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Module 1
Introduction to the landscape of Investment Indian Capital Markets World markets and various indices Risk and Return in Investment
Introduction of Investment
Financial investments are in stocks, bonds, and other types of security. Indirect financial investments can also be done with the help of mediators or third parties, such as pension funds, mutual funds, commercial banks, and insurance companies.
Modes of Investment
A. Security forms of Investment 1. 2. 3. 4. Corporate Bonds/Debentures Public Sector Bonds Preference Shares Equity Shares
Modes of Investment
B. Non-Security Forms of Investment 1. 2. 3. 4. 5. 6. 7. National Savings Scheme National Savings Certificates Provident Funds Corporate Fixed Deposits Life Insurance Policies Unit Schemes Post Savings Bank Accounts
Characteristics of Investment
Risk Return Safety Liquidity Marketability
Portfolio Management
Portfolios are combinations of assets held by the investors. Selection of such securities that would fit in well with the assets preferences, needs and choice of the investors.
Investment Alternatives
Real Estate Gold Shares Mutual Funds Bonds Fixed Deposits Insurance/ ULIP
Real Estate
Commercial Real Estate: Commercial real estate involves a real estate investment in properties for commercial purposes such as renting. Residential Real Estate: This is the most basic type of real estate investment, which involves buying houses as real estate properties.
Gold
Gold ETFs allow investment in gold in small denominations, which makes it easier for the retail investor to participate.
Physical Gold
Shares
Investment in Stock market for long term, trading with margins or doing short sales
Mutual Funds
passed back to
Investor
Returns
Generates
Fund Manger
Invest In
Securities
Mutual Funds
A professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities.
Bonds are fixed interest bearing certificates issued by government or similar for a fixed period of time.
Insurance / ULIP
Unit linked Insurance plans provides safety for life as well as financial security for the old age, critical situations etc.
Stock Exchanges
Total stock exchanges -23 Regional Stock exchanges 21 NSE and BSE The over the counter Exchange of India (OTCEI) The Interconnected Stock Exchange of India (ICSE)
Primary Market
Primary Market New Issue Market
Private Placement
Offer of Sale
Rights Issue
Secondary Markets
1. Specified securities : Paid up capital 50 millions Market capitalization 100 millions 20000 shareholders 2. Non-Specified Securities 3. Permitted securities
Secondary Markets
Margin Payment 1. Scrip wise Margins 2. Turnover Margins 3. Adhoc Margins 4. Carry Forward Margins
TYPES OF ORDERS
Types of Orders
1. Market Order Market orders are simply buy or sell orders that are to be executed immediately at current market price.
Types of Orders
2. Limit orders Investors specify prices at which they are willing to buy or sell a security. if the stock falls below the limit on a limit buy order then the trade is to be executed.
100
237.20
237.90
100
200
237.15
238.00
200
500
237.10
238.20
500
Types of Orders
2. Limit orders
Condition Price Below the limit Price Above the Limit Limit Buy Order Buy Stop Loss Order Sell Limit Sell Order Stop-Buy Order
Types of Orders
2. Limit orders Investor placed a buy order for 50 shares of ABB at Rs. 345 as Limit buy order. If the price of ABB falls at 344.20, than the order is executed.
Types of Orders
3. Best orders Best orders are at the top of the list: the offers to buy at the lowest price and to sell at the highest price. The buy and sell orders at the top of the list Rs. 235 and Rs. 242
Types of Orders
4. Day Orders It expires at the close of the trading days. 5. Open or good till canceled Remain in force for up to 6 Months unless canceled by the customer
Types of Orders
6. Fill or Kill Orders expire if the broker cannot fill them immediately.
Margin Trading
The act of taking advantage of brokers loans is called buying on margins. In the US, the current margin requirement is 50% There may be for intra-day or weekly margin trading facility
Margin Trading
The percentage margin is defined as the ratio of the networth of the account to the market value of the securities.
Margin Trading
For 100 shares@100, If investors pay Rs. 6000 towards purchase of Rs. 10000, borrowing the remaining 4000 from the broker. The initial balance sheet looks like Assets Value 10000 Liability_____________ Loan from broker 4000 Equity trader 6000
Margin Trading
If the stock price decline to Rs.70 per share, the account balance becomes: Assets Value 7000 Liability_____________ Margin 4000 Equity trader 3000
Maintenance Margin
If the stock value fall below Rs.4000, equity would become negative. If margin falls below level, the broker will issue a Margin Call
Short Sales
A short sale allows investors to profit from a decline in a securitys price An investors borrows a share of stock from a borrower and sells it. Later the short seller must purchase the same stock in the market
Consider the following Limit Order book of a specialist. The last trade in the stock took place at a price of Rs. 50
Limit Buy Orders Price Shares Limit Sell Orders Price Shares
49.75
49.50 49.25 49
500
800 500 200
50.25
51.50 52.75 53.25
100
100 300 100
If a market buy and market sell order for 100 shares comes in, at what price will it be filled? Would you desire to increase or decrease your inventory of this stock?
For Marriott, you have placed a stop-loss order to sell at Rs. 38. What are you telling your broker?
World Markets
India Bombay Stock Exchange Limited: National Stock Exchange of India: United States American Stock Exchange Chicago Stock Exchange Nasdaq-Amex New York Stock Exchange
World Markets
Great Britain The London Stock Exchange
NASDAQ
In 1971, the National Association of Securities Dealers Automated Quotation System (NASDAQ) began to offer immediate information on computer linked system of bid and asked prices for stocks offered by various dealers.
NASDAQ
Bid price is that at which a dealer is willing to purchase a security Asked price is that at which the dealers sell a security
NASDAQ
Nasdaq is divided into 2 sectors, 1. Nasdaq national market system 2. Nasdaq Small Cap Market
NASDAQ
Nasdaq has 3 levels of Subscribers I. Level I are not actively buying or selling security II. Level II tend to be brokerage firms III. Level III are making markets buying and selling stock actively
Euronext
Euronext was formed in 2000 by a merger of the paris, Amsterdam and Brussels exchange. It uses an electronic trading system called NSC (New Quotation System)
Euronext
In 2001, it also purchased LIFFE, the London International Financial Futures and Options Exchange
Nifty - Sensex
It is constructed as a value-weighted index. Market capitalization of each stock is multiplied with a free float factor to arrive at the modified market capitalization of the stocks.
Nifty - Sensex
Total market cap of Infosys 59080 Cr Free float adjustment factor 0.8
Nifty - Sensex
Combine Free-float market cap of Sensex = 387067 Weight of infosys in sensex = 47264 = 12.21% 387067
1. 2. 3. 4. 5.
Market Risk Interest Rate Risk Purchasing Power or Inflation Risk Credit Risk Economic Risk
1. 2. 3. 4.
Portfolio Investors Portfolio are composed of diverse types of assets. Investing in an asset with a payoff pattern that offsets exposure to a particular source of risk is called Hedging.
Portfolio Risk The risk that remains even after extensive diversification is called Portfolio risk. Such risk is also called systematic risk or non diversifiable risk.
Portfolio Risk The risk that can be eliminated by diversification is called Unique risk or diversifiable risk
1. The supply funds from savers, primarily households 2. The demand for funds from businesses 3. The governments net supply or demand for funds as modified by actions of RBI.
The growth rate of the money is known as Nominal rates of interest Suppose FD amount = 10000
The growth rate of the purchasing power is called real interest rate. Suppose rate of inflation (i) = 6%
Nominal rate of interest ( R) = 10%
= 4%
r =
1+R -1 1+I
Sum
X expects to earn a nominal rate of 10% with rate of inflation to be 6%, what is real rate of return he will earn
Sum
An equity share of Rs. 10 promises a dividend of 20% and it is expected that the price of the share rise from the current level of Rs. 60 to 80 in a year. Inflation rate is 14%, what is the real rate of return of the equity?
Boom
0.25
35
Normal Growth
0.50
20
Recession
0.25
10
Sum
Torent estimates the probability and the expected returns for the five observations
Probability 0.1 0.2 0.4 0.2 0.1
Possible Return
-10%
5%
20%
35%
50%
Portfolio Risk
Return on 2 Assets Move Together Covariance is Positive Risk is more on Portfolio
Covariance is negative
Portfolio Risk
The covariance for portfolio risk = 1 Sum total ( Rx Rx) ( Ry Ry) N Rx = Return on Security X R = Expected rate of return N = Number of Observations
Portfolio Risk
Coeeficient of correlation of x and y are Y xy= Cov x y
xy
Portfolio Risk
Return I. Stock X I. Stock Y II. Stock X II. Stock Y 7 13 11 5 Expected Return 9 9 9 9 Variance -2 +4 +2 -4
Power of Diversification
Diversification into many more securities, continues to spread out exposure to firm-specific factors and portfolio volatility should continue to fall.
Power of Diversification
Portfolio risk does fall with diversification. However even extensive diversification cannot eliminate risk.
Power of Diversification
Finding by Obaidullah The total risk of an individual stock is on average 11.7%. It falls to about 9.5% when a second stock is added to create a two-stock portfolio.
Power of Diversification
Stock TCS Adani Quantity 100 100 Purchase price 550 900 Low Price 500 850 High Price 610 1000
Power of Diversification
Stock TCS Adani RPL Ultratech Quantity 100 100 100 100 Purchase price 550 900 900 400 Low Price 500 850 880 380
Return @ Low price = Total Purchase price Risk at Low price 2,75,000 2,61,000 = 14000
Power of Diversification
Average Portfolio Risk 50 40 30 20
10
0 10 20 30 40 50
REVISION
Thank You..