.
1177, Budhwar Peth
Bank of Maharashtra Building, 2nd Floor
Bajirao Road
Pune 411 002, India
Saurashtra Kutch Stock Exchange Ltd.
4, Swaminarayan Gurukul Building
Dhebarbhai Road
Rajkot 380 002, India
Uttar Pradesh Stock Exchange Association Ltd.
Padam Towers
14/113 Civil Lines
Kanpur 208 001, India
Vadodara Stock Exchange Ltd.
101 Paradise Complex
Tilak Road, Sayaji Gunj
Vadodara 390 005, India
National Stock Exchange of India
Mahendra Towers, "A" Wing
1st Floor, RBC, Worli
Bombay 400 018, India
Phone: 91-22-493-2555
Fax: 91-22-493-5631
OTC Exchange of India
92/93 Market Tower "F"
Cuffe Parade
Bombay 400 005, India
Phone: 91-22-218-8164
Fax: 91-22-218-8511

Over-the-Counter (OTC)
Securities dealers operate at many different locations across the country.
Connected by NASDAQ system (National Association of Securities Dealers Automated
Quotation system).
LISTING OF SECURITIES
Listing means admission of the securities to dealings on a recognized stock exchange. The
securities may be of any public limited company, Central or State Government, quasi
governmental and other financial institutions/corporations, municipalities, etc.
The objectives of listing are mainly to:
provide liquidity to securities;
mobilize savings for economic development;
Protect interest of investors by ensuring full disclosures.
The Exchange has a separate Listing Department to grant approval for listing of securities of
companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956,
Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI
and Rules, Bye-laws and Regulations of the Exchange.
2.1 A company intending to have its securities listed on the Exchange has to comply with
the listing requirements prescribed by the Exchange. Some of the requirements are as
under:I
Minimum Listing Requirements for new companies
II Minimum Listing Requirements for companies listed on other stock exchanges
Minimum Requirements for companies delisted by this Exchange seeking relisting of this
III
Exchange
IV Permission to use the name of the Exchange in an Issuer Company's prospectus
V Submission of Letter of Application
VI Allotment of Securities
VII Trading Permission
VIII Requirement of 1% Security
IX Payment of Listing Fees
X Compliance with Listing Agreement
XI Cash Management Services (CMS) - Collection of Listing Fees
[I] Minimum Listing Requirements for new companies
The following revised eligibility criteria for listing of companies on the Exchange, through Initial
Public Offerings (IPOs) & Follow-on Public Offerings (FPOs), effective August 1, 2006.
ELIGIBILITY CRITERIA FOR IPOs/FPOs

Companies have been classified as large cap companies and small cap companies. A large
cap company is a company with a minimum issue size of Rs. 10 crores and market
capitalization of not less than Rs. 25 crores. A small cap company is a company other
than a large cap company.

CATEGO
RY

Large Cap
Small Cap

POS
TISSU
E
PAID
-UP
Rs. 3
crores
Rs. 3
crores

MINIMU
M ISSUE
SIZE

MINIMUM
MARKET
CAPITALIZATI
ON

Rs.
10 Rs. 25 crores
crores
Rs.
3 Rs. 5 crores
crores

MINIMUM
INCOME/TURNO
VER

Rs. 3 crores

MINIMUM
NUMBER OF
PUBLIC
SHAREHOLDE
RS

1000

[II] Minimum Listing Requirements for companies listed on other stock exchanges
1.
2.
3.
4.
5.
6.

7.
8.

The company should have

Minimum issued and paid up equity capital of Rs. 3 crores.
profit making track record for last three years.
Minimum networth of Rs. 20 crores (networth includes Equity capital and free reserves
excluding revaluation reserves).
Minimum market capitalisation of the listed capital should be at least two times of the
paid up capital.
The company should have a dividend paying track record for the last 3 consecutive years
and the minimum dividend should be at least 10%.
Minimum 25% of the company's issued capital should be with Non-Promoters
shareholders as per Clause 35 of the Listing Agreement. Out of above Non Promoter
holding no single shareholder should hold more than 0.5% of the paid-up capital of the
company individually or jointly with others except in case of Banks/Financial
Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-Resident
Indians.
The company should have at least two years listing record with any of the Regional Stock
Exchange.
The company should sign an agreement with CDSL & NSDL for demat trading.

[III] Minimum Requirements for companies delisted by this Exchange seeking relisting of
this Exchange
The companies delisted by this Exchange and seeking relisting are required to make a fresh
public offer and comply with the prevailing SEBI's and BSE's guidelines regarding initial public
offerings.
[IV] Permission to use the name of the Exchange in an Issuer Company's prospectus

The Exchange follows a procedure in terms of which companies desiring to list their securities
offered through public issues are required to obtain its prior permission to use the name of the
Exchange in their prospectus or offer for sale documents before filing the same with the
concerned office of the Registrar of Companies. The Exchange has since last three years formed
a "Listing Committee" to analyse draft prospectus/offer documents of the companies in respect
of their forthcoming public issues of securities and decide upon the matter of granting them
permission to use the name of "Bombay Stock Exchange Limited" in their prospectus/offer
documents. The committee evaluates the promoters, company, project and several other factors
before taking decision in this regard.
[V] Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on the
Exchange is required to submit a Letter of Application to all the Stock Exchanges where it
proposes to have its securities listed before filing the prospectus with the Registrar of
Companies.
[VI] Allotment of Securities
As per Listing Agreement, a company is required to complete allotment of securities offered to
the public within 30 days of the date of closure of the subscription list and approach the Regional
Stock Exchange, i.e. Stock Exchange nearest to its Registered Office for approval of the basis of
allotment.
In case of Book Building issue, Allotment shall be made not later than 15 days from the closure
of the issue failing which interest at the rate of 15% shall be paid to the investors.
[VII] Trading Permission
As per Securities and Exchange Board of India Guidelines, the issuer company should complete
the formalities for trading at all the Stock Exchanges where the securities are to be listed within 7
working days of finalisation of Basis of Allotment.
A company should scrupulously adhere to the time limit for allotment of all securities and
dispatch of Allotment Letters/Share Certificates and Refund Orders and for obtaining the listing
permissions of all the Exchanges whose names are stated in its prospectus or offer documents. In
the event of listing permission to a company being denied by any Stock Exchange where it had
applied for listing of its securities, it cannot proceed with the allotment of shares. However, the
company may file an appeal before the Securities and Exchange Board of India under Section 22
of the Securities Contracts (Regulation) Act, 1956.
[VIII] Requirement of 1% Security
The companies making public/rights issues are required to deposit 1% of issue amount with the
Regional Stock Exchange before the issue opens. This amount is liable to be forfeited in the
event of the company not resolving the complaints of investors regarding delay in sending refund
orders/share certificates, non-payment of commission to underwriters, brokers, etc.
[IX] Payment of Listing Fees
All companies listed on the Exchange have to pay Annual Listing Fees by the 30th April of every
financial year to the Exchange as per the Schedule of Listing Fees prescribed from time to time.

[X] Compliance with Listing Agreement

The companies desirous of getting their securities listed are required to enter into an agreement
with the Exchange called the Listing Agreement and they are required to make certain
disclosures and perform certain acts. As such, the agreement is of great importance and is
executed under the common seal of a company. Under the Listing Agreement, a company
undertakes, amongst other things, to provide facilities for prompt transfer, registration, subdivision and consolidation of securities; to give proper notice of closure of transfer books and
record dates, to forward copies of unabridged Annual Reports and Balance Sheets to the
shareholders, to file Distribution Schedule with the Exchange annually; to furnish financial
results on a quarterly basis; intimate promptly to the Exchange the happenings which are likely
to materially affect the financial performance of the Company and its stock prices, to comply
with the conditions of Corporate Governance, etc.
The Listing Department of the Exchange monitors the compliance of the companies with the
provisions of the Listing Agreement, especially with regard to timely payment of annual listing
fees, submission of quarterly results, requirement of minimum number of shareholders, etc. and
takes penal action against the defaulting companies.
[XI] Cash Management Services (CMS) - Collection of Listing Fees
As a further step towards simplifying the system of payment of listing fees, the Exchange has
entered into an arrangement with HDFC Bank for collection of listing fees, from 141 locations,
situated all over India.Details of the HDFC Bank branches, are available on our website site
www.bseindia.com as well as on the HDFC Bank website www.hdfcbank.com The above facility
is
being
provided
free
of
cost
to
the
Companies.
Companies intending to utilise the above facility for payment of listing fee would be required to
furnish the information, (mentioned below) in the Cash Management Cash Deposit Slip. These
slips would be available at all the HDFC Bank centres.
5. Stock Exchanges and its Functions

Function and purpose

The stock market is one of the most important sources for companies to raise money.
Established for the purpose of assisting, regulating and controlling business of buying,
selling and dealing in securities
This allows businesses to be publicly traded, or raise additional capital for expansion by
selling shares of ownership of the company in a public market.
Provides a market for the trading of securities to individuals and organizations seeking to
invest their saving or excess funds through the purchase of securities

Provides a physical location for buying and selling securities that have been listed for
trading on that exchange
In fact, the stock market is often considered the primary indicator of a country's economic
strength and development.
Establishes rules for fair trading practices and regulates the trading activities of its
members according to those rules
The exchange itself does not buy or sell the securities, nor does it set prices for them

Securities and Exchange Board of India

Securities and Exchange Board of India is established to protect the interests of investors in
securities and to promote the development of and to regulate the securities market and for
matters connected therewith or incidental thereto
SEBI envisages the implementation of investor protection through just and fair
enforcement and various regulations/circulars stipulated by SEBI.
Another very important aspect in realisation of SEBIs mandate is
Empowering investors through education
6. Risk Return: Security Returns- Risk Measurements Picturing Risk and Return.
Risk
The chance that an investment's actual return will be different than expected. This
includes the possibility of losing some or all of the original investment. Usually
measured using historical returns or average returns.
Higher risk means a greater opportunity for high returns. i.e. higher the risk higher
will be the return.
Risk can be classified in to two types.
Risk is influenced by external and internal considerations.

1. Systematic risk
2. Unsystematic risk
RISK

Systematic
SystematicRisk
Risk
Market
Risk
Market Risk
Interest
InterestRate
RateRisk
Risk
Purchasing
Power
Purchasing PowerRisk
Risk

Unsystematic
UnsystematicRisk
Risk
Business
Risk
Business Risk
Financial
FinancialRisk
Risk

1. Systematic Risk
Systematic risk is Uncontrollable, Non-diversifiable, Unpredictable
happened due to external factors of an organization. It can be also called as
external risk.
Happens due to
a. Economic
b. Sociological
c. Political
i.e. risk of security market and economy.
Various external risks
i. Market Risk
Risk which comes out as the change in the returns of the securities due to the
changes in the security market.
It is the risk of loss due to adverse movements in the market rates during the
compulsory holding period having an impact on the portfolio held by the
bank. Compulsory holding period denotes the duration which instrument
cannot be sold by an organization. This is normally the time period, which is
required in taking delivery of the instrument. Any adverse movements beyond
the compulsory holding period is due to the judgmental error and therefore
should be analyzed differently. Market risk is also important in constantly
determining the true worth of a collateral security provided by the borrower.
Foreign Exchange risk is often regarded as a part of the Market Risk, but may
be bifurcated for facilitating better analysis.

ii. Interest rate Risk

It is the risk of loss of revenue or increase in cost due to adverse movements
in the market interest rates.
Risk which arises as the change in the returns of the securities due to the
fluctuations in the interest rate.
iii.

Purchasing Power Risk

It happens due to the fluctuation in inflation and affects investments. It
directly related with interest rate risk.

2. Unsystematic Risk
Unsystematic risk is unique to a particular firm. It is controllable,
diversifiable, predictable happened due to internal factors of an organization. It
can be also called as internal risk.
Happens due to
a. Labour
b. Weak Managerial Policies
c. Consumer Preferences
i. Business Risk
This refers to the risk of doing business in a particular industry or
environment and it gets transferred to the investors.
ii. Financial Risk
It arises when companies resort to financial leverage or the use of debt
financing. The more the company resorts to debt financing the greater is the
financial risk.
Measurement of risk
i.

Range
Range is the return between the highest return and the lowest return.

ii.

Variance
The Variance of an assets rate of return can be found as the sum of the squared
deviation of each possible rate of return from the expected rate of return
multiplied by the probability that the rate of return occurs.
n

VAR(k)= i=1 Pi(ki-k)2

VAR(k)= Variance of returns
Pi= probability associated with ith possible outcome.
ki= rate of return from the ith possible outcome.
K=Expected rate of return

n= Number of years
iii.

Standard deviation
It is the most popular way of measuring variability of returns. It is nothing but the
square root of the variance of the rate of returns.

= VAR(k)
iv. Beta ()
Beta is nothing but the systematic relationship between the return of a security or
the portfolio and the market.
It can be calculated as
=

Cov(ki,km)
---------------var(km)

v. Capital asset pricing model(CAPM)

CAPM establishes a linear relationship between the required rate of return of a
security and its systematic or undiversifiable risk or beta.
The CAPM is based on the following assumptions
1. Investors are risk-averse and use the expected rate of return and standard
deviation of return as appropriate measures of risk and return for their
portfolio.
2. Investors make their investment decisions based on a single-period horizon
i.e. the next immediate time period.
3. Transaction costs in financial markets are low enough to ignore and assets can
be bought and sold in any unit desired. The investor is limited only by his
wealth and price of the asset.
4. Taxes do not affect the choice of assets.
5. All individuals assume that they can buy assets at the going market price and
they all agree on the nature of the return and risk associated with each
investment.
Under CAPM the rate of return in
= Risk free rate of return + Risk Premium
= Rf + (km-rf)
Risk free rate of return
Investors can invest in the risk free instruments such as treasury bills.
Such instruments which are having less risk and less return. The returns from
such instruments are called risk free return.
These risk free rate of return designated as Rf.
Risk Premium

The investors will expect a risk premium to compensate their risk.

Risk Premium=(km-rf)

Measures of Risk
Risk
The chance that an investment's actual return will be different than expected. This
includes the possibility of losing some or all of the original investment. Usually
measured using historical returns or average returns.
Higher risk means a greater opportunity for high returns. i.e. higher the risk higher
will be the return.
Risk can be classified in to two types.
Risk is influenced by external and internal considerations.
3. Systematic risk
4. Unsystematic risk
RISK

Systematic
SystematicRisk
Risk
Market
MarketRisk
Risk
Interest
InterestRate
RateRisk
Risk
Purchasing
PurchasingPower
PowerRisk
Risk

Unsystematic
UnsystematicRisk
Risk
Business
BusinessRisk
Risk
Financial
FinancialRisk
Risk

3. Systematic Risk
Systematic risk is Uncontrollable, Non-diversifiable, Unpredictable
happened due to external factors of an organization. It can be also called as
external risk.
Happens due to
d. Economic
e. Sociological
f. Political

i.e. risk of security market and economy.

Various external risks
i. Market Risk
Risk which comes out as the change in the returns of the securities due to the
changes in the security market.
It is the risk of loss due to adverse movements in the market rates during the
compulsory holding period having an impact on the portfolio held by the
bank. Compulsory holding period denotes the duration which instrument
cannot be sold by an organization. This is normally the time period, which is
required in taking delivery of the instrument. Any adverse movements beyond
the compulsory holding period is due to the judgmental error and therefore
should be analyzed differently. Market risk is also important in constantly
determining the true worth of a collateral security provided by the borrower.
Foreign Exchange risk is often regarded as a part of the Market Risk, but may
be bifurcated for facilitating better analysis.
ii. Interest rate Risk
It is the risk of loss of revenue or increase in cost due to adverse movements
in the market interest rates.
Risk which arises as the change in the returns of the securities due to the
fluctuations in the interest rate.
iii.

Purchasing Power Risk

It happens due to the fluctuation in inflation and affects investments. It
directly related with interest rate risk.

4. Unsystematic Risk
Unsystematic risk is unique to a particular firm. It is controllable,
diversifiable, predictable happened due to internal factors of an organization. It
can be also called as internal risk.
Happens due to
d. Labour
e. Weak Managerial Policies
f. Consumer Preferences
i. Business Risk
This refers to the risk of doing business in a particular industry or
environment and it gets transferred to the investors.
ii.

Financial Risk

It arises when companies resort to financial leverage or the use of debt

financing. The more the company resorts to debt financing the greater is the
financial risk.
Measurement of risk
vi.

Range
Range is the return between the highest return and the lowest return.

vii.

Variance
The Variance of an assets rate of return can be found as the sum of the squared
deviation of each possible rate of return from the expected rate of return
multiplied by the probability that the rate of return occurs.
n

VAR(k)= i=1 Pi(ki-k)2

VAR(k)= Variance of returns
Pi= probability associated with ith possible outcome.
ki= rate of return from the ith possible outcome.
K=Expected rate of return
n= Number of years
viii.

Standard deviation
It is the most popular way of measuring variability of returns. It is nothing but the
square root of the variance of the rate of returns.

= VAR(k)
ix.

Beta ()
Beta is nothing but the systematic relationship between the return of a security or
the portfolio and the market.
It can be calculated as
=

x.

Cov(ki,km)
---------------var(km)

Capital asset pricing model(CAPM)

CAPM establishes a linear relationship between the required rate of return of a
security and its systematic or undiversifiable risk or beta.
The CAPM is based on the following assumptions
6. Investors are risk-averse and use the expected rate of return and standard
deviation of return as appropriate measures of risk and return for their
portfolio.

7. Investors make their investment decisions based on a single-period horizon

i.e. the next immediate time period.
8. Transaction costs in financial markets are low enough to ignore and assets can
be bought and sold in any unit desired. The investor is limited only by his
wealth and price of the asset.
9. Taxes do not affect the choice of assets.
10. All individuals assume that they can buy assets at the going market price and
they all agree on the nature of the return and risk associated with each
investment.
Under CAPM the rate of return in
= Risk free rate of return + Risk Premium
= Rf + (km-rf)
Risk free rate of return
Investors can invest in the risk free instruments such as treasury bills.
Such instruments which are having less risk and less return. The returns from
such instruments are called risk free return.
These risk free rate of return designated as Rf.
Risk Premium
The investors will expect a risk premium to compensate their risk.
Risk Premium=(km-rf)