SECURITY ANALYSIS AND INVESTMENT MANAGEMENT

HIMANSHU PURI FACULTY DIAS

INVESTMENTS

Traditional investments covers:

Security analysis
Involves

estimating the merits of individual investments

Portfolio management
Deals

with the construction and maintenance of a collection of investments

SECURITY ANALYSIS
The fundamental analysis process:
1) 2)

3)

The analyst considers prospects for the economy The analyst determines which industries are likely to fare well in the forecasted economic conditions The analyst chooses particular companies within the favored industries

EIC analysis (a top-down approach)

AND Technical Analysis: Past price and volume

PORTFOLIO MANAGEMENT
A properly constructed portfolio achieves a given level of expected return with the least possible risk

Portfolio managers have a duty to create the best possible collection of investments for each customers unique needs and circumstances

PURPOSE OF PORTFOLIO MANAGEMENT

Portfolio management primarily involves reducing risk rather than increasing return

Consider two $10,000 investments:

1) 2)

Earns 10% per year for each of ten years (low risk) Earns 9%, -11%, 10%, 8%, 12%, 46%, 8%, 20%, 12%, and 10% in the ten years, respectively (high risk)

THE PORTFOLIO MANAGERS JOB

Begins with a statement of investment policy, which outlines:

Return requirements Investors risk tolerance Constraints under which the portfolio must operate

THE SIX STEPS OF PORTFOLIO MANAGEMENT

1) 2) 3) 4) 5) 6) Learn the basic principles of finance Set portfolio objectives Formulate an investment strategy Have a game plan for portfolio revision Evaluate performance Protect the portfolio

DEFINITION OF INVESTMENT

What is an investment?

Anything you buy with the expectation that it will increase in value and will provide some return as Interest, Dividend Capital Appreciation

Why is investing important?

Because you need to increase wealth so you are not dependent on anyone do the things you want to do in life.

WHAT IS INVESTMENT ?

Money we earn is partly spent and rest saved for meeting future expenses. Instead of keeping the savings idle we like to use savings in order to get return on it in the future. This is called Investment.

WHY INVEST ?

Earn Return on idle resources Generate sum of money for specified goal in life Make provision for uncertain future To meet the cost of inflation

THE STRUCTURE OF THE INVESTMENT PROCESS AND THE CIRCULAR FLOW OF INCOME

Financial Institutions

Suppliers

Demanders

Financial Markets

PARTICIPANTS IN THE INVESTMENT PROCESS

a. Government Mostly a demander of funds b. Business Demander and Supplier of Funds c. Individuals Mostly Supplier and Demanders of Funds also

d. Brokers
Direct v/s Indirect investing

PERSONAL INVESTMENT PROCESS

a. Meeting Investment Prerequisites b. Establishing Investment Goals c. Evaluating Investment Vehicles d. Selecting Suitable Investments e. Constructing a Portfolio f. Managing the Portfolio

THE INVESTMENT PROCESS

A description of the process is:

1. Set investment policy

Objectives Amount Choice of assets

2. Conduct security analysis

Examine securities (identify those which are mispriced?)

Use
a. Technical analysis the examination of past prices for trends b. Fundamental analysis true value based on future expected returns

THE INVESTMENT PROCESS

3.

Portfolio Construction

Identify

assets Choose extent of diversification

4.

Portfolio Evaluation
the performance of portfolio
previous three steps

Assess

5.

Portfolio Revision

Repeat

INVESTMENT V/S SPECULATION

Factors Degree of risk Return Basis of decision Period of Investment Investment Less Income of the investee Analysis of fundamentals Long Speculation Relatively High Change in Market Price Rumors, Tips Short

INVESTMENT ENVIRONMENT

Encompasses all types of investment opportunities and market structure that facilitates buying and selling of these investments

Components: Types of securities Institutional set up Market Intermediaries

Financial market is a market wherein financial instruments such as financial claims, assets and securities are traded.

FINANCIAL MARKETS & INSTITUTIONS

FINANCIAL MARKET
A financial market is a mechanism that allows people to easily buy & sell (trade) financial securities ( such as stocks & bonds ), commodities ( such as precious metals or agricultural goods ).

FINANCIAL MARKET

An FM may or may not have a particular physical existence. Location of NYSE,NSE, BSEmarket for stocks.

ROLE

One of the important requisites for the accelerated development of an economy is the existence of a dynamic and resilient financial market.

It helps the economy in the following manner: Savings mobilization Investment National growth- productive purposes Entrepreneurship growth Industrial development.

FUNCTIONS
Provide borrowers with funds Provide lenders with earning assets Providing liquidity in the market

CONSTITUENTS OF FINANCIAL MARKET

Primary Market Secondary Market Money Market Capital Market Domestic Market Forex Market

Debt Market Equity Market Derivative Market Insurance Market

TYPES OF FINANCIAL MARKET

Capital market

Commodity Market

Money Market

Financial Market

Derivatives Market

Insurance Market

Foreign Exchange Market

OPTIONS FOR RETAIL INVESTOR

Real Asset v/s Financial Asset Equity Debt Mutual Funds Fixed Deposits with Banks Post office schemes Insurance Short term investments Gold Real Estate Antiques

EQUITY SHARES
It commonly referred to as ordinary share represents the form of fractional ownership in a business venture.

Equity shareholders have the right to get dividends as declared.

DEBT
This instrument represents contract whereby one party lend money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principle amount by the borrower to the lender.

CLASSIFICATION OF DEBT
BONDS: Issued by Govt.(Central and State),Public Sector Organisation DEBENTURES: Issued by Private Corporate Sector.

MUTUAL FUND

A Mutual fund is a collective investment vehicle that pools together investor money. This collective pool of money is invested in accordance to stated objective.

Mutual Funds are : A large pool of resources Managed by professionals Diversified investment for lower risk & better return

FIXED DEPOSITS WITH BANKS

It allows an investor to deposit a lump sum of money for a fixed period ranging from a few weeks to a few year and earn a pre-determined rate of interest. Guaranteed Returns depends upon term. Safe and Secured Investments

POST OFFICE SCHEMES

Offered by Govt. of India Safe, secure and risk-free Investment Transferable to any post office in India Attractive Rate of Interest Post office monthly income scheme Kisan Vikas Patra National Savings certificate Public Provident Fund

GOLD

Physical Gold in the form of bars and coins Gold accounts in banks where units in the gold a/c in the banks are backed up by physical gold held in the bank and bank gives assurance that the investor can convert the gold back to cash anytime.

REAL ESTATE INVESTMENT

Financial instrument that invests primarily in the real estate such as offices, apartments, shopping centres, hotels etc. Tend to pay high returns Attractive investment opportunity when the stock market is falling.

INSURANCE

A promise of compensation for specific potential future losses in exchange for a periodic payment. Now it is considered as a investment tool also:
ULIPs

SHORT TERM INVESTMENT

Certificate of Deposits Commercial papers T bills

But this market is predominantly used by institutional investors and corporate much

CONCLUSION
Investors looks at superior returns and measured risk therefore he has to select a dynamically balanced asset allocation mix consisting of the different investment options available in the Financial Market.