Investment Analysis and Portfolio

Management

Security Markets -2

Security Trading Mechanism:

Price Discovery
Security prices in the capital market is determined by the
process of supply and demand.
Under ideal condition the market price of a security
should be equal to the intrinsic value of the securities.
The intrinsic value of a security comes from the cash
flows expected from the security in the future.
Since investors differ from each other in information,
age, attitude, tax brackets, and needs they arrive at
different estimates for the same security.

Price Trend:
If the market price is below the estimated value or
intrinsic value, investor want to buy the security, and
the if price is above the estimated value, they want to
sell it.
The market price of the security responds to demand and
supply. It goes up if the demand exceeds supply, and it
goes down if the supply exceeds demand (up/down
trending market!).
The condition when supply equals demand is known as
equilibrium.

Investment Return:
1. Capital Gain / Loss:
If an investor buys a security at a low price and sells at a high
price, he makes a profit.
On the other hand, if he buys high and sells low, he realizes a
negative profit, i.e., a loss.
2. Periodic Income:
Any cash distributions (dividends or interest) that the investor
receives from the security add to the profits.

Trading Process:
1. Beneficiary Owners (BO) account opening in a brokerage house
which are registered under a stock exchange.
2. Equity investment
3. Order placement
4. Clearing and Settlement : A trade executed through exchanges
is settled amongst the brokers through the clearing house of
the exchanges.
5. Trading of matured shares
6. Liquidation of shares: Withdrawals and/or reinvestment
*** Considerations: cost of trading: commission, interest, account management and
advising fee etc.

Flow Chart of Clearing and Settlement

(A-Category Companies)

Types of Order
Instructions to the brokers on how to complete
the order

Market Order
Limit Order
Day Order
Good till Canceled Order
Stop loss Order etc.

Costs of Trading / Investment:

1. Commission: Fees paid to broker for making the
transaction.

2. Interest on Margin Loan

3. Other fees (if applicable).

Long and Short Position

1. Long Position: You buy now and sell on a later
date.
If buy price < sell price = profit.
If buy price > sell price = loss.

2. Short Position: You borrow share and sell now,

buy back on a later date to return your
borrowed shares.
If sell price > buy price = profit.
If sell price < buy price = loss.

Thank You