M.B.A IV Semester Course 406 FM-02 SECURITY ANALYSIS AND INVESTMENT MANAGEMENT LESSONS 1 TO 6 INTERNATIONAL CENTRE FOR DISTANCE EDUCATION AND OPEN LEARNING HIMACHAL PRADESH UNIVERSITY, GYAN PATH, SUMMERHILL, SHIMLA-171005 Contents Sr. No. Topoc Page No. LESSON-1 STOCK MARKET 1 LESSON-2 NEW ISSUE MARKET 15 LESSON-3 VALUATION OF SECURITIES 26 LESSON-4 FUNDAMENTAL ANALYSIS 37 LESSON-5 TECHNICAL ANALYSIS 58 LESSON-6 PORTFOLIO MANAGEMENT 80 LESSON-1 STOCK MARKET Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Financial Market 1.3 Components of Financial Market 1.4 Stock Exchange 1.5 Nature and Characteristics of Stock Exchange 1.6 Function of Stock Exchange 1.7 Advantages of Stock Exchange 1.8 Organisation of Stock Exchange in India 1.9 Operational Mechanism of Stock Exchanges 1.10 Listing of Securities 1.11 Self-check Questions 1.12 Summary 1.13 Glossary 1.14 Answers: Self-check Questions 1.15 Terminal Questions 1.16 Suggested Readings 1.0 Learning Objectives After going through this lesson the learners should be able to: 1. Understand the financial market. 2. Discuss the components of financial market. 3. Understand the function of stock market. 4. Describe the operational mechanism of the stock exchange. 1.1 Introduction Stock market or secondary market is a place where buyer and seller of listed securities come together. This market is one of the important components of financial markets. In order to understand stock markets in detail, we shall understand the structure of financial market in an economy. Sections of this unit explain briefly the financial markets, components of financial markets, nature and functions of stock market, its Organization and statutory regulations for listing securities on stock markets. 1.2 Financial Market All business units have to raise short-term as well as long-term funds to meet their working and fixed capital requirements from time to time. This necessitates a mechanism with the help of which the fund 1 providers (investors/ lenders) can interact with the borrowers/ users (business units) and transfer the funds to them as and when required. This aspect is taken care of by the financial markets which provide a place where or a system through which, the transfer of funds by investors/lenders to the business units is adequately facilitated. 1.3 Components of Financial Markets Financial markets can broadly be divided into 2 types i.e. capital (long term funds) and money market (short term funds). Money market is the financial market for short term funds which is further divided into sub markets. These are call money market, treasury bills, commercial bills, acceptance houses, commercial paper market and more. Capital market on the other hand, is a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. The capital market has two interdependent and inseparable segments, the primary market and stock (secondary market). Primary Market The primary market provides the channel for sale of new securities. The issuer of Securities sells the securities in the primary market to raise funds for investment and/ or to discharge. In other words, the market wherein resources are mobilized by companies through issue of new securities is called the primary market. These resources are required for new projects as well as for existing projects with a view to expansion, modernization, diversification and upgradation. This market id explained in detail in the next unit. 2 Secondary (Stock) market Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. This market lays an equally important role in mobilizing long-term funds by providing the necessary liquidity to holdings in shares and debentures. It is an organized market where shares and debentures are traded regularly with high degree of transparency and security. In fact, an active secondary market facilitates the growth of primary market as the investors in the primary market are assured of a continuous market for liquidity of their holdings. 1.4 Stock Exchange Stock exchange is the term commonly used for a secondary market, which provide a place where different types of existing securities such as shares, debentures and bonds, government securities can be bought and sold on a regular basis. A stock exchange is generally organized as an association, a society or a company with a limited number of members. It is open only to these members who act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act has defined stock exchange as an “association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities 1.5 Nature and Characteristics of Stock Exchange: The stock exchange is an organized market for the purchase and sale of listed securities. They facilitate, regulate and control the trade in securities. The following are the features of stock markets: 1. Association: Stock market is an association of persons that may be incorporated or not. 2. Mechanism: It provides a place or mechanism through which industrial and government securities may be bought and sold. 3. Organized market: It is an organized market for securities. It allows trading in securities subject to certain regulations. 4. Market for old securities: It provides the ready market for old securities that have been already issued by the companies to public. It does not deal in the fresh shares, debentures and bonds to be issued by the companies or government agencies to the public. In stock market transactions in old securities of companies are carried on without the involvement of companies 5. Deals with listed securities: It offers trading facilities only for those securities that are listed by the companies or issuing agencies with the exchange. It a company has not complied with the listing procedure of a stock market then its securities are not allowed to be traded on such stock market. 6. Only the members allowed dealing: These stock markets allow only their members to transact the business in the market. Outsiders or nonmembers cannot purchase or sale the securities on these stock exchanges. Membership of a 2 particular stock exchange (say Bombay stock Exchange or National stock Exchange or Bangalore Stock Exchange) is acquired by individuals and firms only on payment of the membership fees prescribed by that stock exchange. 3 7. Ensures free transferability of securities and securities evaluation: Stock exchange provides a mechanism for free transfer of industrial securities and also makes continuous evaluation of securities traded in the market. 1.6 Functions of a Stock Exchange The functions of stock exchange can be as follow 1. Provides ready and continuous market: By providing a place where listed securities can be bought and sold regularly and conveniently, a stock exchange ensures a ready and continuous market for various shares, debentures, bonds and government securities. This lends a high degree of liquidity to holdings in these securities as the investor can en-cash their holdings as and when they want. 2. Provides information about prices and sales: A stock exchange maintains complete record of all transactions taking place in different securities every day and supplies regular information on their prices and sales volumes to press and other media. This enables the investors in taking quick decisions on purchase and sale of securities in which they are interested. Not only that, such information helps them in ascertaining the trend in prices and the worth of their holdings. This enables them to seek bank loans, if required. 3. Provides safety to dealings and investment: Transactions on the stock exchange are conducted only amongst its members with adequate transparency and in strict conformity to its rules and regulations which include the procedure and timings of delivery and payment to be followed. This provides a high degree of safety to dealings at the stock exchange. There is little risk of loss on account of non-payment or non delivery. Securities and Exchange Board of India (SEBI) also regulates the business in stock exchanges in India and the working of the stock brokers. 4. Evaluation of securities: It the stock exchange, the prices of securities clearly indicate the performance of the companies. It integrates the demand and supply of securities in an effective manner. It also clearly indicates the stability of companies. Thus, investors are in a better position to take stock of the position and invest according to their requirements. 5. Mobilizes savings: The savings of the public are mobilized through mutual funds, investments trusts and by various other securities. Even those who cannot afford to invest in huge amount of securities are provided opportunities by mutual funds and investment trusts. 6. Healthy speculation: The stock exchange encourages healthy speculation and provides opportunities to shrewd businessmen to speculate and reap rich profits from fluctuations in security prices. The price of security is based on supply and demand position. It creates a healthy trend in the market. Any artificial scarcity is prevented due to the rules and regulations of the market.. 7 Mobility of funds: The stock exchange enables both the investors and the companies to sell or buy securities and thereby enable the availability of funds.