OBJECTIVE OF THE SUBJECT

The objective of this subject is to

provide the students with a
conceptual framework of stock
markets, functionaries in these
markets & their mode of training.
 SYLLABUS
Module 1: Basics of Investing: 10 Hrs
Financial System – Meaning, Definitions, Features
and Functions of Financial System. Classification
of Financial System. Basics of Investment &
Investment Environment - Meaning and Objectives
of Investment. Investment Process, Risk and
Return, Sources of Financial information.
Introduction to Fundamentals and Technical
Analysis
The word finance is derived from the Latin
word ‘finis’ which means money.
It refers to the management of the flow of
money through organizations.
 The term "finance" in our simple understanding is
perceived as equivalent to 'Money'.
 But finance exactly is not money, it is the source of
providing funds for a particular activity.
 Thus finance does not mean the money with the
Government, but it refers to sources of raising
revenue for the activities and functions of a
Government.
According to O. Ferrel C & Geoffrey Hirt, “ The term
finance refers to all activities related to obtaining
money and its effective use”.

According to Henry Ford, “ Finance or money is an

arm or leg which one can either use it or lose it”.
 A financial system is a complex, well integrated set of sub-
systems of financial institutions, markets, instruments and
services which facilitates the transfer and allocation of funds,
efficiently and effectively.

 The word "system", in the term "financial system", implies a

set of complex and closely connected or interlined institutions,
agents, practices, markets, transactions, claims, and liabilities
in the economy.
 Objectives of Financial System
• Mobilization of savings & converting it into
investments
• To create link between savers & investors.
• To provide financial support & assistance to the
business organizations
• To facilitate the growth & expansion of financial
markets
• To encourage rapid industrialization
• Development of backward & rural areas &
infrastructure development of the country
• To safe guard the financial environment
• To facilitate economic development of the country
 Savings Function

Liquidity Function

Risk Function

Payment Function

Policy Functions

Promotional Functions
 Development of Financial System in
India
• The development of financial system in the
country took a different turn after
Independence so as to fulfil the
socioeconomic and political objectives.
• The Government started creating new
financial institutions to supply finance both
for agricultural & industrial development and
also started nationalizing some important
financial institutions so that the flow of
finance might be in the right direction.
 Roadmap of Development
• Nationalization of Financial Institutions-
RBI was established in 1935 and was
nationalized in 1948.
• Nationalization of the Imperial Bank of
India in 1955 by renaming it as State Bank
of India
• In 1955, Merger of 245 insurance
companies into a single corporation called
Life Insurance Corporation of India.
 Roadmap of Development
• Starting of Unit Trust of India is another
landmark in the history of development of
financial system to strengthen the system and to
supply institutional credit to industries which was
established in 1964 which is the oldest & largest
mutual fund in India.
• Establishment of Development Banks-
IFCI- Industrial Finance Corporation of India set
up in 1948 with the object of making medium &
long term credits available to industries.
 Roadmap of Development
• SFC’s- State Financial Corporations were
established under the State Financial
Corporation Act, 1951 with a view to
providing medium & long term finance to
medium & small industries.
• ICICI- Industrial Credit & Investment
Corporation of India in 1955 to develop
large & medium industries in private sector
on the initiative of World Bank.
 Roadmap of Development
• At the state level , the State Industrial
Development Corporations (SIDCO)/State
Industrial Investment Corporations were
created to meet the financial requirements of
the states and to promote regional
development.
• In 1971 IDBI & LIC jointly set up the Industrial
Reconstruction Corporation of India (IRCI) wit
the main objective of reconstructing and
rehabilitating sick industrial undertaking.
 Roadmap of Development
• The National Bank for Agriculture and Rural
Development (NABARD) was established in
July 1982. The functions of Agricultural Credit
Department and Rural Planning and Credit
Cell of the RBI have taken over by NABARD.
• The Export & Import Bank of India(EXIM Bank)
was set-up in January 1st, 1982 to takeover the
operations of International Finance wing of
IDBI. Its main objective is to provide
assistance to exporters & importers.
 Roadmap of Development
• The Stock Holding Corporation of India Ltd
was set- up in 1987 to tone up the stock &
capital markets in India. Its main objective is to
provide quick share transfer facilities, clearing
services, depository services, support
services, management information services
etc. The SHCIL was set-up by seven financial
institutions viz.., IDBI, IFCI, ICICI, LIC, GIC,
UTI & RBI
 Roadmap of Development
• Credit Rating Agencies have been established
to help investors to make a decision of their
investment in various instruments and to protect
from risky ventures. Credit rating is now
mandatory for all debt instruments. Some of the
credit rating agencies established are:
• Credit Rating & Information Services of India
Ltd., (CRISIL).
• Investment Information & Credit Rating Agency
of India Ltd., (ICRA).
• Credit Analysis & Research Ltd.,(CARE)
 Roadmap of Development
Legislative Support

The Indian Companies Act- The act was passed

in 1956 with a view to regulate the functioning of
companies from birth to death. It mainly aims at
giving more protection to investors.
Securities Contracts Regulation Act- The act was
passed in 1956 to prevent undesirable
transactions in securities. It mainly regulates the
business of trading in the stock exchanges.
 Roadmap of Development
Legislative Support

Monopolies & Restrictive Trade Practices Act-

This act was passed in 1970 to ensure the proper
functioning of the economic system and to
prevent concentration of economic power in the
hands of a few.
Foreign Exchange Regulations Act- This act was
passed in 1973 to regulate the foreign exchange
dealings and to control Indian Investments abroad
& vice versa.
 Roadmap of Development
Legislative Support
Securities Exchange Board of India Act-
The Securities and Exchange Board of India (SEBI) is
the regulator for the securities market in India. It was
established in the year 1988 and given statutory powers
on 30 January 1992 through the SEBI Act, 1992.

Indian Contract Act- This Act may be called the Indian

Contract Act, 1872 as it extends to the whole
of India [except the State of Jammu and Kashmir]; and it
shall come into force on the first day of September, 1872.
 Roadmap of Development
Legislative Support
Negotiable Instrument Act- THE NEGOTIABLE
INSTRUMENTS ACT, 1881 ACT NO. 26 OF 1881
[9th December, 1881.] An Act to define and amend
the law relating to Promissory Notes, Bills of
Exchange and Cheques.
Banking Regulation Act- The Banking Regulation
Act, 1949 is a legislation in India that regulates
all banking firms in India. Initially, the law was
applicable only to banking companies. But, 1965 it
was amended to make it applicable to
cooperative banks and to introduce other changes.
 Financial System &
Economic Development

[Link] Savings
[Link] Investments
[Link] Investments in Financial Assets
[Link] Savings on the Basis of National
Priorities
[Link] Trade, Industry & Agriculture
[Link] Entrepreneurial Talents
[Link] Financial Services
[Link] Backward Areas
 Weakness of Indian Financial
System
 Lack of Coordination between different
financial institutions.

 Monopolistic market structures

 Erratic Capital Market

 Differences between Banks &
NBFC’s
Banks NBFC’s
Bank is a government An NBFC is a company
authorized financial that provides banking
intermediary that aims services to people
at providing banking without holding a bank
services to the general license.
public.
Demand Deposit Demand Deposit not
accepted accepted
Incorporated under Incorporated under
Banking Regulation Act, Companies Act 1956
1949
 Definition

Institution which collects funds from

the public and places them
in financial assets, such as
deposits, loans and bonds, rather
than tangible property.
 These are the business organizations that act
as mobilizes of savings, and as purveyors of
credit or finance
 Also provide various financial services
 Deal in financial assets such as deposits, loans,
securities
 These assets can be seen on the asset side of
the balance sheet of banks or any other
1. Banking Financial Institutions
 Which participate in the economy’s payments system i.e.,
they provide transaction services
 Their deposits liabilities constitute a major part of the national
money supply

2. Non-banking financial institutions

 Which act as mere purveyors of credit and they will not create.
e.g., LIC, UTI, IDBI
• The amount of money that is left over after
personal expenses have been met can be
positive.
• For those who tend to rely on credit and loans
to make ends meet, they will have negative
savings.
• Savings can be turned into further increased
income through investing.
Investment is the allocation of monetary resources to
assets that are expected to yield some returns over a
period of time. It involves the commitment of resources
which have been saved with the expectation that some
benefits will accrue in future.

In other words, Investment is a commitment of funds to

derive the future income in the form of interest,
dividend, rent, premium or appreciation in the value of
principal capital.
 An investment is a monetary asset
purchased with the idea that the asset will
provide income in the future or appreciate
and be sold at a higher price.
 Investment means sacrificing some money
value in the present with the expectation of
making gains in the future.
 Element of sacrifice
 Element of futurity
 Risk
 Expectation of gains
  Safety
 Regularity of Income
 Capital Gain
 Tax Savings
 Liquidity
 Speculation
.  Hedging
 Arbitrage
 Arbitrage is a financial process that occurs when someone
sells the same asset in two different markets
simultaneously, one at a higher price than the other.
Arbitrage allows investors to gain profit in the difference
between the two market prices. The pay-off investors
receive may be large enough to cover the cost of
simultaneous transactions.
 Arbitrageurs are professionals who practice arbitrage.
They sell assets such as:
•Stocks
•Bonds
•Derivatives, including futures contracts and forwards
•Commodities, such as grain, oil or natural gas
•Currency, such as USD or Euros
The following examples illustrate
the arbitrage process:

The stock for a phone company

trades for $25 on the NYSE. At the
same time, it trades for $25.50 at
the Shanghai Stock Exchange.
The arbitrageur buys the stock
from the NYSE and immediately
sells it on the Shanghai market,
earning a profit of 50 cents.
 Returns
 Capital Appreciation
 .
Safety & Security of Funds
 Safety of Principal
 Stability of Income
 Liquidity
 Tax benefits
 Capital growth
.
• A return, also known as a
financial return, in its simplest
terms, is the money made or
lost on an investment over
some period of time.

• A return is the change in price of

an asset, investment, or project
over time, which may be
represented in terms of price
change or percentage change.
 Attributes of Return
• A return can be expressed nominally as the change
in rupee/dollar /pound value of an investment
over time.
• A return can also be expressed as a percentage
derived from the ratio of profit to investment.
• A positive return represents a profit while a
negative return marks a loss.
• The total return for stocks includes price change
as well as dividend and interest payments.
• Several return ratios exist for use in fundamental
analysis.
 Types of Return

• Expected return = best guess of what return

will be if we invest in a security
• Required return = minimum return that we
will accept on the investment; minimum
acceptable return
• Actual return = not known until after we buy
and then sell the security some time late
Components of Return

 Dividend
 Interest
 Capital
yield/appreciation
 Definition of Risk

Risk is defined as a condition in which there is

a possibility of an adverse deviation from a
desired outcome, that is expected or hoped for.
Thus , risk is a combination of circumstances,
and in this combination ,there is a possibility of
loss.
• Why risk must be considered while investing?
• While evaluating an investment it is important to
gauge the risk along with the probable return as risk
and return are two sides of the same coin.
 Types of Information

• The types of information, which are relevant for

investment purpose, are of the following
categories:
(i) World Affairs: International factors, which
influence domestic, output and employment
and for investment in the domestic market.
Also foreign political affairs, wars, crude oil
prices and the state of foreign markets affect
our markets.

(ii)Domestic Economic and Political Factors;

Gross domestic products, agricultural output,
monsoon, money supply, inflation, Govt,
policies, taxation, etc., affect our markets.
 Types of Information

(iii) Industry information: Market demand, installed capacity,

competing units, capacity utilization, market share of the major units,
market leaders, prospects of the industry, international demand for
exports, inputs and capital goods abroad, import competing
products, labour problems and Govt, policy towards the industry are
all relevant factors to be considered in investment decision making.

(iv) Company information: corporate data, annual reports, stock

exchange publications. Dept, of company affairs and their circulars,
press releases on corporate affairs by Govt, industry chambers or
associations of industries etc. are also relevant for security prices
analysis.
 Types of Information

(v) Security Market information; The Credit rating of companies,

data on market trends, security market analysis and market
reports, trade and settlement data, listing of companies and
delisting, record dates and book closures etc.
(vi) Data on Related Markets: Such as Govt, securities, money
market, forex market, commodities market etc. are useful for
deciding on alternatives avenues of investment.
(vii) Data on Mutual Funds: Their schemes and their
performance, N A V and repurchase prices etc. are needed as
they are also investment.
 Types of Information
1. World Affairs: The day-to- day developments abroad are
published in Financial Journals like Economic Times,
Financial Express, Business Line, etc.
2. Some foreign journals, like wall street journal, London
economist, and Far East economic Review and Indian
journals like, Business India, Fortune India etc. also contain
developments of economic and financial nature in India and
abroad. IMF News survey, World Bank and IMF Quarterly
Journal, (namely, Finance and Development) News Letters
of Foreign Banks like those of Grindlays, Standard, etc.,
contain all the needed information on world development.
 Types of Information
2. National Economic Affairs: The daily newspaper particularly
financial papers referred to above contain all the national
information; Beside Journal like Economics and Political Weekly,
Business India, Data line business. Business Today, Fortune
India contain the material on economic developments.
RBI's Annual Reports, Reports on currency and finance and RBI
monthly Bulletins and CMIE reports all contains a wealth of
information on the economy and the country.
The Economics Survey of the Govt, of India provide the
information on, economy, industry, trade sector of the country.
The reports of the Planning Commission and annual reports of
various ministries also contain a lot of information and data on
the respective organization.
 Types of Information
• 3. Industry Information: There are various Associations -
Chambers of Commerce, Merchants' Chambers and other agencies
who publish Industry data. The reports of planning commission,
govt, of India, publications from Industry and commerce Ministries
also contain a lot of information. The Center for Monitoring Indian
Economy (CMIE) publishes various volumes and update them from
time to time containing data on various sectors of the economy and
industries, and the subscribers get these volumes and reports.
• Directory of information published by the B.S.E. also contains
information on industries and companies and this is updated from
time to time. Many Daily financial papers brings out regularly
studies on various Industries and their prospects. Industry data
micro level is available in Govt, publications, industry-wise, the
monthly reports of various Associations of Industries give more up-
to-date and timely information
 Types of Information
• 4. Company information: The information on various companies
listed on stock exchanges is readily available in daily financial
papers. Besides the fortnightly journals of capital market, Dalalstreet,
business India contain a lot of information on the industries and
companies, listed on stock exchanges.
• Results of equity and market research are also published in these
journals. As referred to earlier the B.S.E (Bombay stock exchange)
publishes directory of capital market and dalal street also publish
these data.
• Computer software weekly reviews, monthly reviews giving data on
various aspects of listed companies.
• The annual reports of companies and their half yearly unaudited
results are another source of information on the companies.
• The financial journalists give write ups on various companies after
interviewing their executives and these are published in economic
times and other financial dailies, like business line & financial
express.
 Types of Information
• 5. Security market information: A number of big broker firms who have
equity research are sending newsletter on market information with
fundamental and technical analysis, combined in those report's to their
clients.
• The capital market, dalal street, business India and few other stock
market journals like fortune India, investment week, etc. contain the
information on security markets.
• The ICFAI also publishes a monthly called chartered financial analyst
which contains economic data company information and market
information security analysis. The data on Trade cycles and settlements,
record dates, book closures etc., are contained in financial papers like
Economic Times, Business Line, Financial Express etc., after they are
released by stock exchanges and companies. While the newsletter of
Merchant Bankers, brokers' firms.
• Investment Analysts, are available to subscribers or their own clients,
others are available for all at stipulated prices.
 Types of Information
• 7. Data on Related Markets; Data on Money markets Govt. Securities
Market are available in the publications of RBI Indian Bank Association,
Securities Trading Corporation and banks NSE.
• These data are published on a daily basis on the financial Dailies and
journals. The publications who deal with these markets are however fewer
in number compared to those on stock and capital markets.
• The information on forex markets is available in IRB publication, foreign
exchange dealers association and foreign banks. These data are
published in the form of exchanges rates and cross Currency rates in
financial dailies regularly.
• The developments in these markets are reviewed in the dailies or weekly
and fortnightly journals. The data on Bullion market and rates for gold and
silver are available on a Daily basis in the financial press. These data are
published in RBI Bulletins and are also available in CMIE reports. Many of
these data on forex markets in countries abroad can be obtained from
London Economist, Eastern Economic Review, and Wall Street journal.
 Types of Information
• Security Price Quotations: The daily quotations on various Stock
Exchanges OTCEI and NSE are published in the daily papers. Each
stock Exchange is publishing its own daily quotations list giving out
opening, high low and closing quotations of all traded securities.
• They also publish volume of trade for individual securities and also
the total for all securities traded on a daily basis, in terms of shares
and value of trades.
• The Price indices, for all securities, industry-wise, region-wise etc.,
are published by the RBI B.S.E and major Stock Exchanges, in the
country. Besides each financial Daily has its own Index published in
its paper.
 Types of Information
Data on primary market: New issues in the pipeline are first known to the
SEBI as they get the draft prospectus for vetting and even before that, they
would come to know of them from merchant bankers' reports. But
consolidation and publications of this information is done by a magazine called
"PRIME" publication.
Prime publishes all information of new issues in the pipe line - industry- wise
and size wise analysis and public over subscription and under subscription etc.
the performances of companies.
Merchant bankers, underwriters and broker etc. in the new issue market are
also analyzed by them. Geographical and centrewise collection of new issues
and other relevant company information are given by them. Following them a
number of magazines, merchant bankers, registers and brokers like Karvys
are publishing them.
Financial journalists are giving a write up on the forthcoming new issues as
also some cable operators. The RBI and Dept, of company affairs in addition
to SEBI collect and publish these data from time to time in their reports once in
a quarter, half yearly and yearly.
MEANING OF FUNDAMENTAL
ANALYSIS
• The basic purpose of buying a security is
to earn dividends and ultimately sell it at
higher price. An investor, therefore, is
interested in obtaining estimates of future
dividends, and also the future price of the
share. These in turn will depend upon the
performance of the industry to which the
company belongs, and the general
economic situation of the country.
 Meaning of Fundamental Analysis
• Fundamental Analysis is a process of analyzing a
security in order to determine its fair value (also
known as intrinsic value), by evaluating relevant
economic, financial, non-financial and other
quantitative and qualitative factors.
• In other words, a fundamental analyst evaluates the
health and the performance of any company by
observing the crucial numbers and major economic
indicators.
The objectives of Fundamental
Analysis of Stock Market
• To predict the future price of the share of the
company
• To do the valuation of the asset of the company
• In order to project the performance of the
business
• To measure the credit risk
• To evaluate the management’s decisions
• In order to find the intrinsic value of the asset
Fundamental Analysis Framework
Fundamental analysis comprises of:
▫ Economic analysis
▫ Industry analysis
▫ Company analysis

• Basically uses two types of approach

▫ Top – down approach
▫ Bottom – up approach
 Types of Information
• Economy-wide factors. These include the
factors like growth rate of the economy,
the rate of inflation, foreign exchange rates
etc. which affect profitability of all
companies
 Types of Information
• 2. Industry-wide factor. These include factors, which are
specific to industry to which the company belongs. For
instance, the demand supply gap in the industry. The
emergence of substitutes, and changes in government
policies towards industry affect the company belonging
to an industry. 3. Company specific factors. These
factors are specific to a firm. The firm-specific factors like
plant and machinery, the brand image of the product,
and ability of the management to affect the profitability.
 Phases of Fundamental Analysis
PHASE NATURE PURPOSE INDICATORS
FIRST Economic To access the general Economic indicators
Analysis economic situation of
the nation
SECON Industry To assess the prospects Industry life cycle analysis,
D Analysis of various industry Competitive analysis of
groupings. industries etc.
THIRD Company To analyse the Analysis of Financial
Analysis Financial and Non- Aspects: Sales, Profitability,
financial aspects of a EPS etc. Analysis of Non-
company to determine financial aspects:
whether to buy, sell or management, corporate
hold the shares of a image, product, quality etc.
company.
 Meaning of
Technical Analysis
Technical analysis is a means of
examining and predicting price
movements in the financial
markets, by using historical price
charts and market statistics. It is
based on the idea that if a trader
can identify previous market
patterns, they can form a fairly
accurate prediction of future price
trajectories.
DIFFERENCES BETWEEN
 LINE
CHART

BAR
CHART
 JAPANESE
CANDLE
STICK

POINT &
FIGURES
 HEAD &
SHOULDERS

SUPPORT &
RESISTENCE