Invt Chapter 4 ppt.pptx best presentation
- 2. Concept of Security Analysis • Security analysis: refers to the analysis of trading securities. • It analyses the share price returns and the risk involved in the investment. • The security analysis will help in understanding the behavior of security prices, market and decision making for investment. • The entire process of estimating return and risk of a security is known as security analysis. 2
- 3. • Generally, the investors are interested primarily in selling a security for more than they pay for it. • There is no return without risk. • The process of estimating return and risk for individual securities is known as ‘’security analysis’’. • Security analysis is the essence of valuation of financial instruments. • The value of financial asset depends upon their return and risk. 3
- 4. Objectives of security analysis: • To estimate the risk and return related to a particular security. • To find out the intrinsic value of the security with a view to make a buy/sell decision • To identify the undervalued securities to buy or over value securities to sell. 4
- 5. • To analyze the stock market trends to understand the stock market pattern and behavior. • To forecast the future earnings and dividends along with the price of the securities. • To find out the key determinants of the intrinsic value. • To analyze and point out the position of economy industry and the company with a view to select the possible company for investment. 5
- 6. Approaches to Security Analysis: • The security analysis aimed at identifying under securities to buy and overvalued securities to sell. • It involves the entire process of estimating return and risk for an individual security. • The approaches for security analysis are broadly grouped into the following categories. –Fundamental analysis and –Technical analysis 6
- 7. 1. Fundamental Analysis: • It is a time honored value based approach depending upon a careful assessment of the fundamental of an economy, industry and the company. • The fundamental analysis studies the general economic situation makes an evaluation of an industry and finally does an in-depth analysis of both financial and the non- financials of the company of choice. 7
- 8. The fundamental analysis involves the analysis of the following: a)The Economic Analysis b)The Industry Analysis c) The Company Analysis • Analysts and investors use two alternative approaches for fundamental analysis: –“Top-down” forecasting approach: From economy, then for industries, and finally for companies –“Bottom-up” forecasting approach: From companies, then made analysis and forecasts for industries and for the economy. 8
- 9. 2. The Economic Analysis: • In the economic analysis the investor has to analyze the economic factor to forecast of the economy in order to identify the growth of the economy and its trend. • It describes the macroeconomic situation in the particular country and its potential influence on the profitability of stocks. 9
- 10. The contents of Macroeconomic analysis: • The behavior of economics in the context of economic cycle (at what point of this cycle is the economy now: –growth stage? peak? decline stage? recession stage?); • Fiscal policy of the government (financial stability, budget deficit, public debt, etc.) • Monetary policy (the stability of national currency against other foreign currencies; the ability of authorities (Central Bank) to use the money market instruments on time, etc.) 10
- 11. • The other economic factors: –Inflation/deflation; –The level of unemployment; –The level of consumption; –Investments into businesses; –Foreign trade and the exchange rate of the foreign currency against national currency (devaluation? revaluation?) 11
- 12. • Techniques Used For Economic Analysis 1. Anticipatory Surveys: They help investors to form an opinion about the future state of the economy. 2. Barometer/Indicator Approach: Various indicators are used to find out how the economy shall perform in the future. 3. Economic Model Building Approach: In this approach, a precise and clear relationship between dependent and independent variables is determined. 12
- 13. B) Industry Analysis: • The object of the industry analysis is to assess the prospects of various industrial groupings. • The industry analysis helps to identify the industries with a potential for future growth and to select companies from such industry to invest in its securities. • The industry analysis involves industry life cycle analysis, investment implication, structure and characteristics of an industry. 13
- 14. The contents of Industry analysis should answer the following questions: What is the nature of the industry? Is it monopolistic or competitive? What is the level of regulation and administration inside this industry? What is the situation with the self-organization of the human resources in this industry? How important and how complex is the technology for this industry? What are the key factors which influence this industry? What conditions in production and financial activity are important in this industry? What is the stage of the industry’s development cycle? (Introductory? Growth? Maturity? Decline?) 14
- 15. Factors Affecting Industry Analysis: (a) Product Life-Cycle (b) Demand Supply Gap; (c) Barriers to Entry; (d) Government Attitude; (e) State of Competition in the Industry; (f) Cost Conditions and Profitability and (g) Technology and Research. 15
- 16. Techniques Used For Industry Analysis –Regression Analysis: Investor diagnoses the factors determining the demand for output of the industry through product demand analysis. –Input – Output Analysis: It reflects the flow of goods and services through the economy, intermediate steps in production process as goods proceed from raw material stage through final consumption. 16
- 17. C) The Company Analysis: • Company analysis is the last leg in the economy, industry and company analysis sequence. • The company analysis is a study of variable that influence the future of a firm both qualitatively and quantitatively. • The purpose of company analysis is to know the intrinsic value of a share of a company. • The bases for the company analysis are the publicly disclosed and audited financial statements of the company: 17
- 18. Techniques Used in Company Analysis – Ratio analysis is useful when converting raw financial statement information into a form that makes easy to compare firms of different sizes. The analysis includes the examination of the main financial ratios: – Correlation & Regression Analysis: Simple regression is used when inter relationship covers two variables. For more than two variables, multiple regression analysis is followed. – Trend Analysis: The relationship of one variable is tested over time using regression analysis. It gives an insight to the historical behavior of the variable. 18
- 19. II: The Technical Analysis: • As an approach to investment analysis, technical analysis is radically different from fundamental analysis. • The technical analysis is frequently used as a supplement to fundamental analysis; it is concerned with a critical study of the daily or weekly price volume data of index comprising several shares. • It helps the investors to buy cheap and sell high, regardless of the type of company the investor choose. • The technical analysis complies a study of the market itself and not of the various external factors which affect the market. 19
- 20. • See the following scenario: – In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. – By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store. 20
- 21. Differences in between technical and Fundamental analysis 1. Charts vs. Financial Statements. – A technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. – Technicians believe that all the information they need about a stock can be found in its charts. 21
- 22. 2. Time Horizon –Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. –While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. 22
- 23. 3. Trading Versus Investing – Technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. – Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. 23