Professional Documents
Culture Documents
Capital Market and Security Analysis
Capital Market and Security Analysis
and
Security Analysis
Need for Capital Markets and Portfolio
Management
Equities
Other Mutual
Securities Funds
Investment
Oppotunities
Derivative
Financial
& Bonds
Commodity
Money Mkt
Securities
Types of Securities
Money market securities
Short-term debt instruments sold by governments,
financial institutions and corporations
They have maturities when issued of one year or
less.
Money market securities includes Treasury Bills,
Commercial papers, Bank deposits etc.
Types of Securities…cont
Capital market securities
– Instruments having maturities greater than one year
and those having no designated maturity at all.
– It is the market from where long term capital is
raised.
1. Corporate bonds
– Fixed income securities like bonds have a specified
payment schedule.
– Bonds promise to pay specific amounts at specific
times
Capital Market Securities
2. Common Equity Shares
Ordinary or common shares represents the ownership
position of the company. The holders of ordinary
shares, called shareholders. They are legal owner of
the company.
Capital Market Securities
3. Preference Shares
Preference shares have the preference over the common
equity shares in terms of payments of dividend and repayment
of capital in case of wind up of the company. Preference share
holders get fixed dividends.
Types of Preference shares-
1.Redeemable preference shares-
Redeemable preference shares are available
with certain maturity.
2. Irredeemable preference shares-
Irredeemable preference shares are available
without any maturity period. In India companies
are not allowed to issue irredeemable preference
shares.
Mutual Funds
A Mutual Fund is a trust that pools the savings of a number
of investors who share a common financial goal.
The money thus collected is invested by the fund manager
in different types of securities depending upon the objective
of the scheme. These could range from shares to
debentures to money market instruments.
Stock
Market
Money
Market
Types of Mutual Fund
On the basis of Structure-
Open-end Funds
( Pt Pt 1 ) Div
Ri
Pt 1
(1760 1752) 10
Ri 100 1.07%
1752
Forex Risk
Systematic Risk
Market Risk-
Market risk refers to that portion of total variability in the
return caused by factors affecting the whole market.
Economic, political and sociological changes are sources
of this type risk.
SD
( R R ) 2
n
Where, R is return of the security, n is number of
observations.
Measurement of Systematic Risk
Systematic risk refers to that portion of total risk or variation
in rate of return which are caused by factors affecting the
prices of all securities.
Beta of financial securities is used to measure the
systematic risk. It indicatives the level of sensitiveness of
each security to the market.
n XR X R
i
n X X
2 2
n XR X R 12 * 265 51* 61
i i 0.16
n X 2 X
2
12 * 251 (51) 2
Calculation of Alpha value
Alpha of any financial security indicates the minimum level
of return which an investor can expect from that
security.
Calculation of expected return and risk using
the probabilities of happening.
Reliance Ind.
stages Return Risk Probability E(R) Risk
Growth 12% 8 25% 12x0.25=3 8x0.25=2
Expansion 10% 12 25% 10x0.25=2.5 12x0.25=3
Stagnation 5% 15 25% 5x0.25=1.25 15x0.25=3.75
Decline 2% 18 25% 2x0.25=0.5 18x0.254.5
Capital Money
Market Market
Organized Unorganized
Long Term Stock Sub
Banking Banking
Loan Market Markets
Sector Sector
Call Money-
when money is lent or borrowed for overnight.
Notice Money-
when money is lent or borrowed more that one day
and upto fourteen days.
Participants in Call money market
1. Those permitted to operate both as
lenders and borrowers of call loans-
Commercial banks-
State bank of India-
Co-operative banks
Discount & Finance House of India-
Security Trading Corporation of India-
2. Those permitted to operate only as
lenders-
1.LIC, UTI, GIC, IDBI, NABARD-
2. Entities/corporate/mutual funds with bulk
lendabale resources subject to approval from RBI.
Treasury Bills
Treasury bills are the promissory notes or a kind of
financial bill issued by RBI on behave of central
government with discount for a fixed period, not
extending beyond one year.
TBs are issued with a promise to pay the amount stated
therein to the bearer of the instruments.
TBs are issued on discount basis.
Periodicity of TBs-
14 days TBs, 91 days TBs, 182 days TBs, 364
days TBs.
Participants in TBs
• Reserve Bank of India-
• State Bank of India-
• Commercial Banks-
• State Govts, and other approved bodies-
• DFHI, and STCI-
• Financial Institutions- IDBI, ICICI, IFCI, LIC, GIC-
• Corporate entities-
• General public-
• FIIs-
Computation of Yield on TBs
Facevalue Issueprice 364
Yd 100
Issueprice days
100 98 364
Yd 100 12.56%
98 91
Commercial Papers
Commercial papers are debt instruments
issued by corporates for raising short term
resources from the money market. CPs
are unsecured debts-no provision is made
behind the CPs.
Corporates having approval from RBI are
eligible to issue CPs.
CPs are issued on interest/discount basis.
Certificates of Deposits
A certificate of deposit is a marketable document
of title to a time deposit for a specified period.
CDs is a receipt given to the depositor by a bank
or any other institution entitled to issue CD.
A CD is issued at a discount and it is negotiable
instrument.
Regulation of Indian Financial
Market
Regulation of Money Market
Money market is that market from where capital can be
raised for short time period.
Reserve bank of India (RBI) is the statutory body which is
authorized to regulate the Indian money market.
Regulation of Capital Market
Capital market is that market from where capital can be
raised for long time period.
Securities and Exchange Board of India (SEBI) is the
statutory body which is authorized to regulate the Indian
capital market.
Types of Market Transactions
Market transactions is process in which stocks are
purchased or sold at particular time and price. Basically two
types of transactions exist-buying orders and sell orders.
Buy Order
Buy order is executed to purchase certain number of stocks
from the stock market. Buy order is used when investors
expected the rise in the price of stocks in near future.
Sell Order
Sell order is executed to sell certain number of stocks into
the stock market. Sell order is used when investors
expected the decline in the price of stocks in near future.
Sell Order…..cont.
Sell Order of two types.
Sell long Orders-
This is the order wherein investors orders to sell the stocks
which he owns in the stock market.
Sell short Orders-
This is the order wherein investors orders to sell the stocks
which he does not owns in the stock market. This is kind of
short selling.
Types of orders
Orders which are given on the basis of price
constraints are called Price Limit Orders
Orders which are given on the basis of time
constraints are called Time Limit Orders
Price Limit of Orders
An investor can have his order executed either at the best
prevailing market price on the stock exchange or at a price
he determines.
Market Order –
buy or sell at prevailing market price.
Price Limit Order-
buy or sell at specified price suggested by investor.
Day Order –
A day order is that order remain active during a particular
trading day.
Week/Month Order-
A week/month order is that order remain active during a
particular week/month day.
Open Order-
An open order is that order remain active until they are
either executed or cancelled.
Margin Account (Trading)
A margin account with a broker allows for limited
borrowing to purchase assets.
•A margin account needs a hypothecation
agreement
– A. broker can pledge securities as collateral
– B. broker can lend the securities to others
•For A. and B., shares are held in street name
– Owned legally by brokerage
– Dividends, voting rights, reports go to investor
Margin Account
• Margin Purchase
– Borrow money from broker to invest.
– The cost of borrowing is interest plus a service
charge.
• Initial margin requirement
– The minimum % of investment from investor’s own
funds
• Actual margin
market value of assets - loan
Actual Margin
market value of assets
Margin Account
• A margin account is marked to market at the end
of each trading day
– A daily calculation of actual margin
• A margin account is subject to a maintenance
margin requirement
– The minimum acceptable value of the actual margin
• If actual margin < maintenance margin then a
margin call is issued
• The investor is obliged to add cash or securities
to the margin account
Short Sales
• A short sale is the sale of a security you do not
own
• This is achieved by borrowing share certificates
from someone else
• The borrowing process is arranged by a broker
• To allow shares to be borrowed the broker either
– a. Uses shares held in street name
– b. Borrows from another broker
Short Sales
• Margin
– There is a risk involved so short seller (A)
must make an initial margin advance to the
broker
– The broker then calculates the margin each
day
– Short sales should be used when prices are
expected to fall
Fixed income securities
Fixed income securities differ from each other in
promised return for several reasons
The maturity of the bonds
The creditworthiness of the issuer
The taxable status of the bond
Income and capital gains are taxed differently in
many countries
Bonds are designed to exploit these differences
Types of Bonds
Based on Issuer-
1.Corporate Bonds-
Corporate bonds are issued by private
firms.
2. Govt. Bonds-
Govt. bonds are issued by govt. bodies like
central govt., central bank of the country,
local bodies, state govt. etc.
Types of Bonds
Based on Yield-
1.Interest Bearing Bonds-
Interest bearing bonds gives interest to
the investor after every quarterly or
annually basis.
2. Zero coupon Bond-
Zero coupon bonds give lump sump
amount to the investor at the time of
redemption of the bond.
Types of Bonds….cont.
Based on Conversion-
1.Convertible Debentures-
Convertible bonds are those bonds which are converted into
common equity shares at the time of maturity.
1. Partial Convertible debentures-
2. Fully convertible debentures-
2. Non convertible debentures-
Non Convertible bonds are those bonds which cant be
converted into common equity shares at the time of maturity.
Valuation of Bond
Bonds are marketable instruments. Therefore it is
very important for the investors to find the right
value of the bond. In order to find out the right
value of bond a valuation is done.
2. Opportunity Cost-
Opportunity cost refers, whatever monetary benefits are
sacrificed for the sake of another monetary benefits.
Calculation of Present value of Bond
Suppose an investor want to purchase a five year bond, Rs.
1,000 par value, bearing the nominal interest rate of 7 percent
per annum. The investor required rate of return is 8 percent.
What should be the value of the bond?
Int1 Int 2 Int 3 Int n Bn
Bo ... n
(1 k ) (1 k ) 2
(1 k ) 3
(1 k ) (1 k ) n
70 70 70 70 70 1000
Bo 2
3
4
5
5
(1.08) (1.08 ) (1.08 ) (1.08 ) (1.08 ) (1.08)
When kd=17%,
15*PVFA (17%,7)+100*PVF (17%,7)=92.13
When kd=16%
15*PVFA (16%,5)+100*PVF (15%,5)=95.97
It means that the cost of this bond will lie between 17 and
16%.
By Interpolation
Difference
PV required 94.0
1.97
Pv at 16% 95.97
3.84
Pv at 17% 92.13
1.97
Kd 16% (17% 16%) 16.5%
3.84
The cost of this bond will be 16.5%
Calculation of Current Yield
Yield to maturity takes into account present value of interest
payments and capital gain or loss over the bond. But current yield is
takes into account only annual interest and does not consider capital
gain or loss. Current yield is annual interest divided by bonds current
market price.
A bond is available at Rs. 883/- with face value Rs. 1000/-. The
bond will pay interest at 6 percent per annum for 5 years.
Annual i nterest
CurrentYie ld
current market price of bond
The current yield is 60/883= 6.8%
Calculation of Yield to Call/Put
Corporate bonds are also available with call and put
provisions.
If bond is available with call provision, it means that
company can call back its bond before maturity. On in
other words bond will be redeemed or called before
maturity.
On the other hand if bonds are available with put provision
then investor has the right to redeem the bond before the
maturity period.
A 10 year bond will pay 10% interest, with face value Rs.
1000/- is callable is 5 years at a price of Rs. 1050/- The
bond is currently available at Rs. 950/- What is the yield to
call of the bond?
When bond amortized each year
The govt. is proposing to sell a 5 year bond of 1000 at 8%
interest rate per annum. The bond amount will be amortized
equally over its life. The required rate of return of the investor
is 7%. What will be the present value of the bond?
Interest in the 1st year = 1000*0.08=80
2nd year= (1000-200)*0.08=64
3rd year= (800-200)*0.08=48
4th year=(600-200)*0.08=32
5th year=(400-200*0.08=16
AA High grade.
A High medium grade.
BAA Lower medium grade.
BA Process speculative elements.
Generally lack characteristics of desirable
B investment.
CAA Poor standing, may be in default.
Ca Speculative to a higher degree.
C Lower grade.
Credit Rating of Standard & Poor Corp.
AAA Highest Grade
AA High grade.
A Upper medium grade.
BBB medium grade.
BB Lower medium grade.
B Speculative.
CCC-CCC Outright speculative.
C Reserved for income bonds.
DDD-D In default, indicating salvage value.
Credit Rating Agencies in India
Credit Rating and Information Services of
India Ltd (CRISIL).
70 70 1070
(1) ( 2) (3)
(1.07) (1.07) 2 (1.07) 3
D 2.81
70 70 1070
(1.07) (1.07) (1.07) 3
2
1000
(3)
(1.07) 3
D 3
1000
(1.07) 3
The duration of the bond is 3 years. So in order the get the
desired yield of the bond, investor will have to keep
invest for 3 years.
price of bonds when there is change in
the interest rate
When there will be any change in the market interest rate,
the price of the bond will also change.
90 90 1090
(1) ( 2) 2
(3)
(1.09) (1.09) (1.09) 3
D ?
90 90 1090
(1.09) (1.09) (1.09) 3
2
Exercise
A bond with 12% coupon issued 3 years ago is redeemable after
5 years from now at a premium of 5%. The interest prevailing
in the market is 14%. Calculate the duration of the bond?
Exercise
A 3 year bond with 9%coupon has YTM of10%. What is
the current price of the bond? If yields fall below 50
points basis. Use duration to estimate the new price?
Immunization of Bonds
An investor needs Rs 1 lakh after 2 years and has two bonds in his mind
with YTM of 10%. Bond A has annual coupon rate of 7%, matures in 4
years and is priced at 904.90. bond B has annual coupon of 6%
matures in one year and is priced at 963.64. How many bonds of each
should he buy?
First of all we need to calculate the amount needed today to get Rs 1
lakh after two years
Money required=100000/1.1^2=82644.63
Cyclical Industries-
Cyclical industries are those industries whose growth rate is
largely affected by economic growth rate (GDP). These
industries expand with high economic growth rate whereas
growth rate decline with the decline of economic growth rate
like Consumer good industry, Aviation, Hotel and Tourism.
Stocks of such industries are called Cyclical Stocks.
Industry Classification according to
Business Cycles…cont
Defensive Industries-
Defensive industries are those industries whose growth
rate is not affected by growth rate of economy (GDP) like
Health Care. Stocks of such industries are called
Defensive Stocks or Income Stocks.
• Qualitative Analysis-
Qualitative analysis deals with analysis of
subjective factors with are associated with
different industries.
Quantitative Analysis
1.Forecasting of Present and Future Market
Position and Profitability of the Industry.
Investment Strategy-
40
35
30
25
20
15
10
5
0
Buyers
Suppliers
Industry Negotiatio
Negotiation
Competitors n
Power
Power
Threats
Of
Substitutes
Michael E. Porter’s approach of Industry
Analysis…cont
Industry Competitors-
In a industry the following types of competition can
be there.
– Perfect completion
– Imperfect competition
– Monopoly
– Oligopoly
Michael E. Porter’s approach of Industry
Analysis…cont
Threats from new entrants
In some industries it is easy to make entry while in
some industry it is difficult to make entry. There
are certain barriers which make it difficult to make
entry. These are-
• Cost related barriers
• Regulation related barriers
Michael E. Porter’s approach of Industry
Analysis…cont
Buyers negotiation power
In some industries buyer have more negotiation
power. Buyers can influence the price of the
product as a result the profit of the firms from such
industry will remain volatile.
Supplier negotiation power
In some industries suppliers have more negotiation
power. Buyers can not influence the price of the
product as a result the profit of the firms from such
industry will remain stable.
Fundamental Analysis
Fundamental Analysis deals with the macro level analysis of
the economy by which the prospective ness of the economy is
analyzed.
Before investing into any stock market Institutional investors
are interested in the present and future growth prospects of
that market.
Therefore fundamental analysis or economic analysis serves
a great purpose to the investors.
Relationship between Economic
Fundamentals and Stock Market
Appreciation
Strong Economic
in
Fundamentals
domestic currency
Bullish
More FIIs
Stock Market
Growth Rate-
GDP is defined as the total market value of all final goods and
services produced within the country in a given period of time.
Whereas Gross National Product is the market value of final
products and earning from abroad.
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Growth Rate 7.8 4.8 6.5 6.1 4.4 5.8 4.0 8.5 7.5 8.1 9.0 9.5
G D P G r o w th R a te
9
8
7
6
5
4
3
2
1
0
Year
2. Per Capital Income-
Per capita income means how much each individual
receives, in monetary terms, of the yearly income that is
generated in their country through productive activities. That
is what each citizen would receive if the yearly income
generated by a country from its productive activities were
divided equally among everyone.
80.00
60.00
40.00
Return
20.00
0.00
-20.00
-40.00
Year
Comparative Analysis of Difference
Stock Markets Returns
Market/Index March 2006 Dec. 2006
South Korea KOSPI 10.86 12.21
Thailand SET 9.97 9.40
Indonesia JCI 21.68 25.10
Malaysia KLCI 15.33 17.35
Taiwan TWSE 14.62 20.85
BSE SENSEX 20.92 22.76
NSE S & P NIFTY 20.26 21.26
Comparative Analysis of Different
Stock Exchanges*
Country In local Currency In $ term Difference
• Brazil 21.7 33 11.3
• India 4.7 13 8.3
• Thailand 13.4 18.6 5.2
• China 52.1 55.8 3.7
• Malaysia 23.8 25.4 1.6
• Pakistan 36.1 37.0 0.9
• Singapore 17.4 17.1 0.3
• Taiwan 13.0 12.3 0.7
• Argentina 6.5 5.0 1.5
• Indonesia 17.7 15.9 1.8
S & P 500 Hang Sang Kospi Sensex SSE Com. Index Nikkei 227
Op 1478 15532 943 3972 1535 8340
Cl 1523 27812 1897 20287 5261 15307
Budget Analysis-
Budget of the Govt. can be surplus or deficit. Budget deficit
is another important factor which determine the foreign
investment in the country. A high budget deficit in the
indication of govt. excess spending, and govt. owes debt.
Consumer Survey
Consumer survey indicates the trend of consumers
preferences, their income level, their attitude towards a
particular products.
Index of Industrial Production-
Index of industrial production indicates the performance of
manufacturing industries, coal and mining industries and oil
refining industries.
Agriculture Production
Agriculture production also indicates the performance of the
economy. Agriculture of the economy is self reliance or it is
depending upon monsoon. If agriculture is depending upon
monsoon then GDP growth rate of the economy will be
highly unstable.
Fundamental Analysis
Fundamental Analysis deals with the macro level analysis of
the economy by which the prospective ness of the economy is
analyzed.
Before investing into any stock market Institutional investors
are interested in the present and future growth prospects of
that market.
Therefore fundamental analysis or economic analysis serves
a great purpose to the investors.
Relationship between Economic
Fundamentals and Stock Market
Appreciation
Strong Economic
in
Fundamentals
domestic currency
Bullish
More FIIs
Stock Market
Growth Rate-
GDP is defined as the total market value of all final goods and
services produced within the country in a given period of time.
Whereas Gross National Product is the market value of final
products and earning from abroad.
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Growth Rate 7.8 4.8 6.5 6.1 4.4 5.8 4.0 8.5 7.5 8.1 9.0 9.5
G D P G r o w th R a te
9
8
7
6
5
4
3
2
1
0
Year
2. Per Capital Income-
Per capita income means how much each individual
receives, in monetary terms, of the yearly income that is
generated in their country through productive activities. That
is what each citizen would receive if the yearly income
generated by a country from its productive activities were
divided equally among everyone.
80.00
60.00
40.00
Return
20.00
0.00
-20.00
-40.00
Year
Comparative Analysis of Difference
Stock Markets Returns
Market/Index March 2006 Dec. 2006
South Korea KOSPI 10.86 12.21
Thailand SET 9.97 9.40
Indonesia JCI 21.68 25.10
Malaysia KLCI 15.33 17.35
Taiwan TWSE 14.62 20.85
BSE SENSEX 20.92 22.76
NSE S & P NIFTY 20.26 21.26
P/E Ratio and Future Scenario
A short Case
ABN Mutual Fund (FII) invested $100 million in Sensex
portfolio on Jan,1, 2007. On that day Sensex closed at
14,000 and exchange rate was Re.45/1$. On 31 May,
2007 ABN Mutual Fund withdrew its total investment. On
that day Sensex closed at 15000 points and exchange
rate was Re. 40/$1. During the investment period ABN
Mutual Fund got Rs. 10cr as dividends. Calculate the
relative rate of return which ABN Mutual Fund got from
Indian Stock market?
Comparative Analysis of Different
Stock Exchanges*
Country In local Currency In $ term Difference
• Brazil 21.7 33 11.3
• India 4.7 13 8.3
• Thailand 13.4 18.6 5.2
• China 52.1 55.8 3.7
• Malaysia 23.8 25.4 1.6
• Pakistan 36.1 37.0 0.9
• Singapore 17.4 17.1 0.3
• Taiwan 13.0 12.3 0.7
• Argentina 6.5 5.0 1.5
• Indonesia 17.7 15.9 1.8
S & P 500 Hang Sang Kospi Sensex SSE Com. Index Nikkei 227
Op 1478 15532 943 3972 1535 8340
Cl 1523 27812 1897 20287 5261 15307
Budget Analysis-
Budget of the Govt. can be surplus or deficit. Budget deficit
is another important factor which determine the foreign
investment in the country. A high budget deficit in the
indication of govt. excess spending, and govt. owes debt.
Consumer Survey
Consumer survey indicates the trend of consumers
preferences, their income level, their attitude towards a
particular products.
Index of Industrial Production-
Index of industrial production indicates the performance of
manufacturing industries, coal and mining industries and oil
refining industries.
Agriculture Production
Agriculture production also indicates the performance of the
economy. Agriculture of the economy is self reliance or it is
depending upon monsoon. If agriculture is depending upon
monsoon then GDP growth rate of the economy will be
highly unstable.
Valuation of Redeemable preference
shares
Div1 Div 2 Div3 Div n Pn
Po ... n
(1 k ) (1 k ) 2
(1 k ) 3
(1 k ) (1 k ) n
Div 9
Po 81.82
K 0.11
Valuation of Common Equity shares
The valuation of common equity shares are
more difficult in comparison of bond and
preference shares because of uncertainty of
earning and market price of common
shares.
However, by looking the historical track
record of dividend and market price of
common equity shares we can do valuation.
Valuation of Common equity shares
Single Period Valuation-
Dividend Discount Method-
Suppose an investor is willing to buy a share whose trading is going
at Rs. 19/- suppose the share is expected to pay dividend equal to
Rs. 2/- and year end the price will be Rs. 21/- If the investor
opportunity cost of capital is 15 percent, how much should he pay
for the shares?
Div P1 2 21
Po 20
(1 K ) 1.15
Rs. 20/- is the present value of the share.
If market price of the share is more than the current price, it means
the share is over valued.
On the other hand if the market price of the share is less than the
current price of share than the share is undervalued.
Valuation of Common equity shares
Multiperiod Valuation-
Dividend Discount Method-
In multiperiod valuation the share is kept hold for number of years, and in
which a series of dividend is received by the investors.
Div1 2(1.05)
P0 Rs 42
K g 0.10 0.05
Div (1 g ) Div1
Po
Ke g Ke g
3.70(1 0.08)
K Rs100
0.12 0.08
Div1 4.13(1.05)
P0 Rs 61.95
K g 0.12 0.05