Stock exchange is an organized market
for purchase and sale of listed securities. Various services for stock brokers
and traders in terms of trading of stocks, bonds and other securities are
provided by the stock exchanges. These exchanges also provide other facilities
for the issue and redemption of securities and other financial instruments. It
also provides capital events including the payment of income and dividends. Any
investor would analyse the risk associated with the avenue of their concern
before investing his investible part of the wealth. The actual return which he
receives from a stock may vary from his expected return and depends on the risk
he is ready to bear. The risk is measured in terms of variability of return.
There are several factors that cause risk. They are either common to all stocks
or specific to a particular stock. Every investor would prefer to analyze the
risk factors which would help him to plan his portfolio, so that he can
minimize his risk and maximize his return by diversifying into right avenues.
The risk and return relationship is a concept applicable in real life
situations as well as in terms of financial analysis. The amount of risk
assumed should be proportionate to the expected returns. Managing risk is very
important aspect for an investor. The Indian pharmaceuticals market is the
third largest in terms of volume and thirteenth largest in terms of value, as
per a report by Equity Master. Branded drugs dominate the pharmaceuticals
market, constituting nearly 70 to 80 per cent of the market. India is the
largest provider of generic drugs globally with the Indian generics accounting
for 20 per cent of global exports in terms of volume. Before 1990’s the main
area of investment were bank deposits, gold, property and such other forms of
tangible assets but for the past few years we had been witnessing a lot of investment opportunities
coming up in the form of primary and secondary market since the globalization
which had its inception during 90’s foreign capital flowing to India .new multinational
entered the market and a lot of investment opportunities were opened to the people who kept their saving in
bank and other kind of fixed assets. The topic analysis of risk and return in
the pharmaceutical sector and had been selected because a lot of investors are
making investment in the shares of different companies. The investors have to
be aware of the risk involved in making the investment so the investors have to
calculate the variance and the beta value to know the present condition of the
Company to know whether there is any risk in investing in the particular company
and does the company offer good returns.
The companies which I have been selected
for research having different growth strategies and difference in revenue, profitability
and market capitalization .Currently according to the 2017 report the
drugs and pharmaceuticals sector attracted cumulative FDI inflows worth US$
14.71 billion between April 2000 and March 2017, according to data released by
the Department of Industrial Policy and Promotion (DIPP).
The Indian pharmaceutical is one of the fast growing sector
not only in India but also the whole world There are 74 U.S. FDA-approved
manufacturing facilities in India, more than in any other country outside the
U.S, and in 2008, almost 25% of all Abbreviated New Drug Applications (ANDA) to
the FDA are expected to be filed by Indian companies. Since Growths in other
fields notwithstanding, generics are still a large part of the picture. London
research company Global Insight estimates that India’s share of the global
generics market will have risen from 4% to 35% in 2006, over 20,000 registered
drug manufacturers in India sold $15 billion worth of formulations and bulk
drugs. 85% of these formulations were sold in India while over 60% of the bulk
drugs were exported, mostly to the United States and Russia. Most of the
players in the market are small-to-medium enterprises; 250 of the largest companies
control 70% of the Indian market. Thanks to the 1970 Patent Act, multinationals
represent only 35% of the market, down from 70% thirty years ago.
A company ,which has a high intrinsic worth
,is not necessarily the best stock to buy .it may have no growth prospects or
it may be overpriced .similarly a company that performs well during any one
year may not be the best to buy on the contrary ,a company which has been badly
for some time might have turn the corner and it may be the best to buy ,as its
shares may be under prices and it has good prospects of growth hence an
analysis of risk or return guides an investor in proper profitable investment.
Return is the primary motivating force that drives investment it represents the
reward for undertaking investment .since the game of investing is about returns,
measurement of realized return is necessary to assess how well the investment
manager has done. In addition historical return is often used as an important
input on estimating future return.
THE COMPONENT OF RETURN
The return of an investment consist of two
Current return the component that often comes
to mind when one is thinking about return is the periodic cash flow such as dividend
or interest generated by the investment .current return is measured as the
periodic income in relation to the beginning price of the investment.
Capital return the second component of return is reflected
in the price change called the capital return .it is simply the price
appreciation (or depreciation) divided by the beginning price of the assets.
Thus total return =current return + capital
Risk refers to the possibility that the
actual outcome of an investment will differ from its expected outcome .more
specifically, most investors are concerned about the actual outcome being less than
the expected outcome .the wider the range of possible outcomes the greater the
DIFFERENT TYPE OF RISK
Forces that contribute to variance in return-price
or dividend-constitute the element of risk .some influence are external to the
organization can not be controlled other influence are internal to the organization
that are controllable to a large extent .in an investment decision those
factors which is uncontrollable is called systematic risk .on the other hand
those factors are controllable and internal to the organization are called
unsystematic risk these are the two broad categories of risk
This is the most familiar of all risks. Also
referred to as volatility, market risk is the the day-to-day fluctuations in a
stock’s price. Market risk applies mainly to stocks and options. As a whole,
stocks tend to perform well during a bull market and poorly during a bear
market – volatility is not so much a cause but an effect of certain market forces.
Volatility is a measure of risk because it refers to the behaviour, or
“temperament”, of your investment rather than the reason for this behaviour.
Because market movement is the reason why people can make money from stocks,
volatility is essential for returns, and the more unstable the investment the
more chance there is that it will experience a dramatic change in either
Market risk is caused by investors reaction
to the tangible as well as intangible events expectation of lower corporate
profile in general may cause the larger body of common stocks to fall in price
.investors are expressing their judgment that too much is being paid for
earning in the light of anticipated events .the basis for the reaction is a set
of real, tangible, events political, social or economic.
INTEREST RATE RISK –
The changes in the interest rate have a
bearing on the welfare of investors. As the interest rate goes up, the market
prices of existing fixed income securities fall and vice versa. This happens
because the buyer of a fixed income security would not buy it at par value or
face value if its fixed interest rate is lower than the prevailing interest
rate on similar security.
INFLATION RISK (PURCHASING POWER RISK)
The loss of purchasing power due to the
effects of inflation. When inflation is
present, the currency loses its value due to the rising price level in the economy. The higher the inflation rate, the faster the
money loses its value.
The uncertainty associated with the ability
to sell an asset on short notice without loss of value.
A highly liquid asset can be sold for fair
value on short notice. This is because
there are many interested buyers and sellers in the market. An illiquid asset is hard to sell because
there there few interested buyers. This
type of risk is important in some project investment decisions but is discussed
extensively in Investment courses.
FOREIGN EXCHANGE RISKS
Uncertainty that is associated with potential
changes in the foreign exchange value of a currency.
There are two major types: translation risk
and transaction risks.
Uncertainty associated with the translation
of foreign currency denominated accounting statements into the home
currency. This risk is extensively
discussed in Multinational Financial Management courses.
Uncertainty associated with the home currency
values of transactions that may be affected by changes in foreign currency
values. This risk is extensively discussed in the Multinational Financial
Unsystematic risk are those risk which is
firm specific or peculiar to a firm or industry the different type of
unsystematic risk are discussing below.
The uncertainty associated with a business
firm’s operating environment and reflected in the variability of earnings
before interest and taxes (EBIT). Since
this earnings measure has not had financing expenses removed, it reflects the
risk associated with business operations rather than methods of debt
financing. This risk is often discussed in
General Business Management courses.
Business risk can be divided into two board
categories: external and internal .Internal business risk is largely associated
with the efficiency with which a firm conduct its operation within the border
operating environment imposed upon it .each firm has its on internal risk, and
the degree to which it is successful in coping with them is reflected in
The uncertainty brought about by the choice
of a firm’s financing methods and reflected in the variability of earnings
before taxes (EBT), a measure of earnings that has been adjusted for and is
influenced by the cost of debt financing.
This risk is often discussed within the context of the Capital Structure
By Engaging in debt financing the firm
changes the characteristics of the earning stream available to the common stock
holders, specifically ,the reliance in debt financing ,called financial
leverage ,has at least three important effect on common stock holders
.1)increase the variability of their return 2)effect their expectation
concerning to the return 3)increase the
risk of being ruined .
Investment is the employment of the fund with
aim of achieving additional growth in value .an investment is a sacrifice of
current money or other resources for future benefits .it is the allocation of
monetary resources to assets that are expected to yield gain or positive return
over a given periods of time .it involves the commitment of resources which
have saved or put away from current consumption in the hope that some benefits
will acure in future.
The three key aspects of any investment are
time capital gain and risk the sacrifice takes place now and is certain .the
benefits are expected in the future and tend to be uncertain.
Risk: investment is considered to involve
limited risk and is confined to those avenues where the principle is safe. No
investments are completely risk free
Capital gain: If purchase of securities is
preceded by proper investigation and analysis and review to receive a stable
return over a period of time it is termed as investment.
Time: A longer time, fund allocation is
termed as investment. The investor constantly evaluates the work of a security.
There has to be a constant review of securities to find out whether it is a suitable
investment. The investment is an attempt to carefully plan, evaluate and
allocate funds in various investments which offer safety of principal, moderate
and continuous return and long term commitment.
In stock market parlance investment decision
refers to making a decision regarding the buy and sell orders. As we know
economic analysis or factors play in any investment decision which is made for
making a gain and better returns. Economic analysis and forecasting company performance
and of returns is necessary for making investment.
Any investment is risky and such investment
decision is difficult to make. It is based on availability of money and
information on economy industry and company, share prices are ruled by
expectation of the market and the market sentiments.
As we know these decisions are influenced by
availability of money and flow of information.
What to buy and sell also depends on the fair
value of shares and the extent of over valuation and under valuation. For
making such a decision the common investors have to depend more up on a study
of fundamental rather than technical, although technical are also important
PRIMARY AND SECONDARY CAPITAL MARKET
Primary market is the market for issue of new
securities .it therefore essentially consists of the companies issuing
securities, he public subscribing to these securities, he regulatory agencies like
SEBI and the government, merchant bankers and bank who underwrite the issues
and help in collecting subscription money from the public.
Secondary Market refers to a market where
securities are traded after being initially offered to the public in the
primary market and/or listed on the Stock Exchange. Majority of the trading is
done in the secondary market. Secondary market comprises of equity markets and
the debt markets.
For the general investor, the secondary
market provides an efficient platform for trading of his securities. For the
management of the company, Secondary equity markets serve as a monitoring and
control conduit—by facilitating value-enhancing control activities, enabling implementation
of incentive-based management contracts, and aggregating information (via price
discovery) that guides management decisions.
Stock market is place where the stocks or
shares are purchased and sold .stock exchange is an organized market where
securities are traded .these securities are issued by the government, semi-government,
public sector undertakings and companies for borrowing funds and raising
resources. securities are defined as any monetary claims and includes stock
,shares, debentures,bonds etc .if these securities are marketable as in the
case of government stocks; they are transferable by endorsement and are like
moveable property .they are tradable on the stock exchange .
Exchanges are located all over the world with
the most famous one being the New York stock exchange. The NYSE annually traded
almost 14 trillion dollars worth of capital .thousands of stocks are listed on this exchange. when you buy a stock
you will need to learn which exchanges list it other than locating quote in the
news paper with online trading and the automation of order system ,there is
very little reason to determine where the stock trades from the customers
There are 22 stock exchanges in India, the
first being the Bombay Stock Exchange (BSE), which began formal trading in
1875, making it one of the oldest in Asia. Over the last few years, there has
been a rapid change in the Indian securities market, especially in the
Advanced technology and online-based
transactions have modernized the stock exchanges. In terms of the number of
companies listed and total market capitalization, the Indian equity market is
considered large relative to the country’s stage of economic development. The
number of listed companies increased from 5,968 in March 1990 to about 20,000
by May 2006 and market capitalization has grown almost 11 times during the same
period. The debt market, however, is almost non existent
BOMBAY STOCK EXCHANGE LIMITED (BSE)
Bombay Stock Exchange Limited is the oldest
stock exchange in Asia with a rich heritage. Popularly known as
“BSE”, it was established as “The Native Share & Stock
Brokers Association” in 1875. It is the first stock exchange in the
country to obtain permanent recognition in 1956 from the Government of India
under the Securities Contracts (Regulation) Act, 1956.The Exchange’s pivotal
and pre-eminent role in the development of the Indian capital market is widely
recognized and its index, SENSEX, is tracked worldwide. Earlier an
Association of Persons (AOP), the Exchange is
now a demutualised and corporatised entity incorporated under the provisions of
the Companies Act, 1956, pursuant to the BSE (Corporatisation and
Demutualization) Scheme, 2005 notified by the Securities and Exchange Board of
India (SEBI).With demutualization, the trading rights and ownership rights have
been de-linked effectively addressing concerns regarding perceived and real
conflicts of interest. The Exchange is professionally managed under the overall
direction of the Board of Directors. The Board comprises eminent professionals,
representatives of Trading Members and the Managing Director of the Exchange.
The Board is inclusive and is designed to benefit from the participation of
market intermediaries. In terms of organization structure, the Board formulates
larger policy issues and exercises over-all control. The committees constituted
by the Board are broad-based. The day-to-day operations of the Exchange are managed
by the Managing Director and a management team of professionals.
The Exchange has a nation-wide reach with a
presence in 417 cities and towns of India. The systems and processes of the
Exchange are designed to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading volumes on the Exchange
showed robust growth. The Exchange provides an efficient and transparent market
for trading in equity, debt instruments and derivatives. The BSE’s On Line
Trading System (BOLT) is a proprietary system of the Exchange and is BS
7799-2-2002 certified. The surveillance and clearing & settlement functions
of the Exchange are ISO 9001:2000 certified.
THE NATIONAL STOCK EXCHANGE OF INDIA LIMITED
The National Stock Exchange of India Limited
has genesis in the report of the High Powered Study Group on Establishment of
New Stock Exchanges, which recommended promotion of a National Stock Exchange
by financial institutions (FIs) to provide access to investors from all across
the country on an equal footing. Based on the recommendations, NSE was promoted
by leading Financial Institutions at the behest of the Government of India and
was incorporated in November 1992 as a tax-paying company unlike other stock
exchanges in the country.
On its recognition as a stock exchange under
the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced
operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital
Market (Equities) segment commenced operations in November 1994 and operations
in Derivatives segment commenced in June 2000
It is the largest stock exchange in India and
the third largest in the world in terms of volume of transactions. NSE is
mutually-owned by a set of leading financial institutions, banks, insurance
companies and other financial intermediaries in India but its ownership and
management operate as separate entities. As of 2006, the NSE VSAT terminals,
2799 in total, cover more than 1500 cities across India. In March 2006, the NSE
had a total market capitalization of 4,380,774 crore INR making it the
second-largest stock market in South Asia in terms of market-capitalization.
S CNX NIFTY
S CNX Nifty is a well diversified 50
stock index accounting for 22 sectors of the economy. It is used for a variety
of purposes such as benchmarking fund portfolios, index based derivatives and
index funds S CNX Nifty is owned and managed by India Index Services and
Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is
India’s first specialized company focused upon the index as a core product.
IISL have a consulting and licensing agreement with Standard & Poor’s
(S), who are world leaders in index services.
The average total traded value for the last
six months of all Nifty stocks is approximately 45.24% of the traded value of
all stocks on the NSE .Nifty stocks represent about 57.92% of the total market
capitalization as on April 10, 2007. Impact cost of the S CNX Nifty for a
portfolio size of Rs.5 million is 0.08% S.P CNX Nifty is professionally maintained
and is ideal for derivatives trading.