| Security analysis | | | | The industry analysis should take into account the |
| Security analysis refers to the analysis of trading | | | | following factors among others as influencing the |
| securities from the point of their prices, returns and | | | | performance of the company, whose shares are to |
| risks. All investments are risky and the expected | | | | be analyzed. The factors like, business life cycle, raw |
| return is related to the quantum of risk. All investors | | | | material supply, demand and market tendency, labor |
| try to earn more return with low level of risk or | | | | supply, automation, future prospects etc. are |
| without risk. For this purpose they are considering | | | | considered here, before making investment in equity |
| some objectives. These are: | | | | shares. |
| Objectives | | | | Company-specific factors |
| Regular income – the income from the | | | | In company analysis the profit and loss account and |
| investment should be regular and consistent one. The | | | | balance sheet are analyzed before investing into a |
| high fluctuation is income stream is not suitable for | | | | share of the company. Here the factors like sources |
| the long-term growth. | | | | and uses of funds, profitability, dividend payout ratio, |
| Capital appreciation – the investment must yield | | | | price-earnings ratio, track record of the company and |
| regular income as well as growth in value i.e, capital | | | | the promoters etc are considered. |
| appreciation. It is the difference between the selling | | | | Hence fundamentalist’s objective is to relate the |
| price and purchase price. | | | | current market price of a security to its intrinsic value |
| Safety of capital – the capital invested in assets | | | | or theoretical value and to execute a buy or sell |
| requires the safety. Safety is the important element | | | | order accordingly in order to ensure superior gains |
| which protects the loss of capital and return from | | | | from the market. |
| the investments. | | | | Technical analysis |
| Liquidity – liquidity is the ease of convertibility or | | | | The technical school of thought developed its own |
| marketability of assets. | | | | theory for determining the behavior of stock prices. |
| Hedge against Inflation – the inflation is the | | | | The technicians do not believer fundamentalists |
| biggest problem we are facing today, hence the rate | | | | thoughts. Technical analysis of the market is based n |
| of return from the investment requires high yield to | | | | some basic tenets, namely, that all fundamental |
| beat inflation rate. | | | | factors are discounted by the market and are |
| These are the major objectives of an investor; to | | | | reflected in prices. Secondly, these prices move in |
| attain these objectives a careful and critical security | | | | trends or waves which can be both upward and |
| analysis is necessary. The literature on security | | | | downward depending on the sentiment, psychology |
| analysis can be consolidated to form three | | | | and emotions of operators or traders. Finally, the |
| approaches to explaining the behavior of share prices | | | | present trends are influenced by the past trends and |
| and their valuation. These analysis are used to find | | | | the projection of future trends is possible by an |
| out the answer for the question like, why share | | | | analysis of past price trends. According to the |
| prices fluctuate, how they are determined, what to | | | | technicians, prices are determined in the following |
| buy or sell and when to buy or sell. | | | | manner. |
| Fundamental analysis | | | | Prices of securities are determined by the demand |
| Fundamental analysis relates to an examination of the | | | | and supply of securities in the market. Demand and |
| intrinsic worth of the company, to find out whether | | | | supply of securities are to be considered the main |
| current market price is fair, overpriced or under | | | | essence of changes in security prices. The collection |
| priced. Intrinsic worth is the real worth of the | | | | of past market data used to find out the history of |
| company share price; it is calculated dividing the net | | | | price movements and depict these on a chart. The |
| assets by number of equity shares outstanding. | | | | chart helps to determine future prices. |
| Hence fundamentalists attempt to estimate the | | | | Hence, the technical analysis reveals that the past |
| intrinsic worth of a share by analyzing the various | | | | behavior of stock prices gave an indication about the |
| economic, industry and company related factors. | | | | future of the stocks. |
| Analysis on fundamental factor is considered | | | | Efficient Market Hypothesis |
| necessary while making investment in equity shares. | | | | The efficient market hypothesis is based on the flow |
| At any phase in the economy, there are some | | | | of free and correct information and the market |
| industries which are mounting while others are | | | | absorption of it. The theory of efficient market |
| declining. The performance of companies will depend | | | | hypothesis describes the efficiency in three forms. |
| among other things upon the state of the industry as | | | | These are weak form, semi-strong form and the |
| a whole and the economy. If the industry is | | | | strong form. In 1991 Eugene F Fama has re-titled |
| prosperous, the companies, within the industries may | | | | these categories as tests for return predictability, |
| also be prosperous although a few may be in a bad | | | | event studies and test for private information. |
| shape. The performance of a company depends not | | | | The weak of efficient market hypothesis says that |
| only of the industry and of the economy, but more | | | | current prices of stocks reflect all information, which |
| importantly, on its own performance. | | | | is already contained in the past. The weak for also |
| Macro-economic factors | | | | holds that prices have no memory and yesterday has |
| It is concerned with macro-economic factors; these | | | | nothing to do with tomorrow. The semi-strong form |
| factors have much impact on the market price of | | | | of EMH asserts that the security prices incorporate all |
| the shares. These are growth rates of national | | | | publicly available information such as information |
| income and industrial sectors, inflation and interest | | | | available from annual reports, dividends and earnings |
| rate, foreign trade and exchange rates, savings and | | | | announcements etc. Lastly, the strong form of EMH |
| investment of the public, monsoon and agriculture | | | | maintains that current prices of stocks reflect all the |
| performance, political stability etc. Hence this factor | | | | information including the insider information. |
| not only affects a particular script but affect the | | | | Having awareness in these factors can help to earn |
| stock market as whole. | | | | more returns in the market. |
| Industry-wide factors | | | | |