Traditional Methods Of

Security Analysis

Group No. 3

Shyamala Devi Shreya PathakAseem KumarBhartendu GautamP. Brijesha Avunoori Satish

Group Members

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.

 

Introduction – Fundamental Analysis

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

Introduction Contd..

Earnings Per Share

The portion of a company's profit allocated to each outstanding share

Drawback

Tools used in Fundamental Analysis

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

Dividend Discount model

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 

Constant Growth Model 

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

Economic Analysis

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.

Industry Analysis:

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

Drawbacks Of Fundamental Analysis:

Comparison Between Fundamental And Technical Analysis

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

Comparison between Fundamental and Technical Analysis

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