NISM-Series-XV: Research Analyst Certification Examination

CHAPTER 1: INTRODUCTION TO RESEARCH ANALYST PROFESSION

  • 1.1 Primary Role of a Research Analyst

    • Research Analysts (RAs) assist clients in making informed investment decisions through data collection and analysis.

    • Data and information are essential for RAs, including macro and micro economic factors, industry-specific details, and company-specific information.

    • Economic data comes from government statistics, central banks (RBI), and international agencies (IMF, ADB, World Bank).

    • Industry information is sourced from journals and publications.

    • Company data is collected from financial statements, annual reports, company officials, plant visits, market surveys, and stakeholder interviews.

    • Analysis involves understanding qualitative factors (operational efficiency, competitiveness, and management ethics) and quantitative factors (revenues, costs, profitability, and risks).

    • RAs interact with companies and analyze data to recommend whether to buy, hold, or sell securities.

  • 1.2 Primary Responsibilities of a Research Analyst

    • Sell-side analysts publish research reports with recommendations to buy, hold, or sell, including earnings expectations and price targets; they work for firms providing investment banking and broking services.

    • Buy-side analysts work for asset managers (mutual funds, hedge funds) and make recommendations for internal use by fund managers; their reports are generally not public.

    • Independent research analysts sell research to various clients on a subscription basis, providing customized reports for investment or competitive analysis.

    • RAs conduct comprehensive studies, evaluate past performance, and analyze future expectations to make recommendations.

  • 1.3Basic Principles of Interaction with Companies/Clients

    • Interaction with companies and clients enhances insights, but requires cross-verification of management claims to avoid misinformation.

    • Analysts should conduct pre-meeting research on the company, its products, industry, and competitors, reviewing financial information and annual reports.

    • Maintaining independence and neutrality is crucial, avoiding biases and ensuring factual analysis.

    • Analysts should leverage their network to gather insights from relevant contacts, including competitors and stakeholders.

    • Clarity in questions ensures efficient use of time with management, using questionnaires for better understanding.

    • Communication with clients should be realistic, based on facts, and free of bias.

    • Written reports should be simple, clear, and concise, disclosing any conflicts of interest and stating assumptions.

    • Analysts must act with sincerity, honesty, and ethics, following SEBI regulations.

  • 1.4Important Qualities of a Research Analyst

    • The job requires quantitative and qualitative skills, including comfort with numbers, analytical tools, business model comprehension, and competitive dynamics understanding.

    • Desired qualities include:

      • Good with numbers and financial concepts

      • Proficiency in Excel and data analytical tools

      • Ability to read and comprehend financial statements

      • Pertinent questioning skills

      • Attention to detail

      • Strong written and verbal communication skills

CHAPTER 2: INTRODUCTION TO SECURITIES MARKET

  • 2.1 Introduction to Securities and Securities Market

    • Securities are transferable financial instruments representing debt or ownership, issued by companies, financial institutions, or governments.

    • They allow investors to convert savings into financial assets and borrowers to raise money.

    • Securities facilitate the transfer of rights without affecting issuers, enabling long-term fundraising and investor exit options.

    • Securities markets provide liquidity, making it easy to buy and sell securities at market prices.

    • They channel resources from surplus to productive needs, converting savings into investments.

    • The market consists of investors (buyers), borrowers (sellers), intermediaries, and regulatory bodies.

    • Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) defines "securities," including shares, derivatives, units of collective investment schemes, security receipts, and government securities.

  • 2.2 Product Definitions / Terminology

    • 2.2.1 Equity Shares: Represent fractional ownership in a business venture; equity shareholders collectively own the company and bear the risk and rewards.

    • 2.2.2 Debentures/Bonds/Notes: Instruments for raising long-term debt, either secured or unsecured, with various types (fully convertible, non-convertible, partly convertible) in domestic or foreign currency.

      • Fully Convertible Debentures: Fully convertible into ordinary shares of the issuing company with terms specified at issue.

      • Partly Convertible Debentures: Partially convertible into ordinary shares, with the non-convertible portion redeemed as standard debt.

      • Non-Convertible Debentures: Pure debt instruments repayable on maturity without conversion features.

    • 2.2.2.1 Foreign Currency Bonds: Bonds issued in a currency different from the issuer's home country, carrying lower interest rates but exposing the issuer to foreign currency risk.

    • 2.2.2.2 External Bonds / Masala Bonds: Bonds issued in a currency different from the country of issue (Euro bonds), or denominated in Indian rupees (INR) but issued outside India (Masala bonds).

    • 2.2.3 Warrants and Convertible Warrants: Options allowing investors to buy equity shares of the issuer at a pre-determined price after a specified time.

    • 2.2.4 Indices: Market indexes track market movement using prices of representative shares, weighted by market capitalization, used for performance comparison, economic indication, and as underlying for index funds and futures.

      • Examples include NSE’s Nifty 50, S&P BSE Sensex, and MSEI’s SX40.

    • 2.2.5 Mutual Fund Units: Investment vehicles pooling money from investors to invest in a portfolio of securities, with each investor's share represented by issued units and valued by Net Asset Value (NAV).

    • 2.2.6 Exchange Traded Funds (ETFs): Investment vehicles tracking an index, commodity, or asset basket, traded on stock exchanges with real-time pricing and typically lower expense ratios than mutual funds.

    • 2.2.7 Hybrids/Structured Products:

      • Preference Shares: Shares with preference over common equity in dividend and capital repayment, lacking voting rights, offering fixed dividend rates.

      • Convertible Debentures & Bonds: Debt instruments convertible into equity shares at a future date, offering coupon payments until conversion, with options for full, partial, or optional conversion.

      • Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs) and American Depository Receipts (ADRs): Financial instruments representing shares of a foreign company, trading in local markets and denominated in local currency.

      • Foreign Currency Convertible Bonds (FCCBs): Foreign currency-denominated convertible debt papers issued by companies in international markets, with interest and principal paid in foreign currency.

      • Equity Linked Debentures (ELDs): Floating rate debt instruments with interest based on the returns of an underlying equity asset, providing capital protection and equity participation.

      • Commodity Linked Debentures (CLDs): Floating rate debt instruments with interest based on the returns of an underlying commodity asset, often linked to precious metals.

      • Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS): Debt instruments issued against receivables and cash flows from financial assets like home loans or credit card receivables.

      • REITs/InvITs: Investment vehicles pooling money to invest in revenue-generating real estate or infrastructure projects, offering favorable tax treatment and requiring distribution of surplus cash flow to unit holders.

    • 2.2.8 Commodities: Basic, homogenous materials traded for production or consumption, including precious metals, commodity ETFs, managed futures contracts, and warehouse receipts.

      • Precious metals: Such as gold and silver are investments that can help preserve real value of money.

      • Commodity ETFs: A fund that invests pooled investment in a range of phyiscal commodities.

      • Managed futures contract: A portfolio of futures contract that are actively managed by professionals.

      • Warehouse receipts: A document that shows ownership of goods stored in a warehouse.

  • 2.3 Structure of Securities Market

    • The securities market facilitates the issuance, purchase, and transfer of securities.

    • It has two interdependent segments: primary and secondary markets.

    • The primary market is where issuers raise capital, and securities are issued.

    • The secondary market facilitates trades in already-issued securities, providing liquidity.

    • Public issues are offered to the general public.

    • An Initial Public Offer (IPO) is the first sale of shares to the public; Follow on Public Offer (FPO) is when a company issues securities to public after IPO.

    • Qualified Institutional Placements (QIPs) are private placements made to Qualified Institutional Buyers (QIBs).

    • Preferential Issue-Preferential issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis.

    • Rights and Bonus Issues are securities issued to existing shareholders, enabling them to buy more securities at a specific price (rights) or without consideration (bonus).

    • Onshore and Offshore Offerings - Issuers can either issue the securities in the domestic market and raise capital or approach investors outside the country

    • Offert for Sale (OFS)- An offer where the shares offered in an IPO or FPO are not fresh shares issued by the company, but an offer by existing shareholders to sell shares that have already been allotted to them

    • Sweat Equity and Employee Stock Option Scheme (ESOPs are instruments given by a company to its employees that give them an option to buy the shares of the company at pre-determined price after a period of time.

    • The secondary market includes Over-The-Counter (OTC) and Exchange Traded Markets.

    • The Exchange Traded Markets are trading and settlement id done through the stock exchange where the clearing corporation guarantees the settlement.

    • Trades are settled through clearing corporations, which act as counterparties and guarantee trades.

    • Risk Management - In exchange traded world, the clearing corporation gives settlement guarantee of trades through margins.

  • 2.4 Various Market Participants and Their Activities

    • Market participants include buyers, sellers, and intermediaries.

    • Intermediaries include stock exchanges, depositories, depository participants, trading members, authorized persons, custodians, clearing corporations, merchant bankers, and underwriters.

    • Institutional participants include Foreign Portfolio Investors (FPIs), Mutual Funds, Insurance Companies, Pension Funds, Venture Capital Funds, Private Equity Firms, Hedge Funds, Alternative Investment Funds, Investment Advisers, Employee Provident Fund (EPF), National Pension Scheme (NPS), Family Offices and Corporate Treasuries.

    • Retail participants include individual investors and High Net-worth Individuals (HNIs).

    • Proxy advisory services advise investors on voting rights and recommendations.

  • 2.5 Kinds of Transactions

    • Transactions vary from immediate settlement (cash trades) to distant settlement (forward transactions).

    • Cash trades are settled on the same day; Tom trades are settled the next day; Spot trades are settled two days after the trade date.

    • Forward contracts are agreements to buy or sell an asset at a future date at a pre-determined price.

    • Futures are standardized, exchange-traded forward contracts with specifications for market lots, quality, and delivery terms.

    • Options give the right, but not the obligation, to buy (call) or sell (put) an asset at a stated price on or before a stated date.

    • Swaps are contracts to exchange cash flows based on a pre-arranged formula.

    • Trading involves buying/selling assets for short-term gains; hedging offsets potential losses; arbitrage profits from price discrepancies; pledging shares secures loans.

  • 2.6 Dematerialization and Rematerialization of securities

    • Dematerialization converts physical securities into electronic form.

    • Rematerialization converts electronic securities back into physical form.

CHAPTER 3: TERMINOLOGY IN EQUITY AND DEBT MARKETS

  • 3.1 Terminology in Equity Market

    • 3.1.1 Face Value (FV): The nominal price of a share.

      • Used to calculate equity capital and dividend payable, remains constant unless a stock split

      • FV is important in calculating dividend; dividend is calculated as a % of face value.

    • 3.1.2 Book Value: Net-worth of the company; net-worth of the company divided by the number of outstanding stock.

      • Good way of understanding how well placed is the investment.

    • 3.1.3 Market Value: Market price of a share, market cap = market price x shares outstanding

    • 3.1.4 Replacement Value: Market value of all companys assets at a point of time.

    • 3.1.5 Intrinsic Value: Present Value of expected free cash flows from the asset.

      • Estimating the intrinsic value at which to trade and invest in an equity may be considered a science as well as a art.

    • 3.1.6 Market Capitalization (Market Cap): Amount to buy entire company at current market price = Market price per share multiplied by number of outstanding stock.

    • 3.1.7 Enterprise Value: Overall value of the business.

      • EV = Value of CS + Value of Non-controlling interest +Value of Preferred Capital + Value of Debt - Cash

    • 3.1.8 Earnings – Historical, Trailing and Forward are the profits of a business.

      • Earnings and be defined at different levels (Net Profit, EBIN, EBITDA)

    • 3.1.9 Earnings Per Share (EPS): company Profits earned divided by number of outstanding shares.

      • Indicates amount of profit the company has earned for every share it issued.

      • EPS = Net Profit/ Number of Shares outstanding

    • 3.1.10 Dividend Per Share (DPS): Portion of profit which the company distributes amongst it's equity holders.

    • 3.1.11 Price to Earnings Ratio (PE Ratio): Measures market price willing to pay for earnings of a company.

      • PE Ratio = Market price per share/Earnings per share

    • 3.1.12 Price-to-Sales Ratio (P/S) Used to find if the price is over/under valued; measures price investors are willing to pay for each rupee.

      • P/S Ratio = Current Market Price (CMP) / Annual Net Sales per Share

      • P/S Ratio = Market capitalization / Annual Net Sales

    • 3.1.13 Price-to-Book Value Ratio (P/BV) Widely used to find price to the value, shows compnay's price compared to it's book value

      • The P/BV measures a company's current market price (CMP) vis a vis its book value.

      • Book value is calculated by dividing net-worth by the number of outstanding shares

    • 3.1.14 Differential Voting Rights (DVR): Less than 1 voting right unlike shares of common stock.

  • 3.2 Terminology in Debt Market

    • Debt capital is provided by lenders expecting regular interest at a fixed rate and repayment of principal after an agreed period.

    • Debt instruments include secured and unsecured loans, with public issues listed on stock exchanges for secondary market trading.

    • Face Value: the amount of borrowing represented by the debt instrument.

    • Coupon Rate: Interest paid on the bond, as a percentage of its face value.

    • Maturity: The tenure of the loan; the date the bond is redeemed.

    • Principal: The amount of borrowing repaid on maturity.

    • Redemption of a Bond: When a bond matures, the borrow pays back the principal to the investor.

    • Holding Period Returns (HPR): The return earned on an investment during a specific period when the bond was bought and held by the investor.

    • Current Yield: Coupon divided with current market price of bond the result expressed as %.

    • Yield to Maturity (YTM): A more comprehensive way of calculating return; present value equated to market price of rate which equates the PV.

    • Duration: Measure of bond value sensitivity; weghted average maturity with the present value of future CF used as weight.

  • 3.3Types of Bonds

    • Based on the features/specifications (Principal, Maturity and Coupon rate).

    • Zero-Coupon Bond: Bonds without coupon, issue at a discount, treasury bills, commercial papers

    • Floating–Rate Bonds: Continuous constant Adj. with coupon rates, and carries lower interest rates

    • Convertible Bonds: Option for investors to convert the amount invested into equity in the future.

    • Principal – Protected Note (PPN): Aims at providing protection of the principle amount invested by investors.

    • Inflation – Protected Securities: Offers preotection from deflation by increasing the rates and cuopons.

    • Foreign currency bonds: Bonds issued by a company in a currency that is different from the currency of its home country.

    • External bonds: Also referred to as Euro bonds, are bonds issues 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.

CHAPTER 4: FUNDAMENTALS OF RESEARCH

  • 4.1 What is Investing?

    • Investing involves committing money to earn returns over time via analysis of safety/risk, income, and growth; it is distinct from short-term trading.

    • Active vs. Passive Investing

      • Active Investing involves identifying securities that should be bought or sold by constantly evaluating securities so as to maximize profits.

      • Passive Investing is mainly investing in all the stocks of a index such as S&P 500 or Nifty 50.

  • 4.2 The role of research in investment activity

    • Fundamental research involves both research (obtaining data) and analysis (evaluating data) to arrive at investment decisions.

    • Economic analysis focuses on understanding macro-economic factors.

    • Industry analysis involves assessing the regulatory environment, business models and industry dynamics.

    • Company analysis examines qualitative (business strengths, management) and quantitative (financial statements) aspects.

    • Insider information vs Mosaic analysis.

      • Insider information would have direct impact immediately on investor decisions; mosaic would not.

  • 4.3 Technical Analysis

    • Forecasting the direction of prices through the study of patterns in historical market data; integrating price, volume, and trend indicators.

    • Technical focuses on Identifying support and resistance levels, which represent points at which there is a lot of buying and selling interest respectively

      • Trend in share price not a strong indication to base decisions on.

  • 4.4 Fundamental Analysis

    • It is focused on long term investing of equity based on the rewards generated by the capital.

    • Based on the premise that equity shares reflect part ownership of a company (Fair Price Equity)

    • Requires deeper study of many aspects (economic, industry, and company)

  • 4.5 Quantitative Research

    • Applying pure econometric approach in fundamental analysis suffers from some major limitations.

    • Researchers focus on finance and operational metrics of the company to draw conclusions.

  • 4.6 Behavioral Approach to Equity Investing

    • Based on analysis of available information so that they reflect the expected performance and risks associated with the investment, instead of being influenced by opinions and outside news.

CHAPTER 5: ECONOMIC ANALYSIS

  • 5.1 Basic Principles of Microeconomics

    • Microeconomics studies individual behavior regarding consumption based on prices.

  • 5.2 Basic Principles of Macroeconomics

    • Macroeconomics studies

My apologies, chapter 5 appears to be truncated. Macroeconomics studies the behavior of the economy as a whole. More details will be needed to provide