Investment management

UNIT I

The term investment management refers to commitment of existing fund in anticipation of earning profits
or capital gain in the assets.

It is an activity engaged by the people(called investor) who have surplus money after meeting all the
expenditure.

IMPORTANCE OF INVESTMENT MANAGEMNET.

Investments are important due to increase in life expectancy of a person, planning for retirement income,
high planning for additional income due to high rates of taxation and inflationary pressure in an economy,
the expectation of continuous stable income in the form of regular dividends, interests.

1. Longer Life Expectancy: Investment decisions have become significant because the life
expectancy of people have increased with good medical care. It is the fact that there is an
increasing number of women working in the organizations. Men and women are responsible for
planning their own investments during their working life so that after retirement they are able to
have a stable income through balanced investments.
2. Taxation: Taxation introduces an element of compulsion in a person’s savings. Every country has
different tax saving schemes for bringing down taxation levels of a person. Since investments
provide regular and stable income and also give relief in taxation, investors are interested to
make an useful investments by proper planning.
3. Interest Rates: Interest rates vary according to the choice of investment plan. Investors prefer safe
investments with a good return. A risk-less security will bring low rates of return. Government
securities are riskfree. However, market risk is high with high rates of return. Before allocations of
any amount, the different types of securities must be analyzed to calculate their benefits and their
disadvantages. Stability of interest is as important as receiving a high rate of interest.
4. Inflation: In a developing economy, there are rising prices and inflationary trends. A rise in prices
will lead to a fall in standard of living. Before funds are invested, the different securities must be
evaluated to find the right choice of investments to tide over inflationary situations.
5. Income: When there is an increase in the employment opportunity and income of the people will
lead the people to think about investment.
6. Adequate Legal safeguards: It encourages accumulation of savings and investments since the
people have the assurance of protection of the money.

Scope of investment management

The scope of investment management is: To understand the exact meaning of investment .
 To find out different avenues of investment .
To maximize return and minimize risk
To make a programme for investment through evaluating securities, constructing a portfolio and
reviewing a portfolio
To find out a time period for investments to take place & to evaluate through various techniques to get
the best return for the investor.
Objectives of investment management/ Factors of sound investment
Investment management involves analysis and selection of investment opportunities. An investor should
frame an overall financial plan stating how much total funds to be invested, how much to be invested in
real estate. Financial securities etc. There are several factors which the investor may look into the
investment.
Liquidity: It means that the investment is saleable or convertible into cash without delay. It is the
relationship between the time dimension and price dimension of sale of an investment. Liq uidity provides
a chance to exit from the investment and get back the money. Different types of investment assets have
different degree of liquidity. The instruments of money market are more liquid than the instruments of
capital market which in turn more liquid than the real estate assets.
Safety of Principal: The investor should take care that the investment amount is safe . The safety of
investment depends upon various factors such as economic conditions of a country, Earning capacity of
the company/organization, company where investment is made etc. Bonds issued by the government or
banks are more safe than the bonds issued by the private companies. Investment made in debentures are
more safe than the investment made in preference share which in turn more safe than the investment in
equity share.
Stability of Return: The primary objective of the investment is to earn a stable income. When an
investment provides a stable income is called a good investment. Otherwise it is known as Risky
investment. Return from Fixed Deposit, Saving a/c, bonds & Debentures are stable whereas return from
equity shares are not stable.
Capital Appreciation: Investment on land, buildings, equity shares provide capital appreciation. There are
some investments such as fixed deposits, bonds & debentures where both initial value and maturity value
are same. Investment which offers capital appreciation has equal chance of capital loss. In case of
debentures, capital loss may occur, if a company is wound up.
Tax aspects of investments: Investment decision also differ according to the treatment of initial
investment, return on investment, and redemption etc. Investment in Public Provident Fund has tax
benefit. Whereas investment in equity shares has tax exemption from dividend income but the purchase
or sale are subjected to capital gain.
Investment Horizon: It means the date of liquidation is planned. Investment decision are made in such a
way that the maturity period of investment is concides with the requirement of investment f und.
Gambling & Speculation
Gambling : Gambling is artificial and unnecessary risk created for increased expected returns. It connotes
high risk and the expectation of high returns. It consists of uncertainty and high stakes for thrill and
excitement.
Speculation: In speculation, there is an investment of funds with the expectation of return in the form of
capital profit resulting from change in price or sale of investment. It is a short term investment. The
degree of uncertainty is higher in case of speculation comparing to investment.
 Difference between Investment and Speculation
FACTOR INVESTMENT SPECULATION
1. Degree of Risk Relatively Lesser Relatively Higher
2. Basis of Return Earning Capacity of the company Change in the price
3. Basis of Decision Based on Fundamental analysis Based on Rumours, excitement
4. Duration of Investment Long term Short term
5. Purpose of Investment To earn a stable & regular income To earn capital gain
7. Type of Contract Creditors Ownership

Difference between Investment and Gambling

FACTOR INVESTMENT GAMBLING
1. Basis It is based on proper analysis It is based on unreliable sources
such as tips and rumours
2. Degree of Risk Relatively Lesser Relatively Higher
3. Amount of Return It provides an annual return It involves the expectation of
high return.
4. Nature of Activity Investment is a planned activity It is an unplanned activity
5. Duration of Investment Long term Short term
6. Type of analysis It is a scientific analysis It is a non-scientific analysis

UNIT II
FINANCIAL MARKET
The term financial market where financial securities and derivatives are traded. It may be classified into
Capital Market & Money Market.
FINANCIAL MARKET

Capital Market Money Market

(Capital Market is a market for long term (Money market is market for short term
Assets having maturity of more than 1 year) financial assets of maturity period of
less than one year)

Primary Market Secondary Market

( in Primary Market, Companies ( In Secondary Market, where previously
Issues Securities such as Shares, issued Securities are traded among
Debentures to the public for the investors.)
the First time.)
 PARTICIPANTS OF CAPITAL MARKET
1. Banks
2. Financial Institutions
3. Stock Exchange
4. Brokers
5. Merchant Banker
6. Mutual Fund
7. Custodians
8. Credit Rating Agencies

Banks : In capital market, banks take active part in trading securities and bond market. It also
invest in equity and mutual funds as a part of their fund management.

Financial Institutions. FIs provide and lend long term funds to the industry as well as agriculture. It raises funds
through long term bonds from financial system and borrowings from international financial institutions like
Internatinal Finance Corporation, International Bank for Reconstruction and Development etc.

Stock Exchange : Developing countries like India, Stock Exchange plays a crucial role in
promoting capital formation through effective mobilization of savings and investment
safety. It provides liquidity of investment to the investors by ensuring them to sell out any
of their investment securities at any time.
Brokers : Brokers those approved by the capital market regulators can operate in stock
exchange by intermediating between buyers and sellers of securities. They collect a fee
called brokerage for rendering their services.
Merchant Bankers: The first and for most activity of merchant bank is Underwriting. It will
assist to increase the supply of securities in the capital market. Portfolio service is the main
function of merchant banking. Underwriting the process in which the underwriter raises and
arrange to collect the funds from the investors on behalf of the companies either debt or
equity shares.
Mutual Fund: It is a corporation collects money from the investors which is invested in the
capital market to buy the shares, debentures and other securities. The profits earned by the
company will be shared to the investors called Unit Holders in proportion to their holding
number of units .
Custodians: Custodians are corporations who are allowed to hold and operate the securities
on behalf of the customers. Custodians are controlled and regulated by the capital market
regulator.
Credit Rating Agencies: It is a corporate body engaged in the business of rating of securities
offered by the companies. The rating are provided based on the Creditworthiness and
Credentials of the company which is decided by the borrowing and lending of the
transactions done in the past.
 INSTRUMENTS OF CAPITAL MARKET

Shares Debentures Bonds Derivatives Stocks

Equity Shares Preference Shares

Cumulative Preference Shares
Non-Cumulative Pref.Shares
Participating Preference Shares
Non-Participating Pref.Shares
Convertible Preference Shares
Non-Convertible Pref.Shares
Redeemable Preference Shares
Irredeemable Preference Shares

Registered Bearer Secured Unsecured Redeemable Irredeemable Convertible Non-

Debentures Debentures Debentures Debentures Debentures Debentures Debentures Convertible
Debentures

SHARES: The total value of the capital is divided into different units is called shares. Each and every share
has a definite value is called face value of the share. It may be Equity Shares and Preference Shares
Equity Share: It is also called ordinary shares. The equity shareholders will get dividend after the
dividend on preference shares has been paid. The financial risk is more in case of equity share,
hence it is also termed as Risk Capital. There is no question of refund of equity fund during the
lifetime of the company. So, it is the long term fund of the company. When a company has a large
amount of equity capital, the creditors also lend money easily to the company. It increases credit
worthiness of the company. Equity shareholders are the real owners of the company, Hence they
have voting right to choose the directors of the company.If an existing company issues additional
equity shares to the public, then the company should first offer to the current equity shareholders.
Preference Shares: Preference shares are those in which the holders have the preferential rights to get
the dividend during the life time of the company and also get back their share capital before
redeeming share capital to other shareholders during the winding-up of the company.

Cumulative Preference Shares: If the company has not paid dividend in any year due to inadequate
profit, such unpaid dividend is considered as arrear and it must be paid in the subsequent year.
Non-Cumulative Pref.Shares : The holders can’t claim arrears of dividend. The unpaid dividend
may not be carried forward to subsequent year.
Participating Preference Shares: The holders of this kind shares have the right to claim or
participate in the surplus profit after payment to other shareholders if remains and also during the
winding up of the company, they can participate in the surplus of the assets in addition to their
share capital.
Non-Participating Pref.Shares: The holders of this kind of shares have neither right to participate in
the surplus profit after paying dividend to other shareholders nor in the surplus assets during the
winding up of the company.
Convertible Preference Shares : These shareholders can convert the preference shares into equity
shares within a specific period time.
Non-Convertible Pref.Shares : These shareholders can not convert the preference shares into
equity shares .
Redeemable Preference Shares : According sec.80, the preference shares can be redeemed after a
specific period at the discretion of the company.
Irredeemable Preference Shares: These kinds of shares does not have maturity period to redeem
their share capital. These shareholders can’t get back their share capital during the life time of the
company.

DEBENTURES: It is a long term debt. It is an acknowledgment of debt issued by the company for a
certain amount of money and giving an undertake to repay after a specific period of time.
Debenture holders have the right to get interest annually from the company.
Registered Debentures : The Name of the Holders, Value, Type of debentures are recorded in the
register of debenture holders . The debentures will be redeemed only to these holders.
Bearer Debentures : The debentures will be redeemed to the bearer. The Name of the Holders,
Value, Type of debentures are Not recorded in the register of debenture holders .
Secured Debentures : When the debentures are secured fully or partly by a charge over the assets
of the company is secured debentures. If the company fails to pay either interest or principal
amount, the assets of the company can be sold for payment to investors.
Unsecured Debentures: When the debentures are Not secured fully or partly by a charge over the
assets of the company is called unsecured debentures.

Redeemable Debentures : When the debentures can be redeemed after a specific period at the
discretion of the company.
Irredeemable Debentures : When the debentures can not be redeemed after a specific period
during the life time of the company.
Convertible Debentures : These debenture holders can convert their debentures into either
preference shares or equity shares within a specific period time.
Non- Convertible Debentures : These debenture holders cannot convert their debentures into
either preference shares or equity shares within a specific period time.
BOND : A written and signed promise to pay a certain sum of money on a certain date, or on
fulfillment of a specified condition.
Derivatives : A derivative is a contract between two parties which derives its value/price from an
underlying asset. The most common types of derivatives are futures, options & forwards .
Stocks : A stock is a general term used to describe the ownership certificates of any company..
Stocks are of two types—common and preferred. The holder of Common Stocks has voting rights
that can be exercised in corporate decisions, the later doesn't. However, they are legally entitled
to receive a certain level of dividend payments before any dividends can be issued to others.
DIFFERENCE BETWEEN EQUITY AND PREFERENCE SHARES
BASIS EQUITY SHARES PREFERENCE SHARES
1. Term of Financing Used as long term financing Both long term & Medium
term financing
2. Nature of Return It fluctuates according to Rate of Return is fixed
 earning
3. Ownship They are real owners of the They are not owners of the
company & have voting right. company & No voting right.
4. Redeemability It can’t be redeemed during Can be redeemed after a
the life time of the company specific period of time.
5. Priority of Dividend Dividend will be paid after They have preferential rights.
payment to preference shares
6. Type of Investors Suitable for Adventures Suitable for less Adventures
7. Borrowing Capacity More borrowing capacity Less borrowing capacity
8. Capitalization High chance for over Low chance for over
capitalisation capitalisation

DIFFERENCE BETWEEN PREFERENCE SHARES AND DEBENTURES

BASIS PREFERENCE SHARES DEBENTURES
1. Meaning Capital Funds of the Company Borrowed Funds of the Co.
2. Nature These are Capital financing These are debt financing
instrument instrument.
3. Status of Holder Owners Creditors
4. Obligation to Company Dividends to be paid out Interest to be paid annually
profits earned by the company irrespective profits.
5. Tax Benefit It results in dividend expenses It results in interest expenses
which is not tax deductible which is a tax deductible
expenses. expenses to Company.
6. Dilution of Control Issue of Pref.Shares indirectly Issue of Debentures does not
dilute the existing dilute the existing
shareholders shareholders

UNIT III
MEANING & FUNCTIONS OF STOCK EXCHANGE
Stock exchange is an organized market for buying and selling corporate and
other securities. Here, securities are purchased and sold out as per the rules and
regulations. It provides a secured mechanism or platform for trading in different securities ..
Functions : Liquidity and Marketability: One of the main drawing factors of the stock exchange is
that it enables high liquidity. The securities can be sold at any time and be converted to cash. It is a
continuous market and the investors can reinvest with ease.
Price Determination: In a secondary market, the only way to determine the price of securities i s the
rules of supply and demand. A stock exchange enables this process via constant valuation of all the
securities. Such prices of shares of various companies can be tracked via the index.
Safety: The government strictly governs and regulates the stock exchanges. In the case of the BSE,
the Securities Board of India is the governing body. All transactions occur within the legal
framework. This provides the investor with assurances and a safe place to transact in securities.
Agency for Capital formation: It plays a vital role in the capital formation of a country. It
encourages the habits of saving, investing & risk bearing among the public.
Speculation : Stock exchange is a speculative market. This speculation is kept within the
legal framework.
 Equity: The stock exchange ensures ownership of securities. It educates the public about the safety
and the benefits of investing in the stock market. It ensures a better quality of transactions and
smooth functioning.
Evaluation of Securities: It evaluates the securities in effective manner and determine the price.
Evaluation is a continuous process. The price prevailing in the stock exchange is called market
quotation.

LISTING OF SECURITIES
Government and corporate securities are traded in the stock exchange. But the stock exchange
would‘t allow all the securities to deal with it. The stock exchange maintain a list of selected
companies securities and only these securities are traded in it. The list is called as Official Trade
List. Unlisted Securities are not traded in the stock exchange. Hence the companies whose
securities are to be traded, should apply to the stock exchange and get its name are included in
official trade list.
Inclusion of the name of the company in the official trade list whose securities are traded in the
stock exchange is listing of securities.
Objectives of Listing of Securities: (a) Provision of ready marketability. (b)Imparting liquidity to the
securities. (c) Provision of free negotiability. (d) Protecting the interests of the investors.

ADVANTAGES OF LISTING OF SECURITIES

(A) Advantages to the Company
(B) Advantages to the Investors

Advantages to the Company: 1. It enhances the Status of the company & management.
2. It helps the companies to raise funds easily.
3. Listed companies are eligible for certain fiscal benefits such as concessional rate of income
tax, benefits of carry forward and any loss in the previous year which can be set off.
4. When the Listed companies approaches to the financial institutions and commercial banks
for short term and long term accommodation are treated favorably.
5. It facilitates any expansion programme.

Advantages to the Investors : 1. Listing makes the securities more prestigious and enhances their
marketability. Hence, the holders of such securities can convert their holdings without any difficulty in
times of need.

2. The security prices are regularly published in the financial newspapers and periodicals. Hence, the
investors can sell their holdings at the current market price.

3. Holders of listed securities are eligible for certain concessions in matters relating to Income Tax, Wealth
Tax etc. in their capacity as assessees. Listed securities enjoy more public confidence. Hence, they have
high collateral value. The bankers will readily accept such securities for providing loans and other
accommodations.

4. Listed companies should make a fair disclosure of certain information and so the investors are given a
reasonable opportunity of judging the merits of the concern.

5. Listed securities ensure safety to the funds of the investors.

 Investment in Commodities

Investing in commodities differs from other types of investments. The biggest difference in investing in
commodities is the fact that they are physical goods. There are various ways in which investment in
commodities can be made. Investment in Commodity, Commodity Derivatives.

The commodity market is one of the important constituent of financial market. It deals several products
namely metals, crude oil, precious metals, energy and soft commodities such as coffee, wheat, cotton,
palm oil, spices, coffee, etc. It is an organized market for selling standardized products.

DIFFERENCES BETWEEN STOCK EXCHANGE AND COMMODITY EXCHANGE

STOCK EXCHANGE COMMODITY EXCHANGE

1. Stock, Debentures, Mutual funds are traded Commodities such as gold, rice, coal etc are traded
in stock exchange in commodity exchange

2. Share Holders used to get dividend Commodities depend upon their value supported
by physical possessions because these are
purchased under certain economic conditions.
3. Stock exchange is controlled by Securities Government of India is regulatory body in India.
Exchange Boards of India
4. Ownership of the company are traded Ownership of goods and commodities are traded.

5. Investment is for longer period Investments in commodities are for short period.

IV UNIT
MONEY MARKET
 Money market is a market where short term funds are raised.
 In money market, short term financial instruments with high liquidity are traded.
 Reserve Bank of India, Commercial Bank, Non-Banking financial institutions , Insurance
companies & Brokers are the intermediaries of the money market.
 Money Market has the following characteristics
 Liquidity- These instruments are highly liquid because the instruments are for short period
 Safety- Instruments of MM will be safe since the issuers of MM instruments have strong
credit rating.
 Discounting Price- These are issued at discount price on the face value.

INSTRUMENTS OF MONEY MARKET

Promissory Commercial Treasury Call Money Certificates of Commercial

Notes Bill Bill Deposits Paper
 Promissory Notes: A promissory note is a written agreement to pay a specific amount to specific
party at a future date . It is an agreement between the borrower and the lender who receives the
payment at a future date.Personal promissory Note, Commercial Promissory Note, Real Estate
Promissory Note, Investment Promissory Note are the different kinds/types of promissory notes
Commercial Bill : It is also known as Bill of Exchange. A bill of exchange is a written order that
binds one party to pay a fixed sum of money to another party on demand or at a predetermined
date. It is a negotiable instrument . Drawer, Drawee & Payee are the parties to the Bill of
Exchange.
Treasury Bill : It is the safest financial instrument of money market. It carries zero-risk. Hence the
return or profit are not attractive. It is issued by the Central Government. It has a maturity of 90
days, 160 days, & 360 days. Treasury Bills can be purchased through auctions or indirectly from
secondary markets. Treasury Bills are issued at discount and are paid at par price. It is also called
as Zero-Coupon Bond .
Call Money : Call money is a short term finance used for interbank transactions. It has a maturity
period of one day to fifteen days. All the Commercial Banks should maintain cash balance with RBI
which is known as Cash Reserve Ratio (CRR). The rate of CRR is keep on changing that affects the
availability of funds for providing loans and other commercial activities. Call money is a facility
under which a bank can borrow money from other banks to maintain CRR and rate of interest is
called Call Rate.
Certificates of Deposits : Certificate of Deposits are issued by Commerical Banks and financial
institutions to individuals and corporate. It is unsecured and negotiable.
Commercial Paper: It is an unsecured instrument issued with a fixed maturity by the company and
approved by RBI. It was introduced in India in 1990. Commercial paper ensures high rate of return
to investors. In India, companies having at least a net worth of four crores are allowed to raise
capital by issuing commercial paper. It is issued at a discount on the face value & redeemed at par
value. It has a maturity period of 7 days to one year.

IMPORTANCE OF MONEY MARKET

Liquidity : Money market provides quick liquidity for short term to meet the urgent and immediate
obligations. Main and basic need remains with Industrial Houses to meet their working capital
requirements of short periods. If this period is long enough it may increase the cost of funds.
Profitability: It is therefore always ensured that their remains a reasonable balance between acquiring
liquidity and the earning profitability. The main object of any industrial or business house remains to earn
the maximum profitability.
Optimum cash flow : If the money for a short period raised from money market fulfills the objective for
which the money market is created will lead to overcome the gap of deficit and surplus cash flow.
High Value of Transactions : Since the transactions in money market are for high value, these are most for
a short period, the cost funds remain high if compared with earnings of interest.
Safety: Money market instruments are safer than other types because of liquidity and the nature of
lenders.
 DIFFERENCE BETWEEN MONEY MARKET & CAPITAL MARKET

BASIS MONEY MARKET CAPITAL MARKET

Meaning Market for short term securities Market for long term securities.
Nature of Market Informal Formal
Participanats RBI, Commercial Bank, Non-finacial Stock Exchange, Mutual Funds,
Institutions , Brokers etc. Insurance Companies etc.

Financial Instruments Promissory notes, Commercial Bill, Call Shares, Debentures, Derivatives,
Money, Treasury Bill, Certificates of Bonds etc.
Deposits, Commercial paper.

Risk Low Risk involved High Risk involved

Liquidity High Liquidity Low Liquidity

Time Within One year More than one year

Rate of Return Low High

Purpose To fulfill short term needs of funds To fulfill long term needs of
funds

INVESTMENT SCHEMES OFFERED BY POST OFFICE

(A) Recurring Deposit Scheme : Depositor has to pay the defaulted monthly deposit with default fee
and then pay current month deposit. Any Person including minor can open and operate the
account. Account can be transferred from one post office to another post office.
(B) Monthly Income Scheme : Any Individual can open the account. Interest can be drawn through
auto credit into savings account. Bonus on principal amount is admissible on maturity.
(C) Public Provident Fund : Deposit can be made in lump sum or in instalments. Premature closure is
not allowed. This schme qualify for deduction f rom Iincome under the income Tax Act.
(D) National Savings Certificates : It is specially designed for income tax assesses. No maximum limit
for investment. No tax deduction at source.Certificated can be kept as collateral security for
obtaining loan from bank. It has a maturity period of 5 and 10 years.
(E) Senior Citizen Saving Scheme : Any person above the age of 60 years can open the account.
Account can be transferred from one post office to another post office. Interest can be drawn
through auto credit into savings account.
(F) Kissan Vikas Patra : The scheme is designed to encourage long term investment and savings
amontst the masses. It is suitable for investors who are reluctant to risk taking, have
surplusmoney and looking for assured returns.
(G) Sukanya Samridhi Accounts : This scheme is offered to girl children up to the age of 10 years.
There are minimum and maximum amount is set for the deposit. Account can be closed after
completion of 21 years or till the marriage of the girl after she is 18 years old.

V UNIT
FUNDAMENTAL ANALYSIS
There are two approaches to study security prices and valuation. They are Fundamental Analysis
and Technical Analysis. When an investor evaluates the information about the past and the
expected future performance of the industry, companies and the economy as a whole in advance
is known as fundamental analysis. It is a systematic approach for estimating the future dividends
and share price. Fundamental analysis involves three stages
(1) Economic Analysis
(2) Industry Analysis
(3) Company Analysis
Economic Analysis : The performance of a company depends on the economy of a country. An
investor has to study economic variables in order to evaluate the performance of the
company. The following are the various economic variables. (a) Gross National Product (b)
Savings and Investment (c) Inflation (d) Agriculture (e) Rates of Interest (f) Government
Revenue, Expenditure and Deficits. (g) Infrastructure (h) Political Stability.
Gross National Product : It is the value of all finished goods and services produced in a
country during a year by its nationals.
Inflation: It is the rate at which the price of the goods and services rising and consequently
the purchasing power of the people is falling.
Agriculture : It is an important part of the Indian economy, It has a linkage directly and
indirectly with the industry. Some industries uses agricultural products as raw materials and
certain industries supplies inputs to agriculture. Hence increase or decrease in agricultural
production has impact on the industrial production and its performance.
Rates of Interest: Cost and availability of credit are also determined by the rate of interest
prevailing in the economy. Low rate of interest lead to low cost of finance which enhance
profitability. On the other hand, higher rate of interest resulted in higher cost of production
which decreases demand and profitability.
Government Revenue, Expenditure and Deficits.: Government is the largest investor and
spender of money. So the trends in government revenue, expenditure and deficits have an
impact on the performance of the company.
Infrastructure : The development of an economy depends upon the availability infrastructure
such as transportation, fuel, communication, The availability of infrastructure has direct
impact on the performance of the company.
 Political Stability : The stability of the political environment is essential for the growth and
development of an economy. No industry can prosper if there is any political turmoil. Long term
economic policies can be framed only by stable government.

Industry analysis : It is an important stage in fundamental analysis. It indicates an investor

whether the industry is growing or not. Industry analysis refers evaluating the strength and
weakness of a particular industry which can be classified
(1) Life cycle of an Industry
(2) Characteristics of an Industry
(3) Profit Potential of an Industry
Life cycle of an Industry

An industry has a life cycle consists of 4 stages namely Pioneering Stage, Expansion Stage,
Stagnation Stage, Decay Stage.

Pioneering Stage : This is the first stage in the industrial life cycle. Technology and products are
introduced at this stage. Great scope for profit increase. Several companies enter into market and
compete with each other. Non performing and weak companies are kicked out of the industry.

Expansion Stage: Companies those have survived in the pioneering stage can enter into expansion
stage. Companies grow further and gain a reasonable market share and frame its own marketing
strategy. Companies which are at the expansion stage are attractive for investment purpose.

Stagnation Stage: This is the third stage of industrial life cycle. The growth and development t of
the industry stabilizes at this stage. Sales and Profit increases at a slow rate due to new technology
and buying habits of the customers.

Decay Stage : This is the final stage of life cycle. At this stage, there would not be any demand for
the product . New and competitors product used to come to market. Industry may exit.

CHARACTERISTICS OF AN INDUSTRY
Relationship between Demand & Supply: The relationship between demand and supply should be
studied. There should not be much gap between demand and supply. If the supply is more than the
demand, it will reduce the profitability of the industry through a decline in the unit price of the
product. Insufficient supply will increase the profitability through higher unit price.
Period of Life: It is an important factor for industry analysis. Life of the industry depends upon the
product and the technology used by the industry. If a particular industry fails to adopt
technological change, which causes to obsolete in production within a short time in turn investor
will not be interested to invest in that company.
State of Labour : If labour in a particular industry is revolutionary, the prospects of that industry
would not be bright.
Attitude of the government: The attitude of the government is also influencing the performance of
an industry. The government may encourage or discourage the growth and development of a
particular industry .
Availability of Raw Materials: This is one of the important factor for analyzing the profitability of
an industry. Some of the industries may not have sufficient quantum of raw materials or may
import from the foreign country.
Profit potential of an industry: It depends upon the following factors.

SUPPLIERS

Bargaining power of suppliers

INDUSTRRY COMPETITOR
POTENTIAL Threat of Threat of
ENTRANTS New Entrants RIVALARY AMONT Substitutes SUBSTITUTES
EXISTING FIRMS

Bargaining Power of Buyers

BUYERS

Company Analysis: Once Economic Analysis & Industry Analysis is finished, an investor should
evaluate the company analysis in order to find out strength and weakness and future prospectus of
the company . It involves the following steps.
Marketing Plan : It means analyzing Sales both in terms of volume and value , market share of the
product & company.
Accounting Aspects: It is a study about method of inventory pricing such as LIFO, FIFO,
depreciation method like original cost method, written down method, non-operating income such
as dividends, interest etc.
Profitability Ratio : Another important step in company analysis is analyzing gross profit ratio, net
profit ratio, operating profit ratio, interest on investment ratio etc.
Technical Analysis : It is a methodology that makes buy and sell decision using market statistics.

BASIS FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS

1. Meaning Fundamental Analysis is a Technical analysis is a method
practice of analyzing securities of determining the future
by determining the intrinsic price of the stock using charts
value of the stock. to identify the patterns and
trends.
2. Objective To identify the value of the To identify the right time to
stock. enter or exit the market.
3. Focuses on Both Past and Present data. Past data only.
based on the information available based on m arket trends and prices
4. Decision m aking
and statistic evaluated. of stock.

5. Future prices Predicted on the basis of past and Predicted on the basis of charts
present performance and and indicators.
profitability of the com pany.

6. Period Long term investment Short term Investment