(YEAR-2019)

SUBJECT - SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT

COURSE - M.B.A.

SEMESTER- 3rd

FACUTLY NAME - Mr. ABHAYPRATAP SINGH

UNIT-I
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 Capital Market

Definition:
Capital Market is the market where buyers and sellers engage in trade of financial securities
like bonds stock etc. The Buying and Selling is undertaken by participants such as individuals and
institutions.
Capital Market, is used to mean the market for long term investments, that have explicit or
implicit claims to capital. Long term investments refers to those investments whose lock-in period is
greater than one year. In the capital market, both equity and debt instruments, such as equity shares,
preference shares, debentures, zero-coupon bonds, secured premium notes and the like are bought and
sold, as well as it covers all forms of lending and borrowing.
The Capital Market of a country is the Barometer of that country’s economy and provides
mechanism for Capital Formation. The Capital Market of India is one of the emerging and promising
Capital Market of world after 1990.

Functions of Capital Market

 Mobilization of savings to finance long term investments.

 Facilitates trading of securities.

 Minimization of transaction and information cost.

 Encourage wide range of ownership of productive assets.

 Quick valuation of financial instruments like shares and debentures.

 Facilitates transaction settlement, as per the definite time schedules.

 Offering insurance against market or price risk, through derivative trading.

 Improvement in the effectiveness of capital allocation, with the help of competitive price mechanism.

Capital market is a measure of inherent strength of the economy. It is one of the best source of finance, for
the companies, and offers a spectrum of investment avenues to the investors, which in turn encourages
capital creation in the economy.

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 Types of Market:-

1. Primary Market: Otherwise called as New Issues Market, it is the market for the trading of new
securities, for the first time. It embraces both initial public offering and further public offering. In the
primary market, the mobilization of funds takes place through prospectus, right issue and private
placement of securities.

2. Secondary Market: Secondary Market can be described as the market for old securities, in the sense
that securities which are previously issued in the primary market are traded here. The trading takes place
between investors that follows the original issue in the primary market. It covers both stock exchange and
over-the counter market.

Capital market improves the quality of information available to the investor regarding the investment. Add
to that, it plays a crucial role in encouraging the adoption of rules of corporate governance, which backs
the trading environment. It includes all the processes that help in the transfer of already existing securities.

National Stock Exchange (N.S.E.)

The National Stock Exchange of India Limited is the leading Stock Exchange of India located
in Mumbai. The NSE was established in 1992 as the demutualized electronic exchange in country. NSE
was the first exchange in country to provide a modern, fully automated screen based electronic trading
system which offered easy trading facility to investors spread across length and breadth of the country.
Vikram Limaye is M.D. and C.E.O. of NSE

Bombay Stock Exchange (B.S.E.)

The Bombay Stock Exchange is the first and largest securities market in India and was
established in 1875. As the native share and stock Broker’s association. B.S.E. close to 6,000 companies
and is on of the largest exchange in the world, along with the New York Stock Exchange (NYSE). It
helps in development of the country’s capital market and helps grow the Indian Corporate Sector.

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 What Is an Exchange?

First, what is an exchange? Put simply; an exchange is an institution, organization, or

association which hosts a market where stocks, bonds, options and futures, and commodities are traded.
Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules
and regulations on the firms and brokers that are involved with them. If a particular company is traded on
an exchange, it is referred to as "listed."

Securities that are not listed on a stock exchange are sold OTC, which stands for Over-The-Counter.
Companies that have shares traded OTC are usually smaller and riskier because they do not meet the
requirements to be listed on a stock exchange. Many giant blue-chip stocks, such as Berkshire
Hathaway, at one time traded on the over-the-counter market before migrating to the so-called "Big
Board," or New York Stock Exchange.

Nature or Characteristics of Stock Exchage

1. Organized Body- A stock exchange is an organized body with a management committee and rules
that control how the exchange works. Traders on the exchange are subject to the rules of the exchange,
which are enforced by the management committee. At one time, a stock market was a physical place
where traders met face-to-face to make deals, but today most trades take place electronically.

2. Public Company Stock- Public companies are a key component of stock markets. Public
companies are those that have stock that is bought and sold on a public stock exchange. Before a stock can
be sold, it must first be listed on the exchange. To protect its investors, a public company is required to
disclose financial and business information that could affect stock value.

3. Trading Through Brokers- Trading on a stock exchange is restricted to stock brokers and traders
who are members of the exchange. Individual investors must have a brokerage account in order to
participate in trading. For many people, brokerage services are provided as part of an employer-sponsored
retirement investment fund. For individuals who want to trade independently, an individual account is
required.

4. Going Public with IPOs- Initial public offerings (IPOs) are the mechanism used to introduce a
company’s stock for public sale on a stock exchange. An IPO is said to take place in the primary market,

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with follow-on trading between investors occurring in the secondary market. An IPO allows a company to
raise capital for future growth by selling shares to the public.

5. Stock Prices Reflects Supply and Demand- The price of a company’s stock reflects supply
and demand for the stock itself and is often independent of the company’s success. A company’s stock
may be considered desirable for a variety of reasons, from the strength of an industry sector to the
popularity of a brand.

6. Stock Market Prediction- In order to make a profit, stock market traders must predict whether a
stock’s value will rise. Share prices often reflect the overall economy and can be volatile as investors react
to financial news and current events, but traders who are successful predictors can realize significant
gains.

Structure of Stock Exchange

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Some of the Important Functions of Stock Exchange/Secondary Market are listed
below:

1. Economic Barometer:
A stock exchange is a reliable barometer to measure the economic condition of a country. Every major

change in country and economy is reflected in the prices of shares. The rise or fall in the share prices

indicates the boom or recession cycle of the economy. Stock exchange is also known as a pulse of
economy or economic mirror which reflects the economic conditions of a country.

2. Pricing of Securities:
The stock market helps to value the securities on the basis of demand and supply factors. The securities of
profitable and growth oriented companies are valued higher as there is more demand for such securities.

The valuation of securities is useful for investors, government and creditors. The investors can know the

value of their investment, the creditors can value the creditworthiness and government can impose taxes
on value of securities.

3. Safety of Transactions:
In stock market only the listed securities are traded and stock exchange authorities include the companies

names in the trade list only after verifying the soundness of company. The companies which are listed
they also have to operate within the strict rules and regulations. This ensures safety of dealing through
stock exchange.

4. Contributes to Economic Growth:

In stock exchange securities of various companies are bought and sold. This process of disinvestment and

reinvestment helps to invest in most productive investment proposal and this leads to capital formation
and economic growth.

5. Spreading of Equity Cult:

Stock exchange encourages people to invest in ownership securities by regulating new issues, better
trading practices and by educating public about investment.

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6. Providing Scope for Speculation:
To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of
securities.

7. Liquidity:
The main function of stock market is to provide ready market for sale and purchase of securities. The

presence of stock exchange market gives assurance to investors that their investment can be converted into

cash whenever they want. The investors can invest in long term investment projects without any
hesitation, as because of stock exchange they can convert long term investment into short term and
medium term.

8. Better Allocation of Capital:

The shares of profit making companies are quoted at higher prices and are actively traded so such
companies can easily raise fresh capital from stock market. The general public hesitates to invest in

securities of loss making companies. So stock exchange facilitates allocation of investor’s fund to
profitable channels.

9. Promotes the Habits of Savings and Investment:

The stock market offers attractive opportunities of investment in various securities. These attractive

opportunities encourage people to save more and invest in securities of corporate sector rather than
investing in unproductive assets such as gold, silver, etc.

Limitation of Stock Exchange

1. Unethical practices: Many unethical practices are rampant in Indian stock markets. Prices of shares are
artificially increased before rights issues by circular trading. Gullible members of public who buy such
shares find the prices of such shares dropping greatly and lose their money.

2. Misinformation: Funds are raised from investors promising investment in projects yielding high
returns. But some promoters divert the money to speculative activities and other personal purposes.
Investors who invest their money in such companies ultimately lose their money.

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3. Absence of Genuine Investors: A very small proportion of purchases and sales effected in a stock
exchange are by genuine investors. Speculators constitute a major portion of the market. Many of the
transactions are carried out by speculators who plan to derive profits from short term fluctuations in prices
of securities. This is evident from the fact that majority of the transactions are of the carry-forward type.
4. Fake shares: Frauds involving forged share certificates are quite common. Investors who buy shares
unfortunately may get such fake certificates. They would not be able to trace the seller and their entire
investment in such fake shares would be a loss.

5. Insider trading: Insider trading is a common occurrence in many stock exchanges. Insiders who come
to know privileged information use it either to buy or sell shares and make a quick profit at the expense of
common shareholders. Though many rules and regulations have been formulated to curb insider trading, it
is a continuing phenomenon.

6. Unofficial transactions: Unofficial markets exist along with the regular stock exchange. Trading takes
place in these unofficial stock exchanges after trading hours of the regular stock exchange. Unofficial
buying and selling transactions are entered into in these unofficial stock exchanges (kerb trading and
dabba trading) even before an issue opens up for subscription. Though trading in such unofficial stock
exchanges are illegal, they continue to exist.

7. Prevalence of Price Rigging: Price rigging is a common evil plaguing the stock markets in India.
Companies which plan to issue securities artificially try to increase the share prices, to make their issue
attractive as well as enable them to price their issue at a high premium. Promoters enter into a secret
agreement with the brokers.

8. Thin trading: Though many companies are listed in stock exchange, many are not traded. Trading is
confined to only around 25% of the shares listed on a stock exchange. Therefore the investors have
restricted choice and many shares lack liquidity.

9. Excessive Speculation: There is excessive speculation in some shares which artificially results in
increasing or decreasing the prices. Increase or fall in prices do not have any relationship with the
fundamental strengths or weakness of the company. Many small investors are unaware of this fact. They
buy shares based on price movements and ultimately suffer losses.

10. Underdeveloped debt market: The debt market in India has not been developed to the required
extent. There is very little liquidity in the debt markets.
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11. Payment crisis: Market players indulge in excessive speculation and trading to profit from the
increase and decrease in prices. When movement (increase/decrease) in the security prices is contrary to
their expectations they are not able to settle the transaction (pay cash for securities bought).

12. Poor liquidity: The main objective of listing shares in a stock exchange is to provide liquidity. But in
India, out of over 6,400 companies which are listed, 90 percent of trading is restricted to only 200 to 250
actively traded scrip. There is high volatility (fluctuations) in case of actively traded scrip and low
liquidity in the others.

13. Delay in admitting securities: There is high delay in admitting securities for trading. Sometimes it
goes beyond 60 or even 70 days. Therefore, liquidity of investments is affected.

14. Poor services: The number of brokers is less and many brokers provide very poor service to investors,
There are more than 50,000 sub-brokers and they are totally unregulated. There are many instances of sub
brokers committing fraudulent acts and investors losing money.

15. Broker defaults: Due to excess speculation in specific shares, broker defaults occur. Such defaults
destabilize stock exchanges and results in payment crisis.

Index- An Index is an Indicator or measure of something. In finance , it typically refers to a statistical

measure of change in a securities market.

NIFTY - National Stock Exchange is the leading stock exchange of India. Full Form of NIFTY is
National Stock Exchange Fifty. NIFTY normally comprises of 50 stock but right now there are 51 Stock.
It is know as NIFTY 50. It is owned and managed by India Index Securities and Products Limited (IISL).

Sensex- Full Form of Sensex is Sensitive Index. People are happy when the Sensex goes up and upset
when it goes down. Sensex is the stock market index of the Bombay Stock Exchange or BSE – it is also
called BSE Sensex. It is the market weighted stock index of 30 companies that are selected on the basis of
financial soundness and performance. Usually, large and well-established companies that are are
representatives of the various industrial sectors are chosen. It was first published in 1986. The base value
of Sensex is 100 and the base year is 1978-79.

Let us look at some numbers- The number of stocks in the Sensex – 30

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What is Market capitalization?

Market capitalization is the combined worth of all the stocks of different companies within the stock
exchange. The market capitalization of a company is arrived at by the product of the price of its stock and
number of shares issued by the company. This figure is multiplied by the free-float factor to determine the
free-float market capitalization. The free float factor is derived from the information each company
submits regarding the free floating shares. Every company has to give the information on a quarterly basis
in a format given by BSE. The free float market capitalization of all companies is summed up. The free
float market capitalization is then divided by an index divisor to get the Sensex value. This divisor adjusts
for changes in stocks and other corporate actions. The divisor is the value of the Sensex Index in the base
year.

New Issue Market-

A new issue is a reference to a security that has been registered, issued, and is being sold on a
market to the public for the first time. The term does not necessarily refer to newly issued stocks,
although initial public offerings (IPOs) are the most commonly known new issues. Securities that can be
newly issued include both debt and equity.

Nature of New Issue Market

(1) It is related with New Issues: The first important feature of the primary market is that it is related with the new

issues. Whenever a company issues new shares or debentures, it is known as Initial Public Offer (IPO).

(2) It has No Particular Place: Primary market is not the name of any particular place but the activity of bringing

in new issues is called the primary market.

(3) It has Various Methods of Floating Capital: Following are the methods of raising capital in the primary

market:

(i) Public Issue:- Under this method, the company issues a prospectus and invites the general public to purchase

shares or debentures.

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(ii) Offer for Sale: Under this method, firstly the new securities are offered to an intermediary (generally firms of

stock brokers) at a fixed price. They further resell the same to the general public. The advantage of doing this is that

the issuing company feels free from the tedious work of making a public issue.

(iii) Private Placement: Under this method, the company sells securities to the institutional investors or brokers

instead of selling them to the general public. They, in turn, sell these securities to the selected clients at a higher

price. This method is preferred as it is a cheaper method of raising funds as compared to a public issue.

(iv) Right Issue: This method is used by those companies who have already issued their shares. When an existing

company issues new shares, first of all it invites its existing shareholders. This issue is called the right issue. In this

case, the shareholder has the right either to accept the offer for himself or assign a part or all of his right in favour of

another person.

(v) Electronic Initial Public Issue (e-IPOs): Under this method, companies issue their securities through the

electronic medium (i.e. internet). The company issuing securities through this medium enters into a contract with a

Stock Exchange. SEBI registered broker have to be appointed for the objective of accepting applications. This

broker regularly sends information about it to the company.

(4) It Comes before Secondary Market:

The transactions are first made in the primary market. The turn of the secondary market comes later.

Function of New Issue Market-

Important Function of New Issue Market is as below

1. Organization of New Issues:

The organization of new issues requires investigation of viability and
prospects of new projects. An important element of the organization of new shares is the knowledge about
adequacy and structure of financial arrangements.
2. Underwriting of New Issues:
Another step involved in floating a new issue is its underwriting. The term
underwriting means guaranteeing purchase of a specified amount of new issue at a fixed price. The
purchase may be for sale to the public, for only one’s portfolio or for both the purposes.

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3. Distribution of New Issue:
Distribution of new issues means the sale of the stock to the public. The
issue is sold to the public by issuing of prospectus. Prospectus is an invitation to the public to purchase the
issue. It gives details about the company, issue and the underwriters. It acts as an important indicator of
the investment climate in the economy.

Limitations of New Issue Market-

1. Ineffective mobilization of savings

It is felt that the new issue market has not fared well in the recent past. Particularly, the new issue market
could not mobilize adequate savings from the public. Hardly about 5% of financial savings of the
household sector is mobilized for investment in shares and debentures. A larger portion of domestic
savings goes to the private market or to the financial institutions.

2. Functional and institutional gap

The new instruments in the new issue market do not appeal to the investing public. The reason is that the
merchant banking which is the major player in the new issue market is still in its infancy in India. In fact,
the merchant bankers are not playing any developmental role and they do not pay adequate attention to the
preparation of project reports, though it is their responsibility to do so. As a result, the small investors are
often deceived by the tall claims of the companies and they do not find the new issues attractive.

3. Risk aversion
Underwriters and financial institutions subscribe more for preference shares and debentures than for
equity shares. The reason is that debentures, being fixed income bearing securities are more attractive to
the investing public. So, they prefer debentures to equity shares..

4. In ordinate delay in the allotment process

The average investor in semi urban and rural areas has to send the application form for shares to the
centers where banks accept it. He has to incur some expenditure on securing a bank draft and postal
charges for mailing it. Till the shares are allotted, he suffers loss of interest. If shares are not allotted, he
has to pay collection charges in getting the refund of application money.

5. Problems of the company

The issuing companies also suffer from certain problems. They are often tempted to present a rosy picture
about the projected figures of turnover, profits, dividends, etc., for the future, which can be avoided.
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Secondly, some companies make exaggerated claims about their prospects to the public. Thirdly, their
claims about over-subscription are often false. Apart from these, there are no fixed norms for appraisal of
the projects prepared by the companies.

Trading of Securities

While many types of companies own equities or bonds as part of their assets, trading securities are a
special class of asset used by a company -- mainly financial institutions -- to create profits by buying and
selling, rather than holding the security for any length of time. Generally, trading securities are held for
very short periods of time, possibly only hours or days, depending on the security and the market.
Trading securities is a category of securities that includes both debt securities and equity securities,
and which an entity intends to sell in the short term for a profit that it expects to generate from
increases in the price of the securities. This is the most common classification used for investments
in securities.

Trading is usually done through an organized stock exchange, which acts as the intermediary
between a buyer and seller, though it is also possible to directly engage in purchase and sale
transactions with counterparties.

Trading securities are recorded in the balance sheet of the investor at their fair value as of the
balance sheet date. This type of marketable security is always positioned in the balance sheet as
a current asset.

If there is a change in the fair value of such an asset from period to period, this change is recognized
in the income statement as a gain or loss. Other types of marketable securities are classified
as available-for-sale and held-to-maturity.
1. Equity Security-
An equity security is a financial instrument that represents an ownership share in a corporation.
The instrument also gives its holder the right to a proportion of the earnings of the issuing
organization. The typical equity security is common stock, which also gives its owner the right to a
share of the residual value of the issuing entity, in the event of a liquidation. A less-common equity
security is preferred stock, which may also provide its owner with a periodic dividend, along with
other rights that give it a priority interest over the holders of common stock.

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Equity securities also give their holders varying levels of voting rights in regard to certain matters,
such as the appointment of a board of directors that then acts on behalf of the shareholders. A
sufficiently large amount of ownership of equity securities will give the owner voting control over a
business. Depending on the restrictions noted on the face or back of a stock certificate, it may be
possible to sell shares to a third party. Only corporations issue equity securities. They are not issued
by non-profit entities, partnerships, or sole proprietorships.

2. Debt Security-

A debt security is any type of security that must be paid back in full to the investor, along
with interest. The investor has the right to trade the security to a third party. The risk associated with
a debt security is generally less than that of an equity security, since the amount on loan should
eventually be paid back. Examples of debt securities are bonds, convertible debt, commercial
paper, promissory notes, and redeemable preferred stock.

Bond - A bond is a fixed obligation to pay that is issued by a corporation or government entity to
investors. Bonds are used to raise cash for operational or infrastructure projects. Bonds usually
include a periodic coupon payment, and are paid off as of a specific maturity date. There are a
number of additional features that a bond may have, such as being convertible into the stock of the
issuer, or callable prior to its maturity date. A bond may be registered, which means that the issuer
maintains a list of owners of each bond. The issuer then periodically sends interest payments, as well
as the final principal payment, to the investor of record. It may also be a coupon bond, for which the
issuer does not maintain a standard list of bond holders. Instead, each bond contains interest coupons
that the bond holders send to the issuer on the dates when interest payments are due. The coupon
bond is more easily transferable between investors.

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 Types of Order
What is an 'Order'
An order is an investor's instructions to a broker or brokerage firm to purchase or sell a security. Orders
are typically placed over the phone or online. Orders fall into different available types which allow
investors to place restrictions on their orders affecting the price and time at which the order can be
executed. These order instructions will affect the investor's profit or loss on the transaction and, in some
cases, whether the order is executed at all.
Types of order
There are four different types of orders:
1. Market order - This order is designed to be executed immediately, at the current market price - no
price is specified on the order.
A market order is a request to buy or sell a security at the best-available price in the current market. It is
widely considered the fastest and most reliable way to enter or exit a trade, and provides the most likely
method of getting in or out of a trade quickly. For many large-caps, liquid stocks, for instance, market
orders fill nearly instantaneously.
The trade-off, however, is that market orders fill at a price dictated by the market, as opposed to limit or
stop orders, which provide a trader more control. Using market orders can sometimes lead to unintended,
and in some cases, significant costs.

2. Limit Order
A limit order is an order placed with a brokerage to execute a buy or sell transaction at a set number of
shares and at a specified limit price or better. It is a take-profit order placed with a bank or brokerage to
buy or sell a set amount of a financial instrument at a specified price or better; because a limit order is not
a market order, it may not be executed if the price set by the investor cannot be met during the period of
time in which the order is left open. Limit orders also allow an investor to limit the length of time an order
can be outstanding before being canceled.
 There are two types of limit orders:
o Buy limit order - this order is entered at a price below the current market price (since it
would not make sense to specify a higher-than-market price!).
o Sell limit order - this order is placed above the current market price.

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3. Stop Order-
A stop order is an order to buy or sell a security when its price moves past a particular point, ensuring a
higher probability of achieving a predetermined entry or exit price, limiting the investor's loss or locking
in a profit. Once the price crosses the predefined entry/exit point, the stop order becomes a market order.
Also referred to as a "stop" or "stop-loss order."
 there are two types:
o Buy stop order - these are used to limit losses on short stock positions and are always
placed above the current market price and filled only if the market rises.
o Sell stop order - these are used to limit losses on long stock positions and are always
placed below the current market price and filled only if the market falls.

4. Stop Limit-Order-
This order is used to ensure that a specific price is received, but the order is only placed when a specific
stop price is reached. The stop price and the limit price do not need to be the same. However, there is a
risk that the stop price could be reached, but the market never reaches the limit price. In that case, the
order will never be filled.
A stop-limit order is a conditional trade over a set timeframe that combines the features of stop with those
of a limit order and is used to mitigate risk. The stop-limit order will be executed at a specified price, or
better, after a given stop price has been reached. Once the stop price is reached, the stop-limit order
becomes a limit order to buy or sell at the limit price or better

Margin Trading

Margin Trading is purchasing stocks without investing the full capital. The trades have a systematized
strategy for purchasing stocks in future market without having the capital.
For example, Assume that you want to purchase 1000 shares of SBI, which exchanges at Rs.200, you
will require around Rs.2,00,000. Whereas in margin trading, you purchase a future contract of SBI by
paying 15% as margin. Which means that by investing Rs.30,000 you can get exposure to stock value of
Rs.2,00,000

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 Margin Call:
Once the broker purchases a future or stocks in the margin account, the customer can see the daily profit
and loss in his account. In case value of the stock price offered falls beneath the purchase price, the broker
will request the customer to add extra margin to hold the position in margin trading. In a scenario when
customer is unable to allocate extra margin, the broker square-off the stocks position to protect himself
from risk due to fall in stock price. This squaring-off position from broker’s end typically occurred when
there is significant fall in stock price and customer does not have liquidity to meet the required margin. Or
when customer takes benefit of over leverage and slight fall in price can impact hugely to the customer
due to over risk. Under those circumstances broker has to mandatory sell the open position of the
customer.

The Advantages of Margin Trading: Leverage is of the greatest advantage in margin trading.
Margin can increase your profits dramatically. For example: with 10% of margin you can buy 10 times of
the cash stocks in future market. Let us take an example to better understand the advantage of leverage.
Assume that you want to buy 1000 shares of SBI, at Rs.200 in cash market, then you will require
Rs.2,00,000 to purchase the SBI stocks. Whereas in 10% margin trading, with capital of Rs.2,00,000 you
purchase 10,000 SBI shares in future market. Suppose in near term SBI stock price rise with Rs.10, then in
cash market you will earn profit of Rs.10,000 (1000 Shares * Rs.10). Whereas in margin trading your
profit will be Rs.1,00,000 (10,000 Shares * Rs.10). This margin gives you the clear picture that margin
trading gives you the opportunity to maximize your profits .

Risks of Margin Trading:

Margin account at the same time are too risky and are not for all the customers. Those who enter into
margin trading without proper knowledge will have to suffer a huge losses. This is because leverage
increases the risk to your capital investment. For example: Assume that you want to buy 1000 shares of
SBI, which is trading at Rs.200 with the intension of getting out with 15% profit. Through 15% margin on
future contract, you can buy 1000 shares of SBI at Rs.30,000. One fine day when stock price fall 15% then
broker has to sell your open position due to shortfall of margin. In this scenario, your capital loss is 100%
which is too much. Even a loss of 15% can turn your account into bankrupt. Whereas in the cash account,
your loss is only 15% and you can still hold the position with the intension of recovery in the short term

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 Securities and Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India. It
was established in the year 1988 and given statutory powers on 30 January 1992 through the SEBI Act,
1992.

Securities and exchange Board of India (SEBI) was first established in the year 1988 AQF as a non-
statutory body for regulating the, securities market. It became an autonomous body by The Government of
India on 12 May 1992 and given statutory powers in 1992 with SEBI Act 1992 being passed by the Indian
Parliament. SEBI has its headquarters at the business district of Bandra Kurla Complex in Mumbai, and
has Northern, Eastern, Southern and Western Regional Offices in New
Delhi, Kolkata, Chennai and Ahmedabad respectively. It has opened local offices
at Jaipur and Bangalore and is planning to open offices
at Guwahati, Bhubaneshwar, Patna, Kochi and Chandigarh in Financial Year 2013 - 2014.

Initially SEBI was a non statutory body without any statutory power. However, in 1992, the SEBI was
given additional statutory power by the Government of India through an amendment to the Securities and
Exchange Board of India Act, 1992. In April 1988 the SEBI was constituted as the regulator of capital
markets in India under a resolution of the Government of India. The SEBI is managed by its members,
which consists of following:

The chairman who is nominated by Union Government of India. Two members, i.e., Officers from Union
Finance Ministry. One member from the Reserve Bank of India. The remaining five members are
nominated by Union Government of India, out of them at least three shall be whole-time members.

After amendment of 1999, collective investment scheme brought under SEBI except NIDHI, chit fund and
cooperatives.

Reasons for Establishment of SEBI:

With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such as
price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules and
regulations of stock exchange and listing requirements. Due to these malpractices the customers started
losing confidence and faith in the stock exchange. So government of India decided to set up an agency or
regulatory body known as Securities Exchange Board of India (SEBI).

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 Purpose and Role of SEBI:
SEBI was set up with the main purpose of keeping a check on malpractices and protect the interest of
investors. It was set up to meet the needs of three groups.
1. Issuers:
For issuers it provides a market place in which they can raise finance fairly and easily.
2. Investors:
For investors it provides protection and supply of accurate and correct information.
3. Intermediaries:
For intermediaries it provides a competitive professional market.
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development of
stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and its
statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important
functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud and cheat
the investors.

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(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc. These insiders have
sensitive information which affects the prices of the securities. This information is not available to people
at

large but the insiders get this privileged information by working inside the company and if they use this
information to make profit, then it is known as insider trading, e.g., the directors of a company may know
that company will issue Bonus shares to its shareholders at the end of year and they purchase shares from
market to make profit with bonus issue. This is known as insider trading. SEBI keeps a strict check when
insiders are buying securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce the sale or
purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various
companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:
 SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot
change terms in midterm.
 SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
Imprisonment.
 SEBI has stopped the practice of making preferential allotment of shares unrelated to market
prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange and
increase the business in stock exchange. Under developmental categories following functions are
performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in
following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.

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3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as
merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement has been
made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees,
merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
The Organizational Structure of SEBI:
1. SEBI is working as a corporate sector.
2. Its activities are divided into five departments. Each department is headed by an executive director.
3. The head office of SEBI is in Mumbai and it has branch office in Kolkata, Chennai and Delhi.
4. SEBI has formed two advisory committees to deal with primary and secondary markets.
5. These committees consist of market players, investors associations and eminent persons.

Clearing and Settlement Procetures

Any transfer of financial instruments, such as stocks, in the primary or secondary markets involves 3
processes:
1. Execution
2. Clearing
3. Settlement

1. Execution
Execution is the transaction whereby the seller agrees to sell and the buyer agrees to buy a
security in a legally enforceable transaction. Thereafter, all the processes that lead up to settlement is
referred to as clearing, such as recording the transaction. Settlement is the actual exchange of money, or
some other value, for the securities.

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2. Clearing-
Clearing is the process of updating the accounts of the trading parties and arranging for the
transfer of money and securities. There are 2 types of clearing:
(a) Bilateral Clearing-
In bilateral clearing, the parties to the transaction undergo the steps legally necessary
to settle the transaction.
(b) Central Clearing –
Central Clearing uses a third-party — usually a clearinghouse — to clear trades.

Clearinghouses are generally used by the members who own a stake in the
clearinghouse. Members are generally broker-dealers. Only members may directly use the services of the
clearinghouse; retail customers and other brokerages gain access by having accounts with member firms.
The member firms have financial responsibility to the clearinghouse for the transactions that are cleared. It
is the responsibility of the member firms to ensure that the securities are available for transfer and that
sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member
firms will have to make up for any shortfalls. If a member firm becomes financially insolvent, only then
will the clearinghouse make up for any shortcomings in the transaction.
For transferable securities, the clearinghouse aggregates the trades from each of
its members and nets out the transactions for the trading day. At the end of the trading day, only net
payments and securities are exchanged between the members of the clearinghouse. For options and futures
and other types of cleared derivatives, the clearinghouse acts as counterparty to both the buyer and the
seller, so that transactions can be guaranteed, thereby virtually eliminating counterparty risk. Additionally,
the clearinghouse records all transactions by its members, providing useful statistics, as well as allowing
regulatory oversight of the transactions.
3. Settlement
Settlement is the actual exchange of money and securities between the parties of a trade
on the settlement date after agreeing earlier on the trade. Settlement-
There are two types of settlement Fixed and rolling.
(i) A fixed cycle starts on a particular day and ends after five days. For example – in the mutual stock
exchange the settlement cycle starts on Monday and ends on Friday. In the NSE its starts on Wednesday
on one week and ends on Tuesday of the following week.

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(ii) A rolling settlement is one in which trades outstanding at the end of the day have to be settled at the
end of the T+X time frame work. T is the trade date and X is the days and specified by SEBI. In this
settlement, payments are made quicker than in the weekly settlement. Thus Investors benefits from
increased liquidity.
On 15 January 1998, SEBI made T+5 rolling settlement mandatory for institutional investors, namely,
domestic financial institutions, banks, mutual funds, and foreign institutional investors in respect of eight
securities for which dematerialized trading was made compulsory.
SEBI has decided to shorten the rolling settlement cycle from T+5 to T+3 to derive benefits of increased
efficiency of the rolling settlement and ensure speedier settlement. The compulsory rolling settlement on
T+3 basis commended on 1st April 2002.
In the light of the experience gained with the working of T+5 and T+3 settlement, it was considered
desirable to shorten the settlement period to T+2. Under the new trading cycle, all transactions are closed
in two trading days after the deal is struck.

Regularity Systems for Equity Market

Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and
Exchange Board of India and The Reserve Bank of India.
The Ministry of Finance regulates through the Department of Economic Affairs - Capital Markets
Division. The division is responsible for formulating the policies related to the orderly growth and
development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of
the investors. In particular, it is responsible for
 institutional reforms in the securities markets,
 building regulatory and market institutions,
 strengthening investor protection mechanism, and
 providing efficient legislative framework for securities markets.

The Division administers legislations and rules made under the

 Depositories Act, 1996,
 Securities Contracts (Regulation) Act, 1956 and
 Securities and Exchange Board of India Act, 1992.

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Securities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI
Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s primary functions include
protecting investor interests, promoting and regulating the Indian securities markets. All financial
intermediaries permitted by their respective regulators to participate in the Indian securities markets are
governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required to
register with DDPs in order to participate in the Indian securities markets.

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934. The RBI is
responsible for implementing monetary and credit policies, issuing currency notes, being banker to the
government, regulator of the banking system, manager of foreign exchange, and regulator of payment &
settlement systems while continuously working towards the development of Indian financial markets.
The RBI regulates financial markets and systems through different legislations. It regulates the foreign
exchange markets through the Foreign Exchange Management Act, 1999.

National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and implement rules and
regulations to govern the securities market. These rules and regulations extend to member registration,
securities listing, transaction monitoring, compliance by members to SEBI / RBI regulations, investor
protection etc. NSE has a set of Rules and Regulations specifically applicable to each of its trading
segments. NSE as an entity regulated by SEBI undergoes regular inspections by them to ensure
compliance.

Types of Investors-
Investors can be broadly classified into the following categories.
1. Retail Investors-
Retail Investors (Individual Investor) are the persons who buy and sell securities for
their personal account, and not for another company or organization. They are known as individual
investors or small investors.

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2. Institutional Investors-
Institutional Investors are mutual funds, unit trusts, insurance companies,
banks, and other large institutions which invest their member’s money in share and bonds. They have
professional analyst and advisors who can usually analyses the stock market trends much better than
individual investors. They trade in large volumes and play a vital role in the Stock Market. Institutional
investors often account for the bulk of the trade done on the stock exchange, over a sustained period.
3. Foreign Institutional Investor-
Foreign Institutional Investors are venture capital, funds. Pension
funds.hedge funds. mutual funds and other institution registered outside country of the financial market in
which they take an investment exposure. FIIs are allowed to invest in the primary and secondary capital
markets in the India through the portfolio investment scheme. under this FIIs can acquire shares or
debenture on Indian companies through stock exchange in India. They have to registered with SEBI.

Security analysis

Security analysis refers to the analysis of trading securities from the point of their prices, returns and risks.
All investments are risky and the expected return is related to the quantum of risk. All investors try to earn
more return with low level of risk or without risk. For this purpose they are considering some objectives.
These are

Aim/ Objectives
1. Regular income – the income from the investment should be regular and consistent one. The high
fluctuation is income stream is not suitable for the long-term growth.
2.Capital appreciation – the investment must yield regular income as well as growth in value i.e, capital
appreciation. It is the difference between the selling price and purchase price.
3. Safety of capital – the capital invested in assets requires the safety. Safety is the important element
which protects the loss of capital and return from the investments.
4. Liquidity – liquidity is the ease of convertibility or marketability of assets.
5. Hedge against Inflation – the inflation is the biggest problem we are facing today, hence the rate
of return from the investment requires high yield to beat inflation rate.

These are the major objectives of an investor; to attain these objectives a careful and critical security
analysis is necessary. The literature on security analysis can be consolidated to form three approaches to

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explaining the behavior of share prices and their valuation. These analysis are used to find out the answer
for the question like, why share prices fluctuate, how they are determined, what to buy or sell and when to
buy or sell

Approaches of security analysis

Security analysis is closely linked with portfolio management. The main objective of Security analysis is
to appraise the intrinsic value of security. There are two basic approaches to security analysis as follows.

1. Fundamental Approach, and

2. Technical approach.
The Fundamental Approach of Security Analysis
The Fundamental approach suggests that every Stock has an intrinsic value which should be equal to the
present value of the future Stream of income from that stock discounted at an appropriate risk related rate
of Interest. Estimate of real worth of a stock is made by considering the earnings potential of firm which
depends upon investment environment and factors relating to specific industry, competitiveness, quality of
management. Operational efficiency, profitability, capital structure and dividend policy.

Thus, security analysis is done to evaluate the current market value of particular security with the intrinsic
or theoretical value. Decisions about buying and selling an individual security depend upon the conferred
relative value. Sinc6 this approach is based on relevant facts, it gives true estimate of the value of a
security and it is widely use in estimation of security prices

Technical Approach in Security Analysis

The other technique of security analysis is known as Technical Approach. The basic assumption of this
approach is that the price of a stock depends on supply and demand in the market place and has little
relationship with its intrinsic value. All financial date and market information of a given security is
reflected in the market price of a security. Therefore, an attempt is made through charts to identify price
movement patterns which predict future movement of the security,

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