Fundamental analysis Technical analysis FUNDAMENTAL ANALYSIS Fundamental analysis FA is a method of measuring a securitys intrinsic value by examining related economic and financial factors ID: 1029702
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1. UNIT IIINVESTMENT ANALYSIS & STRATEGIESFundamental analysisTechnical analysis
2. FUNDAMENTAL ANALYSIS Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining related economic and financial factors .INTRINSIC VALUE : it Represents all the future returns generated at their discounted value. If it is more than the market value, it is worth buying.Fundamental analysis is analyzed under 3 categories :Analysis of the Economy Industry analysisAnalysis of the company
3. Analysis of the economythe important factors considered:Government policyArrival of monsoonBusiness confidence and industrial activityInvestment climate and financial sector reformsPresence of foreign institutional investors
4. industry analysisAn industry analysis consists of three major elements: The underlying forces at work in the industryThe overall attractiveness of the industry The critical factors that determine a company's success within the industry.
5. Company analysisQuality of ManagementFinancial StrengthTransparency in Accounting policiesProduction policiesMarketing Excellence
6. Benefits of fundamental analysisMeasurement of Intrinsic valueIntuitive AppealAvoiding Herd MentalityTiming of Purchase and SaleTotal Picture of BusinessUsing Real Time InformationQualitative ApproachMore AcceptabilityLong-Term InvestmentValue Investment
7. Technical analysis It is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing mathematical and statistical trends gathered from trading activity, such as price movement and volume.ASSUMPTIONS OF TECHNICAL ANALYSIS:‘The Market Discounts Everything’‘Price Moves in Trends’‘History Tends to Repeat Itself’‘Art Over Science’Momentum Reverses
8. BASIS FOR COMPARISONFUNDAMENTAL ANALYSISTECHNICAL ANALYSISMeaningFundamental Analysis is the practice of analyzing an asset to determine its intrinsic value of the stock.Technical analysis is a method of determining the stock’s future price using charts to identify the patterns and trends.Relevant forLong term investmentsShort term investmentsFunctionInvestingTradingObjectiveTo identify the intrinsic value of the stock.To identify the right time to enter or exit the market.Decision makingDecisions are based on the information available and statistics evaluated.Decisions are based on market trends and prices of stock.Focuses onBoth Past and Present data.Past data only.Form of dataEconomic reports, news events, and industry statistics.Chart AnalysisFuture pricesPredicted on the basis of past and present performance and profitability of the company.Predicted on the basis of charts and indicators.Type of traderLong-term position trader.Swing trader and short-term day trader.
9. TOOLS OF TECHNICAL ANALYSISDOW THEORYCHARTSBREADTH OF THE MARKETRELATIVE STRENGTH OF THE MARKETMOVING AVERAGE ANALYSISTRADING VOLUMESCANDLE STICK MODELELLIOT’S WAVE THEORY
10. A ) DOW THEORY – This theory was formulated by Charles henry dow who was the editor of wall street journal in u.s.a. he formulated a hypothesis that movement in the stock market will not be on a random basis , but will be influenced by the three distinct cyclical trends which guide its directions. These movements occur simultaneouslyThe three movements are : Primary movement : The long period movements that carry the entire market up and down. They last for several years. Secondary movement : These occur in the opposite direction to primary movements and will restrain the movement and last only for a short while. They are also knowns as corrections. Minor movements: The tertiary movements in the market are minor movements which are day to day fluctuations occurring in the market. Since they are for very short duration they don’t have any significance in the analysis.
11. The six tenets of dow theory The Three MovementsThree Phases of market Trends Factoring All the NewsSynchronised Averages of Related VariablesVolumes should confirm TrendsTrends Continue.
12. b) Charts : they are created on graph sheets or diagrams. These are two dimensional representation of the price movement. The ‘x ‘axis represents the time and the ‘y’ axis represents the stock prices. A LINE CHART: In Line charts the prices are plotted as points and an attempt to visualize the flow of points from one end to another will give us an idea about the trend in the market. A BAR CHART: In Bar chart the price for each period is made to stand like bars. The height of the bars are proportional to the price increase . By comparing the heights of the bars, we can measure the trends.A POINT AND FIGURE CHART: In this charts for every increase, vertical columns of X and O are plotted. The X represents increase in prices and O represents the decline in prices. X axis indicates the date and Y axis indicates the value of stock prices. The height of these crosses gives the idea of the trend.
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14. C) BREADTH OF THE MARKET: It is based on stock market cycles. The bull or bear phase may continue for a long period of time. The manner in which the continuous rise or continuous fall takes place indicates uniformity in behaviour. Advance –decline ratio is used as a tool for measuring this.. The overall breadth of the market is gauged by the investors through the main indices like Sensex or Nifty.D) RELATIVE STRENGTH ANALYSIS : It computes the momentum as a percentage of higher closes to lower closes. These are measured in a scale of 100 .An index of 60 to 40 indicates overbought market and 40 to 60 indicates oversold market.E) MOVING AVERAGE ANALYSIS : This analysis is useful in determining the risk profile of a share in comparison with the index. The moving average of shares and index are plotted on a graph. The trends shown by these two moving averages can help in understanding the risk profile of the share in comparison with the index.F) TRADING VOLUMES : The trading volume is considered to know the extent of participation by the volume of the investors and traders. If the price movement is accompanied by corresponding volumes, then the movement may develop into a trend. Otherwise it is an isolated incident.
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16. Blue chips : definition – according to new York stock exchange ,a blue chip is “ stock in a corporation with a national reputation for quality , reliability and the ability to operate profitably in good times and bad”.PICKING UP BLUE-CHIPS :HIGH MARKET CAPITALISATIONDYNAMIC MANAGEMENTVALUE CREATION FOR SHARE – HOLDERSFAVOURITE OF INSTITUTIONSHIGH LEVEL OF NETWORTHHEALTHY ACCOUNTING PRACTICESCORPORATE GOVERNANCEEXPANSION AND FUTURE GROWTHCORPORATE ACTIONLOW IMPACT COST