Module III

APPROACHES TO SECURITY ANALYSIS

Portfolio Management

Portfolio Combinations of securities in which an investors

investments are invested

Efficient Management of investments in various Securities of an

investor is portfolio management

It involves time to time choosing and revising portfolio of securities in

order to optimize the return

Objectives of Portfolio Management

Security of Principal Investment

Consistency of Returns

Capital Growth

Liquidity & Marketability

Diversification of Portfolio

Favorable Tax Status

Principles of Portfolio Management

Emphasis on returns from Collective holdings of the investor

Should Cater to the needs of the investors like tax benefits, steady
returns, high returns, etc.

High Risk high Returns Should Balance the Risk & Expected Return of
the Investor

Liquidation of Portfolio & Liquidation of Securities in it should be at the

same time

One should act fast to take advantage of the available opportunities &
reduce the impact of the adverse situations pertaining to the
securities held

Scope of Portfolio Management

Identification of Investors Requirement

Formulation of Investment Policy Strategy Expected Return, Risk

Tolerance, Liquidity Requirement, etc.

Execution of Strategy

Monitoring of Portfolio

Portfolio Return
Security

Return (%)

Proportion of
Investment

17.50

0.15

24.80

0.25

15.70

0.45

21.30

0.15

Portfolio Return

(17.50 x 0.15) + (24.80 x 0.25) + (15.70 x 0.45)

+ (21.30 x 0.15) = 19.085%

Security Analysis - Introduction

Analysis of tradeable financial instruments is securities analysis

Fundamental Analysis

Concentrates on aspects like efficiency of management, quality of

product, financial statistics, industry analysis, economic analysis and many
other
readily quantifiable data to assess the performance of the companies
& in
turn the intrinsic value of the security

Technical Analysis
Concentrates on analyzing the past data through charts, volumes,
momentum & a group of mathematical indicators to assess the
performance of the companies & in turn the market price of the security

Fundamental Analysis

Fundamental Analysis employees the top down approach that starts

with the overall economy and then works down from industry group to
specific companies.

Logical progression is used to take investment decisions

Thus Fundamental Analysis Involves Three Steps

Economic Analysis

Industry Analysis

Company Analysis

Fundamental Analysis Economic

Analysis

Agricultural Growth India is an agrarian society any progress in the

agricultural sector will reflect in the industrial sector as well

Industrial Growth Industrial growth is a major contributor for the growth in

the economy of the country

Type of Economy India is a Mixed Economy (Mixture of Capitalist &

Socialist Economy)

Business Cycle Different stages of business cycles have direct effect on

the performance of Industries/ Companies (Phases of Business Cycles
Boom, Recession, Depression & Recovery

Gross Domestic Product (GDP) It is an important indicator for the rate of

growth of the economy

Fundamental Analysis Economic

Analysis

Savings & Investments Saving & Investment mentality of the people in the
economy and availability of proper channels for mobilizing these savings

Interest Rates It directly affects the capital investment as well as the

security markets

Inflation Inflation reduces the purchasing power & real growth of the
economy. Eg. Inflation would badly affect the consumer durables

Government Budget An Increase in the government expenditure generates

higher demand for goods & services

Political Stability Stable Political Environments helps in making long term

economic plans, fiscal policies etc.

Infrastructure Facilities Essential for industrial & agricultural growth

Fundamental Analysis - Industry

Analysis
Industry is generally described as homogeneous group of companies producing similar
products

Industry Classified on the basis of Business Cycle Growth, Cyclical, Defensive &
Cyclical Growth Industry

Industry Life Cycle Pioneering, Expansion , Stagnation & Decay

Raw Material & Other Inputs

Profitability

Capacity Utilization

Nature of Demand Fluctuating or Stable Demand

Government Policies Any reliefs, subsidies etc.

Labour Problems

Fundamental Analysis Company

Analysis

Business Plan

Market Share

Growth in Revenue

Competitive Edge

Management

Financial Analysis

Tools for Financial Analysis

Liquidity Ratios

Current Ratio (CA/CL)

Quick Ratio {(CA - Stock - Prepaid)/CL}

Leverage Ratios

Debt Equity Ratio (Debt/ Shareholders Equity)

Interest Coverage Ratio (EBIT/Interest)

Proprietary Ratio (Shareholders Equity/Total Assets)

Profitability Ratios

Gross Profit Ratio

Net Profit Ratio

Tools for Financial Analysis

Profitability Ratios

Return on Asset (EAT/Total Assets)

Return On Capital Employed (EBIT/Total Capital Employed)

Return on Equity (EAT/Shareholders Equity)

Profitability Ratios Specific to Equity Share Holders

Earning Per Share-EPS (EAT & Pref. Dividend/No. of Equity Shares)

Dividend Yield (Dividend Per Share/ Market Price Per Share)

Dividend Payout Ratio (Dividend Per Share/ Earning Per Share-EPS)

Tools for Financial Analysis

Turnover Ratios

Stock Turnover (Sales/Stock)

Debtors Turnover (Sales/ Debtors)

Current Assets Turnover

Fixed Assets Turnover

Financial Statement Analysis

Comparative Analysis (YOY & Pear Companies)

Common Size Statements etc.

Technical Analysis

With the help of several indicators, the technical analyst analyses the
relationship between the overall market & the individual stock.

Assumptions of Technical Analysis

The market value of the scrip is determined by the interaction of demand &
supply

The market discounts everything. Like insider information, forthcoming

opportunities & problems etc.

The market always moves in trend

In rising markets the investors psychology has up beats & they purchase
the shares in greater volumes , driving the price higher.

Technical Analysis

With the help of several indicators, the technical analyst analyses the
relationship between the overall market & the individual stock.

Technical analysis is based almost entirely on the analysis of price &

volume

Price Fields Open (Price of 1st Trade), High, Low, Close (Price of last
trade), Volume (No. of shares traded during a period), Bid (Price a
purchaser is willing to pay) & Ask (Price a seller is willing to accept)

Technical Analysis - Dow Theory

Explains the movements of the indices of Dow Jones Averages

Assumptions of Dow Theory

No Single Individual or Buyer can influence the major trend of the market

Market discounts everything

The theory is not infallible It is not a tool to beat the market but provides
a way to understand it better

Technical Analysis - Dow Theory

Trend Trend is the direction of movement. The trend lines are

straight lines drawn connecting either the tops or bottoms of the
share price movement

Trend Reversal

According to Dow Theory, the market has three movements

Primary Movements

Secondary Reactions

Minor Movements

Technical Analysis - Dow Theory

The primary movement is the long range cycle that carries the entire
market up or down. This is the long term trend in the market. (May
last for a year or two)

The secondary reactions act as a restraining force on the primary

movement these are in the opposite direction to the primary
movement and last only for a short while these are also known as
corrections. These are secondary reactions.

The third movement in the market is the minor movements which are
the day to day fluctuations in the market. The minor movements are
not significant

Dow Theory - Primary Movement/

Trend - Bearish Trend

Bearish Trend - The bear market is also characterized by three phases,

in the first phase, price begin to fall due to abandonment of hopes. in
the second phase, companies start to reporting lower profits and lower
dividends, in the final phase, price fall still further due to distress
selling .a bearish market would be indicated by the formulation of
lower tops and lower bottoms

Dow Theory - Primary Movement/

Trend - Bullish Trend

Bullish trend - During the bull market, in the first phase the price
would advance with the revival of confidence in the future of business.
During the second phase, price would advance due to improvements
in corporate earnings, in the third phase, prices advance due to
inflation and speculation. According to Dow Theory, the formulation of
higher bottoms and higher tops indicates a bullish trend.

Dow Theory - Primary Movement/

Trend

Price Chart

Price chart is the basic tool used by the technical analyst to study the
share price movement

Line Chart

Bar Chart

Candle Stick Chart

Line Chart

Bar Chart

Candle Stick Chart

Candle Stick Chart

Support and Resistance

Head & Shoulder Formation

Head & Shoulder Formation

Market Indicators

Volume of Trade Volume expands with a bull market & narrows down
in a bear market. If the volume falls with the rise in price or vice versa
it is a matter of concern for the investor

Breadth of the Market Studies the advances & declines in a Stock

Market. Advances means the number of shares whose prices have
increased & declines means shares whose prices have declined. The
net difference between the advances & declines is MARKET BREADTH

Odd-Lot Index Shares sold in smaller lots, fewer than 100 are called
odd lot. Odd lot purchase is concentrated at the top of the market
cycle & odd lot selling at the bottom

Mathematical & Technical Indicators

Moving Average

Exponential Moving Average

Moving Average Convergence & Divergence (MACD)