NISM-Series-XV: Research Analyst Certification Examination Notes

Research Analyst Profession

Primary Role of a Research Analyst (RA): To assist clients in making informed investment decisions by collecting and analyzing data from various sources.
Key Responsibilities:
- Gathering macroeconomic and microeconomic data.
- Collecting industry-specific information.
- Acquiring company-specific information from financial statements, annual reports, company officials, plant visits, market surveys, and stakeholder interviews.
- Analyzing qualitative factors (operational efficiency, competitiveness, management ethics) and quantitative factors (revenues, costs, profitability, risks).
Types of Research Analysts:
- Sell-side Analysts: Publish research reports publicly, recommending to buy, hold, or sell securities with price targets based on future earnings expectations. Employed by investment banks, brokerages, and advisory service firms.
- Buy-side Analysts: Work for asset managers (mutual funds, hedge funds, etc.), generating internal investment recommendations for fund managers. Reports are generally not public.
- Independent Research Analysts: Work for research originators or boutique firms, selling research on a subscription basis to various clients (investors, institutions, regulators, etc.). Provide customized research reports.
- Other entities like newspapers, media, and information consolidators also provide research reports.
Primary Responsibilities of RAs: Understanding industries, companies, and economies to evaluate growth.
- Understanding the Economy: Focus on macroeconomic factors (national income, inflation, interest rates, unemployment), fiscal and monetary policies, FDI/FPI flows, savings/investment patterns, and global impacts on GDP.
- Understanding the Industry: Thorough understanding of the regulatory environment, business models, competition, operating factors, and consumer behavior within the industry.
- Understanding Companies: Qualitative (strengths/weaknesses of business model, management capabilities) and quantitative (balance sheets, profit/loss statements, cash flows, assets/liabilities) analysis.
Basic Principles of Interaction with Companies/Clients:
- Pre-meeting Research: Thoroughly learn about the company's products, industry, and competitors; familiarize yourself with financial information and annual reports.
- Independence and Neutrality: Maintain an unbiased opinion based on factual information and avoid revealing non-public information.
- Networking: Acquire relevant contacts for meaningful insights into the company's performance and plans.
- Clarity of Questions: Prepare clear and specific questions to make effective use of time with management.
- Realistic suggestions based on facts, clear communication in written reports, disclosure of conflicts of interest, and clear statement of assumptions when communicating with clients.
Important Qualities of a Research Analyst:
- Strong quantitative and qualitative skill sets.
- Proficiency in data analysis, financial concepts, and financial statements/reports.
- Ability to ask pertinent questions.
- Attention to detail.
- Strong written and verbal communication skills.

Introduction to Securities Market

Definition of Securities: Transferable financial instruments representing debt or ownership in an incorporated entity (equity shares, debentures, bonds, etc.).
Function of Securities Market:
- Channel savings into investments, transferring resources from those with surplus to those with productive needs.
- Create liquidity, facilitating buying and selling of securities at market prices.
Key Players in the Securities Market:
- Investors/Providers of funds (buyers of securities).
- Borrowers/Seekers of funds (sellers of securities).
- Intermediaries (facilitate transfer of funds and securities).
- Regulatory bodies (responsible for orderly market development).
Types of Securities:
- Equity Shares.
- Debentures/Bonds/Notes: Instruments for raising long-term debt, can be secured or unsecured, convertible or non-convertible.
- Warrants and Convertible Warrants: Options to buy equity shares at a predetermined price after a specific time.
- Indices: Track market movement using prices of a representative sample of shares.
- Mutual Fund Units: Investment vehicles that pool money from investors and invest in a portfolio of securities.
- Exchange Traded Funds (ETFs): Track an index, commodity, or basket of assets; traded on stock exchanges.
- Preference Shares: Special equity shares with preference over common shares in dividend and capital repayment.
- Convertible Debentures & Bonds: Debt instruments convertible into equity shares at a future date.
- Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs), and American Depository Receipts (ADRs): Financial instruments representing shares of a foreign company.
- Foreign Currency Convertible Bonds (FCCBs): Foreign currency denominated convertible debt papers issued by companies in international markets.
- Equity Linked Debentures (ELDs): Floating rate debt instruments linked to equity asset returns.
- Commodity Linked Debentures (CLDs): Floating rate debt instruments linked to commodity asset returns.
- Mortgage-Backed Securities (MBS) and Asset-Backed Securities (ABS): Debt instruments backed by financial asset receivables.
- REITs/InvITs: Investment vehicles pooling money to invest in real estate and infrastructure projects, respectively.
- Commodities: Basic materials or goods that are largely homogenous in nature.
Structure of Securities Market:
- Primary Market: Issuers raise capital by issuing fresh securities to investors (IPOs, FPOs, private placements).
- Secondary Market: Trades in already-issued securities, providing liquidity to investors (stock exchanges, OTC markets).
Key Market Participants:
- Stock Exchanges: Provide trading platforms.
- Depositories: Hold securities in electronic form (CDSL, NSDL).
- Depository Participants (DPs): Agents of depositories, providing services to investors.
- Trading Members (Stock Brokers): Facilitate buy and sell transactions.
- Authorized Person: Agent appointed by stock broker to assist investors.
- Custodians: Safeguard funds and securities of large clients.
- Clearing Corporations: Guarantee settlement of trades.
- Clearing Banks: Manage funds for clearing members.
- Merchant Bankers: Act as issue managers and investment bankers.
- Underwriters: Guarantee subscription of public offers.
- Foreign Portfolio Investors (FPIs): Entities investing in Indian securities.
- Mutual Funds: Professionally managed investment schemes.
- Insurance Companies: Invest in securities.
- Pension Funds: Manage retirement funds.
- Venture Capital Funds: Invest in early-stage companies.
- Private Equity Firms: Provide funding to growing companies.
- Hedge Funds: Investment vehicles with wide mandates.
- Alternative Investment Funds: Privately pooled investment schemes in alternative assets.
- Investment Advisers: Help investors with asset allocation and investment choices.
- Retail Participants: Individual investors.
- Proxy Advisory services firms: Advise investors including recommendations on voting matters.
Transactions in Securities Market:
- Cash, Tom and Spot Trades: Settlement occurs on the same day, the next day, or two business days after the trade date, respectively.
- Forward Transactions: OTC agreements to buy or sell an asset at a future date and price.
- Futures: Standardized exchange-traded forward contracts.
- Options: Contracts that give the right, but not the obligation, to buy (call) or sell (put) an asset.
- Swaps: Agreements to exchange cash flows in the future.
- Trading, Hedging, Arbitrage, Pledging of Shares: Various strategies involving securities.
Dematerialization and Rematerialization:
- Dematerialization: Converting physical securities into electronic form.
- Rematerialization: Converting electronic securities back into physical form.

Terminology in Equity and Debt Markets

**Equity Market
- Face Value (FV):**
  - Nominal price of a share multiplied by number of shares issued by its face value.
  - Important for calculating dividends.
- Book Value:
  - It's the net-worth of the company (Total Assets - Total Liabilities)
  - Book value per share = Net-worth / Number of outstanding shares
- Market Value:
  - The market price of a share.
  - Market capitalization = Market price per share multiplied by total number of outstanding shares.
- Replacement Value:
  - The cost which it would have to bear today is known as the ‘Replacement Value’ of the existing firm.
- Intrinsic Value:
  - The discounted value of the cash that can be taken out of a business during its remaining life
- Market Capitalization (Market Cap):
  - Amount to buy the entire company.
  - Market capitalization (Market Cap), is the amount of money required to buy out an entire company at its current market price.
  - Calculated as market price per share of the company multiplied by total number of outstanding shares.
  - Categorized as large, mid, or small-cap.
- Enterprise Value (EV):
  - Overall value of the business, accounting value of all sources of capital.
    $EV = Value of common equity + value of non-controlling interest + Value of preferred capital + Debt – cash, cash equivalents and financial investments$
- Earnings:
  - Net profits, EBIT, EBITDA.
  - Historical, trailing, and forward earnings.
- Earnings Per Share (EPS):
  - Company's profit for every share it has issued.
    $EPS = Net Profit/ Number of shares outstanding$
- Dividend Per Share (DPS):
  - Portion of profit distributed.
- Price to Earnings Ratio (PE Ratio):
  - Measure of the price that the market is willing to pay for the earnings of a company.
  - $PE = Market price per share/Earnings per share$
- Price-to-Sales Ratio (P/S):
  - The price investors are willing to pay for each rupee of sales.
  - $P/S Ratio = Current Market Price (CMP) / Annual Net Sales per Share$
- Price-to-Book Value Ratio (P/BV):
  - Measures company's current market price (CMP) vis a vis its book value.
  - PBV is useful measure to value stocks where the earnings are negative and the more widelyused PE ratio is not applicable.
  - $P/BV = CMP/BV$
- Differential Voting Rights (DVR):
  - Shares with less than one voting right per share.
Debt Market
- Face Value:
  - represents how much loan is represented by that particular debt paper
- Coupon Rate:
  - rate is the Interest paid on the bond/debt security
- Maturity:
  - the tenor or term to maturity
- Principal:
  - the amount of borrowing of the issuer
- Redemption of a Bond:
  - When a bond matures, the investor ‘redeems’ the bond
- Holding Period Returns (HPR):
  - the return earned on an investment during a specific period
- Current Yield:
  - Coupon is divided with the current market price of the bond and the result is expressed as percentage
- Yield to Maturity (YTM):
  - measure of return calculation of a debt security.
  - This method takes into consideration all future cash flows coming from the bond (coupons plus the principal repayment)
- Duration:
  - measures the sensitivity of the price of a bond to changes in interest rates.
  - Bonds with high duration experience greater increases in value when interest rates decline and greater losses in value when rates increase
**Types of Bonds
- Zero-Coupon Bond:**
  - Bonds which do not pay coupon in their entire term are known as Zero Coupon Bonds
- Floating – Rate Bonds:
  - bonds whose coupon is not fixed, as in the case of vanilla bonds, but is reset periodically with reference to a defined benchmark.
- Convertible Bonds:
  - debt instrument with the option to investors to convert the amount invested into equity shares of the issuer company later
- Principal – Protected Note (PPN):
  - a debt product which aims at providing protection of the principle amount invested by investors, if the investment is held to maturity
- Inflation – Protected Securities:
  - provide inflation protected returns to the investors. The coupon income as well as the principal is adjusted for inflation
- Foreign currency bonds:
  - bonds issued by a company in a currency that is different from the currency of its home country
- External bonds:
  - bonds issued in a currency that is different from the currency of the country in which it is issued
- Perpetual bonds:
  - bonds which do not have a stated maturity date.

Fundamentals of Research

Investment: Upfront commitment of money to earn returns; thorough analysis of risk, income, and growth potential.
Active Investing: Identifying specific securities for purchase or sale; constant portfolio evaluation; higher effort and transactions.
Passive Investing: Investing in a broad set of securities representing an asset class, often following an indexing strategy; lower effort.
Role of Research: Combining research (gathering information) and analysis to arrive at investment conclusions.
- Economic information from government statistics and central banks.
- Global data from International Monetary Fund (IMF), Asian Development Bank (ADB), World Bank, etc.
- Industry-specific journals and publications.
- Company-specific information from financial statements, annual reports, company officials, plant visits, surveys, and stakeholder interviews.
Insider Information vs. Mosaic Analysis:
- Insider information: Non-public price-sensitive information that affects investment decisions.
- Mosaic analysis: Combining information from different sources to gain critical insight; acceptable if not based on insider information.
Technical Analysis:
- Forecasting price direction through the study of historical market data (price and volume).
- Essential Elements are History of past prices, volume of trading, and time frame.
- Uses price charts, support/resistance levels, and trends.
- Relies on trading volumes, moving averages, and chartist techniques.
Fundamental Analysis:
- Focused on long-term investing; aligns value with company returns on share capital.
- Focuses on economic analysis, industry analysis, and company analysis.
Quantitative Research:
- Using quantitative (econometric) approaches for both technical and fundamental analysis.
- Limitations involve availability of comparable information and changes in accounting standards.
Behavioral Approach to Equity Investing:
- Acknowledges the influence of behavioral biases (fear, greed) on investment decisions.
- Securities prices deviate from fair value due to market participants' emotions.

Economic Analysis

Economics Definition: The study of choices made under scarcity and their impact on individuals and society.
Microeconomics: Studies individual behavior and decisions regarding consumption and production based on prices. Focuses on supply and demand and their prices.
Basic Principles of Microeconomics:
- Deals with the understanding and working of a free market economy.
- Helps us understand how the prices of the products and services get determined in an economy.
- Microeconomics also deals with the how firms adopt different strategies to increase their profits
- Decision making process at the evel of inputs, outputs, prices, production levels, profits and losses of individual firms.
Macroeconomics: Studies the economy as a whole, focusing on aggregate supply and demand, unemployment rates, GDP, price levels, inflation, and public policies.
Basic Principles of Macroeconomics:
- Helps us understand general state of the economy such as Domestic Production, , Domestic Consumption, General Price levels, Growth, etc.
- Helps us understand drivers of income, savings, investments and employment in the economy.
- Helps us understand various aspects of international trade of goods and services.
- Facilitates understanding on how inter-linkages across the economies work.
Macroeconomic Variables:
Important statistics
- National Income: GDP and GNP measured through product, income, and expenditure methods for level of welfare, economic growth, and income distribution.
- Savings and Investments: Personal, corporate, and public savings and their conversion into productive investments.
- Inflation: Increase in price levels, measured by WPI and CPI, impacting interest rates and demand.
- Unemployment Rate: Percentage of the eligible and willing to work population that is unemployed.
- Flows from Foreign Direct Investment (FDI) and Foreign Portfolio Investments (FPI): Foreign capital flows to promote growth.
- Fiscal Policies: Government revenues and expenses affecting aggregate demand and income.
- Monetary Policies: Central bank policies affecting money supply, inflation, and interest rates.
- International Trade, Exchange Rate, and Trade Deficit: Transactions with other countries and their impact on currency value.
- Globalization: Inter-linkages across the economies affect.
Positive and Negative Effects of Globalization: * Positives: Efficiency, growth, tech. Improvements, etc.
- Negatives: Competition results in survival of the fittest, Integrated economies leads to world crisis etc.