SECURITY ANALYSIS AND INVESTMENT MANAGEMENT

Security analysis and investment managementInvestment environmentInvestment is the employment of funds on assets with the aim of earning income or capital appreciation

When a person has more money than he requires for current consumption,he would be coined as a potential investor.

Investor would invest in securities,gold,real estates,LIC,bank deposits,mutual funds,real assets etc Company invest in extension of the existing firm or undertaking new venture

MAIN AIMEARNING INCOMECAPITAL APPRECIATIONATTRIBUTES AFFECTINGTIMERISKCharacteristics of investmentReturnRiskSafetyLiquidity

CONCEPTSEconomic investmentGeneral investmentFinancial investmentOBJECTIVESIncreasing the rate of returnReducing riskLiquidityHedge against inflationSafety

INVESTMENT PROCESS

1.Framing the policyInvestment FundsObjectivesKnowledge

2.AnalysisMarket analysisIndustry analysisCompany analysis

3.ValuationIntrinsic valueFuture value4.Construction of portfolioDiversificationIndustry diversificationCompany DiversificationDebt and equity diversificationSelection

5.EvaluationAppraisalRevisionInvestment alternativesReal estatesReal assetsSecuritiesLICDepositsMutual fundsPost office depositsProvident fund schemesDerivatives

INVESTMENT ALTERNATIVESFixed Income Securities

Life InsurancePREFERENCE SHARESClaims on the companys income are limitedReceive fixed dividendOn liquidation, claims on the assets of the firm are fixedPayment of dividend is the discretion of the Board of DirectorsDo not enjoy any of the voting powers except when any resolution affects their rightsPreference shares are of 6 types. They are:CumulativeNon-cumulativeConvertibleRedeemableIrredeemableCumulative convertibleCumulative preference sharesCumulative total of all unpaid preferred dividends must be paid before dividends are paid on the common equityUnpaid dividends are known as arrearsArrears accrue only for a limited number of years and not indefinitelyNon cumulative sharesIf there is no profit or inadequate profit in the company in a particular year , the company does not pay it.

During winding up, if the preference and equity shares are fully paid, they have no further rights to have claim in the surplus.Convertible preference sharesIt can be converted into equity shares at the end of specified period

Gives additional privilege of sharing the potential increase in the equity value, along with the security and stability of incomeRedeemable preference sharesThese shares can be issued only if there is a provision in the Articles of AssociationRedemption of shares can be done only when:Partly paid shares are fully paid upFund for redemption is created from profitsIf any premium has to be paid on redemption, it should be paid out of the profits or out of companys share premium accountWhen redemption is made out of profits, sum equal to nominal value of redeemed shares should be transferred to the capital redemption reserve accountIrredeemable preference sharesThese shares are not redeemable except on occasions like winding up of the business.Cumulative convertible preference sharesIntroduced by government in 1984

This share gives a regular return of 10% during the gestation period from 3 to 5 years and then converted into equity

Issued for purposes like setting up of new projects, expansion or diversification of existing projects, working capital requirements etcBONDA long term debt instrument that promises to pay a fixed annual sum as interest for specified period of time.

Issued at par or discount.

Traded in stock market.Types of BondsSecured and unsecuredSecured bond is secured by the real assets of the issuerIn unsecure bond, the name and fame of issuer may be the only securityPerpectual and redeemableBonds that do not mature are perpectual bondsRedeemable bonds can be redeemed after a specific period of timeFixed interest rate and floating interest rateIn fixed interest rate, the interest rate is fixed at the time of the issueIn floating interest rate, the interest rates change according to prefixed normsZero coupon bondsThese bonds sell at a discount and the face value is repaid at maturityThe company does not have the burden of servicing the debt during execution of projectDeep discount bondsBonds are sold at large discount on their nominal value, interest is not paid for them and they mature at par valueCapital indexed bondsIn this bond, the principal amount of the bond is adjusted for inflation for every year.It gives the investor an increase in return by taking inflation into account.LIFE INSURANCEIt is a contract for payment of a sum of money to the person assured on the happening of event insured against.

Contract provides for the payment of an amount on the date of maturity or at specified dates at periodic intervals or if unfortunate death occurs.

It eliminates risk.AdvantagesProtection

Easy payments

Liquidity

Tax reliefLIC SCHEMESBasic life insurance plans

Term assurance plans

Plans for children

Pension plans

Jeevan SaritaBasic life insurance plansWhole life assurance planLow cost insurance plan where the sum assured is payable on the death of the life assured and premiums are payable throughout life.

Endowment assurance planThe sum assured is payable on the date of maturity or on the death of the life assured, if earlier.Term assurance plansTwo-year temporary assurance planTerm assurance for 2 years is availableSum assured is payable only on the death of the life assured during the termConvertible term assurance planProvides term assurance for 5 to 7 years with an option to purchase new, limited payment whole life policy or an endowment assurance policy at the end of the term.Bima sandeshA term assurance plan with the provision for return of premiums paid, on the life assured surviving the term

Bima kiranImproved version of Bima Sandesh with added attraction of loyalty addition, in-built accident cover and free term cover after maturity.Plans for ChildrenJeevan Sukanya is plan for girls.

The Childrens Money Back Assurance Plan is specially designed to provide for childrens higher educational expenses.

It added attractions of guaranteed additions, loyalty additions and optional family benefit.Pension plansProvide for either immediate or deferred pension for life

Pension payments are made till the death of the annuitantJeevan SaritaA joint life last survivor annuity cum assurance plan.

Claim amount is payable partly in lumpsum and partly in the form of an annuity.

Balance sum is assured on the death of the survivor.FINANCIAL ALTERNATIVES1. VARIABLE INCOME SECURITIESEQUITY SHARESReferred as common stock or ordinary shares.Share capital of a company is divided into a number of small units of equal value called shares.Stock is a set of shares put together in a bundle.A certificate under the common seal of company specifying the number of shares held by a member is share certificate.SWEAT EQUITYIntroduced in the Companies (Amendment) Ordinance, 1998.Form a part of equity share capitalDefinition has 2 different dimensions:Shares issued at a discount to employees and directorsShares issued for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rightsIn the first form, issue of sweat equity may be priced at a discount to the preferential pricing or at a discount to face valueIn the second form, the sweat equity can be issued against know-how, intellectual property rights or in recognition of value additions.It is at the normal preferential price.Reasons for issuing sweat equityDirectors and employees contribute intellectual property rights to the company

It is in the form of research, strategy, software developed for the company or adding profit

Non- voting SharesCarry no voting rightsCarry additional dividends instead of the voting rightsHave right to participate in the bonus issueIf these shares are not paid dividend for two years, the shares would automatically get voting rightsRight SharesShares offered to the existing shareholders at a price by the companySuch shares should be offered to the existing shareholders at first, in proportion to the capital paid upon the shares held by themIn the event of company failing to receive 90% subscription, the company have to return the entire money received.Bonus SharesDistribution of shares in addition to the cash dividends to the existing shareholdersIssued to the existing shareholders without any payment of cashBonus issue could be made only when all the partly paid shares, are made fully paid upBonus shares are declared by the directors only when they expect a rise in the profitability of the concern.Share classification as per stock marketGrowth sharesThe stocks that have higher rate of growth than the industrial growth rate in profitability

Income sharesStock of companies that have comparatively stable operations and limited growth opportunities.Eg: bank sharesDefensive sharesStocks unaffected by market movementsEg: pharmaceutical stocks

Cyclical sharesUpward and downward movements of business cycle affect the business of certain companies and their stock price.Eg: automobile sectorSpeculative sharesShares that have lot of speculative trading in them. 2. REAL ASSETS (Gold & Silver)Considered as best hedge against inflationFavorite form of investment among rural and semi-urban populationInvestors tend to invest in jewellery instead of pure goldWhen they buy jewellery, the price realisation is usually less than the total purchase price3. ARTPaintings are the most sought after form of artNew trend in the art market is to invest in young upcoming painters whose prices will soar over the yearsIf an investor likes to buy paintings as a form of investment, he has to consider following points:Paintings of young paintersShould possess the basic idea of the paintingInvestor should have aesthetic sense

INVESTMENT ALTERNATIVESREAL ESTATE

MUTUAL FUNDS

MONEY MARKET SECURITIES

TAX SHELTERED SAVINGS SCHEME

REAL ESTATEOffers a high return to the investors

It means land and buildings

Prices has gone up by more than 12% over the past ten years

Population growth has propelled demand in real estate businessInclude business of residential properties

generally sold either by a relator or directly by the individual who owns the property

ADVANTAGES OF REAL ESTATE BUSINESSSignificant profits

Additional income

Access to creditDISADVANTAGES OF REAL ESTATE BUSINESSDebt

Additional expensesMUTUAL FUNDSInvestment companies obtain funds through sale of units

Funds are placed under professional management

Many schemes are available A) OPEN ENDED SCHEMEOffers units and accepts funds on a continuous basis

Investment can be withdrawn at any time

No maturity period

Not listed in the Stock exchangeB) CLOSED ENDED FUNDSFixed maturity period

Kept open for a limited period

Once closed, the units are listed on a Stock exchange

Buying and Selling through Stock exchangeOTHER SCHEMES..Growth scheme

Income scheme

Balanced scheme

Money market scheme

Tax saving scheme

MONEY MARKET SECURITIESMarket where short term securities are tradedA) TREASURY BILLInstrument of short term maturity

Issued by Govt. of India

91 days maturity period

Low interest rates

B) COMMERCIAL PAPERShort term negotiable instrument issued by company

Fixed maturity period

3-6 months

Sold at discount and redeemed at face value

C) CERTIFICATE OF DEPOSITMarketable receipt of funds deposited in a bank for a fixed period

Specified rate of interest

Negotiable

Denominations and interest rate are high

Minimum size of Rs10 lakh

Additional CDs are issued in the multiples of Rs5 lakh

TAX SHELTERED SAVINGS SCHEMEAims at providing tax relief

Income will not be taxable

Schemes like PPF, NSS, NSC are availableA) PUBLIC PROVIDENT FUND SCHEMEInterest rate of 12.5% per year

Exempted from income tax under sec88

Maximum limit of deposit per annum is Rs60000

Interest is accumulated with deposit

Investor can withdraw 50% of the balance from the 7th year onwards

Life of 15 yearsB) NATIONAL SAVINGS SCHEMEAny one can invest in this scheme

100% income tax rebate

Interest and capital are fully taxable if withdrawn during their lifetime

4 years lock in period

Maximum tax rebate of Rs12000C) NATIONAL SAVINGS CERTIFICATEOffered by post office

Come in denominations of 500, 1000, 5000, and 10000

5 years life period

12% interest

Deposits Warrants Antiques

Deposits Earn fixed rate of return They are not negotiable instruments

Types of Deposits Bank Deposits:- Current Account Savings AccountFixed Deposite Account Post Office Deposits:-Offering fixed deposit and monthly income scheme. Monthly income scheme is a popular for retired. 13% interest paid monthly. Term of Scheme is 6 Year, at the end of which a bonus of 10% is paid.

Types of Deposits Cntd. NBFC Deposits:- NBFC comes under the purview of the RBI. Amendment of RBI act in 1997, made registration compulsory for NBFCs.NBFC Nature Period Maximum Limit:- Limit for acceptance of deposits based on credit rating of the company. Interest:- Higher interest Vary with Maturity period Security:- Comparatively security is much lower than the deposits with Banks.

NBFC Nature Cntd

Warrants A warrant is a bearer document of title to by specified no of equity shares at a specified price. Warrants can be exercised over a no of year. Life period of a warrants are long. Warrants are detachable. Investors cancel the warrants separately and they are traded in the market. Warrants CntdThe person who is holding the warrant cannot enjoy the benefits of equity holder before the conversion of the warrant.Price at which the warrants are converted is called exercise price.Exercise price is always greater than the current market price of the respective equity at the time of issue of warrant

Warrants Cntd Three types of Warrants:

Detachable Putted NakedAntiquesIs an object of historical interest It may be a coin, sculpture, manuscript or any other object of olden days.The owner of the antique has to register himself with Archeological Society of India.Society issues a Certificate of RegistrationPurchase and Sale of antiques should be informed to the society

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