Amity Business School

Amity Business School

MBA, Semester 3, class of 2013 Security Analysis and Portfolio Management Akhil Swami/ lecture 1 to 4

Course structure

Amity Business School

Module I: Background of Capital market/Corporate Governance and Methods of Fund Raising Importance of Strong Capital market in Economy, Investment opportunities available to Investors, relation of demographic characteristics with investment pattern of individuals, Process of investment in Financial assets, intermediaries

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and Role of SEBI/OTCEI//ROC/Stock exchanges-Listing agreement , clause 49, Importance of Corporate Governance and changes taking place/required in the law. Salient features and operation of stock exchanges, Trading arrangements, Changing scenario of Indian stock market. Relationship of Primary market with Secondary market, raising of Funds by IPO/FPO/Right issue

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Merchant banking and its functions , contemporary issue in Capital market.

Amity Business School

Strength of any economy will be identified by the efficiency and effectiveness of its capital market and banking system. In the era of liberalization, when world has become a global village, economics of scale and economics of scope becomes important and banking/ capital market plays a crucial role in the same.
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Difference between Registrar of company and registrar of issue. Role of SEBI and its difference with CCI which was the governing body for issue management. Interconnection between primary market and secondary market.

Power and function of SEBI

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Regulating the business in stock exchanges and other security markets. Registering and regulating the working of stock brokers and other intermediaries. Regulating substantial acquisition of shares and takeover of companies. Registering/regulating the working of collective investment schemes including mutual funds(IRDA and SEBI dispute)
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Prohibiting fraudulent and unfair trade practices in the security market. Prohibiting insider trading. Protecting investors interest. Inspecting and regulating stock exchanges and other intermediaries. SEBI has primary market department, secondary market department, MF department and derivative cell.
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Process of IPO/FPO/Right issue/

Difference between RHP and ordinary prospectus. Contents of a prospectus. Process of IPO. Pre issue and post issue obligations. Listing agreements and clause 49. Role of Merchant bankers.

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Investment

Amity Business School

One can invest in Jewelry /Real estate/Bond/Shares/Warrants/Preference stocks/Bank deposits/LIC/ULIP/PF Schemes FCCB/NCD/FCD/PCD/Mutual Funds/ETF-----What is the basis of these investments? Rule of 100-----Deduct your age from 100, and what remains invest in equityrest in Debt instruments---why????
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investment

Amity Business School

The investment will depend upon understanding the trade cycle so that one can buy at bottom and sell at peak. The cycle will follow the principal of economics , law of demand and law of supply. Duration of cycle will also play a important role in investment strategy.

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Contd

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Risk bearing investors/risk averse investorswhich depends upon Demographic Characteristics of the investor. Rule of 100. QIBS/QIPSmall investor/HNI/FII/DII/Mutual funds. ADR/GDR/IDR Private equity Funds/Angel Financers/anchor invester. Large cap/mid cap/small cap stocks.

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Type of companies and stocks

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Defensive---FMCG, Pharma. Growth companies---currently undervalued stock that has a high probability of being properly valued in the near term. Here mid caps and small caps with potential and good management can be identified. Cyclic companies and stocks---volatility in earnings and hence if identified the pattern will give good returns.

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Speculative---great risk but greater returns if entry and exit is good. Arbitrage. Alpha---gives the vertical intercept point of the regression line. in a perfect world it should be zero and line should start from 0.if the alfa was positive., the opposite equilibrium process would occur , investors would rush to buy and expected return would fall.

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Venture capital (VC) is Financial provided to early-stage, high-potential, high risk, growth start up companies . The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as Biotechnology, IT, Software, etc.
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The typical venture capital investment occurs after the Seed Funding around as growth funding round in the interest of generating a return through an eventual realization event, such as an IPO or Trade sale of the company. It is important to note that venture capital is a subset of private equity . Therefore all venture capital is private equity, but not all private equity is venture capital.

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Difference between Investment and Speculation

Both involve purchase of assets with a motive of making profits. Investor prefers low risk and speculator high risk---goes for frequent trading. Investor goes for fundamental of the companies and speculator on trends/movements. Holding is for long duration for investor and low for speculator.

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ADR

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AMERICAN DEPOSITORY RECEIPT: Is a certificate issued by United States in lieu of a foreign security. The original securities are lodged in a bank or with a custodian abroad. American Depository Receipt are traded in the US for all intents and purposes as if they were a domestic stock.
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Contd..

Amity Business School

An American Depository Receipt dividend is paid in the US dollars so it provides a way for American investors to buy foreign securities without having to abroad and without having to switch in and out of foreign currencies. Strong hands/weak hands/..Dividend yield on stock investment.SIP/ELSS. Sectoral performance. QIP and QIB.

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QIP, which came into effect on May 08, 2006, is a designation of securities issue, through which SEBI, allows a company listed in India to raise funds from the domestic market without any pre-issue filings to the regulators. This was incorporated in order to encourage the Indian companies to raise funds through domestic markets, rather than resorting to ADRs and getting those funds from the

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Bulls Bears Stags Lame ducks Bear traps Bull Traps. Private placement/bought out deal. Interest sensitive stocks.
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Bulls and Bear Traps---are major breakouts that are soon followed by abrupt sharp price reversals. Defensive stocks/aggressive stocks. Hedge funds. Growth stocks/value stocks/momentum stocks. IPO/FPO/Right issue/stock split/bonus issue/Record date/closure of books/
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Some terms

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Registrar of issue/Registrar of company/. Dead Cat Bounce---A temporary recovery from a prolonged decline or bear market , after which the market continues to fall. Blood Letting-----A period of severe investing losses , The term comes from the old medical practice that involved bleeding out a patient. Strong hands and weak hands and interpretation.

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Scalping---Is a trading style where small price gaps created by the Bid-Ask spread(What are these) are exploited. Market Breadth---The difference between inclining stocks and declining stocks. How market breadth helps predicting the direction of the market Thickness of the market-----difference between ask and bid price. More thickness means more trades probability.

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Hinder burg Omen

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When there are both new 52 weeks high and 52 weeks low, it indicates that the market is going through a period of extreme divergence and is not very conducive for further rise,. Cash holding by HNI and MF and interpretation of the market. Follow the smart money.

Some terms

Amity Business School

Torpedo Stocks---A declining stock that will most likely continue to decline. Air pocket Stock---When the price of a stock plunges unexpectedly similar to airplane when it hits a air pocket. Down Tick---A trade is on the down tick when the last trade occurred at a price lower than the previous one.

Some terms

Amity Business School

Flight to quality----The action of investors moving their capital away from riskier investments to the safest investment vehicle. Capitulation---A military term , refers to surrendering or giving up. Falling knife---When the shares have a free fall-Dont out your had below a falling knife.

Some terms

Amity Business School

Lame Duck---is a bear who has made a short sale(what is short sale and short covering) but is unable to his commitment to deliver the securities sold by him on account of rises in prices of securities subsequently to short sale He is said to be struggling like a lamer duck. Stagis a trader who applies for shares in IPO, He is a optimist .

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Failed signals---when the market fails to follow through in the direction of the charted signal, there is a great chance that the market will move significantly on the opposite direction.

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Financial Markets
Money Market

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Market in which liquid funds (cash) as well as highly liquid securities are traded for a very short duration Main participants are banks and financial institutions Few corporate houses, insurance companies, mutual funds, PF trusts and NBFC also play an active role in this market Provides liquidity support to banking system

Capital Market
Provides opportunities to companies to raise funds directly from investors Functions under supervision of Securities and Exchange Board of India

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Money Market

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Call Money Market Government Securities/Gilt-edged security market Commercial Papers Markets for Bills of Exchange

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Call Money Market

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Market in which surplus cash of banks and corporate houses is traded for a very short duration (normally <15 days) Main transactions carried by banks to fulfill their liquidity and CRR requirements Banks allowed to participate as provider and user of funds Majority of transactions done by banks over telephone Interest rate influenced by demand and supply of money available in the market. What does interest rate movement in money market indicates????????

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Gilt Edged Securities Market

Market for Government Securities Issued by Central/State Govt. or any of their agencies Highly safe instruments for investment RBI acts as underwriter and market maker Types of Gilt Edged Securities

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Dated Securities of Government- Maturity period of more than 1 year and carry a coupon rate Treasury Bill Issued by RBI on behalf of central government Maturity period not exceeding 364 days Dont carry any interest, instead are issued at discount to face value Issued through a system of auction

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Commercial Papers (CPs)

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Unsecured papers issued by companies in the form of a promissory note to raise finance for a short term Dont carry any interest rate, instead are issued at a discount Negotiable in nature Minimum maturity period of 15 days and a maximum of one year

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Markets for Bills of Exchange

Amity Business School

Bill of Exchange is an unconditional order by a writer (drawer) of the bill to drawee to make a particular payment on a future date upon the presentation of the bill Bill may be presented by drawer himself or by the bearer on behalf of the drawer Banks and financial institutions also deal in bills of exchange

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Capital Markets
Primary markets

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Provides a platform for new as well as old companies to raise funds by issuing securities directly to the ultimate investors Provides bridge between savings and investments

Secondary Market/Stock Market

Regulated market place in which listed securities are bought and sold through the intervention of brokers Follow open system of 2-way quotation 23 stock exchanges in India. Are Primary market and secondary market interrelated? Listing agreement with stock exchanges/Clause 49/Delisting/odd lots/Dispersal of shareholders/Share holding/
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Contd----

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Why SEBI made rule of minimum shareholding and maximum shareholding norms for Promoters? AMFI/IRDA/SEBI.

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Primary Market: Fund Raising Mechanism

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Public Issue---IPO/FPO---Fixed price issue/Price bands--Prospectus vs Red herring prospectus/Book Runner/road show/Underwriters/ROC/Registrar of issue/Bankers to the issue/Role of brokers/Role of merchant bankers/Pre issue lead managerpost issue lead manager. Bought out deal Controller of capital issues and SEBI.

Private Placement Rights Issue

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IIP

Amity Business School

IIP basically are presentation of Growth in different sectors of Industry with respect to same industry in corresponding period of last year. 2. that means, growth is dependent not only growth in absolute numbers but also on base effect(If last growth was high last year , it will look to be lesser this year and vice versa, because of the base effect)

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Anchor Investor

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An Anchor Investor is the first investor in any round, that provides subsequent investors a degree of confidence. Until you have the first investor, no body wants to be the first one to take a bite. Once you have the first investors, others feel assurance that others are willing to invest. So typically an anchor investor will know you and have a high degree of confidence in your project.

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Contd.

Amity Business School

The concept of anchor investors came up in June 2010, following a directive by SEBI. Put briefly, anchor investors are entities which are offered, and subscribed to, shares in an IPO before the offer opens to the public.

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As per new guidelines of SEBI, these investors cannot sell off before 1 month of the listing.

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International portfolio

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A grouping of investment assets, such as stocks, bonds and mutual funds, that focuses on securities from foreign markets rather than on domestic ones. An international portfolio is designed to give the investor exposure to growth in emerging and international markets and offers a form of diversification.
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Merchant bankers

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Advisory services. Market operations. Issue management. Non fund based financial services.

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How The prices of IPO are decided

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Project is appraised by a FI/Bank/ COP/Means of financing is decided. On the basis of assumptions, the profitability and cash flow is estimated. PAT is estimated, On the basis of EPS and PE ratio of the comparable industry, th eprojected price is estimated and investors convinced that they will make money if invest in companys stocks.
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WHY MF were asked to call their instrument as NFO and not a IPO----IPO give s a impression to the investors that it is cheap which is not a fact so it was called FPO. Why is it advantageous for promoters to get IPO on Premium.

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How indexes are made. What are large cap, midcap and small cap . Why it is beneficial to invest in these stocks. What is the correlation between primary market and secondary market. What is the correlation between investing in large cap/midcap and small cap.
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Corporate governance

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Types of Directors---Promoter, professional, nominee and independent. Clause 49 and listing agreement.. Audit committee, remuneration committee and grievances committee.

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Face value of share is important as the dividend is calculated on the face value, so if one purchases Co. x share for Rs 700 with face value of Say Rs 10, and dividend declared is 200% , he will get Rs 20 as dividend and dividend yield will be Rs 20 /700==2.8%.

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Beta coefficient

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Beta coefficient is a measure of the volatility of stock price in relation to movement in stock index of the market. The beta factor of the market is 1.

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