Financial Market

Analytics
 Why should you
undergo this course
?
Myth
Reality
 Financial Market
• A financial market is a market for creation and exchange of
financial assets
• A financial market helps to link the savers and the investors by
mobilizing funds between them. In doing so it performs the
‘Allocative Function’.
• Consequences of Allocative Function
– The rate of return offered to the households would be higher
– Scare resources are allocated to those firms which have the highest
productivity for the economy.
 Financial Market
• Alternative Mechanism of Allocation of Fund:
Two major alternative mechanisms through which allocation of
funds can be done:
– Banks: Households can deposit their surplus funds with banks, who in turn
lend these funds to business firms.
– Financial Markets: Households can buy the securities (shares and
debentures) offered by a business using financial markets.
 Types of Financial Market
• Stock Markets: In this kind of Market, an organization makes a listing of
its shares which traders and investors buy and sell. Stock Markets,
through the usage of IPO(Initial Public Offering), allows companies to
raise capital.

• Over The Counter Markets: It is a kind of decentralized market, without

fixed geographical locations. Here, the trade is directly done between
two parties instead of an agent/broker. Most stock trading is done
through exchanges. Typically this is the market for smaller companies.

• Bond Markets: The kind of securities that allow investors to borrow

money from the lender for a certain period of time, with a fixed interest
rate is known as bonds. Bonds are issued to aid financial projects by
different state and central government bodies, municipal
corporations, etc. Bonds are usually issued as bills and notes.
 Types of Financial Market
• Money Markets: This kind of market that trades in securities with higher
liquidities and is relatively safer. In addition, the interest return is also
lesser than those in capital market.

• Derivative Markets: This is a kind of market where a contract is signed

between two or more parties depending upon the financial securities
or assets. The worth of the derivatives is derived from the primary
source of security to which it is linked, thus making it “secondary
security”.

• Forex Markets: Foreign Exchange Market, also called the Forex Market,
is the kind of market that basically deals with currencies. As cash is the
most liquid asset, Forex Market has the highest liquidity of all markets
around the globe. Banks, commercial organizations, and investment
management firms comprise the majority of the Forex Market.
 Functions of Financial Markets
• Mobilizing Funds: Among the diverse types of functions served by
Financial Markets, one of the most crucial functions is that of
mobilization of savings. Thus financial markets help to channelize
surplus funds into the most productive uses.
• Determination of Prices: In the financial markets, the households
are suppliers and business firms represent the demand. The
interaction between the forces of demand and supply helps to
establish a price for a financial asset being traded in the
financial market.
 Functions of Financial Markets
• Liquidity of Financial Holdings: Tradable assets must be provided
with liquidity for its smooth functioning and flow. It not only allows
investors to easily sell their securities and assets, but also allows
them to easily convert them into cash money by providing the
choice of mortgaging the securities.
• Ease of Access: As financial markets attract household funds
and business firms alike, relevant parties do not have to spend
any resource, be it capital or time, to find prospective buyers or
sellers. Additionally, it also provides necessary information related
to trading, which also reduces the effort that interested parties
must put in to complete their trades.
Money Market vs
Capital Market
 Money Market
• The money market is the trade in short-term debt. It is a constant
flow of cash between governments, corporations, banks, and
financial institutions, borrowing and lending for a term as short as
overnight and no longer than a year.
• The money market is a good place for individuals, banks, other
companies, and governments to park cash for a short period of
time, usually one year or less.
• It is a market where low risk, unsecured and short term debt
instruments that are highly liquid are issued and actively traded
every day.
 Money Market
• The returns are modest but the risks are low. The instruments used
in the money markets include deposits, collateral loans,
acceptances, and bills of exchange.
• Institutions operating in the money markets include the Reserve
Bank of India, commercial banks, state governments and
corporate houses, mutual funds and non-banking finance
companies.
• The money market plays a key role in ensuring that banks, other
companies, and governments maintain the appropriate level of
liquidity on a daily basis.
 Money Market
• Individual investors may use the money markets to invest their
savings in a safe and accessible place.
• Many choices are available, including mutual funds that focus
on state money market funds, municipal funds, and Central
Government Treasury funds. Many of the central government
funds are tax-free.
• When a company or government issues short-term debt, it's
usually to cover routine operating expenses or supply working
capital, not for capital improvements or large-scale projects.
 Working Capital
• Installation of Fan • Long Term Capital
• Installation of Desk, Boards, • Long Term Capital
Projector
• Purchase of Stationery
(Chalks, Marker, Duster) • Working Capital

• Paying rent, power bill, water • Working Capital

bill.
 Capital Market
• The capital market is where stocks and bonds (securities) are
traded.
• The overriding goal of the companies institutions that enter into
the capital markets is to raise money for their long-term
purposes, which usually come down to expanding their
businesses and increasing their revenues. They do this by issuing
stock shares and by selling corporate bonds.
• The capital market is by nature riskier than the money market
and has greater potential gains and losses.
 Money Market Vs Capital Market
Basis Money Market Capital Market
Definition A random course of financial A kind of financial market
institutions, brokers, money where the company or
dealers, banks, etc., wherein government securities are
dealing on short-term financial generated and patronized
tools are being settled is referred with the intention of
to as Money Market. establishing long-term finance
to coincide with the capital
necessary is called Capital
Market.
Instruments Commercial Papers, Treasury Bonds, Debentures, Shares.
Certificate of Deposit, Bills, Trade
Credit, etc.
 Money Market Vs Capital Market
Basis Money Market Capital Market
Participants Commercial banks, non-financial Financial institutions, foreign
institutions, central bank, chit investors, Commercial banks,
funds, etc. retail investors, etc.
Liquidity Money markets are highly liquid. Capital markets are
comparatively less liquid.
Risk Money markets have low risk. Capital markets are riskier in
comparison to money markets.
Maturity Instruments mature within a year. Instruments take longer time to
attain maturity
Purpose To achieve short term credit To achieve long term credit
requirements of the trade. requirements of the trade.
 Money Market Vs Capital Market
Basis Money Market Capital Market
Functions Increasing liquidity of funds in the Stabilising economy by
economy. increase in savings

Return on ROI is usually low in money ROI is comparatively high in

Investment market. capital market
Types of Capital Market

Capital
Market

Primary Secondary
Market Market
 Primary Market
• Primary market is also known as New Issue Market.
• In the primary market, new stocks and bonds are sold to the
public for the first time.
• In a primary market, investors are able to purchase securities
directly from the issuer.
• The issuer utilizes these funds for investments in building, plant,
machinery etc.
• Types of primary market issues include an initial public offering
(IPO), a private placement, a rights issue, and a preferred
allotment.
 Secondary Market
• It is also called as Stock Exchanges Market.
• It is a market for the sale and purchase of previously issued or
second hand securities or existing securities.
• Under this market, the securities are not directly issued by the
company to the investors. The securities are sold by the existing
investors to other investors.
• An investor in need of cash and another investor in search of
securities can exchange resources satisfying each other’s
need/want.
 Primary Market Vs Secondary Market
Basis Primary Market Secondary Market
Definition A primary market is a A secondary market is a
marketplace where corporations prototype of the capital
imbibe a fresh issue of shares for market where debentures,
being contributed by the public current shares, options, bonds,
for soliciting capital to meet their treasury bills, commercial
necessary long-term funds like papers, etc., of the enterprises
extending the current trade or are patronized amongst the
buying a unique entity. investors.
Also known as New Issue Market (NIM) Aftermarket, Securities
Exchange Market
Purchasing Direct purchase Indirect purchase
type
Beneficiary The beneficiary is the company The beneficiary is the investor
 Primary Market Vs Secondary Market
Basis Primary Market Secondary Market
Parties Buying and selling takes place Buying and selling takes place
involved between the company and the between the investors.
investors.
Intermediaries Underwriters, Merchant Bankers, Brokers, Commercial Banks
involved Commercial Banks
Location No fixed geographical location It has fixed geographical
location.
Financing It provides financing to the No Financing is provided
provided to existing companies for facilitating
growth and expansion.
Purchase The purchase process happens The company issuing the
Process directly in the primary market shares is not involved in the
between the company and the purchasing process.
investor.
 Stock Exchange
• It is established for the purpose of assisting, regulating and
controlling of business in buying, selling and dealing in securities.
• It is a platform where buyers and sellers come together to trade
financial tools during specific hours of any business day while
adhering to SEBI’s well-defined guidelines.
• Two major stock exchanges in India:
– Bombay Stock Exchange (BSE)
– National Stock Exchange (NSE)
 Bombay Stock Exchange (BSE)
Old Building Inside view
 Bombay Stock Exchange (BSE)
New Building Inside view
 National Stock Exchange (NSE)
NSE Building Inside view
 Rewind
• Financial Market:
A financial market is a market for creation and exchange of
financial assets
• Alternative Mechanism of Allocation of Fund
Banks and Financial Markets
• Types of Financial Markets
– Stock Markets
– Over The Counter Markets
– Bond Markets
– Money Markets
– Derivative Markets
– Forex Markets
 Rewind
• Functions of Financial Markets
– Mobilizing Funds
– Determination of Prices
– Liquidity of Financial Holdings
– Ease of Access

• Money Market vs Capital Market

• Types of Capital Market
– Primary Market
– Secondary Market

• Difference between Primary and Capital Market

• Stock Exchange – BSE & NSE
 Investment
• An investment is an asset or item acquired with the goal of
generating income or appreciation of value or both.
• An investment always concerns the outlay of some resource
today—time, effort, money, or an asset—in hopes of a greater
payoff in the future than what was originally put in.
• Investments can be diversified to reduce risk, though this may
reduce the amount of earning potential.
 Investment Objectives
• Primary Objectives
– Security: Certainty in recovery of principal
– Liquidity: Conversion of investment into cash with minimum loss of capital
and minimum loss of time, to meet unexpected future needs.
– Yield: Net return out of investment

• Secondary Objectives:
– Tax Minimization
– Convenience & Planning Horizon
 Types of Investments
• Stocks/Equities
• Bonds/Fixed-Income Securities
• Mutual Funds
• Real Estate
• Commodities
• Collectibles
 Security Analysis
• Security: It is a certificate/financial instrument that can be
traded. Analysis: Detailed examination of elements.
• Security Analysis deals with arriving at proper value of individual
securities, so that appropriate decisions may be made based on
such valuations as compared to the value placed on such
securities in the market.
• Security analysis involves diligently determining the intrinsic value
of securities, such as stocks and financial instruments, to help
investors make well-informed decisions for optimal returns.
• Security analysis serves the pivotal purpose of enhancing
individuals’ net worth by strategically investing their earnings in
diverse financial instruments to achieve profitable outcomes.
 Security Analysis - Features
• To value financial instruments like equity, debt, and company
warrants.
• To use publicly available information to arrive at the value of the
securities.
• Security analysts must act with integrity, competence, and
diligence while conducting security risk analysis.
• Security analysts should place the interest of clients above their
interests.
Approaches of Security Analysis

Approaches
of Security
Analysis

Fundamental Technical
Analysis Analysis
 Fundamental Analysis
• Fundamental analysis (FA) measures a security's intrinsic value by
examining related economic and financial factors.
• Intrinsic value is a measure of what an asset is actually worth. It is
the value determined without any influence from external
factors.
– Internal matters like a firms products, its management and the strength of
its brands in the market place determine the intrinsic value.

• Fundamental analysts study anything that can affect the

security's value, from macroeconomic factors such as the state
of the economy and industry conditions to microeconomic
factors like the effectiveness of the company's management.
 Fundamental Analysis
• The end goal is to determine a number that an investor can compare
with a security's current price to see whether the security is
undervalued or overvalued by other investors.
• Fundamental analysis is usually done from a macro to micro
perspective to identify securities that are not correctly priced by the
market.
• Analysts typically study, in order:
– The overall state of the economy
– The strength of the specific industry
– The financial performance of the company issuing the stock

• This ensures they arrive at a fair market value for the stock.
Major Aspects of Fundamental Analysis

• Economic Analysis:
It is the study of economy as a whole in which the entity
operates.
• Industry Analysis:
Analysis of segment in which we are going to invest
• Company Analysis:
Analysis of company in which investment is to be made.
 Economic Analysis
• Economic analysis refers to evaluating costs and benefits to
check the viability of a project, investment opportunity, event, or
any other matter.
• In other words, it involves identifying, evaluating, and comparing
costs and benefits. In addition, there are many other significant
concepts involved.
• It is a process in which business owners try to gain a clear picture
of existing economic climate.
• Economic analysis majorly focuses on Macroeconomic factors.
 Macroeconomic Factors
Any global news comes, Indian stock markets:
 Economic Analysis
• Macroeconomic factors to – Infrastructure Development
be assessed while analyzing – Demographic Factors
the overall economy are: – Political Stability
– Gross Domestic Product (GDP)
– Savings and Investment
– Inflation
– Union Budget
– Interest rates
– Tax structure
– Balance of payment
– Monsoon & Agricultural output
 Techniques used in Economic Analysis

• Anticipatory Surveys
• Barometer/Indicator Approach
• Economic Model Building Approach
 Anticipatory Surveys

• One approach to short-term forecasting involves conducting a

survey focused on the specific business of interest.
• This method is inherently approximate, relying on factors such as
beliefs, intentions, and future budgetary decisions of the
government.
• Despite its inherent limitations, this survey-based approach
provides a broad indication of the potential future
developments in the economy.
• The main purpose of this method is to gain insights into the
various economic activities taking place in the economy.
 Anticipatory Surveys

• The method of forecasting through surveys involves two primary

approaches:
• The first approach is based on personal contact, where
individuals meet with people directly and record conversations
about their intentions to invest money in different products and
industries in the future.
• Another method of survey involves using a detailed
questionnaire that can be filled out either through face-to-face
interviews or by allowing respondents to complete the form
themselves.
 Anticipatory Surveys - Limitations

• A company that wishes to utilize data-driven decision-making

needs to have access to substantial relevant data from a range
of activities, and sometimes big data sets are hard to come by.
• Time also plays a role in how well these techniques work. Though
a model may be successful at one point in time, customer
behavior changes with time and therefore, a model must be
updated.
• The survey results do not guarantee that the intentions of the
surveyor would materialize in the foreseeable future as the results
depend on multitude of factors which may change at any given
point.
 Barometer/Indicator Approach

• The economic indicators are factors that indicate the present

status, progress or slowdown of the economy.
• Various indicators are used to find out how the economy shall
perform in the future. The indicators have been classified as
under:
– Leading Indicators: They lead the economic activity in terms of their
outcome. They relate to the time series data of the variables that reach
high/low points in advance of economic activity.
This indicates what is going to happen in the economy in the near future.

Ex: Customer spending on discretionary products may be estimated

through the growth in GDP per capita.
 Barometer/Indicator Approach

– Roughly Coincidental Indicators: They reach their peaks and troughs at

approximately the same in the economy.

It indicates what the current situation of the economy is.

– Lagging Indicators: They are time series data of variables that lag behind
in their consequences vis-a- vis the economy. They reach their turning
points after the economy has reached its own already.

It indicates what has already happened in the economy.

 Economic Model Building Approach

• In this approach, a precise and clear relationship between

dependent and independent variables is determined.
• GNP model building or sectoral analysis is used in practice
through the use of national accounting framework. The steps
used are as follows:
• Hypothesize total economic demand by measuring total income
(GNP) based on political stability, rate of inflation, changes in
economic levels.
 Economic Model Building Approach

• Forecasting the GNP by estimating levels of various components

viz. consumption expenditure, gross private domestic investment,
government purchases of goods/services, net exports.

After forecasting individual components of GNP, add them up to

obtain the forecasted GNP.
• Comparison is made of total GNP thus arrived at with that from
an independent agency for the forecast of GNP and then the
overall forecast is tested for consistency. This is carried out for
ensuring that both the total forecast and the component wise
forecast fit together in a reasonable manner.
Economic Model Building Approach

Estimate total economic demand through based on

various factors

Forecast GNP by estimating levels of various

components of GNP and adding them up.

Compare forecast GNP with GNP estimates of

independent agencies