Security Analysis and Portfolio Management

What is a Security ?

Assets with some financial value are called securities.

Characteristics of Securities

• Securities are tradable and represent a financial value.
• Securities are fungible.

Classification of Securities

• Debt Securities: Tradable assets which have clearly defined terms and conditions are called debt securities. Financial instruments sold and purchased between parties with clearly mentioned interest rate, principal amount, maturity date as well as rate of returns are called debt securities.

• Equity Securities: Financial instruments signifying the ownership of an individual in an organization are called equity securities. An individual buying equities has an ownership in the company’s profits and assets.

• Derivatives: Derivatives are financial instruments with specific conditions under which payments need to be made between two parties.

What is Security Analysis ?

The analysis of various tradable financial instruments is called security analysis. Security analysis helps a financial expert or a security analyst to determine the value of assets in a portfolio.

Why Security Analysis ?

Security analysis is a method which helps to calculate the value of various assets and also find out the effect of various market fluctuations on the value of tradable financial instruments (also called securities).

Classification of Security Analysis

Security Analysis is broadly classified into three categories:

1. Fundamental Analysis
2. Technical Analysis
3. Quantitative Analysis

What is Fundamental Analysis ?

Fundamental Analysis refers to the evaluation of securities with the help of certain fundamental business factors such as financial statements, current interest rates as well as competitor’s products and financial market.

What are Financial Statements ?

Financial statements are nothing but proofs or written records of various financial transactions of an investor or company.

Financial statements are used by financial experts to study and analyze the profits, liabilities, assets of an organization or an individual.

What is Technical Analysis ?

Technical analysis refers to the analysis of securities and helps the finance professionals to forecast the price trends through past price trends and market data.

What is Quantitative Analysis ?

Quantitative analysis refers to the analysis of securities using quantitative data.

Difference between Fundamental Analysis and Quantitative Analysis

Fundamental analysis is done with the help of financial statements, competitor’s market, market data and other relevant facts and figures whereas technical analysis is more to do with the price trends of securities.

What is Portfolio Management ?

The stream which deals with managing various securities and creating an investment objective for individuals is called portfolio management. Portfoilo management refers to the art of selecting the best investment plans for an individual concerned which guarantees maximum returns with minimum risks involved.

Portfolio management is generally done with the help of portfolio managers who after understanding the client’s requirements and his ability to undertake risks design a portfolio with a mix of financial instruments with maximum returns for a secure future.

Portfolio Theory

Portfolio theory was proposed by Harry M. Markowitz of University of Chicago. According to Markowitz’s portfolio theory, portfolio managers should carefully select and combine financial products on behalf of their clients for guaranteed maximum returns with minimum risks.

Portfolio theory helps portfolio managers to calculate the amount of return as well as risk for any investment portfolio.

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