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ASSIGNMENT ON
SECURITY ANALYSIS & PORTFOLIO MANAGEMENT
Submitted to: Submitted by:
Prof. Sanjay Sinha Bharathi Venkit Sarma
Date: 17th
Oct 2011 Roll no: 055
Batch F1
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Country: India
Sector: Telecom Sector
Company: Reliance Communications
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Security Analysis:-
What is a security?Assets with some financial value are called securities.
Characteristics of Securities?o Securities are tradable and represent a financial value.o Securities are fungible.
Classification of Securitieso
Debt Securities: Tradable assets which have clearly defined terms and conditionsare called debt securities. Financial instruments sold and purchased between
parties with clearly mentioned interest rate, principal amount, maturity date as
well as rate of returns are called debt securities.
o Equity Securities: Financial instruments signifying the ownership of anindividual in an organization are called equity securities. An individual buying
equities has an ownership in the companys profits and assets.
o Derivatives: Derivatives are financial instruments with specific conditions underwhich payments need to be made between two parties.
What is Security Analysis?The analysis of various tradable financial instruments is called Security Analysis. These
can be classified into debt securities, equities, or some hybrid of the two. More broadly,
futures contracts and tradable credit derivatives are sometimes included. Security analysis
helps a financial expert or a security analyst to determine the value of assets in a
portfolio. Security analysis is typically divided into fundamental analysis, which relies
upon the examination of fundamental business factors such as financial statements, and
technical analysis, which focuses upon price trends and momentum. Quantitative analysis
may use indicators from both areas.
Why use 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 (also called securities). Wall Street has scores of analysts, strategists and
portfolio managers hired to do one thing: beat the market. Analysts are hired to find
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undervalued stocks. Strategists are hired to predict the direction of the market and various
sectors. Portfolio managers are hired to put it all together and outperform their
benchmark, usually measured as the S&P 500. Granted, there are many studies and
disputes raging on the performance of equity mutual funds, but it is safe to assume that
about 75% of equity mutual funds underperform the S&P 500. With these kinds of stats,
individual investors would surely be better off simply investing in an index fund rather
than attempting to beat the market.
The added value of analysis is in the eye of the beholder. A fundamental analyst believes
that analyzing strategy, management, product, financial statistics and many other readily
and not-so-readily quantifiable numbers will help choose stocks that will outperform the
market. They are also likely to believe that there is little or no value in analyzing past
prices and that technical analysts would be better off stargazing. The technical analyst
believes that the chart, volume, momentum and an array of mathematical indicators hold
the keys to superior performance. Technicians are just as likely to believe thatfundamental data is hogwash pure and simple. And then there are the Random Walkers
who believe that any attempt to try and outwit the market is futile.
Methods of Security Analysis:When the objective of the analysis is to determine what stock to buy and at what price,
there are two basic methodologies
o Fundamental analysis maintains that markets may misprice a security in the shortrun but that the "correct" price will eventually be reached. Profits can be made bytrading the mispriced security and then waiting for the market to recognize its
"mistake" and re-price the security.
o Technical analysis maintains that all information is reflected already in the stockprice. Trends 'are your friend' and sentiment changes predate and predict trend
changes. Investors' emotional responses to price movements lead to recognizable
price chart patterns. Technical analysis does not care what the 'value' of a stock is.
Their price predictions are only extrapolations from historical price patterns.
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Fundamental Analysis:-
It is a method of evaluating a security that entails attempting to measure its intrinsic value by
examining related economic, financial and other qualitative and quantitative
factors. Fundamental analysts attempt to study everything that can affect the security's value,including macroeconomic factors (like the overall economy and industry
conditions) and company-specific factors (like financial condition and management).
The end goal of performing fundamental analysis is to produce a value that an investor can
compare with the security's current price, with the aim of figuring out what sort of position to
take with that security (underpriced = buy, overpriced = sell or short). This method of security
analysis is considered to be the opposite of technical analysis.
Fundamental analysis is about using real data to evaluate a security's value. Although most
analysts use fundamental analysis to value stocks, this method of valuation can be used for justabout any type of security. Fundamental analysis is a method used to determine the value of a
stock by analyzing the financial data that is 'fundamental' to the company. That means that
fundamental analysis takes into consideration only those variables that are directly related to the
company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not
look at the overall state of the market nor does it include behavioral variables in its methodology.
It focuses exclusively on the company's business in order to determine whether or not the stock
should be bought or sold.
For example, an investor can perform fundamental analysis on a bond's value by looking at
economic factors, such as interest rates and the overall state of the economy, and informationabout the bond issuer, such as potential changes in credit ratings. For assessing stocks, this
method uses revenues, earnings, future growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future growth. In terms of
stocks, fundamental analysis focuses on the financial statements of the company being evaluated.
One of the most famous and successful fundamental analysts is the Oracle of Omaha, Warren
Buffett, who is well known for successfully employing fundamental analysis to pick securities.
His abilities have turned him into a billionaire.
Fundamental analysis is performed on historical and present data, but with the goal of making
financial forecasts. There are several possible objectives:
To conduct a company stock valuation and predict its probable price evolution, To make a projection on its business performance, To evaluate its management and make internal business decisions, To calculate its credit risk.
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Fundamental analysis includes:
1. Economic analysis2. Industry analysis3. Company analysis
On the basis of these three analyses the intrinsic value of the shares are determined. This is
considered as the true value of the share. If the intrinsic value is higher than the market price it is
recommended to buy the share. If the price is equal to market price, then hold the share and if it
is less than the market price, then sell the shares.
Fundamental analysis of a business involves analyzing its financial statements and health, its
management and competitive advantages, and its competitors and markets. When applied to
futures and forex, it focuses on the overall state of the economy, interest rates, production,
earnings, and management. When analyzing a stock, futures contract, or currency using
fundamental analysis there are two basic approaches one can use; bottom up analysis and top
down analysis.
http://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Competitorshttp://en.wikipedia.org/wiki/Marketshttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Marketshttp://en.wikipedia.org/wiki/Competitorshttp://en.wikipedia.org/wiki/Financial_statements8/3/2019 SAPM Trim4
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Technical Analysis:-
It is a method of evaluating securities by analyzing statistics generated by market activity, such
as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic
value, but instead use charts and other tools to identify patterns that can suggest future activity.Technical analysts believe that the historical performance of stocks and markets are indications
of future performance.
In a shopping mall, a fundamental analyst would go to each store, study the product that was
being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on
a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the
products in the store, the technical analyst's decision would be based on the patterns or activity of
people going into each store.
Technical analysis is the forecasting of market prices by means of analysis of data generated bythe process of trading. Technical analysis relies on the assumption that markets discount
everything except information generated by market action, ergo, all you need is data generated
by market action.
The principles of technical analysis are derived from hundreds of years of financial market data.
Some aspects of technical analysis began to appear in Joseph de la Vega's accounts of the Dutch
markets in the 17th century. In Asia, technical analysis is said to be a method developed by
Homma Munehisa during early 18th century which evolved into the use of candlestick
techniques, and is today a technical analysis charting tool. In the 1920s and 1930s Richard W.
Schabacker published several books which continued the work of Charles Dow and William
Peter Hamilton in their books Stock Market Theory and Practice and Technical Market
Analysis. In 1948 Robert D. Edwards and John Magee published Technical Analysis of Stock
Trends which is widely considered to be one of the seminal works of the discipline. It is
exclusively concerned with trend analysis and chart patterns and remains in use to the present.
As is obvious, early technical analysis was almost exclusively the analysis of charts, because the
processing power of computers was not available for statistical analysis. Charles Dow reportedly
originated a form of point and figure chart analysis.
Dow Theory is based on the collected writings of Dow Jones co-founder and Editor Charles
Dow, and inspired the use and development of modern technical analysis at the end of the 19th
century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William Delbert
Gann and Richard Wyckoff who developed their respective techniques in the early 20th century.
More technical tools and theories have been developed and enhanced in recent decades, with an
increasing emphasis on computer-assisted techniques using specially designed computer
software.
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While fundamental analysts examine earnings, dividends, new products, research and the like,
technical analysts examine what investors fear or think about those developments and whether or
not investors have the wherewithal to back up their opinions; these two concepts are called psych
(psychology) and supply/demand. Technicians employ many techniques, one of which is the use
of charts. Using charts, technical analysts seek to identify price patterns and market trends in
financial markets and attempt to exploit those patterns. Technicians use various methods and
tools, the study of price charts is but one.
Technicians using charts search for archetypal price chart patterns, such as the well-known head
and shoulders or double top/bottom reversal patterns, study technical indicators, moving
averages, and look for forms such as lines of support, resistance, channels, and more obscure
formations such as flags, pennants, balance days and cup and handle patterns.
Technical analysts also widely use market indicators of many sorts, some of which are
mathematical transformations of price, often including up and down volume, advance/decline
data and other inputs. These indicators are used to help assess whether an asset is trending, and if
it is, the probability of its direction and of continuation. Technicians also look for relationships
between price/volume indices and market indicators. Examples include the relative strength
index, and MACD. Other avenues of study include correlations between changes in options
(implied volatility) and put/call ratios with price. Also important are sentiment indicators such as
Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques may ignore
the other approaches, yet many traders combine elements from more than one technique. Some
technical analysts use subjective judgment to decide which pattern(s) a particular instrumentreflects at a given time and what the interpretation of that pattern should be. Others employ a
strictly mechanical or systematic approach to pattern identification and interpretation.
Technical analysis is frequently contrasted with fundamental analysis, the study of economic
factors that influence the way investors price financial markets. Technical analysis holds that
prices already reflect all such trends before investors are aware of them. Uncovering those trends
is what technical indicators are designed to do, imperfect as they may be. Fundamental indicators
are subject to the same limitations, naturally. Some traders use technical or fundamental analysis
exclusively, while others use both types to make trading decisions.
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