Security Analysis And Portfolio Management

Presented By-

Aditya kumar Mishra

Wasim akhtar

2013-15

CONTENTS- Introduction to portfolio management.

Investment.

Speculation.

Gambling.

Investment decision.

Factors affecting investment decision making.

Investors classification.

Financing decision- Key points while making financing decision.

Investment avenues- Bond, Preference share, equity share, government securities and post office deposit.

References.

What is portfolio management?

Portfolio management comprises all the processes involved in the creation and maintenance of an investment portfolio.

Mainly it deals with security analysis, portfolio analysis, portfolio selection, portfolio revision and portfolio evaluation. In other words we can say that portfolio management helps in analysis of individual securities as well as in the analysis of portfolios.

Define Investment. Investment may be defined as “ a commitment of funds made

in the expectation of some positive rate of return”. Expectation of return is an essential element of investment.

These are the main features of investment-

Return.

Risk.

Safety.

Liquidity.

Return-All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation. The difference between the sale price & the purchase price is capital appreciation.

Risk- Risk is inherent in any investment. The risk may relate to loss of capital, delay in repayment of capital, nonpayment of interest, or variability of returns. While some investments like government securities & bank deposits are almost risk less, others are more risky. The risk of an investment depends on the following factors.

1.The longer the maturity period, the longer is the risk.

2. The lower the credit worthiness of the borrower, the higher is the risk .The risk varies with the nature of investment.

Safety-The safety of an investment implies the certainty of return of capital without loss of money or time. Safety is another features which an investors desire for his investments. Every investor expects to get back his capital on maturity without loss & without delay.

Liquidity- An investment, which is easily saleable, or marketable without loss of money & without loss of time is said to possess liquidity. Some investments like company deposits, bank deposits, P.O. deposits, NSC, NSS etc. are not marketable.

Speculation- Sometimes it is very difficult to make a differentiation

between speculation and investment. “ Speculation is a financial action that does not guarantee safety of initial investment along with the return on principal sum.” Normally it is a short run phenomenon.

Speculator always try to earn capital gain rather income from investment. That is why speculator is always associated with buying the securities at lower rate and selling at higher rate.

Difference between investment and speculation

INVESTMENT

Marketable assests are not necessary.

It is a long run phenomenon.

Income is very stable.

Quantity of risk is small.

SPECULATION

Marketable assests are necessary.

It is a short run phenomenon.

Income is very uncertain and erratic.

Quantity of risk is large.

Gambling- Gambling is an economic process of taking high risks

not only for high returns, but also for thrill and excitement. It is surrounded by uncertainty and is based on tips and rumors. Horse races, card games and lotteries etc are good examples of gambling.

Gambling is quite opposite of investment as investment is well planned action whereas it is unplanned action taken without considering the nature of risk.

Investment Decision- One of the most important long term decisions for any

business relates to investment. Investment is the purchase or creation of assets with the objective of making gains in the future. Typically investment involves using financial resources to purchase a machine/ building or other asset, which will then yield returns to an organization over a period of time.

Factors affecting investment decision making- The main factors which affects the decision related to

investment are as follows-

i. Availability of capital.

ii. Return on investment.

iii. Safety.

iv. Government Policies.

v. International trend.

Classification of investors- As we all know that investor is a person who allocates

capital with the expectation of a financial return. These are of two types-Individual investors and institutional investors.

Individual investors- Individual investors are large in number but their investable resources are comparatively smaller. Generally they do not have skill to carry out extensive evaluation and analysis before investment. These investors are often classified based on risk tolerance.

On the basis of risk tolerance, individual investors are of four types-

Individual investors

ConservativeModerately

Conservative

Moderately

AggressiveAggressive

Conservative-They seek to preserve their principal investment by avoiding risky investments. Therefore investments such as government securities and bonds that promise a constant income stream is preferred over stocks .

Moderately Conservative- These investors may invest in stocks but also seek a constant income stream by investing in government securities, real estate and bonds.

Moderately Aggressive-Moderately aggressive investors usually have similar investment objectives as aggressive investors. But they have lower risk tolerance .For them mutual funds is better option.

Aggressive-Aggressive investors tend to be risk lovers. They are willing to embrace risky investments as their objective is to maximize returns in the long run.

Institutional investors-

Institutional investors are those organization which have surplus fund to make an investment. These are fewer in numbers. Mutual funds, investment companies, Banking and non banking companies etc are example of institutional investors.

Institutional investors keep huge amount of fund for investment .They appoint professional fund managers to carry out extensive analysis and evaluation of different investment opportunities.

Financial Decision- Decisions that involve determining the proper amount of

funds to employ in a firm , selecting projects and capital expenditure analysis, raising funds on the most favorable terms possible, and managing working capital such as inventory and accounts receivable, are known as financial decision.

(http://www.answers.com/topic/financial-decisions#ixzz38pgFFCQe)

Difference between investment decision and financing decision

Investment decision.

It involves investment of companies capital in current and fixed assests.

Investment decision results in outflows of cash.

Financing decision

It involves finding the sources of funds required to invest in business i.e. bonds, equity shares etc.

Financing decision results in inflow of cash.

Investment Avenues- Investment avenues means investor will invest the

income in various types of securities. Different investment avenues are available to investors. Like all investments, they also carry certain risks.

Some important investment avenues are Bonds , Preference Shares , Equity Shares, Government Securities , Post Office Deposits, Real Estates, Venture Capital , Mutual Fund ,Exchange Traded Funds, Life Insurance.

Bonds-A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. Generally, a bond is a promise to repay the principal along with interest (coupons) on a specified date (maturity). Some bonds do not pay interest, but all bonds require a repayment of principal.

( http://www.investorwords.com/521/bond.html#ixzz38pwgZzDs)

Preference Shares- Preference shares are those shares which carry a following preferential right over other classes of shares-

Preferential shareholders get fixed amount of dividend at a fixed rate every year.

Preferential shareholders have the right to repayment of capital in the event of company’s winding up.

Equity Shares- Shares which are not preference share are termed as equity share. These shares do not carry any preferential right .

Government Securities-

A bond (or debt obligation) issued by a government authority, with a promise of repayment upon maturity that is backed by said government. A government security may be issued by the government itself or by one of the government agencies. These securities are considered low-risk, since they are backed by the taxing power of the government. Examples of government securities include Dated securities, Zero coupon and treasury bills .

These securities are usually used to raise funds that pay for the government's various expenses, including those related to infrastructure development projects.

(http://www.investopedia.com/terms/g/governmentsecurity.asp)

Post Office Deposit- Like Banks , Post office also accepts deposit from normal

people of the country. It rewards interest on those deposit. Different types of schemes are offered by Post office to attract those who earn moderate income. Recurring deposits, NSC, Time deposit, Mothly saving scheme etc are example of it.

Indira Vikash Patra and Kissan Vikash Patra are saving certificates issued by post offices.

References- Kevin.S, 2014, Security and portfolio management.

Maheshwari.S.N, 5th edition, Corporate Accounting.

(http://businesscasestudies.co.uk/business-theory/finance/investment-decisions.html#ixzz38pjj0k8f).

(http://www.investopedia.com/terms/g/governmentsecurity.asp).

( http://www.investorwords.com/521/bond.html#ixzz38pwgZzDs).

(http://www.jamfinfacts.com/index.php/find-your-investing-style.html)

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