SONIA SARDANA

INVESTMENT
Investment is employment of funds with aim of achieving additional income or growth in value. It’s a long term
commitment, where essential quality is waiting for a reward. It’s a commitment of resources which have been
saved or put away from current consumption in the hope that some benefit will occur in future.
Investment in economic sense:
Investment is a Net addition to the economy’s capital stock, which consists of goods, and services that are used
in the production of other goods and services. It’s a formation of productive capital. Net additions to the capital
stock of the society means an increase in the buildings, equipments or inventories.
Investment in financial sense:
Investment is a Monetary assets purchased with the idea that the asset will provide an income and capital
appreciation. It’s an exchange of financial claims like stock, bonds, real estate etc. Investment is parting with
one’s fund to be used by another party for productive activity. Investment is a conversion of money or cash into
a monetary asset on a claim on future money for a return.

SPECULATION
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.
· Investment and speculation are somewhat different and yet similar because speculation requires an
investment and investments are at least somewhat speculative.
· Both are leading to claim on money, aims at maximizing return.
· Investment is putting money in an asset which has less risk, where as speculation is selecting an
investment with higher risk in order to profit from an anticipated price movement.
· If investment is done with long term objective, speculation is of short term objective.
Investment is distinguished from speculation in 3 ways.
•Risk
•Capital gain
•Time.
investment, a well grounded and carefully planned speculation

GAMBLING
Gambling is a High risk speculation, where the investor plays for high stakes. It’s uncontrolled/careless venture
to look for very quick profits in the short term. Gambling is based upon tips, rumors, its unplanned, unscientific,
and without the knowledge of the exact nature of risk.
Characteristics of gambling
•It is typical, chronic and repetitive experience
•Gambling Absorb all other interests
•Displays persistent optimism without winning
•Never stops while winning
•Risks more than what can be afforded

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•Enjoys a strange thrill, a combination of pleasure and pain.

ARBITRAGE
•Deliberate switching of funds between markets in order to maximize net gains on short term investments. Such
dealings may be in currencies, commodities, Arbitrage is not considered as pure speculation
Difference between investment and speculation
INVESTMENT •SPECULATION

Length of commitment Long term Short term

Quantity of risk Small High

Earnings Likes to have moderate rate of Likes to have high returns for
return associated with limited assuming high risk.
risk.
Stability of income Very stable Uncertain

Reason for purchase Scientific analysis Tips, inside information etc

Psychological attitude Cautious and conservative Daring and careless

Funds Uses his own funds and avoids Uses borrowed funds to
borrowed funds. supplement his personal
resources.

NEED FOR INVESTMENT

a) Longer life expectancy and planning for retirement
b) Increasing rates of taxation
c) Inflation
d) Increase in income level
e) Availability of different investment channels
OBJECTIVES OF INVESTMENT
1) Increasing the returns
2) Reducing the risk
3) Improving the liquidity (through marketability)
4) Hedge against inflation
5) Providing for safety of funds

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INVESTMENT PROCESS
The following steps are involved in the process of investments. These steps are not only applicable for
individuals but also for institutions.

Investment Analysis Valuation Portfolio Portfolio

Policy Construction Evaluation

-Investible -Market -intrinsic -Diversification -Appraisal

fund value
-Industry -Selection &
allocation -Revision
-Objectives -Future
-Knowledge -Company Value

1) Determining investment objectives and policy.

Investment objectives are determined in terms required rate of return, need for regular income, risk perception
and need for liquidity. Risk takers objective is to earn higher rate of return, where as objective of risk averse
investors is the safety of funds. Investment policy calls for determining categories of financial assets, amount of
investment & time to invest.

2) Security analysis
It is an examination of risk return characteristics of the individual securities identified under the last step. It is
done with an aim to know whether securities worthwhile to invest or not?
There are different approaches involved in security analysis.
Technical analysis – This Studies the past and recent price movements of securities.
Fundamental analysis –This analyses the true or intrinsic value of securities, which are worked out to compare
with current market price.
There are some more important approaches involved in security analysis.
Market analysis
Industry analysis
Company analysis

3) Valuation
The valuation helps the investor to determine the return and risk in an investment. Different valuation
techniques can be used for that:
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-Simple discounting model
-Price earnings ratio
-book value of share
-market value of share etc.

4) Construction of portfolio
Portfolio is a combination of securities. This step consists of identifying the specific security to invest and
determining the proportion of investor’s wealth to be invested in each alternative.

5) Portfolio revision & evaluation

Portfolio has to revise from time to time. New securities may be available in the market with high returns and
low risk. It is a continuous process. It is examining the portfolio for determining return and risk characteristic
continuously. Such risk return must be compared with a certain yardstick. Proper portfolio evaluation leads to
timely revision.

INVESTORS
Investors (whose purpose is for long term investment) are the person who is putting money in long term to
maximize return and minimize risk.
Type of Investors
Risk Averser: - He wants to avoid risk and is satisfied with the small or less profit. He always prefers to take govt.
securities because risk chances are less in govt. securities.
Risk Lover: - are those who are ready to take risk to get maximum profit.
Risk Neutral: - are those who make a balance b/w risk and return.

Other type of investors

Measured Investor: The measured investors starts investing early, enjoys investing and is happy with his/her
current financial situation. They invest regularly & time to time they rebalance his or her portfolio.

Reluctant Investor: The reluctant investor does not enjoy investing and they prefer to spend as little time as
possible on his or her investments. However, the reluctant investor is confident that he or she will have a
comfortable retirement. They avoid concentration of portfolio in a single investment and invest too little & too
late.
Competitive Investor: The competitive investor enjoys investing, but makes a habit of trying to beat the market.
This investor is happy with his or her current situation and is confident about the future. They invest regularly,
start investing early and put much money.

Unprepared Investor: The unprepared investor tends to postpone investing. This investor is not happy with his
or her current financial situation and forecast for a secure retirement and lacks confidence in his or her

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investment ability. He invests too little, too late and not regularly. He understands the importance of investing
and is willing to learn, even though he or she can be a slow starter.

Contrarians: - They buy the securities when rests of the world sell are called contrarians investors.

Trend followers: - Such investor at present goes with the market. They follow the market conditions.

Hedgers & Holders: - these investors want maximum return and less risk.

Trustful Investors: - these are the investors who don’t have any knowledge about market and need some advisor
for doing investment.

Knowledgeable Investors: - they have proper knowledge about market and they try to increase their return by
taking above average risk and active themselves in stock selection. They seek help from the financial advisor
with a view to enhance their return.

Conservative Investors: - This are also called risk aversor and tends to shy away from equity.

Distrustful Investors: - They don’t believe in any single advisor. They move from one advisor to another. They
have half knowledge and get it from gossips and tips.

TYPES OF SPECULATORS
Speculator is the person who is ready to take risk to earn profits.
1. BULL (Tejiwala)
Bulls are also known as Tejiwala. He is an operator who expects a rise in prices of securities in the
future. He makes purchases in anticipation of price rise and with the intention to sell at higher prices.
He has no intention to take delivery of shares as he is the speculator. He buys only for reselling and earn
profits by way of difference in prices.
2. BEAR (Mandiwala)
These speculators are also known as Mandiwala. They expect the prices to fall in the future and
therefore, start selling at current prices with a view to repurchase them at lower rates.
3. STAGE
The nature of a stage speculator is coward. It tries to move cautiously and safely. He does not involve
himself in selling and purchasing of securities in the market like bull and bear. He relies only in
applying for new shares and sell them at a premium if he gets an allotment. He sells the shares before
being called to pay the allotment money.
4. LAME DUCK
It is the second form of a bear. When a bear is feels difficulty in fulfilling his commitment, he is called
struggling like a lame duck. As told above, a bear sells the securities at current levels for repurchasing at

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lower levels. But sometimes it happens that prices do not fall. In that situation he is not able to get the
securities from the market and on the other hand buyer refuses to carry over the transaction.

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INVESTMENT: RISK- RETURN
MOTIVE FOR INVESTMENT CAN BE
•Gain a sense of power or prestige
•Controlling corporate
•To earn a handsome return on investment

Investors want to maximize expected returns subject to their tolerance for risk
RISK
Risk and uncertainty are integral part of an investment decision. Risk is the possibility of a loss. In a financial
sense it’s a possibility that realized return will be less than the return that was expected.
The risks can be classified into two categories, viz,
(a) Systematic or uncontrollable risk
(b) Unsystematic or controllable risk

( A ) SYSTAMATIC RISK OR UNCONTROLLABLE RISK

These risks affect the entire market. These are the forces that are uncontrollable, external and broad in their
effect. These factors are beyond the control of the corporate and the investor. They cannot be entirely avoided by
the investor. The systematic risk is further sub-divided into:
1) MARKET RISK:
The variability in a security’s returns resulting from fluctuations in the aggregate market is known as market
risk. All securities are exposed to market risk including recessions, wars, structural changes in the economy, tax
law changes, even changes in consumer preferences. Market risk is sometimes used synonymously with
systematic risk.

2) INTEREST RATE RISK:

It refers to uncertainty of future market values and size of future income caused by fluctuations in the general
level of interest rates. Interest rate affects the prices of bonds, debentures more severely. Affects not only
investors but also companies borrowing. In many cases fluctuations in interest rates is caused by govt. monitory
policy. Indirectly affects equity market also.

3) PURCHASING POWER RISK / INFLATION RISK

A factor affecting all securities is purchasing power risk also known as inflation risk. With uncertain inflation,
the real (inflation-adjusted) return involves risk, even if the nominal return is safe (e.g., a Treasury bond). This
risk is related to interest rate risk, since interest rates generally rise as inflation increases, because lenders
demand additional inflation premiums to compensate for the loss of purchasing power.
This risk arises out of change in prices of goods and services.
In India, purchasing power risk is associated with inflation and rising prices in the economy.

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(B) UNSYSTEMATIC RISK OR CONTROLLABLE RISK
Is that portion of total risk that is unique or peculiar to a firm or an industry.
Factors such as management capacity, consumer preference, labour strikes leads to unsystematic risk.
Unsystematic risk is sometimes referred to as "specific risk". This kind of risk affects a very small number of
assets. An example is news that affects a specific stock such as a sudden strike by employees. Diversification is
the only way to protect yourself from unsystematic risk. Different unsystematic risks are

1) BUSINESS RISK
Operating environment of the business causes it. It arises out of inability of a firm to maintain its competitive
position.
Internal business risk
It is associated with operational efficiency of the firm. Reasons for internal business risks are.
§ fluctuations in sales
§ R&D obsolescence
§ labour problem / attrition
§ higher fixed costs

External business risk

It results of operating conditions imposed on the firm by circumstances beyond its control.
§ social or regulatory factors.
§ political factor
§ business cycle

2) FINANCIAL RISK:
It is associated with the way in which a company finances its activities. It can be gauged by looking at the
capital structure of a firm. It refers to the variability of income to the equity capital due to debt capital.

Return is the motivating force and principal reward in the investment process.
It’s a key method available to investors in comparing alternative investments.

EXPECTED RETURN:
Expected return is the return from an asset that investors anticipate, they will earn over some future period. It’s
a predicted return which may or may not occur. Investors should be willing to purchase the security if the
expected return is adequate. But sometime expected return may not materialize.

REALISED / HISTORICAL RETURN

It is the return which was earned on the investment by the investors.

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COMPONENTS OF RETURN
Return in typical investment consists of two components. The basic component is periodical cash receipt
(income) in form of interest or dividend. Another component is the change in the price of the asset called as
capital gain or loss. (Difference between purchase and sale price)
YIELD
Yield refers to income component in relation to some price for a security.
In financial economics, the term yield indicates a rate of return that is based on compounding, reinvestment,
and/or the changing market value of a security.

•EG: Rs 1000, 6% coupon bond purchased for Rs 950

Yield is 60 × 100 = 6.31%
950
Equity share paying Rs 4/year as dividend and purchased at Rs 100. Yield is 4%
ESTIMATED YIELD
Expected cash income / current price of the asset.
ACTUAL YIELD
Cash income / amount invested.
Yield is not a proper measure of return from a security. Capital gain or loss must also be considered.
TOTAL RETURN
Return across time or from different security can be measured and compared using total return concept. Total
return for a given holding period relates to all the cash flows received by an investor during any designated
time period.

ANTICIPATED RETURN
Although it’s difficult to calculate anticipate the return accurately, it can be done with the help of the
probability. Probability describes the likelihood occurrence of an event i.e., likelihood of getting a certain rate of
return.

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OPERATIONS OF INDIAN STOCK MARKET

Stock exchanges provide an organized market for transactions in shares and other securities.
v The emergence of capital market can be traced back to the second half of the eighteenth century when the
transactions were limited to loan stock transactions of the East India Company.
v By 1830 some Stock exchanges at Bombay, Ahmedabad and Calcutta started functioning.
v Bombay Stock Exchange was formalised in 1875.
v As of 2005, there are 23 recognised stock exchanges in India with about 6000 stock brokers.

Division and Location of Stock Exchanges in India

Region Exchange City
Northern Ludhiana Stock Exchange Ludhiana
Region Delhi Stock Exchange Delhi
Jaipur Stock Exchange Jaipur
U.P. Stock Exchange Kanpur
Southern Hyderabad Stock Exchange Hyderabad
Region Bangalore Stock Exchange Bangalore
Mangalore Stock Exchange Mangalore
Madras Stock Exchange Chennai
Commbatore Stock Exchange Coimbatore
Cochin Stock Exchange Cochin
Easter Region Calcutta Stock Exchange Calcutta
Gauhati Stock Exchange Gauhati
Magadh Stock Exchange Patna
Bhubaneswar Stock Exchange Bhubaneswar
Wester Bombay Stock Exchange Mumbai
Region National Stock Exchange Mumbai
OTCEI Stock Exchange Mumbai
M.P. Stock Exchange Indore
Pune Stock Exchange Pune
Vadodara Stock Exchange Vadodara
Ahmedabad Stock Exchange Ahmedabad
Saurashtra Kutch Stock Exchange Rajkiot
The form of Organization structure of stock exchanges varies.
v 14 stock exchanges are organized as public limited companies
v 6 companies limited by guarantee and
v 3 are voluntary non-profit organizations.
v Of the total of 23 only 9 stock exchanges have been granted permanent recognition. Others have to seek
recognition on annual basis.

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v Presently more than 9000 companies have got their shares listed in stock exchanges. Among these
companies, 500 account for around 99 per cent of trading volume.

Application for recognition of stock exchanges: Any stock exchange, which is desirous of being recognized
under SEBI Act, has to make an application in the prescribed manner to the Central Government. Such
application is to be accompanied by a copy of the bye-laws of the stock exchange for the regulation and control
of contracts and also a copy of the rules relating to the constitution of the stock exchange and in particular to-
(a) The governing body of such stock exchange, its constitution and powers of management and the manner in
which its business is to be transacted;
(b) The powers and duties of the office bearers of stock exchange;
(c) the admission into the stock exchange of various classes of members, the qualifications for membership, and the
exclusion, suspension, expulsion and re-admission of members;
(d) The procedure for the registration of partnership as members of the stock exchange in cases where the rules
provide for such membership; and the nomination and appointment of authorized representatives and clerks;
and
(e) Such other particulars as specifically prescribed.

Grant of recognition to stock exchange: The Central Government may grant recognition if it is satisfied:
(a) That the rules and bye-laws of the stock exchange applying for registration ensure fair dealing and protect
investors;
(b) that the stock exchange is willing to comply with any other conditions it may impose for the purpose of
carrying out the object of this Act; and
(c) That it would be in the interest of the trade and also in the public interest to grant recognition to the stock
exchange.

For the grant of recognition to stock exchanges the Central Government may prescribe conditions relating to-
(a) The qualifications for membership of stock exchanges;
(b) The manner in which contracts shall be entered into and enforced as between members;
(c) the representation of the Central Government on each of the stock exchanges by such number of persons not
exceeding three as the Central Government may nominate in this behalf; and
(d) The maintenance of accounts of members and their audit by chartered accountants whenever such audit is
required by the Central Government.

STEPS IN STOCK EXCHANGE TRANSACTIONS

There are various steps in completing and executing transactions at a stock exchange.
PLACING AN ORDER
The buyer or seller of securities can place order by telegram, telephone, letter, fax etc. or in person. The orders
can be of following types:
1. Limit Order, i.e., order to buy/sell at a fixed price specified by the client. This price may be inclusive or exclusive
of brokerage.

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2. Best rate order, i.e., order to buy/sell at the best possible price. The client may also fix a time frame within which
the order is to be executed.
3. Immediate or cancel order, i.e., order to execute purchase/sale immediately at the quoted price. If not executed
immediately, the order gets cancelled.
4. Limited discretionary order, i.e., order to buy/sell within the specified price range and/or within the given time
period as per the best judgement of the broker.
5. Stop loss order, i.e., order to sell as soon as price falls upto a particular level, so that the client does not suffer a
loss more than the pre-specified amount.
6. Open order, i.e., an order where the client does not fix any price limit or time limit on the execution of the order
and relies on the judgement of the broker.

EXECUTION OF ORDERS
Normally orders are executed in trading ring of stock exchanges which work from 12.00 noon to 2.00 p.m. on
Monday to Friday and a special one hour session on Saturday. Transactions before and after the trading time are
termed ‘kerb dealings’. Entry in the ring is restricted to only identity card holders.
Generally there is a single jobber/travaniwala for particular scrip. But in case of actively traded scrips involving
large volume of business, there could be more than one jobber for a scrip. Jobbers offer two-way quotes for the
scrip they deal in.. The final price at which the deal takes place is settled on mutual acceptance between the two
brokers- one buying the security and the other selling it at negotiated price. Once the transaction is finally
settled, the details are recorded in a chaupri which is compared at the end of each working day to ensure that
all transactions are matched. The prices at which different scrips are traded on a particular day, are published
in the newspapers the very next day. These prices are available from the jobbers.

PREPARATION OF CONTRACT NOTES:

A contract note is a written agreement between the broker and the client for the executed transaction. Contract
note is prepared on the basis of transactions recorded in the Pucca Sauda Book after the execution of the order.
Contract note also contains particulars of the brokerage chargeable by the broker. A copy of contract note is
also sent to the client.

DELIVERY OF SHARE CERTIFICATE AND TRANSFER DEED:

The delivery of share is in the form of share certificate and transfer deed. Transfer deed is signed by the
transferer, i.e., seller and is authenticated by a witness. Particulars in the transfer deed are filled in by the
transferee, i.e., buyer. It also bears stamp of the selling broker.
Delivery/bargains are of four types:
1. Spot delivery, i.e., the transaction is settled by delivery and payment on the date of the contract or the next day.
2. Hand delivery, i.e., delivery and payment is completed within 14 days from the date of the contract.
3. Specified or special delivery, i.e., delivery and payment may be completed after 14 days as specified at the time
of the bargain.

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4. Clearing, i.e., delivery and clearing of security take place through a clearance house.
Most of the transctions are conducted on the basis of hand delivery.

SENDING SHARES TO THE COMPANY FOR TRANSFERS:

For getting the shares transferred in the buyer’s name the following should be sent to the company:
1. The share certificate, and
2. The duly filled transfer deed with share transfer stamps of the specified value affixed on it.
After verifying the validity of the transfer, the company has to return the share certificate to the buyer within
two months. The share certificate bears a new ledger folio number, transfer number, date and buyer’s name at
the reverse of the certificate. These particulars are endorsed by the appropriate authority of the company.

FACTORS INFLUENCING PRICES ON STOCK EXCHANGE

The factors which influence the prices of shares on stock exchange are as follows:
v Financial Position of the company
v Demand and supply position
v Role of Financial Institutions
v Speculative Activities
v Government Policy
v Interest Rates
v Trade Cycle

TRADING SYSTEM
Trading on stock exchanges is done through brokers and dealers.
· All members can act as brokers and for this purpose they have to maintain security deposits.
· Brokers act as agents. They make buying 0r selling for others, for which they receive brokerage
commission.
· Dealers act as principals and sell securities on their own accounts.

The exchange rules, bye laws and regulations have identified eight major functional specialization of the
members.
1. Commission Broker
The commission broker executes buying and selling on the floor of the stock exchange.
2. Floor Broker
Floor brokers execute orders for fellow members and receives a share brokerage commission charged
by a commission broker.
3. Tataniwala
He/she is a jobber or specialist in selected shares. He/she ‘makes the market’ i.e brings continuity to
dealings. They specialize in stocks which are traded inactively.
4. Dealer in non-cleared securities
He/she deals in securities which are not on the active list.
5. Odd-lot Dealer
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They buy/sell odd lots, make them up into marketable trading units. These dealers receive commission.
Their earnings come from the difference between the process at which they buy and sell.
6. Budiwalas
He/she specializes in buying and selling simultaneously in different markets. The difference between the
buying price in another market constitutes his profit. However, he can transact such business only if a
security is traded on more than one stock exchange and if exchanged telephonically.
7. Security Dealer
This dealer specializes in trading in Government securities. He/she mainly act as a jobber and takes the
risks inherent in ready purchase and sale of securities.

Members are permitted to deal only in listed securities. However, with the approval of the governing body they
can deal in listed securities of other exchanges. There are three type of contracts permitted by the stock
exchanges, members can transact for delivery i.e.,
a) Delivery: For delivery as well as payment on the same day as the date of contract or at the most the nest
day.
b) Hand-delivery: Delivery and payment within the time and dates stipulated at the time of entering into
bank in which time shall not exceed 14 days following the date of contract
c) Special delivery: For delivery and payment on anytime exceeding 14 days from the date of contract
when entering into a bargain permitted by the governing body or the president.

WEAKNESSES OF INDIAN STOCK MARKET

· Rampant speculation
· Insider Trading
· Oligopolistic
· Limited Forward Trading
· Outdated share Trading system
· Lack of a single market
· Problem of interface between the primary and secondary
· Inadequacy of investor service

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NEW ISSUE MARKET
• NIM comprises all people, institutions, methods/mechanism, services and practices in raising fresh
capital for both new and existing companies. This mkt. is also called as primary mkt.
• Raising resources from the investors by issuing them only new or fresh securities, which were not
available previously.
• Issuer may be considered as a manufacturer.
• Issuing houses, investment banker & brokers act as the channel of distribution for the new issue.

SECONDARY MKT./ STOCK MKT./ STOCK EXCHANGE

Deals in existing securities i.e. securities which have already been issued by co.’s and are listed with the stock
exchanges

RELATIONSHIP B/W PRIMARY & SECONDARY MKT.

• The primary/ NIM can’t function without the secondary mkt.
Secondary mkt. provides liquidity to issued securities.
• NIM provides a direct link b/w prospective investors & the company by providing liquidity & safety.
SM provides an indirect link b/w savers & the co. by providing marketability & capital appreciation in
the stock market.
• S.E exercise control over the primary market through their listing requirements.
The co. seeking for listing on the respective stock exchange has to comply with all the rules & regulation
given by the stock exchange.
• Though the primary mkt. & secondary mkt. are complementary to each other, their functions & the
organizational set up are different from each other. The health of the primary mkt. depends upon the
secondary mkt. and vice-versa.

DIFFERENCE B/W PRIMARY & SECONDARY MKT.

DIFFERENCES

NATURE OF
CONTRIBUTION ORGANI- PARTICI-
FUNCTIONAL CONTROLLING
TO ZATIONAL PATION
DIFF. DIFF.
INDUSTRIAL DIFF. DIFF.
FINANCE

FUNCTIONAL DIFFERENCE
• NIM deals with new securities, which are issued for the first time for public subscription.
• Stock exchange provides a ready market for buying & selling of old securities.
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ORGANISATIONAL DIFFERENCE
• S.E is a well – established org. having physical existence located in particular geographical areas
with rules & regulations for conduct of the business.
A S.E is a place where dealers of security meet regularly at appointed time announced by the mkt.
The members are supplied with information about co.’s and daily changes in prices of stocks.
· NIM don’t enjoys any tangible form. It renders services to the lenders & borrowers of the funds at the
time of any particular operation & the services are taken up entirely by banks, brokers & underwriters.

NATURE OF CONTRIBUTION TO INDUSTRIAL FINANCE

• NIM provides funds to co. for starting a new enterprise or for either expansion or diversification of an
existing one by making direct link b/w companies that require funds & the investing public.
Contribution of NIM is direct.
• The role of a S.E in providing capital is indirect, as it provides marketability to the shares.

PARTICIPATION
• All co.’s participate into primary mkt.
• Securities of only listed co.’s can be traded at S.E.

CONTROL
• NIM is controlled by SEBI
Stock Exchanges &
Companies Act.
• Secondary mkt. is subjected to control both from within & outside.

DIFFERENCE B/S PRIMARY & SECONDARY MARKET

PRIMARY SECONDARY
• Mkt. for new securities. Mkt. for existing securities
• No fixed geographical location. Located at a fixed place.
• Raising fresh resources for the corporate sector. Facilitates transfer of securities from
one corporate investor to another
.
• All co.’s participate into primary market. Securities of only listed co.’s can be
traded at S.Ex
• Controlled by SEBI, stock exchanges & the companies Subjected to control both from within & outside.
Act,1956.

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FUNCTIONS OF NIM

ORIGIN-
ATION
MAIN FUNCTION OF NIM:
• To facilitate transfer resources from savers to the users.
• The savers are individuals, commercial banks, insurance.
• The users are public limited co. & the govt. FUNCTIONS

NIM
Mobilizing funds UNDER- DISTRI-
savers users WRITING BUTION

*individuals *govt.
*comm. Banks *public ltd. Co.
* insurance co.

• It is not only a platform for raising funds to establish new enterprises, but
• Also for expansion / diversification / modernizations of existing units.

NIM can be classified as

IPO SEO
A mkt. where firm go A mkt. where firms which
To the public for the are already trade raise
first time through initial additional capital through
public offering (IPO). seasoned equity offering (SEO).

1.ORIGINATION
• Origination deals with the origin of new issue.
• The proposal is analyzed in terms of
* Type of issue Equity
preference share
deb.
convertible deb.
*size of issue
*pricing of an issue at par
at premium
*methods of issue
*technique of selling the securities.
• The function of origination is carried out by merchant bankers, who may be commercial banks, Indian
financial institutions or private firms.

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2.UNDERWRITING
• Underwriting is an agreement whereby the underwriter promises to subscribe to a specified number of
shares or debentures in the event of public not subscribing to the issue.
• If issue is fully subscribed, then there is no liability for the underwriter.
• If a part of share issue is unsold, the underwriter will buy these shares.
• Thus underwriting is a guarantee for the success of the issue.
• Underwriting is a guarantee for the marketability of shares.

METHOD OF UNDERWRITING
• STANDING BEHIND THE ISSUE (specified number of share).
• OUTRIGHT PURCHASE
• CONSORTIUM METHOD

ADVANTAGES OF UNDERWRITING
• The issuing co. is relieved from the risk of finding buyers for the issue offered to the public.
• The co. is assured of getting minimum subscription within the stipulated time.
• The co. is assured of getting / raising adequate capital.
• Provide advice with regard to timing of security issue, the pricing of issue, the size & type of securities to
be issued etc.
• Public confidence on the issue enhances when underwritten by the reputed underwriters.

UNDERWRITERS IN INDIA
• INSTITUTIONAL INVESTORS NON-INSTITUTIONAL INVESTORS
LIC BROKERS (who guarantee shares only
UTI with a view to earn commission)
IDBI
ICICI
COMMERCIAL BANKS
GENERAL INSURANCE CO.’S

3.DISTRIBUTION
• Distribution refers to the sale of securities to the investors.
• It is a specialized activity rendered by brokers & dealers.
• They maintain regular & direct contact with the present & prospective ultimate investors.

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 SONIA SARDANA
ISSUE MECHANISM
BOUGHT
OFFER OUT
THROUGH DEALS PRIVATE
PROSPECT PLACE-
US MENT
(IPO)

GREEN
RIGHT
SHOE
ISSUE
OPTION

ISSUE
MECHAN-
BOOK ISM SAFETY
BUILDING NET

STOCK
QIBs
INVEST

E-IPO FPO

1. PUBLIC ISSUE (PROSPECTUS)

Issuing company directly offers to the general public/institutions a fixed number of shares at a stated price
through a document called prospectus.
Ø Name of the company
Ø Address of the registered office of the co.
Ø Existing & proposed activities
Ø Location of the industry
Ø Name of the directors
Ø Capital structure : Authorized
issued
paid-up
Ø Dates of opening & closing the subscription list
Ø Minimum subscription
Ø Names of the brokers / underwriters / bankers / managers & registrars to the issue.
Ø Terms of the present issue
- Authority for the issue
- Terms of payment
- Procedure & time schedule for allotment
- How to apply – availability of forms
- mode of payment
- Special tax benefits to the co. & the shareholders.

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 SONIA SARDANA
MERITS & DEMERITS OF ISSUE THROUGH PROSPECTUS

MERITS DEMERITS
• Inviting a large section through • Expensive method
advertisement. – Printing of prospectus
• Direct method & no intermediaries. – Advertisement
• Allotment on a non-discriminatory basis. – Banks commission
• Avoid concentration of wealth in few – Underwriting comm.
hands. – Legal charges
– Stamp duty
– Listing fee
– Registration charges
• Suitable only for large issues

PROSPECTUS
Draft
Prospectus

The prospectus is an invitation to offer. It is an

invitation to the public to take shares or debenture
in the company or deposit money in the company. Red-
Abridged
Herring Prospectus
Types of Prospectus Prospectus
Prospectus

· Draft Prospectus
A company before making any public issue
of securities, shall file a draft prospectus Shelf
Prospectus
with SEBI, through an eligible merchant
banker, atleast 21 days prior to the filling of
prospectus with ROC (Registrar of companies). If any specific changes are suggested by SEBI within the
said 21 days, the issuing company shall carry out such changes in the draft prospectus before filing
prospectus with ROC.

· Abridged Prospectus
Abridges Prospectus means a memorandum containing all silent features of a prospectus. A compay can
not supply application forms for share of debentures unless the form is accompanied by abridged
prospectus.

· Shelf Prospectus
Sometimes, securities are issued in stages over a period of time, particularly in respect of infrastructure
projects where the size of issue is large, as huge funds have to be collected. In such cases, filing of

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 SONIA SARDANA
prospectus each time will be very expensive. Companies Act 1956 allows a prospectus called ‘shelf
prospectus’ to be filed with ROC. At subsequent stages only ‘Information Memorandum’ is required to
be filed. The shelf prospectus is valid for a period of 1 year from the date of opening of first issue of
securities under that prospectus.

· Red-Herring Prospectus
A prospectus is said to be a red-herring prospectus if it is one that contains all information as per the
contents of the prospectus, but does not have information on price of securities offered and number od
securities offered through such document. Thus, a red-herring prospectus lacks price and quantity of
the securities offered. This is used in book-building issues only. Only upon completion of the bidding
process all the details of the final price included in the offer document. The offer document filed
thereafter with ROC is called a ‘prospectus’.

2. BOUGHT OUT DEALS / OFFER FOR SALE

· BOD is a process of investment by a sponsor or a syndicate (group) of investors / sponsors directly in a
company.
· BOD is a process of wholesale of equities by a co. A co. allots shares in full or in lots to sponsors at a
price negotiated b/w the co. & sponsor (s).
· After a particular period of agreed upon b/w the sponsor & the co. the shares are issued to the public by
the sponsor with a premium.
· Pricing is the essential element to be decided. The bought out dealers decides the price after analyzing
the viability, gestation period, promotor’s background & future projections.

ADVANTAGES OF BOUGHT OUT DEALS / OFFER FOR SALE

• Advantage of using the funds immediately without worrying about the source of investment.
• Waste of time at the initial stage (time taken to raise money) can be avoided by going for BOD.
• Easier to convince an investment banker for an investment rather than the general public.
• When the mkt. sentiment is low & the secondary mkt. is undergoing a bear phase, a co. may like to come
to the mkt. with a public issue.
• Merchant bankers also gain handsomely from a BOD.
• The investors also gain from the BOD in a way that they get good issues where some merchant bankers
has already invested in it.

DIS-ADVANTAGES OF BOUGHT OUT DEALS

• A fear of loss of control of mgt.
• Sponsor may also influence the policy decision / functioning of the co.
• Risk for investment bankers if a co. does not perform as per the expectations of sponsor.
• Risk for common investor, bcoz the investment bankers at a later date is entitled to ask for a higher
price for the risk taken by him.

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 SONIA SARDANA
• If a merchant banker does not make proper analysis of the co., it may face a lot of problem with the
BOD.

3. PRIVATE PLACEMENT

• The issue houses or brokers buy the securities outright with the intention of placing them with their
clients afterwards.
• Issue is placed with a small number of financial instt., corporate bodies & high net worth individuals.
• Financial intermediaries purchase the shares & sell them to investors at a later date at a suitable price.
• The issue houses or brokers maintain their own list of clients & through customer contact sell the
securities.

ADVANTAGES OF PRIVATE PLACEMENT

• Cost effective [cost of underwriting, brokerage, printing, mailing].
• Time effective [time required to completing the legal formalities & other formalities].
• Structure effectiveness [it can be structured to meet the needs of the entrepreneurs. It is flexible to suit
the entrepreneur & the financial intermediaries.]
• Access effective [a public ltd. Co. – listed or unlisted, small or big].
• In a depressed mkt. conditions, placement method is a useful method.
DIS-ADVANTAGES OF PRIVATE PLACEMENT
A selected group of small investors are able to buy a large no. of shares & get majority holding in a company.

4. RIGHT ISSUES
• If an existing co. intends to raise additional funds, it can do so by borrowing or by issuing new shares.
• If a public co. offers existing shareholders the opportunity to subscribe further shares. This method of
raising finance is called “RIGHT ISSUES”.
• The shareholders have no legal binding to accept the offer & they have the right to renounce the offer in
favors of any person.
• Generally right shares are offered at an advantageous rate compared with the market rate.
ACCORDING TO SEC.81, THE CO. HAS TO SATISFY CERTAIN CONDITIONS TO ISSUE RIGHT SHARES
• Any co. (can make right issue)
(i) Which has completed two yr. after its incorporation. or
(ii) Which has completed one yr. from the first allotment of shares after its incorporation.
whichever is earlier.
• Further shares shall first be offered to the existing shareholders in proportion to the shares held by them
in-the-paid-up capital, on the date of such offer.
• A notice should be issued to specify the number of shares issued.
• The time given to accept the right offer should not be less than 15 days.
• The notice also should state the right of the shareholders to renounce the offer in favors of others.

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 SONIA SARDANA
• The notice shall mention that if the offer is not accepted within the time of offer, will be deemed to have
been declined.
• After the expiry of the time given in the notice, the board of directors has the right to dispose the
unsubscribed shares in such a manner, as they think most beneficial to the company.

REASONS FOR A RIGHT ISSUES

• For funding expansion project
• Company can improve its capital structure without increasing debt.
• Company do not want to increase its liability of control.
• Easy to persuade their existing shareholders to subscribe cash for new issues when the share prices are
relatively high.

ADVANTAGES OF RIGHT ISSUES

• To companies : lower issue costs
lower administration cost
lower underwriting cost
• To shareholders : maintain their original proportion of share ownership
: get share at lower-price
N = no. of rights needed to buy one new share to maintain their original proportion of ownership
N = no. of outstanding shares
no. of new shares to be offered

5. SAFETY NET
• Safety net is a scheme under which a person or a co. undertakes to buy shares issued and allotted in a
new issue from the allottees at a stipulated price.
• This is an agreement in relation to issue of equity shares.
• The main feature of the safety net is to provide the equity investors safety of their investments from fall
of the share price below the issue price.
• The safety net scheme generally puts provision for buying back the shares at a price lower than the
issue price, & the difference will be the premium to the buyer for the risk taken in purchase of shares
back from the investors.

6. STOCK INVEST
• In case of oversubscription of issue there have been inordinate delays in refund of excess application
money & large amounts of investor’s funds remain locked up in co.’s for long period, affecting liquidity
of the investing public.
• To overcome the said problem, a new instrument called ‘STOCKINVEST’ is introduced.

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 SONIA SARDANA

7. FOLLOW ON PUBLIC OFFERING

• When an existing listed co. either make a fresh issue of securities to the public or makes an offer for sale
of securities to the public for the first time, through an offer document, such issues are called as ‘follow
on public offerings’.
• Such public issue of securities or offer for sale to public is required to satisfy the stock exchange listed
obligations along with SEBI guidelines.

8. E-IPO
• The co.’s are now allowed to issue capital to the public through on-line system of the stock exchange.
• For making such on-line issues, the co.’s should comply with the provisions contained in SEBI
guidelines.
• The appointment of various intermediaries by the issuer includes a pre-requisite that such members/
registrars have the required facilities to accommodate such an on-line issue process.

9. QUALIFIED INSTITUTIONAL BUYERS (QIBs)

• QUALIFIED INSTITUTIONAL BUYERS are those institutional investors who are generally perceived to
possess expertise & the financial muscle to evaluate & invest in the capital mkt.
• As par the SEBI guidelines, QIBs shall mean the followings:
*Public financial institution
*scheduled commercial banks
*mutual funds
*foreign institutional investor registered with SEBI
*multi lateral & bilateral development financial instt.
*venture capital funds registered with SEBI
*foreign venture capital investors registered with SEBI
*state financial development corporations.
*insurance co.’s registered with IRDA
*provident funds with a minimum corpus of Rs.25 crores
*pension funds with a minimum corpus of Rs.25 crores.
• These entities are not required to register with SEBI as QIBs. Any entities falling under the categories
specified above are considered as QIBs for the purpose of participating in primary issuance process.

10. BOOK BUILDING

• Book building is basically a capital issuance process used in IPO (initial public offer), aiding price &
demand discovery.
• It is a mechanism, wherein (during the period for) which the book for the IPO is open, bids are collected
from investors at various prices, which are above or equal to the floor price.
• The offer / issue price is then determined after the bid closing date, based on certain evaluation criteria.

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 SONIA SARDANA
THE PROCESS OF BOOK BUILDING
• The issuer who is planning an IPO nominates a lead merchant banker as a ‘book runner’.
• The issuer specifies the no. of securities to be issued & the price bond for orders.
• The issuer also appoints syndicate members with whom orders can be placed by the investors.
• Investors place their order with a syndicate member, who inputs the orders into the electronic book.
This process is called ‘bidding’ & is similar to open auction.
• A book should remain open for a minimum of five days.
• Bids can’t be entered less than the floor price,
• The bidder can revise bids before the issue closes.
• On the close of the book building period, the book runner evaluates the bids on the basis of the
evaluation criteria which may include:
*price aggression
*investor quality
*earliness of bids, etc.
• The book runner & the co. conclude the final price at which it is willing to issue the stock & allocation
of securities.
• No. of shares is fixed.
• The issue size is based on the price per share discovered through the book building process.
• Allocation of securities is made to the successful bidders

DIFFERENCE B/W OFFER OF SALE & BOOK BUILDING

OFFER OF SALE BOOK BUILDING
• The price at which the securities are • The price at which the securities will be
offered/allotted is known in advance to the offered / allotted is not known in advance to
investor. the investor. Only an indicative price range
is known.

• Demand for the sec. offered is known only • Demand for the sec. offered can be known
after the closure of the issue. everyday as the back is built.

• Payment is made at the time of subscription • Payment only after allocation.

whereas refund is given after allocation.

11. GREEN SHOE OPTION

It is an option allowing the issuing company to issue additional shares when the demand is high for the shares.
SEBI guidelines allow the issuing company to accept over subscription subject to a ceiling, say 15% of the offer
made to the public. In certain cases, the Green Shoe option can be even more 15%. The concept has been used in
Indian capital market and is used in initial public offering through book-building process. SEBI has allowed the
use of the option with a view to boost the investor’s confidence and to put a check for speculative practices. The
Green shoe Option facility would bring in price stability of Initial Public offerings.
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 SONIA SARDANA

FACTOR TO BE CONSIDERED BY THE INVESTORS

The investor has to be alert and careful in his investment. He has to analyze several factors. They are given
below-
(1) Promoters credibility
(a)Promoters past performance with reference to the companies promoted by them earlier.
(b)The integrity of the promoters should be found out with enquiries and from financial magazines and
newspapers.
(c)Their knowledge and experience in the related field.
(2) Efficiency of the Management
(a) The managing director’s background and experience in the field.
(b) The composition of the Board of directors is to be studied to find out whether it is broad based and
professionals are included.
(3) Project details
(a) The credibility of the appraising institution or agency.
(b) The stake of the appraising agency in the forthcoming issue.
(c) Availability of Raw materials, government norms regarding it and the tax concessions, if any.
(4) Product
(a) Reliability of the demand and supply projections of the product.
(b) Competition faced in the market and the marketing strategy.
(c) If the product is export oriented, the tie-up with the foreign collaborator or agency for the purchase of
products.
(5) Financial data
(a) Accounting policy
(b) Revaluation of the assets, if any
(c) Analysis of the data related to capital, reserve, turnover, profit, and dividend record and profitability ratio.
(d) Possibilities for achieving the financial projections as indicated by the appraising institution.
(6) Litigation (Court case), pending litigations and their effect on the profitability of the company. Default in the
payment of dues to the banks and financial institutions.
(7) Risk factors. A careful study of the general and specific risk factors should be carried out.
(8) Statutory clearance. Investors should find out whether all the required statutory clearance has been obtained
if not what is the current status.
(9) Auditor’s Report: A thorough reading of the auditor’s report is needed especially with reference to
significant notes to accounts, qualifying remarks, and changes in the accounting policy. In the case of offer the
investors have to look for the recent un-audited working results at the end of letter of offer.
(10) Investor Service: Promptness in replying to the enquiries of allocation of shares, refund of money, annual
reports, dividends and share transfer should be assessed with the of past record.

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 SONIA SARDANA

INVESTORS PROTECTION IN THE PRIMARY MARKET

To provide protection to the investor the several steps have been taken:
· Project Appraisal
The investor’s protection starts right from the protection of the principal amount of investment.
Technical & economic feasibility of the project is evaluated. Based on the appraisal, the project cost is
finalized. The profitability of the project should be estimated and given.
· Underwriting
Reputed institutions and agencies underwrite the issue. If the lead managers participate more than 5%
of the minimum stipulated amount offered to the public., it would increase the confidence of the public
regarding the pricing and saleability of the issue.
· Disclosures in the prospectus
All necessary information will be provided in the newspaper. It is the duty of the lead manager to verify
the accuracy of the data provided in the prospectus.
· Clearance by the stock exchange
The issue document has to be cleared by the stock exchange on which the proposed listing is offered.
The stock exchange verify the factors related with the smooth trading of the shares.
· Signing by Board of Directors
The Board of directors should sign the prospectus. A copy is also filed with the office to the Registrar of
the Companies.
· SEBI’s Role:
o SEBI scrutinizes the various offer documents from the viewpoint of investor’s protection and full
disclosure. It has the power to ask for additional information whenever needed. This makes the
lead managers to prepare the offer document with due care and diligence.
o When the disclosure of the information is complete, wide publicity has to be given in the
newspapers.
o In the allotment procedure, to make sure of transparency, SEBI’s nominee is appointed apart
from the stock exchange nominee in the allotment committee. Inclusion of valid application and
rejection of invalid applications are checked.
· Redressal of investors grievances:
The department of Company Affairs has introduced computerized system of processing the complainta
to handle it effectively. The companies are requested to give feedback regarding the action taken on
each complain within a stipulated time period.
If the companies do not respond and are slow in the process of settlement of companies, penal action
can be takes.
If the performance of the Registrar to the issue is not satisfactory in settling the complaints, SEBI can
take appropriate action against Registrar.

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 SONIA SARDANA

PRICE BAND
The issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of
the floor price) in the offer document filed with SEBI and the actual price can be determined at a later date
before filing the offer document with ROC.
For example
Price Band: 250-320
Here Floor price: Rs. 250
Maximum price: Rs. 320

DIFFERENTIAL PRICING
Differential pricing of an issue where one category is offered at a price different from the other category is
called ‘differential pricing’. The SEBI Guidelines, 2000 allows the differential pricing only if the securities to
applicants in the firm allotment category is at a price higher than the price at which the net offer to the public
means the offer made to the Indian public, and does not include firm allotment of reservation or promoter’s
contribution.

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 SONIA SARDANA

OTCEI
Over the counter exchange of India was started in 1992. The OTCEI was started with the objective of providing
a market for the smaller companies that could not offered the listing fees of the large exchange and didn’t fulfill
the minimum capital requirement of listing.
OBJECTIVES:
The aim at creating a fully decentralized and transport market. Over the counter exchange means trading
across the counter in scrip.
The counter refers to the location of the member or dealer of the OTCEI where the deal or trade takes place.
Every counter is treated as trading floor for OTCEI where the investor buy or sell.

PROMOTERS OF OTCEI:
OTCEI is incorporated as company under section 25 of the Indian companies’ act 1956.
Promoters are as followings:
· UTI
· ICICI
· IDBI
· IFCI
· LIC
· GIC
· SBI CAPITAL MARKET
· CANBANK FINANCIAL SEVICES

FEATURES OF OTCEI
NATIONWIDE TRADING:
OTCEI has nationwide network. The securities listed on OTCEI can be traded across the country through centres
in different cities.
RINGLESS TRADING:
OTCEI exchange has eliminated the traditional trading ring with a view to have greatest accessibility to the
factor. Trading will instead take place through a network of computers of OTCEI dealers located several places
within the same cities and across cities.
TOTALLY COMPUTERISED:
All the activities of OTCEI trading will be computerized, making for a more transport, quick and complained
market.
TRANSPARENT TRADING:
The trading on OTCEI is done in a transparent manner through computers. The investor can see the buy and sell
rates with his own eyes on the computers.
ONLY AUTHORIZED DEALERS:
The dealers authorized and approved by OTCEI can only deal on it.

TWO WAY OF MAKING A PUBLIC OFFER:

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 SONIA SARDANA

Another important feature of OTCEI is its two way of making a public offer. Under direct offer, a company can
of its shares directly to the public after getting them sponsored by a sponsor but under indirect offer. The
company has given its shares first to the sponsor who along with the company can at a later and convenient
time make an offer.
FASTER TRANSFER AND TARDING OF SHARES:
OTCEI trading also provides for transfer of shares of Registrars up to a certain percentage per folio. This assists
in faster transfers.
INVESTOR REGISTRATION
The investor registration required to be done only once and is valid for the trading on any OTC counter in the
country in any scrip. The purpose of the investor registration is to facilitate computerized trading. It also
provides greater safety of operations the investors.
TRADING IN UNLISTED EQUITY SHARES
The SEBI has allowed trading of equity shares of all unlisted companies on the OTCEI in pursuance of Dave
Committee’s recommendations to boost the business volume of OTCEI. Such trading provides an opportunity to
make the stocks liquid and tradeable.
TRADING IN FUTURES AND OPTIONS AND FORWARD CONTRACT ON STOCK etc.
On the basis of recommendations of Dave committee’s report, the SEBI allowed the trading of instruments, like
futures and options, forward contracts on stocks, other forms of forward transactions and stock lending.

LISTING AT OTCEI
Listing Requirements
Guidelines issued by SEBI for the listing of the securities at OTCEI are as follows:
(1) The company should be a public company;
(2) The minimum equity share capital of the company should be of Rs 30 lakh, subject to a minimum
public offer of 25% of equity shares worth Rs. 20 lakhs in face value;
(3) The existing companies with issued capital of Rs. 25 crore could be listed on OTCEI, SEBI has now
removed upper limit of Rs. 25 crore of issued capital and allowed all companies to list on OTCEI. The
Ministry of finance has allowed the listing of:
(4) The company to be listed must must track record of paying dividends in the previous three years;
(5) Companies with issued capital of more than Rs. 3 crore have to comply with listing requirements and
guideline as applicable on the companies listed on other stock exchanges;
(6) Trading of 20% equity of public sector units that are offered for for sale on the stock markets are
allowed as permitted securities on OTCEI.
(7) Earlier it was mandatory that the companies listed on OTCEI make a minimum public offer of 40%. This
minimum requirement of 40% have been brought down to 20% for closely- held companies and new
companies;
(8) A company which listed on any other recognized stock exchange in India is not eligible for listing on
simultaneously except the scrips of those companies will be allowed o be traded only under permitted
category on OTCEI;
(9) MRTP/FERA companies may be listed on OTCEI if these satisfy guidelines for listing on other stock
exchanges;

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(10) A property company which is listed on any other recognized stock exchange in the country is eligible
for listing on OTCEI simultaneously;
(11) The companies which do not have track record of paying dividends and which have not been apprised
by financial institution are also eligible for listing on OTCEI
Subject of following two conditions;
(a) They must be sponsored by any member; and
(b) They must appoint at least two market makers to provide continuous liquidity to the stocks;
(12) Companies engaged in hire purchases, finance, leasing, amusement park, etc. were now made eligible
for listing on OTCEI provided the company fulfill all the following conditions;
(a) They have paid-up capital of at leas Rs. 1 crore;
(b) They have track record of continuous profitability for at least past 3 years;
(c) The debt- equity ratio of these companies should conform to the RBI guidelines;
(d) The objectives of issue should also include seeking membership of OTCEI;
(e) The sponsor in the scrips of these companies should hold at least 10% of the public offer as market
making inventory in comparison with a minimum of 5% applicable o other OTCEI listed companies;
(f) Such companies listed on OTCEI or their group/associate companies are not permitted to make market
in their own scrips;
(g) In case such companies have floated fixed deposits/debentures, they should obtain investment grade
rating by a rating agency

Procedure for listing

The procedure adopted for the listing of shares at OTCEI is as follows:
(1) OTCEI appoints a member as a sponsor for the company’s issue. The sponsor appraises the project or
company on various aspects, such as technical, managerial, commercial, economical and financial. After
appraisal, the sponsor certifies the OTCEI regarding its appraisal.
(2) The sponsor determines the price of shares to be offered to the public, members and dealers of OTCEI.
(3) The sponsor after compliance with all SEBI guidelines gets all statutory consent.
(4) The sponsor registers the issue with OTCEI and makes the listing application to the OTCEI as per rules
and regulations.
(5) After getting the approval, the allotment is made.
(6) Once the allotment is over, the equity is listed and trading commences.

Application for listing

After the completion of entire process of allotment and refund, the company or the sponsor makes the
application for the listing of scrips at OTCEI. The following documents are to be attached with the application
for listing:
(1) Listing agreement
(2) Certificate from auditor that the allotment letters, counter receipts and advice-cum-refund orders have
been mailed;
(3) A certificate from the auditor that the allotment has been made as per the basis approved by OTCEI;
(4) Company’s confirmation that all cheques for brokerage and underwriting commission have directly been
posted to members and dealers;

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(5) A copy of the newspaper announcement giving the basis of allotment as approved by OTCEI, and
(6) A Cheque/demand draft for the listing fee.

Listing Fee
The fee structure for listing is as follows:
Initial Listing Fees
Annual Listing Fees
Paid-up capital
Upto Rs. 3 crore
Rs. 3 crore- Rs. 10 crore
Rs. 10 crore- Rs. 20 crore
Rs. 20 crore- Rs. 50 crore
Rs. 50 crore- Rs. 100 crore
Above Rs. 100 crore
: Rs. 7,500
:
: Amount of Annual Fees
: Rs. 7500/-
: Rs. 15000/-
: Rs. 25000/-
: Rs. 40000/-
: Rs. 85000/-
: Rs. 1000 for every Rs. 10 crore

PLAYERS in the OTCEI (Parties/ Participants involved in OTCEI Trading)

· Investor
· Issuer Companies
· Members and Dealers
· Market Makers
o Compulsory Market Making
o Additional Market Making
o Voluntary Market Making
· Sponsors
· Registrars and Custodians
· Central Clearing Bank
· Settler
· Monitoring Agencies

BENEFITS OF OTCEI:
FOR COMPANIES:
· It will provides a method of funds raising through capital market instruments which are priced fairly
· In OTCEI the companies will be able to negotiate the issue price the sponsor who will market the issue.
· It will also help to save unnecessary issue expenses on raising funds from capital market.

FOR INVESTOR:
· Investment in stock will become easier. Its wide network will bring the stock exchange to every street
corner.
· It will provide greater confidence and fidelity of trade.
· Investor can look up the price displayed at the OTC counter.
· It will enable transaction completely quickly.
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 SONIA SARDANA

· It also provide liquidity to investors

· It will quoted regularly to provide sufficient opportunities for investor to exist.
· Investors may get greater sense of security.

FOR FINANCIAL ENVIRONMENT:

· It will help spread the stock exchange operations geographically and intergrated.
· Capital investment into a national forum
· It will encourage closely held companies across the country to boost entreprenurship.

TRADING MECHANISM OF OTCEI:

An investor can buy and sell any listed scrip at any OTC Exchange counter. The investor can also make an
application for services like transfer of shares, splitting and consolidation of shares, nomination and revocation
of nomination, registering power of attorney etc. The parties involved in trading on OTC are investor, Counter,
Settler Registered Custodian, Company and Bank.
The trading documents mainly involved in OTC Exchange transactions are:
· Temporary Counter Receipt (TCR)
· Permanent Counter Receipt (PCR)
· Sales Confirmation Slip (SCS)
· Transfer Deed (TD)
· Service Application Form (SAF)
· Application Acknowledgement Slip (AAS) and
· Deal Form (DF)

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 SONIA SARDANA

COST OF INVESTING IN SECURITIES

Cost of Investment in securities can be also termed as transaction cost,
Which can be divided into broad headings:
– Trading Cost
– Clearing Cost
– Settlement Cost
Trading Cost
Trading costs consist of brokerage cost, market impact cost and securities transaction cost.
• Brokerage Cost: Brokerage Cost is the brokerage paid to the broker. Due to heightened competition in
stock broking, brokerage cost has fallen significantly.
• Market Impact Cost: It is the difference between actual transaction price and the ‘ideal price’.
• Securities Transaction Cost (STT): It is the levy on securities transaction. Currently, for delivery based
trades in equally b/w the buyer & seller. This means that for a transaction worth Rs. 100, the buyer and
seller have to pay 10 paise each.
Clearing Cost
• When a negotiated trade takes place, the counterparty may default OR
• When a trade takes place on an exchange, the exchange may default in its payment.
Clearing costs are costs experienced in resolving such defaults.

Role of clearing corporation

• While the stock exchange provides the trading platform, the clearing corporation looks after the post-
trade activities such as:
– Clearing all trade
– Determining the obligation of members
– Arranging for pay-in of funds/securities
– Arranging for pay-out of funds/securities
– Guaranteeing settlement
– Collecting & maintaining margins/collateral/base capital/other funds.
The clearing corporation is connected electronically to the exchange, the clearing bank, depositories, custodian
and members.
Settlement costs
• A trade is finally consummated when securities and funds actually change hands. Settlement costs are
costs associated with such transfer.
• Today settlement costs have come down due to:
– Advent of dematerialization
– Elimination of stamp duty on dematerialized trades and
– Improvement of banking technology

TRANSACTION COSTS
Thanks to the introduction of screen-based trading and electronic delivery transaction costs have fallen sharply
in India.

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 SONIA SARDANA

MID - 1993 TODAY

TRADING 3.75% 0.40%

BROKERAGE COST 3.00% 0.25%
MARKET IMPACT COST 0.75% 0.15%
CLEARING
COUNTERPARTY RISK PRESENT ABSENT
SETTLEMENT 1.25% 0.10%
PAPERWORK COST 0.75% 0.10%
BADPAPER RISK 0.50% 0.00%

TOTAL 5.00% (+RISK) 0.50%

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 SONIA SARDANA

MECHANICS OF INVESTMENT
1) Selection of a Broker
2) Opening an Account with the Broker
3) Placing an Order for Purchase or Sale of shares
4) Preparing a Contract Note and Specifying the Choice of Delivery
5) Settlement of contract on a Stock Exchange

1) SELECTION OF A BROKER
Stock brokers acts as an intermediary between investor and stock exchange. While appointing a person as a
broker of the exchange, the authorities examine his qualifications, experience in similar fields, his track record
etc. Some exchanges also conduct a written test and interview before appointing a person as a broker.

Qualifications for registration as stockbroker

§ —He is an Indian citizen with age of at least 21 years
§ —He is not a bankrupt
§ —He has not compounded with creditors
§ —He has not been convicted for any fraud or dishonesty
§ —He is not engaged in any other business except that of an agent or broker in securities
§ —He is not connected with a company or corporation
§ —He is not a defaulter of any stock exchange and
§ —He should have passed at least 12th standard examinations.

While selecting a member of a stock exchange, the selection committee has also to consider professional and
other educational qualifications, experience relevant to securities market, financial status and the performance
of the applicant in the written test and interview.

2) OPENING AN ACCOUNT WITH THE BROKER:

The broker usually insists that the investor should open an account with the broker. Before opening an account
the broker tries to satisfy himself as to the credit worthiness of the client in terms of financial strength,
knowledge of stock markets and risks attached. To that extent he may ask a bank reference along with a proof
of residence from the client. This is necessary for a long term cordial relationship between the broker and his
client.
The broker also insists that the investor should also open a demat account if he does not already has one.

3) PLACING AN ORDER
The buyer or seller of securities can place order by telegram, telephone, letter, fax etc. or in person. The orders
can be of following types:

1. Limit Order, i.e., order to buy/sell at a fixed price specified by the client. This price may be inclusive or
exclusive of brokerage.

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 SONIA SARDANA

2. Best rate order, i.e., order to buy/sell at the best possible price. The client may also fix a time frame within
which the order is to be executed.

3. Immediate or cancel order, i.e., order to execute purchase/sale immediately at the quoted price. If not
executed immediately, the order gets cancelled.

4. Limited discretionary order, i.e., order to buy/sell within the specified price range and/or within the given
time period as per the best judgement of the broker.

5. Stop loss order, i.e., order to sell as soon as price falls up to a particular level, so that the client does not suffer
a loss more than the pre-specified amount.

6. Open order, i.e., an order where the client does not fix any price limit or time limit on the execution of the
order and relies on the judgement of the broker.

Execution of orders
· Normally orders are executed in trading ring of stock exchanges which work from 12.00 noon to 2.00
p.m. on Monday through Friday and a special one hour session on Saturday.
· Transactions before and after the trading time are termed ‘kerb dealings’. Entry in the ring is restricted
to only identity card holders.
· On the floor separate locations are reserved for trading in specified and unspecified shares.
· Generally there is a single jobber for a particular scrip. But in case of actively traded scrips involving
large volume of business, there could be more than one jobber for a scrip.
· Jobbers offer two-way quotes for the scrip they deal in. Thus, they act as market maker and provide
liquidity to the market.
· The order is executed either by auction or negotiation
· In case of negotiated settlement, the broker or his assistant approaches the concerned jobber, ascertains
the latest quotation and makes a bid/offer. If it is not acceptable, then broker may make counter
bid/offer. The final price at which the deal takes place is settled on mutual acceptance between the two
brokers- one buying the security and the other selling it at negotiated price.
· Once the transaction is finally settled, the details are recorded in a chaupri which is compared at the
end of each working day to ensure that all transactions are matched.
· —The prices at which different scrips are traded on a particular day, are published in the newspapers
the very next day. These prices are available from the jobbers.

4) PREPARING A CONTRACT NOTE AND SPECIFYING THE CHOICE OF DELIVERY

· A transaction gets materialised with the issue of contract note. A contract note is a written agreement
between the broker and the client for the executed transaction. Contract note is prepared on the basis of
transactions recorded in the Pucca Sauda Book after the execution of the order. Contract note also
contains particulars of the brokerage chargeable by the broker. A copy of contract note is also sent to
the client.

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· Delivery of share certificate and transfer deed : The delivery of share is in the form of share certificate
and transfer deed. Transfer deed is signed by the transferor, i.e., seller and is authenticated by a witness.
Particulars in the transfer deed are filled in by the transferee, i.e., buyer. It also bears stamp of the selling
broker.
A Contract Note will Contain:
1. Name of the security bought or sold
2. Price at which the deal has taken place
3. Brokerage or commission to be charged
4. Date of Settlement
5. Choice of delivery

· Delivery/bargains are of four types:

Spot delivery, i.e., the transaction is settled by delivery and payment on the date of the contract or the next
day.
Hand delivery, i.e., delivery and payment is completed within 14 days from the date of the contract.
Specified or special delivery, i.e., delivery and payment may be completed after 14 days as specified at the
time of the bargain.
Clearing, i.e., delivery and clearing of security take place through a clearance house.
Most of the transactions are conducted on the basis of hand delivery.

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 SONIA SARDANA

MARKETS AND BROKERS

Stock brokers
Stock brokers are members of recognised stock exchanges who buy, sell or otherwise deal in securities. For a
broker to deal in securities on a recognised stock exchange, it is obligatory that he should be registered as stock
broker with SEBI. For registration one has to satisfy certain qualifications and meet conditions laid down by
SEBI.

Qualifications for registration as stock broker

— He is an Indian citizen with age of at least 21 years;
— He is not a bankrupt;
— He has not compounded with creditors;
— He has not been convicted for any fraud or dishonesty;
— He is not engaged in any other business except that of an agent or broker in securities;
— He is not connected with a company or corporation;
— He is not a defaulter of any stock exchange; and
— He should have passed at least 12th standard examination.

While selecting a member of a stock exchange, the selection committee has also to consider professional and
other educational qualifications, experience relevant to securities market, financial status and the performance
of the applicant in the written test and interview.

Conditions for grant of certificate to a stock broker

— He holds the membership of any stock exchange;
— he shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which
he is a member;
— in case of any change in the status and constitution, the stock broker shall obtain prior permission of the
Board to continue to buy, sell or deal in securities in any stock exchange;
— he shall pay the amount of fees for registration in the manner provided in the regulations; and
— he shall take adequate steps for redressal of grievances of the investors within one month of the date of
the receipt of the complaint and keep the board informed about the number, nature and other
particulars of the complaints received from such investors.
— He is not engaged as principal or employee in any business other than that of securities except as a
broker or agent not involving any personal financial liability;
— He has never been expelled or declared a defaulter by any other stock exchange;
— He has not been previously refused admission to membership unless a period of one year has elapsed
since the date of such rejection.

Broker/Dealer
— All stock exchange members are brokers/dealers though not all firms in practice act in this dual
capacity. Opening a securities account with a broker involves establishing the client’s identity and
depositing the requisite amount to cover the initial security purchase. The broker’s role includes seeking
to execute the client’s orders at the best possible prices. In several accounts, the brokers also maintain

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securities on behalf of their clients and send them the dividend and interest cheques when these are
received.
— The brokerage is negotiable between the broker and the client. The maximum brokerage in the Bombay
Stock Exchange, for instance, is subject to a ceiling of 2.5 per cent of the contract value. However, the
average brokerage charged by the members from the clients is much lower. Typically there are different
scales of brokerages for delivery transaction, trading transaction, and so on.

Procedure for registration of stock brokers

1. Application for registration
A broker seeking registration with SEBI has to apply through the stock exchange of which he is a member.
The stock exchange has to forward the application within 30 days from its receipt.
2. Furnishing of information, clarification, etc.
SEBI may require the applicant to furnish further information or clarification, regarding the dealings in
securities and matters connected thereto to consider the application for grant of a certificate.
3. Consideration of application
SEBI takes into account, for considering the grant of a certificate all maters relating to buying, selling, or
dealing in securities and in particular the following, whether the stock broker-
(a) is eligible to be admitted as a member of a stock exchange;
(b) has the necessary infrastructure like adequate office space, equipments and manpower to effectively
discharge his activities.
4. Granting registration
SEBI, on being satisfied that the stock broker is eligible, shall grant a certificate to the stock broker and send
an intimation to that effect to the stock exchange or stock exchanges, as the case may be.
5. Stock brokers to abide by code of conduct
The stock broker holding a certificate shall, at all times, abide by the prescribed code of conduct.

Code of conduct for stock brokers

A stock broker has to follow prescribed code of conduct regarding honest, skilful dealing in tune with statutory
requirements, and discharge of duty to the investors and other stock brokers.
A. General conduct
(1) Integrity
(2) Exercise of due skill and care
(3) Manipulation
(4) Malpractices
(5) Compliance with statutory requirements

Duty to other stock brokers

— Conduct of dealings- A stock broker has to co-operate with the other contracting party in comparing
unmatched transactions.
— Protection of client’s interests- A stock broker should extend fullest co-operation to other stock brokers
in protecting the interests of his clients regarding their rights to dividends, bonus shares, right shares
and any other right related to such securities.

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— Transactions with stock brokers- A stock-broker should carry out his transactions with other stock
brokers and must comply with his obligations in completing the settlement of transactions with them.
— Advertisement and publicity- A stock broker must not advertise his business publicly unless permitted
by the stock exchange.
— Inducement of clients- A stock broker must not resort to unfair means of inducing clients from other
stock brokers.
— False or misleading returns- A stock broker must not neglect or fail or refuse to submit the required
returns and not make any false or misleading statement on any returns required to be submitted to the
SEBI and the stock exchange.

Maintenance of books and records

Every stock-broker has to keep and maintain the following books of account, records and documents:
— Register of transactions (sauda book),
— Clients ledger, General ledger,
— Journals, Cash book, Bank pass book,
— Documents register which should include particulars of shares and securities received and delivered,
— Members’ contract books showing details of all contracts entered into by him with other members of the
same exchange or counterfoils or duplicates of memos of confirmation issued to such other members,
— Counterfoils or duplicates of contract notes issued to clients,
— Written consent of clients in respect of contracts entered into as principals,
— Margin deposit book, Registers of accounts of sub-brokers,
— An agreement with a sub-broker specifying the scope of authority and responsibilities of the stock
broker and such sub-broker.
Every stock broker has to preserve above books of accounts and records for a minimum period of five years.
Moreover, if required, he has to submit a copy of the audited balance sheet and profit and loss account of an
accounting period to SEBI within six months of the close of the period.

Sub-broker
— The eligibility criteria for registration as a sub-broker in case of an individual is that the applicant
should not be less than 21 years of age, has not been convicted of any offence involving fraud or
dishonesty, passed the class 12 or equivalent examination from an institution recognised by the
government.
— A sub-broker has to cooperate with his broker in comparing unmatched transactions. A sub-broker
cannot knowingly and wilfully deliver documents that constitute bad delivery. A sub-broker has to co-
operate with the other contracting party for prompt replacement of documents that are declared as bad
delivery.

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INVESTMENT COMPANIES
Investment companies are firms that invite individual investors to subscribe to their capital, combine the capital
thus collected into a common pool of investible resources and then seek to accomplish the investment objectives
of the investors by investing these resources in an appropriate portfolio of securities. Investment companies may
have a number of different schemes (or 'funds' as they are sometimes called; we shall use the terms
interchangeably) catering to the specific investment objectives of different classes of investors. These investment
schemes, offered by investment companies, can be categorized based either on the nature of their capitalization
or based on their investment objectives or based on the types of assets held by them.

Investment Companies in India

 Unit Trust of India (UTI)
 Mutual Funds of Commercial Banks (MFS)
 Life Insurance Corporation of India (LIC)
 Investment Options for Investment Companies In India

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OBJECTIVES OF SECURITY ANALYSIS

An investor can have various objectives & expectations from his investment. To check whether an investment
alternative can fulfill his expectations or not, he makes a detail analyses
INVESTMENT PROCESS
1. Investment Policy
2. Collection of investment alternatives
3. Security (Alternative Analysis)
4. Valuation
5. Portfolio Construction
6. Portfolio Evaluation

Security Analysis can be done by various techniques:

· Market Analysis
· Industry Analysis
· Company Analysis

OBJECTIVES OF SECURITY ANALYSIS:

· To take investment decisions
o When to invest
o How much to invest
o Where to invest
· To find out risk & return related to investment
· To estimate current income
· To estimate growth in income
· To estimate capital appreciation
· To estimate the level of preservation/safety of capital etc.

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GOVERNMENT SECURITIES

The securities issued by RBI on behalf of Govt. Of India, are known as Govt. securities. The Govt. of India uses
these funds to meet their expenses.

Govt. Securities are also known as ‘Gilt Edged securities’. Moreover Govt. securities are considered to be risk free
securities.
Following are the different types of government securities:
a) Treasury Bills:
b) Dated securities
c) Zero coupon bonds
d) Partly paid stock
e) Floating rate bonds
f) Capital indexed bonds
g) REPO

Treasury Bills:
· Treasury bills are the short term money market instruments.
· Issued by RBI on behalf of Govt. of India.
· Issued at discount and redeemed at par.
· Maximum tenure of this sec. is 1 year.
· No tax is deducted at source and there is minimal default risk.
Interest provided on these securities is known as Coupon rate.

Dated Securities
These securities carry generally a fixed coupon rate and a fixed maturity period .
For eg. 11.4%Govt. of India 2008, govt. security.

Features:
· These are issued at Face value.
· Rate of interest and tenure of these securities is fixed at the time of issuance of securities and doesn’t
change at maturity.
· Interest payment is made on half yearly basis.
· Redeemed at face value.

Zero Coupon bonds

These securities are issued at discount to the face value and redeemed at par.
· No interest is paid on these securities.

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· Tenure of these securities is fixed.

Partly Paid Stock

· Principal amount is paid in installments, in these securities.
· These type of securities are issued at face value and redeemed at face value.
· The benefit is the Coupon rate(interest rate).The interest payment is made on half yearly basis.

Floating rate Bonds

As the name is suggesting, floating means variable interest rate. In these securities variable interest rate is
received which is calculated as a fixed percentage over a benchmark rate.
· Issued at face value and redeemed at par on maturity.
· Interest payment is made on half yearly basis.
· Interest rate is fixed as a percentage over benchmark rate and benchmark rate can be Bank rate or
inflation etc.

Capital index bond

In Capital index bond, the interest rate is calculated as a fixed percentage over wholesale price index.
· Issued at face value.
· Interest rate changes according to the change in wholesale price index.
· Maturity is fixed and interest is payable on half yearly basis.

Repo or Repurchase agreement and Re-Repo

It creates an agreement between buyer and seller to repurchase an instrument. Repos are from the side of
seller to repurchase an instrument at a predetermined rate for a predetermined rate.

Why the Repos are used?

· To meet the deficiency of cash
· To increase the returns on funds
· To borrow the securities to meet regulatory requirement.
· For adjusting liquidity in financial system.
Risk in Repos:
Govt. Securities are for very short period, so risk is minimum.

ADVANTAGES & DISADVANTAGES OF INVESTMENT IN GILTS

Advantages
1. The main advantage of investing in G-secs is that there is a minimal default risk, as the instrument is issued
by the GOI.

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2. G-secs, especially dated securities, offer investors the opportunity to invest in very long-term debt (at times
with maturity over 20 years), which is usually not available from the private sector.
3. Although some issues of G-secs tend to be illiquid, there is adequate liquidity in most other issues. In fact,
buying and selling from/to a primary dealer can take care of the liquidity risk.

Disadvantages
There is no tax deducted at source and the investor can avail tax benefit u/s 80L i.e. Rs 3,000/-
The minimum amount for investing in gilts varies depending on the primary dealer. Hold these instruments in a
demat form.

What are Gilt accounts?

Accounts maintained by investors with the primary dealers for holding their government securities and
Treasury bills in the demat form are known as gilt accounts. The salient features of gilt accounts are:

1. It is like a bank, which debits or credits the holders account on withdrawal or deposit of the money.
Similarly in a gilt account the holder's account is debited or credited on the sale or purchase of the
securities.
2. The account holder receives a statement at periodic intervals showing the balance of securities in his
account.
3. All the securities are maintained in demat mode, which can be converted into physical mode whenever
required by the gilt account holder.

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 SONIA SARDANA

NON-SECURITY FORMS OF INVESTMENT

Investment in financial assets consists of

a) Securitized (i.e., security forms of) investments
b) Non-securitized investments. (Non-Marketable securities)

Non-security form of investment

Non-securitized securities are those securities which can not be converted into cash easily, that why they are
also called as non-marketable securities. In India, the household sector's investment in non-security forms
constitutes a major proportion of its total investment in financial assets. There are a large number of non-
security forms of financial assets that are available to investors in India. These are more in the nature of savings
of individuals and households, particularly for the benefit of small savers. These investments are guided more by
conveniences safety and tax
benefits rather than a strong desire to earn a very attractive rate of return. Most of the investments are illiquid
but are generally accepted as good collateral for borrowing from banks.

Other Forms of Non-Marketable Securities

 Bank Deposits
 Post Office Time Deposits (POTDs)
 Monthly Income Scheme of The Post Office (MISPO)
 Kisan Vikas Patra (KVP)
 National Savings Certificate
 Company Deposits
 Employees Provident Fund Scheme
 Public Provident Fund Scheme

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 SONIA SARDANA

REAL ESTATE NVESTMENT

Real estate has historically been useful in a portfolio for both income and capital gains. Home ownership, in
itself, is a form of equity investment, as is the ownership of a second or vacation home, since these properties
generally appreciate in value. Other types of real estate, Such as residential and commercial rental property can
create income streams as well as potential long-term capital gain.

Real estate investment can be made directly, with a purchase in your own name or through investments in
limited partnerships, mutual funds or Real Estate Investment Trust (REIT). REIT is a company organized to invest
in real estate. Shares are generally traded in the organized exchanges.

Also there are many kinds of investments. Some are very speculative while other are more conservative. The
major classifications are:

· Residential house.
· Sources of housing finance.
· Features of housing loans.
· Guidelines for buying a flat.
· Commercial property.
· Agriculture Land.
· Suburban land.
· Time share in a holiday resort.
· Unimproved land
· Improved Real Estate
· New and used residential property.
· Vacation homes.
· Low income housing.
· Certified historic rehab structures.
· Other income –producing real estate such as office buildings, shopping centers and industrial or
commercial properties.
· Mortgages such as through certificates packaged and sold through entities.

ADVANTAGES OF REAL ESTATE INVESTMENT

· The potential for high returns in real estate exists due, in part to the frequent use of financial leverage.
Financial leverage is the use of borrowed funds, as in a long term mortgage, to try to increase the rate of
return that can be earned o the investment. It is considered ‘Favorable’ leverage, but when the reverse is
true, it is considered unfavorable leverage

· There is potential tax advantage in real estate, as well. First, for personal use residential property, There
is the opportunity to deduct interest paid . There may also be a deduction for property taxes . If the
property is income producing, other expenses may be deductible as well, such as depreciation,
insurance and repairs. Also, Real estates can be traded or exchanged for similar kind of property on a

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tax free basis. And lastly, If the sale of investment real estate results in a profit , the gain is normally a
capital gain

· Some consider Real Estate a good hedge against inflation

· Good quality carefully selected income property will generally produce a positive cash flow.

· As a Real Estate owner, you may be in a position to take your games from real estate through
refinancing the property without having to sell the property, therein triggering a taxable capital gain.
Real Estate is advantageous in this respect, Because good quality properties can be used to secure
mortgage loans up to a relatively high percentage of current value.

DISADVANTAGES OF REAL ESTATE INVESTMENT

· There is generally limited marketability In real estate (depending on the nature and location of the
property)

· There is also a lack of liquidity, in that there is no guarantee that the property can be disposed of its
original value, especially if it must be done within a short period of time

· A Relatively large initial investment often is required to buy real estate

· If ownership in investment property is held directly by the investor, there are many “Hands-on”
management duties that can be performed

· Real estate is often considered high risk because it is fixed in location and character. It is particularly
vulnerable to economic fluctuations such as interest rate changes or recession

· The tax reforms act of 1986 eliminated many of the previously available tax advantages relating to real
estate.

REASONS FOR INVESTING IN REAL ESTATE

· High capital appreciation comparison to gold or silver particularly in the urban area.

· Availability of loans for the construction of houses. The 1999-2000 budget provide huge incentives to
the middle class to avail of housing loans. Scheduled bank now have to disburse 3 percent of their
incremental deposit in housing finance

· The possession of a house gives an investor a psychologically secure feeling and a standing among
friends and relatives.

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RISK IN INVESTING IN REAL ESTATE

· Malpractices. Often-gullible investors become cheated in the purchase of land. The properties already
sold are resold to the investors. The investor has to lose the hard earned money.

· Restriction of the purchase. The land ceiling act restricts the purchase of agricultural land beyond limit.

· Lack of liquidity. If the investor wants to sell the property, he cannot immediately realize the money. The
waiting period may be months or years.

POINTS TO BE TAKEN CARE WHILE INVESTING IN REAL ESTATE

· The plot should be approved by the local authority because on the unapproved layout construction of a
house is not permitted.

· Possibility of capital appreciation. It depends on the locality and other facilities of the site.

· Originality of title deeds. The site should be free from encumbrance. Encumbrance certificate for a
minimum period of latest 15 years should be got from the registrar office.

· Plinth area should be verified.

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INVESTMENT INSTRUMENTS OF THE MONEY MARKET

Money market is a short- term credit market that deals in assets of relative liquidity such as treasury bills, bills
of exchange, short-term government securities etc.

The money market is a reservoir of short-term funds. It is a region where short- funds are bought and sold
through telephone or mail. Funds are borrowed in the market for a short period ranging from a day to six
months or less than one year. The assets, which are used as credit instruments, are known as “near money
assets”.
Importance of Money Market:
· Dealing in bills of exchange and commercial papers.
· Dealing in treasury bills and short dated government securities.
· Guiding central banking policies
· Making central banking policies effective
· Reduction of disparities in interest rates
· Influencing the capital market

Features of a Developed Money Market:

· Existence of an efficient and effective central bank
· Well organized commercial banking system
· Existence of specialized sectors
· Free flow of funds between the various sub-markets
· Adequate facilities for transfer of funds
· Uniformity in interest rates
· Availability of ample funds
· Existence of specialized financial institutions

Features and weaknesses of Indian Money Market:

· Existence of unorganized money market
· Absence of integration
· Diversity in money rates of interests
· Seasonal rigidity of money
· Highly volatile call money market
· Absence of the bill market
· Absence of well organized banking system

Money market is the market in which short-term funds are borrowers and lent. The money market does not
deal in cash or money but in trade bills, promissory notes and government papers which are drawn for short
periods. These short-term bills are known as near money.

Instruments of Money Market

Ø Commercial Bills
Ø Treasury Bills (TBs)
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 SONIA SARDANA

Ø Certificate of Deposits (CDs)

Ø Commercial Papers (CP)
Ø ADRs/GDRs
Ø Call and Short Notice Money Market
Ø Repurchase Agreement (REPO)
Ø Central Government Securities (Gilt-edged securities)
Ø Term Money
Ø Trade Bills
Ø Banker’s Acceptance
Ø Hundis
Ø Fringe Market
COMMERCIAL BILLS
Commercial bill or the bills of exchange, popularly known as bill is a written instrument containing an
unconditional order. Bill of exchange is a very important document in commercial transaction. When the buyer
is unable to make the payment immediately, the seller may draw a bill upon him payable after a certain period.
The buyer accepts the bill and returns to the seller. The seller may either retain the bill till the due date or get it
discounted from some banker and get immediate cash. Usually such bills are discounted or rediscounted by
commercial banks to lend credit to the bill-holders or to borrow from the central bank.

Indian bill market is an underdeveloped one. A well organized bill market or discount market for short-term
bill is essential for establishing an effective link between credit agencies and Reserve Bank of India.

The reasons for the poor development of bill market in India are historical and include:

Ø Preference for cash to bills

Ø Lack of uniform practices with regard to bills
Ø Excessive stamp duty
Ø Preference for cash credit and overdraft arrangements as a means of borrowings from commercial
banks
Ø Lack of specialized discount houses

Reserve Bank of India started making efforts in this direction in 1952.However; a new and proper bill market
was introduced in 1970.

TREASURY BILLS
The treasury is a short-term government security, usually of the duration ranging from 14 days to 364 days,
sold by the central bank (RBI) on behalf of the government. There is no fixed rate of interest payable on treasury
bills. These are sold by the central bank on the basis of competitive bidding. Treasury bills are highly secured
and liquid because of guarantee of repayment assured by the RBI.
TYPES OF TREASURY BILLS
Treasury bills are basically of two types:
Ø Ordinary/Reglar

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Ø Adhoc

ORDINARY/REGULAR TRAESURY BILLS (Auctioned T-Bills)

These are issued to the public and the RBI by a process of auction and bidding .The objective is to meet the
additional short-term financial needs of the government. Bids are usually invited for 14 days, 182 days, 91 days
and 364 days treasury bills. The ordinary TBs can be got rediscounted with RBI.

ADHOC TREASURY BILLS

These are issued in favor of RBI with a view to replenish Government’s cash balances by employing temporary
surpluses of state government and semi-government departments.

Banks are the main subscribers to such treasury bills because they offer a stable and attractive return, high
liquidity and can be encashed at a very short notice with RBI

CERTIFICATE OF DEPOSITS
Ø Certificate of deposits are marketable receipts in bearer or registered form of funds deposited in the
bank for a specified period at a specified rate of interest
Ø They are different from the fixed deposits in the sense that they are freely transferable
Ø It can be sold to someone else and can be traded on the secondary market.
Ø They are liquid and risk less in terms of default of payment of interest and principal

COMMERCIAL PAPERS
Ø Commercial Papers are short-term usance promissory notes issued by reputed companies with good
credit standing and sufficient tangible assets.
Ø CPs are unsecured and are negotiable by endorsement and delivery.
Ø CPs are normally issued in a bearer form on discount to face value basis. The issuing companies
normally can buy-back CPs if the need arises.
Ø CPs are normally issued by banks, public utilities, insurance and finance companies.The buyers of CPs
include banking and non-banking financial institutions.

ADR’s and GDR’s

American Depository Receipts (ADR’s) are the forerunners of Global Depository Receipts (GDR’s).
Ø These are the instruments in the nature of depository receipt or certificate.
Ø These instruments are negotiable and represent publicly traded , local currency equity shares issued
by non-American Company.
Ø NRIs like to invest in these instruments.
Ø For Indian companies, it is a preferred source of raising capital.
Ø ADRs are listed on American Stock Exchange whereas GDRs are listed in stock exchange other than
American Stock exchange, say Luxembourg or London
Ø The process of issue of ADR involves delivery of ordinary shares of Indian company to a Domestic
Custodian Bank (DCB). In India, which instructs the overseas Depository Bank (ODB) to issue ADR
on the predetermined ratio.

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Ø ADR/GDR is an evidence of either American Depository Shares (ADS) or Global Depositor Shares
(GDS).
Ø Each ADS/GDS represents the underlying ordinary share of the issuing company.
Ø The holders of GDRs/ADRs are entitled to dividend, bonus shares and right issue.
Ø The holders may exercise their voting right through the ODB.
Ø Sale of GDRs outside India to non-residents is not taxable in India. Indian companies issuing
ADRs/GDRs need not approach Ministry of Finance, Govt. of India, for prior approval.
Ø Some of the companies who have gone in for ADRs are INFOSYS technology, Satyam Infoway ,ICICI
Bank, Silver line Tech ,Rediff.

CALL AND SHORT NOTICE MONEY MARKET

Call money refers to money given for a very short period.

Ø It may be taken for a day or overnight but not exceeding seven days in any circumstances. Surplus
funds of the commercial banks and other institutions are usually given as call money.
Ø Banks are the borrowers as well as lenders for the call funds. Banks borrow call funds for a short
period to meet the Cash Reserve Ratio requirements have been met.

Sometimes, individuals of very high financial standing may borrow money for a very short period to meet their
business financial needs. The rates of interest are very low on call funds. The call money loans may be given for
the purpose of dealing

Notice money is money, which can be for a period up to 14 days

Ø It appears on the asset side of a bank balance sheet and represents temporary loans to bill brokers,
stockbrokers and other banks.
Ø If the loan is given for one day, it is called “money at call”
Ø If the loan cannot be called back on demand and will require at least notice of 3 days, for calling back, it
is called ‘money at short notice’.
Ø The rate of interest on which money is lent fluctuates everyday, sometimes, very quickly depending
upon the demand for and supply of money.

REPURCHASE AGREEMENT (REPO)

Ø REPO’s is a market based instrument,it serves the purpose of a indirect instrument of monetary control
in a liberlised financial market.
Ø REPO is a money market instrument, which enables collateralized short term borrowing and lending
through sale/purchase operations in debt instruments.
Ø Under repo,a holder of securities sell them to an investor with an agreement to repurchase at a
predetermined date and rate
Ø Repo rate is the annualised rate for the funds transferred by the lender to the borrower.
Ø Repo is also called ready forward transaction as it involves selling a security on spot basis and
repurchases the same on forward basis.

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CENTRAL GOVERNMENT SECURITIES (GILT-EDGED SECURITIES)

The Government Securities/ bonds are known as ‘gilt-edged securities. The ownership of the gilt-edged
securities is largely limited to the banking system in India. The return on gilt-edged securities is much lower
than virtually all other forms of investment. The central Government issues securities for terms ranging from 1
year to 10 years either at a fixed rate or through auction

TERM MONEY
RBI has permitted some of the all India Financial Institutions like IDBI, ICICI, IFCI, HBI, SIDBI, NABARD, EXIM-
Bank etc. to borrow from the market for a period of three months and upto a period of not more than six
months within the stipulated limits. The rate of interest on the term money is determined between the parties by
mutual negotiation. The investment in term money is unsecured and the limits are fixed by the RBI. The term
money is accepted by their institutions at a discounted value. On the due date the payment will be equal to the
face value of the instruments.
TRADE BILLS
These are bills exchange arising out of bona fide commercial transactions. They include both inland bills and
foreign bills.

BANKERS' ACCEPTANCES
These are bills of exchange accepted by commercial banks on behalf of their customers. A Banker’s acceptance
is a draft against a bank, ordering the bank to pay some specified amount at a future date. The banker’s
acceptance is a very safe security.

HUNDIS
These are short-term credit instruments dealt with in the Indian money market. They refer to indigenous bills of
exchange drawn in vernacular languages and under various circumstances.

FRINGE MARKET
The fringe market is a disorganized money market, deemed to include everything that is outside the scope of the
money market. The fringe market include activities like the Inter-Corporate Deposit (ICD) market, small-scale
trade financing, financing of investments in the stock market, lending against promissory notes etc. The ICDs
market is the most visible feature of the fringe market.

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FUNDAMENTAL ANALYSIS
The intrinsic value of an equity share depends on a multitude of factors. The earning of the company, the
growth rate and the risk exposure of the company have a direct bearing on the price of the share
The fundamental school of thought appraised the intrinsic value of shares through
· Economic analysis
· Industry analysis
· Company analysis
The commonly analysed macro economic factors are as follows:
.
ECONOMIC ANALYSIS
The level of economic analysis has an impact on investment in many ways. If the economy grows rapidly, the
industry can also be expected to show rapid growth and vice-versa.
1. GROSS DOMESTIC PRODUCT:- GDP indicates the growth of the company. GDP indicates the aggregate
value of the goods and services produced in the economy.
GDP high growth rate in GDP--- favourable to stock market.
low growth rate in GDP---- unfavourable to stock market.

2.SAVING AND INVESTMENT:- stock market is a channel through which the saving of the investors are made
available to the corporate bodies. The saving and investment patterns of the public affect the sock to a great
extent.

3.INFLATION:- along with the growth of the GDP, if the inflation rate also increases, then the real rate of
growth would be very little.
Inflation inflation--- good for stock market
high inflation--- harmful for stock market

4.INTEREST RATE:- the interest rate affects the cost of financing to the firms. Availability of cheap fund,
encourages speculation and rise in the prices of shares.
Interest rate less interest rate--- favourable to stock market.
More interest rate---- unfavourable to stock market.

5.BUGET:- the budget draft provides an elaborate account of the government revenues and expenditures.
budget surplus budget--- favourable to stock market.
Deficit budget--- unfavourable to stock market.

6.THE BALANCE OF PAYMANT:- the balance of payment is the record of a country receipts from and payment
abroad. The difference between receipts and payments may be surplus and deficit.
B.O.P favourable BOP---- favourable to stock market.
Unfavourable BOP---- unfavourable to stock market.

7.INFRASTRUCTURE FACILITIES:- it is essential for the growth of industrial and agricultural sector. Good
infrastructural facilities affect the stock market favourably.

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Infrastructure facilities good facilities--favourable effect on S.M

Poor facilities—unfavourable effect on S.M

8.DEMOGRAPHIC FACTORS:- the demographic data provides details about the population by age, occupation,
literacy and geographic location. The population by age indicates the availability of able work force. The cheap
labour force in India has encouraged many multinational to start their ventures. Indian labour is cheaper
compared to the3 Western labour force.

INDUSTRY ANALYSIS
An industry is a group of firms that have similar technological structure of production and produce similar
products. Companies are distinctly classified to give a clear picture about their manufacturing process and
products.
1.INDUSTRY GROUP:-
· Food products
· Beverages
· Textiles
· Wood and wood products
· Chemical and chemical products
· Machinery and machine tools
2.TYPES OF INDUSTRY:-
These industries can be classified on the basis of the business cycle. They are classified into:
· Growth industry
· Cyclical industry
· Defensive industry
· Cyclical growth industry
· Growth industry:- the growth industries have special features of high rate of earnings and growth in
expansion, independent of the business cycle. The expansion of the industry mainly depends on the
technological changes. certain industries like colour television and telecommunication industries have
shown remarkable growth.
· Cyclical industry:- the growth and profitability of the industry move along with the business cycle.
During the boom period they enjoy growth and during depression they suffer a set back.
· Defensive industry:- defensive industry define the movement of business cycle. For example:- food and
shelter are the basic requirement of humanity. The food industry withstands recession and depression.
· Cyclical growth industry:- this is a new type of industry that is cyclical and at the same time growing.
For example: the automobile industry experiences periods of stagnation, decline but the grow
tremendously. The change in technology and introduction of new models help the automobile industry
to resume their growth path.

3.INDUSTRY LIFE CYCLE:-

· Pioneering stage:- in this stage the demand for the product is low and the producer try to develop
brand name, differentiate the product and create a product image. In this situation, it is difficult to
select companies for investment because the survival rate is unknown.

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· Rapid growth stage:-the companies have stable growth rate in this stage and they declare dividend
to the shareholders. It is advisable to invest in the shares of these companies.
· Maturity and stabilization stage:- in this stage, the growth rate tends to moderate and the rate of
growth would be more or less equal to the industrial growth rate. The investors have to closely
monitor the events that take place in the maturity stage of the industry.
· Declining stage:- in this stage, demand for the particular product and the earnings of the companies
in the industry decline. It is better to avoid investing in the shares of the low growth industry even
in boom period.
4.factor to be considered:- the investor has to analyse some other factors too. These are:
· Growth of the industry:-
· Cost structure and profitability
· Nature of the product
· Nature of the competition
· Govt. policy
· Labour

COMPANY ANALYSIS
· In the company analysis the investor assimilates the several bits of information related to the company
and evaluate the present and future values of the stock. The present and future values are affected by a
number of factors and they are:
Factors share value
Competitive edge Historical price of stock
Earnings P/E ratio
Capital structure Economic condition
Management Stock market condition
Operating efficiency
Financial performance

Future price Present price

1. Competitive edge:- the competitiveness of the company can be studied with the help of the market
share, the growth of annual sales, the stability of annual sales. The market share helps to determine a
company relative competitive position within the industry. The growth in sales of the company is
analysed both in rupee terms and in physical terms. In stability of sales, if a firm has stable sales
revenue, other things being remaining constant, will have more stable earning.
2. Earning of the company:- earning do not always increase with the increase in sales. The investor should
not depend only on the sales, but should analyse the earning of the company. The earning might have
been generated through the sales of assets.

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3. Capital structure:- capital structure is the combination of debt & equity. The debt ratio indicates the
position of long term and short term debts in the company finance. The debenture may be in the form of
debentures.
4. Management:- the management of the firm should efficiently plan, organize, and control the activities
of the company. The basic objective of management is to attain the stated objectives of company for the
good of the equity shareholders, the public and the employees.
5. Operating efficiency:- the operating efficiency of a company directly affects the earning of a company.
The expanding company that maintains high operating efficiency. If a firm has stable operating ratio,
the revenue will also be stable. A growing company should have low operating ratio to meet the
growing demand for its product. The operating efficiency of the firm determines the profit expectation
of the company.
6. Financial performance:- the best source of financial information about a company is its own financial
statement. The statement gives the historical and current information about the company operation. The
current information aids to analyse the present status of the company.

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Role & functions of stock exchange

· Maintain active trading
· Fixation of Prices
· Ensures Safe and fair dealing
· Aids in financing the industry
· Dissemination of information
· Performance Inducer
· Self-regulating organization

Market Making concept

In the market making, market makers offer two way quotes continuously i.e buy quote and sell quote. The main
objective behind the market making concept is to make the merchant bankers accountable even after an issue is
over. This promotes liquidity to small investor.
There are three types of market making:
· Compulsory Market Making
· Additional Market
· Voluntary Market Making

Dematerialization
Dematerialization is a process in which the physical certificates of an investor are takes back by the company.
The registrar destroys the shares and equivalent number of shares is certified in the electronic holdings of the
investor. This is done at the request of the investor.
The Process
6
NSDL Depository Participant
2
5
4 3 1 7

Registrar Investor

1. Surrendering of certificate to Depository Participants for dematerialization.

2. NSDL (National Security Depository Limited) is informed by the DP through electronic connectivity.
3. Original share certificates are submitted to the registrar by the DP.
4. The request for dematerialization from NSDL to the registrar.
5. The registrar credits an equivalent number of shares in the account and informs NSDL.
6. The NSDL updates its own account and the depository participants are informed.
7. The depository agent credit it in the account of the investor and the same is informed to the investor.

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Kondratev Wave Theory

Nikolay Kondratev was a Russian economist and statistician born in 1892. He helped develop the first Soviet
Five- year Plan. From 1920 to 1928 he was Director of the study of Business Activity at the Timiriazev
Agricultural Academy. While there, he devoted his attention to the study of Western capitalist economies. In the
economies of Great Britain and the United States, he identified long-term business cycles with a periods of 50-
60 years. He became well- known after the US market crash of 1929, which Kondratev predicated would follow
the US crash of 1870. His hypothesis of a long-term business cycle is called the Kondratev Wave Theory.
Note that the market crash for 1987 occurred 58 years after the crash of 1929, a period consistent with
Kondratev’s Theory. Some modern economists believe that Kondratev’s Theory has merits. Many others believe
that significant macro-economic changes, such as floating exchange rates, the elimination of the gold standard,
the reeducation of barriers to free trade, make the decision cycle less predictable, still, many market analysts
consider Kondratev’s work in their assessment of the stock market and its risks.

Chaos Theory
At recent finance conference, a few researchers have presented papers on the Chaos theory and its implication
to the stock market. In physics, Chaos theory is growing field of study examining instance in which apparently
random behavior is, in fact, quite systematic or even deterministic, Scientists apply this theory to weather
prediction, population growth estimates, and fisheries biology.
(1) As an example of the latter application, a given volume of ocean water, left free from human
interference, will not necessarily reach an equilibrium population of the various species that inhibit it.
As fishes grow, they consume the smaller fry(of their own or a different species) in increasing numbers.
Fewer younger fishes are left to mature; this coupled with the natural death of the older fish, eventually
results in a sudden drastic reeducation in fish population, causing dismay to fishermen and excitement
in the local media. At the same time, it result in reduced predation and competition for food among the
surviving fry, so the population begins dramatically, and the cycle continues. Interactions between
species add complexity to the process.
(2) Investment analysts have sought a pattern in stock behaviour since the origin of the exchange. Msssuch
remains unknown about how security prices are determined, and Chaos theory may eventually
provided some potential answers. If the apparent randomness of security price changes, can be shown
to be non-random, much of the theory of the finance would need revision.

Bar chart & Line Chart

The Bar chart is the simplest and most commonly used tool of a technical analyst. To build a bar a dot is entered
to represent the highest price at which he stock is traded on that day, week or month. Then another dot is
entered to indicate the lowest price on that particular date. A line is drawn to connect both the points a
horizontal nub is drawn to mark the closing price. Line charts are used to indicate the price movements. The
line chart is a simplification of the bar chart. Here a line is drawn to connect the successive closing prices.

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Efficient market

If all the investments are plotted on the risk-return sphere,

individual securities would be dominated by portfolios, and the
efficient frontier would take shape, indicating investments
which yield maximum return given the level of risk bearable,
or which minimises risk given the expected level of return. The
figure depicts the boundary of possible investments in
securities A, B, C, D, E and F; and B, C, D are lying on the
efficient frontier.

Market Portfolio
The combination of all risky assets is called as market portfolio. In market portfolio an investor is assumed to
invest in only risky assest.
Leverages Portfolio
To have a leveraged portfolio, investor has to consider not only risky assets but also risk free assets. He should be
able to borrow and lend money at a given rate of interest.
1. CAAR
v Recent developments in the Indian stock market.
1. Recent development/ Trends/Reforms in Primary market.
2. Recent development/ Trends/Reforms in Primary market.
Extra:
1. CAPM Theory
2. Characteristic line
3. Arbitrageurs
4. Depository system / DEMAT
5. Indian Institutional Investors (IIIs)
Foreign Institutional Investors (FIIs)
Foreign Institutional Investors are those investors are those investors who are non-resident in the nature but invest
the money in the capital or primary or secondary market securities including the government securities. It has to
be channelised within the framework of guidelines from the Government/RBI/SEBI. Foreign Institutional
investors include foreign pension funds, mutual funds, investment trusts, asset management companies, nominee
companies and the incorporated and institutional portfolio managers or their power of attorney holders.

Credit Rating Agencies:

1. Credit Rating and Information Services of India Ltd. (CRISIL)
2. Credit Analysis and Research (CARE)
3. Investment Information and Credit Rating Agency of India Ltd. (ICRA)
4. Duff & Phelps Credit Rating India (DCR)

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SECURITY MARKET LINE

•When CAPM is depicted graphically its called SML
The line that graphs the systematic, or market, risk versus return of the whole market at a certain time and
shows all risky marketable securities.
•The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The X-axis
represents the risk (beta), and the Y-axis represents the expected return. The market risk premium is
determined from the slope of the SML.
•It is a useful tool in determining if an asset being considered for a portfolio offers a reasonable expected return
for risk. Individual securities are plotted on the SML graph.

CAPITAL MARKET LINE – CML

•A line used in the capital asset pricing model to illustrate the rates of return for efficient portfolios depending
on the risk-free rate of return and the level of risk (standard deviation) for a particular portfolio
•The CML is derived by drawing a tangent line from the intercept point on the efficient frontier to the point
where the expected return equals the risk-free rate of return.

The CML is considered to be superior to the efficient frontier since it takes into account the inclusion of a risk-
free asset in the portfolio. The capital asset pricing model (CAPM) demonstrates that the market portfolio is
essentially the efficient frontier. This is achieved visually through the security market line (SML).

Optimal portfolio
The optimal portfolio concept falls under the modern
portfolio theory. The theory assumes (among other
things) that investors fanatically try to minimize risk
while striving for the highest return possible. The theory
states that investors will act rationally, always making
decisions aimed at maximizing their return for their
acceptable level of risk.
The chart below illustrates how the optimal portfolio
works.
A portfolio that gives maximum return with minimum risk is called optimum portfolio.

Characteristic Line

A line that best fits the points representing the returns on

the assets and the market is called ‘characteristic line’.

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Hybrid Instruments
A warrant is a long-term call option issued along with a bond or on a standalone basis. Warrants are generally
detachable from the bond, and they trade separately. When warrants are exercised, the firms receive additional
equity capital and the original bonds remain outstanding. Warrants are 'sweeteners' that are used to make the
underlying debt or preferred share issue more attractive to investors.

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