MBAF– 104

1. What are securities? Write any two fetures of securities.

Ans: Stock exchanges constitute the primary institution of the secondary market. The evolution and the
development of various stock exchanges in India and abroad were presented briefly.
The stock exchange is a key institution facilitating the issue and sale of various types of securities. It
is a pivot around which every activity of the capital market revolves. In the absence of the stock
exchange, the people with savings would hardly invest in corporate securities for which there would
be no liquidity (buying and selling facility).
Concept of Securities
Security analysis is about valuing the assets, debt, warrants, and equity of companies from the
perspective of outside investors using publicly available information. The security analyst must have a
thorough understanding of financial statements, which are an important source of this information. As
such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and
financial accounting.
While there is much overlap between the analytical tools used in security analysis and those used in
corporate finance, security analysis tends to take the perspective of potential investors, whereas
corporate finance tends to take an inside perspective such as that of a corporate financial manager.
Certificated Securities
Securities that are represented in paper (physical) form are called certificated securities. They may be
bearer or registered.
Bearer securities
Bearer securities are completely negotiable and entitle the holder to the rights under the security (e.g.
to payment if it is a debt security, and voting if it is an equity security). They are transferred by
delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing
Objectives of Security Analysis
Security analysis refers to the analysis of trading securities from the point of their prices, returns and
risks. All investments are risky and the expected return is related to the quantum of risk. All investors
try to earn more return with low level of risk or without risk. For this purpose they are considering
some objectives as:
General Objectives
Regular income: The income from the investment should be regular and consistent one. The high
fluctuation is income stream is not suitable for the long-term growth.
Capital appreciation: The investment must yield regular income as well as growth in value i.e.,
capital appreciation. It is the difference between the selling price and purchase price.
Safety of capital: The capital invested in assets requires the safety. Safety is the important element
which protects the loss of capital and return from the investments.
Liquidity: Liquidity is the ease of convertibility or marketability of assets.
Hedge against Inflation: The inflation is the biggest problem we are facing today, hence the rate of
return from the investment requires high yield to beat inflation rate.
These are the major objectives of an investor; to attain these objectives a careful and critical security
analysis is necessary. The literature on security analysis can be consolidated to form three approaches
to explaining the behaviour of share prices and their valuation. These analysis are used to find out the
answer for the question like, why share prices fluctuate, how they are determined, what to buy or sell
and when to buy or sell.
2. Who are brokers? Write its important role in security market..

Ans: Broker
A broker is an independent party, whose services are used extensively in some
industries
Securities market is a component of the wider financial
market where securities can be bought and sold between subjects of
the economy, on the basis of demand and supply. Securities markets
encompasses equity markets, bond markets and derivatives
markets where prices can be determined and participants both professional and
non professionals can meet.

3. what do you understand by efficient portfolio & efficient frontier?

Ans: Portfolio management in investment companies is a four stage process comprising the following
stages:
Stage 1: Identifying the objectives, and level of risk acceptable to, the target group of investors
and setting goals and objectives for the scheme so as to meet the objectives of this target group of
investors.
Stage 2: Evaluating individual securities with respect to their risk-return characteristics.
Stage 3: Identifying the set of efficient portfolios and selecting an optimal (with respect to the
expectations of the target group of investors) portfolio out of this set of efficient portfolios.
Stage 4: Reviewing the portfolio on a continuous basis and reforming it as and when required.
1.9.2 Investment Companies in India
By our definition of investment companies, we can identify quite a large number of investment
companies in India. The Investment Companies in India are:
1. Unit Trust of India (UTI): The UTI was established in 1964 with the objective of making
available the benefits of industrial growth to small savers. The UT collects investible resources
from investors through the sale of securities called ‗units‘. These funds are then invested by UTI in
various financial assets. Holders of ‗units‘ received dividends from UTI. Since its inception, UTI
has offered various schemes to cater to the need of different classes of investors. Most of these
schemes are:
a). Income Oriented Schemes: These funds offer a return much higher than the bank deposits but
with less capital appreciation. The emphasis being on regular returns, the pattern of investment in
general is oriented towards fixed income yielding securities like non-convertible debentures of
consistently good dividend paying companies, etc.
Example: Income-Oriented Scheme issued by UTI:
Units Scheme of 1964
Growing Income Unit Scheme of 1987

4. What do you understand by systematic and non systematic risk?.

Ans: Systematic Risk
Market Risk
Finding stock prices falling from time to time while a company's earning are rising, and vice versa, is
not uncommon. The price of a stock may fluctuate wide within a short span of time even though
earnings remain unchanged. The causes this phenomenon are varied, but it is mainly due to a change
in investors' attitudes toward equities in general, or toward certain types or groups of securities in
particular. Variability in return on most common stocks that are due to basic sweeping changes in
investor expectations is referred to as market risk.
Non Systematic
Non systematic risk is that portion of total risk that is unique or peculiar to a firm or an industry, above
and beyond that affecting securities markets in general. Factors such as management capability,
consumer preferences, and labor strikes can cause unsystematic variability of affect one industry
and/or one firm, they must be examined separately for each company.
The uncertainty surrounding the ability of the issuer to make payments on securities stems from two
sources: (1) the operating environment of the business, and (2) the financing of the firm. These risks
are referred to as business risk and financial risk, respectively. They are strictly a function of the
operating conditions of the firm and the way in which it chooses to finance its operations. Our
intention here will be directed to the broad aspects and implications of business and financial risk. Indepth
treatment will be the principal goal of later chapters on analysis of the economy, the industry,
and the firm.