SECURITY ANALYSIS & PORTFOLIO MANAGEMENT

Points Notes

Question Investment Attributes or Features / Evaluation factors of Investment

-Return, Risk, Liquidity, Tax Shelter, Convenience
Question Difference between
- Investment, Speculation and Gambling
Question Why do people invest? / Need or Objectives for Investments
- Safety, Income, Inflation Hedging,Tax
Question Financial System in India
 The word "system", in the term "financial system", implies a set of complex and closely
connected or interlined institutions, agents, practices, markets, transactions, claims, and
liabilities in the economy.

 Financial System Consist of

• Financial markets,
• financial intermediation
• financial instruments or financial products.

Financial Market Instruments

Question Structure of Capital Market

Sanesh Varghese DD, MACFAST.

Question Participants In The Securities Market
1. Regulators CLB, RBI, SEBI, DEA, DCA , SEC, FRB
2. Merchant Bankers or Investment Bankers
3. Registrars
4. Underwriter
5. Brokers
6. Bankers to issue
7. Collection agents
8. Depositories
9. Advertisers
10. Legal Councils
11. Credit rating agencies
12. Stock Exchanges
13. Mutual Funds , Venture capital funds, FIIs
14. Custodians
15. Debenture trustees
16. Listed Securities

Question Steps in Public Issue In India

1. Approval of the board of directors
2. Approval of shareholders
3. Appointment of the lead manager
4. Due diligence by the lead manager
5. Appointment of other intermediaries like co-managers,
6. advisors, underwriters, bankers, brokers, and
7. registrars
8. Preparation of the draft prospectus
9. Filing of the draft prospectus with SEBI
10. Application for listing in stock exchanges
11. Filing of the prospectus (after any modifications suggested by SEBI) with the Registrar of
Companies
12. Promotion of the issue
13. Printing and distribution of applications
14. Statutory announcement

Sanesh Varghese DD, MACFAST.

 15. Collection of applications
16. Processing of applications
17. Determination of the liability of underwriters
18. Finalisation of allotment
19. Giving of demat credit (or dispatch of share
20. certificates) and refund orders
21. Listing of the issue

Question Different Investment avenues / Investment medias

Marketable Non Marketable
 Equity  Bank Deposit
 Debentures  LIC Policies
 Bonds  PF
 Warrants  Post Office
 Money Markets
 Mutual Funds Other Instruments(tangible
 ETF  Real Estates
 Derivatives  Precious Objects

Question Participants In The Securities Market

1. CLB, RBI, SEBI, DEA, DCA , SEC, 10. Advertisers
FRB 11. Legal Councils
2. Merchant Bankers or Investment 12. Credit rating agencies
Bankers 13. Stock Exchanges
3. Registrars 14. Mutual Funds ,
4. Underwriter 15. Venture capital funds, FIIs
5. Brokers 16. Custodians
6. Bankers to issue 17. Debenture trustees
7. Collection agents 18. Listed Securities
8. Depositories
9. Regulators

Question Steps in Public Issue in India for a company

1. Approval of the board of directors
2. Approval of shareholders
3. Appointment of the lead manager
4. Due diligence by the lead manager
5. Appointment of other intermediaries like co-managers,
6. advisors, underwriters, bankers, brokers, and
7. registrars
8. Preparation of the draft prospectus
9. Filing of the draft prospectus with SEBI
10. Application for listing in stock exchanges
11. Filing of the prospectus (after any modifications suggested by SEBI) with the Registrar of
Companies
12. Promotion of the issue
13. Printing and distribution of applications
14. Statutory announcement
15. Collection of applications
16. Processing of applications

Sanesh Varghese DD, MACFAST.

 17. Determination of the liability of underwriters
18. Finalisation of allotment
19. Giving of demat credit (or dispatch of share
20. certificates) and refund orders
21. Listing of the issue

Question Depository system :Share kept in electronic form and transfer

• NSDL 7th June 1996 NSE

• CSDL Feb 1999 BSE
• Features
– Securities in Dematerialised Form
– Fungibiilty
– Parties Involved [ Depository ,DP, BO, the issuer]
– Free Transferability
– No stamp duty
– No risk
 Facilities Offered By Depository System:
– (a) Dematerialisation.
– (b) Rematerialisation.
– (c) Electronic settlement of trade.
– (d) Nomination facility.
– (e) Electronic credit of securities allotted in public, rights and bonus issue.
– (f) Pledging or hypothecation of dematerialised securities.
– (g) Freezing of demat accounts.
– (h) Stock lending/borrowing facilities, etc.
 Benefits of Depositories
1. Reduction in paper work.
2. Elimination of risks associated with physical scrip such as theft, forgery, mutilation,
loss of share certificates etc.
3. Elimination of bad delivers.
4. Increased liquidity of scrip through speedy settlement and reduction in delays in
registration.
5. Low transaction costs for purchase and sale of securities compared to physical
mode.
6. No stamp duty on transfer of securities.
7. Facilities the issuer companies to update the information regarding shareholders
and to communicate with them in better ways.
8. Attract foreign investors and promoting foreign investment.
9. Emergence of healthy and efficient capital market.
10. Greater opportunity for the development of sophisticated custodial services etc.
Question Stock Market Index -A number representing components
 Basis of difference various indices
o Component stock (Generic and Specific)
o Number of stock / Sensex 30 but Nifty 50
o Base period (Sensex 1978-79 but nifty 85-86)
o Calculation methodology ( Price weighted , Value weighted and Equal weighted )

 Practical usage
o Indicator of market

Sanesh Varghese DD, MACFAST.

 o Indicator of Economy
o Finding Correlation and watching the movement of stock
 Methods
o Price weighted index (Dow Jones ,Nikkei)
o Value weighted index
o Full market capitalization (Sensex,Nifty Old)
o Free float market capitalization (Sensex,Nifty current)
o Relative weight index(ET Index)

Question SEBI - Parliament give statutory status 1992

 Objectives
o To protect the interest of investors
o To promote the development of Securities Market
o To regulate Securities Market
 Roles
o Frame policies, norms, guidelines,
o monitoring, investigating, punishing, levying fine,
o Licensing
o Investor education, grievances redressal
 Functions
o Regulating the business in SE and any other market
o Registering and regulating (any related SM)
o Registering and regulating the working of collective investment scheme (MF)
o Prohibiting fraudulent and unfair trading practice
o Promoting investor education and training of intermediaries
o Prohibiting insider trading in securities
o Regulating substantial acquisition of shares and take over of companies
o Calling information ,undertaking inspection
 Organization of SEBI / Divisions
1. Primary Dept –Policy matters, investor grievances redressal and guidance
2. Issue Mgt & Intermediaries Dept
3. Secondary Market Dept
4. Institutional investment
5. Legal and investigation Dept
 SEBI Role division
1. Primary Market
2. Secondary Market
3. Mutual Funds
4. FII

SEBI and Primary Market

1. Entry Norms
2. Promoters Contribution
3. Disclosure Norms
4. Book Building Norms
5. Allocation of Shares
6. Market Intermediaries

SEBI and Primary Market

• Entry Norms

Sanesh Varghese DD, MACFAST.

 » -3 year dividend record or appraised by public FI and FI
participate

» 5 public share holder/each 1 lakh issue

» Vet offer documents(OTCEI exempted)

» Banks at least two year profitability

• Promoters Contribution

» Not less than 20% and bring it before public issue (if issue ^ 100c
bring 50%)

» At least 20% contribution locked 5 years (but if dividend record 3

years)

» Non-underwritten the unsubscribed part is promoters

• Disclosure Norms(new details Aug 1997)

» Offer documents –details

» Unaudited quarterly statement after listing (CB Bhave Committee)

• Book Building Norms

» Public issue -100% book building

» Atleast 30 book building centre

• Allocation of Shares

» To bring small investors(1000 or <) minimum application no 200

» Minimum public norm 25%

» Interest paid 15% if refund (non allot) is not made within specified
period

» Max time for allotment is 30 days

• Market Intermediaries

» Licensing(MB, underwriters, registrars ,broker, custodians, transfer

agents etc)

» Scrutinizing track record

» Merchant Bank -5 Crores network

» (New norms Category 2,3,4 abolished)

SEBI and Secondary Market

• Governing Board

• Infrastructure

Sanesh Varghese DD, MACFAST.

 • Settlement and Clearing

• Debt Market

• Price Stabilization

• Delisting

• Brokers

• Insider Trading

Governing Board

» 50:50 broker :non broker(40:60 derivatives)

» Non broker-arbitration, disciplinary and default committee + govt

,public

• Infrastructure

» sufficiency

» On line screen based is must

• Settlement and Clearing

» T+2,short sales, clearing houses

• Debt Market

» -debenture rating mandated

» Listing allowed even if equity not listed

» Dematerialization allowed

» FII allowed 100%

• Price Stabilization

» Monitoring division for abnormal price changes

» Special margin system/penal margin(25)

» Circuit breakers(Price band 10% daily 25% weekly)

• Delisting

» Voluntary delisting after buy offer to public

» 3 year Listing fees submit additional

• Brokers

» Registration

» Adequacy norms(infra structure and other requirements)

Sanesh Varghese DD, MACFAST.

 » Code of conducted –contract note, periodic information to client

» Financial statements submission

» Regional centre for complaint redressal

» Suspension penalization cancelation

» Sub broker allowed

• Insider Trading

» Insider trading regulation norm of 1992

» Defined insider and price sensitive information

SEBI and Mutual Fund

» 1992- code of conduct

» 1996-mutual fund regulation act fund management

» 1998 further additions

• Disclosure

» Offer documents (full details)

» Due diligence by AMC

» FM details

• Investment

» AMC net worth 5 cr-40% sponsors

» Not exceed 5% single type in single co

» Not exceed 10% all type in single co

» Not option, short sales,unlisted, privately placed

• Accountability

» Proper records and intimation

» Total expense max 6% of corpus created

• Dividend

» Not less than 90% if divided scheme

SEBI and FII Regulation 1992

» based on FDI policy

» Registration

• Custodians

Sanesh Varghese DD, MACFAST.

 » SEBI approval

» Broker should transfer (share or cash)to custodian with 48 hrs

• Preferential Allotment

» Subject approval of share holders

» Max 15% subjected max limit of aggregate 24%(single max 5%)

» Highest price during last 26 weeks

Sanesh Varghese DD, MACFAST.

 Module 2

Question Risk

Systematic Unsystematic

All Industry/firms Specific Industry/Firms

Uncontrollable by investors Controllable by investors

(diversification)

1.Market Risk 1.Business Risk

Natural factors (Internal and External Operating

Environment)
Man made factors
2. Financial Risk
2. Interest Rate risk
Capital Structure
Bonds and Debentures
Debt Equity
3.Purchasing Power Risk
Individual Company Risk
Demand Pull
Measure = S.D
Cost Push

Affect the real rate of return

Market Risk

Measure= beta

Total Risk =Systematic Risk + Unsystematic Risk

Question Bond Price Theorems

1. Bond prices & yields move in opposite directions.

2. Bond prices are more sensitive to yield changes the longer their maturities.

3. The price sensitivity of bonds to yield changes increases at a decreasing rate

with maturity.

4. High coupon bond prices are less sensitive to yield changes than low coupon bond
prices.

5. With a change in yield of a given number of basis points, the associated percent gain is
larger than the percent loss.

Sanesh Varghese DD, MACFAST.

 Module 3

Question Factors influencing Share Price Movements

 Change in price is happening because of change in investors expectation of benefits
 Performance of Company ( higher Profit)
Therefore factors influencing are
1. General Economic,
2. Specific Industry and
3. Specific Company
4. Phycology of Investors or crowd d behaviour
Each sub Category of above factors are evaluated based of its Favourability or un-
favourability towards the increase of profits to the company selected
Researchers have found that stock price changes can be attributed to the following factors:
 Economy-wide factors : 30-35 percent
 Industry factors : 15-20 percent
 Company factors : 30-35 percent
 Others factors : 15-25 percent
The Key Variables Commonly Used To Describe the state of
( Give Comment on each whether share price increases if each item increase or decrease
become favorable or un favorable)
Profit potential of a Company depends on
1. Profit possibilities by more sales possibility
2. Managerial Efficiency (various dimensions)
3. Asset and Liability structure
4. Financial statement Analysis
5. ratio Position [eps growth]
6. Market Share
7. Capacity Utilization
8. Modernization and Expansion Plans
9. Order Book Position
10. Availability of raw material

Industry Factors
1. Industry Life Cycle
2. Demand Supply Gap
3. Competitive Conditions
4. Permanence
5. Labour Conditions
6. Attitude of Government
7. Supply of Raw Materials
8. Cost Structure

the Macro economy are :

1. Growth Rate Of Gross Domestic Product
2. Industrial Growth Rate
3. Agriculture And Monsoons
4. Savings And Investments
5. Government Budget And Deficit

Sanesh Varghese DD, MACFAST.

 6. Price Level And Inflation
7. Interest Rates
8. Balance Of Payment, Forex Reserves, And Exchange Rate
9. Infrastructural Facilities And Arrangements

Question Explain Fundamental Analysis

Need :
 Selecting a share for investment
 Finding the value of a share for taking investment decision
Method
EIC or CIE
Explain EIC + Analytical tools
(Analytical tools are same factors given in the previous essay: Descibe each of economic , industry
and company factos)

Question Economic Forecasting

Methods
1. Survey
2. Economic Indicators
3. Leading [Fiscal Monitory productivity rainfall Capital Indices]
4. Coincidental [GDP interest rates reserve funds GDP Gap
5. Lagging [ unem, cpindex foreign fund flow]
6. Diffusion and Composite Indices
7. Econometric Models

Question Technical Analysis

Need : To fix the timing of investment
Concept
 A study of past share price behavior to predict the future trend is termed as technical
analysis
 A forecasting technique which utilizes historical share price data.
 Share prices are determined by the demand and supply forces operating in the market.
 share prices moves in trends or waves which may be upward or down ward.
Principles of Technical Analysis

Market value of a security related to the demand and supply forces.

There are both rational and irrational factors which surround the supply and demand
forces.
 Security prices behave in a manner that their movement is continuous in a particular
direction for some length of time.
 The shifts in demand and supply can be detected through charts
 Patters can be projected by charts.
Assumptions of Technical Analysis

 The market value of the scrip is determined by the interaction of supply and demand.
 The market discounts everything.

Sanesh Varghese DD, MACFAST.

  The market always moves in trend.
 History repeats itself.

Question Main theories in of Technical Analysis

Dow theory [ Hint : draw the diagram of dow theory]

 Market has three movements: primary movement, secondary reactions, minor movements
1. Primary movement: long term trend
2. Secondary reactions: restraining force on the primary move
3. Minor movements: intra day fluctuations

 The three movements are compared to:

tide, waves and ripples of the sea

Elliot Wave theory [ Hint : draw the diagram of theory]

1. The market has a cyclical pattern

2. Total 8 movements make a cycle
3. 5 Movements contribute towards upward movement and 3 contributes downward
movements
4. Movement in same directions are directional and opposite are called correctional ; thus
1,3,5 are directional 2 and 4 are corrections
5. The upward movement is followed by a decline (upto 30 to 35 percent of the rise)
6. Each cycle of upward movement and decline takes the market to a higher level

Question Tools for Technical Analysis

1. Charts and Pattern Analysis

2. Mathematical Indicator Analysis

Charts Analysis
 Types of charts [ Hint draw each chart diagram]

1. Candle Stick
2. Bar-OHLC
3. Line Chart
4. Point and Figure

Pattern Analysis
1. Candle stick pattern
Other chart patterns
 Trend reversals
2. Head and shoulders
3. Inverse Head and shoulders
 Continuation Patterns
4. Triangle
5. Flag

Sanesh Varghese DD, MACFAST.

Mathematical Indicatators

1. Moving averages
Simple and exponential
F=
EMA=(CP-Prema)xF +Prema
2. ROC ( )
( )

3. RSI
RSI=100-[100/(1+RS)]
RS=Average gain per day / Average loss per day
4. MACD
(ST ema - LT ems)

5. Breadth of the Market

daily difference or cumulative difference b/w advances and decline
Normal is Convergence and divergence is signal
6. Short Interest – Amount of short selling
If more in future price may go high due to high purchase requirement to cover
7. Mutual fund Cash ratio
8. Cash to net asset
Low cash ratio Less than 5% - short of cash –they may sell – market dowm

Different Charting Techniques

1. The Dow Theory

2. Bar And Line Charts
3. Point And Figure Chart
4. Moving Average Analysis [ Cross overs]
5. Relative Strength Analysis
6. Rate of change {ROC]

Question Random Walk Theory RWT

 T Technical Analysis >> Stock prices move in orderly fashion

 Theory against Technical Analysis is RWT
 Share price change based changes in each influencing factors
 It move in random direction based on each new information
 The movement will continue till that information fully reflect in price
 So the theory is based on the assumption that market is efficient and later came know as
efficient market theory
Question Efficient market Hypothesis

Assumptions

 `Market efficiency` is the accuracy and speed with which market translates the expectation
into prices
 Market has Operational and Informational efficiency

Sanesh Varghese DD, MACFAST.

  Share prices represent a random walk rather than an orderly movement.
 Changes in stock prices show independent behavior
and are dependent on the new pieces of information that are received but within
themselves are independent of each other.
 Capital market is efficient in processing information.
 An efficient capital market is one in which security prices equal their intrinsic value at all
times, and where most securities are correctly priced.

Forms of Market Efficiency

 Week form – past/historical

 Semi strong form – publicly available
 Strong form – public plus private
Past data (info or history) is already reflected so no prediction for future thus negate TA

• Test weak form of efficiency

two type of test - statistical pattern test and trading rule test

Pattern test

1 Serial correlation test

Correlation of price movement in different periods

2 Run test

Different runs in different period

Trading rule test

3 Filter rule against buy and hold rule

Statistical pattern

4 If prices changes are random curve is normal

Past data (info or history) and Public available information like reports s will reflected instaneosly

• Test semi strong form of efficiency

Residual analysis

An event and its impact on share price

Using Sharpe model

Expected return and actual return comparison

information

• Test strong form of efficiency

1. Profitability analysis of active investors in insider category

Sanesh Varghese DD, MACFAST.

 2. Profitability analysis on Mutual fund analyst who can avail pvt info

(First test is + and second is -)

• Test semi strong form of efficiency

Residual analysis

An event and its impact on share price

Using Sharpe model

Expected return and actual return comparison

Module 5

Question Portfolio Management

Management of Investment fund –Optimising return

Steps (Phases)

1. Security Analysis (Return & Risk -FA and TA)

2. Portfolio Analysis(Return & Risk )

3. Portfolio Selection (Optimal Portfolio )

4. Portfolio Revision

5. Portfolio evaluation

Question Portfolio Analysis

– Portfolio Analysis

– Return

– Risk

– Two securities

– More than two

– Covariance (average of product of deviation)

Question Portfolio Selection

Optimise

Criteria

With same return

With same risk

Sanesh Varghese DD, MACFAST.

 Efficient frontier (Return –risk )

Index model

Question CAPM

Essentially, the capital asset pricing model (CAPM) is concerned with two questions:

What is the relationship between risk and return for an

efficient portfolio?

What is the relationship between risk and return for an

individual security?

Assumptions

• RISK - AVERSION

• MAXIMISATION . . EXPECTED UTILITY

• HOMOGENEOUS EXPECTATION

• PERFECT MARKETS

CAPM ( Securities are under priced over priced or correctly priced)

• CAPM ( Securities are under priced over priced or correctly priced)

CAPM and Estimated return comparison

CAPM >> is less – Under priced

Question Portfolio Revision

Change in existing mix

Need Factors

1. New funds

2. Risk tolerance

3. Investment goal change

4. Liquidation needs

Sanesh Varghese DD, MACFAST.