VEDA DEGREE COLLEGE

CHAMPAPET, HYDERABAD

ANALYSIS OF INVESTMENT IN FINANCIAL ASSETS

(FINANCE ELECTIVE -1)
BBA SEMESTER – 5

PRESENTED BY,
B. PRATHIBA, M.COM, MBA
 UNIT – 1
INTRODUCTION

MEANING AND DEFINITION OF INVESTMENT:

Investment is the employment of funds with the aim of getting return on it. In general terms, investment
means the use of money in the hope of making more money. In finance, investment means the purchase
of a financial product or other item of value with an expectation of favorable future returns.
Investment refers to the concept of deferred consumption, which involves purchasing an asset,
giving a loan or keeping funds in a bank account with the aim of generating future returns. Various
investment options are available, offering differing risk-reward tradeoffs.
“ An investment is an asset or item acquired with the goal of generating income or
appreciation.”
OBJECTIVES OF INVESTMENT:
1. Safety: It refers to the surety of return or protection of principal amount without any loss. Safety
is an important feature of every investment tool that is analyzed before allocating any fund in it.
2. Income Stability: Income stability refers to the regularity of income without any fluctuations.
Every investor wants to invest in such assets which provide return consistently.
3. Liquidity: Liquidity refers to how quickly an investment can be sold or converted into cash. It
simply means easiness with which investment can be sold in the market without any loss. Most of
the investors want to invest in liquid assets.
4. Safety of Principal: Every investment is subject to fluctuations in its price which is caused due to
changing market conditions. An investment tool is termed as adequate if it ensures the safety of
the principal to investors.
5. Capital Appreciation: Capital appreciation is an important feature of every investment tool.
Every investment is expected to rise in its value over a period of time which is a key determinant
for making deploying funds in it. Investors should properly forecast which assets are expected to
appreciate in the future and make timely purchases of them.
6. Tax Benefits: While deciding an investment option, the burden of taxes on its income is an
important determinant analyzed by investors. He should choose such investment securities which
put less tax burden and maximize its return.
7. Marketability: Marketability refers to the ease with which the investment securities can be
purchased and sold or can be transferred in the market.
FEATURES OF INVESTMENT
Return: Investors buy or sell financial instruments in order to earn return on them. The return on
investment is the reward to the investors. The return includes both current income and capital gain or
losses, which arises by the increase or decrease of the security price.
Risk: Risk is the chance of loss due to variability of returns on an investment. In case of every
investment, there is a chance of loss. It may be loss of interest, dividend or principal amount of
investment.
Liquidity: Liquidity is also important factor to be considered while making an investment. Liquidity
refers to the ability of an investment to be converted into cash as and when required. The investor wants
his money back any time. Therefore, the investment should provide liquidity to the investor.
 Safety of principal: Safety of funds invested is one of the essential ingredients of a good investment
programme. Safety of principal signifies protection against any possible loss under the changing
conditions. Safety of principal can be achieved through a careful review of economic and industrial
trends before choosing the type of investment.
Capital growth: One of the important principles of investment is capital appreciation. A company
flourishes when the industry to which it belongs is sound. So, the investors, by recognizing the
connection between industry growth and capital appreciation should invest in growth stocks.
Stable income: Investors invest their funds in such assets that provide stable income. Regularity of
income is consistent with a good investment programme. The income should not only be stable but also
adequate as well.
FINANCIAL ASSETS
A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank
deposits, bonds, and participations in companies' share capital. Financial assets are usually
more liquid than tangible assets.
REAL ASSETS VS FINANCIAL ASSETS
Real assets can be defined as assets that are tangible or physical in nature such as property, plants and
equipment. Real assets help companies to generate revenue and are important because they have an
intrinsic value related to them. The intrinsic value depends on the substance and properties of the
assets.
The financial assets' monetary value can't be obtained unless it is converted to cash. Examples of
financial assets include shares, bonds, and debentures.
The following are the difference between real assets and financial assets:

SPECULATION
Speculators are sophisticated investors or traders who purchase assets for short periods of time
and employ strategies in order to profit from changes in its price. Speculators are important to
markets because they bring liquidity and assume market risk. Speculators are individuals (or
institutions) that practice short-term bets on assets with the expectation of generating a profit.
Safety: Safety is another feature that an investor desire .
TYPES OF SPECULATORS:
 Bullish speculator: A bull is an optimistic speculator. He buys shares with an expectation to sell
them at higher price in the future.
 Bearish speculator: A bear is a speculator who sells shares in anticipation of fall in prices. If the
price falls as expected, he buys the securities at lower prices and makes profit.
 INVESTMENT Vs SPECULATION

HEDGING
Hedging is the purchase of one asset with the intention of reducing the risk of loss from another asset. In
finance, hedging is a risk management technique that focuses on minimizing and eliminating the risk of
uncertainty. It aids in limiting losses that may occur as a result of unforeseeable variations in the price of
the investment.

TYPES OF HEDGING

 Forward contract: The forward contract is a non-standardized agreement to buy specified assets
at a determined price on a date agreed by two independent parties. The forward contract is drawn
for various types of assets like commodities, currencies, etc.
 Futures contract: The futures contract is a standardized agreement to buy specified assets at a
specified price on a date agreed by two independent parties. The futures contract is drawn for
various types of assets like commodities, currencies, etc.
 Money Markets: Money markets cover many types of financial activities of currencies, money
market operations for interest, calls on equities where short-term loans, borrowing, selling and
lending happen with a maturity of one year or more.
 Arbitrage
Arbitrage is the simultaneous purchase and sale of the same or similar asset in different markets in
order to profit from tiny differences in the asset’s listed price. It exploits short-lived variations in the
price of identical or similar financial instruments in different markets or in different forms.
 Par Value
Par value, also known as nominal or original value, is the face value of a bond or the value of a stock
certificate, as stated in the corporate charter.
Stock certificates issued for purchased shares show the par value. The par value of shares, or the stated
value per share, is the lowest legal price for which a company sells its shares.
Par value is required for a bond or a fixed-income instrument and shows its maturity value and the
dollar value of the coupon, or interest, payments due to the bondholder.
 Book Value
 Book value is equal to the cost of carrying an asset on a company’s balance sheet, and firms calculate
it by netting the asset against its accumulated depreciation.
Book value is the accounting value of the company’s assets less all claims senior to common equity
(such as the company’s liabilities). The term “book value” derives from the accounting practice of
recording asset value at the original historical cost in the books.
 Market Value

Market value is the price at which a product or service could be sold in a competitive, open market.
The term market value also refers to a company’s or an asset’s worth in the financial market. A
company’s market value is the price that investors are ready to pay for its shares.

 Intrinsic value

Intrinsic value is a way of describing the perceived or true value of an asset. This is not always identical
to the current market price because assets can be over- or undervalued. Intrinsic value is a common part
of fundamental analysis, which investors use to assess stocks, as well being used in options pricing.

INVESTMENT PROCESS

The investment process involves a series of activities leading to the purchase of securities or other
investment alternatives. The investment process can be divided into five stages or steps as mentioned
below:
1. Framing of Investment Policy
The government or the investor before proceeding into investment formulates the policy for the
systematic functioning. The essential ingredients of the policy are the investible funds, objectives and the
knowledge about the investment alternatives and markets.
 Investible Funds: The entire investment procedure revolves around the availability of
investment funds. The funds may be generated through savings or from borrowings, if the funds
are borrowed, the investor has to be extra careful.
 Objectives: The objectives are framed on the basis of the required rate of return, need for
regularity of income, risk perception and the need for liquidity.
 Knowledge: The knowledge about the investment alternatives and markets plays a key role in the
policy formulation. The investment alternatives range from security to real assets. The risk and
return associated with investment alternatives differ from each other.
2. Investment Analysis
The investor should be aware of the stock market structure and the functions of the brokers. The mode
of operation varies among BSE, NSE and OTCOEI. Brokerage charges are also different. The knowledge
about the stock exchanges enables him to trade the stock intelligently.
 Market Analysis: Market analysis is a detailed assessment of your business’s target market and the
competitive landscape within a specific industry. Market analysis includes quantitative data such as
the actual size of the market you want to serve, prices consumers are willing to pay, revenue
projections, and qualitative data such as consumers’ values, desires, and buying motives.
  Industry Analysis: Industry analysis helps an investor understand the market factors that tend to
impact the company in question. These factors can be the industry's demand-supply forces,
demographics, competitiveness, entry and exit costs, and so on.
 Company Analysis: The purpose of company analysis is to help the investors to make better
decisions. The company's earnings, profitability, operating efficiency, capital structure and
management have to be screened. These factors have direct bearing on the stock prices and the
return of the investors.
3. Valuation
The valuation helps the investors to determine the return and risk expected from an investment in the
common stock.
 Intrinsic Value: The intrinsic value of the share is measured through the book value of the share
and the price earnings ratio. Simple discounting models also can be adopted to value the shares.
The real worth of the share is compared with the market price and then the investment decisions
are made
 Future Value: The future value of the securities could be estimated by using a simple statistical
technique. Like trend analysis. The analysis of the historical behavior of the price enables the
investor to predict the future value.
4. Portfolio Construction
A portfolio is a combination of securities. The portfolio is constructed in such a manner to meet the
investor goals and objectives. The investor should decide how best to reach the goals with the securities
available. Towards this end he diversifies his portfolio and allocates funds among the securities.
 Diversification: Portfolio diversification is the process of investing your money in different
asset classes and securities in order to minimize the overall risk of the portfolio. There are
several ways to diversify the portfolio.
 Debt and Equity Diversification: Debt instruments provide assured return with limited capital
appreciation. Common stocks provide income and capital gain but with the flavor of uncertainty.
Both debt instruments and equity are combined to complement each other.
 Industry Diversification: Industries growth and their reaction to government policies differ
from other. Banking industry share may provide regular return but with limited capital
appreciation. The information technology stock yields high return and capital appreciation but
their growth potential after year 2002 is not predictable. Thus, industry diversification is needed
and it reduces risk.
 Company Diversification: Securities from different companies are purchased to reduce risk.
Technical analysis suggests the investors to buy securities based on the price movement.
Fundamental analysts suggest the selection of financially sound and investor friendly companies.
 Selection: Based on the diversification level, industries and company analyze the securities have
to be selected. Funds are allocated for the selected securities.
5. Portfolio Evaluation
The portfolio has to be managed efficiently. The efficient management calls for evaluation of the
portfolio. The process consists of portfolio appraisal and revision.
  Appraisal: The return and risk performance of the security vary from time to time. The variability
returns of the securities is measured and compared. The developments in economy, industry,
relevant companies from which the stocks are bought have to appraise. The appraisal warns loss
and steps can be taken to avoid such losses.
 Revision: Revision depends on the results of the appraisal. The low yielding securities with are
replaced with high yielding securities with low risk factor.

INVESTMENT INFORMATION

SOURCES OF INVESTMENT INFORMATION

There are various factors that influence the investors while making investment decisions. There are two
main types of investments those are "Real investments" and "Financial investments". Decisions of
investment made by investors are based on various factors. One of the important factors to be
considered before making any investment decision is the source of information relating to the
investment.

NEED FOR INVESTMENT INFORMATION: Investors require timely and accurate information for
making investment decisions. This is because if the investor does not get the right information at right
time regarding the right asset there are chances that he may not make the right investment decisions. To
make the right investment decision investors should be aware of the right sources of information
available in the market.
The types of Investment information, which are relevant for our purposes are of the
following categories:
(i) World Affairs: International factors, which influence domestic income, output and employment
and for investment in the domestic market by F.F.I.s, O.C.B.s, etc. Also foreign political affairs, wars,
and the state of foreign markets affect our markets.

(ii) Domestic Economic and Political Factors: Gross domestic products, agricultural output,
monsoon, money supply, inflation, Govt. policies, taxation, etc., affect our markets.

(iii) Industry Information: Market demand, installed capacity, competing units, capacity
utilization, market share of the major units, market leaders, prospects of the industry, international
demand for exports, inputs and capital goods abroad, import competing products, labor problems
and Govt. policy towards the industry are all relevant factors to be considered in investment
decision-making.

(iv) Company Information: Corporate data, annual reports, Stock Exchange publications, Dept. of
company affairs and their circulars, press releases on corporate affairs by Govt., industry chambers
or associations of industries etc. are also relevant for security price analysis.

(v) Security Market Information: The Credit rating of companies, data on market trends, security
market analysis and market reports, equity research reports, trade and settlement data, listing of
companies and delisting, record dates and book closures etc., BETA factors, etc. are the needed
information for investment management.

(vi) Security Price Quotations: Price indices, price and volume data, breadth, daily volatility, range
and rate of changes of these variables are also needed for technical analysis.

(vii) Data on Related Markets: Such as Govt., securities, money market, forex market etc. are
useful for deciding on alternative avenues of investment.

(viii) Data on Mutual Funds: Their schemes and their performance, N A V and repurchase prices
etc. are needed as they are also investment avenues.

(ix) Data on Primary Markets/New Issues, etc.

FACTORS TO BE CONSIDERED FOR INVESTMENT DECISIONS

Investing is the act of assigning resources, usually money, into assets with the hope of earning
profits. Types of investments range from savings accounts and fixed-term deposits to property and
shares on the stock market. People choose investments according to their personal needs, goals and
interests. There are factors which need to be considered before making investment decisions.

1. Return on Investment (ROI): Return on investment is the benefit that the investor gains after
deducting the cost of the investment.
o It can be in the form of interest, dividends or capital appreciation (an increase in the value
of assets).
o The return on investment should be expressed as the net after-tax income.
o The net after-tax return should be higher than the inflation rate.
o There is usually a direct link between risk and return on investment.

2. Risk: In finance, risk refers to the possibility of losing money due to unforeseen circumstances.
 The higher the potential return, the higher the potential risk of losing money.
  For example, investing in shares has a higher risk than investing in a fixed deposit, but it also
promises higher returns.

3. Investment Period / Investment Term: Investment period is the duration (length of time) of the
investment, which can influence the return on investment.
 The investment can be short, medium or long term.
 Long-term investments must be held for more than a year, while short-term investments are
held for one year or less.
 Long-term investments generally yield higher returns than short-term investments.

4. Liquidity: Cash is considered a liquid asset because it can be easily accessed and used to buy
almost anything. Liquidity, therefore, refers to how quickly and easily an investment can be
converted to cash.
 In case of emergencies, there should be an amount of capital allocated to an investment that
can be easily converted to cash.
 A savings account is more liquid than property because it is easier to convert to cash, while
property takes time to sell.
 Many shares on the stock market are considered fairly liquid because they can be easily sold to
other traders in the market.

5. Taxation / Tax Implications: Tax is a compulsory fee that citizens must pay to the government.
 Different investments have different tax rates.
 The investor must consider income tax implications in order to secure a high net after-tax
return.

6. Inflation Rate: Inflation is the continuous rise in the prices of general goods and services, which
leads to a decrease in the value of money. When the inflation rate rises, the purchasing power of
consumers decreases.
 A good investment should have a return on investment that is higher than the inflation rate.
 Some investments such as property and shares are positively impacted by inflation. Their
value can increase as inflation rises.

7. Volatility / Fluctuations on Investment Markets: Volatility is a rise and fall of market prices. If
a market goes through frequent swings or fluctuations, it is seen as highly volatile. Low volatility
means that the investment, market or economy is stable.
 Before making an investment, the investor should consider the fluctuations in national and
international economic trends.
 The level of volatility will have an impact on the amount of returns that the investment yields.
 Market volatility is usually associated with investment risk.
8. Investment Planning Factors: When planning investments, you should consider the safest
possible investment opportunities. Although some investments offer low returns, they can be
safer than those that offer higher gains.
 To minimize risk, you should divide investments between the different investment options.
 The method of calculating interest should also be considered.
 Market volatility is usually associated with investment risk.

9. Budget: The investor’s budget is the amount of capital that the investor has.
 Investors must budget for unexpected costs.
  The budget should provide for emergencies, savings and investments.
 Investors can decide how much of their surplus money can go to investments.

CONCEPT OF RISK
What Is Risk?
Although it is often used in different contexts, risk is the possibility that an outcome will not be as
expected, specifically in reference to returns on investment in finance.
IN an investor context, risk is the amount of uncertainty an investor is willing to accept in regard
to the future returns they expect from their investment.

Definition: “Risk implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an
investment.”

TYPRS OF RISK

A. Systematic Risk
Systematic risk is due to the influence of external factors on an organization. Such factors are
normally uncontrollable from an organization's point of view.

It is a macro in nature as it affects a large number of organizations

operating under a similar stream or same domain. It cannot be planned by the organization.
1. Interest rate risk: Interest-rate risk arises due to variability in the interest rates from time to
time. It particularly affects debt securities as they carry the fixed rate of interest. The types of
interest-rate risk are depicted and listed below.

 Price risk arises due to the possibility that the price of the shares, commodity, investment, etc. may decline
or fall in the future.
 Reinvestment rate risk results from fact that the interest or dividend earned from an investment can't be
reinvested with the same rate of return as it was acquiring earlier.

2. Market risk: Market risk is associated with consistent fluctuations seen in the trading price of
any particular shares or securities. That is, it arises due to rise or fall in the trading price of listed
shares or securities in the stock market.

3. Purchasing power or inflationary risk: Purchasing power risk is also known as inflation risk. It
is so, since it emanates (originates) from the fact that it affects a purchasing power adversely. It is
not desirable to invest in securities during an inflationary period.

The types of power or inflationary risk are depicted and listed below.

 Demand inflation risk arises due to increase in price, which result from an excess of demand over supply. It
occurs when supply fails to cope with the demand and hence cannot expand anymore.
 Cost inflation risk arises due to sustained increase in the prices of goods and services. It is actually caused
by higher production cost.

B. Unsystematic Risk

Unsystematic risk is due to the influence of internal factors prevailing within an organization. Such
factors are normally controllable from an organization's point of view.
It is a micro in nature as it affects only a particular organization. It can be planned, so that
necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.
 1. Business or liquidity risk: Business risk is also known as liquidity risk. It is so, since it
emanates (originates) from the sale and purchase of securities affected by business cycles,
technological changes, etc.
The types of business or liquidity risk are depicted and listed below.
 Asset liquidity risk is due to losses arising from an inability to sell or pledge assets. For e.g.
assets sold at a lesser value than their book value.
 Funding liquidity risk exists for not having an access to the sufficient-funds to make a
payment on time. For e.g. when commitments made to customers are not fulfilled on time.
2. Financial or credit risk: Financial risk is also known as credit risk. It arises due to change in the
capital structure of the organization.
3. Operational risk: Operational risks are the business process risks failing due to human errors. This
risk will change from industry to industry. It occurs due to breakdowns in the internal procedures,
people, policies and systems.

MEASUREMENT OF RISK

Risk management involves identifying and analyzing risk in an investment and deciding whether or not
to accept that risk given the expected returns for the investment.
Assessing risk is essential for determining how worthwhile a specific project
or investment is and the best process to mitigate those risks. Risk analysis provides different approaches
that can be used to assess the risk and reward tradeoff of a potential investment opportunity.

MEATHODS OF MEASURING RISK

1.Range Analysis: One of the earliest methods used to measure risk is the simple range analysis. This
means that the range of possible outcomes related to an asset is considered. The highest point and the
lowest point of the range are noted down and subtracted. The end result is the width of the range.
2. Standard deviation: The most frequently used measurement of investment risk is standard
deviation. Standard deviation is a statistical measure of the degree to which an individual value in a
probability distribution tends to vary from the mean of the distribution.
A high standard deviation means that the asset has a wide range of possible outcomes, which implies
more uncertainty and risk. A low standard deviation means that the asset has a narrow range of possible
outcomes, which implies more stability and predictability. Standard deviation is often used to calculate
the risk premium, which is the extra return that investors demand for holding a risky asset over a risk-
free asset.

 Standard Deviation Formula

The standard deviation formula that is used for the calculation of the standard deviation of a mutual
fund as well is:

Expected return = E [ P X R]
Where:

 Ri- The return observed in a specific time frame (say one year or three years)

 R avg- The average returns observed over this time frame

 N- The number or the sample size

3.The coefficient of variation (COV): COV is the ratio of the standard deviation of a data set to the
expected mean. Investors use it to determine whether the expected return of the investment is worth the
degree of volatility, or the downside risk, that it may experience over time.

 The formula for the coefficient of variation is:

Coefficient of Variation = (Standard Deviation / Mean) * 100.

1. Calculate the expected rate of return from the following information relating to B Ltd.

State of the Economy Probability of Occurrence Rate of Return

Boom 0.30 40%
Normal 0.50 30%
Recession 0.2. 20%

2. An investor would like to find the expected return on the share of Golden Ltd. The following data
have been available: Calculate the expected return from the share.
State of the Economy Probability of Occurrence Rate of Return(%)
Boom 0.30 30
Normal 0.50 18
 Recession 0.2. 10

3. Illustration 3 Given below are the likely returns in case of shares of VCC Ltd. and LCC Ltd. in the
various economic conditions. Both the shares are presently quoted at 100 per share.
Economic Conditions Probability Returns of VCC Ltd. Returns of LCC Ltd
High Growth 0.3 100 150
Low Growth 0.4 110 130
Stagnation 0.2 120 90
Recession 0.1 140 160
Which of the two companies are risky investments?
4. The rate of return of stocks of A and B under different states of economy are presented below
along with the probability of the occurrence of each state of the economy.
Boom Normal Recession
Probability of Occurrence 0.3 0.4 0.3
Rate of Return on stock A (%) 20 30 50
Rate of Return on stock B (%) 50 30 20
(a) Calculate the expected rate of return and standard deviation of return for stocks A and for stocks
B.
(b) If you could invest in either stocks A or stocks B, but not in both, which stock would you prefer
and why?
5. Shankar has been considering investment in stock X or Y. He has estimated the following
distribution of returns of stock X and Stock Y. calculate expected return and standard deviation.
Return on stock X Return on stock Y Probability

-10 05 10
0 10 25
10 15 40
20 20 20
30 25 05
5. Mr. Sumit invested in equity shares of Wipro ltd, its anticipated returns and associated
probabilities are given below:
Return (%): -15 -10 5 10 15 20 30
Probability: 0.05 0.10 0.15 0.25 0.30 0.10 0.05
You are required to calculate expected return and risk in terms of standard deviation.

6. The probabilities and associated returns of modern foods ltd are given below:

Return (%): 12 15 18 20 24 26 30
Probability: 0.05 0.10 0.24 0.26 0.18 0.12 0.05
Calculate expected return and risk in terms of standard deviation.

RISK-RETURN TRADE OFF

 Risk-return tradeoff is an investment principle that indicates that the higher the risk, the higher
the potential reward. To calculate an appropriate risk-return tradeoff, investors must consider
many factors, including overall risk tolerance, the potential to replace lost funds, and more.

Understanding risk-return trade-off

Every investment instrument comes with a certain level of risk, where the investors can lose the capital
amount owing to various negative factors. However, the level of risk depends on the investment
duration, the instrument’s volatility and risk tolerance. Risk-return trade-off is a term used in capital
markets by investors who believe that an investment instrument is likely to provide higher returns if it
contains a high level of risk.
As per the trade-off concept, investing with low levels of risk can provide stable but not high returns.

______________________________________________________________________________

SECURITY ANALYSIS
Security analysis is a method which helps to calculate the value of various assets and also find out the
effect of various market fluctuations on the value of tradable financial instruments. The security analysis
process involves the analysis and evaluation of different financial instruments like bonds, stock, or any
other security where funds can be invested to earn good returns.
OBJECTIVES OF SECURITY ANALYSIS
1. Regular income - the income from the investment should be regular and consistent one. T high
fluctuation is income stream is not suitable for the long-term growth.
2.Capital appreciation - the investment must yield regular income as well as growth in value l ie,
capital appreciation. It is the difference between the selling price and purchase price.
3. Safety of capital - the capital invested in assets requires the safety. Safety is the important element
which protects the loss of capital and return from the investments.
4. Liquidity-liquidity is the ease of convertibility or marketability of assets.
5. Hedge against Inflation - the inflation is the biggest problem we are facing today, hence t rate of
return from the investment requires high yield to beat inflation rate.

APPROACHES TO SECURITY ANALYSIS

Security Analysis refers to the analysis of the proper value of the individual securities like
stocks, shares and bonds. It is the method of analyzing the value of securities like shares and
other instruments to assess the total value of business which will be useful for investors to take
decisions
Security Analysis refers to the analysis of the proper value of the individual securities like
stocks, shares and bonds. It is the method of analyzing the value of securities like shares and
other instruments to assess the total value of business which will be useful for investors to take
decisions
Security Analysis refers to the analysis of the proper value of the individual securities like
stocks, shares and bonds. It is the method of analyzing the value of securities like shares and
other instruments to assess the total value of business which will be useful for investors to take
decisions
Security Analysis refers to the analysis of the proper value of the individual securities like
stocks, shares and bonds. It is the method of analyzing the value of securities like shares and
other instruments to assess the total value of business which will be useful for investors to take
decisions
Security analysis refers to analyzing the value of securities like shares and other instruments to assess
the business’s total value, which will be useful for investors to make decisions. There are three methods
to analyze the value of securities – fundamental, technical, and quantitative analysis.
It involves analyzing various factors, such as financial statements, industry trends, market conditions,
and company-specific information, to make informed investment decisions. There are two primary
approaches to security analysis, fundamental Analysis and technical Analysis.

1. Fundamental Analysis

Fundamental analysis (FA) refers to the process of studying any security’s intrinsic value with the object of
making profits while trading in it. The primary purpose of fundamental analysis is to determine whether
the security or stock is undervalued or overvalued and thereby make an informed decision to buy, hold, or
sell it in order to maximize the potential for gains.
The Fundamental Analysis Involves Three Steps are:
A) Economic analysis
B) Industry analysis
C) Company analysis

A) Economic Analysis-First and foremost step in top-down approach is evaluation of economic

conditions. Economic indicators are taken into the account to analyze overall of the economy. These
factors help analysts to develop a sound understanding of the overall conditions.
Factors Affecting Economic Analysis
 Growth Rate of National Income: The rate of growth of the national economy is an important
variable to be considered by an investor GNP (gross national product), NNP (t national product),
GDP (gross domestic product
 Inflation: Inflation leads to erosion of purchasing power in the hands of consumers, this will
result in lower the demand of products Inflation prevailing in the economy has considerable
impact on the performance of companies
 Government Revenue, Expenditure and Deficits: Government is the largest investor and
spender of money, the trend in government revenue and expenditure and deficit have a significant
impact on the performance of industries and companies' expenditure by the government
stimulates the economy by creating jobs and generating demand.
 Exchange Rates: The performance and profitability of industries and companies that are major
importers or exporters are considerably affected the exchange rates of the rupee against major
currencies of the world.
 Infrastructure: The development of an economy depends very much on the infrastructure
available. The availability of infrastructure facilities such as power, transportation, and
communication systems affect the performance of companies’ bad infrastructure lead to
inefficiencies, lower productivity, wastage and delays.
 Monsoon: The Indian economy is essentially an agrarian economy and agriculture forms a very
important sector of the Indian economy. The performance of agriculture to a very extent depends
on the monsoon; the adequacy of the monsoon determines the success or failure of the
agricultural activities in India.
 Economic and Political Stability: A stable political environment is necessary for steady and
balanced growth. Stable long term economic policies are what are needed for industrial growth,
such stable policies emanate only from stable political systems as economic an political factors are
interlink

B) Industry Analysis: Industry analysis is a tool that gives investors an A to Z insight into any industry.
This encompasses insights about the level of competition in the industry, demand and supply situation,
how easily can new companies enter the industry etc. The analysis takes into account external and
internal factors that can impact an industry.
 Nature of Demand: Industry’s present and future business scope are based on the
overall market size and rate of growth. When the demand for the product offered in an
industry is high and increases continuously due to an increase in population, and
 income of people, changes in tastes and preferences, etc. the industry automatically
becomes attractive. As against, when the demand is decreasing the industry becomes
unattractive.
 Industry Potential: Overall sales potential also has an impact on the industry
attractiveness i.e. the high volume industry has more potential as compared to a low
volume one.
 Profit Potential: Profit potential implies the possibility of making the desired volume of
profit. The volume of profit is influenced by sales volume and profit margin.
 Growth Prospects: The higher the growth prospects in an industry the more attractive
it is, and vice versa.
 Entry and Exit Barriers: Depending on the entry and exit barriers, the industry
becomes more or less attractive. High entry and low exit barriers often make the
industry more attractive, as they tend to reduce competition from entering the and at
the same time, they reduce the cost of exit from the industry.
 Operational Efficiency: Operational efficiency is calculated as a ratio between input
and output. Factors the influence operational efficiency are men to machine ratio, labor
productivity, availability of power and infrastructure, technology level, quality of raw
materials, and so forth.
 Technological Advancements: Industry performance is also influenced by the
development and use of state-of-the-art technology and so the firms that use modern
technology to produce goods, have a competitive advantage over other firms, because of
reduced cost and high quality.
 Innovation: You might have observed that there are certain industries wherein the rate
of innovation is more than others especially in the electronic industry.

PORTER'S FIVE FORCES MODEL

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E Porter of
Harvard Business School as a simple framework for assessing and evaluating the competitive strength
and position of a business organization.
Porter's Five Forces is a model that identifies and analyzes five competitive forces that shape every
industry and helps determine an industry's weaknesses and strengths. Five Forces analysis is
frequently used to identify an industry's structure to determine corporate strategy.
 Industry Competition: More rivals and similar products and services reduce a company’s
strength. It reveals market competitiveness, rivals, and competitive strategy comprehension.
Many variables affect industrial rivalry. Industry expansion, Fixed costs value-added, intermittent
overcapacity, product disparities, brand identity, switching costs, Informational complexity,
competition diversity, corporate stakes, and departure hurdles. Promotional and pricing battles
may affect a business’s bottom line when rivalry is intense.
 Potential of New Entrants into the Industry: This group explores how rivals can enter the
market. When new competitors may enter easily, incumbent businesses risk losing market share.
Strong entry barriers allow incumbent enterprises to demand higher prices and better conditions.
 Power of Suppliers: This aspect considers a supplier’s influence on a company. When evaluating
the prospect of supplier overreliance, the elements to consider include market supply, bargaining
power, and switching suppliers involves money, from rewiring hardware to developing new
supply networks.
  Power of Customers: One of the Five Forces is customers’ capacity to push down prices. If there
are fewer customers than suppliers, they have “buyer power.” This implies they may easily move
to cheaper competitors, lowering costs.
 Substitutes Threat: This force analyses how simple it is for consumers to switch products or
services. The final force is other substitute products. Companies with no comparable substitutes
can raise prices and lock in advantageous conditions. When close replacements are available,
buyers might skip a company’s goods, reducing its power.

C) Company Analysis- Company analysis contains an evaluation & examination of a company, its
financial health & prospects, management strategy or marketing activities & its strengths & weaknesses.
It examines a firm's financial condition, products and services, and competitive strategy. Typically,
this allows us to better identify how an organization responds to external threats and opportunities.
 Quantitative Analysis :As the name suggests, it relies on a company’s numbers like profits,
revenue, sales, cash flows, etc. You need to rigorously study the company’s balance sheet,
annual reports and other data that is publicly available to carry out the analysis. Under this,
you will be closely analyzing various ratios and numbers to get an idea about the entity’s
overall financial health.
 Qualitative Analysis: The second category involves studying all qualitative indicators or
parameters. Under this, you need to study the company’s goodwill, top management, brand
recognition or value, consumer outlook towards the company, and recognition in
competitive markets. This analysis is much harder than a normal quantitative analysis; this
is because there is no set formula for measuring and studying these parameters.
You can carry out the fundamental analysis of a stock by analyzing the following components:
 Understand the Company and its business model: First step is to understand the company in
which you wish to put your money. This will help in getting more clarity and enable you to arrive
at correct conclusions. You can visit the website of the company or study its annual reports to do
so.
 Study Financial Statements: The next step involves carefully carrying out rigorous analysis on
the company’s financial statements. You will have to go through balance sheets, cash flow
statements, and profit & loss statements to get an idea about the company’s financial health.
 Check Debt Obligations: After this, you should look at the company’s debt obligations. It is
crucial as debt plays an important role in ascertaining financial stability. The amount and type of
debt that a company has should be assessed thoroughly.
 Analyze Company’s Competitors: Companies work in an interconnected and competitive
environment. Therefore, it becomes important to check their competitors to know where the
company stands in terms of performance.
 Prospects: Finally, you will have to consider the future outlook of the company. For this, you
would need to indulge in the long-term assessment of the company’s financial health and
business/industry outlook.

2. TECHNICAL ANALYSIS
Technical analysis is the process of predicting the price movement of tradable instruments using
historical trading charts and market data. As a result, investors can spot potential short- and long-
term investment opportunities. Commonly used in behavioral finance and quantitative research, it
helps analysts examine trends in securities trading.
Importance of Technical Stock Analysis
Performing technical stock analysis can help you determine the following:
 Intrinsic stock value compared to its market price.
 Ability of an asset to perform in the market.
 Instability of an asset’s price over a particular period.
 Historically persistent price fluctuations.
 Impact of certain micro and macroeconomic events on stock value.
 Trade volumes, resistance and support levels.
 On-going stock market trends.

Techniques of Technical Analysis

1. Candlestick: The candlesticks help investors identify trading patterns and enter a profitable
trade. The patterns are represented by combining two or more candles in a particular sequence.
This representation could be better and more useful with a single candlestick than multiple for an
overall market view.

2. Bar: Bar charts contain a series of vertical lines, marking the price fluctuation range during a
specific time frame. It is one of the easiest charts for investors to interpret. They can identify the
open, high, low, and close prices, all at once.

3. Line Charts: The line charts are formed as a link between different closing prices. This line is
traced from left to right, with only the closing prices being pointed on the graphs. These charts are
the fundamental form of technical analysis performed by experts.

4. Moving Averages: It helps traders detect ongoing trading trends. The commonly
considered moving averages for the price levels to be checked against are 10, 20, 50, 100, and 200.
If the prices go above the moving average, the trend is an uptrend, while if the price moves below
the moving average, it marks the downtrend.

5. Relative Strength Indicator (RSI): RSI measures the magnitude of the price fluctuation. It
indicates if asset prices are in the overbought or oversold status and the reading falls between 0
and 100. If it is above 70, the prices are in the overbought region, while below 30, it is in the
oversold zone.

6. Dow Theory:

The Dow Theory is an approach to trading developed by Charles H. Dow, who, with Edward Jones and
Charles Bergstresser, founded Dow Jones & Company, Inc. and developed the Dow Jones Industrial
Average in 1896. Dow fleshed out the theory in a series of editorials in the Wall Street Journal, which he
co-founded.
THE ASSUMPTIONS OF THE THEORY ARE:
  Three significant market trends: They are primary, secondary, and minor trends defined by
their duration. Primary trends can be uptrend or downtrend lasting months to years, while
secondary one moving opposite to the primary will last weeks or a few months. Minor trends are
treated as insignificant variations lasting from a few hours to weeks, and they are not as
important as the others.
 Primary trends have three distinct phases: The different phases in bear markets are
distribution, public participation, and panic. Bull markets, on the other, have accumulation, public
participation, and excess phase.
 Stock market discount everything: The market indexes react quickly to all forms of information.
It can be related to the entity or economy as a whole. For instance, any economic shock or issues
in the company management will affect stocks and move the indices upward or downward.
 Volume confirms the trend: Trading volume increases during an uptrend and decrease during
depressions.
 Indices confirm each other: Multiple indices moving in an identical pattern reveal a trend since
they give the same signal. Whereas if two indices move in the opposite direction, it is difficult to
deduct a trend.
 Trends continue until solid clues imply the reversal: Traders should be aware of trend
reversals. It’s easy to confuse them with secondary trends, so Dow cautions the investor to be
careful and confirm trends with several sources before believing it’s a reversal.

FUNDAMENTAL VS TECHNICAL ANALYSIS

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from investments. Safety refers to the protection of
investor principal amount and expected rate of return. The
safety of investment is identified with the certainty of
return of capital without loss of time or money.
.Safety: Safety is another feature that an investor desires
from investments. Safety refers to the protection of
investor principal amount and expected rate of return. The
safety of investment is identified with the certainty of
return of capital without loss of time or money.
.Safety: Safety is another feature that an investor desires
from investments. Safety refers to the protection of
investor principal amount and expected rate of return. The
safety of investment is identified with the certainty of
return of capital without loss of time or money.