UNIT-I

INTRODUCTION TO INVESTMENT

Investing in various types of assets is an interesting activity that attracts people

from all walks of life irrespective of their occupation, economic status, education
and family background. When a person has more money than he requires for
current consumption, he would be coined as a potential investor. The investor who
is having extra cash could invest it in securities or in any other assets like gold or
real estate or could simply deposit it in his bank account. The companies that have
extra income may like to invest their money in the extension of the existing firm
or undertake new venture. All of these activities in a broader sense mean
investment.
CONCEPT OF INVESTMENT
Investment is the employment of funds on assets with the aim of earning income
or capital appreciation. Investment has two attributes namely time and risk.
Present consumption is sacrificed to get a return in the future. The sacrifice that
has to be borne is certain but the return in the future may be uncertain. This
attribute of investment indicates the risk factor. The risk is undertaken with a view
to reap some return from the investment. For a layman, investment means some
monetary commitment. A person’s commitment to buy a flat or a house for his
personal use may be an investment from his point of view. This cannot be
considered as an actual investment as it involves sacrifice but does not yield any
financial return.
To the economist, investment is the net addition made to the nation’s capital stock
that consists of goods and services that are used in the production process. A net
addition to the capital stock means an increase in the buildings, equipments or
inventories. These capital stocks are used to produce other goods and services.
Financial investment is the allocation of money to assets that are expected to yield
some gain over a period of time. It is an exchange of financial claims such as
stocks and bonds for money. They are expected to yield returns and experience
capital growth over the years.
The financial and economic meanings are related to each other because the
savings of the individual flow into the capital market as financial investments, to
be used in economic investment. Even though they are related to each other, we
are concerned only about the financial investment made on securities.

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Investment management / Portfolio management: Diversification of
investment in order to get maximum return with minimum risk.
CHARACTERISTICS OF INVESTMENT
The main investment objectives are increasing the rate of return and reducing
the risk. Other objectives like safety, liquidity and hedge against inflation can be
considered as subsidiary objectives.
Return: Investors always expect a good rate of return from their investments.
Rate of return could be defined as the total income the investor receives during
the holding period stated as a percentage of the purchasing price at the beginning
of the holding period.
Return = (Ending value –beginning value) + Dividend x 100
Beginning value

Rate of return is stated semi-annually or annually to help comparison among the

different investment alternatives.
Risk: Risk of holding securities is related with the probability of actual return
becoming less than the expected return. The word risk is synonymous with the
phrase variability of return. Investments’ risk is just as important as measuring
its expected rate of return because minimizing risk and maximizing the rate of
return are interrelated objectives in the investment management. An investment
whose rate of return varies widely from period to period is risky than whose return
that does not change much. Every investor likes to reduce the risk of his
investment by proper combination of different securities.
Liquidity: Marketability of the investment provides liquidity to the investment.
The liquidity depends upon the marketing and trading facility. If a portion of the
investment could be converted into cash without much loss of time, it would help
the investor meet the emergencies. Stocks are liquid only if they command good
market by providing adequate return through dividends and capital appreciation.
Hedge against inflation: Since there is inflation in almost all the economy, the
rate of return should ensure a cover against the inflation. The return rate should
be higher than the rate of inflation; otherwise the investor will have loss in real
terms. Growth stocks would appreciate in their values overtime and provide a
protection against inflation. The return thus earned should assure the safety of
the principal amount, regular flow of income and be a hedge against inflation.
Safety & Security: The selected investment avenue should be under the legal
and regulatory frame work. If it is not under the legal frame work, it is difficult to

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represent the grievances, if any. Approval of the law itself adds a flavour of safety.
Even though approved by law, the safety of the principal differs from one mode of
investment to another. Investments done with the government assure more safety
than with the private party. From the safety point of view investments can be
ranked as follows: bank deposits, government bonds, UTI units, non-convertible
debentures, convertible debentures, equity shares, and deposits with the non-
banking financial companies.
OBJECTIVES OF INVESTMENT:
1. Return maximization
2. Risk minimization
3. Maintaining liquidity
4. Ensuring safety and security
5. Availing tax benefits
6. Hedge against inflation

CLASSIFICATION OF INVESTMENT
Various types of securities are traded in the market. Broadly securities represent
evidence to property right. Security provides a claim on an asset and any future
cash flows the asset may generate. Commonly we think of securities as shares
and bonds. According to the Securities Contracts Regulation Act 1956, securities
include shares, scrips, stocks, bonds, debentures or other marketable like
securities of any incorporated company or other body corporate, or government.
Securities are classified on the basis of return and the source of issue. On the
basis of income they may be classified as fixed or variable income securities. In
the case of fixed income security, the income is fixed at the time of issue itself.
Bonds, debentures and preference shares fall into this category. Sources of issue
may be government, semi government and corporate. The incomes of the variable
securities vary from year to year. Dividends of the equity shares of companies’
can be cited as an example for this. Corporate generally raises funds through fixed
and variable income securities like equity shares, preference shares and
debentures.
EQUITY SHARES
Equity shares are commonly referred to common stock or ordinary shares. Even
though the words shares and stocks are interchangeably used, there is a difference
between them. Share capital of a company is divided into a number of small units
of equal value called shares. The term stock is the aggregate of a member’s fully

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paid up shares of equal value merged into one fund. It is a set of shares put
together in a bundle. The “stock” is expressed in terms of money and not as many
shares. Stock can be divided into fractions of any amount and such fractions may
be transferred like shares.
Equity shares have the following rights according to section 85 (2) of the
Companies Act 1956.
1. Right to vote at the general body meetings of the company.
2. Right to control the management of the company.
3. Right to share in the profits in the form of dividends and bonus shares.
4. Right to claim on the residual after repayment of all the claims in the case of
winding up of the company.
5. Right of pre-emption in the matter of issue of new capital.
6. Right to apply to court if there is any discrepancy in the rights set aside.
7. Right to receive a copy of the statutory report, copies of annual accounts
along with audited report.
8. Right to apply the central government to call an annual meeting when a
company fails to call such a meeting.
9. Right to apply the Company Law Board for calling an extraordinary general
meeting.
SWEAT EQUITY
Sweat equity is a new equity instrument introduced in the Companies
(Amendment) Ordinance, 1998. Newly inserted Section 79A of the Companies Act,
1956 allows issue of sweat equity. However, it should be issued out of a class of
equity shares already issued by the company. It cannot form a new class of equity
shares. Section 79A (2) explains that all limitations, restrictions and provisions
applicable to equity shares are applicable to sweat equity. Thus, sweat equity
forms a part of equity share capital.
The definition of sweat equity has two different dimensions:
• Shares issued at a discount to employees and directors.
• Shares issued for consideration other than cash for providing know-how or
making available rights in the nature of intellectual property rights or value
additions, by whatever name called.
NON-VOTING SHARES
Non-voting shares carry no voting rights. They carry additional dividends instead
of the voting rights. Even though the idea was widely discussed in 1987, it was

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only in the year 1994 that the Finance Ministry announced certain broad guidelines
for the issue of non-voting shares.
They have right to participate in the bonus issue. The non-voting shares also can
be listed and traded in the stock exchanges. If non-voting shares are not paid
dividend for two years, the shares would automatically get voting rights. The
company can issue this to a maximum of 25 per cent of the voting stock. The
dividend on non-voting shares would have to be 20 percent higher than the
dividend on the voting shares. All rights and bonus share for the non-voting shares
have to be issued in the form of non-voting shares only.
RIGHT SHARES
Shares offered to the existing shareholders at a price by the company are called
right shares. They are offered to the shareholders as a matter of legal right. If a
public company wants to increase its subscribed capital by way of issuing shares
after two years from its formation date or one year from the date of first allotment,
whichever is earlier, such shares should be offered first to the existing
shareholders in proportion to the capital paid up on the shares held by them at
the date of such offer. This pre-emptive right can be forfeited by the shareholders
through a special resolution. The shareholder can renounce the right shares in
favour of his nominee. He may renounce all or part of the shares offered to him.
The right shares may be partly paid. Minimum subscription limit is prescribed for
right issues. In the event of company failing to receive 90% subscription, the
company shall have to return the entire money received. At present, SEBI has
removed this limit. Right issues are regulated under the provisions of the
Companies Act and SEBI.
BONUS SHARES
Bonus share is the distribution of shares in addition to the cash dividends to the
existing shareholders. Bonus shares are issued to the existing shareholders
without any payment of cash. The aim of bonus share is to capitalize the free
reserves. The bonus issue is made out of free reserves built out of genuine profit
or share premium collected in cash only. The bonus issue could be made only
when all the partly paid shares, if any, existing are made fully paid up.
The declaration of the bonus issue used to have favourable impact on the
psychology of the shareholders. They take it as an indication of higher future
profits. Bonus shares are declared by the directors only when they expect a rise
in the profitability of the concern. The issue of bonus shares enables the

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shareholders to sell the shares and get capital gains while retaining their original
shares.
PREFERENCE STOCK
The characters of the preferred stock are hybrid in nature. Some of its features
resemble the bond and others the equity shares. Like the bonds, their claims on
the company’s income are limited and they receive fixed dividend. In the event of
liquidation of the company their claims on the assets of the firm are also fixed. At
the same time like the equity, it is a perpetual liability of the corporate. The
decision to pay dividend to the preferred stock is at the discretion of the Board of
Directors. In the case of bonds, payment of interest rate is mandatory.
The dividend received by the preferred stock is treated on par with the dividend
received from the equity share for the tax purposes. These shareholders do not
enjoy any of the voting powers except when any resolution affects their rights.
Cumulative preference shares: the cumulative total of all unpaid preferred
dividends must be paid before dividends are paid on the common equity. The
unpaid dividends are known as arrearages. The arrearages do not earn interest.
The non-payment of the dividend only continues to grow. The arrearages accrue
only for a limited number of years and not indefinitely. Generally three years of
arrears accrue and the accumulative feature ceases after three years. But the
dividends in arrears continue if there is no such provision in the Articles of
Association. In the case of liquidation, no arrears of dividends are payable unless
there is a provision for them in the Articles of Association.
Non-cumulative shares: As the name suggests, the dividend does not
accumulate. If there is no profit or inadequate profit in the company in a particular
year, the company does not pay it. In the winding up of a company if the
preference and equity shares are fully paid, they have no further rights to have
claims in the surplus. If there is a provision in the Articles of Association for such
claims, then they have the rights to claim.
Convertible preference shares: The convertibility feature makes the preference
share a more attractive investment security. The conversion feature is almost
identical with that of the bonds. These preference shares are convertible as equity
shares at the end of the specified period and are quasi-equity shares. This gives
the additional privilege of sharing the potential increase in the equity value, along
with the security and stability of income.
Redeemable preference shares: If there is a provision in the Articles of
Association, redeemable preference shares can be issued. But redemption of the

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shares can be done only when
a) The partly paid up shares are made fully paid up.
b) The fund for redemption is created from the profits, which would otherwise
be available for distribution of dividends or out of the proceeds of a fresh issue
of shares for the purpose.
c) If any premium has to be paid on redemption, it should be paid out of the
profits or out of the company’s share premium account.
d) When redemption is made out of profits, a sum equal to the nominal value of
the redeemed shares should be transferred to the capital redemption reserve
account.
Irredeemable preference shares: This type of shares is not redeemable
except on occasions like winding up of the business. In India, this type of shares
was permitted till 15th June1988. The introduction of section 80A in the
Companies Act 1956 put an end to it.
Cumulative Convertible Preference Shares (CCPS): The CCPS were
introduced by the government in 1984. This preference share gives a regular
return of 10% during the gestation period from three years to five years and then
converted into equity as per the agreement. According to the guidelines CCPS can
be issued for any of the following purposes (a) setting up of new projects (b)
expansion or diversification of existing projects (c) normal capital expenditure for
modernization and (d) working capital requirements. CCP failed to attract the
interest of the investors because the rate of interest is very low and the gain that
could be received from the conversion into equity also depends on the profitable
functioning of the equity.
DEBENTURE
According to Companies Act 1956 “Debenture includes debenture stock, bonds
and any other securities of company, whether constituting a charge on the assets
of the company or not”. Debentures are generally issued by the private sector
companies as a long-term promissory note for raising loan capital. The company
promises to pay interest and principal as stipulated. Bond is an alternative form
of debenture in India. Public sector companies and financial institutions issue
bonds.
Characteristic Features of Debentures:
It is given in the form of certificate of indebtedness by the company specifying
the date of redemption and interest rate.

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Interest: The rate of interest is fixed at the time of issue itself which is known as
contractual or coupon rate of interest. Interest is paid as a percentage of the par
value of the debenture and may be paid annually, semi -annually or quarterly. The
company has the legal binding to pay the interest rate.
Redemption: As stated earlier the redemption date would be specified in the
issue itself. The maturity period may range from 5 years to 10 years in India. They
may be redeemed in instalments. Redemption is done through a creation of
sinking fund by the company. A trustee in charge of the fund buys the debentures
either from the market or owners. Creation of the sinking fund eliminates the risk
of facing financial difficulty at the time of redemption because redemption requires
huge sum.
Buy back provisions help the company to redeem the debentures at a special price
before the maturity date. Usually the special price is higher than the par value of
the debenture.
Indenture: Indenture is a trust deed between the company issuing debenture
and the debenture trustee who represents the debenture holders. The trustee
takes the responsibility of protecting the interest of the debenture holders and
ensures that the company fulfills the contractual obligations. Financial institutions,
banks, insurance companies or firm attorneys act as trustees to the investors. In
the indenture the terms of the agreement, description of debentures, rights of the
debenture holders, and rights of the issuing company and the responsibilities of
the company are specified clearly.
Types of Debentures
Debentures are classified on the basis of the security and convertibility
1. Secured or unsecured
2. Fully convertible debenture
3. Partly convertible debenture
4. Non-convertible debenture
Secured or unsecured: A secured debenture is secured by a lien on the
company’s specific assets. In the case of default the trustee can take hold of the
specific asset on behalf of the debenture holders. In the Indian market secured
debentures have a charge on the present and future immovable assets of the
company.
When the debentures are not protected by any security they are known as
unsecured or naked debentures. In the American capital market debenture means
unsecured bonds while bonds could be secured or unsecured. Unsecured

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debentures find it difficult to attract investors because of the risk involved in them.
Generally debentures are rated by the credit rating agencies.
Fully convertible debenture: This type of debenture is converted into equity
shares of the company on the expiry of specific period. The conversion is carried
out according to the guidelines issued by SEBI. The FCD carries lower interest
rate than other types of debentures because of the attractive feature of
convertibility into equity shares.
Partly convertible debenture: This debenture consists of two parts namely
convertible and nonconvertible. The convertible portion can be converted into
shares after a specific period. Here, the investor has the advantage of
convertible and non-convertible debentures blended into one debenture. Ex.
Procter and Gamble had issued PCD of Rs.200 each to its existing shareholders.
The investor can get a share for Rs.65 with the face value of Rs.10 after 18
months from allotment.
Non-convertible debenture: Non-convertible debentures do not confer any
option on the holder to convert the debentures into equity shares and are
redeemed at the expiry of the specified period.
BOND
Bond is a long term debt instrument issued by government that promises to pay
a fixed annual sum as interest for specified period of time. The basic features of
the bonds are given below
1) Bonds have face value. The face value is called par value. The bonds may be
issued at par or at discount.
2) The interest rate is fixed. Sometimes it may be variable as in the case of
floating rate bond. Interest is paid semi-annually or annually. The interest
rate is known as coupon rate. The interest rate is specified in the certificate.
3)The maturity date of the bond is usually specified at the issue time except in
the case of perpetual bonds.
4) The redemption value is also stated in the bonds. The redemption value may
be at par value or at premium.
5) Bonds are traded in the stock market. When they are traded the market value
may be at par or at premium or at discount. The market value and redemption
value need not be the same.
Secured bonds and unsecured bond: The secured bond is secured by the real
assets of the issuer. In the case of the unsecured bond the name and fame of
issuer may be the only security.

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Perpetual bonds and redeemable bonds: Bonds that do not mature or never
mature are called perpetual bonds. The interest alone would be paid .In the
redeemable bond, the bond is redeemed after a specific period of time. The
redemption value is specified by the issuer.
Fixed interest rate bonds and floating interest rate bonds: In the fixed
interest rate bonds, the interest rate is fixed at the time of the issue. Whereas in
the floating interest rate bonds, the interest rates change according to the
prefixed norms. For example in Dec 1993 State Bank of India issued floating
interest rate bonds worth of Rs.500 Cr. pegging the interest rate with its own
three and five years fixed deposit rates to provide built in yield flexibility to the
investors.
Zero coupon bonds: These bonds sell at a discount and the face value is repaid
at maturity. The origin of this type of bond can be traced in the U.S. Security
Market. The high value of the U.S. Government security prevented the investors
from investing their money in the government security. Big brokerage companies
like Merril Lynch, Pierce and others purchased the government securities in large
quantum and resold them in smaller denomination - at a discounted rate. The
difference between the purchase cost and face value of the bond is the gain for
the investor. Since the investor does not receive any interest on the bond, the
conversion price is suitably arranged to protect the interest loss to the investor.
Deep discount bonds: Deep discount bond is another form of zero coupon bond.
The bonds are sold at large discount on their nominal value; interest is not paid
for them and they mature at par value. The difference between the maturity value,
and the issue price serves as an interest return. The deep discount bonds’ maturity
period may range from 3 years to 25 years or more. IDBI was the first to issue
deep discount bonds in India in 1992 with varying maturity period options. ICICI
also issued deep discount bonds with four optional maturity periods in 1997. Early
redemption option is provided at the end of the 6th, 12thand 18thyear.
Capital indexed bonds: In the capital indexed bond, the principal amount of the
bond is adjusted for inflation for every year. For example, an investment of
Rs.1000 in the inflation indexed bonds earn the investor a semi -annual interest
income for the five years’ period. The reselling of the principal amount is done
semi- annually based on the WPI movements. The principal amount of the bond
is adjusted for inflation for each of the years. On the inflation-adjusted principal,
the coupon rate of 6 per cent is worked.

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The benefit of the bond is that it gives the investor an increase in return by taking
inflation into account. The investor enjoys the benefit of a return on his principal,
which is equal to the average inflation between the issue (purchase) and maturity
period of the instrument. To avail the benefit of inflated principal, the investor
needs to hold the instrument for the entire 5 year period.
WARRANTS:
A warrant is a bearer document of title to buy specified number of equity shares
at a specified price. Usually warrants can be exercised over a number of years.
The life periods of warrants are long. Warrants are generally offered to make the
bond or preferred stock offering more attractive. Bonds may bear low interest rate
but the warrants offered along with them helps the investor to enjoy the equity
appreciation value. Warrants are detachable. The investor can sell the warrants
separately and they are traded in the market.
The person who is holding the warrant cannot enjoy the benefits of the equity
holder before the conversion of the warrant. The price at which the warrants are
converted is called exercise price. The exercise price is always greater than the
current market price of the respective equity at the time of issue of warrant. When
warrants are issued along with host securities and detachable, they are known as
detachable warrants. In some cases the warrants can be sold back to the company
before the expiry date, such type is known as puttable warrants. Naked warrants
are issued separately and not with any host securities. The investor has the option
to convert it into equity or bond.
Advantages of Warrants
1) Warrants make the non-convertible debentures and other debentures more
attractive and acceptable.
2)The debentures along with the warrants are able to create their own market
and reduce the company’s dependence on financial institutions and mutual
funds.
3) Since the exercise of the warrants takes place at a future date, the cash flow
and the capital structure of the company can be planned accordingly.
4) The cost of debt is reduced if warrants are attached to it. Investors are willing
to accept lower interest rate in the anticipation of enjoying the capital
appreciation of equity value at a later date.
5) Warrants provide high degree of leverage to the investor. He can sell the
warrant in the market or convert it into stocks or allow it to lapse. But if the
conversion is compulsory, even if there is a fall in the price of the shares, the

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investors have to shell out money from his pocket.
6) Warrants are liquid and they are traded in the stock exchanges. Hence, the
investor can sell the warrants before exercising them.
NON CORPORATE SECURITIES
i) Deposits in banks and non-ban banking companies
ii) Post office deposits and certificates
iii) Life insurance policies
iv) Provident fund schemes
v) Government and semi-government securities
vi) Mutual fund schemes
vii) Real estates
viii) Gold & silver

SPECULATION vs INVESTMENT
Speculation means taking up the business risk in the hope of getting short term
gain. Speculation essentially involves buying and selling activities with the
expectation of getting profit from the price fluctuations. This can be explained with
an example. If a spouse buys a stock for its dividend, she may be termed as an
investor. If she buys with the anticipation of price rise in the near future and the
hope of selling it at a gain price she would be termed as a speculator. The dividing
line between speculation and investment is very thin because people buy stocks
for dividends and capital appreciation.
The time factor involved in the speculation and investment is different. The
investor is interested in consistent good rate of return for a longer period. He is
primarily concerned with the direct benefits provided by the securities in the long
run. The speculator is interested in getting abnormal return i.e. extremely high
rate of return than the normal return in the short run. Speculator’s investments
are made for short term.
The speculator is more interested in the market action and its price movement.
The investor constantly evaluates the worth of security whereas the speculator
evaluates the price movement. He is not worried about the fundamental factors
like his counterpart, the investor.
The investor would try to match the risk and return. The speculator would like to
assume greater risk than the investors. Risk refers to the possibility of incurring
loss in a financial transaction. The negative short term fluctuations affect the

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speculators in a worse manner than the investors. The risk factor involved in the
investment is also limited.
After studying the factors related with the concerned company’s stock, the
investor buys it and hence the risk exposure is limited. The investor likes to invest
in securities where his principal would be safe.

GAMBLING vs INVESTMENT
A gamble is usually a very short term investment in a game or chance. Gambling
is different from speculation and investment. The time horizon involved in
gambling is shorter than speculation and investment. The results are determined
by the roll of dice or the turn of a card. Secondly, people gamble as a way to
entertain themselves, earning incomes would be the secondary factor. Thirdly, the
risk in gambling is different from the risk of the investment. Gambling employs
artificial risks whereas commercial risks are present in the investment activity.
There is no risk and return trade off in the gambling and the negative outcomes
are expected. But in the investment there is an analysis of risk and return. Positive
returns are expected by the investors. Finally, the financial analysis does not
reduce the risk proportion involved in the gambling.

THE INVESTMENT PROCESS

The investment process involves a series of activities leading to the purchase of
securities or other investment alternatives. The investment process can be
divided into five stages (i) framing of investment policy (ii) investment analysis
(iii) valuation (iv) portfolio construction (v) portfolio evaluation. The following
table explains the stages and factors connected thereof.
Portfolio
Investment Portfolio
Analysis Valuation Evaluation
Policy Construction

Investible Intrinsic
Market Diversification Appraisal
fund value

Objectives Future Selection &

Industry
value allocation Revision

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 Knowledge Company

INVESTMENT POLICY
The government or the investor before proceeding into investment formulates
the policy for the systematic functioning. The essential ingredients of the policy
are the investible funds, objectives and the knowledge about the investment
alternatives and market.
Investible funds: The entire investment procedure revolves around the
availability of investible funds. The fund may be generated through savings or
from borrowings. If the funds are borrowed, the investor has to be extra careful
in the selection of investment alternatives. The return should be higher than the
interest he pays. Mutual funds invest their owners’ money in securities.
Objectives: The objectives are framed on the premises of the required rate of
return, need for regularity of income, risk perception and the need for liquidity.
The risk taker’s objective is to earn high rate of return in the form of capital
appreciation, whereas the primary objective of the risk averse is the safety of the
principal.
Knowledge The knowledge about the investment alternatives and markets plays
a key role in the policy formulation. The investment alternatives range from
security to real estate. The risk and return associated with investment alternatives
differ from each other. Investment in equity is high yielding but has more risk
than the fixed income securities. The tax sheltered schemes offer tax benefits to
the investors.
The investor should be aware of the stock market structure and the functions of
the brokers. The mode of operation varies among BSE, NSE and OTCEI. Brokerage
charges are also different. The knowledge about the stock exchanges enables him
to trade the stock intelligently.
SECURITY ANANALYSIS
After formulating the investment policy, the securities to be bought have to be
scrutinized through the market, industry and company analysis.

Market analysis. The stock market mirrors the general economic scenario. The
growth in gross domestic product and inflation are reflected in the stock prices.
The recession in the economy results in a bear market. The stock prices may be
fluctuating in the short run but in the long run they move in trends i.e. either
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upwards or downwards. The investor can fix his entry and exit points through
technical analysis.
Industry analysis
The industries that contribute to the output of the major segments of the
economy vary in their growth rates and their overall contribution to economic
activity. Some industries grow faster than the GDP and are expected to continue
in their growth. For example the information technology industry has
experienced higher growth rate than the GDP in 1998. The economic significance
and the growth potential of the industry have to be analysed.
Company analysis
The purpose of company analysis is to help the investors to make better decisions.
The company’s earnings, profitability, operating efficiency, capital structure and
management have to be screened. These factors have direct bearing on the stock
prices and the return of the investors. Appreciation of the stock value is a function
of the performance of the company. Company with high product market share is
able to create wealth to the investors in the form of capital appreciation.

Valuation:
The valuation helps the investor to determine the return and risk expected from
an investment in the common stock. The intrinsic value of the share is measured
through the book value of the share and price earnings ratio. Simple discounting
models also can be adopted to value the shares. The stock market analysts have
developed many advanced models to value the shares. The real worth of the
share is compared with the market price and then the investment decisions are
made.
Future value of the securities could be estimated by using a simple statistical
technique like trend analysis. The analysis of the historical behaviour of the price
enables the investor to predict the future value.

Construction of portfolio:
A portfolio is a combination of securities. The portfolio is constructed in such a
manner to meet the investor’s goals and objectives. The investor should decide
how best to reach the goals with the securities available. The investor tries to
attain maximum return with minimum risk. Towards this end he diversifies his
portfolio and allocates funds among the securities.

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Diversification The main objective of diversification is the reduction of risk in the
loss of capital and income. A diversified portfolio is comparatively less risky than
holding a single portfolio. There are several ways to diversify the portfolio.
Debt and equity diversification Debt instruments provide assured return with
limited capital appreciation. Common stocks provide income and capital gain but
with the flavour of uncertainty. Both debt instruments and equity are combined to
complement each other.
Industry diversification: Industries’ growth and their reaction to government
policies differ from each other. Banking industry shares may provide regular
returns but with limited capital appreciation. The information technology stock
yields high return and capital appreciation but their growth potential after the year
2002 is not predictable. Thus, industry diversification is needed and it reduces
risk.
Company diversification: Securities from different companies are purchased to
reduce risk. Technical analysts suggest the investors to buy securities based on
the price movement. Fundamental analysts suggest the selection of financially
sound and investor friendly companies.
Selection Based on the diversification level, industry and company analyses the
securities have to be selected. Funds are allocated for the selected securities.
Selection of securities and the allocation of funds and seals the construction of
portfolio.
Evaluation:
The portfolio has to be managed efficiently. The efficient management calls for
evaluation of the portfolio. This process consists of portfolio appraisal and revision.
Appraisal:
The return and risk performance of the security vary from time to time. The
variability in returns of the securities is measured and compared. The
developments in the economy, industry and relevant companies from which the
stocks are bought have to be appraised. The appraisal warns the loss and steps
can be taken to avoid such losses.

Revision:
It depends on the results of the appraisal. The low yielding securities with high
risk are replaced with high yielding securities with low risk factor. To keep the

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return at a particular level necessitates the investor to revise the components of
the portfolio periodically.

INVESTMENT INFORMATION
In the investment process we have seen that the investor should have knowledge
about the investment alternatives and the markets. He has to analyze the
economy, industry and the company. For all these, he needs adequate flow of
information. The source of information varies with the type of information
required.
International affairs: With increasing globalization, international events affect
the economy of the nation. Nations are economically and politically linked with
each other. The economic crisis of one nation has a contagion effect on the other.
The depreciation of the peso value in Mexico affects the trade in Asia. The South-
East Asian crisis has affected Asia, United States and Europe. Indian capital market
reacted to the crisis and there was a fall in the Sensex for a brief period. The
policies of the IMF and the World Bank also affect the volume of loan for the
development purpose. Not only the economic events but political events and wars
also affect the stock market. U.S. air raids on Iraq affected the Indian economy
and the capital market. Almost all the daily news papers carry the international
news. Some foreign journals like London Economist, Far East Economic Review
and Indian magazines like Business World and Fortune India review the
international events. International financial institution like IMF, World Bank and
Asian Development Bank publish their own survey reports periodically.
National affairs. The growth of the national economy and political events within
the nation influence the investment decisions. The political events are provided by
the news papers, magazines like India Today, Out Look, Fortune India, The Week
etc. The economic events and their implication on the securities markets are
analyzed in Financial Express, Economic Times and Business Line. RBI Bulletin and
annual reports give a wide range of information regarding macro-economic
indicators like GDP, GNP, inflation, agricultural and industrial production, capital
market, development in the banking sectors and the balance of payment. Center
for Monitoring Indian Economy also publishes reports about the macro economic
factors. The Economic Survey of India and reports of companies also provide
information regarding the economy, industry and other sectors.
Industry information: Information about the industry is required to identify the
industries that perform better than the national economy as a whole. Financial

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news papers regularly bring out industrial studies for the benefit of the investors.
Experts’ opinions about the industries are available in Business India, Business
Today and Dalal Street. CMIE also publishes data regarding the industries.
Bombay Stock Exchange publishes the Directory of Information that contains
industry and company information.
Company information: A source of company information must be developed to
facilitate the company analysis. The BSE, NSE and OTCEI provide details about
the listed companies in the web sites. Almost all the financial journals carry out
the company analysis and even suggest enter, exit and stay hints for the particular
company stock. The Annual Reports of the companies and the un-audited
quarterly and half-yearly results also provide an insight into the performance of
the company. Software companies also sell details regarding the financial
performance of the companies in the floppies.
Stock Exchange Directory comes in eighteen volumes. It gives information about
all listed public companies and major public sector corporations. Kothari’s
Economic and Industry Guide of India gives relevant financial information about
the public limited companies. Times of India Directory gives detailed information
about many industrial groups and companies.
Stock market information: All the financial dailies and investment related
magazines publish the stock market news. Separate News Bulletins are issued by
BSE, NSE and OTCEI providing information regarding the changes that take place
in the stock market. SEBI news letter gives the changes in the rules and
regulations regarding the activities of the stock market. Reserve Bank of India
Bulletin also carries the information about the stock markets.

Investment environment:
The investment environment constitutes internal and external environment.
Internal environment:
a) Management
b) Board of directors
c) Company dividend policy
External environment
1. Political environment
2. Economic environment
3. Socio cultural environment
4. Technological environment

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