This presentation gives an overview of the basics of Security Analysis and Portfolio Management

1. Security Analysis and Portfolio
Management
By
Dr. Vinita Kalra

2. Investment
• Movement of funds from Surplus Sector to
Deficit Sector
• When a person has more money than he
requires for current consumption, he would
be a potential investor.
• Definition: “The process of sacrificing
something now for the purpose of gaining
something later.”

3. Dimensions of Investment
• Sacrifice – Today
• Gain – Later
• Time

4. Different views..
• Layman – Monetary Commitment
• Economist – Net Addition made to the
nation’s capital stock that consists of goods
and services that are used in the production
process.
• Financial investment is the allocation of
money to assets that are expected to yield
some gain over a period of time.

5. Features of Investment
• Return
• Risk
• Time Period
• Liquidity / Marketability
• Safety

6. Objectives of Investment
• Maximization of Return
1. Annual Income (Dividend, Interest etc)
2. Capital Appreciation
• Minimization of Risk
• Liquidity
• Hedge against Inflation
• Tax Considerations

7. Other…
• Near-Term High Priority Goals
• Long-Term High Priority Goals
• Low Priority Goals
• Entrepreneurial or Money - Making Goals

8. Features of an Ideal Investment
• Safety
• Liquidity
• Regularity and Stability of Income
• Stability of Purchasing Power
• Capital Appreciation
• Tax Benefits
• Legality

9. Types of Investors
• Individuals
• Institutions
1. Insurance Companies
2. Mutual Funds
3. Banks
4. FII

10. Investment Constraints
• Risk Tolerability
• Liquidity / Marketability
• Investors Age
• Need for Regular Income
• Tax Liability / Exemption

11. Errors While Investing
• Inadequate comprehension of return and risk.
• Vaguely formulated investment policy.
• Naive extrapolation of the past.
• Cursory decision-making.
• Simultaneous Switching
• Misplaced love for cheap stocks.
• Over diversification and under-diversification.
• Buying shares of familiar companies
• Wrong attitude toward losses and profits.
• Tendency to speculate.

12. Investment vs. Speculation
Basis Investment Speculation
1. Time Horizon Plans for a longer time
horizon
Plans for a very short period
2. Holding Period From 1 year to few years Varies from few days to
months
3. Risk Assumes moderate risk Willing to undertake high
risk
4. Return Likes to have moderate rate
of return
Likes to have high rate of
return
5. Decision Basis Considers fundamental
factors and evaluates the
performance of the
company regularly
Considers inside
information, hearsays and
market behavior
6. Funds / Leverage Uses his own funds and
avoids borrowed funds
Relies on borrowed funds to
supplement his personal
resources

13. Investment vs. Gambling
• Gambling is a very short term investment in a game.
• Time horizon is shortest.
• Results are determined by the roll of dice or turn of a
card.
• Entertainment is primary, Earning income is secondary.
• Employs artificial risks while investment involves
commercial risk.
• No risk-return trade-off; Negative outcomes are
expected.
• Financial analysis does not reduce the risk proportion
involved in gambling

14. Approaches to Investment Decision
Making
• Fundamental Approach
• Psychological Approach
• Academic Approach
• Eclectic Approach

15. Fundamental Approach
• Most commonly advocated.
• There is an intrinsic value of a security and this
depends upon the underlying fundamental
factors.
• Intrinsic value is based on EIC analysis.
• At any given point of time, there are some
securities for which the prevailing market price
would differ from the intrinsic value.
• Sooner or later, the market price would fall in line
with the intrinsic value.
• Superior returns can be earned by buying under-
valued securities & selling over-valued
securities.

16. Psychological Approach
• Stock prices are guided by emotions rather than
reason.
• Prices are influenced by the psychological mood
of the investors.
• Investors use some form of technical analysis
with a view to develop trading rules aimed at
profit making.
• Based on certain persistent and recurring
patterns of price movements.
• Uses a variety of tools like bar chart, point and
figure chart, moving averages analysis etc…

17. Academic Approach
• Believes that stock markets are reasonable
efficient in reacting quickly and rationally to the
flow of information.
• Stock prices reflect intrinsic value very well.
• Prices behavior corresponds to random walk.
Successive price changes are independent.
• There is a positive relationship between risk and
return.
• Expected return from a security is linearly related
to its systematic risk.

18. Eclectic Approach
• Based on all the three different approaches.
• Fundamental approach is helpful in
establishing basic standards and benchmarks.
• Technical analysis is useful in broadly gauging
the prevailing mood of the investors.
• Despite many instances of misprices
securities, there appears to be a fairly strong
correlation between risk and return.

19. Investment
Process
Investment
Policy
1. Investible
Funds
2. Objectives
3. Knowledge
Analysis
1. Market
2. Industry
3. Company
Valuation
1. Intrinsic
Value
2. Future
Value
Portfolio
Construction
1. Diversification
2. Selection &
Allocation
Portfolio
Evaluation
1. Appraisal
2. Revision

20. Sources of Investment Information
• International Affairs
• National Affairs
• Industry Information
• Company Information
• Stock Market Information