Note: 1. Any three questions attempt from Assignment A or B2. Case study All questions are compulsary 3. All questions are compulsary from Assignment C

1 . A ) Sweet equity is the best form of reward for those who contribute to the growth of the companies discussSweat equity shares are shares issued by a listed company to itsemployees and directors in accordance with the Companies Act, 1956and SEBI Regulations

Issue of sweat equity by a listed company

A company whose equity shares are listed on a recognised stockexchange may issue sweat promoter equity shares, to its employeesand directors in accordance with the Companies Act, 1956 and SEBI Regulations. In case of issue of sweat equity shares to promoters,approval by a simple majority of the shareholders in a general meeting is required. The promoters to whom such sweat equity shares are to be issued cannot participate in such a meeting.

The price of sweat equity shares cannot be less than the maximum value of the average of the weekly high and low of the closing prices of the related equity shares during the six months preceding the relevant date; or during the two weeks preceding the relevant.

The amount of sweat equity shares issued will be treated as part ofmanagerial remuneration if the shares are issued to any director ormanager for non-cash consideration, which does not take the formof an asset that can be shown in the balance sheet of the company.

Sweat equity shares have a lock-in period of three years from thedate of allotment. The sweat equity issued by a listed company will be eligible for listing only if such issues are in accordance with SEBI regulations

1 b)Why do investor add real estate in their portfolio?Real estate

Buying property is an equally strenuous investment decision. Realestate investment generally offers easy entry and good hedge againstinflation. But, during deflationary and recessionary periods, the valueof such investments may decline. Real estate investments areclassified as direct or indirect. In a direct investment, the investorholds legal little to the property. Direct real estate investments include single-family dwellings, duplexes, apartments, land and commercial property.

In case of indirect investment, investors appoint a trusteeto hold legal title on behalf of all the investors in the group.The more affluent investors are likely to be interested in the followingtypes of real estate: agricultural land, semi-urban land, andtime-share in a holiday resort. The most important asset for individualinvestors generally is a residential house or flat because the capitalappreciation of residential property is, in general, high. Moreover,loans are available from various quarters for buying/constructing aresidential property. Interest on loans taken for buying/constructinga residential house is tax-deductible within certain limits. Besides,ownership of a residential property provides psychological satisfaction.

However, real estate may have the disadvantages of illiquidity,declining values, lack of diversification, lack of tax shelter, a longdepreciation period and management problems.

Reasons for investing in real estate are given below:High capital appreciation compared to gold or silver particularlyin the urban area.Availability of loans for the construction of houses. The 1999-2000 budget provides huge incentives to the middle class toavail of housing loans. Scheduled banks now have to disburse3 per cent of their incremental deposits in housing finance.Tax rebate is given to the interest paid on the housing loan.Further Rs. 75,000 tax rebate on a loan upto Rs. 5 lakhs whichis availed of after April 1999. if an investor invests in a housefor about Rs. 6-7 lakh, he provides a seed capital of about Rs.1-2 lakh. The Rs. 5 lakh loan, which draws an interest rate of15 percent, will work out to be less than 9.6 per cent becauseof the Rs. 75,000 exempted from tax annually. In assessingthe wealth tax, the value of the residential home is estimatedat its historical cost and not on its present market value.

The possession of a house gives an investor a psychologicallysecure feeling and a standing among his friends and relatives.

With real estate being a part of thecapital allocationdecisions of both institution and retail investors, there has been increasing development in real estate funds. Due to the capital intensity of real estate investing, its requirement for active management and the rise in global real estate opportunities, institutions are gradually moving to real estatefunds of fundsto allow for appropriate asset management.

The same is true for retail investors, who now have a much larger selection of real estate mutual funds, allowing for efficient capital allocation and diversification. Like any other investment sector, real estate has its benefits and its disadvantages. However, real estate should be considered for most investment portfolios, and real estate investment trusts (REITs) and real estate mutual funds may be the best methods tofill that allocation.1. C) What are the step taken by sebi to protect investors in primary marketInvestors protection in the primary market

The investing public should be protected to ensure healthy growthof primary market. The term investors protection has a wider meaningin the primary market. The principal ingredients of investor protectionare- (a) Provision of all the relevant information; (b) Provision ofaccurate information; and (c) Transparent allotment procedureswithout any bias.To provide the above mentioned factors several steps have been taken.They are project appraisal, under-writing, clearance of the issuedocument by the stock exchange and SEBIs scrutiny of the issuedocument.

1. Project appraisal is the first step in the entire process of theproject. Technical and economic feasibility of the project isevaluated. If the project itself is not technically feasible andeconomically viable, whatever may be the other steps taken toprotect the investors are defeated. Appraisal shows whetherthe project is meaningful and can be financed. The investorsprotection starts right from the protection of the principalamount of investment. Based on the appraisal, the project costis finalised. The cost should be neither understated noroverstated. The profitability of the project should be estimatedand given. To ensure fair project appraisal, SEBI has made itmandatory for the project appraisal body to participate a certainamount in the forthcoming issue.

2.Underwriting

Once the issue is finalised the underwriting procedure starts.Reputed institutions and agencies, providing credibility to theissue normally underwrite the issue. If the lead managersparticipate more than five per cent of the minimum stipulatedamount offered to the public, it would increase the confidenceof the public regarding the pricing and saleability of the issue.

3 .Disclosures in the Prospectus

SEBI has issued stringent norms for the disclosure ofinformation in the prospectus. It is the duty of the leadmanager to verify the accuracy of the data provided in theprospectus. The pending litigation should be given clearly.The promoters credibility in fulfilling the promises of theprevious issues (if any) should be stated. A clear version of therisk factors should be given. Any adverse development thataffects the normal functioning and the profit of the companyshould be highlighted in the risk factor.

4 .Clearance by the Stock Exchange

The issue document has to be cleared by the stock exchangeon which the proposed listing is offered. The stock exchangesverify the factors related with the smooth trading of the shares.Any bottleneck in this area will be eliminated since thetransferability is the basic right of the shareholders. Tradingof the shares helps the investor to liquidate his share at anytime. If the issues are not traded in the secondary market at agood price, they would dampen the spirit of the investor.

5. Signing by Board of Directors

The Board of Directors should sign the prospectus. A copy isalso filed with the office to the Registrar of the Companies.This along with the other material documents referred to inthe prospectus are available for inspection by the members ofthe public. The minimum amount to be subscribed by thepromoters and maintained for a minimum number of yearsalso safeguard the interest of the investors.

6. SEBIs Role

SEBI scrutinises the various offer documents from the viewpoint of investors protection and full disclosure. It has thepower to delete the unsubstantiated claims and ask foradditional information wherever needed. This makes the leadmanagers to prepare the offer document with due care anddiligence. When the disclosure of the information is complete,wide publicity has to be given in the newspapers. In theallotment procedure to make sure of transparency, SEBIsnominee is appointed apart from the stock exchange nomineein the allotment committee. Inclusion of valid applications andrejection of invalid applications are checked. The representativeof the SEBIs see to it that undue preference is not given tocertain group of investors.

7. For redressal of investors grievances, The Department of Company Affairs has introduced computerised system ofprocessing the complaints to handle it effectively. Thecompanies are requested to give feed back regarding the actiontaken on each complaint within a stipulated time period. If thecompanies do not respond and are slow in the process ofsettlement of complaints, penal action can be taken againstthe companies under the provisions of the Companies Act. Ifthe performance of the Registrar to the issue is not satisfactoryin settling the complaints, SEBI can take appropriate actionagainst such Registrar. Several Investors Associations are alsofunctioning to help the investors complaints redressedpromptly.

Factors Needed to Make the Investor ProtectionEffective

1. Investors Awareness

Even though many mechanisms exist in the various stagesof the issue, the investor awareness regarding themechanism is limited. To remove this, provision ofinformation regarding the status of an application andredressal of grievances should be provided at all centreswhere applications are collected.

2. Strict norms for Premium Fixation

The guidelines issued by SEBI in Dec 1996 nforjustification of premium on the basis of MalegamCommittee recommendations still leave scope for fixationof relatively high premiums. It is desirable to evolve astraight jacket formula on the lines of erstwhile valuationguidelines under the Capital Issues Control Act.

3. Safety Nets

It is imperative to provide for safety nets atleast in respectof small investors holding shares up to 200 for at least oneyear. The safety net has to be honoured by the issuers,merchant bankers and underwriters under a formulanormally agreed upon. The stipulation of safety net itselfwill result in the fixtion of realistic premium.

4. Punitive action

a. The punitive action under the companies Act needs tobe stepped up, especially under section 62, 63 and 209 A. Sec62 provide for comp.ensation to investors for losses arisingout of misstatement in the prospectus. SEBI, stockexchanges and investors association file the cases under thissection because the individual investor finds it impossibleto institute cases under this section.

b. In case of successful prosecution and promoters beingdeclared insolvency, compensation should come fromInvestors Protection Fund.

c. Regarding the fly by night operators, the Departmentof company Affairs should step up action under Sec 209 Aof the Companies Act. Powers under this section should bedelegated to SEBI for effective functioning.5. Promoters Stake

It is necessary to raise the promoters stake in new issueswhich has been curtailed drastically from 60 per cent earlierto 20 per cent now. It needs to be raised to at least 40 percent. This reduces the scope for manipulation of prices.

Recent Trends in the Primary Market

The liberalization policy adopted by the government in the earlynineties resulted in a boom in the secondary market. The boomwas not restricted to the secondary market alone, the primarymarket which till then was working under the Controller ofCapital Issue also enjoyed the boom withthe repealing of theController of Capital Issue Act. With the dawn of an era of freepricing more and more companies accessed the primary market.There was a fall inthe amount raised through primary marketfrom March 1995 with much-publicized M.S. shoe episode.This episode put a break on the new issues activity. the collapseof the CRB capital market was another fatal blow on theprimary market. The primary market was dull and insipid in1997-98. The number of primary issues, which were 813 in1996-97 drastically fell down to 62 issues in 1997-98. It isinteresting to note that out of every 100 public issues 39 wasover subscribed in 1995-96 but in 1996-97 it was 8. At the sametime the 7 out of everys 100 companies in 1996-97 had toreturn application money to investors for failing to raiseminimum stipulated amount in capital issue. The reasons forthis sordid state of affairs are given below.

2. A ) Discuss the dematerialisation and Rematerialisation process in NSDL

Dematerialisation:It is the process by which a client can get physical certificates converted into electronic balances.An investor intending to dematerialise its securities needs to have an account with a DP. The client has to deface and surrender the certificates registered in its name to the DP. After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialisation. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the Investor with the DPDematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the BOs account with his DP. The client (registered owner) will submit a request to the DP in theDematerialisation Request Formfor dematerialisation, along with the certificates of securities to be dematerialised. Before submission, the client has todefacethe certificates by writing "SURRENDERED FOR DEMATERIALISATION". The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client. The DP will scrutinize the form and the certificates. This scrutiny involves the following Verification of Client's signature on the dematerialisation request with the specimen signature (the signature on the account opening form). If the signature differs, the DP should ensure the identity of the client. Compare the names on DRF and certificates with the client account. Paid up status ISIN (International Securities Identification Number) Lock - in status Distinctive numbers In case the securities are not in order they are returned to the client and acknowledgment is obtained. The DP will reject the request and return the DRF and certificates in case: A single DRF is used to dematerialise securities of more than one company. The certificates are mutilated, or they are defaced in such a way that the material information is not readable. It may advise the client to send the certificates to the Issuer/ R&T agent and get new securities issued in lieu thereof. Part of the certificates pertaining to a single DRF is partly paid-up; the DP will reject the request and return the DRF along with the certificates. The DP may advise the client to send separate requests for the fully paid-up and partly paid-up securities. Part of the certificates pertaining to a single DRF is locked-in, the DP will reject the request and return the DRF along with the certificates to the client. The DP may advise the client to send a separate request for the locked-in certificates. Also, certificates locked-in for different reasons should not be submitted together with a single DRF In case the securities are in order, the details of the request as mentioned in the form are entered in the DPM (software provided by NSDL to the DP) and a Dematerialisation Request Number (DRN) will be generated by the system. The DRN so generated is entered in the space provided for the purpose in the dematerialisation request form. A person other than the person who entered the data is expected to verify details recorded for the DRN. The request is then released by the DP which is forwarded electronically to DM (DM - Depository Module, NSDL's software system) by DPM. The DM forwards the request to the Issuer/ R&T agent electronically. The DP will fill the relevant portion viz., the authorisation portion of the demat request form. The DP willpunch the certificateson the company name so that it does not destroy any material information on the certificate. The DP will then despatch the certificates along with the request form and a covering letter to the Issuer/ R&T agent. The Issuer/ R&T agent confirms acceptance of the request for dematerialisation in his system DPM (SHR) and the same will be forwarded to the DM, if the request is found in order. The DM will electronically authorise the creation of appropriate credit balances in the client's account. The DPM will credit the client's account automatically. The DP must inform the client of the changes in the client's account following the confirmation of the request. The issuer/ R&T mayreject dematerialisationrequest in some cases. The issuer or its R&T Agent will send an objection memo to the DP, with or without DRF and security certificates depending upon the reason for rejection. The DP/Investor has to remove reasons for objection within 15 days of receiving the objection memo. If the DP fails to remove the objections within 15 days, the issuer or its R&T Agent may reject the request and return DRF and accompanying certificates to the DP. The DP, if the client so requires, may generate a new dematerialisation request and send the securities again to the issuer or its R&T Agent. No fresh request can be generated for the same securities until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and the DP about it.

In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates that are to be dematerialised. Separate DRF has to be filled for each ISIN. The complete process of dematerialisation is outlined below:

Surrender certificates for dematerialisation to your DP.DP intimates to the Depository regarding the request through the system.DP submits the certificates to the registrar of the Issuer Company.Registrar confirms the dematerialisation request from depository.After dematerialising the certificates, Registrar updates accounts and informs depository regarding completion of dematerialisation.Depository updates its accounts and informs the DP.DP updates the demat account of the investor.

Rematerialisation:Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the rematerialisation request to the DP with whom he has an account. The DP enters the request in its system which blocks the clients holdings to that extent automatically. The DP releases the request to NSDL and sends the request form to the Issuer/ R&T agent. The Issuer/ R&T agent then prints the certificates, despatches the same to the client and simultaneously electronically confirms the acceptance of the request to NSDL. Thereafter, the clients blocked balances are debited. The client will submit arequest to the DPfor rematerialisation of holdings in its account. On receipt of the request form, the DP will verify that the form is duly filled in and issue to the client, an acknowledgement slip, signed and stamped. The DP will verify the signature of the client as on the form with the specimen available in its records. If the signatures are different the DP will ensure the identity of the client. If the form is in order the DP will enter the request details in its DPM (software provided by NSDL to the DP). While entering the details, if it is found that the client's account does not have enough balance, the DP will not entertain the request. The DP will intimate the client that the request cannot be entertained since the client does not have sufficient balance. If there is sufficient balance in the client's account, the DP will enter the request in the DPM and the DPM will generate a Rematerialisation Request Number (RRN). The RRN so generated is entered in the space provided for the purpose in the rematerialisation request form. Details recorded for the RRN should be verified by a person other than the person who entered the data. The request is then released to the DM by the DP. The DM forwards the request to the Issuer/ R&T agent electronically. The DP will fill the authorisation portion of the request form. The DP will then despatch the request form to the Issuer/ R&T agent. While processing the request, the Issuer/ R&T agent may report some objections. Depending on the nature of objection, the Issuer/ R&T agent may reject the request or process it partially, seeking rectification for the remaining, and send an objection memo to the DP. The Issuer/ R&T agent accepts the request for rematerialisation prints and despatches the certificates to the client and sends electronic confirmation to the DM. The DM downloads this information to the DPM and the status of the rematerialisation request is updated in the DPM. The DP must inform the client about the changes in the client account following the acceptance of the request.

2B)Stock market indices are the barometre of the stock market Discuss

Index numbers are termed as barometers of economy as they mirrorthe relative changes taking place in various economic indicators likeGDP, exports, prices, etc. similarly stock market indices are thebarometers of the stock market. They reflect the stock market behaviour.

STOCK MARKET INDICES

With some 7,000 companies listed on the Bombay stockexchange, it is not possible to look at the prices of every stock to findout whether the market movement is upward or downward. Theindices give a broad outline of the market movement and representthe market. Some of the stock market indices are BSE Sensex, BSE-200, Dollex, NSE-50, CRIOSIL-500, Business Line 250 and RBIindices of Ordinary Shares. Usefulness of indices would be clear fromthe following points:1. Stock market indices help to recognise the broad trends in themarket.

2. Stock prise index can be used as a benchmark for evaluatingthe investors portfolio.

3. The investor can use the indices to allocate funds rationallyamong stocks. To earn returns on par with the market returns,he can choose the stocks that reflect the market movement.

4. Index funds and futures are formulated with the help of theindices. Usually fund managers construct portfolios to emulateany one of the major stock market index. ICICI has floatedICICI index bonds. The return of the bond is linked with theindex movement.

5. Technical analysts studying the historical performance of theindices predict the future movement of the stock market. Therelationship between the individual stock and index predictsthe individual share price movement.

6. Stock market function as a status report on the generaleconomy. Impacts of the various economic policies are reflectedon the stock market.

Computation of stock index

Different methods have been suggested for the computation of stockindices. They are the market value weighted method, price weightedmethod, and equal weight method.

The market value weighted method computes a stock index in whicheach stock affects the index in proportion to its market value. This isalso called the capitalisation-weighted index. The price weightedmethod gives weights to each security forming the index according tothe price per share prevailing in the market. Weights can also begiven equally to all the shares. This method of computing the indexis known as equal weight method

2C)How can increasing short interest give a bullish interpretation and why ?Short Interest as a Bullish Indicator

Why is heavy short interest a bullish indicator? Well, a substantial accumulation of short interest on a particular stock leaves the door open for a potential short-squeeze rally. This situation typically occurs when an equity suddenly moves sharply higher perhaps as the result of a positive earnings surprise, or an analyst upgrade. A sharp increase in price results in a loss for the short sellers, forcing them to cover (or buy back) their bearish bets in order to minimize the damage. This rush to cover their shorted shares leads to further gains in the shares, and in turn draws more short sellers into covering their positions.

Yet, this kind of short-squeeze situation is not necessary for a bullish investor to reap the benefits of this bearish sentiment. Heavy short interest on a rising stock can help fuel the securitys rally as these shorted shares are slowly and steadily unwound in the form of buying pressure. On a strongly uptrending security, a healthy accumulation of short interest can be thought of as sideline cash should the stock's gains continue.

Short Interest as a Bearish Indicator

Can heavy short interest be used as a bearish indicator? Actually, it can. If a stock is in a sharp downtrend and is also faced with a heavy amount of short interest, we could see the stock suffer additional significant losses as the bears increase their short positions. This downward volatility has increased following the elimination of the uptick rule on July 6, 2007. (The uptick rule required that every short sale be entered at a price that was higher than the price of the previous trade. The uptick rule was created to prevent short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.)

Measuring Short Interest

There are two key indicators that are used to measure the level of short interest: the short-interest ratio and short interest as a percentage of a stocks total float. The short-interest ratio is determined by dividing the total number of shares sold short by a stocks average daily trading volume during a one-month period. The short-interest ratio is a rough estimate of how many days it would take investors to buy back all of their shorted shares at the stocks average daily trading volume. For our purposes, we typically view any reading above 4 or 5 as a sign of heavy pessimistic sentiment.

Meanwhile, the percentage of a stocks total float (or the total number of shares of a company available for trading) that has been dedicated to short selling is another indication of how bearish investors might be. For our purposes, we typically view any readings above 5% as a sign of heavy pessimistic sentiment.

Short interest can be a useful sentiment indicator, since it measures the level of investor pessimism toward a given stock. Specifically, short interest is created when an investor sells shares of a stock that he or she has borrowed from a broker, but does not own outright. A basic short-selling strategy is profitable when the price of the shorted stock declines, allowing the investor to buy the stock back at a lower price in order to replace the borrowed shares. Thus, the short seller hopes and likely assumes that the stock he or she has sold short will continue to drop.

Twice a month, brokerage firms are required to report the number of shares that have been shorted in their client accounts. This information is compiled for each security and then released to the public. By monitoring changes in a stock's short-interest figures, investors are able to gauge the public's level of pessimism toward the stock. Generally speaking, a high volume of short interest indicates that investors have a negative outlook for the company (although heavy short interest can also be created out of arbitrage situations, such as mergers and the release of convertible bonds). From a contrarian viewpoint, we see this pessimism as bullish for the stock if it is in an uptrend.

Short selling is one way to give a person the ability to profit from a falling stock. It is the selling of a security that the seller doesn't own. Oneborrowsa stock (or futures contract or option), thensellsit, hoping to replace those borrowed shares by buying them backat a lower priceand thus earning a profit.If the security goes up from the price at which you initially sold, your loss is the difference, and it can be unlimited. That's the risky part of short-selling - your potential profit is limited while your risk is unlimited (if you are un-hedged).Short interest is the total number of shares of a stock that have been sold short but not yet covered. The NYSE reports the total short interest for each stock once per month, usually around the middle of the month. These are only trades that are already settled, so there is some lag in the reporting.

A large increase or decrease in short interest can be a good indicator of sentiment. A high (or rising) short interest means that a large amount of people believe that a stock will go down, similar to the short futures contracts from the Commitments of Traders data and high put/call ratios.The short-interest ratio is the total number of shares sold short (short interest) divided by average daily volume. This is also called "days to cover" because it shows - given the security's average trading volume - how many days it will take to cover all of the short positions. The higher the ratio, the longer it would take to buy back the borrowed shares, and the potentially more bullish it is. It is potentially bullish because if some positive catalyst occurs, then there may be heavy buying demand from those short looking to cover (buy back) their shares.Just as individual stocks have short interest ratios, so do the exchanges as a whole, which are simply the addition of all the individual stocks. The traditional way to calculate the short interest ratio on the NYSE is to take the short interest on all the individual stocks on the exchange and divide it by the average daily trading volume on the NYSE over the past month.So, for example, if there were two billion shares sold short at the end of the reporting period, we would divide that by the average daily volume on the NYSE for the same period, say, one billion shares per day. This would give us a NYSE short ratio of 2, which means that it would take two days to cover all of the short positions. A higher ratio means there is more bearish sentiment on the exchange.There are some challenges here, mainly the fact that short interest is very seasonal. It is lower in the early months of the year and higher in the later months, probably because of tax implications. We have analyzed each year from 1943-2002 and adjusted the short sales to normalize these effects.This gives us a better perspective of actual sentiment rather than seasonal influences. Also, instead of using just one month's volume to calculate the ratio, we use the past 12 months, which helps to cancel out seasonal volume influences as well.When we see a buildup in short interest, that provides a base for those shorts to eventually cover, driving prices higher. Therefore, high short interest ratios tend to be bullish. Conversely, low short interest ratios mean that traders are optimistic about the long-term prospects of the market, and have decreased their short holdings. This robs the market of a potential short-covering base, and tends to be bearish.

3A)Explain the utility of economic analysis and state the economic factor considered for this analysis ?

In the economic analysis the investor has to analyse the economic factor to forecast of the economy in order to identify the growth of the economy and its trend.Further based on the economic analysis the investor will identify the industry groups which are promising in the coming years in order to choose the best company in such industry group. The economic analysis provides the investor to develop a sound economic understand and be able to interpret the impact of important economic indicators on the markets.

Return assumptions for the stock and bond markets and sales, cost, andprofit projections for industries and nearly all companies necessarily embodyeconomic assumptions. Investors are concerned with those forces in theeconomy which affect the performance of organization in which they wish toparticipate, through purchase of stock. By identifying key assumptions andvariables, we can monitor the economy and gauge the implications of newinformation on our economic outlook and industry analysis. In order to beat the market on a risk adjusted basis, the investor must have forecasts that differ from the market consensus and must be correct more often than not.

Economic trends can take two basic forms: cyclical changes that arisefrom ups and downs of the business cycle, and structural changes that occurwhen the economy is undergoing a major change in how it functions. Some ofthe broad forces which impact the economy are:

Population

Population gives and idea of the kind of labour force in a country.Increasing population gives demand for more industries like hotels, residences,

service industries

Like health, consumer demand like refrigerators and cars.Increasing population therefore shows a greater need for economic development.Although it does not show the exact industry that will expand.

Research and technological development

The economic forces relating to investments would depend on theamount of resources spent by the government on the particular technologicaldevelopment affecting the future. Investors would prefer to invest in thoseindustries in which the larger share of development funds are being allocated by the government. For example in India oil and information technology arereceiving a greater amount of attention and may be considered for investment.

Macroeconomic Stability

General macroeconomic conditions are very important in terms of thegeneral climate under which investment decisions are made. So economicgrowth will depend to some extent upon the stability of the economy e.g. fiscal balance, and reasonably predictable levels of inflation. Macroeconomic stability reduces the risks of investment and might therefore be seen as a necessary condition for growth. Fiscal balance ensures that there is less risk of inflation, because there will be less risk of governments printing money. This may also stabilize the exchange rate and allow interest rates to be set at a reasonably low level - so further encouraging investment.

Trade Liberalization, Capital Mobility and Exchange Rate PolicyThe abolition of trade restrictions (tariffs and quotas) is often seen as anecessary condition for growth. The idea is to widen markets and thus alloweconomies of scale in exporting industries. It is often argued that exchange rates need to be adjusted downwards at the same time, to ensure that potential exporters can compete on world markets. To encourage direct foreigninvestment restrictions on international capital flows may need to be reduced.

Natural Resources and Raw Material

The natural resources are largely responsible for a countrys economicdevelopment and overall improvement in the condition of corporate growth. The discovery of oil in Middle Eastern countries and the discovery of gas in America has significantly changed the economic and investment pattern of the countries.

Gross domestic product (GDP)

GDP measures the total output of goods and services for final useoccurring within the domestic territory of a given country, regardless of theallocation to domestic and foreign claims. Gross domestic product at purchaservalues (market prices) is the sum of gross value added by all resident and nonresident producers in the economy plus any taxes and minus any subsidies not included in the value of the products. Higher GDP level is an indication of higher economic development and thereby higher investment ability.

International Trade

Exports and Imports of goods and services represent the value of allgoods and other market services provided to or received from the rest of theworld. They include the value of merchandise, freight, insurance, transport,travel, royalties, license fees, and other services, such as communication,construction, financial, information, business, personal, and governmentservices. They exclude labor and property income (formerly called factorservices) as well as transfer payments. Higher levels of international tradeespecially higher exports are indicative of higher earnings and therefore higher economic development of a country.

Inflation

Higher inflation is generally negative for the stock market because itcauses higher interest rates, it increases uncertainty about future prices andcosts, and it harms firms that cannot pass their cost increases on to consumers.Some industries may benefit inflation. Natural resource industries benefit if their production costs do not rise with inflation, because their output will likely sell at higher price.

Interest Rates

Banks usually benefit from volatile interest rates because stable interestrates lead to heavy competitive pressures that squeeze their interest margins.High interest rates clearly harm the housing and the construction industry.

Economic Indicators

Besides the factors discussed above there are other significant economicindicators such as countrys fiscal policy, monetary policy, stock prices, state of capital market, labour productivity, consumer activity etc.

Forecasting techniques

There are basically five economic forecasting techniques:

Surveys: It is a method of short term forecasting. It is broadly used to convey the future course of events in the economy. The method to do this is approximate because it is based on beliefs, notions and future budgeting of the government.It, however, broadly indicates the future of events in the economy.

Economic Indicators: It gives indication of the economic process throughcyclical timings. These projections are a method of getting indications of thefuture relating to business depressions and business prosperity. This methodalthough has its advantages of giving the future indications of the economy isnot an exact method of finding out the economic activity. It gives resultsapproximately and is at best an estimation of the future of the economicconditions.

Diffusion Indexes: The diffusion index is a method which combines thedifferent indicators into one total measure and it gives weaknesses and strength of a particular time series of data. The diffusion index is also called a census or a composite index.

Economic Model Building: This is a mathematical and statistical application toforecast the future trend of the economy. This technique can be used by trained technicians and it is used to draw out relation between two or more variables. The technique is to make one independent variable and independent variable and to draw out a relationship between these variables. The answer of drawing these relationships is to get a forecast of direction as well as magnitude.

Opportunistic Model Building: This method is the most widely used economicforecasting method. This is also sectoral analysis of Gross National ProductModel Building. This method uses the national accounting data to be able toforecast for a future short-term period. It is a flexible and reliable method offorecasting. The method of forecasting is to find out the total income and thetotal demand for the forecast period. To this are added the environmentconditions of political stability, economic and fiscal policies of the government, policies relating to tax and interest rates. This must be added to Gross domestic investment, government purchases of goods in services, consumption expenses and net exports. The forecast has to be broken down first by an estimate of the government sector which is to be divided again into State Government and Central Government expenses. The gross private domestic investment is to be calculated by adding the business expenses for plan, construction and equipment changes in the level of business. The third sector which is to be taken is the consumption sector relating to the personal consumption factor. This sector is usually divided into components of durable goods, non-durable goods and services. When data has been taken of all these sectors these are added up to get the forecast for the Gross National Product.

What is meant by Fundamental Analysis and how Fundamental analysis differ from Technical analysis?

1) FUNDAMENTAL ANALYSIS :

The first major analysis of securities analysis is the fundamental analysis. A Fundamental analysis is a time honored value based approach depending. Upon a careful assessment of the fundamental of an economy, industry and the company. The fundamental analysis studies the general economic situation makes an evaluation of an industry and finally does an in-depth analysis of both financial and the non financials of the company of choice. The fundamental analysis is aimed at analyzing the various3 fundamentals or basic factors that effect the risk return of the securities. The fundamental analysis involves the analysis of the following:A) THE ECONOMIC ANALYSISB) THE INDUSTRY ANALYSISC) THE COMPANY ANALYSIS

A) THE ECONOMIC ANALYSIS:In the economic analysis the investor has to analyse the economic factor toforecast of the economy in order to identify the growth of the economy and its trend.Further based on the economic analysis the investor will identify the industry groupswhich are promising in the coming years in order to choose the best company in suchindustry group. The economic analysis provides the investor to develop a soundeconomic understand and be able to interpret the impact of important economicindicators on the markets

B) INDUSTRY ANALYSIS:The object of the industry analysis is to assess the prospects of variousindustrial groupings. The industry analysis helps to identify the industries with a potential for future growth and to select companies from such industry to invest in its securities. The industry analysis involves industry life cycle analysis, investment implication, structure and characteristics of an industry.

C) THE COMPANY ANALYSIS:Company analysis is the last leg in the economy, industry and company analysis sequence. The company analysis is a study of variable that influence the future of a firm both qualitatively and quantitatively. The purpose of company analysis is to know the intrinsic value of a share of a company.

2) THE TECHNICAL ANALYSIS :As an approach to investment analysis, technical analysis is radically different from fundamental analysis. The technical analysis is frequently used as a supplement to fundamental analysis is, concerned with a critical study of the daily or weekly price volume data of index comprising several shares. The technical analysis analyses the buying and selling pressure, which govern the price trend. It helps the investors to buy cheap and sell high, regardless of the type of company the investor choose. Thetechnical analysis complies a study of the market itself and not of the various external factors which effect the market. According to technical analyst, all relevant factors get gets reflected in the volume of the stock exchange transaction and the level of the share prices

Technical analysis has an important bearing on the study of pricebehavior and has its own method in predicating significant price behavior.Technical analysis is probably the most controversial aspect of investmentmanagement. That technical analysis is a delusion, that it can never be moreuseful in predicating stock performance than examining the insides of a deadsheep, in the ancient Greek traditions.

Technical analysis involves a study of market generated data like pricesand volumes to determine the future direction of price movement. Martin J.Pring explains as The technical approach to investing is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces. The art of technical analysis-for it is an art-is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has been reversed.

Basic assumptionThe basic premises underlying technical analysis are as follows.

1. The market and / or an individual stock act like a barometer rather than athermometer. Events are usually discounted in advance with movements as the likely result of informed buyers and sellers at work.

2. Before a stock experiences a mark-up phase, whether it is minor or major,a period of accumulation usually will take place. Accumulation or distributionactivity can occur within natural trading trends. The ability to analyseaccumulation or distribution within net natural price patterns will be, therefore, a most essential pre-requisite.

3. The third assumption is an observation that deals with the scope andextends of market movements in relation to each other. In most cases, a smallphase of stock price consolidation which is really phase of backing and filling will be followed by a relative short-term movement, up or down, in the stocks price. On the other hand a larger consolidation phase can lead to a greater potential stock price move.

Differences between Technical Analysis and Fundamental AnalysisThe key differences between technical analysis and fundamentalanalysis are as follows:

1. Technical analysis mainly seeks to predict short term pricemovements, whereas fundamental analysis tries to establish longtermvalues.

2. The focus of technical analysis is mainly on internal market data,particularly price and volume data. The focus of fundamentalanalysis is on fundamental factors relating to the economy, theindustry, and the firm.

3. Technical analysis appeals mostly to short-term traders, whereasfundamental analysis appeals primarily to long-term investors.

3C)What industry life cycle exhibit status of the industry and gives the clue to entry or exit for investors ,elucidate?Industry Life Cycle

An insightful analysis when predicting industry sales and trends inprofitability is to view the industry over time and divide its development intostages similar to those that humans progress through. The number of stages in the industry life cycle analysis can be based on a five stages model, whichincludes:

1. Pioneering Development2. Rapid accelerating growth3. Mature growth during this period is very small or negative profit marginsand profits.4. Stabilization and market maturity5. Deceleration of growth and decline.

Besides being useful when estimating sales, the analysis of an industryslife cycles also can provide insights into profit margins and earnings growth.The profit margin series typically peaks early in the total cycle and then levelsoff and declines as competition is attracted by the early success of the industry.

1. Pioneering Development: During this start up stage, the industryexperiences modest sales growth and very small or negative profitmargins and profits. The market for the industrys product or serviceduring this time period is small, and the firms involved incur majordevelopment costs.

2. Rapid Accelerating Growth: During this stage a market develops for theproduct or service and demand becomes substantial. The limited numberof firms in the industry faces little competition and individual firms canexperience substantial backlogs. The profit margins are very high. Theindustry builds its productive capacity as sales grow at an increasing rateas the industry attempts to meet excess demand. High scales growth andhigh profit margins that increase as firms become more efficient causeindustry and firm profits to explode. During this phase profits can growat over 100% a year as a result of the low warning base and the rapidgrowth of scales and net profit margins.

3. Mature Growth: The success in stage two has satisfied most of thedemand for the industry goods or service. Thus, future scales growthmay be above normal but it no longer accelerates for example, if the overall economy is growing at 8% scale for this industry might grow at anabove normal rate of 15% to 20% a year. Also the rapid growth of scalesand high profit margins attract competitors to the industry which causesan increase in supply and lower prices which means that the profitmargins begin to decline to normal levels. 4. Stabilization And Market Maturity: During this stage which is probablythe longest phase the industry growth rate declines to the growth rate ofthe aggregate economy or its industry segment. During this stageinvestors can estimate growth easily because scales correlate highly withan economic series. Although scales grow in line with the economyprofit growth varies by industry because the competitive structure variesby industries and by individual firms within the industry because theability to control costs differs among companies. Competition producestight profit margins and the rates of return on capital eventually becomeequal to or slightly below the competitive level.

5. Declaration of Growth and Decline: At this stage of maturity theindustry sales growth declines because of shifts in demand or growth ofsubstitutes. Profit margins continue to be squeezed and some firmsexperience low profit or even losses. Firms that remain profitable mayshow very low rates of return on capital. Finally, investors beginthinking about alternative uses for the capital tied up in this industry.

Assessing the Industry Life Cycle

The industry life cycle classification of industry evolvement helpsinvestors to assess the growth potential of different companies in an industry.Based on the stage of industry, they can better assess the potential of different companies within an industry. However, there are limitations to this type of analysis First, it is only a generalization, and investors must be careful not to attempt to categorize every industry, or all companies within a particular industry, into neat categories that may not apply. Second, even the general framework may not apply to some industries that are not categorized by many small companies struggling for survival. Finally, the bottom line in security analysis is stock prices, a function of the expected stream of benefits and the risk involved.

The industry life cycle tends to focus on sales and share of the marketand investment in the industry. Although all of these factors are important toinvestors, they are not the final items of interests.

The pioneering stage may offer the highest potential returns, but it alsoposes the greatest risk. Several companies in an industry will fail or do poorly.Such risk may be appropriate for some investors, but many will wish to avoidthe risk inherent in this stage.

Investors interested primarily in capital gains should avoid the maturitystage. Companies at this stage may have relatively high payouts because theyhave fewer growth prospects. These companies will often offer stability inearnings and dividend growths.

Clearly, companies in the fourth stage of the industrial life cycle, decline,are usually to be avoided. Investors should seek to spot industries in this stage and avoid them. It is the second stage, expansion that is probably of most interest to investors. Industries that have survived the pioneering stage often offer good opportunities for the demand for their products and services is growing more rapidly than the economy as a whole. Growth is rapid but orderly an appealing characteristic to investors.

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