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Note:

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

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