CU-BCOM-SEM-IV-Fundamental and Technical Analysis in Stock Market-Second Draft

BACHELOR OF COMMERCE SEMESTER-IV FUNDAMENTAL & TECHNICAL ANALYSIS IN STOCK MARKET

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 2 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1: Equity Analysis....................................................................................................... 4 Unit - 2 Valuing Investments............................................................................................... 13 Unit - 3 Alternative Methods............................................................................................... 27 Unit - 4 Securities Market ................................................................................................... 37 Unit - 5 Trading At Stock Exchange.................................................................................... 50 Unit - 6 Risk And Return .................................................................................................... 59 Unit - 7 Security Analysis ................................................................................................... 67 Unit - 8 Economic Analysis................................................................................................. 76 Unit - 9 Industry Analyses................................................................................................... 87 Unit - 10 Company Analysis ............................................................................................... 99 Unit - 11 Valuation Methodologies ................................................................................... 114 Unit - 12 Technical Analysis ............................................................................................. 133 Unit - 13 Types Of Charts ................................................................................................. 159 Unit - 14 Breadth Indicators .............................................................................................. 197 3 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1: EQUITY ANALYSIS STRUCTURE 1.0 Learning Objectives 1.1 Introduction 1.2 MeasurementofReturnandRiskofEquityShares 1.3 Approaches to Equity Analysis 1.3.1 Equity Valuation 1.3.2 Discounted Cash Flow 1.3.3 The Cost Approach 1.3.4 The Comparable Approach 1.4 Summary 1.5 Keywords 1.6 Learning Activity 1.7 Unit End Questions 1.8 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe return and risk of equity shares.  Explain different approaches to equity analysis.  Illustrate the equity value formula. 1.1 INTRODUCTION The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly held companies take place. While both terms - stock market and stock exchange - are used interchangeably, the latter term is generally a subset of the former. But this isn’t your typical market, and you can’t show up and pick your shares off a shelf the way you select produce at the grocery store. Brokers typically represent individual traders — these days, that’s often an online broker. You place your stock trades through the broker, which then deals with the exchange on your behalf. 4 CU IDOL SELF LEARNING MATERIAL (SLM)

Every market is a meeting point of buyers and sellers. Markets are all about transactions. Somebody buys, somebody sells. In the equity market, trading keeps on happening at an incredible speed. Investors can deal in shares in a fraction of a second. Every day, thousands of crores worth of equities are transacted in the equity market in India. If you are new to markets, you should gain some knowledge before you venture into the equity market. Plus, there are different types of the equity markets and so you know about them as well. In the following sections, you will know about 12 important things related to the Indian 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. In the global context, equities are traded either over the counter or at stock exchanges. There are multiple buyers and sellers of the same equity/share. Hence, you stand a good chance to strike a nice deal at the equity market. If you want to begin online equity trading in India, you must get a demat account. Open a demat account in simple steps. Equities are mostly traded on the stock exchanges in India. In the Indian stock market, equities are available for trading at the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) and the latest entrant, Metropolitan Stock Exchange of India (MSE). Shares of stock market listed companies are bought/sold. Equity share trading is roughly in two forms - spot/cash market and futures market. These are the different types of equity market in India. The spot market or cash market is a public financial market in which stocks are traded for immediate delivery. The futures market is a place where the shares' delivery is due later. With the help of an equity trading account, a trustworthy broker like Nirmal Bang and online equity trading systems, investors can utilize the Indian equity market. Shares/stocks traded in the equity market belong to companies that show growth. Investors typically invest in 'growth' stocks, which belong to small companies showing potential for high growth rates. The growth stocks are those where investors are ready to make big bids in the live equity market, be it in India or global equity market. With the help of online equity trading, investors aim to accumulate growth stocks today so that they can them off after incredibly low prices. The concept behind how the stock market works is simple. Think of an auction house where buyers and sellers negotiate prices and make trades. Now, substitute the auction house and 5 CU IDOL SELF LEARNING MATERIAL (SLM)

items with equity market and shares. Companies list their shares on an exchange. Investors can buy shares in the primary market i.e., IPOs, and secondary market. The stock market is regulated by a financial watchdog. The equity market is maintained by stock exchanges, and various stakeholders like brokers, dealers, clearing corporations etc. It is an extended family of institutions, and this is the true equity market meaning. Equity in NSE refers to stock market. The securities market has two segments, the new issues (primary) market and the stock (secondary) market. Currently more than 1300 securities or stocks are available for trading on the NSE. The stock exchange's automated screen-based trading allows investors across the length and breadth of India to trade and invest. The NSE trading system is called 'National Exchange for Automated Trading' (NEAT). The equity space in NSE comprises of cash/spot trading and trading in equity derivatives. 1.2 MEASUREMENTOFRETURNANDRISKOFEQUITYSHARES Measuring Risk and Return in an Equity Fund Using Alpha and Beta. Alpha is a financialriskratio which can be used to predict returns from holding an investment. ... Put differently, beta shows how volatile an investment is compared to the market. Beta exposure is measured relative to a benchmark index like the S&P 500. In this subject, risk and return are calculated using various techniques. The return is calculated using net asset value, rate of return, divided, geographical mean, and risk are calculated using co-variance, geometric mean, beta, standard deviation, and correlation (using statistical methods). The rate of equity shares has not been fixed. Common Methods of Measurement for Investment Risk Management  Standard Deviation.  Sharpe Ratio.  Beta.  Value at Risk (VaR).  R-squared.  Categories of Risks.  The Bottom Line. To calculate the equity-risk premium, subtract the risk-free rate from the return of a stock over a period. For example, if the return on a stock is 17% and the risk-free rate over the same period is 9%, then the equity-risk premium would be 8% for the stock over that period. 1.3 APPROACHESTO EQUITY ANALYSIS 6 CU IDOL SELF LEARNING MATERIAL (SLM)

1.3.1 Equity Valuation Equity valuation is a blanket term and is used to refer to all tools and techniques used by investors to find out the true value of a company's equity. In accounting, equity refers to the book value of stockholders' equity on the balance sheet, which is equal to assets minus liabilities. Equity value constitutes the value of the company's shares and loans that the shareholders have made available to the business. The calculation for equity value adds enterprise value to redundant assets (non-operating assets) and then subtracts the debt net of cash available. We calculate equity value by multiplying the total shares outstanding by the current share price. The Enterprise Value of a company is the total value of the firm that includes other metrics as well, such as debt, minority shares, cash & cash equivalents, and preference shares. The Equity Value Formula We need to calculate the equity value for a company. Wait, what? Equity value is simply the value that is because of the shareholders of a company for they provided the equity. Equity value is calculated by multiplying the total shares outstanding by the current share price. Equity Value = Total Shares Outstanding X Current Share Price OR Equity Value = Enterprise Value – Debt 1.3.2 Discounted Cash Flow Discounted cash flow (DCF) is a method of valuation used to determine the value of an investment based on its return or future cash flows. Although DCF is the standard for valuing privately held companies. We can also use it as an acid test for publicly traded stocks. Here are the steps required to value stocks using the discounted cash flow valuation method First, take the average of the last three years' free cash flow (FCF) of the company. Next, multiply this calculated FCF with the expected growth rate to estimate the free cash flows of future years. Key Takeaways  Discounted cash flow (DCF) is a method of valuation used to determine the value of an investment based on its return or future cash flows.  The weighted average cost of capital is used as a hurdle rate, meaning the investment's return must outperform the hurdle rate. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

 Although DCF is the standard for valuing privately held companies; it can also be used as an acid test for publicly-traded stocks. 1.3.3 The Cost Approach The cost approach is a real estate valuation method that estimates the price a buyer should pay for a piece of property is equal the cost to build an equivalent building. In the cost approach, the property's value is equal to the cost of land, plus total costs of construction, less depreciation. There are three primary equity valuation models: the discounted cash flow (DCF) approach, the cost approach, and the comparable (or comparable) approach. The comparable model is a relative valuation approach. The formula for the cost approach is: Replacement or reproduction cost— depreciation + land value = value. A breakdown of the steps of this method follows: Estimate the replacement or reproduction cost of the improvement (structure). 1.3.4 The Comparable Approach The main purpose of equity valuation is to estimate a value of a firm or its security. A key assumption of any fundamental value technique is that the value of the security (in this case, equity, or a stock) is driven by the fundamentals of the firm’s underlying business at the end of the day. There are three primary equity valuation models: the discounted cash flow (DCF) approach, the cost approach, and the comparable (or comparable) approach. The comparable model is a relative valuation approach. The basic premise of the comparable approach is that an equity’s value should bear some resemblance to other equities in a similar class. For a stock, this can simply be determined by comparing a firm to its key rivals, or at least those rivals that operate similar businesses. Discrepancies in the value of similar firms could spell opportunity. The hope is that it means the equity is undervalued and can be bought and held until the value increases. The opposite could hold true, which could present an opportunity for shorting the stock or positioning one’s portfolio to profit from a decline in its price. Key Takeaways  The three primary equity valuation models are the discounted cash flow (DCF), the cost, and the comparable (or comparable) approach.  The comparable model is a relative valuation approach.  The first primary comparable approach is the most common and looks at market comparable for a firm and its peers. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

 The second comparable approach looks at market transactions where similar firms or divisions have been bought out or acquired by other rivals, private equity firms, or other classes of large, deep-pocketed investors. 1.4 SUMMARY  It has been historically proved that investment in stocks provides the highest returns, over a long-term investment horizon. In fact, investment in stocks and securities provides you with returns that can beat inflation. It is among the most viable investment avenues.  Investment in equities can also provide your income through dividend issuance. Issuing of dividends is a corporate action, where listed companies share their profits with existing shareholders. Though it is not mandatory for companies to issue dividends, companies issue dividends to signal profitability and increase their investor base.  You must, however, remember that equities have greater exposure to market volatility. Hence, you must conduct thorough market research, besides exercising due diligence, while investing in stock markets.  You can minimize the associated risks by choosing to invest in equity instruments, like Futures and Options (F&O).  The stock exchanges provide an open trade platform for buying and selling stocks and securities. This is completely automatic and computerized, and traders can see the trades on a screen before placing orders.  What if you did not purchase stocks of a company at the time of an IPO? You can purchase and sell these shares in the secondary market. Here, you can plan your investment by deciding on an entry and exit point.  You must remember that you can only trade in equities through a stockbroker, who is registered with a government-regulated depository and acts as a link between an investor and the stock exchange. 1.5 KEYWORDS  Equity Share Markets: An equity market is a market in which shares of companies are issued and traded, either through exchanges or over-the-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy.  Stock Market Analysis: Stock analysis is also called equity analysis or market analysis. Investors or traders make buying or selling decisions based on stock analysis 9 CU IDOL SELF LEARNING MATERIAL (SLM)

information. ... It involves studying the past and present market data and creating a methodology to choose appropriate stocks for trading.  Types of Equity Markets: Primary Equity Market: These are the shares offered to general investors through IPOs. Once the IPO is closed, the shares of a company are listed on the stock exchange. The two major stock exchanges facilitating trading in stocks are The NSE and BSE. Secondary Equity Market: You can purchase and sell these shares in the secondary market. Here, you can plan your investment by deciding on an entry and exit point.  Sensational Stock Exchange of India Limited is the leading stock exchange of India, located in the Mumbai city of Maharashtra state. It is under the ownership of some leading financial institutions, Banks, and Insurance companies. NSE was established in 1992 as the first dematerialized electronic exchange in the country. 1.6 LEARNING ACTIVITY 1. Once a company goes public, then the shares of that stock trade on one of the major U.S. stock exchanges (The New York Stock Exchange, the American Stock Exchange, and NASDAQ). The stock exchange is like a flea market where buyers and sellers come together, and the buyers try to get an item for as low a price as possible and the sellers try to sell an item for as high as possible. How do you teach about the right time or price of equity? ___________________________________________________________________________ ___________________________________________________________________________ 2. When a company goes to the stock market for the first time to raise the money it’s called an Initial Public Offering, which is also called an IPO. What is the stock exchange and an IPO? ___________________________________________________________________________ ___________________________________________________________________________ 1.7 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are equitable instructional practices? 2. What is equity learning? 3. What is equity share? 4. How do you analyse equity? 10 CU IDOL SELF LEARNING MATERIAL (SLM)

5. How do you write an equity summary? Long Questions 1. How many ways to analyse stock? 2. Describe A Study on Analysis of Equity Share Price Behavior? 3. Illustrate types, features, and advantages of equity shares? 4. What are the different types of valuation of equity shares? 5. How to apply comparable company analysis using stock valuation? B. Multiple Choice Questions 1. What is the most used account to buy/sell shares? a. CEMAT b. DEMAT c. EEMAT d. SMAT 2. How many companies are included in the SENSEX? a. 30 b. 25 c. 35 d. 20 3. What do IPO and FPO mean? a. Initial Public Offering, First Public Offer b. Invest Public Offering, First Public Offer c. Ideal Public Offering, First Public Offer d. Initial Public Offering, Follow on Public Offer 4. Identify a suitable option for the following: A growing stock market is referred to as a _____ market and a falling stock market is called a ____ market. a. Bear, Bull. b. Bull, Bear. c. Positive, Negative. d. Negative, Positive 11 CU IDOL SELF LEARNING MATERIAL (SLM)

5. What is the price at which bond is traded in the stock exchange? a. Redemption value. b. Face value c. Market value d. Maturity value Answers 1-c, 2-b, 3-d, 4-a, 5-c. 1.8 REFERENCES References  R. Krater, Matthew. (May 21, 2019). A Beginner's Guide to the Stock Market.Independently published.  Bogle Wiley, John C. (October 16, 2017). The Little Book of Common-Sense Investing. Updated and revised edition.  English, James. (16 May 2001). Applied Equity Analysis: Stock Valuation Techniques for Wall Street Professionals. McGraw-Hill Education. Textbooks  Collins, J. L. (June 18, 2016). The Simple Path to Wealth. Create Space Independent Publishing Platform, 1st Edition.  J. Fabozzi, Frank. (December 7, 2021). Bond Markets, Analysis, and Strategies, tenth edition. The MIT Press.  Valentine, James. (16 February 2011). Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts. McGraw-Hill Education; 1st edition. Websites  https://www.thestreet.com/investing/how-to-invest-ways-to-make-your-money-grow- 11748100  https://www.proprofs.com/quiz-school/story.php?title=stock-market-broker-round-1  https://www.indiainfoline.com/investment-guide/what-is-equity-market 12 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2 VALUING INVESTMENTS STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 InvestmentManagementApproach 2.2.1 Asset Allocation 2.2.2 Financial Statement Analysis 2.2.3 Stock Selection 2.2.4 Monitoring of Existing Investments 2.2.5 Portfolio Strategy and Implementation 2.3 AssetClasses 2.4 Investments 2.5 Equities 2.6 Compounding and Discounting 2.7 Summary 2.8 Keywords 2.9 Learning Activity 2.10 Unit End Questions 2.11 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the trade-offs between risk and return  Illustrate the real-world implications of the Separation Theorem of investments  Estimate and interpret the ALPHA (α) and BETA (β) of a security, two statistics commonly reported on financial websites  Describe what is meant by market efficiency and what it implies for patterns in stock returns and for the asset-management industry • Understand market multiples and income approaches to valuing a firm and its stock, as well as the sensitivity of each approach to assumptions made 13 CU IDOL SELF LEARNING MATERIAL (SLM)

 Identify specific examples of a market multiples valuation and a discounted cash flow valuation This course was previously entitled “Financial Evaluation and Strategy: 2.1 INTRODUCTION Value investing is the art of buying stocks that trade at a significant discount to their intrinsic value. Value investors achieve this by looking for companies on cheap valuation metrics, typically low multiples of their profits or assets, for reasons which are not justified over the longer term. Value investors seek a margin of safety. The difference between a stock's intrinsic value and its current market price is called the margin of safety. The key to value investing is to find stocks with a good margin of safety — or put another way, plenty of upside potential. This main section is concerned with the principles of investments. It is important to have a clear idea of the objective of investment and to differentiate it from speculation and gambling. It is essential to understand the context / environment of investments: the macroeconomy and its drivers, and the substance of the four levels of research. It is essential to be cognizant of the risk inherent in most investments and appreciate that there is a positive relationship between risk and return. Because of the significance of investments to all individuals, many theories on and related to investments have been proffered. While not all are of pragmatic employ, many of them extrude useful practical lessons. An important principle is that financial and real asset markets discover prices which do not necessarily align with fair value (given the level of risk- free and other interest rates); thus, it is important to appreciate the principle underlying the valuation of investments. It is also important to understand the essence of portfolio management. These issues are addressed under the following headings:  Definition and objective of investment.  Risk-free rate.  Investment environment.  Risk and return.  Investment theory: practical lessons.  Valuation of investments.  Portfolio management. How do investors derive intrinsic value? When ferreting for value stocks, there are multiple fields which value investors look to cover to determine their intrinsic value as precisely as possible. These include a company’s 14 CU IDOL SELF LEARNING MATERIAL (SLM)

financial history, its revenues and cash flows over the years, business model, profits, future profitability, et al. They might also choose to investigate why stocks of a company are undervalued, and whether they have the necessary organisational and financial capacity to recover from such undervaluation. There are also some qualitative indicators which provide an insight into whether stocks of a company are undervalued or overvalued. They are –  Indulgence in a financial scam.  The credit rating of a company signifying its debt clearing capacities.  Profit or loss during the previous market recession. In addition to this, a value investor also analyses multiple financial metrics to arrive at a more concrete conclusion regarding the underlying potential of a company, which are – Earnings Before Interests and Taxes (EBIT) EBIT is used to determine a company’s cash flow without the effect of secondary expenses and profits. Taxation, here, is a primary factor as its laws allow for certain phenomena which might mask a company’s real earning potential. For instance, a company might suffer losses in its initial years, but if it is founded on a sound financial and organisational framework, it shall generate profits in subsequent operating cycles. However, as tax laws dictate, companies can choose to carry forward their losses into following years to set off against future profits, causing such future profits to be lowered. It masks a company’s earning potential. Hence, taxation is left out to determine a company’s intrinsic value. Earnings Before Interests, Taxes, Depreciation, and Amortisation (EBTIDA) It is a development on EBIT, whereby earnings are calculated after excluding depreciation and amortisation expenses. Depreciation and amortisation are provisions and do not affect actual cash flow. Therefore, it provides a more detailed and precise insight into a company’s earning potential. Discounted Cash Flow Discounted cash flow analysis is a crucial metric which allows investors to devise a company’s future cash flows and find their current value. It does so with the use of a discounted rate accounting for price level increase. Investors use this metric to determine the present value of a company and its future potential. As investors gain a concrete idea about the two factors mentioned above, they know whether its stocks are undervalued or not. P/E Ratio 15 CU IDOL SELF LEARNING MATERIAL (SLM)

Price-to-earnings ratio or P/E ratio signifies the relationship between a company’s share prices and per-share earnings (EPS). If a company’s shares are priced at Rs. 100 in the stock market and its EPS is Rs. 18, its P/E ratio would be (100/18) or 5.55. This metric is crucial for every investor as it signifies the amount an investor needs to invest in a company to earn Re. 1 of its earnings. In the example provided here, an investor would need to pay Rs. 5.5/share to make Re. 1 of its earnings. P/E ratio of a company goes up if its EPS is low and vice versa. When the P/E ratio of an organisation is high, it signifies that an investor needs to pay a large amount to earn one unit of the company’s earnings. Hence, a high ratio implies that the stock of such a company is overvalued. P/B ratio P/B ratio or Price-to-book value ratio signifies the per unit book value of a company’s assets and per unit share price. For a company, the former is derived by dividing the total book value of a company’s assets by market value of its outstanding shares. In case a company’s share prices are lower than its per unit book value, it denotes that its stocks are undervalued. It also refers to the fact that an organisation possesses the necessary capacity to earn profits in the future and is facing a short-term financial crisis due to factors such as low demand. 2.2 INVESTMENTMANAGEMENTAPPROACH 2.2.1 Asset Allocation Asset allocation is essentially an investment strategy to stabilize risks and returns by choosing investment instruments according to your financial goals, risk tolerance and time horizon. Asset classes have different levels of risk and return variability. Each asset class may perform differently over time. Six Asset Allocation Strategies That Work  Strategic Asset Allocation.  Constant-Weighting Allocation.  Tactical Asset Allocation.  Dynamic Asset Allocation.  Insured Asset Allocation.  Integrated Asset Allocation.  The Bottom Line. 2.2.2 Financial Statement Analysis 16 CU IDOL SELF LEARNING MATERIAL (SLM)

Financial analysis is the process of using financial information to assist in investment and financial decision-making. Financial analysis helps managers with efficiency analysis and the identification of problem areas within the firm. Also, it helps managers identify strengths on which the firm should build. Externally, financial analysis is useful for credit managers evaluating loan requests and investors considering security purchases. Three financial statements are critical to financial statement analysis: the balance sheet, the income statement, and the statement of cash flows. We provide a brief overview of each statement and describe what information it contains. The Balance Sheet The balance sheet provides the details of the accounting identity. Assets = Liabilities + Owners> equity or Investments = Investments paid for with debt + Investments paid for with equity. The balance sheet is a financial snapshot of the firm, usually prepared at the end of the fiscal year. That is, it provides information about the condition of the firm at one point in time. By reviewing a series of balance sheets from different years, the analyst can identify changes in the firm over time. I. Assets generate income (the left-hand side) The left-hand side of the balance sheet lists the fi rm’s assets. The only reason for a firm to hold an asset is if it produces income. The assets of the firm produce the firm’s income. There is no reason for a firm to hold an asset if it is not going to produce income. II. Financing the assets (the right-hand side) For every dollar in assets the firm has, there will either be a dollar of liability or a dollar of equity on the right-hand side of the balance sheet. The right-hand side of the balance sheet shows how the firm is financing its assets. By adjusting the mix of debt and equity, the lowest cost of financing can be achieved. In summary, the left-hand side of the balance sheet reports the assets that earn income, and the right-hand side reports how these assets are financed. The Income Statement: Unlike the balance sheet, which tells us the state of the firm at one point in time, the income statement tells us how the firm has performed over a period. Income statements usually have two sections. The first section reports the results of operating activities or operating income. This includes sales minus operating expenses. Financing activities are reported in the second section, where interest expense, taxes, and preferred dividends are subtracted to arrive at net income. 17 CU IDOL SELF LEARNING MATERIAL (SLM)

Statement of Cash Flows: Many students are not as comfortable with the statement of cash flows as they are with the income statement and balance sheet. It does, however, provide insight not readily available from the other statements. In finance, we are particularly concerned with cash flows rather than accounting earnings. 2.2.3 Stock Selection Stock picking is the selection of equities based on a certain set of criteria with the hope of achieving a positive return. In today's global economy, analysing vast amounts of information to arrive at an investment decision is very difficult. A Step-by-Step Guide Pick Stocks:  Determine your investing goals. Not every investor is looking to accomplish the same thing with their money.  Find companies you understand.  Determine whether a company has a competitive advantage.  Determine a fair price for the stock.  Buy a stock with a margin of safety. 2.2.4 Monitoring of Existing Investments How do you keep your investments on track? Rebalancing your investment portfolio regularly is important because it can bring your asset allocation back in line. The changing value of your investments means that your asset allocation may no longer match your investment goals, so you'll need to adjust.  Create a financial plan.  Look at the whole picture.  Establish benchmarks.  Evaluate your individual holdings. 2.2.5 Portfolio Strategy and Implementation Implementing a proficient portfolio strategy originates with determining appropriate allocation between equity and fixed income for each investor. Getting this decision right is critical to long-term investing success. 9 Steps for Implementing Successful Project Portfolio Management  Set the Strategy.  Win Executive Support.  Build the Implementation Team. 18 CU IDOL SELF LEARNING MATERIAL (SLM)

 Collect Project Data.  Evaluate Your Projects.  Create Your Portfolio.  Test and Refine.  Project Portfolio Management Roll-out. Strategic Portfolio Planning is the business process by which organizations determine the set of innovation and new product development (NPD) investments they will fund—and those they won't—to achieve their business objectives. 2.3 ASSETCLASSES An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. 1. Market Story & Outlook: 2. Charting the 7 Asset Classes 3. US Equities 4. Currency 5. Bond/Fixed Income: 6. Commodities 7. Global Markets 8. Real Estate (REITS) 2.4 INVESTMENTS An investment is an asset, or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchase a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth. An investment always concerns the outlay of some capital today—time, effort, money, or an asset—in hopes of a greater payoff in the future than what was originally put in. For example, an investor may purchase a monetary asset now with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit. Most ordinary individuals can easily make investments in stocks, bonds, and CDs. With stocks, you are investing in the equity of a company, which means you invest in some residual claim to a company's future profit flows and often gain voting rights (based on the 19 CU IDOL SELF LEARNING MATERIAL (SLM)

number of shares owned) to give your voice to the direction of the company. Bonds and CDs are debt investments, where the borrower puts that money to use in a pursuit that is expected to bring in cash flows greater than the interest owed to the investors. 12 Best investments policy’s:  High-yield savings accounts.  Certificates of deposit (CDs)  Money market funds.  Government bonds.  Corporate bonds.  Mutual funds.  Index funds.  Exchange-traded funds (ETFs) 2.5 EQUITIES Equities are pieces of a company, also known as \"stocks.\" When you buy stocks or shares of a company, you're basically purchasing an ownership interest in that company. A company's stockholders or shareholders all have equity in the company or own a fractional portion of the whole company. And an equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange. 2.6 COMPOUNDING AND DISCOUNTING Definition of Compounding For understanding the concept of compounding, first, you need to know about the term future value. The money you invest today, will grow, and earn interest on it, after a certain period, which will automatically change its value in future. So, the worth of the investment in future is known as its Future Value. Compounding refers to the process of earning interest on both the principal amount, as well as accrued interest by reinvesting the entire amount to generate more interest. Compounding is the method used in finding out the future value of the present investment. Definition of Discounting Discounting is the process of converting the future amount into its Present Value. Now you may wonder what the present value is. The current value of the given future value is known 20 CU IDOL SELF LEARNING MATERIAL (SLM)

as Present Value. The discounting technique helps to ascertain the present value of future cash flows by applying a discount rate. Comparison Chart Basis For Compounding Discounting Comparison Meaning The method used to determine The method used to determine the future value of present the present value of future investment is known as cash flows is known as Compounding. Discounting. Concept If we invest some money today, What should be the amount we what will be the amount we get need to invest today, to get a at a future date. specific amount in future. Use of Compound interest rate. Discount rate Known Present Value Future Value Factor Future Value Factor or Present Value Factor or Compounding Factor Discounting Factor Formula FV = PV (1 + r)^n PV = FV / (1 + r)^n 2.7 SUMMARY  An analyst estimating intrinsic value is implicitly questioning the market’s estimate of value.  If the estimated value exceeds the market price, the analyst infers the security is undervalued. If the estimated value equals the market price, the analyst infers the security is valued. If the estimated value is less than the market price, the analyst infers the security is overvalued. Because of the uncertainties involved in valuation, an analyst may require that value estimates differ markedly from market price before concluding that a misevaluation exists.  Analysts often use more than one valuation model because of concerns about the applicability of any model and the variability in estimates that result from changes in inputs. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

 Three major categories of equity valuation models are present value, multiplier, and asset-based valuation models.  Present value models estimate the value as the present value of expected future benefits.  Multiplier models estimate intrinsic value based on a multiple of some fundamental variable.  Asset-based valuation models estimate value based on the estimated value of assets and liabilities.  The choice of model will depend upon the availability of information to input into the model and the analyst’s confidence in both the information and the appropriateness of the model.  Companies distribute cash to shareholders using dividend payments and share repurchases.  Regular cash dividends are a key input to dividend valuation models.  Key dates in dividend chronology are the declaration date, ex-dividend date, holder- of-record date, and payment date.  In the dividend discount model, value is estimated as the present value of expected future dividends.  In the free cash flow to equity model, value is estimated as the present value of expected future free cash flow to equity.  The Gordon growth model, a simple DDM, estimates value as D 1/(r – g).  The two-stage dividend discount model estimates value as the sum of the present values of dividends over a short-term period of high growth and the present value of the terminal value at the end of the period of high growth. The terminal value is estimated using the Gordon growth model.  The choice of dividend model is based upon the patterns assumed with respect to future dividends.  Multiplier models typically use multiples of the form: P/ measure of fundamental variable or EV/ measure of a fundamental variable.  Multiples can be based upon fundamentals or comparable.  Asset-based valuations models estimate the value of equity as the value of the assets less the value of liabilities. 2.8 KEYWORDS 22 CU IDOL SELF LEARNING MATERIAL (SLM)

 Investment Strategy: An investment strategy is a plan designed to help individual investors achieve their financial and investment goals. Your investment strategy depends on your personal circumstances, including your age, capital, risk tolerance, and goals.  Valuing Investments: Valuation is the process of determining the fair value of a financial asset. The process is also referred to as “valuing” or “pricing” a financial asset. The fundamental principle of valuation is that the value of any financial asset is the present value of the expected cash flows.  Financial Statement Analysis: Financial statement analysis is the process of analysing a company's financial statements for decision-making purposes.  Analyst: The main task of an analyst is to perform an extensive analysis of financial statements.In this free guide, we will break down the most important methods, types, and approaches to financial analysis.  Capital Asset Pricing Model: The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. 2.9 LEARNING ACTIVITY 1. Understanding mathematical approaches on value investment. How much can you afford on investment—both initially and on an on-going basis? ________________________________________________________________________ ________________________________________________________________________ 2. One might think that investing in the stock market is a difficult task and therefore the individual would assess one’s abilities rationally. The empirical evidence suggests the opposite, as the investors tend to oversimplify the situations that lead to mistakes in the investment decision process. How to run your investment portfolio? ________________________________________________________________________ ________________________________________________________________________ ______ 2.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Elaborate on the following: Should I invest directly or through an agent? 23 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Justify this statement: I have been investing in a SIP for two years and have yet to see returns, should I continue? 3. What should my ideal mutual fund portfolio look like? 4. How many mutual funds should an investor have? 5. What is Free Cash Flow to Firm? Long Questions 1. What is Free Cash Flow to Equity? 2. What is the Dividend Discount Model? 3. What is the Difference between Enterprise value and equity value? 4. What are the most common multiples used in valuation? 5. How would you present these valuation methodologies to investors? B. Multiple Choice Questions 1. What is Investment? a. Net additions made to the nation’s capital stocks b. Person’s commitment to buy a flat or house c. Employment of funds on assets to earn returns d. Employment of funds on goods and services that are used in production process 2. Speculator is a person ___________________ a. Who evaluates the performance of the company. b. Who uses his own funds only. c. Who is willing to take high risk for high returns. d. Who considers here says and market behaviours. 3. Which one of the following is not a money market security? a. Treasury bills. b. National savings certificate. c. Certificate of deposit. d. Commercial paper. 4. Commercial papers are ____________________ 24 a. Unsecured promissory notes CU IDOL SELF LEARNING MATERIAL (SLM)

b. Secured promissory notes c. Sold at a premium d. Issued for a period of 1 to 2 years 5. Registrar to the issue _________________________ a. Helps in the appointment of lead managers b. Drafts the prospectus c. Recommends the basis of allotment d. Directs the various agencies involved in the issue Answers 1-c, 2-c,3-b, 4-a,5-c 2.11 REFERENCES References  Damodaran, Aswat. (20 April 2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset, 3rd Edition. USA: Wiley.  Damodaran, Aswath. (1 January 2008). Damodaran on Valuation, 2ed Paperback. USA: Wiley.  Agarwal, M.R. (1 January 2014). Investment Management Paperback. Garima Publications Textbooks  Damodaran, Aswath. (19 October 2009). Damodaran on Valuation: Security Analysis for Investment and Corporate Finance (Wiley Finance Book 324) 2nd Edition, Kindle Edition.  Gupta, Vishal. (30 November 2020). Learn to Win Arguments and Succeed -20 Powerful Techniques to Never Lose an Argument again, with Real-Life Examples. A life Skill for everyone. India: Self-Published.  Pring, Martin. J. (1 July 2017). Technical Analysis Explained: The Successful Investor's Guide to Spotting Investment Trends and Turning Points. McGraw Hill Education. Websites  https://www.investopedia.com/terms/i/investment.asp 25 CU IDOL SELF LEARNING MATERIAL (SLM)

 https://www.cfainstitute.org/en/membership/professional-development/refresher- readings/equity-valuation-concepts-basic-tools  https://corporatefinanceinstitute.com/resources/knowledge/finance/analysis-of- financial-statements/ 26 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 3 ALTERNATIVE METHODS STRUCTURE 3.0 Learning Objectives 3.1 Introduction 3.2 Management Quality 3.3 Portfolio Sizing 3.4 Diversification vs. Concentration 3.5 Summary 3.6 Keywords 3.7 Learning Activity 3.8 Unit End Questions 3.9 References 3.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain management quality.  Describe portfolio sizing.  Differentiate diversification vs. concentration. 3.1 INTRODUCTION An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment. Key Takeaways An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories. Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.  Most alternative investments are unregulated by the SEC and tend to be somewhat illiquid. 27 CU IDOL SELF LEARNING MATERIAL (SLM)

 While traditionally for institutional investors and accredited investors, alternative investments have become feasible to retail investors via alt funds, ETFs, and mutual funds.  Most alternative assets are illiquid, especially compared to their conventional counterparts. For example, investors are likely to find it considerably more difficult to sell an 80-year-old bottle of wine compared to 1,000 shares of Apple Inc., due to a limited number of buyers. Investors may have difficulty even valuing alternative investments, since the assets, and transactions involving them, are often rare. For example, a seller of a 1933 Saint-Gaudens Double Eagle $20 gold coin may have difficulty determining its value, as there are only 13 known to exist as of 2018.  While today it is possible to purchase almost everything online, there is usually a designated market for every commodity. For instance, people drive to city outskirts and farmlands to purchase Christmas trees, visit the local timber market to buy wood and other necessary material for home furniture and renovations, and go to stores like Walmart for their regular grocery supplies. Such dedicated markets serve as a platform where numerous buyers and sellers meet, interact, and transact. Since the number of market participants is huge, one is assured of a fair price. For example, if there is only one seller of Christmas trees in the entire city, he will have the liberty to charge any price he pleases as the buyers won’t have anywhere else to go. If the number of tree sellers is large in a common marketplace, they will have to compete against each other to attract buyers. The buyers will be spoiled for choice with low- or optimum- pricing making it a fair market with price transparency. Even while shopping online, buyers compare prices offered by different sellers on the same shopping portal or across different portals to get the best deals, forcing the various online sellers to offer the best price. Regulation of Alternative Investments Even when they don't involve unique items like coins or art, alternative investments are prone to investment scams and fraud due to their unregulated nature. Alternative investments are often subject to a less clear legal structure than conventional investments. They do fall under the purview of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and their practices are subject to examination by the Securities and Exchange Commission (SEC). However, they usually don't have to register with the SEC. As such, they are not overseen or regulated by the SEC or the Financial Services Regulatory Commission as are mutual funds and ETFs. So, it is essential that investors conduct extensive due diligence when considering alternative investments. Often, only those deemed as accredited investors should have access to alternative investment offerings. Accredited investors are those with a net worth exceeding $1 million—not counting their residence—or with a personal income of at least $200,000.2 28 CU IDOL SELF LEARNING MATERIAL (SLM)

Strategy for Alternative Investments Alternative investments typically have a low correlation with those of standard asset classes. This low correlation means they often move counter—or the opposite—to the stock and bond markets. This feature makes them a suitable tool for portfolio diversification. Investments in hard assets, such as gold, oil, and real property, also provide an effective hedge against inflation, which hurts the purchasing power of paper money. Because of this, many large institutional funds such as pension funds and private endowments often allocate a small portion of their portfolios—typically less than 10%—to alternative investments such as hedge funds. The non-accredited retail investor also has access to alternative investments. Alternative mutual funds and exchange-traded funds—aka alt funds or liquid alts—are now available. These alt funds provide ample opportunity to invest in alternative asset categories, previously difficult and costly for the average individual to access. Because they are publicly traded, alt funds are SEC-registered and -regulated, specifically by the Investment Company Act of 1940.3 SEC. 3.2 MANAGEMENT QUALITY Quality management is the act of overseeing different activities and tasks within an organization to ensure that products and services offered, as well as the means used to provide them, are consistent. It helps to achieve and maintain a desired level of quality within the organization. Quality management consists of four key components, which include the following:  Quality Planning – The process of identifying the quality standards relevant to the project and deciding how to meet them.  Quality Improvement – The purposeful change of a process to improve the confidence or reliability of the outcome.  Quality Control – The continuing effort to uphold a process’s integrity and reliability in achieving an outcome.  Quality Assurance – The systematic or planned actions necessary to offer sufficient reliability so that a particular service or product will meet the specified requirements. The aim of quality management is to ensure that all the organization’s stakeholders work together to improve the company’s processes, products, services, and culture to achieve the long-term success that stems from customer satisfaction. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

The process of quality management involves a collection of guidelines that are developed by a team to ensure that the products and services that they produce are of the right standards or fit for a specified purpose.  The process starts when the organization sets quality targets to be met and which are agreed upon with the customer.  The organization then defines how the targets will be measured. It takes the actions that are required to measure quality. It then identifies any quality issues that arise and initiates improvements.  The final step involves reporting the overall level of the quality achieved. The process ensures that the products and services produced by the team match the customers’ expectations. 3.3 PORTFOLIO SIZING Not all markets are created equal, nor is each trade. In a strong uptrend, you might consider getting more aggressive. You might be willing to risk more dollars per trade because the reward potential is greater. You may even use margin to juice up your returns. When things are weak, you may adopt a conservative stance. Consider reducing the portfolio risk to just half a percent per trade or less. It's also smart to do less trading in an unfavorable environment. There are also situations were allowing for a larger loss on the trade makes sense. What if you identify a strong stock that typically gets support at its 10-week moving average and at your entry, the 10-week line is 10% away? What do you do? You can adjust your position size. In this case, $1,000 risked will lead to a $10,000 position size ($1000/0.10). You're taking on a little extra risk for the trade, so you adjust your position size down from 12.5% of the entire portfolio to 10%. Of course, as with any portfolio management decision, consider the trade-offs. If the stock is truly a big winner, you will have less invested. But that might be better than passing up the trade entirely. Or even worse, your 8% loss triggers and then you watch the stock bounce off the 10-week line and go on a winning streak without you. 3.4 DIVERSIFICATION VS. CONCENTRATION Most basic articles on personal finance advise investing in a diversified portfolio. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

Diversification Concentration Diversification is for those who have a low- An investor goes for a concentrated portfolio risk appetite. when's/he has a high-risk appetite and is engaged in deep research. Diversifying investments is touted as One of the benefits of a more concentrated reducing both risk and volatility. While a portfolio is that while it does increased risk, diversified portfolio may lower overall risk it also increases potential gains. level, it also reduces your potential capital gains. The more extensively diversified an investment portfolio, the more likely it is to mirror the performance of the overall market. When investments in one area perform Investment portfolios that obtain the highest poorly, other investments in the portfolio can returns for investors are not usually widely offset losses. That is particularly true when diversified. Those with investments investors hold assets that are negatively concentrated in a few companies or industries correlated. are better at building vast wealth. For example, long-term U.S. Treasuries made significant gains when stocks declined in 2008. Diversification may also open additional profit opportunities. An investor who chooses to diversify with A more concentrated portfolio also enables investments in foreign stocks can try to put investors to focus on a manageable number funds into countries experiencing economic of high-quality investments. Wiliam J. booms. Those shares can produce substantial O'Neil, Gerald Loeb, and Jesse Livermore gains at a time when the performance of built their fortunes through concentrated domestic stocks is mediocre to poor. Such a investments. situation occurred in the U.S. between 2003and 2007, when foreign stocks consistently outperformed U.S. markets. 3.5 SUMMARY 31 CU IDOL SELF LEARNING MATERIAL (SLM)

 Stock valuation methods can be primarily categorized into two main types: absolute and relative.  Absolute stock valuation relies on the company’s fundamental information. The method generally involves the analysis of various financial information that can be found in or derived from a company’s financial statements. Many techniques of absolute stock valuation primarily investigate the company’s cash flows, dividends, and growth rates. Notable absolute stock valuation methods include the dividend discount model (DDM) and the discounted cash flow model (DCF).  Relative stock valuation concerns the comparison of the investment with similar companies. The relative stock valuation method deals with the calculation of the key financial ratios of similar companies and derivation of the same ratio for the target company. The best example of relative stock valuation is comparable companies’ analysis.  Dividend Discount Model (DDM): The dividend discount model is one of the basic techniques of absolute stock valuation. The DDM assumes that the company’s dividends represent the company’s cash flow to its shareholders.  Essentially, the model states that the intrinsic value of the company’s stock price equals the present value of the company’s future dividends. Note that the dividend discount model is applicable only if a company distributes dividends regularly and the distribution is stable.  Discounted Cash Flow Model (DCF): The discounted cash flow model is another popular method of absolute stock valuation. Under the DCF approach, the intrinsic value of a stock is calculated by discounting the company’s free cash flows to its present value.  The main advantage of the DCF model is that it does not require any assumptions regarding the distribution of dividends. Thus, it is suitable for companies with unknown or unpredictable dividend distribution. However, the DCF model is sophisticated from a technical perspective.  Comparable Companies Analysis: The comparable analysis is an example of relative stock valuation. Instead of determining the intrinsic value of a stock using the company’s fundamentals, the comparable approach aims to derive a stock’s theoretical price using the price multiples of similar companies.  The most used multiples include price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA). The comparable companies’ analysis method is one of the simplest from a technical perspective. However, the most challenging part is the determination of truly comparable companies. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

 Additional Resources: CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:  Comparable Company Analysis  Investing: A Beginner’s Guide  Relative Valuation Models  Valuation Methods  Alternative Trading Systems (ATS) are a trading venue that matches buyers and sellers for transactions.  ATS face less regulation compared to traditional stock exchanges and primarily focus on finding buyers and sellers of securities.  Trading conducted on ATS is not publicly available, which is especially popular for traders, such as institutional investors who wish to trade large amounts of securities altogether. 3.6 KEYWORDS  Stock Valuation Methods: While it comes to investing, stock picking plays a crucial role. One should never be in a hurry as choosing stocks for wealth creation is an art. Careful research and patience is needed; You should check several aspects of the company before investing. There are some essential parameters that must be analysed and compared with similar companies before picking a stock. For this, we must first understand stock valuation's meaning. It is the process by which you find out the value of a stock by certain formulas. Let us learn the methods that are used in the valuation of stocks. The 2 stock valuation methods are absolute and relative.  Stock Diversion: Divergence is when the price of an asset is moving in the opposite direction of a technical indicator, such as an oscillator, or is moving contrary to other data. Divergence warns that the current price trend may be weakening, and in some cases may lead to the price changing direction.  Stock Diversion Portfolio: The purpose of portfolio diversification is portfolio risk management. ... Portfolio diversification will lower the volatility of a portfolio because not all asset categories, industries, or stocks move together. Holding a variety of non-correlated assets can nearly eliminate unsystematic risk (specific risk).  Private Debt:Private debt refers to investments that are not financed by banks (i.e., a bank loan) or traded on an open market. The “private” part of the term is important— 33 CU IDOL SELF LEARNING MATERIAL (SLM)

it refers to the investment instrument itself, rather than the borrower of the debt, as both public and private companies can borrow via private debt. Private debt is leveraged when companies need additional capital to grow their businesses. The companies that issue the capital are called private debt funds, and they typically make money in two ways: through interest payments and the repayment of the initial loan.  Hedge Funds: Hedge funds are investment funds that trade relatively liquid assets and employ various investing strategies with the goal of earning a high return on their investment. Hedge fund managers can specialize in a variety of skills to execute their strategies, such as long-short equity, market neutral, volatility arbitrage, and quantitative strategies. Hedge funds are exclusive, available only to institutional investors, such as endowments, pension funds, and mutual funds, and high-net-worth individuals. 3.7LEARNING ACTIVITY 1. In finance and investment planning, portfolio diversification is the risk management strategy of combining a variety of assets to reduce the overall risk of an investment portfolio. What is the purpose of portfolio diversification in portfolio risk management? ________________________________________________________________________ ________________________________________________________________________ 2. Absolute stock valuation methods include the dividend discount model (DDM) Dividend Discount Model. The Dividend Discount Model (DDM) is a quantitative method of valuing a company's stock price based on the assumption that the current fair price of a stock. What methods will you apply for stock control management? ___________________________________________________________________________ ___________________________________________________________________________ 3.8 UNIT END QUESTIONS A. Descriptive Questions 34 Short Questions 3. Elaborate on the following: Are debt funds better than fixed deposits? 4. How to Choose the Best Stock Valuation Method? 5. What are Stock control methods? 6. What is the accuracy of alternative stock valuation methods? 7. What is inventory valuation? CU IDOL SELF LEARNING MATERIAL (SLM)

Long Questions 1. Think The Stock Market Is Expensive? 2. What are Stock Buyback Methods? 3. What are Stock Valuation Methods? 4. What do you mean by portfolio analysis? 5. What are the types of portfolio analysis existing? B. Multiple Choice Questions 1. Identify a suitable option for the following: Financial disclosure regulations affecting the brokerage industry are a type of_________. a. Market risk. b. Financial risk. c. Business risk. d. Liquidity risk. 2. Identify a suitable option for the following: If interest rates rose, you would expect ____________ to also rise. a. Business risk. b. Financial risk. c. Liquidity risk. d. Inflation risk. 3. How can you define total return as defined in the text? a. The difference between the sale price and the purchase price of an investment. b. Measured by dividing the sum of all cash flows received by the amount invested. c. The reciprocal of a return relative. d. Measured by dividing all cash flows received by its selling price. 4. What is stated based on 1.0? 35 a. Total return. b. Return relative. c. Cumulative wealth index. d. Geometric mean. CU IDOL SELF LEARNING MATERIAL (SLM)

5. What problem does the return relative solve? a. Inflation. b. Negative returns. c. Interest rates. d. Tax differences. Answers 1-c, 2-c, 3-b, 4-a, 5-a. 3.9 REFERENCES References  Sarnoff, Sarnoff. (6 December 2019). Jesse Livermore Speculator King. Diana.  Livermore, Jesse. (1 January 2012). How to Trade in Stocks (Chinese Edition). Master Publishing & Media Co., Ltd.  Weinstein, Stan. (9 January 1992). Stan Weinstein's Secrets for Profiting in Bull and Bear Markets (PERSONAL FINANCE & INVESTMENT). McGraw Hill Education; 1st edition. Textbooks  Minervini, Mark. (16 May 2013). Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market (BUSINESS BOOKS).McGraw-Hill Education; 1st edition.  Covel, Michael, W. (24 February 2009). The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires. Harper Business.  Livermore, Jesse, Lauriston. Lefèvre, Edwin. Wyckoff, Richard, DeMille. (27 June 2019). Jesse Livermore's Two Books of Market Wisdom: Reminiscences of a Stock Operator & Jesse Livermore's Methods of Trading in Stocks. Mockingbird Press. Websites  https://www.angelone.in/knowledge-center/share-market/portfolio-types  https://help.tallysolutions.com/article/Tally.ERP9/Reports/Display_Inventory_Report s/stock_valuation_methods.htm  https://www.ndtv.com/business/try-these-investment-options-if-you-are-looking-for- alternative-to-stock-market-2488243 36 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 4 SECURITIES MARKET STRUCTURE 4.0 Learning Objectives 4.1 Introduction 4.2 OverviewsofSecuritiesMarket 4.3FinancialMarketStructures 4.4Roles of Stock Exchange 4.5 Functions of Stock Exchange 4.6 Summary 4.7 Keywords 4.8 Learning Activity 4.9 Unit End Questions 4.10 References 4.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the basic concepts about the capital market.  Analyze the capital market institutions.  Describe the roles and functions of stock exchange. 4.1 INTRODUCTION The global securities market has been constantly evolving over the years to better serve the needs of traders and investors alike. Traders require liquid markets with minimal transaction and delay costs in addition to transparency and assured completion of the transaction. Based on these core requirements, a handful of securities market structures have become the dominant trade execution structures in the world. Primary Market is the market for new securities issues and is facilitated by underwriting groups. The companies sell their securities to the public directly to the investors through the underwriters (normally investment banks for stock and bond issuance). When the firm is issuing shares for the very first time, it is called Initial Public Offering (IPO). New shares issued by firms whose shares are already trading in the market are called seasoned or secondary issues. The issuing company receives cash from the sale and uses it to expand or 37 CU IDOL SELF LEARNING MATERIAL (SLM)

fund the operations. After the initial sale, the securities trading will be conducted on the secondary market. A secondary market, also known as the aftermarket, is the market where the trading of the previously issued securities is conducted.On a secondary market, an investor buys securities from another investor instead of the issuer. It is important that the secondary market provides liquidity and therefore provides continuous information about the market price of the securities. Secondary markets are mainly organized in two ways. One is to form a centralized and organized exchange where all buyers and sellers (or their representative agents) meet and conduct trading.The more investors participate in a market, the greater the centralization of that market, and the more liquid the market. Some examples of this form of secondary markets are New York Stock Exchange (NYSE) and American Stock Exchange (AMEX). The other way is the Over the counter (OTC) market which is a secondary market where securities are traded directly between two parties. Trading occurs via dealers who carry inventories of securities and contact each other by computer, telephone, or another electronic network instead of a physical trading floor. Over-the-counter dealers quote a bid price at which they would buy, and an ask price at which they would sell. An example of an over-the- counter securities market is the National Association of Securities Dealers Automated Quotations System (Nasdaq). 4.2 OVERVIEWSOFSECURITIESMARKET The securities market has two interdependent and inseparable segments, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for the creation and sale of new securities, while the secondary market deals in securities previously issued. Securities are financial instruments issued to raise funds. The primary function of the securities markets is to enable to flow of capital from those that have it to those that need it. Securities market help in the transfer of resources from those with idle resources to others who have a productive need for them. The three basic functions of securities markets are capital formation, liquidity, and risk management. These markets pair the companies that need capital to function, and the investors with capital that are looking for a return on their investments. 4.3FINANCIALMARKETSTRUCTURES Financial markets comprise five key components: the debt market, the equity market, the foreign exchange market, the mortgage market, and the derivatives market. Equity instruments are traded in the equity market, also known as the stock market. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

The market is the place where buyers and sellers agree on the exchange of commodities under certain conditions. Since the commodities could be sold via Internet, phone, or mail in the modern world, markets should not be strictly located geographically. As a rule, to identify the market structure, it is important to understand whether there is competition and how strong it is. There are two types of market structure depending on the competition Perfect – is an ideal place where the demand and supply laws rule and where manufacturers and sellers cannot influence prices. Commodities are similar with similar quality in the perfect market, that is why it makes no difference from what seller to buy them. There are very many sellers and buyers and all of them can freely trade and buy in the market. There are no ideal markets in real life (although the markets of popular exchange instruments, such as, for example, S&P index futures, are very close to perfect ones), that is why they are studied from the theoretical point of view. Imperfect – is a market where manufacturers could influence prices through changing the manufactured quantity or quality of commodities. There are no common prices on commodities here because goods are not similar. Moreover, there could be fewer manufacturers than buyers. Monopoly and oligopoly are examples of imperfect markets. Financial markets are the basis of the economy. Free money funds are mobilized in them and distributed between economic sectors. Mechanisms of investment attraction and protection are developed in the financial markets. Thus, the money flows into the economy, which supports economic growth and financial development. 4.4ROLES OF STOCK EXCHANGE A stock exchange standardizes investments, allowing people to buy or sell discrete and equal shares of ownership in various companies. It facilitates the transfer of funds between investors and businesses, regulating as necessary to provide maximum safety for everyone's investments. The role of the stock market is to raise long-term funds for corporations (primary market) while providing a platform for the trading of securities (secondary market). Stock exchanges encourage investment through a pooling of resources, enabling corporations to obtain funds to expand their businesses. After the recent issue or the original issue of securities is complete; securities become second-hand and are traded (i.e., bought and sold) at the floor of the stock exchange-through brokers and other intermediaries. The literal meaning of stock exchange is an exchange of stock (or shares and other securities) between buyers and sellers. 39 CU IDOL SELF LEARNING MATERIAL (SLM)

Stock exchange could be very simply defined as follows A stock exchange is an organized market, where second-hand securities that have been listed thereon, may be bought and sold, in a safe, quick, and convenient manner. Salient features of the stock exchange are the following:  Stock exchange is a market for second-hand securities  It is basically a market for second-hand listed securities of companies viz., shares, debentures/ bonds, and government securities.  Stock exchange allows dealing only in listed securities. In fact, the stock exchange maintains an official list of securities that could be purchased and sold at its floor. Unlisted securities i.e., securities that do not figure in the official list of the stock exchange; could not be dealt in the stock exchange.  Stock exchange is an organized market for dealing in securities. Activities of a stock exchange are governed by a recognized code of conduct, apart from statutory regulations.  All transactions in securities at the stock market are effected through authorized members only. Role of the Stock Exchange (or Functions of the Stock Exchange) The role of the stock exchange could be highlighted with reference to the following functions performed by it, in the economy of a nation: (i) Ready Market Stock exchange is a convenient meeting place for buyers and sellers of second-hand securities. Investors who prefer liquidity (i.e., cash) can sell their securities; and those who wish to invest in securities can buy the same. Since stock exchange ensures liquidity of investment; people are induced to buy securities. (ii) Safe Market The stock exchange is, perhaps, the safest market for having transactions in securities. A stock exchange functions according to a recognized code of conduct and is subject to strict statutory regulations. Since the establishment of SEBI (Securities and Exchange Board of India) in the year 1988, dealings in securities at stock exchanges have become further safer. In the absence of the stock exchange, the investing public might be deceived or cheated by shrewd unscrupulous brokers. (iii) Evaluation of Securities 40 CU IDOL SELF LEARNING MATERIAL (SLM)

Stock exchange determines the prices of various securities (in terms of their real worth) through the interplay of demand and supply forces. Prices at which transactions in securities take place are recorded and published, in the form of market quotations. Securities for which published quotations are readily available; become reliable securities for obtaining loans etc. against these. (iv) Agency of Capital Formation The stock exchange is an agency of capital formation. It draws the savings of the man in the street into productive investment channels. Since the stock exchange provides a safe and convenient market for liquidity and investment purposes; people are induced to save and invest in securities. Through the stock exchange, savings of people who otherwise would have gone into destructive channels, are routed into productive channels. (v) Qualitative Industrial and Commercial Development Stock exchange aids in the process of ensuring qualitative industrial and commercial development of the economy. This is so, because, through the stock exchange, people keep shifting their investment from inefficient companies (which do not pay good dividends) to efficient companies (which promise high returns on investment). This shifting process of investment is especially important for a country where savings are scarce. (vi) Acting as a Barometer of the Company Barometer is something that shows the changes that are happening in an economic, social, or political situation). The stock exchange is sensitive to economic, political, and social conditions of the economy as such conditions affect the prices of securities. In fact, price trends at the stock exchange reflect the economic climate of the country. “Stock exchanges are not merely the chief theatres of business transactions; they are also barometers which indicate the general conditions of the atmosphere of business in a country.”- Alfred Marshall. (vii) Control Over Company Managements Stock exchange very directly exercises control over the managements of companies, whose securities are listed with it. In fact, those companies whose securities are listed with a stock exchange must abide by the rules and regulations of the stock exchange. (viii)Individual Investors Stock markets allow investors to put their money to good use in a business without dealing with all the hassles of actually owning and running a company. If investors choose wisely, they make money through their investments. In return, the companies they invested in get to use the influx of money to develop their businesses. Individual investors get a chance to 41 CU IDOL SELF LEARNING MATERIAL (SLM)

participate in and benefit from the growth of various businesses, while limiting their risk to no more than what they invested. (ix)Economic Benefits On the scale of a full economy, the stock market is where people can invest their savings in the development of a country. Investors have their individual motivations -- generally, personal profit -- but taken together, investors’ decisions about where they will invest their money usually end up rewarding the companies with the greatest potential for growth and punishing under-performing or unhealthy companies. In other words, the stock market efficiently distributes money to the companies where it does the best, which strengthens the entire economy. (x)Liquidity Healthy speculation involves analyzing a company to determine a reasonable price for its stock and then making an investment choice based on whether you think its current price in the stock market is too high or too low. The combined effect of many speculators is to create a liquid market, which means buyers and sellers are equally divided at the current stock price. In other words, if half of speculators are pessimistic about a company and half are optimistic, chances are someone will be willing to buy or sell its stock at the current price. (xi)Raising Capital For businesses that lack the resources necessary for growth, selling shares on the stock market can provide an infusion of capital, which a company’s can then use to develop and strengthen the organization. For example, suppose a company has an idea for a new product but can’t afford to produce and market it. The company can sell shares of itself on a stock exchange, trading partial ownership for the chance to increase the company’s value. (xii)A continuous and Ready Market for Securities Rules and Functions of Stock Exchange Stock exchange provides a ready and continuous market for the purchase and sale of securities. It provides a ready outlet for buying and selling of securities. The stock exchange also acts as an outlet/counter for the sale of listed securities. (xiii)Facilitates Evaluation of Securities Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e., price list). (xiv)Encourages Capital Formation 42 CU IDOL SELF LEARNING MATERIAL (SLM)

Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk-taking among the investing class and converts their savings into a profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment. (xv)Provides Safety and Security In Dealings Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well-defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors. (xvi)Regulates Company Management Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e., supervision) of stock exchange authorities. (xvii)Facilitates Public Borrowing Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly. (xviii)Provides Clearing House Facility Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility. (xix)Facilitates Healthy Speculation Healthy speculation keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector. (xx)Serves as Economic Barometer Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions. (xxi)Facilitates Bank Lending Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities. 4.5 FUNCTIONS OF STOCK EXCHANGE A stock exchange standardizes investments, allowing people to buy or sell discrete and equal shares of ownership in various companies. It facilitates the transfer of funds between investors and businesses, regulating as necessary to provide maximum safety for everyone’s 43 CU IDOL SELF LEARNING MATERIAL (SLM)

investments. Many stock exchanges exist. The major one’s act as barometers of the economic performances of various countries. Some of the Important Functions of Stock exchange are listed below:  Economic barometer.  Pricing of securities.  Safety of transactions.  Contributes to economic growth.  Spreading of equity cult.  Providing scope for speculation.  Liquidity.  Better allocation of capital. 4.6SUMMARY  Stock exchange: is a centralized location where the shares of publicly traded companies are bought and sold. ... The main difference between using a stock exchange and over the counter (OTC) methods of trading stocks is that, on an exchange, transactions are mediated rather than taking place directly between two parties.  Raising Capital: Through initial public offerings (IPO) or issuing of new shares, companies can raise capital to fund operations and expansion projects. This provides companies with avenues to increase growth.  Corporate Governance: Companies that are publicly listed on a stock exchange must conform to reporting standards that are set by regulating bodies. This includes having to report their financial statements and earnings regularly and publicly to their shareholders.  Management: The actions of a company’s management are constantly under public scrutiny and directly affect the value of the company. Public reporting helps ensure that management will make decisions that benefit the goals of the company and its shareholders, thereby acting efficiently.  Economic Efficiency: In addition to encouraging management efficiency, exchanges also facilitate economic efficiency through the allocation of capital. Stock exchanges provide an avenue for individuals to invest their cash, as opposed to merely saving these funds. This means that the capital that would otherwise be untouched is utilized towards economic benefits, resulting in a more efficient economy. 44 CU IDOL SELF LEARNING MATERIAL (SLM)

 Exchanges: In addition, exchanges also provide liquidity, as it is relatively easy to sell one’s holdings. By providing liquidity and real-time price information on company shares, the stock exchange also encourages an efficient market by allowing investors to actively decide the value of companies through supply and demand.  Securities markets can be split into two levels: primary markets, where new securities are issued, and secondary markets where existing securities can be bought and sold. They are securities; monies intended for investment in securities; monies and securities received in the process of securities management.  Stock markets need to support an efficient mechanism for price discovery, which refers to the act of deciding the proper price of a security and is usually performed by assessing market supply and demand and other factors associated with the transactions.  While getting the number of buyers and sellers for a particular financial security are out of control for the stock market, it needs to ensure that whosoever is qualified and willing to trade gets instant access to place orders which should get executed at the fair price.  While more participants are important for efficient working of a market, the same market needs to ensure that all participants are verified and remain compliant with the necessary rules and regulations, leaving no room for default by any of the parties. Additionally, it should ensure that all associated entities operating in the market must also adhere to the rules, and work within the legal framework given by the regulator.  Along with wealthy and institutional investors, a very large number of small investors are also served by the stock market for their small number of investments. These investors may have limited financial knowledge and may not be fully aware of the pitfalls of investing in stocks and other listed instruments. The stock exchange must implement necessary measures to offer the necessary protection to such investors to shield them from financial loss and ensure customer trust.  Listed companies are largely regulated and their dealings are monitored by market regulators, like the Securities and Exchange Commission (SEC) of the U.S. Additionally, exchanges also mandate certain requirements – like, timely filing of quarterly financial reports and instant reporting of any relevant developments - to ensure all market participants become aware of corporate happenings. Failure to adhere to the regulations can lead to suspension of trading by the exchanges and other disciplinary measures.  A local financial regulator or competent monetary authority or institute is assigned the task of regulating the stock market of a country. The Securities and Exchange Commission (SEC) is the regulatory body charged with overseeing the U.S. stock 45 CU IDOL SELF LEARNING MATERIAL (SLM)

markets. The SEC is a federal agency that works independently of the government and political pressure. The mission of the SEC is stated as: \"to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.  Stock exchanges operate as for-profit institutes and charge a fee for their services. The primary source of income for these stock exchanges are the revenues from the transaction fees that are charged for each trade carried out on its platform. Additionally, exchanges earn revenue from the listing fee charged to companies during the IPO process and other follow-on offerings. 4.7 KEYWORDS  Stock exchange: It is a place where shares of public listed companies are traded. ... A stock exchange facilitates stockbrokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus, it is the meeting place of the stock buyers and sellers.  Securities market: Security is a financial instrument that can be traded between parties in the open market. The four types of security are debt, equity, derivative, and hybrid securities. Holders of equity securities (e.g., shares) can benefit from capital gains by selling stocks.  Raising Capital: Companies can raise capital through either debt financing or equity financing. Debt financing requires borrowing money from a bank or other lender or issuing corporate bonds. ... Equity financing involves giving up a percentage of ownership in a company to investors, who purchase shares of the company.  Bonds and Securities: A bond is a debt security, like an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation.  Corporate Governance: Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. 4.8 LEARNING ACTIVITY 1. Corporate governance is the corner stone of any good business. It encompasses the processes, practices, and policies that a company relies on to make formal decisions and to manage the company. What are the 4 P's of corporate governance? ___________________________________________________________________________ ___________________________________________________________________________ 46 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Securities are financial instruments issued to raise funds. The primary function of the securities markets is to enable to flow of capital from those that have it to those that need it. What is securities market and its types? ___________________________________________________________________________ ___________________________________________________________________________ 4.9UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Can I trade when markets are closed or shut down? 2. How many Sectors are there to invest in Stock Market? 3. Is there any time for buying shares or doing a trade? 4. Is it safe to invest in Unlisted Stocks as a beginner? 5. How to Find Undervalued Stocks? Long Questions 1. What are the important macroeconomic indicators that influence stock market? 2. Are you aware of the term ‘securities’ and ‘securities markets? 3. What do stockbrokers and sub-brokers do in the securities markets? 4. What role do merchant bankers perform in securities markets? 5. What is the role of underwriters in the securities markets? B. Multiple Choice Questions 1. Who controls the capital market in India? a. RBI b. NABARD c. SEBI d. IRDA 2. Identify the year in which SEBI was established? 47 a. 1990 b. 1989 c. 1992 d. 1988 CU IDOL SELF LEARNING MATERIAL (SLM)

3. How many companies are included in the BSE Sensex? a. 25 b. 30 c. 50 d. 111 4. Which among the following does not belong to the stock exchange? a. KPO b. IPO c. NSE d. NAV 5. Which among the following is not an objective of SEBI? a. To regulate securities market b. To protect interests of inventors c. To promote individual businesses d. To promote the development of the market Answers 1-c, 2-d, 3-b, 4-a, 5-c 4.10 REFERENCES References:  Malkiel, Burton, G. (22 January 2016). A Random Walk Down Wall Street. W. W. Norton & Company; Eleventh edition.  Clason, George, S. (1 August 2018). The Richest Man in Babylon. Fingerprint! Publishing.  Carnegie, Dale. Hill, Napoleon. Clason, George, S. Murphy, Joseph. (1 January 2020). World’s Most Popular Books to Achieve Success and Build a Fortune. BeThink Books. Textbooks:  Kiyosaki, Robert, T. (11 April 2017). What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not! Plata Publishing; Second edition. 48 CU IDOL SELF LEARNING MATERIAL (SLM)

 Graham, Benjamin. Dodd, David. (1 July 2017). Security Analysis. McGraw Hill Education; 6th edition.  Parikh, Parag. (1 July 2017). VALUE INVESTING AND BEHAVIORAL FINANCE. McGraw Hill Education; 1st edition. Websites:  https://www.investopedia.com/terms/s/security.asp  https://www.tradebulls.in/learn-stock-market/securities-market/basics-securities- market  https://www.business-standard.com/article/opinion/securities-market-on-the-cusp-of- change-121062401631_1.html 49 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 5 TRADING AT STOCK EXCHANGE STRUCTURE 5.0 Learning Objectives 5.1 Introduction 5.2 Trading System 5.3 Market Timing 5.4 Circuit Breaker 5.5 TradeOrder 5.5.1 Time 5.5.2 Price 5.5.3 Quantity Conditions 5.6 OrderMatchingRules 5.7 Summary 5.8 Keywords 5.9 Learning Activity 5.10 Unit End Questions 5.11 References 5.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain trading system.  Identifymarket timing.  List order matching rules.  Analyze trade order. 5.1 INTRODUCTION A stock exchange is a marketplace where securities, such as stocks and bonds, are bought and sold. Bonds are typically traded Over the Counter (OTC), but some corporate bonds can be traded on stock exchanges. Stock exchanges allow companies to raise capital and investors to make informed decisions using real-time price information. Exchanges can be a physical 50 CU IDOL SELF LEARNING MATERIAL (SLM)