A summer training project report on

A study on Capital market and guide to

Make safe investment decision
at
Odisha capital market and enterprises ltd.
(Formerly known as Bhubaneswar stock exchange)

The essential requirement of MFC 3rd semester for the partial fulfilment of award
of degree of MASTER OF FINANCE AND CONTROL.

Submitted by
Nazia Parveen
MFC (3rd. Semester)
Roll no: MF1115, Regd.no: 222/2014
Department of commerce
Berhampur University

Under the supervision of

Company guide: Faculty guide:

Name: Mr. BIPIN BIHARI DUTTA Name: Prof PRAKASH CH. MISHRA
(Assistance manager) (HEAD OF THE DEPT. OFCOMMERCE)
BhSE BERHAMPUR UNIVERSITY

1
 PREFACE

The successful completion of this project was a unique experience for us

because by visiting many place and interacting various person, I achieved a
better knowledge about this project. The experience which I gained by doing
this project was essential at this turning point of my carrier this project is
being submitted which content detailed analysis of the research under taken
by me. The research provides an opportunity to the student to devote her
skills knowledge and competencies required during the technical session.
The research is on the topic “Capital market”.

2
 Acknowledgement
With all humility I would like to express that I was very lucky to undergo
summer training at Bhubaneswar Stock Exchange. It was a golden
opportunity for gaining practical experience and self development. Further,
I am honoured to have so many wonderful people who helped me
insistently in several ways for the completion of this project report.
The completion of my project depends upon the co-operation, coordination
and combined efforts of several recourses of knowleged, inspiration and
energy”.
I am extremely thankful to Mr. Bipin Bihari Dutta who in spite of his busy
schedule of work spared his invaluable time to listen and guide all through
the project period. Without his active support and supervision it was not
possible to complete the project work.
All my friends deserve thanks for their cooperation and sharing of valuable
information that helped me in the preparation of this report.
Last but not least I owe my heartfelt gratitude to my parents for their
constant help, encouragement and emotional support during the entire
period of Summer Internship without which this report would not have
been completed.

Nazia parveen
Mfc (3rd.sem)
Roll.no: MF1115,Redg.no:222/2014

3
 Index
Sl no. particulars Page no.

1 Bhse ( Introduction) 4

2 Capital market 9

3 Debt or Bond market 10

4 Stock or equity market 14

5 Role of capital market 23

6 Role of capital market in India 24

7 Factors affecting in capital market 28

8 Indian stock market overview 31

9 Trading pattern of Indian stock market 35

10 Capital market efficiency 35

11 Mutual funds (as a part of capital market) 38

12 Investment strategies 44

13 Fundamental analysis 45

14 Technical analysis 55

15 Current stock market scenario 70

16 Investment lesson in stock market 71

17 Ten things to consider for investment 75

18 Where not to invest in dubious scheme 79

19 20 mantras for wise investment 80

20 Bibliography 81

4
 Bhubaneswar Stock Exchange
Bhubaneswar Stock Exchange Ltd. (BhSE) has been functioning as a
recognized Stock Exchange in India spreading the culture of equity in the
State of Orissa for more than 20 years. It was initially incorporated on 17th
Aprial,1989 as a public company, limited by guarantee with an objective
facilitate, assist regulate or control the business of buying, selling or dealing
in stock, shares and like securities within the meaning of securities
Contracts (Regulation) Act,1956. Ministry of Finance, Govt. of India granted
recognition to the BhSE on 5th June, 1989 under the provisions of
securities contracts (Regulation) Act, 1956 for initial period of five years.
Thereafter, the recognition of the BhSE is being renewed from time to time
by Securities and Exchange Board of India (SEBI). Subsequently,
pursuant to the amendment to the Securities Contracts (regulation) Act,
1956during the year 2004 by the Govt. of India in order to provide for
corporatisation and demutualization of the stock exchange in the country,
BhSE in compliance with the requirement of corporatisation first in order
to get itself a corporatized entity was converted from company limited by
guarantee to a company limited by share on 9th Desember,2005 by way of
fresh incorporation under the companies Act,1956.Further, during the year
2007 BhSE successfully diluted its share capital to public in compliance
with requirement of demutualization in order to ensure at least 51% of
paid up share capital are held by the persons other than the stock-broker
shareholder.

Management

The affairs of BhSE are controlled and supervised by Board of Directors

under the provision of its Memorandum and articles of Association, Rules,
Regulation and By laws of the stock exchange framed in line with
companies Act, 1956, securities contracts (Regulation) Act,1956 SEBI
Act,1992. The day to day affairs are managed by chief Executive officer of
the stock exchange. The Board of Directors of the stock Exchange
comprises of 8 Directors such as 2 (Two) Public Interest Director who are
appointed out of SEBI constituted panel, 3 (Three) Shareholder Directors
and 2 (Tow) Trading Member Directors who are appointed by the
shareholder of the BhSE and a Whole Time Chief Executive who is the ex-
officio Director of the board. The Present status of the Board of Directors of
BhSE is as under:

5
Public Interest Directors
1. Shri Vivekananda Pattanayak, IAE (Retd.)(Appointed as chairman of the
BhSE)
2. (Vacant at present)
Shareholder Director
3. Shri K.N. Ravindra, Representative of shareholder of the BhSE, National
Aluminum Company Ltd. (NALCO)
4. Shri Deelip Kumar choudhury, Shareholder of the BhSE
5. Shri Anil Kumar Patro, Shareholder of the BhSE
6. Shri Tarum Kumar Agrawalla, Shareholder of the BhSE
Trading Member Director
7. Shri Thomas Mathew, Trading Member of the BhSE
8. Shri Raj Kumar Khemka, Trading Member of the BhSE
Ex-officio Director
9. Shri Debaraj Biswal, Chief Executive officer of the BhSE The duties and
responsibilities of day to day management and affairs of the BhSE are
vested with the Chief Executive Officer (CEO) of the Exchange in terms of
provisions of its Articles of Association. Shri Debaraj Biswal, CEO is
discharging his power, duties and responsibilities of day to day
management of the BhSE under the control and supervision of the Board of
Directors. Shri Biswal is supported by 3 (Three) Managers, 4 (Four) Asst.
Managers and 4 (Four) Sr. Executives
Trading Operation
The trading and settlement operation of the BhSE was computerized since
inception. The Exchange switched over from “out-cry system” of trading to
“Screen Based Trading” with effect from 20th May, 1997. However, the
trading on the BhSE segment is dispensed with at present with the
instruction of SEBI for want of adequate market infrastructure and
regulatory mechanism.
Operational Infrastructure
Upon automation of the trading activities, Trading Hall of the Stock
Exchange has been modernized with the latest capital market
infrastructures.
Settlement System
The settlement of the Exchange is carried out on “Daily Rolling Basis” (T+2)
as per the SEBI Guidelines issued from time to time. Pay-in/pay-out, in
terms of Settlement Calendar, is affected well in time through the
centralized banking system of the Stock Exchange. Canara Bank has
established a Branch to facilitate the pay-in/pay-out operation as well as
the banking transactions of the Stock Exchange and its trading members.

6
Clearing House BhSE has its own Clearing House. The transactions
conducted by the trading members through
the Exchange are settled by delivery of securities against selling and
payment against buying through the Clearing House of the Stock Exchange
in accordance with the prescribed settlement program under a “Centralized
Delivery and Payment System”.
Depository Participant Services
BhSE is a registered Depository Participant (DP) of Central Depository
Services (India) Ltd. (CDSL) and has been providing DP services to the
investors in securities.
Inter-Connectivity
BhSE has played an instrumental role, among others, in mooting the idea of
establishing of an Inter-connected Market System (ICMS). This effort was
resulted in establishing “Inter-connected Stock Exchange of India of Ltd.
(ISE)” at Navy Mumbai. The object of establishing ISE was to provide a
nationwide equity market through the trading members of participating
Stock Exchanges. Trading operation was carried out on the ISE segment for
quite sometimes. However, in the presence of nationwide terminals
provided by National Stock Exchange (NSE) and Bombay Stock Exchange
(BSE), ISE trading activities did not go a long way in absence of liquidity in
its segment. ISE, as an alternative measure to provide active trading
segments in the securities market to the trading members of its
participating Stock Exchanges as well as its dealers, floated a wholly owned
subsidiary company, namely, ISE Securities & Services Ltd. (ISS) which in
turn obtained the trading membership of NSE and BSE. At present the
trading members of BhSE are conducting trading on NSE and BSE segments
as the registered subbrokers of ISS.
Listed Stock
Despite introduction of SEBI Delisting Guidelines, 2003, Bhubaneswar
Stock Exchange continued to have listing of securities of several companies
having aggregate paid-up capital of around Rs.2, 000 crores.
Primary Market
BhSE has been playing an active role for the growth of primary market
activities with the support of its trading members. The Stock Exchange
ensures promotional steps for participation of investing public at a large
scale in the Initial Public Offers (IPOs)/Public Issues of several companies.
Customers’ Protection Fund
Investors’ protection is the cornerstone of a vibrant market. BhSE has
established a Statutory Fund namely, “Bhubaneswar Stock Exchange
Customers’ Protection Fund” with an object to protect the customers from
the risk of defaulting trading members. As per the Rules of the said Fund,
presently a customer is entitled to be indemnified to a maximum of Rs.50,

7
000/- towards his legitimate claim against a defaulter trading member of
the Stock Exchange.
Investors’ service cell
BhSE has an “Investors’ Service Cell” which also ensures protection of the
investors. It promptly attends the complaints of various nature lodged by
the investors against companies as well as the trading members of the
Stock Exchange. It plays an important role in a friendly approach to redress
the investors’ grievances The Investors’ Service Cell undertakes due care to
build up confidence of the common investors in the securities market.
Library
Bhubaneswar Stock Exchange has a good library. It is enriched with several
books and guidelines relating to capital market. It also subscribes
Periodicals and Financial News Dailies for readers. In addition, prime
magazines for new issues, annual reports of several listed companies are
available with it. The library of the Stock Exchange is, thus playing a
promotional role for enrichment of knowledge of the staff, trading
members, investors, students and research scholars at large.
Employment
Bhubaneswar Stock Exchange has also been instrumental in generating
various nature of employment, both directly and indirectly, in the State of
Orissa. As a result, apart from direct employment for its own purpose, it
has created opportunity for generation of a number of indirect
appointments in various capacities such as sub-brokers, authorized
assistants, authorized representatives and other staff in the stock-broking
firms.
Current Activities other than trading operation
Apart from trading operation, BhSE is engaged in promotion and
development of securities market in the interest of the investing public in a
big way such as –
Investors’ Awareness Programme
BhSE is conducting investors’ awareness programmes by way of
seminars/workshop from time to time for education and awareness of
investing public in securities. The aim of the BhSE is to have at least 5-6
awareness programmes in a year at different location of the State of Orissa.
During the current financial year, BhSE has already organized three such
programmes, two in Bhubaneswar and one in Berhampur and it has
proposal to organize two more seminars one in Sambalpur and the other in
Angul by the end of this financial year.
Securities Market Training Programme
BhSE is providing a Certificate Course, namely, “Basics of Capital Market.
With the expansion of capital market which includes the reach of its
activities in the form of course contents at various B-Schools and +2

8
Commerce level schools, practical oriented education programme in
securities market activities is in increasing demand now days as it
promises youth to make career in the field of securities market. BhSE aims
at undertaking practical oriented training programmes for the students of +
Commerce and B-Schools in a big way as well as for the youths who want to
make their career in securities market. At present, BhSE is engaged in
imparting training to the students of few management institutes. During
this year, BhSE has already undertaken training programmes for the
students of Institute of Mathematics and Application, Bhubaneswar and
Inter Science Institute of Management and Technology, Bhubaneswar for a
period of 10 days each. A number of Institutes have also approached BhSE
to undertake similar training programmes for their students.
Students Assistance Programme
The students of various Institutes and B-Schools require preparing project
papers on different topics including the topics related to activities in Stock
Exchange and securities market. The students of a number of Institutes and
B-Schools visit BhSE either directly or sponsored by their Institutes every
year for assistance in preparation of their project papers. BhSE assists and
supports those students in their project work by providing necessary
guidance and securities market information.
Future Plan of Action
BhSE has worked out a number of measures to furtherance its activities in
securities market and promotional activities in spreading equity cult and
investors awareness. Such measures include -
A. To explore and participate in the SME Stock Exchange to encourage SME
entrepreneurs in the State of Orissa to raise capital under securities market
mechanism and to provide a platform of trading in SME securities.
B. To commence certificate course and diploma course in capital market.
C. To reach sub-urban areas of the State to spread the culture of equities
and awareness.
D. To upgrade the infrastructural facilities to facilitate expansion of trading
activities.

9
 CAPITAL MARKET

The capital market is the market for securities, where Companies and
governments can raise long-term funds. It is a market in which money is
lent for periods longer than a year. A nation's capital market includes such
financial institutions as banks, insurance companies, and stock exchanges
that channel long-term investment funds to commercial and industrial
borrowers. Unlike the money market, on which lending is ordinarily short
term, the capital market typically finances fixed investments like those
in buildings and machinery.

Nature and Constituents:

The capital market consists of number of individuals and institutions
(Including the government) that canalize the supply and demand for
longterm capital and claims on capital. The stock exchange, commercial
banks, co-operative banks, saving banks, development banks, insurance
companies, investment trust or companies, etc., are important constituents
of the capital markets. The capital market, like the money market, has three
important Components, namely the suppliers of loanable funds, the
borrowers and the Intermediaries who deal with the leaders on the one
hand and the Borrowers on the other. The demand for capital comes mostly
from agriculture, industry, trade The government. The predominant form
of industrial organization developed Capital Market becomes a necessary
infrastructure for fast industrialization. Capital market not concerned
solely with the issue of new claims on capital, But also with dealing in
existing claims.

10
 Debt or Bond market

The bond market (also known as the debt, credit, or fixed income market)
is a financial market where participants buy and sell debt securities,
usually in the form of bonds. As of 2009, the size of the worldwide bond
market (total debt outstanding) is an estimated $82.2 trillion [1], of which
the size of the outstanding U.S. bond market debt was $31.2 trillion
according to BIS (or alternatively $34.3 trillion according to SIFMA).
Nearly all of the $822 billion average daily trading volume in the U.S. bond
market takes place between broker-dealers and large institutions in a
decentralized, over-the-counter (OTC) market. However, a small number of
bonds, primarily corporate, are listed on exchanges. References to the
"bond market" usually refer to the government bond market, because of its
size, liquidity, lack of credit risk and, therefore, sensitivity to interest rates.
Because of the inverse relationship between bond valuation and interest
rates, the bond market is often used to indicate changes in interest rates or
the shape of the yield curve.

11
Contents

 Market structure
 Types of bond markets
 Bond market participants
 Bond market size
 Bond market volatility
 Bond market influence
 Bond investments
 Bond indices

1. Market structure

Bond markets in most countries remain decentralized and lack common

exchanges like stock, future and commodity markets. This has occurred, in
part, because no two bond issues are exactly alike, and the variety of bond
securities outstanding greatly exceeds that of stocks. However, the New
York Stock Exchange (NYSE) is the largest centralized bond market,
Representing mostly corporate bonds..

2. Types of bond markets

The Securities Industry and Financial Markets Association (SIFMA)

classifies the broader bond
Market into five specific bond markets.
 Corporate
 Government & agency
 Municipal
 Mortgage backed, asset backed, and collateralized debt obligation
 Funding

3. Bond market participants

Bond market participants are similar to participants in most financial
markets and are essentially either buyers (debt issuer) of funds or sellers
(institution) of funds or often both.
Participants include:
 Institutional investors

12
  Governments
 Traders
 Individuals

4. Bond market size

Amounts outstanding on the global bond market increased 10% in 2009 to

a record $91 trillion. Domestic bonds accounted for 70% of the total and
international bonds for the remainder. The US was the largest market with
39% of the total followed by Japan (18%). Mortgage-backed bonds
accounted for around a quarter of outstanding bonds in the US in 2009 or
some $9.2 trillion. The sub-prime portion of this market is variously
estimated at between $500bn and $1.4 trillion. Treasury bonds and
corporate bonds each accounted for a fifth of US domestic bonds. In Europe,
public sector debt is substantial in Italy (93% of GDP), Belgium (63%) and
France (63%). Concerns about the ability of some countries to continue to
finance their debt came to the forefront in late 2009. This was partly a
result of large debt taken on by some governments to reverse the economic
downturn and finance bank bailouts. The outstanding value of international
Bonds increased by 13% in 2009 to $27 trillion. The $2.3 trillion issued
during the year was down 4% on the 2008 total, with activity declining in
the second half of the year.

5. Bond market volatility

For market participants who own a bond, collect the coupon and hold it to
maturity, market volatility is irrelevant; principal and interest are received
according to a pre-determined schedule. But participants who buy and sell
bonds before maturity are exposed to many risks, most importantly
changes in interest rates. When interest rates increase, the value of existing
bonds falls, since new issues pay a higher yield. Likewise, when interest
rates decrease, the value of existing bonds rise, since new issues pay a
lower yield. This is the fundamental concept of bond market volatility:
changes in bond prices are inverse to changes in interest rates. Fluctuating
interest rates are part of a country's monetary policy and bond market
volatility is a response to expected monetary policy and economic changes.
Economists' views of economic indicators versus actual released data
contribute to market volatility. A tight consensus is generally reflected in
bond prices and there is little price movement in the market after the
release of "in-line" data. If the economic release differs from the consensus
view the market usually undergoes rapid price movement as participants

13
interpret the data. Uncertainty (as measured by a wide consensus)
generally brings more volatility before and after an economic release.
Economic releases vary in importance and impact depending on where the
economy is in the business cycle.

6. Bond market influence

Bond markets determine the price in terms of yield that a borrower must
pay in able to receive funding. In one notable instance, when President
Clinton attempted to increase the US budget deficit in the 1990s, it led to
such a sell-off (decreasing prices; increasing yields) that he was forced to
abandon the strategy and instead balance the budget

7. Bond investments

Investment companies allow individual investors the ability to participate

in the bond markets through bond funds, closed-end funds and unit-
investment trusts. In 2006 total bond fund net inflows increased 97% from
$30.8 billion in 2005 to $60.8 billion in 2006.Exchange-traded funds (ETFs)
are another alternative to trading or investing directly in a bond issue.
These securities allow individual investors the ability to overcome large
initial and incremental trading sizes.

8. Bond indices

Main article: Bond market index A number of bond indices exist for the
purposes of managing portfolios and measuring performance, similar to the
S&P 500 or Russell Indexes for stocks. The most common American
benchmarks are the Barclays Aggregate, Citigroup BIG and Merrill Lynch
Domestic Master. Most indices are parts of families of broader indices that
can be used to measure global bond portfolios, or may be further
subdivided by maturity and/or sector for managing specialized portfolios.

14
 STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions, not a physical facility or discrete entity) for the
trading of company stock and derivatives at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.
The size of the world stock market was estimated at about $36.6 trillion US
at the beginning of October 2008. The total world derivatives market has
been estimated at about $791 trillion face or nominal value, 11 times the
size of the entire world economy. The value of the derivatives market,
because it is stated in terms of notional values, cannot be directly compared
to a stock or a fixed income security, which traditionally refers to an actual
value. Moreover, the vast majority of derivatives 'cancel' each other out(i.e.,
a derivative 'bet' on an event occurring is offset by a comparable derivative
'bet' on the event not occurring). Many such relatively illiquid securities are
valued as marked to model, rather than an actual market price. The stocks
are listed and traded on stock exchanges which are entities of a corporation
or mutual organization specialized in the business of bringing buyers and
sellers of the organizations to a listing of stocks and securities together. The
largest stock market in the United States, by market cap is the New York
Stock Exchange, NYSE, while in Canada, it is the Toronto Stock Exchange.
Major European examples of stock exchanges include the London Stock
Exchange, Paris Bourse, and the Deutsche Borse. Asian examples include
the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Shanghai
Stock Exchange, and the Bombay Stock Exchange. In Latin America, there
are such exchanges as the BM&F Bovespa and the BMV.

Contents
1. Trading
2. Market participants
3. History
4. Importance of stock market
5. Function and purpose
6. Relation of the stock market to the modern financial system
7. The stock market, individual investors, and financial risk

1.Trading

15
Participants in the stock market range from small individual stock
investors to large hedge fund traders, who can be based anywhere. Their
orders usually end up with a professional at a stock exchange, who
executes the order. Some exchanges are physical locations where
transactions are carried out on a trading floor, by a method known as open
outcry. This type of auction is used in stock exchanges and
commodityexchanges where traders may enter "verbal" bids and offers
simultaneously. The other type of stock exchange is a virtual kind,
composed of a network of computers where trades are made electronically
via traders. Actual trades are based on an auction market model where a
potential buyer bids a specific price for a stock and a potential seller asks a
specific price for the stock. (Buying or selling at market means you will
accept any ask price or bid price for the stock, respectively.) When the bid
and ask prices match, a sale takes place, on a first-come-first-served basis if
there are multiple bidders or askers at a given price. The purpose of a stock
exchange is to facilitate the exchange of securities between buyers and
sellers, thus providing a marketplace (virtual or real). The exchanges
provide real-time trading information on the listed securities, facilitating
price discovery.
The New York Stock Exchange is a physical exchange, also referred to as a
listed exchange —only stocks listed with the exchange may be traded.
Orders enter by way of exchange members and flow down to a floor broker,
who goes to the floor trading post specialist for that stock to trade the
order. The specialist's job is to match buy and sell orders using open
outcry. If a spread exists, no trade immediately takes place--in this case the
specialist should use his/her own resources (money or stock) to close the
difference after his/her judged time. Once a trade has been made the
details are reported on the "tape" and sent back to the brokerage firm,
which then notifies the investor who placed the order. Although there is a
significant amount of human contact in this process, computers play an
important role, especially for so-called "program trading".

The NASDAQ is a virtual listed exchange, where all of the trading is done
over a computer network. The process is similar to the New York Stock
Exchange. However, buyers and sellers are electronically matched. One or
more NASDAQ market makers will always provide a bid and ask price at
which they will always purchase or sell 'their' stock. The Paris Bourse, now
part of Euronext, is an order-driven, electronic stock exchange. It was
automated in the late 1980s. Prior to the 1980s, it consisted of an open
outcry exchange. Stockbrokers met on the trading floor or the Palais
Brongniart. In 1986, the CATS trading system was introduced, and the
order matching process was fully automated. From time to time, active

16
trading (especially in large blocks of securities) have moved away from the
'active' exchanges. Securities firms, led by UBS AG, Goldman Sachs Group
Inc. And Credit Suisse Group, already steer 12 percent of U.S. security
trades away from the exchanges to their internal systems. That share
probably will increase to 18 percent by 2010 as more investment banks
bypass the NYSE and NASDAQ and pair buyers and sellers of securities
themselves, according to data compiled by Boston-based Aite Group LLC, a
brokerage-industry consultant. Now that computers have eliminated the
need for trading floors like the Big Board's, the balance of power in equity
markets is shifting. By bringing more orders in-house, where clients can
move big blocks of stock anonymously, brokers pay the exchanges less in
fees and capture a bigger
share of the $11 billion a year that institutional investors pay in trading
commissions as well as the surplus of the century had taken place.

2. Market participants

A few decades ago, worldwide, buyers and sellers were individual

investors, such as wealthy businessmen, with long family histories (and
emotional ties) to particular corporations. Over time, markets have become
more "institutionalized"; buyers and sellers are largely institutions (e.g.,
pension funds, insurance companies, mutual funds, index funds, exchange-
traded funds, hedge funds, investor groups, banks and various other
financial institutions). The rise of the institutional investor has brought
with it some improvements in market operations. Thus, the government
was responsible for "fixed" (and exorbitant) fees being markedly reduced
for the 'small' investor, but only after the large institutions had managed to
break the brokers' solid front on fees. (They then went to 'negotiated' fees,
but only for large institutions. However, corporate governance (at least in
the West) has been very much adversely affected by the rise of (largely
'absentee') institutional 'owners'.

3. History
Established in 1875, the Bombay Stock Exchange is Asia's first stock
exchange. In 12th century France the courratiers de change were concerned
with managing and regulating the debts of agricultural communities on
behalf of the banks. Because these men also traded with debts, they could
be called the first brokers. A common misbelief is that in late 13th century
Bruges commodity traders gathered inside the house of a man called Van
der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing

17
what had been, until then, an informal meeting, but actually, the family Van
der Beurze had a building in Antwerp where those gatherings occurred; the
Van der Beurze had Antwerp, as most of the merchants of that period, as
their primary place for trading. The idea quickly spread around Flanders
and neighboring counties and "Beurzen" soon opened in Ghent and
Amsterdam. In the middle of the 13th century, Venetian bankers began to
trade in government securities. In 1351 the Venetian government outlawed
spreading rumors intended to lower the price of government funds.
Bankers in Pisa, Verona, Genoa and Florence also began trading in
government securities during the 14th century. This was only possible
because these were independent city states not ruled by a duke but a
council of influential citizens. The Dutch later started joint stock companies,
which let shareholders invest in business ventures and get a share of their
profits - or losses. In 1602, the Dutch East India Company issued the first
share on the Amsterdam Stock Exchange. It was the first company to issue
stocks and bonds. The Amsterdam Stock Exchange (or Amsterdam Beurs)
is also said to have been the first stock exchange to introduce continuous
trade in the early 17th century. The Dutch "pioneered short selling, option
trading, debt-equity swaps, merchant banking, unit trusts and other
speculative instruments, much as we know them" There are now stock
markets in virtually every developed and most developing economies, with
the world's biggest markets being in the United States, United Kingdom,
Japan, India, China, Canada, Germany, France, South Korea and the
Netherlands.

4. IMPORTANCE OF STOCK MARKET

18
5. Function and purpose:

The main trading room of the Tokyo Stock Exchange, where trading is
currently completed through computers. The stock market is one of the
most important sources for companies to raise money. 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. The
liquidity that an exchange provides affords investors the ability to quickly
and easily sell securities. This is an attractive feature of investing in stocks,
compared to other less liquid investments such as real estate. History has
shown that the price of shares and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of
social mood. An economy where the stock market is on the rise is
considered to be an up-and-coming economy. In fact, the stock market is
often considered the primary indicator of a country's economic strength
and development. Rising share prices, for instance, tend to be associated
with increased business investment and vice versa. Share prices also affect
the wealth of households and their consumption. Therefore, central banks
tend to keep an eye on the control and behavior of the stock market and, in
general, on the smooth operation of financial system functions. Financial
stability is the raison d'etre of central banks. Exchanges also act as the
clearinghouse for each transaction, meaning that they collect and deliver
the shares, and guarantee payment to the seller of a security. This

19
eliminates the risk to an individual buyer or seller that the counterparty
could default on the transaction. The smooth functioning of all these
activities facilitates economic growth in that lower costs and enterprise
risks promote the production of goods and services as well as employment.
In this way the financial system contributes to increased prosperity. An
important aspect of modern financial markets, however, including the stock
markets, is absolute discretion. For example, American stock markets see
more unrestrained acceptance of any firm than in smaller markets. For
example, Chinese firms that possess little or no perceived value to
American society profit American bankers on Wall Street, as they reap
large commissions from the placement, as well as the Chinese company
which yields funds to invest in China. However, these companies accrue
no intrinsic value to the long-term stability of the American economy, but
rather only short-term profits to American business men and the Chinese;
although, when the foreign company has a presence in the new market, this
can benefit the market's citizens. Conversely, there are very few large
foreign corporations listed on the Toronto Stock Exchange TSX, Canada's
largest stock Exchange. This discretion has insulated Canada to some
degree to worldwide financial conditions. In order for the stock markets to
truly facilitate economic growth via lower costs and better employment,
great attention must be given to the foreign participants being allowed in.

6. Relation of the stock market to the modern financial

system

The financial systems in most western countries have undergone a

remarkable transformation. One feature of this development is
disintermediation. A portion of the funds involved in saving and financing,
flows directly to the financial markets instead of being routed via the
traditional bank lending and deposit operations. The general public's
heightened interest in investing in the stock market, either directly or
through mutual funds, has been an important component of this process.
Statistics show that in recent decades shares have made up an increasingly
large proportion of households' financial assets in many countries. In the
1970s, in Sweden, deposit accounts and other very liquid assets with little
risk made up almost 60 percent of households' financial wealth, compared
to less than 20 percent in the 2000s. The major part of this adjustment in
financial portfolios has gone directly to shares but a good deal now takes
the form of various kinds of institutional investment for groups of
individuals, e.g., pension funds, mutual funds, hedge funds, insurance
investment of premiums, etc. The trend towards forms of saving with a
higher risk has been accentuated by new rules for most funds and

20
insurance, permitting a higher proportion of shares to bonds. Similar
tendencies are to be found in other industrialized countries. In all
developed economic systems, such as the European Union, the United
States, Japan and other developed nations, the trend has been the same:
saving has moved away from traditional (government insured) bank
deposits to more risky securities of one sort or another.

7.The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to

manage the associated increased risks. Stock prices fluctuate widely, in
marked contrast to the stability of (government insured) bank deposits or
bonds. This is something that could affect not only the individual investor
or household, but also the economy on a large scale. The following deals
with some of the risks of the financial sector in general and the stock
market in particular. This is certainly more important now that so many
newcomers have entered the stock market, or have acquired other 'risky'
investments (such as 'investment' property, i.e., real estate and
collectables). With each passing year, the noise level in the stock market
rises. Television commentators, financial writers, analysts, and market
strategists are all overtaking each other to get investors' attention. At the
same time, individual investors, immersed in chat rooms and message
boards, are exchanging questionable and often misleading tips. Yet, despite
all this available information, investors find it increasingly difficult to
profit. Stock prices skyrocket with little reason, then plummet just as
quickly, and people who have turned to investing for their children's
education and their own retirement become frightened. Sometimes there
appears to be no rhyme or reason to the market, only folly. This is a quote
from the preface to a published biography about the long-term value-
oriented stock investor Warren Buffett.[9] Buffett began his career with
$100, and $100,000 from seven limited partners consisting of Buffett's
family and friends. Over the years he has built himself a multi-billion-dollar
fortune. The quote illustrates some of what has been happening in the
stock market during the end of the 20th century and the beginning of the
21st century.

A.Primary Market, also called the new issue market, is the market for
issuing new securities. Many companies, especially small and medium
scale, enter the primary market to raise money from the public to expand
their businesses. They sell their securities to the public through an initial
public offering. The securities can be directly bought from the

21
shareholders, which is not the case for the secondary market. The primary
market is a market for new capitals that will be traded over a longer period.
In the primary market, securities are issued on an exchange basis. The
underwriters, that is, the investment banks, play an important role in this
market: they set the initial price range for a particular share and then
supervise the selling of that share. Investors can obtain news of upcoming
shares only on the primary market. The issuing firm collects money, which
is then used to finance its operations or expand business, by selling its
Shares. Before selling a security on the primary market, the firm must fulfill
all the requirements regarding the exchange. After trading in the primary
market the security will then enter the secondary market, where numerous
trades happen every day. The primary market accelerates the process of
capital formation in a country's economy. The primary market categorically
excludes several other new long-term finance sources, such as loans from
financial institutions. Many companies have entered the primary market to
earn profit by converting its capital, which is basically a private capital, into
a public one, releasing securities to the public. This phenomena is known as
"public issue" or "going public." There are three methods though which
securities can be issued on the primary market: rights issue, Initial Public
Offer (IPO), and preferential issue. A company's new offering is placed on
the primary market through an initial public offer.
*Functioning of Primary Market

The main function of primary market is to facilitate transfer of recourses

from the savers to the users. The saver is individuals, commercial banks
and insurance companies etc. The users are public limited companies and
government. It plays important role in mobilising the funds from savers
and transferring them to borrowers for productive purposes. It’s not only a

22
platform for raising finance to establish new enterprise but also for
expansion /diversification/modernisation of existing units.
Classification of issue of share :

B.Secondary Market is the market where, unlike the primary market, an

investor can buy a security directly from another investor in lieu of the
issuer. It is also referred as "after market". The securities initially are
issued in the primary market, and then they enter into the secondary
market. All the securities are first created in the primary market and then,
they enter into the secondary market. In the New York Stock Exchange, all
the stocks belong to the secondary market. In other words, secondary
market is a place where any type of used goods is available. In the
secondary market shares are manoeuvred from one investor to other, that
is, one investor buys an asset from another investor instead of an issuing
corporation. So, the secondary market should be liquid.
Example of Secondary market:
In the New York Stock Exchange, in the United States of America, all the
securities belong to the secondary market.

*Importance of Secondary Market:

Secondary Market has an important role to play behind the developments

of an efficient capital market. Secondary market connects investors'
favouritism for liquidity with the capital users' wish of using their capital
for a longer period. For example, in a traditional partnership, a partner

23
cannot access the other partner's investment but only his or her
investment in that partnership, even on an emergency basis. Then if he or
she may breaks the ownership of equity into parts and sell his or her
respective proportion to another investor. This kind of trading is facilitated
only by the secondary market

ROLE OF CAPITAL MARKET

The primary role of the capital market is to raise long-term funds for
governments, banks, and corporations while providing a platform for the
trading of securities. This fundraising is regulated by the performance of
the stock and bond markets within the capital market. The member
organizations of the capital market may issue stocks and bonds in order to
raise funds. Investors can then invest in the capital market by purchasing
those stocks and bonds. The capital market, however, is not without risk. It
is important for investors to understand market trends before fully
investing in the capital market. To that end, there are various market
indices available to investors that reflect the present performance of the
market.

Regulation of the Capital Market

Every capital market in the world is monitored by financial regulators and

their respective governance organization. The purpose of such regulation is
to protect investors from fraud and deception. Financial regulatory bodies
are also charged with minimizing financial losses, issuing licenses to
financial service providers, and enforcing applicable laws.

The Capital Market’s Influence on International Trade

Capital market investment is no longer confined to the boundaries of a

single nation. Today’s corporations and individuals are able, under some
regulation, to invest in the capital market of any country in the world.
Investment in foreign capital markets has caused substantial enhancement
to the business of international trade.

The Primary and Secondary Markets

The capital market is also dependent on two sub-markets – the primary

market and the secondary market. The primary market deals with newly

24
issued securities and is responsible for generating new long-term capital.
The secondary market handles the trading of previously-issued securities,
and must remain highly liquid in nature because most of the securities are
sold by investors. A capital market with high liquidity and high
transparency is predicated upon a secondary market with the same
qualities.

ROLE OF CAPITAL MARKET IN INDIA:

India’s growth story has important implications for the capital market,
which has grown sharply with respect to several parameters — amounts
raised number of stock exchanges and other intermediaries, listed stocks,
market capitalization, trading volumes and turnover, market instruments,
investor population, issuer and intermediary profiles. The capital market
consists primarily of the debt and equity markets. Historically, it
contributed significantly to mobilizing funds to meet public and private
companies’ financing requirements. The introduction of exchange-traded
derivative instruments such as options and futures has enabled investors
to better hedge their positions and reduce risks. India’s debt and equity
markets rose from 75 per cent in 1995 to 130 per cent of GDP in 2005.

25
But the growth relative to the US, Malaysia and South Korea remains low
and largely skewed, indicating immense latent potential. India’s debt
markets comprise government bonds and the corporate bond market
(comprising PSUs, corporate, financial institutions and banks). India
compares well with other emerging economies in terms of sophisticated
market design of equity spot and derivatives market, widespread retail
participation and resilient liquidity. SEBI’s measures such as submission of
quarterly compliance reports and company valuation on the lines of the
Sarbanes-Oxley Act have enhanced corporate governance. But enforcement
continues to be a problem because of limited trained staff and companies
not being subjected to substantial fines or legal sanctions. Given the
booming economy, large skilled labour force, reliable business community,
continued reforms and greater global integration vindicated by the
investment-grade ratings of Moody’s and Fitch, the net cumulative portfolio
flows from 2003-06 (bonds and equities) amounted to $35 billion. The
number of foreign institutional investors registered with SEBI rose from
none in 1992-93 to 528 in 2000-01, to about 1,000 in 2006-07. India’s
stock market rose five-fold since mid-2003 and outperformed world
indices with returns far outstripping other emerging markets, such as
Mexico (52 per cent), Brazil (43 per cent) or GCC economies such as Kuwait
(26 per cent) in FY-06. In 2006, Indian companies raised more than $6
billion on the BSE, NSE and other regional stock exchanges. Buoyed by
internal economic factors and foreign capital flows, Indian markets are
Globally competitive, even in terms of pricing, efficiency and liquidity.

US subprime crisis:
The financial crisis facing the Wall Street is the worst since the Great
Depression and will have a major impact on the US and global economy.
The ongoing global financial crisis will have a ‘domino’ effect and spill over
all aspects of the economy. Due to the Western world’s messianic faith in
the market forces and deregulation, the market friendly governments have
no choice but to step in. The top five investment banks in the US have
ceased to exist in their previous forms. Bears Stearns was taken over some
time ago. Fannie Mae and Freddie Mac are nationalised to prevent their
collapse. Fannie and Freddie together underwrite half of the home loans in
the United States, and the sum involved is of $ 3 trillion—about double the
entire annual output of the British economy. This is the biggest rescue
operation since the credit crunch began. Lehman Brothers, an investment
bank with a 158 year-old history, was declared bankrupt; Merrill Lynch,
another Wall Street icon, chose to pre-empt a similar fate by deciding to sell
to the Bank of America; and Goldman Sachs and Morgan Stanley have
decided to transform themselves into ordinary deposit banks. AIG, the

26
world’s largest insurance company, has survived through the Injection of
funds worth $ 85 billion from the US Government.

The question arises: why has this happened?

Besides the cyclical crisis of capitalism, there are some recent factors which
have contributed towards this crisis. Under the so-called “innovative”
approach, financial institutions systematically underestimated risks during
the boom in property prices, which makes such boom more prolonged. This
relates to the short sightedness of speculators and their unrestrained
greed, And they, during the asset price boom, believed that it would stay
forever. This resulted in keeping the risk aspects at a minimum and thus
resorting to more and more risk taking financial activities. Loans were
made on the basis of collateral whose value was inflated by a bubble. And
the collateral is now worth less than the loan. Credit was available up to full
value of the property which was assessed at inflated market prices. Credits
were given in anticipation that rising property prices will continue. Under
looming recession and uncertainty, to pay back their mortgage many of
those who engaged in such an exercise are forced to sell their houses, at a
time when the banks are reluctant to lend and buyers would like to wait in
the hope that property prices will further come down. All these factors
would lead to a further decline in property prices.

Effect of the subprime crisis on India:

Globalization has ensured that the Indian economy and financial markets
cannot stay insulated from the present financial crisis in the developed
economies. In the light of the fact that the Indian economy is linked to
global markets through a full float in current account (trade and services)
and partial float in capital account (debt and equity), we need to analyze
the impact based on three critical factors: Availability of global liquidity;
demand for India investment and cost thereof and decreased consumer
demand affecting Indian exports. The concerted intervention by central
banks of developed countries in injecting liquidity is expected to reduce the
unwinding of India investments held by foreign entities, but fresh
investment flows into India are in doubt. The impact of this will be three-
fold: The element of GDP growth driven by off-shore flows (along with
skills and technology) will be diluted; correction in the asset prices which
were hitherto pushed by foreign investors and demand for domestic
liquidity putting pressure on interest rates. While the global financial
system takes time to “nurse its wounds” leading to low demand for
investments in emerging markets, the impact will be on the cost and
related risk premium. The impact will be felt both in the trade and capital
account. Indian companies which had access to cheap foreign currency

27
funds for financing their import and export will be the worst hit. Also,
foreign funds (through debt and equity) will be available at huge premium
and would be limited to blue-chip companies. The impact of which, again,
will be three-fold: Reduced capacity expansion leading to supply side
pressure; increased interest expenses to affect corporate profitability and
increased demand for domestic liquidity putting pressure on the interest
rates. Consumer demand in developed economies is certain to be hurt by
the present crisis, leading to lower demand for Indian goods and services,
thus affecting the Indian exports. The impact of which, once again, will be
three-fold: Export-oriented units will be the worst hit impacting
employment; reduced exports will further widen the trade gap to put
pressure on rupee exchange rate and intervention leading to sucking out
liquidity and pressure on interest rates.

The impact on the financial markets will be the following:

Equity market will continue to remain in bearish mood with reduced off-
shore flows, limited domestic appetite due to liquidity pressure and
pressure on corporate earnings; while the inflation would stay under
control, increased demand for domestic liquidity will push interest rates
higher and we are likely to witness gradual rupee depreciation and
depleted currency reserves. Overall, while RBI would inject liquidity
through CRR/SLR cuts, maintaining growth beyond 7% will be a struggle.
The banking sector will have the least impact as high interest rates,
increased demand for rupee
Loans and reduced statutory reserves will lead to improved NIM while, on
the other hand, other income from cross-border business flows and
distribution of investment products will take a hit. Banks with capabilities
to generate low cost CASA and zero cost float funds will gain the most as
revenues from financial intermediation will drive the banks ‘profitability.
Given the dependence on foreign funds and off-shore consumer demand for
the India growth story, India cannot wish away from the negative impact of
the present global financial crisis but should quickly focus on alternative
remedial measures to limit damage and look in-wards to sustain growth!

Role of capital market during the present crisis:

In addition to resource allocation, capital markets also provided a medium

for risk management by allowing the diversification of risk in the economy.
The well-functioning capital market improved information quality as it

28
played a major role in encouraging the adoption of stronger corporate
governance principles, thus supporting a trading environment, which is
founded on integrity. liquid markets make it possible to obtain financing for
capital-intensive projects with long gestation periods.. For a long time, the
Indian market was considered too small to warrant much attention.
However, this view has changed rapidly as vast amounts of international
investment have poured into our markets over the last decade. The Indian
market is no longer viewed as a static universe but as a constantly evolving
market providing attractive opportunities to the global investing
community. Now during the present financial crisis, we saw how capital
market stood still as the symbol of better risk management practices
adopted by the Indians. Though we observed a huge fall in the sensex and
other stock market indicators but that was all due to low confidence among
the investors. Because balance sheet of most of the Indian companies listed
in the sensex were reflecting profit even then people kept on withdrawing
money. While there was a panic in the capital market due to withdrawal by
the FIIs, we saw Indian institutional investors like insurance and mutual
funds coming for the rescue under SEBI guidelines so that the confidence of
the investors doesn’t go low. SEBI also came up with various norms
including more liberal policies regarding participatory notes, restricting
the exit from close ended mutual funds etc. to boost the investment. While
talking about currency crisis, the rupee kept on depreciating against the
dollar mainly due to the withdrawals by FIIs. So , the capital market tried to
attract FIIs once again. SEBI came up with many revolutionary reforms to
attract the foreign investors so that the depreciation of rupee could be put
to halt.

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors. Some of the factors

which influence capital
Market is as follows:-

A) Performance of domestic companies:-

The performance of the companies or rather corporate earnings is one of

the factors which has direct impact or effect on capital market in a country.
Weak corporate earnings indicate that the demand for goods and services
in the economy is less due to slow growth in per capita income of people .
Because of slow growth in demand there is slow growth in employment
which means slow growth in demand in the near future. Thus weak
corporate earnings indicate average or not so good prospects for the

29
economy as a whole in the near term. In such a scenario the investors (both
domestic as well as foreign) would be wary to invest in the capital market
and thus there is bear market like situation. The opposite case of it would
be robust corporate earnings and it’s positive impact on the capital market.
The corporate earnings for the April – June quarter for the current fiscal
has been good. The companies like TCS, Infosys,Maruti Suzuki, Bharti
Airtel, ACC, ITC, Wipro,HDFC,Binani cement, IDEA, Marico Canara Bank,
Piramal Health, India cements , Ultra Tech, L&T, Coca- Cola, Yes Bank, Dr.
Reddy’s Laboratories, Oriental Bank of Commerce, Ranbaxy, Fortis, Shree
Cement, etc have registered growth in net profit compared to the
corresponding quarter a year ago. Thus we see companies from
Infrastructure sector, Financial Services, Pharmaceutical sector, IT Sector,
Automobile sector, etc. doing well . This across the sector growth indicates
that the Indian economy is on the path of recovery which has been
positively reflected in the stock market (rise in sensex & nifty) in the last
two weeks. (July 13-July 24).

B) Environmental Factors :-

Environmental Factor in India’s context primarily means- Monsoon . In

India around 60 % of agricultural production is dependent on monsoon.
Thus there is heavy dependence on monsoon. The major chunk of
agricultural production comes from the states of Punjab, Haryana & Uttar
Pradesh. Thus deficient or delayed monsoon in this part of the country
would directly affect the agricultural output in the country. Apart from
monsoon other natural calamities like Floods, tsunami, drought,
earthquake, etc. also have an impact on the capital market of a country.
The Indian Met Department (IMD) on 24th June stated that India would
receive only 93 % rainfall of Long Period Average (LPA). This piece of news
directly had an impact on Indian capital market with BSE Sensex falling by
0.5 % on the 25th June . The major losers were automakers and consumer
goods firms since the below normal monsoon forecast triggered
concerns that demand in the crucial rural heartland would take a hit. This
is because a deficient monsoon could seriously squeeze rural incomes,
reduce the demand for everything from motorbikes to soaps and worsen a
slowing economy.

C) Macro Economic Numbers:-

The macroeconomic numbers also influence the capital market. It includes

Index of Industrial Production (IIP) which is released every month, annual
Inflation number indicated by Wholesale Price Index (WPI) which is

30
released every week, Export – Import numbers which are declared every
month, Core Industries growth rate ( It includes Six Core infrastructure
industries – Coal, Crude oil, refining, power, cement and finished steel)
which comes out every month, etc. This macro –economic indicators
indicate the state of the economy and the direction in which the economy is
headed and therefore impacts the capital market in India. A case in the
point was declaration of core industries growth figure. The six Core
Infrastructure Industries – Coal, Crude oil, refining, finished steel, power &
cement –grew 6.5% in June , the figure came on the 23 rd of July and had a
positive impact on the capital market with the Sensex and nifty rising by
388 points & 125 points respectively.

D) Global Cues:-

In this world of globalization various economies are interdependent and

interconnected. An event in one part of the world is bound to affect other
parts of the world; however the magnitude and intensity of impact would
vary. Thus capital market in India is also affected by developments in other
parts of the world i.e. U.S. , Europe, Japan , etc. Global cues includes
corporate earnings of MNC’s, consumer confidence index in developed
countries, jobless claims in developed countries, global growth outlook
given by various agencies like IMF, economic growth of major economies,
price of crude –oil, credit rating of various economies given by Moody’s, S &
P, etc. An obvious example at this point in time would be that of subprime
crisis & recession. Recession started in U.S. and some parts of the Europe in
early 2008 .Since then it has impacted all the countries of the world-
developed, developing, less- developed and even emerging economies.

E) Political stability and government policies:-

For any economy to achieve and sustain growth it has to have political
stability and pro- growth government policies. This is because when there
is political stability there is stability and consistency in government’s
attitude which is communicated through various government policies. The
vice- versa is the case when there is no political stability .So capital market
also reacts to the nature of government, attitude of government, and
various policies of the government. The above statement can be
substantiated by the fact the when the mandate came in UPA government’s
favour ( Without the baggage of left party) on May 16 2009, the stock
markets on Monday , 18th May had a bullish rally with Sensex closing 800
point higher over the previous day’s close. The reason was political

31
stability. Also without the baggage of left party government can go ahead
with reforms.

F) Growth prospectus of an economy:-

When the national income of the country increases and per capita income
of people increases it is said that the economy is growing. Higher income
also means higher expenditure and higher savings. This augurs well for the
economy as higher expenditure means higher demand and higher savings
means higher investment. Thus when an economy is growing at a good
pace capital market of the country attracts more money from investors,
both from within and outside the country and vice -versa. So we can say
that growth prospects of an economy do have an impact on capital markets.

G) Investor Sentiment and risk appetite:-

Another factor which influences capital market is investor sentiment and

their risk appetite .Even if the investors have the money to invest but if
they are not confident about the returns from their investment , they may
stay away from investment for some time.At the same time if the investors
have low risk appetite , which they were having in global and Indian capital
market some four to five months back due to global financial meltdown and
recessionary situation in U.S. & some parts of Europe , they may stay away
from investment and wait for the right time to come.

INDIAN STOCK MARKET AN OVERVIEW:

Evolution
Indian Stock Markets are one of the oldest in Asia. Its history dates back to
nearly 200 years ago. The earliest records of security dealings in India are
meagre and obscure. The East India Company was the dominant institution
in those days and business in its loan securities used to be transacted
towards the close of the eighteenth century. By 1830's business on
corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half
a dozen brokers recognized by banks and merchants during 1840 and
1850. The 1850's witnessed a rapid development of commercial enterprise
and brokerage business attracted many men into the field and by 1860 the
number of brokers increased into 60. In 1860-61 the American Civil War
broke out and cotton supply from United States of Europe was stopped;
thus, the 'Share Mania' in India begun. The number of brokers increased to
about 200 to 250. However, at the end of the American Civil War, in 1865, a

32
disastrous slump began (for example, Bank of Bombay Share which had
touched Rs 2850 could only be sold at Rs. 87). At the end of the American
Civil War, the brokers who thrived out of Civil War in 1874, found a place in
a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they formally
established in Bombay, the "Native Share and Stock Brokers' Association"
(which is alternatively known as " The Stock Exchange "). In 1895, the
Stock Exchange acquired a premise in the same street and it was
inaugurated in 1899. Thus, the Stock Exchange at Bombay was
consolidated.

Other leading cities in stock market operations:

Ahmedabad gained importance next to Bombay with respect to cotton

textile industry. After 1880, many mills originated from Ahmedabad and
rapidly forged ahead. As new mills were floated, the need for a Stock
Exchange at Ahmedabad was realized and in 1894 the brokers formed "The
Ahmedabad Share and Stock Brokers' Association". What the cotton textile
industry was to Bombay and Ahmedabad, the jute industry was to Calcutta.
Also tea and coal industries were the other major industrial groups in
Calcutta. After the Share Mania in 1861-65, in the 1870's there was a sharp
boom in jute shares, which was followed by a boom in tea shares in the
1880's and 1890's; and a coal boom between 1904 and 1908. On June 1908,
some leading brokers formed "The Calcutta Stock Exchange Association".
In the beginning of the twentieth century, the industrial revolution was on
the way in India with the Swadeshi Movement; and with the inauguration
of the Tata Iron and Steel Company Limited in 1907, an important stage in
industrial advancement under Indian enterprise was reached. Indian
cotton and jute textiles, steel, sugar, paper and flour mills and all
companies generally enjoyed phenomenal prosperity, due to the First
World War. In 1920, the then demure city of Madras had the maiden thrill
of a stock exchange functioning in its midst, under the name and style of
"The Madras Stock Exchange" with 100 members. However, when boom
faded, the number of members stood reduced from 100 to 3, by 1923, and
so it went out of existence. In 1935, the stock market activity improved,
especially in South India where there was a rapid increase in the number of
textile mills and many plantation companies were floated. In 1937, a
stock exchange was once again organized in Madras - Madras Stock
Exchange Association (Pvt) Limited. (In 1957 the name was changed to
Madras Stock Exchange Limited). Lahore Stock Exchange was formed in
1934 and it had a brief life. It was merged with the Punjab Stock Exchange
Limited, which was incorporated in 1936.

33
Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was
followed by a slump. But, in 1943, the situation changed radically, when
India was fully mobilized as a supply base. On account of the restrictive
controls on cotton, bullion, seeds and other commodities, those
dealing in them found in the stock market as the only outlet for their
activities. They were anxious to join the trade and their number was
swelled by numerous others. Many new associations were constituted for
the purpose and Stock Exchanges in all parts of the country were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange
Limited (1940) and Hyderabad Stock Exchange Limited (1944) were
incorporated. In Delhi two stock exchanges - Delhi Stock and Share
Brokers' Association Limited and the Delhi Stocks and Shares Exchange
Limited - were floated and later in June 1947, amalgamated into the Delhi
Stock Exchange Association Limited.

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression.

Lahore Exchange was closed during partition of the country and later
migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock
Exchange Limited was registered in 1957 and recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the
Central Government for recognition under the Securities Contracts
(Regulation) Act, 1956. Only Bombay, Calcutta, Madras, Ahmedabad, Delhi,
Hyderabad and Indore, the well-established exchanges, were recognized
under the Act. Some of the members of the other Associations were
required to be admitted by the recognized stock exchanges on a
concessional basis, but acting on the principle of unitary control, all these
pseudo stock exchanges were refused recognition by the Government
of India and they thereupon ceased to function. Thus, during early sixties
there were eight recognized stock exchanges in India (mentioned
above). The number virtually remained unchanged, for nearly two decades.
During eighties, however, many stock exchanges were established: Cochin
Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited
(at Kanpur, 1982), and Pune Stock Exchange Limited (1982), Ludhiana
Stock Exchange Association Limited (1983), Gauhati Stock Exchange
Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985),
Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock
Exchange Limited (1989), Bhubaneswar Stock Exchange Association

34
Limited (1989), Saurashtra Kutch Stock Exchange Limited (at Rajkot,1989),
Vadodara Stock Exchange Limited (at Baroda, 1990) and recently
established exchanges - Coimbatore and Meerut. Thus, at present, there are
totally twenty one recognized stock exchanges in India excluding the Over
The Counter Exchange of India Limited (OTCEI) and the National Stock
Exchange of India Limited (NSEIL). The Table given below portrays the
overall growth pattern of Indian stock markets since independence. It is
quite evident from the Table that Indian stock markets have not only
grown just in number of exchanges, but also in number of listed companies
and in capital of listed companies. The remarkable growth after 1985 can
be clearly seen from the Table, and this was due to the favoring
government policies towards security market industry.
Growth Pattern of the Indian Stock Market

Sl.no As on 31st 1946 1961 1971 1975 1980 1985 1991 1995
December

1 No of stock 7 7 8 8 9 14 20 22
exchange
2 No of listed co. 1125 1203 1599 1552 2265 4344 6229 8593

3 No of stock 1506 2111 2838 3230 3697 6174 8967 11784

issued of listed
cos.
4 Capital of 270 753 1812 2614 3973 9723 32041 59583
listed co.(in
cr.rs.)
5 Market value 971 1292 2675 3273 6750 25302 110279 478121
of capital of
listed cos.(in
cr.rs)
6 Capital per 24 63 113 168 175 224 514 693
listed
cos.(lakh. Rs)
4/2
7 Market Value 86 107 167 211 298 582 1770 5564
of
Capital per
Listed
Cos. (Lakh Rs.)
(5/2)

35
8 Appreciated 358 170 148 126 170 260 344 803
value
of Capital per
Listed Cos.
(Lakh Rs.)

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed securities of public

limited companies. They are broadly divided into two categories, namely,
specified securities (forward list) and nonspecified securities (cash list).
Equity shares of dividend paying, growth-oriented companies with a paid-
up capital of at least Rs.50 million and a market capitalization of at least
Rs.100 million and having more than 20,000 shareholders are, normally,
put in the specified group and the balance in non-specified group.
Two types of transactions can be carried out on the Indian stock exchanges:
(a) spot delivery transactions "for delivery and payment within the time
or on the date stipulated when entering into the contract which shall not be
more than 14 days following the date of the contract" : and
(b) Forward transactions "delivery and payment can be extended by
further period of 14 days each so that the overall period does not exceed 90
days from the date of the contract". The latter is permitted only in the case
of specified shares. The brokers who carry over the outstanding pay carry
over charges (cantango or backwardation) which are usually determined
by the rates of interest prevailing. A member broker in an Indian stock
exchange can act as an agent, buy and sell securities for his clients on a
commission basis and also can act as a trader or dealer as a principal, buy
and sell securities on his own account and risk, in contrast with the practice
prevailing on New York and London Stock Exchanges, where a member can
act as a jobber or a broker only. The nature of trading on Indian Stock
Exchanges are that of age old conventional style of faceto- face trading with
bids and offers being made by open outcry. However, there is a great
amount of effort to modernize the Indian stock exchanges in the very
recent times.

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new
information accurately and in real time. Capital market efficiency is judged
by its success in incorporating and inducting information, generally about
the basic value of securities, into the price of securities. This basic or

36
fundamental value of securities is the present value of the cash flows
expected in the future by the person owning the securities. The fluctuation
in the value of stocks encourage traders to trade in a competitive manner
with the objective of maximum profit. This results in price movements
towards the current value of the cash flows in the future. The information is
very easily available at cheap rates because of the presence of organized
markets and various technological innovations. An efficient capital market
incorporates information quickly and accurately into the prices of
securities. In the weak-form efficient capital market, information about the
history of previous returns and prices are reflected fully in the security
prices; the returns from stocks in this type of market are unpredictable. In
the semi strong-form efficient market, the public information is completely
reflected in security prices; in this market, those traders who have non-
public information access can earn excess profits. In the strong-form
efficient market, under no circumstances can investors earn excess profits
because all of the information is incorporated into the security prices. The
funds that are flowing in capital markets, from savers to the firms with the
aim of financing projects, must flow into the best and top valued projects
and, therefore, informational efficiency is of supreme importance. Stocks
must be efficiently priced, because if the securities are priced accurately,
then those investors who do not have time for market analysis would feel
confident about making investments in the capital market. Eugene Fama
was one of the earliest to theorize capital market efficiency, but empirical
tests of capital market efficiency had begun even before that.

Efficient-market hypothesis

In finance, the efficient-market hypothesis (EMH) asserts that financial

markets are "informationally efficient". That is, one cannot consistently
achieve returns in excess of average market returns on a risk-adjusted
basis, given the information publicly available at the time the investment is
made. There are three major versions of the hypothesis: "weak", "semi-
strong", and "strong". Weak EMH claims that prices on traded assets (e.g.,
stocks, bonds, or property) already reflect all past publicly available
information. Semi-strong EMH claims both that prices reflect all publicly
available information and that prices instantly change to reflect new public
information. Strong EMH additionally claims that prices instantly reflect
even hidden or "insider" information. There is evidence for and against the
weak and semi-strong EMHs, while there is powerful evidence against
strong EMH. The validity of the hypothesis has been questioned by critics
who blame the belief in rational markets for much of the financial crisis of
2007–2010. Defenders of the EMH caution that conflating market stability

37
with the EMH is unwarranted; when publicly available information is
unstable, the market can be just as unstable.
Theoretical background

Beyond the normal utility maximizing agents, the efficient-market

hypothesis requires that agents have rational expectations; that on average
the population are correct (even if no one person is) and whenever new
relevant information appears, the agents update their expectations
appropriately. Note that it is not required that the agents be rational. EMH
allows that when faced with new information, some investors may
overreact and some may under react. All that is required by the EMH is that
investors' reactions be random and follow a normal distribution pattern so
that the net effect on market prices cannot be reliably exploited to make an
abnormal profit, especially when considering transaction costs (including
commissions and spreads). Thus, any one person can be wrong about the
market—indeed, everyone can be—but the market as a whole is always
right. There are three common forms in which the efficient-market
hypothesis is commonly stated—weak-form efficiency, semi-strong-
form efficiency and strong-form efficiency, each of which has different
implications for how markets work.
In weak-form efficiency, future prices cannot be predicted by analyzing
price from the past. Excess returns cannot be earned in the long run by
using investment strategies based on historical share prices or other
historical data. Technical analysis techniques will not be able to
consistently produce excess returns, though some forms of fundamental
analysis may still provide excess returns. Share prices exhibit no serial
dependencies, meaning that there are no "patterns" to asset prices. This
implies that future price movements are determined entirely by
information not contained in the price series. Hence, prices must follow a
random walk. This 'soft' EMH does not require that prices remain at or near
equilibrium, but only that market participants not be able to systematically
profit from market 'inefficiencies'. However, while EMH predicts that all
price movement (in the absence of change in fundamental information) is
random (i.e., non-trending), many studies have shown a marked tendency
for the stock markets to trend over time periods of weeks or longer and
that, moreover, there is a positive correlation between degree of trending
and length of time period studied (but note that over long time periods, the
trending is sinusoidal in appearance). Various explanations for such large
and apparently non-random price movements have been promulgated. But
the best explanation seems to be that the distribution of stock market
prices is non-Gaussian (in which case EMH, in any of its current forms,
would not be strictly applicable). The problem of algorithmically

38
constructing prices which reflect all available information has been studied
extensively in the field of computer science. For example, the complexity of
finding the arbitrage opportunities in pair betting markets has been shown
to be NP-hard.
In semi-strong-form efficiency, it is implied that share prices adjust to
publicly available new information very rapidly and in an unbiased fashion,
such that no excess returns can be earned by trading on that information.
Semi-strong-form efficiency implies that neither fundamental analysis nor
technical analysis techniques will be able to reliably produce excess
returns. To test for semi-strong-form efficiency, the adjustments to
previously unknown news must be of a reasonable size and must be
instantaneous. To test for this, consistent upward or downward
adjustments after the initial change must be looked for. If there are any
such adjustments it would suggest that investors had interpreted the
information in a biased fashion and hence in an inefficient manner. In
strong-form efficiency, share prices reflect all information, public and
private, and no one can earn excess returns. If there are legal barriers to
private information becoming public, as with insider trading laws, strong-
form efficiency is impossible, except in the case where the laws are
universally ignored. To test for strong-form efficiency, a market needs to
exist where investors cannot consistently earn excess returns over a long
period of time. Even if some money managers are consistently observed to
beat the market, no refutation even of strong-form efficiency follows: with
hundreds of thousands of fund managers worldwide, even a normal
distribution of returns (as efficiency predicts) should be expected to
produce a few dozen "star" performers.

MUTUAL FUNDS AS A PART OF CAPITAL MARKET

INTRODUCTION TO MUTUAL FUND AND ITS VARIOUS ASPECTS

Mutual fund is a trust that pools the savings of a number of investors who
share a common financial goal. This pool of money is invested in
accordance with a stated objective. The joint ownership of the fund is thus
“Mutual”, i.e. the fund belongs to all investors. 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 appreciations realized are shared by its unit holders in proportion

39
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. A Mutual Fund is an investment tool that allows small
investors access to a well-diversified portfolio of equities, bonds and other
securities. Each shareholder participates in the gain orloss of the fund.
Units are issued and can be redeemed as needed. The fund’s Net Asset
value (NAV) is determined each day. Investments in securities are spread
across a wide cross-section of industries and sectors and thus the risk is
reduced. Diversification reduces the risk because all stocks may not move
in the same direction in the same proportion at the same time. Mutual fund
issues units to the investors in accordance with quantum of money
invested by them. Investors of mutual funds are known as unit holders.

40
When an investor subscribes for the units of a mutual fund, he becomes
part owner of the assets of the fund in the same proportion as his
contribution amount put up with the corpus (the total amount of the fund).
Mutual Fund investor is also known as a mutual fund shareholder or a unit
holder. Any change in the value of the investments made into capital
market instruments (such as shares, debentures etc) is reflected in the Net
Asset Value (NAV) of the scheme. NAV is defined as the market value of the
Mutual Fund scheme's assets net of its liabilities. NAV of a scheme is
calculated by dividing the market value of scheme's assets by the total
number of units issued to the investors.

ADVANTAGES OF MUTUAL FUND

 Portfolio Diversification
 Professional management
 Reduction / Diversification of Risk
 Liquidity
 Flexibility & Convenience
 Reduction in Transaction cost
 Safety of regulated environment
 Choice of schemes
 Transparency

DISADVANTAGE OF MUTUAL FUND

 No control over Cost in the Hands of an Investor

 No tailor-made Portfolios
 Managing a Portfolio Funds
 Difficulty in selecting a Suitable Fund Scheme

HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY

The mutual fund industry in India started in 1963 with the formation of
Unit Trust of India, at the initiative of the Government of India and Reserve
Bank. Though the growth was slow, but it accelerated from the year 1987
when non-UTI players entered the Industry. In the past decade, Indian
mutual fund industry had seen a dramatic improvement, both qualities
wise as well as quantity wise. Before, the monopoly of the market had seen
an ending phase; the Assets Under Management (AUM) was Rs67 billion.
The private sector entry to the fund family raised the Aum to Rs. 470 billion
in March 1993 and till April 2004; it reached the height if Rs. 1540 billion.

41
The Mutual Fund Industry is obviously growing at a tremendous space with
the mutual fund industry can be broadly put into four phases according to
the development of the sector. Each phase is briefly described as under.
First Phase – 1964-87 Unit Trust of India (UTI) was established on 1963 by
an Act of Parliament by the Reserve Bank of India and functioned under the
Regulatory and administrative control of the Reserve Bank of India. In
1978 UTI was de-linked from the RBI and the Industrial Development Bank
of India (IDBI) took over the regulatory and administrative control in place
of RBI. The first scheme launched by UTI was Unit Scheme 1964. At the end
of 1988 UTI had Rs.6,700 crores of assets under management. Second
Phase – 1987-1993 (Entry of Public Sector Funds)
1987 marked the entry of non- UTI, public sector mutual funds set up by
public sector banks and Life Insurance Corporation of India (LIC) and
General Insurance Corporation of India (GIC). SBI Mutual Fund was the first
non- UTI Mutual Fund established in June 1987 followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian
Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual
Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had
set up its mutual fund in December 1990.At the end of 1993, the mutual
fund industry had assets under management of Rs.47,004 crores. Third
Phase – 1993-2003 (Entry of Private Sector Funds) 1993 was the year in
which the first Mutual Fund Regulations came into being, under which all
mutual funds, except UTI were to be registered and governed. The
erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the
first private sector mutual fund registered in July 1993. The 1993 SEBI
(Mutual Fund) Regulations were substituted by a more comprehensive and
revised Mutual Fund Regulations in 1996. The industry now functions
under the SEBI (Mutual Fund) Regulations 1996. As at the end of January
2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores.
Fourth Phase – since February 2003 In February 2003, following the repeal
of the Unit Trust of India Act 1963 UTI was bifurcated into two separate
entities. One is the Specified Undertaking of the Unit Trust of India with
assets under management of Rs.29,835 crores as at the end of January
2003, representing broadly, the assets of US 64 scheme, assured return and
certain other schemes The second is the UTI Mutual Fund Ltd, sponsored
by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the
Mutual Fund Regulations. Consolidation and growth. As at the end of
September, 2004, there were 29 funds, which manage assets of Rs.153108
crores under 421 schemes.

42
CATEGORIES OF MUTUAL FUND:

Let us have a look at some important mutual fund schemes under the
following three categories based on maturity period of investment:

I. Open-Ended - This scheme allows investors to buy or sell units at any

point in time. This does not have a fixed maturity date.

1. Debt/ Income - In a debt/income scheme, a major part of the investable

fund are channelized towards debentures, government securities, and
other debt instruments. Although capital appreciation is low (compared to
the equity mutual funds), this is a relatively low risk-low return investment
avenue which is ideal for investors seeing a steady income.

2. Money Market/ Liquid - This is ideal for investors looking to utilize

their surplus funds in short term instruments while awaiting better
options. These schemes invest in short-term debt instruments and seek to
provide reasonable returns for the investors.

3. Equity/ Growth - Equities are a popular mutual fund category amongst

retail investors. Although it could be a high-risk investment in the short
term, investors can expect capital appreciation in the long run. If you are at
your prime earning stage and looking for long-term benefits, growth
schemes could be an ideal investment.

43
3.i. Index Scheme - Index schemes is a widely popular concept in the west.
These follow a passive investment strategy where your investments
replicate the movements of benchmark indices like Nifty, Sensex, etc.

3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like
infrastructure, IT, pharmaceuticals, etc. or segments of the capital market
like large caps, mid caps, etc. This scheme provides a relatively high risk-
high return opportunity within the equity space.

3.iii. Tax Saving - As the name suggests, this scheme offers tax benefits to
its investors. The funds are invested in equities thereby offering long-term
growth opportunities. Tax saving mutual funds (called Equity Linked
Savings Schemes) has a 3-year lock-in period.

4. Balanced - This scheme allows investors to enjoy growth and income at

regular intervals. Funds are invested in both equities and fixed income
securities; the proportion is pre-determined and disclosed in the scheme
related offer document. These are ideal for the cautiously aggressive
investors.

II. Closed-Ended - In India, this type of scheme has a stipulated maturity

period and investors can invest only during the initial launch period known
as the NFO (New Fund Offer) period.

1. Capital Protection - The primary objective of this scheme is to

safeguard the principal amount while trying to deliver reasonable returns.
These invest in high-quality fixed income securities with marginal exposure
to equities and mature along with the maturity period of the scheme.

2. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual
fund schemes with a defined maturity period. These schemes normally
comprise of debt instruments which mature in line with the maturity of the
scheme, thereby earning through the interest component (also called
coupons) of the securities in the portfolio. FMPs are normally passively
managed, i.e. there is no active trading of debt instruments in the portfolio.
The expenses which are charged to the scheme, are hence, generally lower
than actively managed schemes.

III. Interval - Operating as a combination of open and closed ended

schemes, it allows investors to trade units at pre-defined intervals.

44
INVESTMENT STRATEGIES

1. Systematic Investment Plan: under this a fixed sum is invested each

month on a fixed date of a month. Payment is made through post dated
cheques or direct debit facilities. The investor gets fewer units when the
NAV is high and more units when the NAV is low. This is called as the
benefit of Rupee Cost Averaging (RCA)
2. Systematic Transfer Plan: under this an investor invest in debt oriented
fund and give instructions to transfer a fixed sum, at a fixed interval, to an
equity scheme of the same mutual fund.
3. Systematic Withdrawal Plan: if someone wishes to withdraw from a
mutual fund then he can withdraw a fixed amount each month.

Risk-Return Trade-off

The principle that potential return rises with an increase in risk. Low levels
of uncertainty (low-risk) are associated with low potential returns,
whereas high levels of uncertainty (high-risk) are associated with high
potential returns. According to the risk-return trade-off, invested money
can render higher profits only if it is subject to the possibility of being lost

.BREAKING DOWN 'Risk-Return Trade-off'

Because of the risk-return trade-off, you must be aware of your
personal risk tolerance when choosing investments for your portfolio.
Taking on some risk is the price of achieving returns; therefore, if you want
to make money, you can't cut out all risk. The goal instead is to find an
appropriate balance - one that generates some profit, but still allows you to
sleep at night.

45
 Fundamental analysis:
Fundamental analysis, in accounting and finance, is the analysis of a
business's financial statements (usually to analyze the
business's assets, liabilities, and earnings); health;[1] and
its competitors and markets. When applied to futures and forex, it focuses
on the overall state of the economy, and considers factors including interest
rates, production, earnings, employment, GDP, housing, manufacturing and
management. When analyzing a stock, futures contract, or currency using
fundamental analysis there are two basic approaches one can use: bottom
up analysis and top down analysis.[2] The terms are used to distinguish such
analysis from other types of investment, such as quantitative and technical.
Fundamental analysis is performed on historical and present data, but with
the goal of making financial forecasts. There are several possible objectives:

1. to conduct a company stock valuation and predict its probable price

evolution;
2. to make a projection on its business performance;
3. to evaluate its management and make internal business decisions;
4. and/or to calculate its credit risk.
Fundamental analysis is the examination of the underlying forces that
affect the well being of the economy, industry groups, and companies. As
with most analysis, the goal is to derive a forecast and profit from future
price movements. At the company level, fundamental analysis may involve
examination of financial data, management, business concept and
competition. At the industry level, there might be an examination of
supply and demand forces for the products offered. For the national
economy, fundamental analysis might focus on economic data to assess
the present and future growth of the economy. To forecast future stock
prices, fundamental analysis combines economic, industry, and company
analysis to derive a stock's current fair value and forecast future value. If
fair value is not equal to the current stock price, fundamental analysts
believe that the stock is either over or under valued and the market price
will ultimately gravitate towards fair value. Fundamentalists do not heed
the advice of the random walkers and believe that markets are weak-form
efficient. By believing that prices do not accurately reflect all available

46
information, fundamental analysts look to capitalize on perceived price
discrepancies.

General Steps to Fundamental Evaluation

Even though there is no one clear-cut method, a breakdown is presented

below in the order an investor might proceed. This method employs a top-
down approach that starts with the overall economy and then works
down from industry groups to specific companies. As part of the analysis
process, it is important to remember that all information is relative.
Industry groups are compared against other industry groups and
companies against other companies. Usually, companies are compared
with others in the same group. For example, a telecom operator (Verizon)
would be compared to another telecom operator (SBC Corp), not to an oil
company (ChevronTexaco).

A. Economic Forecast

First and foremost in a top-down approach would be an overall

evaluation of the general economy. The economy is like the tide and
the various industry groups and individual companies are like boats.
When the economy expands, most industry groups and companies
benefit and grow. When the economy declines, most sectors and
companies usually suffer. Many economists link economic expansion
and contraction to the level of interest rates. Interest rates are seen as
a leading indicator for the stock market as well. Below is a chart of the
S&P 500 and the yield on the 10-year note over the last 30 years.
Although not exact, a correlation between stock prices and interest
rates can be seen. Once a scenario for the overall economy has been
developed, an investor can break down the economy into its various
industry groups.

47
5.

B.Group Selection

If the prognosis is for an expanding economy, then certain groups are likely to
benefit more than others. An investor can narrow the field to those groups that
are best suited to benefit from the current or future economic environment. If
most companies are expected to benefit from an expansion, then risk in equities
would be relatively low and an aggressive growth-oriented strategy might be
advisable. A growth strategy might involve the purchase of technology, biotech,
semiconductor and cyclical stocks. If the economy is forecast to contract, an
investor may opt for a more conservative strategy and seek out stable income-
oriented companies. A defensive strategy might involve the purchase of
consumer staples, utilities and energy-related stocks.

48
 To assess a industry group's potential, an investor would want to consider the
overall growth rate, market size, and importance to the economy. While the
individual company is still important, its industry group is likely to exert just as
much, or more, influence on the stock price. When stocks move, they usually
move as groups; there are very few lone guns out there. Many times it is more
important to be in the right industry than in the right stock! The chart below
shows that relative performance of 5 sectors over a 7-month time frame. As the
chart illustrates, being in the right sector can make all the difference.

6.
C.Narrow within the Group
Once the industry group is chosen, an investor would need to narrow the
list of companies before proceeding to a more detailed analysis. Investors
are usually interested in finding the leaders and the innovators within a
group. The first task is to identify the current business and competitive
environment within a group as well as the future trends. How do the
companies rank according to market share, product position and
competitive advantage? Who is the current leader and how will changes
within the sector affect the current balance of power? What are the
barriers to entry? Success depends on an edge, be it marketing,
technology, market share or innovation. A comparative analysis of the

49
competition within a sector will help identify those companies with an
edge and those most likely to keep it.
D.Company Analysis
With a shortlist of companies, an investor might analyze the resources
and capabilities within each company to identify those companies that are
capable of creating and maintaining a competitive advantage. The analysis
could focus on selecting companies with a sensible business plan, solid
management and sound financials.
E.Business Plan

The business plan, model or concept forms the bedrock upon which all
else is built. If the plan, model or concepts stink, there is little hope for the
business. For a new business, the questions may be these: Does its
business make sense? Is it feasible? Is there a market? Can a profit be
made? For an established business, the questions may be: Is the
company's direction clearly defined? Is the company a leader in the
market? Can the company maintain leadership?

F.Management
In order to execute a business plan, a company requires top-quality
management. Investors might look at management to assess their
capabilities, strengths and weaknesses. Even the best-laid plans in the
most dynamic industries can go to waste with bad management (AMD in
semiconductors). Alternatively, even strong management can make for
extraordinary success in a mature industry (Alcoa in aluminum). Some of
the questions to ask might include: How talented is the management
team? Do they have a track record? How long have they worked together?
Can management deliver on its promises? If management is a problem, it
is sometimes best to move on.

G.Financial Analysis
The final step to this analysis process would be to take apart the financial
statements and come up with a means of valuation. Below is a list of
potential inputs into a financial analysis.

50
 Accounts Payable Good Will
Accounts Receivable Gross Profit Margin
Acid Ratio Growth
Amortization Industry
Assets - Current Interest Cover
Assets - Fixed International
Book Value Investment
Brand Liabilities - Current
Business Cycle Liabilities - Long-term
Business Idea Management
Business Model Market Growth
Business Plan Market Share
Capital Expenses Net Profit Margin
Cash Flow Pageview Growth
Cash on hand Pageviews
Current Ratio Patents
Customer Relationships Price/Book Value
Days Payable Price/Earnings
Days Receivable PEG
Debt Price/Sales
Debt Structure Product
Debt:Equity Ratio Product Placement
Depreciation Regulations
Derivatives-Hedging R&D
Discounted Cash Flow Revenues
Dividend Sector
Dividend Cover Stock Options
Earnings Strategy
EBITDA Subscriber Growth
Economic Growth Subscribers
Equity Supplier Relationships
Equity Risk Premium Taxes
Expenses Trademarks
Weighted Average Cost of
Capital
The list can seem quite long and intimidating. However, after a while, an
investor will learn what works best and develop a set of preferred
analysis techniques. There are many different valuation metrics and much
depends on the industry and stage of the economic cycle. A complete
financial model can be built to forecast future revenues, expenses and

51
profits or an investor can rely on the forecast of other analysts and apply
various multiples to arrive at a valuation. Some of the more popular ratios
are found by dividing the stock price by a key value driver.

Ratio Company Type

Price/Book Value Oil

Price/Earnings Retail
Price/Earnings/Growth Networking
Price/Sales B2B
Price/Subscribers ISP or cable company
Price/Lines Telecom
Price/Page views Web site Biotech
Price/Promises
This methodology assumes that a company will sell at a specific multiple
of its earnings, revenues or growth. An investor may rank companies
based on these valuation ratios. Those at the high end may be considered
overvalued, while those at the low end may constitute relatively good
value.
H.Putting it All Together
After all is said and done, an investor will be left with a handful of
companies that stand out from the pack. Over the course of the analysis
process, an understanding will develop of which companies stand out as
potential leaders and innovators. In addition, other companies would be
considered laggards and unpredictable. The final step of the fundamental
analysis process is to synthesize all data, analysis and understanding into
actual picks.
I. Strengths of Fundamental Analysis
*Long-term Trends
Fundamental analysis is good for long-term investments based on very
long-term trends. The ability to identify and predict long-term economic,
demographic, technological or consumer trends can benefit patient
investors who pick the right industry groups or companies.
*Value Spotting

52
Sound fundamental analysis will help identify companies that represent a
good value. Some of the most legendary investors think long-term and
value. Graham and Dodd, Warren Buffett and John Neff are seen as the
champions of value investing. Fundamental analysis can help uncover
companies with valuable assets, a strong balance sheet, stable earnings,
and staying power.
*Business Acumen
One of the most obvious, but less tangible, rewards of fundamental
analysis is the development of a thorough understanding of the business.
After such painstaking research and analysis, an investor will be familiar
with the key revenue and profit drivers behind a company. Earnings and
earnings expectations can be potent drivers of equity prices. Even some
technicians will agree to that. A good understanding can help investors
avoid companies that are prone to shortfalls and identify those that
continue to deliver. In addition to understanding the business,
fundamental analysis allows investors to develop an understanding of the
key value drivers and companies within an industry. A stock's price is
heavily influenced by its industry group. By studying these groups,
investors can better position themselves to identify opportunities that are
high-risk (tech), low-risk (utilities), growth oriented (computer), value
driven (oil), non-cyclical (consumer staples), cyclical (transportation) or
income-oriented (high yield).
*Knowing Who's Who
Stocks move as a group. By understanding a company's business,
investors can better position themselves to categorize stocks within their
relevant industry group. Business can change rapidly and with it the
revenue mix of a company. This happened to many of the pure Internet
retailers, which were not really Internet companies, but plain retailers.
Knowing a company's business and being able to place it in a group can
make a huge difference in relative valuations.
Weaknesses of Fundamental Analysis
*Time Constraints

53
Fundamental analysis may offer excellent insights, but it can be
extraordinarily time-consuming. Time-consuming models often produce
valuations that are contradictory to the current price prevailing on Wall
Street. When this happens, the analyst basically claims that the whole
street has got it wrong. This is not to say that there are not misunderstood
companies out there, but it is quite brash to imply that the market price,
and hence Wall Street, is wrong.
*Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics
of each company. For this reason, a different technique and model is
required for different industries and different companies. This can get
quite time-consuming, which can limit the amount of research that can be
performed. A subscription-based model may work great for an Internet
Service Provider (ISP), but is not likely to be the best model to value an oil
company.
*Subjectivity
Fair value is based on assumptions. Any changes to growth or multiplier
assumptions can greatly alter the ultimate valuation. Fundamental
analysts are generally aware of this and use sensitivity analysis to present
a base-case valuation, an average-case valuation and a worst-case
valuation. However, even on a worst-case valuation, most models are
almost always bullish, the only question is how much so. The chart below
shows how stubbornly bullish many fundamental analysts can be.

54
*Analyst Bias
The majority of the information that goes into the analysis comes from the
company itself. Companies employ investor relations managers
specifically to handle the analyst community and release information. As
Mark Twain said, “there are lies, damn lies, and statistics.” When it comes
to massaging the data or spinning the announcement, CFOs and investor
relations managers are professionals. Only buy-side analysts tend to
venture past the company statistics. Buy-side analysts work for mutual
funds and money managers. They read the reports written by the sell-side
analysts who work for the big brokers (CIBC, Merrill Lynch, Robertson
Stephens, CS First Boston, Paine Weber, DLJ to name a few). These
brokers are also involved in underwriting and investment banking for the
companies. Even though there are restrictions in place to prevent a
conflict of interest, brokers have an ongoing relationship with the
company under analysis. When reading these reports, it is important to
take into consideration any biases a sell-side analyst may have. The buy-
side analyst, on the other hand, is analyzing the company purely from an
investment standpoint for a portfolio manager. If there is a relationship
with the company, it is usually on different terms. In some cases this may
be as a large shareholder.

Definition of Fair Value

When market valuations extend beyond historical norms, there is

pressure to adjust growth and multiplier assumptions to compensate. If
Wall Street values a stock at 50 times earnings and the current
assumption is 30 times, the analyst would be pressured to revise this
assumption higher. There is an old Wall Street adage: the value of any
asset (stock) is only what someone is willing to pay for it (current price).
Just as stock prices fluctuate, so too do growth and multiplier
assumptions. Are we to believe Wall Street and the stock price or the
analyst and market assumptions?

55
It used to be that free cash flow or earnings were used with a multiplier to
arrive at a fair value. In 1999, the S&P 500 typically sold for 28 times free
cash flow. However, because so many companies were and are losing
money, it has become popular to value a business as a multiple of its
revenues. This would seem to be OK, except that the multiple was higher
than the PE of many stocks! Some companies were considered bargains at
30 times revenues.
Conclusions
Fundamental analysis can be valuable, but it should be approached with
caution. If you are reading research written by a sell-side analyst, it is
important to be familiar with the analyst behind the report. We all have
personal biases, and every analyst has some sort of bias. There is nothing
wrong with this, and the research can still be of great value. Learn what
the ratings mean and the track record of an analyst before jumping off the
deep end. Corporate statements and press releases offer good
information, but they should be read with a healthy degree of skepticism
to separate the facts from the spin. Press releases don't happen by
accident; they are an important PR tool for companies. Investors should
become skilled readers to weed out the important information and
ignore the hype.

Technical analysis
In finance, technical analysis is a security analysis methodology for
forecasting the direction of prices through the study of past market data,
primarily price and volume.[1] Behavioral economics and quantitative
analysis use many of the same tools of technical analysis,[2][3][4][5] which,
being an aspect of active management, stands in contradiction to much
of modern portfolio theory. The efficacy of both technical and fundamental
analysis is disputed by the efficient-market hypothesis which states that
stock market prices are essentially unpredictable.
Technical analysis employs models and trading rules based on price and
volume transformations, such as the relative strength index, moving
averages, regressions, inter-market and intra-market price

56
correlations,business cycles, stock market cycles or, classically, through
recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysis approach
to security and stock analysis. Technical analysis analyzes price, volume
and other market information, whereas fundamental analysis looks at the
facts of the company, market, currency or commodity. Most large brokerage,
trading group, or financial institutions will typically have both a technical
analysis and fundamental analysis team.
Technical analysis is widely used among traders and financial professionals
and is very often used by active day traders, market makers and pit traders.
In the 1960s and 1970s it was widely dismissed by academics. In a recent
review, Irwin and Park reported that 56 of 95 modern studies found that it
produces positive results but noted that many of the positive results were
rendered dubious by issues such as data snooping, so that the evidence in
support of technical analysis was inconclusive; it is still considered by
many academics to be pseudoscience. Academics such as Eugene Fama say
the evidence for technical analysis is sparse and is inconsistent with
the weak form of the efficient-market hypothesis. Users hold that even if
technical analysis cannot predict the future, it helps to identify trading
opportunities.
In the foreign exchange markets, its use may be more widespread
than fundamental analysis. This does not mean technical analysis is more
applicable to foreign markets, but that technical analysis is more
recognized as to its efficacy there than elsewhere. While some isolated
studies have indicated that technical trading rules might lead to consistent
returns in the period prior to 1987, most academic work has focused on the
nature of the anomalous position of the foreign exchange market. It is
speculated that this anomaly is due to central bank intervention, which
obviously technical analysis is not designed to predict. Recent research
suggests that combining various trading signals into a Combined Signal
Approach may be able to increase profitability and reduce dependence on
any single rule.

Principles

57
Stock chart showing levels of support (4,5,6, 7, and 8) and resistance (1, 2,
and 3); levels of resistance tend to become levels of support and vice versa.
A fundamental principle of technical analysis is that a market's price
reflects all relevant information, so their analysis looks at the history of a
security's trading pattern rather than external drivers such as economic,
fundamental and news events. Therefore, price action tends to repeat itself
due to investors collectively tending toward patterned behavior – hence
technical analysis focuses on identifiable trends and conditions.
Market action discounts everythinng
Based on the premise that all relevant information is already reflected by
prices, technical analysts believe it is important to understand what
investors think of that information, known and perceived.
Prices move in trends
Technical analysts believe that prices trend directionally, i.e., up, down, or
sideways (flat) or some combination. The basic definition of a price trend
was originally put forward by Dow theory.
An example of a security that had an apparent trend is AOL from November
2001 through August 2002. A technical analyst or trend follower
recognizing this trend would look for opportunities to sell this security.
AOL consistently moves downward in price. Each time the stock rose,
sellers would enter the market and sell the stock; hence the "zig-zag"
movement in the price. The series of "lower highs" and "lower lows" is a
tell tale sign of a stock in a down trend. In other words, each time the stock
moved lower, it fell below its previous relative low price. Each time the
stock moved higher, it could not reach the level of its previous relative high
price.
Note that the sequence of lower lows and lower highs did not begin until
August. Then AOL makes a low price that does not pierce the relative low
set earlier in the month. Later in the same month, the stock makes a
relative high equal to the most recent relative high. In this a technician sees

58
strong indications that the down trend is at least pausing and possibly
ending, and would likely stop actively selling the stock at that point.
History tends to repeat itself
Technical analysts believe that investors collectively repeat the behaviour
of the investors that preceded them. To a technician, the emotions in the
market may be irrational, but they exist. Because investor behaviour
repeats itself so often, technicians believe that recognizable (and
predictable) price patterns will develop on a chart. Recognition of these
patterns can allow the technician to select trades that have a higher
probability of success.
Technical analysis is not limited to charting, but it always considers price
trends.[1] For example, many technicians monitor surveys of investor
sentiment. These surveys gauge the attitude of market participants,
specifically whether they are bearish or bullish. Technicians use these
surveys to help determine whether a trend will continue or if a reversal
could develop; they are most likely to anticipate a change when the surveys
report extreme investor sentiment. Surveys that show overwhelming
bullishness, for example, are evidence that an uptrend may reverse; the
premise being that if most investors are bullish they have already bought
the market (anticipating higher prices). And because most
investors are bullish and invested, one assumes that few buyers remain.
This leaves more potential sellers than buyers, despite the bullish
sentiment. This suggests that prices will trend down, and is an example
of contrarian trading.
Recently, Kim Man Lui, Lun Hu, and Keith C.C. Chan have suggested that
there is statistical evidence of association relationships between some of
the index composite stocks whereas there is no evidence for such a
relationship between some index composite others. They show that the
price behavior of these Hang Seng index composite stocks is easier to
understand than that of the index.
Technical Analysis is the forecasting of future financial price movements
based on an examination of past price movements. Like weather
forecasting, technical analysis does not result in absolute predictions
about the future. Instead, technical analysis can help investors anticipate
what is “likely” to happen to prices over time. Technical analysis uses a
wide variety of charts that show price over time.

59
Technical analysis is applicable to stocks, indices, commodities, futures or
any tradable instrument where the price is influenced by the forces of
supply and demand. Price refers to any combination of the open, high,
low, or closes for a given security over a specific time frame. The time
frame can be based on intraday (1-minute, 5-minutes, 10-minutes, 15-
minutes, 30-minutes or hourly), daily, weekly or monthly price data and
last a few hours or many years. In addition, some technical analysts
include volume or open interest figures with their study of price action.

The Basis of Technical Analysis

At the turn of the century, the Dow Theory laid the foundations for
what was later to become modern technical analysis. Dow Theory was
not presented as one complete amalgamation, but rather pieced

60
 together from the writings of Charles Dow over several years. Of the
many theorems put forth by Dow, three stand out:

 Price Discounts Everything

 Price Movements Are Not Totally Random
 “What” Is More Important than “Why”

1.Price Discounts Everything

This theorem is similar to the strong and semi-strong forms of market

efficiency. Technical analysts believe that the current price fully reflects
all information. Because all information is already reflected in the price, it
represents the fair value, and should form the basis for analysis. After all,
the market price reflects the sum knowledge of all participants, including
traders, investors, portfolio managers, buy-side analysts, sell-side
analysts, market strategist, technical analysts, fundamental analysts and
many others. It would be folly to disagree with the price set by such an
impressive array of people with impeccable credentials. Technical
analysis utilizes the information captured by the price to interpret
what the market is saying with the purpose of forming a view on the
future.

2.Prices Movements are not Totally Random

Most technicians agree that prices trend. However, most technicians also
acknowledge that there are periods when prices do not trend. If prices
were always random, it would be extremely difficult to make money using
technical analysis. In his book, Schwager on Futures: Technical Analysis,
Jack Schwager states:

“One way of viewing it is that markets may witness extended periods of

random fluctuation, interspersed with shorter periods of nonrandom
behavior. The goal of the chartist is to identify those periods (i.e. major
trends).”

61
 A technician believes that it is possible to identify a trend, invest or trade
based on the trend and make money as the trend unfolds. Because
technical analysis can be applied to many different time frames, it is
possible to spot both short-term and long-term trends. The IBM chart
illustrates Schwager's view on the nature of the trend. The broad trend is
up, but it is also interspersed with trading ranges. In between the trading
ranges are smaller uptrend within the larger uptrend. The uptrend is
renewed when the stock breaks above the trading range. A downtrend
begins when the stock breaks below the low of the previous trading range.

3."What" is More Important than "Why"

In his book, The Psychology of Technical Analysis, Tony Plummer

paraphrases Oscar Wilde by stating, “A technical analyst knows the price of
everything, but the value of nothing”. Technicians, as technical analysts are
called, are only concerned with two things:

1. What is the current price?

2. What is the history of the price movement?
The price is the end result of the battle between the forces of supply and
demand for the company's stock. The objective of analysis is to forecast the
direction of the future price. By focusing on price and only price, technical
analysis represents a direct approach. Fundamentalists are concerned with
why the price is what it is. For technicians, the why portion of the equation
is too broad and many times the fundamental reasons given are highly
suspect. Technicians believe it is best to concentrate on what and never

62
mind why. Why did the price go up? It is simple, more buyers (demand)
than sellers (supply). After all, the value of any asset is only what someone
is willing to pay for it. Who needs to know why?

General Steps to Technical Evaluation

Many technicians employ a top-down approach that begins with broad-

based macro analysis. The larger parts are then broken down to base
the final step on a more focused/micro perspective. Such an analysis
might involve three steps:

1. Broad market analysis through the major indices such as the S&P
500, Dow Industrials, NASDAQ and NYSE Composite.
2. Sector analysis to identify the strongest and weakest groups within
the broader market.
3. Individual stock analysis to identify the strongest and weakest
stocks within select groups.
The beauty of technical analysis lies in its versatility. Because the
principles of technical analysis are universally applicable, each of the
analysis steps above can be performed using the same theoretical
background. You don't need an economics degree to analyze a market
index chart. You don't need to be a CPA to analyze a stock chart. Charts
are charts. It does not matter if the time frame is 2 days or 2 years. It
does not matter if it is a stock, market index or commodity. The
technical principles of support, resistance, trend, trading range and
other aspects can be applied to any chart. While this may sound easy,
technical analysis is by no means easy. Success requires serious study,
dedication and an open mind.

Chart Analysis

Technical analysis can be as complex or as simple as you want it. The

example below represents a simplified version. Since we are interested
in buying stocks, the focus will be on spotting bullish situations.

63
Overall Trend: The first step is to identify the overall trend. This can
be accomplished with trend lines, moving or peak/trough analysis. As
long as the price remains above its uptrend
linezxZxZXResistance: Areas of congestion and previous highs above
the current price mark the resistance levels. A break above resistance
would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as

MACD. If MACD is above its 9-day EMA (exponential moving average)

64
 or positive, then momentum will be considered bullish, or at least
improving.

Buying/Selling Pressure: For stocks and indices with volume figures

available, an indicator that uses volume is used to measure buying or
selling pressure. When Chaikin Money Flow is above zero, buying
pressure is dominant. Selling pressure is dominant when it is below
zero.

Relative Strength: The price relative is a line formed by dividing the

security by a benchmark. For stocks it is usually the price of the stock
divided by the S&P 500. The plot of this line over a period of time will
tell us if the stock is outperforming (rising) or under performing
(falling) the major index.

The final step is to synthesize the above analysis to ascertain the

following:

 Strength of the current trend.

 Maturity or stage of current trend.
 Reward to risk ratio of a new position.
 Potential entry levels for new long position.

Top-Down Technical Analysis

For each segment (market, sector and stock), an investor would analyze
long-term and short-term charts to find those that meet specific
criteria. Analysis will first consider the market in general, perhaps the
S&P 500. If the broader market were considered to be in bullish mode,
analysis would proceed to a selection of sector charts. Those sectors
that show the most promise would be singled out for individual stock
analysis. Once the sector list is narrowed to 3-4 industry groups,
individual stock selection can begin. With a selection of 10-20 stock

65
 charts from each industry, a selection of 3-4 of the most promising
stocks in each group can be made. How many stocks or industry groups
make the final cut will depend on the strictness of the criteria set forth.
Under this scenario, we would be left with 9-12 stocks from which to
choose. These stocks could even be broken down further to find the 3-4
of the strongest of the strong.

Strengths of Technical Analysis

Not Just for stocks : Technical analysis has universal applicability. It can
be applied to any financial instrument -stocks, futures and commodities,
fixed-income securities, forex, etc

1.Focus on Price

If the objective is to predict the future price, then it makes sense to focus on
price movements. Price movements usually precede fundamental
developments. By focusing on price action, technicians are automatically
focusing on the future. The market is thought of as a leading indicator and
generally leads the economy by 6 to 9 months. To keep pace with the
market, it makes sense to look directly at the price movements. More often
than not, change is a subtle beast. Even though the market is prone to
sudden knee-jerk reactions, hints usually develop before significant moves.
A technician will refer to periods of accumulationas evidence of an
impending advance and periods of distribution as evidence of an impending
decline.

2.Supply, Demand, and Price Action

Many technicians use the open, high, low and close when analyzing the
price action of a security. There is information to be gleaned from each bit
of information. Separately, these will not be able to tell much. However,
taken together, the open, high, low and close reflect forces of supply and
demand.

66
The annotated example above shows a stock that opened with a gap up.
Before the open, the number of buy orders exceeded the number of sell
orders and the price was raised to attract more sellers. Demand was brisk
from the start. The intraday high reflects the strength of demand (buyers).
The intraday low reflects the availability of supply (sellers). The close
represents the final price agreed upon by the buyers and the sellers. In this
case, the close is well below the high and much closer to the low. This tells
us that even though demand (buyers) was strong during the day, supply
(sellers) ultimately prevailed and forced the price back down. Even after
this selling pressure, the close remained above the open. By looking at price
action over an extended period of time, we can see the battle between
supply and demand unfold. In its most basic form, higher prices reflect
increased demand and lower prices reflect increased supply.

3.Support/Resistance

Simple chart analysis can help identify support and resistance levels. These
are usually marked by periods of congestion (trading range) where the
prices move within a confined range for an extended period, telling us that
the forces of supply and demand are deadlocked. When prices move out of
the trading range, it signals that either supply or demand has started to get
the upper hand. If prices move above the upper band of the trading range,

67
then demand is winning. If prices move below the lower band, then supply
is winning.

4.Pictorial Price History

Even if you are a tried and true fundamental analyst, a price chart can
offer plenty of valuable information. The price chart is an easy to read
historical account of a security's price movement over a period of time.
Charts are much easier to read than a table of numbers. On most stock
charts, volume bars are displayed at the bottom. With this historical
picture, it is easy to identify the following:

 Reactions prior to and after important events.

 Past and present volatility.
 Historical volume or trading levels.
 Relative strength of a stock versus the overall market.

5. Assist with Entry Point

Technical analysis can help with timing a proper entry point. Some
analysts use fundamental analysis to decide what to buy and technical
analysis to decide when to buy. It is no secret that timing can play an
important role in performance. Technical analysis can help spot demand
(support) and supply (resistance) levels as well as breakouts. Simply
waiting for a breakout above resistance or buying near support levels can
improve returns.

It is also important to know a stock's price history. If a stock you thought

was great for the last 2 years has traded flat for those two years, it would
appear that Wall Street has a different opinion. If a stock has already
advanced significantly, it may be prudent to wait for a pullback. Or, if the
stock is trending lower, it might pay to wait for buying interest and a
trend reversal.

68
Weaknesses of Technical Analysis

1.Analyst Bias

Just as with fundamental analysis, technical analysis is subjective and

our personal biases can be reflected in the analysis. It is important to be
aware of these biases when analyzing a chart. If the analyst is a
perpetual bull, then a bullish bias will overshadow the analysis. On the
other hand, if the analyst is a disgruntled eternal bear, then the analysis
will probably have a bearish tilt.

2.Open to Interpretation

Furthering the bias argument is the fact that technical analysis is open
to interpretation. Even though there are standards, many times two
technicians will look at the same chart and paint two different
scenarios or see different patterns. Both will be able to come up with
logical support and resistance levels as well as key breaks to justify
their position. While this can be frustrating, it should be pointed out
that technical analysis is more like an art than a science, somewhat like
economics. Is the cup half-empty or half-full? It is in the eye of the
beholder.

3.Too Late

Technical analysis has been criticized for being too late. By the time the
trend is identified, a substantial portion of the move has already taken
place. After such a large move, the reward to risk ratio is not great.
Lateness is a particular criticism of Dow Theory.

4.Always Another Level

Even after a new trend has been identified, there is always another
“important” level close at hand. Technicians have been accused of
sitting on the fence and never taking an unqualified stance. Even if they

69
 are bullish, there is always some indicator or some level that will
qualify their opinion.

5.Trader's Remorse

Not all technical signals and patterns work. When you begin to study
technical analysis, you will come across an array of patterns and
indicators with rules to match. For instance: A sell signal is given when
the neckline of a head and shoulders pattern is broken. Even though
this is a rule, it is not steadfast and can be subject to other factors such
as volume and momentum. In that same vein, what works for one
particular stock may not work for another. A 50-day moving average
may work great to identify support and resistance for IBM, but a 70-day
moving average may work better for Yahoo. Even though many
principles of technical analysis are universal, each security will have its
own idiosyncrasies.

Conclusions

Technical analysts consider the market to be 80% psychological and

20% logical. Fundamental analysts consider the market to be 20%
psychological and 80% logical. Psychological or logical may be open for
debate, but there is no questioning the current price of a security. After
all, it is available for all to see and nobody doubts its legitimacy. The
price set by the market reflects the sum knowledge of all participants,
and we are not dealing with lightweights here. These participants have
considered (discounted) everything under the sun and settled on a
price to buy or sell. These are the forces of supply and demand at work.
By examining price action to determine which force is prevailing,
technical analysis focuses directly on the bottom line: What is the
price? Where has it been? Where is it going?

Even though there are some universal principles and rules that can be
applied, it must be remembered that technical analysis is more an art

70
 form than a science. As an art form, it is subject to interpretation.
However, it is also flexible in its approach and each investor should use
only that which suits his or her style. Developing a style takes time,
effort and dedication, but the rewards can be significant.

Current stock market scenario

The Indian stock market turned out to be among the world's best
performers in 2014 with the Bombay Stock Exchange (BSE) Sensex rising
29% from 21,140 on January 1 to 27,312 on December 19. Most market
players believe this stellar run will continue in 2015 on the back of reforms,
strong foreign fund inflows, revival of manufacturing, improvement in the
macro-economic situation and rise in corporate earnings growth.
Attractive Valuations
Despite the sharp rise, the valuation of the Indian stock market is still
attractive. On December 12, the Sensex was trading at a price-to-earnings
(PE) ratio of 18.5, marginally lower than the five-year average of 18.77.
Yogesh Nagaonkar, vice-president, Institutional Equities, Bonanza
Portfolio, says Indian stocks are an attractive investment if the person's
horizon is three-five years. One reason is that the return on equity of BSE
200 companies is bottoming out. "Revival of growth of Indian companies,
which were facing tough times for the past five years, is still at a nascent
stage. Nifty 50 companies can see 16-17% earnings growth in the next one
year. This may rise to 19-20% two years from now," he says.

Indian Stock Market in Global Scenario

The recent global economic situation has witnessed immense highs and
lows including some unfortunate happenings related to stock market. This
has surged a debate on is it really that easy to make money in Indian stock
market today. Timing is the most important factor while investing in stock
market. This fluctuates on rapid basis so one cannot be completely
dependent on this for money until and unless you are in this business for a
long time.

According to experts most of the time markets have overvalued or

undervalued stocks. This is the reason why you get a wonderful buying and
selling opportunity due to high and low valuations at the time when stocks

71
are traded. With the help of Indian stock market today you need to test
your financial knowledge, analytical capabilities, thought process and
mental strength. This arena is not for weak and herd people.

Investment Lessons in Stock Market

The first investment lesson is that when a Company goes through bad
phase you should always look for turnaround signals. This way you get
loads of opportunity to make money. One of the most tips to trade in stock
market is to have patience so that you can make most out of it. Even if the
price of stocks have considerably gone down so it is not in your hands to
get rid of them so wait for the right time till the prices go up.

It is not a wise decision to pull up all your savings in Indian stock market
today. So wait till the market drop which is the right time to make
investment. The market might take some time to rise so that you are
comfortable to draw your savings and invest them. In this way the eventual
returns will be high though it is hard to predict the time when it will rise.
So if you planning to invest then you must take several aspects in mind like
the total cost incurred which will help you to estimate the concurrent
expenses that will incur in the entire process. This will help you to estimate
the actual profit from that investment.

Another important thing that you should keep in mind is that make a
regular note of costs both direct and indirect so that you know the absolute
profit from entire transaction made. Remember diversification is the rule of
game in stock market. It is advisable that do not bet all your money in one
stock but in multiple ones. Experts advise you to diversify your portfolio so
that the associated risk is reduced which is related to single stock. In this
way you increase your chance to grab more profit.

How to Avoid Losses in Stock Market?

To avoid losses you can buy stock from various companies so that even one
loss can be compensated and your portfolio is not affected. This way you
will be guarded against losses. According to Indian stock market
today investors should keep a track of market trend to know in which
direction the financial market is moving. Generally market trends can be
classified as primary trends, secular trends (long-term). With this principle
one can get an idea that market cycle works due to persistence and
regularity. This principle is consistent due to technical analysis an
inconsistent unpredictability of financial market. Market prices are purely
based on sustained movement in market price over a period of time.

72
For example if you are a retail investor then you strategy should be to
prepare investment maps. This will help you in planning your strategy as
per your needs. Most stock market investors employ different strategies to
invest in share market which is according to their investment risk profile,
money needs, capital and knowledge level.

8 tips on investing in the current market scenario

The current market scenario has not only made investors jittery, but also
sent many of them scurrying for safer havens. A majority of investors,
however, are still in a fix over their next move. Should they still stay
invested for the long haul or make an exit with whatever losses or gains
they have had in the equity market? Is this the right time to start cherry
picking from a longer-term perspective or should one still wait in
anticipation of the market going to give more attractive levels to get in?
Although the answer may vary from individual to individual, depending
upon one's risk appetite and investment goal, here are some tips which
may help you stay clear of the mess and chart out some winning strategies
in these times of crisis and world-wide panic:
1. Do not try to time the market
One thing that Warren Buffett, one of the world's greatest investors,
doesn't do is try to time the stock market, although he does have a very
strong view on the price levels appropriate to individual shares. A majority
of investors, however, do just the opposite, something that financial
planners have always warned against.
"You should never try to time the market. In fact, nobody has ever done this
successfully and consistently over multiple business or stock market cycles.
Catching the tops and bottoms is a myth. It is so till today and will remain
so in the future. In fact, more people have lost money than gained in doing
so," Anil Chopra, Group CEO at Bajaj Capital, said.
2. Stay in the market
Instead of trying to time the market, one should spend time in the markets.
"Waiting on the sidelines is simply not an option as empirical research has
shown the majority of gains in the stock markets is concentrated over a
very few days. If somebody misses these days, and there is a high
probability that you will if you wait on the sidelines for that proverbial
bottom, the return from investment drops sharply to even less than 50%
than what it could have been. You never know when the markets will start
recovering," Chopra added.

73
3. Stick to your asset allocation
One must not over or under expose to any particular asset class simply
based on a widely held perception. Individual investors have a habit of
falling prey to the herd mentality. Historical evidence suggests that
typically adverse news flow is at its peak during market bottoms. It is very
tough to go against the herd or 'popular wisdom' as we incorrectly call it.
Only a disciplined asset allocation strategy combined with a robust
rebalancing process can help you avoid falling into the trap. People tend to
allocate more and more money towards the perceived safety of debt or
money market instruments near market bottoms, thereby trying to protect
their capital from further erosion. One must not under expose to any asset
class merely because he believes that markets will fall more. Similarly, one
must also not over expose to any asset class if he believes it to be cheap.
Maintaining a balanced asset allocation in line with the risk profile and
future financial goals is the best thing to do in such circumstances.

4. Don't rely too much on tips

"You should never invest on recommendations alone. Instead, always have
a proper analysis before investing," Lovaii Navlakhi, Managing Director and
Chief Financial Planner at International Money Matters, said.
Should you be unable to do that, take the help of a qualified financial
planner.
5. Research properly before investing
Proper research is a must before investing in stocks. But that is rarely done.
Investors generally go by the name of a company or the industry.
"If one doesn't have the time or temperament for studying the markets,
always take help of a suitable financial advisor," Ashish Kapur, CEO at
Invest Shoppe India, said.
6. Look at stock-specific opportunities
Experts also suggest investors look at stock-specific opportunities rather
than getting perturbed by weak macroeconomic data. In fact, some stocks
have a mind of their own and will continue to do well even in bad market
conditions.
"History is replete with examples of such stocks and instances where stock
price of companies such as Asian Paints, ITC, Hindustan Unilever, Nestle,
Colgate, Gillette and many others have done well even during bear phases.
Such companies generally have robust business models, enjoy strong
competitive advantage and, hence, higher pricing power over their peers

74
and display strong fundamentals such as consistent free cash flows and
high margins. They will continue to prosper even during periods of
uncertainty," Chopra added.
Also, during a bear phase, even good-quality stocks can get hammered
badly and are available at dirt cheap valuations. Such stocks tend to bounce
back sharply once sentiment changes. Both types of stocks present
attractive opportunities for above-average gains over the medium to long
term.
7. Focus on fundamentals of companies
At a time when we seem to be in a prolonged period of slowdown, it is
better to look at the fundamentals of companies in terms of how strong
their business proposition is and, more importantly, the near-term growth
prospects. Remain focused on the health of a company's balance sheet. That
is because although we are in some kind of a slowdown, valuations are
supportive. So keep positioning yourselves in those companies in which
growth will start to come back and which are very well placed in terms of
being able to exploit growth opportunities.
"It is very important to be only in those companies which have good
fundamentals and balance sheets. This is because there are a large number
of companies which either have damaged business fundamentals or have
got damaged balance sheets. Those companies, in fact, are likely to stay in
the ICU longer even if the economy starts to pick up some momentum. So, it
is about getting the stock selection right at this point of time," Vetri
Subramaniam, CIO at Religare Mutual Fund, said.

8. Go contrarian
More than anything else, valuations are the main drivers of long-term
returns from equities. For instance, people who had bought stocks after or
during sharp downsides such as in 2003 or in 2008-09 on the cheap must
still be sitting on significant gains even after the current fall.
"Empirical evidence suggests that whenever certain valuation ratios such
as the price to book value or the price to earnings ratio of leading indices
such as Sensex or S&P CNX Nifty fall below a certain level, returns from
stock markets over the next one or two years are very high. Given the
current level of valuations, when most valuation parameters are at or near
all-time lows, it is time to take a contrarian call (against popular wisdom or
herd mentality) and invest in markets with a medium- to long-term view,"
Chopra said.

75
Financial Navigating in the Current Economy: Ten Things to Consider
Before You Make Investing Decisions

Invest Wisely: An Introduction to Mutual Funds. This publication

explains the basics of mutual fund investing, how mutual funds work, what
factors to consider before investing, and how to avoid common pitfalls.
Financial Navigating in the Current Economy: Ten Things to Consider
Before You Make Investing Decisions

Given recent market events, you may be wondering whether you should
make changes to your investment portfolio. The SEC’s Office of Investor
Education and Advocacy is concerned that some investors, including
bargain hunters and mattress stuffers, are making rapid investment
decisions without considering their long-term financial goals. While we
can’t tell you how to manage your investment portfolio during a volatile
market, we are issuing this Investor Alert to give you the tools to make an
informed decision. Before you make any decision, consider these areas of
importance:

1. Draw a personal financial roadmap.

Before you make any investing decision, sit down and take an honest look
at your entire financial situation -- especially if you’ve never made a
financial plan before.

The first step to successful investing is figuring out your goals and risk
tolerance – either on your own or with the help of a financial professional.
There is no guarantee that you’ll make money from your investments. But if
you get the facts about saving and investing and follow through with an
intelligent plan, you should be able to gain financial security over the years
and enjoy the benefits of managing your money.

2. Evaluate your comfort zone in taking on risk.

All investments involve some degree of risk. If you intend to purchase

securities - such as stocks, bonds, or mutual funds - it's important that you
understand before you invest that you could lose some or all of your
money. Unlike deposits at FDIC-insured banks and NCUA-insured credit
unions, the money you invest in securities typically is not federally
insured. You could lose your principal, which is the amount you've
invested. That’s true even if you purchase your investments through a
bank.

76
The reward for taking on risk is the potential for a greater investment
return. If you have a financial goal with a long time horizon, you are likely
to make more money by carefully investing in asset categories with greater
risk, like stocks or bonds, rather than restricting your investments to assets
with less risk, like cash equivalents. On the other hand, investing solely in
cash investments may be appropriate for short-term financial goals. The
principal concern for individuals investing in cash equivalents is inflation
risk, which is the risk that inflation will outpace and erode returns over
time.
Federally Insured Deposits at Banks and Credit Unions -- If you’re not sure if
your deposits are backed by the full faith and credit of the U.S. government, it’s
easy to find out. For bank accounts, go towww.myfdicinsurance.gov. For credit
union accounts, go tohttp://webapps.ncua.gov/Ins/.

3. Consider an appropriate mix of investments.

By including asset categories with investment returns that move up and

down under different market conditions within a portfolio, an investor can
help protect against significant losses. Historically, the returns of the three
major asset categories – stocks, bonds, and cash – have not moved up and
down at the same time. Market conditions that cause one asset category to
do well often cause another asset category to have average or poor
returns. By investing in more than one asset category, you'll reduce the
risk that you'll lose money and your portfolio's overall investment returns
will have a smoother ride. If one asset category's investment return falls,
you'll be in a position to counteract your losses in that asset category with
better investment returns in another asset category.

In addition, asset allocation is important because it has major impact on

whether you will meet your financial goal. If you don't include enough risk
in your portfolio, your investments may not earn a large enough return to
meet your goal. For example, if you are saving for a long-term goal, such as
retirement or college, most financial experts agree that you will likely need
to include at least some stock or stock mutual funds in your portfolio.
Lifecycle Funds -- To accommodate investors who prefer to use one investment
to save for a particular investment goal, such as retirement, some mutual fund
companies have begun offering a product known as a "lifecycle fund." A
lifecycle fund is a diversified mutual fund that automatically shifts towards a
more conservative mix of investments as it approaches a particular year in the
future, known as its "target date." A lifecycle fund investor picks a fund with
the right target date based on his or her particular investment goal. The
managers of the fund then make all decisions about asset allocation,
diversification, and rebalancing. It's easy to identify a lifecycle fund because its
name will likely refer to its target date. For example, you might see lifecycle

77
funds with names like "Portfolio 2015," "Retirement Fund 2030," or "Target
2045.”

4. Be careful if investing heavily in shares of employer’s stock or

any individual stock.

One of the most important ways to lessen the risks of investing is

todiversify your investments. It’s common sense: don't put all your eggs in
one basket. By picking the right group of investments within an asset
category, you may be able to limit your losses and reduce the fluctuations
of investment returns without sacrificing too much potential gain.

You’ll be exposed to significant investment risk if you invest heavily in

shares of your employer’s stock or any individual stock. If that stock does
poorly or the company goes bankrupt, you’ll probably lose a lot of money
(and perhaps your job).

5. Create and maintain an emergency fund.

Most smart investors put enough money in a savings product to cover an

emergency, like sudden unemployment. Some make sure they have up to
six months of their income in savings so that they know it will absolutely be
there for them when they need it.

6. Pay off high interest credit card debt.

There is no investment strategy anywhere that pays off as well as, or with
less risk than, merely paying off all high interest debt you may have. If you
owe money on high interest credit cards, the wisest thing you can do under
any market conditions is to pay off the balance in full as quickly as
possible.

7. Consider dollar cost averaging.

Through the investment strategy known as “dollar cost averaging,” you can
protect yourself from the risk of investing all of your money at the wrong
time by following a consistent pattern of adding new money to your
investment over a long period of time. By making regular investments with
the same amount of money each time, you will buy more of an investment
when its price is low and less of the investment when its price is high.
Individuals that typically make a lump-sum contribution to an individual
retirement account either at the end of the calendar year or in early April
may want to consider “dollar cost averaging” as an investment strategy,
especially in a volatile market.

78
8. Take advantage of “free money” from employer.

In many employer-sponsored retirement plans, the employer will match

some or all of your contributions. If your employer offers a retirement plan
and you do not contribute enough to get your employer’s maximum match,
you are passing up “free money” for your retirement savings.
Keep Your Money Working -- In most cases, a workplace plan is the most
effective way to save for retirement. Consider your options carefully before
borrowing from your retirement plan. In particular, avoid using a 401(k) debit
card, except as a last resort. Money you borrow now will reduce the savings
vailable to grow over the years and ultimately what you have when you retire.
Also, if you don’t repay the loan, you may pay federal income taxes and
penalties.

9. Consider rebalancing portfolio occasionally.

Rebalancing is bringing your portfolio back to your original asset allocation

mix. By rebalancing, you'll ensure that your portfolio does not
overemphasize one or more asset categories, and you'll return your
portfolio to a comfortable level of risk.
Stick with Your Plan: Buy Low, Sell High -- Shifting money away from an asset
category when it is doing well in favor an asset category that is doing poorly
may not be easy, but it can be a wise move. By cutting back on the current
"winners" and adding more of the current so-called "losers," rebalancing forces
you to buy low and sell high.

You can rebalance your portfolio based either on the calendar or on your
investments. Many financial experts recommend that investors rebalance
their portfolios on a regular time interval, such as every six or twelve
months. The advantage of this method is that the calendar is a reminder of
when you should consider rebalancing. Others recommend rebalancing
only when the relative weight of an asset class increases or decreases more
than a certain percentage that you've identified in advance. The advantage
of this method is that your investments tell you when to rebalance. In
either case, rebalancing tends to work best when done on a relatively
infrequent basis.

10. Avoid circumstances that can lead to fraud.

Scam artists read the headlines, too. Often, they’ll use a highly publicized
news item to lure potential investors and make their “opportunity” sound
more legitimate. The SEC recommends that you ask questions and check
out the answers with an unbiased source before you invest. Always take
your time and talk to trusted friends and family members before investing.

79
 WHERE NOT TO INVEST DON’T INVEST IN DUBIOUS SCHEMES
Introduction
There are several dubious schemes operating in the market. The promoters
of such schemes float companies with attractive names. They start
in a particular area and then, on attaining saturation of member
enrollments, keep shifting over to new areas. While promoting the
schemes, they get film stars, politicians, sportspersons etc. at grand
functions to impress the public. They engage persuasive direct marketing
agents, print attractive brochures, release eye-catching advertisements and
hoardings and offer gifts to the investors. They also use attractive slogans.
They also “honour” their members with titles like Silver Member or Gold
Member. Some of such schemes that are designed to entrap the gullible
public by luring them with the promise of becoming rich overnight are:
 MONEY CIRCULATION SCHEMES (MCS),MULTI-LEVEL MARKETING
SCHEMES (MLM),NETWORK MARKETING (NWM),SELF EMPLOYMENT
YOJANA (SEY) By enrollment into such scheme, one gets back some or full
initial investment and then keeps gaining financially by enrolling new
members. So also the second set of enrollers keeps multiplying and gain
financially, luring every onlooker. Such a system of chain to work endlessly
to provide profit to everyone concerned ultimately breaks down at some
stage, resulting in big financial losses to many. When a person fails to get
his required clients or enrollers, the promoters of the scheme do not tell
about the non-viability of the scheme but blame it as one’s personal failure.
Many companies have now disguised into the activity of marketing goods,
services, drugs and health care products.
 CHIT FUNDS
Chit fund is a kind of savings scheme under which a person enters into an
agreement with a specified number of persons that every one of them shall
subscribe a certain sum of money by way of periodical installments over a
definiteperiod and that each such subscriber shall, in his turn, as
determined by lot or by auction or by tender, be entitled to the prize
amount. However, there are many such schemes which have been misused
by their promoters and there are many instances of the founders running
what is basically a Ponzi scheme and absconding with their money.
 DEPOSITS
Finance Companies take deposits from the public, promising them
unusually high returns. Since high returns are unsustainable, ongoing
Repayments of interest and deposit amounts depend on continuous and
uninterrupted flow of fresh deposits. At some stage, when the flow of
deposits gets stifled, the payments to the investors stop, leaving them high-
and-dry.
 PRIVATE PLACEMENTS

80
 Many companies offer equity shares /convertible debentures/preference
shares etc to the public through the private Placement route, often for a “a
mega project’ and promise dream returns. By law, such securities cannot be
sold to more tan 49 persons, beyond which the Company is required to
come out with a Public Issue under the guidelines of SEBI.
 PLANTATION COMPANIES
Many companies offer schemes that multiply money by investment into
plantations. Most of such companies are not registered with SEBI, and
typically have fled with the investors’ monies.
 Caution for the general public
Remember that there is no free lunch and that there is some catch when
some one offers to make money for you easily and quickly. So any get rich
quick scheme or high returns schemes should be suspected. Remember
also that these schemes are unsecured, are illegal and are not regulated by
the Government. As such, if you lose money, you will not be able to seek any
help from the Government.

20 MANTRAS TO WISE INVESTING

Save prudently…..Invest even more wisely
You need to invest, otherwise your savings will depreciate in value /
purchasing power. However, mindless or reckless investing is hazardous to
wealth; please become an investor… and not a trader or a gambler.
20 Mantras to Wise Investing
Mantra 1 Follow life-cycle investing
You can afford to take greater risks when you are young.
As you cross 50, you should consider gradually getting out of risk
instruments.
By 60, you may exit risk instruments. (To not lose your capital when you
have stopped earning new money). There are better things to do than
watch the ticker on TV!
Mantra 2 Read carefully, and take informed decisions
Do due diligence; take informed decisions.
Read about options and processes on iepf.gov.in and visit mca.gov.in for
more information on companies
For example, for IPOs, read about the offer. This is difficult, with the offer
documents now running into more than 1000 pages; abridged prospectus
too is difficult to read. Yet, read you must, at least, the risk factors,
litigations, promoters, company track record, issue objects and key
financial data.
Mantra 3 Invest only in fundamentally strong companies

81
 Invest only in companies with strong fundamentals; these are the ones
that will withstand market pressures, and perform well in the long term.
Strong stocks are also liquid stocks.
Do not go for penny stocks; you may get lured as these rise by 5-10% a
day against top stocks that rise 5-10% in a year; you will typically enter at
peak and then make losses.
Remember, equity investments cannot be sold back to the company /
promoters.
Mantra 4 Consider investing in IPOs
IPOs have been a good entry point.
Decide whether you are investing in an IPO as an IPO or in the IPO of a
company.
During bull runs, almost all IPOs provide positive returns on the listing
day. If investing in an IPO just because it is an IPO during a bull phase, it
may be advisable to exit on the listing date, as you have invested without
due diligence.
However, most such investors put IPOs on a pedestal and expect them to
perform forever. That will not happen as an IPO becomes a listed stock on
the listing date, and will then behave like that; and only some will be
outstanding.
If an investor does not book profit on the listing date, he is either greedy
or takes a wrong call on the company/industry/market.
He should then not fault the IPO price or blame regular/issuer/merchant
banker. In any case, he invested in the IPO by choice; it was not forced upon
him.
However, if you invest in the IPO of a company, with due diligence, then
do not get bothered by immediate post-listing performance or volatility.
Remain invested as you would in a listed stock.
Mantra 5 PSU IPOs deserve special attention
PSU IPOs are typically from companies that are profitable and have a
significant track record and market leadership; also very little risk of fraud.
In almost all PSU IPOs, there is a discount for the retail investors.
Mantra 6 Invest in mutual funds, but select the right fund and scheme
Mutual funds are a better vehicle for the small investors, most of whom
have little skills or time to manage a personal portfolio.
The problem is that there are too many mutual funds, and there are too
many schemes. Spend time to select the right fund manager and the right
scheme/s.
And remember, mutual funds are subject not just to market risks, and that
investing in these does not mean guaranteed returns.
Mantra 7 Beware of free advice

82
 Too many people in the capital market offer free advice; these come
through TV, print media, websites, emails and SMS.
Don’t act blindly on such advice; remember free advice carries no
accountability
Mantra 8 Don’t get taken in by advertisements
Advertisements are to make you feel good.
Don't get carried away by attractive headlines, appealing visuals and
messages.
Don’t get carried away by upward arrows, big percentages and deceptive
numbers.
Mantra 9 Don’t get overwhelmed by sectoral frenzies/bull runs
Remember, you cannot buy the shares of the Indian economy or of India
Inc. or of a sector… ultimately you have to buy into a specific company.
Also, sectoral frenzies keep changing.
All companies in a sector are not necessarily outstanding. Each sector will
have some very good companies, some reasonably good companies and
many bad companies.
Be also careful about companies that change their names to reflect
current sectoral fancy.
Mantra 10 Look at the credentials of the entity/person
Many scamsters are waiting to exploit your greed; targeting gullible small
investors.
Be careful about the entity seeking your money; visit watchout
investorts.com before investing.
Mantra 11 Be careful promoters issuing shares/ warrants to
themselves
Many a times, preferential allotments to promoters are for the benefit of
the promoters only, at the expense of minority shareholders.
Mantra 12 ”Cheap” shares are not necessarily worth buying
Price of a share can be low (and therefore appear cheap) because in
reality the company is not doing well; the hype about the company/sector
and comparison with prices of good companies may induce you.
Worse, the price can become low because the face value has been split
(over 500 companies have split their shares); rationale given is to make
shares affordable to small investors; not valid as one can buy even one
share; real purpose is to make shares appear “cheap”
Mantra 13 Beware of guaranteed returns offers
Be extra careful before investing in any offer which promises very high
returns.
Remember the plantation companies many of which promised
phenomenal returns (in some cases, 50% on Day 1)!
Let not greed make you an easy prey!

83
Mantra 14 Don’t borrow to invest
Interest mounts by the day; returns don’t necessarily.
Invest within your means.
Mantra 15 Deal only with registered intermediaries
There are many unregistered operators in the market who will lure you
with promises of high returns, and then vanish with your
Money or they will miss-sell or they will undertake unauthorized
transactions.
Deal with registered intermediaries, it also allows recourse to regulatory
action.
Mantra 16 Don't over-depend upon 'comfort' factors like
IPO Grading
Independent Directors
Corporate Governance Awards
CSR Activities
Mantra 17 Don’t take decisions based just on summary accounts
Read through the schedules as well as qualifications and notes to the
accounts.
Check out for “Other Income” and unusual expenses
Look out especially for entries relating to related party transactions,
sundry debtors, subsidiaries’ accounts, cash/bank balances.
Mantra 18 Learn to sell
Most investors buy and then just hold on (Regrettably, most advice by
experts on the media is also to buy or hold, rarely to sell).
Profit is profit only when it is in your bank (and not in your register or
Excel sheet).
Don’t be greedy. Leave some profits for the buyer too. Remember, you
cannot maximize the market’s profits.
Set a profit target and sell, unless you have good reasons to hold on for
very long term.
Mantra 19 If after all this, you do have a grievance...
Seek help of www.investorhelpline.in.
The final… Mantra 20 Be honest
Be honest as only then you can demand honesty and fight for your rights.

***

84
 Bibliography

 Indian financial system Book by M.Y.Khan

 Securities Analysis and Portfolio Management: Book by V. A.
Avadhani
 Investment Analysis And Portfolio Management, Book by Prasana
chandra
 Business today (current stock market outlook)
 www.googlesearch.com
 www.slideshare.net.com
 http://www.nseindia.com
 http://www.bhseindia.com
 http://www.bseindia.com
 www.iepf.gov.in/IEPF_GU/pdf/20Mantras.pdf
 http://www.sebi.gov.in/sebiweb

85