Unit 3: Investment Management

 Securities Market: Equity Shares and Debt Securities, SEBI, Stock Exchange (concepts
only)
 Pre-requisites for Investing in Securities Market- Bank Account, Trading Account and
Demat Account, KYC Process
 Investment through IPO, Trading through Online/Mobile App, Registered Stock Broker
 Risk Evaluation: Macro-economic, Industrial and Technical Analysis.
 Mutual Funds: Meaning and Purchase of Funds (SIP & Lumpsum), Risk-o-Meter
 Exchange Traded Funds, Commodity Market, Digital Currency and NTF

Securities Market
Securities are financial instruments and include instruments such as shares, bonds, debentures
of a company or corporate body or a government. Corporate bodies, Government uses this
platform to raise funds from the public/financial institutions to finance their developmental
projects.

The function of securities market is to allow companies to raise capital from public (primary
market) and to enable trading in the shares of public companies (secondary market).
A stock market is a public market for the trading of company shares at an agreed price; these
are securities listed on a stock exchange.

Financial Securities
An investment is an allocation of resources/fund into an asset or group of assets with the
expectation of generating future income or appreciation in value. Financial Securities can be
broadly classified into
1. Equity Shares
2. Debt Securities

Equity shares
 Shares/stocks reflect ownership interest in a company. These securities are highly risky
as the returns are subjected to profit/loss.
 These products earn returns, depending on the profits made by the company.
o Dividend: Distribution of certain portion of company’s profit to its
shareholders.
 Investing in equities is riskier and definitely demands more time than other investments.

Investments in equities can be made through

 Primary market: By applying for shares that are offered to the public.
 Secondary market: By buying shares that are listed on the stock exchange.

Debt Securities
 A corporate body/government borrow the fund from the public/financial institutions by
issuing debt securities.
 Since the fund is borrowed, it comes with an obligation like interest rate, renewal date,
maturity period etc.
 Debentures: It is a long term promissory note issued in favour of debenture holders. It
is usually issued at a fixed rate of interest and are repayable at maturity.
 Bonds: A Bond is a promise made to repay a sum of money at certain interest rate over
a period of time. Interest coupons are attached to bonds paying periodical interest.
Stock Exchange
A stock exchange is an organisation constituted for the purpose of assisting and carrying out
buying, selling or otherwise dealing in securities.
 A stock exchange provides a trading platform, where buyers and sellers can meet to
transact in securities.
 A stock exchange could be a regional stock exchange whose area of
operation/jurisdiction is limited to a region or a national exchange permitted to have
nationwide trading.

Though a number of other exchanges exist, NSE and BSE are the two most significant stock
exchanges in India, and are responsible for the vast majority of share transactions. Bombay
Stock Exchange (BSE) is the oldest stock exchange in India.
The Over-The-Counter Exchange of India (OTCEI) is an electronic stock exchange based in
India that consists of small- and medium-sized firms aiming to gain access to overseas capital
markets

Securities and Exchange Board of India (SEBI)

It is a body to set up by the Parliament in 1992 to protect investors, and to regulate and develop
capital market. It started operations in 1988 through an order of Government of India. It is head
quartered in Mumbai with regional offices in Delhi, Kolkata, Chennai and Ahmedabad.
 SEBI also educates investors, facilitates redressal of their grievances and protects them
by introducing consumer-friendly disclosures from time to time.
 Facilitates registration and regulation of stock brokers, sub-brokers, registrars of all
issues, merchant bankers, underwriters, portfolio managers etc
 Prohibits fraudulent and unfair trade practices relating securities market like insider
trading, circular trading, price rigging etc.

Primary Market
New issue market where company/institutions raise funds or capital from public by issuing
new securities/first time issued securities.
Objective: To Raise Capital for the company
Who issues securities?: Corporate entities (companies) and Government (State and Central)

Types of Issues:
1. Public issues
a. IPO: Initial Public Offering
b. FPO: Further Public Offering
2. Preferential issues, Rights issue, Bonus issue

IPO: Initial Public Offering:

 Financial securities like shares issued for the first time to the public
 Done by unlisted company
 Fresh issue of securities/offers its existing securities for sale/combination of both
 Paves way for listing and trading of the issuer’s securities in the stock exchange.

FPO: Further Public Offering

 Follow on offer, done by already listed company
 Fresh issue of securities / offer for sale of securities to public
Pre-requisites For Investing in Securities
An Investor needs to have the following accounts to Trade in Securities Market

• Savings account in any Commercial bank

Saving • To transfer/receipt of funds from buying/selling of securities
Bank
Account

• With SEBI registered Stock Broker (Trading Member)

Trading • To buy pr sell securities on the Stock exchange.
Account

• With a SEBI registered Depository Participant (DP)

• To hold shares in Demat (Electronic) mode
Demat • NSDL (National Securities Depository Ltd) & CDSL (Central Depository
Account Services Ltd) are two SEBI depositories in India

Forms to be filled to Open a new Trading and Demat Account

1. KYC (Know Your Client) Form

a. Physical KYC
b. e-KYC (online)
2. Account Opening Form

Know Your Client (KYC): For the purpose of opening of Demat and trading account with a
Depository Participant/Stock broker, the investor has to complete KYC process
 Investor has to submit officially valid documents as proof of identity and proof of
address like PAN, Aadhar, Passport/Driving license etc.
 This can be done online through Aadhaar based e-KYC mechanism or offline by
visiting the registered intermediary by submitting the documents.

Documents to open Trading/Demat Account

Proof of Identity Proof of Address

•PAN - Mandatory •Voter ID

•Voter ID card •Driving License
•Driving License •Ration card
•Passport •Passport
•Aadhar card •Aadhar
•Any other valid identity card issued by •Bank account statement or bank passbook
Central or State Government •Electricity bill/gas bill
Investment through IPO, Registered Stock Broker

Initial Public Offering (IPO)

 Process of a company to be publicly listed and traded company
 Fresh issue of shares/offer for sale of shares by existing investors or combination of
both

How does an Investor apply in IPO or buy first time issued securities?
Investment through Registered Stock Broker

Visit the Designated Branch of the Stock

broker and make an entry in the visitor's Get quote for the scrip/security you
register at the premises of the Stock want to trade on
Broker

Provide proof of placement of order to

the Trading Member. Verify trades at Mention scrip, price, quantity, type
the end of the trading session of order you want ot place, the
exchange on which you want to
execute

Trades are subject to payment of

Margins

Rights of a Shareholder
Trading through Online/Mobile App

Place Order: Online through Website or Mobile App

 Always check the orders available for the shares of the scrip before placing your order,
this gives the idea of supply and demand
 Select the stock you want to trade in
 Place the order for Buy/Sell for a specified quantity and specified price.

Market Watch:
 It is displayed in the online trading platform i.e website/mobile app
 It allows investor to check details of the stock that he wants to buy/sell
 Information displayed on Market Watch
o Last traded price
o Percentage change
o Previous day close
o Open price, High price, Low price and Close price on a day (OHLC)
o Volumes: number of shares are being traded at a particular point of time

Post Trade: Trade Confirmation by Stock Exchange

 Trade Confirmation by SMS: At the end of the day, exchange sends SMS & Email
containing information of trade
 SMS: Contains value traded on a day
 Email: Contains breakup of trades executed through a trade merchant on a day, email
come from domain of stock exchange.
Risk Evaluation: Macro-economic, Industrial and Technical Analysis.
Having first understood the markets, it is important to know how to go about selecting a
company, a stock and the right price. A little bit of research, some diversification and proper
monitoring will ensure that the investor earns good returns.

Bull Market: It occurs when the securities are on the rise, investors will be optimistic.
Bear Market: It occurs when the securities fall for a sustained period of time, investors are said
to be pessimistic.

Pro-active approach enables investors to know about the prospective investment

Questions to ask before investing

 Is the company’s revenue increasing?
 Is the company actually making a profit?
 Is the company able to repay its debts?
 Is the company in a position strong enough to compete with its peers?

Sources of information for the analysis

 Stock exchange website
 Company website
 Industry research
 Newspaper/magazines
 Social media

How to do analysis?

Review Understand Compare

Review
 Data related to current economic environment affecting company’s growth and stock
price
 Company’s financial health analysis by examining financial statements for at least last
2 years
 Latest price and volume, historical data, corporate announcement etc

Understand
 Business model of the company with respect to future growth

Compare
 Target company and its competitors to understand the worth of the target company
FUNDAMENTAL ANALYSIS

The selection of an investment hence starts with fundamental analysis. The fundamental
analysis examines the economic environment, industry performance and company performance
before making an investment decision.

Fundamental Analysis involve

1. Economic Analysis
2. Industry Analysis
3. Company Analysis

Researchers have found that stock price changes can be attributed to the following factors
Economy wide factors : 30-35%
Industry factor s : 15-20%
Company factors : 30-35%
Other factors : 15-25%

ECONOMIC ANALYSIS

Economic analysis deals with the study of major macroeconomic variables. It aims at
determining if the economic environment is conducive and is capable of encouraging the
growth of business sector, especially capital market.

1. Gross Domestic Product: GDP is the measure of total value of goods and services
produced in a country in that particular period of time, usually a year. The estimated
growth rate of the economy would be an indicator of prospective economic condition.
2. Inflation: Higher rates of inflation upsets business plans, leads to rising costs and
squeeze profit margins. On other hand, it leads to erosion of purchasing power by
consumers.
3. Balance of Payment: It represents country’s financial obligations with other countries.
Deficit Balance of Payment shows excessive import over exports which will resort to
further external borrowing eroding the value of currency and leading to eventual debt
trap.
4. Technological factors: Technological advancement leads to better utilization of
resources, expansion of business operations, cuts down unnecessary expenditure and
economies of information. For example, the price values of pharmaceutical stocks rise
with an invention of new medicine that cures cancer.
5. Exchange rates: Exchange rate determines the value of domestic currency and stability
in Balance of Payment. Too much of economic dependency on other countries increases
import bill and hence high exchange rates.
6. Infrastructural facilities: It includes transportation facilities, adequate power supply,
supply of industrial raw materials, sound financial infrastructure. Better infrastructural
facilities attract more investment and hence rising stock prices is seen in capital market.
7. Economic Reforms: It includes reforms in banking sector, external trade affairs, rules
and regulations related to industrial and agricultural trade practices.
8. Government policies: Depending on the conditions prevailing in a country
government makes periodical changes in the macroeconomic criterions through
budgetary announcement, leagal policy, industrial policy, monetary policy, changes in
tax rate, interest rate etc.
Industry Analysis
Industry analysis is a market assessment tool designed to provide an insight into different
segments and sectors of a particular industry. Industry analysis is a type of business research
that focuses on the status of an industry. It includes review of an industry’s recent performance,
current status, outlook for the future. It is judged on the basis of combination of qualitative and
statistical data.

1. Industry performance over time: It is done in order to identify the stage of product
life cycle that the industry is expected to face. Usually time duration of 3 to 5 years is
considered to determine whether industries that perform well in one time period would
continue to perform well in subsequent time periods. In some cases, technological
change, innovation and product variation restrict the ability to successfully forecast the
further performance of the industry
2. Industry Life Cycle: Before making an investment it is inevitable to study the
industrial sector at which is industrial growth prospects. Development in every industry
can be analyzed with the help of life cycle, divided into four well defined stages.
3. Industrial Environment: The environment prevailing in an industry can affect the
business units in that industry. It includes government policies, associations like
CII(Confederation of Indian Industry), ASSOCHAM (Associated Chambers of
Commerce and Industry of India) etc represents the member units before the
governments. They are helpful in bringing certain common issues and resolving.
4. Risk level in an Industry: Risk is measured in terms of market performance of shares
and identifying investment market perception. Risk is determined in terms of variability
in returns which vary depending on the economic situations and expectations associated
with time duration.

COMPANY ANALYSIS

Company analysis refers to evaluation of a particular company’s past performance and future
prospects to ensure safety on the invested fund as well as to earn reasonable return. Company
analysis often includes forecasting the company’s financial statements.

1. Project analysis: An investor deploys his funds in securities either through secondary
market or in primary market but it is important to ensure safety of the investment fund.
An investor therefore should pay attention to project in which he is investing and the
return expected. It includes evaluating project potential, appraisal of the project,
promoters and environmental clearance.
2. Product analysis: It is advisable that an investor know the range of products, use of
products, marketability of products etc of that particular company. It includes
evaluating marketing size, sales, growth in sales, stability in sales, research and
development initiatives.
3. Accounting policies: In the absence of proper accounting policies, the earnings of the
company will be wrongly projected. Firm should provide adequate disclosures to
describe its strategy, current performance and future prospects,
4. Profitability: Profitability ratio can be used to measure the operating efficiency of a
company like Gross profit margin, Net profit margin, Earning power, Return on equity,
Earning per share.
5. Dividend policy: Dividend policy is concerned with financial policies of paying cash
dividend in the present or paying increased dividend at a later stage.
 6. Capital structure: Capital structure studies how a company finances its overall
business operations and growth by using different sources of funds.
7. Management: Efficiency of management can be analyzed based on their ability to
maintain competitiveness, expansion, high profit margin, efficient usage of resources,
harmonious relationship with government, market leadership, trained and efficient
employees and company’s relationship with its staff.
8. Analysis of financial statements: Financial statement of a company provides the best
possible information about the profitability and financial soundness of the company.

TECHNICAL ANALYSIS

Technical analysis is a stock price forecasting technique using past historical price trends to
predict the future price movements. It is based on the assumption that historical performance
or behavior is a strong indication of the future performance or behaviour.

1. Charting tools: Technical analysis is done on the basis of historical price movement
plotted on a two-dimensional chart.

2. Support and Resistance: Prices move in a zig-zag fashion and form low price and
high price. A support is plotted at the daily low price and resistance at the daily high
price. Investor shall buy at support and sell at resistence.

3. Head and Shoulders:

a. Left Shoulder (First top): It is indicates bull i.e increasing price in the trading
market followed by heavy purchase. Prices reach peak with strong buying
impulse and fall down with less volume of trend.
b. Head (Second Top): Again there is a high volume of trade which takes the
price to a higher top than which was at left shoulder. Price fall back due to less
volume of trade which are far below the top of left shoulder.
 c. Right Shoulder (Third top): It is formed when the price reach the height less
than the head but equal to the left shoulder and begin to fall. Thus price increase
moderately by market activities and fall again.
d. Confirmation: Horizontal line joining the bottoms of these three tops is called
confirmation. This indicates fall in price below neckline. It is also called as
‘Break out’. And gives useful signal to those who wish to sell stock.

4. Stock Trends:

Mutual Funds
When it comes to investment decisions, it’s better to leave it to the experts. A good investment
advisor can help you maximise returns and minimise risks. So from the expert point of view,
the best option for you as an investor to achieve your personal financial goals is Mutual Funds.

A mutual fund pools money from many investors and invests the money in stocks, bonds, short
term money market instruments, other securities or assets, or some combination of these
investments. The combined holdings the mutual fund owns are known as its portfolio. Each
unit represents an investor’s proportionate ownership of the fund’s holdings and the income
those holdings generate.

Mutual fund issue units to the investors in accordance with the quantum of money invested by
them. Investors of mutual funds are known as unit holders and not shareholders.

Mutual funds are not all about stocks. Mutual funds invest in stocks and debt securities. They
even invest in gold, silver, commodities, etc. So, don't think all mutual funds invest in stocks.
Mutual funds that mostly invest in stocks are called Equity mutual funds. Debt mutual funds
invest in debt instruments or fixed income securities. You have to choose mutual funds based
on your goals, investment horizon, and risk profile.
 Professional management: Money is invested through fund managers
 Diversification: Diversification is an investing strategy that can be neatly summed up
as “Don’t put all your eggs in one basket”. By owning shares in a mutual fund instead
of owning individual stocks or bonds, the risk is spread out.
 Economy of scale: Since mutual fund buys and sells large amount of securities at a
time, its transaction costs are lower than what an individual would pay for securities
transactions.
 Liquidity: Mutual fund units are convertible into money by way of sale in the market
 Simplicity: Buying a mutual fund unit is simple. Many banks have sponsored their own
line of mutual funds and minimum investment amount is small.
 Tax benefits: Different mutual fund categories are subjected to different tax treatments.
It is important to understand the tax benefits a fund before investing.

Systematic Investment Plan (SIP)

 It allows an investor to invest a fixed amount of money regularly in a mutual fund
scheme.
 It lets you set aside a fixed sum of money at regular intervals (monthly or quarterly)
with an objective to gain capital appreciation in the longer run.
 SIP investment inculcates the habit of savings.
 As the investments are done over different market cycles, the investor benefits from the
market volatility by getting to buy more units of the same fund when the markets are
low and buying less units when the prices are high.

Advantages of SIP
 Disciplined approach to investments
 No need to time the market
 Power of compounding
 Lighter on the wallet

Lumpsum Investment
 When you invest in a mutual fund in a lump sum, it means a single, bulk amount locked
into a one-time mutual fund investment. This is as opposed to spreading it out over
time, like in SIP (Systematic Investment Plans).
 Lump-sum investments in mutual funds are usually preferred by prominent players and
investors who particularly depend on company stock appreciation for capital creation.

Investors should examine carefully before investing in mutual funds. Do your research
and compare various mutual fund schemes before investing.

RISKOMETER in Mutual Fund Industry is aimed at

helping investors interpret the inherent risk
associated with a scheme through easy-to-
understand colour code boxes.

On a monthly basis, the risk level for the schemes

shall be evaluated, based on the securities in
which the scheme invests. Equity securities are
highly riskier compared to debt securities.
Commodity Market
Commodities are goods with economic value. They are products which are produced and
traded. They are usually raw materials for further processing.

Major commodities traded are

 Edible oilseed: Groundnut, Mustard seed, Cottonseed, Soy oil, Crude palm oil etc
 Food grains: Wheat, Gram, Bajra, Maize etc
 Bullion: Gold, Silver
 Metals & Energy: Natural Gas, Crude oil, Copper, Zinc, Aluminium, Lead, Nickel,
Steel
 Spices: Turmeric, Pepper, Cumin Seed, Cardamom etc
 Fibres: Cotton, Jute etc
 Others: Castor seed, Cluster seed, Rubber etc

Commodities are traded because of the commodity price risk and price uncertainty, which
adversely impacts the financial position of those who use and produce commodities.
Ex: As the price of steel rises, this increases the cost of automobile production and can
negatively impact the producer’s margins.
Commodity price changes because of political and regulatory changes, seasonal variations,
weather, technology and market conditions.

Hedging:
The process of protecting against financial loss or price is risk is hedging. A hedge will
guarantee a consumer the supply of required commodity at a set price and a producer the known
price for commodity output. The producers and consumers of commodities can participate in
the commodity derivatives exchange to protect against adverse price movements.

The major commodity derivative exchanges in India:

 Multi Commodity Exchange of India Ltd (MCX): predominantly for non-agricultural
products like gold, silver, aluminium, copper, zinc, and energy products like crude oil
and natural gas
 National Commodity and Derivative Exchange (NCDEX): predominantly for
agricultural products like pulses, cereals, sugar etc

Stock Market Commodity Market

Market type Market which trades in stock Market which trades in commodities
Shares, Bonds, Debentures and
Items traded Wheat, Oil, Gold, Silver, Sugar, Minerals etc
other securities
MCX (Multi Commodity Exchange of India
BSE (Bombay Stock Exchange),
Exchange Ltd), NCDEX (National Commodity and
NSE (National Stock Exchange)
Derivative Exchange Limited)

Digital Currency and NTF