Security Analysis

NSE- NSE was incorporated in November 1992. but inaugurated in 1994. First
exchange in India to implement fully automates screen-based trading system.
First exchange
in India to go live to the world through satellite communication. The first
exchange in India to grant permission for internet trading.

Key points about NSE:

• It provides a platform for trading in equities, derivatives, debt

instruments, and other financial products.
• The Nifty 50 is NSE's benchmark index, representing the performance of
the top 50 companies listed on the exchange.
• NSE is known for promoting transparency, efficiency, and investor
protection in the Indian financial markets.

History and Background:

• Founded: 1992
• Location: Mumbai, India
• Significance: NSE was the first exchange in India to provide a fully
automated, electronic trading platform. It revolutionized the stock
trading landscape in India by making it more transparent, accessible, and
efficient.

Key Features of NSE:

1. Electronic Trading Platform:

• Fully Automated: NSE offers a sophisticated trading system that
provides investors across the country with equal access.
Efficient and Transparent: Real-time trading and automatic order
matching ensure transparency, which helps reduce malpractices and
market manipulation.

2. Market Segments:
• Equities: NSE is a popular platform for buying and selling shares of
publicly listed companies.
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• Derivatives: NSE was a pioneer in introducing derivatives trading in

India, including Futures and Options on stocks and indices like the
Nifty.
• Currency Derivatives: Allows traders to hedge against currency risk.
• Debt Market: Offers trading in corporate bonds, government securities,
and treasury bills.

3. Indices:
• The Nifty 50 is the flagship index of NSE, comprising 50 of the largest
and most liquid companies across various sectors.
• Other indices include Nifty Bank, Nifty IT, and Nifty Midcap 100,
which track specific sectors and market segments.

4. Clearing and Settlement:

• The NSE ensures a robust clearing and settlement system through its
wholly-owned subsidiary, the National Securities Clearing
Corporation Limited (NSCCL).
• Settlement is done on a T+2 basis (i.e., two business days after the trade
date), ensuring efficiency and reducing counterparty risk.

5. Market Surveillance:
NSE employs advanced surveillance systems to monitor trading
activities and detect unusual patterns that could indicate market
manipulation or insider trading.

Regulatory Framework:

• Regulated by SEBI: The Securities and Exchange Board of India

(SEBI) regulates NSE, ensuring fair trading practices and protecting the
interests of investors.
• Listing Requirements: NSE has strict guidelines for companies looking
to list on the exchange, ensuring that only financially sound and
transparent companies are listed.

Investor Services:

• Online Trading Platforms: NSE offers electronic trading platforms

through brokers, which enables retail investors to trade stocks online.
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• Education and Awareness: NSE also conducts various investor

education programs, helping people understand stock market concepts
and investment strategies. Technological Advancements:

• Algorithmic Trading: NSE is at the forefront of introducing algorithmic

trading in India, which allows institutional investors to use advanced
strategies for large-scale trading.
• Mobile and Internet Trading: It also provides tools for mobile and
internet-based trading, making the market more accessible. Global
Recognition:
NSE is one of the largest exchanges globally by market capitalization. It
ranks among the top 10 stock exchanges in the world and plays a vital
role in the integration of Indian markets with global markets.

How NSE Works:

• Trading: Investors buy and sell securities through brokers registered

with the NSE. The exchange matches buy and sell orders electronically,
ensuring a seamless trading experience.
• Settlement: Once a trade is executed, NSE’s clearing house steps in to
ensure the transaction is completed, with the securities and money being
exchanged between the buyer and seller.

Benefits of NSE:

• Liquidity: NSE offers high liquidity due to the large number of

participants and diverse range of financial products available for trading.
• Price Discovery: The large volume of trades provides a more accurate
reflection of market sentiment and price movements.
• Cost-Effectiveness: With its advanced technology, trading on the NSE
is cost-efficient, benefiting both retail and institutional investors.

NSE vs. BSE:

• NSE is often compared to the Bombay Stock Exchange (BSE), another

major exchange in India. While the BSE is older, the NSE has gained
prominence due to its advanced technology and larger trading volumes,
especially in derivatives.
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BSE- BSE is voluntary non-profit making association of broker members.

Established in 1875. It emerged as a premier stock exchange n 1960s.
Until March 1995, BSE followed the open outcry system of trading. The
BSE changed its system of trading operations, on system known as BSE
Online Trading System (BOLT).
What is BSE?

• Bombay Stock Exchange (BSE) is a marketplace where shares of

publicly listed companies are bought and sold.
• It provides a platform for companies to raise capital by issuing shares,
and for investors to trade shares in those companies.
• BSE has a well-known benchmark index called S&P BSE Sensex,
which tracks the performance of 30 of the largest and most actively
traded companies on the exchange.

Functions of BSE: 1. Facilitating Stock

Trading:
o BSE provides a regulated platform for buying and selling
securities like stocks, bonds, mutual funds, derivatives, and other
financial instruments.
o It ensures transparency in transactions and helps determine the
price of listed securities through demand and supply dynamics.
2. Raising Capital for Companies:
o Companies can raise capital for their business operations and
growth by listing their shares on BSE through an Initial Public
Offering (IPO).
o Investors can then buy shares of the company and participate in
its ownership.
3. Providing Liquidity:
o BSE helps create liquidity for shares, allowing investors to easily
buy and sell their investments.
o Investors can enter and exit investments efficiently, with the
exchange facilitating transactions quickly and securely.
4. Price Discovery:
o Through the constant trading of shares, BSE helps in the
discovery of the fair market price of stocks based on real-time
supply and demand. o The BSE Sensex is used as a benchmark to
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understand the performance of the stock market and the overall

economy.
5. Ensuring Safety and Security:
o BSE is regulated by the Securities and Exchange Board of
India (SEBI), which ensures that all trading activity is
transparent and fair. o It also implements rules to prevent
fraudulent activities and protects the interests of investors.
6. Providing Market Data:
o BSE offers a wide range of data and analytics to investors,
traders, and financial institutions, which helps in making
informed decisions.
o It publishes information on stock prices, indices, market trends,
and financial news.
7. Offering Diverse Financial Instruments:
o Apart from equities (stocks), BSE offers platforms for trading
derivatives, commodities, mutual funds, and debt instruments. o
This enables investors to diversify their portfolios and manage
risk.
Importance of BSE:

• BSE plays a pivotal role in the growth of India's economy by helping

companies raise funds and by providing investors with opportunities to
invest.
• It acts as a barometer for the economy, with its indices reflecting the
state of the financial markets.

Trading- The voluntary exchange of goods and services between

individuals or entities. It can occur on a local, national, or international
level and involves transactions that aim to satisfy the needs and wants of
the participants. Trade can take various forms, including barter, retail, and
financial trading, and is essential for economic growth and development.
Types of trading: - Day Trading:
This form of trade involves purchasing and selling stocks in a single day. In
the case of day trading, individuals hold stocks for a few minutes or hours. A
trader involved in such trade needs to close his/her transactions prior to the
day’s market closure.
Swing Trading:
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This style of stock market trading is used to capitalise on the short-term stock
trends and patterns. Swing trading is used to earn gains from stock within a
few days of purchasing it; ideally one to seven days. Traders technically
analyse the stocks to gauge the movement patterns they are following for
proper execution of their investment objectives

3.Momentum Trading:
In case of momentum trading, a trader exploits a stock’s momentum, i.e. a
substantial value movement of stock, either upwards or downwards. A trader
tries to capitalise on such momentum by identifying the stocks that are either
breaking out or will break out.
In case of upward momentum, the trader sells the stocks he/she is holding,
thus yielding higher than average returns. In case of downward movement, the
trader purchases a considerable volume of stocks to sell when its price
increases.

4. Position Trading:
Position traders hold securities for months aiming to capitalise on the long-
term potential of stocks rather than short-term price movements. This style of
trade is ideal for individuals who are not market professionals or regular
participants of the market.

5. Dabba Trading” also known as “Bucketing” is the process used by

brokers to route their client's trades outside the Stock/Commodity exchange.
In such trading, the broker either does not execute any trade or matches and
execute trades on its own terminal.
Trade settlement is a two-way process which comes in the final stage of the
transaction. Once the buyer receives the securities and the seller gets the
payment for the same, the trade is said to be settled. While the official deal
happens on the transaction date, the settlement date is when the final
ownership is transferred. The transaction date never
changes and is represented with the letter ‘T’. The final settlement does not
necessarily occur on the same day. The settlement day is generally T+2.
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Sensex- SENSEX= The S&P BSE SENSEX (S&P Bombay

Stock Exchange Sensitive Index), also-called the BSE 30 or simply the
SENSEX. The base value of the S&P BSE SENSEX is taken as 100 on 1
April 1979, and its base year as
1978–79. Sensex is calculated using the "Free-float Market Capitalization"
methodology. As per this methodology, the level of index at any point of time
reflects the Free-float market value of 30 component stocks relative to a base
period.

Key Aspects of Sensex 1.

Composition:
oComprises 30 companies from various sectors, representing a
significant portion of the market capitalization of the BSE.
o The companies are selected based on various factors such as
market capitalization, liquidity, and sector representation.
2. Base Year:
o The Sensex was introduced in 1986, with a base year of 1978-79.
Its initial value was set at 100.

Functions of Sensex

1. Market Indicator:
o Acts as a barometer of the Indian stock market, reflecting the
overall market sentiment and economic health. o Investors and
analysts use it to gauge market trends and make informed
investment decisions.
2. Benchmark for Investments:
o Serves as a benchmark for mutual funds and other investment
portfolios, helping investors compare their returns against the
index.
3. Economic Insights:
o Provides insights into the performance of key sectors in the
Indian economy, influencing monetary policy and economic
forecasts.
4. Investment Decisions:
o A rise in the Sensex often indicates investor confidence, while a
decline may suggest bearish sentiments or economic concerns. o
Investors often use the index movements to make strategic
decisions regarding buying or selling stocks.
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5. Global Impact:
o The performance of the Sensex can also impact foreign
investment flows into India, influencing global investors'
perceptions of the Indian market.

Nifty- Nifty is a major stock index in India introduced by the National stock
exchange. Nifty is calculated using the same methodology adopted by the
BSE in calculating the Sensex – but with three differences. They are:
The base year is taken as 1995
The base value is set to 1000
Nifty is calculated on 50 stocks actively traded in the NSE 50 top stocks are
selected from 24 sectors.

The Nifty is the flagship stock market index of the National

Stock Exchange (NSE) of India. Officially known as the Nifty 50, it
represents the weighted average of the 50 largest and most actively traded
companies across various sectors listed on the NSE.

Key Features and Functions of Nifty:

1. Benchmark Index: Nifty serves as a barometer for the overall

performance of the Indian stock market and economy. It tracks the
movement of the 50 most liquid and large-cap Indian stocks.
2. Sector Representation: The index represents diverse sectors of the
economy, such as banking, IT, energy, pharmaceuticals, and more. This
helps investors track sector-wise performance and make informed
decisions.
3. Market Performance Indicator: Investors and analysts use Nifty to
assess how the market is performing over time. A rising Nifty indicates
a general uptrend in the stock market, while a falling Nifty reflects a
downtrend.
4. Investment and Trading: Nifty is widely used as a benchmark for
index funds, mutual funds, and exchangetraded funds (ETFs). Investors
can buy these funds to gain exposure to the top 50 companies in the
Indian market.
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5. Derivatives Market: Nifty is also the underlying asset for derivatives

like futures and options. Traders use Nifty futures and options for
hedging, arbitrage, and speculative purposes.
6. Risk Management: Since Nifty includes companies from different
sectors, it offers a degree of diversification, helping to spread risks for
investors.

Nifty 50- The Nifty 50 is a stock market index representing the 50 largest and
most liquid companies listed on the National Stock Exchange (NSE) of
India. It is one of the two major stock indices in India, alongside the Sensex,
which is based on the Bombay Stock Exchange (BSE). The Nifty 50 provides
investors with an idea of the overall performance of the Indian equity market
and serves as a benchmark for investment portfolios.

Key features of the Nifty 50 include:

• Composition: It consists of 50 large-cap companies from various

sectors, such as banking, technology, energy, consumer goods, and
more.
• Sectoral Representation: It offers a broad representation of the Indian
economy, with companies from sectors like finance, information
technology, energy, healthcare, etc.
• Weightage: Companies in the Nifty 50 are weighted according to their
market capitalization, meaning larger companies have more influence
on the index's movement.
• Purpose: It is widely used as a benchmark for mutual funds, exchange-
traded funds (ETFs), and individual portfolios.

The Nifty 50 reflects the Indian stock market's health and is often used by
both domestic and international investors to gauge market trends.

BSE Sensex 30- The BSE Sensex 30 (or simply Sensex) is the benchmark
index of the Bombay Stock Exchange (BSE) in India. It represents the
performance of 30 of the largest and most actively traded companies listed on
the BSE. These companies are chosen based on their market capitalization,
liquidity, and sector representation, making Sensex a key indicator of the
overall market performance in India.

Key Points:
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BSE: Bombay Stock Exchange, one of the major stock exchanges in

•
India.
• Sensex 30: The index is made up of 30 companies from various sectors,
including finance, IT, energy, and consumer goods, among others.
• Market Indicator: It serves as a barometer for the Indian economy and
is widely followed by investors, analysts, and traders.
Base Year: The Sensex was launched in 1986 with a base value of 100, with its
base year being 1978-79

TYPES OF RISK
Unfortunately, the concept of risk is not a simple concept in finance. There are
many different types of risk identified and some types are relatively more or
relatively less important in different situations and applications. In some
theoretical models of economic or financial processes, for example, some
types of risks or even all risk may be entirely eliminated. It is ever-present and
must be identified and deal with.
In the study of finance, there are a number of different types of risk has been
identified. It is important to remember, however, that all types of risks exhibit
the same positive risk-return relationship.
Risk can be classified into two types of risks which are as follows:

1. UNSYSTEMATIC RISK- It is a part of total risk which is unique to the firm or

industry due to factors such as strikes, lack-out, consumer preferences and
management policies. It is caused by the factors that are independent of the
price mechanism operating in the security market. It is eliminated or
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minimized which is called unsystematic or unique risk. The unsystematic risk is

also further classified into the followings.
i) Business risk- The possibility that a company will have lower than anticipated
profits, or that it will experience a loss rather than a profit. Business risk is
influenced by numerous factors, including sales volume, per-unit price, input
costs, competition, overall economic climate and government regulations. A
company with a higher business risk should choose a capital structure that has
a lower debt ratio to ensure that it can meet its financial obligations at all
times.
ii) Financial risk- The possibility that shareholders will lose money when they
invest in a company that has debt, if the company's cash flow proves
inadequate to meet its financial obligations. When a company uses debt
financing, its creditors will be repaid before its shareholders if the company
becomes insolvent. Financial risk also refers to the possibility of a corporation
or government defaulting on its bonds, which would cause those bondholders
to lose money.
3. Operational Risk- Operational risk can be summarized as human risk; it is
the risk of business operations failing due to human error. Operational risk will
change from industry to industry, and is an important consideration to make
when looking at potential investment decisions. Industries with lower human
interaction are likely to have lower operational risk.
2. SYSTEMATIC RISK- External factors that cannot be controlled causes risk
which are known as systematic risks. Systematic risks are non-diversifiable and
they arise out of the factors such as market, nature of industry, state of the
economy. Systematic risks can be further classified into:
i) Interest rate risk- The risk that an investment's value will change due to a
change in the absolute level of interest rates, in the spread between two rates,
in the shape of the yield curve or in any other interest rate relationship. Such
changes usually affect securities inversely and can be reduced by diversifying
(investing in fixed-income securities with different durations) or hedging (e.g.
through an interest rate swap).
ii) Market risk- The possibility for an investor to experience losses due to
factors that affect the overall performance of the financial markets. Market
risk, also called "systematic risk," cannot be eliminated through diversification,
though it can be hedged against. The risk that a major natural disaster will
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cause a decline in the market as a whole is an example of market risk. Other

sources of market risk include recessions, political turmoil, changes in interest
rates and terrorist attacks.
3. Purchasing power risk- Purchasing power risk is the uncertainties of the
purchasing power of amounts to be received. It refers to the impact of inflation
or deflation on an investment. High inflation erodes the capital value of all
investments. It is also known as inflation risk. Variations in the returns are
caused by the loss of purchasing power of currency and inflation causes the
loss of purchasing power. In a sense, investment is regarded as the
postponement of consumption. The higher the inflation rate, the faster the
money losses its value.
iv) Management risk- The risks associated with ineffective, destructive or
underperforming management, which hurts shareholders and the company or
fund being managed. This term refers to the risk of the situation in which the
company and shareholders would have been better off without the choices
made by management.

Factors Affecting Systematic Risk

• Economic Conditions:
o Recessions: Periods of economic decline can lead to widespread
job losses, lower consumer spending, and decreased business
profits, impacting the entire market.
o Inflation: High inflation erodes purchasing power, increases
borrowing costs, and can slow economic growth, negatively
affecting stock prices.
o Interest Rates: Changes in interest rates can impact the
attractiveness of bonds and other fixed-income securities,
influencing investor demand for stocks.
• Political Events:
o Geopolitical Uncertainty: Wars, international conflicts, and
political instability can create uncertainty and negatively impact
investor sentiment.
o Government Policies: Changes in tax laws, regulations, and trade
policies can significantly impact businesses and the overall
economy.
• Natural Disasters:
o Large-scale Disasters: Natural disasters such as earthquakes,
hurricanes, and pandemics can disrupt supply chains, damage
infrastructure, and negatively impact economic activity.
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Factors Affecting Unsystematic Risk

• Company-Specific Factors:
o Management Quality: Poor management decisions, lack of
innovation, and ethical lapses can negatively impact a company's
performance.
o Competition: Increased competition can erode market share and
profitability.
o Product Development: Failure to develop new products or adapt
to changing consumer preferences can hurt a company's
competitiveness.
o Legal and Regulatory Issues: Lawsuits, regulatory investigations,
and changes in regulations can create uncertainty and negatively
impact a company's stock price.
• Industry-Specific Factors:
o Technological Disruptions: Rapid technological advancements
can disrupt entire industries, making existing products and services
obsolete.
o Regulatory Changes: Changes in industry regulations can
significantly impact the profitability and competitiveness of
companies within a particular sector.
o Consumer Preferences: Shifts in consumer tastes and preferences
can impact demand for products and services.
• Sector-Specific Factors:
o Economic Downturns: Economic downturns can
disproportionately affect certain sectors, such as cyclical industries
like manufacturing and consumer discretionary goods.
o Commodity Price Fluctuations: Fluctuations in commodity
prices can significantly impact the profitability of companies in
sectors such as energy, agriculture, and materials.

Return

Return on investment- Return on Investment (ROI) is a financial metric used

to evaluate the efficiency or profitability of an investment. It measures the
return (profit or gain) compared to the investment's cost. ROI is a commonly
used performance measure because it provides insight into how effectively
capital is being used to generate profits.
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A return, also known as a financial return, in its simplest terms, is the

money made or lost on an investment over some period of time.
There are two type of return- Actual Return.
Expected Return.

Actual Return- An Actual Return refers to the realized profit or loss

generated by an investment or asset over a specific period. It is calculated
based on the income (e.g., dividends or interest), capital gains (or losses),
and other forms of return (such as rent in real estate) the asset produces
during the holding period. Unlike expected return, which is an estimate, the
actual return reflects what has actually been earned or lost.
Actual Return has two components- Current return.

Capital Return
Expected Return- Expected Return refers to the anticipated or average
return an investor expects to earn from an investment over a specified
period of time. It is a probabilistic estimate based on historical data or
assumptions about future market conditions. The expected return is
calculated by multiplying the possible returns of an investment by the
likelihood of each return occurring and then summing up these products.
Security market- A securities market is a system of interconnection between
all participants (professional and nonprofessional) that provides effective
conditions: to attract new capital by means of issuing new security
(securitization of debt) to transfer real asset into financial asset
Participants in the securities market
Regulators= the key agency that have a significant regulatory influence, direct
or indirect over the security market are currently as follows:
_ The company law board
_ RBI
_ SEBI
_ The department of economic affairs (DEA)
_ Department of company affairs (DCA)
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stock exchange= A stock exchange is an institution where securities that

have already been issued are bought and sold. Presently 23 stock exchange
in India. Listed securities= securities that are listed on various stock exchange
Depositories = a depository is an institution which dematerialises physical
certificate and effects transfer of ownership by electronic book entries.
Presently there are two depositories in India. NSDL = National securities
depository limited CSDL = Central securities depository limited
Broker = Broker are registered member of the stock exchange through
whom investor transact.
FII = Institutional investor from abroad who are registered with SEBI to
operate in Indian capital market.

Introduction of Investment
An investment is a sacrifice of current money or other resources for future
benefits
Investment Alternative

• Marketable Security
-Equity share= Equity shares represent ownership share.
Bond/ debenture= Bond or debenture represent long term
debt instrument
Money market instrument=
Treasury bill
Commercial paper
Certificate of deposit

• Mutual fund= A mutual fund represent a vehicle for collecting

investment.
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• Life insurance= Policy that provide protection benefits are

designed to protect the policy holder from the financial consequence
of unwelcome events such as death, or long-term sickness /disability

• Real estates
Residential House
-Commercial property Agricultural
Land

• Precious object
Gold
silver
Precious stone

• Nonmarketable financial assets

Bank deposit
Post office deposit
Company deposit provident fund
deposit

Financial market
Financial markets refer broadly to any marketplace where the trading of
securities occurs, including the stock market, bond market, forex market,
and derivatives market, among others. Financial markets are vital to the
smooth operation of capitalist economies.
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Functions of Financial Market

The functions of the financial market are explained with the help of points
below:

1. It facilitates mobilisation of savings and puts it to the most

productive uses.

2. It helps in determining the price of the securities. The frequent

interaction between investors helps in fixing the price of securities, on
the basis of their demand and supply in the market.

3. It provides liquidity to tradable assets, by facilitating the

exchange, as the investors can readily sell their securities and convert
assets into cash.

4. It saves the time, money and efforts of the parties, as they don’t
have to waste resources to find probable buyers or sellers of
securities. Further, it reduces cost by providing valuable information,
regarding the securities traded in the financial market
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Fundamental Analysis
Fundamental analysis is primarily concerned with determining the intrinsic
value or the true value of a security. For determining the security’s intrinsic
value, the details of all major factors (GNP, industry sales, firm sales and
expense etc) is collected or an estimates of earnings per share may be
multiplied by a justified or normal prices earnings ratio.
After making this determination, the intrinsic value is compared with the
security’s current market price. If the market price is substantially greater
than the intrinsic value the security is said to be overpriced.
If the market price is substantially less than the intrinsic value, the security is
said to be under-priced. However, fundamental analysis comprises:

1. Economic Analysis

2. Industry Analysis

3. Company Analysis
ECONOMIC ANALYSIS
For the security analyst or investor, the anticipated economic environment,
and therefore the economic forecast, is important for making decisions
concerning both the timings of an investment and the relative investment
desirability among the various industries in the economy. The key for the
analyst is that overall economic activities manifest itself in the behavior of
the stocks in general. That is, the success of the economy will ultimately
include the success of the overall market

For an industry analyst, we can study following things-

1. GDP

2. Inflation

3. Interest rate

4. Business cycle

5. Trade policy
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6. Taxation policy

7. Public expenditure policy

INDUSTRY ANALYSIS
The mediocre firm in the growth industry usually out performs the best
stocks in a stagnant industry. Therefore, it is worthwhile for a security
analyst to pinpoint growth industry, which has good investment prospects.
The past performance of an industry is not a good predictor of the future- if
one look very far into the future. Therefore, it is important to study industry
analysis. For an industry analyst- industry life cycle analysis, characteristics
and classification of industry is important
INDUSTRY LIFE CYCLE ANALYSIS-

1. Pioneering stage: During this stage, the technology and product

is relatively new. The prospective demand for the product is promising
in this industry. The demand for the product attracts many producers
to produce the particular product. This led to severe competition and
only fittest companies survive in this stage.

2. Rapid growth stage: This stage starts with the appearance of

surviving firms from the pioneering stage. The companies that beat the
competition grow strongly in sales, market share and financial
performance. The improved technology of production leads to low
cost and good quality of products.

3. Maturity and stabilization stage: After enjoying aboveaverage

growth, the industry now enters in maturity and stabilization stage.
The symptoms of technology obsolescence may appear. To keep going,
technological innovation in the production process should be
introduced. A close monitoring at industries events are necessary at
this stage.
4. Decline stage: The industry enters the growth stage with
satiation of demand, encroachment of new products, and change in
consumer preferences. At this stage the earnings of the industry are
started declining.
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CLASSIFICATION OF INDUSTRY

1. Growth Industries: These industries have special features of high

rate of earnings and growth in expansion, independent of the business
cycle. The expansion of the industry mainly depends on the
technological change or an innovative way of doing or selling
something

2. Cyclical Industries: The growth and profitability of the industry

move along with the business cycle. These are those industries which
are most likely to benefit from a period of economic prosperity and
most likely to suffer from a period of economic recession.

3. Growth Industries: These industries have special features of high

rate of earnings and growth in expansion, independent of the business
cycle. The expansion of the industry mainly depends on the
technological change or an innovative way of doing or selling
something

4. Cyclical Industries: The growth and profitability of the industry

move along with the business cycle. These are those industries which
are most likely to benefit from a period of economic prosperity and
most likely to suffer from a period of economic recession.
CHARACTERISTICS OF AN INDUSTRY ANALYSIS
In an industry analysis, the following key characteristics should be considered
by the analyst. These are explained as below:

1. Post sales and Earnings performance: The two important factors

which play an important role in the success of the security investment
are sales and earnings. The historical performance of sales and
earnings should be given due consideration, to know how the industry
have reacted in the past.

2. Nature of Competition: The numbers of the firms in the industry

and the market share of the top firms in the industry should be
analyzed. One way to determine competitive conditions is to observe
whether any barriers to entry exist. The demand of particular product,
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its profitability and price of concerned company scrip’s also determine

the nature of competition

3. Labour Conditions and Other Industrial Problems: The labour

scenario in a particular industry is of great importance. If we are
dealing with a labour-intensive production process or a very
mechanized capitalintensive process where labour performs crucial
operations, the possibility of strike looms as an important factor to be
reckoned with. Certain industries with problems of marketing like high
storage costs, high transport costs etc leads to poor growth potential
and investors have to careful in investing in such companies.

4. Nature of Product Line: The position of the industry in the life

cycle of its growth initial stage, high growth stage and maturing stage
are to be noted. It is also necessary to know the industries with a high
growth potential like computers, electronics, chemicals, diamonds etc.,
and whether the industry is in the priority sector of the key industry
group or capital goods or consumer goods groups.
Company Analysis
If the economic outlook suggests purchase at the time, the industry analysis
will aid the investor in selecting the proper industry in which to invest.
Nonetheless, when to invest and in which industry is not enough. It is also
necessary to know which companies’ industries should be selected.”
The real test of an analyst’s competence lies in his ability to see not only the
forest but also the trees. Superior judgment is an outcome of intelligence,
synthesis and inference drawing. That is why, besides economic analysis
and industry analysis, individual company analysis is important.
Framework of Company Analysis
The two major components of company analysis are:
Financial
Non-financial
A good analyst gives proper weightage to both these aspects and tries to
make an appropriate judgment. In the process of evaluating the investment-
 •

worthiness of a company’s securities, the analyst will be concerned with two

broad categories information: (i) internal and (ii) external.
Internal information consists the data and events relating to the enterprise
as publicized by it.
External information comprises the reports and analyses made by sources
outside the company viz. media and research agencies.
1. Non-financial Aspects:

(a) History and business of the company

(b) Top management team

(c) Collaboration agreements

(d) Product range

(e) Future plans of expansion/diversification

(f) R&D

(g) Market standing – competition and market share

(h) Corporate social responsibility

(i) Industrial relations scenario

Besides these internal factors, the external environment related to the
company survival and image:

a) Statutory controls

b) Government policy

c) Industry life cycle stage

d) Business cycle stage

e) Environmentalism

f) Consumerism, etc.

g) Corporate image etc.

 •

2.Financial Aspects: Financial analysts interested in making investments in

equality shares of a company will be concerned with the prospects of rise in
value of the firm.
The main techniques of financial analysis are:

1. Comparative Financial Statements

2. Trend Analysis

3. Common Size Statement

4. Fund Flow Statement

5. Cash Flow Statement

6. Ratio Analysis

1) Comparative Financial Statements: In comparative financial

statement, the financial statements of two periods are kept by side so
that they can be compared. By preparing comparative statement the
nature and quantum of change in different items can be calculated and
it also helps in future estimates. By comparing with the data of the
previous years it can be ascertained what type of changes in the
different items of current year have taken place and future trends of
business can be estimated.
2) Trend Analysis: In order to compare the financial statements of
various years trend percentages are significant. Trend analysis helps in
future forecast of various items on the basis of the data of previous
years. Under this method one year is taken as base year and
on its basis the ratios in percentage for other years are calculated.
3) Common Size Statement: Common size financial statements are
such statements in which items of the financial statements are
converted in percentage on the basis of common base. In common size
Income Statement, net sales may be considered as 100 percent. Other
items are converted as its proportion. Similarly, for the Balance sheet
items total assets or total liabilities may be taken as 100 percent and
proportion of other items to this total can be calculated in percentage.
•

4) Fund Flow Statement: Fund Flow Statement is prepared to find

out financial changes between two dates. It is a technique of analyzing
financial statements. With the help of this statement, the amount of
change in the funds of a business between two dates and reasons
thereof can be ascertained. The investor could see clearly the amount
of funds generated or lost in operations. These reveal the real picture
of the financial position of the company.
5) Cash Flow Statement: The investor is interested in knowing the
cash inflow and outflow of the enterprise. The cash flow statement
expresses the reasons of change in cash balances of company between
two dates. It provides a summary of stocks of cash and uses of cash in
the organization. It shows the cash inflows and outflows. Inflows
(sources) of cash result from cash profit earned by the organization,
issue of shares and debentures for cash, borrowings, sale of assets or
investments, etc. The outflows (uses) of cash results from purchase of
assets, investment redemption of debentures or preferences shares,
repayment of loans, payment of tax, dividend, interest etc.
6) Ratio Analysis: Ratio is a relationship between two figures
expressed mathematically. It is quantitative relationship between two
items for the purpose of comparison. Ratio analysis is a technique of
analyzing financial statements. It helps in estimating financial
soundness or weakness. Ratios present the relationships between
items presented in profit and loss account and balance sheet. Its
summaries the data for easy understanding, comparison and
interpretation.
Some other factors: -

Net Profit –
Net profit can have different meaning for different people. Net means
‘after all deductions. Net profit normally refers to profit after deduction
of all operating expenses, particularly after deduction of fixed costs or
fixed overheads. This contrasts with the term ‘gross profit’ which
generally refers to the difference between sales and direct cost of goods
sold, before the deduction of operating costs or overheads. Net profit is
also generally referred to as Profit After Tax (PAT), the profit figure after
deduction of tax.
•

Profit Margins –
Amount of earnings don’t tell the complete story. Increasing earnings are
good but if the cost increases more than revenues then the profit margin
is not improving. The profit margin measures how much the company
keeps in earnings out of every rupee of their revenues. Thus, this measure
is very useful for comparing similar companies, within the same industry.
Profit Margin is calculated on the basis of a simple formula that is:
Profit margin= Net income/Revenue

Return on Equity Ratio –

Return on Equity (ROE) shows the efficiency of a company in earning its
profits. It is a ratio of revenue and profits to owners’ (shareholders)
equity. The profitability of a company can be measured by finding out
how much profit a company can earn with the money that has been
invested by its shareholders. This can be made easy with the return on
equity ratio.
Return on Equity Ratio is calculated as follows;
Return on equity = Net Income / Shareholder’s Equity

Price to Earnings (P/E) Ratio –

Price-to-Earnings (P/E) ratio is commonly used to know valuation of a
share of the company. It gives us the current share price in the market in
reference to its per share earnings. Thus, we can calculate the Price of
earnings or PE ratio as follows;
PE = Price per Share / Earnings per Share
5] Price-to-Book (P/B) Ratio –
A Price-to-Book (P/B) ratio is used to compare a stock’s market value to
its book value. This ratio gives certain idea of whether you are paying too
high price for the stock as it denotes what would be the left-over value if
the company was to wind up today.
It can be calculated as:
 •

P/BV Ratio = Current Market Price per Share / Book Value per Share Book
Value per Share = Book Value / Total number of shares
A higher P/B ratio than 1 denotes that the share price is higher than what
the company’s assed would be sold for. The difference indicates what
investors think about the future growth potential of the company.

What is real state investment plan

A real estate investment plan is a strategic framework designed to guide an

investor in acquiring, managing, and growing a real estate portfolio while
achieving specific financial goals. Below is a detailed breakdown of what such
a plan includes:

1. Defining Investment Objectives

• Short-term goals: Generating immediate cash flow through rental

income or short-term property flips.
• Long-term goals: Building wealth through property appreciation, equity
buildup, and passive income.
• Risk tolerance: Understanding how much risk the investor is willing to
take (e.g., low-risk rental properties vs. high-risk development projects).

2. Budgeting and Capital Allocation

• Initial capital: How much capital is available for investment, including

savings, loans, or investor funding.
• Financing strategy: Evaluating options such as:
o Conventional mortgages
o Private financing
o Hard money loans
o Joint ventures or partnerships
• Reserves: Setting aside funds for maintenance, taxes, emergencies, or
unforeseen expenses.
 •

3. Market Research and Analysis

• Location analysis: Identifying high-growth or high-demand areas based

on:
o Economic growth and job opportunities
o Population growth
o Infrastructure development
• Property types: Choosing from residential, commercial, industrial, or
mixed-use properties.
• Market trends: Analyzing trends like interest rates, real estate cycles,
and rental yields.

4. Investment Strategy Selection

• Rental properties: Generating passive income through long-term

tenants.
• Fix-and-flip: Purchasing distressed properties, renovating, and selling for
profit.
• Real estate development: Constructing new properties for sale or lease.
• REITs (Real Estate Investment Trusts): Investing indirectly in real
estate through publicly traded trusts.
• Vacation rentals: Short-term rentals in tourist hotspots (e.g., Airbnb
properties).

5. Acquisition Process

• Property identification: Using real estate agents, brokers, and online

platforms to find suitable properties.
• Due diligence: Inspecting the property, reviewing legal documents, and
verifying financial feasibility.
• Negotiation and closing: Negotiating purchase price, terms, and
finalizing the transaction.

6. Property Management

• Self-management vs. hiring a property manager: Deciding whether to

manage properties directly or outsource.
• Maintenance and repairs: Regular upkeep to maintain property value.
 •

• Tenant management: Screening tenants, setting lease terms, and

handling tenant relations.
• Cash flow management: Tracking income and expenses to ensure
profitability.

7. Exit Strategy

• Selling for profit: Timing the market for maximum capital gains.
• Refinancing: Taking out equity to reinvest in additional properties.
• 1031 exchange: Deferring capital gains taxes by reinvesting proceeds
into a similar property.

8. Risk Management

• Insurance: Ensuring properties are adequately insured for risks like fire,
flood, and liability.
• Diversification: Investing in different types of properties and locations to
mitigate risk.
• Legal protection: Using legal entities (LLCs or corporations) to limit
personal liability.
• Economic risk: Preparing for market downturns by maintaining cash
reserves and reducing leverage.

9. Performance Monitoring

• Tracking metrics: Regularly evaluating key metrics such as:

o ROI (Return on Investment)
o Cap rate (Capitalization rate)
o Cash-on-cash return
o Occupancy rate
• Adjusting the strategy: Based on performance, market changes, or
personal goals.

10. Tax Planning

 •

• Deductions: Taking advantage of tax deductions for mortgage interest,

property depreciation, and expenses.
• Capital gains planning: Minimizing taxes on property sales through
strategic timing or 1031 exchanges.
• Working with a tax advisor: Ensuring compliance and optimizing tax
benefits.

Example Real Estate Investment Plan Outline

Goal: Build a $2M real estate portfolio in 10 years

Capital: $200,000 initial investment + $1M financing
Market: Growing suburban areas with high rental demand
Strategy:

1. Acquire 3 single-family rental properties in the first year.

2. Use rental income to cover operating costs and mortgages.
3. Reinvest profits into multifamily properties by year 5.
4. Exit through refinancing or sale by year 10.

To develop a personalized real estate investment plan for you, I’ll need a few
key details:

1. Primary Goal:
o Are you looking for long-term wealth accumulation, steady cash
flow, or short-term profits through property flipping?
2. Available Capital:
o How much capital do you currently have to invest, and are you
open to financing options like loans or partnerships?
3. Preferred Property Type:
o Do you prefer residential (single-family or multifamily),
commercial (offices, retail spaces), or mixed-use properties?
4. Location Preferences:
o Any specific cities or regions you want to focus on? Urban areas,
suburbs, or tourist hotspots?
5. Time Horizon:
o How long are you planning to hold onto your investments before
considering an exit?
6. Risk Tolerance:
o Are you comfortable with higher-risk investments for potentially
higher returns, or do you prefer safer, more stable properties?

How can analysis be using data source?

 •

Economic data,

Market data,

Company data

Analyzing real estate investments using various data sources—such as

economic data, market data, and company data—can provide a comprehensive
understanding of risks, returns, and opportunities. Below is a structured
approach on how to perform such analysis:

1. Economic Data Analysis

Key Metrics to Analyze

• GDP Growth: A growing economy boosts real estate demand.

• Unemployment Rate: Lower unemployment increases purchasing
power, affecting housing demand.
• Interest Rates: High interest rates can reduce real estate affordability and
investment returns.
• Inflation: Real estate can act as a hedge against inflation, but high
inflation may increase costs.

Data Sources

• Government reports (e.g., central banks, statistical bureaus)

• World Bank, IMF, OECD datasets

How to Use

• Correlate GDP growth with historical property price increases.

• Model future property demand using employment and income trends.
• Factor interest rate forecasts into your financial models for expected
returns.

2. Market Data Analysis

Key Metrics to Analyze

• Property Price Trends: Historical and current trends in property values.

 •

• Rental Yields: Average rental income relative to property price.

• Occupancy Rates: Higher occupancy rates signal stronger demand.
• Supply & Demand: New constructions vs. population growth in the area.

Data Sources

• Real estate platforms (Zillow, Realtor, local MLS databases)

• Industry reports from firms like CBRE, JLL, and Colliers
• Publicly available government records (permits, transactions)

How to Use

• Compare historical price growth across different markets to identify

outperforming regions.
• Analyze rental yield and occupancy rates for different property types.
• Use demographic and supply-demand data to forecast future market
trends.

3. Company Data Analysis

Key Metrics to Analyze

• Revenue Growth: Consistent growth signals a healthy company.

• Profit Margins: Higher margins suggest efficient operations.
• Debt Levels: Real estate companies often carry significant debt; analyze
debt-to-equity and interest coverage ratios.
• Asset Portfolio: Analyze the company’s property holdings for type,
location, and value.

Data Sources

• Financial statements (balance sheet, income statement, cash flow)

• Annual reports and investor presentations
• Market intelligence platforms (Bloomberg, Capital IQ, Yahoo Finance)

How to Use

• Evaluate publicly listed REITs and property developers to identify strong

performers.
• Compare key financial ratios with industry benchmarks.
• Analyze portfolio diversification and exposure to different property types
and regions.
 •

4. Integrated Analysis for Investment Decisions

• Risk Assessment:
Combine economic indicators (interest rates, unemployment) with market
data (occupancy rates, rental yields) to assess investment risk.
• Valuation Models:
Use Discounted Cash Flow (DCF) models and Capitalization Rate (Cap
Rate) methods for property valuation.
• Scenario Analysis:
Create multiple scenarios based on different economic conditions (e.g.,
high inflation vs. low inflation) to test investment resilience.
• Portfolio Optimization:
Diversify investments across geographies and property types to reduce
risk.

What is strategical role of the bond and types of the bond.

Strategic Role of Bonds in Investment

Bonds play a crucial role in investment strategies by providing several key

benefits:

1. Diversification
o Bonds reduce overall portfolio risk because they typically move
inversely to equities. When stock markets are volatile, bonds offer
stability.
2. Income Generation
o Bonds provide regular interest payments (coupon payments),
making them a reliable source of income for investors, especially
retirees.
3. Capital Preservation
o High-quality bonds (e.g., government bonds) are relatively low-
risk and help preserve capital in uncertain market conditions.
4. Hedging Against Deflation
o During periods of deflation, bond prices typically rise, offering a
hedge against falling prices in other asset classes.
5. Risk Management
o Bonds are less volatile than stocks. Allocating a portion of a
portfolio to bonds reduces overall portfolio volatility.
 •

Types of Bonds

1. Government Bonds
o Issued by national governments to finance public projects and
expenditures.
o Examples:
▪ U.S. Treasury Bonds (T-bonds)
▪ UK Gilts
▪ Indian Government Securities (G-Secs)
2. Corporate Bonds
o Issued by corporations to raise capital for business operations,
expansion, or projects.
o Higher risk than government bonds but offer higher yields.
3. Municipal Bonds
o Issued by local governments or municipalities to finance public
infrastructure projects.
o Often tax-exempt at the federal and state levels.
4. Zero-Coupon Bonds
o Sold at a discount to their face value and do not pay periodic
interest. The investor receives the face value at maturity.
5. Convertible Bonds
o These bonds can be converted into a predetermined number of
shares of the issuing company.
o Useful for investors seeking both fixed income and potential equity
upside.
6. Floating Rate Bonds
o The coupon rate is linked to a benchmark interest rate (e.g.,
LIBOR).
o Helps investors benefit from rising interest rates.
7. Inflation-Linked Bonds
o Provide protection against inflation, as the principal or interest
payments are adjusted for inflation.
o Example: U.S. Treasury Inflation-Protected Securities (TIPS).
8. High-Yield Bonds (Junk Bonds)
o Issued by entities with lower credit ratings.
o Higher risk but offer higher returns.
9. Green Bonds
o Issued to finance environmentally friendly and sustainable projects.
10.Perpetual Bonds
o Have no maturity date and continue paying interest indefinitely.
o The principal is not repaid, but investors benefit from ongoing
coupon payments.
 •

To create a personalized bond investment strategy tailored to your real estate

investment plan, I'll need a few details:

1. Investment Horizon
o How long do you plan to stay invested in bonds? (Short-term: 1–3
years, Medium-term: 4–7 years, Long-term: 8+ years)
2. Risk Tolerance
o Are you comfortable with higher risk for potentially higher returns,
or do you prefer low-risk, steady income?
3. Income Requirement
o Do you need regular income from your bond investments to fund
your real estate activities?
4. Diversification Goals
o Would you like the bond portfolio to complement your other real
estate assets by reducing overall risk?
5. Geographic Preference
o Should the bond investments be focused on a specific country or
region?

Inventory at the reporting data, exchange rate, forward, future, swap, port

An agreement between two parties to buy or sell an asset at a specific price and
time in the future. For example, an agricultural producer might enter into a
forward contract to sell corn at a specific price in six months.

Futures

Similar to forwards, but are standardized contracts traded on a futures

exchange. Gains and losses are settled daily.

Options

A contract that gives the buyer the right to buy or sell an asset at a specific price
and time in the future. The buyer pays a premium to the seller for this
right. There are two types of options:

Call option: Gives the buyer the right to buy the asset.

Put option: Gives the buyer the right to sell the asset.

Swaps- An agreement between two parties to exchange cash flows over a period
of time. Swaps are often used to manage risk, and interest rate swaps are
popular in the banking industry.
 •

Cash study
Ketan Parekh Scam

Q1: Does the Ketan Parekh Scam serve as a stark reminder of the need
for effective oversight and regulation in financial markets?

Yes, the Ketan Parekh Scam serves as a stark reminder of the need for
effective oversight and regulation in financial markets.

Here's how:

• Market Manipulation and Loopholes: Ketan Parekh exploited

loopholes in the regulatory framework, engaging in circular trading,
price rigging, and front running. The lack of stringent surveillance at the
time allowed him to manipulate stock prices, demonstrating the need for
stricter oversight.
• Failure of Institutional Controls: The role of banks and financial
institutions in providing excessive credit to Parekh showed inadequate
internal controls. The lack of coordination between regulatory bodies
and financial institutions exposed vulnerabilities in the system.
• Impact on Investor Confidence: The aftermath of the scam saw a
massive crash in stock prices, particularly in the TMT sector, which
eroded investor confidence in the financial markets. This highlighted the
necessity of implementing safeguards to restore trust and protect retail
investors.
• Regulatory Reforms Post-Scam: Following the scam, SEBI and other
regulators introduced reforms aimed at enhancing transparency,
tightening control on margin trading, and implementing better
surveillance mechanisms. This indicated that the financial system
required ongoing regulation and monitoring to prevent similar incidents.

The Ketan Parekh scam underscored the importance of effective oversight to

prevent market manipulation, protect investors, and ensure the smooth
functioning of financial markets.

Q2: Explain the risks associated with excessive leverage and speculative
trading practices in the context of the Ketan Parekh Scam.

Excessive leverage and speculative trading played a central role in the Ketan
Parekh scam, creating substantial risks that eventually led to the collapse.
Here's how:
•

• Leverage Amplified Risk: Ketan Parekh borrowed large sums from

banks and financial institutions to finance his stock market activities.
While leverage can magnify returns, it also amplifies losses when stock
prices move unfavorably. When the market turned, Parekh's excessive
leverage contributed to severe financial instability.
• Speculative Investments in Volatile Sectors: Parekh focused on
highly speculative sectors, such as technology, media, and
telecommunications (TMT), during a period of market euphoria. The
speculative nature of these investments made them particularly
vulnerable to market fluctuations, leading to heightened risk when
prices started to fall.
• Risk of Price Manipulation: Parekh’s speculative trading and price
rigging artificially inflated stock prices, creating a bubble. As soon as
the market lost confidence, the inflated stock prices crashed,
exacerbating the financial losses.
• Banking Sector Exposure: The significant involvement of banks and
financial institutions, which extended credit to Parekh beyond
prescribed limits, increased the systemic risk. When the scam unraveled,
the exposure of these institutions to Parekh's highly leveraged positions
led to further instability in the financial sector.