INVESTMENT MANAGEMENT

Investment management is the professional management of various securities (shares,

bonds etc and other assets (e!g! real estate, to meet specified investment goals for the
benefit of the investors! Investors ma" be institutions (insurance companies, pension
funds, corporations etc! or private investors (both directl" via investment contracts and
more commonl" via collective investment schemes e!g! mutual funds !
The term asset management is often used to refer to the investment management of
collective investments, #hilst the more generic fund management ma" refer to all forms
of institutional investment as #ell as investment management for private investors!
Investment managers #ho speciali$e in advisor" or discretionar" management on behalf
of (normall" #ealth" private investors ma" often refer to their services as wealth
management or portfolio management often #ithin the conte%t of so&called 'private
ban(ing'!
The provision of )investment management services) includes elements of financial
anal"sis, asset selection, stoc( selection, plan implementation and ongoing monitoring of
investments!
*utside of the financial industr", the term 'investment management' is often applied to
investments other than financial instruments! Investments are often meant to include
pro+ects, brands, patents and man" things other than stoc(s and bonds! Even in this case,
the term implies that rigorous financial and economic anal"sis methods are used! Applied
Information Economics is one approach developed to appl" statisticall" and economicall"
sound optimi$ation methods to portfolios of other t"pes of investments!
Investment management is a large and important global industr" in its o#n right
responsible for careta(ing of trillions of dollars, euro, pounds and "en! ,oming under the
remit of financial services man" of the #orld)s largest companies are at least in part
investment managers and emplo" millions of staff and create billions in revenue!
Fund manager (or investment advisor in the -!S! refers to both a firm that provides
investment management services and an individual(s #ho directs )fund management)
decisions!
Industry scope
The business of investment management has several facets, including the emplo"ment of
professional fund managers, research (of individual assets and asset classes, dealing,
settlement, mar(eting, internal auditing, and the preparation of reports for clients! The
largest financial fund managers are firms that e%hibit all the comple%it" their si$e
demands! Apart from the people #ho bring in the mone" (mar(eters and the people #ho
direct investment (the fund managers, there are compliance staff (to ensure accord #ith
legislative and regulator" constraints, internal auditors of various (inds (to e%amine
internal s"stems and controls, financial controllers (to account for the institutions) o#n
mone" and costs, computer e%perts, and 'bac( office' emplo"ees (to trac( and record
transactions and fund valuations for up to thousands of clients per institution!
Key problems of running such businesses
.evenue is directl" lin(ed to mar(et valuations, so a ma+or fall in asset prices
causes a precipitous decline in revenues relative to costs/
Above&average fund performance is difficult to sustain, and clients ma" not be
patient during times of poor performance/
Successful fund managers are e%pensive and ma" be headhunted b" competitors/
Above&average fund performance appears to be dependent on the uni0ue s(ills of
the fund manager/ ho#ever, clients are loath to sta(e their investments on the
abilit" of a fe# individuals& the" #ould rather see firm&#ide success, attributable
to a single philosoph" and internal discipline/
Evidence suggests that si$e of an investment firm correlates inversel" #ith fund
performance, i!e!, the smaller the firm the better the chance of good performance!
Anal"sts #ho generate above&average returns often become sufficientl" #ealth"
that the" esche# corporate emplo"ment in favor of managing their personal
portfolios!
The most successful investment firms in the #orld have probabl" been those that have
been separated ph"sicall" and ps"chologicall" from ban(s and insurance companies! That
is, the best performance and also the most d"namic business strategies (in this field have
generall" come from independent investment management firms!
Investment managers and portfolio structures
At the heart of the investment management industr" are the managers #ho invest and
divest client investments!
A certified compan" investment advisor should conduct an assessment of each client)s
individual needs and ris( profile! The advisor then recommends appropriate investments!
Asset allocation
The different asset classes are stoc(s, bonds, real&estate, derivatives, and commodities!
The e%ercise of allocating funds among these assets (and among individual securities
#ithin each asset class is #hat investment management firms are paid for! Asset classes
e%hibit different mar(et d"namics, and different interaction effects/ thus, the allocation of
monies among asset classes #ill have a significant effect on the performance of the fund!
Some research suggests that allocation among asset classes has more predictive po#er
than the choice of individual holdings in determining portfolio return! Arguabl", the s(ill
of a successful investment manager resides in constructing the asset allocation, and
separatel" the individual holdings, so as to outperform certain benchmar(s (e!g!, the peer
group of competing funds, bond and stoc( indices!
Long-term returns
It is important to loo( at the evidence on the long&term returns to different assets, and to
holding period returns (the returns that accrue on average over different lengths of
investment!
Diversification
Against the bac(ground of the asset allocation, fund managers consider the degree of
diversification that ma(es sense for a given client (given its ris( preferences and
construct a list of planned holdings accordingl"! The list #ill indicate #hat percentage of
the fund should be invested in each particular stoc( or bond! The theor" of portfolio
diversification #as originated b" Mar(o#it$ and effective diversification re0uires
management of the correlation bet#een the asset returns and the liabilit" returns, issues
internal to the portfolio (individual holdings volatilit", and cross&correlations bet#een
the returns!
Investment styles
There are a range of different st"les of fund management that the institution can
implement! 1or e%ample, gro#th, value, mar(et neutral, small capitali$ation, inde%ed, etc!
Each of these approaches has its distinctive features, adherents and, in an" particular
financial environment, distinctive ris( characteristics!
Performance measurement
1und performance is the acid test of fund management, and in the institutional conte%t
accurate measurement is a necessit"! 1or that purpose, institutions measure the
performance of each fund (and usuall" for internal purposes components of each fund
under their management, and performance is also measured b" e%ternal firms that
speciali$e in performance measurement!
Absolute versus relative performance
In the -SA and the -2, t#o of the #orld)s most sophisticated fund management mar(ets,
the tradition is for institutions to manage client mone" relative to benchmar(s! 1or
e%ample, an institution believes it has done #ell if it has generated a return of 34 #hen
the average manager generates a 54 return!
Ris-ad!usted performance measurement
6erformance measurement should not be reduced to the evaluation of fund returns alone,
but must also integrate other fund elements that #ould be of interest to investors, such as
the measure of ris( ta(en! Several other aspects are also part of performance
measurement7 evaluating if managers have succeeded in reaching their ob+ective, i!e! if
their return #as sufficientl" high to re#ard the ris(s ta(en/ ho# the" compare to their
peers/ and finall" #hether the portfolio management results #ere due to luc( or the
manager8s s(ill! The need to ans#er all these 0uestions has led to the development of
more sophisticated performance measures, man" of #hich originate in modern portfolio
theor"!
9hat Is Investment
: Man" interpretations
: ;ending mone" to another for a return
: 6urchase of shares, real estate, Gold for capital appreciation
: An insurance plan or 6ension plan
: Investment is a commitment of funds for earning additional income
: Investment is considered as the sacrifice of certain present value of mone" in
anticipation of a re#ard
<efinition of Investment
: 1isher = >ordan ? An investment is a commitment of funds made in the
e%pectation of some positive rate of returns
: 1! Amling ? The purchase b" an individual or Institutional investor of a financial
or real asset that produces a return in proportion to the ris( the Investor assumed
over some future investment period

Investment Scenario
: Toda", managing investment has become much more challenging and comple%
than ever
: -nprecedented volatilit" of stoc( mar(et
: Mutual funds
: <erivatives
: <ebt mar(et
: @an(A ,ompan" deposits
: Gold
: .eal estate
: 6lethora of investment instruments to choose from
,lassification of investment
: 1inancial investment
: Economic investment
1inancial investment
: It means emplo"ment of funds in the form of assets #ith the ob+ective of earning
additional income or appreciation in the value of investment in future
: Assets for investment var" #ith respect to ris(, Safet" and return
: @an( deposits, @onds, Shares, Mutual funds
Economic investment
: It is net addition to the capital stoc( of the societ"
: Investment in those goods and services #hich are used for the production of other
goods and services
: @uilding, Machineries, Inventories
Investment Involves
B! .eal assets
: .eal assets are tangible assets li(e land, buildings, bullions
C! 1inancial assets
: 1inancial assets are instruments having an indirect claim to real assets held b"
some others
Investment *b+ectives
Ma%imi$ation of the economic #elfare of the investor in the long run!
Ma%imi$ation of #ealth and the li0uidit" offered b" the #ealth!
*b+ectives Involves
: .eturn
: ,apital appreciation
: Safet"
: ;i0uidit"
: Dedge against inflation
: Ta% planning
.eturn
: Investment is a commitment of funds made in the e%pectation of some positive
return!
: Investor #hile ma(ing investments consider man" aspects related to return such
as the timing, fre0uenc" and 0uantum of return
,apital Appreciation
: It is an important ob+ective of investment
: @efore investment investors should identit" the assets #hich appreciate in value
: .eal asset or financial asset
: 6urchase of propert" at right time and the ideal gro#th stoc(s ensure appreciation
to investors!
Safet"
: It is a vital aspect mostl" investors #ill (eep a#a" from other investment options
#hich are not cent percent safe! 1eat of loss of capital than loss of revenue

;i0uidit"
: <egree of read" encashabilit"
: Investors prefer investments #ith high li0uidit"
Dedge against Inflation
: See(ing protection against inflation
: Inflation has the effect of raising prices #ith effect of falling standard of living
: .egular and ade0uate return against an" possible erosion in investment!
Ta% 6lanning
: 9ise investor considers ta% implications before investments
: Investment offers certain ta% saving avenues
: InterestA <ividend earned as #ell as ,apital gains are ta%able
: The rate of ta% various from BE4 to FE4 #ith a surcharge

"#$ I%&$'"($%" PR)*$''- FI&$ '"A+$'
I%&$'"($%" P)LI*,

'$*-RI", A%AL,'I'
&AL-A"I)%
P)R"F)LI) *)%'"R-*"I)%
P)R"F)LI) $&AL-A"I)%

I%&$'"($%" P)LI*,
6olic" for s"stematic functioning
Availabilit" of investible funds
*b+ective are framed on the basis of need for regularit" of income, ris( perception,
li0uidit"
2no#ledge about investment alternatives
'$*-RI", A%AL,'I'
The securities to be bought have to be scrutini$ed through the maret. industry and
company analysis
&AL-A"I)%
Delps investor to determine the return and ris( e%pected from an investment in the
common stoc(
Intrinsic value of the share is measured through the boo( value of the share and the
price earning ratio!
P)R"F)LI) *)%'"R-*"I)%
6ortfolio is a combination of securities
6ortfolio is constructed in a manner to meet the investors goals
Ma%imum return #ith minimum ris(
<iversifies portfolio and allocation of funds among the selected securities
P)R"F)LI) $&AL-A"I)%
The portfolio has to be managed efficientl"
The efficient management re0uires evaluation
This process consist of portfolio appraisal and revision
P)R"F)LI) APPRAI'AL
The return and ris( performance of the securit" var" from time to time
The variabilit" of the returns of the securities is measured and compared
The appraisal #arns the loss and steps can be ta(en to avoid such losses
P)R"F)LI) R$&I'I)%
.evision depends on the results of the appraisal
To (eep the return at a particular level necessitates the investor to revise the components
of the portfolio periodicall"
1-N<AMENTA; ANA;GSIS7
Introduction
1undamental anal"sis is the cornerstone of investing! In fact, some #ould sa" that "ou aren)t
reall" investing if "ou aren)t performing fundamental anal"sis! @ecause the sub+ect is so
broad, ho#ever, it)s tough to (no# #here to start! There are an endless number of investment
strategies that are ver" different from each other, "et almost all use the fundamentals!
The goal of this tutorial is to provide a foundation for understanding fundamental anal"sis!
It)s geared primaril" at ne# investors #ho don)t (no# a balance sheet from an income
statement! 9hile "ou ma" not be a 'stoc(&pic(er e%traordinaire' b" the end of this tutorial,
"ou #ill have a much more solid grasp of the language and concepts behind securit" anal"sis
and be able to use this to further "our (no#ledge in other areas #ithout feeling totall" lost!
The biggest part of fundamental anal"sis involves delving into the financial statements! Also
(no#n as 0uantitative anal"sis, this involves loo(ing at revenue, e%penses, assets, liabilities
and all the other financial aspects of a compan"! 1undamental anal"sts loo( at this
information to gain insight on a compan")s future performance! A good part of this tutorial
#ill be spent learning about the balance sheet, income statement, cash flo# statement and
ho# the" all fit together

9hat is 1undamental Anal"sisH
A method of evaluating a securit" b" attempting to measure its intrinsic value b"
e%amining related economic, financial and other 0ualitative and 0uantitative
factors! 1undamental anal"sts attempt to stud" ever"thing that can affect the securit")s
value, including macroeconomic factors (li(e the overall econom" and industr"
conditions and individuall" specific factors (li(e the financial condition and management
ofcompanies!
The end goal of performing fundamental anal"sis is to produce a value that an
investor can compare #ith the securit")s current price in hopes of figuring out #hat sort
of position to ta(e #ith that securit" (under priced I bu", overpriced I sell or short!
Securities mar(et line
The securities mar(et line (SM; graphs the relationship bet#een ris( and return! The
securities mar(et line is a straight line! It touches the efficient frontier and passes though
the ris( free rate of return!
The SM; lies above the efficient frontier, e%cept at the one point #here it touches! This
sho#s that the availabilit" of a ris( free asset improves the returns available for a an"
given level of ris( and vice&versa! The line that graphs the s"stematic, or mar(et, ris(
versus return of the #hole mar(et at a certain time and sho#s all ris(" mar(etable
securities!
Technical Anal"sis
A method of evaluating securities b" anal"$ing statistics generated b" mar(et activit",
such as past prices and volume! Technical anal"sts do not attempt to measure a securit")s
intrinsic value, but instead use charts and other tools to identif" patterns that can suggest
future activit"
,apital Asset 6ricing Model ? ,A6M
A model that describes the relationship bet#een ris( and e%pected return and that is used in
the pricing of ris(" securities!

The general idea behind ,A6M is that investors need to be compensated in t#o #a"s7 time
value of mone" and ris(! The time value of mone" is represented b" the ris(&free (rf rate in
the formula and compensates the investors for placing mone" in an" investment over a period
of time! The other half of the formula represents ris( and calculates the amount of
compensation the investor needs for ta(ing on additional ris(! This is calculated b" ta(ing a
ris( measure (beta that compares the returns of the asset to the mar(et over a period of time
and to the mar(et premium (.m&rf!
The ,A6M sa"s that the e%pected return of a securit" or a portfolio e0uals the rate on a ris(&
free securit" plus a ris( premium! If this e%pected return does not meet or beat the re0uired
return, then the investment should not be underta(en! The securit" mar(et line plots the
results of the ,A6M for all different ris(s (betas!
-sing the ,A6M model and the follo#ing assumptions, #e can compute the e%pected return
of a stoc(7 if the ris(&free rate is F4, the beta (ris( measure of the stoc( is C and the
e%pected mar(et return over the period is BE4, the stoc( is e%pected to return BJ4
(F4KC(BE4&F4!
,apital Mar(et ;ine ? ,M;
A line used in the capital asset pricing model to illustrate the rates of return for efficient
portfolios depending on the ris(&free rate of return and the level of ris( (standard deviation for
a particular portfolio!
The ,M; is derived b" dra#ing a tangent line from the intercept point on the efficient
frontier to the point #here the e%pected return e0uals the ris(&free rate of return!
The ,M; is considered to be superior to the efficient frontier since it ta(es into account the
inclusion of a ris(&free asset in the portfolio! The capital asset pricing model (,A6M
demonstrates that the mar(et portfolio is essentiall" the efficient frontier! This is achieved
visuall" through the securit" mar(et line (SM;!
6ortfolio Management
The art and science of ma(ing decisions about investment mi% and polic", matching
investments to ob+ectives, asset allocation for individuals and institutions, and balancing
ris( vs! performance
SE,-.ITG ANA;GSIS
'ecurity Analysis, authored b" professors @en+amin Graham and <avid <odd of
,olumbia -niversit", laid the intellectual foundation for #hat #ould later be called
'value investing'! The #or( #as first published in BLF5, follo#ing unprecedented losses
on 9all Street! In summing up lessons learned, Graham and <odd chided 9all Street for
its m"opic focus on a compan")s reported earnings per share, and #ere particularl" harsh
on the favored 'earnings trends!' The" encouraged investors to ta(e an entirel" different
approach b" gauging the rough value of the operating business that la" behind the
securit"! Graham and <odd enumerated multiple actual e%amples of the mar(et)s
tendenc" to irrationall" under&value certain out&of&favor securities! The" sa# this
tendenc" as an opportunit" for the savv"!
At bottom, Securit" Anal"sis stands for the proposition that a #ell&disciplined investor
can determine a rough value for a compan" from all of its financial statements, ma(e
purchases #hen the mar(et inevitabl" under&prices some of them, earn a satisfactor"
return, and never be in real danger of permanent loss! 9arren @uffett, the onl" student in
Graham)s investment seminar to earn an AK, made billions of dollars b" methodicall" and
rationall" implementing the tenets of Graham and <odd)s boo(!
Securit" Anal"sis is still used as a te%tboo( at ,olumbia -niversit"! Securit" Anal"sis
also represents the genesis of financial anal"sis and fundamental anal"sis! Do#ever, in
the BLJEs Graham stopped advocating a careful use of the techni0ues described in his te%t
in selecting individidual stoc(s, citing the e%tensive efforts and costs re0uired to generate
superior returns in a modern efficient mar(et! Instead, Graham later suggested the use of
one or t#o simple criteria to the investor)s entire portfolio, focusing on results of the
group rather than on individual securities!
MBN
'ystematic Ris
.is( #hich is common to an entire class of assets or liabilities! The value of investments
ma" decline over a given time period simpl" because of economic changes or other
events that impact large portions of the mar(et! Asset allocation and diversification can
protect against s"stematic ris( because different portions of the mar(et tend to
underperforms at different times! also called mar(et ris(!
The ris( inherent to the entire mar(et or entire mar(et segment! Also (no#n as 'un&
diversifiable ris(' or 'mar(et ris(!'
Mar(et ris(
(aret ris is the ris( that the value of an investment #ill decrease due to moves in
mar(et factors! The four standard mar(et ris( factors are7
E0uit" ris( , or the ris( that stoc( prices #ill change!
Interest rate ris( , or the ris( that interest rates #ill change!
,urrenc" ris( , or the ris( that foreign e%change rates #ill change!
,ommodit" ris( , or the ris( that commodit" prices (i!e! grains, metals, etc! #ill
change!
(easuring
Mar(et ris( is t"picall" measured using a Value at .is( methodolog"! Value at ris( is #ell
established as a ris( management techni0ue, but it contains a number of limiting
assumptions that constrain its accurac"! The first assumption is that the composition of
the portfolio measured remains unchanged over the single period of the model! 1or short
time hori$ons, this limiting assumption is often regarded as acceptable! 1or longer time
hori$ons, man" of the transactions in the portfolio ma" mature during the modeling
period! Intervening cash flo#, embedded options, changes in floating rate interest rates,
and so on are ignored in this single period modeling techni0ue!
Mar(et ris( can also be contrasted #ith Specific ris(, #hich measures the ris( of a
decrease in ones investment due to a change in a specific industr" or sector, as opposed to
a mar(et&#ide move!
-ns"stematic .is(
.is( that affects a ver" small number of assets! Sometimes referred to as specific ris(!
The ris( of price change due to the uni0ue circumstances of a specific securit", as
opposed to the overall mar(et! This ris( can be virtuall" eliminated from a portfolio
through diversification!
Technical anal"sts

A method of evaluating securities b" anal"$ing statistics generated b" mar(et activit",
such as past prices and volume! Technical anal"sts do not attempt to measure a securit")s
intrinsic value, but instead use charts and other tools to identif" patterns that can suggest
future activit"!
"echnical analysis is the stud" of past financial mar(et data, primaril" through the use of
charts, to forecast price trends and ma(e investment decisions! In its purest form,
technical anal"sis considers onl" the actual price behavior of the mar(et or instrument,
based on the premise that price reflects all relevant factors before an investor becomes
a#are of them through other channels!
Technical anal"sts (or technicians identif" non&random price patterns and trends in
financial mar(ets and attempt to e%ploit those patterns!
MBN
9hile technicians use various
methods and tools, the stud" of price charts is primar"! Technicians especiall" search for
archet"pal patterns, such as the #ell&(no#n head and shoulders reversal pattern, and also
stud" such indicators as price, volume, and moving averages of the price! Man" technical
anal"sts also follo# indicators of investor ps"cholog" (mar(et sentiment!
Technicians see( to forecast price movements such that large gains from successful trades
e%ceed more numerous but smaller losing trades, producing positive returns in the long
run through proper ris( control and mone" management!
There are several schools of technical anal"sis! Adherents of different schools (for
e%ample, candlestic( charting, <o# Theor", and Elliott #ave theor" ma" ignore the
other approaches, "et man" traders combine elements from more than one school!
Technical anal"sts use +udgment gained from e%perience to decide #hich pattern a
particular instrument reflects at a given time, and #hat the interpretation of that pattern
should be! Technical anal"sts ma" disagree among themselves over the interpretation of a
given chart!
Technical anal"sis is fre0uentl" contrasted #ith fundamental anal"sis, the stud" of
economic factors that some anal"sts sa" can influence prices in financial mar(ets! 6ure
technical anal"sis holds that prices alread" reflect all such influences before investors are
a#are of them, hence the stud" of price action alone! Some traders use technical or
fundamental anal"sis e%clusivel", #hile others use both t"pes to ma(e trading decisions!
.ET-.N
.eturn is the primar" motivating force that drives investment! It is representing the
re#ard for underta(ing investment! ,omponents of return are7
,urrent return& it measured as the periodic income in relation to the beginning
price of the investment!
,apital return& the price appreciation or depreciation divided b" the beginning
price of the asset! Assets li(e e0uit" stoc(
Total return for an" securit" is defined as7
Total return I current return K capital return
%)(I%AL R$"-R%
*API"AL APPR$*IA"I)%
DI&ID$%D'
*)(P)-%D RA"$ )F R$"-R%
#)LDI%+ P$RI)D R$"-R%
*API"AL APPR$*IA"I)%
Investment in assets #hose face value increases #ith passage of time
,apital appreciation of investments ensures that the purchasing po#er of investment
(eep pace #ith inflation (prevents eroding value
DI&ID$%D'
9hen "ou invest in compan" shares "our annual returns come form dividends
*)(P)-%D RA"$ )F R$"-R%
9hen the interest earns interest the securit" is said to be pa"ing a compound interest
The interest earned amount is automaticall" reinvested as the same rate as applicable to
the original investment!
#)LDI%+ P$RI)D R$"-R%
Investments are made for a certain period! The D6. ta(es into account the total
returns to an investor in that period, including both interest or dividend, and
capital gains, if an"!
D6. I Total income during holding period (<ividendA Interest K ,apital Gain O
6urchase price P BEE
FA*")R' D$"$R(I%I%+ R$"-R% )% I%&$'"($%"
6rice of the stoc(
T"pe of the stoc(
Issue price of the stoc(
.eserve for dividend
1uture pro+ects of the compan"
Good#ill of the compan"
Govt! rules and polices!
.IS2
.is( is defined as possibilit" of meeting danger or of suffering from harm or loss!
In financial terms, it implies possibilit" of receiving less return than e%pected or
Not receiving an" return at all or
Even not getting "our principal amount bac(
The probabilit" of actual return being less than the e%pected return or the probabilit" of
adverse return
Q9orr" is not a sic(ness but a sign of health if "ou are not #orried "ou are not ris(ing
enoughR
Gou cannot be rich #ithout ta(ing ris(s
.is(s and re#ards go hand in hand
Digher the ris(s, higher the returns the investment is e%pected to generate!
Gou should ta(e calculated, not rec(less ris(s
Ever" investment opportunit" is e%posed to some ris( or the other
A full understanding of the various important ris(s is essential for ta(ing calculated
ris(s and ma(ing sensible investment decisions!

.IS2S ,;ASSI1I,ATI*NS
B! S"stematic .is(s
Mar(et ris(
Interest rate ris(
6urchasing po#er ris(
C! -ns"stematic ris(s

@usiness .is(
1inancial .is(
Insolvenc" or <efault .is(
F! *ther ris(s
6olitical ris(
Management ris(
Mar(etabilit" .is(

"otal Ris / 'ystematic Ris 0 -nsystematic Ris
','"$(A"I* RI'K
It emanates from three sources7
Mar(et ris(
Interest rate ris(
Inflation ris(
SGSTEMATI, .IS2
E%ternal factors that cannot be controlled cause ris(s #hich are (no#n as s"stematic
ris(s
S"stematic ris( are non diversifiable
Arise out of factors such as mar(et, nature of industr", state of econom" etc!
MA.2ET .IS2
Mar(et ris( is the ris( of movement in securit" prices due to factors that affect the
mar(et as a #hole, rather than particular companies or industries!
Investors reaction to#ards various events is the main factor affecting the mar(et ris(!
@usiness recession, depression, long term changes in consumption pattern!
-ne%pected #ar, election, instabilit" of Govt!, demise of head of state, speculative
activit" in the mar(et!
The fall or rise in the prices of securit" causes a fear of loss or utmost confidence in the
minds of investors!
9hen investors sharpl" react to a loss, it #ill result in e%cessive selling, pushing prices
do#n
Investors reaction to gain #ill result in more bu"ing, pushing prices up
Good economic forecasting is the (e" to anticipating changes in the stoc( and bond
mar(ets!
INTE.EST .ATE .IS2
A change in interest rate is a ma+or source of ris( to the holders of bonds = debentures!
An increase in interest rate #ill result in decrease in demand for securities!
Increase in interest rate #ill result in increased earnings to lending institutions
,ompanies using borro#ed funds, #ill result in lo#er earnings, lo#er dividends, and
conse0uent lo#er share prices!
Securities produce cash income streams over future time periods! The" are discounted
b" the mar(et to "ields present values #hich influence prices of these securities!
9hen ever the discount factor changes or cash stream changes, prices also change!
.ise in mar(et interest rate causes a decline in mar(et prices of securities and vice
versa!
6-.,DASING 6*9E. .IS2A IN1;ATI*N .IS2
6urchasing po#er ris( is the probable loss in purchasing po#er of returns to be
received!
If inflation occurs during future period the bu"ing po#er of cash interestAdividend
income is li(el" to be received #ould decline!
If rate of inflation is e0ual to the mone" rate of return, the investor does not add
an"thing to his e%isting #ealth since he obtains $ero rate of return!
Investment is considered as postponement of consumption
-NSGSTEMATI, .IS2
.is( due to uncertaint" surrounding a particular firm or industr"!
It is uni0ue = peculiar to a firm or industr"
<ue to factors li(e managerial inefficienc", technological change, availabilit" if ra#
material, changes in consumer preference, labor problems
-ns"stematic ris( emanates from three sources
@usiness ris(
1inancial ris(
<efault or insolvenc" ris(
@-SINESS .IS2
@usiness ris( is that portion of ris( caused b" prevailing environment of business
Variation that causes in operating environment
@usiness ris( can be of t#o broad categories

B! Internal business ris(
C! E%ternal business ris(
INTE.NA; @-SINESS .IS2
Fluctuation in sales 7 loss of sales means loss of profit
R1D 7 .=< is re0uired for constant innovation = for operational efficienc"
#R( 7 operational efficienc" depends on management of personnel
Fi2ed cost 7 cost should be +ustifiable = not to affect profitabilit"
Production of single product
EPTE.NA; @-SINESS .IS2
3usiness cycle 7 fluctuation in business c"cle leads to fluctuation in earnings
Demographic factor7 distribution of population b" age group, health, education and
lac( of s(ill of emplo"ees, attitude to #or(!
+overnment polices7 .is( due to Govt! polices, 1<I, <isinvestment, nationali$ation
etc
'ocial 1 Regulatory factors 7 General operating environment of business,
environmental protection act, price control, fi%ation of 0uotas, import& e%port control

1INAN,IA; .IS2S
The #a" the compan" handles its financial activities
It can be ascertained b" the anal"sis of capital structure of the firm
Digh emplo"ment of debt in business
<E1A-;T .IS2
This ris( due to inabilit" of firm to satisf" the needs of investors li(e interest, dividend,
repa"ment of capital etc
The default ris( arises due to deterioration of financial strength of the compan"
Adverse movements in li0uidit", solvenc", operating e%penses
S *TDE. .IS2S
6olitical ris(
Management ris(
Mar(etabilit" ris(
6*;ITI,A; .IS2
Mainl" for investment in foreign securities
,hange in foreign Govt!
Nationali$ation of business in foreign countr"!
Inabilit" of Govt! to handle indebtedness
MANAGEMENT .IS2
Total variabilit" of return caused b" management decision
Do#ever 0ualified = capable management team there are chances of +udgmental errors
and #rong decisions
MA.2ETA@I;ITG .IS2
;oss of li0uidit" and monitor" loss in conversion from one asset to another!
ST*,2 EP,DANGE
A stoc e2change, share maret or bourse is a corporation or mutual organi$ation
#hich provides facilities for stoc( bro(ers and traders, to trade compan" stoc(s and other
securities! Stoc( e%changes also provide facilities for the issue and redemption of
securities, as #ell as, other financial instruments and capital events including the pa"ment
of income and dividends! The securities traded on a stoc( e%change include7 shares issued
b" companies, unit trusts and other pooled investment products and bonds! To be able to
trade a securit" on a certain stoc( e%change, it has to be listed there! -suall" there is a
central location at least for record(eeping, but trade is less and less lin(ed to such a
ph"sical place, as modern mar(ets are electronic net#or(s, #hich gives them advantages
of speed and cost of transactions! Trade on an e%change is b" members onl"! The initial
offering of stoc(s and bonds to investors is b" definition done in the primar" mar(et and
subse0uent trading is done in the secondar" mar(et! A stoc( e%change is often the most
important component of a stoc( mar(et! Suppl" and demand in stoc( mar(ets is driven b"
various factors #hich, as in all free mar(ets, affect the price of stoc(s (see stoc(
valuation!
There is usuall" no compulsion to issue stoc( via the stoc( e%change itself, nor must
stoc( be subse0uentl" traded on the e%change! Such trading is said to be off e%change or
over&the&counter! This is the usual #a" that bonds are traded! Increasingl", stoc(
e%changes are part of a global mar(et for securities!
"he role of stoc e2changes
Raising capital for businesses
(obili4ing savings for investment
Facilitating company growth
Redistribution of wealth
*orporate governance
*reating investment opportunities for small investors
+overnment capital-raising for development pro!ects
3arometer of the economy
*N;INE SE,-.ITIES T.A<ING
Shares and other financial products or securities (e!g! bonds, foreign e%change and
managed investment funds ('ecurities ma" be e%changed or traded online using the
internet ($2changes! The Internet helps drive do#n transaction costs, facilitate cross&
border transactions and avoid the need to conduct trades using intermediaries!
As the trend of doing thing through Internet is gro#ing ver" rapidl" and ever"one
in toda"8s life #ant to do ever" #ith the mouse clic(s #hile sitting around his des(! Thus
if "ou are an investor and #ant to do online trading, it is necessar" for "ou to (no# #ell
about online trading before actuall" staring trading online! These are various trading
academies giving training on online trading! These institutions are also providing online
training!
*b+ectives of online securities trading
Increase transparence in the mar(ets!
Enhance mar(et 0ualit" through improved li0uidit", b" increasing 0uote continuit"
and mar(et depth!
.educe settlement ris(s due to open trade, b" elimination of mismatches!
6rovide management information s"stem!
Introduce fle%ibilit" in s"stem, to handling gro#ing volumes easil" and to support
nation#ide e%pansion of mar(et activit"!
Through online trading three fundamental ob+ectives of securities regulation can be
easil" achieved these are 7
B! Investor8s protection!
C! ,reation of a fair and efficient mar(et!
F! .eduction of the s"stematic ris(s!
SE,-.ITIES AN< EP,DANGE @*A.< *1 IN<IA (SE@I
The Securities and E%change @oard of India came into being in April BLTT to promote
orderl" and health" development of the securities mar(ets and to provide ade0uate
investor protection! It #as a long ?felt need to establish a competent authorit" in order to
liberate the gro#ing securit" mar(et from the e%isting trading malpractices and
inade0uacies prevailing in the mar(et! Dead0uarters in @omba", SE@I8s function is to
ensure a conductive environment for gro#th in the capital mar(et! The environment
includes the rules and regulations, the institutions and these interrelationships,
instruments, practices, infrastructure and polic" frame#or(! A legal bod", SE@I caters to
the need of the issue of securities, the investor and the mar(et intermediaries!

SE@I has also been releasing a number of guidelines for pla"ing the mar(et! The ne#
frame#or( aims at better investor protection through improved disclosure re0uirements,
accounting standards, compensation and arbitration, small investor8s protection fund,
steps against insider trading and other malpractices!
*b+ectives of SE@I
As per '$3I act 5667 it has mainly three ob!ectives8
6rotection of investor8s interests and thus ensuring stead" flo# of saving from the
savers to the capital mar(et!
6romotion of gro#th and development of securities mar(et!
.egulation of securities mar(et in order to ensue efficient services b" merchant
ban(ers, bro(ers, mutual funds and other intermediaries!
The role of SE@I

It is an independentl" constituted board #ith regulator" po#er over stoc(
e%changes, mutual funds and capital issues! Do#ever, there is government control in
the sense of having nominees from the Ministr" on its @oard! The regulator" po#ers
given to SE@I are also sub+ect to government directives and overrules! The po#er to
prosecute and find defaulters is also denied! SE@I is tr"ing to establish itself #ith its
t#o& fold role of tr"ing to implement e%isting legislations and of introducing ne#
guidelines and regulations!
<EMATE.IA;IUATI*N
Demat account
Demat account, short term for demateriali4ed account is a t"pe of ban(ing account
#hich demateriali$e the paper&based ph"sical shares! The idea of demateriali$ed account
is to avoid the need to hold ph"sical shares&&the shares are virtuall" being bought and
sold through the ban(ing account! This account is popular in India and also the SE@I
mandates <emat account for share trading above 3EE shares!
<emateriali$ation 6rocess
Steps7
5! ,lientA Investor submit the <.1 (<emat .e0uest 1orm and ph"sical certificates to <6!
<6 chec(s #hether the securities are available for <emat! ,lient defaces the certificate
b" stamping VSurrendered for <emateriali$ation8! <6 punches t#o holes on the name of
the compan" and dra#s t#o parallel lines across the face of the certificate!
79 <6 enters the <emat re0uest in his s"stem to be sent to NS<;! <6 dispatches the
ph"sical certificates along #ith the <.1 to the .=T Agent!
:9 NS<; records the details of the electronic re0uest in the s"stem and for#ards the
re0uest to the .=T Agent!
;9 .=T Agent, on receiving the ph"sical documents and the electronic re0uest, verifies
and chec(s them! *nce the .=T Agent is satisfied, demateriali$ation of the concerned
securities is electronicall" confirmed to NS<;!
<9 NS<; credits the demateriali$ed securities to the beneficiar" account of the investor
and intimates the <6 electronicall"! The <6 issues a statement of transaction to the client!