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Investment Analysis and

Portfolio Management

Security Markets -1

Investment:
The commitment of funds to one or more Assets that will
be held over some future time period.

Investment Opportunities:
Real Assets:
These are physical assets like Gold, Oil or Real estate.
Financial Assets:
Paper (or electronic) claims on some issuer. Such as
Marketable Securities, Shares, Bonds, Derivatives etc.

Why do we investment ?
Investment Motives:
1. Need for liquidity: Liquidity management- regulatory
requirements and short term investments.
2. Speculation: Earning risk adjusted return on
investment.
3. Hedging : Management of downside risk of
investment.

Who are the investors?


Types of Investors in the Market:
Individual: Investment for savings and investment.
Company: Investment of excess liquidity/fund,
mergers and takeovers etc.
Institutional Investors: Professional investment / fund
managers.

Unit and Portfolio investment


Unit investment: Investment in only one asset.
Portfolio investment: Investments in a group of assets
rather than investing in only one asset to diversify risk.

Modes of Investment:
Direct Investment:

Investors buy and sell securities


themselves typically through brokerage accounts. This includes
primarily Capital market securities and derivative securities.

Indirect Investment:

The buying and selling of shares of


investment companies. The investment companies hold portfolios of
investment. E.g. Mutual Fund.

Markets and Financial Assets


DIRECT INVESTMENT
Nonmarketable

- Deposit accounts and Savings certificates.

A. Money Market

Treasury bills and bonds.


Other short term instruments like Commercial
Paper, Repo, Reverse Repo etc.

B. Capital Market

Equities: Common stock & Preferred Stock etc.


Fixed Income: Bonds and Debentures.
Asset Backed Securities

C. Derivative Market

D. FX Market

Forward Contracts
Future Contracts
Options Put options, Call options
Swaps etc.
Currency Pairs
Currency Derivatives

INDIRECT INVESTMENT
E. Investment Companies
(AMCs - Fund Managers)

Open End & Close End Mutual Funds

A. Money Market Securities (MMS)


Money markets securities include short term, highly liquid,
relatively low-risk debt instruments.
MMS are sold by government, financial institutions and corporations
to investors with temporary excess fund to invest and are traded in
the money market.
The maturities of money market instruments range from one day to
one year and are often less than 90 days.

Why do Government trade MMS?


To meet the expenses of the government.
To achieve and stabilize monetary policy of the
government including keeping a check on
inflation.

B. Capital Market Securities (CMS)


Long term securities issued by the public limited
companies and the Government and are listed with
the stock exchanges are known as capital market
securities.
Stock exchange provide market mechanism to buy and
sell securities.

Different types of CMS


1.
2.
3.
4.
5.

Equity Securities
Debt Securities
Asset Back Securities
Derivatives
Mutual Funds etc.

1. Equity Security:
Common Stock:
Equity securities represent an ownership interest. By
buying equity securities one can participate in the
ownership of a corporation.
These securities provide a residual claim on
corporations assets after payment of all obligation in
case of liquidation.

Equity Security (cont.):


Preferred Stock
The corporation has to pay the promised dividend to the
preferred stock holder irrespective of its business
performance or earnings.
In case of liquidation preferred stock holder ranks
before the common stock holder.

Rights of an equity securities holders:


Become an owner proportionate to shareholding.
Can attend annual general meeting (AGM) or appoint a
proxy if articles allows.
Can vote to elect directors.
Entitles to receive audited annual financial statements
before AGM and periodical financial report on time.
Entitles to receive cash/stock dividend if approves.
Entitles to receive right share in case of declaration.
Can inspect minutes book of the corporation etc.

Limited liability
Stockholders also have limited liability, meaning that
they can not lose more than their investment in the
corporation. In the event of financial difficulties,
creditors have recourse only to the assets of the
company, leaving the stock holders personal assets
protected.
In sole-proprietorship or partnership business the
creditors have recourse to the personal assets of the
owner/partner (unlimited liability).

2. Debt Securities: Bonds and Debentures


Bonds (debentures) can be described simply as long
term debt instruments representing the contractual
obligation, or IOU.
The buyer of a bond is lending money to the issuer
who, in turn, agrees to pay interest on the loan and
repay the principal at a standard maturity date.
The bond-holders are not the owner of the issuer.
Since the rate of return is fixed the bonds are also
called fixed income securities.
securities

Different types of Bonds (key features)

Zero coupon bond


Floating rate bond
Callable bonds
Putable bonds
Convertible bonds
Cumulative bonds
Income bonds
Index bonds
Euro bonds etc.

Asset-Backed Securities (ABS)


A financial security backed by a loan, lease or receivables
against assets other than real estate and mortgagebacked securities. For investors, asset-backed securities
are an alternative to investing in corporate debt.
An ABS is essentially the same thing as a mortgagebacked security, except that the securities backing it are
assets such as loans, leases, credit card debt, a company's
receivables, royalties and so on, and not mortgage-based
securities.

C. Derivative Market Securities


Forward, Futures, Options, Swaps etc.
Financial derivatives have several important
applications, including risk management, trading
efficiency, and speculations.
Derivatives offer an opportunity to limit the risk
faced by both individual and institutional investors.
It also allows investors to speculate on underlying
securities.

Currency Futures and Options Market


Forwards & Futures contracts specify a standard volume
of a particular instrument to be exchanged on a specific
settlement date. Unlike forward contracts however,
futures contracts are sold on exchanges (e,g CME &
CBOT).
Options contracts give the right to buy or sell a specific
instrument at a specific price within a specific period of
time. They are sold on exchanges too.
Swap contract is an agreement between two parties to
exchange sequences of cash flows for a set period of
time.

D. FX Market Instruments
Foreign Currency:
Hundreds of banks facilitate foreign exchange
transactions, though the top 20 handle about 50% of
the transactions.
At any point in time, arbitrage ensures that exchange
rates are similar across banks.
Trading between banks occurs in the interbank
market. Within this market, foreign exchange
brokerage firms sometimes act as middlemen.

E. Mutual Funds : Managed Funds


Investors likely to diversify their investment over
several different securities so that the losses on some
securities may be compensated by the gains of others.
Forming such portfolios, however, is time consuming and
expensive for individual investors.
Asset Management Companies (AMC) manage such
portfolio and issues unit against such portfolio to the
public which is known as unit of mutual funds.
Investors buy units in these mutual funds and receive
benefits of diversification.

Different types of Mutual Funds


Close-end mutual funds: Close-end mutual fund
means any fund which is listed with stock exchange and
whos tenure and size are prefixed.
Open-end mutual funds: Open-end mutual fund does
not have any prefixed tenure or size and this fund also
does not take listing in the stock exchange.

Parties that are required to float Mutual


Funds in Bangladesh
1.
2.
3.
4.

Sponsors who provide initial seed money.


Trustee who looks after the interest of the unit holders.
Custodian who keeps safe keeping of funds assets.
Asset
Management
Company
(AMC)
who
professionally mange the portfolio.

The Markets
Primary Market
New issue
Money exchanged between issuer and investors
Issuer receives the proceeds from the sale and
investors receive securities.

Secondary Market
Existing owner sells to another party
Issuing firm doesnt receive proceeds and is not
directly involved.

Organization of Secondary Market


Auction Market : DSE, ASX, NYSE etc.
OTC Market: Network of communications between the
security dealers. (e.g. NASDAQ)

Private Placements
Sale of Securities to a limited number of
sophisticated investors.
Dominated by institutions
Very active market for debt securities
Not active for stock offerings

Thank You