SECURITY

ANALYSIS
CONTENTS

• Capital Market
• Market of Securities
• Stock exchange & New issue market
• Trading of securities
• Equity
• Debentures
• SEBI
• Investment and Investors
• Aims and Approaches of security analysis
Capital Market

• Also known as “Securities market”

• Market for long term funds
• Supported by forum for equity and debt transactions
• Comprises of:
1. Stock/security exchanges/markets(secondary markets)
2. New issue/primary markets(initial public offering markets)
Market of Securities

• Market where securities can be bought and sold on the basis of

demand and supply
• Advantage to both investors and issuers
• Securities available for first time – primary securities market
• Existing securities transferred between parties – secondary
market
Stock exchange & New issue markets

• New issue market deals in new securities while stock exchange is a

market for old securities.
• New issue market supplies funds to corporate enterprise directly
whereas Stock exchange play indirect role in industrial financing
by providing liquidity to investments already made
• Stock exchange has physical existence whereas new issue market
doesn’t have any organizational setup.
Stock exchange & New issue market(contd.)

• Functions of stock exchange

1. Nexus between savings and investments
2. Market place
3. Continuous price formation
• Functions of New issue market
1. Origination
2. Underwriting
3. Distribution
Trading of Securities

• Class of asset used by company to create profits by buying and

selling
• Very liquid and easily valued
• Marked to market
• Borrowing money to execute securities transaction is referred to
as using margin
Equity

• Concept
“long-term finance, representing ownership capital/securities to its
owners(equity holders/ordinary shareholders) share reward and
risk associated with ownership of corporate enterprises”
• Types
1. Authorized share capital
2. Subscribed Share capital
Equity(contd.)

• Features
1. Residual claim to income
2. Residual claim on assets
3. Right to control
• Merits
1. Permanent source of funds
2. Doesn’t involve obligatory dividend payment
3. Basis of long-term financing
Equity(contd.)

• Demerits
1. Higher cost of funds
2. High floatation cost
3. Dilution of control of existing shareholders
Debentures

• Definition
“debt instrument indicating company has borrowed certain sum of
money and promises to repay it in future”
• Attributes
1. Interest
2. Trust indenture
3. Maturity
4. Security
Debentures(contd.)

5. Debenture redemption reserve

6. Call price
7. Call premium
• Advantages
1. Lower cost
2. No dilution of control
• Disadvantages
1. Restrictive covenants in trust deed
Debentures(contd.)

2. Increased financial risk

3. High cost of quality
4. Legally enforceable contractual obligations
SEBI(contd.)

 Conduct inquiries and audit of stock exchange

 Takeover of companies
 Rules for intermediaries
• Role of SEBI in mutual funds
1. SEBI notified regulations for mutual funds in 1993
2. All mutual funds governed by SEBI
• Role of SEBI in IPO
1. Company going public should have permission from SEBI
SEBI(contd.)

2. SEBI validate IPO by making sure document has enough

information
• Protection guidelines by SEBI
1. Eligibility norms for companies issuing security
2. Pricing by companies issuing securities
3. Pre issue obligations
4. Contents of offer document
Investment and Investors

• Definition
“Making of a sacrifice in the present with the hope of deriving
future benefits”
• Nature of Investment decisions
1. Assumed that investors are rational and prefer uncertainty
2. Assumed that investors are risk takers
• Investment process
1. Work out objective and then evolve policy
Investment and Investors(contd.)

2. Identification of categories of financial assets

3. Security analysis
4. Portfolio construction
5. Speculation
• Types of Investors
1. Angel investors
2. Peer-to-peer lending
Investment and Investors(contd.)

3. Bank
4. Venture capitalist
5. Personal investors
• Investor protection
1. Assure investors not being defrauded
2. Investors informed about their purchase
3. Measured by indicators such as reorganization laws, SEBI
guidelines
Aims & approaches of Security analysis

• Aims
1. Regular income
2. Capital appreciation
3. Safety of capital
4. Liquidity
5. Hedge against inflation
• Approaches
1. Fundamental analysis
Aims & Approaches of
Security analysis(contd.)

2. Technical analysis
3. Fair game model
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