financial mangment

1. Name Zainab Khurshid
Class BBA 4th
Roll No 161268
Assignment IBF
Assigned By Sir Allah Ditah

2. Factors effecting value of stock
Fundamental Factors
In an efficientmarket,stockpriceswouldbe determined primarilybyfundamentals,which,atthe basic
level,refertoa combinationof twothings:
 An earningsbase,suchasearningspershare (EPS)
 A valuationmultiple,suchasa P/E ratio
An ownerof a commonstock has a claimon earnings,andearningspershare (EPS) isthe owner'sreturn
on hisor her investment.Whenyoubuyastock,you are purchasinga proportional share of an entire
future streamof earnings.That'sthe reasonfor the valuationmultiple:Itisthe price youare willingto
pay forthe future streamof earnings.
Part of these earningsmaybe distributedasdividends,while the remainderwill be retainedbythe
company(onyour behalf) forreinvestment.We canthinkof the future earningsstreamasa functionof
boththe currentlevel of earningsandthe expectedgrowthinthisearningsbase.
As showninthe diagram,the valuationmultiple (P/E),orthe stockprice as some multiple of EPS,isa
wayof representingthe discountedpresentvalue of the anticipatedfuture earningsstream.
The Earnings Base
Althoughwe are usingEPS,an accountingmeasure,toillustrate the conceptof earningsbase,thereare
othermeasuresof earningspower.Manyargue that cash-flow basedmeasuresare superior.For
example,freecashflowpershare isusedas an alternative measure of earningspower.
The way earningspowerismeasuredmayalsodependonthe type of companybeinganalyzed.Many
industrieshave theirowntailoredmetrics.Real estate investmenttrusts(REITs),forexample,use a

3. special measure of earningspowercalledfundsfromoperations(FFO).Relativelymature companiesare
oftenmeasuredbydividendspershare,whichrepresentswhatthe shareholderactuallyreceives.
Technical Factors
Thingswouldbe easierif onlyfundamental factorssetstockprices!Technical factorsare the mix of
external conditionsthatalterthe supplyof anddemandfora company'sstock.Some of these indirectly
affectfundamentals.(Forexample,economicgrowthindirectlycontributestoearningsgrowth.)
Technical factorsinclude the following:
Inflation.
We mentionedinflationasan inputintothe valuationmultiple,butinflationisahuge driverfroma
technical perspective aswell.Historically,low inflationhashada strong inverse correlationwith
valuations (lowinflationdriveshighmultiplesandhighinflationdriveslowmultiples).Deflation,onthe
otherhand,is generallybadforstocksbecause itsignifiesalossinpricingpowerforcompanies.
Economic Strength of Market and Peers.
Companystockstend to track withthe marketandwiththeirsectoror industrypeers.Some prominent
investmentfirmsargue thatthe combinationof overall marketandsectormovements –as opposedtoa
company'sindividualperformance –determinesamajorityof a stock'smovement.(There hasbeen
researchcitedthat suggeststhe economic/marketfactorsaccountfor90%.) For example,asuddenly
negative outlookforone retail stockoftenhurtsotherretail stocksas"guiltbyassociation"dragsdown
demandforthe whole sector.
Substitutes.
Companiescompete forinvestmentdollarswithotherassetclassesonaglobal stage.These include
corporate bonds,governmentbonds,commodities,real estate andforeignequities.The relation
betweendemandforU.S.equitiesandtheir substitutesishardto figure,butitplaysan importantrole.
Incidental Transactions.
Incidental transactionsare purchasesorsalesof a stockthat are motivatedbysomethingotherthan
belief inthe intrinsicvalue of the stock.These transactionsincludeexecutive insidertransactions,which
are oftenpre-scheduledordrivenbyportfolioobjectives.Anotherexampleisaninstitutionbuyingor
shortinga stockto hedge some otherinvestment.Althoughthese transactionsmaynotrepresent
official "votes cast"foror againstthe stock,theydo impactsupplyanddemandand,therefore,can
move the price.
Demographics.
Some importantresearchhasbeendone aboutthe demographicsof investors.Muchof it concerns
these twodynamics:

4. Middle-aged investors
whoare peakearnersthat tendtoinvestinthe stock market
Older investors
whotendto pull outof the marketin orderto meetthe demandsof retirement
The hypothesisisthatthe greaterthe proportionof middle-agedinvestorsamongthe investing
population,the greaterthe demandforequitiesandthe higherthe valuationmultiples.
Trends.
Oftena stock simplymovesaccordingtoa short-termtrend.Onthe one hand,a stock thatis movingup
can gather momentum,as"successbreedssuccess"andpopularitybuoysthe stockhigher.Onthe other
hand,a stock sometimesbehavesthe oppositewayina trendanddoeswhat iscalledrevertingtothe
mean.Unfortunately,because trendscutbothwaysandare more obviousinhindsight,knowingthat
stocksare "trendy"doesnothelpuspredictthe future
Liquidity.
Liquidityisanimportantandsometimesunder-appreciatedfactor.Itreferstohow muchinvestor
interestandattentionaspecificstockhas.Wal-Mart'sstock, forexample,ishighlyliquidandtherefore
highlyresponsive tomaterial news;the average small-capcompanyislessso.Tradingvolume isnotonly
a proxyfor liquidity,butitisalsoa functionof corporate communications(thatis,the degree towhich
the companyis gettingattentionfromthe investorcommunity).Large-capstockshave highliquidity –
theyare well followedandheavilytransacted.Manysmall-capstockssufferfromanalmostpermanent
"liquiditydiscount"because theysimplyare notoninvestors'radarscreens
Market Sentiment
Market sentimentreferstothe psychologyof marketparticipants,individuallyandcollectively.Thisis
perhapsthe mostvexingcategorybecause we know itmatterscritically,butwe are onlybeginningto
understandit.Marketsentimentisoftensubjective,biasedandobstinate.Forexample,youcanmake a
solidjudgmentaboutastock'sfuture growthprospects,andthe future may evenconfirmyour
projections,butinthe meantime,the marketmaymyopicallydwell onasingle piece of newsthatkeeps
the stock artificiallyhighorlow.Andyoucan sometimeswaitalongtime inthe hope thatother
investorswillnotice the fundamentals.