FINANCIAL MARKETS

Ecosystem of Financial Markets

 Comprises various institutions, instruments, and infrastructure.

Includes:

o Stock Exchanges (e.g., NSE, BSE)

o Banks and NBFCs

o Regulators like SEBI and RBI

o Clearing Corporations and Depositories

 Retail Investors: Individuals who invest personal money.

 Institutional Investors: Mutual funds, insurance companies, pension funds, etc.

 Issuers: Corporates and governments that raise capital by issuing securities.

 Intermediaries: Brokers, merchant bankers, and underwriters who assist in

transactions.

 Regulators: SEBI ensures market discipline and protects investors.

 Primary Market:

o Where companies issue new securities for the first time (e.g., IPO).

o Purpose: To raise fresh capital.

o Investors buy directly from the issuer.

 Secondary Market:

o Where previously issued securities are traded among investors.

o Examples: NSE, BSE.

o Purpose: Provides liquidity and price discovery.

IPO
The first time a company sells its shares to the public.Purpose: To raise funds for
expansion, debt repayment, or other business needs. To increase brand visibility and
credibility. To offer an exit route to early investors. Retail Investors: Individuals investing
small amounts (usually under ₹2 lakhs).

Qualified Institutional Buyers (QIBs): Mutual funds, insurance companies, etc.

Non-Institutional Investors (NIIs): High-net-worth individuals or corporates.

Anchor Investors: Institutional investors who invest before the IPO opens.

Fresh Issue: New shares issued to raise capital; increases the company’s capital base.

Offer for Sale (OFS): Existing shareholders sell their shares; no new capital raised.

Follow-on Public Offer (FPO): Public issue of shares by a listed company.

Rights Issue: Issued to existing shareholders at a discount.

Types of Investment Funds

1. Multicap Fund – Invests across companies of different market capitalizations (large-

cap, mid-cap, small-cap) for diversified exposure.

2. Dividend Yield Fund – Focuses on companies that regularly pay high dividends,
providing potential income along with capital appreciation.

3. Value Fund – Invests in undervalued stocks with strong fundamentals, aiming for
long-term gains as their true value is realized.

4. Contra Fund – Follows a contrarian investment strategy by investing in stocks that

are currently out of Favor but expected to perform well in the future.

5. Sectoral Fund – Invests exclusively in a specific sector (e.g., technology,

pharmaceuticals) and is riskier due to concentration in one industry.

6. Thematic Fund – Focuses on broader themes, like ESG (Environmental, Social,

Governance) or emerging technologies, spanning multiple sectors.

7. ELSS (Equity Linked Savings Scheme) Fund – Provides tax benefits under Section 80C
of the Income Tax Act while investing primarily in equities.

8. Focused Fund – Invests in a concentrated portfolio of a limited number of stocks,

aiming for high conviction bets rather than broad diversification.
Dividend
A portion of company profits distributed to shareholders.

Interim Dividend (declared during the year)

Final Dividend (declared at year-end)

Impact: Provides regular income to shareholders; reduces retained earnings.

Bonus Issue
Free shares given to existing shareholders based on their current holdings.

Example: 1:1 bonus issue means 1 new share for every 1 share held.

Impact: Increases share capital but doesn’t affect overall value; lowers stock price per share,
making it more affordable.

Right Issue
Offering existing shareholders, the right to purchase additional shares at a discounted price.

Purpose: Raise additional capital without taking on debt.

Impact: Can dilute existing share value if not fully subscribed.

Stock Split
Dividing existing shares into multiple new shares (e.g., 1 share becomes 5).

Make shares more affordable and increase liquidity. Reduces face value and price per share
but total market capitalization remains the same.

Buyback of Shares
Company repurchases its own shares from the market. Reduce the number of outstanding
shares, increase EPS, and signal confidence. May increase share value and benefit
remaining shareholders.

Basis of Selection of Commodities

1. Price Volatility

Commodities with frequent and significant price changes are more attractive for trading due
to profit opportunities.

2. Share of GDP

Commodities that contribute significantly to the country’s Gross Domestic Product (GDP)
are prioritized due to their economic impact.

3. Correlation with Global Markets

Commodities linked to international prices help in managing global exposure and hedging
strategies.

4. Share of External Trade

Commodities with high import/export volumes are considered more liquid and globally
relevant.

5. Government Intervention

The degree of regulation and support (like subsidies or MSPs) affects pricing and trading
potential.

6. Warehousing Facilities

Adequate and efficient storage infrastructure ensures smoother delivery and risk
management.

7. Traders Distribution

A wide and active trader base increases market liquidity and participation.

8. Geographical Spreads

Commodities produced or consumed across many regions reduce regional concentration

risks.

Black-Scholes Formula for Option Pricing

Call Option Price (C): C=S⋅N(d1)−K⋅e−rt⋅N(d2)

Put Option Price (P): P=K⋅e−rt⋅N(−d2)−S⋅N(−d1)

Trading Decision Framework

Types of Trading Based on Decision Timeframe:

 Swing Trading: 60–90 minutes timeframe

 Intraday Trading (Return): 5–15 minutes timeframe

 Positional Trading: Daily charts

Volumes should confirm price:

 A strong uptrend or downtrend should be accompanied by increasing volume.

 Volume acts as a validation of price moves.

Averages confirm each other:

 Example: Nifty and Bank Nifty (Bank Nifty has the highest weight in Nifty).

 When both indices (or other correlated instruments) move together, it strengthens
the signal.

Trend Continuation Rule:

 “Trends will stay UP or DOWN unless you have a definite signal of reversal.”

 Do not assume a trend has changed without clear technical confirmation.

Bull Calendar Spread

Bull Calendar Spread: This is an options trading strategy that involves buying a long-term call
option and selling a short-term call option on the same underlying asset, with both options
having the same strike price. It profits from the increase in the price of the underlying asset,
with the maximum profit occurring if the stock price rises moderately

Bear Calendar Spread

Bear Calendar Spread: In contrast, a bear calendar spread involves selling a long-term call
and buying a short-term call on the same underlying asset. It profits when the price of the
underlying asset falls or stays stagnant, with the maximum profit achieved if the price drops
slightly.

Bottom-Up Approach
A Bottom-Up Approach in business analysis starts by focusing on individual components,
such as a company’s fundamentals (like financial statements, operations, etc.), and then
aggregating them to get a broader view of the industry or market. It is typically used for
stock picking and analyzing the health of a specific company.

Porter’s Five Forces

Porter’s Five Forces is a framework for analyzing the competitive forces within an industry:
1. Threat of New Entrants: How easy it is for new competitors to enter the market.
2. Bargaining Power of Suppliers: The power suppliers have in influencing prices.
3. Bargaining Power of Buyers: The power buyers must influence prices.
4. Threat of Substitute Products or Services: The likelihood of customers finding alternative
products.
5. Industry Rivalry: The intensity of competition among existing firms in the industry.

SWOT Analysis
SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis is a strategic planning
tool that evaluates the internal and external factors that can affect a business:
Strengths: What a company does well.
Weaknesses: Areas where the company may be lacking.
Opportunities: External factors that could be leveraged for success.
Threats: External factors that could harm the company.

Standalone Analysis vs. Consolidated Analysis

Standalone Analysis: Analyzes the performance of a company in isolation, without
considering its subsidiaries or affiliated companies.
Consolidated Analysis: Considers the performance of a parent company along with its
subsidiaries, providing a more comprehensive picture of the organization’s financial health.

Annual Report
An Annual Report is a comprehensive report on a company's activities throughout the
preceding year. It includes financial statements, management discussions, and disclosures to
provide shareholders and stakeholders with a clear view of the company’s performance.

Management Discussion & Directors' Report

Management Discussion: This section of the annual report offers insights from the
management regarding the company’s performance, strategies, challenges, and market
conditions. It typically explains the financial results and future outlook.

Directors' Report: This includes the board of directors' comments on the performance of the
company, corporate governance, future strategies, and other important corporate
developments.

Notes to Account
The Notes to Account section provides detailed information and explanations about specific
items in the financial statements. It clarifies how numbers in the balance sheet, profit and
loss statement, etc., are calculated or derived.

Corporate Governance
Corporate Governance refers to the system of rules, practices, and processes by which a
company is directed and controlled. It involves balancing the interests of the company's
stakeholders, such as shareholders, management, customers, suppliers, and the community.

Shareholding Pattern
The Shareholding Pattern section in a company’s annual report provides a breakdown of the
ownership of shares in the company, listing major shareholders, institutional holdings, and
any changes in the shareholder base over time.

P/L Statement Analysis

P/L (Profit and Loss) Statement Analysis involves evaluating a company’s income and
expenses to determine profitability. Key metrics analyzed include gross profit, operating
profit, and net profit margins.

Balance Sheet Analysis

Balance Sheet Analysis involves assessing a company's financial position at a specific point in
time by analyzing its assets, liabilities, and shareholders’ equity. It provides insight into the
company’s liquidity, solvency, and overall financial health.

TTM Analysis
TTM (Trailing Twelve Months) Analysis is a method of measuring a company’s financial
performance using data from the most recent 12 months. It provides a more up-to-date
picture of performance than using annual or quarterly figures.

Fibonacci Retracement
Fibonacci Sequence:
 The Fibonacci sequence is a set of numbers that starts with 0 and 1, and each
subsequent number is the sum of the two preceding numbers. The sequence goes on
infinitely.
 The ratio of consecutive Fibonacci numbers converges to the Golden Ratio
(approximately 1.618), and when it is divided, the ratios tend to approximate certain
important levels for market analysis.

Fibonacci Retracement Levels:

23.6%: This is the first and shallowest retracement level.

38.2%: The next key level, often used to predict a reversal in the market.

50%: While not a Fibonacci number, this level is significant as it represents a halfway point.

61.8%: This is considered the most important Fibonacci level for retracement.

78.6%: A deeper retracement, sometimes used by traders to gauge a stronger market

pullback.

Benjamin Graham's Valuation Formula

the pioneer of value investing, proposed a formula to estimate a stock's intrinsic value
based on earnings and growth potential.

[ V = EPS \times (8.5 + 2g) ] Where:

( V ) = Intrinsic value of the stock

( EPS ) = Earnings per share (last 12 months)

( 8.5 ) = Base P/E ratio for a no-growth company

( g ) = Expected annual earnings growth rate (7–10 years)