Raju Final 2

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Chapter I

INTRODUCTION

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INTRODUCTION :

The analysis of the movement of share prices is known as the

equity analysis. Equity analysis has two main approaches, which are

used in analysis of movement of share prices. FUNDAMENTAL

APPROACH and TECHNICAL APPROCH. The objective of both the

approaches is to buy at a lower price and sell at a higher price, and

obtain good return for the investment, but there is a difference

between a material studies and the basis of analysis among these

two approaches.

Fundamental Analyst is a person who follows the fundamental

approach and could be concerned with the fundamental factors. He

aims at arriving at the true worth of the share based on current and

future earnings capacity of the company. If the share is quoted

below its true worth, he would be it and if, he finds the share price

is higher than its true worth, he would be booking profits or will try

to move out of the scrip.

Technical Analyst is person who follows the technical approach and

is concerned with the direction of movement of shares. He would be

buying, if he sees that the main trend is raising and would be

moving out of the scrip as and when he finds the scrip is reversing

direction. His approach is based mainly on analysis of DEMAND

SUPPY equation. If the demand for the scrip is greater than its

supplies the prices would be expected to raise, prompt in the

analyst to buy. On the same count, if the supply of a scrip exceeds

its supplies the prices would be expected to raise, prompt In the

analyst to buy. On the same count, if the supply of a scrip exceeds

its demand, the prices are expected to move downwards or drop

and he would exit from the scrip of book profits. Though there are

two approaches to investing in the scrips more often the analyst is

Familiar with both approaches. A technical analyst would look at the

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basic fundamentals before investing and the fundamentals before

investing and the fundamental analyst would bear in mind the

technical position if the market.

FUNDAMENTAL FACTORS

According to the classical investment theory, fundamental

analysis is based on the theory that the price of a share is affected

by the dividends that the shareholders expect to receive from the

company in future. Fundamental analysis aimed at estimation the

future price of a share. This future price is dependant on a the

future EPS of the company, as well as on how the market perceives

the risk of share, I.e., the future P/E in future.

Future price = Future EPS * Future P/E

BRIEF HISTORY OF INDIAN CAPITAL MARKET

The origination of the Indian securities market may be traced

back to 1875, when 22 enterprising brokers under a Banyan treeestablished the Bombay Stock Exchange (BSE). Over the last 125

years, the Indian securities market has evolved Continuously to become

one of the most dynamic, modern and efficient securities Markets in

Asia. Today, Indian markets conform to international standards both in

Terms of structure and in terms of operating efficiency.

There are 22 stock exchanges in India, the first being theBombay Stock Exchange (BSE), which began formal trading in 1875,

making it one of the oldest in Asia. Over the last few years, there has

been a rapid change in the Indian securities market, especially in

the secondary market. Advanced technology and online-based

transactions have modernized the stock exchanges. In terms of the

number of companies listed and total market capitalization, the Indian

equity market is considered large relative to the country's stage of

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economic development. The number of listed companies increased

from 5,968 in March 1990 to about 10,000 by May 1998 and

market capitalization has grown almost 11 times during the same

Period.

The capital market consists of primary and secondary markets.

The primary market in which public issue of securities is made through

a prospectus is a retail market and there is no physical location. Offer

for subscription to securities is made to investing community

The primary market deals with the issue of new instruments by

the corporate sector such as equity shares, preference shares and debt

instruments. Central and State governments, various public sector

industrial units (PSUs), statutory and other authorities such as state

electricity boards and port trusts also issue bonds/debt instruments.

Since 1991/92, the primary market has grown fast as a result of

the removal of investment restrictions in the overall economy and a

repeal of the restrictions imposed by the Capital Issues Control Act. In

1991/92, Rs62.15 billion was raised in the primary market. This

figure rose to Rs276.21 billion in 1994/ 95. Since 1995/1996,

however, smaller amounts have been raised due to the overall

downtrend in the market and tighter entry barriers introduced by SEBI

for investor protection.

The secondary market or stock exchange is a market for trading

and settlement of securities that have already been issued. The

investors holding securities sell securities through registered

brokers/sub-brokers of the stock exchange. Investors who are

desirous of buying securities purchase securities through registered

brokers/sub-brokers of the stock exchange. It may have a physical

location like a stock exchange or a trading floor.

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Since 1995, trading in securities is screen-based and Internet-

based trading has also made an appearance in India. The secondary'

market consists of 23 stock exchanges including the National Stock

Exchange, Over-the-Counter Exchange of India (OTCE1) and InterConnected Stock Exchange of India Ltd. The secondary market

provides a trading place for the securities already issued, to be bought

and sold. It also provides liquidity to the initial buyers in the primary

market to reefer the securities to any interested buyer at any price,

if mutually accepted. An active secondary market actually promotes

the growth of the primary market and capital formation because

investors in the primary market are assured of a continuous market andthey can liquidate their investments.

India has seen a tremendous change in the secondary market for

equity. Its equity market will most likely be comparable with the world's

most advanced secondary markets within a year or two. The key

ingredients that underlie market quality in India's equity markets are:

Exchanges based on open electronic limit order book;

Nationwide integrated market with a large number of

informed traders and fluency of Short or long positions; and

No counter party risk.

CAPITAL MARKET

Primary Market (New Issue Market):

This method includes the data collected from the personal

discussions with the authorized clerks and members of the

Exchange.

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Secondary Market:

The secondary collection method includes the lectures of the

superintend of the Department of Market Operations, EDP etc, and

also the data collected from the News, Magazines of the NSE, HSE

and different books issue of this study.

Capital Market Participants: There are several major players in the

primary market. These include the merchant bankers, mutual funds,

financial institutions, foreign institutional investors (FHs) and

individual investors. In the secondary market, there are the stock

brokers (who are members of the stock exchanges), the mutual

funds, financial institutions, foreign institutional investors (FHs), and

individual investors. Registrars and Transfer Agents, Custodians and

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Depositories are capital market intermediaries that provide important

infrastructure services for both primary and secondary markets.

Market regulation: It is important to ensure smooth working of

capital market, as it is the arena where the players in the economic

growth of the country. Various laws have been passed from time to

time to meet this objective.

The financial market in India was highly segmented until the initiation

of reforms in 1992-93 on account of a variety of regulations and

administered prices including barriers to entry. The reform process was

initiated with the establishment of Securities and Exchange Board of

India (SEBI). The legislative framework before SEBI came into being

consisted of three major Acts governing

The capital markets:

The Capital Issues Control Act 1947, which restricted

access to the securities market and controlled the pricing of

issues.

The Companies Act, 1956, which sets out the code of

conduct for the corporate sector In relation to issue, allotment

and transfer of securities, and disclosures to be made in Public

issues.

The Securities Contracts (Regulation) Act, 1956,which regulates transactions in Securities through control over

stock exchanges. In addition, a number of other acts, e.g., the

Public Debt Act. 1942, the Income Tax Act, 1961, the Banking

Regulation Act, 1949 have substantial bearing on the working of the

securities market.

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Introduction to Bombay Stock Exchange

Bombay Stock Exchange Limited is the oldest stock exchange

in Asia with a rich heritage. Popularly known as "BSE", it was

established as "The Native Share & Stock Brokers Association" in

1875. It is the first stock exchange in the country to obtain

permanent recognition in 1956 from the Government of India under

the Securities Contracts (Regulation) Act, 1956.The Exchange's

pivotal and pre-eminent role in the development of the Indian capital

market is widely recognized and its index, SENSEX, is tracked

worldwide. Earlier an Association of Persons (AOP), the Exchange is

now corporative entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatisation and

Demutualization) Scheme, 2005 notified by the Securities and

Exchange Board of India (SEBI).

In terms of organization structure, the Board formulates larger

policy issues and exercises over-all control. The committees

constituted by the Board are broad-based. The Managing Director

and a management team of professionals manage the day-to-day

operations of the Exchange.

The Exchange has a nation-wide reach with a presence in 417

cities and towns of India. The systems and processes of the Exchange

are designed to safeguard market integrity and enhance transparency

in operations. During the year 2004-2005, the trading volumes on the

Exchange showed robust growth.

The Exchange provides an efficient and transparent market for

trading in equity, debt instruments and derivatives. The BSE's On Line

Trading System (BOLT) is a proprietary system of the Exchange and is

BS 7799-2-2002 certified. The surveillance and clearing & settlement

functions of the Exchange are ISO 9001:2000 certified.

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INVESTING IN COMMODITY

You can place your orders through our dealers across all our

branch/franchisee Toll free number 39702090 between 10 - 12 pm

till market closes If you require terminal for MCX/NCDEX or both

need RS1 lac as margin money.

KEY BENEFITS OF COMMODITIES SHAREKHAN

You are getting 20time expose in MCX &10 time in NCDEX

depends on commodity to open an account We have sms facility

where u getting market information as well as buy/sell call You arealso getting yahoo chat, where our dealer/RM are always help for

market information as well as buy/sell call.

PORTFOLIO MANAGEMENT SERVICES

Can you analyze the prices of 1,500 shares every morning?

Can you afford to gamble only on the recommendations from your

friends and the information overload from magazines and financialdailies? And, of course, more importantly, if you happen to be a

High Net worth Individual, do you have the time to judge which

advice is reliable, authentic and has the least chance of failure?

With the Sharekhan Team Managing Your Portfolio, you can

be assured that your investments are in safe hands!

We follow a multi-disciplined approach incorporating

quantitative analysis, fundamental analysis and technical analysis.

This multi-pronged approach enables us to provide risk-controlled

returns for you. Right from choosing the combination of stocks

most suitable for you based on your risk appetite to monitoring

their movements and discussing them with you at special events.

This is how we make investing completely hassle-free for you

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Introduction to National Stock Exchange

The National Stock Exchange of India was promoted by leading

financial institution at the behest of the government of India, and was

incorporated in November 1992 as a tax-paying company. In April

1993 it was recognized as a Stock exchange under the Securities

Contracts (Regulation) Act, 1956. NSE commenced operations in the

Wholesale Debt-Market (WDM) segment in June 1994. The Capital

Market (Equities) segment of the NSE commenced operations in

November 1994, while operations in the Derivatives segment

commenced in June 2000.

The National Stock Exchange of India (NSE) is one of the

largest and most advanced stock markets in India. The NSE is the

world's third largest stock exchange in terms of transactions. It is

located in Mumbai, the financial capital of India. The NSE VSAT has

2791 terminals that cover 334 cities across India.

NSE has remained in the forefront of modernization of India'scapital and financial markets, and its pioneering efforts include:

Setting up the first clearing corporation "National Securities

Clearing Corporation Ltd." in India. NSCCL was a landmark in

providing notation on all spot equity market (and later, derivatives

market) trades in India.

Co-promoting and setting up of National Securities

Depository Limited, first depository in India. > Setting up of S&P

CNX Nifty.

NSE pioneered commencement of Internet Trading in

February 2000, which led to the wide popularization of the NSE in

the broker community.

Being the first exchange that, in 1996, proposed exchange

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traded derivatives, particularly on an equity index, in India. After

four years of policy and regulatory debate and formulation, the

NSE was permitted to start trading equity derivatives three days

after the BSE.

Being the first exchange to trade ETFs (exchange traded

funds) in India.

Introduction to Securities and Exchange Board of India (S EBI)

In 1988 the Securities and Exchange Board of India (SEBI)

was established by the Government of India through an executiveresolution, and was subsequently upgraded as a fully autonomous

body (a statutory Board) in the year 1992 with the passing of the

Securities and Exchange Board of India Act (SEBI Act) on 30th January

1992. In place of Government Control, statutory and autonomous

regulatory boards with defined responsibilities, to cover both

development & regulation of the market, and independent powers have

been set up. Paradoxically this is a positive outcome of the SecuritiesScam of

1990-91.

The regulatory body for the investment market in India. The

purpose of this board is to maintain stable and efficient markets by

creating and enforcing regulations in the market place.

The Securities and Exchange Board of India is similar to the

U.S. SEC. The SEBI is relatively new (1992) but is a vital component

in improving the quality of the financial markets in India both to attract

foreign investors and to protect Indian investors

Its main functions are providing for

Regulating the business in stock exchanges and any other

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securities markets

Registering and Regulating the working of stock

brokers, sub-brokers, share transfer agents, bankers to an issue,

trustees of trust deeds, registrars to an issue, merchant bankers,

underwriters, portfolio managers, investment advisers and such

other intermediaries who may be associated with securities

markets in any manner.

Registering and Regulating the working of the

depositories, participants, custodians of securities, foreign

institutional investors, credit rating agencies and such other

intermediaries as the Board may, by notification, specify in this

behalf.

Registering and Regulating the working of venture capital

funds and collective investment schemes including mutual funds;

Promoting and Regulating self-regulatory organizations;

Prohibiting fraudulent and unfair trade practices relating to

securities markets;

Promoting Investors' education and training of

intermediaries of securities markets;

Prohibiting insider trading in securities;

Regulating substantial acquisition of shares and takeover of

companies;

Calling for information from, undertaking inspection,

conducting inquiries and audits of the stock exchanges, mutual

funds and other persons associated with the securities market and

intermediaries and self- regulatory organizations in thesecurities market;

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Calling for information and record from any bank or any

other authority or board or corporation established or

constituted by or under any Central, State or Provincial Act in

respect of any transaction in securities which is underinvestigation or inquiry by the Board

Performing such functions and exercising such powers

under the provisions of Securities Contracts (Regulation) Act,

1956, as may be delegated to it by the Central Government.

levying fees or other charges for carrying out the purpose

of this section;

Performing such other functions as may be prescribed.

NEED FOR THE STUDY

It is to find out that people want to Invests in which type of

Instruments.

To analysis Indian capital markets

SCOPE OF THE STUDY

Investor can assess the company financial strength and

factors that effect the company. Scope of the study is limited.

We can say that 70% of the analysis is proved good for the

investor, but the 30% depends upon market sentiment.

The topic is selected to analyses the factors that effect the

future EPS of a company based on fundamentals of the

company.

The market standing of the company studied in the order to

give a better scope to the Analysis is helpful to the investors,

share holders, creditors for the rating of the company.

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OBJECTIVES OF THE STUDY:

To find if there is any relationship between income levels and

the investment Scheme preferred in capital markets.

To rate the areas of their knowledge based on a scale of 1-10

on the capital market instruments.

To analyze if there is a pattern between the occupation and

the types of investments of the investors.

To find out the preferences in the way of trading in stocks.

(Online/offline trading)

To know the time period for there investments in the capital

makets.

To study the origin, growth, and the regulation of capital

markets in India

RESEARCH METHODOLOGY:

Research Population: People of Hyderabad and Secunderabad.

Sample Size : 200

Techniques used to select the sample : Simple Random

Sampling

Questionnaire is designed in such a manner that it has minimal

ambiguity, and the respondents can easily analyse it.

MEANS OF DATA COLLECTION : Questionnaire, Telephonic

Interview, Meetings external studies such as articles, newspapers,

published journals of books.

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Analyzing Technique: Chi-square technique and simple

percentages.

Assumptions:

The assumptions that will be taken into consideration during this

study are

The sample of 200 being chosen is a reflection of all the

people in Hyderabad and Secunderabad.

The factors effecting the decision of the population are limited

to those mentioned in the Questionnaire.

SAMPLE DESIGN:

As already mentioned above, we have chosen people based

on the random sampling technique. Hence, the sampling from

associated here was the population of Hyderabad and

secunderabad. And over her, the sampling technique used, will

enable us to use Chi-square technique, which helps us in obtaining

valuable information from the data acquired through the research.

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Chapter II

COMPANY PROFILE

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COMPANY PROFILE

SHAREKHAN

SSKI,a veteran equities solutions company with over 8decades of experience in the Indian stock markets. The SSKI Group

comprises of Institutional Broking and Corporate Finance. The

Institutional broking division caters to domestic and foreign

institutional investors, while the Corporate Finance Division focuses

on niche areas such as infrastructure, telecom and media, SSKI has

been voted as the Top Domestic Brokerage House in the research

category, by the Euro Money survey and Asia Money survey.

Share khan is also about focus. Sharekhan does not claim

expertise in too many things. Sharekhan's expertise lies in stocks

and that's what he talks about with authority. So when he says that

investing in stocks should not be confused with trading in stocks or

a portfolio-based strategy is better than betting on a single horse, it

is something that is spoken with years of focused learning andexperience in the stock markets. And these beliefs are reflected in

everything Share khan does for you.

Share khan India's leading stockbroker is the retail arm of

SSKI, An organization with over eighty years of experience in the

stock market. With over 240 share shops in 110 Cities, and India's

premier online trading destinations-Www.sharekhan.com, ourscustomer enjoy multi-channel access at the stock markets, share

khan offer u trade execution facilities for cash as well as derivatives

on the BSE & NSE and most importantly we bring you investment

advice tempered by eighty years of broking experience Through our

portal Sharekhan.com, we've been providing investors a powerful

online trading platform, the latest news, research and other

knowledge-based tools for over 5 years now. We have dedicatedterms for fundamental and technical research so that you get all the

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information your need to take the right investment decisions. With

branches and outlets across the country, our ground network is one

of the biggest in India. We have a talent pool of experienced

professionals specially designated to guide you when you needassistance, which is why investing with us is bound to be a hassle-

free experience for you! Reason why you should choose Share Khan

EXPERIENCE:

SSKI has more than eight decades of trust and credibility in

the Indian stock market. In the Asia Money Broker's poll held

recently, SSKI won the 'India's best broking house for 2004' award.

Ever since it launched share khan as its retail broking division in

February 2000, it has been providing institutional-level research

and broking services to individual investors.

TECHNOLOGY:

With our online trading account you can buy and sell shares in

an instant from any PC with an Internet connection. You will get

access to our powerful inline trading tools that will help you take

complete control over your investment in shares.

ACCESSIBILITY:

In addition to our online and phone trading services, we also

have a ground network of 240 share shops across 110 cities in Indiawhere you can get personalized services. Knowledge:

In a business where the right information at the right time

can translate into direct profit, you get access to wide range of

information on our content- rich portal, Sharekhan.com. You will

also get a useful set of knowledge-based tools that will empower

you to take informed decisions.

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CONVENIENCE:

You can call our Dial-n-Trade number to get investment and

execute your transaction. We have a dedicated call-centre to

provide this service via a toll-free number from anywhere in India.

CUSTOMER SERVICE:

Our customer service team will assist you for any help that

you need relating to transactions, billing, demat and other queries,

our customer service can be contacted via a toll-free number, email

or live chat on sharekhan.com

INVESTMENT ADVICE:

Sharekhan has dedicated research teams for fundamental and

technical research. Our analysts constantly track the pulse of the

market and provide timely investment advice to you in the form of

daily research emails, online chat, printed reports on SMS on your

phone.

A SHARE KHAN OUTLET OFFERS THE FOLLOWING SERVICES

o Online BSE and NSE executions (through BOLT and NEAT

terminals)

o Free access to investment advice from Share khan's research

team Share khan Value Line (a fortnightly publicationwith reviews of recommendations, stocks to watch out for

etc.

o Daily research reports and market review (High Noon, Eagle

Eye)

o Pre-market Report (Morning Cuppa)

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o Daily trading calls based on technical analysis

o Cool trading products (Daring Derivatives, Trading Ring and

Market Strategy)

o Personalized advice

o Live market information

o Depository services: Demat and Remat transactions

o Derivatives trading (Futures and Options)

o Commodity trading (MCX &NCDEX)

MUTUAL FUNDS

Portfolio and management services

Internet-based online trading: Speed Trade, Speed Trade Plus All

you have to do is walk into any of their 588 share shops across 213cities in India to get a host of trading related services - Their

friendly customer service staff will also help you with any

accounting related queries you may have.

Brief Introduction about the Services at Sharekhan.

GET EVERYTHING YOU NEED AT A SHARKEHAN OUTLET

DEMAT SERVICES:

Dematerialization and trading in the demat mode is the safer

and faster alternative to the physical existence of securities. Demat

as a parallel solution offers freedom from delays, thefts, forgeries,

settlement risks and paper work.

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This system works through depository participants (DPs) who

offer demat services and the securities are held in the electronic

form for the investor directly by the Depository.

Sharekhan Depository Services offers dematerialization

services to individual and corporate investors. We have a team of

professionals and the latest technological expertise dedicated

exclusively to our demat department, apart from a national network

of franchisee, making our services quick, convenient and efficient.

At Sharekhan, our commitment is to provide a complete demat

solution which is simple, safe and secure

ONLINE SERVICES TO SUIT YOUR NEEDS

With a Sharekhan online trading account, you can buy and

sell shares in an instant! Anytime you like and from anywhere you

like!

We were amongst the pioneers of online trading in India and

have launched sharekhan.com in February 2000.Since then, we

have been at the forefront in understanding customer needs,

analyzing trends and bringing innovation in our offerings. We have

online trading products that are customized to the habits and

preferences of investors as well as traders.

You can choose the online trading account that suits your

trading habits and preferences - the Classic Account for most

investors and Speed trade for active day traders. Your Classic

Account also comes with Dial-n-Trade completely free, which is an

exclusive service for trading shares by using your telephone,

CLASSIC ACCOUNT: This account allows the client to trade

through our website and is suitable for the retail investor. Our

online trading website also comes with Dial-n-Trade service that

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enables you to buy and sell shares by calling our dedicated toll free

number 1-600-227050.

SPEED TRADE: Speed Trade is a next generation online trading

products that brings the power of your broker's terminal to your PC.

It is ideal for active traders who transact frequently during

movements. SPEEDTRADE is an internet-based application available

on a CD, which provides everything a trader needs on one screen,

thereby, reducing the time required to execute a trade.

KEY FEATURES OF SPEED TRADE:

Single Screen Trading Terminal

Real - time Streaming Quotes

Live Tic-by-Tic Intra - day Charting

Instant Order / Trade Confirmations in the same window

Hot keys similar to Broker's Terminal

Customized Alerts based on multiple Parameters

Back-up Facility to Place Trading on Direct Phone Lines

FEATURES

Trading a/c with Demat a/c.

Online orders on Phone.

Timely Advice and Research Reports.

Banking gateways with five banks.

(HDFC, CITIBANK, UTI, IDBI, OBC)

Live streaming quotes.

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First year free demat a/c.

Freedom from paper work.

Trade from any net enabled PC.

After- hour orders

Mobile Alerts*

Apply IPO'S Online*.

RESEARCH- the SCIENCE of INVESTING

Research and in-depth knowledge of markets provide better

analysis that speculations or reactions to rumors. Our teams of

dedicated analysts are therefore, constantly at work to track

performance and trends and determine and winners. That's why all

our trading - products have extremely high success rates! Our

research products are tailor-made to suit all your needs.

LONG-TERM INVESTING

Intra-day & short-term trading

High-income yields

Hedging products and lots more

INVESTING IN MUTUAL FUNDS THROUGH SHARE KHAN

We're glad to announce that you will now be able to invest in

Mutual Funds through us! We've started this service for a few

mutual funds, and in the near future will be expanding our scope to

include a whole lot more. Applying for a mutual fund through us is

open to everybody, regardless of whether you are a Sharekhan

customer. To invest in a fund, all you have to do is download the

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application form, print it out, fill it in and send it over to us. We'll do

the rest for you

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Chapter III

INVESTORS PERCEPTIONS

TOWARDS TRADING OFSECURITIES

An Analysis

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MUTUAL FUNDS

History

When three Boston securities executives pooled their money

together in 1924 to create the first mutual fund, they had no idea

how popular mutual funds would become.

The idea of pooling money together for investing purposes

started in Europe in the mid-1800s. The first pooled fund in the U.S.

was created in 1893 for the faculty and staff of Harvard University

On March 21 st, 1924 the first official mutual fund was born. It was

called the Massachusetts Investors Trust.

The mutual fund industry in India started in 1963 with the

formation of Unit Trust of India, at the initiative of the Government

of India and Reserve Bank the. Though the growth was slow, but it

accelerated from the year 1987 when non-UTI players entered theindustry.

Definition

A mutual fund is nothing more than a collection of stocks

and/or bonds. You can think of a mutual fund as a company that

brings together a group of people and invests their money in stocks,

bonds, and other securities. Each investor owns shares, which

represent a portion of the holdings of the fund.

A mutual fund is simply a financial intermediary that allows a

group of investors to pool their money together with a

predetermined investment objective. The mutual fund will have a

fund manager who is responsible for investing the pooled money

into specific securities (usually stocks or bonds). When you invest in

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a mutual fund, you are buying shares (or portions) of the mutual

fund and become a shareholder of the fund.

Mutual funds are one of the best investments ever created

because they are very cost efficient and very easy to invest in (you

don't have to figure out which stocks or bonds to buy).

By pooling money together in a mutual fund, investors can

purchase stocks or bonds with much lower trading costs than if they

tried to do it on their own. But the biggest advantage to mutual

funds is diversification.

Income is earned from dividends on stocks and interest

on bonds. A fund pays out nearly all of the income it receives

over the year to fund owners in the form of a distribution.

If the fund sells securities that have increased in price,

the fund has a capital gain. Most funds also pass on these

gains to investors in a distribution.

If fund holdings increase in price but are not sold by the

fund manager, the fund's shares increase in price. You can

then sell your mutual fund shares for a profit

Advantages of investing in mutual funds

Professional management .Investment diversification

Liquidity

Explicit investment goals

Simple reinvestment programs

Disadvantages of investing in mutual funds:

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Many funds charge hefty fees, leading to lower overall

returns.

Over time, statistics have shown that most actively managed

funds tend to Underperform their benchmark averages.

Mutual funds cannot be bought or sold during regular trading

hours, but instead are priced just once per day.

Intial public offer:

IPO - initial public offering - Initial Public Offering or IPO is the

first sale of stock by a private company to the public. IPO are often

smaller, younger companies seeking capital to expand their

business.

An initial public offering (IPO) is the first sale of a

corporation's common shares to public investors. The main purpose

of an IPO is to raise capital for the corporation. While IPO's are

effective at raising capital, they also impose heavy legal complianceand reporting requirements. The term only refers to the first public

issuance of a company's shares; any later public issuance of shares

is referred to as a Secondary Market Offering.

A company's first sale of stock to the public. Securities offered

in an IPO are often, but not always, those of young, small

companies seeking outside equity capital and a public market fortheir stock. Investors purchasing stock in IPO's generally must be

prepared to accept very large risks for the possibility of large gains.

IPO's by investment companies (closed end funds) usually contain

underwriting fees, which represent a load to buyers.

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INTRODUCTION TO DERIVATIVES :

The term "Derivative" indicates that it has no independent

value, i.e. its value is entirely "derived" from the value of the

underlying asset. The underlying asset can be securities,

commodities, bullion, currency, livestock or anything else. In other

words, Derivative means a forward," future, option or any other

hybrid contract of pre determined fixed duration, linked for the

purpose of contract fulfillment to the value of a specified real or

financial asset or to an index of securities.

With Securities Laws (Second Amendment) Act, 1999,

Derivatives has been included in the definition of Securities. The

term Derivative has been defined in Securities Contracts

(Regulations) Act, as:

A security derived from a debt instrument, share, loan,

whether secured or unsecured, risk instrument or contract fordifferences or any other form of security;

A contract which derives its value from the prices, or

index of prices, of underlying securities;

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INTRODUCTION OF DERIVATIVES IN INDIA :

The initial steps to launch derivatives were taken in 1995 with

the introduction of the Securities Laws (Amendment) Ordinance,

1995 that withdrew the prohibition on trading in options on

securities in the Indian stock market. In November 1996, a 24-

member committee was set up by the Securities Exchange Board of

India (SEBI) under the chairmanship of LC Gupta to develop an

appropriate regulatory framework for derivatives trading. The

committee recommended that the regulatory framework applicable

to the trading of securities would also govern the trading of

derivatives.

The plan to introduce derivatives in India was initially mooted

by the National Stock Exchange (NSE) in 1995. The main purpose of

this plan was to encourage greater participation of foreign

institutional investors (FIIs) in the Indian stock exchanges.

Derivatives were introduced in a phased manner. Initially,

trading was restricted to index futures contracts based on the S&P

CNX Nifty Index and BSE-30 (Sensex) Index. Later, trading was

extended to index options (based on the same indices) in June

2001, and options on individual securities in July 2001. SEBI also

permitted the launch of futures contracts on individual stocks in

November 2001...

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On June 9, 2000, the Bombay Stock Exchange (BSE)

introduced India's first derivative instrument - the BSE-30 (Sensex)

index futures. It was introduced with three month trading cycle -

the near month (one), the next month (two) and the far month(three). The National Stock Exchange (NSE) followed a few days

later, by launching the S&P CNX Nifty index futures on June 12,

2000.

In spite of these encouraging developments, Industry analysts

felt that the derivatives market had not yet realized its full

potential. Analysts pointed out that the equity derivative markets

on the BSE and NSE had been limited to only four products - index

futures, index options and individual stock futures and options

which were limited to certain select stocks.

PARTICIPANTS IN DERIVATIVES MARKET :

Hedgers : Hedgers are those who protect themselves from the risk

associated with the price of an asset by using derivatives. A personkeeps a close watch upon the prices discovered in trading and when

the comfortable price is reflected according to his wants, he sells

futures contracts. In this way he gets an assured fixed price of his

produce. In general, hedgers use futures for protection against

adverse future price movements in the underlying cash commodity.

Hedgers are often businesses, or individuals, who at one point or

another deal in the underlying cash commodity.

Speculators: Speculators are somewhat like a middleman. They

are never interested in actual owing the commodity. They will just

buy from one end and sell it to the other in anticipation of future

price movements. They actually bet on the future movement in the

price of an asset.

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Futures Contract means a legally binding agreement to buy or sell

the underlying security on a future date. Future contracts are the

organized/standardized contracts in terms of quantity, quality (in

case of commodities), delivery time and place for settlement on anydate in future. The contract expires on a pre-specified date which is

called the expiry date of the contract. On expiry, futures can be

settled by delivery of the underlying asset or cash. Cash settlement

enables the settlement of obligations arising out of the

future/option contract in cash.

Option Contract:

Options Contract is a type of Derivatives Contract, which gives the

buyer/holder of the contract the right (but not the obligation) to

buy/sell the underlying asset at a predetermined price within or at

end of a specified period. The buyer / holder of the option purchase

the right from the seller/writer for a consideration which is called

the premium. The seller/writer of an option is obligated to settle the

option as per the terms of the contract when the buyer/holder

exercises his right. The underlying asset could include securities, an

index of prices of securities etc.

Index Futures and Index Option Contracts:

Futures contract based on an index i.e. the underlying asset is the

index, are known as Index Futures Contracts. For example, futurescontract on NIFTY Index and BSE-30 Index. These contracts derive

their value from the value of the underlying index

Similarly, the options contracts, which are based on some index,

are known as Index options contract. However, unlike Index

Futures, the buyer of Index Option Contracts has only the right but

not the obligation to buy / sell the underlying index on expiry. Index

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Option Contracts are generally European Style options i.e. they can

be exercised / assigned only on the expiry date.

An Index in turn derives its value from the prices of securities that

constitute the index and is created to represent the sentiments of

the market as a whole or of a particular sector of the economy.

Indices that represent the whole market are broad based indices

and those that represent a particular sector are sectoral indices.

In the beginning futures and options were permitted only

on S&P Nifty and BSE Sensex. Subsequently, sectoral indices

were also permitted for derivatives trading subject to fulfilling

the eligibility criteria. Derivative contracts may be permitted on

an index if 80% of the index constituents are individually

eligible for derivatives trading. However, no single ineligible

stock in the index shall have a weight age of more than 5% in

the index. The index is required to fulfill the eligibility criteria

even after derivatives trading on the index have begun. If the

index does not fulfill the criteria for 3 consecutive months, then

derivative contracts on such index would be discontinued.

By its very nature, index cannot be delivered on maturity

of the Index futures or Index option contracts therefore, these

contracts are essentially cash settled on Expiry.

THE REGULATORY FRAMEWORK OF DERIVATIVES MARKET ININDIA:

With the amendment in the definition of 'securities' under

SC(R) A (to include derivative contracts in the definition of

securities), derivatives trading takes place under the provisions of

the Securities Contracts (Regulation) Act, 1956 and the Securities

and Exchange Board of India Act, 1992.

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Dr. L.C Gupta Committee constituted by SEBI had laid down

the regulatory framework for derivative trading in India. SEBI has

also framed suggestive bye-law for Derivative Exchanges/Segments

and their Clearing Corporation/House, which lay's down theprovisions for trading and settlement of derivative contracts. The

Rules, Bye-laws & Regulations of the Derivative Segment of the

Exchanges and their Clearing Corporation/House have to be framed

in line with the suggestive Bye-laws. SEBI has also laid the

eligibility conditions for Derivative Exchange/Segment and its

Clearing Corporation/House. The eligibility conditions have been

framed to ensure that Derivative Exchange/Segment & ClearingCorporation/House provide a transparent trading environment,

safety & integrity and provide facilities for redressal of investor

grievances. Some of the important eligibility conditions are-

Derivative trading to take place through an on-line screen

based Trading System.

The Derivatives Exchange/Segment shall have on-line

surveillance capability to

monitor positions, prices, and volumes on a real time basis

so as to deter market manipulation.

The Derivatives Exchange/ Segment should have

arrangements for dissemination

of information about trades, quantities and quotes on a

real time basis through

atleast two information-vending networks, which are easily

accessible to investors across the country.

The Derivatives Exchange/Segment should have

arbitration and investor

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Grievances redressal mechanism operative from all the

four areas / regions of the country.

The Derivatives Exchange/Segment should have

satisfactory system of

monitoring investor complaints and preventing

irregularities in trading.

The Derivative Segment of the Exchange would have a

separate Investor Protection Fund.

The Clearing Corporation/House shall perform full novation,

i.e., the Clearing Corporation/House shall interpose itself

between both legs of every trade, becoming the legal

counterparty to both or alternatively should provide an

Unconditional guarantee for settlement of all trades.

The Clearing Corporation/House shall have the capacity to

monitor the overall position of Members across both derivatives

market and the underlying securities market for those Members

who are participating in both.

The level of initial margin on Index Futures Contracts shall

be related to the risk of loss on the position. The concept of

value-at-risk shall be used in calculating required level of initial

margins. The initial margins should be large enough tocover the

one-day loss that can be encountered on the position on 99%

of the days.

The Clearing Corporation/House shall establish facilities for

electronic funds transfer (EFT) for swift movement of margin

payments.

In the event of a Member defaulting in meeting its

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liabilities, the Clearing Corporation/House shall transfer client

positions and assets to another solvent Member or close-out all

open positions.

The Clearing Corporation/House should have capabilities to

segregate initial margins deposited by Clearing Members for

trades on their own account and on account of his client. The

Clearing Corporation/House shall hold the clients' margin

money in trust for the client purposes only and should not allow

its diversion for any other purpose.

The Clearing Corporation/House shall have a separate

Trade Guarantee Fund for the trades executed on Derivative

Exchange / Segment.

Presently, SEBI has permitted Derivative Trading on the

Derivative Segment of BSE and the F&O Segment of NSE.

DEFINITION

A share represents a participation in the capital of a company. A

shareholder is in theory a partner in the company. It gives him the

rights, proportionally to his holdings, to participate in the

management of the company, to receive the profits and to dispose

of the net assets of the company.

The above definition describes only the general principles and the

effective right of the shareholder depends of shares type.

The shareholder exercises his rights through the general meetings

of the company by appointing or revoking the management, the

supervisory board, and/or other bodies.

OBJECTIVES

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In recent years, a lot of individual investors have become

disillusioned with the stock market. They often fear its increased

volatility, the influences of corporate raiders and insider trading,

and the overwhelming presence of mammoth investmentinstitutions.

For many the stock market has become a place where common

sense has been supplanted by irrational price movements.

But behind this smokescreen, we strongly believe that the stock

market is still a market of stocks and that quality companies that

are undervalued can still by bought and held to produce above

average profits.

By presenting some techniques, we will try to prove you that

success in the stock market is much more of common sense and

discipline than of gurus insight.

Introduction to investing in shares

If youre planning to make your own share investments, be

prepared for a lot of hard work. But, hopefully, youll also have

some fund and financial success along the way.

Each of the following pages contains a number of topics that

represent some of the information you should have and consider

before making a decision on which shares to invest in.

Shares and the economic environment

Information about the economic environment that might affect your

share investments includes

Industry sector understand the industry sector in which the

company operates, for example, retail, property, financial, IT & T,

forestry, agriculture or listed trusts.

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Basic economic knowledge understand the impact of economic

events on the company. These can range from macro economics,

including interest, exchange and inflation rates, through to micro

policy, such as tariffs.

Government Understanding the Governments economic direction

may help alert you to future policy decisions.

Shares and company specific information:

Information relevant to the individual company that you should look

into includes :

Annual report know what to read and whats being said

between the lines.

Directors who are the directors and what are their

qualifications for the directorship of this company?

Management team a high quality management team is

one of the key success drivers for a business.

Debt levels understand the risks and benefits of varying

degrees of debt.

Cash flow understand why cash flow is more important

than profit, and how to find the right information.

Market position what position does the company have in

its sector?

Branding understand the importance of brands and the

associated difficulties in measuring brand value.

Technology how important is technology to the business?

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Competition what is the competition? Where are future

threats? Is the company prepared for them?

Ratios learn which financial ratios you should use in

measuring a business, how to calculate them and where to

find the information.

Sustainable profitability the value of a company is based

on its future sustainable earnings. Learn what that means

and how to prepare your own analysis.

Abnormal items do companies really report the goodnews above the line as an abnormal item?

Shares ad investor specific information:

Information that may be useful as you build your investment

portfolio includes:

Volatility learn the importance of riding the waves of

volatility.

Income or growth decide what you need, then learn how

to identify a share which will deliver the required result.

Risk adversity you need to understand your level of risk

adversity, before building a share portfolio which might

give you sleepless nights.

Time in the market understand why it is that time in the

market will create wealth, without trying to second guess

the market.

Taxation what will the taxation implications be of your

share investment decisions?

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Pitfalls what to watch out for, including tips from friends,

family and share brokers.

Resources the internet delivers to your PC an unlimited

array of information and resources.

SHARES AND SHARE HOLDERS:

Types of shares:

A company may have many different types of shares that come withdifferent conditions and rights.

Ordinary Shares are standard shares with no special rights

or restrictions. They have the potential to give the highest

financial gains, but also have the highest risk. Ordinary

shareholders are the last to be paid if the company is

wound up.

Preference Shares typically carry a right that gives the

holder preferential treatment when annual dividends are

distributed to shareholders. Shares in this category have a

fixed value, which means that a shareholder would not

benefit from an increase in the business profits. However,usually they have rights to their dividend ahead of ordinary

shareholders if the business is in trouble. Also, where a

business is wound up, they are likely to be repaid the par

or nominal value of shares ahead of ordinary shareholders.

Cumulative preference shares give holders the right that, if

a dividend cannot be paid one year, it will be carriedforward to successive years, Dividends on cumulative

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preferred shares must be paid, despite the earning levels

of the business.

Redeemable Preference shares come with an agreement

that the company can buy them back at a future date

this can be at a fixed date or at the choice of the business.

A company cannot issue only redeemable shares.

Introduction to Equity Finance:

Equity:

Equity is the term commonly used to describe the ordinary share

capital of a business. Ordinary shares in the equity capital of a

business entitle the holders to all distributed profits the holders of

debentures and preference shares have been paid.

Ordinary (equity) shares:

Ordinary shares are issued to the owners of a company. The market

value of a companys shares has little (if relationship to their

nominal or face value. The market value of a companys shares is

determined the price another investor is prepared to pay for them.

Deferred Ordinary Shares These are a form of ordinary shares,

which are entitle to a dividend only after a certain date or only if profits rise above a cel amount.

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Reasons for Issue of Ordinary Shares:

The company might want to raise more cash for the

expansion of a companys operations. A company decides

to issue new shares to raise cash its to existing

shareholders, when a company sells the new shares to

existing shareholders in proportion to their exist

shareholding in the company, this is known as a right

issue .

The company might want to issue new shares partly to

raise cash but more importantly float its share on a stock

market. When a UK company is floated, it must make

available a minimum proportion of its shares to general

investing public.

The company might issue new shares to the shareholders

of another company, in order to take it over.

There are many examples of business that use their high

share price as a way of making an offer other businesses.

The shareholders of the target business being acquired

received shares in the business and perhaps also some cash.

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SOURCES OF EQUITY FINANCE:

Retained profits: i.e. retaining profits, rather than paying

them out as dividends. This is the important source of

equity.

Rights issues : i.e. an issue of new shares. After retained

profits, rights issues are the next important source.

New issues of shares to the public: i.e. an issue of new

shares to new shareholders. IN total in UK, this is the least

important source of equity finance.

Issue procedures:

This section describes the procedural aspects of raising of equity

shares and securities convertible/exchangeable into equity shares

prescribed by the Securities and Exchange Board of India (SEBI) in

terms of the following : (i) eligibility norms, (ii) pricing of issues,

(iii) promoters contribution and lock-in requirements, (iv) initial

public offer (IPO) through book building, (v) green shoe option, (vi)

initial public offer through stock exchange on-line system (E-IPO)

and (vii) preferential issues.

Eligibility Norms for Public Issues:

The companies issuing securities (capital) through offer document,

this is, (i) prospectus in the case of a public issue or offer for saleand (ii) letter of offer in case of a rights issue, should satisfy the

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following at the time of filing draft offer document with the SEBI

and also at the timing of filing the final offer document with the

Registrar of Companies (ROCs)/designated stock exchange.

Filing of offer document:

In case of public issue of securities y any company as well as any

time of securities by a listed company through a rights issue in

excess of Rs.50 lakh., a draft prospectus should be filed with the

SEBI through an eligible registered merchant banker, at least 21

days prior to filing it with the Registrar of Companies (ROCs).

Although under no obligation to do so, if the SEBI specifies any

changes in the draft prospectus within 21 days, the issuer/lead

merchant banker should carry them out before filing it with ROCs.

However, companies prohibited under any order/direction of the

SEBI from accessing the capital market cannot issue any security.

The companies intending to issue securities to public issue

should apply for listing them in the stock exchange(s). Moreover, all

the issuing companies must (i) enter into an agreement with a

depository registered with the SEBI under the SEBI Depositories

and Participants Regulation, 1996, for dematerialization of securities

already issued/securities proposed to be issued to the

public/existing shareholders and (ii) give an option to

subscribers/shareholders/investors to receive security certificates or

hold securities in a dematerialized form with a depository. The

eligibility norms for issue of equity shares and convertible securities

relate to (1) unlisted companies and (2) listed companies.

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Initial Public Offerings (IPOs)/Offer for Sale by Unlisted

Companies :

An unlisted company can make an IPO? offer for sale of equity

shares/any other security convertible into, or exchangeable with,

equity shares at a later date only if it meets all the following

conditions

It has net tangible assets (i.e. total net assets, excluding

intangible assets) of at least Rs. 3 percent should be in

monetary assets; if more than 50 per cent of the net

tangible assets are held in monetary assets, the company

should have firm commitments to deploy the excess in its

business/project (i.e. the object for which the money is

proposed to be raise to cover the objects of the issue).

It has a track record of distributable profit in terms of

Section 205 of the Companies Act for at least 3 out of the

immediately 5 years; extraordinary items should not beconsidered to compute the distributable profits. IN case of

(i) partnership firms converted into companies and (ii) an

unlisted company formed out of division of a an existing

company, the track record of distributable profits of the

firm/division spun off would be considered only if their

financial statements for the relevant/respective years

conform to, and are revised in the format prescribed by,

the Companies Act and also comely with the following : (a)

Adequate disclosures as per Schedule VI of the companies

Act and also comply with the following : (a) Adequate

disclosures as per Schedule VI of the companies Act are

made in the; and (b) They are duly certified by a chartered

accountant to the effect that (i) the accounts are revised or

otherwise and the disclosures are in accordance with the

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provisions of Schedule VI and (ii) the accounting standards

of the Institute of Chartered Accountants of India (ICAI)

have been followed, and the financial statements present a

true and fair picture of the firms/divisions spun off accounts.

It has a net worth (i.e. the aggregate value of paid-up

equity capital and free reserves (excluding revaluation

reserves) minus the aggregate value of accumulated losses

and deferred expenditure not written off (including

miscellaneous expenses not written off) of at least Rs. 1

crore in each of the preceding 3 full years (of 12 months

each).

In case of change of its name within the last one year, at

lest 50 percent of the revenue for the preceding one

full year is earned by the company from the activity

suggested by the new name and

The aggregate of the proposed issue and all previous

issues made in the same financial year in terms of size (i.e.

offer through offer document plus firm allotment and

promoters contribution through the offer document) does

not exceed 5 times its pre-issue net worth as per the

audited balance sheet of the financial year.

If an unlisted company does not comply with any of the five

conditions specified above, it may make an IPO of equity

shares/security convertible into, exchangeable with, equity at a

later date, only if it satisfies both the following conditions: CD The

issue is made through the book-building process with at least 50

per cent of the issue size being allotted to the Qualified

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Institutional Buyers (QIBs) failing which the full subscription

would be refunded; or the project has at least 15 per cent

participation by banks/financial institutions of which at least 10 per

cent comes from the appraisers. In addition, at least 10 per cent of the issue size should be allotted to the QIBs failing which the full

subscription should be refunded; and The minimum post-issue

issue face value of capital of the company would be Rs 10 crore or

there would be a compulsory market-making for at least 2 years

from the-date of listing of the shares subject to the following:

Market makers undertake to (0 offer buy and sell quotes

for a minimum depth of 300 shares and (ii) ensure that the bid-ask

spread (i.e. difference between quotations for sale and purchase)

for their quotes would not at any time exceed 10 per cent;

The inventory of the market-makers on each of such stock

exchanges, as on the date of allotment of securities, would be at

least 5 per cent of the proposed issue of the company.

A QIB means (1) a public financial institution (PFI) in terms of

Section 4-A of the Companies Act. (2) banks, (3) mutual funds, (4)

foreign institutional investors (FIIs) registered with the SEBI, (5)

multilateral and bilateral development finance institutions, (6)

venture capital funds (VCFs) registered with the SEBI. (8) state

industry development corporations (SIDCs), (9) insurance companies

registered with Insurance Regulatory and Development Authority

(IRDA), (10) provident funds with minimum corpus of Rs 25 crore

and (11) pension funds with minimum corpus of Rs 25 crore.

An unlisted company satisfying all the conditions outlined above

can allot equity shares/ securities convertible into or exchangeable

with, equity shares at a later date in a public issue or offer for sale

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only if the number of the prospective allotters is not less than

1,000.

Public Issue by Listed Companies:

All listed companies are eligible to make public issue of equity

shares/securities convertible into, or exchangeable with equity

shares at a later date on the condition that the issue size in terms

of the aggregate of the proposed issue and all previous issues

made in the same financial year (i.e. offer through offer document

plus firm allotment plus promoters' contribution through the offer

document) does not exceed 5 times its pre-issue networth as per

the audited balance sheet of the last financial year. In case of a

change in the name of the issuer company within the last one year

(reckoned from the date of filing of the offer document), the

revenue accounted for by the activity suggested by the new name

should not be less than 50 per cent of its total revenue in the

preceding one full year.

A listed company which does not fulfil the above conditions,

would be eligible to make a public issue through book-building

process with the same conditions as are applicable to unlisted

companies

Exemptions The eligibility norms specified above for IPOs/offer

for sale by unlisted companies and public issues by listedcompanies are not applicable in the following cases:

Private/public sector banks

Infrastructure companies, wholly engaged in the business

of developing, maintaining and operating infrastructure

facility within the meaning of Section 10(23-G) of the

Income Tax Act (a), whose project has been appraised by a

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(PFI)/Infrastructure Development Finance Com pany

(IDFO/Infrastructure Leasing and Financial Services Ltd

(ILFS) or a bank which was earlier a PFI and (b) not less

than 5 per cent of the project cost has been financed byany of the appraising institutions jointly/severally by way of

loan/subscription to equity or combina tion of both.

Rights issue by a listed company.

Equity Shares:

Issue of Equity Shares (also known as Ordinary or Common shares)

is undertaken by a joint stock corporation of raising long term

capital from the investors who are interested in the participation

/sharing of the final profit or loss. Hence the funds raised through

issue of equity shares are called Owners capital since the holders of

these shares are the real owners.

Equity is a source of permanent capital and are not redeemed

during the life time of the company. The equity shareholders are

entitle for the dividend, rate of which is decide by the board of

directors of the company. Hence it is known as Variable Income

Security.

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Features of Equity Shares

Maturity: Equity Shareholders can demand their capital

only at the time of liquidation of the company and after the

claims of others, including preference share holders are

settled .

Claims / Right to Income: Equity shareholders have a

residual claim on the income of the company. The

distribution and the rate of dividend to equity shareholders,

is left to the discretion of the Board of Directors of the

company under the Companies Act, 1956.

Claim on Assets: In the event of liquidation of the

company, priority is given to creditors and preferred stock

holders in settling the claims. The equity shareholders are

entitled for all whatever left only after meeting all the other

claims.

Voting Rights and Control: Every Equity shareholder has

voting right equivalent to the number of shares held on

resolutions in the meetings of the company.

Pre-emptive Right: This is a right of the existing

shareholder to purchase new shares in proportionate to the

number of shares held. As per Section 81 of the Companies

Act, 1956, the new shares shall be offered in proportion to

existing equity shareholders.

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Advantages of Equity Shares:

Equity shares do not create any obligation to pay fixed rate

of dividend.

Equity Shares provide permanent source of capital since it

need not be repaid till the company is in existence.

Equity shares do not create any charge over the assets of

the company.

Disadvantage of Equity Shares:

More Equity Share Capital issued means less utilization of

trading on equity.

As equity capital can not be redeemed, there is danger of

over capitalization

Investors desirous of investing in safe securities with fixed

income do not go for equity shares.

VALUATION:

Valuation is the process that links risk and return to determine the

worth of an asset. It can be applied to expected benefits from

real/physical as well as financial assets/securities to determine their

worth at a given point of time. The key inputs to the valuation

process are i) expected returns in terms of cash flows together with

their timing and ii) risk in terms of the required return. The value of

an asset depends on the return (cash flow) it is expected to provide

over the holding/ownership period. The cash flow stream can be 1)

annual, 2) intermittent and 3) even one-time. IN addition to the

total cash flow estimates, their timing/pattern (seamount year-

wise) is also required to identify the return expected from thebond/share. The required return is used in the valuation process to

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incorporate risk into the analysis/exercise. Risk denotes the chance

that an expected outcome (return/cash flow) would not be realized.

The level of risk associated with a given cash flow/return has a

significant bearing on its value, that is, the greater the risk, thelower the value & vice versa. Higher risk can be incorporated into

the valuation analysis by using a higher

required/capitalization/discount rate to determine the present

value.

Valuation of ordinary/Equity shares:

The ordinary equity shareholders buy/hold shares in

expectation of periodic cash dividends and an increasing share

value. They would buy a share when it is under valued (i.e., its true

value is more than its market price) and sell it when its market

price is more than its true value (i.e., it is overvalued). The value of

a share is equal to the present value of all future dividends it is

expected to provide over an infinite time horizon.

D1 D2 D

P = (1+k e ) 1 + (1+k e ) 2 + (1+k e )

Where

P = Value of shares

D t = Per share dividend expected at the end of year, t

k e = required return on share

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The equation is designed to computer the value of shares with

reference to the expected growth pattern of future dividends and

the appropriate discount rate.

EQUITY VALUATION:

The outcome of the corporate shareholding valuation service is a

fair and unbiased opinion on the equity (a shareholding package)

value on the market. The opinion may be delivered in a form of

verbal advice, a written tentative conclusion, or a standard

valuation report in a written form.Equity valuations are relevant in

the instance of:

Sale or purchase of a business;

Using the equity to make a non-monetary (property)

contribution to a limited company, which is being

established or expanded;

The rate of exchange of the shares of a corporation underreorganization (merger or split-up) must be grounded;

A court of law or bailiff action;

It is a request of the owner of the property or the customer

of the valuation.

Valuation means the intrinsic worth of the company. There arevarious methods through which one can measure the intrinsic worth

of a company.

Net Asset Value (NAV):

NAV or Book value is one of the most commonly used methods of

valuation. As the name suggests, it is the net value of all the assets

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of the company. If you divide it by the number of outstanding

shares, you get the NAV per share.

One way to calculate NAV is to divide the net worth of the company

by the total number of outstanding shares.

NAV can also be calculated by adding all the assets and subtracting

all the outside liabilities from them. This will again boil down to net

wroth only. One can use any of the two methods to find out NAV.

One can compare the NAV with the going market price while taking

investment decisions.

Discounted Cash Flows Method (DCF):

DCF is the most widely used technique to value a company. It takes

into consideration the cash flows arising to the company and also

the time value of money. The cash flows are calculated for a

particular period of time. The time period is fixed taking into

consideration various factors. These cash flows are discounted tothe present at the cost of capital of the company. These discounted

cash flows are then divided by the total number of outstanding

shares to get the intrinsic worth per share.

The concept of a cost of equity:

The cost of equity is the cost to the company of providing equity

holders with the return they require on their investment.

The primary financial objective is to maximize the return to equity

shareholders. This return is as the future dividend yield and capital

growth.

In practice, this return will be such as to provide new shareholders

with the same future returns as existing shareholders expect to

obtain on their investment at market values.

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Anticipated rate of return on existing equity:

The anticipated rate of return on a share acquired in the market

consists of two components:

Dividends paid until share sold

Price when sold

IN this sense, the returns are directly analogues to those on a

debenture, with dividends replacing interest and sale price replacing

redemption price.

Applying the concept of compound interest, in making a purchase

decision it is assumed that the investor discounts future receipts ata personal discount rate (or personal rate of time preference).

In order to make a purchase decision, the shareholder must believe

the price is below the value of the receipts, i.e., -

Current price, P 0 < Dividends to sale + Sale price

Discounted t rate I

Algebraically, if the share is held for n years then sold at a price Pn

and annual dividends to year n are D1, D2, D3, Dn

Then :

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The dividend valuation model:

The dividend valuation model is a development of the share

valuation model described above.

The important feature of the dividend valuation model is the

recognition of the fact that shares are in themselves perpetuities.Individual investors may buy or sell them, but only very

exceptionally are they actually redeemed.

One Period Valuation Model:

To value a stock, you first find the present discounted value

of the expected cash flows.

P0 = Div1/(1+ke) + P1/(1+ke) where

P0 = The current price of the stock

Div = the dividend paid at the end of year 1

Ke = required return on equity investments

P1 = the price at the end of period one

P0 = Div1/(l+ke) + P1/(l+ke)

Generalized Dividend Valuation Model:

The one period model can be extended to any number of periods.

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P0 = D1(l+ke)l + D2/(l+ke)2++Dn/(l+ke)n + Pn/(l+ke)n

If Pn is far in the future, it will not affect P0. Therefore, the model

can be rewritten as :

P0 = S Dt/(l + ke) t

The model says that the price of a stock is determined only by the

present value of the dividends.

If a stock does not currently pay dividends, it is assumed that it will

someday after the rapid growth phase of its life cycle is over.

Computing the present value of an infinite stream of dividends can

be difficult. Simplified models have been developed to make the

calculations easier.

The Gordon Growth Model:

P0 = D0(l+g) 1 + D0(l+g) 2 + . + D0(l+g)

(l+k e) 1 (l+k e ) 2 (l+k e)

where

D0 = the most recent dividend paid

g = the expected growth rate in dividends

ke = the required return on equity investments

The model can be simplified algebraically to read :

P0 = D0 (l+g) D1

(ke g) (ke - g)

Assumptions:

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Dividends continue to grow at a constant rate for an extended

period of time.

The growth rate is assumed to be less than the required return on

equity, ke.

Price Earnings Valuation Method:

The price earning ration (PE) is a widely watched measure of howmuch the market is willing to pay for $1 of earnings from a firm.

A high PE has two interpretations.

A higher than average PE may mean that the market

expects earnings to rise in the future.

A high PE may indicate that the market thinks the firms

earnings are very low risk and is therefore willing to pay a

premium for them .

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INTRODUCTION:

TABLE 1 AGE WISE CLASIFICATION

AGE NO OF PEOPLE19-25 7826-35 6736-45 34>45 21

AGE GROUP

0

20

40

60

80

100

19-25 26-35 36-45 >45

Age

NO OF PEOPLE

ANALYSIS

Most of the Investors are in the age group of 19-25

It can be inferred that most of the people are in the age were

they are mostly towards investing in capital markets.

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This may be because as they see earnings opportunity in

Indian capital markets which is growing.

TABLE 2 OCCUPATION WISE CLASSIFICATION

OCCUPATION NO OF PEOPLE

BUSINESS 74

SERVICE 87STUDENT 28

OTHERS 11

OCCUPATION

37%

43%

14% 6%

BUSINESS

SERVICE

STUDENT

OTHERS

In the sample size of 200, most of the people (43%) are there

from the service.

We can infer from this that most of the service class people

invest in IPO and equity as it gives risk less and easy returns

to the investors.

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Sample size consists of less no students. As they dont have

practical exposure in capital markets.

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TABLE 4 INTRESTED IN TRADING/INVESTING

YES 117

NO 83

NO OF PEOPLE INTRESTED IN

TRADING

58%

42%YES

NO

42% of the people gave a negative response on the capital

markets.

It may because of speculation and fluctuations in Indian

securities market.

58% of people prefer/interested in Indian capital markets as

they see opportunity to earn or to make profits in fluctuating

markets.

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TABLE 5 MAIN REASON BEHIND TRADING/INVESTING

REASON NO OF PEOPLE

FUTURE PLANNIGN 43

EARNINGS 136

EXEMPTION IN TAX 21

0

20

40

60

80

100

120

140

160

FUTURE

PLANNIGN

EARNINGS EXEMPTION IN

TAX

REASONS

N O O F P E O

P L

NO OF PEOPLE

It can be interpreted that most of the people wants to book

profits in the bullish market.

Future planning has been preferred by less no of people, as

people want to earn in the emerging market like India.

People dont invest in capital markets to get an exemption in

taxes, as there is no long-term capital gain in the securities

market.

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TABLE 6 INVESTMENT PREFERENCES

INVESTIMENTS NO OF PEOPLE

MUTUAL FUNDS 25

EQUITY 57

IPO 78

COMMODITY 7

DERIVATIVES 27

PMS 6

0

10

20

30

40

50

60

70

80

90

MUTUAL

FUNDS

EQUITY IPO COMMODITY DERIVATIV ES PMS

N O

O F P E O P L E

NO OF PEOPLE

Most of people invest in Initial Public Offer as it offer higher

return and less risk of investors

Inspite of high risk and volatile markets investors still prefer

secondary markets for investing in equities.

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TABLE 7 KNOWLEDGE LEVEL OF THE INVESTORS IN

PERCENTAGES

INVESTIMENTS PERCENTAGEMUTUAL FUNDS 63.9

EQUITY 65.8IPO 83.33

COMMODITY 15.4DERIVATIVES 30.3

PMS 35.7

PERCENTAGE

63.9

65.8

83.33

15.4

30.3

35.7

MUTUAL FUNDS

EQUITY

IPO

COMMODITY

DERIVATIVES

PMS

When collected the data on knowledge level of respondents on

a scale of 1-10 83.3% people were comfortable while

investing in IPOs.

Knowledge level on commodity and derivatives is very less as

it is new to Indian markets and the investors should be

educated.

Portfolio management service is also very less as most of the

investors are self-investors.

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TABLE 8 TIME PERIOD OF THE INVESTMENT DONE

TIME PERIOD NO OF PEOPLE

SHORT TERM 39

MEDIUM TERM 113

LONG TERM 48

20%

56%

24%

SHORT TERM

MEDIUM TERM

LONG TERM

Most of he investors are medium term (1-3 months) as they

make profits whenever available to them in the markets.

Short-term investors are the people who do intraday trading

i.e. invest for a week or so in the markets. These are the

people who are extremely intelligent and have a high

knowledge based on capital markets instruments.

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TABLE 9 WAY OF TRADING IN STOCK MARKETS

WAY OF TRADING NO OF PEOPLEONLINE 113

OFFLINE 87

0

50

100

150

NO OFPEOPLE

ONLINE OFFLINE

WAY OF TRADING

Majority of the respondents prefer online trading accounts as

it is easy and fast and it does not require any paperwork.

Service class and the students mostly preferred online trading

as it easy for them. Because they can invest in markets at

any point of time.

Respondents who prefer offline accounts is because of less

brokerage and the people are not IT savvy.

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Null Hypothesis (H 0 ) : There is no relationship between the

occupation of people and the investment option chosen.

Alternate Hypothesis (H 1 ) : There is a relationship between the

occupation of people and the investment option chosen.

Contingency Table Income Levels and investment preferred

INVESTMENTS MUTUAL

FUNDS

EQUITY IPO DERIVATIVES TOTAL

ROWSOCCUPATION

BUSINESS 12 18 28 10 68

SERVICE 6 26 37 12 81

STUDENT 5 10 7 5 27

COLUMN

TOTALS

23 54 72 27 176

Degrees of Freedom : (no.of rows 1)* (no.of columns-1)

= (3-1) * (4-1) = 6

Signification Level ( ) = 0.05

Chi-Square Critical (x 2 c) = 1.64

Expected Cell Frequency Table :

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INVESTMENTS MUTUAL

FUNDS

EQUITY IPO DERIVATIVES

OCCUPATION

BUSINESS 8.88 20.86 27.81 10.43

SERVICE 10.58 24.85 33.13 12.42

STUDENT 3.5284 8.28 11.045 4.14

Chi Square (x 2) = [(Fi-ei) 2 /e i]

X2 = 6.640597

It is seen that Chi square value for this contingency table is

6.640597 and the critical Chi square value for a significance level of

0.05 and degrees of freedom: 6 is 1.64. Hence, the null hypothesis

is rejected.

There is a relationship between the OCCUPATION and the

INVESTMENTS preferred.

Similarly, the relation between, pattern between the age group and

the investments preferred

AGE GROUP * INVESTMENTS PREFERRED

Null Hypothesis (H 0 ) : There is no relationship between the age

groups and the investment preferred.

Alternate Hypothesis (H 1 ) : There is a relationship between the

age groups and the investment preferred.

Contingency Table of AGE GROUP and INVESTMENTS preferred.

INVESTMENTS MUTUAL

FUNDS

EQUITY IPO DERIVATIVES TOTAL

ROWSAGE GROUP

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19-25 5 30 33 7 75

26-35 8 16 29 9 62

36-45 7 5 11 6 29

>45 5 6 5 5 21

TOTAL 25 57 78 27 187

Degrees of Freedom : (no.of rows -1) * (no. of columns-1)

= (4-1) * (4-1) = 9

Significance Level ( ) = 0.05

Chi-Square Critical

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