Securities Analysis and Portfolio Management by V.A. Avadhani

Securities Analysis and Portfolio Management by V.A. Avadhani

1

INTRODUCTION 
TO 
SECURITIES 
This book is on investment and securities. Security analysis is a pre-requisite for making 
investments. In the present day financial markets, investment has become complicated and is both an 
art and a science. One makes investments for a return higher than what he can get by keeping the 
money in a commercial or co-operative Bank or even in an investment Bank. In the finance field, it 
is a common knowledge that money or finance is scarce and that investors try to maximise their 
return. But the return is higher, if the risk is also higher. Return and Risk go together and they have 
a trade off. All investments are risky to some degree or other. The art of investment is to see that 
the return is maximised with the minimum of risk, which is inherent in investments. 
If the investor keeps his money in a bank in savings accoun~ he takes the least risk, as the money 
is safe and he will get back when he wants it but he runs the risk that the return in real terms, adjusted 
for inflation is negative or small and even if positive, it may not come upto his expectations or needs. 
In this above discussion, we concentrate on the word "Investment" and for making investrnent, 
we need to make security analysis. It then becomes necessary to define investment and security analysis 
at the outset. 
WHAT IS INVESTMENT? 
. Investment is parting with one's fund, to be used by another party, user of fund, for productive 
activity. It can mean giving an advance or loan or contributing to the equity (ownership capital) or 
debt capital of a corporate or non-corporate business unit. Generalised, investment means conversion 
of cash or money into a monetary asset or a claim on future money for a return. This return is for 
saving (as abstaining from present consumption), parting with saving or liquidity (to be rewarded for 
waiting for a future consumption) and lastly for taking a risk involving the uncertainty about the 
actual return, time of waiting and cost of getting back funds, safety of funds, and risk of the variability 
of the return. 

Definition of Security Analysis 
For making proper investment involving both risk and return, the investor has to make a study 
of the alternative avenues of investment - their risk and return characteristics and make proper 
projection or expectation of the risk and return of the alternative investments under consideration. He 
has to tune the expectations to his preferences of the risk and return for making a proper investment 
choice. The process of analysing the individual securities and the market as a whole and estimating 
the risk and return expected from each of the investments with a view to identifying undervalued 
securities for buying and overvalued securities for selling is both an art and a science and this is what 
is called security analysis. 
WHAT IS SECURITY? 
Investment in capital market is in various financial instruments, which are all claims on money. 
These instruments may be of various categories with different characteristics. These are all called 
securities in the market parlance. In a legal sense also, the Securities Contracts Regulation Act, (1956) 
has defined the security as inclusive of shares, scrips, stocks, bonds, debenture stock or any other 
marketable instruments of a like nature in or of any debentures of a company or body corporate, the 
Government and semi-Government body etc. It includes all rights and interests in them including 
warrants, and loyalty coupons etc., issued by any of the bodies, organisations or the Government. The 
derivatives of securities and Security Index are also included as securities in the above definition in 
1998. 
In the strict sense of the word, a security is an instrument of promissory note or a methoj of 
borrowing or lending or a source of contributing to the funds needed by a corporate body or non-

corporate body. Private security for example is also a security as it is a promissory note of an individual 
or firm and gives rise to a claim on money. But such private securities or even securities of private 
companies or promissory notes of individuals, partnerships or firms to the extent that their marketability 
is poor or nil, are not part of the capital market and do not constitute part of the security analysis. 
If the capital market is efficient and security prices reflect perfectly all the market information, 
then all the investors get the same average returns and no one can get exceptional returns. But in India 
the markets are not efficient, information is not free and not easily accessible and the market does 
not fully absorb immediately all the information. In this scenario, exceptional returns or superior 
returns are possible due to varying degrees of information available with investors. 
In an efficient capital market, superior returns are possible by proper security analYSis and 
investment through the insider information on the company or security and through better forecasting 
ability of the investor and superior expertise in security analYSis. 
WHAT IS PORTFOLIO? 
A combination of such securities with different risk-return characteristics will constitute the 
portfolio of the investor. Thus, a portfoliO is a combination of various assets and/or instruments of 
investments. The combination may have different features of risk and return, separate from those of 
the components. The portfolio is also built up out of the wealth or income of the investor over a 
period of time, with a view to suit his risk or return preferences to that of the portfolio that he holds. 
The portfolio analysis is thus an analysis of the risk-return characteristics of individual securities in the 
portfolio and changes that may take place in combination with other securities due to interaction 
among themselves and impact of each one of them on others. 
INVESTMENT AND SPECULATION . 
Having seen what is investment it is necessary to know what is speculation, as investment and 
speculation are next door neighbours. Speculation involves the investment and vice versa. Both are

Securities Analysis and Portfolio Management by V.A. Avadhani