As you want I am here giving you notes for Security Analysis and Portfoio Management subject of MBA course of VTU.

Notes :Security Analysis and Portfoio Management

MODULE-1

INTRODUCTION TO CONCEPTS OF INVESTMENTS:
In its broadest sense, an investment is a sacrifice of current money or other resources for future benefits. There are many avenues of investment available today, viz deposit in bank account, purchase of long term government bond, buy equity shares of a company…, contribute to provident fund account, purchase of a plot of land etc.,

An investment is a commitment of funds made in expectation of some positive return. If the investment is properly undertaken the return will commensurate with the risk the investor assumes.
Financial and non-financial assets Investments generally involve real assets and financial assets. Real assets are tangible material things such as buildings, automobiles, text books etc, financial assets are pieces of paper representing an indirect claim to real assets held by someone else. These pieces of paper represent debt or equity commitments in the form of IOUs or stock certificates. Among the many properties that distinguish real from financial assets are of special interest to investor is liquidity. Liquidity refers to the ease of converting an asset into money quickly, conveniently and bit little exchange cost. Real assets are generally less liquid than financial assets, largely because real assets are more heterogeneous, often peculiarly adapted to a specific use and yield benefit only in cooperation with other productive factors. In addition, return on real assets are frequently more difficult to measure accurately owing to the absence of broad, ready ad active markets. Many of the concepts techniques and decision rules applicable to financial assets are applicable to real assets. However focus of the subject is on financial assets.

Investment activity
Financial assets (ACQUISION OF ASSETS) Physical assets

In brief real assets produce goods and service, whereas financial assets define allocation of income or wealth among investors. Real assets opera only on asset side of balance sheet. Financial assets appear on both sides. Financial assets are created and destroyed in the course of business. Real assets are destroyed due to wear out or accident.
Security: Investment in capital market is in various financial instruments which are all claims on money. These instruments are called securities in the market parlance. Securities Contract Regulations act (1956) has defined security as inclusive of shares, scrips, stocks, bonds, debentures stock or any other marketable securities of a like nature in or any debentures of a company or body corporate, the government and semi government body etc.,. it includes all rights and interests in them including warrants and loyalty coupons etc., issued by any of the bodies organizations or govt. Portfolios are combinations of assets held by investors.

The two key aspects of any investment are time and risk. While sacrifice for making an investment is certain, the expected benefits in the future tends to be uncertain. In some investments like government bonds, the time element is dominant. In stock options investment in a company risk element is dominant. Finally in investments in equity shares both time and risk are important.

Objectives of financial investment use funds or savings for further creation of assets or acquisitions of existing assets.

Investment methods The various avenues for investment ranging from risk less to high risk investment opportunities consist of both security and non security forms of investment.
All securitized forms given below are marketable.

A. Security forms of investment
a. Corporate bonds* / Debentures
i. Convertible
ii. Non-convertible
b. Public sector Bonds
i. Taxable
ii. Tax free
c. Preference shares
d. Equity shares
i. New issue
ii. Rights issue
iii. Bonus issue
B. Non- security forms of Investment (non-marketable)
a. National Savings scheme
b. National savings Certificates
c. Provident fund
i. Statutory Provident Fund
ii. Recognised P F
iii. Un recognized P F
iv. Public Provident Fund
d. Corporate Fixed Deposits
i. Public sector
ii. Private sector
e. Life Insurance Policies (LIC & other private sector)
i. Whole life policies
ii. Limited payment life policy
iii. Convertible whole life assurance policy
iv. Endowment assurance policy
v. Jeevan mitra
vi. Special endowment plan with profits
vii. Jeevan sathi
viii. The new money back plan etc.,
f. Schemes of Unit Trust of India (some ar marketable among these)
i. Unit schemes of UTIMF(UTI-II)
ii. Unit schemes of UTI-I
iii. Unit linked insurance plan, 1971capial gains unit scheme 1983
iv. Children’s gift growth funds 1986
v. Parent’s gift growth funds 1986
vi. Monthly income unit scheme with extra bonus plus growth
vii. Master shares
viii. Master gains
ix. Equity linked savings scheme
x. Growing monthly income unit scheme
xi. Master plus etc.,
More than 60 UTI schemes and mutual funds of banks

g. Post office savings bank account
i. Recurring deposit
ii. Time deposit
iii. Monthly income scheme
iv. Social security certificates
h. others such as
i. Rahat patras or relief bonds
ii. Kissan vikas patra
iii. Deposits in co-operative banks
1. Recurring deposits
2. time deposits

Sources of information Sources of information or information on stock market activity is reported in various media. It is covered in news papers, business periodicals, other publications, radio and television. For most of the investors the coverage in Economic Times or the Financial Express is adequate. For greater details the most comprehensive source of information is ‘Daily Official Quotation list of BSE’. In addition prospectus of the public issue can be referred.

Just as securities and financial institutions come into existence as natural responses to investor demand, so too do markets evolve to meet needs. There are four types of markets. Viz. Direct search market, brokered markets, dealer markets and auction markets.

A direct search market is least organized market. Here buyers & sellers meet seek each other out directly. One example is of a transaction taking place in such a market would be the sale of a used refrigerator in which the seller advertises in the local newspaper. Such markets are characterized by sporadic participation and low priced and non standard goods. It does not pay most people or firms seek profits by specializing in such an environment.
Brokered market In brokered markets where trading in a good, is sufficiently active, brokers can find it profitable to offer search services to buyers and sellers. An example is real estate market, where economies of scale in search of available homes and prospective buyers make it worth while for participants to pay brokers to conduct searches for them. Brokers develop specialized knowledge on valuing asset traded in a given market. An important brokered investment market is primary market, where new issues of securities are offered to public. In primary market investment brokers act as brokers. They seek out investors to purchase securities directly from the issuing corporation. Another brokered market is that for large block of shares (> 10000 shares), are so large that brokers or ‘block houses’ are often engaged to search directly for other large traders rather than bringing the trade directly to the stock exchange where relatively smaller investors trade.

When trading activity in a particular type of assets increases dealer markets arise. Here dealers specialize in various assets, purchasing them for their inventory and selling them for a profit from their inventory. Dealers unlike traders, trade assets from their own account . The profit margin is ‘bid – asked’ spread, the difference between buying and selling from the inventory. Dealer market save traders search costs because market participants can easily look up prices at which they can buy from or sell to dealers. The over the counter (OTC) securities is a market is an example of dealer market. Fair amount of market activity is required before dealing in a market become an attractive source of income. Trading among investors of already issued securities is said to take place in ‘secondary market’. OTC market is an example of secondary market. Trading in secondary market does not affect the outstanding amount of securities; ownership is simply transferred from one investor to another.

The most integrated market is an ‘auction market’ in which all transactors in a good converge at one place to bid on or offer a good. Both Mumbai Stock Exchange (BSE) and National Stock Exchange of India (NSE) are examples of an auction market. An advantage of auction market over dealer markets is that one need not search for a best price to buy a good. If all the participants converge they can arrive upon a mutually agreeable price and thus make ‘bid-asked’ spread.

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