Security Analysis
Ramya Pattabiraman
What is an investment ?
Definition by
• Economists
• Financial Experts
Investment is putting money into something with the expectation
that it will generate income or profit or its value will appreciate in
future.
What are securities ?
• Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
corporate.
• Derivative
• Units or any other such instrument issued to the investors under any mutual fund
scheme
• Government securities
• Rights or interests in securities
Basic Investment Objectives
Security
Liquidity
Yield
A best investment decision will be one,
which has the best possible compromise
between these three objectives
Investment vs. Speculation
Basis for Comparison Investment Speculation
Meaning The purchase of an asset with the Speculation is an act of conducting a
hope of getting returns is called risky financial transaction, in the hope
investment. of substantial profit.
Basis for decision Fundamental factors, i.e. performance Hearsay, technical charts and market
of the Company psychology
Time horizon Long term Short term
Risk involved Moderate High
Intent to profit Change in value Change in prices
Expected Rate of Return Modest High
Investment vs. Gambling
Basis for Comparison Investment Gambling
Planning Horizon Longer Short
Basis for decisions Scientific analysis of intrinsic Based on tips and rumours
value
Nature Planned activity Unplanned activity
Risk Commercial Risk Artificial Risk
Return expectation Risk-return trade-off determines Negative returns high possibility
return
Motive Safety of principal and stability Entertainment while earning
of returns
Security Analysis
Fundamental Analysis
• Analysis of the economy
• Industry Level Analysis
• Company Analysis
Analysis of the Economy
• Performance of a company is linked to overall economic development of the
country
• Demand for goods and services is directly related to growth of the economy
• Economic factors include – GDP growth rate, inflation, investment activity
• Capital market – bullish or bearish phase
Industry Level Analysis
• Composition of the industry vs the national economy
• Factors – technological changes, consumer preferences, availability of
substitutes
• Industry life cycle / Industry growth cycle
• Pioneering stage
• Expansion stage
• Stagnation stage
Company Analysis
• Financial Statements – primary source of data
• Fundamental Analysis tools include
• EPS
• P/E ratio
• PEG
• P/S ratio
• P/B ratio
• Dividend yield
• Dividend pay-out ratio
• Book value per share
• Return on equity
Company Analysis
• Technical Analysis involves forecasting the direction of prices through study
of past market data
• Price
• Volume
• Major assumption being, the chart patterns tend to repeat themselves and
this repetition can be used to forecast future price movements
Technical Analysis
• Dow Jones Theory – three cyclical trends
• Primary (1 to 3 yrs)
• Secondary (3 weeks to 3 months)
• Intermediate / minor trends (less than 3 weeks)
• Technical Analysis tools
• Charts
• Price indicators
Line Chart
Bar Chart
Candlestick Chart
Point and Figure Chart
Patterns created by Charts
• Support and resistance levels
• Heads and shoulders configuration (HST, IHST)
• Triangle / coil formation
• Double top / Double bottom
Technical Indicators
• Advance-Decline Ratio
• Market Breadth Index
• Moving Averages
Risk
Risk
Systematic Unsystematic
Interest rate Market Risk Inflation Business Risk Financial Risk
Return
• Current Return
• Capital Return
• Total Return = Current + Capital = Holding Period Return
Efficient Capital Market Hypothesis
