Overview of global capital market.

Market indices and overview of Securities market in India Primary and Secondary market

Agenda (Lecture 1 and 2)

What is Investment? Investment Alternatives Investment Vs Speculation Investment Vs Gambling Financial Markets and its Functions Classification of Financial Markets What is Capital Market? Bonds or Fixed Income Securities Equity Shares Attraction of Global Capital Market Stock Market Indices and its computation SEBI Overview of Security Analysis Overview of Portfolio Management

The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.

Investment Alternatives
Non-Marketable Financial Assets (eg: Bank Deposits, Post office deposits etc) Equity Shares Bonds Money Market Instruments (Debt Instruments having maturity of less than one year at the time of issues) Mutual Funds Life Insurance Real Estate Precious Objects Financial Derivatives

Investment Vs Speculation
"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative. Graham & Dodd Speculation: The activity of forecasting the psychology of the market. John Maynard Keynes

Investment Vs Speculation
Investor Planning Horizon Speculator Relatively longer Very short planning planning horizon, usually horizon at least one year Normally not willing to assume more risk Usually seeks a modest rate of return. Attaches greater significance to fundamental factors and attempts a careful evaluation of the prospects of the firm Typically uses his own funds. Ordinarily willing to assume high risk Looks for high rate of return Relies more heavily on hearsay, technical charts and market psychology

Risk Disposition Return Expectations Basis for decisions

Leverage

Normally resorts to substantial amount of borrowing

Investment Vs Gambling
Gambling is fundamentally different from speculation

and investment. Compared to investment and speculation, the result of gambling is known more quickly Rational people gamble for fun, not for income Gambling creates risk without providing any commensurate economic return

Financial Markets and its Functions

A financial market is a market for creation and

exchange of financial assets. Functions: Facilitates Price Discovery Provides Liquidity to Financial assets Considerably reduce the cost of transacting

Classification of Financial Markets

There are different ways to classify financial markets: Nature of claim: Debt market and Equity Market Maturity of Claim: Money Market and Capital Market Timing of delivery: Cash or spot market and forwards or futures markets Organizational Structure: Exchange traded or Over the counter

MONEY MARKET
Function of a money market is to channel savings into short term productive investment with minimum risk. Money market instruments: Call money Term money Treasury bills Commercial papers Certificates of deposits, etc. Assignment 1: Write a brief description of the above terms? Submission by Monday evening.

Financial Markets Capital Market Money Market Primary Market Secondary Market Forex Market Forward Market

Primary Market

Secondary Market

Spot Market

Cash Market

Derivatives Market

What is Capital Market

A capital market is a market for securities (debt or

equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year.
The capital market includes the stock market (equity

securities) and the bond market (debt).

The main economic role of a capital market is to match

players who have excess funds to players who are in need of funds.

Capital Market
Primary Market Secondary Market

Stock Market

Bond Market

Bonds or Fixed Income Securities

Bond or Debentures represent long-term debt instruments. The issuer of a bond promises to pay a stipulated stream of cash flows. Various fixed income instruments include: Government securities or gilt edged securities RBI saving bonds Debentures Public sector undertaking bond

Equity Shares
Equity capital represents ownership capital. Equity shareholders bear the risk and enjoys the reward of ownership.
Stock markets classify equity shares as:

Blue chip shares (Shares of Large well established, and financially strong companies with an impressive record of earnings and dividend)
Growth shares (Shares of companies which enjoys an above average rate of growth as well as profitability) Income shares (Shares of companies with fairly stable operations, high dividend payout ratios).

Equity Shares
Defensive shares (Shares of companies that are generally unaffected by ups and down in general business conditions)

Speculative shares (Shares that tend to fluctuate widely because there is a lot of speculation trading in them).

Types of Corporate Stock

Preferred Stock
Fixed dividends, priority over common stock

Common Stock
Variable dividends, based on companys profits.

Convertible
Preferred stock that can be converted into

common stock at a stated price

Attraction of the Global Capital Market?

Increases the supply of funds available for borrowing. Borrowers perspective

Lowers the cost of capital. Investors perspective Provides a wider range of investment opportunities.

Growth of Global capital market: - TECHNOLOGY. - Deregulation by governments of capital flows and financial services.

Risk Reduction Through Portfolio Diversification

(a) Risk reduction through domestic diversification
1.0
Variance of portfolio return Variance of return on typical stock 0.27 Total Risk 1 10 20 Systematic Risk 30 40 50 U.S. Stocks

Number of stocks

Risk Reduction Through Portfolio Diversification

(b) Risk reduction through domestic and international diversification
1.0
Variance of portfolio return

Variance of return on typical stock

0.27 0.12 1 10

U.S. Stocks International Stocks

20 30 40 Number of stocks

50

Stock Market Indices

With large number of companies listed on the Bombay stock

exchange and NSE, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward.
An index is basically an indicator. It gives you a general idea

about whether most of the stocks have gone up or most of the stocks have gone down.
Some of the stock market indices are BSE Sensex, BSE-200,

NSE-50 etc.
The Sensex is an indicator of all the major companies of the BSE

and Nifty is an indicator of all the major companies of the NSE.

Computation of stock index

Suppose the Index consists of only 2 stocks: Stock A and Stock B.

Shares

Total Shares

Held by Promoters

Free Floating Shares

Current Total Market Market Price Capitali zation 120 200 120000 400000

Free Float Market Cap 96000 200000

A B

1000 2000

200 1000

800 1000

So as of today the market capitalization of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalization of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).

Computation of stock index

The year 1978-79 is considered the base year of the index with a

value set to 100. What this means is that suppose at that time the market capitalization of the stocks that comprised the index then was, say, 60,000 then we assume that an index market cap of 60,000 is equal to an index-value of 100. Thus the value of the index today is = 296,000 x 100/60,000 = 493.33 This is how the Sensex is calculated. The factor 100/60000 is called index divisor. Note: During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.

Differences between the indices

The main factors that differentiate one index from the

other are given below:

1. The number of the component stocks 2. The composition of the stocks 3. The weights 4. Base year

Major stock market indices

Major stock market indices

SEBI (Securities & Exchange Board of India)

SEBI is the authority regulating the securities market of India. All the listed companies have to comply with its rules. Companies are allowed to issue capital provided the issues are in conformity with the published guidelines relating to disclosure ad other matters relating to investor The stock exchanges also come under the purview of SEBI. The functioning of stock exchanges is regulated by SEBI.

Security Analysis
The process of analyzing the individual securities and the

market as a whole and estimating the risk and return expected from each of the investments with a view to identifying undervalued securities for buying and overvalued securities for selling is both an art and a science and this is what is called security analysis.
Security Analysis involves the projection of future

dividend, or earnings flows, forecast of the share price in the future and estimating the intrinsic value of a security based on the forecast of earnings or dividends.

Portfolio Management
The portfolio analysis is an analysis of the risk-return

characteristics of individual securities in the portfolio and changes that may take place in combination with other securities due to interaction among themselves and impact of each one of them on others.

Portfolio Management Process

Determine investment objectives and policies
Undertake a security analysis Construct a portfolio Review of portfolio Evaluate the performance

Thank You