INTRODUCTION TO SECURITIES

Learning Objectives

What is investment & what is security.

Investment & Speculation - Difference.
What is security analysis.
Risk & Return in Investment.
Need for tradability.

INTRODUCTION TO SECURITIES

What is Investment?
Investment is parting with ones funds,
to be used by another party, user of
funds,
for
productive
activity.
Investment means conversion of cash or
money into a monetary asset or a claim on
future money for a return.
This return is for
saving- abstaining from consumption,
parting with savings and liquidity,
for risk of uncertainty about actual
return, its timing , safety of funds
etc.

INTRODUCTION TO SECURITIES

What is Security Analysis?

The process of analyzing the individual
securities and the market as a whole
and estimating the risk & return
expected from each of the investments
with a view to identifying undervalued
securities for buying and overvalued
securities for selling
is both an art and science
and this is what is called security
analysis.

INTRODUCTION TO SECURITIES

What is a Security ?
All financial instruments in the capital
market which are all claims on money ,
are securities.
Securities Contracts Regulation Act, 1956
includes as securities
shares & scrips,
stocks, bonds,
debentures of corporate / government
bodies,
derivatives of securities or their
index,
and rights & interests in all above.

INTRODUCTION TO SECURITIES

What is a Portfolio ?
A combination of securities , each with
varying degree of risk and return,
constitutes a portfolio. The combination
has its own pattern of risk & returns,
independent of risk & return of each
component of the portfolio.
The portfolio analysis is analysis of the
risk-return characteristics of individual
securities in the portfolio plus analysis
of changes that take place due to
interaction among themselves and impact
of each one of them on others.

INTRODUCTION TO SECURITIES

Investment and Speculation

Investment and speculation
door
neighbors.
Speculation
investment and vice versa.

are next
involves

Both are claims on money and aim at

maximization of returns consistent with
risks taken.
Motive
is
distinguishing
speculation.

a
determining
factor,
between investment and

INTRODUCTION TO SECURITIES

Investment and Speculation

In investment, the investor has a long
or medium term objective, takes delivery
of securities and books profits as and
when
returns
are
higher
than
his
expectations.
In speculation perspective is short
term and aim is to maximize returns
through buying & selling with least
regard to delivery.
Speculation forms a major portion of activity on
stock markets. It imparts liquidity and
continuing trade and quotation.

INTRODUCTION TO SECURITIES

Security Analysis

Projection of future dividend or earnings

flows, forecast of the share price and
estimating the intrinsic value of security
based on expected earnings or dividends is
traditionally
the
heart
of
security
analysis.

Modern security analysis relies on

> fundamental analysis of security
> risk return analysis depending
variability of returns,
> covariance,
> safety of funds & projections
returns.

on
of

INTRODUCTION TO SECURITIES

Security Analysis

Security analysis is a tool for efficient

portfolio management; both of them go
together and cannot be dissociated.
As
per
traditional
portfolio
theory
selection of appropriate securities that
fit with the asset preferences, needs and
choices of the investor was the scope of
portfolio management.

INTRODUCTION TO SECURITIES

Security Analysis

Modern
portfolio
management
theory
postulates that maximization of returns &
minimization of risk will yield optimal
results and the choice and attitudes of
investors are only starting point for
investment decisions and that vigorous
risk return analysis is necessary for
optimization of returns.

INTRODUCTION TO SECURITIES

Portfolio Analysis

Portfolio analysis includes portfolio

construction, selection of securities,
revision
of
portfolio,
evaluation
&
monitoring
of
the
performance
of
portfolio.
Portfolio
management
is
a
dynamic
concept, subject to daily & hourly
changes based on the information flows,
money flows and host of other economic or
uneconomic forces
operating
in
the
country on the markets & securities.

INTRODUCTION TO SECURITIES

Modes of Investments

Security Form :
Corporate Bonds / Debentures
Public Sector Bonds
Preference & Equity Shares.
Non-security Forms : not marketable
Post
Life
Unit
bank

Office savings Instruments

Insurance Corporation Policies
Trust & Other Mutual Funds
Deposits etc

INTRODUCTION TO SECURITIES

Features of Investments

$
$
$
$

1. Risk :
Longer the maturity period greater is the
risk.
Greater the creditworthiness of borrower,
lesser is the risk.
The risk is less in case of debt
instruments like debentures, more so if
they are secured.
The
risk
is
higher
on
ownership
instruments like equity due to their
unsecured
nature
&
variability
of
returns.

INTRODUCTION TO SECURITIES

Features of Investments

2. Return :
$

Return is in the form of yield and

capital appreciation. In case of debt
instruments rate of return is low but
certain. In case of equity, rate can be
higher but uncertain. Tax benefits or
concessions
available
on
certain
investments, increase the effective rate
of return to investors.

INTRODUCTION TO SECURITIES

Features of Investments

3. Safety :
$ The safety of capital is the certainty of
return on capital without loss of money
or time involved. Risk free instruments
offer maximum safety but low returns.
4. Liquidity :
If
the
capital
asset
is
easily
realizable, saleable or marketable, then
it is said to be liquid.

INTRODUCTION TO SECURITIES

Need for tradability

Tradability
offers
marketability
liquidity to investments.

&

Equity
shares
of
listed
companies,
debentures, Government securities, Mutual
Funds are tradable and possess liquidity.
Bank & Company Fixed deposits, Post
Office Deposits, LIC Policies, PF &
pension funds are not tradable & hence
not liquid.

INTRODUCTION TO SECURITIES

Classes of Instruments

Ownership or Debt nature of instruments.

Equity and all other type of shares are
ownership, while debentures, bonds, deposits
belong to debt category.

Term period to maturity.

Equity shares have no maturity period,
others- debentures- have a long term [ 7 to
12 years], mid term or short term- bank
deposits- [ 1 to 5 years] maturity period.

Issuers credit worthiness.

Government and public sector instruments are
less risky and carry more creditworthiness.
Private
instruments
are
risky
&
less
creditworthy.

INTRODUCTION TO SECURITIES

Classes of Instruments

There are non-corporate investments where

amounts can be invested in Real Estate,
Banks, Post Offices, Insurance Companies,
Central Government Schemes etc.
These can be marketable like real estate
or gold or non-marketable like Post
Office certificates.
Interest can be payable regularly, or reinvested or paid only on maturity.
In case of insurance, amounts are payable
linked to an event [ death, theft].
Investment can be made in a lump sum or
spread over several installments.

INTRODUCTION TO SECURITIES

Classes of Instruments

There are corporate investments in the

form
of
debt
[
debentures,
bonds,
deposits] or ownership [ equity shares ].
Former carry a fixed rate of return,
while equity shares earn income that is
variable.
Our study concentrates
investments.

on

marketable

Next Chapter Two , Markets for

Securities & Taxes