FUNDAMENTAL ANALYSIS:- Introduction:- Fundamental analysis examines the economic environment ,industry performance and company performance before making an investment decision. The three components of fundamental analysis are:1. Economic analysis2. Industry analysis3. Company analysis
Economic analysis:- Influence of economy: companies are a part of the industrial and business sector, which in turn is a part of the overall economy. In the Indian economy ,the first place are considered are the behavior of monsoon and the performance of agriculture. Secondly , India has a mixed economy, where the public sector plays a vital role. Thirdly , the monetary policy and trends in money supply which mainly depend on government’s budget policy.
Economic analysis:- Fourthly , the general business conditions in the form of business cycles or the level of business activity. Fifthly , the economic and political stability in the form of stable and long term economic policies and a stable political system with no uncertainty would also necessary. All of the above factors of the economy influence the corporate performance and in forecasting the growth of the economy and of industry.
Economic analysis:- Economic analysis aims at determining if the economic climate is conductive and is capable of encouraging the growth of business sector, especially the capital market. When the company expands ,most industry groups and companies are expected to benefit and grow. When the company declines most sectors and companies usually face survival problems.
Tools for economic analysis:- The most used tools for economic analysis are:1. Gross domestic product2. Monetary policy and liquidity3. Inflation4. Interest rates5. International influence6. Consumer sentiment7. Fiscal policy8. Influences on long term expectations9. Influences on short term expectations
Gross domestic product:- Gross domestic product is one measure of economic activity. Major components of GDP are; Consumer spending Investment spending Government expenditure Goods and services produced domestically for export Consumption in the process of import distribution
Monetary policy and liquidity:- A good monetary policy and liquidity is essential for the economy ,excess liquidity can be harmful. Excess money supply can lead to inflation, higher interest rates and higher risk premiums leading to costly sources of capital and slow growth. Inflation:- Inflation can be defined as a trend of rising prices caused by demand exceeding supply.
Interest rates:- Interest rate is the price of credit. It is the percentage of fee received or paid by individuals or organizations when they lend or borrow money. there are many kinds of interest rates bank primary lending rate ,treasury bill rate and so on. International influence:- One of the important measure of influence is the exchange rate. The PPP derives from the assumption that identical goods should be sold at identical prices.
Consumer sentiment:- consumer sentiment is usually expressed in terms of future expenditures planed and the feeling about future economy. Fiscal policy:- The fiscal policy of the government involves the collection and spending of revenue. In particular, fiscal policy refers to efforts by the government to stimulate the economy directly, through spending.
Long term growth expectations:- The long term growth path of the economy is determined by supply factors.The rate of growth of output can be seperated in to two distinct categories1. Growth from an increase in the factor inputs to production2. Growth in output relative to the growth of all factor inputsCobb-Douglas production function is Y=T*L*K*E
Influences on short termexpectations: Short terms expectations are mainly caused by demand factors. Fluctuations in demand relative to long term supply constraints create fluctuations in real GDP which are known as business cycles. Short term economic forecasting focuses on sources of demand as a means to predict future trends in economic variable.