Equity Investments

Abhinav Rajverma
 Equity Investments

 Equity investment – represents an ownership interest in a firm

 Investing in equity – options for retail investors
Equity shares and equity mutual funds
Private equity – includes venture capital
 Income for investors
Dividends
Capital Appreciation
 Demat Account
• It holds financial securities in electronic form
• Maintained by two depository organisations in India
National Securities Depository Limited
Central Depository Services Limited

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 Why Consider Stocks?
 Neither dividends nor capital appreciation is guaranteed.
 Dividends are paid at the board’s discretion.
 Capital appreciation takes place when the company does well.
Benefits
Over time, stocks outperform all other investments
Stocks reduce risk through diversification.
Stocks are liquid and easy to buy.
Stay ahead of inflation.
Drawbacks
Risk losing it all
Taxes on profitable stock sales
Emotional ups and downs
Competing with institutional and professional investors

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 Stock Market Jargons
Bull Market Bear Market Trading Volume
Market Order Limit Order Day Order
Intra-day Trading Bid/buy Ask/offer
Close Price OHLC Liquidity
Long Position Short Position Square off
Round lot Odd lot Circuit Braker
Ex-dividend date Declaration date Dividend Yield
IPO FPO Rights Issue
Index Stock Beta Out-of-The-Money (OTM)
Moving Average Blue Chip Stock Defensive Stock
Mutual Funds Equity Funds Exchange-Traded Funds

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 Stock Classifications
 Growth Stock
Relatively rapid growth, usually new companies
Generally, does not pay dividends, high risk (beta > 1.5)
 Value Stock
Under-valued stocks ➜ high potential for a superior return
 Income Stock
High dividends, steady stream of income (e.g., utility firms)
 Blue-chip Stock
Long records of profit, dividend payments, good reputation,
less risky
 Speculative Stock
Extreme risk with the possibility of extreme returns in
compensation for that risk

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 Valuation of Common Stocks
Absolute Valuation
 Calculate intrinsic” value of a share
 Focuses on the fundamentals of the company – future
earnings and business growth, dividends, the firm risk, etc.
 Dividend Discount Model
 Discounted Cash Flow Model
Relative Valuation
 Calculate “relative” value of a stock.
 Price to Earnings (P/E) – indication of how much investors
are willing to pay for a dollar of the company’s earnings
 Price to Book Value (P/BV)
 Price to Sales (P/S)

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 Securities Markets
Primary Markets – newly issues securities are traded
 Initial public offering (IPO)
 Follow-on Public Offering (FPO)
 Rights Issue
 Private Placements
Secondary Markets – previously issued securities are traded
 Organized exchange
 Over-the-counter market
 Block Deal
International Markets – foreign securities are traded
 American Depository Receipts (ADRs)
 Global Depository Receipts (GDRs)

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 Offer For Sale (OFS)
OFS Snapshots
 The OFS mechanism – introduced (in July 2012) to facilitate
promoters to dilute their holding in listed companies.
 A separate window is provided by the Exchange.
 Faster and cost-effective than other routes for the promoter.
 To encourage retail participation in OFS – a minimum 10% of
the issue size must be reserved for retail investors.
Retail Investors
 Bid value up to Two lakh rupees
Who is eligible?
 India's top 200 companies by market capitalisation.
 Promoters/non-promoters with 10% holding in the company.

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 The Ethical Dilemma

Issuer Pay Problem

Gazette Notification – January 14, 2022

 Investors holding more than 20 per cent stake in the
company – shares offer for sale shall not exceed more than
50 per cent of their pre-issue shareholdings.
 Shareholders holding less than 20 per cent stake in the
company – shares offer for sale shall not exceed more than
10 per cent of the issuer.

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 How Securities Are Traded?
Order Size – Round lots, Odd lots
Types of Order
 Market orders – buy/sell immediately at the best price
 Limit orders – buy/sell only at a certain price or better.
 Stop-loss orders – buy/sell if the price moves unfavorably
above/below a specified level.
 Open orders or good-till-cancelled (GTC) orders
Short Selling
 Borrow stock from the broker and then sell it.
 Later buy and return stock to broker
 Margin – collateral an investor deposit with the broker
 Adjustments for dividend payments if any
Bid/Ask Price
 Bid price – highest price someone is willing to pay
 Ask/offer price – lowest price someone is willing to sell

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 Brokerage Account
Asset Management Account – All-in-one account
Cash Account – pay in full for security purchases
Margin Account
Margin or Initial Margin
Maintenance Margin
Margin Call
Joint Accounts
 Joint Tenancy Account with the Right of Survivorship
When one owner dies, the other receives full ownership of
assets in the account.
 Tenancy-in-Common Account
The deceased’s portion of the account goes to the heirs of
the deceased, not the surviving account holder.
Discretionary Account
 Authorize a broker to make trade for you
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 As an Investor, What Should You Know?
Value
 Is this a good price for this stock?
Quality
 Is this firm in a position that will allow it to be profitable
into the future?
Strengths and Weaknesses
 What are this firm’s strengths and weaknesses, and are
they likely to get better or worse?
Threats and Opportunities
 What are this firm’s threats and opportunities, and are
they likely to get better or worse?

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 Fundamental vs Technical
Fundamental Analysis
 Function of future earnings and dividends, expected levels
of interest rates, and the firm’s risk, etc.
 Price/earnings ratio – indication of how much investors
are willing to pay for a dollar of the company’s earnings

Technical Analysis
 Focuses on supply and demand
 Simple Moving Average (SMA)
 Exponential Moving Average (EMA)
 Moving Average Convergence Divergence (MACD)
 Relative Strength Index (RSI)

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 Rupee Cost Averaging
You invest a fixed amount of money at regular intervals
irrespective of whether the markets are going high or low.
Advantages of RCA
 A SIP is an easy way of doing this due to this benefit of rupee
cost averaging.
 Investing through SIPs – market volatility is mitigated to some
extent => the overall gains will increase.
 RCA works out best in choppy markets but is useful even when
the markets are in a bull run.
 It helps you buy more units when the markets are cheap and
lesser units when they are expensive.
 This approach brings down your average cost per unit over the
long-term.
 Keeps you from trying to time the market.

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 Other Investment Strategies
Buy-and-hold strategy
 Involves buying stock and holding it for a period of years.
 Avoids timing the market.
 Minimizes brokerage fees, transaction costs.
 Postpones capital gains taxes.
 Gains taxed as long-term capital gains.

Dividend Reinvestment Plans (DRIP)

 Automatically reinvest the dividends in the same firm’s stock
without brokerage fees.
 Use a DRIP to reinvest rather than spend your dividends.
 Still pay income taxes.
 Stuck reinvesting in old company instead of new.

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 Risk and Return Go Hand in Hand
 Beta is a measure of how responsive a stock or portfolio is
to changes in the market portfolio.
 Beta benchmark for market is 1.
 Beta greater than 1 indicates that stock moves up and down
more than market.
 Short-term investments in stocks are very risky.
 Holding stocks longer reduces variability of average annual
return.
 Primary securities markets is where new securities are sold.
 Previously issued securities are traded in the secondary
markets, which can be organized exchanges.

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 Capital Gains Tax Rates
Listed Equity Shares
 STCG Tax – 15 per cent
 LTCG Tax – 10% without indexation (over Rs. 1 lakh)
Dividend Income
 In the hand of the recipient
Equity Funds
 STCG – if sold before 12 months
 STCG Tax – 15%
 LTCG Tax – 10% without indexation (over Rs. 1 lakh)
 ELSS – tax-exempt u/s 80C
Non-Equity Funds
 STCG – if sold before 36 months
 STCG Tax – as per the tax rate
 LTCG Tax – 20% with indexation

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 Portfolio Optimization
Steps
• Compute the daily/monthly/annual returns of each asset
• Compute the average returns of each asset.
• Compute the covariance of each asset (Covariance Matrix)
• Using an initial weight, compute the portfolio's return and standard deviation.
• Annualize the portfolio return and standard deviation.
• Use Solver to find the optimal weights based on the objective

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Price Ladder (1/2)

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Price Ladder (2/2)

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 Candlestick Chart

 Candlesticks reflect investor sentiments and help the analyst to

determine when to enter and exit trades.
 Long white/green candlesticks indicate there is strong buying
pressure; this typically indicates price is bullish
 Long black/red candlesticks indicate there is significant selling
pressure. This suggests the price is bearish.

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 Technical Indicators

Simple Moving Averages

Exponential Moving Averages
Fibonacci Levels - 23.6%, 38.2%, 50%, 61.8%, 100%
RSI Index
Bollinger bands – Price & Volatility
N (20) periods MA
Generally, 2-SD from MA line
MACD - (Signal, Fast, Slow)

https://charting.bseindia.com/#

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 Summary
 Common stocks over time outperform all other investments.
 Common stocks can be blue-chip, growth, income, speculative,
defensive, large- to small-cap stocks.
 Stocks are liquid.
 Stock indexes such as the Sensex and Nifty show health of stock
market.
 Interest rates, risk, and expected future growth are the major
methods to determine the value of common stock.
 Use one or more investment strategies such as rupee-cost
averaging, buy-and-hold, and DRIPs.
 Stocks are riskier but diversification and watching beta values
can help.

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Thank You
for
Your Time

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