Overview of global capital market.

Market indices and

overview of Securities market in India – Primary and
Secondary market
Agenda (Lecture 1 and 2)
 What is Investment?
 Investment Alternatives
 Investment Vs Speculation
 Investment Vs Gambling
 Financial Markets and its Functions
 Classification of Financial Markets
 What is Capital Market?
 Bonds or Fixed Income Securities
 Equity Shares
 Attraction of Global Capital Market
 Stock Market Indices and its computation
 SEBI
 Overview of Security Analysis
 Overview of Portfolio Management
The money you earn is partly spent and the rest saved for
meeting future expenses. Instead of keeping the savings
idle you may like to use savings in order to get return on it
in the future. This is called Investment.
Investment Alternatives
Non-Marketable Financial Assets (eg: Bank Deposits, Post
office deposits etc)
Equity Shares
Bonds
Money Market Instruments (Debt Instruments having
maturity of less than one year at the time of issues)
Mutual Funds
Life Insurance
Real Estate
Precious Objects
Financial Derivatives
Investment Vs Speculation
"An investment operation is one which, upon thorough
analysis promises safety of principal and an adequate
return. Operations not meeting these requirements are
speculative.“
Graham & Dodd
Speculation: The activity of forecasting the psychology of
the market.
John Maynard Keynes
Investment Vs Speculation
Investor Speculator
Planning Horizon Relatively longer Very short planning
planning horizon, usually horizon
at least one year
Risk Disposition Normally not willing to Ordinarily willing to
assume more risk assume high risk
Return Expectations Usually seeks a modest Looks for high rate of
rate of return. return
Basis for decisions Attaches greater Relies more heavily on
significance to hearsay, technical charts
fundamental factors and and market psychology
attempts a careful
evaluation of the
prospects of the firm
Leverage Typically uses his own Normally resorts to
funds. substantial amount of
borrowing
Investment Vs Gambling
 Gambling is fundamentally different from speculation
and investment.
 Compared to investment and speculation, the result
of gambling is known more quickly
 Rational people gamble for fun, not for income
 Gambling creates risk without providing any
commensurate economic return
Financial Markets and its Functions
 A financial market is a market for creation and
exchange of financial assets.
Functions:
 Facilitates Price Discovery
 Provides Liquidity to Financial assets
 Considerably reduce the cost of transacting
Classification of Financial Markets
There are different ways to classify financial markets:
 Nature of claim: Debt market and Equity Market
 Maturity of Claim: Money Market and Capital Market
 Timing of delivery: Cash or spot market and forwards
or futures markets
 Organizational Structure: Exchange traded or Over
the counter
MONEY MARKET
Function of a money market is to channel savings into short
term productive investment with minimum risk.
Money market instruments:-
 Call money
 Term money
 Treasury bills
 Commercial papers
 Certificates of deposits, etc.
Assignment 1: Write a brief description of the above terms?
Submission by Monday evening.
 Financial Markets

Capital Market Money Market Forex Market

Primary Secondary Primary Secondary Spot Forward

Market Market Market Market Market Market

Cash Derivatives
Market Market
What is Capital Market
 A capital market is a market for securities (debt or
equity), where business enterprises (companies) and
governments can raise long-term funds. It is defined as a
market in which money is provided for periods longer
than a year.

 The capital market includes the stock market (equity

securities) and the bond market (debt).

 The main economic role of a capital market is to match

players who have excess funds to players who are in
need of funds.
 Capital Market

Primary Secondary
Market Market

Bond
Stock Market
Market
Bonds or Fixed Income Securities
Bond or Debentures represent long-term debt instruments.
The issuer of a bond promises to pay a stipulated stream of
cash flows.

Various fixed income instruments include:

 Government securities or gilt edged securities
 RBI saving bonds
 Debentures
 Public sector undertaking bond
Equity Shares
Equity capital represents ownership capital. Equity shareholders
bear the risk and enjoys the reward of ownership.

Stock markets classify equity shares as:

Blue chip shares (Shares of Large well established, and

financially strong companies with an impressive record of
earnings and dividend)

Growth shares (Shares of companies which enjoys an above

average rate of growth as well as profitability)

Income shares (Shares of companies with fairly stable

operations, high dividend payout ratios).
Equity Shares
Defensive shares (Shares of companies that are generally
unaffected by ups and down in general business conditions)

Speculative shares (Shares that tend to fluctuate widely because

there is a lot of speculation trading in them).
Types of Corporate Stock
 Preferred Stock
 Fixed dividends, priority over common stock
 Common Stock
 Variable dividends, based on company’s profits.
 Convertible
 Preferred stock that can be converted into
common stock at a stated price
 Attraction of the Global Capital Market?
 Increases the supply of funds available for borrowing.
 Borrower’s perspective
Lowers the cost of capital.
 Investor’s perspective
Provides a wider range of investment
opportunities.

Growth of Global capital market:

- TECHNOLOGY.
- Deregulation by governments of capital flows and
financial services.
Risk Reduction Through Portfolio
Diversification
(a) Risk reduction through domestic diversification

1.0

Variance of
portfolio return

Variance of U.S. Stocks

return on 0.27
typical stock Total Systematic
Risk Risk

1 10 20 30 40 50
Number of stocks
Risk Reduction Through Portfolio
Diversification
(b) Risk reduction through domestic and
international diversification

1.0

Variance of
portfolio return

Variance of
U.S. Stocks
return on
0.27
typical stock International Stocks
0.12

1 10 20 30 40 50
Number of stocks
Stock Market Indices
 With large number of companies listed on the Bombay stock
exchange and NSE, it is not possible to look at the prices of
every stock to find out whether the market movement is
upward or downward.

 An index is basically an indicator. It gives you a general idea

about whether most of the stocks have gone up or most of the
stocks have gone down.

 Some of the stock market indices are BSE Sensex, BSE-200,

NSE-50 etc.

 The Sensex is an indicator of all the major companies of the BSE

and Nifty is an indicator of all the major companies of the NSE.
Computation of stock index
 Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Shares Total Held by Free Current Total Free

Shares Promoters Floating Market Market Float
Shares Price Capitali Market
zation Cap

A 1000 200 800 120 120000 96000

B 2000 1000 1000 200 400000 200000

 So as of today the market capitalization of the index (i.e. stocks A and B) is Rs

520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalization of
the index is Rs 296,000. (Rs 96,000 + Rs 200,000).
Computation of stock index
 The year 1978-79 is considered the base year of the index with a
value set to 100. What this means is that suppose at that time the
market capitalization of the stocks that comprised the index
then was, say, 60,000 then we assume that an index market cap
of 60,000 is equal to an index-value of 100.
 Thus the value of the index today is = 296,000 x 100/60,000 =
493.33
 This is how the Sensex is calculated.
 The factor 100/60000 is called index divisor.
Note: During market hours, prices of the index scrips, at which
latest trades are executed, are used by the trading system to
calculate Sensex every 15 seconds and disseminated in real time.
Differences between the indices
 The main factors that differentiate one index from the
other are given below:
1. The number of the component stocks
2. The composition of the stocks
3. The weights
4. Base year
Major stock market indices
Major stock market indices
 SEBI (Securities & Exchange Board of India)

SEBI is the authority regulating the securities market of India. All

the listed companies have to comply with its rules. Companies
are allowed to issue capital provided the issues are in conformity
with the published guidelines relating to disclosure ad other
matters relating to investor

The stock exchanges also come under the purview of SEBI.

The functioning of stock exchanges is regulated by SEBI.
Security Analysis
 The process of analyzing the individual securities and the
market as a whole and estimating the risk and return
expected from each of the investments with a view to
identifying undervalued securities for buying and
overvalued securities for selling is both an art and a
science and this is what is called security analysis.

 Security Analysis involves the projection of future

dividend, or earnings flows, forecast of the share price in
the future and estimating the intrinsic value of a security
based on the forecast of earnings or dividends.
Portfolio Management
 The portfolio analysis is an analysis of the risk-return
characteristics of individual securities in the portfolio
and changes that may take place in combination with
other securities due to interaction among themselves
and impact of each one of them on others.
Portfolio Management Process
 Determine investment objectives and policies
 Undertake a security analysis
 Construct a portfolio
 Review of portfolio
 Evaluate the performance
Thank You