INVESTMENT PORTFOLIO MANAGEMENT

INTRODUCTON:
An investment is a sacrifice of current money or other resources for future; benefits. Numerous avenues of investment are available today. You can deposit money in a bank account or purchase a long-term government bond or invest in the equity shares of a company or contribute to provident found account or buy a stock option or acquire a plot of land or investment in some other form. The two key aspects of any investment are time and risk. The sacrifice takes place now and is certain. The benefit is expected in the future and tends to be uncertain. In some investments (like government bonds) the time element is the dominant attribute. In other investments (like stock options) the risk element is the dominant attribute. In yet other investments (like equity shares) both time and risk are important. Almost everyone owns a portfolio of investments. The portfolio is likely to comprise financial assets (banks deposits, bonds, stocks, and so on) and real assets9car, house, and so on). The portfolio may be the result of a series of haphazard decisions or may be the result of deliberate and careful planning. INVESTMENT VRSUS SPECULATION According to Benjamin Garahm An investment operation is on which, upon through analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Very broadly, the characteristics of an investor differ from the speculative as follows:

SNO
Planning horizon

INVESTOR
An investor has a relatively longer planning horizon is holding period usually at last one year An investor is not willing to assume more than moderate risk. Rarely those he knowingly assume high risk.

SPECULATOR
A speculator has very short planning horizon is holding period may be a few days to a few months A speculator is ordinarily willing to assume high risk

Risk disposition

Return expectation

Basis for decision

A speculator looks for a high An investor usually seeks a rate of return in exchange for modest rate of return which the high risk borne by him. limited risk assumed by him. An investor attaches greater A more speculator relies more significance to fundamental on hearsay, technical charts, factors and attempts a careful and market psychology. evaluation of the prospects of the firm.

INVESTMENT ALTERNATIVES AND THEIR EVALUATION There is a bewildering range of investment alternatives. The more important ones, from the point of view of individual investors, are displayed in exhibit 1.1 INVESTMENT ALTERNATIVES: A brief description of various investment alternatives are avenues is given below. They are discussed at length in the following chapters. Deposits: A good portion of the financial assets of individuals is held in the form of deposits. They can be broadly classified as: Bank deposits Post office deposits Company fixed deposits Government savings schemes: Government of India offers a number of small savings schemes to individual investors. These schemes are offered through the post office and select banks. The important savings schemes are: 1. Public provident fund: 2. Senior citizens savings scheme: 3. National savings certificate:

INVESTMENT ALTERNATIVES
INVESTMEN T AVENUES

Deposits

Government Saving Schemes Bonds or debentures

Money market instruments

Equity shares

Mutual fund schemes

Insurance products

Retirements products

Real estate

Precious objects

Derivatives

Money market instruments: Debt instruments which have a maturity of less than one year at the time of issue are called money market instruments-these instruments are highly liquid and have negligible risk. The major money market instruments are: Treasury bills Certificates of deposit Commercial paper Repos

Bonds or debentures: Bonds are debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flow. Bonds may be classified into categories: Government securities PSU bonds Debentures of private sector companies Preference shares

Equity shares: Equity shares represent ownership capital. As an equity shareholder; you have an ownership stake in the company. This essentially means that you have a residual interest in income and wealth. Perhaps the most romantic among various investment avenues, equity shares are classified into the following broad categories by stock market analysts: Blue chip shares Growth shares Income shares Cyclical shares Speculative shares

Mutual funds: instead of directly buying equity shares and fixed income instruments, you can participate in various schemes floated by mutual funds which, in turn, invest in equity shares and fixed income securities. There are three broad types of mutual fund schemes. Equity schemes Debt schemes Balanced schemes:

Life insurance: in a broad sense, life insurance may be viewed as an investment. Insurance premiums represent the sacrifice and the assured sum, the benefit. The important types of insurance policies in India are:

Endowment assurance policy Money back policy Whole life policy Term assurance policy

Retirement products: the important retirement products are: Employees provident fund scheme 1952. Employees pension scheme 1952. New pension scheme, 2004 Real estate: for the bulk of the investors the most important asset in their portfolio is kikely to be interested in the following types of real estate: Agricultural land Semi-urban land Commercial property A resort home A second house

Precious objects: precious objects are teams that are generally small in size but highly valuable in monetary terms. The important precious objects are; Gold and silver Precious stones Art objects

Financial derivatives: a financial derivative is an instrument whose value is derived from the value of an underlying asset. It may be viewed as a side bet on the asset. The most important financial derivatives from the point of view of investors are: Options Futures

PORTFOLIO MANAGEMENT PROCESS: Investment management (portfolio management) is a complex activity which may be broken down into the following steps: Specification for investment objectives and constraints: the typical objectives sought by investors are current income, capital appreciation, and safety of principal. The relative importance of these objectives should be specified. Further, the constraints arising from liquidity, time horizon, tax, and special circumstances must be identified. Quantification of capital market expectations: to address the asset-mix question you need relatively long term estimates of returns and risks of various asset classes. Put differently, you have to quantify capital market expectations.

Choice of the asset mix: The most important decision in portfolio management is the asset mix decision. Very broadly, this is concerned with the proportions of stocks and bonds in the portfolio. The appropriate stock-bond mix depends mainly on the risk tolerance and investment horizon of the investor. Formulation of portfolio strategy: once a certain asset mix is chosen, an appropriate portfolio strategy has to be hammered out. Two broad choices are available an active portfolio strategy or a passive portfolio strategy. An active portfolio strategy strives to earn superior risk-adjusted returns by resorting to market timing, or sector rotation, or security selection, or some combination of these. Selection of securities: Generally, investors pursue an active stance with respect to security selection. For stock selection, investors commonly go by fundamental bonds are yield to maturity, credit rating, term to maturity, tax shelter, and liquidity. Portfolio revision: This value of a portfolio as well as its composition-the relative proportions of stock and bond components-may change as stocks and bonds fluctuate. In response to such changes, periodic rebalancing of the portfolio is required. Portfolio execution: this is the phase of portfolio management which is concerned with implementing the portfolio plan by buying and or selling specified securities in given amounts . Performance Evaluations: The performance of a portfolio should be evaluated periodically. The key dimensions of portfolio performance evaluation are risk and return and the key issue is whether the portfolio returns commensurate with its risk exposure. Such a review may provide useful feedback to improve the quality of the portfolio management process on a continuing basis.

UNIT 2:
INRODUCTION:

SECURITIES MARKET

The securities market is the market for equity, debt, and derivatives. The debt market, in turn, may be divided into three parts...The government securities market, the corporate debt market, and the money market. The derivatives market, in turn, may be divided into two parts, viz the options market and the futures market. The structure of the securities market is shown in below Diagram space: structure of the securities market:
Securities market

Equity market

Debt market

Derivatives market

Government securities market

Corporate debt market

Money market

Options market

Futures market

PARTICIPANTS IN THE SECURITIES MARKET: The Indian securities market comprises of a number of participants who link demanders of funds with suppliers of funds. They are as follows: Regulators: the key agencies that have a significant regulatory influence, direct or indirect, over the securities market are currently as follows: The company law board which is responsible for the administration of the companies act, 1956. The RBI which is primarily responsible, inter alia, for the supervision of banks, money market, and government securities market. The securities and exchange board of India (SEBI) which is responsible for the regulation of the capital market. The department of economic affairs an arm of the government, which, inter alia, is concerned with the orderly functioning of the financial markets as a whole. The ministry of company affairs an arm of the government, which is responsible for the administration of corporate bodies.

Stock exchanges: A stock exchange is an institution where securities that have already been issued are bought and sold. The major exchanges in India are NSE AND BSE. Listed securities: Securities that are listed on various stock exchanges and hence eligible for being traded thee are called listed securities. Presently about 10,000, securities are listed on all the stock exchanges in India put together.

Depositories: A depository is an institution which de-materializes physical certificates and effects transfer of ownership by electronic book entries. Presently there are two depositories in India...Viz...The national securities depository limited and the central securities depository limited. Brokers: Brokers are registered members of the stock exchanges through whom investors transact. There are about 10,000 brokers in India. Foreign institutional investors: Institutional investors from abroad who are registered with SEBI to operate in the Indian capital market are called foreign institutional investors. Merchant bankers: Firms that inter alia specialize in managing the issue of securities are called merchant bankers. They have to be registered with SEBI. Primary dealers: Appointed by the RBI, primary dealers serve as underwriters in the primary market and as market makers in the secondary market form government securities. Mutual Funds: A mutual fund is a vehicle for collective investment. It pools and manages the funds of investor. There are about 30 mutual funds in India. Custodians: A custodian looks after the investment back office of a mutual fund. It receives and delivers securities, collects income, distributes dividends, and segregates the assets between schemes. Registrars and transfer agents: A registrar and transfer agent is employed by a company or a mutual fund to handle all investor-related services. Underwriters: An underwriter agrees to subscribe to a given number of shares in the event the public subscription is inadequate. The underwriter, in essence, stands guarantee for public subscription. Bankers to an Issue: The bankers to an issue collect money on behalf of the company from the applicants. Debenture trustees: When debentures are issued by a company, a debenture trustee has to be appointed to ensure that the borrowing firm fulfils its contractual obligations. Venture capital funds: A venture capital fund is a pool of capital which is essentially invested in quit shares or equity-linked instruments of unlisted companies. Credit rating agencies: A credit rating agency assigns ratings primarily to debt securities. PRIAMRY EQUITY MARKET: Although the equity market in India has been functioning since the late nineteenth century, the primary equity market, also called the new issues market, remained rather dull and inactive, barring occasional but brief bursts of activity, till 1991. In 1992, the control of capital issues act was abolished and SEBI was entrusted with the responsibility of regulating the primary market. A series of initiatives taken by SEBI, along with a more conducive environment that emerged in the wake of economic reforms, imparted a strong fillip to the primary market. There are three ways in which a company may raise equity capital in the primary market Public issue Rights issue Private placement

Public issue: By far the most important method of issuing securities, a public issue involves sales of securities to the public at large. The issue of securities to members of the public involves a fairly elaborate process comprising of the following steps. Approval of the board of directors Approval of shareholders Due diligence by the lead manager Appointment of other intermediaries like co-managers, advisors, underwriters, bankers, brokers, and registrars Preparation of the draft prospectus Filling of the draft prospectus with SEBI Application for listing in stock exchanges Filling of the prospectus with the registrar of companies Promotion of the issue Printing and distribution of applications Statutory announcement Collection of applications Processing of applications Determination of the liability of underwriters Finalization of allotment Giving of demat credit and refund orders Listing of the issue.

Rights issue: A rights issue involves selling securities in the primary market by issuing rights to the existing shareholders. When a company issues additional equity capital, it has to be offered in the first instance to the existing shareholders on a pro rate basis. This is required under section 81 of the company Act 1956. The shareholders, however, may by a special resolution forfeit this right, partially or fully, to enable a company to issue additional capital to the general public or to selected investor son a preferential basis. Private placement: A private placement is an issue of securities to a select group of persons not exceeding 49. Private placement of shares and convertible debentures by a listed company can be of two types: preferential allotment and qualified institutional placement. THE NATIONAL STOCK EXCHANGE: Inaugurated in 1994, the national stock exchange seeks to Establish a nation-wide trading facility for equities, debt, and hybrids, Facilitate equal access to investors across the country, Impart fairness, efficiency, and transparency to transactions in securities. Shorten settlement cycle, and Meet international securities market standards.

The distinctive features of NSE, as it functions currently, are as follows: The NSE is a ring less, national computerized exchange. The NSE has two segments, the capital market segment and the wholesale debt market segment. The capital market segment covers equities, convertible debentures, and retail trade in non-

convertible debentures. The wholesale debt market segment is a market for high value transactions in government securities, PSU bonds, commercial papers, and other debt instruments. The trading members in the capital market segment are connected to a central computer in Mumbai through a satellite link-up, using VSATs (Very Small Aperture Terminals). Incidentally,, NSE is the first exchange in the world to employ the members in the wholesale debt market segment are linked through dedicated high speed lines to the central computer at Mumbai. The NSE has opted for an order-driven system. When an order is placed by a trading member, the computer automatically generates a unique order number and the member can take a print of order confirmation slip containing this number. When a trade takes place, a trade confirmation slip is printed at the trading members work station. It gives details like quantity, price, code number of counterparty, and so on. The identity of a trading member is not revealed to others when he places an order or when his pending orders are displayed. Hence, large orders can be placed on the NSE. Members are required to deliver securities and cash by a certain day. The payout day is the following day. All trades on NSE are guaranteed by the national securities clearing corporation (NSCC). This means that when A buys from B, NSCC becomes the counterparty to both legs of the transaction. In effect, NSCC becomes the seller to A and the buyer from B. This eliminates counterparty risk.

THE BOMBAY STOCK EXCHANGE: Established in 1875, the Bombay stock exchange (BSE) is one of the oldest organized exchanges in the world with a ling, colorful, and chequered history. Its distinctive features are as follows: The BSE switched from an open outcry system to a screen-based system in 1995 which is called BOLT (which is an acronym for BSE On-Line Trading). It accelerated its computerization programme in response to the threat from the NSE. To begin with, BOLT was a quote-driven as well as an order-drive system, with jobbers feeding two-way quotes and brokers feeding buy or sell orders this hybrid system reflected the historical practice of BSE where jobbers played an important role. A jobber is a broker who trades on his own account and hence offers a two-way quote or a bi-ask quote. The bid price reflects the price at which the jobber is willing to buy and the ask price represents the price at which the jobber is willing to sell. From august 13, 2001, however, BSE, like NSE, became a completed order-driven market. In October 1996 SEBI permitted BSE to extend its BOLT network outside Mumbai. A number of various, subsidiary companies of regional exchanges became members of BSE and through them members of regional exchanges now serve as sub-brokers of BSE. This has expanded the reach of BSE considerably. TRADING AND SETTLEMENT: Trading: each stock exchange has certain listed securities and permitted securities which are trades on it. Members of the exchange alone are entitled to the trading privileges. Investors interested in buying or selling securities should place their orders with the members(also called as brokers0 of

the exchange. There are two way of organizing the trading activity: the open outcry system and the screen-based system. Open outcry system: As the nomenclature suggest, under the open outcry system, traders shut and resort to signals on the trading floor of the exchange which consists of several notional trading posts of different securities. A member wishing to buy or sell a certain security reaches the trading post where the security is trades. Here, he comes in contract with others interested in transacting in that security. Buyers make their bids and sellers make their offers and bargains are closed at mutually agreed-upon prices. In stocks where jobbing is done, the jobber plays an important role. He stands ready to buy or sell on his account. He quotes his bid (buying) and asks (selling) prices. He provides some stability and continuity to the market. Screen-based system: In the screen-based system, the trading ring is replaced by the computer screen and distant participants can trade with each other through a computer network. A large number of participants, geographically separated, can trade simultaneously at high speeds. The screen-based trading system is.. Enhances the information efficiency of the market as more participants trade at a faster speed, Permits the market participants to get a full view of the market, which increased their confidence in the market; and Establishes transparent audit trail. While computerized trading is more efficient, it decidedly lacks the vibrancy and vitality of the traditional floor trading. Settlement: Traditionally, trades in India were settled by physical delivery. This means that the securities had to physically move from the seller to the sellers broker, from the sellers br oker to the buyers brokers (through the clearing house of the exchange or directly), and from the buyers broker to the buyer. Further, the buyer had to lodge the securities and with the transfer agents of the company and the process of transfer took one to three months, this led to high paperwork cost and created bad paper risk. To mitigate the costs and risks associated with physical delivery, security transactions in developed markets are settled mainly through electronic delivery facilitated by depositories. A depository is an institution which dematerializes physical certificates and effects transfer of ownership by electronic by electronic book entries. To enable the creation of depositories to facilitate dematerialized trading in India, the central government promulgated the depository ordinance, 1995 which was followed by the depositories Act, 1996. The highlights of the depositories Act are as follows: Every depository will be required to be registered with the securities and exchange board of India. Investors will have the choice of continuing with the existing share certificates or opt for the depository mode. Investors opting to join the depository mode are required to register with the agents of the depositories. These will be custodial agencies like banks, financial institutions, and large brokerage firms. While the depository will be the registered owner in the register of the company, the investor will enjoy the economic benefits as well as the voting rights on the share concerned. Shares in the depository mode will be fungible. This means that they will cease to have distinctive numbers.

 Investors having entered the depository mode can leave the system and get share certificates from the company as registered owner in the books of the company. Ownership changes in the changes in the depository system will be made no stamp duty on transfer of ownership. Any loss caused to the beneficial owners due to the negligence of the depository or the participant will be indemnified by the depository. TRANSACTION COSTS: Transaction costs may be divided into three broad heading: trading costs, clearing costs, and settlement costs. Trading costs: Trading costs consist of brokerage cost, market impact cost, and securities transaction tax and other charges. Brokerage cost is the brokerage paid to the broker. Due to heightened competition in stock broking, brokerage cost has fallen steeply. Clearing costs: when a negotiated trade takes place, the counterparty may default or when a trade takes place on an exchange, the exchange may default in its payout Settlement costs: A trade is finally consummated when securities and funds actually change hands. Settlement costs are costs associated with such transfer. With the advent of dematerialization, elimination of stamp duty on dematerialized trades, and improvement of banking technology, settlement costs have come down substantially.

OVER THE COUNTER EXCHANGE OF INDIA OTCEI The OTCEI was incorporated in October, 1990 as a Company under the Companies Act 1956. It became fully operational in 1992 with opening of a counter at Mumbai. It is recognized by the Government of India as a recognized stock exchange under the Securities Control and Regulation Act 1956. It was promoted jointly by the financial institutions like UTI, ICICI, IDBI, LIC, GIC, SBI, IFCI, etc.
The Features of OTCEI are:1. OTCEI is a floorless exchange where all the activities are fully computerized. 2. Its promoters have been designated as sponsor members and they alone are entitled to sponsor a company for listing there. 3. Trading on the OTCEI takes place through a network of computers or OTC dealers located at different places within the same city and even across the cities. These computers allow dealers to quote, query & transact through a central OTC computer using the telecommunication links. 4. A Company which is listed on any other recognised stock exchange in India is not permitted simultaneously for listing on OTCEI. 5. OTCEI deals in equity shares, preference shares, bonds, debentures and warrants. 6. The Participants of OTCEI are :i. ii. iii. iv. v. vi. Members and dealers appointed by OTCEI, Companies whose securities are listed, Investors who trade in the OTCEI, Registrar who keeps custody of scrip certificates, Settlement Bank which clears the payment between counters, and SEBI and Government who supervise and regulate the working.

UNIT 3-FUNDAMENTAL ANALYSIS (OR) INDUSTRY ANALYSIS

INTRODUCTION: To determine the intrinsic value of an equity share, the security analyst must fore-cast the earnings and dividends expected from the stock and choose a discount rate which reflects the risk of the stock. This is what is involved in fundamental analysis, perhaps the most popular method used by investment professionals. The earnings potential and risk of a firm are linked to the prospects of the industry to which it belongs. The prospectuses of various industries, in turn, are largely influenced by the developments in the macro economy. Researchers have found that stock price changes can be attributed to the following factors: Economy-wide factors: 30-35 percent Industry factors: 15-20 percent Company factory:30-35 percent Others factors: 15-25 percent

Based on the above evidence, a commonly advocated procedure of fundamental analysis involves a threestep examination, which calls for. UNDERSTANDING THE MACRO-ECONOMIC ENVIRONMENT AND DEVELOPMENTS. Analyzing the prospects of the industry to which the firm belongs Assessing the projected performance of the company and the intrinsic value of its shares.

MACRO ECONOMY ANALYSIS: The macroeconomic is the overall economy environment in which all firms operate. The key variables commonly used to describe the state of the macro economy are: Growth rate of gross domestic product Industrial growth rate Agriculture and monsoons Savings and investments Government budget and deficit Government debt Price level and inflation Interest rates Balance of payment, forex reserves, and exchange rate Foreign investment Infrastructural facilities and arrangements Sentiments

Growth rate of gross domestic product (GDP): The gross domestic product or some variant of it, like the gross national product -is a measure of the total production of final goods and services in the economy during a specified period usually a year. The GDP of the Indian economy for the fiscal 2011-2012 was estimated at about seven million crore in current rupees. On economic forecasting: William sherdeen, author of the bestselling book fortune sellers, reviewed the leading research on the accuracy of forecasts made from 1970 to 1995. He found that: Economic cannot forecast the turning points in the economy. The forecasting skill of economists is about as good as guessing. No economic forecasters consistently lead the pack in forecasting accuracy. Industrial growth rate: The GDP growth rate represents the average of the growth rates of the three principal sectors of the economy, viz. the services sector, the industrial sector, and the agricultural sector. Agriculture and monsoons: Agriculture accounts for about a quarter of the Indian economy and has important linkages, direct and indirect, with industry. Hence, the increase or decrease of agricultural production has a significant bearing on industrial production and corporate performance. Companies using agricultural raw materials as inputs or supplying inputs to agriculture are directly affected by the changes in agricultural production. A spell of good monsoons imparts dynamism to the industrial sector and buoyancy to the stock market. Savings and investments: The demand for corporate securities has an important bearing on stock price movements. So investment analysts should know what the level of investment in the economy is and what proportion of that investment is directed toward the capital market. Government budget and deficit: Government plays an important role in most economies, including the Indian economy. The central budget (as well as the state budgets) prepared annually provides information on revenues, expenditures, and deficit. Government debt: The IMF reckons that when the government debt exceeds 60 percent of GDP, the impact of any government spending turns negative as doubts regarding the sustainability of debt lead to lower consumer spending and higher long-term interest rates. Economists Kenneth rogeff and Carmen reinhart believe that when government debt exceeds 90 percent of GDP, median growth rate falls by 1 percent and the mean growth rate falls even more. INDUSTRY ANALYSIS: In the previous section we looked at the macroeconomic picture. In accordance with the recommended economy-industry-company analysis sequence, we now move onto industry analysis. The objective of this analysis is to assess the prospects of various industrial groupings. Admittedly, it is almost impossible to forecast exactly which industrial sectors will appreciate the most. Yet careful analysis can suggest which industries have a brighter future than others and which industries are plagued with problems that are likely to persist for a while. Concerned with the basics of industry analysis this section is divided into four parts: Sensitivity to the business cycle. Industry life cycle analysis Study of the structure and characteristics of an industry

Profit potential of industries: porter model.

Sensitivity to business cycle: Once you have a forecast of the state of the macroeconomic, you can examine its implications for different industries. Industries vary in their sensitivity to the business cycle. For example, the automobile industry is more responsive to the business cycle. During expansionary periods, the demand for automobiles tends to rise sharply and during recessionary periods, the demand for automobiles tends to fall sharply. The sensitivity of a firms earnings to the business cycle is determined by three factors: the sensitivity of the firms sales to business conditions, the operation leverage, and the financial leverage. Sensitivity of sales: The sales of firms in industries that sell necessities such as food, drugs, and personal care products are less sensitive to business conditions. On the other hand, sales of firms in industries such as automobiles, air transport, and machine tools are more sensitive to business conditions. Operating leverage: Operating leverage reflects the division between fixed and variable costs. Fixed costs remain constant irrespective of changes in the volume of output. Depreciation charges, interests on long term debt, rent, insurance, lease rentals, managerial salaries, and so on represent fixed costs. Variable costs vary with the volume of output material cost, power cost, interest on working capital advance, selling commission, and so on are examples of variable costs. Firms with high fixed costs as opposed to variable costs are said to have high operating leverage. The profits of such firms are more sensitive to business conditions. Firms with high variable costs as opposed to fixed costs are said to have low operating leverage. The profits of such firms are less sensitive to business conditions. Financial leverage: Financial leverage, which stems from the use of debt funds, is the third factor that influences the sensitivity of a firm to business cycle. Other things being equal, the higher the degree of financial leverage the greater the sensitivity of a firms to business cycle. Industry Life Cycle Analysis: Many industrial economists believe that the development of almost every industry may be analyzed in terms of a life cycle with four well-defined stages. 1) 2) 3) 4) Pioneering stage Rapid growth stage Maturity and stabilization stage Decline stage Pioneering stage: During this stage, the technology and or the product is relatively new. Lured by promising prospects, many entrepreneurs enter the field. As a result, there is keen, and often chaotic, competition. Only a few entrants may survive this stage. Rapid growth stage: Once the period of chaotic developments is over, the rapid growth stage arrives. Thanks to a relatively orderly growth during this period, firms which survive the intense competition of the pioneering stage, witness significant expansion in their sales and profits. Maturity and stabilization stage: After enjoying an above-average rate of growth during the rapid growth, the industry enters the maturity and stabilization stage. During this stage, when the industry is more or less fully developed, its growth rate is comparable to that sales and profits.

 Decline stage: With the satiation of demand, encroachment of new products, and changes in consumer preferences, the industry eventually enters the decline stage, relative to the economy as a whole. In this sage, which may continue indefinitely, the industry may grow slightly during prosperous periods, stagnate during normal periods, and decline during recessionary periods. Evaluation and investment implications: The experience of most industries suggest that they go through the four phases of the industry life cycle, through thee are considerable variations in terms of the relative duration of various stages and the rates of growth during these stages. Because of these variations, it may not be easy to define what the current stage is, how long it will last, and what would be its precise growth rate. Give industry analysis prior attention in your investment selection process. Display caution during the pioneering stage-this stage has an appeal primarily for speculators. Respond quickly and expand your commitments during the rapid growth stages. Moderate your investment during the maturity stage. Sensibly disinvest when signals of decline are evident.

Study of the structure and characteristics of an industry Since each industry is unique, a systematic study of its specific features and characteristics must be an integral part of the investment decision process. Industry analysis should focus on the following: Structure of the industry and nature of competition. The number of firms in the industry and the market share of the top few firms in the industry. Licensing policy of the government. Entry barriers, if any. Pricing policies of the firm. Degree of homogeneity or differentiation among products. Competition from foreign firms Comparison of the products of the industry with substitutes in terms of quality, price, appeal, and functional performance.

Nature and prospectus of demand: Major customers and their requirements. Key determinants of demand Degree of cyclicality in demand Expected rate of growth in the foreseeable future

Cost, efficiency, and profitability: Proportions of the key cost elements, namely, raw material, labor, energy, and overheads Productivity of labor Turnover of inventory, receivables, and fixed assets Control over price of outputs and inputs Behaviors of prices of inputs and outputs in response to inflationary pressures. Return on asset, earning power, and return on equity.

Technology and research: Degree of technological stability Important technological changes on the horizon and their implications Research and development outlays as percentage of industry sales Proportion of sales growth attributable to new products

UNIT -4 COMPANY ANALYSIS

INTRODUCTION: A financial analyst is a person who analyses securities and makes recommendations thereon. In determining whether a s security is worth buying, holding, or selling, financial analysts employ fundamental analysis and technical analysis. Fundamental analysis looks at matter like future earnings and dividends to assess intrinsic value, whereas technical analysis involves a study of past and volumes to determine the direction of price movement. Fundamental analyses take two somewhat different approaches in their search for mispriced securities. The first approach involves estimating the intrinsic value and comparing the same with the prevailing market price to determine whether the security is underpriced or fairly priced or overpriced. The second approach involves estimating a securitys expected return, given its current price and intrinsic value, and then comparing it with the appropriate return for securities with similar characteristics. STRATEGY ANALYSIS: Strategy analysis seeks to explore the economics of a firm and identify its profit drivers so that the subsequent financial analysis reflects business realities. The profit potential of a firm is largely influenced by the industry or industries in which it participates by the strategy it follows to compete in its chosen industry or industries and by the way in which it exploits synergies across its business portfolio. 1. Competitive strategy; Among the various frameworks of strategy formulation, the one developed by Michael E. Porter in his seminal work competitive strategy has been perhaps the most influential in shaping management practice. Product differentiation: Cost leadership can be attained by exploiting economies of scale, exercising tight cost control, minimizing costs in area like R&D and advertising, and deriving advantage from cumulative learning. Product differentiation involves creating a product that is perceived by customers as distinctive or even unique so that they can be expected to pay a higher price.

COMPETITIVE POSITION OF THE FIRM Superior Cost-cum-differentiation advantage Differentiation advantage

Relative differentiation position Inferior Low cost advantage Superior 2. Corporation strategy analysis: When you analysis a multi-business firm, you have to evaluate not only the profit potential of individual business but also the economic implications of managing different businesses under one corporate canopy. For example, general electric has succeeded immensely in creation significant value by managing a highly diversified set of business ranging from light bulbs to aircraft engines, whereas sears failed in managing retailing with financial services. ACCOUNTING ANALYSIS: Accounting analysis seeks to evaluate the extent to which the firms accounting reports capture its business reality. As an analyst you must be familiar with the institutional framework for financial reporting, the potential sources of noise and bias in accounting, and the differences between good accounting quality and bad accounting quality. Accounting quality: Here are the key pointers of good and bad accounting quality. Good accounting quality The accounting data focuses on key success factors and risks Managers use their accounting discretion to make accounting numbers more informative The firm provides adequate disclosures to describe its strategy, its current performance, and future prospects There are no red flags Bad accounting quality The accounting date fails to highlight key success factors and risks Managers use their accounting discretion to disguise reality The firm just fulfills the minimal disclosure requirements prescribed by accounting regulations There are serious red flags. Stuck-in-the middle relative cost position indicator

UNIT 5: TECHNICAL ANALYSIS

Introduction: As an approach to investment analysis, technical analysis is radically different from fundamental analysis. While the fundamental analyst believes that the market is 90 percent logical and 10 percent psychological, the technical analyst assumes that it is 90 percent psychological and 10 percent psychological. Technical analyses dont evaluate a large number of fundamental factors relating to the company, the industry, and the economy. Instead, they analyses internal market data with the help of charts and graphs. Subscribing to the castles-in the-air approach, they view the investment game graphs. They look at charts to understand what the market participants have been doing and believe that this provides a basis for predicting future behavior. Although technical analysis can be applied to commodities, currencies, bonds, and equity stocks, our discussion is restricted to equity stocks WHAT IS TECHNICAL ANALYSIS? Technical analysis involves a study of market generated data like prices and volumes to determine the future direction of price movement. In his book technical analysis explained, Marin J. Pring explains The technical approach to investing is essentially a reflection of idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces. The art of technical analysis-for it is an art-is to identify trend changes at any early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has been reversed. Basic premises: the basic premises underlying technical analysis, as articulated by Robert. A. Lovely are as follows. Market prices are determined by the interaction of supply and demand forces. Supply and demand are influenced by a variety of factors, both rational and irrational. Barring minor deviations, stock prices tend to move in fairly persistent trends. Shifts in demand and supply bring about changes in trends. Because of the persistence of trends and patterns, analysis of past market data can be used to predict future price behaviors.

Differences between technical analysis and fundamental analysis: 1) Technical analysis mainly seeks to predict short-term price movements, whereas fundamental analysis tries to establish long-term values 2) The focus of technical analysis is mainly on internal market data, particularly factors relating to the economy, the industry, and the firm. 3) Technical analysis appeals mostly to short-term traders, whereas fundamental analysis appeals primarily to long-term investors CHARTING TECHNIQUES Technical analysts use a variety of charting techniques. The most popular ones seem to be the Dow Theory, bar and line charts, the pint and figure chart, the moving average line and the relative strength line.

However, as a prelude to that its helpful t briefly explains the basic concepts underlying chart analysis. Basic concepts underlying chart analysis: The basic concepts underlying chart analysis are 1) Persistence of trends 2) Relationship between volume and trend 3) And resistance and support levels Trends: The key belief of the chartists is that stock prices tend to move in fairly persistent trends. Stock price behavior is characterized by inertia; the price movement continues along a certain path until it meets an opposing force, arising out of an altered supply demand relationship . Relationship between volume and trends: chartists believe that generally volume and trend go hand in hand. When a major upturn begins the volume of trading increases as the price advances and decreases as the price declines. Support and resistance levels: Chartists assume that it is difficult for the price of a share to rise above a certain level called the resistance level and below a certain level called support level. If investors find that prices fall after their purchases, they continue to hang on to their shares in the hope of a recovery. And when the price rebounds to the level of their purchase price, they tend to sell and heave a sigh of relief as they break even. As result, the same is not likely to rise above this level, the resistance level. EVALUATION OF TECHNICAL ANALYSIS: Technical analysis appears to be a highly controversial approach to security analysis. It has its ardent votaries; it has its sever critics. The advocates of technical analysis offer the following interrelated arguments in support of their position. 1) Under the influence of crowd psychology, trends persist for quite some time. Tools of technical analysis that make help in identifying these trends early are helpful aids in investment decision making. 2) Shifts in demand and supply are gradual rather than instantaneous. Technical analysis helps in detecting these shifts rather early and hence provides clues to future price movements. 3) Fundamental information about a company is absorbed and assimilated by the market over a period of time. Hence, the price movement tends to continue in more or less the same direction till the information is fully assimilated in the stock price. 4) Charts provide a picture of what has happened in the past and hence give a sense trading of volatility that can be expected from the stock. Further, the information on trading volume which is ordinarily provided at the bottom of a bar chart gives a fair idea of the extent of public interest in the stock.