traditional methods of security analysis - fundamental analysis
TRANSCRIPT
Group No. 3
Shyamala Devi
Shreya Pathak
Aseem Kumar
Bhartendu Gautam
P. Brijesha
Avunoori Satish
What is Fundamental Analysis
Examination of future earning potential of the company.
Analysis of the economic well-being of a financial entity as opposed to only its price movements.
Analyses various factors that impact the performance of the company.
It considers economic, financial and other qualitative and quantitative factors.
Objective
Valuation of stock in comparison to its current price.
Decision to buy or sell the stock on the basis of its valuation in
the market.
Underpriced = buy
Overpriced = sell or short
Earnings Per Share
The portion of a company's profit allocated to each outstanding share
Drawback
Price Earning Ratio
A valuation ratio of a company's current share price compared
to its per-share earnings.
= Market Value Per Share
Earnings Per Share(EPS)
Drawback
Dividend Payout Ratio
measures the percentage of a company's net income that is
given to shareholders .
=Total Annual Dividends Per Share
Diluted Earnings Per Share
Present value of all future cash flows in the form of dividends
plus the present value of the sale price expected .
P= [D1/(1+r)] + [P1/ (1+r)]
Where,
P = Current price/ market price of the share today
D1 = Dividend expected at the end of one year
r = discount rate/ required rate of return
P1= market price/ expected price of share at the end of year 1
Presumes that dividend per share is growing at the constant
rate
P= D1/ r-g
Where,
D1 = dividend per share at the end of first year
r = Expected rate of return
g = Constant growth rate
It is important to analyse the economic activity in which all the companies operate.
For economic analysis we can see few economic indicators.
• Global Economy
• Domestic Economy
The top down analysis of company starts with global and domestic economy
Domestic Economy
1. GDP
2. EMPLOYMENT
3. INFLATION
4. INTEREST RATE
5. BUDGET DEFICIT
6. OTHER FACTORS:- Money supply, Fiscal policy, Monetary Policy,
Labour productivity, Stock Price, FII & FDI investment etc.
1. Introduction:
Second phase of fundamental analysis.
Industries selected in the previous stage are scanned individually.
A micro study of each industry is carried out.
Objective is to provide information about the best industry for investment-making.
Steps taken for industry analysis:
Study of industry life cycle
Study of qualitative and quantitative factor.
1. Study of industry life cycle:
Pioneering stage
Rapid growth stage
Maturity and Stabilization
Decline/Diversification
Steps taken for industry analysis:
2. Study of Qualitative and quantitative factors:
Qualitative factors
Quantitative factors
Steps taken for industry analysis contd..:
They rely on historical data
Poor predictors of how share price reacts to economic and
industry level changes
Provides poor estimates of expected returns
Do not offer measures of variability of returns
Do not reflect underlying risk reward relationship
FUNDAMENTAL ANALYSIS
TECHNICAL ANALYSIS
It starts with the study of
Financial Statements
Financial analyst attempts to
measure a company's
intrinsic value
Long term approach,
Historical data is taken
under consideration
Fundamental analysis is
used to make an investment
Technical analyst approaches a
security from the charts.
Technical traders believe there is
no reason to analyze a
company's fundamentals
because these are all accounted
for in the stock's price.
Short term data is considered for
analysis of stocks
Technical analysis is used for a
trade