Basic of Investment Management

1. Securities Markets
Unit I
YBAE04 Investment Management
Dr KVR Rajandran
Professor/DoMS
PMIST

2. Introduction
• The issue of securities by corporate units in India is as old as the introduction of joint-
stock enterprises by the British Government.
• The 18th and 19th centuries saw the emergence of cotton and jute textiles, tea and
other plantation industries in India. Many companies were set up as joint-stock
enterprises with liability limited by shares.
• A vast number of businessmen in major cities purchased these shares and trading
started in them early in the 19th century, thanks to their enterprising spirit. In those
days, although many of these companies were financed by the issue of shares to the
public, they mainly depended on the joint-stock British banks in India and borrowable
from abroad.
• British enterprise and the British Government have thus helped the emergence of the
securities markets in India. The corporate securities have come to have a market first.
So far as the Government securities are concerned, the British India Government
borrowed mostly in London by issue of Sterling.
• Only later in the 19th century the Government issued treasury bills and Government
securities in rupees. This led to the emergence of the Government securities market
also in India.
• Marketable securities are investments that can easily be bought, sold, or traded on
public exchanges. These types of investments can be debt securities or
equity securities

3. What is Market Securities
• Securities markets are markets in financial assets or instruments and
these are represented as I.O.Us (I owe you) in financial form. These are
issued by business organisations, corporate units and the Governments,
Central or State. Public sector undertakings also issue these securities.
These securities are used to finance their investment and current
expenditure. These are thus sources of funds to the issuers.
• There are different types of business organisations in India, namely,
partnership firms, co-operative societies, private and public limited
companies and joint and public sector organisations etc. The more
frequently organised method
• is the company, registered under the Indian Companies Act 1956. Under
this Act, there are three types of companies:
– (a) companies limited by guarantee;
– (b) companies which are private limited companies — limited by shares paid
up; and
– (c) companies which are public limited companies — limited by shares paid up
and companies limited by guarantee cannot enter the market.
 Exercise I-list out ten private limited companies

4. What are Securities?
• Securities are claims on money and are like promissory notes or
I.O.U. Securities are a source of funds for companies, Governments
and Semi-Government bodies. There are two types of sources of
funds namely internal and external and securities emerge when
funds are raised from external sources.
• The external sources of funds of the companies are as follows:
– (A) Long-term Funds
• (i) Ownership Capital — equity and preference capital, and Non-voting Shares.
• (ii) Debt Capital — debentures and long-term borrowings in the form of
deposits from public or credit limits or term loans or advances from banks and
financial institutions, etc.
– (B) Short-term Funds
• (i) Borrowings from banks, and other corporates.
• (ii) Trade credits and suppliers’ credits, etc.

5. Characteristics of Securities
• The major characteristics of securities are their
transferability and marketability. These help the
process of trading and investment in them.
• Under the Indian Companies Act, Sections 82 and 111
deal with the transfer of shares. In the case of public
limited companies, the objective of the Companies Act
as also of the Listing Agreement with the Stock
Exchanges is to ensure free and unfettered transfer of
shares. Under Section 82 of the Companies Act, shares
are treated as any movable property. As any right to
property, these are freely transferable.

6. Stock Exchange and New Issue
Markets
• The New Issue Market deals with ‘new securities’ issued for the first
time to the public and the stock exchange deals with those
securities which have already been issued once to the public. Even
though their functions differ, their roles are complementary in
nature. The NIM, functions as a ‘direct’ link between the companies
which require a provision for funds and the investing public.
• The Stock Exchange provides capital to firms ‘indirectly’. The
transactions relating to purchase and sale of securities provide both
liquidity and marketability. The stock exchange is, thus, an
important medium of transfer of resources for those shares which
have already been issued.
• It also plays a role in the transfer of securities with the companies
whose shares are being dealt with as the process of registration of
shares must be conducted when they are transferred.

7. Investment Alternatives
• Deposits- A good portion of the financial assets of
individuals is held in the form of deposits
– Bank Deposits
– Post Office Deposits
– Company Fixed Deposits
• Government Savings Schemes – Government of
India offers a number of small savings schemes to
individual to invest.
– Public Provident Fund
– Senior Citizens’ saving scheme
– National Savings Certificate

8. Investment Alternatives
• Money Market Instruments – Debt Instruments which
have maturity of less than one year at the time of issue
are called money market instruments
• Treasury Bills
• Certificate of Deposit
• Commercial Paper
• Bonds or Debentures- Bons or debentures represent
long term debt instruments.
– Government Securities
– PSU bonds
– Debentures of private sector companies

9. Investment Alternatives
• Equity Shares- Represent ownership capital. As an
equity shareholder, one have a owner ship stake in the
company
– Blue Chip shares
– Growth shares
– Income shares
– Cyclical shares
– Speculative shares
• Mutual Funds – invested in equity shares and fixed
income securities
– Equity schemes
– Debt schemes

10. Investment Alternatives
• Life Insurance- Insurance premiums represents
represent the sacrifice and the assured sum.
– Endowment assurance policy
– Money back policy
– Whole life policy
– Term assurance policy
• Retirement Products
– Employees’ Provident Fund (EPF) Scheme 1952
– Employees’ Pension Scheme (EPS), 1952
– New Pension Scheme, 2004
– Pension schemes of insurance companies and mutual
funds

11. Investment Alternatives
• Real Estate-
– Agricultural Land
– Semi-urban land
– Commercial property
• Precious Objects – Precious objects are items are
generally small in size but highly valuable in
monetary
– Gold and silver
– Precious stones
– Art Objects

12. Equity Market
• Equity market is a place where stocks and shares of companies are
traded. The equities that are traded in an equity market are either
over the counter or at stock exchanges. Often called as stock
market or share market, an equity market allows sellers and buyers
to deal in equity or shares in the same platform.
• First things first, it is important to begin with a good understanding
of what is equity market in the Indian context. Equity market, often
called as stock market or share market, is a place where shares of
companies or entities are traded. The market allows sellers and
buyers to deal in equity or shares in the same platform.
What is liquidity? ( Note)
• What is Liquidity? Liquidity refers to the ease with which an asset,
or security, can be converted into ready cash without affecting its
market price .

13. Debt Market
• The debt market is any market situation where
the trading of debt instruments takes place.
Examples of debt instruments include
mortgages, promissory notes, bonds, and
Certificates of Deposit. A debt market
establishes a structured environment where
these types of debt can be traded with ease
between interested parties.

14. Derivatives Market
• Derivative instruments can be traded on the
stock exchange or can be traded on the over-
the-counter (OTC). Exchange simply defines
the establishment of the stock exchange
where all the securities are traded and follow
the rules and regulations by the SEBI.

15. Government Securities Market
• The marketable debt issued by the government and semi-
government bodies which represents a claim on the
government is called government securities. It is also called
as gilt-edged security. Government securities are issued for
the purpose of refunding the maturing securities for
advance refunding of securities which are not yet matured,
and raising fresh cash resources. Treasury bills and bonds
are the examples of government securities. One of the
important features of the government securities is that
they are considered to be totally secured financial
instruments. They ensure safety of both capital and
income. Central government securities are the safest
amongst all securities.

16. Money Market
• The money market refers to trading in very
short-term debt investments. At the wholesale
level, it involves large-volume trades between
institutions and traders. At the retail level, it
includes money market mutual funds bought
by individual investors and money market
accounts opened by bank customers.

17. Options Market
• The term option refers to a financial instrument
that is based on the value of underlying securities
such as stocks. An options contract offers the
buyer the opportunity to buy or sell—depending
on the type of contract they hold—the underlying
asset. Unlike futures, the holder is not required to
buy or sell the asset if they decide against it. Each
contract will have a specific expiration date by
which the holder must exercise their option. The
stated price on an option is known as the strike
price. Options are typically bought and sold
through online or retail brokers.

18. Futures Market
• A futures market is an auction market in which
participants buy and sell commodity and
futures contracts for delivery on a specified
future date.

19. Stock Exchange and New Issue
Markets Structure
Equity
Market
Debt
Market
Derivatives
Market
Securities
Market
Government
Securities market
Corporate
Debt Market
Money
Market
Options
Market
Future
Market
Reference: Prasana Chandra (2012), “ Investment Analysis and Portfolio
Management” Tata McGraw Hill Publication pg 3.2 Exhibit 3.1

20. Regulatory Body
• The Company Law Board (CLB) who is administration of the
Companies Act, 1956
• The Reserve Bank of India(RBI) which is primary responsible
for the supervision of bank, money market, and
government securities market
• The Securities and Exchange Board of India (SEBI) which is
responsible for the regulation of the capital market
• The Department of Economic Affairs (DEA) an arm of the
government, which is concerned with the orderly
functioning of the financial market
• The Ministry of Company Affairs(MCA) an arm of the
government which is responsible for the administration of
corporate bodies

21. Investor Protection
• Small investors are the backbone of the Indian
capital market and yet a systematic study of
their concerns and attempts to protect them
has been relatively of recent origin. Due to
lack of proper investor protection, the capital
market in the country has experienced a
stream of market irregularities and scandals in
the 1990s. SEBI itself, though formed with the
primary objective of investor protection

22. Rate of Return
• Rate of return on an investment for a period
( Which is usually a period of one year)
Rate of Return = Annual Income + (Ending Price-Beginning Price)
Beginning Price
Price at the beginning of the year =Rs 60.00
Dividend of period paid =Rs 2.40
Price at the end of the year =Rs 66.00
Rate of return= 2.40(66-60)/60= 0.14 or 14%
This shows that value of Rs 1 has gain 0.14 percentage

23. Stock Exchange
• NSE-National Stock Exchange
• BSE- Bombay Stock Exchange
• Nifty – Top 50 companies
• Sensex – Stock Exchange Sensitive Index
• NYSE-New York Stock Exchange
• NASDAQ- National Association of Securities
Dealers Automated Quotation System
• TSE-Tokyo Stock Exchange
• SEAQ – Stock Exchange Automated Quotation
(UK)

24. Financial Market
• It is a market for creation and exchange of financial
assets
– Facilitate prices discovery
– Provide Liquidity
– Reduce the cost of transaction
• Classification of Financial Markets
– Money market- Short term finance claim
– Capital market – long term finance claim
– Primary market – new claims
– Secondary market- outstanding
– Futures market-delivery occurs at a predetermine time
– Spot market- delivery occur immediately