1. What are NSE and Nifty 50 Index? What is the index methodology?

(explain basics of share

market)
The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India,
located in Mumbai. It was established in 1992 as the first demutualized electronic exchange in
the country.
It was the first exchange in the country that provided a modern, fully automated screen-based
electronic trading system which allowed easy trading facility to the investors spread across the
length and breadth of the country. The total market capitalization of NSE is >$2.27 trillion.
NSE was mainly set up in the early 1990s to bring in transparency in the markets. Instead of
trading membership being confined to a group of brokers, NSE ensured that anyone who was
qualified, experienced and met minimum financial requirements was allowed to trade. In this
context, NSE was ahead of its times when it separated ownership and management in the
exchange under SEBI's supervision. The price information which could earlier be accessed only
by a handful of people could now be seen by a client in a remote location with the same ease.
The paper-based settlement was replaced by electronic depository-based accounts and
settlement of trades was always done on time. One of the most critical changes was that a
robust risk management system was set in place, so that settlement guarantees could protect
investors against broker defaults.

NSE offers trading and investment in the following segments

Equity
● Equities
● Indices
● Mutual Funds
● Exchange Traded Funds
● Initial Public Offerings
● Security Lending and Borrowing Scheme etc.
Derivatives
● Equity Derivatives (including Global Indices like CNX 500, Dow Jones and FTSE )
● Currency Derivatives
● Interest Rate Futures
Debt
● Corporate Bonds
Equity Derivatives

When the profit margin of a company go below the interest at which it has taken loan from a
bank it falls to a debt trap ie company’s net profit is less than interest it has to pay to bank. In
this situation company will never be able to repay the loan. To raise capital while avoiding debt
trap companies allows liquidation of equities in which the buyer of the equity becomes the
owner of the company and company is not obliged to pay him either principle or interest of the
amount that he has invested in the company. Equity buyer invests in the hope that in due
course of time, company will start earning profits which will be higher than bank Fixed Deposit.

NSE is a platform where companies can issue shares and investors can buy shares. It is well
regulated through SEBI.
The NIFTY 50 index is National Stock Exchange of India's benchmark broad based stock
market index for the Indian equity market. NIFTY stands for National Stock Exchange Fifty . It
represents the weighted average of 50 Indian company stocks in 12 sectors and is one of the
two main stock indices used in India, the other being the BSE sensex.
Nifty 50 Index is the stratified sample of 50 companies from the population of 1600 companies
listed in NSE. Its purpose is represent Compounded Annual Growth Rate of the companies
listed in NSE.
It is owned and managed by India Index Services and Products which is a subsidiary of NSE
strategic investment corporation limited.
It is a diversified 50 stock index accounting for 12 sectors of the economy. It is used for a variety
of purposes such as benchmarking fund portfolios, index based derivatives and index funds.
NIFTY 50 is owned and managed by NSE Indices Limited (formerly known as India Index
Services & Products Limited) (NSE Indices). NSE Indices is India's specialised company
focused upon the index as a core product.
● The NIFTY 50 Index represents about 62.9% of the free float market capitalization of the
stocks listed on NSE as on March 31, 2017.
● The total traded value of NIFTY 50 index constituents for the last six months ending
March 2017 is approximately 43.8% of the traded value of all stocks on the NSE.
● Impact cost of the NIFTY 50 for a portfolio size of Rs.50 lakhs is 0.02% for the month
March 2017.
● NIFTY 50 is ideal for derivatives trading.

Nifty is basically a market index used by National Stock Exchange of India. As it covers 50
stocks from multiple segments of the market, it is highly versatile and diversified. It is calculated
using the –“FREE FLOAT MARKET CAPITALIZATION“ methodology. Understanding Free-
Float Market Capitalization
Free float shares of a company are those that are traded in the open market. Not all shares
issued by the company are free float. The shares which are held by the government or
promoters of the company are not actively traded. The shares that are traded in the market are
taken into consideration while calculating Nifty. Below are the classes of shareholding that are
generally omitted from the characterization as Free-float are the following:
● Shares that are held by founders, directors, acquirers, etc. which contains an element of
control over the business entity
● Shares that are held by individuals or groups or organisations having “Controlling
Interest”
● Shares that are held by the Government playing the role of promoter or acquirer
● Equity held by the foreign investors through the FDI Route
● Strategic shareholding by private corporate bodies and/ or individuals
● Cross-holding or equity or shares that are held by associates and group companies
● Shares held by Employee Welfare Trusts
● Locked-in shares and shares which would not normally be sold in the open market
Nifty Calculation
The Nifty is a market capitalization weighted index based on this Free Float Method. They
involve the total market capitalization of the companies weighted by their effect on the index, so
the larger stocks would make more of a difference to the index as compared to a smaller market
cap company
Key Points while calculating NIFTY
1. 1995 is taken to be the base year
2. The base value is set at 1000
3. Nifty calculation is done taking into consideration 50 stocks that are actively traded on
NSE
4. These 50 top stocks belong to 24 sectors.
Formulas
● Market Capitalization = Shares outstanding * Market Price Per Share
● Free Float Market Capitalization = Shares outstanding * Price * IWF (Investible Weight
Factor)
● Index Value = Current Market Value / Base Market Capital * Base Index Value (1000)

IWF is a unit of floating stock expressed in terms of the number available for trading. Base
market capital of the Index is the combined market capitalisation of each scrip comprising the
Index during the base period and is equated to an Index value of 1000 known as the base Index
value.

2. Why do we need to invest? Does it increase my stress level? Why shouldn’t I deposit my
money in a reputed bank, and get the nominal interest without any worry?

If investing for more than 5 years, equity is almost risk free. (include Hypothesis testing on past
data)(p-value of return more than 7%)

3) How can be effective investor and stock evaluate?

The ancient Greeks proposed earth, fire, water and air as the main building blocks of all
matter, and classified all things as a mixture of these elements. Investing has a similar set of
four basic elements that investors use to break down a stock’s value.

Basic Elements for investor to break down at a stock market are:

1. Price-to-Book Ratio (P/B)
2. Price-to-Earning Ratio (P/E)
3. Price-to-Earning Growth Ratio (PEG)
4. Dividend Yield

The Price-to-Book Ratio (P/B)_Earth

The price-to-book (P/B) ratio represents the value of the company if it is torn up and sold
today.This is useful to know because many companies in mature industries falter in terms of
growth but can still be a good value based on their assets. The book value usually includes
equipment, buildings, land and anything else that can be sold, including stock holdings and
bonds. With purely financial firms, the book value can fluctuate with the market as these stocks
tend to have a portfolio of assets that goes up and down in value.

Industrial companies tend to have a book value based more in physical assets, which
depreciate year after year according to accounting rules. In either case, a low P/B ratio can
protect you – but only if it’s accurate. This means an investor has to look deeper into the actual
assets making up the ratio.

Price-to-Earnings Ratio (P/E)_Fire

The price to earnings (P/E) ratio is possibly the most scrutinized of all the ratios. If
sudden increases in a stock’s price are the sizzle, then the P/E ratio is the steak. A stock can go
up in value without significant earnings increases, but the P/E ratio is what decides if it can stay
up. Without earnings to back up the price, a stock will eventually fall back down.

The reason for this is simple: a P/E ratio can be thought of as how long a stock will take
to pay back your investment if there is no change in the business. A stock trading at $20 per
share with earning of $2 per share has a P/E ratio of 10, which is sometimes seen as meaning
that you’ll make your money back in 10 years if nothing changes. The reason stocks tend to
have high P/E ratios is that investors try to predict which stocks will enjoy progressively larger
earnings. An investor may buy a stock with a P/E ratio of 30 if he or she thinks it will double its
earnings every year (shortening the payoff period significantly).

If this fails to happen, then the stock will fall back down to a more reasonable P/E ratio. If
the stock does manage to double earnings, then it will likely continue to trade at a high P/E
ratio. You should only compare P/E ratios between companies in similar industries and markets.

The PEG Ratio_Air:

Because the P/E ratio isn’t enough in and of itself, many investors use the price to
earnings growth (PEG) ratio. Instead of merely looking at the price and earnings, the PEG ratio
incorporates the historical growth rate of the company’s earnings. This ratio also tells you how
your stock stacks up against another stock. The PEG ratio is calculated by taking the P/E ratio
of a company and dividing it by the year-over-year growth rate of its earnings. The lower the
value of your PEG ratio, the better the deal you’re getting for the stock’s future estimated
earnings.

By comparing two stocks using the PEG, you can see how much you’re paying for growth
in each case. A PEG of 1 means you’re breaking even if growth continues as it has in the past.
A PEG of 2 means you’re paying twice as much for projected growth when compared to a stock
with a PEG of 1. This is speculative because there is no guarantee that growth will continue as
it has in the past.

The P/E ratio is a snapshot of where a company is and the PEG ratio is a graph plotting
where it has been. Armed with this information, an investor has to decide whether it is likely to
continue in that direction.

Dividend Yield_Water:

It’s always nice to have a backup when a stock’s growth falters. This is why dividend-
paying stocks are attractive to many investors – even when prices drop you get a paycheck.
The dividend yield shows how much of a payday you’re getting for your money.

By dividing the stock’s annual dividend by the stock’s price, you get a percentage. You
can think of that percentage as the interest on your money, with the additional chance at growth
through the appreciation of the stock.
 Although simple on paper, there are some things to watch for with the dividend yield.
Inconsistent dividends or suspended payments in the past mean that the dividend yield can’t be
counted on. Like the water element, dividends can ebb and flow, so knowing which way the tide
is going – like whether dividend payments have increased year over year – is essential to
making the decision to buy. Dividends also vary by industry, with utilities and some banks
paying a lot whereas tech firms invest almost all their earnings back into the company to fuel
growth.

No Element Stands Alone

P/E, P/B, PEG and dividend yields are too narrowly focused to stand alone as a single
measure of a stock. By combining these methods of valuation, you can get a better view of a
stock’s worth.

Any one of these can be influenced by creative accounting – as can more complex ratios
like cash flow. As you add more tools to your valuation methods though, discrepancies get
easier to spot. However, these four main ratios may be overshadowed by thousands of
customized metrics, but they will always be useful stepping stones for finding out whether a
stock’s worth buying.

There are 3 different methods of doing a stock valuation.

● Simple Price / Earning (PE) Ratio & PEG

● Discounted Cash Flow (DCF)
● Discounted Earning Per Share (EPS)

Simple PE Ratio & PEG

As a general guideline, a company is at its fair value if the PE is about 15. If the PE ratio
less than 15, it is considered under value, and vice versa. We also do a quick comparison of
current PE versus the average PE historically. We will pay special attention to the stock price
movement if the current PE is more higher than the historical PE average.

PEG refers PE ratio divided by company growth rate. PEG = 1 means that PE growth
rate is the same as the company growth rate (measured by either EPS growth rate or net
operating cash flow growth rate)

If PEG < 1, the stock price is under value.

If PEG > 1, the stock price is over value.

If PEG = 1, the stock price is at its fair value.

Discounted Cash Flow Model (DCF)

This model is to estimate the company next 10 years net operating cash flow (Future
Value, FV) and re-calculate to the Present Value (PV), and add all ten years PV together. The
intrinsic value can be calculated after dividing the total number of shares,. The assumption
made is the company must be able to generate cash growth consistently with a CAGR
(Compounded Annual Growth Rate) which computed from the past history of net operating cash
flow.Net Operating Cash Flow information can be found from the company annual reports,
under the Cash Flow Statement.

Discounted Earning Per Share Model (EPS)

Similar to the DCF model, but this time Earning Per Share is being looked into. EPS
information can be found at the Income Statement by getting the Net Earning number and
divided by the total number of shares. By looking at the historical EPS, a CAGR for EPS growth
can be calculated.

By bringing all the 10 years FV of EPS to PV, adding them together give an intrinsic
value of the stock.Valuation of a stocks need some financial background and need some
practice.

Two key areas to pay attention to:

(1) Where to find the information? All the financial statement can be found from the annual
reports by going to the company website.

(2) Understand the Financial Fundamental & Definitions like Present Value, Future Value,
Discount Rate, CAGR and also practise how to use them. We should use the financial calculator
to calculate the CAGR and intrinsic value calculator to calculate the intrinsic value of the stocks.

We found that DCF model is a better model although it is a little more complicated
because Cash Flow is not easily manipulated by the company accountant and cash is always
easily be audited. If the company business model is solid, the net operating cash flow grows
consistently every year. On the other hand, good EPS numbers do not mean the company is
increasing the sales revenue and gaining competitive advantage to expand the market share.

EPS can be manipulated easily as the company accountant can add whatever provision
they want, using different amortization or depreciation method or using different revenue
recognition method.

Furthermore, the company can make the EPS more attractive by buying back shares,
doing all sorts of cost cutting internally (like selling company fixed assets) to make the number
looks nice.

After the intrinsic value is calculated, we compare the current stock price with the intrinsic
value. If the current stock price is at least 20% discount to the intrinsic value, we will put the
stocks in my watchlist and wait for the right time to buy.

4. What is a portfolio? What is portfolio management? Why do we need it?

A Portfolio is a grouping of financial assets such as stocks, bonds, commodities,
currencies and cash equivalents, as well as their fund counterparts, including mutual,
exchange-traded and closed funds. A portfolio can also consist of non publicly tradable
securities, like real estate, art, and private investments. Portfolios are held directly by investors
and/or managed by financial professionals and money managers. Investors should construct an
investment portfolio in accordance with their risk tolerance and their investing objectives.
Investors can also have multiple portfolios for various purposes. It all depends on one's
objectives as an investor.
Portfolio management is the art and science of making decisions about investment mix
and policy, matching investments to objectives, asset allocation for individuals and institutions,
and balancing risk against performance. Portfolio management is all about determining
strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs.
international, growth vs. safety, and many other trade-offs encountered in the attempt to
maximize return at a given appetite for risk.
The benefits of having an investment portfolio can be far-reaching, possibly lasting for
generations to come. Wise investing can help an individual not only to guard his initial
investment but also grow that capital to levels that it would not otherwise have attained. With
investments come certain privileges, not the least of which is to enjoy the profits that the
company earns and shares with investors. While an investment portfolio introduces some risk, it
also offers an investor some control over his financial future.

a. Diversification
Having an investment portfolio in and of itself is not necessarily beneficial. An investor
needs to allocate capital in a prudent way in order to reap the benefits of having exposure to the
financial markets. By creating a diversified investment portfolio, which is to spread capital
across more than just one investment category, investors can reap benefits. Diversification into
multiple asset classes will help to protect an investor's capital in the event that one segment of
the financial markets does not perform well. In the 10 years ending in 2009, for instance, stocks
traded on the New York Stock Exchange declined by 0.5 percent, according to "The Wall Street
Journal," while bonds advanced in the same period.

B. Potential
Without an investment portfolio, an individual may be unprepared for some of the major
milestones in life. Placing money in a bank savings account may protect money, but growth is
likely to be highly modest in comparison with the potential profits in the financial markets. By
having an investment portfolio, an investor can not only invest to guard his capital but also
position the portfolio to potentially earn sizable profits so that he is prepared for events such as
funding a college education.

C. Income
By building an investment portfolio that focuses on income securities, an investor can
supplement his income for the near term and in the future. For instance, dedicating a
percentage of assets to dividend-paying stocks will create a steady income stream of those
distributions. Stock dividends are not generally guaranteed, but certain companies make
uninterrupted payments over decades. Investing in bonds is another way to generate income,
as these fixed-income securities make regular interest payments over the life of the investment.

D. Liquidity
 An investor who chooses to direct capital into the financial markets as opposed to other
investment choices, such as real estate, is likely to be able to access that money in a timely
manner when needed. Unlike real estate, equities or fixed-income instruments can be easily
traded based on supply and demand. As a result, an investor can exchange the investment for
cash rather quickly. Investing in tangible assets, such as land, is a longer-term commitment that
generally can not easily and quickly be converted to cash.