Investment Analysis and Portfolio Management
Unit-III: Fundamental Analysis and Technical Analysis
-Dr. Ranpreet Kaur
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Fundamental analysis
• Fundamental analysis attempts to understand and predict intrinsic value of
stocks based on an in-depth analysis of various economic, financial,
qualitative, and quantitative factors.
• A fundamental analysis is all about getting an understanding of the
economic conditions, Industry state and company position as the health of
its business and its future prospects.
• It includes reading and analyzing Economic affairs, Industry analysis and
company analysis to get an understanding of the comparative advantages,
competitors and its market environment.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Cont…
Fundamental analysts use either top-down or bottom-up methods of analysis, or
sometimes both.
A top-down analysis might function in the following manner:
1) The entire market is analyzed, including global and macroeconomic
indicators
2) The specific sector, such as Technology. The industry, for example
semiconductor manufacturers
3) The specific stock, for example company ABC
Conversely, a bottom-up analysis starts by investigating specific stocks first.
The fundamental analyst observes trends, market and price movements,
company financial statements, interest rates, return on equity, and numerous
other indicators with one goal in mind: buying or selling stocks that will provide
a high return on investment.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Economy Analysis
• The economy is studied to determine if overall conditions are good for the stock
market.
• Is inflation a concern?
• Are interest rates likely to rise or fall?
• Are consumers spending?
• Is the trade balance favorable?
• Is the money supply expanding or contracting?
• What are government policies?
• Fiscal deficits??
• Political conditions??
These are just some of the questions that the fundamental analysis tries to answer.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Industry Analysis
• The company's industry obviously influences the outlook for the company. Even
the best stocks can post mediocre returns if they are in an industry that is
struggling. In industry analysis these things need to be concerned--
• Industry life cycle
• Porter’s five force model
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Industry life cycle
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Porter five force Model - Analysis
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Company Analysis
After determining the economy and industry conditions, the company analysis is done to determine
its financial health. This is usually done by studying the following-
• Mission
• Vision
• History of the company
• Growth strategies -Product profile strength, Foreign Collaborations, Future Business plans
• Top Management
• Competition
• company's financial statements -Market Share ,Growth in sales dividend ,EPS,P/E ratio and
bottom line.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Cont..
From Financial statements a number of useful ratios can be calculated.
The ratios fall under these categories:
• profitability,
• liquidity,
• leverage,
• efficiency.
When performing ratio analysis on a company, the ratios should be compared to other
companies within the same or similar industry .
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Technical Analysis
• Two major types of analysis for predicting the performance of a
company’s stock
• fundamental
• technical
• Technical
• looks for peaks, bottoms, trends, patterns, and other factors affecting a
stock’s price movement
• makes a buy/sell decision based on those factors
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
What is Technical Analysis?
• Method of evaluating securities by analyzing statistics generated by
• Market activity
• Past Prices
• Volume
• Not try to focus or measure intrinsic value
• Instead look for patterns and indicators on charts to determine future performance
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Assumptions/basic premises
• Market prices-Demand and supply
• Demand and supply influenced by a variety of factors.
• Technicians believe that securities move in very predictable trends and patterns.
• Trends continue until something happens to change the trend(Shift in demand and
Supply)
• Shift in demand and Supply can be detected with the help of charts of market actions.
• Until that change takes place, price levels are predictable.
• Due to Persistence of trends and patterns analysis of past data can be used to predict
future.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Importance
• To predict market performance
• To analyze the trend
• To analyze the affect of demand and supply forces
• To make trading/investment decision
• To understand the affect of new information(flucuations)
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Dow Theory
Dow believed that the stock market as a whole was a reliable measure of overall business
conditions within the economy and that by analyzing the overall market, one could
accurately gauge those conditions and identify the direction of major market trends and the
likely direction of individual stocks.
(1) The "main movement", primary movement or major trend may last a year to several
years. It can be bullish or bearish.
(2) The "medium swing", secondary reaction or intermediate reaction may last from few
days, weeks to months .
(3) The "short swing" or minor movement varies with opinion are random on day to
day(daily Fluctuations)from hours to a month or more..
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Types of Chart
Line Chart-
• The most basic of the four charts is the line chart because it represents only the closing prices over
a set period of time.
• The line is formed by connecting the closing prices over the time frame.
• Line charts do not provide visual information of the trading range for the individual points such as
the high, low and opening prices.
• However, the closing price is often considered to be the most important price in stock data
compared to the high and low for the day and this is why it is the only value used in line charts.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Line Chart
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
Bar Charts
• The bar chart expands on the line chart by adding several more key pieces of information
to each data point.
• The chart is made up of a series of vertical lines that represent each data point.
• This vertical line represents the high and low for the trading period, along with the
closing price.
• The close and open are represented on the vertical line by a horizontal dash
• The opening price on a bar chart is illustrated by the dash that is located on the left side
of the vertical bar.
• Conversely, the close is represented by the dash on the right.
Unit-III: Fundamental Analysis and Technical Analysis Centre for Distance and Online
Investment Analysis and Portfolio Management
The Bar Chart
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The Bar Chart
(Continued)
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Candle Stick Charting
• Been around for hundreds of years
• Often referred to as “Japanese Candles” because the Japanese would use them to
analyze the price of rice contracts
• Similar to bar chart, but uses color to show if stock was up (green) or down (red)
over the day
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Candle Stick Charting (Continued)
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Cont..
• Green is an example of a bullish
pattern, the stock opened at (or near)
its low and closed near its high
• Red is an example of a bearish pattern.
The stock opened at (or near) its high
and dropped substantially to close near
its low
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Investment Analysis and Portfolio Management
Point and Figure Chart
• Somewhat rare
• Plots day-to-day increases and declines in price.
• A rising stack of XXXX’s represents increases
• A rising stack of OOOO’s represents decreases.
• Typically used for intraday charting
• If used for multi-day study, only closing prices will be used
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Point and Figure Chart
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Drawing Point & Figure Charts
• Point & Figure charts are independent of
time.
• An X represents an up move.
• An O represents a down move.
• The Box Size is the number of points
needed to make an X or O.
X
X
X XO
X XO
XO O
XO O
X
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Investment Analysis and Portfolio Management
Using the Moving Average
• Shows the average value of a security’s price over a period of time
• The most commonly used averages are of 20,30,50, 100 and 200 days
• The longer the time span, the less sensitive the moving average to daily price changes
• Moving averages are used to emphasize the direction of a trend and smooth out price and
volume fluctuations.
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Moving Average
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Relative Strength Index (RSI)
• A comparison between the days a stock finishes up against the days it finishes down.
• Based on the assumption that some securities rise rapidly during the bull phase but fall
slowly during the bear phase.
• The shorter the number of days used to calculate the more volatile
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Technical Indicators
• Breadth Indicators
-The Advances-decline Line(Breadth of the market)
- New Highs and lows
-Volume(High trading Volume-Bullish Signal)
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Sentiment Indicators
-Short Interest ratio(High-Bullish)
=Total Number of Shares sold Short/Average daily trading Volume
- Put/call Ratio (rise –Buy Signal)
=Number of Puts Purchased/Number of Calls Purchased
-Trin Statistic(more than 1-Bearish)
=(Number Advancing/Number declining) / (Volume Advancing/Volume Declining)
-Mutual Fund Liquidity(High-Bullish)
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Behavioral Finance
• Behavioral finance is the concept linked with psychology and sociology to explain the
impact of the behavior on the financial decision making and the subsequent consequences
on the financial market. It helps in assisting to know and understand the irrational
behavior of individuals in buying and selling the stocks and in investment decisions.
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Behavioral Finance and its impact on Investment decision
making
• Olsen (1998): “Behavioral finance tries to find out in understanding and predicting systematic
financial market implications of psychological decision process.”
• Belsky and Gilowich (1999) have stated” behavioral finance as a behavioral economics and
further defined as combining the twin discipline”
• Shefrin (2001) says, “Behavioral finance is the study to explain the effects of psychology on
financial decision making and financial markets. “
• Verma (2004) has described “Behavioral finance as the concept of understanding how people
overlook fundamentals and take investment decisions based on the sentiments and emotions.”
• Therefore behavioral finance can be summarized as application of scientific making process of
individual groups and entities. Research on the psychological, social and emotional assistance for
market participants and movement of market prices. It also provides explanation for psychological
and sociological factors that affects the financial decision
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