SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT
BY SUDESHNA DUTTA
ASST. PROFESSOR – FINANCE
BIITM
 MEANING OF INVESTMENT

Investment is the application of present resources which have been saved or put aside from current
consumption in the hope that some benefit will occur in the future
 NEED FOR INVESTMENT

• Increase in income level

• Increase in life expectancy
• Retirement benefits
• Minimise inflation pressure
• Tax benefits
 OBJECTIVES

• Maximise returns
• Minimise risk
• Hedge against inflation
• Regular income
• Avail tax benefits
• Safety for funds
 FACTORS INFLUENCING INVESTMENT
DECISION
• Return
• Risk
• Liquidity
• Tax shelter
• Marketability
• Convenience
 INVESTMENT PROCESS

• Determining investment objectives and policy

• Security analysis
• Construction of portfolio
• Portfolio revision/rebalancing
• Portfolio evaluation
• kyc from sebi is mandatory ( registered office) for mutual funds & stock market entry –
individual investors only
 INVESTMENT ALTERNATIVES/AVENUES

• Financial Assets • Real Assets • Financial

Real Estate

Future
Stock

• Financial security
•
• Real Estate Derivative
Bonds • Bullion Investment • Forward
• Mutual Fund
• Future
• Shares
• Options
• Money Market
• Swaps
Instruments
• Life Insurance
Policies
 NON MARKETABLE SECURITIES

• Bank deposits
• Post office savings
• Monthly income scheme of post office
• Kisan vikas patra
• National savings certificate
• Company deposits
• Employee provident fund scheme (EPF)
• Public provident fund deposits
SHARES
 EQUITY SHARES CAPITALISATION

• Blue chip stock

• Growth stock
• Income stock
• Cyclical stock
• Defensive stock
• Speculative stock
• Tech stock
 BONDS OR DEBENTURES

• Government bonds –
• RBI, PSU
• Corporate bonds
• Municipal bonds
 MONEY MARKET INSTRUMENTS

• Treasury bills
• Certificate of deposits
• Commercial paper
• Repos
 MUTUAL FUNDS

• Equity scheme
• Debt scheme
• Balanced scheme
 LIFE INSURANCE

• Endowment assurance policy

• Money back policy
• Whole life policy
• Term assurance policy
• Ulip
 REAL ASSETS

• REAL ASSET
• BULLION INVESTMENT
 FINANCIAL DERIVATIVES

• Options
• Futures
• Forwards
• Swaps
• CollateraLS
 INVESTMENT VS. SPECULATION – KEY
DIFFERENCES
BASIS OF INVESTMENT SPECULATION
COMPARISON
Meaning The purchase of an asset with the hope of getting Speculation is an act of conducting a risky
returns is called investment. financial transaction, in the hope of
substantial profit.
Basis for Decision Fundamental Factors, i.e. Performance of the Hearsay, Technical Charts and Market
Company Psychology
Time Horizon long Short Term

Risk Involved Moderate Risk High Risk

Intent to Profit Changes in value Changes in prices

Expected Rate of Modest rate of return High rate of return

Return
Income Stable Uncertain and Erratic

Behaviour of Conservative and Cautious Uncertain and Erratic

Participants
Funds An investor uses his own funds. A speculator uses borrowed funds.
 INVESTING AND GAMBLING- KEY
BASIS OF COMPARISON
DIFFERENCES GAMBLING
INVESTMENT
Risk Management Tactics Moderate risk involved High risk involved
Gambling is Time-Bound Long term Short term
Limiting Losses Loss can be minimized Unlimited losses
Indicators are Different Fundamental analysis,technical analysis Hearsay, market psycology
Availability of Information information about companies (such as earnings, gamblers have no way of gettingauthentic
financial ratios, etc.) and their stocks are readily information
available
Placing a Bet Not possible Possible

Entrepreneurship Possible Not possible

Economic Benefits You are simply helping that company grow by You are simply helping that company
making your funds available for that company to do grow by making your funds available for
business with that company to do business with
Frequency The more you gamble, the more likely you are to the more you trade with various
lose more money companies, the better your chances of
making profits
 RISK

• Risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment
decision. In general, as investment risks rise, investors seek higher returns to compensate
themselves for taking such risks. Every saving and investment product has different risk and return..
If an asset has no variability in returns, the assets is considered to be risk free like one year t-bills
What is the measure of risk?
• Risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment
decision. In general, as investment risks rise, investors seek higher returns to compensate
themselves for taking such risks. Every saving and investment product has different risks and
returns.
 TYPE OF RISK

Systematic risk (not diversifiable):systematic risk is the risk inherent to the entire market or market segment.
Systematic risk, also known as “un-diversifiable risk,” “volatility” or “market risk,” affects the overall market,
not just a particular stock or industry.
1. Market risk:variability in returns due to fluctuations in aggregate market. Market risk cannot be
eliminated but it can be reduced. Recession, wars etc
2. Interest rate risk: interest risk refers to variability of total returns, particularly on fixed income securities
due fluctuation in interest rates
3. Purchasing power risk: when purchasing power declines; inflation also leads to hike in interest rates
because lenders demand more to compensate themselves for loss in purchasing power. It arises out of
changes in the prices of goods and services and technically it covers both inflation and deflation period.
In India, purchasing power risk is associated with inflation and rising prices.
 TYPE OF RISK

Unsystematic risks (diversifiable):unsystematic risk is the risk that is inherent in a specific company or
industry. By investing in a range of companies and industries, unsystematic risk can be drastically reduced
through diversification. Synonyms of unsystematic risk include diversifiable risk, nonsystematic risk,
residual risk and specific risk.
• Business risk:business risk refers to the basic viability of a business—the question of whether a company
will be able to make sufficient sales and generate sufficient revenues to cover its operational expenses and
turn a profit.
• Financial risk:it is associated with the method through which it plans its financial structure. If the capital
structure of a company tends to make earnings unstable, the company may fail financially. Large amounts
of debt financing also increase the risk.
 MEASURING RISK

• THE MOST COMMONLY USED MEASURE OF RISK

• FOR SECURITIES IS STANDARD DEVIATION
• SD MEASURE THE TOTAL RISK OF A SECURITY OR A PORTFOLIO
• IT MEASURE DEVIATIONS OF EACH OBSERVATION FROM THE ARITHMETIC MEAN
MEASURING RISK
 INTERPRETATION

• The 5.89 SD means that the security return can fluctuate between +/-5.89 from the mean value of
16%
• More specifically, the return can fluctuate between 16 - 5.89 = 10.11 or 16 + 5.89 = 21.89
 CONCEPT OF RISK-RETURN IN PORTFOLIO
CONTEXT
• RISK : risk is inherent in any investment. This risk may relate to loss or delay in repayment of the principal
capital or loss or non-payment of interest or variability of returns. While some investments are almost risk less
like govt. Securities or bank deposits, others are more risky.
• Return: return differs amongst different instruments. The most important factor influencing return is risk.
Normally, the higher the risk ,the higher is the return.
• A portfolio is composed of two or more securities. Each portfolio has risk-return characteristics of its own. A
portfolio comprising securities that yield a maximum return for given level of risk or minimum risk for given
level of return is termed as ‗efficient portfolio‘. In their endeavour to strike a golden mean between risk and
return the traditional portfolio managers diversified funds over securities of large number of companies of
different industry groups.
 CONCEPT OF RISK-RETURN IN PORTFOLIO
CONTEXT
• A portfolio theory provides a normative approach to investors to make decisions to invest their
wealth in assets or securities under risk. The theory is based on the assumption that investors are
risk averse. Portfolio theory originally developed by harry markowitz states that portfolio risk,
unlike portfolio return, is more than a simple aggregation of the risk, unlike portfolio return, is
more than a simple aggregation of the risks of individual assets.
 PORTFOLIO RETURN
• The expected return of a portfolio represents weighted average of the expected returns on the
securities comprising that portfolio with weights being the proportion of total funds invested in
each security
• Applying formula (5.5) to possible returns for two securities with funds equally invested in a
portfolio, we can find the expected return of the portfolio is continued in the next page
 PORTFOLIO RETURN

Security X Security Y • The expected return =(50%)*15%

Expected Return Rj 15.0 % 12.6%
+(50%)*12.6
Standard Deviation Oj 10.7% 1.5%
• =13.8%
CASELET 1
 SOLUTION CASELET 1

• EXPECTED RETURNS
 SCC : 20%* -5% + 30%* 10% + 40%* 25% + 10%* 35% = 15.5%
 ECC : 14%
 ECC : 14%
 CASELETS – 2 & 3
2. You have invested rs. 50,000/- , 30% of which is invested in company– A, which has an expected
rate of return of 15%, and 70% of which is invested in company- B, with an expected return of 12%.
What is the return on your portfolio? What is the expected percentage rate of return?
3. The current market price of a share is rs.300/- an investor buys 100 shares. After one year he sells
these shares at a price of rs.360/- and also receives the dividend of rs.15/- per share. Find out his total
return, % return, dividend yield and capital gains and capital gains yield.
 SOLUTION - 2

Return on portfolio:
• Company A : .30 x Rs.50,000 x .15 = Rs.2,250
• Company b : .70 x Rs.50,000 x .12 = Rs.4,200
TOTAL RETURN : 2,250 + 4,200 = Rs.6,450
Expected percentage rate of return:
6,450/ 50,000 x 100 = 12.9%
 SOLUTION-3

• INITIAL INVESTMENT = 300 X 100 = RS.30,000

• DIVIDEND EARNED = 15 X 100 = RS. 1,500
• CAPITAL GAINS = ( 360 – 300 ) X 100 = RS.6,000
• TOTAL RETURN = 1,500+ 6,000 = 7,500
• TOTAL PERCENT RETURN = 7,500/30,000 X 100

=25%
DIVIDEND YIELD = 15/300 X 100 = 5%
CAPITAL GAINS YIELD = 6,000/30,000 X 100
= 20%
CASELET - 4
SOLUTION CASE LET 4
SOLUTION CASE LET 4
 DIVERSIFICATION
• Diversification is venerable rule of investment which suggests ―don‘t put all your eggs in one
basket‖, spreading risk across a number of securities. Diversification may take the form of unit,
industry, maturity, geography, type of security and management. Through diversification of
investments, an investor can reduce investment risks. Investment of funds, say, rs. 1 lakh evenly
among as many as 20 different securities is more diversified than if the same amount is deployed
evenly across 7 securities.
 BASICS OF STOCKMARKET OPERATIONS
• Stock exchange: stock exchange is a virtual market where buyers and sellers trade in existing securities. It is
a market hosted by an institute or any such government body where shares, stocks, debentures, bonds,
futures, options, etc. Are traded. A stock exchange is a meeting place for buyers and sellers.
• Before selling the securities through stock exchange, the companies have to get their securities listed in the
stock exchange. The name of the company is included in listed securities only when stock exchange
authorities are satisfied with the financial soundness and other aspects of the company.
• Previously the buying and selling of securities was done in trading floor of stock exchange; today it is
executed through compute
 TRADING PROCEDURE ON A STOCK
EXCHANGE
• Selection of a broker: the buying and selling of securities can only be done through SEBI registered brokers
who are members of the stock exchange. The broker can be an individual, partnership firms or corporate
bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor or
speculator.
• Opening Demat account with depository: Demat (dematerialized) account refer to an account which an
Indian citizen must open with the depository participant (banks or stock brokers) to trade in listed securities
in electronic form. Second step in trading procedure is to open a demat account. The securities are held in
the electronic form by a depository. Depository . is an institution or an organization which holds securities
(e.G. Shares, debentures, bonds, mutual (funds, etc.) At present in india there are two depositories: NSDL
(national securities depository ltd.) And CDSL (central depository services ltd.) There is no direct contact
between depository and investor. Depository interacts with investors through depository participants onlY
 TRADING PROCEDURE ON A STOCK
EXCHANGE
• Placing the order: after opening the demat account, the investor can place the order. The order can be
placed to the broker either (DP) personally or through phone, email, etc.
Investor must place the order very clearly specifying the range of price at which securities can be bought or
sold. E.G. “Buy 100 equity shares of reliance for not more than rs 500 per share”
• Executing the order: as per the instructions of the investor, the broker executes the order i.E. He buys or
sells the securities. Broker prepares a contract note for the order executed. The contract note contains the
name and the price of securities, name of parties and brokerage (commission) charged by him. Contract
note is signed by the broker.
• Settlement: trade settlement is the process of transferring securities into the account of a buyer and cash
into the seller's account following a trade. This is the last stage in the trading of securities done by the
broker on behalf of their clients
 TRADING MECHANISMS

• Trading mechanisms refer to the logistics behind trading assets and securities, regardless of the type of market.
These markets can be exchanges, dealers or OTC markets. The mechanisms are the operations by which buyers
of an asset are matched with sellers. There are two main types of trading mechanisms:
 Order driven markets:in an order driven market, buyers and sellers of assets are able to place orders for assets
they wish to purchase or sell. They can list at market price, which executes a market order instantaneously at the
best available price. Alternatively, they can list a fixed/limit price, which executes either a limit or stop order, not
to be executed until certain pricing conditions are met
 Quote driven markets:in a quote driven market, continuous prices or ―quotes‖ are provided to buyers and sellers.
These prices are provided by market makers, which mean these types of systems are better suited for dealer or
OTC markets. For a buyer, the price provided is the price a dealer is willing to sell at. For a seller, the price
provided is the price a dealer is willing to buy at. Typically, the quoted buy price will be lower than the sell price.
 TYPES OF ORDER

1. Intraday : intraday, the positions are squared off within the same trading session
2. Carry-forward trade: either delivery is taken or the position is carried forward to a later date (futures and
options)
There are different ways in which an order can be placed:
MIS – stands for margin intraday square off.
• Mis is used for trading intraday equity, intraday F&O, and intraday commodity trading
• Using the MIS product code you will get an intraday leverage between 3 to 10 times based on what stock you are
trading.
• For F & O the margins required will be 35% and 45% of total margin required , for index & stock contracts
respectively
 DIFFERENT WAYS OF PLACING ORDER

CNC IS USED FOR DELIVERY BASED TRADING OF EQUITY. USING CNC PRODUCT CODE YOU
WILL NOT GET ANY LEVERAGE NOR WILL YOUR POSITION BE AUTO SQUARED OFF. YOU
WILL NOT BE ABLE TO SELL USING THE PRODUCT CODE CNC WITHOUT HOLDING THE
PARTICULAR STOCK IN YOUR DEMAT ACCOUNT
NOTE: CNC IS JUST A PRODUCT CODE. IF YOU USE CNC TO BUY AND SELL A SHARE ON THE
SAME DAY, IT WILL STILL BE CONSIDERED AS AN INTRADAY TRADE.
 DIFFERENT ORDER TYPES IN STOCK MARKET

What is an order?
An order is nothing but an instruction that an investor gives to buy or sell stocks on a trading platform or to a stock
broker. There are different order types in the market.
Market order
• A market order is an order to buy or sell a security at current market prices. Once placed, this order is to be executed
immediately. The important feature of a market order is that it guarantees the execution of the order. However, the
price at which the order is to be executed cannot be guaranteed
• For example, imagine that the current market price of stock X is Rs 120. You place a market order to buy the stock at
this price. Your order would be executed immediately. However, there’s no guarantee that the security is bought at the
‘ask’ price of Rs 120
 Different order types in stock market
Limit order
• A limit order allows you to place an order in a security at the price you want. So, a buy limit order means
you are ready to buy the security at a specific price or lower. And a sell limit order means you wish to sell
the security at the limit price or higher. There is however no guarantee that this order will get executed,
unlike market orders
• If you put a buy limit order for a stock at rs 50, it means that you are ready to buy the stock at a price
equal to or lower than rs 50. Similarly, a sell limit order for a stock at rs 50 means that you would like to
sell the stock at rs 50 or higher
• The best part is that this helps you ensure you don’t have to follow the stock trend every second to get the
right price. The limit order automates your trading to a certain degree. Such orders can last for a day, a
few weeks and sometimes even a month or more.
 Different order types in stock market
Stop order
• This is an order to buy or sell a stock whenever the stock price reaches a specific value. This value is
known as the ‘stop price’. The stop order remains dormant until this price is reached. And once the
price is reached, the stop order becomes a market order or limit order and your order is placed
• A stop loss order is quite useful if you don’t have the time to track and execute stop losses on your
trades during the day. For example, you know that you would face a big loss if stock X falls below the
price of Rs 35. But since you cannot monitor the stock regularly, you can put a stop order to sell the
stock once it reaches this level
• This way, you can avoid a major loss. That’s the reason why this type of order is also known as a
‘stop-loss’ order.
 Different order types in stock market

Cover order
• A cover order is a combination of a market order and a stop-loss order. This means, your buy (or
sell) order is always a market order. In addition, you would also have to specify a stop-loss
trigger price (STLP) and the limit price. This way, your risk exposure in the market automatically
reduces.
• However due to the leverage that is given in cover order, this SLTP needs to fall within defined
ranges depending on the security and your broker. Through a cover order, you can get the
advantage of lowering your risk and ensuring that your losses are limited
 Different order types in stock market

After market order (AMO)

• After-market orders are orders that are placed beyond market hours. The normal market hours
are between 9.15 am to 3.30 pm.
• But, the entire period outside market hours cannot be used to place after market orders. Different
brokers specify a time interval, within which we can place the amos.
• There are also conditions on the price of security you can set in limit orders, normally it is in
range of 5-10% of adjusted closing price but the exact range varies among different brokers.
Amos can also be set at market price.
 Different order types in stock market

Bracket order (BO)

• Bracket order combines the benefits of multiple orders placed simultaneously allowing you to
fully automate a particular purchase or sale in a given security.
• It essentially consists of 3 legs or individual orders, which allows you to place a buy or sell order,
its target order as well as its stop loss order. This results in a fully covered order being placed on
the exchange allowing you to both automatically book profits as well as automatically cover
losses.
• The only caveat is that bracket orders typically will have time period restricted to a single day
and may not be accessible for longer time frames.
 Different order types in stock market

Based on time duration: also based on time duration, there can be:
 Good for day order – order will stay valid till the end of current trading session.
 Good till day order – by using we can keep our order active for few [Link]- if we place an order on 1st
march and it does not get executed, we can carry forward to say till 4th march. If it doesn‘t get executed
even on 4th march, the order will be cancelled.
 Immediate or cancel order- the order once placed will be executed immediately, if it is not executed it
will cancel itself. In this case, it may so happen that the order will be partially executed. Eg- if we place
an order to buy 1000 shares and only 600 shares gets immediately purchased, the rest order of 400 will
gets cancelled.
 CLEARING AND SETTLEMENT PROCESS
The Indian share market has a complex mechanism that ensures investors receive the shares they
bought or the money they made by selling the same. The process by which the shares are settled in
the Indian stock market is called the trading cycle. The trading cycle includes performing three
basic tasks:
1. Trading
2. Clearing
3. SettlemenT