module 1 sapm

8/7/2019 Module 1 SAPM

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MODULE 1MODULE 1MODULE 1MODULE 1

SECURITY ANALYSISSECURITY ANALYSIS

ANDAND

PORTFOLIO MANAGMENTPORTFOLIO MANAGMENTHARISHA.B.V

AIP(FINANCE & CONTROL)

IIM BANGALORE


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INVESTMENT

Income can be what is spent for currentconsumption or saved for the futureconsumption.

Investment is a sacrifice of current money orother resources for future benefits.

Investment is a commitment offunds(resources) made in the expectation ofsome positive rate of return.


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Investment is a commitment of money

for a time period in order to derive future

payment that will Compensate the

investor for

1. The time the funds are committed

2. The expected rate of inflation

3. The uncertainty of the future payments


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In the finance sense, investment is thecommitment of a persons funds to derive futureincome in the form of interest, dividend,premiums, pension benefits or appreciation in thevalue of their capital .

In the economic sense investment means thenet additions to the economys capital stock whichconsists of goods and services that are used inthe production of other goods and services(formation of new and productive capital)


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Essential nature of investment

Reduced current consumption

Planned later consumption

By saving money (instead of spending it ),

individuals tradeoff present consumption for a

larger future consumption.


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Characteristics ofInvestment

Return

Risk

Liquidity ( Marketability )

Tax benefits

Convenience.

Safety.


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Objectives of investment

Maximization of return.

Minimization of risk.

Hedge against inflation.


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Investments v/s Speculation

Particulars Investments Speculation

Time horizon At least 1 year For few days or

months

Risk ModerateH

igh risk

Return

expectation

Modest rate of

return

High rate of

return(Capital

gains)Analysis

leverage

Fundamental

Own funds

Technical,

charts

Borrowed funds


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Category ofInvestors

Individual Investors

Institutional Investors

1. Bank trust departments2. Pension funds

3. Mutual funds

4. Insurance companies


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FINANCIALMARKETS

A place for creation of financial assets.

FUNCTIONS OF FINANCIAL MARKETS

Facilitate price discovery

Provide liquidity to financial assets

Reduce the cost of transacting1. search costs

2. information costs


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Classification of financial markets

1. Nature of claimDebt marketEquity market

2. Maturity of claimMoney market

Capital market3. Seasoning of claim

Primary market

Secondary market

4. Timing of delivery

Cash or spot marketForward or futures market

5. Organizational structureExchange traded market

Over-the-counter market


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Approaches to investment decision making

Fundamental approach

Psychological approach

Academic approach

Eclectic approach


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Fundamental approach

There is an intrinsic value of a security.

Intrinsic value depends on company,

industry, and economy.

Market price varies from time to time

Undervalued securities- Buy

Overvalued securities - sell


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Psychological approach

Stock prices are guided by emotion

rather than reason.

Since psychic values appear to be more

important than intrinsic value it isprofitable to analyze how investors tend

to behave.


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Academic approach

Stock prices reflects intrinsic value fairly

well. Market price = intrinsic value.

Stock price is having a random

behaviour

Past behaviour cannot be used to

predict future price behaviour.


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Eclectic approach

Fundamental analysis is helpful inestablishing basic standards andbenchmarks.

Technical analysis helps to know the

prevailing mood of investors.

The market is neither well ordered asacademic approach not as speculative as thepsychological indicates

It is characterized by some inefficiencies andimperfections.


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Security Analysis and Portfolio Management

Security analysis

It is the analysis or study of risk and returntrade off of a security after taking intoconsideration the objective of the investor.

Portfolio management

It is the analysis or study of risk and return

trade off of group of investments after takinginto consideration the objective of the investor


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Portfolio Management Process

Security analysis(valuation)Specification of investment objectives andconstraints through Fundamental analysisTechnical analysis, (Efficient Market Hypothesis).

Portfolio analysisChoice of asset mix

Formulation of portfolio strategy

Portfolio selection

Active investment strategyPassive investment strategy

EMH


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Portfolio execution

Portfolio revision

Portfolio evaluation(performance

evaluation)


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Investment Avenues

Financial assets

Financial assets are paper/electronic

claims on some issuer (govt/ company)

Real assets

it is represented by tangible assets like

residential house , agricultural farm,

gold etc.


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Financial assets(direct investing)

Non marketable financial assetsSavings deposits

Certificate of deposits

Post office time deposits

Bank deposits

Monthly income scheme ofpost office

Kisanvikas patra

National saving certificate

Company deposits

Employee provident fund scheme

Public provident fund

Money marketTreasury bills

Certificates of deposits

Commercial paper

Repos


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Capital market

Fixed income securities

Treasuries

Agencies

Municipals

corporates

Equities

Preference shares

E

quity shares


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Derivatives market

Futures

options


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Financial assets (indirect investing)

Investment companies(mutual funds)

Unit investment trust

Open end

Closed end.


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Real assets

Residential house

Commercial property

Agricultural land

Suburban landPrecious objects

Gold and silver

Precious stones

Art objects

PaintingsAntiques

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