UNIT I INVESTMENT SETTING

PART-A 1. What is Investment? Investment is the employment of funds on assets with the aim of earning income or capital appreciation. Investment has two attributes namely time and risk. Present consumption is scarified to get a return in the future. The sacrifice that has to be borne is certain but the return in the future may be uncertain. The is attribute of investment indicates the risk factor. The risk undertaken with a view to reap some return from the investment. 2.Define speculation? Speculation means taking up the business risk in the hope of getting short term gain. Speculation essentially involves buying and selling activities with the expectation of getting profit from the price fluctuations. This can be explained with an example. If a spouse buys a stock for its dividend, she may be termed as an investor. If she buys with the anticipation of price rise in the near future and the hope of selling it at a gain price she would be termed as a speculator. 3.Define securities? Investment in capital market is in various financial instruments, which are all claims on money. These instruments may be various categories with different characteristics. These are all called securities in the market parlance. In a legal sense also, the Securities Contracts Regulation Act, (1956) has defined the security as inclusive of shares, scrips, stocks, bonds, debentures stock or any other marketable instruments of a like nature in or any debentures of a company or body corporate, the Government and semi-Government body etc., 4.What are warrants? A warrant is a bearer document of title to buy specified number of equity shares at a specified price. Usually warrants can be exercised over a number of years. The life periods of warrants are long. Warrants are generally offered to make the bond or preferred stock offering more attractive. Bonds may bear low interest rate but the warrants offered along with them helps the investor to enjoy the equity appreciation value. Warrants are detachable. The investor can sell the warrants and they are traded in the market. 5.List the investors objectives? The five main investors or investment objectives are 1. Return 2. Risk 3. Liquidity 4. Hedge against inflation 5. Safety

6. What do you mean by investible fund? The entire investment procedure revolves around the availability of invest ible funds the fund may be generated through savings or from borrowings. If the funds are borrowed, the investor has to be careful in the selection of investment alternatives. The return should be higher than the interest he pays. Mutual funds invest their owners money in securities 7. What is sweat Equity? Sweat equity is a new equity instrument introduced in the companies (Amendment) Ordinance, 1998. Newly inserted Section 79A of the Companies Act, 1956 allows issue of sweat equity. However, it should be issued out of a class of equity already issued by the company. The Definition of sweat equity has two different dimensions, a) Shares issued at a discount to employees and directors b) Shares issued for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. 8. Differentiate Between investment and Gambling? INVESTMENT GAMBLING 1. It is a long-term Activity. - The Time horizon is very short 2. Investment is a way of earning - Gambling is a way of Entertainment 3. Commercial risk is involved. In it - It Employees Artificial risk 9. List out Characteristics of Equity stock? Equity Shares are commonly referred to common stock or ordinary shares Equity share or stock have the following body meeting of the company they are as follows a) Right to vote at the General body meeting of the company b) Right to control the management of the company c) Right to share in the profits in the form of dividends and bonus shares d) Right to claim on the residual after repayment of all the claims in the case of winding up of the company e) Right of pre-emption in the matter of issue of new capital f) Right to apply to court if there is any discrepancy in the rights set aside g) Right to receive a copy of the statuary report, copies of annual meeting when a company fails to call such a meetings 10. What are the various types of debentures? Debentures are classified on the basis of the security and convertibility they are 11. Secured or unsecured Debenture 12. Fully convertible Debenture 13. Partly Convertible Debenture 14. Non-convertible Debentures 11.What is a share certificate?

Share Certificate means a certificate under the common seal of the company specifying the number of shares held by any member. Share certificate provides the prima facie evidence of title of the members to such shares. This gives the shareholders the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing marketable title. 12.What are gilt edged securities? Gilt edged securities / Government securities refers to the marketable debt issued by the government or semi-government bodies. A government security is a claim on the government. It is a totally secure financial instrument ensuring safety of both capital and income. That is why it is called gilt-edged security or stock. Central Government securities are the safest amongst all securities 13.List out the Difference between speculation and gambling? * Speculation means taking up the business risk in the hope of getting short gain * A gamble is usually a very short-term investment in a game or chance. * The speculator is more interested in the market action and its price movement * The results are determined by the roll of dice or the turn of a card. * The Speculator is more interested in the market action and its price movement 14.What do you mean by primary market? New Issues Market (NIM) comprises all people, institutions, method/mechanism, services and practices involved in raising fresh capital for both new and existing companies. This market is also called primary market. NIM helps raising resources from the investors by issuing them only new or fresh securities. Thus, NIM facilities direct conversion of savings into corporate investment or diversion of resources from the rest of the system to the corporate sector, 15.List the intermediaries in the primary market? The Intermediaries in the primary market they are; Merchant bankers/ Lead managers, underwriters, bankers to the issue, brokers to the issue, registrars and share transfer agents and debentures trustees are the intermediaries in the primary market. 16.List the advantages of warrants? Advantages of Warrants a) Warrants make the non-convertible debentures more attractive and acceptable. b) The debentures along with the warrants are able to create their own market and reduce the companys dependence on financial institutions and mutual funds c) Since the exercise of the warrants takes place at a future date, the cash flow and the capital structure of the company can be planned accordingly d) The cost of debt is reduced if warrants are attached to it. Investors are willing to accept lower interest rate in the anticipation of enjoying the capital appreciation of equity value at a later date. e) Warrants provide high degree of leverage to the investor. He can sell the warrant it the market or convert it into stocks or allow it to lapse. But if the conversion is compulsory, even if there is a fall in the price of the shares, the investors have to shell out money from his pocket

g) Warrants are liquid and they are traded in the stock exchanges, hence, the investor can sell the warrants before exercising them. 17.What is a Deep Discount Bonds? The Deep discount bond is another form of Zero coupon bond. The bonds are sold at large discount on their nominal value; interest is not paid for them and they mature at par value. The difference between the maturity value, and the price serves as an interest return. The deep discount bonds, maturity period may range from 3 years to 25 years or more. 18.What do you mean by CPS? Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date to issue. 19.Explain ZCBs? These are bonds at discount and rapid at face value. The difference between the issue price and the redemption price represents the return to the investor. No periodic interest payment is made. Zero Coupon Bonds bear no reinvestment risk but they are prone to interest rate risk making their prices highly volatile The buyer of zero coupon bonds receives one and only one payment, at maturity of the bond. Zero coupon bonds on auction basis was introduced in January 1994 by Government of India. 20.Define Security Analysis? Security Analysis in both traditional sense and modern sense involves the projection of future dividend, or earnings flows, forecast of the share price in the future and estimating the intrinsic value of a security based on the forecast of earnings or dividends Thus, security analysis in traditional sense is essentially an analysis of the fundamental values of a share and its forecast for the future through the calculation of its intrinsic worth of the share, Modern Security analysis relies on the fundamental analysis of the security, leading to its intrinsic worth and also risk-return analysis depending on the variability of the returns, covariance safety of funds and the projections of the future returns,

PART-B
1. Investment And Speculation are somewhat similar and Different in certain respect explain? Different between investment and speculations a) Time horizon b) Risk c) Return d) Decision e) Funds 2.Explain the process of investment undertaken by the investor? The investment policy can be divided into five stages 1. Framing of Investment policy -investible fund -Objectives -Knowledge

2. Invest able Analysis -Market -Industry -Company 3. Valuation 4. Portfolio Construction -Diversification -Selection and Allocation 5.Portfolio Evaluation -Appraisal -Revision 3.Explain the primary and secondary objectives of investment? Primary objectives:1. Increasing the rate of return 2. Reducing the risk Secondary objectives:1. Liquidity 2. Safety and 3. Hedge against inflation, 4.Explain the roles and regulations of SCRA? The securities contract and regulations Act (1956) SEBI Regulations and Reserve Bank of India constitute the regulatory set up. 1.Stock exchanges 2.Stockbrokers 3.Investment schemes 4.Investor protection 5.Information 6.Scra In addition to the general powers of regulation, sebi also provides guidelines for some of the specific financial services as described below Mutual funds Venture capital financing a) Union government b) CCI c) SEBI d) Inspection e) I.T.Act Portfolio management services Stock broking - Qualification - Regulations - Capital adequacy - Inspection - By laws - Working knowledge,

5. What are the sources of Investment? The sources of investment information they are, a) World affairs b) Domestic Economic and political factors c) Industry Information d) Company information e) Security Market Information f) Security Price Quotation g) Data on Related Markets h) Data on Mutual Funds i) Data on primary Market 6.List and explain the market indicators? The use of technical indicators to measure the direction of the overall market should precede any technical analysis of individual stocks because of the systematic influence of the general market on stock prices The following are the some market Indicators a)Dow Theory b)Price Indicators Advances and Declines - New highs and New Lows - The most Active List c) Volume Indicators Odd-Lot Trading Odd-Lot Short Sales d)Other Market Indicators a. Mutual Fund Activity b. Credit Balance Theory c. Confidence Indicators 7.Discuss the various types and features of debentures? Types:Debentures are classified on the basis of the security and convertibility they are, 1.Secured or unsecured Debenture 2.Fully convertible Debenture 3.Partly Convertible Debenture 4.Non-convertible Debentures Features:The Following are the Features of debentures 1. Issue 2. Negotiability 3. Security 4. Duration 5. Convertibility 6. Return 7. Claims 8. Indenture

8. List the new innovations in bond market? The bond market is chiefly over the- counter in nature. And todays bond market offers issues to suit any investor. The bond market is normally separated into two issuer segments; domestic (government and corporate) and international A number of specialized types of bonds have appeared in recent years among the more interesting are:*Mortgage-backed securities, *puttable bonds, *Floating-rate instruments, and *Zero coupon bonds, 9. Explain how investors protection measures taken by the authorities in primary market? Measures taken to review the market A listed company having immediate three years of dividend paying track record only can access the market * If a manufacturing company did not such a track record, it could access the public issue market provided the financial institutions or a scheduled commercial bank appraised its project and such appraising entity is also participating in the project fund. * The companies were required to complete the allotment of securities within 30 days of the closure of the issue. *It would be necessary for a corporate body making a public issue * Sebi does not vet offer documents of companies having track record of3 years dividend payment * Removal of mandatory requirement of 90 percent minimum subscription clause in cases of offer for sale * Reducing the minimum application size for subscribing to a public issue from Rs 5000 to Rs 2000 * Sebi abolished the fixed par value concept and, instead companies can fix the value of the shares HCL, Technologies IPO has a par value of RS. 4 per share, offered at Rs 580 per shares 10. How can investors protections made effective? TO ensure healthy growth of primary market, the investing public should be protected. The term investors protection has a wider meaning in the primary market. The principal ingredients of investor protection are a) Provision of all the relevant information b) Provision of accurate information and c) Transparent allotment procedures without any bias To provide the above-mentioned factors several steps have been taken. They are project appraisal, underwriting, and clearance of the issue document by the stock exchange and SEBIs scrutiny of the issue document Factors needed to make the investor protection Effective 1. Investors awareness 2. Strict norms for premium fixation 3. Safety nets 4. Punitive action 5. Promoters stakes