Stock Market Operations

Module 2

DR.R.VENNILA
ASSOCIATE PROFESSOR,
SCHOOL OF COMMERCE
STUDIES,
JAIN UNIVERSITY
 Quick Recap

 Trading Software
 Common features of Trading Software
 How to choose a Trading Software
 Examples
 Related YouTube Videos
 Module 2

Fundamental Analysis
 Meaning and purpose of Fundamental analysis. Trading/investing, Fundamental analysis/technical
analysis, share price movement, Approaches in the fundamental analysis, EIC Analysis, Porter’s 5
Model, Comparative Valuation, Competitors, Factors affecting the stock market prices.
 Company analysis- Nature of the business and management structure of the company.
 Financial statements of the company-Earnings statement items, Common size statements, Ratio
Analysis, Types of ratios, Liquidity ratios, Debt ratios, Activity Matters, Profitability analysis,
Profitability Ratios, Valuation Ratios, SWOT Analysis of companies.
Technical Analysis
 Introduction to Technical Analysis, the basic assumptions, Dow Theory, Types of price charts, Different
Types of Candle Sticks, Price Pattern, Technical Indicators, Lagging Indicators or OSCILLATORS,
Relative Strength Index (RSI), Stochastic Oscillator, Exit Strategy (Risk Management
 Introduction

 Fundamental analysis is a method of assessing the intrinsic

value of a stock.
 It combines financial statements, external influences, events,
and industry trends. It is important to note that the intrinsic
value or a fair value of a stock does not change overnight
 Usage of Fundamental Analysis

 Fundamental analysis uses three sets of data:

1. historical data to check how things were in the past
2. publicly known information about the company, including
announcements made by the management and what others say
about the company
3. information that is not known publicly but is useful, i.e., how the
leadership handles crises, situations, etc.
 Elements of Fundamental Analysis
Performance of the overall industry the company participates in

Domestic political environment

Relevant trade agreements and external politics

The company’s financial statements

The company’s press releases

News releases related to the company and its business

Competitor analysis
Types of Fundamental Analysis

Qualitative: a Quantitative: an
study that analysis that is
involves brand purely number-
value, based and
management considers the
decisions, the company’s
financial financial
performance of statements and
the company concludes the
over a given share price from
period, and other the observations.
similar factors.
 Processes of Fundamental Analysis

 There are also two processes of fundamental analysis. One is top-down, and
the other is a bottom-up approach.
 The top-down approach looks into the macroeconomic factors first and then
digs into the specific company.
 On the other hand, the bottom-up approach analyses the company first and then
checks the effect of macroeconomic factors on the company’s performance.
Steps to do Fundamental Analysis

Economic,
industry, and
company
analysis

Evaluation of
Recommendation financial
statements

Study of non-
Use of FA tools
financial aspects
 1. Economic, industry, and company analysis
 Fundamental Analysis considers the industry’s structure, economy, industry dynamics,
aspects of broader markets, and all the other macroeconomic factors.
 The experts study the products, commodities, services rendered, and substitutes
available along with cost structure and revenue model and composition and the
company’s future goals and objectives.
 2. Evaluation of financial statements
 Every company report is studied closely – the balance sheets, income statement, cash
flow, price to book value of equity, the net market value of assets, and other vital
ratios with revenue.
 3. Study of non-financial aspects
 Besides a company’s financial statements, non-financial matters like competition,
management, business policies, etc., also influence a company. Therefore, in the
Fundamental Analysis of stocks, experts also look for factors that can influence or
undermine the company’s performance.
 4. Use of Fundamental Analysis tools
 Investors and analysts use financial ratios to determine a company’s financial standing.
It is used along with the available financial data from past reports to measure future
growth, stability, and investment.
 5. Recommendation
 Based on the study, investment decisions are taken. Analysts advise investors to buy,
sell, or hold security after carefully assessing its intrinsic value and financial stability.
 1. Economic Analysis

 To estimate the stock price changes, an analyst has to analyze the macro
economic environment and the factors peculiar to the industry he is concerned
with.
 The economic activities affect the corporate profits, investors, attitude and the
share prices. Fall in the GDP or a slackness inn the economic growth may lead
to fall in corporate profit and consequently the security prices.
 For the purpose of economic analysis, an analyst should be familiar with the
forecasting techniques.
Contd...

 It is important to predict the course of National economy because it

affects:
 Corporate profits
 Investor attitudes and expectations
 Security prices
 The investor makes an analysis of the economy to determine the
investment strategy.
 Strategic considerations in economic
analysis

 Involves a study of economic trends in the economy like growth

rate of GNP, employment, price level, aggregate corporate profits,
etc.
 Study of economic policies of the govt.
 Study of relationship between economic trends and policies and
stability of such relationships
 Study of world economic trends and their impact.
 Economic Forces

Political
Technological Role of stability and
Population
development government Balance of
trade

Performance Natural Business

of agriculture resources conditions
 Macroeconomic factors

a. Gross domestic product (GDP): GDP indicates the rate of growth of the economy. GDP
represents the aggregate value of the goods and services produced in the economy. GDP consists
of personal consumption expenditure, gross private domestic investment and government
expenditure on goods and services and net export of goods and services. The estimates GDP are
available on an annual basis.
b. Savings and investment: It is obvious that growth required investment which in turn requires
substantial amount of domestic savings. Stock market is a channel through which the savings of
the investors are made available to the corporate bodies.
 c. Inflation: A long with the growth of GDP, if the inflation rate also increases, then the
real rate of growth would be very little. The demand in the consumer product industry is
significantly affected. The industries which come under the government price control
policy may lose the market, for example Sugar. The government control over this
industry, affects the price of the sugar and thereby the profitability of the industry itself.
 d. Interest rates: The interest affects the cost of financing to the firms. A decrease in
interest rate implies lower cost of finance for firms and more profitability. More money is
available at a lower interest rate for the brokers who are doing business with borrowed
money. Availability of cheap fund encourages speculation and rise in the price of shares.
 e. Budget: The budget draft provides an elaborate account of the government
revenues and expenditures. A deficit budget may lead to high rate of inflation and
adversely affect the cost of production. Surplus budget may result in deflation.
Hence, balanced budget is highly favorable to the stock market.
 f. The tax structure: Every year in March, the business community eagerly awaits
the Government’s announcement regarding the tax policy. Concessions and
incentives given to a certain industry encourage savings. The Minimum Alternative
Tax (MAT) levied by the Finance Minister in 1996 adversely affected the stock
market.
 g. The balance of payment: The balance of payment is the record of a country’s money
receipts from and payments abroad. The difference between receipts and payments may
be surplus or deficit. Balance of payment is a measure of the strength of rupee on
external account. If the deficit increase, the rupee may depreciate against other
currencies, thereby, affecting the cost of imports.
 h. Monsoon and agriculture: Agriculture is directly and indirectly linked with the
industries. For example, Sugar, Cotton, Textile and Food processing industries depend
upon agriculture for raw-material. Fertilizer and insecticide industries are supplying
inputs to the agriculture. A good monsoon leads to higher demand for impute and result
in bumper crop. This would lead to buoyancy in the stock market. When the monsoon is
bad, agricultural and hydel power production would suffer. They cast a shadow on the
share market.
 i. Infrastructure facilities Infrastructure facilities are essential for the growth of
industrial and agricultural sector. A wise network of communication system is a must
for the growth of the economy. Regular supply of power without any power cut would
boost the production. Banking and financial sectors also should be sound enough to
provide adequate support to the industry and agriculture.
 j. Demographic factors The demographic data provides details about the population by
age, occupation, literacy and geographic location. This is needed to forecast the demand
for the consumer goods. The population by age indicates the availability of able work
force. The cheap labour force in India has encouraged many multinationals to start their
ventures. Indian labour is cheaper compared to the Western labour force.
Thank You