INVESTMENT MANAGEMENT

In

Aryan Singh
BBA, 5th Semester,
IIMT College Of Management
 INDEX
UNIT-I
…………………………………………………………………………………………………………
Investment
……… 1 - –16 Features of Investment – Principles of Investment – Kinds of Investment – Stages in
Investment – Investment Vs Speculation – Sources of Investment information.

Unit- II
………………………………………………………………………………………………………
Investment
………17 Risk- 36 – Systematic Risk – Unsystematic Risk – Business Risk – Measurement of Risk
– Corporate Securities - New Issue Market – Conventional Stock Exchanges – New Stock
Exchanges - Listing of Securities.

Unit- III
………………………………………………………………………………………………………
……… 37
Security - 43 indicators – Securities and Exchange Board of India – Objectives – Functions –
market
SEBI Guidelines

Unit- IV ………………………………………………………………………………….... 44 -61

Fundamental Analysis – Economic Analysis – Industry Analysis – Company Analysis –
Technical Analysis – Types of Charts – Indicators – Evaluation.

Unit- V.………………………………………………………………………………….... 62 - 80
Portfolio Analysis – Portfolio Constructions & Management – Portfolio evaluation & Portfolio –
Mutal Funds – Types - Merits and Demerits.
 UNIT-I

Investment – Features of Investment – Principles of Investment – Kinds of Investment –

Stages in Investment – Investment Vs Speculation – Sources of Investment information.

Introduction
The term ‘investing’ could be associated with different activities, but the common target in these activities is
to ‘employ’ the money (funds) during the time seeking to enhance the investor’s wealth. Funds to be
invested come from assets already owned, borrowed money and savings. By foregoing consumption today
and investing their savings, investors expect to enhance their future consumption possibilities by increasing
their wealth. However, it is always useful to make a distinction between real and financial investments. Real
investments usually involve some kind of tangible assets, such as land, machinery, factories, etc. Financial
investments involve contracts in paper or electronic form, such as stocks, bonds, etc.
Investment activity involves the use of funds or savings for acquisition of assets & further creation of assets.
Investment is an employment of funds on assets in the aim of earning income or capital appreciation.
Definition of Investment
“Investment analysis is the study of financial securities for the purpose of successful investing. “An
investment is the purchase of goods that are not consumed today but are used in the future to create wealth.”
“An investment is a commitment of funds make in the expectation of some positive rate of return.” Example
– equity shares, preference share and debentures etc.
According to oxford dictionary “investment is defined as the action or process of investment money for
profit.”
According to Keynes “investment is defined as the addition of the value of the capital equipment which has
resulted from the productive activity of the period.”
Types of Investment
 Real Investment – Purchase of fixed assets
 Financial Investment – Purchase of securities
Definition-Economic sense
“Investment means the net additions to the economy’s capital stock which consists of goods and services
that are used in the production of other goods and services” (Capital formation) Investment is the net
addition made to the nation’s capital stock that consists of goods and services that are used in the production
process. A net addition to the capital stock means an increase in the buildings, equipment’s, or inventories.
These capital stocks are used to produce other goods & services.

Definition–Financial sense
“Investment is a commitment / employment of funds made in the expectation of some positive rate of return.
If the investment is properly undertaken, the return will be commensurate with the risk that the investor
assumes.”
- Donald E. Fischer and Ronald J. Jordan

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Financial investment is the allocation of money to assets that are expected to yield some gain over a period.
Characteristics of Investment
 Safety of principal (e.g., gilt edged securities)
 Liquidity (e.g., CPs and CDs)
 Income stability (e.g., Debentures)
 Capital appreciation (e.g., equity)
 Tangibility (e.g., land and buildings)
Investment refers to investing money in financial physical assets and marketing assets. Major investment
features are risk, return, safety, liquidity, marketability, concealability, capital growth, purchasing power,
stability, and the benefits.
1. Risk
Risk refers to the loss of principal amount of an investment. It is one of the major characteristics of an
investment. The risk depends on the following factors:
When investment maturity period is longer; investor will take larger risks. • Government or Semi-
Government bodies issue securities, which have lesser risks. •In the case of the debt instrument or fixed
deposit, the risk of above investment is less due to their secured and • fixed interest payable. For instance,
debentures.
In the case of ownership instrument like equity or preference shares, the risk is more due to their unsecured •
nature and variability of their return and ownership character. The risk of degree of variability of returns is
more in the case of ownership capital as compared to debt capital. • The tax provisions would influence the
return of risk.
2. Return
Return refers to expected rate of return from an investment. Return is an important characteristic of
investment. Return is the major factor which influences the pattern of investment that is made by the
investor. Investor always prefers high rate of return for his investment.
3. Safety
Safety refers to the protection of investor principal amount and expected rate of return. Safety is also one
of the essential and crucial elements of investment. Investor prefers his capital’s safety. Capital is the
certainty of return without loss of money, or it will take time to retain it. If investor prefers less-risky
securities, he chooses Government bonds. In cases, where investor prefers high rate of returns, investor
will choose private securities, whose safety is low.

4. Liquidity
Liquidity refers to investments ready to be converted into cash. In other words, it is available
immediately in the cash form. Liquidity means that investment is easily realisable, saleable, or
marketable. When the liquidity is high, then the return may be low. For example, UTI units. An investor
generally prefers liquidity for his investments and safety of funds through a minimum- risk and
maximum-return investment.
5. Marketability
Marketability refers to buying and selling of securities in market. Marketability means transferability or
saleability of an asset. Securities listed in a stock market are more easily marketable than which are not
listed. Public Limited Companies’ shares are more easily transferable than those of private limited
companies.
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6. Concealability
Concealability is another essential characteristic of the investment. Concealability means investment to
be safe from social disorders, government confiscations or unacceptable levels of taxation. Property
must be concealable and should leave no record of income received from its use or sale. Gold and
precious stones have long been esteemed for these purposes, because they combine high value with
small bulk and are readily transferable.
7. Capital growth.
Capital growth refers to appreciation of investment. Capital growth has today become an important
character of investment. Capital appreciation, also known as capital growth, refers to the increase in the
value of an investment over time. It tells you how much profit you would pay taxes on, if you sold the
investment that day. Investors and their advisers are constantly seeking ‘growth stock’ in the right
industry; bought at the right time.
8. Purchasing power stability
It refers to the buying capacity of investment in market. Purchasing power stability has become one of
the import traits of investment. Investment always involves the commitment of current funds with the
objective of receiving greater amounts of future funds. Investment Analysis and Portfolio Management
4/JNU OLE
9. Stability of income
It refers to constant return from an investment. Another major characteristic feature of the investment is
the stability of income. Stability of income must look for different paths just as the security of the
principal. Every investor must always consider stability of monetary income and stability of the
purchasing power of income.
10. Tax benefits
Tax benefit is the last characteristic feature of the investment. Planning an investment programme
without considering the tax burden may be costly to the investor. There are two problems:
One concerned with the amount of income paid by the investment. Another is the burden of income tax
upon that income.
Need for and Importance of Investments
An investment is an important and useful factor in the context of present-day conditions. Some factors are
very important, while considering these investments.

They are outlined below:

• Longer life expectancy or planning for retirement
• Increasing rates of taxation
• High interest rates
• High rates of inflation
• Larger incomes
• Availability of a complex number of investment outlets
a. Longer life expectancy
Investment decisions have become more significant as most people in India retire between the ages of 56 to
60. Investment decisions must be planned to make wise saving decisions. Saving on their own does not
increase wealth; the saving must be invested in such a way that the principal and income will be adequate
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 for a greater number of retirement years. Longer life expectancy is one reason for effective savings and
further investment activities that help the investment decisions.
b. Increasing rates of taxation
When tax rate is increased, it will focus on generating savings by the taxpayer. When the taxpayer invests
their income in provident fund, pension fund, Unit Trust of India, Life Insurance, Unit Linked Insurance
Plan, National Saving Certificates, Development Bonds, Post Office Cumulative Deposit Schemes, etc., it
affects their taxable income.
c. Interest rates
Interest rate is one of the most important aspects of a sound investment plan. The interest rate differs from
one investment to another. There may be changes between degree of risk and safe investments. They may
also differ due to different benefit schemes offered by the institutions. A high rate of interest may not be the
only factor favouring the outlet for investment. Stability of interest is an important aspect of receiving a high
rate of interest.
d. Inflation
Inflation has become a continuous problem. It affects in terms of rising prices. Several problems are
associated and coupled with falling standards of living. Therefore, investor’s scrutiny of the inflation will
make further investment process delayed. Investor ensures to check the safety of the principal amount and
security of the investment. Both are crucial from the point of view of the interest gained from the
investments.
e. Income
Income is another important element of the investment. When government provides jobs to the unemployed
persons in the country, the ultimate result is ensuring income than saving the extra income. More incomes
and more avenues of investment have led to the ability and willingness of working people to save and invest
their funds.

f. Investment channels
The growth and development of the country leading to greater economic prosperity has led to the
introduction of a vast area of investment outlets. Investment channels mean an investor is willing to invest in
several instruments like corporate stock, provident fund, and life insurance, fixed deposits in the corporate
sector and unit trust schemes.
Objectives of Investment
1. Maximization of return
2. Minimization of risk
3. Hedge against inflation (if the investment cannot earn as much as the rise in price level, the ‘real’ rate of
return will be negative)
4. Safety
5. Liquidity
6. Tax Benefit
1. Return

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 Rate of return could be defined as the total income the investor receives during the holding period expressed
as a percentage of the purchasing price at the beginning of the holding period.
Return = (End period value - Beginning period value + Dividend x 100)
/ Beginning period value
2. Risk
• Risk of holding securities is related with the probability of actual return becoming less than the expected
return
• The word “risk” is synonymous with the phrase “variability of return.”
• Investment risk is just as important as measuring its expected rate of return…… because minimizing risk
and maximizing the rate of return are interrelated objectives in the investment management.
3. Hedge against Inflation
• The rate of return should ensure a cover against the inflation.
• The return thus earned should assure the safety of the principal amount, regular flow of income and be a
hedge against inflation
4. Safety
Investment done with Government assure more safety than with the private party.
5. Tax Benefit
Investment may be undertaken to reduce the income tax burden. E.G. Savings bond, Provident Fund,
Insurance etc.
6. Liquidity
• Marketability of the investment provides liquidity to the investment. The liquidity depends upon the
marketing and trading facility.
• Stocks are liquid only if they command good market by providing adequate return through dividends and
capital appreciation.

Classification of Investment
FINANCIAL ASSETS
1. Cash
2. Bank Deposits
BECOMES 3. P.F
4. Pension Scheme
5. Post Office Scheme

SAVER PHYSICAL ASSETS

INVESTOR
6. House, Land, Building, Flats
7. Gold, Silver, and Other Metals
8. Consumer Durables

MARKETABLE ASSETS
1. Shares, Bonds
2. Government Securities
3. Mutual Funds
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The classification of investments into various groups is explained in the paragraphs given below:
On the basis of physical investments
Physical investments are as follows:
• House•
• Land•
• Building•
• Gold and silver•
• Precious stones•
On the basis of financial investment
Financial investments are further classified on the basis of:
• Marketable and transferable investments•
• Non-marketable investments•
• Security forms of investment / Marketable investments are as follows:
1.Corporate Bonds /Debentures
(a) Convertible
(b) Non-convertible.
2.Public Sector Bonds
(a) Taxable
(b) Tax Free.
3. Preference Shares
4. Equity Shares - New issue, Rights Issue, Bonus Issue
Non-Security Forms of Investment (non-marketable) /non-marketable investments are as follows:
O Bank deposits•
O Provident and pension funds•

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O Insurance certificates•
O Post office deposits•
O National saving certificates•
O Company deposits•
O Private company shares, etc.
Classes of Instruments
Instruments traded can be classified on the following:
1. By ownership or debt nature of instruments.
2. By term period to maturity – Short term, Medium-term and long-term.
3. By the issuer’s creditworthiness, government securities or private securities or Post Office certificate etc.
Investment Alternatives
1. Direct Investment Alternatives
Fixed principal investments (e.g. Savings a/c, government bonds) Variable principal investments (e.g.
Preference shares, equity shares) non-security investments (e.g. business ventures)
2. Indirect investment alternatives (e.g. PF, Insurance)
Investment Alternatives
 The investment alternatives range from financial securities to non-security investments. The financial
securities may be negotiable or non-negotiable.
 The negotiable securities are transferable. Non-negotiable is not transferable also called as non-
securitized financial investment.
 Deposit schemes offered by post office, banks, public provident fund, national savings scheme are non-
securitized financial investments.
Negotiable Securities
1. Variable income securities
Equity shares, growth shares, income shares, defensive shares, cyclical shares, speculative shares.
2. Fixed income securities
Preference shares, debentures, bonds, government, money market, treasury bills, commercial papers,
certificate of deposit.
Non-Negotiable Securities
 Deposits: it can earn rate of return
 Bank deposits, post office deposits, etc.
 Schemes of LIC.
 Tax benefits from life insurance.
 Mutual funds.
 Real assets.
 Real estate.
 Arts and antiques.
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Financial Assets
 Equity shares
 Bonds
 Preference shares
 Non- marketable financial assets
 Money market instruments
 funds
 Life insurance
 Financial derivatives
Equity Shares
• Represents ownership capital
– They elect the board of directors and have a right to vote on every resolution placed before the
company.
– They enjoy the pre-emptive right which enables them to maintain their proportional ownership.
• Risk: residual claim over income
• Reward: partners in progress
• The amount of capital that a company can issue as per its memorandum represents authorized capital
• The amount offered by the company to the investors is called issued capital
• The part of issued capital that is subscribed to by the investors is called subscribed capital / paid up capital
• Par / Face / Nominal value of a share is stated in the memorandum and written on the share script
• Issue of shares at a value above its par value is called issue at a premium
• Issue of shares at a value below its par value is called issue at a discount
• The price at which the share currently trades in the market is called the market value
• Blue chip shares: Shares of large, well established and financially strong companies with impressive record
of earnings and dividend
• Growth shares: Shares of companies having fairly strong position in the growing market and having an
above average rate of growth and profitability
• Income shares: Shares of companies having fairly stable operations, limited growth opportunities and high
dividend payouts
• Cyclical shares: Shares of companies performing as per the business cycles
• Defensive shares: Shares of companies relatively unaffected by the ups and downs in the general economic
conditions
• Speculative shares: shares of companies whose prices fluctuate widely because of a lot of speculative
trading being done on them
• Equity shares are commonly referred to as common stock or ordinary shares
• Share capital of a company is divided into a number of small units of equal value called shares.
• The “stock” is the aggregate of a member’s fully paid-up shares of equal value merged into one fund.

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• The ‘stock’ is expressed in terms of money and not “as many” shares. Sweat Equity: The Sweat Equity has
two dimensions:
Shares issued at a discount to employees and directors.
Shares issued for consideration other than cash for providing know-how or making available rights or value
additions.
Non-Voting Shares
Non-voting shares carry no voting rights.
The non-voting shares also can be listed and traded in the stock exchanges.
The dividend on non-voting shares would have to be 20% higher than the dividend on the voting shares.
Right Shares
 Shares offered to the existing shareholders at a price by the company are called “right shares”.
 If a public company wants to increase its subscribed capital by way of issuing shares after 2 years from
its formation date or 1 year from the date of first allotment……the shares should be offered first to the
existing shareholders in proportion to the capital paid up on the shares held by them at the date of such
offer. This is called pre-emptive right.
Debentures
 According to Companies Act 1956, “Debenture includes debenture stock, bonds and any other securities
of company, whether constituting a charge on the assets of the company or not”.
 Debentures are generally issued by the private sector companies as a long-term promissory note for
raising loan capital.
Bonds
• They are long term debt instruments issued for a fixed time period
• Bonds are debt securities issued by the government or PSUs
• Debentures are debt securities issued by private sector companies
• They comprise of periodic interest payments over the life of the instrument and the principal repayment at
the time of redemption
• Debt securities issued by the central government, state government and quasi government agencies are
referred to as gilt-edged securities
• Callable bonds are the ones that can be called for redemption earlier than their date of maturity. This right
to call is available with the company.
• Convertible bonds are the ones that can be converted into equity shares at a later date either fully or partly.
This option is available with the bond holder.
• Coupon rate is the nominal rate of interest fixed and printed on the bond certificate. It is calculated on the
face value and is payable by the company till maturity.
Preference Shares
• Represents a hybrid security that has attributes of both equity shares and debentures.
• They carry a fixed rate of dividend. However, it is payable only out of distributable profits.

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• Dividend on preference shares is generally cumulative. Dividend skipped in one year has to be paid
subsequently before equity dividend can be paid.
• Only redeemable preference shares can be issued

Non-Marketable Securities
These represent personal transactions between the investor and the issuer.
Bank Deposits
– There are various kinds of bank accounts – current, savings and fixed deposit.
– While a deposit in a current account does not earn any interest, deposit made in others earn an
interest.
– Liquidity, convenience and low investment risks are the common features of the bank deposits.
– Deposits in scheduled banks are safe because of the regulations of RBI and the guarantee provided
by the Deposit Insurance Corporation on deposits up to Rs 1,00,000 per depositor of the bank.
Company Deposits
– Deposits mobilized by companies are governed by the provisions of section 58A of Companies Act,
1956
– The interest offered on this fixed income deposits is higher than what investors would normally get
from the banks.
– Manufacturing and trading companies are allowed to pay a maximum interest of 12.5%.
– The rates vary depending on the credit rating of the company offering the deposit.
Post Office Monthly Income Scheme
– Meant for investors who want to invest a lump sum amount initially and earn interest on a monthly
basis.
– Minimum investment is Rs.1000 in multiples of Rs 1,000
– The maximum deposits in all the accounts taken together should not exceed Rs.4 lakhs in a single
account and Rs.8 lakhs in a joint account.
– The tenure of the MIS scheme is six years.
Money Market Instruments
• Debt instruments which have a maturity of less than a year at the time of issue is called money market
instruments
• These are highly liquid instruments
Treasury Bills
– Issued by GOI
– They are of two durations – 91 days and 364 days.
– Are negotiable instruments and can be rediscounted with GOI?
– They are sold on an auction basis every week in certain minimum denominations by the RBI.
– They do not carry an explicit interest rate. Instead, they are issued at a discount to be redeemed at
par. The implicit return is a function of the size of discount and the period of maturity.
– They have zero default risk, assured return, are easily available.
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Certificate Of Deposits
– Negotiable instruments issued by banks / financial institutions with a maturity ranging from 3
months to 1 year.
– These are bank deposits transferable from one party to another.
– The principal investors are banks, financial institutions, corporates and mutual funds.
– These carry an explicit rate of interest.
– Banks normally tailor make their denominations and maturities to suit the needs of the investors.
Commercial Papers
– Issued in form of promissory notes redeemable at par by the holder on maturity.
– Usually has a maturity period of 90 to 180 days.
– They are sold at a discount to be redeemed at par.
– CPs can be issued by corporates having a minimum net worth of Rs 5 crores and an investment grade
from credit rating agencies.
– Minimum issue size is Rs 25 lacs.
Mutual Funds
• Also known as an instrument for collective investment
• Investment is done in three broad categories of financial assets i.e. stocks, bonds and cash
• Depending on the asset mix, mutual fund schemes are classified as: Equity schemes, hybrid schemes and
debt schemes
• On the basis of flexibility, Mutual fund schemes may be: Open ended or Close ended
– Open ended schemes are open for subscription & redemption throughout the year.
– Close ended schemes are open for subscription only for a specified period and can be redeemed
only on a fixed date of redemption.
• On the basis of objective, mutual funds may be growth funds, income funds, or balanced funds
• NAV of a fund is the cumulative market value of the assets of the fund net of its liabilities
Financial Derivatives
• Derivative is a product whose value is derived from the value of the one or more underlying assets. These
underlying assets may be equity, bonds, foreign exchange, commodity or any other asset.
• Derivative does not have a value of its own. Rather its value depends on the value of the underlying asset.
• Derivatives initially emerged as hedging devices against fluctuations in commodity prices and commodity
linked derivatives remained the sole form of such products. Financial derivatives emerged post 1970 period.
• Financial derivatives have various financial instruments as the underlying variables
• Futures and Options are two basic types of derivatives
Futures is a transferable contract between two parties to buy or sell an asset at a certain date in the future at a
specified price.
– It is a standardized contract with a standard underlying asset, a standard quantity and quality of
underlying instrument and a standard timing of settlement.
– It may be offset prior to its maturity by entering into an equal and opposite transaction.
– It requires margin payments and follow daily movements.

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Options are of two types:
– Call option gives the buyer of the option a right but not an obligation to buy a given quantity of the
underlying asset, at a given price, on or before a given future date.
– Put option gives the buyer of the option a right but not an obligation to sell a given quantity of the
underlying asset, at a given price, on or before a given future date.
Real Assets
 Real estate
 Precious objects
Process Of Investment
1. Investment Policy
The Government or the investor before proceeding into investment formulates the policy for systematic
functioning.
• Determination of Investible wealth (parting)
• Determination of portfolio objectives (returns/appreciation)
• Identification of potential investment assets (market analysis)
• Consideration of attributes of investment assets (risk, return)
• Allocation of wealth to asset categories (tentative)
i. Investible fund: The entire investment procedure revolves around the availability of investible funds. The
fund may be generated thru savings or borrowings. If the funds are borrowed, the investor has to be extra
careful in the selection of investment alternatives. The return should be higher than the interest he pays.
ii. The objectives are framed on the premises of the required rate of return, need for regularity of income,
risk perception and the need for liquidity. The risk taker objective is to earn high rate of return in the form of
capital appreciation.
iii. Knowledge: The knowledge about the investment alternatives and markets plays a key role in the policy
formulation. The investment alternatives range from Security to Real Estate. The risk and return associated
with the investment alternatives differ from each other. The investor should be aware of the stock market
structure and functions of the brokers.

2. Investment Valuation:
The valuation helps the investor to determine the return and risk expected from an investment in the
common stock, the intrinsic value of the share and price earnings ratio.
Future Value: Future value of the securities could be estimated by using a simple statistical technique like
trend analysis.
• Valuation of stocks
• Valuation of debentures and bonds
• Valuation of other assets

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3. Investment / Security Analysis
• Economic analysis
• Technical analysis
• Efficient Market Approach
After formulating the investment policy, the securities to be bought have to be scrutinized through the
market, industry & company analysis.
Market analysis: The stock market shows the general economic scenario. The growth in gross domestic
product and inflation are reflected in the stock prices. The stock prices may be fluctuating in the short run
but in the long run they move in trends. Industry analysis: The industries that contribute to the output of the
major segments of the economy vary in their growth rates and their overall contribution to economic
activity. Some industries grow faster than the GDP and are expected to continue in their growth.
Company Analysis: The purpose of company analysis is to help the investors to make better decisions. The
company’s earnings, profitability, operating efficiency, capital structure and management have to be
screened. These factors have a direct bearing on the stock prices and the return of the investors. Appreciation
of the stock value is a function of the performance of the company.
4. Portfolio Construction
• Determination of diversification level
• Consideration of investment timing (boom/depression)
• Selection of investment assets
• Allocation of investible wealth
• Evaluation of portfolio for feedback
A Portfolio is a combination of securities. The portfolio is constructed in such a manner to meet the
investor’s goals and objectives. The investor should decide how best to reach the goals with the securities
available. Towards this end he diversifies his portfolio and allocates funds among the securities.
 Diversification - The main objective of diversification is the reduction of risk in the loss of capital and
income. There are several ways to diversify the portfolio.
 Debt and equity diversification - Both debt instruments and equity are combined to complement each
other.
 Industry diversification – Industries growth and their reaction to government policies differ from each
other. Hence industry diversification is needed, and it reduces risk.
 Company diversification – Securities from different companies are purchased to reduce risk.
 Selection: Based on diversification level, industry and company analyses, the securities have to be
selected.
5.Portfolio Evaluation
The efficient management of portfolio consists of portfolio appraisal and revision.
 Appraisal: The return and risk performance of the security vary from time and time. The developments
in the economy, industry and relevant companies from which the stocks 14 are bought have to be
appraised. The appraisal warns the loss and steps can be taken to avoid such losses.

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 Revision: Revision depends on the results of the appraisal. The low yielding securities with high risk are
replaced with high yielding securities with low risk factor. To keep the return at a particular level
necessitates the investor to revise the components of the portfolio periodically.
 Securities: Security means “a document which represents the investments made by an investor”. There
are two types:
– Creditorship Securities (e.g. Preference, bonds & debentures)
– Ownership Securities (e.g. Equity Shares)

Investment And Speculation

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“Speculation, is an activity, quite contrary to its literal meaning, in which a person assumes high risks, often
without regard for the safety of his invested principal, to achieve large capital gains.”
The time span in which the gain is sought to be made is usually very short.
Investment involves putting money into an asset which is not necessarily in order to enjoy a series of
returns. The investor sacrifices some money today in anticipation of a financial return in future. He indulges
in a bit of speculation. There is an element of speculation involved in all investment decisions.
However, it does not mean that all investments are speculative by nature. Genuine investments are carefully
thought-out decisions. On the other hand, speculative investments are not carefully thought-out decisions.
They are based on tips and rumors. An investment can be distinguished from speculation in three ways–risk,
capital gain and time period. Risk has a definite financial meaning it is a possibility of incurring a loss in a
financial transaction.
Investment involves limited risk while speculation is considered as an investment of funds with high risk.
Speculation involves buying a security at a low price and selling at a high price to make a capital gain.
Investment involves longer-term allocation of funds, while speculation involves holding a security for the
short-term and trading quickly to earn a higher gain. Speculation involves a higher level of risk and a more
uncertain expectation of return. Investments are not risk-free, but the risk can be calculated. The expected
return is consistent with the risk of investment.

Different Types of Investors:

 Conservative investors often invest in cash. THIS means that they put their money in interest bearing
savings accounts, money market accounts, mutual funds, US Treasury bills, and Certificates of Deposit.
These are very safe investments that grow over a long period of time. These are also low risk
investments.
 Moderate investors often invest in cash and bonds and may dabble in the stock market. Moderate
investing may be low or moderate risks. Moderate investors often also invest in real estate, providing
that it is low risk real estate.
 Aggressive investors commonly do most of THEIR investing in the stock market, which is higher risk.
They also tend to invest in business ventures as well as higher risk real estate. For instance, if an
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 aggressive investor puts his or her money into an older apartment building, then invests more money
renovating the property, they are running a risk. They expect to be able to rent the apartments out for
more money than the apartments are currently worth or to sell the entire property for a profit on their
first investments. In some cases, this works out just fine, and in other cases, it doesn't. It's a risk.
Investment Information
 International affairs.
 National affairs.
 Industry information.
 Company information.
 Stock market information

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 Unit- II (12 Periods)
Investment Risk – Systematic Risk – Unsystematic Risk – Business Risk – Measurement of Risk
– Corporate Securities - New Issue Market – Conventional Stock Exchanges – New Stock Exchanges
- Listing of Securities.

Introduction
The dictionary means risk is the possibility of loss or injury; risk is the possibility of not getting the expected
return. The difference between expected return and actual return is called the risk in investment. Investment
situations may be high-risk, medium and low-risk investment.
2.1.1 Elements Of Risk
The components of risk are broadly two groups:
Systematic risks
Unsystematic risks
Systematic risks
The systematic risks are caused by factors external to the particular company and uncontrollable by the
company. The systematic risk affects the market as a whole. It refers to that part of the total variability of the
return caused by common factors affecting the prices of all securities alike through economic, political and
social factors.
Unsystematic risks
In case of unsystematic risks, the factors are specific, unique and related to the particular industry or
company. It refers to that part of the total variability of the return caused due to unique factors relating to
that firm or industry, through such factors as management failure, labor strikes, raw material scarcity, etc.
2.1.2 Sources of Risk
Sources of risk are discussed in the paragraphs given below:
Interest rate risk
Interest rate risk is the variation in the single period rates of return caused by the fluctuations in the market
interest rate. Most commonly, the interest rate risk affects the debt securities like bonds and debentures.
Market risk
Jack Clark Francis has defined market risk as that portion of total variability of return caused by the
alternating forces of bull and bear market. This is a type of systematic risk that affects the share market
price. Shares move up and down consistently for some period of time.

Purchasing power risk

Another type of systematic risk is the purchasing power risk. It refers to the variation in investor return
caused by inflation.
Business risk
Every company operates within a particular operating environment; the operating environment comprises
both the internal environment within the firm and external environment outside the firm.
Business risk is thus a function of the operating conditions faced by a company and is the variability in
operating income caused by the operating conditions of the company.
Financial risk
It refers to the variability of the income to the equity capital due to the debt capital. Financial risk in a
company is associated with the capital structure of the company. The debt in the capital structure creates
fixed payments in the form of interest. This creates more variability in the earnings per share available to
equity shareholders. This variability of return is called financial risk, and it is a type of unsystematic risk.
Liquidity risk
While there is almost always a ready market for government bonds, corporate bonds are sometimes entirely
different animals. There is a risk that an investor might not be able to sell his or her corporate bonds quickly
due to a thin market with few buyers and sellers for the bond. Low interest in a particular bond issue can
lead to substantial price volatility and possibly have an adverse impact on a bondholder’s total return (upon
sale). Much like stocks that trade in a thin market, you may be forced to take a much lower price than
expected to sell your position in the bond.
Exchange rate risk
It is the uncertainty of returns to an investor who acquires securities denominated in a currency different
from his or her own. The likelihood of incurring this risk is becoming greater as investors buy and sell assets
around the world, as opposed to only assets within their own countries. A U.S. investor who buys Japanese
stock denominated in yen must consider not only the uncertainty of the return in yen, but also any change in
the exchange value of the yen relative to the U.S. dollar. That is, in addition to the foreign firm’s business
and financial risk and the security’s liquidity risk, the investor must consider the additional uncertainty of
the return on this Japanese stock, when it is converted from yen to U.S. dollars.
Country risk
It is also called political risk. It is the uncertainty of returns caused by the possibility of a major change in
the political or economic environment of a country. The United States is acknowledged to have the smallest
country risk in the world, because its political and economic systems are the most stable. During the spring
of 2011, prevailing examples include the deadly rebellion in Libya against Muammar Gadhafi; a major
uprising in Syria against President Bashar al-Assad; and significant protests in Yemen against President Ali
Abdullah Saleh. In addition, there has been a recent deadly earthquake and tsunami in Japan that is
disturbing numerous global corporations and the currency markets. Individuals who invest in countries that
have unstable political or economic systems must add a country risk premium when determining their
required rates of return.
Definition of New Issue:
A new issue is a stock or bond that is being sold to investors for the first time. This new issue can be an
Initial Public Offering (IPO) of a company, or it can be a new issue floated by an organization that has
floated many such issues in the past. The market that deals with these new issues is called the primary
market, as opposed to the secondary market that deals with existing shares and bonds.
Function of the New Issue Market:
Role / Functions of Primary Market
o Origination: It deals with the origin of the new issue. The proposal is analyzed in terms of the
nature of the security, the size of the issue, timing of the issue and floatation method of issue.
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o Underwriting: It is a contract that makes the subscription of share predictable and removes the element
of uncertainty in the subscription.
o Distribution: It refers to the sale of securities to investors. This is carried out with the help of the lead
managers & brokers to the issue.
Now, the main function of the New Issue Market, i.e. channeling of investible funds, can be divided, from
the operational standpoint, into a triple-service function:

(a) Origination
(b) Underwriting
(c) Distribution
(a) Origination:
Origination refers to the work of investigation and analysis and processing of new proposals. This in turn
may be:
(i) A preliminary investigation undertaken by the sponsors (specialized agencies) of the issue. This
involves a/careful study of the technical, economic, financial and/legal aspects of the issuing
companies to ensure that/it warrants the backing of the issue house.
(ii) Services of an advisory nature which go to improve the quality of capital issues. These services
include/advice on such aspects of capital issues as: determination of the class of security to
be/issued and price of the issue in terms of market conditions; the timing and magnitude of issues;
method of flotation; and technique of selling and so on.
(b) Underwriting:
Underwriting entails an agreement whereby a person/organization agrees to take a specified number of
shares or debentures, or a specified amount of stock offered to the public in the event of the public not
subscribing to it, in consideration of a commission the underwriting commission.
(c) Distribution:
The sale of securities to the ultimate investors is referred to as distribution; it is another specialized job,
which can be performed by brokers and dealers in securities who maintain regular and direct contact with
the ultimate investors. The ability of the New Issue Market to cope with the growing requirements of the
expanding corporate sector would depend on this triple-service function.
Financial Market
Mechanism that allows people to buy and sell financial securities (such as shares & bonds) and items of
value at low transaction cost.
Markets work by placing many interested buyers and sellers in one place, thus making it easier for them to
find each other.
Participants In Financial Market
 Borrower: Issues a receipt to lender promising to pay back capital
 Individuals – e.g. Bank loans, mortgages
 Companies - for short term or long-term cash flows or future business expansion

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 Government - for public expenditure, or on behalf of nationalized industries, municipalities or other
public sector bodies
 Public corporations- e.g. postal services, railways and utility companies
 Lender: Will expect some compensation in the form of interest or dividend, in return. Lender could be.
- Individuals
- Companies
- Government
Segments of Financial Market
The eight major market segments listed below can help fund-raisers differentiate financial behavior patterns
of investors at various socio-economic levels:
 Wealth Market
 Upscale Retired
 Upper Affluent
 Lower Affluent
 Mass Market
 Mid-scale Retired.
 Lower Market
 Downscale Retired
Types of Financial Market
1. Capital Market
 Stock Markets - which provide financing through the issue of shares or common stock and enable
subsequent trading.
 Bond Markets - which provide financing through the issuance of bonds, enable subsequent trading.
 Commodity Markets - which facilitate trading of commodities.
 Money Markets - which provide short-term debt financing and investment.
 Derivative Markets – which provide instruments for the management of financial risk.
 Insurance Markets - which facilitate redistribution of various risk.
 Foreign Exchange Markets - which facilitate trading of foreign exchange.
2. Primary Market
New Issue Market
Stocks available for the first time are offered through a new issue market. The issuer may be a
new company or an existing company.
The objectives of a capital issue are given below:
 To start a new company.
 To expand an existing company.
 To diversify production.
 To meet the regular working capital requirements.
 To capitalize the reserves.
Relationship Between the Primary & Secondary Market

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 The new issue market cannot function without the secondary market. The secondary market or the stock
market provides liquidity for the issued securities.
 The stock exchanges, through their listing requirements, exercise control over the primary market.
 The primary market provides a direct link between the prospective investors and the company.
 The health of a primary market depends on the secondary market and vice versa.
Parties Involved in New Issue
1. Managers to the issue: Lead Managers are appointed by the company to manage the public issue
programs. Their main duties are.
a. drafting of prospectus
b. preparing the budget of expenses related to the issue.
c. suggesting the appropriate timings of the public issue
d. assisting in marketing the public issue successfully
e. advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to
the issue, advertising agency etc.
f. directing the various agencies in the issue.
2. Registrar to the issue:
After the appointment of the lead managers of the issue, in consultation with them, the registrar for the issue
is appointed.
The Registrar normally receives the share application from various collection centers.
3. Underwriters:
Underwriting is a contract by means of which a person gives an assurance to the issuer to the effect that the
former would subscribe to the securities offered in the event of non-subscription by the person to whom they
were offered. The person who assures is called an underwriter. The underwriters do not buy and sell
securities. They stand as back-up supporters and underwriting is done for a commission.
Underwriters are divided into 2 categories:
- Financial institutions and banks, &
- Brokers & approved investment companies
Some of the underwriters are financial institutions, commercial banks, merchant bankers, members of the
stock exchange, export & import bank of India, State Bank of India etc.
4. Bankers to the issue:
They have the responsibility of collecting the application money along with the application form. The
bankers to the issue generally charge a commission besides the brokerage of the issue.
Depending on the size of the issue, more than one banker to the issue is appointed. When the size of the
issue is large three or four bankers are appointed as bankers to the issue. The number of collection centers is
specified by the central government.
5. Advertising agencies:

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Advertising plays a key role in promoting public issues. The advertising agencies take the responsibility of
giving publicity to the issue on the suitable media. The media may be newspapers/ magazines/
hoardings/press release or a combination of all.
6. Financial Institutions:
Financial institutions generally underwrite the issue and lend term loans to the companies. Hence, normally
they go through the draft of prospectus, study the proposed programs for the public issue and approve them.
IDBI, IFCI and ICICI, LIC, GIC and UTI are some of the institutions that underwrite and give financial
assistance.
Methods Of Floating New Issues: -
The various methods which are used in the floating of securities in the new issue market are:
Public issues Offer for sale Placement Right issues.
i. Public issues or Initial public offering (IPO) The issuing company directly offers to the general
public/institutions a fixed number of securities at a stated price or price band through a document
called prospectus. This is the most common method followed by companies to raise capital through
issue of the securities.
ii. Offer of sale consists of outright sale of securities through the intermediary of issue houses or share
brokers. It consists of two stages: the first stage is a direct sale by the issuing company to the issue
house and brokers at an agreed price. In the second stage, the intermediaries resell the above securities
to the ultimate investors. The issue houses purchase the securities at a negotiated price and resell at a
higher price. The difference in the purchase and sale price is called turn or spread.
iii. Right Issue When a listed company proposes to issue securities to its existing shareholders, whose
names appear in the register of members on record date, in the proportion to their existing holding,
through an offer document, such issues are called ‘Right Issue’. This mode of raising capital is best
suited when the dilution of controlling interest is not intended.
iv. Private placement involves the sale of securities to a limited number of sophisticated investors such as
financial institutions, mutual funds, venture capital funds, banks, and so on. It refers to the sale of
equity or equity related instruments of an unlisted company or sale of debentures of a listed or
unlisted company.
v. Preferential Issue An issue of equity by a listed company to selected investors at a price which may or
may not be related to the prevailing market price is referred to as preferential allotment in the Indian
capital market. In India preferential allotment is given mainly to promoters or friendly investors to
ward off the threat of takeover.
vi. Fixed Price Process The price which has been fixed by the company for its securities before issue is
brought to the market. The price at which the securities are offered/allotted is known in advance to the
investor. Demand for the securities offered is known only after the closure of the issue. Payment is
made at the time of subscription whereas a refund is given after allotment.
vii. Book-Building/Price Band It is a process used for marketing a public offer of equity shares of a
company. Book building is a process wherein the issue price of a security is determined by the
demand and supply forces in the capital market The Price at which securities will be allotted is not
known in advance to the investor. Only an indicative price range is known. (Also called price band
and it should not be more than 20% of the floor price).

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 BASIS FOR COMPARISON IPO FPO

Meaning IPO refers to an offer of securities FPO refers to an offer of securities

made to the public for subscription for subscription to the public by a
by the company for the first time publicly traded enterprise

Issuer Unlisted company Listed company

Raising Capital Through the first time from public Through a subsequent public
contribution

Risk High Comparatively low

Objective The main objective is raising The main objective is subsequent

capital through public investment public investment
Predictability Less predictable More predictable

Profit Higher than FPO Lower than IPO

Types Equity shares and Preferred shares Dilutive offering and non-dilutive
offering
viii. Listing of Securities Listing means admission of the securities to dealings on a recognized stock
exchange. The securities may be of any public limited company, central or state government, quasi-
governmental and other financial institutions/corporations, municipalities etc.

Players in New issue market:

The main agencies involved in the public issue are managers to the issue, registrars to the issue,
underwriters, bankers, advertising agencies, financial institutions and government/statutory agencies.
Managers to the issue: Lead managers are appointed by the company to manage the public issue programs.
Their main duties are (a) drafting of prospectus (b) preparing the budget of expenses related to the issue (c)
suggesting the appropriate timings of the public issue (d) assisting in marketing the public issue successfully
(e) advising the company in the appointment of registrars to the issue, underwriters, brokers, bankers to the
issue, advertising agents etc. and
(f) directing the various agencies involved in the public issue. There are many agencies which are
performing the role of lead managers to the issue. The merchant banking division of the financial
institutions, subsidiary of commercial banks, foreign banks, private sector banks and private agencies are
available to act as lead managers.
Registrar to the issue: In consultation with the lead manager, the Registrar to the issue is appointed.
Quotations containing the details of the various functions they would be performing and charges for them
are called for selection. Among them the most suitable one is selected. It is always ensured that the registrar
to the issue has the necessary infrastructure like computer, internet and telephone.
The Registrars to the issue normally receive the share application from various collection centers. They
recommend the basis of allotment in consultation with the Regional Stock Exchange for approval. They
arrange for the dispatching of the share certificates. They handover the details of the share allocation and
other related registers to the company. Usually, registrars to the issue retain the issuer records for at least for

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a period of six months from the last date of dispatch of letters of allotment to enable the investors to
approach the registrars for redressal of their complaints.
Underwriters: Underwriter is a person/organization who gives an assurance to the issuer to the effect that
the former would subscribe to the securities offered in the event of non-subscription by the person to whom
they were offered. They stand as back-up supporters and underwriting is done for a commission.
Underwriting provides insurance against the possibility of inadequate subscription. Some of the underwriters
are financial institutions, commercial banks, merchant bankers, members of the stock exchange, Export and
Import Bank of India etc. The underwriters are exposed to the risk of non-subscription and for such risk
exposure they are paid an underwriting commission.
When appointing an underwriter, the financial strength of the prospective underwriter is considered because
he has to undertake the agreed non-subscribed portion of the public issue.
The other aspects considered are.
a. experience in the primary market
b. past underwriting performance and default
c. outstanding underwriting commitment
d. the network of investor clientele of the underwriter and
e. his overall reputation.
Bankers to the issue: The responsibility of collecting the application money along with the application
form is on bankers to the issue. The bankers charge commission besides the brokerage, if any. Depending
upon the size of the public issue more than one banker to the issue is appointed. When the size of the issue is
large, three or four banks are appointed as bankers to the issue. The number of collection centers is specified
by the central government. The bankers to the issue should have branches in the specified collection centers.
In big or metropolitan cities more than one branch of the various bankers to the issue are designated as
collecting branch for acceptance of money. To create investment awareness in the minds of the people
collecting branches are designated in the different towns of the state where the project is being set up. If the
collection centers for application money are located nearby people are likely to invest the money in the
company shares.

Advertising agents: Advertising a public issue is very essential for its promotion. Hence, the past track
record of the advertising agency is studied carefully. Tentative programs of each advertising agency along
with the estimated cost are called for. After comparing the effectiveness and cost of each program with the
other, a suitable advertising agency is selected in consultation with the lead managers to the issue. The
advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media
may be newspapers /magazines/ hoardings/press release or a combination of all.
The financial institutions: The function of underwriting is generally performed by financial institutions.
Therefore, normally they go through the draft of prospectus, study the proposed program for public issue
and approve them. IDBI, IFCI, ICICI, LIC, GIC and UTI are the some of the financial institutions that
underwrite and give financial assistance. The lead manager sends copy of the draft prospectus to the
financial institutions and include their comments, if any in the revised draft.
Regulatory bodies: The various regulatory bodies related with the public issue are:
1. Securities Exchange Board of India

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 2. Registrar of companies
3. Reserve Bank of India (if the project involves foreign investment)
4. Stock Exchanges where the issue is going to be listed.
5. Industrial licensing authorities
6. Pollution control authorities (clearance for the project has to be stated in the prospectus)
Collection centers: There should be at least 20 mandatory collection centers inclusive of the places where
stock exchanges are located. If the issue does not exceed Rs. 10 cr (excluding premium if any) the
mandatory collection centers are the four metropolitan centers viz. Mumbai, Delhi, Calcutta and Chennai
and at all such centers where stock exchanges are located in the region in which the registered office of the
company is situated.
In addition to the collection branch, authorized collection agents may also be appointed. The names and
addresses of such agent should be given in the offer documents. The collection agents are permitted to
collect such application money in the form of cheques, draft, stock invests and not in the form of cash. The
application money collected should be deposited in the special share application account with the
designated scheduled bank either on the same day or latest by the next working day.

Types Of Underwriting
Different types of underwriting are as follows:
1. Firm underwriting: Firm underwriting is an underwriting agreement where an underwriter agrees
to buy a definite number of shares or debentures in addition to the shares or debentures, he has
already promised to subscribe to under the underwriting agreement. In firm underwriting, the
underwriters are liable to take up the agreed number of shares or debentures even if the issue is over
subscribed.
2. Complete underwriting: When the whole issue of shares or debentures of a company is
underwritten, it is called complete underwriting. In such a case the whole issue is underwritten either
by an individual/institution agreeing to take the entire risk or by a number of firms or institutions,
each agreeing to take the risk to a limited extent.
3. Partial underwriting. When only a part of the issue of shares or debentures of a company is
underwritten, it is known as partial underwriting. In such a case the part of the issue is underwritten
either by an individual/institution or by a number of firms or institutions each agreeing to take the
risk to a limited extent.
4. Syndicate Underwriting: When the issue is very big, and it is impossible to be underwritten by a
single underwriter syndicate underwriting comes to rescue. In syndicate underwriting, a few
underwriting firms form a syndicate and jointly undertake to underwrite the issue. The amount to be
underwritten and the ratio is determined in advance among the firms.
5. Joint Underwriting: In Joint underwriting, when the issue is too large, the issuer company itself
appoints more than one underwriter to reduce the burden from a single underwriter. Each
Underwriter underwrites for a specified amount and in a specified ratio. It is different from a
syndicate underwriting in a way that in Syndicate underwriting the underwriting firm themselves
form a syndicate and represent themselves as single underwriting firm but in Joint underwriting, the
issuer company itself appoint a number of firms to underwrite the issue.

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 6. Sub-underwriting: If an underwriter has promised to underwrite an issue and later on it feels that it
is beyond his individual capacity, then he may appoint a sub-underwriter to safeguard himself. For
example, if an underwriter A has underwritten for an amount of 40 crores, and later on he finds it
difficult to underwrite single Handedly he may appoint a sub- underwriter to underwrite 10 crores. In
this case, the sub-underwriter is liable to underwriter only and he has no connection with the
company. the relationship between underwriter and sub-underwriter is same as an agent and sub-
agent.
The importance of underwriting can further be highlighted from the following functions performed
by the underwriters:
1. Assurance of Adequate Finance:
Underwriting is an act of undertaking guarantee by an underwriter to buy and pay for the shares or
debentures placed before the public in the event of their non-subscription. Thus, through underwriting, an
issuing company is assured of procuring the required funds from the issue of shares or debentures.
In the event of non-subscription by the public, underwriters purchase the unsubscribed part of the issue and
provide finance to the company.
2. Supplying Valuable Information to Companies:
In addition to the protection of risk of the issuing companies with regard to the success of the issue, the
underwriters supply valuable information in regard to capital market conditions, general response of the
investors, etc. to the issuing companies. These companies are, usually, benefited from the expert advice of
the underwriters.
3. Distribution of Securities:
After purchasing securities, underwriters distribute the same to the real investors. The underwriters, through
agents and others diffuse the issue over a large number of investors scattered in different part of the country.
Thus, underwriting helps promoters to retain control over the management of the company.
4. Increase in Goodwill of the Issuing Company:
The underwriting of capital issues by prestigious institutions generates confidence among investors and
improves their response to the issues. Investors in advanced countries are influenced more by the prestige of
the underwriting agencies than by the prestige of the issuing company. Underwriting, thus, ultimately
increases the goodwill of the issuing company.
5. Service to Prospective Investors:
Underwriters provide essential information about the issuing companies to the prospective investors and also
advise them about various issues. They encourage people to save more and direct their savings in corporate
securities. Thus, investors are also benefited through underwriting.
6. Service to the Society:
The pace of industrialization of a country depends to a great extent upon the successful flotation of capital
issues. By mobilizing resources and providing adequate finance, underwriters play a very important role in
setting up of new projects, increasing employment, production and per capita income. Thus, it is not only the
corporate enterprises but also the society at large which is benefited by underwriting.
Advantages of primary market or the new issue market

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1. It provides opportunity for new investors to start new enterprises: Persons with technical know-how
may resort to promote new ventures which are profit oriented. The new issue market gives them an
opportunity to materialize their ideas.
2. Existing companies will be in a position to expand their activities: When the existing companies find
their products obsolete, they would like to venture into new areas of production for which they require
additional capital. The new issue market helps them raise the required funds.
3. Promotion of partnership firm into Public Limited companies or merger of companies or facilitates
buy-back of shares: When new ventures are started, a management may wish to have a control on the
ownership and for this purpose, they would like to enter into a buy-back arrangement. By this
arrangement, the shares will be issued to a group of persons (NRIs) for a specific period after which they
will be bought back from out of the profits. This ensures the retention of ownership and prevents any
change in management.
Classification of securities in Primary Market:
Securities dealt in the new issue market or primary market are classified as
1. Equity Shares.
2. Preference Shares.
3. Debentures.
1. Equity shares: These are shares issued by companies for raising capital. The owners of these shares are
shareholders. Normally, the face value of the shares may be Rs.10 or Rs.100. A group of fully paid
shares are called stock, and these can be transferred. The shareholders are entitled to profits, which are
distributed to them in the form of dividends. The share capital will be refunded to them only during the
winding up of the company, provided the company has sufficient assets.
2. Preference shares: Preference shares are similar to equity shares but are given on a preference basis to
certain shareholders like promoters, auditors, etc. There are cumulative, non- cumulative, participating,
redeemable, irredeemable, convertible and non-convertible preference shares. Preference shareholders
will get the first preference in the distribution of dividend over equity shareholders. The same condition
applies in the repayment of capital at the time of winding up.
3. Debentures: It is a loan obtained by the company from the public for a fixed interest rate for a fixed
period. Those investors who do not want to take any risks will prefer debentures as they have less risk
on the repayment compared to shares. There are debentures which have mortgage charge on the assets of
the company and these debenture holders are assured of repayment.
Listing of Securities
Listing means the admission of securities of a company to trading on a stock exchange. Listing is not
compulsory under the Companies Act. It becomes necessary when a public limited company desires to
issue shares or debentures to the public. When securities are listed in a stock exchange, the company has
to comply with the requirements of the exchange.
Objectives of Listing
The major objectives of listing are.
1. To provide ready marketability and liquidity of a company’s securities.
2. To provide free negotiability to stocks.

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3. To protect shareholders and investors’ interests.
4. To provide a mechanism for effective control and supervision of trading.
Shares Listing Procedure
According to Regulation 4(2) of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, no
issuer shall make a public issue or rights issue of securities unless they make an application to one or more
recognized stock exchanges and had chosen one of them as a designated stock exchange.
In the case of Initial Public offer, it is required for the issuer to make an application for Shares Listing in at
least one recognized stock exchange having nationwide trading terminals.
Conditions
The company has to follow specified conditions before Shares listing in stock exchange:
 Shares of a company shall be offered to the public through the prospectus, and 25% of securities must
be offered.
 Date of opening of subscription, receipt of the application and other details should be mentioned in the
prospectus.
 The capital structure of the company should be wide, and the securities of the company should be in
the public interest.
 The requirement for the Minimum issued is Rs. 3 Crores out of which 1.8 Crore must be offered to the
public.
 There is a requirement for at least 5 public shareholders in respect of every Rs. 1 Lakh of fresh issue of
capital and 10 shareholders for every Rs.1 lakh of the offer of existing capital.
 In the case of excess application money, the company has to pay interest within the range of 4% to 15%
in case there is a delay in the refund and delay should not be more than 10 weeks from the date of
closure of subscription list.
 The company has paid-up share capital of more than Rs. 5 crores should get registered in the
recognized stock exchange and compulsorily on the regional stock exchange.
 The auditor or secretary of the company has to declare that share certificate has been stamped for
listing so that shares belonging to promoter’s quota cannot be sold or transferred for 5 years.
 Letter of allotment, Letter of regret and letter of a right shall be issued.
 Receipts for all securities deposited either by way of registration or split.
 Consolidation and renewal certificates will be issued for a certificate of the division, letter of allotment,
transfer, and letter of rights, etc.
 The company has to notify the stock exchange regarding the board meeting, changes in the
composition of the board of directors and the case of the new issue of securities in place of a reissue of
forfeited shares.
 Due notice should be given to the stock exchange for closing transfer books for a declaration of
dividend, rights issue or bonus issue.
 After the annual general meeting, the annual return is required to be filed.
 The company is required to comply with the conditions imposed by the stock exchange for the listing
of security.
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Different Types of Listing of Securities
 Initial Listing
In this case shares of the company are listed for the first time on the stock exchange.
 Public issue
The company who has listed its shares on a stock market comes out with a public issue.
 Right Issue
The company who has listed its shares in a stock exchange issue shares to its existing shareholders.
 Bonus Shares
When a listed company issue bonus shares to its existing shareholders for capitalizing its profits.
 Listing for merger or amalgamation
The amalgamated company issues new shares to the shareholders of the merged company, and these
new shares are listed.
Procedure for Listing Requirements
Public Company has to submit the following documents to Shares Listing in stock exchange:
 Certified copy of Memorandum & Article of Association.
 Prospectus & agreement with underwriters.
 Details of Capital Structure.
 Copies of an advertisement offering securities during the last 5 years.
 Copies of financial statement & auditor’s report for the last 5 years.
 Copy of shares & debentures, letter of allotment and letter of regret.
 Details of the company since incorporation including changes in the capital structure, borrowings, etc.
 Details of shares or debentures issued for consideration other than cash.
 A statement defining the distribution of shares and other details related to the commission, brokerage,
discounts, or terms related to the issue of shares.
 Agreement with a financial institution, if any.
 Details of shares forfeited.
 Details of securities about which permission to deal with are applied for.
 A copy of consent from SEBI.
ADVANTAGES OF LISTING
The advantages of listing can be summarized under two heads namely,
1. Advantages to company management.
2. Advantages to the investors.

ADVANTAGES TO THE COMPANY MANAGEMENT

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 1. It gives the management and the company a higher status and facilitates expansion programs.
2. Such companies can raise finance very easily.
3. Listed companies are eligible for certain fiscal advantages such as concessional rate of income tax,
benefits of carry forward and set off of losses of the earlier years etc.
4. Such companies are better placed while approaching the SEBI for its consent under any of the
provisions of the SEBI Act.
5. Listed companies are treated favorably by the financial institutions and commercial banks when they
approach them for short-term and long-term accommodations.
ADVANTAGES TO THE INVESTORS
1. Listing makes the securities more prestigious and enhances their marketability. Hence, the holders of
such securities can convert their holdings without any difficulty in t times of need.
2. The security prices are regularly published in the financial newspapers and periodicals. Hence, the
investors can sell their holdings at the current market price.
3. Such securities generally fetch higher prices.
4. Holders of listed securities are eligible for certain concessions in matters relating to Income Tax, Wealth
Tax etc. in their capacity as assesses.
5. Listed securities enjoy more public confidence. Hence, they have high collateral value. The bankers will
readily accept such securities for providing loans and other accommodations.
6. Listed companies should make a fair disclosure of certain information and so the investors are given a
reasonable opportunity of judging the merits of the concern.
7. Listed securities ensure safety to the funds of the investors.
Disadvantages Of Listing
Listing, however, is not free from defects. The procedure of listing has certain definite limitations and
disadvantages. Some of the inherent limitations of listing are given below:
1. Listing makes people depend upon share brokers, jobbers etc. Many of them are weak speculators and
frequently put their clients into difficulties. They create violent price fluctuations.
2. Securities, which are unable to have a stable value, shall lose their prestige and fell down in the esteem of
the investors and bankers.
3. The management is also induced to show keen interest in the price movements for personal gains. They
may take advantage of their inside knowledge and indulge in speculation.
4. The free negotiability of securities enables a few interested people to buy a substantial portion of the
securities and thereby capture the management of the company.
5. The company should furnish certain information in detail. Such a detailed disclosure may even injure the
prospects of the company.

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 Unit- III ………………………………………………………………………………………………………………

Security market indicators – Securities and Exchange Board of India – Objectives – Functions – SEBI Guidelines

Secondary Market
 The market for long-term securities like Bonds, Equities, Stocks and Preferred stocks is divided into
Primary and Secondary markets.
 The primary market deals with the new issue securities.
 Outstanding securities are traded in the secondary markets, which is commonly known as stock market
or stock exchange market.
 In the secondary market, investors can sell and buy securities.
 Stock markets predominantly deal in the equity shares.
 Debt instruments like bonds debentures are also traded in the stock market.
 Growth of the primary market depends on the secondary market.
History of Stock Exchanges in India
 The origin of stock exchange in India can be traced back to the 19th century.
 After civil war between1860-61, the number of brokers dealing in shares increased.
 The brokers organized an informal association in Mumbai named “The Native Stock and
 Share Brokers Association” in 1875. 21
 Securities and Contract Regulation Act 1956, (SCR) gave powers to the Central Govt. to regulate the
stock exchanges.
 The stock exchanges in Mumbai, Kolkatta, Chennai, Ahmedabad, Delhi, Hyderabad and Indore were
recognized by SCR Act.
 At present, we have 23 stock exchanges in India.
Stock Exchanges In India:
It is an organized market for the purchase and sale of industrial and financial security. It is also known as
Secondary market or stock market
Functions Of Stock Exchanges
1. Ensure Liquidity of Capital: The stock exchanges provide a place where shares and stocks are converted
in to cash.
2. Continuous Market for securities: The stock exchanges provide a ready market for securities.
3. Evaluation of securities: The investors can evaluate the worth of their holdings from the prices quoted at
different exchanges for those securities.
4. Mobilizing surplus savings: Ready market-The investors do not have any difficulty in investing their
savings by purchasing shares, bonds etc., from the exchanges.
5. Helpful in raising New capital: The new concerns raise the capital for the first time and existing concerns
increase their capital
6. Safety in Dealings: Rules governed by Securities contract(Regulation ) Act, 1956

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7. Listing of Securities: Listed securities can purchase in market
8. Platform for public debt: Stock exchanges for organized markets of government securities
9. Clearing House of Business Information: The listed companies must provide financial statements, annual
reports etc.,
Stock Exchanges in India
1. Bombay stock Exchange (BSE)
¸ It is the oldest stock exchange in Asia
¸ It has established as The Native share and stock Brokers in 1875
Features of BSE
¸ Largest stock Exchange in Asia
¸ Fifth largest stock market in the world
¸ More than 6, 000 Indian companies are listed in BSE
¸ It used BOLT ( BSE online Trading system) as the stock trading system in the world
OTCEI
 ¸ It started in oct 1990
 ¸ It uses the model as NASDAQ ( National association of security Dealers automated Quotations)
Features of OTCEI
 Ringless Trading: Screen based trading
 National network: wide network and grater liquidity
 Totally computerized: Transparent and quick market
 Exclusive List of companies: Exclude other stock exchange companies
 Two ways of making a public offer:
 Direct offer : offer shares directly to public
 Indirect offer: offer shares indirectly to public ie., to sponsors
 Fast Transfers: fast settlement called counter receipt
 Trading Mechanism: Export and Import Shares. The parties are Investor, counter, settler registered
custodian, company and bank
Objectives of OTCEI
 ¸ To provide a nation wide investor base to small companies
 ¸ To encourage public issues
 ¸ To enable small companies to raise capital at low cost
 ¸ To offer quick settlement and transparent facilities
 ¸ To provide a single trading platform for investors
Benefits of OTCEI To Investors:
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 ¸ Easy Accessibility
 ¸ Improved Liquidity
 ¸ Transparency
 ¸ Immediate transfer of shares
 ¸ Speedy settlement of Trades
Benefits for Issuing companies:
 ¸ Low cost of Issuing shares
 ¸ Beneficial for small companies
 ¸ Benefit on account of the image Market maker
3. NSE(National Stock Exchange)
NSE was promoted by IDBI, ICICI, IFCI, GIC, LIC, State bank of India, SBI capital
markets limited, SHCIL and IL & FS as a joint stock company under the companies Act 1956.
Features of NSE
 ¸ India s largest exchange
 ¸ Equity capital : 25 crores
 ¸ Head quarters in Mumbai and back office in Chennai
 ¸ It is a joint stock company and tax paying company
 ¸ Strict in disclosure and listing norms
Advantages of NSE
 ¸ Wider accessibility
 ¸ Screen based trading
 ¸ Non disclosure of trading members identity
 ¸ Transparent of transactions
 ¸ Matching of orders
 ¸ Effective settlement of corporate benefit
 ¸ Trading in dematerialized form
 ¸ SGL ( subsidiary General Ledger) facility in debt market
ISE ( Inter connected Stock Exchange)
¸ It is a national level stock exchange, providing trading, clearing, settlement, risk management and
surveillance support to its trading members.
¸ Aims to address small companies
Features of ISE
 ¸ Accountability

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 ¸ Integrity
 ¸ Innovation
 ¸ Knowledge
ß ISE
 ¸ It has 841 trading members
 ¸ It has floated ISS ( Interconnected Securities & services limited)
 ¸ Trading members of ISE can access NSE & BSE by registering themselves as sub
 brokers of ISS
Features of ISE
 ¸ Accountability
 ¸ Integrity
 ¸ Innovation
 ¸ Knowledge
Functions of ISE
 ¸ Create a single integrated national level solution by high cost services
 ¸ Create markets for listed companies and small capital companies in particular
 ¸ Optimally utilizing the existing infrastructure
 ¸ Provide clear settlements
Advantages of ISE
 ¸ Moderate fees
 ¸ Easy compliance
 ¸ Improved visibility
 ¸ Infrastructure
 ¸ IPO distribution system- Primary market
 ¸ Additional facility
 ¸ Investor Protection
 ¸ Website
Relationship between NSE & OTCEI
 Ringless No trading floor
 Screen based trading- computerized
 Transparency-can check the exact price
2.9 Trading System In Stock Exchanges
 ¸ Finding a broker
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 ¸ Opening an account with broker
 ¸ Placing the order
 ¸ Making the contact
 ¸ Preparing contact note
¸ Settlement of transaction
1. Finding a broker
The shares are brought through a stock broker who is a licensed member of a recognised stock exchange.
Services
1. Provide in formations: capital structures, earnings, dividend policies and prospects
2. Supply investment Literature: Education to investors, providing financial periodicals, prospectus and
reports of companies
3. Availability of competent Representatives:
appointing sufficient incharges
2. Opening an account with the broker:
The broker opens an account in the name of the protectiveness client only if the broker is satisfied about the
creditworthiness of the investors and his intention to trade in the market. 3. Placing the orders
a. Market orders- urgent desire
b. Limit orders: Maximum or minimum price at which the investors is willing to buy or sell shares
c. Stop loss orders: conditional market order to stop loss
d. Cancel order: Execute immediately
e. Discretionary order: Execution for the best
f. Open order: No time or limit for the execution
g. Fixed price order: client specifies the price at which the shares are to be purchased
h. Other orders
¸ Day orders: Unless registration
¸ Good Till cancelled(GTC) Order: Order remains open until executed or cancelled.
¸ Not held order: Gives discretion to the floor brokers
¸ Participate but do not Initiate (PNI): The floor brokers is instructed to participate in trading but not to
become aggressive
All or None Order (AON): The order wants to be executed by customer
Fill or kill order(FOK): Complete execution
Immediate or cancel(IOC): Part of the order which is not executed will be cancelled
3. Making the contract : Announcement by slip in a box
4. Preparing Contact note: Parties will record all details in contract
5. Settlement of Transaction: Settlement by the payment of buyers
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Contracts:
1. Ready Delivery contracts: Immediate delivery of contacts and cash payment
2. Forward Delivery contacts: carrying over the transactions to the next settlement day
Settlements:
1. Fixed settlement:
It starts on a particular day and ends after five days
2. Rolling settlement:
fifth working day settlement
Trading on margin
It refers to the use of borrowed funds to supplement the investor's own money. Investors will do Partial
money settlement by own and part from broker
Advantages
¸ It provides more profit with less investment
¸ Increases buying power
¸ Suitable for experienced traders
Short selling:
It s the practice of selling borrowed securities.
Advantages
¸ Profit and price decline
¸ It became as highly conservative investment strategy
Trades settlement in Stock Market
Fixed settlement system: The BSE had a settlement cycle of Monday to Friday and NSE from Wednesday to
Tuesday.
Transactions can be carried forward for 15 day period to a maximum of 90 days
Rolling settlement system: The settlement takes place ‘n’ day’s after the trading day. The shares bought &
sold are paid in for ‘n’ days after the trading day after a particular transaction.
The rolling settlement cycle is noted by, t+n days

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