Investment in Shares

Dr. S M Shafi Department of Business & Financial Studies University of Kashmir. Synoptic View

• Investment Instruments & Avenues

• Market

• Case for Investing in Shares

• Market Index

Investment Instruments & Avenues Financial Instruments

Two Categories:

1. Money Market Instruments 2. Capital Market Instruments

Money Market Instruments

1. Certificate of Deposits 2. Commercial Paper 3. Treasury Bills

All maturing within One Year [ Short Term Instruments]

Capital Market Instruments

1. Shares 2. Debentures ( Bonds )

S h a r e s

1. Equities ( No Fixed Dividend, Voting Right) 2. Preference Shares ( Dividend Fixed, No Voting Right)

[ Maturing after One Year]

Debentures: 15% 5000 Debentures of Rs.1000 each

Types of Debentures Secured/Unsecured Redeemable/ Convertible/ Zeero Coupon or Naked Irredeemable Non-Convertible Rate/ Specific Debentures Debentures Coupon Rate

Investment Options Available To Small Investors

Investment Options Remarks • Require huge investment • Land • No stream of regular income • Low risk, highly rewarding. low liquidity

• Bank deposits • Low return; low risk & high liquidity

• Shares • Regular income plus capital appreciation high • return/risk Bonds • Generate steady regular income • Low return & low risk 8

Stock Market Stock Market

Raising of Capital From market:

1. Primary Market [Through IPO] 2. [ ]

Why Stock Exchange Market? Two Reasons 1. For exit & Entry Purposes 2. Price Discovery

Stock Exchanges

• 23 Stock Exchanges in India • BSE & NSE – The most followed • BSE is the Oldest • NSE is modern and professionally driven • Regional Stock Exchanges • Bourses in French Language

Listing

• Initial Listing in Regional Stock Exchange is Mandatory.

• Then you can List in BSE or NSE or both

• Initial Listing Fee and Yearly Listing Fee

Specified/Non-Specified Group

Specified Group Non-Specified Group

Non-Cash List Cash List

Three years Mandatory in this After Three Years shift to Group Non- Specified Group Stock Markets: Then & Now

Earlier Now

Physical Exchange Virtual

Open Outcry System, Screenbased Traded Trading Floor Client Broker, Floor Internet Brokers Types of Players in the Market

• Gamblers

• Speculators

• Investors

Types of Brokers

Bull [ Tejiwala]

Bear [ Mandiwala]

Jobber [Tarawaniwala]

Stag [ who buys fresh issues from IPO] Speculative Transaction Bulls & Bears Earlier: a) Carry Forward System b) Badla System C) Trading Now : a) Carry Forward Abolished b) T+2 c) Margin Trading Continues d) Govt. Thinks of T+1

The Case for Investing in The Case for Investing in Shares Company Price Price Nov. Nov. 2005 Gain 2004 Times

About 2 RIL 440 810 times

About 2 J&K BANK 250 465 times

More than INFOSIS 1250 2700 2 times

About 3 BHEL 450 1200 times

19 The Case for Investing in Shares Colgate India Ltd: Capital Appreciation by 90 times

Shares bought in 1980-81 100

Bonus issue in 1982 [ 1 : 1 ] 100 200

Bonus issue in 1985 [ 1 : 1 ] 200 400

Bonus issue in 1987 [ 1 : 1 ] 400 800

Bonus issue in 1989 [ 1 : 1 ] 800 1600

Bonus issue in 1992 [ 3 : 5 ] 960 2560

20 The Case for Investing in Shares Colgate India Ltd: Capital Appreciation by 90 times

1980-81 1993-94 No of Shares bought in 1980 100 2560

Market price per share 125 440

Market value of investment 12500 11,26,400 Growth in investment 90 times Market price of gold 1400 4200 Growth in gold value 3 times

21 Different Issue Prices

 Issue at Par

 Issue at Premium

 Issue at Discount Methods of Pricing

1. Fixed Pricing Mechanism 2. Book Building

Fixed Pricing Mechanism

• Price is fixed by the promoter….. • Same price is paid by all the subscribers

23 Book Building Method

Book Building Method • Bids are invited from the investors with a band price say 450-900 • On the basis of the bids, cut-off price is fixed. • The cut off price to be paid by all

Different Values

What are the different values?

: Face value

: Book value

: Market value

25 Market Index

Major Indices

BSE Sensex = 30 Scrips Covers 16 Sectors

NSE CNX S&P Nifty = 50 Scrips Covers 22 Sectors Thursday, May 08, 2008

Free-Float No. of Full Mkt. Cap.(Rs. Free-Float Weight Scrip Code Scrip Name Close Price Mkt. Cap Shares(normal) in Crores) Adj. Factor in Index(%) (Rs.in Crores)

500325 RELIANCE 2,666.15 1,453,648,601 387,564.52 0.50 193,782.26 16.56 532174 ICICI BANK L 891.30 1,111,477,508 99,065.99 1.00 99,065.99 8.46 500209 INFOSYS TECH 1,779.80 571,995,750 101,803.80 0.85 86,533.23 7.39 500510 LARSEN & TOU 2,886.20 292,147,098 84,319.50 0.90 75,887.55 6.48 500010 HOUSING DEVE 2,720.60 284,029,121 77,272.96 0.85 65,682.02 5.61 500875 I T C LTD 215.05 3,768,561,010 81,042.90 0.70 56,730.03 4.85 532454 BHARTI ARTL 827.60 1,897,907,446 157,070.82 0.35 54,974.79 4.70 500112 STATE BANK O 1,729.80 631,558,654 109,247.02 0.45 49,161.16 4.20 500312 ONG CORP LTD 1,028.35 2,138,872,530 219,950.96 0.20 43,990.19 3.76 500470 TATA STL 845.65 731,234,846 61,836.87 0.70 43,285.81 3.70 500180 HDFC BANK LT 1,508.40 354,432,920 53,462.66 0.80 42,770.13 3.65 532712 REL COM LTD 542.95 2,064,026,881 112,066.34 0.35 39,223.22 3.35 500103 BHEL 1,760.20 489,520,000 86,165.31 0.35 30,157.86 2.58 500376 SATYAM COMP 471.10 670,479,293 31,586.28 0.95 30,006.97 2.56 500696 HIND UNI LT 250.95 2,177,983,566 54,656.50 0.50 27,328.25 2.33 532555 NTPC LTD 192.70 8,245,464,400 158,890.10 0.15 23,833.51 2.04 532540 TCS LTD. 943.70 978,610,498 92,351.47 0.25 23,087.87 1.97 500390 RELIANCE ENR 1,394.10 234,668,582 32,715.15 0.70 22,900.60 1.96 532532 JAIPRAK ASSO 269.05 1,170,563,191 31,494.00 0.60 18,896.40 1.61 532868 DLF LIMITED 643.80 1,704,832,680 109,757.13 0.15 16,463.57 1.41 500300 GRASIM INDUS 2,331.85 91,674,210 21,377.05 0.75 16,032.79 1.37 500570 TATA MOTORS 669.10 385,490,822 25,793.19 0.60 15,475.91 1.32 500440 HINDALCO IN 180.05 1,227,184,963 22,095.47 0.70 15,466.83 1.32 507685 WIPRO LTD. 497.15 1,461,439,242 72,655.45 0.20 14,531.09 1.24 500520 MAHINDRA & M 678.75 245,741,813 16,679.73 0.80 13,343.78 1.14 500359 RANBAXY LABO 470.05 373,227,647 17,543.57 0.70 12,280.50 1.05 532500 MARUTISUZUK 770.25 288,910,060 22,253.30 0.50 11,126.65 0.95 500087 CIPLA LTD. 211.55 777,291,358 16,443.60 0.65 10,688.34 0.91 500425 AMBUJA CEME 111.40 1,522,373,923 16,959.25 0.55 9,327.59 0.80 500410 ACC LTD 743.25 187,634,983 13,945.97 0.60 8,367.58 0.71

TOTAL 2,388,066.86 1,170,402.47

Construction of Stock Market Indices: Market Capitalisation Method

Share Price in Price in No. of Out- M.Cap. In M.Cap. in base Yr current Yr standing shares Base year Current year ( In million )

A 50 70 10 500 700 B 40 50 8 320 400 C 100 90 7 700 630 D 20 80 5 100 400 E 15 24 9 135 216 ------1755 2346

Market Cap. Index = 2346/1755 = 133.67

Index Divisor

• 100/base year market capitalization • Suppose base year M. Capitalisation= 5500 crores • Remember the base year Market Capitalization was kept equal to 100 Points • Thus Index Divisor= 100/5500=1/55 • Suppose further that the Current Market Capitalisation= 10,00,000 crores

• Thus Index would be= 1/55X 10,00,000= 18818 Other BSE & NSE Indices

• BSE 100 BSE IT • BSE 200 BSE FMCG • BSE 500 BSE Capital Goods • BSE Tech BSE Consumer Dur • Dollex 30 BSE H Care • DOLLEX 100 BSE Bankex • Dollex 200 BSE Auto • BSE PSU BSE Metal Foreign Indices

• NASDAQ 100 • NYSE • LSE 100 • Standard & Poor 500 • Dow Jones Industrial Averages( DJIA) 200 • CAC 40 ( French) • Dax 15 ( German) • Nikkei 225 ( Japan) • Hang Seng ( Hong Kong)

WHO SELECTS THESE STOCKS? They are selected by the Index committee of IISL.

Some of the criteria they follow include : 1)Market capitalization. 2)Liquidity. 3)Continuity. 4)Industry representation. 5)Listed history.

Represents 44% of market capitalization 16 sectors 52% of trading volumes

Risk Profile of Various Assets

Return speculative share. growth share.

Debentures bluechip sh.

PSU Bonds

Govt. sec.

Risk

………………RISK – RETURN – RELATIONSHIP……………….

33

R e g u l a t o r 1947 To 1992 From June ,1992 Capital Issues Control Act , 1947 Securities and Exchange Board of India SEBI, 1992

Stricter Liberal

IPOs not easily Possible strict pricing IPOs Possible with Free Pricing Regime regime

Transparency: Transparency: More Transparency ensured: No Transparency ensured 1. Risk Factors a) Internal b) External

Regulates: Equities & Debentures, Bonds Derivatives, Mutual Funds, How to Set a Limit to Your Greed?

Here Are Some Tips:

1. Have a realistic profit goal & sell once it is reached 2.Don’t aim to sell at peak levels? You don’t know what the peak price is until the market starts sliding down 3. Realize your profits & don’t worry about profits you may have lost by not waiting longer 4. Sell when price is moving up

35 Rules of the Stock Market Investment Game

You Should not buy…… 1. Unlisted shares 2. Inactive shares 3. Shares of closely held companies.

36

Derivatives Financial Instruments

1. Forwards 2. Futures 3. Options: a) Call b) Put Option 4. Swaps a) Currency Swaps b) Swaps

Thank You All