Chapter – I

INTRODUCTION

1
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 it’s true worth, he would be it and if, he finds the share price
is higher than it’s 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 it’s
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
it’s 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
it’s 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 scrip’s more often the analyst is
Familiar with both approaches. A technical analyst would look at the

2
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 tree
established 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 the

Bombay 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

3
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.

4
 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 Inter
Connected 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 and
they 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.

5
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

6
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.

7
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.

8
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 are
also 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 financial
dailies? 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

9
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's

capital 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

10
 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 executive
resolution, 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 Securities
Scam 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

11
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 the
securities market;

12
  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 under
investigation 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.

13
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.

14
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.

15
 Chapter – II

COMPANY PROFILE

16
 COMPANY PROFILE

SHAREKHAN

SSKI,a veteran equities solutions company with over 8

decades 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 and
experience 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, ours
customer 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 dedicated
terms for fundamental and technical research so that you get all the

17
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 need
assistance, 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
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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 India
where 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.

18
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 publication
with 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)

19
 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 213
cities in India to get a host of trading related services - Their
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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.

20
 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

21
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.

22
 • 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

23
application form, print it out, fill it in and send it over to us. We'll do
the rest for you

24
 Chapter – III
INVESTORS PERCEPTIONS
TOWARDS TRADING OF
SECURITIES
–An Analysis

25
 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 the
industry.

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

26
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:

27
  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 compliance
and 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 for
their 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.

28
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 for
differences or any other form of security;

 A contract which derives its value from the prices, or

index of prices, of underlying securities;

29
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...

30
 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 person
keeps 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.

31
They are the second major group of futures players. These
participants include independent floor traders and investors. They
handle trades for their personal clients or brokerage firms. Buying a
futures contract in anticipation of price increases is known as 'going
long'. Selling a futures contract in anticipation of a price decrease is
known as 'going short'. Speculative participation in futures trading
has increased with the availability of alternative methods of
participation.

Arbitrators: According to dictionary definition, a person who has

been officially chosen to make a decision between two people or
groups who do not agree is known as Arbitrator. In commodity
market Arbitrators are the people who take the advantage of a
discrepancy between prices in two different markets. If he finds
future prices of a commodity edging out with the cash price, he will
take offsetting positions in both the markets to lock in a profit.
Moreover the commodity futures investor is not charged interest on
the difference between margin and the full contract value.

THE STRUCTURE OF DERIVATIVE MARKETS IN INDIA:

Derivative trading in India takes can place either on a

separate and independent Derivative Exchange or on a separate
segment of an existing Stock Exchange. Derivative
Exchange/Segment function as a Self-Regulatory Organization
(SRO) and SEBI acts as the oversight regulator. The clearing &
settlement of all trades on the Derivative Exchange/Segment would
have to be through a Clearing Corporation/House, which is
independent in governance and membership from the Derivative
Exchange/Segment

Futures Contract:

32
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 any
date 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, futures
contract 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

33
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 IN

INDIA:

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.

34
 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 the
provisions 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 & Clearing
Corporation/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

35
 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

36
 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 share’s 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

37
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 investment
institutions.

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 guru’s insight.

Introduction to investing in shares

If you’re planning to make your own share investments, be

prepared for a lot of hard work. But, hopefully, you’ll 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.

38
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 Government’s 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 what’s 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?

39
  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 good

news 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?

40
  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 with
different 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 carried
forward to successive years, Dividends on cumulative

41
 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 company’s shares has little (if relationship to their
nominal or face value. The market value of a company’s 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.

42
Reasons for Issue of Ordinary Shares:

 The company might want to raise more cash for the

expansion of a company’s 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.

43
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 sale
and (ii) letter of offer in case of a rights issue, should satisfy the

44
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.

45
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 be
considered 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

46
 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 firm’s/division’s 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

47
 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

48
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 listed
companies 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

49
 (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 by
any 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.

50
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.

51
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 the
bond/share. The required return is used in the valuation process to

52
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, the
lower 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+ke) 1 + (1+ke) 2 + (1+ke)

Where

P = Value of shares
Dt = Per share dividend expected at the end of year, t
ke = required return on share

53
 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 under

reorganization (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 are

various 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

54
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 to
the 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 at
a 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, P0 < 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 :

Po <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

By similar logic, the seller of the share must believe that

56
Po <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

These different views will occur for two reasons

 Different forecasts for D1, D2 etc and for Pn by the different

investors.

 Different discount rates being applied by different investors.

However, since the price of shares is normally in equilibrium, for the

majority of investors who are not actively trading in that security :

Po = <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

Limitations of the above valuation model:

It is important to appreciate that there are a number of problems

and specific assumptions in this model

 Anticipated value for dividends and prices: all of the

dividends and prices used in the model are the investor’s
estimates of the future.

 Assumption of investor rationality : the model assumes

investors act rationally and make their decisions about
share transactions on the basis of financial evaluation.

 Application of discounting : it assumes that the

conventional compound interest approach equates cash
flows at different points in time.

 Dividends are paid annually: with the next dividend

payable in one year.

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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.

58
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+ke)1 (l+ke)2 (l+ke)

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:

59
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 how

much 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 firm’s

earnings are very low risk and is therefore willing to pay a
premium for them.

60
INTRODUCTION:

TABLE 1 – AGE WISE CLASIFICATION

AGE NO OF PEOPLE
19-25 78
26-35 67
36-45 34
>45 21

AGE GROUP

100

80

60
NO OF PEOPLE
40

20

0
19-25 26-35 36-45 >45
Age

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.

61
  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 87

STUDENT 28

OTHERS 11

OCCUPATION

6%
14%
37% BUSINESS
SERVICE
STUDENT
OTHERS

43%

 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.

62
 Sample size consists of less no students. As they don’t have
practical exposure in capital markets.

63
TABLE 3 – INCOME WISE CLASSIFICATION

INCOME NO OF PEOPLE

5000-15000 28

15000-25000 91

25000-35000 46

>35000 35

100
NO OF PEOPLE

80

60 NO OF
40 PEOPLE
20
0
5000- 15000- 25000- >35000
15000 25000 35000
INCOME

 Sample size consist of most of the people in income group of

15000-25000

 It can be inferred from this that people in this Income group

are more toward investing in capital markets.

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TABLE 4 – INTRESTED IN TRADING/INVESTING

YES 117

NO 83

NO OF PEOPLE INTRESTED IN

TRADING

42%
YES
NO
58%

 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

160
140
120
NO OF PEOPLE

100
80 NO OF PEOPLE

60
40
20
0
FUTURE EARNINGS EXEMPTION IN
PLANNIGN TAX
REASONS

 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 don’t 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

90
80
70
NO OF PEOPLE

60
50
NO OF PEOPLE
40
30
20
10
0
MUTUAL EQUITY IPO COMMODITY DERIVATIVES PMS
FUNDS

 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 PERCENTAGE
MUTUAL FUNDS 63.9
EQUITY 65.8
IPO 83.33
COMMODITY 15.4
DERIVATIVES 30.3
PMS 35.7

PERCENTAGE

35.7
63.9

30.3 MUTUAL FUNDS

EQUITY
IPO
15.4
COMMODITY
DERIVATIVES
65.8 PMS

83.33

 When collected the data on knowledge level of respondents on

a scale of 1-10 83.3% people were comfortable while
investing in IPO’s.

 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

THE PERIOD OF INVESTMENTS

24% 20%

SHORT TERM
MEDIUM TERM
LONG TERM

56%

 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 PEOPLE

ONLINE 113
OFFLINE 87

WAY OF TRADING

150

100
NO OF
PEOPLE
50

0
ONLINE OFFLINE

 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.

70
Null Hypothesis (H0): There is no relationship between the
occupation of people and the investment option chosen.

Alternate Hypothesis (H1): There is a relationship between the

occupation of people and the investment option chosen.

Contingency Table Income Levels and investment preferred

INVESTMENTS MUTUAL EQUITY IPO DERIVATIVES TOTAL

OCCUPATION FUNDS ROWS

BUSINESS 12 18 28 10 68

SERVICE 6 26 37 12 81

STUDENT 5 10 7 5 27

COLUMN 23 54 72 27 176
TOTALS

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

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

 Signification Level (  ) = 0.05

 Chi-Square Critical (x2c) = 1.64

Expected Cell Frequency Table :

71
INVESTMENTS MUTUAL EQUITY IPO DERIVATIVES

OCCUPATION FUNDS

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 (x2) = [(Fi-ei)2/ei]

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 (H0) : There is no relationship between the age

groups and the investment preferred.

Alternate Hypothesis (H1) : There is a relationship between the

age groups and the investment preferred.

Contingency Table of AGE GROUP and INVESTMENTS preferred.

INVESTMENTS MUTUAL EQUITY IPO DERIVATIVES TOTAL

AGE GROUP FUNDS ROWS

72
 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 (X2c) = 3.33

73
Expected Cell Frequency Table: People

INVESTMENTS MUTUAL EQUITY IPO DERIVATIVES

AGE GROUP FUNDS

19-25 10.0267 22.8609 31.283 10.8288

26-35 8.288 18.8983 25.860 8.9518

36-45 3.877 8.893 12.096 4.1871

>45 2.8074 6.4010 8.759 3.0320

Chi-Square (X2) = ∑ [Fi-ei)2/ei]

X2 = 16.72279

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

16.72279 and the critical Chi square value for a significance level of
0.05 and degrees of freedom : 9 is 3.33. Hence, the null hypothesis
is rejected.

There is a relationship between the AGE GROUP and the

INVESTMENTS preferred.

74
 Chapter –IV
FINDINGS & CONCLUSION

75
FINDINGS:

The Indian Capital Markets today present a vastly different picture

from what it was a decade ago

 Lots of checks and balances with efficient and electronic

tading, and settlement system.

 A range of players that include mutual funds, FIIs, hedg

funds, corporates and other institutions

 Expansion of asset classes

 From offer price to price discovery, GDR to reverse

ADRs

Some of the major developments in the markets have been in

the area of

 Primary markets

 Extent Participation of Institutional Players

 Introduction and progress of Derivatives

 Settlement and monitoring systems

The Indian capital market has witnessed some significant reforms

on the structural, operational and regulatory front over a period of
time. The changes such as abolition of controller of capital issues,
establishment of market regulator (SEBI), introduction of a
nationwide screen-based trading, dematerialization of securities,
electronic trading, sophisticated risk-management techniques,
derivative trading, rolling settlement, shortening of settlement
cycle, ban on deferral products, formation of clearing Corporation of
India and demutualization of stock exchanges have marked a new
era in the functioning of the capital market.

76
CONCLUSION:

 58% of the people are interested in investing in capital

markets as they see a huge growth in Indian financial
markets.

 It can be seen that maximum service class people invest in

IPO because of less risk and reasonable returns.

 Knowledge level on commodity and derivatives trading is very

less when compared to equity and IPO. It may be because
investors are looking for profit making in market.

 It can be concluded from the chi square test 1 that their

exists a relationship between the OCCUPATION and the
INVESTMENTS preferred i.e. people with service class prefer
IPO’s than equity as it offers easy returns. Respondents with
business background prefer to invest in equities as they can
afford to take risk.

 It may be concluded from the chi square test 2 that there

exist a relationship between the AGE GROUPS and the
INVESTMENT preferred i.e. with the age above 45 would like
invest in mutual funds and people with the age group 19-25
would like to invest in more IPO’s and equities.

77
BIBLIOGRAPHY

WEBSITES:

 www.nseindia.com

 www.yahoofinance.com

 www.hseindia.org

 www.sebi.com

 www.google (search)

JOURNALS AND MAGAZINES:

 Dalal Street

 Journal on portfolio management

 Harvard business review

 Business standard

 Business today

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