 Investment is the current commitment of money

for a particular period of time in order to derive

anticipated future benefits that will compensate
for:
a) The time for which funds are committed.
b) The expected rate of Inflation.
C) The uncertainty of future payment.
 Investments refers to sacrifice of current
resources in anticipation of a future benefit.
 Investment involves commitment of certain
current cash flow in anticipation of an uncertain
future cash flows.
 Higher the Risk, Higher is the Expected
Return.
A well diversified Portfolio reduces
Unsystematic risk by a large way.
 Higher the time period of investment,
lesser is the uncertainties of Investment.
 Investor prefers among securities which
yield higher return for the same risk or
lower risk for the same return.
 Investment decisions are based on
Investment objectives and Constraints.
The primary objective of any Investment is to
increase the rate of return and to reduce the
risk. However the other objectives of
Investment include-(RRLIST)
 Maximising Return.
 Minimising Risk.
 Maint Liquidity.
 Hedge against Inflation.
 Increasing Safety.
 Saving tax
 Based on Time period and Priority,
Investment Objectives can be classified into:

 Near term high priority goals.

 Long term high priority goals.

 Low priority goals.

 Entrepreneurial or Money making goals.

 Investments are carefully thought out
decisions which involves calculated risk
whereas speculation on the other hand is
based on rumors, hearsay, tips, mkt
behaviour etc.
 The volumes of trade of an investor is
generally smaller than that of a speculator.
 Investor generally follows passive approach
whereas speculator follows an active
approach.
(FACT SIR)
 Gambling is defined as an act of betting on an
uncertain outcome.
 The outcome of gambling is largely a matter of
luck.
 The risk that gamblers assume is highly
disproportionate to that of their expected
return.
 Gambling generally involves an entry fee.
 Gamblers show a sign of addiction and fun
loving.
 Gambling does not involve a bet on economic
activity rather it is a bet on artificial risk.
 Results of gambling are known in quick time.
 The results of gambling are random in nature
and it is not correlated with an past events.
 On the basis of their risk bearing capacity

 Risk seekers -a person who is willing to take more risks while

investing in order to earn higher returns.

 would prefer investing his money in stocks as they have the

potential to give higher returns than fixed deposits.

 Risk avoiders- A person who prefers lower returns with

known risks rather than higher returns with unknown risks.
 would prefer investing in fixed deposits, bonds, etc. as they involve lesser risk
 Risk bearers - An entrepreneur is an agent who buys factors of production
at certain prices in order to combine them into a product with a view to selling it at
uncertain prices in the future.
 On the basis of groups
1. Individual investors
2. Institutional investors
A security is an instrument of promissory
note or a method of borrowing or lending or
a source of contributing to the funds needed
by a corporate body or non-corporate body.
 “The process of analysing the individual
securities and the market as a whole and
estimating the risk and 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 a science and this is what is
called security analysis.”
A portfolio is a combination of various assets
and/or instruments of investments. The
combination may have different features of
risk and return.
 The portfolio analysis is an analysis of the
risk-return characteristics of individual
securities in the portfolio and changes that
may take place in combination with other
securities due to interaction among
themselves and impact of each one of them
on others.
 To estimate the risk and return related to a particular
security.
 To find out the intrinsic value of the security with a
view to make a buy/sell decision
 To identify the under valued securities to buy or over
value securities to sell.
 To analyze the stock market trends to understand the
stock market pattern and behavior.
 To forecast the future earning and dividends along
with the price of the securities.
 To find out the key determinants of the intrinsic
value.
 To analyse and point out the position of economy
industry and the company with a view to select the
possible company for investment.
The following are the three
approaches to Security Analysis
1. Fundamental analysis
2. Technical analysis
3. Efficient market hypothesis.
 Fundamental analysis is a time honored value
based approach depending upon a careful
assessment of the fundamental of an
economy, industry and the company. The
fundamental analysis involves the analysis of
the following:
 A) THE ECONOMIC ANALYSIS
 B) THE INDUSTRY ANALYSIS
 C) THE COMPANY ANALYSIS
 It is concerned with a critical study of the
daily or weekly price volume data of index
comprising several shares.
 It analyses the buying and selling pressure,
which govern the price trend.
 It helps the investors to buy cheap and sell
high, regardless of the type of company the
investor choose.
 It compiles a study of the market itself and
not of the various external factors which
effect the market
 The efficient market hypothesis is based on
the flow of free and correct information and
the market absorption of it. It is also called
as “RANDOM WALK THEORY” The theory of
efficient market hypothesis describes the
efficiency in three forms:

1. Weak form
2. Semi-strong form
3. Strong form
 Efficientmarket hypothesis (EMH) is an idea
partly developed in the 1960s by Eugene
Fama.

 It states that it is impossible to beat the

market because prices already incorporate
and reflect all relevant information. This is
also a highly controversial and often disputed
theory.
 The efficient market hypothesis is based on
the flow of free and correct information and
the market absorption of it. It is also called
as “RANDOM WALK THEORY”
 The theory of efficient market hypothesis
describes the efficiency in three forms:

1. Weak form
2. Semi-strong form
3. Strong form
 In 1991 Eugene F Fama has re-titled these
categories as tests for return predictability,
event studies and test for private information.
 The weak form says that current prices of
stocks reflect all information, which is already
contained in the past. The weak form also
holds that prices have no memory and
yesterday has nothing to do with tomorrow.
 The semi-strong form of EMH asserts that the
security prices incorporate all publicly
available information such as information
available from annual reports, dividends and
earnings announcements etc.
 Lastly, the strong form of EMH maintains that
current prices of stocks reflect all the
information including the insider information.
 There are three forms of EMH: Weak, Semi-strong and Strong

 Weak Form EMH:

 Suggests that all past information is priced into securities.
Fundamental analysis of securities can provide an investor with
information to produce returns above market averages in the
short term but there are no "patterns" that exist. Therefore
fundamental analysis does not provide long-term advantage and
technical analysis will not work.
 Semi-Strong Form EMH:
 Implies that neither fundamental analysis nor technical analysis
can provide an advantage for an investor and that new
information is instantly priced in to securities.
 Strong Form EMH:
 Says that all information, both public and private, is priced into
stocks and that no investor can gain advantage over the market
as a whole. Strong Form EMH does not say some investors or
money managers are incapable of capturing abnormally high
returns but that there are always outliers included in the
averages.
 Proponents of EMH, even in its weak
form, often invest in index funds or
certain ETFsbecause they are passively managed
(these funds simply attempt to match, not beat,
overall market returns). Index investors might
say they are adhering to the common saying, "If
you can't beat 'em, join 'em." Instead of trying to
beat the market, they will buy an index fund
that invests in the same securities as the
underlying benchmark index.
 With that said, there will still be investors who
will beat the market averages. However, these
investors are in the minority and it is arguable
that at least some part of their success can be
attributable to luck.
 When you deposit a certain sum in a bank
with a fixed rate of interest and a specified
time period, it is called a bank Fixed Deposit
(FD). At maturity, you are entitled to receive
the principal amount as well as the interest
earned at the pre-specified rate during that
period. The rate of interest for Bank Fixed
Deposits varies with the amount invested.
 The interest can be calculated monthly,
quarterly, half-yearly, or annually, and varies
from bank to bank.
Under a Recurring Bank Deposit, you invest a
specific amount in a bank on a monthly basis
for a fixed rate of return. The deposit has a
fixed tenure, at the end of which you get
your principal sum as well as the interest
earned during that period.
The rate of interest, calculated quarterly or as
specified by the bank, varies between 6 and
7 per cent, depending on the maturity period
and the amount invested.
A Time Deposit is an investment option that
pays annual interest rates between 6.25 and
7.5 per cent, compounded quarterly, and is
available through post-offices across the
country.
 Amount Invested doubles in 110 months (9 years
& 2 months)
 Certificate can be purchased by an adult for

himself or on behalf of a minor or by two adults.

 KVP can be purchased from any Departmental

Post office.
 Facility of nomination is available.
 Certificate can be transferred from one person

to another and from one post office to another.

 Certificate can be encashed after 2 & 1/2 years

from the date of issue.

 Scheme specially designed for Government
employees, Businessmen and other salaried
classes who are Income Tax assesses.
 No maximum limit for investment.
 No Tax deduction at source.
 Certificates can be kept as collateral security

to get loan from banks.

 Rate of interest 7.90%.
 It includes T-Bills (364, 182, 91 & 14 days),
Bonds issued by the Central & State
Government, State Financial Institutions,
Municipal Bodies, Port Trusts, and Electricity
Bodies etc. T-Bills are discounted
instruments and these may be traded with a
repurchase clause, called repos. Repos are
allowed in 364, 182 and 91 days T-Bills and
the minimum repo term is 1 day.
 It can be of many types like Regular Income,
Infrastructure, Tax saving or Deep Discount
Bonds. These are investment products with
fixed coupon rates and a definite period
after which they are redeemed. The bonds
may be regular income with the coupons
being paid at fixed intervals or cumulative in
which interest is paid on redemption. Deep
Discount bonds are one, which is issued at a
discount at the face value, and the investor
is paid the face value at redemption.
 Corporates can raise funds from the public in
the form of fixed deposits. These deposits
are unsecured and are mainly used for the
working capital requirements.
 These unsecured public deposits are
governed by the Companies (Acceptance of
Deposits) Amendment Rules 1978. Under this
rule, public deposits can’t exceed 25% of the
share capital and free reserves and the
maximum maturity period is 3 years while
the minimum is 6 months.
 These are short term funding instruments
issued by banks and financial institutions at a
discount to the face value. Banks can issue
CDs for duration of less than 1 year while FIs
can only issue this for more than 1 year. The
issuing bank or financial institution can’t
repurchase the instruments. CDs have to be
issued for a minimum of Rs. 5 lakhs with
multiples of Rs. 1 lakh thereafter. These are
generally used by corporate to meet their
short-term requirements.
 These represent short-term promissory notes
issued by firms with a high credit rating.
 The maturity of these varies from 15 days to
1 year, sold at a discount to the face value
and redeemed at the face value.
A financial market is a place/system where
financial instruments are exchanged.
 The capital markets are relatively for long term
(greater than one year maturity) financial
instruments (e.g. bonds and stocks).
 Their role can be summarized as follows (IFCO)
(a) The Capital Market is the indicator of the
inherent strength of the economy.
(b) It is the largest source of funds with long and
indefinite maturity for companies and thereby
enhances the capital formation in the country.
(c) It offers a number of investment avenues to
investors.
(d) It helps in channelling the savings pool in the
economy towards optimal allocation of capital in
the country.
There are two types of capital
market:
 Primary Market
 Secondary Market
A market where new securities are bought
and sold for the first time is called the New
Issues market or the IPO market.
 In other words, the first public offering of
equity shares or convertible securities by a
company, which is followed by the listing of a
company’s shares on a stock exchange, is
known as an initial public offering (IPO).
 The Primary market also includes issue of
further capital by companies whose shares
are already listed on the stock exchange.
 It is the direct method of raising capital
available for the company from the public.
 Primary market is a place where corporate may
raise capital by the way of:
a. Initial Public Offer (IPO)- is the first time that
the stock of a private company is offered to
the public.
b. Rights Issue- A rights issue is a dividend of
subscription rights to buy additional securities in
a company made to the company's existing
security holders.
c. Private Placements-a sale of stocks, bonds, or
securities directly to a private investor, rather
than as part of a public offering.
d. Bonus Shares- Bonus
shares are shares distributed by a company to
its current shareholders as fully paid shares free
of charge
e. Bought out deals (Offer for sale)- is a method
of offering securities to the public through a
sponsor (a bank, financial institution, or an
individual).
f. Employees stock option- It is a stock option
granted to specified employees of a company.
ESOs offer the options holder the right to buy a
certain amount of company shares at a
predetermined price for a specific period of
time.
 It Is Related With New Issues
 It Has No Particular Place
 It Has Various Methods Of Float Capital
 It comes before Secondary Market
A market in which an investor purchases a
security from another investor rather than
the issuer, subsequent to the original
issuance in the primary market. So, it can be
stated that secondary markets are the stock
exchanges and the over-the-counter market.
When the securities are traded from the first
holder to another, the issues trade in these
secondary markets.
 It Creates Liquidity
 It Comes After Primary Market
 It Has A Particular Place
 It Encourages New Investments
a. Appointment of Underwriters: The underwriters are
appointed who commit to shoulder the liability and subscribe to
the shortfall in case the issue is under subscribed. For this
commitment they are entitled to a maximum commission of 2.5%
on the amount underwritten.
b. Appointment of Bankers: Bankers along with their
branch network act as the collecting agency and process
of funds procured during the public issue. The banks
provide the temporary loan for periods between the issue
date and the date issue proceeds becomes available after
allotment, which is referred to as ‘bridge loan’.
c. Appointment of Registrars: Registrars process the
application form, tabulate the amount collected during the
issue and initiates the allotment procedures.
d. Appointment of Brokers to the issue: Recognized
members of stock exchanges are appointed as the brokers
to the issue for marketing the issue. They are eligible for a
maximum brokerage of 1.5%.
e. Filing the Prospectus with the registrar of the
Company: The draft prospectus along with the copies
of the agreements entered into with the Lead
mangers, Underwriters, Bankers, Registrars and
Brokers to the issue is filed with the Registrar of
Companies for that State where the registered office
of the company is located.
f. Printing and Dispatching of Application Forms: The
prospectus and application form are printed and
dispatched to the Bankers, Underwriters and Broker
to the issue.
g. Filing the initial listing application: A letter is sent
to the Stock Exchange where the issue is proposed to
be listed giving the details and stating the intent of
getting the shares listed on the exchange. The initial
listing application has to be sent with a fee of Rs.
7500.
h. Statutory Announcement: An abridged version of
the prospectus and the issue starting and closing
dates are to be published in major English dailies and
vernacular newspapers.
i. Processing of Applications: After the close of
Public issue all the application forms are
scrutinized, tabulated and then shares are
allotted against these applications.
j. Establishing the liability of the Underwriter: In
case the issue is not fully subscribed then the
liability of the subscription falls on underwriters,
who have to subscribe to the shortfall, in case
they have not procured the amount committed
by them as per the underwriting agreement.
k. Allotment of Shares: After the issue is
subscribed to the minimum level, the allotment
procedure as prescribed by the SEBI is initiated.
l. Listing of the issue: The shares after having
been allotted have to be listed compulsorily in
the regional stock exchange and optionally at
the other stock exchanges.
 Secondary markets are also referred to as Stock
Exchanges. They are a part of capital market.
The stock exchange is one of the most important
institutions in the Capital Market.
 It is a place where the securities issued by the
Government, public bodies and Joint Stock
Companies are traded.
 As per the Securities Contracts Regulations Act,
1956 a stock exchange is defined as "an
association, organisation or body of individuals
whether incorporated or not, established for the
purpose of assisting, regulating and controlling
business in buying, selling and dealing in
securities”.
 The history of Stock Exchanges in India goes
back to the eighteenth century, when
securities of the East India Company were
transacted. Corporate shares made their
entry in the 1830s and assumed significance
with the enactment of the Companies Act in
the 1850s.
 The Bombay Stock Exchange, the oldest
stock exchange in India was established in
1875.
 There are 6 Stock Exchanges in the country
at present.
 Ahmedabad Stock Exchange Ltd.
 BSE Ltd.
 Calcutta Stock Exchange Ltd.
 Magadh Stock Exchange Ltd.
 Metropolitan Stock Exchange of India Ltd.
 National Stock Exchange of India Ltd.
1. It ensures a measure of safety and fair
dealing.
2. It translates short-term and medium-term
investments into long term funds for
companies.
3. It directs the flow of capital to the area of
maximum returns and ensures ample
investment for the investor depending on
their risk preference.
4. It induces the companies to improve their
standard of performance.
 It is the oldest stock exchange in Asia and
was established as "The Native Share & Stock
Brokers Association" in 1875. It is the first
stock exchange in the country to obtain
permanent recognition in 1956 from the
Government of India under the Securities
Contracts (Regulation) Act, 1956.
 The Exchange provides an efficient and
transparent market for trading in equity,
debt instruments and derivatives. The BSE's
On Line Trading System (BOLT) is a
proprietary system of the Exchange.
 NSE is a fully automated, electronic, screen
based trading system sponsored by IDBI and
co-sponsored by other term lending institutions
such as LIC, GIC and other insurance
companies, commercial banks and other
financial institutions.
 NSE offers trading in the following segments:

a) Equities
b) Derivatives
c) Debt-Corporate Bonds
 Capital markets instruments include:
a) Equity Shares
b) Preference Shares
c) Debentures/ Bonds
d) ADRs
e) GDRs
 These shares are ownership shares of the
company which carry fluctuating dividend.
 They enjoy voting power, dividend and Capital
appreciation if any.
 They are highly liquid due to the availability of
secondary market.
 Ordinary shares without voting power are also
popular now a days.
 These shares carry a fixed return in the form of
dividend.
 They have preference over equity shareholders
on payment of dividend and on repayment of
Capital.
 Cumulative Vs Non Cumulative PS.
 Convertible Vs Non Convertible PS.
 Redeemable Vs Irredeemable PS.
 Debenture or Bond is a creditor ship security with a
fixed rate of return, fixed maturity period, perfect
income certainty and low capital uncertainty.

Types of Debentures include:

 Registered,
 Bearer,
 Redeemable,
 Perpetual,
 Convertible,
 Non Convertible,
 Partially Convertible,
 Callable etc.
 ‘A global depositary receipt (GDR) is a bank
certificate issued in more than one country
for shares in a foreign company. The shares
are held by a foreign branch of an
international bank. The shares trade as
domestic shares but are offered for sale
globally through the various bank branches. A
GDR is a financial instrument used by private
markets to raise capital denominated in
either U.S. dollars or euros.
 Amongst the Indian companies Reliance
Industries was the first to raise funds through
a GDR issue.
 American Depository Receipt (ADRs): An
American Depository Receipt (ADR) is a
negotiable receipt which represents one or
more depository shares held by a US
custodian bank, which in turn represent
underlying shares of non-US issuer held by a
custodian in the home country.
(a) Liquidity and Marketability of Securities: The basic
function of the stock market is the creation of a continuous
market for securities, enabling them to be liquidated, where
investors can convert their securities into cash at any time at
the prevailing market price. It also provides investors the
opportunity to change their portfolio as and when they want
to change, i.e. they can at any time sell one security and
purchase another, thus giving them marketability.
(b) Fair Price Determination: This market is almost a
perfectly competitive market as there are large number of
buyers and sellers. Due to nearly perfect information, active
bidding take place from both sides. This ensures the fair
price to be determined by demand and supply forces.
(c) Source for Long term Funds: Corporates, Government
and public bodies raise funds from the equity market. These
securities are negotiable and transferable. They are traded
and change hands from one investor to the other without
affecting the long-term availability of funds to the issuing
companies.
(d) Helps in Capital Formation: There is nexus
between the savings and the investments of the
community. The savings of the community are
mobilized and channeled by stock exchanges for
investment into those sectors and units which are
favoured by the community at large, on the basis of
such criteria as good return, appreciation of capital,
and so on.
(e) Reflects the General State of Economy: The
performance of the stock markets reflects the boom
and depression in the economy. It indicates the
general state of the economy to all those concerned,
who can take suitable steps in time. The Government
takes suitable monetary and fiscal steps depending
upon the state of the economy.
 Itis the market for the financial instrument,
which derives their values from the
underlying assets like stock, commodity or
currency. Derivatives’ trading has started
with Index Futures, followed by Index Option
and then Stock Option as per the
recommendation of the SEBI appointed L. C.
Gupta Committee.
 RBI SEBI
 Commercial Banks  Primary Market
 Forex Markets  Secondary market

 Financial  Derivatives Market

Institutions
 Primary Dealers
 Commercial banks include public sector banks,
private banks and foreign banks.
 Financial Institutions may be of all India level
like IDBI, IFCI,ICICI, NABARD or sectoral financial
institutions like, EXIM, TFCIL etc.
 The participants in Foreign exchange market
include banks, financial institutions and are
regulated by RBI.
 Primary dealers are registered participants of
the wholesale debt market. They bid at auctions
for government debts, treasury bills, which are
then retailed to banks and financial institutions,
which invest in these papers to maintain their
Statutory Liquidity Ratio (SLR).
 SEBI
was set up as an autonomous regulatory
authority by the Government of India in
1988. It is empowered by two acts namely
‘The SEBI Act, 1992 and The Securities
Contract (Regulation) Act, 1956

 OBJECTIVE
“To protect the interest of the investors in the
securities and to promote the development
of and to regulate the securities market and
the matters connected therewith or
incidental thereto”.
A transfer of financial instruments, such as
stocks, involves 3 processes:
 Execution
 Clearing
 Settlement
 MARKET ORDER: A market order is an order to
buy or sell immediately at the best available
price. These orders do not guarantee a price,
but they do guarantee the order's immediate
execution. Typically, if you are going to buy a
stock, then you will pay a price near the
posted ask. If you are going to sell a stock,
you will receive a price near the posted bid.
A limit order sets the maximum or minimum
price at which you are willing to buy or sell.
For example, if you wanted to buy a stock at
$10, you could enter a limit order for this
amount. This means that you would not pay a
penny over $10 for the particular stock. It is
still possible, however, that you buy it for
less than the $10.
 Alsoreferred to as a stop loss, stopped
market, on-stop buy, or on-stop sell, this is
one of the most useful orders. This order is
different because - unlike the limit and
market orders, which are active as soon as
they are entered - this order remains
dormant until a certain price is passed, at
which time it is activated as a market order.
 This type of order is especially important for
those who buy penny stocks. An all-or-none
order ensures that you get either the entire
quantity of stock you requested or none at
all. This is typically problematic when a
stock is very illiquid or a limit is placed on
the order.
 Thisis a time restriction that you can place
on different orders. A good-till-canceled
order will remain active until you decide to
cancel it. Brokerages will typically limit the
maximum time you can keep an order open
(active) to 90 days maximum.
 In the stock market, margin trading refers to
the process whereby individual investors buy
more stocks than they can afford to. Margin
trading also refers to intraday trading in
India and various stock brokers provide this
service.
 A margin account provides you the resources
to buy more quantities of a stock than you
can afford at any point of time. For this
purpose, the broker would lend the money to
buy shares and keep them as collateral.
1. To place a request with your broker to open
a margin account. This requires you to pay a
certain amount of money upfront to the broker
in cash, which is called the minimum margin.
2. Once the account is open, you are required
to pay an initial margin (IM), which is a certain
percentage of the total traded value pre-
determined by the broker.
3. to maintain the minimum margin (MM)
4. To square off your position at the end of
every trading session. If you have bought
shares, you have to sell them. And if you have
sold shares, you will have to buy them at the
end of the session
5. Convert it into a delivery order after trade,
in which case you will have to keep the cash
ready to buy all the shares you had bought
during the session and to pay the broker's fees
and additional charges.
 Clearing is the process of updating the
accounts of the trading parties and arranging
for the transfer of money and securities.
There are 2 types of clearing:
 Bilateral clearing and Central clearing.
 In bilateral clearing, the parties to the
transaction undergo the steps legally
necessary to settle the transaction.
 Central clearing uses a third-party — usually
a clearinghouse — to clear trades.
 Settlement of securities is a business
process whereby securities or interests in
securities are delivered, usually against (in
simultaneous exchange for) payment of
money, to fulfill contractual obligations, such
as those arising under securities trades.
 Traditional (physical) settlement
 Electronic settlement