Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Security Analysis - II - Question Paper

· Central Counterparty in the form of clearing corporation, which provides the platform to its trading members to trade and ensures that the members meet teir obligations.

· An index based market circuit breaker system is also operative to curb unhealthy volatility. These curcuit breakers applies at 3 stages of the index movement, either way, at 10, 15 and 20 percent.

· The introduction of the derivatives in the market and the gradual enlargement of the basket of products comprising Index Options, Index Futures, Stock choices and Stock Futures, has enhanced the liquidity, efficacy of the market and also given hedging opportunities, besides tempering volatility in margining.

· Central Listing Authority had helped in harmonizing the listing requirement across the different stock exchanges and centralizing the listing powers in 1 single authority.

· The corporate governance standard is a crucial factor for ensuring investors confidence. While the Company legal regulations would take care of the basic requirement of the form of corporate governance structure, SEBI is concerned with the corporate governance.

· As a measure of regulatory dynamism, different guidelines concerning intermediaries, listed entities, and trade practices have been reviewed and suitably replaced.

Several initiatives have been taken to improve the operational efficiency and transparency in equity market and to give investors with the security problems of high quality and to enable entities to raise resources in cost effective manner.

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Caselet 3

11. Value investing is buying shares that are fundamentally sound and stable. Due to reasons such as the decline in confidence of the company the shares may be available at a bargain price. Such buying of shares available at a bargain price with the expectation that the shares will recover over time is value investing. The key to value investing is to obtain bargain shares i.e. price low for temporary or irrational reasons, underpriced in relation to future of company’s potential.

Value investors seek out stocks that are currently undervalued by the market in terms of P/E ratio, P/B ratio, enterprise value, dividend yield or liquidation value. A stock that looks cheap is less risky and less vulnerable to market downtrends than the 1 that is fully priced. Value investors look at margin of safety. They look at buying stocks at maximum discount possible on their intrinsic value. This provides value investors with a margin of safety because the future is difficult to predict.

Value investing looks for stocks whose prices are low for their companies’ supposed intrinsic worth, which is determined by an analysis of certain characteristics and fundamentals of companies. Value investors look for products that are beneficial and high quality, but cheap in price. Value investors trust that the market will eventually begin to favor those quality stocks that were, for a time, undervalued. Value investors should concerned with how well the company can make money as a business.

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12. 1 should remember the subsequent points while investing in a value stock.

· Value stocks are described as stocks of solid companies that are trading at beneath their intrinsic value because they are out of favor or have been overlooked by investors.

· Funds that employ traditional measures to identify value stocks generally invest only in stocks that have P/E ratios well beneath the market avg..

· Value stocks generally offer above-average dividend yields. This income component can make them more attractive to investors seeking greater stability in returns.

· Fund managers who employ a relative value approach may compare a stock’s P/E ratio with industry averages rather than the avg. for the overall market. They also may compare other variables such as potential earnings growth rates or future cash flows. As a result, they may invest in stocks that have above avg. P/E ratios.

· Risks are in interest in this investing. However, including both value and growth investment styles in a portfolio can potentially help smoothen out a few of the variability in returns that accompany changing market and economic cycles.

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