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A comparative Study on Equity Analysis

1.1 INTRODUCTION TO THE FINANCE:FINANCIAL MANAGEMENT:Financial management is that managerial activity which is concerned with the planning & controlling of the firms financial reason as a separate activity of discipline it is of recent origin. Still today it has no unique body of knowledge of its own and draws heavily from economic for the theoretical concepts.

OBJECTIVES OF FINANCIAL MANAGEMENT:It is obvious that the modern approach to financial management is that the firm has to make at least four decisions viz, 1. Investment or long-run asset mix decision. 2. Financial or capital mix decision. 3. Dividend or profit allocation decision. 4. Liquidity or short term asset mix decision These decisions relate to the firms investment & financial policies the financial decisions are unavoidable & continuous. In order to make rationally the firm must have an objective it is generally agreed that the financial objective of the firm should the maximization of owners economic welfare. However there is disagreement as to how the economic welfare of owners can maximize. Two well know criteria put forth for this purpose are

1. INVESTMENT DECISION:Of a firm relates to the selection of assets in which includes will be invested by firm assets which can acquire fall in 2 categories: Long term assets Short term assets or current assets.

Financial management is concerned with the profitable and proper investment of funds in these assets with help of capital budgeting & working capital management techniques R.G.M.C.E.T. Nandyal 1

A comparative Study on Equity Analysis 2. FINANCING DECISIONS:Of firm relate to choice of different source and the proportion of these sources to finance the investment requirements of the financing decision is with the financing mix or capital structure and other related activities

3. DIVIDEND DECISION:Is the third major decision area of financial management the dividend decision comes into picture while dealing with profit distribution i.e., dividend or relation in this area talking into account .Different dimensions should be make regarding what proportion profit be distributed as dividend and what should be retained.

4. LIQUIDITY DECISION:Current assets management which affects a firms liquidity is yet another important finance function in addition to the management of long term assets current assets should be managed efficiently for safeguarding the firms against the dangers of illiquidity and insolvency investment in current assets firms profitability liquidity and risk.

1.2 INTRODUCTION TO THE EQUITIES:

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A comparative Study on Equity AnalysisInvestment may be defined as an activity that commits funds in any financial form in the present with an expectation of receiving additional return in the future. The expectations bring with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment is an activity that is undertaken by those who have savings. Savings can be defined as the excess of income over expenditure. An investor earns/expects to earn additional monetary value from the mode of investment that could be in the form of financial assets. The three important characteristics of any financial asset are: Return-the potential return possible from an asset. Risk-the variability in returns of the asset form the chances of its value going down/up. Liquidity-the ease with which an asset can be converted into cash. Investors tend to look at these three characteristics while deciding on their individual preference pattern of investments. Each financial asset will have a certain level of each of these characteristics.

INVESTMENT AVENUES:There are a large number of investment avenues for savers in India. Some of them are marketable and liquid, while others are non-marketable. Some of them are highly risky while some others are almost risk less.

Investment avenues can be broadly categorized under the following heads:

CORPORATE SECURITIES:R.G.M.C.E.T. Nandyal 3

A comparative Study on Equity Analysis Equity shares. Preference shares. Debentures/Bonds. Derivatives. Others.

CORPORATE SECURITIES:Joint stock companies in the private sector issue corporate securities. These include equity shares, preference shares, and debentures. Equity shares have variable dividend and hence belong to the high risk-high return category; preference shares and debentures have fixed returns with lower risk. The classification of corporate securities that can be chosen as investment avenues can be depicted as shown below:

Equity Shares

Preference shares

Bonds

Warrants

Derivatives

EQUITY SHARES:By investing in shares, investors basically buy the ownership right to the company. When the company makes profits, shareholders receive their share of the profits in the form of dividends. In addition, when company performs well and the future expectation from the company is very high, the price of the companys shares goes up in the market. This allows shareholders to sell shares at a profit, leading to capital gains. Investors can invest in shares either through primary market offerings or in the secondary market.

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A comparative Study on Equity AnalysisThe primary market has shown abnormal returns to investors who subscribed for the public issue and were allotted shares. This policy statement provides general guidelines for determining whether the shares of a small business meet the definition of "equity share" under the Act. It does not address every type of right or restriction that may be attached in some manner to the shares of a small business, nor does it replace or negate the requirements of the Act or accompanying regulations. The policies contained in this statement have drawn on experiences derived from administering the program since 1985. As a result of these experiences, some past policy positions have been modified to ensure all equity share investments are made in accordance with both the technical requirements and "spirit and intent" of the Act.

STOCK EXCHANGE:In a stock exchange a person who wishes to sell his security is called a seller, and a person who is willing to buy the particular stock is called as the buyer. The rate of stock depends on the simple law of demand and supply. If the demand of shares of company x is greater than its supply then its price of its security increase. In Online Exchange the trading is done on a computer network. The sellers and buyers log on to the network and propose their bids. The system is designed in such ways that at any given instance, the buyers/sellers are bidding at the best prices.

TYPES OF STOCKS:Stock typically takes the form of shares of common stock (or voting shares). As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders. Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares (or "convertible preference shares in the United Kingdom). Although there is a great deal of commonality between the stocks of different companies, each new equity issue can have legal clauses attached to it that make it R.G.M.C.E.T. Nandyal 5

A comparative Study on Equity Analysisdynamically different from the more general cases. Some shares of common stock may be issued without the typical voting rights being included, for instance, or some shares may have special rights unique to them and issued only to certain parties. Note that not all equity shares are the same. The transaction cycle for purchasing and selling shares online is depicted below:

Client

Member/ Broking firm.

Stock Exchange (BSE / NSE)

Member/ Broking firm.

Client

HISTORY:During Roman times, the empire contracted out many of its services to private groups called publican. Shares in publican were called "socii" (for large cooperatives) and "particulate" which were analogous to today's Over-The-Counter shares of small companies. Though the records available for this time are incomplete, Edward Chancellor states in his book Devil Take the Hindmost that there is some evidence that a speculation in these shares became increasingly widespread and that perhaps the first ever speculative bubble in "stocks" occurred. The first company to issue shares of stock after the Middle Ages was the Dutch East India Company in 1606. The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families.

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A comparative Study on Equity AnalysisEconomic Historians find the Dutch stock market of the 1600s particularly interesting: there is clear documentation of the use of stock futures, stock options, short selling, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and r