1. Any three questions attempt from Assignment A or B
2. Case study All questions are compulsary 3. All questions are compulsary from Assignment C
1 . A ) Sweet equity is the best form of reward for those who contribute to the growth of the companies discuss Sweat equity shares are shares issued by a listed company to its employees and directors in accordance with the Companies Act, 1956 and SEBI Regulations
Issue of sweat equity by a listed company
A company whose equity shares are listed on a recognised stock exchange may issue sweat promoter equity shares, to its employeesand directors in accordance with the Companies Act, 1956 and SEBI Regulations. In case of issue of sweat equity shares to promoters,approval by a simple majority of the shareholders in a general meeting is required. The promoters to whom such sweat equity shares are to be issued cannot participate in such a meeting.
The price of sweat equity shares cannot be less than the maximum value of the average of the weekly high and low of the closing prices of the related equity shares during the six months preceding the relevant date; or during the two weeks preceding the relevant.
The amount of sweat equity shares issued will be treated as part of managerial remuneration if the shares are issued to any director or manager for non-cash consideration, which does not take the form of an asset that can be shown in the balance sheet of the company.
Sweat equity shares have a lock-in period of three years from the date of allotment. The sweat equity issued by a listed company will be eligible for listing only if such issues are in accordance with SEBI regulations
1 b)Why do investor add real estate in their portfolio? Real estate
Buying property is an equally strenuous investment decision. Real estate investment generally offers easy entry and good hedge against inflation. But, during deflationary and recessionary periods, the value of such investments may decline. Real estate investments are classified as direct or indirect. In a direct investment, the investor holds legal little to the property. Direct real estate investments include single-family dwellings, duplexes, apartments, land and commercial property.
In case of indirect investment, investors appoint a trustee to hold legal title on behalf of all the investors in the group. The more affluent investors are likely to be interested in the following types of real estate: agricultural land, semi-urban land, and time-share in a holiday resort. The most important asset for individual investors generally is a residential house or flat because the capital appreciation of residential property is, in general, high. Moreover, loans are available from various quarters for buying/constructing a residential property. Interest on loans taken for buying/constructing a residential house is tax-deductible within certain limits. Besides, ownership of a residential property provides psychological satisfaction.
However, real estate may have the disadvantages of illiquidity, declining values, lack of diversification, lack of tax shelter, a long depreciation period and management problems.
Reasons for investing in real estate are given below: High capital appreciation compared to gold or silver particularly in the urban area. Availability of loans for the construction of houses. The 1999- 2000 budget provides huge incentives to the middle class to avail of housing loans. Scheduled banks now have to disburse 3 per cent of their incremental deposits in housing finance. Tax rebate is given to the interest paid on the housing loan. Further Rs. 75,000 tax rebate on a loan upto Rs. 5 lakhs which is availed of after April 1999. if an investor invests in a house for about Rs. 6-7 lakh, he provides a seed capital of about Rs. 1-2 lakh. The Rs. 5 lakh loan, which draws an interest rate of 15 percent, will work out to be less than 9.6 per cent because of the Rs. 75,000 exempted from tax annually. In assessing the wealth tax, the value of the residential home is estimated at its historical cost and not on its present market value.
The possession of a house gives an investor a psychologically secure feeling and a standing among his friends and relatives.
With real estate being a part of the capital allocation decisions of both institution and retail investors, there has been increasing development in real estate funds. Due to the capital intensity of real estate investing, its requirement for active management and the rise in global real estate opportunities, institutions are gradually moving to real estate funds of funds to allow for appropriate asset management.
The same is true for retail investors, who now have a much larger selection of real estate mutual funds, allowing for efficient capital allocation and diversification. Like any other investment sector, real estate has its benefits and its disadvantages. However, real estate should be considered for most investment portfolios, and real estate investment trusts (REITs) and real estate mutual funds may be the best methods to fill that allocation. 1. C) What are the step taken by sebi to protect investors in primary market Investors protection in the primary market
The investing public should be protected to ensure healthy growth of primary market. The term investors protection has a wider meaning in the primary market. The principal ingredients of investor protection are- (a) Provision of all the relevant information; (b) Provision of accurate information; and (c) Transparent allotment procedures without any bias. To provide the above mentioned factors several steps have been taken. They are project appraisal, under-writing, clearance of the issue document by the stock exchange and SEBIs scrutiny of the issue document.
1. Project appraisal is the first step in the entire process of the project. Technical and economic feasibility of the project is evaluated. If the project itself is not technically feasible and economically viable, whatever may be the other steps taken to protect the investors are defeated. Appraisal shows whether the project is meaningful and can be financed. The investors protection starts right from the protection of the principal amount of investment. Based on the appraisal, the project cost is finalised. The cost should be neither understated nor overstated. The profitability of the project should be estimated and given. To ensure fair project appraisal, SEBI has made it mandatory for the project appraisal body to participate a certain amount in the forthcoming issue.
2.Underwriting
Once the issue is finalised the underwriting procedure starts. Reputed institutions and agencies, providing credibility to the issue normally underwrite the issue. If the lead managers participate more than five per cent of the minimum stipulated amount offered to the public, it would increase the confidence of the public regarding the pricing and saleability of the issue.
3 .Disclosures in the Prospectus
SEBI has issued stringent norms for the disclosure of information in the prospectus. It is the duty of the lead manager to verify the accuracy of the data provided in the prospectus. The pending litigation should be given clearly. The promoters credibility in fulfilling the promises of the previous issues (if any) should be stated. A clear version of the risk factors should be given. Any adverse development that affects the normal functioning and the profit of the company should be highlighted in the risk factor.
4 .Clearance by the Stock Exchange
The issue document has to be cleared by the stock exchange on which the proposed listing is offered. The stock exchanges verify the factors related with the smooth trading of the shares. Any bottleneck in this area will be eliminated since the transferability is the basic right of the shareholders. Trading of the shares helps the investor to liquidate his share at any time. If the issues are not traded in the secondary market at a good price, they would dampen the spirit of the investor.
5. Signing by Board of Directors
The Board of Directors should sign the prospectus. A copy is also filed with the office to the Registrar of the Companies. This along with the other material documents referred to in the prospectus are available for inspection by the members of the public. The minimum amount to be subscribed by the promoters and maintained for a minimum number of years also safeguard the interest of the investors.
6. SEBIs Role
SEBI scrutinises the various offer documents from the view point of investors protection and full disclosure. It has the power to delete the unsubstantiated claims and ask for additional information wherever needed. This makes the lead managers to prepare the offer document with due care and diligence. When the disclosure of the information is complete, wide publicity has to be given in the newspapers. In the allotment procedure to make sure of transparency, SEBIs nominee is appointed apart from the stock exchange nominee in the allotment committee. Inclusion of valid applications and rejection of invalid applications are checked. The representative of the SEBIs see to it that undue preference is not given to certain group of investors.
7. For redressal of investors grievances,
The Department of Company Affairs has introduced computerised system ofprocessing the complaints to handle it effectively. The companies are requested to give feed back regarding the action taken on each complaint within a stipulated time period. If the companies do not respond and are slow in the process of settlement of complaints, penal action can be taken against the companies under the provisions of the Companies Act. If the performance of the Registrar to the issue is not satisfactory in settling the complaints, SEBI can take appropriate action against such Registrar. Several Investors Associations are also functioning to help the investors complaints redressed promptly.
Factors Needed to Make the Investor Protection Effective
1. Investors Awareness
Even though many mechanisms exist in the various stages of the issue, the investor awareness regarding the mechanism is limited. To remove this, provision of information regarding the status of an application and redressal of grievances should be provided at all centres where applications are collected.
2. Strict norms for Premium Fixation
The guidelines issued by SEBI in Dec 1996 nfor justification of premium on the basis of Malegam Committee recommendations still leave scope for fixation of relatively high premiums. It is desirable to evolve a straight jacket formula on the lines of erstwhile valuation guidelines under the Capital Issues Control Act.
3. Safety Nets
It is imperative to provide for safety nets atleast in respect of small investors holding shares up to 200 for at least one year. The safety net has to be honoured by the issuers, merchant bankers and underwriters under a formula normally agreed upon. The stipulation of safety net itself will result in the fixtion of realistic premium.
4. Punitive action
a. The punitive action under the companies Act needs to be stepped up, especially under section 62, 63 and 209 A. Sec 62 provide for comp.ensation to investors for losses arising out of misstatement in the prospectus. SEBI, stock exchanges and investors association file the cases under this section because the individual investor finds it impossible to institute cases under this section.
b. In case of successful prosecution and promoters being declared insolvency, compensation should come from Investors Protection Fund.
c. Regarding the fly by night operators, the Department of company Affairs should step up action under Sec 209 A of the Companies Act. Powers under this section should be delegated to SEBI for effective functioning. 5. Promoters Stake
It is necessary to raise the promoters stake in new issues which has been curtailed drastically from 60 per cent earlier to 20 per cent now. It needs to be raised to at least 40 per cent. This reduces the scope for manipulation of prices.
Recent Trends in the Primary Market
The liberalization policy adopted by the government in the early nineties resulted in a boom in the secondary market. The boom was not restricted to the secondary market alone, the primary market which till then was working under the Controller of Capital Issue also enjoyed the boom withthe repealing of the Controller of Capital Issue Act. With the dawn of an era of free pricing more and more companies accessed the primary market. There was a fall inthe amount raised through primary market from March 1995 with much-publicized M.S. shoe episode. This episode put a break on the new issues activity. the collapse of the CRB capital market was another fatal blow on the primary market. The primary market was dull and insipid in 1997-98. The number of primary issues, which were 813 in 1996-97 drastically fell down to 62 issues in 1997-98. It is interesting to note that out of every 100 public issues 39 was over subscribed in 1995-96 but in 1996-97 it was 8. At the same time the 7 out of everys 100 companies in 1996-97 had to return application money to investors for failing to raise minimum stipulated amount in capital issue. The reasons for this sordid state of affairs are given below.
2. A ) Discuss the dematerialisation and Rematerialisation process in NSDL
Dematerialisation: It is the process by which a client can get physical certificates converted into electronic balances. An investor intending to dematerialise its securities needs to have an account with a DP. The client has to deface and surrender the certificates registered in its name to the DP. After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/ R&T agent electronically, using NSDL Depository system, about the request for dematerialisation. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as the holder of the securities (the investor will be the beneficial owner) and communicates to NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits the securities in the depository account of the Investor with the DP Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the BOs account with his DP. The client (registered owner) will submit a request to the DP in the Dematerialisation Request Form for dematerialisation, along with the certificates of securities to be dematerialised. Before submission, the client has to deface the certificates by writing "SURRENDERED FOR DEMATERIALISATION". The DP will verify that the form is duly filled in and the number of certificates, number of securities and the security type (equity, debenture etc.) are as given in the DRF. If the form and security count is in order, the DP will issue an acknowledgement slip duly signed and stamped, to the client. The DP will scrutinize the form and the certificates. This scrutiny involves the following o Verification of Client's signature on the dematerialisation request with the specimen signature (the signature on the account opening form). If the signature differs, the DP should ensure the identity of the client. o Compare the names on DRF and certificates with the client account. o Paid up status o ISIN (International Securities Identification Number) o Lock - in status o Distinctive numbers In case the securities are not in order they are returned to the client and acknowledgment is obtained. The DP will reject the request and return the DRF and certificates in case: o A single DRF is used to dematerialise securities of more than one company. o The certificates are mutilated, or they are defaced in such a way that the material information is not readable. It may advise the client to send the certificates to the Issuer/ R&T agent and get new securities issued in lieu thereof. o Part of the certificates pertaining to a single DRF is partly paid- up; the DP will reject the request and return the DRF along with the certificates. The DP may advise the client to send separate requests for the fully paid-up and partly paid-up securities. o Part of the certificates pertaining to a single DRF is locked-in, the DP will reject the request and return the DRF along with the certificates to the client. The DP may advise the client to send a separate request for the locked-in certificates. Also, certificates locked-in for different reasons should not be submitted together with a single DRF In case the securities are in order, the details of the request as mentioned in the form are entered in the DPM (software provided by NSDL to the DP) and a Dematerialisation Request Number (DRN) will be generated by the system. The DRN so generated is entered in the space provided for the purpose in the dematerialisation request form. A person other than the person who entered the data is expected to verify details recorded for the DRN. The request is then released by the DP which is forwarded electronically to DM (DM - Depository Module, NSDL's software system) by DPM. The DM forwards the request to the Issuer/ R&T agent electronically. The DP will fill the relevant portion viz., the authorisation portion of the demat request form. The DP will punch the certificates on the company name so that it does not destroy any material information on the certificate. The DP will then despatch the certificates along with the request form and a covering letter to the Issuer/ R&T agent. The Issuer/ R&T agent confirms acceptance of the request for dematerialisation in his system DPM (SHR) and the same will be forwarded to the DM, if the request is found in order. The DM will electronically authorise the creation of appropriate credit balances in the client's account. The DPM will credit the client's account automatically. The DP must inform the client of the changes in the client's account following the confirmation of the request. The issuer/ R&T may reject dematerialisation request in some cases. The issuer or its R&T Agent will send an objection memo to the DP, with or without DRF and security certificates depending upon the reason for rejection. The DP/Investor has to remove reasons for objection within 15 days of receiving the objection memo. If the DP fails to remove the objections within 15 days, the issuer or its R&T Agent may reject the request and return DRF and accompanying certificates to the DP. The DP, if the client so requires, may generate a new dematerialisation request and send the securities again to the issuer or its R&T Agent. No fresh request can be generated for the same securities until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and the DP about it.
In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates that are to be dematerialised. Separate DRF has to be filled for each ISIN. The complete process of dematerialisation is outlined below:
Surrender certificates for dematerialisation to your DP. DP intimates to the Depository regarding the request through the system. DP submits the certificates to the registrar of the Issuer Company. Registrar confirms the dematerialisation request from depository. After dematerialising the certificates, Registrar updates accounts and informs depository regarding completion of dematerialisation. Depository updates its accounts and informs the DP. DP updates the demat account of the investor.
Rematerialisation: Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates. The client has to submit the rematerialisation request to the DP with whom he has an account. The DP enters the request in its system which blocks the clients holdings to that extent automatically. The DP releases the request to NSDL and sends the request form to the Issuer/ R&T agent. The Issuer/ R&T agent then prints the certificates, despatches the same to the client and simultaneously electronically confirms the acceptance of the request to NSDL. Thereafter, the clients blocked balances are debited. The client will submit a request to the DP for rematerialisation of holdings in its account. On receipt of the request form, the DP will verify that the form is duly filled in and issue to the client, an acknowledgement slip, signed and stamped. The DP will verify the signature of the client as on the form with the specimen available in its records. If the signatures are different the DP will ensure the identity of the client. If the form is in order the DP will enter the request details in its DPM (software provided by NSDL to the DP). While entering the details, if it is found that the client's account does not have enough balance, the DP will not entertain the request. The DP will intimate the client that the request cannot be entertained since the client does not have sufficient balance. If there is sufficient balance in the client's account, the DP will enter the request in the DPM and the DPM will generate a Rematerialisation Request Number (RRN). The RRN so generated is entered in the space provided for the purpose in the rematerialisation request form. Details recorded for the RRN should be verified by a person other than the person who entered the data. The request is then released to the DM by the DP. The DM forwards the request to the Issuer/ R&T agent electronically. The DP will fill the authorisation portion of the request form. The DP will then despatch the request form to the Issuer/ R&T agent. While processing the request, the Issuer/ R&T agent may report some objections. Depending on the nature of objection, the Issuer/ R&T agent may reject the request or process it partially, seeking rectification for the remaining, and send an objection memo to the DP. The Issuer/ R&T agent accepts the request for rematerialisation prints and despatches the certificates to the client and sends electronic confirmation to the DM. The DM downloads this information to the DPM and the status of the rematerialisation request is updated in the DPM. The DP must inform the client about the changes in the client account following the acceptance of the request.
2B)Stock market indices are the barometre of the stock market Discuss
Index numbers are termed as barometers of economy as they mirror the relative changes taking place in various economic indicators like GDP, exports, prices, etc. similarly stock market indices are the barometers of the stock market. They reflect the stock market behaviour.
STOCK MARKET INDICES
With some 7,000 companies listed on the Bombay stock exchange, it is not possible to look at the prices of every stock to find out whether the market movement is upward or downward. The indices give a broad outline of the market movement and represent the market. Some of the stock market indices are BSE Sensex, BSE- 200, Dollex, NSE-50, CRIOSIL-500, Business Line 250 and RBI indices of Ordinary Shares. Usefulness of indices would be clear from the following points: 1. Stock market indices help to recognise the broad trends in the market.
2. Stock prise index can be used as a benchmark for evaluating the investors portfolio.
3. The investor can use the indices to allocate funds rationally among stocks. To earn returns on par with the market returns, he can choose the stocks that reflect the market movement.
4. Index funds and futures are formulated with the help of the indices. Usually fund managers construct portfolios to emulate any one of the major stock market index. ICICI has floated ICICI index bonds. The return of the bond is linked with the index movement.
5. Technical analysts studying the historical performance of the indices predict the future movement of the stock market. The relationship between the individual stock and index predicts the individual share price movement.
6. Stock market function as a status report on the general economy. Impacts of the various economic policies are reflected on the stock market.
Computation of stock index
Different methods have been suggested for the computation of stock indices. They are the market value weighted method, price weighted method, and equal weight method.
The market value weighted method computes a stock index in which each stock affects the index in proportion to its market value. This is also called the capitalisation-weighted index. The price weighted method gives weights to each security forming the index according to the price per share prevailing in the market. Weights can also be given equally to all the shares. This method of computing the indexis known as equal weight method
2C)How can increasing short interest give a bullish interpretation and why ? Short Interest as a Bullish Indicator
Why is heavy short interest a bullish indicator? Well, a substantial accumulation of short interest on a particular stock leaves the door open for a potential short-squeeze rally. This situation typically occurs when an equity suddenly moves sharply higher perhaps as the result of a positive earnings surprise, or an analyst upgrade. A sharp increase in price results in a loss for the short sellers, forcing them to cover (or buy back) their bearish bets in order to minimize the damage. This rush to cover their shorted shares leads to further gains in the shares, and in turn draws more short sellers into covering their positions.
Yet, this kind of short-squeeze situation is not necessary for a bullish investor to reap the benefits of this bearish sentiment. Heavy short interest on a rising stock can help fuel the securitys rally as these shorted shares are slowly and steadily unwound in the form of buying pressure. On a strongly uptrending security, a healthy accumulation of short interest can be thought of as sideline cash should the stock's gains continue.
Short Interest as a Bearish Indicator
Can heavy short interest be used as a bearish indicator? Actually, it can. If a stock is in a sharp downtrend and is also faced with a heavy amount of short interest, we could see the stock suffer additional significant losses as the bears increase their short positions. This downward volatility has increased following the elimination of the uptick rule on July 6, 2007. (The uptick rule required that every short sale be entered at a price that was higher than the price of the previous trade. The uptick rule was created to prevent short sellers from adding to the downward momentum when the price of an asset is already experiencing sharp declines.)
Measuring Short Interest
There are two key indicators that are used to measure the level of short interest: the short-interest ratio and short interest as a percentage of a stocks total float. The short-interest ratio is determined by dividing the total number of shares sold short by a stocks average daily trading volume during a one- month period. The short-interest ratio is a rough estimate of how many days it would take investors to buy back all of their shorted shares at the stocks average daily trading volume. For our purposes, we typically view any reading above 4 or 5 as a sign of heavy pessimistic sentiment.
Meanwhile, the percentage of a stocks total float (or the total number of shares of a company available for trading) that has been dedicated to short selling is another indication of how bearish investors might be. For our purposes, we typically view any readings above 5% as a sign of heavy pessimistic sentiment.
Short interest can be a useful sentiment indicator, since it measures the level of investor pessimism toward a given stock. Specifically, short interest is created when an investor sells shares of a stock that he or she has borrowed from a broker, but does not own outright. A basic short-selling strategy is profitable when the price of the shorted stock declines, allowing the investor to buy the stock back at a lower price in order to replace the borrowed shares. Thus, the short seller hopes and likely assumes that the stock he or she has sold short will continue to drop.
Twice a month, brokerage firms are required to report the number of shares that have been shorted in their client accounts. This information is compiled for each security and then released to the public. By monitoring changes in a stock's short-interest figures, investors are able to gauge the public's level of pessimism toward the stock. Generally speaking, a high volume of short interest indicates that investors have a negative outlook for the company (although heavy short interest can also be created out of arbitrage situations, such as mergers and the release of convertible bonds). From a contrarian viewpoint, we see this pessimism as bullish for the stock if it is in an uptrend.
Short selling is one way to give a person the ability to profit from a falling stock. It is the selling of a security that the seller doesn't own. One borrows a stock (or futures contract or option), then sells it, hoping to replace those borrowed shares by buying them back at a lower price and thus earning a profit.
If the security goes up from the price at which you initially sold, your loss is the difference, and it can be unlimited. That's the risky part of short- selling - your potential profit is limited while your risk is unlimited (if you are un-hedged).
Short interest is the total number of shares of a stock that have been sold short but not yet covered. The NYSE reports the total short interest for each stock once per month, usually around the middle of the month. These are only trades that are already settled, so there is some lag in the reporting.
A large increase or decrease in short interest can be a good indicator of sentiment. A high (or rising) short interest means that a large amount of people believe that a stock will go down, similar to the short futures contracts from the Commitments of Traders data and high put/call ratios. The short-interest ratio is the total number of shares sold short (short interest) divided by average daily volume. This is also called "days to cover" because it shows - given the security's average trading volume - how many days it will take to cover all of the short positions. The higher the ratio, the longer it would take to buy back the borrowed shares, and the potentially more bullish it is. It is potentially bullish because if some positive catalyst occurs, then there may be heavy buying demand from those short looking to cover (buy back) their shares. Just as individual stocks have short interest ratios, so do the exchanges as a whole, which are simply the addition of all the individual stocks. The traditional way to calculate the short interest ratio on the NYSE is to take the short interest on all the individual stocks on the exchange and divide it by the average daily trading volume on the NYSE over the past month. So, for example, if there were two billion shares sold short at the end of the reporting period, we would divide that by the average daily volume on the NYSE for the same period, say, one billion shares per day. This would give us a NYSE short ratio of 2, which means that it would take two days to cover all of the short positions. A higher ratio means there is more bearish sentiment on the exchange. There are some challenges here, mainly the fact that short interest is very seasonal. It is lower in the early months of the year and higher in the later months, probably because of tax implications. We have analyzed each year from 1943-2002 and adjusted the short sales to normalize these effects. This gives us a better perspective of actual sentiment rather than seasonal influences. Also, instead of using just one month's volume to calculate the ratio, we use the past 12 months, which helps to cancel out seasonal volume influences as well. When we see a buildup in short interest, that provides a base for those shorts to eventually cover, driving prices higher. Therefore, high short interest ratios tend to be bullish. Conversely, low short interest ratios mean that traders are optimistic about the long-term prospects of the market, and have decreased their short holdings. This robs the market of a potential short-covering base, and tends to be bearish.
3A)Explain the utility of economic analysis and state the economic factor considered for this analysis ?
In the economic analysis the investor has to analyse the economic factor to forecast of the economy in order to identify the growth of the economy and its trend. Further based on the economic analysis the investor will identify the industry groups which are promising in the coming years in order to choose the best company in such industry group. The economic analysis provides the investor to develop a sound economic understand and be able to interpret the impact of important economic indicators on the markets.
Return assumptions for the stock and bond markets and sales, cost, and profit projections for industries and nearly all companies necessarily embody economic assumptions. Investors are concerned with those forces in the economy which affect the performance of organization in which they wish to participate, through purchase of stock. By identifying key assumptions and variables, we can monitor the economy and gauge the implications of new information on our economic outlook and industry analysis. In order to beat the market on a risk adjusted basis, the investor must have forecasts that differ from the market consensus and must be correct more often than not.
Economic trends can take two basic forms: cyclical changes that arise from ups and downs of the business cycle, and structural changes that occur when the economy is undergoing a major change in how it functions. Some of the broad forces which impact the economy are:
Population
Population gives and idea of the kind of labour force in a country. Increasing population gives demand for more industries like hotels, residences,
service industries
Like health, consumer demand like refrigerators and cars. Increasing population therefore shows a greater need for economic development.Although it does not show the exact industry that will expand.
Research and technological development
The economic forces relating to investments would depend on the amount of resources spent by the government on the particular technological development affecting the future. Investors would prefer to invest in those industries in which the larger share of development funds are being allocated by the government. For example in India oil and information technology are receiving a greater amount of attention and may be considered for investment.
Macroeconomic Stability
General macroeconomic conditions are very important in terms of the general climate under which investment decisions are made. So economic growth will depend to some extent upon the stability of the economy e.g. fiscal balance, and reasonably predictable levels of inflation. Macroeconomic stability reduces the risks of investment and might therefore be seen as a necessary condition for growth. Fiscal balance ensures that there is less risk of inflation, because there will be less risk of governments printing money. This may also stabilize the exchange rate and allow interest rates to be set at a reasonably low level - so further encouraging investment.
Trade Liberalization, Capital Mobility and Exchange Rate Policy The abolition of trade restrictions (tariffs and quotas) is often seen as a necessary condition for growth. The idea is to widen markets and thus allow economies of scale in exporting industries. It is often argued that exchange rates need to be adjusted downwards at the same time, to ensure that potential exporters can compete on world markets. To encourage direct foreigninvestment restrictions on international capital flows may need to be reduced.
Natural Resources and Raw Material
The natural resources are largely responsible for a countrys economic development and overall improvement in the condition of corporate growth. The discovery of oil in Middle Eastern countries and the discovery of gas in America has significantly changed the economic and investment pattern of the countries.
Gross domestic product (GDP)
GDP measures the total output of goods and services for final use occurring within the domestic territory of a given country, regardless of the allocation to domestic and foreign claims. Gross domestic product at purchaservalues (market prices) is the sum of gross value added by all resident and nonresident producers in the economy plus any taxes and minus any subsidies not included in the value of the products. Higher GDP level is an indication of higher economic development and thereby higher investment ability.
International Trade
Exports and Imports of goods and services represent the value of all goods and other market services provided to or received from the rest of the world. They include the value of merchandise, freight, insurance, transport, travel, royalties, license fees, and other services, such as communication, construction, financial, information, business, personal, and government services. They exclude labor and property income (formerly called factor services) as well as transfer payments. Higher levels of international trade especially higher exports are indicative of higher earnings and therefore higher economic development of a country.
Inflation
Higher inflation is generally negative for the stock market because it causes higher interest rates, it increases uncertainty about future prices and costs, and it harms firms that cannot pass their cost increases on to consumers.Some industries may benefit inflation. Natural resource industries benefit if their production costs do not rise with inflation, because their output will likely sell at higher price.
Interest Rates
Banks usually benefit from volatile interest rates because stable interest rates lead to heavy competitive pressures that squeeze their interest margins. High interest rates clearly harm the housing and the construction industry.
Economic Indicators
Besides the factors discussed above there are other significant economic indicators such as countrys fiscal policy, monetary policy, stock prices, state of capital market, labour productivity, consumer activity etc.
Forecasting techniques
There are basically five economic forecasting techniques:
Surveys: It is a method of short term forecasting. It is broadly used to convey the future course of events in the economy. The method to do this is approximate because it is based on beliefs, notions and future budgeting of the government.It, however, broadly indicates the future of events in the economy.
Economic Indicators: It gives indication of the economic process through cyclical timings. These projections are a method of getting indications of the future relating to business depressions and business prosperity. This method although has its advantages of giving the future indications of the economy is not an exact method of finding out the economic activity. It gives results approximately and is at best an estimation of the future of the economic conditions.
Diffusion Indexes: The diffusion index is a method which combines the different indicators into one total measure and it gives weaknesses and strength of a particular time series of data. The diffusion index is also called a census or a composite index.
Economic Model Building: This is a mathematical and statistical application to forecast the future trend of the economy. This technique can be used by trained technicians and it is used to draw out relation between two or more variables. The technique is to make one independent variable and independent variable and to draw out a relationship between these variables. The answer of drawing these relationships is to get a forecast of direction as well as magnitude.
Opportunistic Model Building: This method is the most widely used economic forecasting method. This is also sectoral analysis of Gross National Product Model Building. This method uses the national accounting data to be able to forecast for a future short-term period. It is a flexible and reliable method of forecasting. The method of forecasting is to find out the total income and the total demand for the forecast period. To this are added the environment conditions of political stability, economic and fiscal policies of the government, policies relating to tax and interest rates. This must be added to Gross domestic investment, government purchases of goods in services, consumption expenses and net exports. The forecast has to be broken down first by an estimate of the government sector which is to be divided again into State Government and Central Government expenses. The gross private domestic investment is to be calculated by adding the business expenses for plan, construction and equipment changes in the level of business. The third sector which is to be taken is the consumption sector relating to the personal consumption factor. This sector is usually divided into components of durable goods, non-durable goods and services. When data has been taken of all these sectors these are added up to get the forecast for the Gross National Product.
What is meant by Fundamental Analysis and how Fundamental analysis differ from Technical analysis?
1) FUNDAMENTAL ANALYSIS :
The first major analysis of securities analysis is the fundamental analysis. A Fundamental analysis is a time honored value based approach depending. Upon a careful assessment of the fundamental of an economy, industry and the company. The fundamental analysis studies the general economic situation makes an evaluation of an industry and finally does an in-depth analysis of both financial and the non financials of the company of choice. The fundamental analysis is aimed at analyzing the various 3 fundamentals or basic factors that effect the risk return of the securities. The fundamental analysis involves the analysis of the following: A) THE ECONOMIC ANALYSIS B) THE INDUSTRY ANALYSIS C) THE COMPANY ANALYSIS
A) THE ECONOMIC ANALYSIS: In the economic analysis the investor has to analyse the economic factor to forecast of the economy in order to identify the growth of the economy and its trend. Further based on the economic analysis the investor will identify the industry groups which are promising in the coming years in order to choose the best company in such industry group. The economic analysis provides the investor to develop a sound economic understand and be able to interpret the impact of important economic indicators on the markets
B) INDUSTRY ANALYSIS: The object of the industry analysis is to assess the prospects of various industrial groupings. The industry analysis helps to identify the industries with a potential for future growth and to select companies from such industry to invest in its securities. The industry analysis involves industry life cycle analysis, investment implication, structure and characteristics of an industry.
C) THE COMPANY ANALYSIS: Company analysis is the last leg in the economy, industry and company analysis sequence. The company analysis is a study of variable that influence the future of a firm both qualitatively and quantitatively. The purpose of company analysis is to know the intrinsic value of a share of a company.
2) THE TECHNICAL ANALYSIS : As an approach to investment analysis, technical analysis is radically different from fundamental analysis. The technical analysis is frequently used as a supplement to fundamental analysis is, concerned with a critical study of the daily or weekly price volume data of index comprising several shares. The technical analysis analyses the buying and selling pressure, which govern the price trend. It helps the investors to buy cheap and sell high, regardless of the type of company the investor choose. The technical analysis complies a study of the market itself and not of the various external factors which effect the market. According to technical analyst, all relevant factors get gets reflected in the volume of the stock exchange transaction and the level of the share prices
Technical analysis has an important bearing on the study of price behavior and has its own method in predicating significant price behavior. Technical analysis is probably the most controversial aspect of investment management. That technical analysis is a delusion, that it can never be more useful in predicating stock performance than examining the insides of a dead sheep, in the ancient Greek traditions.
Technical analysis involves a study of market generated data like prices and volumes to determine the future direction of price movement. Martin J. Pring explains as The technical approach to investing is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces. The art of technical analysis-for it is an art- is to identify trend changes at an early stage and to maintain an investment posture until the weight of the evidence indicates that the trend has been reversed.
Basic assumption The basic premises underlying technical analysis are as follows.
1. The market and / or an individual stock act like a barometer rather than a thermometer. Events are usually discounted in advance with movements as the likely result of informed buyers and sellers at work.
2. Before a stock experiences a mark-up phase, whether it is minor or major, a period of accumulation usually will take place. Accumulation or distribution activity can occur within natural trading trends. The ability to analyse accumulation or distribution within net natural price patterns will be, therefore, a most essential pre-requisite.
3. The third assumption is an observation that deals with the scope and extends of market movements in relation to each other. In most cases, a small phase of stock price consolidation which is really phase of backing and filling will be followed by a relative short-term movement, up or down, in the stocks price. On the other hand a larger consolidation phase can lead to a greater potential stock price move.
Differences between Technical Analysis and Fundamental Analysis The key differences between technical analysis and fundamental analysis are as follows:
1. Technical analysis mainly seeks to predict short term price movements, whereas fundamental analysis tries to establish longterm values.
2. The focus of technical analysis is mainly on internal market data, particularly price and volume data. The focus of fundamental analysis is on fundamental factors relating to the economy, the industry, and the firm.
3. Technical analysis appeals mostly to short-term traders, whereas fundamental analysis appeals primarily to long-term investors.
3C)What industry life cycle exhibit status of the industry and gives the clue to entry or exit for investors ,elucidate? Industry Life Cycle
An insightful analysis when predicting industry sales and trends in profitability is to view the industry over time and divide its development into stages similar to those that humans progress through. The number of stages in the industry life cycle analysis can be based on a five stages model, which includes:
1. Pioneering Development 2. Rapid accelerating growth 3. Mature growth during this period is very small or negative profit margins and profits. 4. Stabilization and market maturity 5. Deceleration of growth and decline.
Besides being useful when estimating sales, the analysis of an industrys life cycles also can provide insights into profit margins and earnings growth. The profit margin series typically peaks early in the total cycle and then levels off and declines as competition is attracted by the early success of the industry.
1. Pioneering Development: During this start up stage, the industry experiences modest sales growth and very small or negative profit margins and profits. The market for the industrys product or service during this time period is small, and the firms involved incur major development costs.
2. Rapid Accelerating Growth: During this stage a market develops for the product or service and demand becomes substantial. The limited number of firms in the industry faces little competition and individual firms can experience substantial backlogs. The profit margins are very high. The industry builds its productive capacity as sales grow at an increasing rate as the industry attempts to meet excess demand. High scales growth and high profit margins that increase as firms become more efficient cause industry and firm profits to explode. During this phase profits can grow at over 100% a year as a result of the low warning base and the rapid growth of scales and net profit margins.
3. Mature Growth: The success in stage two has satisfied most of the demand for the industry goods or service. Thus, future scales growth may be above normal but it no longer accelerates for example, if the over all economy is growing at 8% scale for this industry might grow at an above normal rate of 15% to 20% a year. Also the rapid growth of scales and high profit margins attract competitors to the industry which causes an increase in supply and lower prices which means that the profit margins begin to decline to normal levels.
4. Stabilization And Market Maturity: During this stage which is probably the longest phase the industry growth rate declines to the growth rate of the aggregate economy or its industry segment. During this stage investors can estimate growth easily because scales correlate highly with an economic series. Although scales grow in line with the economy profit growth varies by industry because the competitive structure varies by industries and by individual firms within the industry because the ability to control costs differs among companies. Competition produces tight profit margins and the rates of return on capital eventually become equal to or slightly below the competitive level.
5. Declaration of Growth and Decline: At this stage of maturity the industry sales growth declines because of shifts in demand or growth of substitutes. Profit margins continue to be squeezed and some firms experience low profit or even losses. Firms that remain profitable may show very low rates of return on capital. Finally, investors begin thinking about alternative uses for the capital tied up in this industry.
Assessing the Industry Life Cycle
The industry life cycle classification of industry evolvement helps investors to assess the growth potential of different companies in an industry. Based on the stage of industry, they can better assess the potential of different companies within an industry. However, there are limitations to this type of analysis First, it is only a generalization, and investors must be careful not to attempt to categorize every industry, or all companies within a particular industry, into neat categories that may not apply. Second, even the general framework may not apply to some industries that are not categorized by many small companies struggling for survival. Finally, the bottom line in security analysis is stock prices, a function of the expected stream of benefits and the risk involved.
The industry life cycle tends to focus on sales and share of the market and investment in the industry. Although all of these factors are important to investors, they are not the final items of interests.
The pioneering stage may offer the highest potential returns, but it also poses the greatest risk. Several companies in an industry will fail or do poorly. Such risk may be appropriate for some investors, but many will wish to avoid the risk inherent in this stage.
Investors interested primarily in capital gains should avoid the maturity stage. Companies at this stage may have relatively high payouts because they have fewer growth prospects. These companies will often offer stability in earnings and dividend growths.
Clearly, companies in the fourth stage of the industrial life cycle, decline, are usually to be avoided. Investors should seek to spot industries in this stage and avoid them. It is the second stage, expansion that is probably of most interest to investors. Industries that have survived the pioneering stage often offer good opportunities for the demand for their products and services is growing more rapidly than the economy as a whole. Growth is rapid but orderly an appealing characteristic to investors.
objective 3 c 25-b 7 b 27-c 14- a 15-d 16-a 18-a 6-c 2-b 1-d 21-b 4-d 5-b 11-a 34-a 35-c