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INVESTMENT ANALYSIS AND

PORTFOLIO MANAGEMENT

Course Instructor: Prof Shahid


Mahmood
University of the Punjab,
Lahore

Books Recommended
INVESTMENT S - ANALYSIS AND MANAGEMENT
by

Charles P. Jones
9th Edition
FUNDAMENTALS OF INVESTMENTS
by
Sharpe, Alexander, and Bailey

3rd Edition
INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT
by
M. Ranganatham and R. Madhumathi

2nd Edition

Chapter One
INTRODUCTION OF THE
SUBJECT

SOME DEFINITIONS
INVESTMENT
The commitment of funds to one or more assets that will
be held over some future time period for some return.

INVESTMENTS
Although, it is plural form of investment but from the
point of view of this subject, it is the study of investment
process.
It is not an act but a process, involves lot of thinking. So,
we have to act like an investment analyst to investigate
about an investment opportunity.
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THE INVESTMENT PROCESS


There are 5 steps of investment process. The steps are:

Step 1: INVESTMENT POLICY


Investment Policy step can be defined as:
Identify investors unique Objective
Determine Amount of investable wealth
State Objectives in terms of risk and return
Identify potential investment categories

Step 2: SECURITY ANALYSIS


Security Analysis describe:
Using potential investment categories, find mispriced
securities
Using fundamental analysis

Intrinsic value should equal discounted present value

Compare current market price to true market value


Identify reasons for undervaluation and overvaluation
of securities
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Step 3: CONSTRUCT A PORTFOLIO


Constructing a Portfolio includes:
Identify specific assets and
Proportion of wealth in which to invest
Address issues of
Selectivity
Timing
Diversification

Step 4: PORTFOLIO REVISION


Portfolio revision describe:
Periodically repeat step 3 (Portfolio Analysis)
Revise if necessary
Increase/decrease existing securities
Delete some securities
Add new securities

Step 5: PORTFOLIO PERFORMANCE


EVALUATION

Involves periodic determination of


portfolio performance with respect to
risk and return
Also Requires appropriate measures to
adjust risk and return

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IT IS ALL ABOUT DECIDING


When to invest?
What timing should be selected.
The best time to invest in Stock Exchange
is, when it is at the lowest activity level.

Where to invest?
Diversification in securities.
Sectors and countries

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IT IS ALL ABOUT DECIDING


What?
What to buy?
Bonds or Shares

Why to invest?
Financial needs.
The advantages on e can enjoy by
making investment.

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WHY WE INVEST IN
STOCK EXCHANGE?
Dividend/ Bonus shares
It is the distribution of profit by a company among its
shareholders.
If the profit position of a company is good but not the
cash position, then instead of cash dividend, a
company issues shares, called bonus shares.

Capital gain
Selling price of the shares is more than its purchase
price, (due to market fluctuations) then it results in the
form of capital gain.
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WHY WE INVEST IN
STOCK EXCHANGE?
Right Issue

If a company wants to issue more shares, then the first offer is


made to existing shareholders. This offer is made at concessional
prices. It is also called as pre-emptive right or prior right of the
existing shareholders.

Security against loan


These securities can be given to bankers against security against
loan. But bankers are not very happy to accept it as security due to
wider fluctuations.

Liquidity
These securities, also called financial assets are very liquid form
of assets. In case of need these can be easily sold out in stock
exchange market to fulfill the need.

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Continue
Tax concession
Dividend and Capital gains are taxed at lower rates.
The normal rate of tax for companies in Pakistan is
35% flat rate. Whereas, dividend , interest and capital
gains are taxed @ 10% (approximately).
Moreover, total investment is also considered for
rebate, if these are new shares and retain for whole the
year.

Excitement of making investment

Making investment, earning profits is very exciting


process. A person can enjoy the whole process.
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Continue
Secured market.
Its a secured market (operating under the supervision

of Stock Exchange and Security and Exchange


Commission of Pakistan)

Learning the art of management

One has to mange the risk factor, like inflation ,


adverse economic situations, political instability etc. So,
a golden opportunity learn the art of managing the
portfolio.

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FACTORS INFLUENCING THE


INVESTMENT PROCESS
Some factors which influence the
investment process are:

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THE SECURITIES
What are Securities?
A legal representation of the right to received
prospective future benefits under stated
conditions.
It includes both bonds and shares.
Traditionally, a security was a physical
document, such as stock or bond certificate, that
represented your investment in that stock or
bond.

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STRUCTURING THE DECSION


PROCESS
Two steps of structuring the Decision Process are
1. Security Analysis
2. Portfolio Management

Security Analysis
The first part of the investment decision process,
involving the valuation and analysis of individual
securities.

Portfolio Management
The second step in the investment decision process,
involving the management of group of assets.
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INVESTMENT vs SPECULATION
Investment

Speculation

Low and moderate returns risk and


ultimately low and moderate returns

Takes high risk and expects higher


returns

Prefers safety over the returns

Prefers returns over safety

Dont expect too much fluctuations

Tries to get the benefit from the price


fluctuations

No frequent transactions, so period


involved is moderate or long

Frequent transactions, so period involved


is short

Dividend

Capital gain

Physical transfer takes place

Settlement takes place without the use of


physical transfer, only differential is paid
or received.

Example , purchase of shares and


bonds

Purchase of Derivatives
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GAMBLING
It is a game of chance like the tossing of a coin.
It can be on the either side i.e. winning or
loosing.
The risk involved is the highest and requires
least or no analysis. It is , therefore, excluded
from the scope of this subject.

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THE INVESTMENT
ENVIRONMENT
Security Markets
The basic function of Security Markets is that it
is a meeting place for Buyers and Sellers.

Types of Markets Based on Issuer


Primary market
Issuing shares in Initial public offering (IPO). It
is not a particular place but all the banks where
you can get the form free of cost and apply for
shares and bonds.

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THE INVESTMENT
ENVIRONMENT
Secondary Market.
The market where sale and purchase of
bonds and shares takes place for second hand
securities. Stock exchange market is the
example of it.

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Bonds and Shares

BONDS vs COMMON SHARES


EVENTS

BONDS

COMMON SHARES

Status

Debt instrument and shown as


long term liability of the
business

Owner of the business, shown under


the head of Shareholders Equity

Return

Interest is paid to Bondholders

Dividend is paid to Shareholders

Rate Of
Return

Fixed interest rate

Dividend is fluctuating in nature

Duration

Bonds are issued for a stipulated


period

Shares are perpetual, means period


for issue of shares is not mentioned

Nature Of
Payment

Interest payment is compulsory,


even in case of loss, the
company has to pay it

Dividend payment depends upon


the availability of profit.

Risk Factor

More risky for company but less Less risky for company but highly
risky for bondholders
risky for shareholders
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BONDS vs SHARES (cont---)


EVENTS
Islamic
Perspective

BONDS
Fixed interest , strictly
prohibited.

COMMON SHARES
Profit & loss sharing schemes,
admissible in Islam.

Payment At The Firstly the company has to


Time Of
make payment to bondholders,
Liquidation
out of the assets realized

The Common Shareholders are


paid at the end, after the
satisfaction to bonds and the
preference shareholders

Role In Decision No role in decision making


Making
process.

As owner of the business, the


shareholders play important
role in decision making process
of the company.

Voting Right

Bondholders have no voting


right

Shareholders enjoy the voting


right

Tax Factor

No tax payment is involved on


the payment of interest , it is
tax deductible.

Dividend is Taxable

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COMMON vs PREFERENCE SHARES


EVENTS

COMMON
SHARES

PREFERNCE
SHARES

Status

Real owner of the business

Hybrid equity

Return

Fluctuating dividend

Fixed dividend is paid to


Preference shareholders

Duration

Perpetual ,issued for


unlimited time period

Perpetual but sometimes


call provision is added.

Risk Factor

Minimum risk for company


but highest for the
shareholders.

Carry medium level risk


for the company and the
shareholders.

Islamic
Perspective

Profit & loss sharing ,


admissible

Controversial, so not
admissible

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COMMON vs PREFERENCE SHARES


(Continue..)
EVENTS

COMMON SHARES

PREFERNCE
SHARES

Payment At The
Time Of
Liquidation

Paid at the end, after the


satisfaction of bonds and
Preference shares.

Paid ahead of Common


Shares but after the bonds.

Role In Decision
Making

As the real owner of the


No role in decision making
business, the shareholders process.
play important role in
decision making process of
the company.

Voting Right

They enjoy the voting


right

Dont enjoy the voting right

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A research in America
Data was collected from different age and
income groups, ranging from 20 years to
onward .
20-27 years
70% fluctuating and 30% fixed
28-35 years
60% fluctuating and 40% fixed
36-43years
50% fluctuating and 50% fixed
44-51years
40% fluctuating and 60% fixed
52-59 years 30% fluctuating and 70% fixed
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As an Investor which one you will


Prefer?

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What to purchase?
When to buy Common Shares
If your financial position is good, enjoying good health, having
low responsibility level and willing to take risk, then go for more
of common shares than bonds. It means you can invest in three
types of securities simultaneously but make adjustment according
to your requirements. The Preference shares can be treated as fixed
income securities.

When Bonds
On the contrary, due to advanced age, poor health condition and
more responsibilities, one should play safe and need fixed income
at the end of specified period, then go for more bonds and
preference shares than common shares.

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Remember
These are not the hard and fast rules. Generally, It is better to have
a mixture of both equity and debt, to have effective control over
risk and return. Try to make a good portfolio.

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D
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