Security Analysis &
Portfolio Management
----Introduction to Securities and
Security Markets
By
Dr. Ananya Ghosh
What is investment?
Investment involves making a sacrifice in
the present with the hope of deriving
future benefits.
Also known as “postponed consumption”
Risk & expected return are the two key
determinants of investment process.
Investment Opportunities
Equity
Preference Shares
Debentures / Bonds / Fixed Income
Securities
Real Estate
Precious objects e.g. gold, silver,
precious stones, art objects etc.
Insurance policies
What is a security?
Security is a financial asset i.e. the liquid
form of the non-liquid assets which
acknowledges one’s right to a certain
extent in a particular concern.
Classification of Assets
ASSETS
FINANCIAL ASSETS NON-FINANCIAL ASSETS
e.g. Securities e.g. Land, Building, Furniture, Plant
Two Purposes For Investing In
Securities
Return of Principal Amount
Return on Capital
Four Possible Situations
Low Security High
LSHR HSHR Return (LSHR)
High Security High
Return (HSHR)
Low Security Low
Return (LSLR)
LSLR HSLR High Security Low
Return (HSLR)
Risk & Return
Risk and return will be very central terms in our analysis
and it is essential that the reader clearly understands the
meaning of each term and how assets with different
payout structures can be compared. General utility theory
suggests that the average investor is risk averse. Given
the same expected return of two assets with different risks,
he would prefer the one with less risk. (This assumption
may not be perfectly true for all individuals in all situations,
but for the investor community as a whole it is probably
true). For an asset with uncertain cash flows and payoffs,
which are normally distributed, the mean of the distribution
will be the expected return while the standard deviation
forms some kind of “risk”. Choosing the “less risky” asset
therefore comes down to choosing the asset with the
lowest standard deviation in its payout distribution. An
investor could also approach the problem from the other
direction, choosing among assets with the same risk and
then choose the asset with the highest expected return.
Financial Planning
The process of meeting your life goals
through the proper management of your
finances. Life goals can include buying a
home, saving for your child’s education
or planning for retirement.
Investment Decision
Investors are rational and hence do not
prefer uncertainty.
They would assume risk only if adequate
compensation is forthcoming.
The basic investment decision would be
a trade-off between risk & return.
Investment Process
Determine the investment objectives and
policy
Undertake security analysis
Construct a portfolio
Review a portfolio
Evaluate the performance of the portfolio
Factors Influencing Selection
of Investment
Returns
Capital Appreciation
Safety and Security of Funds
Risk
Liquidity
Tax Considerations
Conveyance
Concealability
Individual Investor
A person who buys or sells securities for
his or her own account.
Also called a retail investor or retail
shareholder.
Institutional Investor
An investor such as a bank, insurance
company, retirement fund, hedge fund,
or mutual fund that is financially
sophisticated and makes large
investments, often held in very large
portfolios of investments.
They may often participate in private
placement of securities.
Security Analysis
Behaviour of securities is very complex.
The stock market is known as the “Mirror
of Industrial Growth” . Thus, Security
Analysis deals with the estimation and
calculation of the various risks and
uncertainties involved.
SECURITY ANALYSIS
TECHNICAL ANALYSIS RANDOM WALK HYPOTHESIS
FUNDAMENTAL ANALYSIS There is no intrinsic value Price movements are
Each and every security for each share. Its value is random in nature. We may
has an intrinsic value(IV) determined by market find a pattern of these random
If IV > MV, purchase securities movements.This is also movements. This forms the
If IV < MV, sell securities known as Chartist basis for Efficient Capital
Approach Market Hypothesis.
Investment & Speculation
Possible Consideration Investment Speculation
Degree of risk assumed Less More, if not infinite
Level of income or Moderate High
profit expected
Income orientation Income to accrue over Income to accrue
time quickly and in a
lumpsum
Major consideration Future value of assets Capital gains
and future earning
potential
Nature of income Regular income and Capital gains, generally
possible terminal gain windfall in nature
Types of Securities
Fixed Income Securities
Variable Income Securities
Hybrid Securities
SECURITIES MARKET
PRIMARY SECONDARY
PRIVATE STOCK
PUBLIC ISSUE PLACEMENT EXCHANGES OTCEI
RIGHTS ISSUE
