Investment Analysis and Portfolio Management

Investment Analysis
and
Portfolio Management

COURSE INSTRUCTOR:
Hyacinth Chebangang
(DIPET II, M.Sc. Ph.D)
675428084/694658604
Chebanganghgmail.com

INTRODUCTION TO INVESTMENT

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Companies issue securities from time to time to raise funds in order to meet their
financial requirements for promotion, modernization, expansion, and
diversification or for regular working capital programs. These securities are issued
directly to the investors (both individual as well as institutional) through the
mechanism called primary market or new issue market. The primary market refers
to the set-up which helps the industry to raise funds by issuing different types of
securities.
The money a person earns is partly spent and the rest saved for meeting future
expenses. Instead of keeping the savings idle he may like to use savings in order to
get return on it in the future. This is called Investment.
The term investment refers to exchange of money wealth into some tangible
wealth. The money wealth here refers to the money (savings) which an investor
has and the term tangible wealth refers to the assets the investor acquires by
sacrificing the money wealth. By investing, an investor commits the present funds
to one or more assets to be held for some time in expectation of some future return
in terms of interest or dividend and capital gain.
Definition: “Investment may be defined as an activity that commits funds in any
financial/marketable or physical form in the present with an expectation of
receiving additional return in the future.” For example, a Bank deposit is a
financial asset, the purchase of gold is a physical asset and the purchase of bonds
and shares is marketable asset. “Investment is the commitment of current funds in
anticipation of receiving larger inflow of funds in future, the difference being the
income”.
An investor hopes to be compensated for
(i) forgoing present consumption,
(ii) (ii) for the effects of inflation, and
(iii) (iii) for taking a risk. Features:
There are three basic features common to all types of investment:
1. There is a commitment of present funds.

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2. There is an expectation of some return or benefits from such commitment in

future, and
3. There is always some risk involved in respect of return and the principal
amount invested
1.1 WHAT IS SECURITY? A security means a document that gives its owner a
specific claim of ownership of a particular finance asset. Financial market provide
facilities for buying and selling of financial claims and services. Thus, securities
are financial instruments which are bought and sold in the financial market for
investment. The important financial instruments are shares, debentures, bonds, etc.
Other financial instruments are also known as securities such as Treasury Bill,
Mutual Fund Units, Fixed Deposits, Insurance Policies, Post Office Savings like
National Savings Certificates, Kisan Vikas Patras, Public Provident Funds, etc.
Some of these securities are transferable while some of them are not transferable.
1.2 INVESTMENT OBJECTIVES Investment is a widespread practice and
many have made their fortunes the process. The starting point in this process is to
determine the characteristics of the various investment and then matching them
with the individuals need and preferences. All personal investing is designed in
order to achieve certain objectives. These objectives may be tangible such as
buying a car, house, etc., and intangible objectives such as social status, security,
etc. Similarly, these objectives may be classified as financial or personal
objectives. Financial objectives are safety, profitability and liquidity. Personal or
individual objectives may be related to personal characteristics of individual such
as family commitments, status, etc.
The objectives can be classified on the basis of the investors approach as
follows:
(a) Short-term high priority objectives: Some investors have high priority
towards achieving certain objectives in short time. For example, a young couple
will give high priority to buy a house.
(b) Long-term high priority objectives: Some investors look forward and invest
on the basis of objectives of long-term needs. They want to achieve financial
independence in long period. For example, investing for post-retirement period or
education of child, etc.

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(c) Low priority objectives: These objectives have low priority in investing.
These objectives are not painful. After investing in high priorities assets,
investors can invest in these low priority assets. For example, provision for tour,
domestic appliance, etc.
(d) Money making objectives: Investors put their surplus money in this
kind of investment. Their objective is to maximize wealth. Usually, the investors
invest in shares of companies which provides capital appreciation apart from
regular income from dividend.
Other objectives of investment:
1. RETURN:
Investors expect a good rate of return from their investments. Return from
investment may be in terms of revenue return or income (interest or dividend)
and/or in terms of capital return (capital gain i.e. difference between the selling
price and the purchasing price). The net return is the sum of revenue return and
capital return.
a) Expected Return: The expected return refers to the anticipated return for some
future period. The expected return is estimated on the basis of actual returns in the
past periods. b) Realized Returns: The realized return is the net actual return
earned by the investor over the holding period. It refers to the actual return over
some past period.
2. RISK: Variation in return i.e., the chance that the actual return from an
investment would differ from its expected return is referred to as the risk.
Measuring risk is important because minimizing risk and maximizing return are
interrelated objectives. There are two types of risk i.e. Systematic Risk and
Unsystematic Risk which is discussed in detail later in this chapter.

3. LIQUIDITY: Liquidity, with reference to investments, means that the

investment is saleable or convertible into cash without loss of money and without
loss of time. Different types of investments offer different type of liquidity. Most
of financial assets provide a high degree of liquidity. Shares and mutual fund units
can be easily sold at the prevailing prices. An investor has to build a portfolio
containing a good proportion of investments which have relatively high degree of
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liquidity. Cash and money market instruments are more liquid than the capital
market instruments which in turn are more liquid than the real estate investments.
For ex, money deposited in savings a/c and fixed deposit a/c in a bank is more
liquid than the investment made in shares or debentures of a company.

4. SAFETY: An investor should take care that the amount of investment is safe.
The safety of an investment depends upon several factors such as the economic
conditions, organization where investment is made, earnings stability of that
organization, etc. Guarantee or collateral available against the investment should
also be taken care of.
 Bonds issued by central banks are completely safe investments as compared
with the bonds of a private sector company.
 Likewise it is more safer to invest in debenture than of preference shares of a
company
 Accordingly, it is safer to invest in preference shares than of equity shares of
a company, the reason being that in case of company liquidation, order of
payment is debenture holders, preference share holds and then equity share
holders.
5. TAX BENEFITS: Investments differ with respect to tax treatment of initial
investment, return from investment and redemption proceeds. For example,
investment in Public Provident Fund (PPF) has tax benefits in respect of all the
three characteristics. Equity Shares entails exemption from tax ability of dividend
income but the transactions of sale and purchase are subject to Securities
Transaction Tax or Tax on Capital gains. Sometimes, the tax treatment depends
upon the type of the investor. The performance of any investment decision should
be measured by its after tax rate of return. For example, between 8.5% PPF and
8.5% Debentures, PPF should be preferred as it is exempt from tax while debenture
is subject to tax in the hands of the investors.
6. REGULARITY OF INCOME:
The prime objective of making every investment is to earn a stable return. If
returns are not stable, then the investment is termed as risky. For example, return
(i.e. interest) from Savings a/c, fixed deposit a/c, Bonds & Debentures are stable

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but the expected dividends from equity share are not stable. The rate of dividend
on equity shares may fluctuate depending upon the earnings of the company
1.3 INVESTMENT AND SPECULATION
“Speculation, is an activity, quite contrary to its literal meaning, in which a person
assumes high risks, often without regard for the safety of his invested principal, to
achieve large capital gains.” The time span in which the gain is sought to be made
is usually very short. Investment involves putting money into an assets which is
not necessarily in order to enjoy a series of returns. The investor sacrifice some
money today in anticipation of a financial return in future. He indulges in a bit of
speculation. There is an element of speculation involved in all investment
decisions. However, it does not mean that all investment are speculative by nature.
Genuine investments are carefully thought out decisions. On the other hand,
speculative investments are not carefully thought-out decisions. They are based on
tips and rumors. An investment can be distinguished from speculation in three
ways–risk, capital gain and time period. Risk has definite financial meaning it is
a possibility of incurring a loss in a financial transaction. Investment involves
limited risk while speculation is considered as an investment of funds with high
risk. Speculation involves buying a security at a low price and selling at a high
price to make a capital gain. Investment involves longer-term allocation of funds,
whereas speculation involves holding a security for a short-term and trading
quickly for earning higher gain. Speculation involves a higher level of risk and a
more uncertain expectation of return. Investments are not risk-free but the risk can
be calculated. The expected return is consistent with the risk of investment.
In speculation, there is an investment of funds with an expectation of some return
in the form of capital profit resulting from the price change and sale of investment.
Speculation is relatively a short term investment. The degree of uncertainty of
future return is definitely higher in case of speculation than in investment. In case
of investment, the investor has an intention of keeping the investment for some
period whereas in speculation, the investor looks for an opportunity of making a
profit and “exit- out” by selling the investment.
FACTOR INVESTMMENT SPECULATION

1. Degree of risk Relatively lesser Relatively higher

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2. Basis of return Income and capital gain Change in market price

3. Basis for decision Analysis of fundamentals Rumors, tips, etc

4. Position of investor Ownership Party of an agreement

5. Investment period Long term Short term

1.4 ELEMENTS OF INVESTMENT

(a) Return: Investors buy or sell financial instruments in order to earn
return on them. The return on investment is the reward to the investors. The
return includes both current income and capital gains or losses, which arises by the
increase or decrease of the security price.
(b) Risk: Risk is the chance of loss due to variability of returns on an investment.
In case of every investment, there is chance of loss. It may be loss of interest,
dividend or principal amount of investment. However, risk and return are
inseparable. Return is a precise statistical term and it is measurable. But the risk is
not precise statistical term.
(c) Time: Time is an important factor in investment. It offers several different
courses of action. Time period depends on the attitude of the investors who follows
a ‘buy and hold’ policy. As time moves on analysts believe that conditions may
change and investors may revaluate expected return and risk for each investment.

1.5 FACTORS INFLUENCING SELECTION OF AN INVESTMENT

ALTERNATIVE
There are several constraints that an individual has to take into account before
making an investment. These include:
1. Liquidity: This is one of the parameters used to measure the efficiency
of an investment alternative or instrument. Liquidity is the ability to convert an
investment into money. Higher the liquidity for an investment, higher would be its
demand and vice versa. At the same time, marketability is the measure of demand
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for an investment instrument. The higher the demand, the easier it is to find a
buyer. Liquidity of an investment provides security to the investor that the money
would be available when needed. By way of example, Mrs. Rupiah may sell the
shares invested in a company any time because they have yielded high returns to
pay off a house loan
2. Age: The ability of an individual to take risk is linked with his/her age.
Typically, the higher the age of an individual, the low is the risk appetite or
tolerance.
3. Taxes: The government declares tax benefits for citizens through rebates,
exemptions etc. and these should be considered while making any investment. For
example, under Sec 80CCC an investor gets tax benefit for his investments in
ELSS (Equity Linked Savings Schemes). Investors need to take a call between the
tax benefit and returns these schemes offer. Other options may not have a tax
benefit but may be more lucrative in terms of returns.
4. Need for Regular Income: Investors may have a need to obtain periodical or
regular returns and this will influence their decision to invest in such instruments
5. Time Horizon: As explained before, the time horizon will vary from short term
(as short as one day) to long term which could be a few months to several years
6. Risk Tolerance: Investment decisions are always a tradeoff between the risks
appetites of the investor versus the returns expected. This relation has already been
explained.
7. Lack of time: Some investment instruments like equity (shares), mutual funds,
real estate, and insurance products need a fair amount of analysis to ensure that the
return profile is understood. Sometimes investors, typically professionals like
doctors or lawyers who are interested in these investments, may not be able to
spare the required time for performing the analysis. They may then seek the help of
an intermediary or an advisor. The advisor’s investment objectives may or may not
match with those of the investor and this in itself constitutes a risk. Therefore,
there is no excuse to blindly relying on someone’s advice without possessing
reasonable knowledge of the investment
8. Price Discovery: Several assets such as shares are very active market
instruments and may be volatile. This creates uncertainty in the minds of the

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buyer as to the direction the price will move towards if they buy. Will it come
down leading to a loss or go up resulting in profit?

1.6 INVESTMENT v/s SPECULATION v/s GAMBLING

There is often some confusion between the terms investment, speculation
and gambling. This confusion is often linked with investments made in the
stock market. Investing is NOT gambling. Gambling is putting money at risk by
betting on an uncertain outcome with the hope that you might win money. Part of
the confusion between investing and gambling, however, may come from the way
some people use investment vehicles. For example, it could be argued that buying
a stock based on a ‘hot tip ‘is essentially the same as placing a bet at a casino. A
‘real’ investor does not simply throw his money at any random investment. S/he
first analyses the situation. If there is a reasonable expectation then only s/he
invests. Many people believe that certain investments are speculative in nature. Are
they? An investment may be said to be speculative in nature when the investor
takes a position on the timing of making the investment and exiting from the same.
The time horizon may be as short as a day or sometimes several weeks.
Investments are deemed to be speculative because there is usually no firm
basis other than haunch or intuition for making that investment decision.
Examples of such speculative investments include buying and selling shares in
what is called an intra-day trade. Mr Tallah may buy a share in the morning when
the market opens at say 176 XAF and hope to sell it by the end of the day at 188
XAF. Since nothing fundamentally can explain this investment decision, this may
be speculative. There is the possibility that Mr Tallah has tracked the performance
of this stock or has received a tip from Mr Boke and has taken this decision. Even
in such a case, the investment is speculative. If the share finds buyers at 188
XAF or more, the speculation has been profitable. However if the price falls
and Mr Tallah has to exit i.e. sell the share at a lower value than his purchase price,
it is speculation that results in a loss.
Points of Comparison Investment Market Portfolio
Usually investors have A Speculator has many
longer investment very short planning
Planning Horizon horizon which leads to horizon. His holding
few years. Investors period normally extends
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generally opt for longer from few days to few

investment horizon months.
An investor normally is Spectators, knowingly or
willing to assume a unknowingly is ready to
Risk reasonable & moderate take very high level of risk.
level of risk and he is rarely Generally he is ready to lose
to assume high level of risk. basic capital also.
Return Expectation An investor usually seeks a Speculator usually has a
reasonable rate of return at very high return expectation
limited risk offered by the and for that he is ready to
asset classes. bear high risk also.
An investor focuses on Spectator gives more
fundamental aspects and importance to technical
Basic of Decisions evaluates the future charts, news and
prospects of the companies sentiments of the market
in which investment is
made.
Normally, investors Spectators may invest
invest only his own funds borrowed funds and
Leverage and avoids borrowed create leverage positions
fund. Investors don’t to make more money.
create leverage positions.
Some uninformed people compare investments in the stock market with gambling.
It is not at all true. Gambling or betting is more to do with taking a guess at the
probability of an event. For example, you want to bet who will win the football
match. If there are only two teams, then the chances are 50:50. A coin has only two
sides and here also the chances are 50:50, either head or tail. Therefore, the
probability of head or tail is 50 per cent. It means that if the coin is tossed for a
very large number of times - say 10 times - there will be 5 times when it will be
heads and an equal number when it will be tails. However, if someone takes a
guess on whether it will be heads or tails when the coin is tossed eight times, it is
not possible to predict the outcome. In this case the outcome will be a result of
gambling, especially if there is payout involved.
What is Gambling?
Gambling is fundamentally different from investment and speculation in following
respects.

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 Quick Outcome: Normally Outcome of gambling is know very

quickly. The outcome of rolling a dice or the turn of a dice is almost
known quickly.
 Results don’t depend on Economic activity: Normally results of gambling
are not dependent on any economic activity. For example when you create
position in futures or commodities the prices of stocks or commodities are
some where dependent upon economic activity but when you play card and
bet on that the outcome of that doesn’t depend upon any economic activity.
 Lack of significant Economic benefit: Generally gambling doesn’t provide
significant economic outcome. Whereas, investment and speculation can
provide significant economic outcome.
 Gambling should be for fun: Normally rational people do gambling
for fun and not for making money. So it is clear that gambling should be
more done for fun and not for making money.

INVESTMENT ALTERNATIVES

One may invest in:

Physical assets like real estate, gold/jewellery, commodities etc. and/or Financial
assets such as fixed deposits with banks, small saving instruments with post
offices, insurance/provident/pension fund etc. or Marketable assets - securities
market related instruments like shares, bonds, debentures, derivatives, mutual fund
etc.
CLASSIFICATIONS OF INVESTMENT ACTIVITIES:
1. DIRECT INVESTING: Direct investing involves the buying and selling of
securities by investors themselves. The securities may be capital market securities
such as shares, debentures or derivative products, or money market instruments
such as Treasury Bills, Commercial Bills, Commercial Papers, Certificates of
Deposits, or real assets such as land and building, house, etc or non-financial assets
such as gold, silver, art, antiques, etc.
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2. INDIRECT INVESTING: Investors may not directly invest and manage the
portfolio, rather they buy the units of funds that hold various types of securities on
behalf of the investors example, Mutual funds, Public Provident fund (PPF),
National Savings Scheme (NSS), National Savings Certificate (NSC), and
investment in Insurance Company schemes

INVESTMENT PROCESS
1. Investment Policy:
The government or the investor before proceeding into investment, formulates the
policy for the systematic functioning. The essential ingredients of the policy are the
investible funds, objectives and the knowledge about the investment alternatives
and market.
a) Investible funds: The entire investment procedure revolves around the
availability of investible funds. The fund may be generated through savings or
borrowings. If the funds are borrowed, the investor has to be extra careful in the
selection of investment alternatives. The return should be higher than the interest
he pays. Mutual funds invest their owner’s money in securities.
b) Objectives: The objectives are framed on the premises of the required rate of
return, need for regularity of income, risk perception and the need for liquidity.
The risk taker’s objective is to earn high rate of return in the form of capital
appreciation, whereas the primary objective of the risk averse (person not
interested in taking risk) is the safety of the principal.

c) Knowledge: The knowledge about the investment alternatives and markets

plays a key role in the policy formulation. The investment alternatives range from
security to real estate. The risk and return associated with investment alternative
differ from each other. Investment in equity is high yielding but has more risk than
in fixed income securities.
2. Security Analysis:

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After formulating the investment policy, the securities to be bought have to be

scrutinized through the market, industry and company analysis.
Market Analysis: The general economic scenario is reflected in the stock market.
The growth in gross domestic product and inflation are reflected in the stock
prices. The recession in the economy results in a bear market. The stock prices
may be fluctuating in the short run but in the long run they move in trends i.e.
either upwards or downwards.

Industry Analysis: The industries that contribute to the output of the major
segments of the economy vary in their growth rates and their overall contribution
to economic activity. Some industries grow faster than the GDP and are expected
to continue in their growth. For example, IT industry has higher growth rate than
the GDP in 1998. The economic significance and the growth potential of the
industry have to be analysed.
Company Analysis: The Company’s earnings, profitability, operating efficiency,
capital structure and management have to be analysed. These factors have direct
bearing on the stock prices and the return of the investors. Appreciation of the
stock value is a function of the performance of the company. Company with high
product market share is able to create wealth to the investors in the form of the
capital appreciation.
3. Valuation:
The valuation helps the investor to determine the return and risk expected from an
investment in the common stock. Intrinsic Value: Intrinsic value is the present
value of securities of all future cash inflows by using simple discounting models.
Future Value: Future value of the securities could be estimated by using a simple
statistical technique like trend analysis. The analysis of the historical behaviour of
the price enables the investor to predict the future value.
Construction of Portfolio: A portfolio is a combination of securities. The
portfolio is constructed in such a manner to meet the investor’s goals and
objectives.
Diversification: The main objective of diversification is the reduction of risk in
the loss of capital and income. A diversified portfolio is comparatively less risky
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than holding a single portfolio. Various types of diversification are: 1) Debt –

equity diversification
2) Industry diversification
3) Company diversification Selection: Based on the diversification level, industry
and company analyses the securities have to be selected. Funds are allocated for
the selected securities.
Evaluation: The portfolio has to be managed efficiently. The efficient
management calls for evaluation of the portfolio.
Appraisal: The return and risk performance of the security vary from time to time.
The variability in returns of the securities is measured and compared. The
developments in the economy, industry and relevant companies from which the
stocks are bought have to be appraised. The appraisal warns the loss and steps can
be taken to avoid such losses.
Revision: Revision depends on the results of the appraisal. The low yielding
securities with high risk are replaced with high yielding securities with low risk
factor. To keep the return at a particular level necessitates the investor to revise the
components of the portfolio periodically.
RISK
Investors invest for anticipated future returns, but these returns can be rarely
predicted. The difference between the expected return and the realized return and
latter may deviate from the former. This deviation is defined as risk.
All investors generally prefer investment with higher returns, he has to pay the
price in terms of accepting higher risk too. Investors usually prefer less risky
investments than riskier investments. The government bonds are known as risk-
free investments, while other investments are risky investments

SYSTEMATIC RISK It affects the entire market. It indicates that the entire
market is moving in particular direction. It affects the economic, political,
sociological changes. This risk is further subdivided into:
1. Market risk 2. Interest rate risk 3. Purchasing power risk

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1. Market risk: Jack Clark Francis defined market risk as “portion of total
variability in return caused by the alternating forces of bull and bear markets.
When the security index moves upward for a significant period of time, it is bull
market and if the index declines from the peak to market low point is called
troughs i.e. bearish for significant period of time.
The forces that affect the stock market are tangible and intangible events. The
tangible events such as earthquake, war, political uncertainty and fall in the value
of currency. Intangible events are related to market psychology.
For example – In 1996, the political turmoil and recession in the economy resulted
in the fall of share prices and the small investors lost faith in market. There was a
rush to sell the shares and stocks that were floated in primary market were not
received well.
2. Interest rate risk: It is the variation in single period rates of return caused by
the fluctuations in the market interest rate. Mostly it affects the price of the bonds,
debentures and stocks. The fluctuations in the interest rates are caused by the
changes in the government monetary policy and changes in treasury bills and the
government bonds.
Interest rates not only affect the security traders but also the corporate bodies who
carry their business with borrowed funds. The cost of borrowing would increase
and a heavy outflow of profit would take place in the form of interest to the capital
borrowed. This would lead to reduction in earnings per share and consequent fall
in price of shares.
3. Purchasing power risk: Variations in returns are due to loss of purchasing
power of currency. Inflation is the reason behind the loss of purchasing power. The
inflation may be, “demand-pull or cost-push “.
Demand pull inflation, the demand for goods and services are in excess of their
supply. The supply cannot be increased unless there is an expansion of labour force
or machinery for production. The equilibrium between demand and supply is
attained at a higher price level.
Cost-push inflation, the rise in price is caused by the increase in the cost. The
increase in cost of raw material, labour, etc makes the cost of production high and
ends in high price level. The working force tries to make the corporate to share the

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increase in the cost of living by demanding higher wages. Hence, Cost-push

inflation has a spiraling effect on price level.
UNSYSTEMATIC RISK
Unsystematic risk stems from managerial inefficiency, technological change in
production process, availability of raw materials, change in consumer preference
and labour problems. They have to be analyzed by each and every firm separately.
All these factors form Unsystematic risk.
They are 1. Business risk 2. Financial risk
1. BUISNESS RISK:
It is caused by the operating environment of the business. It arises from the
inability of a firm to maintain its competitive edge and the growth or stability of
the earnings. The variation in the expected operating income indicates the business
risk. It is concerned with difference between revenue and earnings before interest
and tax. It can be further divided into:
 Internal business risk
 External business risk
Internal business risk - it is associated with the operational efficiency of the firm.
The efficiency of operation is reflected on the company’s achievement of its goals
and their promises to its investors. The internal business risks are:
 Fluctuation in sales
 Research and development
 Personal management
 Fixed cost
 Single product
External business risk –It is the result of operating conditions imposed on the firm
by circumstances beyond its control. The external business risk are,
 Social and regulatory factors
 Political risk
 Business cycle.
2. FINANCIAL RISK:

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It is the variability of the income to the equity capital due to the debt capital.
Financial risk is associated with the capital structure of the firm. Capital structure
of firm consists of equity bonds and borrowed funds. The interest payment affects
the payments that are due to the equity investors. The use of debt with the owned
funds to increase the return to the shareholders is known as financial leverage.

PRIMARY MARKET OR NEW ISSUE MARKET

Primary versus Secondary Markets: Primary markets are securities markets in
which newly issued securities are offered for sale to buyers. Secondary markets
are securities markets in which existing securities that have previously been issued
are resold. The initial issuer raises funds only through the primary market.
The primary market is that part of the capital markets that deals with the issue of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a commission that is built into the price
of the security offering, though it can be found in the prospectus. Primary markets
create long term instruments through which corporate entities borrow from capital
market.

Features of primary markets are:

 This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore it is also
called the new issue market (NIM).
 In a primary issue, the securities are issued by the company directly to
investors.
 The company receives the money and issues new security certificates to the
investors.
 Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
 The primary market performs the crucial function of facilitating capital
formation in the economy.
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 The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions. Borrowers in
the new issue market may be raising capital for converting private capital
into public capital; this is known as "going public."
 The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market

 Initial public offering; An initial public offering (IPO) referred to simply as

an "offering" or "flotation," is when a company (called the issuer) issues
common stock or shares to the public for the first time. An Initial Public Offer
(IPO) is the selling of securities to the public in the primary market. It is when
an unlisted company makes either a fresh issue of securities or an offer for sale
of its existing securities or both for the first time to the public. This paves way
for listing and trading of the issuer's securities. The sale of securities can be
either through book building or through normal public issue.
 Rights issue (for existing companies); A rights issue is an option that a
company can opt for to raise capital under a secondary market offering or
seasoned equity offering of shares to raise money. The rights issue is a special
form of shelf offering or shelf registration. With the issued rights, existing
shareholders have the privilege to buy a specified number of new shares from
the firm at a specified price within a specified time.[1] A rights issue is in
contrast to an initial public offering (primary market offering), where shares are
issued to the general public
 through market exchanges. Companies usually opt for a rights issue either when
having problems raising capital through traditional means or to avoid interest
charges on loans.
 Preferential issue. An issue of shares set aside for designated buyers, for
example, the employees of the issuing company.
SOME OF THE IMPORTANT TERMINOLOGY
Stock; The stock or capital stock of a business entity represents the original capital
paid into or invested in the business by its founders.

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Shares; The stock of a business is divided into shares, the total of which must be
stated at the time of business formation. Given the total amount of money invested
in the business, a share has a certain declared face value, commonly known as the
par value of a share.
Stock certificate Ownership of shares is documented by issuance of a stock
certificate. A stock certificate is a legal document that specifies the amount of
shares owned by the shareholder, and other specifics of the shares, such as the par
value, if any, or the class of the shares.
Dematerialization: Dematerialization is the process by which physical certificates
of an investor are converted to an equivalent number of securities in electronic
form and credited to the investor account with his Depository Participant (DP).
Listing of Securities: Listing means admission of securities of an issuer to trading
privileges (dealings) on a stock exchange through a formal agreement. The prime
objective of admission to dealings on the exchange is to provide liquidity and
marketability to securities, as also to provide a mechanism for effective control and
supervision of trading.
Stock Exchange; Stocks (Shares, equity) are traded in stock exchange. India has
two big stock Exchanges (Bombay Stock Exchange - BSE and National Stock
Exchange - NSE) and few small exchanges like Japan Stock Exchange, Lagos
Stock Exchange, Douala Stock exchang etc. Click here to see the list of Stock
Exchanges in India Investor can trade stocks in any of the stock exchange in India.
Stock Broker Investor requires a Stock Broker to buy and sell shares in stock
exchanges (BSE, NSE etc.). Stock Broker are registered member of stock
exchange. A stock broker can register to one or more stock exchanges. Only stock
brokers can directly buy and sell shares in Stock Market. An investor must contact
a stock broker to trade stocks. Broker charge commissions (brokerages) for their
service. Brokerage is usually a percent of total amount of trade and varies from
broker to broker.
Stock Trading Traditionally stock trading is done through stock brokers,
personally or through telephones. As number of people trading in stock market
increase enormously in last few years, some issues like location constrains, busy
phone lines, miss communication etc start growing in stock broker offices.

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Information technology (Stock Market Software) helps stock brokers in solving

these problems with Online Stock Trading.
INVESTMENT AND CAPITAL MARKET
Investment and Capital Market are corollary to each other. For efficient
investment process, existence of healthy capital market is a pre-requisite. Capital
Market in India has witnessed growth and structural changes, during the last two
decades. The capital market of a country is the barometer of that country’s
economy and provides a mechanism for capital formation. The Cameroon
economy is growing at a fast pace due to the liberalisation of the Cameroon
economy and the policies being adopted by the Government of Cameroon. This
raised the interest in the Indian capital market not only from investors in India but
also from the Foreign Institutional Investors. This also has resulted in the growth
of the stock exchange system in India. The capital market works as a mechanism to
facilitate the transfer of funds from the savers (investors) to the borrowers (issuers
of securities). The transfer of funds will be optimum if the capital market is
efficient.
SECONDARY MARKET
With primary issuances of securities or financial instruments, or the primary
market, investors purchase these securities directly from issuers such as
corporations issuing shares in an IPO or private placement, or directly from the
federal government in the case of treasuries. After the initial issuance, investors
can purchase from other investors in the secondary market
Meaning of Stock Exchange: Stock Exchanges are the organized securities markets
regulating the trading in shares, debentures and other securities in the interest of
the investors.

Definition of Stock Exchanges: The Securities Contracts (Regulation) Act, 1956

defines a stock exchange as "an association, organization or body of individuals,
whether incorporate or not, established for the purpose of assisting, regulating and
controlling the business in buying, selling and dealing in securities".
Functions of Stock Exchanges:
The role of a stock exchange in a capital market is as follows:-
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(1) Ready and Continuous Market: The stock exchange provides a ready and
continuous market for the sale and purchase of securities.
(2) Bank Borrowing Facility: Securities listed on a stock exchange serve as a
collateral security when an investor needs funds from a bank.
(3) Promotes Capital Formation: Stock Exchanges promote capital formation as
they encourage investors to invest need funds from a bank.
(4) Safety and Fair Dealing: The Stock Exchange operates under rules and
regulations framed by the Central Government. The rules and regulations framed
by the Central Government are in the interest to ensure safety to the investors and
whatever be their dealings, it should a fair one.
(5) Government Funding: Stock Exchanges helps the government to raise funds
by selling shares and debentures.
(6) Creation of Employment Opportunities: Stock Exchange creates a number
of employment opportunities to a number of brokers, sub brokers as they are the
intermediaries through which shares are being sold.
(7) Evaluation of Securities: Stock Exchanges helps to evaluate the worth of
securities, as securities are traded at a certain price on the stock market. Investors
real worth of their holdings in the form of shares and debentures which are listed
on the stock exchange.
(8) Industrial Development: The capital collected through shares and debentures
can be put to industrial use. With the capital, new industries can be started, existing
ones can be expanded and modernized and thereby enhancing the industrial
development of a country.
(9) Clearing House of Securities: The Stock Exchanges acts as a clearing house
of securities. It facilitates easy and quick clearance of transactions of securities
between the buyers and the sellers.
(10) Facilitates Flow of Capital: Stock Exchange facilitate the flow of capital to
companies who have a high potential to raise substantial funds.

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