chap-2 anant gupta

8/3/2019 Chap-2 Anant Gupta

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2.1- COMPANY PROFILE:-

Share khan is one of the leading retail brokerage firms in the country. It is the retail broking

arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the

stock broking business. Share khan offers its customers a wide range of equity related

services including trade execution on BSE, NSE, Derivatives, depository services, online

trading, investment advice etc.

The firms online trading and investment site www.Sharekhan.com was launched on Feb 8,

2000. The site gives access to superior content and transaction facility to retail customers

across the country. Known for its jargon-free, investor friendly language and high quality

research, the site has a registered base of over one-lakh customers. The number of trading

members currently stands at over 5000. While online trading currently accounts for just

over 1 per cent of the daily trading in stocks in India, Share khan alone accounts for 22 per

cent of the volumes traded online.

The content-rich and research oriented portal has stood out among its contemporaries

because of its steadfast dedication to offering customers best-of-breed technology and

superior market information. The objective has been to let customers make informed

decisions and to simplify the process of investing in stocks.

On April 17, 2002 Share khan launched Speed Trade (Trade Tiger), a net-based executable

application that emulates the broker terminals along with host of other information relevant

to the Day Traders. This was for the first time that a net-based trading station of this caliber

was offered to the traders. In the last six months Speed Trade has become a de facto

standard for the Day Trading community over the net.

Share khans ground network includes over 250 centres in 123 cities in India, of which 20

are fully owned branches. Share khan has always believed in investing in technology to

build its business. The company has used some of the best-known names in the IT industry,

like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, VeriSign Financial

Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading engine and content.

The Morakhia family holds a majority stake in the company. HSBC, Intel & Carlyle are the

other investors.


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With a legacy of more than 80 years in the stock markets, the SSKI group ventured into

institutional broking and corporate finance 18 years ago. Presently SSKI is one of the

leading players in institutional broking and corporate finance activities. SSKI holds a

sizeable portion of the market in each of these segments. SSKIs institutional broking arm

accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all

Domestic Institutional portfolio investment in the country. It has 60 institutional clients

spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65%

of the organizations revenue, with a daily turnover of over US$ 2 million. The Corporate

Finance section has a list of very prestigious clients and has many firsts to its credit, in

terms of the size of deal, sector tapped etc. The group has placed over US$ 1 billion in

private equity deals. Some of the clients include BPL Cellular Holding, Gujarat Pipavav,

Essar, Hutchison and Shoppers Stop.

2.1.1.PROFILE OF THE COMPANY:-

Name of the company : Share khan ltd.Year of Establishment : 1925

Headquarter : Share Khan SSKIA-206 Phoenix House Phoenix Mills CompoundLower ParelMumbai - Maharashtra, INDIA- 400013

Nature of Business : Service ProviderServices : Depository Services, Online Services and

Technical ResearchNumber of Employees : Over 3500Website :www.sharekhan.com

Slogan : Youre Guide to The Financial Jungle.

2.1.2 - ACHIEVEMENTS OF SHAREKHAN:-

a) Rated among the top 20 wired companies along with Reliance, HUJl, Infosys, etcby Business Today, January 2004 edition.

b) Awarded Top Domestic Brokerage House four times by Euro money and AsiaMoney.

c) Pioneers of online trading in India amongst the top 3 online trading websites fromIndia. Most preferred financial destination amongst online broking customers.
http://www.sharekhan.com/http://www.sharekhan.com/http://www.sharekhan.com/http://www.sharekhan.com/


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d) Winners ofBest Financial Website award.e) Indias most preferred brokers within 5 years. Awaaz customers award 2005.

2.1.3- FUTURE PLAN:-

a) 2, 00,000 plus retail customers being serviced through centralized call centres/ websolutions.

b) Branches / Semi branches servicing affluent / aggressive traders through high skillfinancial advisor.

c) 250 independent investment managers/ franchisee servicing 50,000 highly valuedclients.

d) New initiatives Portfolio management Services and commodities trading.

2.1.4- VISION:-

To be the best retail brokering Brand in the retail business of stock market.

2.1.5- MISSION:-

To educate and empower the individual investor to make better investment

decisions through quality advice and superior service.

2.1.6-SHAREKHAN IS IN FACT:-

Among the top 3 branded retail service providers

No. 1 player in online business

Largest network of branded broking outlets in the country serving more than 7, 00,000

clients.

2.1.7- REASON TO CHOOSE SHAREKHAN LTD.:-

2.1.7.1- Experience:

SSKI has more than eight decades of trust and credibility in the Indian stock

market. In the Asia Money broker's poll held recently, SSKI won the 'India's Best

Broking House for 2004 ' award. Ever since it launched Sharekhan as its retail broking

division in February 2000, it has been providing institutional level research and broking

services to individual investors.


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2.1.7.2- Technology:

With its online trading account one can buy and sell shares in an instant from any PC

with an internet connection. One can get access to its powerful online trading tools that

will help him take complete control over his investment in shares.

2.1.7.3-Accessibility:

Share khan provides ADVICE, EDUCATION, TOOLS AND

EXECUTION services for investors. These services are accessible through its centres

across the country over the internet (through the website www.sharekhan.com) as well

as over the Voice Tool.

2.1.7.4-Knowledge:

In a business where the right information at the right time can translate into direct profits,

one can get access to a wide range of information on Sharekhan limiteds content-rich

portal. One can also get a useful set of knowledge-based tools that will empower him to

take informed decisions.

2.1.7.5- Convenience:

One can call its Dial-N-Trade number to get investment advice and execute his transactions.

Sharekhan ltd. has a dedicated call-centre to provide this service via a Toll Free Number

1800-22-7500 & 1800-22-7050 from anywhere in India.

2.1.7.6- Customer Service:Sharekhan limiteds customer service team will assist one for any help that one may

require relating to transactions, billing, demat and other queries. Its customer service can

be contacted via a toll-free number, email or live chat on www.sharekhan.com.

2.1.7.7- Investment Advice:

Sharekhan has dedicated research teams of more than 30 people for fundamental and

technical researches. Its analysts constantly track the pulse of the market and provide

timely investment advice to its clients in the form of daily research emails, online chat,

printed reports and SMS on their mobile phone.

2.1.8- SSKI GROUP COMPANIES:-

a. SSKI Investor Services Ltd (Share khan)b. S.S. Kantilal Ishwarlal Securities


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c. SSKI Corporate Financed. I dream Productionse. Palm spring estates Pvt. Ltd.f. Fin flow Investment Pvt. Ltd.g. I dream Production UK Pvt. Ltd.h.

Share khan Commodities Pvt. Ltd.

2.1.9- PRODUCTS & SERVICES OF SHARE KHAN:-

2.1.9.1- PRODUCTS:-

These are the product, which has been provided by Sharekhan Ltd.


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2.1.9.2- SERVICES:-

A Share khan outlet offers the following services:

Online BSE and NSE executions (through BOLT and NEAT terminals) Free access to investment advice from Share khan's research team Share khan Value Line (a fortnightly publication with reviews of recommendations,

stocks to watch out for etc

Daily research reports and market review (High Noon, Eagle Eye) Pre-market Report (Morning Cuppa) Daily trading calls based on technical analysis Cool trading products (Daring Derivatives, Trading Ring and Market Strategy) Personalized advice Live market information Depository services: De-mat and Re-mat transactions Derivatives trading (Futures and Options) Internet-based online trading: Speed Trade, Speed Trade Plus2.1.9.3- TYPES OF SHARES:-

There are several types of shares, including common stock, preferred stock, treasury stock, and

dual class shares. Preferred stock, sometimes called preference shares, have priority overcommon stock in the distribution of dividends and assets, and sometime have enhanced votingrights such as the ability to veto mergers or acquisitions or the right of first refusal when newshares are issued (i.e. the holder of the preferred stock can buy as much as they want before thestock is offered to others). A dual class equity structure has several classes of shares (forexample Class A, Class B, and Class C) each with its own advantages and disadvantages.Treasury stocks are shares that have been bought back from the public.

A. DERIVATIVES:-A stock option is the right (or obligation) to buy or sell stock in the future at a fixed price. Stockoptions are often part of the package of executive compensation offered to key executives. Some

companies extend stock options to all (or nearly all) of their employees. This was especially trueduring the dot-com boom of the mid- to late- 1990s, in which the major compensation of manyemployees was in the increase in value of the stock options they held, rather than their wages orsalary. Some employees at dot-com companies became millionaires on their stock options. Thisis still a major method of compensation for CEOs.The theory behind granting stock options to executives and employees of a corporation is that,since their financial fortunes are tied to the stock price of the company, they will be motivated toincrease the value of the stock over time.


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B. PRIMARY MARKET (IPOS):-In financial markets, an initial public offering (IPO) is the first sale of a company's commonshares to public investors. The company will usually issue only primary shares, but may also sellsecondary shares. Typically, a company will hire an investment banker to underwrite the offering

and a corporate lawyer to assist in the drafting of the prospectus.

The sale of stock is regulated by authorities of financial supervision and where relevant by astock exchange. It is usually a requirement that disclosure of the financial situation and prospectsof a company be made to prospective investors.

The Federal Securities and Exchange Commission (SEC) regulates the securities markets of theUnited States and, by extension, the legal procedures governing IPOs. The law governing IPOsin the United States includes primarily the Securities Act of 1933, the regulations issued by theSEC, and the various state "Blue Sky Laws".

C.

SECONDERY MARKET:-The secondary market (also called "aftermarket") is the financial market for trading of securitiesthat have already been issued in its initial private or public offering. Stock exchanges areexamples of secondary markets. Alternatively, secondary market can refer to the market for anykind of used goods.

C.1- HISTORY:-

Secondary markets have a long history, beginning perhaps with a flourishing trade in commercialbills of exchange in 12th and 13th century France. It was the French King Philip the Fair whocreated the profession of broker, or "courtier de change," in order to regularize this market.Amsterdam's Bourse, which began operations in 1611, was the first true stock exchange, and thisreflected the importance of Holland in world trade at that time.

C.2- FUNCTION:-

In the secondary market, securities are sold by and transferred from one speculator to another. Itis therefore important that the secondary market be highly liquid and transparent. The eligibilityof stocks and bonds for trading in the secondary market is regulated through financialsupervisory authorities and the rules of the market place in question, which could be a stockexchange.

2.1.9.4- SSKICORPORATE STRUCTURE:-

1. SSKI Securities Pvt. Ltd. Morakhia Family & Associates 100%A- SSKI INVESTORS SERVICE PVT. LTD.-56 % (Retail broking arm of the group):-

Shareholding pattern:

55.5% Morakhia family (promoters) 18.5% HSBC Private Equity India Fund Ltd 18.5% First Carlyle Ventures,


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Mauritius 7.5% Intel Pacific Inc.B. SSKI CORPORATE FINANCE PVT. LTD. (Investment Banking arm of the group)Shareholding pattern:-

50.5% SSKI Securities Pvt. Ltd. 49.5 % Morakhia family

2.1.10TYPES OF ACCOUNTS IN SHARE KHAN:-

Share khan offers two types of trading account for its clients:

Classic Account (which include a feature known as Fast Trade AdvancedClassic Account for the online users) and

Trade Tiger Account Dial- N- Trade

2.1.10.1-CLASSIC ACCOUNT:

This is a User Friendly Product which allows the client to trade through website

www.sharekhan.com and is suitable for the retail investor who is risk-averse and

hence prefers to invest in stocks or who does not trade too frequently. This account

allow investors to buy and sell stocks online along with the following features like

multiple watch lists, Integrated Banking, De-mat and digital contracts, Real-timeportfolio tracking with price alerts and Instant credit & transfer.

Classic accountpresents the easiest way to control your investments with a click of a

button. With live stock prices, online cash transfer and instant order execution you get

complete freedom from boring paper-work. Our friendly customer service

representatives are accessible via toll-free phone, email and live online chat. It helps

help in get live analysis before, during & after market hours. From daily intra-day calls

to long-term stock recommendations, you will get timely advice with well-defined

profit targets. In addition, you can invest in the companies that form part of our Top

Picks research basket

This account comes with the following features:

Facility to integrate choice of 7 Banks / DP / Trading Account Instant credit for shares sold from DP Automatic pick-up of shares from linked DP for Pay-in Automatic deposit of shares into linked DP after payout


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4 to 6 Times leverage on Margin Trades Margin Trading available for entire market session Slab wise brokerage structure for delivery and margin trades, shortly Free Calls for order placement on Toll-Free Trusted, professional advice of Tele-brokers Facility to enter After Market orders online & via phone Daily Research newsletter (Investor Eye) via e-mail Access to new IPO without any paperwork Advanced portfolio monitoring Tools Integrated DP account with trading account Choice of linking 4 banks to trading accounts for online payments Cash and Derivatives trading in a single account E-mail confirmations for all transactions

2.1.10.2- TRADE TIGER ACCOUNT:

This is an internet-based software application, which enables one to buy and sell in an instant.

It is ideal for active traders and jobbers who transact frequently during days session to

capitalize on intra-day price movement. With Sharekhan trade tiger you can trade in stocks,

derivatives and commodities.

What do you get with Trade Tiger:-

Live Streaming Quotes: - Stock Quote changes as they change in the exchange. Youdont miss even a second.

Access all Trading Calls: - Get trading calls from Share khans Technical Desk,fundamental research and day calls.

Advanced Charting features: - its help in see information as you would like to see it,as it is all about spotting opportunities.

Customized Technical Rules: - Create your own chart based or mathematical model basedtrading rules.Trade in BSE & NSE: - Through this we can Buy in NSE, spot an opportunity in BSE & sellwithin seconds.

Pattern Finder: - Through the Trade Tiger software, we can get automatic alerts with technicalevents based on chart patterns.

This account comes with the following features:

a. A single platform for multiple exchange BSE & NSE (Cash & F&O), MCX,NCDEX, Mutual Funds, IPOs

b. Instant order Execution and Confirmation.


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c. Real-time streaming quotes using 2 Market Watchesd. Instant order / trade confirmations in the same windowe. Hot keys similar to a Brokers Terminalf. Multiple Tic-by-Tic Intra-day charts with multiple indicatorsg. Customized alerts based on Multiple Parametersh. Window for Top Gainers, Top Losers, and Most Active updated Live.i. Graph Studies include Average, Band-Bollinger, MACD etc.j. Apply studies such as Vertical, Horizontal, Trend, Retracement & Free lines.k. User can save his own defined screen as well as graph template, which is,

saving the layout for future use.

l. User-defined alert settings on an input Stock Price trigger.m. Tools available to gauge market such as Tick Query, Ticker, Market

Summary, Action Watch, and Option.

n. Premium Calculator, Span Calculator.o.

Shortcut key for FAST access to order placements & reports.

p. Online fund transfer activated with 12 Banks2.1.10.3- DIALNTRADE:-

The Dial N Trade department handles all phone trade transactions and is open to all Sharekhan

clients. This is a wonderful solution for all those clients who are on the move or are not able to

access the internet for any reason whatsoever.

The Sharekhan Advise line Service is a unique subscription based service where you would

receive all Sharekhan Research no matter where you are. You would receive recorded messages,

SMS and Yahoo messages of Sharekhan Research. The service currently offers three customizedproducts, viz. Smart Trades Product, Fundamental Research Basket Product and Stock Ideas

Product.

You can call us on 1800-22-7050/24989191/ (your local STD code)-30307600.

This is the place to call if you want unadulterated, pure Sharekhan Research.

Features of Dial-N-Trade:-

That enable to trade effortlessly

Two dedicated numbers for placing your orders with your cell phone or landline. Tollfree number: 1-800-22-7050. For people with difficulty in accessing the toll-freenumber, we also have a reliance number 30307600, which is charged at Rs. 1.50 perminute for STD calls.

Automatic funds transfer with phone banking (for Citibank and HDFC bank customers) Simple and secure interactive voice response based system for authentication No waiting time. Enter your pin to be transferred to our tele brokers


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You also get the trusted, professional advice of our tele brokers After hours order placement facility between 8.00 am and 9.30 am (timings to be

extended soon)

2.1.11- CHARGE STRUCTURE:

2.1.11.1- Fee structure for General Individual:

Charges Classic Account Trade Tiger Account

Account Opening Nil Nil

Brokerage Intra day 0.03%

Delivery0.30%

Intra day 0.03%

Delivery0.30%

2.1.11.2- BROKARAGE:

It is the charge taken by the guiding company for helping you in buying and selling yourshares. There are different charges for Intraday and Delivery.

2.1.11.3- INTRADAY:

The day to day buying and selling or daily transactions are called as Intraday. You have to

buy or sell the shares within the day only.

2.1.11.4- DELIVERY:

It is the three day transaction. The day you buy the share and the next two days after that

day are called as Delivery. It includes three days. If you are buying any share then you

have to sell it within three days including the buying day.

T+2 = Today + 2 days

2.1.11.5- DEPOSITORY CHARGES:-

Account Opening Charges Nil

Annual Maintenance Charges 1st Year Nil

2nd Year 415/-

2.1.12- PREPAIDACCOUNT:

There are three types of prepaid account are provided to the customers accordingly they

make transactions more and more. All Prepaid accounts are valid for One year only.


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2.1.12.1- SCHEME OF PREPAID BROKERAGE:

Prepaid Brokerage Cash Futures and Options

Futures Options

2000/- Intra-day 0.07%

(Single Side)

Delivery0.40%

0.07 2% or Rs.90,

whichever is

higher

6000/- Intra-day 0.05%

Delivery0.25%

0.05 1.5% or Rs.75,

whichever is

higher

18000/- Intra-day 0.04%

Delivery0.20%

0.04 1% or Rs.50,

whichever is

higher

2.1.12.2- EXPOSURE:

Share khan also helps their customers by providing them a four time Exposure. Example: -

If a customer invests Rs. 20000, then he will get a exposure of 4 times of Rs. 20000 that

means Rs. 20000 * 4 = Rs. 100000. But only for Five days, within 5 days the customer have to

pay back the amount otherwise they will sell your shares. But yes, they will sell the loss

making shares first. If you make any frod, then also you may face the same problem. But

Exposure always helps the customer to invest more and more in profit making scripts. It is

like an Overdraft which you have to return within 5 days.

2.2- EQUITY ANALYSIS & PORTFOLIO MANAGEMENT SERVICES:-

2.2.1 - EQUITY ANALYSIS:-

Share khan Equity Analysis helps satisfy that need by rating stocks based on carefully selected,

fact-based measures. And because we're not focused on investment banking, we don't have thesame conflicts of interest as traditional brokerage firms. This objectivity is only one importantdifference in our ratings.TYPES OF CATEGORIES: - There are different types of categories, those are followings:-

EVERGREEN: - These stocks are steady compound, churning out steady growth rates year onyear. They are typically significant players in their markets, with sound strategies that will helpthem achieve and sustain market dominance in the long run. They have strong brands,


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management credentials and a consistent track record of achieving super normal shareholderreturns. We expect stocks in this category to compound at between 18-20% per annum for thenext five to ten years.

APPLE GREEN: - These are stocks that have the potential to be steady compound and are

attempting to move upwards, to turn Evergreen. They rank a shade below the Evergreencompanies, only because their potential in the five to ten years' time is still not very clear,although they might grow at rates faster than that of the Evergreen stocks in the next year or two.They could grow at 25-30% per annum over the next two to three years.

EMERGING STAR: - These are typically young companies, often in niche businesses, thathave the potential to grow and dominant their niches. Even better, they might turn out to be realgiants, if their niches explode into full blown markets in their own rights. These stocks arepotential ten-baggers but you need to be patient.

UGLY DUCKLING:- These are companies that are trading below their fair value or at values

which are at a significant discount to that of their peer group, due to a combination ofcircumstances. But things are now starting to happen in these companies or in their markets thatare likely to cause a re- evaluation of their prospects. These stocks could double in two to threeyears' time.

VULTURES PICK: - These are companies with valuable assets or brands that have beentrashed to ridiculously low prices. Buy a Vulture's Pick and wait for a predator who finds itsassets undervalued to come along. This could be a long wait but the returns could be startlinglyhigh.

CANNONBALL: - These are companies with valuable assets or brands that have been trashedto ridiculously low prices. Buy a Vulture's Pick and wait for a predator who finds its assetsundervalued to come along. This could be a long wait but the returns could be startlingly high.

2.2.2- PORTFOLIO MANAGEMENT:

Stock exchange operations are peculiar in nature and most of the Investors feel insecure in

managing their investment on the stock market because it is difficult for an individual to identify

companies which have growth prospects for investment. Further due to volatile nature of the

markets, its require constant reshuffling of portfolios to capitalized on the growth opportunities.

Even after identifying the growth oriented companies and their securities, the trading practices

are also complicated, making it a difficult task for investors to trade in all the exchange andfollow up on post trading formalities. That is why professional investment advice through

portfolio management service can help the investors to make an intelligent and informed choice

between alternative investments opportunities without the worry of losing their invested money.

Hence this is very much important to the stock dealers especially who are new to the market.


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Literature supports the efficient markets paradigm- On a well-developed securities exchange,

asset prices accurately reflect the trade off between relative risk and potential returns of a

security

2.2.2.1- MEANING OF PORTFOLIO MANAGEMENT:-

Portfolio management in common parlance refers to the selection of securities and their

continuous shifting in the portfolio to optimize returns to suit the objectives of an investor. In

India, as well as in a number of western countries, portfolio management service has assumed

the role of a specialized service now a days and a number of professional merchant bankers

compete aggressively to provide the best to high net worth clients, who have little time to

manage their investments. The idea is catching on with the boom in the capital market and an

increasing number of people are inclined to make profits out of their hard-earned savings.

Portfolio management service is one of the merchant banking activities recognized by Securities

and Exchange Board of India (SEBI). The service can be rendered either by merchant bankers orportfolio managers or discretionary portfolio manager as define in clause (e) and (f) of Rule 2 of

Securities and Exchange Board of India(Portfolio Managers)Rules, 1993 and their functioning

are guided by the SEBI.

2.2.2.3. BASIC PRINCIPLES OF PORTFOLIO MANAGEMENT:-

There are two basic principles for effective portfolio management which are given below

A. Effective investment planning for the investment in securities by considering the following

factors-

a) Fiscal financial and monetary policies of the Govt. of India and theReserve Bank of India.

b) Industrial and economic environment and its impact on industryProspect in terms of prospective technological changes, competition in the market,

capacity utilization with industry and demand prospects etc.

B. Constant review of investment: It does require to review the investment in securities and to

continue the selling and purchasing of investment in more profitable manner. For this purpose

they have to carry the following analysis:

a) To assess the quality of the management of the companies in which investment has beenmade or proposed to be made.

b) To assess the financial and trend analysis of companies balance sheet and profit & lossAccounts to identify the optimum capital structure and better performance for the purpose

of withholding the investment from poor companies.

c) To analysis the security market and its trend in continuous basis to arrive at a conclusionas to whether the securities already in possession should be disinvested and new


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securities are purchased. If so the timing for investment or dis-investment is also

revealed.

2.2.2.4- ACTIVITIES IN PORTFOLIO MANAGEMENT:-

2.2.2.4.1- There are three major activities involved in an efficient portfolio management whichare as follows:-

a) Identification of assets or securities, allocation of investment and also identifying theclasses of assets for the purpose of investment.

b) They have to decide the major weights, proportion of different assets in the portfolioby taking in to consideration the related risk factors.

c) Finally they select the security within the asset classes as identify.The above activities are directed to achieve the sole purpose to maximize return and

minimize risk in the investment even if there are unlimited risks in the market.

Let us have a look on the composite risk involve in the market during operation:-

I. Interest Rate Risk: This arises due to variability in the interest rates from time to time. A

changes in the interest rates establishes an inverse relationship in the price of the security i.e.

price of securities trends to move inversely with change in rate of interest. Long term

securities shows greater variability in compare to short term securities by this risk.

II. Purchasing Power Risk: It is also known as inflation risk and the inflation affect the

purchasing power adversely. Inflation rates vary over time and changes unexpectedly causing

erosion in the value of real return and expected return. Thus purchasing power risk is more in

inflationary conditions especially in respect of bond and fixed income securities. It is not

desirable to invest in such securities during inflationary situations. Purchasing power risk is

however less in flexible income securities like equity shares or common stock where rise in

dividend income off-sets increase in the rate of inflation and provides advantage of capital

gain.

III. Business risk: Business risk arises from sale and purchase of securities affected by

business cycles, technological changes etc. Business cycles affect all types of securities viz.

there is cheerful movement in boom due to bullish trend in stock price where as bearish trend

in depression brings down fall in the prices of all types of securities. Therefore securities

bearing flexible income affected more than the fixed rated securities during depression due to

decline in their market price.

IV. Financial Risk: This arises due to changes in the capital structure of the company. It is

also known as leveraged risk and expressed in the terms of debt-equity ratio. Excess of debt

over equity in the capital structure of a company indicates that the company is highly geared

even if the per capital earnings (EPS) of such company may be more. Because of the highly


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dependence on borrowings exposes to the risk of winding up for its inability to honour its

commitments towards lenders and creditors. So the investors should be aware of this risk and

portfolio manager should also be very careful.

By taking in to accounts of all the above factors, investment decisions in portfolio management

are taken as followings:

2.2.2.4.2- INVESTMENT DECISION:

By a certain sum of funds, the investment decisions are basically depends upon the following

factors:-

I. Objectives of investment portfolio: This is a crucial point which a Finance Manager must

consider. There can be many objectives of making an investment. The manager of a provident

fund portfolio has to look for security and may be satisfied with none too high a return, where as

an aggressive investment company is willing to take high risk in order to have high capital

appreciation.

How the objectives can affect in investment decision can be seen from the fact that the Unit

Trust of India has two major schemes: Its capital units a re meant for those who wish to have a

good capital appreciation and a moderate return, where as the ordinary unit are meant to provide

a steady return only. The investment manager under both the scheme will invest the money of

the Trust in different kinds of shares and securities. So it is obvious that the objectives must be

clearly defined before an investment decision is taken.

II. Selection of investment: Having defined the objectives of the investment, the next decision

is to decide the kind of investment to be selected. The decision what to buy has to be seen in thecontext of the following:-

a) There is a wide variety of investments available in market i.e. Equity shares,preference share, debentures, convertible bond, Govt. securities and bond, capital

units etc. Out of these what types of securities to be purchased.

b) What should be the proportion of investment in fixed interest dividend securitiesand variable dividend bearing securities? The fixed one ensures a definite return

and thus a lower risk but the return is usually not as higher as that from the

variable dividend bearing shares.

c) If the investment is decided in shares or debentures, then the industries showed apotential in growth should be taken in first line. Industry-wise-analysis is

important since various industries are not at the same level from the investment

point of view. It is important to recognize that at a particular point of time, a

particular industry may have a better growth potential than other industries. For

example, there was a time when jute industry was in great favour because of its


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growth potential and high profitability, the industry is no longer at this point of

time as a growth oriented industry.

d) Once industries with high growth potential have been identified, the next step is toselect the particular companies, in whose shares or securities investments are to

be made.

2.2.2.4.3- To identify the industries, which have a high growth potential the following

techniques/approaches may be taken in to consideration:-

a) Statistical analysis of past performance:A statistical analysis of the immediate past performance of the share price indices of various

industries and changes there in related to the general price index of shares of all industries

should be made. The Reserve Bank of India index numbers of security prices published every

month in its bulletin may be taken to represent the behaviour of share prices of various

industries in the last few years. The related changes in the price index of each industry ascompare with the changes in the average price index of the shares of all industries would

show those industries which are having a higher growth potential in the past few years. It

may be noted that a Industry may not remaining a growth Industry for all the time. So we

have to make an assessment of the various Industries keeping in view the present potentiality

also to finalize the list of Industries in which we will try to spread our investment.

b) Assessing the intrinsic value of an Industry/Company:-After identifying the Industry, we have to assess the various factors which influence the

value of a particular share. Those factors generally relate to the strengths and weaknesses of

the company under consideration, Characteristics of the industry within which the company

fails and the national and international economic scene. The major objective of the analysis is

to determine the relative quality and the quantity of the security. It is also to be seen that the

security is good at current market prices. This approach is known as intrinsic value approach.

Industry analysis can help to assess the nature of demand of a particular product, Cost

structure of the industry and other economic and Govt. constraints on the same. An appraisal

of the particular industries prospect is essential and the basic profitability of any company is

depends upon the economic prospect of the industry to which it belongs. The following

factors are important in this regards:-

a. Demand and Supply pattern for the industries products and its growth potential:The management expert identify fives stages in the life of an industry. These are

Introduction, development, rapid growth, maturity and decline. If an industry has

already reached the maturity or decline stage, its future demand potential is not likely to

be high.


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b. Profitability: It is a vital consideration for the investors as profit is the measures ofperformance and a source of earning for him. So the cost structure of the industry as

related to its sale price is an important consideration. The other point to be considered is

the ratio analysis, especially return on investment, gross profit and net profit ratio of the

existing companies in the industry.

c. Particular characteristics of the industry: Each industry has its own characteristics,which must be studied in depth in order to understand their impact on the working of the

industry. Because the industry having a fast changing technology become obsolete at a

faster rate. Similarly, many industries are characterized by high rate of profits and losses

in alternate years. Such fluctuations in earnings must be carefully examined.

d. Labour management relations in the industry: The state of labour-managementrelationship in the particular industry also has a great deal of influence on the future

profitability of the industry. So it is vital to see that the industry under analysis has been

maintaining a cordial relationship between labour and management.

e.

Company Analysis: To select a company for investment a number of qualitative factorshave to be seen to visualize the performance of the company in future by analyzing its

past performance such as :-

1. Size and ranking: In this regard the net capital employed, the net profits, the return on

investment and the sales volume of the company under consideration may be compared with

similar data of other company in the same industry group to assess the risk associated with

the company.

2. Growth record: Three growth indicators may be looked in to i.e. Price earnings ratio,

Percentage growth rate of earnings per annum and Percentage growth rate of net block of the

company in the past few years should be examined.

3. Financial analysis: By the help of financial analysis we can understand the financial

solvency and liquidity, the efficiency, the profitability and the financial and operating

leverage of the company in which the fund are used.

4. Pattern of existing stock holding: This analysis would show the stake of various parties

associate with the company. An interesting case in this regard is that of the Punjab National

Bank in which the L.I.C. and other financial institutions had substantial holdings. When the

bank was nationalized, the residual company proposed a scheme whereby those shareholders,

who wish to opt out, could receive a certain amount as compensation in cash. It was only atthe instant and bargaining strength of institutional investors that the compensation offered to

the shareholders, who wish to opt out of the company, was raised considerably.

5. Marketability of the shares: Mere listing of a share on the stock exchange does not

automatically mean that the share can be sold and purchase. There may be inactive shares


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with no transaction for long period. So we have to examine the speculative interest of such

scrip, extent of public holding and the particular stock exchange where it is traded.

Fundamental analysis thus is basically an examination of the economics and financial

aspects of a company with the aim of estimating future earnings and dividend prospect. So

after having analysed of all the relevant information we have to decide whether we shouldbuy or sell the securities.

2.2.2.4.4- TIMING OF PURCHASE:-

The timing of dealings in the securities, specially shares is of crucial importance, because

after correctly identifying the companies one may lose money if the timing is bad due to wide

fluctuation in the price of shares of that companies.

The decision regarding timing of purchases is particularly difficult because of certain

psychological factors. It is obvious that if a person wishes to make any gains, he should buy

cheap and sell dear, i.e. buy when the share are selling at a low price and sell when they are

at a higher price. But in practical it is a difficult task. When the prices are rising in the market

i.e. there is bull phase, everybody joins in buying without any delay because every day the

prices touch a new high. Later when the bear face starts, prices tumble down every day and

everybody starts counting the losses. The ordinary investor regretted such situation by

thinking why he did not sell his shares in previous day and ultimately sell at a lower price.

This kind of investment decision is entirely devoid of any sense of timing.

There are various theories and techniques to deal with the portfolio management, some of

their concept are discussed shortly hereunder:-

a) DOW JONES THEORY:- According to this theory of Charles H. Dow, purchase shouldbe made when bull trend started i.e. when price of the share are on the rise and sells them

when they are on the fall i.e. at the time when bearish trend started.

b) RANDOM WALK THEORY:- Basically stock prices can never be predicted becausethey are not a result of any underlying factors but are mere statistical ups and downs. This

hypothesis is known as Random walk hypothesis. In the Laymans language it may be

said that prices on the stock exchange behave exactly the way a drunk would behave

while walking in a blind lane, i.e. up and down, with an unsteady way going in any

direction he likes, bending on the side once and on the other side the second time.

c) CAPITAL ASSETS PRICING MODEL (CAPM):- CAPM provides a conceptualframework for evaluating any investment decision. It is used to estimate the expected

return of any portfolio with the following formula:-

E (Rp) = Rf+Bp(E(Rm)-Rf)

Where,


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E(Rp) = Expected return of the portfolio

Rf = Risk free rate of return

Bp = Beta portfolio i.e. market sensitivity index

E(Rm) = Expected return on market portfolio

(E(Rm)-Rf)= Market risk premium

The above model of portfolio management can be used effectively to:-

Estimate the required rate of return to investors on companys common stock. Evaluate risky investment projects involving real Assets. Explain why the use of borrowed fund increases the risk and increases the rate of

return.

Reduce the risk of the firm by diversifying its project portfolio.

d) MOVING AVERAGE:- It refers to the mean of the closing price which changesconstantly and moves ahead in time, there by encompasses the most recent days and

deletes the old one.

2.2.2.5- CONCLUSION:-

From the above discussion it is clear that equity markets & portfolio management

functioning is based on market risk, so one can get the help from the professional equity

researcher or advisor and portfolio manager or the Merchant banker if required before

investment. Because of the applicability of practical knowledge through technical analysis

can help an investor to reduce risk. In other words Security prices are determined by money

manager and home managers, students and strikers, doctors and dog catchers, lawyers and

landscapers, the wealthy and the wanting. This breadth of market participants guarantees an

element of unpredictability and excitement. If we were all totally logical and could separate

our emotions from our investment decisions then, the determination of price based on future

earnings would work magnificently. And since we would all have the same completely

logical expectations, price would only change when quarterly reports or relevant news was

released.

chap-2 anant gupta

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