“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”—Robert G. Allen
Investment in stock market has witnessed unprecedented growth worldwide especially in the last two decades. Growth in stock market has been parallel to the growth of economy. Investing in stock market requires requisite skills and adequate understanding of market dynamics and tools of investment. As compared to developed stock market where about 30 to 40 per cent of the population participate in stock market, the stock market participation is meagre in India, just about 2 crore equity investors which makes only 2% of the total population. It shows the potential for both vertical and horizontal growth of Indian Stock Market. The plausible reasons for very low stock market participation in India include the more conservative or risk averse nature of Indian investors as well as inadequate knowledge and education regarding stock market instruments, tools, process and trading mechanism. The primary objective of introducing a paper on Investing in stock markets is to fill up this void and educate young minds for investing in stock market in a judicious way.
“An investment in knowledge pays the best interest.” – Benjamin Franklin
The present book “Investing in Stock Market” is written with objective of providing the user a comprehensive understanding of the investment environment, investment decision process and trading mechanism in stock market. It explains various concepts, tools and techniques related with investment in financial assets with lively examples and suitable illustrations. The focus of the book is investment in stock market primarily equity shares. In this seventh edition of the book, some more theoretical concepts have been added along with latest technical tools used in stock markets. Chapter 4 introduces users to role and importance of primary and secondary market segments. Chapter 5 introduces to clearing corporations in India and also the newest national stock exchange - MSEI. Moving further, readers would learn about the EIC framework of fundamental analysis of stocks in Chapter 7. To keep up with the modern tools of technical analysis, filter rules, Credit I-5
Balance Theory, MACD, advance decline ratio and advance interactive charts have been added to Chapter 8. Lastly, payoffs of call and put options are discussed with elaborate illustrations and diagrams in Derivatives Market chapter. The book has been updated with most recent data tables, facts and information regarding stock markets.
The book comprises of 10 chapters. Chapter 1 introduces readers to the basics of investment. Chapter 2 trains about risk and return analysis, measurement of risk and return, and comparison of various alternative investment choices posed to an investor. The focus of Chapter 3 is on Online Trading which is gaining popularity in India. Chapter 4 talks about Indian Securities Market & Chapter 5 provides a comprehensive overview of stock exchanges in India including NSE, BSE, MCX, MSEI, etc. Chapter 6 discusses about derivatives market and its instruments forwords, futures, options, etc. After creating this strong theoretical base, Chapters 7 and 8 aim to inculcate analytical knowledge amongst our readers by deliberating upon tools of fundamental analysis and technical analysis. Lastly, mutual fund investment has been discussed in Chapter 9 and Chapter 10 in great detail. Latest University examination question papers have been added for ready referral by students during exam preparation.
Every chapter begins with a list of learning outcomes which the reader will achieve after successful completion of the chapter. It sets the broad framework for the chapter, followed by - where various concepts and techniques have been explained in a lucid and well knit manner. Wherever required the explanation is supplemented by suitable illustrations, figures and examples. Each chapter provides sufficient number of solved problems for better understanding and application of the concepts explained in the main text. Summary points to recapitulate the concepts and tools are provided at the end of chapters. It helps the reader to glance over the entire discussion presented in that chapter. Every chapter provides a variety of assignments to test the knowledge of the reader. It comprises of True/False statements, theory questions and numerical problems. The topic of Investments is very lively and the reader may want to apply various concepts and techniques in real life. For this “project work” is provided in most of the chapters. Project work helps the students and other readers of this book to actually apply various concepts of investments in real life. Sufficient care has been taken while preparing the manuscript for the book. However there may be some unintentional errors. Readers are welcome to send all comments, suggestions at vanitatripathi.dse@gmail.com or neetipanwar.srcc@gmail.com
Happy reading!
January 2023
DR. VANITA TRIPATHI MS. NEETI PANWAR
I-6
Acknowledgement
The contribution of the omnipresent, omnipotent and omniscient invisible hand cannot be expressed in words. We can only say that our faith in Him becomes more and more intense by each passing day.
I-7
DR. VANITA TRIPATHI
MS. NEETI PANWAR
I-8
Chapter-heads
CHAPTER 1 1 CHAPTER 2 22 CHAPTER 3 70 CHAPTER 4 99 CHAPTER 5 135 CHAPTER 6 153 CHAPTER 7 187 CHAPTER 8 233 CHAPTER 9 269 CHAPTER 10 286 B.COM (HON.) 2018 SEM : II GENERIC ELECTIVE IN COMMERCE 309 B.COM (PROG.) 2018 SEM : IV SKILL ENHANCEMENT COURSE 313 B.COM (HON.) 2019 SEM : II GENERIC ELECTIVE IN COMMERCE 317 B.COM (PROG.) 2019 SEM : IV SKILL ENHANCEMENT COURSE 321 B.COM (HONS.) OBE DEC. 2020 SEM : III GENERIC ELECTIVE 325 B.COM (PROG.) JUNE 2021 SEM : IV SKILL ENHANCEMENT COURSE 327 B.COM (HONS.) DEC. 2022 SEM : III GENERIC ELECTIVE 330 Preface to Seventh Edition I-5 Acknowledgement I-7 Contents I-11 Syllabus I-15 I-9
1.1 Investment 2 1.2 Features (or factors affecting) of investment 3 1.3 Speculation 6 1.4 Investment environment 7 1.5 Types of investment (or securities) 9 1.6 Objectives of investment 14 1.7 The investment decision process 14 1.8 Modes of investment - direct investing and indirect investing 17 1.9 Approaches to investing - active investing (Investment) and passive investing (Investment) 18 SUMMARY 19 TEST YOURSELF 19 THEORY QUESTIONS 20 1 BASICS OF INVESTMENT 2 RISK & RETURN 2.1 Risk return trade off 23 2.2 Return and its measurement 24 2.3 Risk 34 2.4 Calculation of systematic risk 43 2.5 Unsystematic risk 46 2.6 Expected return (Based on capital asset pricing model) 47 2.7 Impact of taxes on investment return 48 2.8 Impact of inflation on return from investment 49 SUMMARY 64 TEST YOURSELF 64 THEORY QUESTIONS 65 NUMERICAL QUESTIONS 65 PROJECT WORK 69 I-11 PAGE Preface to Seventh Edition I-5 Acknowledgement I-7 Chapter-heads I-9 Syllabus I-15 Contents
3.1 Online trading - an introduction 71 3.2 Online trading mechanism 73 3.3 Price quotations 74 3.4 Types of orders 82 3.5 Order conditions 87 3.6 Placing an order? 88 3.7 View/modify/cancel an order 92 3.8 Product types - delivery-based vs. Margin based trading 93 3.9 Buying and selling of shares: using broker’s/analyst’s recommendations 95 SUMMARY 96 TEST YOURSELF 97 THEORY QUESTIONS 98 PROJECT WORK 98 3 TRADING IN SECURITIES 4 INDIAN SECURITIES MARKET 5 STOCK EXCHANGES 4.1 Structure of Indian securities market 100 4.2 Primary market 103 4.3 Secondary market 109 4.4 Market participants 112 4.5 Regulation of securities market in India - (SEBI) 119 4.6 Developments in Indian stock market since 1990 126 4.7 Recent developments in Indian securities market 129 SUMMARY 131 TEST YOURSELF 132 THEORY QUESTIONS 133 5.1 Stock exchange 136 5.2 Role of stock exchange 136 5.3 Stock exchanges in India 137 5.4 Securities (Stock) indices 142 5.5 Trading mechanism on exchanges 144 5.6 Sources of financial information 148 SUMMARY 151 TEST YOURSELF 151 THEORY QUESTIONS 152 6 DERIVATIVES MARKET 6.1 Introduction to derivatives 153 6.2 Classification of Derivatives 154 6.3 Participants (or traders) in derivatives market 155 6.4 Forwards 156 PAGE I-12
6.5 Futures 157 6.6 Options 162 6.7 Financial derivatives market in India 177 SUMMARY 185 TEST YOURSELF 185 THEORY QUESTIONS 186 7 FUNDAMENTAL ANALYSIS 8 TECHNICAL ANALYSIS 9 INTRODUCTION TO MUTUAL FUNDS 7.1 Approaches to security analysis 188 7.2 Fundamental analysis 189 7.3 EIC framework 191 7.4 Company analysis 199 7.5 Stock valuation models (Valuation of equity share) 218 SUMMARY 224 TEST YOURSELF 227 THEORY QUESTIONS 228 PROJECT WORK 229 8.1 Technical analysis 234 8.2 Basic tenets (Propositions) of technical analysis 234 8.3 Trading rules/theory (Technical indicators) 235 8.4 Charts 237 8.5 Limitations of technical analysis 260 8.6 Principles of sound investing [Do’s] 261 8.7 Pitfalls to avoid while investing [Don’ts] 263 SUMMARY 266 TEST YOURSELF 266 THEORY QUESTIONS 267 PROJECT WORK 268 9.1 Mutual funds 269 9.2 Evolution of mutual funds in India 271 9.3 Establishment of mutual funds 272 9.4 Advantages of investing in mutual funds 273 9.5 Limitations of investing in mutual fund 274 9.6 Types of mutual fund schemes 274 9.7 Latest developments regarding mutual funds 279 SUMMARY 283 TEST YOURSELF 284 THEORY QUESTIONS 284 PAGE I-13
10.1 Net asset value (NAV) 286 10.2 Types of loads 288 10.3 Investing in mutual funds 289 10.4 Factors affecting choice of mutual funds 290 10.5 List of mutual funds in India along with their websites 292 10.6 AMFI (Association of mutual funds in India) 294 10.7 CRISIL (Credit Rating Information Services of India Ltd.) 296 SUMMARY 304 TEST YOURSELF 304 THEORY QUESTIONS 305 NUMERICAL QUESTIONS 305 10 INVESTING IN MUTUAL FUNDS PAGE I-14 B.Com (Hon.) 2018 SEM : II Generic Elective in Commerce 309 B.Com (Prog.) 2018 SEM : IV Skill Enhancement Course 313 B.Com (Hon.) 2019 SEM : II Generic Elective in Commerce 317 B.Com (Prog.) 2019 SEM : IV Skill Enhancement Course 321 B.Com (Hons.) OBE DEC. 2020 SEM : III Generic Elective 325 B.Com (Prog.) JUNE 2021 SEM : IV Skill Enhancement Course 327 B.Com (Hons.) DEC. 2022 SEM : III Generic Elective 330
Syllabus
B.COM. (HONS.): SEMESTER III
PAPER BCH 3.4(a): INVESTING IN STOCK MARKETS
COURSE CONTENTS
UNIT-I:
Basics of Investing
UNIT-II:
Indian Security Markets
-
I-15
UNIT-III: Fundamental Analysis
UNIT-IV: Technical Analysis
UNIT-V: Investing in Mutual Funds
B. COM. : SEMESTER IV
PAPER BC 4.4(b): INVESTING IN STOCK MARKETS
COURSE CONTENTS
UNIT-I: Basics of Investing
-
-
’ ’
.
I-16
I-17
UNIT-II: Indian Securities Market
UNIT-III: Fundamental Analysis
UNIT-IV: Technical Analysis
UNIT-V: Investing in Mutual Funds
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’
-
DERIVATIVES MARKET
LEARNING OUTCOMES
After reading this chapter you will be able to :
6.1 INTRODUCTION TO DERIVATIVES
6
CHAPTER
153
“Derivative” includes—
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security,
(B) a contract which derives its value from the prices, or index of prices, of underlying securities.
6.2 CLASSIFICATION OF DERIVATIVES
1. Commodity derivatives and Financial derivatives
-
Para 6.2 154
2. Elementary derivatives and Complex derivatives
6.3
-
3. Exchange traded derivatives and Over The Counter (OTC) derivatives
Hedgers : SpeculatorsArbitrageurs155
PARTICIPANTS (OR TRADERS) IN DERIVATIVES MARKET
Para 6.3
Types of Financial derivativesFinancial 6.4 FORWARDSPara 6.4 156
6.5 FUTURES
FeaturesCustomised Underlying assetSymmetrical rights and obligations Non-regulated market Counter-party Risk or default riskHeld till maturity Liquidity Settlement of Contract -
157 Para 6.5
Features: Standardised Contract Exchange based Trading No default riskClearing house Liquidity Before maturity settlement possible Margin requirement -` ` maintenance margin ` variable call initial margin. Settlement mechanism Para 6.5 158
6.5.1 Futures Contract Terminology
Spot price
Futures price
Contract cycle
Expiry date
Contract Size or Lot size
Price steps
Price bands
6.5.2 Comparison between Forwards and Futures
`
BASIS FORWARDS FUTURES-159 Para 6.5
6.5.3 Types of Financial Futures Contracts
Contract size :
BASIS FORWARDS FUTURES--
a. INDEX FUTURES
` Para 6.5 160
` Expiry : Duration:Example : `b. STOCK FUTURESLot/Contract size : Duration :Expiry : 161 Para 6.5
6.6 OPTIONS
An options is a contract that gives its buyer (holder) a right (but not obligation) to buy or sell a specified asset at a specified price (exercise price) on or before a specified future date.
` ` ` ` `
Example:
options premium
162
Para 6.6
BASIS FUTURES OPTIONS Rights ObligationsPremium paymentMargin requirement Profit and loss potentialRealisation of profits/ lossesa b c Execution of contract163 Para 6.6
COMPARISON BETWEEN FUTURES AND OPTIONS
Purpose
6.6.1 Types of Options:
a. Call options - An options contract that gives its holder the ‘right to buy’ a specified asset at a specified price on or before a specified future date, is termed as call option.
b. Put options - An options contract that gives its holder the ‘right to sell’ a specified asset at a specified price on or before a specified future date, is termed as put option
BASIS FUTURES OPTIONS
-
` ` ` ` ` `
. ` ` Para 6.6 164
6.6.2 Styles of Options:
a European options -
b American options -
6.6.3 Covered Options and Naked options
a. Covered option -
b. Naked option -
` ` ` `
6.6
165 Para
6.6.4 Index, stock, currency and interest rate options:
a. Index options :
b. Stock options :
c. Currency options :
d. Interest Rate options :
6.6.5 BASIC TERMINOLOGY used in case of options
Exercise price (or strike price) -
Expiration date -
Option premium -
Para 6.6 166
6.6.6 PAYOFFS FROM BASIC OPTION POSITIONS
1. CALL OPTION
1(a) Long Call (Buying a call option)
167 Para 6.6
` ` ` `` –
` ` Unlimited Profit area Share Price Premium Limited Loss area Exercise Price Payoff Break-even Price 250 260 - 10
FIGURE 6.1: NET PAY-OFF TO BUYER OF CALL OPTION (LONG CALL)
Para 6.6 168
1(b) Selling a call option (Short Call or call option writer)
–169 Para 6.6
FIG 6.2 : NET PAYOFF OF A SHORT CALL (OR CALL OPTION WRITER/SELLER)
2. PUT OPTION :
2(a) Long Put (i.e. Buying a Put option or Put option holder)
Unlimited Loss area Share Price Premium Profit area Exercise Price Payoff Break-even Price 250 260 10
` ` ` ` ` Para 6.6 170
Loss area Share Price Premium Profit area Payoff Break-even Price 250 240 240 - 10
171 Para 6.6
FIG 6.3 : NET PAY OFF OF A PUT OPTION HOLDER (BUYER)
` ` `
Para 6.6 172
2(b)
Short Put (or Selling a Put Option or Put Option writer)
240 Limited Profit Share Price Premium Loss area Payoff Break-even Price 240 250 10
` ` Break even position of Option parties173 Para 6.6
FIG 6.4: NET PAYOFF OF A SHORT PUT (i.e. PUT OPTION WRITER)
INVESTING IN STOCK MARKETS
AUTHOR : VANITA TRIPATHI, NEETI PANWAR
PUBLISHER : TAXMANN
DATE OF PUBLICATION : JANUARY 2023
EDITION : 7th Edition
ISBN NO : 9789356226425
NO. OF PAGES : 352
BINDING TYPE : PAPERBACK
DESCRIPTION
This book has been written to provide the reader with the following:
• Comprehensive understanding of the investment environment
• Investment decision process
• Trading mechanism in stock markets
Rs. 475 USD 35
It also explains the various concepts, tools, and techniques related to investment in financial assets with lively examples and suitable illustrations. The book's focus is investment in stock markets, primarily equity shares.
This book covers the entire syllabus prescribed for students pursuing:
• B.Com. (Hons.) Semester III Paper BCH 3.4(a) Generic Elective under CBCS Programme
• B.Com. Semester IV Paper 4.4(b) Skill Enhancement Course under CBCS Programme
• Non-Collegiate Women's Education Board
• School of Open Learning of the University of Delhi
• Various Central Universities throughout India
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