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Investment and Securities:-

 Financial Investment is the allocation of funds to assets and securities after

considering their return and risk features.
 Investor plans for a long horizon after considering the fundamental factors and
assumes moderate risk.
 Speculators are interested in short term gains and their buying and selling are based
on the market price movement.
 The main objective of the rational investors are maximizing returns and minimizing
risks. Safety of the principal, tradability and liquidity are his subsidiary objectives.
 The investor should have the knowledge about the economy, the company and the
market structure.
 Equity shares have the right to receive dividend and residual claim.
 Sweat equity is issued to employees or directors at a discount for their contributions
in technical know-how or other specified area.
 Right shares are issued to the existing shareholders art a price, on the pro-data basis.
 Bonus shares are issued to the existing shareholders freely in addition to the dividend
from the company’s reserves.
 Preference stocks have fixed dividends but have a perpetual liability on the

Investment Alternatives:-
 Investment alternatives are many in number. They are negotiable financial securities
and non-negotiable financial investments. Equity offers high return with high risk.
Bonds provide steady and fixed flow of income. The Securities are issued by
Government are secured investments. Treasury bills carry a very low rate of interest.

Commercial paper has short-term maturity and is favoured by companies and

institutional investors.
 Certificate of deposit’s denomination is high and the interest rate is also high.
 Banks’ deposits are safe form of investment. At present accounts like maxi cash
saving, quantum optima, in 1 account and cluster accounts are offered.
 The age old post-office deposit pays higher interest rate. Post office monthly income
scheme’s annualized yield is higher.
 NBFC deposits offer high rate of interest. The risk associated with them also is high.
RBI has laid down several rules to regulate them.
 Public provident scheme is the post office scheme with the early withdrawal facilities.
In NSS, the main advantage is the deferred tax payment. Withdrawal of entire
amount in single period results in heavy taxation.
 Investment in National Saving Certificate provides tax exemption under section 80L.
 Life insurance provides wide variety life and accident cover. Deductions are allowed
under section 80 DD.
 Mutual Funds collect funds from investors and invest in equities or money market as
specified by the schemes.
 Gold and silver are the real asset form of investment. The appreciation of gold prices
is rather very low in the past few years.
 Real estate is a lucrative form of investment with high capital appreciation.
 Knowledge about arts and antiques is the essential pre-requisite for investment in arts
and antiques.

New Issue Market:-

 In the MIM stocks are offered for the first time. The function and the organization of
the new issue market is different from the secondary market.
 In the new issue, the lead managers manage the issue, the underwriters assure to take
up the unsubscribed portion according to his commitment for a commission and the
bankers take up the responsibility of collecting the application form and money.
Advising agencies promote the new issue through new advertising. Financial

institutions and underwriters lend them loans to the company. Government agencies
regulate the issue.
 The new issues are offered through prospectus. The prospectus is drafted according
to SEBI guidelines disclosing the needed information to the vesting public.
 In the bought out deal banks or a company buy the promoter’s shares and they offer
them to the public at a later date. This reduces the cost of raising funds.
 Private placement means placing of the issue with financial institutions. They sell
shares to the investors at a suitable price.
 Right issue means the allotment of shares to the previous shareholders at a pro-ratio
 Book-building involves firm allotment of the instrument to a syndicate created by the
lead managers. The book runner manages the issue.
 Norms are given by SEBI to price the issue. Proportionate allotment method is
adopted in the allocation of shares.
 Project appraisal, disclosure in the prospectus and clearance of the prospectus by the
stock exchanges protect the investors in the primary market along with the active role
played by the SEBI.

The Secondary Market:-

 Outstanding securities are traded in the secondary market.
 Stock exchanges are regulated by the Ministry of Finance, SEBI and the governing
board of the stock exchange.
 Share groups are divided into A, B1 and B group shares.
 Rolling settlements has been introduced.
 Trading can be carried out online.
 Value at risk based margin is introduced.

Listing of Securities:-
 Listing means admission of a public company stocks to be traded on the stock

 To be listed on the stock exchange there should be minimum issued capital and
number of share holders. The minimum issued capital size differs from one stock
exchange to another.
 To get listed, the company has to apply to the stock exchange. Its articles of
Association should be approved. The draft prospectus also should be approved by the
SEBI and concerned stock exchange.
 Separate norms have been prescribed for the listing of shares.
 Delisting may be done compulsorily by the stock exchanges for the reasons like
nonpayment of listing free and other. Voluntary delisting by the companies is
permitted in cases like sickness or closure or thin trading.

Stock Exchanges:-
 The oldest stock exchange BSE is having screen based trading. Price and volume
surveillance is carried out effectively.
 NSE provides screen base, transparent and order driven system. In terms of volumes
and trade NSE stands as a premier stock exchange in India.
 The aim of ISE is to co-operate the trade of the regional stock exchanges.
 OTCEI was established with the purpose of providing a fair trade platform for the
shares of the small cap companies. But later for the survival, companies with
medium and large capital base are permitted to trade in OTCEI.
 The NSDL keeps investors’ securities in the electronic form and settlements are
carried out though book entry.

SEBI – Securities and Exchange Board of India:-

 SEBI was formulated with the aim of protecting the investors, promoting and
regulating the securities market. It is vested with wide range of powers to discharge
its functions.
 In the primary market SEBI Hs tightened the entry norms, laid down rules for
promoters’ contribution.

 The draft prospectus has been modified to provide adequate disclosure to the
investors. Book building has been introduced. The allocations of shares have to be
done within 30 days of the closure of subscription. The fund based and fee based
activities of the merchant bankers are segregated.
 In the secondary market electronic trading is necessary for getting recognition for a
new stock exchange. Weekly settlements are introduced. Rolling settlement methods
is introduced in the dematerialized form. FIIs are allowed to invest in the Indian debt
market. Price filters and margins are introduced to reduce the price volatility.
 Brokers have to get registration. Brokers have to submit their audited balance sheet.
SEBI has the right to inspect the broker’s books and can take disciplinary action.
 To regulate the mutual funds’ disclosure norms standard offer document is prescribed
by SEBI. Investment and management of Mutual Funds are regulated.
 SEBI (Foreign Institutional Investors) Regulation 1995 has laid down regulations for
the registration of FIIs, custodians, preferential allotment and investment limits.
 Risk is measured by the variability of return. Risk has two components, systematic
and unsystematic risk.
 Systematic risk affects the market as a whole. Tangible event like Pokaran blast and
intangible event like Investor’s psychology affect the entire stock market which is
known as market risk.
 Interest rate risk is the variation in return caused by the changes in the market interest
 Purchasing power risk is caused by inflation. Information reduces the real rate of
return earned from the securities.
 Unsystematic risk is unique to the particular industry or company. This is classified
into business risk and financial risk.
 Business risk is caused by the operating environment of the business. This may be
caused by the internal factors like fluctuations in sales or personnel management or
external factors like government policies, rules and regulations.
 Financial risk emerges from the debt component of the capital structure.

 A careful analysis of the past, planning and diversification of the investment can
moderate the effects of the various risk factors.
 Statistically standard deviation and beta estimation help to quantify the risk.
Fundamental Analysis:-
 Fundamental Analysis is the study of economic factors, industrial environment and
the factors related to the company.
 The state of the economy determines the growth of gross domestic product and
investment opportunities.
 An economy with favourable savings, investments, stable prices, balance of payments
and infrastructure facilities provides a best environment for common stock
 The leading coincidental and lagging indicators help to forecast the economic growth.
A rising stock market indicates a strong economy ahead.
 Industrial growth follows a pattern. Buying of shares beyond the pioneering stage
and selling of shares before the stagnation stage are ideal for the investors.
 The cost structure, research and development and the government policies regarding
the industries influence the growth and profitability of the industries. SWOT analysis
reveals the real status of the industry.
 The competitive edge of the company could be measured with the company’s market
share, growth and stability of its annual sales.
 The financial statements of the company reveal the needed information for the
investor to make investment decision.
 The financial health of the company could be analysed with the fund flow and cash
flow statements. The ratio analysis helps the investor to study the individual
parameters like profitability, liquidity, leverage and the value of the stock.

Technical Analysis:-
 The technical analysis studies the behaviour of the price of the stock to determine the
future price of the stock.

 Stock price movements are divided into three: the primary Tmovement, the secondary
movement and the daily fluctuations.
 A primary trend may be a bull market moving in a study upward direction, or a bear
market steadily dropping.
 A secondary trend or secondary reaction is the movement of the market contrary to
the primary trend.
 Support level is the barrier for further decline. It provides a base for an up move.
The resistance level is the level in which advances are temporarily stopped and the
sellers overcome the demand.
 Volume of the trade confirms the trend. Fall of volume with the rise in price
indicates trend reversal and vice-versa.
 Breadth of the market is the net number of stocks advancing versus both those
declining in the market. If the A/D line slopes downward while sensex is rising, it
gives a bearish signal and vice-versa.
 Moving averages are used as a technical indicator. It smoothens out the short term
fluctuations, helpful in comparing the stock price movement with the index
movement and discovering the trend.
 Oscillators show the market or scrip momentum to find out the overbought and
oversold conditions of the market or scrip. Relative strength index and rate of change
index are the commonly used oscillators.
 Charts are the major analytical tools used in technical analysis. Points and figure
chart is one-dimensional chart drawn to predict the extent and direction of the price
movement. Ordinary bar charts generate numerous patterns. These patterns indicate
the trend and the trend reversals.

Efficient Market Theory:-

 The market efficiency is the accuracy and the quickness in which the price reflects the
market related information.
 In the weak form of market, current prices reflect all the information found in the past
prices and traded volumes. Filter rule, runs test and serial correlation are adopted to
find out the market efficiency.

 In the semi-strong form of market, all the publicly available information is reflected
by the security prices.
 In the strong form of market, all the information is fully reflected by the stock prices.
 The low P/E effect, small firm effect and weekend effect are cited as some of the
inefficiencies of the market.

Options and Futures:-

 An option is a contract between two investors that provides the buyer the right (but
not the obligation) to sell or buy the specified asset from the other investors at the
predetermined price within a specified period.
 The call option gives the investor the right to buy (not the obligation) from the option
writer at the specified price at any time during the specified period.
 A put option gives the buyer the right to sell a specified number of stocks of a
company to the option writer at a specified price at any time during the specified
 The values of the call and put options affected by the prices of the underlying stocks,
the striking price of the stock and the option period.
 The black-Scholes theory says that the option price is determined by the market price
of the stock, the exercise price, the life of the option the risk free rate and the risk of
the common stock. The last two factors are assumed to be constant over the option’s
 The stock index features are the futures contracts made on the major stock market
indices. It is an obligation and not an option.

Portfolio-Marcowitz Model:-
 Morkowitz developed algorithms to minimise portfolio risk. Diversification reduces
the unsystematic risk component of the portfolio.
 The level of risk exposure is measured with the help of the standard deviation of the
returns. The expected return is the weighted sum of the expected return of the
portfolio, the weights being the probabilities of their occurrence.

 If securities with less than perfect positive correlation between their price movements
are combined risk can be reduced considerably. The risk would be nil or the standard
deviation would be zero of two securities have perfect negative correlation. Risk
cannot be reduced if the securities have perfect positive correlation.
 Many portfolios may be attainable. But some portfolios are attractive because they
give more return for the same level of risk or same return with lesser level of risk.
These portfolios form the efficient frontier.
 Utility curves of the investor decide the most efficient portfolio.
 In the levered portfolio, investor is permitted to borrow and lend. Risk free assets are
also added with risky assets and it would minimise risk.

The Sharpe Index Model:-

 The Sharpe model is based on the security’s return relationship with the index return.
Beta is the deciding factor in measuring the systematic risk. The systematic and
unsystematic can be computed with the Sharpe model.
 Using the Sharpe model, portfolio return and risk can be computed easily, compared
to the Markwitz model.

Capital Asset Pricing Model: - (CAPM)

 The CAPM is based on specific assumption. The investor could borrow or lend any
amount of money at risk less rate of interest.
 All investors hold only the market portfolio and the riskless securities.
 Market portfolio consists of the investments in all securities of the market. The
proportion invested in each security is equal to the percentage of the total market
capitalization represented by the security.
 The capital market line represents the relationship between the expected return and
standard deviation of the portfolio.
 The risk of the security is indicated by its covariance with the market portfolio.
 Security market line shows the linear relationship between the expected returns and
beats of the securities.

 The objective of the asset pricing model is to identify the equilibrium asset price for
expected return and risk. If the asset prices are not equal, there is a scope for
 An arbitrage portfolio is constructed without any additional financial commitment.
 Investors indulge in arbitrage, moving the price upwards if securities are held in short
position, till the elimination of the arbitrage possibilities.
 The factor sensitivity in arbitrage model indicates the responsiveness of a security’s
return to a particular factor.

Portfolio Evaluation:-
 Portfolio evaluation is carried out to assess the risk and return of the different
 Mutual funds pool together the funds from investors by selling units and invest them
in different types of securities.
 Closed-end funds are open for a specific period for subscription. The open-ended
funds units are available continuously.
 Sharpe index is a measure of risk premium related to the total risk.
 Treynor index measures the funds’ performance in relation to the market
 Jenson index compares the actual or realized return of the portfolio with the
calculated or predicted return. Better performance of the fund depends on the
predictive ability of the managerial personnel of the fund.

Portfolio revision:-
 Passive management of funds consists of indexing of the stocks to be purchased.
 In active managements funds are allocated to buy active stocks in the market.
 Aggressive portfolio consists of more of common stocks while conservative
portfolio consists more of bonds or debentures.
 Portfolios are revised with the help of formulae plans.

 In the rupee cost averaging techniques, varying amount of shares are bought at
regular intervals. This is time diversification of the portfolio.
 According to the constant rupee plan constant amount of fund is maintained for
the shares. The shifting of funds from aggressive to conservative portfolio or
vice-versa occurs according price fluctuations.
 In the variable ratio plan, the proportions of funds on aggressive and conservative
portfolios change according to the varying levels of security market prices.
 In an equity swap two parties agree to make payments to each other based on the
stock market price and interest rate.


Define an investment.
Investment means conversion of cash or money into monetary asset or a claim on future
money for a return. Purchases of asset like shares and securities can either for investment
or speculate or both. Investment is long term in nature.

What is a Security Analysis?

It is a 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. It
includes Market analysis, industry analysis, and company analysis.

What is the meaning of Company analysis?

Company analysis is a study of the variables that influence the future of the firm both
qualitatively and quantitatively. In the company analysis the investor assimilates the
several bits of information relate to the company and evaluate the present and future
values of the stock. The risk and return associated with the purchase of stock is analysed
to take better investment decision.

How is technical Analysis different from Fundamental Analysis in investment


The fundamental analysis believes in the intrinsic value of a share. But technical analysis
makes a forecast of a demand and supply factors operating in a market and their
discussions centre around the short run shifts in these factors.

How charts interpreted in technical analysis?

The line and bar charts and point and figure charts are analysed in the following:-
1. Head and shoulders top are supposed to have two shoulders, left and right and
a head.
2. The Left shoulder is seen during the time when there is a bull in the trading
market followed by heavy purchases.
3. Right shoulder prices rises moderately.
4. Head-Heavy purchases in the market.
Confirmation: This is indicated by drawing a line which is tangent to the left and
right shoulders.

Explain the term Portfolio.

It is a pool of different securities in one basket or investors like to invest in a group or
different collections of securities. Such a group of securities is called portfolio.

What is arbitrage pricing theory?

The arbitrage pricing theory is an equilibrium theory of the relationship between security
expected returns and relevant security attributes.

Define debt market.

It is a market where debt instruments are available.

State the criteria for evaluation of portfolio.

Return: investors always expect a good rate of return from their investment.
Risk: Risk of holding securities is related with the probability of actual return becoming
less than the expected return.

Safety: The selected investment avenue should be under the legal and regulatory
Liquidity: - Marketability of the investment provides liquidity to the investment.
Hedge against inflation: - Since there is inflation in almost all the economy, the rate of
return should ensure a cover against the inflation.

What is a 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. Speculators willing to take high risk.

List any two characteristics of common stock.

Equity shares are commonly referred to common stock or ordinary shares. Ordinary
shareholders have residual claim on a company’s income and assets. They are legal

Distinguish between IPO and FPO.

IPO stands for Initial Public Offer and FPO stands for Follow on Public Offer.
Any company, let say for instance, the Power Finance Corporation needs money to lend
funds to power producers in India. It offers shares to the general public and financial
institutions like mutual funds and qualified institutional buyers in a given range (say
between Rs 73 and Rs 85) referred to as the price band. An IPO lets a company sells its
shares to the public and get money in return. It is so called because it is the first time that
a company sells its shares to the public. The IPO market is also referred to as the primary
market in some parlance.
A company that is already listed on the stock exchanges cal also approach investors for
funds. If Infosys tomorrow comes with another public offer it will then be an FPO as
Infosys is already a listed company. Normally, FPOs are offered at a discount to the
existing market price of that company. This is to make a particular issue attractive for the
potential investors.

Gambling is an act of creating artificial and unnecessary risks for expected increased
return. A gamble is a very short term investment based on rumours and hunches.
Gambling is undertaken just for thrill and excitement. In short, gambling involves
acceptance of exordinary risks even without a thorough knowledge about them for
pecuniary gains. Horse racing, playing cards, lottery etc., are typical examples.
Capital Market:-
Capital market is a market for financial assets which have a long maturity period. Capital
market may be divided into:-
 Government security market.
 Industrial security market.
 Long term loan market which is further subdivided into-
 Term loan market,
 Mortgage market and
 Market for financial guaranties.

New issue market:-

Securities available for the first time are offered through the primary securities market.
The issue may either be a new company or an existing company. In the new issue market,
issuing houses, investment brokers and underwriters take up the responsibility of selling
the stock to the public.

Underwriting refers to the guarantee for ensuring the marketability of an issue. It is an
agreement under which the underwriter promises to subscribe to a specified number of
shares or debentures in the event of public not subscribing to the issue. If the issue is
fully subscribed, the liability of the underwriter does not arise.

Offer for sale:-


While sale through prospectus is a direct method, the offer for sale is an indirect method
of floating new shares. Under this method, securities are offered to public through
intermediaries such as issue houses and brokers. Two stages are involved in the sale of
securities. First, the issuing company issues securities to issuing houses and brokers at a
fixed price. Secondly, the intermediaries resell the securities to the ultimate investors at a
higher price. The profit charged by the issue houses in known as “turn” or “spread”.
This method is advantages to the issuing company as it is relieved from the burden of
printing and advertising prospectus.
Under this method, the issue is placed with limited number of financial institutions,
corporate bodies and noteworthy individuals. These intermediaries, purchases the shares
and sell them to investors at a later date at a suitable price. Placement gives a number of
advantages. First, there is no need for underwriting arrangements, as the placement itself
amounts to underwriting. Secondly, private placement securities are sold to financial
institutions like UTI, Mutual Funds, Insurance companies, merchant banking subsidiaries
of reputed commercial banks. As these institutions are popular among the investing
public, securities can be easily sold to them. Thirdly, this method is suitable when the
issuing company is small in size.

Right Issue:-
Shares of existing companies which are already listed in the stock exchange are sold
through right issue. Under right issue, the shares are first offered to the existing share
holders. These shares are called right shares. The rights themselves are transferable and
saleable in the market by the shareholders who are entitled to buy right shares. Under
section 81 of the Companies act , a company which issues new shares either after two
years of its formation or after one year of first issue of shares, which ever is earlier has to
first offer them to the existing shareholders.

Bonus Issue:-
A method of marketing the securities of a company by converting its accumulated
reserves and surplus profit, it takes the form of ‘bonus issue method’. Bonus issue

merely implies capitalization of existing reserves and surplus of a company. The issue of
bonus shares is subject to certain rules and regulations. The issue does not in any way
affect the resources base of the enterprise. It saves the company enormously of the
hassles of capital issue.

Initial Public Offer (IPO):-

The public issue made by a corporate entity for the first time in its life is called ‘IPO’.
Under this method of marketing, securities are issued to successful applicants on the basis
of the orders placed by them, through their brokers.
When a company whose stock is not publicly traded wants to offer that stock to
the general public, it takes the form of Initial Public Offer. The job of selling the stock is
entrusted to a popular intermediary, the underwriter. An underwriter is invariably an
investment banking company. He agrees to pay the issuer a certain price for a minimum
number of shares, and then resells those shares to buyers, who are often the clients of the
underwriting firm. The underwriters charge a fee for their services.

A method of marketing the shares of a company whereby the quantum and the price of
the securities to be issued will be decided on the basis of the ‘bids’ received from the
prospective shareholders by the lead merchants bankers, is known as “book-building
method”. Under the book-building method, share prices are determined on the basis of
real demand for the shares at various price levels in the market. For discovering the price
at which issue to be made, bids are invited from prospective investors from which the
demand at various price levels is noted. The merchant bankers undertake full
responsibility for the issue. The initial minimum size of issue through book-building
route was fixed at Rs 100 Crores, however, from 9.12.1996, issues of any size are

Bought-out Deals:-
A method of marketing of securities of a body corporate whereby the promoters of an
unlisted company make an outright sale of a chunk of equity shares to a single sponsor or
the lead sponsor, is known as ‘bought-out deals’.

A document that contains information relating to the various aspects of the issuing
company, besides other details of the issue is called ‘prospectus’. The document is
circulated to the public. The general details include the company’s name and address of
its registered office, the name and address of the company’s directors, manager,
managing director, directors, company secretary , legal advisors, auditors, bankers
brokers etc.,, the date of opening and closing of subscription list, contents of articles the
names and addresses of the underwriters, the amount underwritten and the underwriting
commission, material details regarding the project, i.e., location, plant and machinery,
collaboration, performance guarantee, infrastructure facilities, etc. nature of products,
marketing set-up, export potential and obligation, past performance and future prospects,
management perception regarding risk factor, credit rating obtained from any other
recognized rating agency, a statement regarding the fact that the company will make an
application to specified stock exchange for listing its securities and so on.

Employees Stock Option:- ESOP

A method of marketing the securities of a company whereby its employees are
encouraged to take up shares and subscribe to it is known as stock option. It is a
voluntary scheme on the part of the company to encourage employees’ participation in
the company. The scheme also offers an incentive to employees to stay in the company.
The scheme is particularly useful in the case of companies whose business activity is
dominantly based on the talent of the employees, as in the case of software industry. The
scheme helps retain the most productive employees in an industry, which is known for its
constant churning of personnel.

Pricing of issues:-

While fixing an appropriate price, the relevant guidelines for capital issues given by SEBI
from time to time must be considered. Companies, themselves in consultation with the
merchant bankers, do the pricing of issues. While fixing a price for the security issue, the
following factors should be considered:
Qualitative factors, which include the prospects of the industry, track record of the
promoters, the competitive advantage the company has in making the best use of the
business opportunities, and growth of the company as compared to the industry etc.,
Quantitative factors, which include the earnings per share, book value, the average
market price for 2 to 3 years, dividend payment, record, the profit margins, the composite
industry price earnings ratio and the future prospects of the company, etc. with the
abolition of the office of the Controller of Capital Issues, companies can adopt free


The Bombay on-line trading system (BOLT) is CMC’s on-line trading system for trading
in stocks. The system is operational at Bombay Stock Exchange.
BSE on-line trading system (BOLT)
National Exchange for Automated Trading (NEAT). NSE terminal.

P/E ratio:-
The reciprocal of the earnings yield is called the Price-earnings Ratio (P/E) Thus:
Market value per share
Price Earning Ratio =-----------------------------
Earnings per share

Intrinsic Value of Security:-

The actual value of the company or an asset based on an underlying perception of its true
value including all aspects of the business, in terms of both tangible and intangible
factors. This value may or may not be the same as the current market value. Value
indicators use a variety of analytical techniques in order to estimate the intrinsic value of

securities in hopes of finding investments where the true value of the investment exceeds
its current market value.
Intrinsic value of share = Normalized EPS X Expected P/E ratio
Cash dividend / EPS
Expected P/E ratio = -------------------------
Discount rate-Growth rate

Oscillators indicate the market momentum or scrip momentum. Oscillator indicators
have a range, for example between zero and 100 and signal periods where the security is
overbought (near 100) or over sold (near zero). Non bounded indicators still form buy
and sell signals along with displaying strength or weakness, but they vary in the way they
do this. Signaling the trend reversal, rise or decline in the movement.

Breadth of the Market:-

A technical analysis theory that predicts the strength of the market according to the
number of stocks that advance or decline in a particular trading day. The breadth of
market indicator is used to gauge the number of stocks advancing and declining for the
day. If the breadth indicator is strong, this theory predicts that the market will be rising
vice versa.

Open-ended funds:-
An open-ended fund or scheme is one that is available for subscription and repurchase on
a continuous basis. These schemes do not have a fixed maturity period. Investors can
conveniently buy and sell units at Net Asset Value related prices after deduction of exit
load, if any which are declared on a daily basis. The key feature of open-ended schemes
is liquidity.

What are the different stages in industry life cycle?

The industry life cycle has four well defined stages and they are:-

- Pioneering stage
- Rapid growth stage
- Maturity and stabilizing stage
- Declining Stage.
What is bullish trend in a market?
The securities price trend may either increasing or decreasing. When the market exhibits
the increasing trend, it is called bull market.

What are the assumptions used in technical analysis?

-The market value of the scrip is determined by the intersection of supply and demand.
-The market discounts everything.
-The market always moves in trend, except for minor deviations.
-Followed by the historical fact, any layman can understand the market move.

What are the objectives of the Mutual Fund scheme?

1. Professional Management
2. Diversification
3. convenient administration
4. Return potential
5. Low costs
6. Liquidity
7. Flexibility
8. Choice of Schemes
9. Well Regulated

What are the features of preference shares?

 Preference shareholders have a claim on assets and income prior to ordinary
 The dividend rate is fixed in the case of preference shares. Preference shares may
be issued with cumulative rights.

 Both redeemable and irredeemable preference shares can be issued in India.

Redeemable preference shares can have maturity period while irredeemable are
 Preference shares can be convertible.

What do you understand by fundamental approach to security analysis?

Fundamental analysis is a method of security valuation which involves examining the
company’s financials and operations, especially sales, earnings, growth potential, assets,
debt, management, products and competition. Fundamental analysis takes into
consideration only those variables that are directly related to the company itself, rather
than the overall state of the market or technical analysis data.

Explain three types of trends in stock prices?

Trend is the direction of price movement. The share prices can either increase or fall or
remain flat. The three directions of share price movements called as rising, falling and
flat trend. In other words bullish, bearish and flat trend.

What do you infer from the moving average theory of technical analysis?
A moving average is the average price of a security over a set amount of time. By
plotting a security’s average price, the price movement is smoothed out. Once the day-to-
day fluctuations are removed, traders are better able to identify the true trend and increase
the probability that it will work in their favour. Moving averages can be used to quickly
identify whether a security is moving in an uptrend or a downtrend depending on the
direction of the moving average.

What index fund?

In order to track the return performance of markets, market indices of a sub-set of trading
stock is created. The CNX Nifty is one such index of 50 large and liquid stocks. If a
fund manager creates an equity fund, which will invest in the Nifty stocks, in the same
proportion as in the index, he is creating an index fund. This strategy is also called
passive fund management. The cost of this strategy is lower and the fund performance

virtually tracks the market index. An index fund provides and ideal exposure to equity
markets, without the investor having to bear the risks and costs arising form the market
views that a fund manager may be.
What is the difference between SML and CML:-
SML- Security Market Line is a useful tool in determining whether an asset being
considered for a portfolio offers a reasonable expected return for risk. Individual
securities are plotted on the SML graph. If the security’s risk versus expected return is
plotted above the SML, it is undervalued because the investor can expect a greater return
for the inherent risk. A security plotted below the SML is overvalued because the
investor would be accepting less return for the amount of risk assumed.
CML-Capital Market 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 considered to be superior to the efficient frontier since it takes into account
the inclusion of a risk-free asset in the portfolio. The CAPM demonstrates that the
market portfolio is essentially the efficient frontier. This is achieved visually through the
Security market line.
What is the meaning of the company analysis?
Company analysis is a study of those variables which influence the future of the
company, both qualitatively and quantitatively. Company analysis involves a scrutiny of
the company’s financial aspects with a view to identifying its strength, weaknesses and
future business prospects. Further, it is a method of assessing the competitive position,
earning and efficiency of the company and the future prospects of the shareholders of the

What is insider trading?

Trading in a company’s share by a connected person having non-public and price
sensitive information such as expansion plans, financial results and take-over bids, by
virtue of his association, with the company is called insider-trading.

What is a market lot?


A market lot is the minimum number of shares of a particular security that must be
transacted on the exchange. In demat scrip’s; the market lot is fixed at one single share.

What is an odd lot?

The numbers of shares that are less than the market lot are known as odd-lots. Under the
scrip-based delivery system, these shares are normally traded at a discount to the
prevailing price for the marketable lot.

What is an over- the-counter trading?

Trading on those stocks, which are not listed on a stock exchange.
Describe price rigging.
When a person or persons acting in concert with each other collude to artificially increase
or decrease the price of a security, the process is called price rigging.

What is dematerialsation of shares?

Dematerialization is the process through which shares held in electronic form in
depository are converted back into physical form.

Describe screen based trading.

When buying/ or selling of securities is done using computers and matching of trades is
done by the computer, the process is called screen-based trading.

What is settlement?
It refers to the scrip-base netting of trades by a broker after the trading period is over.

What is a spot transfer of shares?

The instruction given by a registered holder of shares to the company to stop the transfer
of shares as a result of theft or loss is known as spot transfer.

What is a trade and settlement guarantee in trading?


Trade guarantee is the guarantee provided by the clearing corporation for all trades that
are executed on the exchange. In contrast, the settlement guarantee, guarantees the
settlement of trade after multilateral netting.

What is trading for delivery?

Trading for delivery is the trading conducted with an intention to deliver shares as
opposed to a position that is squared off within the settlement.

What is a book building issue?

In a book building issue, the issuer appoints lead managers who collect bids with in a
indicated fixed band from prospective investors. A common price is then arrived at for
offloading shares, enabling better pricing with a wide institutional investor base.

What is a green-shoe option?

A green shoe-option or an over-allotment option, which is sometimes a part of an
underwriting agreement, which allows the underwriter to purchase and sell additional
shares if the market’s demand for the share is greater than originally expected.

Describe margin trading?

Margin trading allows investors to buy a stock by paying a part of the transaction value
with the rest being financed by the broker.

What is stock split?

A proportionate increase in the number of outstanding shares by splitting the face value
in a desired ratio is called stock split. For example, a share of face Rs 100 may be split
into10 shares of Rs 10 each.

What is Net Asset Value?

The performance of a particular scheme of mutual fund is denoted by Net Asset Value.

Mutual funds invest the money collected from the investors in securities market. In
simple words, NAV is the market value of the securities held by the scheme. Since
market value of securities changes every day, NAV of a scheme also varies on a day-to-
day basis. The NAV per unit is the market value of securities of a scheme divided by the
total number of units of the scheme on any particular date. For example, if the market
value of the securities of a mutual fund scheme is Rs 200 Lakhs and the mutual fund has
issued 10 Lakhs units of Rs 10 each to the investors, then the NAV per unit of the fund is
Rs20. NAV is required to be disclosed by the mutual funds on a regular basis-daily or
weekly-depending on the type of scheme.

What is open-ended fund/scheme?

An open ended fund or scheme is one that available for subscription and repurchase on a
continuous basis. These schemes do not have affixed maturity period. Investors can
conveniently buy and sell units at NAV related prices after deduction of exit load, if any
which are declared on a daily basis. The key feature of open-ended schemes is liquidity.

What is Close-ended Fund/Scheme?

A close-ended fund or scheme has stipulated maturity periode.g.5-7 years. The fund is
open for subscription only during a specified period at the time of the launch of the
scheme. Investors can invest in the scheme at the time of initial public issue. In order to
provide an exit route to the investors, some close-ended funds given an option of selling
back to the units to the mutual funds through periodic repurchase at NAV related prices.
These mutual funds schemes disclose NAV generally on a weekly basis.

What is Income / Debt oriented Scheme?

The aim of income funds is to provide regular and steady income to investors. Such
schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky
compared to equity schemes. These funds are not affected because of fluctuations in
equity markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of changes in interest rates in the

country. If the interest rate falls, NAVs of such funds are likely to increase in the short
term and vice versa. However, long term investors may not bother about these

What is Gilt Fund?

These funds invest exclusively in government securities. Government securities have no
fault risk. NAVs of this scheme also fluctuate due to change in interest rates and other
economic factors as is the case with income or debt oriented schemes.

What is an IPO?
IPO stands for Initial Public Offering. Any company, let say for instance, the POWER
Finance Corporation needs money to lend funds to power projects in India. It offers
shares to general public and financial institutions like mutual funds and qualified buyers
in given range (say between Rs 73 and Rs 85) referred to as the price band. An IPO lets a
company sell its hares to the public and get money in return. It is so called because it is
the first time that a company sells its share to the public. The IPO market is also referred
to as the primary market in some parlance.

What is an FPO?
Not to be confused with IPO, Fpo stands for follow on public offer. A Company that is
already listed on the stock exchanges can also approach investors for funds. If Infosys
tomorrow comes with another public offer it will be an FPO as Infosys is already a listed
company: Normally, FPOs are offered at a discount to the existing market price of that
company. This is to make a particular issue attractive for the potential investors.


1. Describe the wide array of investment avenues.

Investment avenues can be broadly categorized into the following:

A. Direct investment avenues:
1. Financial corporate securities:
a) Equity shares
b) Preference shares
c) Debentures
d) Bonds
e) Warrants
2. Non security investments consist of:
a) Investment in business and goods
b) Mortgages
c) Real estate
d) Gold, silver and valuables.
3. Bank, Government and other investment.
Cash in hand, cash at bank, post office savings, and Government bonds.

B. Indirect investment avenues:

1. Mutual Funds 2. UTI units 3. Other trust companies
4. Insurance 5. Provident fund 6. Pension fund.
Brief explanation of the above is required.

2. “Stock market indices are the barometer of Indian Economy”. Discuss.

A stock market index is a statistic used to track changes in the average value of a list of
companies which are traded in a particular stock market. A good stock market index is
one which captures the behavior of the overall equity market. It should represent the
market, it should be well diversified and yet highly liquid. Movements of the index
should represents the obtained by ‘Typical’ portfolio in the country.
A market index is very important for its use:
1. As a barometer for market behaviour
2. As a benchmark portfolio performance
3. As an underlying in derivative instruments like index futures and
4. In passive fund management by index funds.

Index Construction Issues

A good index is a trade off between diversification and liquidity. A well diversified
index is more representative of the market/economy. However, there are diminishing
returns to diversification n. Going from 10 stocks to 20 stocks gives a sharp reduction in
risk. Going from 50 stocks to 100 stocks gives very little reduction in risk. Hence, there
is little to gain by diversifying beyond a point. The more serious problem lies in the
stocks that we take into an index when it is broadened. If the stock is illiquid, the
observed prices yield contaminated information and actually worsen an index.

Types of indexes
Most of the commonly followed stock market indexes are of the following two types:
 Price weighted index and
 Market capitalization weighted index.

Price weighted index: In a price weighted index each stock is given weight proportional
to its stock price.
Market capitalization weighted index: In this type of index, the equity price is weighted
by the market capitalization of the company (share price Number of outstanding shares).
Hence, each constituent stock in the index affects the index value in proportion to the
market value of all the outstanding shares. This index forms the underlying for a lot of
index based products like index funds and index futures.
Example:- Below we can see that each stock affects the index value in the proportion to
the market value of all the outstanding shares. In the present example, the base index =
1000 and the index value works out to be 1002
Capital market capitalization
Index= __________________________ X Base value
Base market capitalization
 Current Market capitalization= Sum of (Current market price outstanding shares)
of all securities in the index.
 Base market capitalization = sum of (market price issue size) all securities as on
base date.

3. What are the recent measures taken by the SEBI to protect the investors?
SEBI amends Disclosure and Investor Protection (DIP) guidelines.
Securities and Exchange Board of India has amended the Disclosure AND Investor
Protection Guidelines, 2000 vide circular dated November 29, 2007. The highlights of
the amendments are:

Fast Track Issues (FTIs):

Listed companies satisfying specified requirements can make Fast Track Issues through
Follow-on Public Offerings and Right Issues. The eligibility criteria for the purpose,
inter alia, include minimum market capitalization of public holding, trading turnover,
track record of compliance with listing requirements and investor grievance redressal,

Issue of Indian Depository Receipts:-

The guidelines have been amended to enable all categories of investors to apply for IDR
issues subject to at least 50 % of the issue being subscribed by Qualified Institutional
Buyers (QIBs). The minimum application value in IDR issues has been reduced to Rs
20,000 from Rs 2, 00,000/-. Presently, only QIBs can apply in an issue of IDRs.

Quoting of PAN Mandatory:

Quoting of PAN in application forms for public/rights issues has been made mandatory,
irrespective of the value of application. Presently, applicants in public and rights issues
are required to disclose their PAN/GIR in the application form only if they are making an
application for a value exceeding Rs 50,000/-.

Discount in Issue Price:-

Companies making public issues are permitted to issue securities to retail individual
investors/retail individual shareholders at a discounted price, provided that such discount
does not exceed 10 % of the price at which securities are issued to other categories or
public. For this purpose , retail individual shareholder has been defined to mean a
shareholder (i) whose shareholding is of value not exceeding Rs 1,00,000/- on the day
immediately preceding the record date, and (ii) who makes application or bids in a public
issue for value not exceeding Rs 1,00,000/-.

Reservation of share holders in listed companies:-

Application by shareholders of listed companies under the reserved quota has been
restricted to retail individual shareholders. Presently, listed companies making public
issues can make reservation on competitive basis for its existing shareholders who as on
the record date , are holding shares worth up to Rs 50,000/-. Further, there is no limit on
the value of the application made by such shareholders.

Deletion of the chapter on Guidelines for Issue of Capital by Designated Financial

Institutions (DFIs):-

The special dispensations given to DFIs have been removed by deleting the chapter on
guidelines for Issue of Capital by DFIs from SEBI (DIP) Guidelines. SEBI has
introduced separate guidelines in 1992 for primary issuances by DFIs, to place
companies/corporations/institutions engaged mainly in financing of developmental
activities and playing a catalytic role in the infrastructure development of the country on
a different footing. Presently, DFIs operationally compete on equal footing with private
entities and DFIs, as a concept, may have outlived its utility.

Apart from the above, SEBI has also made certain miscellaneous amendments either to
delete certain provisions, which have become redundant or in respect of which, there
have been requests for exemption on regular basis.

4. “Primary and Secondary markets are complementary to each other but their
organizational set up are different” Comment.
Primary market: - Stocks are available for first time is offered through new issue market.
The issue may be a new company or an existing company market. These issues may be
of new type or the security used in the past. In new issues market the user can be
considered as a manufacturer. The issuing houses, investment bankers act as the channel
of distribution for the new issues.
Secondary market: - the capital apart from the primary market also includes the
secondary market where existing issues are traded. These secondary markets also
referred to as stock markets. It is a market where scrip’s are traded, it involves buying
and selling of securities on the stock exchange through its members.
Relationship between Primary market and Secondary market:-
The new issue market cannot function without the secondary market. The secondary
market or stock market provides liquidity for the issue of securities. The issued securities
are traded in secondary market offering liquidity to the stock at a fair price.
The stock exchanges through their listing requirements, exercise control over the primary
market. The company seeking for listing on the respective stock exchange has to comply
with all the rules and regulations given by the stock exchange.

The primary market provides a direct link between the prospective investors and the
company. By providing liquidity and safety, the stock market encourages the public to
subscribe to the new issues. The marketability and the capital appreciation provided in
the stock market are the major factors that attract the investing public towards the stock
market. Thus, it provides an indirect link between the savers and the company.

5. Discuss the concept of an industry life cycle by describing each of its four phases.
In which phase of the life cycle, investments in an industry are most attractive?
The model is a useful tool for analyzing the effects of an industry’s evolution on
competitive forces. Using the industry life cycle model, we can identify five industry
environments, each linked to a distinct stage of an industry’s evolution.
An embryonic industry environment
A growth industry environment
A shakeout industry environment
A mature industry environment
A declining industry environment

In the introduction stage of the life cycle, an industry in its infancy. Perhaps a new,
unique product offering has been developed and patented, thus beginning a new industry.
Some analysts even add an embryonic stage before introduction. At the introduction
stage, the firm may be alone in the industry. It may be a small entrepreneurial company
or a proven company which used research and development funds and expertise to
develop something new. Marketing refers to new product offerings in a new industry as
“question marks” because the success of the product and the life of the industry is
unproven and unknown. In this situation, it is difficult to select companies for investment
because the survival rate is unknown.



The growth stage also requires a significant amount of capital for the firm. The goal of
marketing efforts at this stage is to differentiate a firm’s offerings from other competitor
within the industry. Thus the growth stage requires funds to launch a newly focused
marketing campaign as well as funds for continued investment in property, plant and
equipment to facilitate the growth required by the market demands. However, the
industry is experiencing more product standardization at this stage, which may encourage
economies of scale and facilitate development of a line-flow layout for production
efficiency. Marketing often refers to products at the growth stage as “stars”. In this stage
the growth rate is more than the industries average growth rate.

As the industry approaches maturity, the industry life cycle curve becomes noticeably
flatter, indicating slowing growth. Some experts have labeled an additional stage, called
expansion, between growth and maturity. While sales are expanding and earnings are
growing from these” cash cows” products, the rate has slowed from the growth stage. In
fact, the rate of sales expansion is typically equal to the growth rate of the economy.
Management efficiency can help to prolong the maturity stage of the life cycle.
Production improvements, like just-in-time methods and lean manufacturing can result in
extra profits. Technology, automatio9n and linking suppliers and customers in a tight
supply chain are also methods to improve efficiency. Investors have to closely monitor
the events that take place in the maturity stage of the industry.

Declines are almost inevitable in an industry. If the product innovation has not kept pace
with other competitors, or if new innovations or technological changes have caused the
industry to become obsolete, sales suffers and the life cycle experiences a decline. In this
phase, sales are decreasing at an accelerating rate, causing the plotted curve to trend
downward. Profits may continue to rise, however. There is usually another, large shake-
out in the industry as competitors who did not leave during the maturity stage now exit
the industry. Yet some firms will remain to compete in the smaller market. Mergers and
consolidations will also be the norm as firms try other strategies to continue to be

competitive or grow through acquisition and/or diversification. In this stage it is better to

avoid investing in the shares of the low growth industry even in the boon period.
Investment in the shares of these type of leads to erosion of capital.

6. How does technical analysis different from the fundamental analysis?

There are two primary schools of thought regarding security analysis –fundamental and
technical analysis. Fundamental analysis utilizes a much wider range of information than
does technical analysis and relies on traditional financial statement analysis. Technical
analysis, on the other hand, concerns itself with attempting to identify patterns in past
price movements. Both consider macro economic trends to differing degrees but
emphasize the use of firm specific micro economic data.
Fundamental Analysis:-
Fundamental Analysis generally refers to the study of the economic factors underlying
the price movement of securities or commodities, not the price movements themselves.
For the most part, this form of analysis usually results in longer-term investments and is
considered to be more conservative approach. At a high level, fundamentalists attempt to
quantify the current value of a stock by gathering data relating to general industry
outlook, overall market conditions, corporate financial strength, historical patterns of
sales, earnings, market shares, dividends, etc. Using this data they then try to assign a
future value to the stock by interpretation and projection. The difference between the
current and future values reflects the fundamentalist’s assessment of the stock’s potential
as an investment opportunity. Investment decisions are made based on this fundamental
information relative to other opportunities.
Much of the work of the fundamentalist involves accurately projecting earnings going
forward and the factors affecting earnings, In theory, the fundamentalist who can make
accurate projections and who chooses quality securities when they are undervalued and
sells them when they are overvalued can reap substantial profits. Of course, when these
assignments are faulty the result is a tendency to maintain a losing position longer than
Technical Analysis:-
Technical Analysis is based on the following three principles:

• Everything relevant to the value of a company’s stock is discounted and reflected in

share price.
• Trends sometimes appear in share price moves and when once started, these trends
tend to persist.
• Activity in the market repeats.
The purpose of technical analysis is to detect the trend or momentum of a stock early so
that a good entry or exit point can be selected. Traditionally, charting is the main
approach for technical analysis. However, interpreting a chart or an indicator is at least
in part, a subjective issue. Even if you have the knowledge and experience to understand
what a chart is telling you, the accuracy is still limited since many trading patterns and
some correlative information are not visible or not perceptible directly. The technical
analysis generally concentrates on the study of historical price and volume data to detect
future trends.
Within the rank of technical analysis there are two factions-chartists and technicians.
While the chartist embraces a more visual approach to the analysis, the technician uses a
more quantitative approach and often employs sophisticated statistical methods.
Chartists refer to line studies such as trend lines, triangles, speed resistance lines, Gann
angles and the like. Technicians employ technical indicators which usually are variations
of common statistical methods such as ordinary least-square regression, exponential
moving averages, etc.
Whereas fundamental analysis allows you to make an informed determination of a
company’s current share valuation, technical analysis aims to improve the timing of your

7. Explain the CAPM theory and its validity in the Indian stock market.
Capital Asset Pricing Model:-
The Capital Asset Pricing Model reflects the market for different financial assets. The
model suggests that asset prices will adjust to achieve the precise return, and to
compensate investors for the risk of the assets, when it is held with a perfectly diversified

By showing how increasing the diversification lowers portfolio’s standard deviation and
variance, Markowitz in 1952 proposed a model. His idea was based on the assumptions
that stock returns are normally distributed and that people like returns but not risks.
Hence, they want a high mean, low standard deviation portfolio. Portfolios with the
highest returns for a given level of risk are known as Mean-variance Efficient frontier
CAPM Assumptions
• Investors are risk averse.
• Investors maximize expected utility of the portfolios over a single period planning
• There exists Perfect Competition (individual investors are price takers).
• Securities are completely divisible.
• Investments are limited to traded financial assets. No taxes or transactions costs are
• Investors are rational mean-variance optimizers.
• Investors have homogeneous expectations.
• In the CAPM, risk is defined using the concept of beta. It is the ratio of the
movements of an individual stock relative to the movements of the overall market
portfolio. It is calculated using daily, weekly or monthly historical data, taken over a
year or more. Statistically, beta is defined as the covariance of the returns of the
stock and the market divided by the variance of the returns of the market. Once beta
is calculated, it is assumed a predictor of future market behavior. If the stock market
goes up (or down) by a particular percentage, then there is a tendency for the stock
also to go up (or down) by the same percentage multiplied by beta. Stock with a beta
greater than 1 are considered riskier; however the market fluctuates, the high beta
stocks fluctuate even more. If the beta is negative, the tendency of the stock is to
move in the direction opposite to that of the market.
CAPM computes E(R), the expected rate of return on a stock, using the formula
E(R) =r+ERP (beta), where r is the risk free interest rate and ERP is the Equity Risk
Premium for the overall market portfolio. The risk free interest rate is usually based on
one or other of the government treasuries.

Let us consider an example:- Consider, Stock A with a beta of 1.37, a risk free return r =
5%, and an ERP of 5.5. The Expected Return on stock A = 5 + 5.5 (1.37) = 12.54%. On
the other hand, consider Stock B with a beta of 1.85, the expected return is 5 + 5.5 (1.85)
= 15.17%. Therefore, extra money is invested in stock with a high beta.

8. What are the SEBI guidelines on pricing of a security?

SEBI Guidelines on Pricing by Companies Issuing Securities:
The companies eligible to make public issue can freely price their equity shares or any
security convertible at a later date into equity shares in the following case:

Public/Rights Issue by Listed Companies

A listed company whose equity shares are listed on a stock exchange, may freely price its
equity shares and any security convertible into equity at a later date, offered through a
public or rights issue.
Public Issue by Unlisted Companies
An unlisted company eligible to make a public issue and desirous of getting its securities
on a recognized stock exchange pursuant to a public issue, may freely price its equity
shares or any securities convertible at a latter date into equity shares.
Infra Structure Company
An eligible infrastructure company shall be free to price its equity shares subject to the
compliance with the disclosure norms as specified by SEBI from time to time.
Initial Public issue by Banks
The banks (whether public sector or private sector) may freely price their issue of equity
shares or any securities convertible at a later date into equity shares subject to approval
by RBI.
Differential Pricing
Any unlisted company or a listed company making a public issue of equity shares or
securities convertible at a later date into equity shares, may issue such securities to the an

applicant in the firm allotment category at a price different from the price at which the
security is being offered to the applicants in the firm allotment category is higher than the
price at which securities are offered to public.
Price Band
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 documents filed with the Board and actual
p[rice can be determined at a later date before filing of the offer document with the ROCs
Payment of Discounts/Commissions etc
No payment, direct or indirect in the nature of a discount, commission, allowance or
other wise shall be made either by the issuer company or the promoters in any public
issue, to the persons who have received firm allotment in such public issue.

9. Discuss the factors considered in EIC Framework.

(Economic, Industrial and Company)
Economic Analysis
The level of economic activity has an impact on investment in many way. If the
economy grows rapidly, the industry can also expected to show rapid growth and vice
versa. The economic Factors are:
 Gross domestic Product
 Savings and Investment
 Inflation
 Interest rate
 Budget
 Tax structure and
 Balance of payment etc.
Company Analysis.
In the company analysis the investor assimilates the several bits of information relate to
the company and evaluate the present and future values of the stock. The risk and return
associated with the purchase of the stock is analyzed to take better investment decision.
The company can be analyzed by two ways;

The Financial Analysis

Management position and competitive edge analysis.
The financial analysis includes the following:
Analysis of income statement
Analysis of balance sheet
Analysis of cash flow statement /funds.
Non financial analysis includes the strength, weakness, opportunity and threat (SWOT)
of the company. The company’s market share, growth of the shares, stability of sales and
its advantages, capital structure etc.
Industry Analysis
An industry is a group of firms that have similar technological structure of production
and produce similar products. These industries can be classified on the basis of business
cycles i.e., classified according to their reactions to the different phases on the business
Industry Life Cycle
This model is a useful tool for analyzing the effects of an industry’s evolution on
competitive forces. Using the industry lifecycle model, we can identify five industry
environments, each linked to a distinct stage of an industry’s evolution:
 An embryonic industry environment
 A growth industry environment
 A shakeout industry environment
 A declining industry environment

10. What are the different types of charts used by technical analyst?
A chart is simply a graphical representation of a series of prices over a set time frame.
For example, a chart may show a stock’s price movement over a one year period, where
each point on the graph represents the closing price for each day the stock is traded.
Chart Types
Line chart
Bar chart
Candle stick chart

Point and figure chart.

Line Chart
The most basic of the four charts is the Line chart because it represents only the closing
prices over a set of time. The line is formed by connecting the closing prices over the
time frame. Line chart do not provide visual information of the trading range for the
individual points such as the high, low and opening prices. However, the closing price is
often considered to be the most important price in stock data compared to the high and
low for the day and this is why it is the only value used in line charts.
Bar Chart

The bar chart expands on the line chart by adding several more key pieces of information
to each data point. The chart is made up of a series of vertical lines that represents each
data point. The chart is made up of a series of vertical lines that represents the high and
low for the trading period, along with the closing price. The close and open are
represented on the vertical line by horizontal dash. The opening price on a bar chart is
illustrated by the dash that is located on the left side of the vertical bar. Conversely, the
close is represented by the dash on the right. Generally, if the left dash (open)is lower
than the right dash(close)then the bar will be shaded black, representing an up period for
the stock, which means it has gained value. A bar that is colored red signals that the
stock has gone down in value over that period. When that is the case, the dash on the
right (close) is lower than the dash on the left (open).

Candle Stick charts

The Candlestick chart is similar to a bar chart, but it differs in the way that is visually
constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing
the period’s trading range. The difference comes in the formation of a wide bar one the
vertical line, which illustrates the difference between the open and close. And, like bar
charts, candlesticks also rely heavily on the use of colors to explain what has happened
during the trading period. A major problem with the candlestick color configuration,
however, is that different sites use different standards.

Point and Figure charts

The point and figure chart is not well known or used by the average investor but it has
had a long history of use dating back to the first technical traders. This type of chart
reflects price movements and is not as concerned about time and volume in the
formulation of the points. The point and figure chart removes the noise, or insignificant
price movements, in the stock, which can distort trader’s views of the price trends. These
types of charts also try to neutralize the skewing effect that time has on chart analysis.11.
11. As an investment advisor what features would you suggest being included in the
investment bunch of a client? Explain the features briefly.

There are variety of investment avenues are open to the investors to suit their needs and
nature. The knowledge about the investment avenues enables the investor to choose
investment intelligently. The required level of return and the risk tolerance level decide
the choice of the investor. The investment alternatives range from financial securities to
traditional non security investments. The financial securities may be negotiable or non-
negotiable. The negotiable securities are transferable. The negotiable may yield variable
income from fixed income. Like, equity shares are variable securities, bonds, debentures;
government securities, Indra vikas patra and money market securities yield fixed income.

Mutual fund is another investment alternate. It is of recent origin in India. Within the
short span of the time, several financial institutions and banks have floated varieties of
mutual funds. The investors with limited funds can invest in the mutual funds and can
have the benefits of the stock market and money market investments as specified by the
particular fund.

The Advantages of Mutual Funds are:

1. Profession management: You avail of the services of experienced and skilled

professionals who are backed by a dedicated investment research team which
analysis the performance and prospects of companies and selects suitable
investments to achieve the objectives of the scheme.

2. Diversification: Mutual Fund invests in a number of companies across the broad

cross section of the industries and sectors. This diversification reduces the risk
because seldom do all stocks decline at the same time and in the same proportion.
You achieve this diversification through a Mutual Fund with far less money than
you can do on your own.

3. Convenient administration: Investing in a Mutual Fund reduces paper work and

helps you to avoid many problems such as bad deliveries, delayed payments and
unnecessary follow up with brokers and companies. Mutual fund saves your time
and makes investing easy and convenient.

4. Return Potential: Over a medium to long term, Mutual Funds have the potential
to provide a higher return as they invest in a diversified basket of selected

5. Low Costs: Mutual funds are a relatively less expensive way to invest compared
to directly investing in the capital equity markets because the benefits of scale in
brokerage, custodial and other fees translate into lower costs for investors.

6. Liquidity: In open-ended scheme, you can get your money back promptly at net
asset value related prices from the mutual fund itself. With close –ended
schemes, you can sell your units on a stock exchange at the prevailing market
price or avail of the facility of direct repurchase in NAV related prices which
some close ended and interval schemes offer you periodically.

7. Transparency: You get regular information on the value of your investment in

addition to the disclosure on the specific investments made by your scheme, the
proportion invested in each class of assets and the fund manager’s investment
strategy and outlook.

8. Flexibility: Through features such as regular investment plans, regular

withdrawal plans and dividend reinvestment plans, you can systematically invest
or withdraw funds according to your needs and convenience.

9. Choice of Schemes: Mutual funds offer a family of schemes to suit your varying
needs over a lifetime.

10. Well Regulated: All mutual funds are registered with SEBI and they function
within the provisions of strict regulations designed to protect the interests of
‘Investors’. The operations of mutual funds are regularly monitored by SEBI.

There are a wide variety of Mutual Fund schemes that cater to your needs, what ever your
age, financial position, risk tolerance and return expectations. Whether as the foundation
of your investment programs or as a supplement, mutual fund scheme can help you meet
your financial goals. The real estate always finds a place in the portfolio. They are gold,
silver, arts, property and antiques. These are all non-financial instruments.

Objectives of Investors:

 Income

 Appreciation of capital

 Safety

 Liquidity

 Hedge against inflation.

Different Investment avenues:

Financial securities/Equity/Non-convertible debentures/Bank deposits/Provident

funds/Mutual funds/ real assets/Real estate Gold: Silver.

12. “Security analysis requires as first step the sources of information on the
basis of which analysis is made”. What are different types of information
used for security analysis?

The security market is a perfect action market where demand/supply pressures

determine the price. These demand/supply pressures depend upon the available

money and the flow of information. It is in this context that source of information
become relevant. Besides, the market analysis and estimate of intrinsic value around
which he market price revolves, would also need an analysis of the flow of

Types of Information-

International affairs: International factors, which influence domestic income, output

and employment and for investment in the domestic market by FFIs, OCBs etc., also
foreign political affairs, war etc., We refer the source of information from some
foreign Journals like London Economist, Far east economic review, World Bank and
Asian development bank Publish their own survey reports periodicals etc.,

National Affairs: GDPs, Agricultural output, monsoon, money supply, inflation,

Government policies etc., affect our market. The information are Newspapers like
India Today, Outlook, Fortune India, the Week etc., The economic events like
financial Express, Economic Times, RBI bulletins, Annual reports etc.,

Industry Information’s: Market demand, installed capacity, competing units,

capacity utilization, market share of major units, international demand for export,
inputs and capital goods abroad, import competing products, labour problems and
government policy towards the industry are all relevant factors to be considered in the
investment decision making. The sources are Business India, Business Today, Dalal
Street Stock Exchange publications etc.

Company Information: Corporate data, annual reports, stock exchange publications.

The BSE, NSE, OTCEI provide detail about listed companies in the web sites.
Kothari’s Economic and industry guide of India gives vrelevant financial information
about the public limited companies.

Stock market information: Financial dailies, Investment related magazine

published by stock exchanges, separate new bulletins issued by NSE, BSE and

OTCEI providing information regarding the changes that takes place in the stock
market. SEBI news letters gives the changes rules and regulations regarding the
activities of stock market.

13. Who are the key players involved in the new issues market?

The first stage is when the company initially issues the security directly from its
treasury at a predetermined offering price. This is a primary market offering. It is
referred to as the Initial Public Offer (IPO).

Primary market consists of the new issues market in which new securities are sold by
public limited companies through public issues of debts or equity and financing
through venture capitalists. The venture capital firm (a new financial intermediary
which emerged in eighties) provides substantial amount of capital mostly through
equity purchases and occasionally through debt offerings to help growth-oriented
firms to develop and succeed.

Players in the New Issue Market:

The players in the new issue market are many and the most important are the following:

1. Merchant Bankers: Their functions and working are crucial to new issue market.
They are the issue managers, co-managers and are responsible to the company and SEBI.
They take all policy decisions for and behalf of the company regarding the new issues
and coordinate the various agencies and give “due diligence” Certificate to the SEBI
regarding the true disclosures as required by law and SEBI guidelines.

2. Registrars: Their functions are next to merchant bankers in importance. They collect
applications for new issues, their cheques, stock invests etc., classify and computerize
them. They also make allotments in consultation with the regional stock exchange
regarding norms in the event of oversubscription and before a public representative.

3. Collecting and Coordinating Bankers: Collecting and coordinating bankers may be

the same or different. While the former collects the subscriptions in cash, cheques, stock
invests etc., the later collects the information on subscription and coordinates the
collection work and monitors the same to the registrars and merchant bankers, who in
turn keep the company informed.

4. Underwriters and Brokers: Underwriters may be financial institutions, banks, mutual

funds, brokers, etc., and undertake to mobilize the subscriptions as agreed to, they have to
make good the shortfalls by their own subscriptions. Brokers along with their network of
sub-brokers market the new issues by their own circulars, sending the application forms
and follow up recommendations.

5. Printers, advertising agencies and mailing agencies: are the other organizations
involved in the new issue market operation.

14. “Chart patterns are helpful in predicting the stock price movement”. Comment.


A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a
sign of future price movements. Chartists use these patterns to identify current trends and
trend reversals and to trigger buy and sell signals.

In the first section of the tutorial, we talked about the three assumptions of technical
analysis, the third of which was that in technical analysis, history repeats itself. The
theory behind chart patterns is based on this assumption. The idea is that patterns are
seen many times, and that these patters signal a certain high probability move in a stock.
Based on the historic trend of a chart pattern setting up a certain price movement,
chartists took for these patterns to identify trading opportunities.

Head and Shoulders:


This is one of the most popular and reliable chart patterns in technical analysis. Head and
shoulders is a reversal chart pattern that when formed, signals that the security is likely to
move against the previous trend.

Refer the figure deployed below:

There are two versions of the Head and shoulders chart pattern. Head and shoulders top
(shown on the left) is a chart pattern that is formed at the high of an upward movement
and signals that the upward trend is about to end. Head and shoulder a bottom, also
known as inverse head and shoulders (shown on the right) is the lesser known of the two,
but is used to signal a reversal in a downtrend.

Cup and Handle

A cup and Handle chart is a bullish continuation patter in which the upward trend has
paused but will continue in an upward direction once the pattern is confirmed this price
pattern forms what looks like a cup, which is preceded by an upward trend. The handle
follows the cup formation and is formed by a generally downward/sideways movement in
the security’s price. Once the price movement pushes above the resistant lines formed in
the handle, the upward trend can continue. There is a wide ranging time frame for this
type of pattern, with the span ranging from several months to more than a year.

Double Tops and Bottoms

This chart pattern is another well known patter that signals a trend reversal-it is
considered to be one of the most reliable and is commonly used. These patterns are

formed after a sustained trend and signal to chartist that the trend is about to reverse. The
pattern is created when a price movement tests support or resistance levels twice and is
unable to break through. This pattern is often used to signal intermediate and long term
trend reversals.

Refer the above figure: - The price movement has twice tried to move above a certain
price level. After two unsuccessful attempts at pushing the price higher, the trend
reverses and the price heads lower. In the case of a double bottom (shown on the right),
the price movement has tried to go lower twice, but has found support each time. After
the second bounce off of the support, the security enters a new trend and heads upward.


Triangles are some of the most well known chart patterns used in technical analysis. The
three types of triangles, which vary in construct and implication, are the symmetrical
triangle, ascending and descending triangle. These chart patterns are considered to last
anywhere from a couple of weeks to several months.

The symmetrical triangle shown below is a pattern in which two trend lines converge
toward each other. This pattern is neutral in that a breakout to the upside or downside is
a confirmation of a trend in that direction. In an ascending triangle, the upper trend line
is flat, while the bottom trend line is upward sloping. This is generally thought of as a
bullish pattern in which chartists look for an upside breakout.

In the descending triangle, the lower trend line is flat and the upper trend line is
descending. This is generally seen as a bearish pattern where chartists look for a
downside breakout.

Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed when there
is a sharp price movement followed by a generally sideways price movement. This
pattern is then completed upon another sharp price movement in the same direction as the
move that started the trend. The patterns are generally thought to last from one to three

weeks. It is observed from the figure that there is little difference between a pennant and
a flag. The main difference between these price movements can be seen in the middle
section of the chart pattern. In a pennant, the middle section is characterized by
converging trend lines, much like what is seen in a symmetrical triangle. The middle
section on the flag pattern, on the other hand, shows a channel pattern, with no
convergence between the trend lines. In both cases, the trend is expected to continue
when the price moves above the upper trend line.


A gap in a chart is an empty space between a trading period and the following trading
periods. For example, if the trading range in one period is between Rs 25 and Rs 30 and
the next trading period opens at Rs 40, there will be a large gap one the chart between
these periods. Gap price movements can be found on bar charts and candlestick charts but
will not be found on point and figure or basic line charts. Gaps generally show that
something of significance has happened in the security, such as a better –than-expected
earnings announcement.

Triple Top and Bottoms

Triple Top and Triple Bottoms are another type of reversal chart pattern in chart analysis.
These are not as prevalent in charts as head and shoulders and double tops and bottoms,
but they act in a similar fashion. These two chart patterns are formed when the price
movement tests a level of support or resistance three times and is unable to break
through; this signals a reversal of the prior trend. Confusion can form with triple tops and

bottoms during the formation of the pattern because they can look similar to the other
chart pattern. After the first two support/resistance tests are formed in the price
movement, the pattern will look like a double top bottom, which could lead a chartist to
enter a reversal position too soon.

15. What are the basic assumptions of CAPM? What are the advantages of
adopting CAPM model in the portfolio management?

The CAPM model explains how the expected rates of return are calculated and how
various assets can be evaluated according to CAPM. Since the CAPM calculation deals
with both internal and external risks, capital assets pricing model is often perceived as a
much better appraisal tool than the Net Present Value model which utilizes only one
discount rate for all investments and completely disregards their varying risk levels.

Assumptions of CAPM

The CAPM is simple and elegant. Consider the many assumptions that underline the
model. Are they valid?

Zero transactions costs. The CAPM assumes trading is costless so investments are
priced to all fall on the capital market line. If not, some investments would hover below
and above the line-with transaction costs discouraging obvious swaps. But we know that
many investments (such as acquiring a small business) involve significant transaction
cost. Perhaps the capital market line is really a band whose width reflects trading costs.

Zero Taxes: The CAPM assumes investment trading s tax free and returns are
unaffected by taxes. Yet we know this to be false: 1) Many investment transactions are
subject to capital gain taxes, thus adding transaction costs; 2) Taxes reduce expected
returns for many investors, thus affecting their pricing of investments; 3) different
returns(dividends versus capital gains, taxable versus-deferred) are taxed differently, thus
inducing investors to choose portfolios with tax favored assets;4) different
investors(individual versus pension plans) are taxed differently, thus leading to different
pricing of the same assets.

Homogenous investor expectations: The CAPM assumes invests have the same beliefs
about expected returns and risks of available investments. But we know that there is a
massive trading of stocks and bonds by investors with different expectations. We also
know that investors have different risk preferences., Again, it may be that the capital
market line is a fuzzy amalgamation of many different investor’s capital market lines.

Available risk-free assets: The CAPM assumes the existence of zero-risk securities, of
various maturities and sufficient quantities to allow for portfolio risk adjustments. But
we know even Treasury bills have various risks: reinvestment risk-investors may have
investment horizons beyond the T-bill maturity date, inflation risk- fixed returns may be
devalued by future inflation, currency risk- the purchasing power of fixed returns may
diminish compared to that of other currencies. ( Even if investors could sell asset short-by
selling an asset she does not own, and buying it back later, thus profiting from price
declines-this method of reducing portfolio risk has costs and assumes unlimited short-
selling ability).

Borrowing at risk-free rate: The CAPM assumes investors can borrow money at risk-
free rates to increase the proportion of risky assets in their portfolio. We know that this is
not true for smaller, non-institutional investors. In fact, we would predict that the capital
market line should become kinked downward for riskier portfolios (b>1) to reflect the
higher cost of risk-free borrowing compared to risk-free lending.

Beta as full measure of risk: The CAPM assumes that risk is measured by the volatility
(standard deviation) of an asset’s systematic risk, relative to the volatility (standard
deviation) of the market as a whole. But we know that investors face other risks; inflation
risk-returns may be devalued but future inflation; and liquidity risk- investors in need of
funds or wishing to change their portfolio’s risk profile may be unable to readily sell at
current market prices. Moreover, standard deviation does not measure risk when returns
are not evenly distributed around the mean (non-bell curve). This uneven distribution
describes our stock markets where winning companies, like Dell and Walmart, have
positive returns (35,000% over 10 Years) that greatly exceed losing companies ‘negative
returns (which are capped at a 100% loss).

16. How does ratio analysis reflect the financial health of a company?

The ratio analysis is the most powerful tool of the financial analysis. Financial ratio
provides numerical relations between two relevant financial data. Financial ratios are
calculated from the balance sheet and profit and loss account. The relationship can be
either expressed in percentile or as a quotient. Ratio summaries the data for easy
understanding, comparation and interpretation. Financial ratios reflect the financial
health in the following manner:

1. Liquidity ratios Current ratio

Quick/acid test ratio

2. Turnover ratio Inventory turnover ratio

Receivable turn over ratio

Fixed asset turnover ratio

Total asset turnover ratio

3. Leverage ratio Debt to asset ratio-D/A

Debt to equity ratio-D/E

4. Profit margin ratio Gross profit ratio-GP

Net profit ratio-NP

Return on asets ratio-ROA

Return on equity ratio-ROE

5. Return on investment ratio-ROI

6. Valuation ratio Dividend ratio-DR

Earning per share-EPS

Price earning ratio-P/E

(Have to explain with the formulas)


17. Discuss the major reforms in the Indian Capital Market.

The capital market reforms were initiated in 1991, as part of the structural reforms
comprising industrial deregulations, privatization, globalization and financial reforms
through liberalization on domestic economic policies and foreign exchange policies.
Foreign direct investment is permitted up to 51% of equity in 34 selected areas and
automatic approvals are granted up to the permitted levels and in selected industrial
sectors for foreign technology and foreign investments by the secretariat for industrial
approvals and Foreign Investment Promotion Board.

Trade policy was also liberalized to allow freely exports and imports subject to a small
negative list. All quantitative restrictions were abolished and discretionary controls and
most of the licensing requirements were dispensed with the EXIM policy for the Eighth
plan period 1992-1997.

Rupee was made convertible on trade account in March 1993 and on current account in
March 1994. There was a further liberalization on FERA regulations since 1992 with the
result that free inflow of funds by FIIs and FFIs etc., was allowed for investment in the
capital market and rupee was allowed to float with the RBI fixing the reference rate for
its deals in Dollar Vs Rupee.

Narashimhan Committee:-

A high level committee on the financial system with Sri M>Narashimhan as the
Chairman was set up in 1991, which made far-reaching recommendations for banking
sector and non banking financial sector to improve the flexibility and operational
efficiency of the markets and the institutions, namely, banks and financial institutions.
The major recommendations are being im0plemented in the direction of deregulation and
liberalization of the policies.

In the area of capital reforms, the Narashimhan Committee emphasized the need for
strengthening the SEBI powers, vesting of CCI powers in the SEBI and freeing
operations in the capital market with the SEBI as the supervisory and Regulatory

As per the recommendations, the SEBI Act was passed in March 1992 vesting legal
powers on SEBI to act as regulatory authority on the stock and capital markets in India
and also for all the intermediaries such as merchant bankers, Registrars, Brokers,
underwriters etc., Mutual Funds are brought under the control of the SEBI first in 1992
and Venture capital funds latter in 1995. All these funds are kept open to the foreign and
private sectors since 1992 and not necessarily to the public financial institutions.

18. Explain the different stages involved in Portfolio Management.

Portfolio is a combination of securities such as Stocks, bonds and money market

instruments. The process of combining the securities so as to obtain optimum return with
minimum risk is called portfolio construction. There are two major approaches
traditionally followed to construct portfolio:

Determining the objectives of the portfolio

Selection of securities to be included in the portfolio

Normally, this is carried out in four to six steps. Before formulating the objectives, the
constraints of the investor should be analyzed. Within the given frame work of
constraints, objectives are formulated. Then based on the objectives, securities are
selected. After that, the risk and return of the securities should be studied. The investor
has to assess the major risk categories that he or she is trying to minimize. Compromise
on risk and non-risk factors has to be carried out. Finally relative portfolio weights are
assigned to securities like bonds, stocks and debentures and then diversification is carried
out. Finally portfolio weights are assigned to securities like bonds, stocks, and
debentures and then diversification is carried out.

Analysis of constraints: - The constraints normally discussed are: Income needs /

liquidity / time horizon / safety / tax considerations and the temperament.

Income needs: The income needs depend on the need for income in constant rupees and
current rupees. The need for income in current rupees arises from the investor’s need to
meet all or part of the living expenses. At the same time, inflation may erode the
purchasing power; the investor may like to offset the effect of the inflation and so, needs
income in constant rupees.

Liquidity: - Liquidity need of the investment is highly individualistic of the investor. If

the investor prefers to have high liquidity, then funds should be invested in high quality
short term debt maturity issues such as money market funds, commercial papers and
shares that are widely traded.

Safety of the principal:- Another serious constraints to be considered by the investor is

the safety of the principal value at the time of liquidation. Investing in bonds and
debentures is safer than investing in the stocks. Even among the stocks, the money
should be invested in regularly traded com0panies of longstanding. Investing money in
the unregistered finance companies may not provide adequate safety

Time horizon:-. Time horizon is the investment – planning period of the individuals.
This varies from individual to individual. Individual’s risk and return preferences are
often described in terms of his” lifecycle”. The stages of the life cycle determine the
nature of the investment. The first stage is early career situation. The other stage of the
time horizon is the mid-career individual. At this stage his assets are larger than his
liabilities. The final stage is the late career or the retirement stage. Here, the time
horizon of the investment is very much limited. He need stable income and once he
retires, the size of income he needs from investment also increases. Thus, the time
horizon puts restrictions on the investment decision.

Tax consideration:- For income tax purpose, interest and dividends are taxed under the
head “income from other sources”. The capital appreciation is taxed under the head
“capital gains” only when the investors sell the securities and realize the gain. This tax is
then at a confessional rate depending on the period for which the asset has been held
before being sold. Investment in government securities and bonds and NSC avoid
taxation. This constraint makes the investor to include the items which will reduce the

Temperament:- The temperament of the investor himself poses a constraint on framing

his investment objectives. Some investors are risk lovers or takers who would like to
take up higher risk even for low return. While some investors are risk averse, who may
not be willing to undertake higher level of risk even for higher level of return. The risk
neutral investors match the return and the risk.

Determination of objectives

Portfolios have the common objectives of financing present and future expenditures from
a large pool of assets. The return that the investor requires and the degree of risk he is
willing to take depend upon the constraints. The objectives of portfolio range from
income to capital appreciation. The common objectives are stated below:

 Current Income

 Growth in Income

 Capital Appreciation

 Preservation of Capital

The investor in general would like to achieve all the four objectives; nobody would like
to lose his investment. But it is not possible to achieve all the four objectives
simultaneously. If the investor aims at capital appreciation, he should include risky
securities where there is an equal likelihood of losing the capital. Thus, there is a conflict
among the objectives.

Selection of Portfolio:

The selection of portfolio depends on the various objectives of the investor. The
selections of portfolio under different objectives are dealt subsequently.

 Objectives and asset mix

 Growth of asset and asset mix

 Capital appreciation and asset mix

 Safety of principal and asset mix

 Risk and return analysis

19. Explain the following technical indicators:

i) New highs and lows ii) Volume iii) Short interest ratio iv) Put/call ratio

New highs and lows: As part of stock market reporting, information is provided on the
52 week high and low prices for each stock. Technical analysts consider the market as
bullish when a significant number of stocks hit the 52 week high each day. On the other
hand, if market indices raise but few stocks hit new highs, technical analysis view this as
a sign of trouble.

Volume: Volume analysis is an important part of technical analysis. Other things being
equal a high trading volume is considered a bullish sign. If heavy volumes are
accompanied rising prices, it is considered even bullish.

Short-interest ratio: The short interest in a security is simply the number of shares that
have been sold short but not yet bought back. Investors sell short when they expect the
prices to fall. So when the short interest ratio is high it means that most investors expect
the price to fall. The technical analyst considers a high short interest ratio as a sing of
bullishness. Put/call ratio: The put/call ratio is defined as:

Number of puts purchased / Number of calls purchased

Speculators buy calls when they are bullish and buy puts when they are bearish. For the
contrary technical analysts, when there is a rise in the put/cat ratio, they considered as
buy signal. When the put/call ratio falls, they considered as a sell signal.

20. Explain the Dow Theory.

The Dow Theory is perhaps the oldest and best known theory of technical analysis. The
market is always considered as having three movements all going at the time. The first is
the narrow movement from day to day. The second is the short swing, running from two
weeks to a month or more; the third is the main movement, covering at least four years in
its market. These three types of trends are compared to tide, wave in zigzag manner.


The trend lines are straight lines drawn connecting either the tops or bottoms of the share
price movement. To draw a trend line, the technical analyst should have at least two tops

or bottoms. The above drawn graph shows the trend lines: Flat trend line and falling
trend line.