FUNDAMENTAL ANALYSIS MODULE PDF
NCFM FUNDAMENTAL ANALYSIS MODULE - Download as PDF File .pdf), Text File .txt) or read online. FUNDAMENTAL ANALYSIS INVESTMENTS. Yumpu PDF Downloader. F NSE NCFM - Fundamental Analysis Module. indd. F NSE NCFM - Fundamental Analysis nissart.info Print as pdf. Fundamental Analysis Module. By-. Aishwarya Pant (), Nikita Agrawal ( ), Rohan Garg (), Romil Bhardwaj () and Sanchit.
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Fundamental Analysis Course a one month programme specially designed for all students and professionals who wish to specialize in the stock market. The. Fundamental Analysis is the art of evaluating the intrinsic value of a stock to find long-term investing opportunities. Learn stock analysis in this module. Fundamental Analysis is the backbone of investing. The program statement analysis, earnings quality, security analysis and valuation classes relating to the.
Hence, why fundamental analysis is popular with investors who employ the download and hold value philosophy. What Is Technical Analysis? Technical analysis is a more short-term approach to investing.
The concept analyzes charts, past stock pricing and volume data, and examines historical data to find patterns in an attempt to predict future trends. Technical analysis is used for short-term trading rather than long-term investing and applies concepts such as the Dow Theory and trend following to determine what to download and sell. All the information an investor needs is reflected in the market price. Rule 2: Movements in pricing are not random.
Rule 3: Price patterns always repeat—given enough time.
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The repetitive nature of price movements is down to market psychology: Investors are consistent in their reactions. Investing vs. Some make money by trading, and some by investing. Warren Buffett, for example, is an investing icon renowned for making billions thanks to long-term strategic investments. Buffett downloads companies and holds onto their stock, sometimes for decades. He believes in taking a slow, steady long-term view.
He even downloads when others are too fearful e. Soros has made several fortunes by taking advantage of the constant state of flux in the markets. Valuing Assets If you are a novice or long-term investor, then it's a good idea to focus on fundamentals first. Investors that are interested in growth and value should consider whether the current price of a stock makes sense when examining the health and prospects of the company that they are evaluating.
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Growth investors place a lot of emphasis on whether a company is going to be able to thrive and grow. It is not unusual for businesses to struggle in its early days, but if a company that is not profitable early on is still able to show growth in revenue, then that can often be enough to attract investors who believe that substantial profits are on the horizon long-term. Those investors may hope to see a scenario where the company breaks through those teething stages and thrives to become hugely profitable.
Growth investors may be willing to hold for a long time, and as such fundamental analysis make sense for them. Fundamentals are influential for value investors too, but the prevailing market condition will also play a significant role. The stock in question should be available in the market at a reasonable price i. Value investors are interested in the past and current performance of a stock, and whether the fundamentals are sound.
Is it conducive or obstructive to the growth of the company and the industry in which the company is operating? For companies operating in emerging markets like India, the economic environment is one of growth, growing incomes, high business confidence etc.
As opposed to this a company may be operating in a developed but saturated market with stagnant incomes, high competition and lower relative expectations of incremental growth. A stable political environment, supported by law and order in society leads to companies being able to operate without threats such as frequent changes to laws, political disturbances, terrorism, nationalization etc.
Stable political environment also means that the government can carry on with progressive policies which would make doing business in the country easy and profitable. Does the company have any core competency that puts it ahead of all the other competing firms? Some companies have patented technologies or leadership position in a particular segment of the business that puts them ahead of the industry in general.
NCFM FUNDAMENTAL ANALYSIS MODULE
For example, Reliance Industries core competency is its low-cost production model whereas Apples competency is its design and engineering capabilities adaptable to music players, mobile phones, tablets, computers etc.
What advantage do they have over their competing firms? Some companies have strong brands; some have assured raw material supplies while others get government subsidies. All of these may help firms gain a competitive advantage over others by making their businesses more attractive in comparison to competitors.
For example, a steel company that has its own captive mines of iron ore, coal is less dependent and affected by the raw material price fluctuations in the marketplace. Similarly, a power generation company that has entered into power download agreements is assured of the sale of the power that it produces and has the advantage of being perceived as a less risky business.
Does the company have a strong market presence and market share? Or does it constantly have to employ a large part of its profits and resources in marketing and finding new customers and fighting for market share? Competition generally makes companies spend large amounts on advertising, engage in price wars by reducing prices to increase market shares which may in turn erode margins and profitability in general.
The Indian telecom industry is an example of cut throat competition eating into companies profitability and a vigorous fight for market share. On the other hand there are very large, established companies which have a leadership position on account of established, large market share. Some of them have near-monopoly power which lets them set prices leading to constant profitability.
There are numerous ways of taking investment decisions in the market such as fundamental and technical analysis as seen in the previous NCFM module2. Lets take a look at some reasons why fundamental analysis is used for stock-picking in the markets? The basic idea underlying market efficiency is that competition will drive all information into the stock price quickly.
Thus EMH states that it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.
According to the EMH, stocks always tend to trade at their fair value on stock exchanges, making it impossible for investors to either consistently download undervalued stocks or sell stocks at inflated prices.
As such, it should be impossible to outperform the overall market through expert stock selection or market timing and that the only way an investor can possibly obtain higher returns is by downloading riskier investments.
The information contained in the past sequence of prices of a security is fully reflected in the current market price of that security. The weak form of the EMH implies that investors should not be able to outperform the market using something that everybody else knows. Yet, many financial researchers study past stock price series and trading volume using a technique called technical analysis data in an attempt to generate profits.
Semi-strong form EMH The semi-strong form of the EMH states that all publicly available information is similarly already incorporated into asset prices. In other words, all publicly available information is fully reflected in a securitys current market price. Public information here includes not only past prices but also data reported in a companys financial statements, its announcements, economic factors and others.
It also implies that no one should be able to outperform the market using something that everybody else knows. The semi-strong form of the EMH thus indicates that a companys financial statements are of no help in forecasting future price movements and securing high investment returns in the long-term.
Strong form EMH The strong form of the EMH stipulates that private information or insider information too is quickly incorporated in market prices and therefore cannot be used to reap abnormal trading profits. Thus, all information, whether public or private, is fully reflected in a securitys current market price.
This means no long-term gains are possible, even for the management of a company, with access to insider information. They are not able to take the advantage to profit from information such as a takeover decision which may have been made a few minutes ago.
The rationale to support this is that the market anticipates in an unbiased manner, future developments and therefore information has been incorporated and evaluated into market price in a much more objective and informative way than company insiders can take advantage of. Although it is a cornerstone of modern financial theory, the EMH is controversial and often disputed by market experts. In the years immediately following the hypothesis of market efficiency EMH , tests of various forms of efficiency had suggested that the markets are reasonably efficient and beating them was not possible.
Over time, this led to the gradual acceptance of the efficiency of markets. Academics later pointed out a number of instances of long-term deviations from the EMH in various asset markets which lead to arguments that markets are not always efficient.
Behavioral economists attribute the imperfections in financial markets to a combination of cognitive biases such as overconfidence, overreaction, representative bias, information bias and various other predictable human errors in reasoning and information processing.
Speculative economic bubbles are an anomaly when it comes to market efficiency. The market often appears to be driven by downloaders operating on irrational exuberance, who take little notice of underlying value.
These bubbles are typically followed by an overreaction of frantic selling, allowing shrewd investors to download stocks at bargain prices and profiting later by beating the markets. Sudden market crashes are mysterious from the perspective of efficient markets and throw market efficiency to the winds.
Other examples are of investors, who have consistently beaten the market over long periods of time, which by definition should not be probable according to the EMH. Another example where EMH is purported to fail are anomalies like cheap stocks outperforming the markets in the long term. Most of these prescriptions are based on the irrationality of the markets in, either processing the information related to an event or based on biased investor preferences.
The Behavioural Aspect Behavioural Finance is a field of finance that proposes psychology-based theories to explain stock market anomalies.
NCFM FUNDAMENTAL ANALYSIS MODULE
Within behavioural finance, it is assumed that information structure and the characteristics of market participants systematically influence individuals investment decisions as well as market outcomes. In a market consisting of human beings, it seems logical that explanations rooted in human and social psychology would hold great promise in advancing our understanding of stock market behaviour. More recent research has attempted to explain the persistence of anomalies by adopting a psychological perspective.
Evidence in the psychology literature reveals that individuals have limited information processing capabilities, exhibit systematic bias in processing information, are prone to making mistakes, and often tend to rely on the opinion of others. The literature on cognitive psychology provides a promising framework for analysing investors behaviour in the stock market.
By dropping the stringent assumption of rationality in conventional models, it might be possible to explain some of the persistent anomalous findings.
For example, the observation of overreaction of the markets to news is consistent with the finding that people, in general, tend to overreact to new information. Also, people often allow their decision to be guided by irrelevant points of reference, a phenomenon called anchoring and adjustment. Experts propose an alternate model of stock prices that recognizes the influence of social psychology.
They attribute the movements in stock prices to social movements.
Since there is no objective evidence on which to base their predictions of stock prices, it is suggested that the final opinion of individual investors may largely reflect the opinion of a larger group. Thus, excessive volatility in the stock market is often caused by social fads which may have very little rational or logical explanation. There have been many studies that have documented long-term historical phenomena in securities markets that contradict the efficient market hypothesis and cannot be captured plausibly in models based on perfect investor rationality.
Behavioural finance attempts to fill that void. Regulatory Hindrances In the real world, many a times there are regulatory distortions on the trading activity of the stocks such as restrictions on short-selling or on the foreign ownership of a stock etc.
Such restrictions hinder the process of fair price discovery in the markets and thus represent deviation from the fair value of the stock.
Then there may be some restrictions on the price movement itself such as price bands and circuit filters which prevent prices of stocks moving more than a certain percentage during the day that may prevent or delay the efficient price discovery mechanism.
Also, 8 many institutional investors and strategic investors hold stocks despite deviation from the fair value due to lack of trading interest in the stock in the short term and that may cause some inefficiencies in the price discovery mechanism of the market. In the EMH, investors have a long-term perspective and return on investment is determined by a rational calculation based on changes in the long-run income flows.
However, in the markets, investors may have shorter horizons and returns also represent changes in short-run price fluctuations. Recent years have witnessed a new wave of researchers who have provided thought provoking, theoretical arguments and provided supporting empirical evidence to show that security prices could deviate from their equilibrium values due to psychological factors, fads, and noise trading.
Thats where investors through fundamental analysis and a sound investment objective can achieve excess returns and beat the market. In fact all types of investing comprise studying some fundamentals. The subject of fundamental analysis is also very vast. However, the most important part of fundamental analysis involves delving into the financial statements. This involves looking at revenue, expenses, assets, liabilities and all the other financial aspects of a company.
Fundamental analysts look at these information to gain an insight into a companys future performance. Fundamental analysis consists of a systemtatic series of steps to examine the investment environment of a company and then identify opportunities. Some of these are: Macroeconomic analysis - which involves analysing capital flows, interest rate cycles, currencies, commodities, indices etc. Industry analysis - which involves the analysis of industry and the companies that are a part of the sector Situational analysis of a company Financial analysis of the company Valuation The previous NCFM module3 focused on macroeconomic and industry analysis, we would examine company analysis financials and valuation in this module.
Chapter 2 : Brushing up the Basics 2. Assets provide returns and ownership of assets provides access to these returns. For example, Rs.
Hence, Rs. Therefore, any wise person would chose to own Rs. In the first option he can earn interest on on Rs.
This explains the time value of money.Income levels and cost of financing also play a vital role. Cash flow is determined by looking at three components by which cash enters and leaves a company. There may be nepotism with the nephews. Fundamental analysis attempts to measure a security's intrinsic value by examining related economic and financial factors, which can be both qualitative and quantitative in nature.
The Behavioural Aspect Behavioural Finance is a field of finance that proposes psychology-based theories to explain stock market anomalies. A low percentage means that the company is less dependent on leverage. The more common notes one comes across are: With the exception of unfunded pension liabilities.
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