Gulzar Report SMC

8/2/2019 Gulzar Report SMC

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ACKNOWLEDGEMENT

It gives me great satisfaction on completion of Summer Internship Projects entitled Hedging

Risk through Derivatives and Equity Analysis. On the submission of my project report

I would like to express my sincere gratitude to my guide Prof. Parvaiz Talib (Training

Advisor) for mentoring me and taking active interest throughout the project and for sharing

his insights on the topics and for being a constantsource of inspiration & courage during the

entire project work. He was always available, correcting mistakes, intelligently directing me

to proper sources of information advising to aimfor simplicity, brevity, clarity and accuracy. I

would like to give special thanks to all faculty staff and I would also like express my sincere

gratitude to Prof. Javed Akhtar (Dean Faculty), Prof. Khalid Azam (Chairman), Prof.

Valeed Ahmad Ansari, Faculty of Management Studies & Research, AMU. I am indeed

thankful to them for their valuable guidance.

I would also like to express my special thanks to the Mr. Mahesh C. Gupta (Chairman), Mr.

Suman (Company Secretary), SMC Global Securities Limited and Mr. Naresh Gogia

(Branch Head-Corporate Client Group) for appointing me as project trainee and for his help

& co-operationduring the Project work.

I would like to thank the entire team of SMC Global Securities Limited, for sharing their

immense experience and extending their support in carrying out this project work. I am

greatly acknowledged for their kind help. Gulzar Siraj

Signatures:


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Certificate


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PREFACE

As a part of MBF program, a student has pursued a project duly approved by the director ofthe institute. I had the privilege of undertaking projects on Hedging Risk through

Derivatives and Equity Research.

My project is divided into five chapters and they are given as under.

1. Chapter one of this study contains, concept of Financial Market. It discuss about the

introduction of the financial market and basic terminology of financial market. It

also discuss about Capital Markets.

2. Chapter two deals with the review of Hedging Risk through Derivatives, as

derivatives are the instruments which are generally used for hedging by an investor.

3. Chapter three deals with Different type of Derivatives Instruments wiz. Future

trading & Option trading. It also discusses the about the trading strategy by the help

of examples.

4. Chapter four deals with the Analysis and Interpretation of Derivative Instruments

and how they are used to hedge risk. Chapter four also includes the equity analysis.

In this part fundamental and technical analysis of five equity shares has been done.

5. Chapter deals with the summary of major findings, discussion of results, suggestion

and limitations of the study.

Signature..........................................

Name...............................................

Enrolment No...................................


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EXECUTIVE SYNOPSIS

Trainee : Gulzar Siraj

Organization : SMC Global Securities Limited

Educational Institute : Master of business Administration (MBA)

2009-11 FMSR, AMU.

Address : 11\6B, Pusa Road Karol Bagh,

New Delhi - 110002

Company Guide : Dealing Head, CCG

Topic : Equity Research and Hedging Risk

through Derivatives

Duration : 8 Weeks (May 28, 2010July 27, 2010)


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Executive Summary

This project had been initiated for the purpose of acquainting me with, right from the basics of

the financial terminology used in the stock markets , further up to gaining in depth knowledge

of all the issues concerning the management of various risks faced by Investors and brokerage

companies.

This work is a detailed study of stock market and stocks. Its about the ways in which investors

can invest in stock market. I have carried out two projects in my summer training. The initial

phase of the document explains what I have understood about the functioning of stock market.

I have tried to explain the entire cash and derivative market in detail with the help of live

examples. All these calculations give a better insight to my work. This risk arises due to number

of reasons, which I have tried to put across. The focus in this project is on Hedging Risk through

Derivatives and Equity Analysis. The entire work has not been done till date. Application of

these ways to analyze stocks is yet to be done, its in progress.

The project is divided into two parts. The first half of the project which contains Project

Hedging Risk through Derivatives examines the working of a stock market and the role of the

Regulatory Authority in maintaining the proper working of stock markets and how one canhedge

risk using derivative instruments. It also explains about the different stock markets working in

India and about their different Indices.

The second part of the project deals with Equity Analysis work which is Project II, includes

both fundamental analysis and technical analysis. Second part of project is as important as

Project I, because whole project contains the work which is carried out by me in these twomonths

of summer training and I am glad to present it in my summer training project. All this has been

done with the help of Annual report, Quarterly results and daily news.

The project had been carried out at SMC Global Securities Limited, Pusa Road, Karol Bagh (New

Delhi).


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TABLE OF CONTENTS

CHAPTER DESCRIPTION PAGE NO.

ACKNOWLEDGEMENT

I. INTRODUCTION 1 Introduction 2 Introduction of Stock Market 4 Understanding of Stock Market Risk 13

II. COMPANY PROFILE 15 Company Profile 16 Vision & Approach 18 Product and Services 19 Achievements by SMC 21

III. REVIW OF LITERATURE 23IV. RESEARCH METHODOLOGY 26

Research Objectives 27 Research Design 28

Data Collection Method 28 Sampling Technique 28


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V. THEORITICAL BACKGROUND OF EQUITY ANALYSIS 29 Equity Analysis Tools 30 Fundamental Analysis 31 Technical Analysis 39

VI. ANALYSIS AND INTERPRETATION 54 Virtual Future Trading 55 Virtual Option Trading 63 Technical Analysis of Shares by Charts 66 Fundamental Analysis of Shares 81

VII. CONCLUSION & SUGGESTIONS 104

Conclusion 110 Suggestion & Recommendation 113 Limitation 114

REFERENCES & BIBLIOGRAPHY 115

ANNEXURES 118


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Table of Content (Tables): Page No.

1. VIRTUAL FUTURE TRADING: 55

1.1 NIFTY 55

1.2 CNX IFRASTRUCTURE 56

1.3 DLF INDIA LTD. 57

1.4 GMR INFRASTRUCTURE LTD. 58

1.5 JP ASSOCIATE LTD. 59

1.6 UNITECH LTD. 60

1.7 RELAINCE INDUSTRIAL INFRASTRUCTURE LTD. 61

2. VIRTUAL OPTION TRADING: 63

2.1 NIFTY 63

2.2 ANALYSIS 64

3. EQUTIY RESEARCH:

3.1 FUNDAMENTAL ANALYSIS 81

3.1.1 COMPANYS BASIC INFORMATION 81

3.1.2 REPORT CARD 82

3.2 FUNDAMENTAL ANALYSIS 83

3.2.1 DLF INDIA LIMITED 83

3.2.2 GMR IFRASTRUCTURE LIMITED 88

3.2.3 JP ASSOCIATE LIMITED 93

3.2.4 UNITECH LIMITED 98

3.2.5 RELAINCE INDUSTRIAL INFRASTRUCTURE LTD. 103


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Table of Content (Charts): Page No.

1. EQUITY RESEARCH 29

1.1 TECHNICAL INDICATORS 41

1.1.1 POSITIVE DIVERGENCE (MACD) 42

1.1.2 BULLISH MOVING AVERAGE CROSSOVER 42

1.1.3 BULLISH CENTERLINE CROSSOVER (MACD) 43

1.1.4 BEARISH MOVING AVERAGE CROSSOVER 44

1.1.5 BEARISH CENTERLINE CROSSOVER (MACD) 45

1.1.6 CENTER LINE CROSSOVER (RSI) 49

1.1.7 WILLIAMS %R INDICATOR 50

1.1.8 WILLIAMS %R TREND 51

1.1.9 EASE OF MOVEMENT (EXAMPLE) 52

2. TECHNICAL ANALYSIS BY CHARTS 66

2.1 DLF INDIA LIMITED 67

2.2 GMR INFRASTRUCTURE LIMITED 70

2.3 JP ASSOCIATE LIMITED 72

2.4 UNITECH LIMITED 75

2.5 RELAINCE IND. INFRA. LIMITED 78


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CHAPTER - ONE

INTRODUCTION


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INTRODUCTION

The time one talks about stock market, another word also clicks and that is risk. People have lost

their millions in this stock market. Stocks are just like gamble for those who dont know how to

invest. The market behaves differently to different people. For speculators it can be risky. They

are the speculators, who mostly lose the most. If I talk about wise people these are always

hedgers. Hedgers always keep risk involved in mind and try to minimize it using different

strategies. One can hedge risk using derivative instruments whether using future trading or option

trading. Investor can surely take out profit from market very easily by just Analyzing the current

situation through Fundamental and Technical Analysis. It helps one to take out his money with

sufficient if not unlimited profits. When I started to learn Equity Analysis at that time the stock

market was going through its Fluctuating phase, it was a slow moving market, and market trend

came unexpectedly. So it's high time when everybody should look at trend of the markets and

stocks. Initially I have tried to show how people suffer losses and make gains in the absence of

analysis and then come understanding those strategies that would help one to gain profit. I have

tried to show all combinations that can be used for analyzing the equity. It also has detailed study

of some companies that would help one to compare those companies and decide which is better to

invest in. The future prospects of a company can also seen using this analysis. For this some ratios

like PE ratio, price to sales, price to operating profits, EPS will be used, apart from that value at

risk is another factor that helps one in making decisions.

For my understanding I referred to a book Fundamental and Technical Analysis of Equity

Shares. This was that book that actually helps me understanding the analysis Part. For all the data

collection www.moneycontrol.com, NSEs site www.nseindia.com and www.icharts.in proved


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to be a great help for me. It helps me track all the historic information about companies and to

track the current trends of the market and stocks. The only limitation of this project is that in

initial phases I have chosen companies of Infrastructure sector. And I have not been able to keep a

track of all those companies because Infrastructure sector is a toughest sector as far as equity

analysisis concerned. There are two reasons for this.

It's was really not possible to analyze 30 of companies.

The companies I have decided to choose for analysis are some top notch companies though there

are some midcaps too but they are very few and banking sector has lot more things to do in equity

analysis.

Derivatives and Analysis are huge project to understand. I have tried to cover everything

but due to time constraint I have to limit its study. This may be a major limitation of this

project.

The project begins with stock market its scenario and gives explanation why people prefer

investing in Indian markets. And then it shifts to its major focus risk with each step I have

understood it better. The following work is the detailed explanation of my work. But before I give

all the details it's important to know what are stocks.


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INTRODUCTION TO STOCK MARKET

Before Moving to stock markets derivative segment we need to understand the basics of stock

market. After that we can easily understand the concept of derivatives segment. Intro to stock

market includes working of stock market, Stock exchanges, financial sector of India, etc.

Stock Market

A stock market (also known as a stock exchange) has two main functions. The first function is to

provide companies with a way of issuing shares to people who want to invest in the company.

This can be illustrated by an example: Suppose a company has a mining lease over an area with

some rich ore deposits. It wants to exploit these deposits, but it doesnt have any equipment. To

buy the equipment it needs money. One way to raise money is through the stock market. The

company issues a prospectus, which is a sort of advertisement informing people about the

prospects of the company and inviting them to invest some money in it. When the company is

floated (established) on the stock market, interested investors can become part-owners of the

company by buying shares. If the company operates at a profit, shareholders benefit in two ways

through the issuing of dividends in the form of cash or more shares, and through growth in the

value of the shares. On the other hand, if the company does not operate at a profit (e.g., if the

price of the product dips), the shareholders will probably lose money. The second function of the

stock market, related to the first, is to provide a venue for the buying and selling of shares.

Stock Exchange

An exchange is an institution, organization, or association which hosts a market where stocks,

bonds, options and futures, and commodities are traded. Buyers and sellers come together to trade

during specific hours on business days. Exchanges impose rules and regulations on the firms and

brokers that are involved with them. If a particular company is traded on an exchange, it is

referred to as "listed". Companies that are not listed on a stock exchange are sold OTC (short for

Over-The-Counter). Companies that have shares traded OTC are usually smaller and riskier

because they do not meet the requirements to be listed on a stock exchange.


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What Is A Share?

In finance a share is a unit of account for various financial instruments including stocks, bonds,

mutual funds, limited partnerships. In simple Words, a share or stock is a document solely to

stocks is so common that it almost replaces the word stock itself. It is issued by a company, which

entitles its holder to be one of the owners of the company. A share is issued by a company or can

be purchased from the stock market. By owning a share you can earn a portion in the firm and by

selling shares you get capital gain. So, your return is the dividend plus the capital gain. However,

you also run a risk of making a capital loss if you have sold the share at a price below your buying

price.

PRIMARY AND SECONDARY MARKETS

There are two ways for investors to get shares from the primary and secondary markets. In

primary markets, securities are bought by way of public issue directly from the company. In

Secondary market share are traded between two investors.

Primary Market

It is a Market for new issues of securities, as distinguished from the Secondary Market, where

previously issued securities are bought and sold. A market is primary if the proceeds of sales

go to the issuer of the securities sold.

Secondary Market

The market where securities are traded after they are initially offered in the primary market is

known as secondary market. Most trading is done in the secondary market. Generally, most shares

have a face value (i.e. the value as in a balance sheet) of Rs.10 though not always offered to the

public at this price. Companies can offer a share with a face value of Rs.10 to the public at a

higher price. The difference between the offer price and the face value is called the premium.

A companys aim is to raise money and simultaneously serve the equity capital. As far as

accounting is concerned, premium is credited to reserves and surplus and it does not increase the

equity. Thus the companies seek to make premium issues. In a buoyant stock market when good


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shares trade at very high prices, companies realize that its easy to command a high premium. The

biggest difference between them is the length of time you hold onto the assets. An investor is

more interested in the long-term appreciation of his assets, counting on that historical rise in

market equity. Hes not generally concerned about short-term fluctuations in prices, because hell

ride them out over the long haul. An investor relies mostly on Fundamental Analysis, which is the

analytical method of predicting long-term prospects of a particular asset. Most investors adopt a

buy and hold approach to assets, which simply means they buy shares of some company and

hold onto them for a long time. This approach can be dangerous, even devastating, in an

extremely volatile market such as todays BSE or NSE Indexes Show. What most investors need

to remember is this: investing is not about weathering storms with your beloved company its

about making money. Traders, on the other hand, are attempting to profit on just those short-term

price fluctuations. The amount of time an active trader holds onto an asset is very short: in many

cases minutes, or sometimes seconds. If you can catch just two index points on an average day,

you can make a comfortable living as a Trader.

Initial Public Offerings:

Corporate may raise capital in the primary market by way of an initial public offer, rights issue or

private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the

primary market. This Initial Public Offering can be made through the fixed price method, book

building method or a combination of both.

In case the issuer chooses to issue securities through the book building route then as per SEBI

guidelines, an issuer company can issue securities in the following manner:

100% of the net offer to the public through the book building route.

75% of the net offer to the public through the book building process and 25% through the

fixed price portion.

Under the 90% scheme, this percentage would be 90 and 10 respectively.


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SEBI (Securities and Exchange Board of India)

In 1988 the Securities and Exchange Board of India (SEBI) was established by the Government of

India through an executive resolution, and was subsequently upgraded as a fully autonomous

body (a statutory Board) in the year 1992 with the passing of the Securities and Exchange Board

of India Act (SEBI Act) on 30th January 1992. In place of Government Control, statutory and

autonomous regulatory boards with defined responsibilities, to cover both development &

regulation of the market, and independent powers have been set up. Paradoxically this is a

positive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board were identified as:

To protect the interests of investors in securities;

To promote the development of Securities Market;

To regulate the securities market and

For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to the

fulfillment of its objectives with commendable zeal and dexterity. The improvements in thesecurities markets like capitalization requirements, margining, establishment of clearing

corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms, the

eligibility criteria, the code of obligations and the code of conduct for different intermediaries

like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars, portfolio managers,

credit rating agencies, underwriters and others. It has framed bye-laws, risk identification and risk

management systems for Clearing houses of stock exchanges, surveillance system etc. which has

made dealing in securities both safe and transparent to the end investor.


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Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &

Sensex) in 2000. A market Index is a convenient and effective product because of the following

reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index options;

It can be used for passive fund management as in case of Index Funds.

NSE (National Stock Exchange):

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange. It is

the large stock exchange in India in terms daily turnover and number of trades, for both equities

and derivative trading. Though a number of other exchanges exist, NSE and the Bombay Stock

Exchange are the two most significant stock exchanges in India and between them are responsible

for the vast majority of share transactions.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and

other financial intermediaries in India but its ownership and management operate as separate

entities. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across

India. In October 2007, the equity market capitalization of the companies listed on the NSE was

US$ 1.46 trillion, making it the second largest stock exchange in South Asia. NSE is the third

largest Stock Exchange in the world in terms of the number of trades in equities. It is the second

fastest growing stock exchange in the world with a recorded growth of 16.6%.

The National Stock Exchange of India was promoted by leading Financial institutions at the

behest of the Government of India, and was incorporated in November 1992 as a tax-paying

company. In April 1993, it was recognized as a stock exchange under the Securities Contracts

(Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM)


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segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations

in November 1994, while operations in the Derivatives segment commenced in June 2000 .

MarketsCurrently, NSE has the following major segments of the capital market:

Equity

Futures and Options

Retail Debt Market

Wholesale Debt Market

NSE Indices

S&P CNX Nifty

CNX Nifty Junior

CNX IT

Bank Nifty

Mini nifty

CNX 100 CNX Midcap

BSE (Bombay Stock Exchange):

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage.

Popularly known as "BSE", it was established as "The Native Share & Stock BrokersAssociation" in 1875. It is the first stock exchange in the country to obtain permanent recognition

in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The

Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely

recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons

(AOP), the Exchange is now a demutualised and corporatized entity incorporated under the


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provisions of the Companies Act, 1956, pursuant to the BSE (Corporatization and

Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay Stock

Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of

the total trading volume in the country. Approximately 70,000 deals are executed on a daily basis,

giving it one of the highest per hour rates of trading in the world. There are around 3,500

companies in the country which are listed and have a serious trading volume. The market

capitalization of the BSE is Rs.5 trillion. The BSE `Sensex' is a widely used market index for the

BSE.

With demutualization, the trading rights and ownership rights have been de-linked effectively

addressing concerns regarding perceived and real conflicts of interest. The Exchange is

professionally managed under the overall direction of the Board of Directors. The Board

comprises eminent professionals, representatives of Trading Members and the Managing Director

of the Exchange. The Board is inclusive and is designed to benefit from the participation of

market intermediaries.

In terms of organization structure, the Board formulates larger policy issues and exercises overall

control. The committees constituted by the Board are broad-based. The day-to-day operations of

the Exchange are managed by the Managing Director and a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The

systems and processes of the Exchange are designed to safeguard market integrity and enhance

transparency in operations. During the year 2004-2005, the trading volumes on the Exchange

showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity, debt instruments

and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the

Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions

of the Exchange are ISO 9001:2000 certified.


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BSE - Other Indices

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock

indices as well:

BSE 100

BSE 200

BSE PSU

BSE MIDCAP

BSE SMLCAP

BSE BANKEX

BSE CAPITAL GOODS

BSE AUTO

BSE DOLLEX 200

BSE REALTY

BSE TECH

Demat Form of Shares:

There are two forms of shares physical or dematerialized (demat) shares. Though the company is

under obligation to offer the securities in both physical and demat mode, you have the choice to

receive the securities in either mode. If you wish to have securities in demat mode, you need to

indicate the name of the depository and also of the depository participant with whom you have

depository account in your application. It is, however desirable that you hold securities in demat

form as physical securities carry the risk of being fake, forged or stolen. just as you have to open

an account with a bank if you want to save your money, make cheque payments etc, Nowadays,

you need to open a demat account if you want to buy or sell stocks So it is just like a bankaccount where actual money is replaced by shares. You have to approach the DPs (they are like

bank branches), to open your demat account. Let's say your portfolio of shares looks like this: 150

of DLF, 50 of Axis Bank, 200 of GMR Infra and 100 of RIL. All these will show in your demat

account. So you don't have to possess any physical certificates showing that you own these

shares. They are all held electronically in your account. As you buy and sell the shares, they are


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adjusted in your account. Just like a bank passbook or statement, the DP will provide you with

periodic statements of holdings and transactions.

Is a demat account a must? Nowadays, practically all trades have to be settled in dematerialized

form. Although the market regulator, the Securities and Exchange Board of India (SEBI), has

allowed trades of up to 500 shares to be settled in physical form, nobody wants physical shares

any more. So a demat account is a must for trading and investing. Most banks are also DP

participants, as are many brokers.

Difference between a Broker and a DP:

A broker is separate from a DP. A broker is a member of the stock exchange, who buys and

sells shares on his behalf and on behalf of his clients. A DP will just give you an account to hold

those shares in dematerlized form. Broker can also provides the facility of DP but he need to take

a permission of either NSDL or CDSL two DP service provider in India.


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UNDERSTANDING STOCK MARKET RISK

As a long term investor, one needs to understand several different kinds of risk:

Market Risk

Market risk is the risk associated with fluctuations in stock prices. This is the first risk many

people think of when they think of the stock market. Many factors can cause stock prices to

fluctuate. Examples include actual or anticipated developments within a particular company or

industry; changes in the outlook for the economy as a whole; or shifts in investor attitude toward

the stock market in general. Downward and upward trends in stock prices can occur over short or

extended periods, and can have a very significant affect on the value of an investment.

There are two ways to reduce market risk. One is to diversify your investments among different

kinds of assets: divide your money among fixed-income and growth investments, for example.

The second way is to steadily invest on a regular basis and ignore market ups and downs and

focus on long-term results.

Inflation Risk

Inflation, defined as a persistent increase in prices, is a serious risk for any long-term investor.

Historically, inflation in the United States has averaged 3.1%, offsetting most of the returns from

investment in cash reserves and bonds, but less than half of that of stocks. Because stocks' real

returns are often generally higher than inflation, stocks offer a way to help protect your money

against inflation risk. If your principal doesn't grow, you can't possibly stay ahead of inflation. A

good way to reduce inflation risk is to invest in growth assets like stocks.

Business Risk

Business risk is the risk of losing your money in an investment that seemed like a winner but

wasn't. It is the specific risk associated with the underlying business of the issuer of a particular

stock, bond, or other investment. If the company's product suddenly loses value, the value of your

investment declines. You can reduce business risk by diversifying your investments.


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Currency Risk

Currency risk is the risk associated with the price fluctuations in the dollar value of international

stocks due to changing currency exchange rates. To an American, the value of any stock held

internationally is not what the stock is worth in its domestic market, but what the stock is worth interms of dollars.

Beta

This refers to how a stock moves vs. the market. If a stock moves more than the market, it has a

high beta. If it moves less than the market it has a low beta. Technology generally has a high beta

while Utilities have low betas. A portfolio of high beta stocks in a down market can create

extreme downward movements, while up-markets can cause tremendous performance. If a market

is demonstrating extreme risk, it is wise to raise cash, lower the beta of your portfolio, and even

consider some hedging of exposure.

All above are different types of risks that influence the stock market. After looking at all the risks

one thing is very clear that controlling price fluctuations is not in our hand. Our major job is to

maximize our returns keeping all the above risks in mind. This is done by hedging funds in

market in way that maximizes the returns. Creating portfolios wisely is another method of risk

hedging, apart from that there are other methods with the help of which risk is minimized.

Hedging

The word hedge literally means to surround in a way as to provide complete protection. A hedge

is an investment that is taken out specifically to reduce or cancel out the risk in another

investment. Defining it in simple words Hedging is a strategy designed to minimize exposure to

an unwanted risk, while still allowing the business to profit from an investment activity. But one

thing has to be kept in mind hedging does not always make money. The best that can be achieved

using hedging is the removal of unwanted exposure. The hedged position will make less profit

than the no hedged position, half the time. One should not enter into the hedging strategy hoping

to make excess profits for sure.


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CHAPTER-TWO

COMPANY PROFILE


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COMPANY PROFILE

ABOUT SMC GLOABL SECURITIES

It's one of the leading firms in financial services in India. It basically deals in Mutual Fund, Fixed

Deposit Schemes, Capital Gain Bonds, GOI Taxable Bonds, NABARD Bonds and Life and

General Insurance. I am working for SMC Global Securities Limited which is one of the leading

companies of financial services. So I would like you to have a look at the profile of the company

SMC Global Securities LimitedSMC: A ONE STOP INVESTMENT SHOP

SMC Group, a leading financial services provider in India is a vertically integrated investment

solutions company, with a pan-India presence. Over the years, SMC has expanded its domestic &

international operations. Existing network includes regional offices at Mumbai, Kolkata, Chennai,

Bangalore, Cochin, Ahmadabad Jaipur, Hyderabad and 3000+ offices across 425+ cities in India.

SMC has plans to grow its network to 5,500 offices across 700+ cities in the next 3 years. The

company has expanded internationally and has established office in Dubai Gold and Commodities

Exchange (DGCX). Its products and Services include Institutional and retail brokerage of equity,

commodity, currency, derivatives, online trading, investment banking, depository services,

clearing services, IPOs and mutual funds distribution, Portfolio management, wealth advisory,

insurance broking, equity and commodity research. SMC is one of the most active trading

organizations in India, averaging over 3,50,000 trades per day. Currently, SMC has a highly

efficient workforce of over 6,000 employees & one of the largest retail network in India currently

serving the financial needs of more than 5,50,000 satisfied investors.


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"THE STRENGTH OF A TREE IS IN DIRECT PROPORTION TO THE STRENGTH OF ITSROOTS"

Mr. Subhash Chand Agarwal and Mr. Mahesh Chand Gupta are

the visionaries who planted the sapling of the Kalpavriksha

called SMC. To shape their vision into a reality they watered the

sapling with their principles of transparency, honesty & integrity

and nourished it with their rock solid commitment for

excellence. Professionally

Mr. Subhash C. Agarwal

Professionally both are chartered accountants, with a rich

experience of more than 20 years in the capital market. Their

exceptional leadership skills, outstanding commitment and

disciplined style of working have fostered SMC into a financial

hub, justifying the words that the future belongs to those who

believe in the beauty of their dreams.


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Mr. Mahesh C. Gupta

Vision

OUR VISION is to be a global major in providing complete investment solutions, with relentless

focus on investor care, through superior efficiency and complete transparency.

OUR APPROACH:

VALUE FOR INVESTORS TRUST: SMC values the trust reposed in by the clients and is

committed to uphold it at all cost.

INTEGRITY AND HONESTY: Integrity, honesty and transparency are the underlying principles

in all our dealings.PERSONALISZED ATTENTION: The most valued asset is our relationship with the clients,

which has been built over years by giving personalized attention.

NETWORK WHICH WORKS: SMC has a vast network extending to 375+ cities/towns ensuring

easy accessibility, convenience and hassle free trading experience.

RESEARCH BASED ADVISORY SERVICES: SMC offers proactive and timely world class

research based advice and guidance to its clients to enable them to take informed decisions.


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Main Focus: Investor Care

Investment at your finger tips

Products and Services

Equity & Derivative Trading:

SMC Trading Platform offers online equity & derivative trading facilities for investors who are

looking for the ease and convenience and hassle free trading experience. We provide ODIN

Application, which is a high -end, integrated trading application for fast, efficient and reliable

execution of trades. You can now trade in the NSE and BSE simultaneously from any destination

at your convenience. You can access a multitude of resources like live quotes, charts, research,

advice, and online assistance helps you to take informed decisions. You can also trade through

our branch network by registering with us as our client. You can also trade through us on phone

by calling our designated representatives in the branches where you are registered as a client.


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Clearing Services:

Being a clearing member in NSE(F&O & Currency), BSE (F&O & Currency), MCX, MCX-SX,

NCDEX and DGCX. SMC is clearing massive volumes of trades of our trading members in thissegment.

Commodity Trading:

SMC is a member of 3 major national level commodity exchanges, i.e. National Commodity and

Derivative Exchange (NCDEX), Multi Commodity Exchange (MCX) and National Multi

Commodity Exchange of India (NMCE) offers you trading platform of NCDEX, MCX and

NMCE. You can get Real-Time streaming quotes, place orders and watch the confirmation, all ona single screen. We use technology using ODIN application to provide you with live Trading

Terminals. In this segment, SMC have spread our wings globally by acquiring Membership of

Dubai Gold and Commodities Exchange. We provide trading platform to trade in DGCX and also

clear trades of trading members being a clearing member.

Distribution of Mutual Funds & IPOs:

SMC offers distribution and collection services of various schemes of all Major Fund houses andIPOs through its mammoth network of branches across India. SMC is registered with AMFI as an

approved distributor of Mutual Funds. We assure you a hassle free and pleasant transaction

experience when you invest in mutual funds and IPOs through us. We are registered with all

major Fund Houses including Fidelity, Franklyn Templeton etc. We have a distinction of being

leading distributors of IPOs. Shortly we will be providing the facility of online investment in

Mutual Funds and IPOs

Online back office support:

To provide robust back office support backed by excellent accounting standards to our branches

we have ensured connectivity through FTP and .net based Application. To ensure easy

accessibility to back office accounting reports to our clients, we have offered facilities to view

various user friendly, easily comprehendible back office reports.


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SMC Depository:

We are ISO 9001:2000 certified DP for shares and commodities. We are one of the leading DP

and enjoy the trust of more than 5.5 Lac investors. We offer a quick, secure and hassle freealternative to holding the securities and commodities in physical form. We are one of the few

Depository Participants offering depository facilities for commodities. We are empanelled with

both NCDEX & MCX.

SMC Research Based Advisory Services:

Our massive R&D facility caters to the need of Investors, who are continuously in need of

opportunities for striking rich rewards on their investment. We have one of the most advanced, hi-tech in house R&D wing with some of the best people, process and technology resources

providing complete research solutions on Equity, Commodities, IPOs and Mutual Funds. We

offer proactive and timely world class research based advice and guidance to our clients so that

they can take informed decisions.

SMC Investor Awareness Forum:

Our dedicated team of professionals is conducting investor meet/seminars across India. Webelieve that a well-informed investor is an empowered investor. We also seek your feedback on

our services in these Investor meets.

Achievement by SMC

"AN ACHIEVEMENT IS BONDAGE. IT OBLIGES ONE TO A HIGHER ACHIEVEMENT"

ISO 9001:2000 certified DP for both shares and commodities

4th largest broking house of India in terms of trading terminals (Source: Dunand Bradstreet, 2008)


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5th largest sub-broker network in the country (Source: Dun and Bradstreet,2007)

Awarded the Fastest Growing Retail Distribution Network (Source: BusinessSphere,2008)

Awarded the Major Volume Driver by BSE for the Third year in a row i.e.2006-07, 2005-06 and 2004-05 (Awarded to top 10 Brokers)

Nominated among the top 3, in the CNBC Optimix Financial Services Award2008 under the "National Level Retail Category".

One of the first financial firms in India to expand operations in the lucrativegulf market, by acquiring valuable license for trading and clearing withDubai gold and commodities exchange (DGCX)

Amongst a Elite group of brokers having proprietary desk for doing risk-freearbitrage in commodities

SMC's diverse network ensures that its investors avail of prompt services whenever they might

need them. SMC has a presence in all the major cities of the country. The contact addresses of

SMC Regional offices, across India are given below.

Contact Us:

SMC - CORPORATE OFFICE

11/6B, ShantiChamber, Pusa Road, New Delhi-110005

Tel.:91-11-30111000


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Fax: 91-11-25754365

E-mail:[email protected]

SMC - REGIONALOFFICES

CHAPTER THREE

Delhi-Daryaganj

8B, 9B & 17, NetajiSubhash Marg,

Daryaganj, New Delhi-110002, Tel.:

91-11-30111333Fax: 91-11-23263297


Mumbai

1st Floor, Dheeraj Sagar,

Opp.Goregaon Sports Club,

LinkRoad Malad(W),Mumbai-400064,

Tel.:Tel:91-22-67341600,

Fax: Fax: 91-22-28805606,E-mail:[email protected]

Chennai

2A, 2nd Floor,MookambikaComplex

No 4,Lady Desikachari Road,

Mylapore,Chennai-600004

Tel.: 91-44-42108069, 42088256

Fax: 91-44-24661798


Kolkata

18, Rabindra Sarani, Poddar Court, Gate

No-4, 4th Floor,Kolkata-700001

Tel.:91-33-39847000

Fax: 91-33-39847004

Email:[email protected]
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REVIEW OF LITERATURE

Review of Literature of Equity Research

1.Abnormal Returns to a Fundamental Analysis Strategy, by Jeffery S.

Abarbanell and Brian J. Bushee American Accounting Association.

Abstract:

We examine whether the application of fundamental analysis can yield significant abnormal

returns. Using a collection of signals that reflect traditional rules of fundamental analysis related

to contemporaneous changes in inventories, accounts receivables, gross margins, selling

expenses, capital expenditures, effective tax rates, inventory methods, audit qualifications, andlabor force sales productivity, we form portfolios that earn an average 12-month cumulative size

adjusted abnormal return of 13.2 percent. We find evidence that the fundamental signals provide

information about future returns that is associated with future earnings news. Moreover, a

significant portion of the abnormal returns is generated around subsequent earnings

announcements. These findings are consistent with the underlying focus of fundamental analysis


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on the prediction of earnings. Significant abnormal returns to the fundamental strategy are not

earned after the end of one year of return cumulation, indicating little support for the idea that the

signals capture information about multiple-year-ahead earnings not immediately impounded in

price or about long-term shifts in firm risk. Additional analysis on a holdout sample suggests that

the strategy continues to generate abnormal returns in a period subsequent to the introduction of

the fundamental signals in the literature, and contextual analyses indicate that the strategy

performs better for certain types of firms (e.g., firms with prior bad news).

2. Short-sellers, fundamental analysis, and stock returns by Patricia M.

Dechow, Amy P. Hutton, Lisa Meulbroek and Richard G. Sloan

Abstract:

Firms with low ratios of fundamentals (such as earning and book values) to market values are

known to have systematically lower future stock returns. We document that short-sellers position

themselves in the stock of such firms, and then cover their positions as the ratios mean-revert. We

also show that short-sellers refine their trading strategies to minimize transactions costs and

maximize their investment returns. Our evidence is consistent with short-sellers using information

in these ratios to take positions in stocks with lower expected future returns.

3. Fundamental Analysis of aggregate interlock by Joost C. Walraven, (Sr.

Research Engr., Univ. of Technology, Delft, The Netherlands)

Abstract:

A model for aggregate interlock has been developed based on the behavior of micro scale. The

relation between displacements and stresses across the crack faces are defined to be a function of

deformation and sliding at particle level. This relation is derived for one particle projecting from

one of the crack faces with an arbitrary diameter and an arbitrary embedment depth. The most

probable distribution of aggregate particles, crossed by the plane of cracking and their positions

with regard to this plane are assessed by a statistical analysis. The general relations between

stresses and displacements for a unit crack area are obtained by integrating all particles

contributions. The model proves to give adequate results, compared with experiments, carried out

on several types of (cracked) concrete. Using this model, further analysis of the mechanism of


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aggregate interlock has been carried out, explaining tendencies observed in tests of other

investigators.

4. Contextual Fundamental Analysis Through the Prediction of ExtremeReturns, by Messod D. Beneish, Charles M. C. Lee and Robin L. Tarpley

Abstract:

This study examines the usefulness of contextual fundamental analysis for the prediction of

extreme stock returns. Specifically, we use a two-stage approach to predict firms that are about to

experience an extreme (up or down) price movement in the next quarter. In the first stage, we

define the context for analysis by identifying extreme performers; in the second stage we develop

a context-specific forecasting model to separate winners from losers. We show that extreme

performers share many common market-related attributes, and that the incremental forecasting

power of accounting variables with respect to future returns increases after controlling for these

attributes. Collectively, these results illustrate the usefulness of conducting fundamental analysis

in context.

CHAPTER FOUR


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RESEARCH METHODOLOGY

RESEARCH METHODOLOGY

RESEARCH OBJECTIVES

The present study includes different strategy of derivatives used in present scenario. Inorder to appraise the equity shares I have conducted a study of five different companies. A

comprehensive study is proposed with the following objectives.

Primary Objective:

a) To evaluate the performance of selected equity shares in terms of risk and future returns.

b) To evaluate the shares pattern on the basis of technical analysis.


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c) To examine the different strategies which are used by the investors for the purpose of

hedging risk.

d) To study the recent and proposed Derivative Instrument and there usage.

Secondary Objectives:

In addition to the above objectives, following secondary objectives are also there.

A. To understand the basic terminology behind working of capital market.

B. To understand the concept of valuating a company on the basis of its financials.

RESEARCH DESIGN

A research design specifies the methods and procedures for conducting survey .Researchdesign is the plan and structure of investigation so conceived as to obtain answer to

research questions. The plan is overall scheme of the research. Descriptive Research

Designhas been adopted while doing the research.

DATA COLLECTION METHOD

Data required for the project e.g. Balance Sheet, statement of Profit & Loss Accounts etc.of different firms were collected from the annual reports of period of 2006-07, 2007-08,


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2008-09 and 2009-10. Besides for Explanation of several issues, different articles, Internet

datas, books etc were consulted. The data collected is a Secondary Data.

Secondary data (1 year) for calculating Beta value. Secondary Data (3 months) for Technical Analysis.

SAMPLING TECHNIQUE

Sample of 5 companies has been selected From infrastructure industry on the basis ofactive trade in NSE.

1. DLF2. GMR

3. UNITECH

4. JAI PRAKASH ASSOCIATE

5. RELIANCE INDUSTRIAL INFRASTRUCTURE LIMITED

CHAPTER - FIVE


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THEORITICAL BACKGROUND

OF

EQUITY ANALYSIS

EQUITY ANALYSIS

EQUITY ANALYSIS TOOLS

Analysis is a tool to determine the good and bad of one company by the way of checking each and

everything from financial statement to future prospect of that company. The objective of the

equity analysis is to determine what stock to buy and at what price and for that investor may use

one method out of two available methods or he can use both the methods at the same time.

Fundamental analysis maintains that markets may misprice a security in the short run but that

the "correct" price will eventually be reached. Profits can be made by trading the mispriced


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security and then waiting for the market to recognize its "mistake" and re-price the security.

Fundamental analysis is the practice of studying the fundamentals (e.g. industry, financial

strength, company management, stock valuation) of a company to determine if the business is a

good investment. Fundamental analysis is a type of stock selection discipline that many consider

to be the cornerstone of investing. You might think of fundamental analysis as a process for

conducting an examination on a company to assess its health and value. The analysis is performed

on historical and present data with the goal of making financial forecasts. Fundamental analysis

can help identify companies with valuable assets, a strong balance sheet, stable earnings, and

staying power. It serves to answer questions, such as: Is the companys revenue growing? Are

they carrying too much debt? Is the stock currently undervalued? The practice enables you to

make your own decision on value, ignoring the markets opinion.

Technical analysis maintains that all information is reflected already in the stock price, so

fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes predate

and predict trend changes. Investors' emotional responses to price movements lead to

recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is.

Their price predictions are only extrapolations from historical price patterns. Investors can use

both these different but somewhat complementary methods for stock picking. Many fundamental

investors use technicals for deciding entry and exit points. Many technical investors use

fundamentals to limit their universe of possible stock to 'good' companies. The choice of stock

analysis is determined by the investor's belief in the different paradigms for "how the stock

market works". Investors may use fundamental analysis within different portfolio management

styles.

1) Buy and hold investors believe that latching onto good businesses allows the investor's

asset to grow with the business. Fundamental analysis lets them find 'good' companies, so

they lower their risk and probability of wipe-out.

2) Managers may use fundamental analysis to correctly value 'good' and 'bad' companies.

Even 'bad' companies' stock goes up and down, creating opportunities for profits.

3) Managers may also consider the economic cycle in determining whether conditions are

'right' to buy fundamentally suitable companies.


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4) Contrarian investors distinguish "in the short run, the market is a voting machine, not a

weighing machine". Fundamental analysis allows you to make your own decision on

value, and ignore the market.

5) Value investors restrict their attention to under-valued companies, believing that 'it's hard

to fall out of a ditch'. The value comes from fundamental analysis.

6) Managers may use fundamental analysis to determine future growth rates for buying high

priced growth stocks.

7) Managers may also include fundamental factors along with technical factors into computer

models (quantitative analysis).

Fundamental Analysis:

Definition

Fundamental analysis is a stock valuation method that uses financial and economic analysis to

predict the movement of stock prices. First of all we prepare a due diligence report of the

company and check if the item shown in financial statement are true/correct or not. The

fundamental information that is analyzed can include a company's financial reports, and non-

financial information such as estimates of the growth of demand for products sold by the

company, industry comparisons, and economy-wide changes, changes in government policies etc.

The Elements of Fundamental Analysis

The elements of the research include financial statements, ratios and valuation measures, among

others. Company factors to consider might include dividends paid, the way a company manages

its cash, the amount of debt a company has, and the growth of a companys revenues, expenses

and earnings. The fundamental analysis of a business involves analyzing these financial

statements and health, its management and competitive advantages, and its competitors and

markets. Thorough fundamental analysis helps you find good companies and minimize the risk

of losses.

The Goal of the Fundamental Investor


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The goal of this analysis is to verify financial strength and determine the true or intrinsic value of a

security. If the market price of the stock deviates from this value, the fundamental investor takes action by

acquiring or selling the stock, depending on the circumstances.

Fundamental analysis is primarily utilized to address the long-term future share price of a company as it

cannot account for short term stock volatility. The process is an extremely valuable exercise for anyone

who runs businesses or is looking to invest in one. Fundamental analysis is typically viewed as a more

conservative approach to stock investing than technical analysis, which is the forecasting of future

financial price movements based on an examination of past price.

Top-down and Bottom-up Approach

Investors can use either a top-down or bottom-up approach for equity analysis.

Top-Down Approach

Under the Top-Down approach to stock picking, the investor starts with the big picture, studying

global economic trends to identify industries and then the companies within those industries that

may offer good investment opportunities. Most fund management companies utilize this approach

in their investing activities and many financial experts recommend this approach to individual

investors for building and managing their portfolios. The top-down investor starts his analysis

with global economics, including both international and national economic indicators, such as

GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. He or

she narrows his search down to regional/industry analysis of total sales, price levels, the effects of

competing products, foreign competition, and entry or exit from the industry. Only then does he

narrow his search to the best business in that area.

The Top-Down Investing Philosophy

Top-down investors believe that you must first develop and understanding of economic

conditions and emerging trends before picking individual stocks. Their argument is that even

companies with strong management and fundamentals will have a difficult time producing profits

and growth if conditions are not right for the sector in which they operate.

Steps in the Top-Down Investing Process:


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Analyze Global Economic Health and Trends: The top-down process starts with the world

economy and an assessment of economic health to determine which regions are struggling and

which are demonstrating strong growth prospects. To make this assessment, the investor will look

at gross domestic product (GDP) figures and trends. The investor also takes note of any

geopolitical unrest that could impact a country or region. The focus then shifts to an analysis of

the U.S. economy and the specific sectors that might benefit from these global factors.

Assess the State of the Domestic Economy: The next step is to look at the major indicators

within the domestic economy, including interest rates, unemployment levels, and inflation. By

combining this information and its impact on various stock sectors with the global trends data, the

investor can start to narrow down a focus to those specific industries that seem to be positioned

for growth.

Identify Specific Stocks within a Sector: The final step is identifying specific stocks within the

selected sector(s) that seem to present the most attractive investment opportunity. By conducting

fundamental analysis, the investors can identify those companies in strong financial positions with

valuations that present good upside potential.

Bottom-Up Approach

The bottom-up investor starts with specific businesses, regardless of their industry/region and

look for financial of that company and look if the is good for investment or not. It starts with a

narrow approach and sometime ends with nothing. With a bottom-up strategy for picking stocks,

the investor chooses companies based on such things as strong fundamentals and the quality of

the management team. The investor performs this analysis without regard to current economicclimate or trends. While top-down investors analyze the big picture, bottom-up investors look

for those companies that seem to be best positioned to outperform their industry competitors,

regardless of industry and macroeconomic factors. Bottom-up choose stocks based on efficiency,

performance, and leadership as the best way to ensure attractive returns.


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Bottom-Up Investing and Fundamental Analysis

Bottom-up investors believe that companies with solid leadership, sound financials, and a strong

market position are bound to perform well, even if their industry and competitors are struggling.

For this reason, bottom-up investing is closely tied to fundamental analysis.

1. Screening for Bottom-Up Investment Candidates:

Using a stock screener, the bottom-up investor might seek the following qualities in an investment

candidate:

Return on Equity (ROE): This measure of profitability indicates how efficiently the company is

using its assets to generate earnings. Specifically, ROE compares net income to shareholders

equity with the understanding that a company cannot grow its earnings faster than its ROE

without increased borrowing. Many bottom-up investors will look for a minimum of 15% on this

measure.

Price to Cash Flow Ratio (P/CF): The P/CF is used to compare the companys market value or

market cap to its operating cash flow in the most recent year. This is an important measure

because cash flows dictate the solvency of the business. Having sufficient cash on hand ensuresthat employees and creditors are paid in a timely manner and keeps the business out of

bankruptcy. While the average P/CF measure varies by industry, many fundamental and bottom-

up investors look for a ratio of 7.5 or lower.

Debt to Equity Ratio: This ratio provides a measure of the companys financial leverage and is

calculated by dividing the companys total liabilities by stockholders equity. A high measure

indicates that the company has been aggressive in funding expansion through debt. The risk is in

that strategy is that the debt financing may eventually outweigh the return it generates. The

average debt/equity ratio varies by industry. Capital-intensive industries often see a ratio greater

than 2, while companies in less capital-intensive industries might see a ratio of under 0.5.


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Revenue Growth: Generally speaking, the strongest stock candidates are those with fast-growing

revenues. While the news regarding a company tends to focus on its earnings, its the companys

revenues that drive those earnings. The revenues are measured on a quarter v. quarter basis and a

minimum of 20% growth is considered strong.

2. Stock Investing and the Industry Life Cycle:

The growth of an industrys sales over time is used to track the life cycle of that industry. When

searching out stocks for potential investment, it is best to have some familiarity with the industry

in which the company operates and an understanding of the current life cycle phase of that

industry.

Stages of the Industry Life Cycle

The industry life cycle describes the various stages an industry goes through, from inception to its

eventual decline. There are usually five stages in this life cycle:

Introduction: In this stage of the industry life cycle, the industry is in its infancy. Often, a new

product has been developed or patented. During this phase, the firm that developed the product

may be alone in the industry, focusing on (what is often referred to in marketing as) early

adopter customers. There is significant risk to investors during the introduction stage as the

company will need a significant amount of cash to promote and differentiate its product.

Growth: In the growth stage, there are multiple companies in the industry seeking to differentiate

themselves and earn market share. Like the introduction stage, the growth stage requires a

significant cash outlay from the firm, but the funding is used toward more focused marketing

efforts and expansion. It is during this phase that a firm may start to benefit from economies of

scale in production. This stage of industry growth, while still presenting risk to investors,

demonstrates the viability of the industry.

Maturity: This is the stage where the industry will start to see diminished growth with the rate of

sales growth often slowing to the rate of overall economic growth. Late entrants appear in this


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stage seeking to capture market share through lower-cost offerings, thus requiring the existing

firms to continue their marketing efforts. For investors, maturity of an industry can mean

relatively stable stock investments with the possibility of income through dividends.

Decline: A decline is inevitable in any industry as technological innovations and changing

consumer tastes adversely affect sales. At this stage, firms exit the industry and existing

competitors often merge and consolidate. An investor should approach stocks in declining

industries with caution.

3. Reviewing the Financial Statements

Financial statements provide valuable information to a variety of users including the company

management team, investors, and government agencies. In reviewing financial statements, it is

not necessary that the user be extremely knowledgeable of accounting practices- a basic

understanding of some simple concepts is all this is required to interpret and utilize the valuable

data these reports offer. In this paper, we outline the purpose of the three primary financial

statements: the balance sheet, the income statement, and the cash flow statement.

The Balance Sheet

The company Balance Sheet is a financial statement that summarizes a companys assets,

liabilities and shareholders equity at a specific point in time. In analyzing the balance sheet,

investors can learn what the company owns and owes at that point in time.

Procedures

The analysis of a business' health starts with financial statement analysis that includes ratios. It

looks at dividends paid, operating cash flow, new equity issues and capital financing. The

earnings estimates and growth rate projections and others can be considered either 'fundamental'(they are facts) or 'technical' (they are investor sentiment) based on your perception of their

validity. The determined growth rates (of income and cash) and risk levels (to determine the

discount rate) are used in various valuation models. The foremost is the discounted cash flow

model, which calculates the present value of the future,

1) Dividends received by the investor, along with the eventual sale price. (Gordon model)


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2) Earnings of the company or

3) Cash flows of the company.

Add all the discounted value to get the future price of the companys share and look how much

one is going to get if he invest in companys share at this point of time.

There are two types of analytical model to find the future share price of a company:

1) Fundamental Analysis

2) Technical Analysis

General Strategy

To a fundamentalist, the market price of a stock tends to move towards its real value or

intrinsic value. If the intrinsic/real value of a stock is above the current market price, the

investor would purchase the stock because he knows that the stock price would rise and move

towards its intrinsic or real value. If the intrinsic value ofa stock was below the market price,

the investor would sell the stock because he knows that the stock price is going to fall and come

closer to its intrinsic value.

All this seems simple. Now the next obvious question is how do you find out what the intrinsic

value of a company is? Once you know this, you will be able to compare this price to the market

price of the company and decide whether you want to buy it (or sell it if you already own that

stock). To start finding out the intrinsic value, the fundamentalist analyzer makes an examination

of the current and future overall health of the economy as a whole.

After you analyzed the overall economy, you have to analyze firm you are interested in. You

should analyze factors that give the firm a competitive advantage in its sector such as

management experience, history of performance, growth potential, low cost producer, brand name

etc. Find out as much as possible about the company and its products.


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I. Do they have any core competency or fundamental strength that puts them ahead of

all the other competing firms?

II. What advantage do they have over their competing firms?

III. Do they have a strong market presence and market share?

IV. Or do they constantly have to employ a large part of their profits and resources in

marketing and finding new customers and fighting for market share?

After you understand the company & what they do, how they relate to the market and their

customers, you will be in a much better position to decide whether the price of the companys

stock is going to go up or down and by that way you can make profit out of it.

TECHNICAL ANALYSIS OF EQUITY SHARES:

Technical Analysis is:

Looks for peaks, bottoms, trends, patterns, and other factors affecting a stocks price

movement.

Makes a buy/sell decision based on those factors.

The world of technical analysis is huge

Hundreds of different patterns and indicators investors claim to be successful

Method of evaluating securities by analyzing statistics generated by


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Market activity

Past Prices

Volume

WHAT IS CHART ANALYSIS?

Chart analysis (also called technical analysis) is the study of market action, using price charts, to

forecast future price direction. The cornerstone of the technical philosophy is the belief that all of

the factors that influence market pricefundamental information, political events, natural

disasters, and psychological factorsare quickly discounted in market activity. In other words,

The impact of these external factors will quickly show up in some form of price movement, either

up or down. Chart analysis, therefore, is simply a short-cut form of fundamental analysis.

Consider the following: A rising price reflects bullish fundamentals, where demand exceeds

supply; falling prices would mean that supply exceeds demand, identifying a bearish fundamental

situation. These shifts in the fundamental equation cause price changes, which are readily

apparent on a price chart. The chartist is quickly able to profit from these price changes without

necessarily knowing the specific reasons causing them. The chartist simply reasons that rising

prices are indicative of a bullish fundamental situation and that falling prices reflect bearish

fundamentals. Another advantage of chart analysis is that the market price itself is usually a

leading indicator of the known fundamentals. Chart action, therefore, can alert a fundamental

analyst to the fact that something important is happening beneath the surface and encourage

closer market analysis.

WHY IS CHART ANALYSIS SO IMPORTANT?

Successful participation in the financial markets virtually demands some mastery of chart

analysis. Consider the fact that all decisions in various markets are based, in one form or another,

on a market forecast. Whether the market participant is a short-term trader or long-term investor,

price forecasting is usually the first, most important step in the decision making process. To

accomplish that task, there are two methods of forecasting available to the market analystthe

fundamental and the technical.


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Fundamental analysis is based on the traditional study of supply and demand factors that cause

market prices to rise or fall. In financial markets, the fundamentalist would look at such things as

corporate earnings, trade deficits, and changes in the money supply. The intention of this

approach is to arrive at an Estimate of the intrinsic value of a market in order to determine if the

market is over or under-valued.

Technical or chart analysis, by contrast, is based on the study of the market action itself. While

fundamental analysis studies the reasons or causes for prices going up or down, technical analysis

studies the effect, the price movement itself. Thats where the study of price charts comes in.

Chart analysis is extremely useful in the price-forecasting process. Charting can be used by itself

with no fundamental input, or in conjunction with fundamental information. Price forecasting,

however, is only the first step in the decision-making process.

Market Timing

The second, and often the more difficult, step is market timing. For short-term traders, minor

price moves can have a dramatic impact on trading performance. Therefore, the precise timing of

entry and exit points is an indispensable aspect of any market commitment. To put it bluntly,

timing is everything in the stock market. For reasons that will soon become apparent, timing is

almost purely technical in nature. This being the case, it can be seen that the application of

charting principles becomes absolutely essential at some point in the decision making process..

Technical Indicators

Before moving to technical analysis we need to understand the basics of technical analysis we

need to understand what does an indicator means and what its usage while doing technical

analysis. And also need to know which indicator to use and at what time.

For the purpose of understanding some of indicators are explained in this project. And their

usages are also explained in this project. Some of the indicators which are used by me are

explained below. But before moving to these indicators we need to understand the basic charting

style and for that purpose I have taken SENSEX and NIFTYs data for the year 2010.


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Moving Average Convergence/Divergence (MACD)

Introduction

Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable

indicators available. MACD uses moving averages, which are lagging indicators, to include some

trend-following characteristics. These lagging indicators are turned into a momentum oscillator

by subtracting the longer moving average from the shorter moving average. The resulting plot

forms a line that oscillates above and below zero, without any upper or lower limits. MACD is a

centered oscillator and the guidelines for using centered oscillators apply.

What Does MACD Do?MACD measures the difference between two Exponential Moving Averages (EMAs). A positive

MACD indicates that the 12-day EMA is trading above the 26-day EMA. A negative MACD

indicates that the 12-day EMA is trading below the 26-day EMA. If MACD is positive and rising,

then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the

rate-of-change of the faster moving average is higher than the rate-of-change for the slower

moving average. Positive momentum is increasing, indicating a bullish period for the price plot. If

MACD is negative and declining further, then the negative gap between the faster moving

average (blue) and the slower moving average (red) is expanding. Downward momentum is

accelerating, indicating a bearish period of trading. MACD centerline crossovers occur when the

faster moving average crosses the slower moving average.

MACD has two type of signals wiz. Bullish signals and Bearish signals.

Bullish Signals

MACD generates bullish signals from three main sources.

1. Positive Divergence

2. Bullish Moving Average Crossover

3. Bullish Centerline Crossover


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Positive Divergence:

A Positive Divergence occurs when MACD begins to advance and the security is still in a

downtrend and makes a lower reaction low. MACD can either form as a series of higher Lows or

a second Low that is higher than the previous Low. Positive Divergences are probably the least

common of the three signals, but are usually the most reliable, and lead to the biggest moves.

Source: www.icharts.in

Bullish Moving Average Crossover:

Bullish Moving Average Crossover occurs when MACD moves above its 9-day EMA, or trigger

line. Bullish Moving Average Crossovers are probably the most common signals and as such arethe least reliable. If not used in conjunction with other technical analysis tools, these crossovers

can lead to whipsaws and many false signals. Bullish Moving Average Crossovers are used

occasionally to confirm a positive divergence. A positive divergence can be considered valid

when a Bullish Moving Average Crossover occurs after the MACD Line makes its second "higher

Low".


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Bullish Centerline Crossover:A Bullish Centerline Crossover occurs when MACD moves above the zero line and into positive

territory. This is a clear indication that momentum has changed from negative to positive or from

bearish to bullish. After a Positive Divergence and Bullish Centerline Crossover, the Bullish

Centerline Crossover can act as a confirmation signal. Of the three signals, moving average

crossover are probably the second most common signals.


Bearish Signals


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MACD generates bearish signals from three main sources. These signals are mirror reflections of

the bullish signals:

1. Negative Divergence

2. Bearish Moving Average Crossover

3. Bearish Centerline Crossover

Negative Divergence:

A Negative Divergence forms when the security advances or moves sideways, and the MACD

declines. The Negative Divergence in MACD can take the form of either a lower High or a

straight decline. Negative Divergences are probably the least common of the three signals, but are

usually the most reliable, and can warn of an impending peak.


Bearish Moving Average Crossover:

The most common signal for MACD is the moving average crossover. A Bearish Moving

Average Crossover occurs when MACD declines below its 9-day EMA. Not only are these

signals the most common, but also they produce the most false signals. As such, moving average

crossovers should be confirmed with other signals to avoid whipsaws and false readings.


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Bearish Centerline Crossover:A Bearish Centerline Crossover occurs when MACD moves below zero and into negative

territory. This is a clear indication that momentum has changed from positive to negative or from

bullish to bearish. The centerline crossover can act as an independent signal, or confirm a prior

signal such as a moving average crossover or negative divergence. Once MACD crosses into

negative territory, momentum, at least for the short term, has turned bearish.



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MACD Signals

The main signal generated by the MACD-Histogram is a divergence followed by a moving

average crossover. A bullish signal is generated when a Positive Divergence forms and there is a

Bullish Centerline Crossover. A bearish signal is generated when there is a Negative Divergence

and a Bearish Centerline Crossover. Keep in mind that a centerline crossover for the MACD

Histogram represents a moving average crossover for the MACD. Divergences can take many

forms and varying degrees. Generally speaking, two types of divergences have been identified:

the slant divergence and the peak-trough divergence.

1. Slant Divergence: A Slant Divergence forms when there is a continuous and relatively

smooth move in one direction (up or down) to form the divergence. Slant Divergences

generally cover a shorter time frame than divergences formed with two peaks or two

troughs.

2. Peak-Trough Divergence: A peak-trough divergence occurs when at least two peaks or

two troughs develop in one direction to form the divergence. A series of two or more

rising troughs (higher lows) can form a Positive Divergence and a series of two or more

declining peaks (lower highs) can form a Negative Divergence. Peak-trough Divergences

usually cover a longer time frame than slant divergences. On a daily chart, a peak-trough

divergence can cover a time frame as short as two weeks or as long as several months.

MACD Benefits

One of the primary benefits of MACD is that it incorporates aspects of both momentum and trend

in one indicator. As a trend-following indicator, it will not be wrong for very long. The use of

moving averages ensures that the indicator will eventually follow the movements of the

underlying security. By using Exponential Moving Averages (EMAs), as opposed to Simple

Moving Averages (SMAs), some of the lag has been taken out.

As a momentum indicator, MACD has the ability to foreshadow moves in the underlying security.

MACD divergences can be key factors in predicting a trend change. A Negative Divergence


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signals that bullish momentum is waning, and there could be a potential change in trend from

bullish to bearish. This can serve as an alert for traders to take some profits in long positions, or

for aggressive traders to consider initiating a short position.

MACD can be applied to daily, weekly or monthly charts. MACD represents the convergence and

divergence of two moving averages. The standard setting for MACD is the difference between the

12 and 26-period EMA. However, any combination of moving averages can be used. The set of

moving averages used

Gulzar Report SMC

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Transcript of Gulzar Report SMC