Security Analysis and Portfolio Management

Class - MBA-III Semester [Finance specialization] Module-Investment Faculty- Prof S. Shamsher

Chapter I

1. 2. 3. 4. 5. 6. 7.

Investment Dimensions of Investment Objectives of Investment Investment Vs Speculation Investment Categories Investment Process Features of Investment avenues Investment

An Investment involves the commitment of funds with the expectation of earning on the positive rate of return from the same. The return expected from the investment needs to be commensurate with the risk involved. Investment is a tool to beat inflation; Provide the return from the investment is higher than the Inflation rate. Dimensions of Investment Losing current purchasing power Future returns Risk element Expectation of Gains

Objectives of Investment Safety Regular income Capital Gain- Capital appreciation in the stock market Tax savings Liquidity- The Marketability of the investment Speculation- Large windfall gain Hedging- Futures and Forwards- Covering the risk through an alternative investment Arbitrage- Buying and selling- Lower to higher market

Investment Vs speculation Regularity of a return Vs a Large sudden gain Time period- Long Vs quick Same stock can be purchased as an investment or a speculation depends on the motivation of the investor Not concerned with the dividend expectations and Long term growth prospects Vs short term appreciation

Process of Investment How do I Decide Whether to purchase or sell an Investment-? Two Basic Approaches Projection of Dividends and Projection of the future price of the Investment and discounting it to the current Value referred to as the Intrinsic Price, The discounting rate is the required rate of return on the investment. This Intrinsic price is compared with the Current Market price adjusted for commissions if its below go in for purchase of the investment otherwise sale of the investment

This however considers only the return perspective of the investment The risk aspects has also to be considered The Return and risk relationship needs to be examined Commensurate Through projections of Future prices by using Charts, Graphs and other statistical Tools.

Investment Categories Real Vs Financial Liquidity in case of Real assets difficult Returns also difficult to measure because of the absence of a well Defined market Financial can take forms of Shares , Bonds, Preferred, LIC , UTI, Insurance policies, Post office schemes, Money market Instruments such as commercial Paper

There are basically tow types of Investment Media Where the borrower is in a debtor position Debt Instruments, Bonds Where the lender is an owners position and is entitle to a share in the residual profits- Equity

Debt Instruments Interest as a percentage of the par value is referred to as the coupon rate or the nominal rate The redemption Price The Principal paid back on redemption Interest may be paid in two ways either the interest may be paid at a fixed interval or the debentures may be sold by the company to the investor at a discount price which is less than the face value or the redemption value or the maturity Value- Example Zero Coupon Bonds or Deep Discount Bonds

Institutional Deposits and Contracts Insurance and its surrender value- Cash or a loan can be taken against a policy Contribution to pension Funds and retirement Funds- Leaving the company before retirement does not entitle him to the share recd from the employer

Bonds Two basic modifications in a debt contract - To Pay regular Interest - To Redeem the principle at maturity Income Bonds- Interest is paid only if earnings are sufficient to permit the same Convertible Bonds-option to convert the same into equity share Lower interest than straight bonds because if converted in to shares than the bonds may provide higher current income Also the bond has an underlying share and therefore the vale may move up because of the underlying share resulting in a capital Gain Call Feature- Call before maturity- Beneficial to the Borrower if there is a decline in the interest rate and he has to pay a higher interest than can call up the money and issue bonds a t a lower rate Issuers are normally required to pay a penalty of one years interest for the call privilege Unsecured bonds are referred to as Debentures Secured bonds secured by real estate are referred to as Mortgage Bonds

International bond investing

Equities Equity investment Via Institutions by purchasing the shares of an investment company Direct equity investments are in the form of common stocks and Preferred Stocks

Features of preferred stock - Also called as hybrid stock as has features of both common stocks and Bonds - Preference in case of Dividends and Repayment - Fixed Dividend payment - Mostly cumulative - Sometimes Participating- Double dividend- The stated dividend plus an extra dividend bonus after the common stock has recd dividend

Real Estate Derivative Contracts-Covered in Chapter VI Features of Investment avenues Risk 1. Longer the maturity period larger the risk 2. Higher the creditworthiness of the borrower lesser the risk 3. Risk also depends upon the nature of return- Higher the variability in return, higher the risk 4. Beta is a measure of Risk, Part from Standard Deviation and Variance Return 1. The capital Gain & the Income 2. Annual Income + Ending Price- Beginning Price/ Beginning Price Liquidity Generally if liquidity is high, the return is low- Bank savings deposits

Marketability This means easy and quick means of transferability of the asset, Thus assets of listed companies are more marketable than those of unlisted companies.

Assignment- Debt Instruments- PPT presentation in Class

Please Note This module has been designed to provide a basic outline of the subject. Further reading is mandatory, for the same; please refer to the prescribed text books and sections as per the Lesson plan. Thank you The End