FELLOWSHIP BAPTIST COLLEGE

Rizal Street, Kabankalan City,

Negros Occidental

COLLEGE OF BUSINESS AND ACCOUNTANCY

BSBA Program

(FMGT 412- Security Analysis)

Fourth Year Level

First Semester
Prelim
A.Y. 2021-2022

MR. SUNDAY WAYNE F. ODANGO, MBA

Instructor
Email: swayne1105@yahoo.com
Mobile: 09959585210 ( Globe)
FB/Messenger: Swayne Odango

Security Analysis
Schedule: 9:00 – 10:30AM TTH

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Instructor: MR SUNDAY WAYNE ODANGO, MBA
Email: swayne1105@yahoo.com
FB: Swayne Odango
Mobile: 09959585210

Course Description:
This subject is intended to develop a student’s ability to analyze financial statements for the purpose of
assessing a company” financial stability, performance and efficiency. The subject involves the analysis of
failed and non-failed companies, employing both classical rates analysis and the failure production
models.

COURSE LEARNING OUTCOMES:

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BJECTIVES:
Enables student to
● Understand the nuances of stock market operations
● Understand the techniques involved in deciding upon purchase or sale of securities

OUTCOME
● Become a good investment analyst

UNIT I INVESTMENT SETTING

Financial and economic meaning of Investment Characteristics and objectives of Investment, Types of
Investment Alternatives Choice and Evaluation Risk and return concepts.

UNIT II SECURITIES MARKETS

Financial Market - Segments Types - - Participants in financial Market Regulatory Environment, Primary
Market Methods of floating new issues, Book building Role of primary market Regulation of primary
market, Stock exchanges in India BSE, OTCEI , NSE, ISE, and Regulations of stock exchanges Trading
system in stock exchanges SEBI.

UNIT III FUNDAMENTAL ANALYSIS

Economic Analysis Economic forecasting and stock Investment Decisions Forecasting techniques.
Industry Analysis: Industry classification, Industry life cycle Company Analysis Measuring Earnings
Forecasting Earnings Applied Valuation Techniques Graham and Dodds investor ratios.

UNIT IV TECHNICAL ANALYSIS

Fundamental Analysis Vs Technical Analysis Charting Methods Market Indicators. Trend reversals
Patterns - Moving Average Exponential moving Average Oscillators Market Indicators Efficient Market
theory.

UNIT V PORTFOLIO MANAGEMENT

Portfolio analysis Portfolio Selection Capital Asset Pricing Model Portfolio Revision Portfolio
Evaluation Mutual Funds.

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Part 1: Prelim- Investment Setting and Security Markets

Part 2: Midterm: Fundamental Analysis

Part 3: Pre-Final: Technical Analysis

Part 4: Final: Portfolio Management.

Grading System:
Exam: 40%
Quizzes: 25%
Requirements: 20%
Oral Exam: 10%
ORLE: 5%
Total: 100%

Subject Requirements:
1. Pass major exams
2. Submit weekly requirements
3. Attend virtual classes, / check messenger for updates and short discussions

TEXTBOOKS
1. Donald E.Fischer & Ronald J.Jordan, Security Analysis & Portfolio Management, PHI Learning.,
New Delhi, 8th edition, 2011.
2. Prasannachandra, Investment analysis and Portfolio Management, Tata McGraw Hill, 2011.

REFERENCES
1. Reilly & Brown, Investment Analysis and Portfolio Management, Cengage Learning, 9 th edition,
2011.
2. S. Kevin , Securities Analysis and Portfolio Management , PHI Learning , 2012.
3. Bodi, Kane, Markus, Mohanty, Investments, 8 th edition, Tata McGraw Hill, 2011.
4. V.A.Avadhan, Securities Analysis and Portfolio Management, Himalaya Publishing House, 2011.
5. V.K.Bhalla, Investment Management, S.Chand & Company Ltd., 2012.

Unit 1: Investment Setting

Financial and economic meaning of Investment Characteristics and objectives of Investment Types of
Investment, Investment alternatives Choice and Evaluation Risk and return concepts.

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1.1. Introduction:

● Investment is putting money into something with the expectation of profit. The word
originates in the Latin "vestis", meaning garment, and refers to the act of putting
things (money or other claims to resources) into others' pockets.
● The term "investment" is used differently in economics and in finance. Economists
refer to a real investment (such as a machine or a house), while financial economists
refer to a financial asset, such as money that is put into a bank or the market, which
may then be used to buy a real asset.

1.2. Financial meaning of investment:

● Financial investment involves of funds in various assets, such as stock, Bond, Real
Estate, Mortgages etc.
● Investment is the employment of funds with the aim of achieving additional income
or growth in value.
● It involves the commitment of resources which have been saved or put away from
current consumption in the hope some benefits will accrue in future. Investment
involves long term commitment of funds and waiting for a reward in the future.
● From the point of view people who invest their funds, they are the supplier of
Capital and in their view investment is a commitment of a person s funds to derive
future income in the form of interest, dividend, rent, premiums, pension benefits or the
appreciation of the value of their principle capital.

● To the financial investor it is not important whether money is invested for a

productive use or for the purchase of secondhand instruments such as existing shares
and stocks listed on the stock exchange.
● Most investments are considered to be transfers of financial assets from one person
to another.

1.3. Economic meaning of investment:

● Economic investment means the net additions to the capital stock of the society
which consists of goods and services that are used in the production of other goods

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 and services. Addition to the capital stock means an increase in building, plants,
equipment and inventories over the amount of goods and services that existed.
● The financial and economic meanings are related to each other because investment
is a part of the savings of individuals which flow into the capital market either directly
or through institutions, divided in new and secondhand capital financing. Investors as
suppliers and investors as users of long-term funds find a meeting place in the
market.

1.4. Basic Investment Objectives

Investment triangle three compromising objectives

Any investment decision will be influenced by three objectives security, liquidity and yield. A best
investment decision will be one, which has the best possible compromise between these three
objectives.

Security

Liquidity

Yield

Security:
Central to any investment objective, we have to basically ensure the safety of the principal.
One can afford to lose the returns at any given point of time but s/he can ill afford to lose the
very principal itself. By identifying the importance of security, we will be able to identify and
select the instrument that meets this criterion. For example, when compared with corporate
bonds, we can vouch safe the safety of return of investment in treasury bonds as we have
more faith in governments than in corporations. Hence, treasury bonds are highly secured
instruments. The safest investments are usually found in the money market and include such
securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers'
acceptance slips; or in the fixed income (bond) market in the form of municipal and other
government bonds, and in corporate bonds

Liquidity:

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 Because we may have to convert our investment back to cash or funds to meet our
unexpected demands and needs, our investment should be highly liquid. They should be en
cashable at short notice, without loss and without any difficulty. If they cannot come to our
rescue, we may have to borrow or raise funds externally at high cost and at unfavorable terms
and conditions. Such liquidity can be possible only in the case of investment, which has
always-ready market and willing buyers and sellers. Such instruments of investment are called
highly liquid investment.
Yield:
Yield is best described as the net return out of any investment. Hence given the level or kind
of security and liquidity of the investment, the appropriate yield should encourage the
investor to go for the investment. If the yield is low compared to the expectation of the
investor, s/he may prefer to avoid such investment and keep the funds in the bank account or
in worst case, in cash form in lockers. Hence yield is the attraction for any investment and
normally deciding the right yield is the key to any investment.

Relationship:

● There is a tradeoff between risk (security) and return (yield) on the one hand and
liquidity and return (yield) on the other.
● Normally, higher the risk any investment carries, the greater will be the yield, to
compensate the possible loss. That is why, fly by night operators, offer sky high returns to
their investors and naturally our gullible investors get carried away by such returns and
ultimately lose their investment. Highly secured investment does not carry high coupon,
as it is safe and secured.
● When the investment is illiquid, (i.e. one cannot get out of such investment at will and
without any loss) the returns will be higher, as no normal investor would prefer such
investment.
● These three points security, liquidity and yield in any investment make an excellent
triangle in our investment decision-making. Ideally, with given three points of any
triangle, one can say the center of the triangle is fixed. In our investment decision too,
this center the best meeting point for S, L and Y is important for our consideration.
● However, if any one or two of these three points are disturbed security, liquidity and
yield in any investment the center of the triangle would be disturbed and one may have

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 to revisit the investment decision either to continue the investment or exit the
investment.
● All these points security, liquidity and yield are highly dynamic in any market and they
are always subject to change and hence our investor has to periodically watch his/her
investment and make appropriate decisions at the right time.
● If our investor fails to monitor her / his investment, in the worst circumstances, s/he may
lose the very investment.
● Thus, we will return to our original statement - A best investment decision will be one,
which has the best possible compromise between these three objectives security,
liquidity and yield.

1.5.Secondary Objectives:

Tax Minimization:

An investor may pursue certain investments in order to adopt tax minimization as part of his or
her investment strategy. A highly-paid executive, for example, may want to seek investments with
favorable tax treatment in order to lessen his or her overall income tax burden. Making
contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an
effective tax minimization strategy.

Marketability / Liquidity:

Many of the investments we have discussed are reasonably illiquid, which means they cannot be
immediately sold and easily converted into cash. Achieving a degree of liquidity, however,
requires the sacrifice of a certain level of income or potential for capital gains. Common stock is
often considered the most liquid of investments, since it can usually be sold within a day or two of
the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or
non-tradable, possessing a fixed term. Similarly, money market instruments may only be

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 redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money
market assets and non-tradable bonds aren't likely to be held in his or her portfolio.

1.6. CHARACTERISTICS OF GOOD INVESTMENT

a. Objective fulfillment

● An investment should fulfill the objective of the savers. Every individual has a definite
objective in making an investment. When the investment objective is contrasted with the
uncertainty involved with investments, the fulfillment of the objectives through the
chosen investment avenue could become complex.

b. Safety

● The first and foremost concern of any ordinary investor is that his investment should be
safe. That is he should get back the principal at the end of the maturity period of the
investment. There is no absolute safety in any investment, except probably with
investment in government securities or such instruments where the repayment of
interest and principal is guaranteed by the government.

c. Return

● The return from any investment is expectedly consistent with the extent of risk assumed

by the investor. Risk and return go together. Higher the risk, higher the chances of getting

higher return. An investment in a low risk - high safety investment such as investment in

government securities will obviously get the investor only low returns.

d. Liquidity

● Given a choice, investors would prefer a liquid investment than a higher return
investment. Because the investment climate and market conditions may change or
investor may be confronted by an urgent unforeseen commitment for which he might
need funds, and if he can dispose of his investment without suffering unduly in terms of
loss of returns, he would prefer the liquid investment.

e. Hedge against inflation

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 ● The purchasing power of money deteriorates heavily in a country which is not efficient or
not well endowed, in relation to another country. Investors, who save for the long term,
look for hedge against inflation so that their investments are not unduly eroded; rather
they look for a capital gain which neutralizes the erosion in purchasing power and still
gives a return.

f. Concealability

● If not from the taxman, investors would like to keep their investments rather confidential

from their own kith and kin so that the investments made for their old age/ uncertain

future does not become a hunting ground for their own lives. Safeguarding of financial

instruments representing the investments may be easier than investment made in real

estate. Moreover, the real estate may be prone to encroachment and other such

hazards.

h. Tax shield

● Investment decisions are highly influenced by the tax system in the country. Investors
look for front-end tax incentives while making an investment and also rear-end tax reliefs
while reaping the benefit of their investments. As against tax incentives and reliefs, if
investors were to pay taxes on the income earned from investments, they look for higher
return in such investments so that their after tax income is comparable to the pre-tax
equivalent level with some other income which is free of tax, but is more risky.

1.7. Different types of investors:

● Conservative investors often invest in cash. THIS means that they put their money in
interest bearing savings accounts, money market accounts, mutual funds, US Treasury
bills, and Certificates of Deposit. These are very safe investments that grow over a long
period of time. These are also low risk investments.
● Moderate investors often invest in cash and bonds, and may dabble in the stock market.
Moderate investing may be low or moderate risks. Moderate investors often also invest
in real estate, providing that it is low risk real estate.

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 ● Aggressive investors commonly do most of THEIR investing in the stock market, which is
higher risk. They also tend to invest in business ventures as well as higher risk real estate.
For instance, if an aggressive investor puts his or her money into an older apartment
building, then invests more money renovating the property, they are running a risk. They
expect to be able to rent the apartments out for more money than the apartments are
currently worth or to sell the entire property for a profit on their initial investments. In
some cases, this works out just fine, and in other cases, it doesn't. It's a risk.

1.8. Types of investment: or various investment alternatives /avenues

Non-marketable Financial Assets:

A good portion of financial assets is represented by non-marketable financial assets. A distinguishing

feature of these assets is that they represent personal transactions between the investor and the

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 issuer. For example, when you open a savings bank account at a bank you deal with the bank
personally. In contrast when you buy equity shares in the stock market you do not know who the
seller is and you do not care. These can be classified into the following broad categories:

● Post office deposits

● Company deposits
● Provident fund deposits
● Bank deposits

Bonds:

● Bond is a debt instrument issued for a period of more than one year with the purpose of
raising capital by borrowing.
● It is certificates acknowledging the money lend by a bondholder to the company. It states it
maturity date, interest rate, and par value.

Mutual Funds:

● Instead of directly buying equity shares and/or fixed income instruments, you can participate
in various schemes floated by mutual funds which, in turn, invest in equity shares and fixed
income securities.
● A mutual fund is made up of money that is pooled together by a large number of investors
who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds

Life Insurance:

● In a broad sense, life insurance may be viewed as an investment. Life insurance is a contract
between the policy holder and the insurer, where the insurer promises to pay a designated
beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending
on the contract, other events such as terminal illness or critical illness may also trigger
payment. In return, the policy holder agrees to pay a stipulated amount (the "premium") at
regular intervals or in lump sums. The important types of insurance policies in India are:
● Endowment assurance policy
● Money back policy
● Whole life policy
● Term assurance policy

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1.10 TYPES OF RISKS:

● Personal Risks
● This category of risk deals with the personal level of investing. The investor is likely to have
more control over this type of risk compared to others.
● Timing risk is the risk of buying the right security at the wrong time. It also refers to selling
the right security at the wrong time. For example, there is the chance that a few days after
you sell a stock it will go up several dollars in value. There is no surefire way to time the
market.
● Tenure risk is the risk of losing money while holding onto a security. During the period of
holding, markets may go down, inflation may worsen, or a company may go bankrupt. There
is always the possibility of loss on the company-wide level, too.
● Company Risks
● There are two common risks on the company-wide level. The first, financial risk is the danger
that a corporation will not be able to repay its debts. This has a great affect on its bonds,
which finance the company's assets. The more assets financed by debts (i.e., bonds and
money market instruments), the greater the risk. Studying financial risk involves looking at a
company's management, its leadership style, and its credit history.
● Management risk is the risk that a company's management may run the company so poorly
that it is unable to grow in value or pay dividends to its shareholders. This greatly affects the
value of its stock and the attractiveness of all the securities it issues to investors.
● Market Risks
● Fluctuation in the market as a whole may be caused by the following risks:
● Market risk is the chance that the entire market will decline, thus affecting the prices and
values of securities. Market risk, in turn, is influenced by outside factors such as embargoes
and interest rate changes. See Political risk below.
● Liquidity risk is the risk that an investment, when converted to cash, will experience loss in its
value. When you want to sell the stock you are currently holding, there is nobody there to buy
your stock, meaning that there is no volume in that stock.
● Interest rate risk is the risk that interest rates will rise, resulting in a current investment's loss
of value. A bondholder, for example, may hold a bond earning 6% interest and then see rates
on that type of bond climb to 7%.

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 ● Inflation risk is the danger that the dollars one invests will buy less in the future because
prices of consumer goods rise. When the rate of inflation rises, investments have less
purchasing power. This is especially true with investments that earn fixed rates of return. As
long as they are held at constant rates, they are threatened by inflation. Inflation risk is tied to
interest rate risk, because interest rates often rise to compensate for inflation. Return of
investment (ROI) is less than the market inflation rate.
● e.g. Return of investment (ROI) : 5%; Market Inflation rate (IR) : 8.5%
● Exchange rate risk is the chance that a nation's currency will lose value when exchanged for
foreign currencies.
● Reinvestment risk is the danger that reinvested money will fetch returns lower than those
earned before reinvestment. Individuals with dividend-reinvestment plans are a group subject
to this risk. Bondholders are another.
● National And International Risks
● National and world events can profoundly affect investment markets.
● Economic risk is the danger that the economy as a whole will perform poorly. When the
whole economy experiences a downturn, it affects stock prices, the job market, and the prices
of consumer products.
● Industry risk is the chance that a specific industry will perform poorly. When problems plague
one industry, they affect the individual businesses involved as well as the securities issued by
those businesses. They may also cross over into other industries. For example, after a national
downturn in auto sales, the steel industry may suffer financially.
● Tax risk is the danger that rising taxes will make investing less attractive. In general, nations
with relatively low tax rates, such as the United States, are popular places for entrepreneurial
activities. Businesses that are taxed heavily have less money available for research, expansion,
and even dividend payments. Taxes are also levied on capital gains, dividends and interest.
Investors continually seek investments that provide the greatest net after-tax returns.
● Political risk is the danger that government legislation will have an adverse effect on
investment. This can be in the form of high taxes, prohibitive licensing, or the appointment of
individuals whose policies interfere with investment growth. Political risks include wars,
changes in government leadership, and politically motivated embargoes.

Investors and speculators:

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 Investors:

● The investors buy the securities with a view to invest their savings in profitable income
earning securities. They generally retain the securities for a considerable length of time. They
are assured of a profit in cash. They are also called genuine investors.

Speculators:

● The speculators buy securities with a hope to sell them at a profit in future. They do not retain
their holdings for a longer period. They buy the securities with the object of selling them and
not to retain them. They are interested only in price differentials. They are not genuine
investors.

Note: Discussion and some illustration will be posted on our GC.

UNIT II- Prelim

SECURITIES MARKETS
2.1 FINANCIAL MARKETS

In economics, a financial market is a mechanism that allows people to buy and sell (trade)
financial securities (such as stocks and bonds), commodities (such as precious metals or

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 agricultural goods), and other fungible items of value at low transaction costs and at
prices that reflect the efficient-market hypothesis. Financial markets can be domestic or
they can be international.

In finance, financial markets facilitate:

● The raising of capital (in the capital markets)

● The transfer of risk (in the derivatives markets)
● International trade (in the currency markets)

- And are used to match those who want capital to those who have it.

2.2 TYPES OF FINANCIAL MARKETS

The financial markets can be divided into different subtypes:

Financial
Market

Capital Market Money Market

Foreign Government
Exchange securitites
Market Market

Derivatives Insurance Commodity

Market Market Market

(A)Capital Market:
The capital market deals in long term funds (shares and debentures). Companies raise their capital
through the issue of shares and debentures.

Capital markets which consist of:

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 Stock markets, which provide financing through the issuance of shares or
common stock, and enable the subsequent trading thereof.
Bond markets, which provide financing through the issuance of bonds, and
enable the subsequent trading thereof.
Another classification of capital market is as follows:

Capital
Market

Primary Secondary
Market Market

Primary Market:

Primary market refers to the sale of shares, directly by the company at the time of promotion and
the investors directly buy the shares from the company through application.

Secondary Market:

● Secondary markets allow investors to sell securities that they hold or buy existing
securities.
● Here sale and purchase of securities will take place through the recognized stock
exchanges.
● Only authorized persons are allowed to deal in the securities in the secondary market,
who are known as brokers.

The main functions of financial market are:

1) To facilitate creation and allocation of credit and liquidity.

2) To serve as intermediaries for mobilization of savings
3) To assist process of balanced economic growth;
4) To provide financial convenience

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Financial market functions:

Financial markets serve six basic functions. These functions are briefly listed below:

Borrowing and Lending: Financial markets permit the transfer of funds (purchasing power) from
one agent to another for either investment or consumption purposes.

Price Determination: Financial markets provide vehicles by which prices are set both for newly
issued financial assets and for the existing stock of financial assets.

Information Aggregation and Coordination: Financial markets act as collectors and aggregators of
information about financial asset values and the flow of funds from lenders to borrowers.

Risk Sharing: Financial markets allow a transfer of risk from those who undertake investments to
those who provide funds for those investments.

Liquidity: Financial markets provide the holders of financial assets with a chance to resell or
liquidate these assets.

Efficiency: Financial markets reduce transaction costs and information costs.

2.3 PARTICIPANTS IN FINANCIAL MARKET:

In the financial markets, there is a flow of funds from one group of parties (funds-surplus units)
known as investors to another group (funds-deficit units) which require funds. However, often these
groups do not have direct link. The link is provided by market intermediaries such as brokers, mutual
funds, leasing and finance companies, etc. In all, there is a very large number of players and
participants in the financial market.

Brokers:

A broker is a commissioned agent of a buyer (or seller) who facilitates trade by locating a seller (or
buyer) to complete the desired transaction. A broker does not take a position in the assets he or she
trades -- that is, the broker does not maintain inventories in these assets. The profits of brokers are
determined by the commissions they charge to the users of their services (the buyers, the sellers, or
both). Examples of brokers include real estate brokers and stock brokers.

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 Diagrammatic Illustration of a Stock Broker:

Payment ----------------- Payment

------------>| |------------->
Stock | | Stock
Buyer | Stock Broker | Seller
<-------------|<----------------|<------------Stock |
(Passed Thru) | Stock
Shares ----------------- Shares

Dealers:

Like brokers, dealers facilitate trade by matching buyers with sellers of assets; they do not engage in
asset transformation. Unlike brokers, however, a dealer can and does "take positions" (i.e., maintain
inventories) in the assets he or she trades that permit the dealer to sell out of inventory rather than
always having to locate sellers to match every offer to buy. Also, unlike brokers, dealers do not
receive sales commissions. Rather, dealers make profits by buying assets at relatively low prices and
reselling them at relatively high prices (buy low - sell high). The price at which a dealer offers to sell an
asset (the "asked price") minus the price at which a dealer offers to buy an asset (the "bid price") is
called the bid-ask spread and represents the dealer's profit margin on the asset exchange. Real-world
examples of dealers include car dealers, dealers in U.S. government bonds, and NASDAQ stock
dealers.

Evaluation:

Explain the following: Read instruction carefully.

● Short size white bond paper

● Use black pen
● To avoid “copy-paste” answers, all your answers should be HANDWRITTEN.
● Write your name on the upper left of each paper you will use for your answers.
● Copy the question first and write your answer/explanation below.

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 ● Each question -1 bond paper.

1. If you have 5 million pesos, what type of investment would you make and why?
2. What type of investor you will be and why?
3. Would you prefer to have a Life Insurance nowadays and why?
4. Would you rather be a risk taker or risk averter and why?
5. What type of financial market would you prefer to invest and why?

**********Nothing Follows***********

Note: Please do not hesitate to contact me in case you cannot fully understand. My contact details in
the cover page.

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