Security Analysis and Portfolio Management

Dr. Prakash Singh Management Studies Group BITS, Pilani

Chapter 1 OVERVIEW

A Broad Map of the Territory

BIRLA INSTITUTE OF TECHNOLOGY AND SCIENCE, PILANI INSTRUCTION DIVISION FIRST SEMESTER 2005-2006 Course Handout Part II
In addition to part -I (General Handout for all courses appended to the time table) this portion gives further specific details regarding the course. Course No. : ECON C412/ MGTS C412 Course Title : Security Analysis & Portfolio Management Instructor-in-charge : Dr. PRAKASH SINGH , Email: p_singh@bits-pilani.ac.in Room No: 1201-I 1. Scope and Objective of the Course: The Objective of the course is to impart an understanding of the methods and techniques of Security Evaluation as well as Design, Analysis and Management of Portfolio of Securities. 2. Text book: D.E. Fisher and R.J. Jordan - Security Analysis and Portfolio Management, Prentice-Hall, 6th Edition. Chandra Prasanna, , Investment Analysis and Portfolio Management ,Tata McGraw Hill , New Delhi 3. Reference books: 1.Bodie Zvi, Kane Alex & Marcus Alan Investments Tata McGraw Hill Ltd. New Delhi 2. Any one National Business daily: ET, BS, BL etc

TOPICS TO BE COVERED/ LECTURE PLAN

Exposure to investment climate, different kinds of securities, security markets. Investment, speculation, securities and its various types, security markets. Learning about basic primary market operations. Various techniques involved in raising money through Prospectus, Book Building etc. Learning basic stock market operations. Types of orders, trading mechanism, common stock exchange problems, margin trading. Understanding risk return characteristics of securities. Types of risks and returns, measurement of Beta. Exposure to Fundamental Analysis technique of Security valuation. Economy, Industry & Company Analysis Learning security valuation. Models of Security Valuation,

Learning Technical Analysis. Basic features, patterns and parameters Learning Efficient Market Theory. Various forms of Marketstrong, semi strong & weak. Exposure to Bond valuation. Bond Analysis & Bond management. Bond Strategies, Duration, Immunization etc. Understanding intricacies of portfolio mgt. Markowitz model, Sharpes Single Index model, Capital Asset Pricing model Learning about financial derivatives. Options, Futures, swaps, warrants, derivative strategies, Black Scholes model for Option Pricing

EVALUATION SCHEME: TEST I TEST II SURPRISE QUIZZES COMPREHENSIVE EXAMINATION

Three Reasons for Investing

Why invest ??? People invest to supplement their income earn capital gains Appreciation refers to an increase in the value of an investment. experience the excitement of the investment process

Why Do Individuals Invest ?

By saving money (instead of spending it), individuals tradeoff present consumption for a larger future consumption.

Defining an Investment
A current commitment of $ for a period of time in order to derive future payments that will compensate for: the time the funds are committed the expected rate of inflation uncertainty of future flow of funds.

Investing Defined
To consume, to save, or to invest a dollar that is earned ? Both saving and investing amount to consumption shifting through time. However, saving involves little, if any, risk, while investing is a risky endeavor.

What is Investing?

Criteria used to determine whether an investment of money is investing or something else, including:

Is it short-term or long-term? Is it productive or unproductive? Is it legal or illegal? Is it rational or irrational?

Investment Vs Speculation

Time Horizon Motive Information

Gambling vs. Speculating

Gambling occurs when Outcome is determined very quickly (a roll of the dice, for instance) A source of entertainment Outcome is not based on an economic endeavor, but, rather, random outcomes Creates risk without expectation of economic benefit Speculation occurs when An asset is purchased with hope that price will rise rapidly, leading to quick profit Not based on random outcomes Example: Buying an IPO of a stock on the first day hoping to sell it in several days at a higher price

INVESTMENT VS. SPECULATION INVESTOR SPECULATOR

PLANNING HORIZON
RISK DISPOSITION RETURN EXPECTATION

LONG
MODERATE MODEST

SHORT
HIGH HIGH

BASIS FOR DECISIONS

LEVERAGE

FUNDAMENTAL
NO

TECHNICAL
HIGH

Investment Alternatives
Assets are things that people own.

Financial assets have a corresponding liability, while real assets do not. Assets
Financial Assets e.g. bond, stock Real Assets e.g. land

Security

What is a Security? What is Security Analysis? - Risk Return Analysis What is a Portfolio?

Why study Security Analysis at all?

Superior Analytical tools Superior forecasting abilities

Investment Alternatives
There are three broad categories of securities. Securities Equity Securities e.g. common stock Fixed Income Securities e.g. bonds, preferred stock Derivative Assets e.g. futures, options

INVESTMENT ALTERNATIVES
Investment Avenues Nonmarketable Financial Assets Bonds

Equity Shares

Money Market Instruments

Mutual Fund Schemes Real Estate

Life Insurance Policies Precious Objects

Financial Derivatives

Investment categories
Investment
Real
Real Estate, Jewelry, Automobiles and other tangibles

Financial
Debt Instruments Equities Investment Companies Derivatives

INVESTMENT ATTRIBUTES RETURN RISK LIQUIDITY TAX SHELTER

CONVENIENCE

EVALUATION OF VARIOUS INVESTMENT AVENUES

Return Current yield Capital appreciation Equity Shares Nonconvertible Debentures Equity Schemes Debt Schemes Bank Deposits Public Provident Fund Life Insurance Policies Residential House Gold and Silver Low High Low Moderate Moderate Nil High Negligible High Low Nil Moderate Risk High Low High Low Negligible Nil Marketability/ Liquidity Fairly high Average High High High Average Tax Shelter High Nil High No tax on dividends Nil Section 80 C benefit Section 80 C benefit High Nil Convenience High High Very high Very high Very high Very high

Nil Moderate Nil

Moderate Moderate Moderate

Nil

Average Low Average

Very High Fair Average

Negligible Average

Debt Instruments

Interest may be paid periodically (or) securities may be sold on a discount price basis Bonds Vs Debentures Debenture Redemption Reserves ZCB s Convertibles FRNs Preference Shares

Debt Instruments (Contd.)

Debt Instruments comprises of the following: Institutional Deposits and contracts Government Debt Securities Private Debt Euro Bonds Insurance Banks-time and demand deposits Provident funds Pension funds Commercial Deposits

Equity
Common stock: dividends and capital gains Preferred stock Voting rights Stock splits ADR and GDR Derivatives: Options and Futures Investment Companies

Equity Contd

Factors:

1)Marketability 2)Tax Considerations 3)Risk-return relation 4)Maturity

Corporate Governance Buy Back of Shares FIIs and P Notes Delisting Reverse Book Building