The document provides an overview of security analysis and different analytical techniques used, including fundamental analysis and technical analysis. Fundamental analysis involves analyzing the economy, industry, and company to determine a company's intrinsic value. Technical analysis uses historical price and volume data to identify trends and patterns that can predict future price movements. Key techniques include chart analysis and identifying support/resistance levels and patterns like head and shoulders. The efficient market hypothesis suggests stock prices already reflect all available public information and it is difficult to outperform the overall market through analysis alone.

1. SECURITY ANALYSIS
Tools & Techniques
Fundamental &Technical Analysis
Prepared by
Jibumon K G

2. Security Analysis
 Security analysis is the analysis of traceable financial instruments
 It helps to finding the proper value of individual securities (stocks
and bonds).
 Security analysis involves the research and evaluation of financial
securities.
 Traders use security analysis to determine how to invest in a particular
market, how much to invest, and when to invest.
 Security analysis is divided into Fundamental Analysis and Technical
Analysis.

3. Fundamental Analysis
The fundamental analysis involve three steps ;
 Economic analysis
 Industry analysis
 Company analysis
Fundamental analysis is really a logical and systematic
approach to estimating the future dividends and share
price that is determined by a number of fundamental
factors relating to the economy, industry and company.

4. Components of Fundamental analysis

5. Economic analysis
The analysis of the state of the economy at the macro level incorporates
• The performance of the economy in the past,
• How it is performing in the present and ,
• How it is expected to perform in future.
Also relevant in this context is to know how various sectors of the economy
are going to grow in the future.
The analysis of the economic factors indicates the trends in macro
economic changes that effect the risk and return on investments.

6.  Growth rate of national income
 GDP
 NNP
 Economy or business cycle
 Inflation
 Inflation reduces the purchasing power and profitability
 WPI
 CPI
 Interest Rates
 cost of debt
 Availability of credit

7.  Government revenue ,expenditure and deficit .
 Government is the largest supplier and investor of money
 Exchange rates
 Trade deficit and balance of payment
 Trade deficit leads to inflation
 Infrastructure
 Political stability
 Monsoon
 India is an agrarian country and the agriculture depends on monsoon .

8. An investor ultimately invests his money in the securities of one or more
specific companies, each company can be characterized as belonging to an
industry.
• The performance of companies would therefore ,be influenced by the
fortunes of the industry to which it belongs.
“as a group of firms producing reasonably similar products which serve
the same needs of common set of buyers.”
Factors to be analysed in industry analysis ;
 Industry life cycle
 Industry characteristics
Industry analysis

9. • Introduction
• Growth
• Maturity
• Decline
• This kind of segregation is extremely
useful to an investor because the profitability
of an industry depends upon its stage of growth.
Industry life cycle

10. In an industry analysis there are a number of key characteristics that should
be considered by the analyst.
 Demand supply gap
 Competitive condition in the industry
 Permanence
 It is the phenomenon related to the products and the technology used by the industry.
 Labour conditions
 Attitude of government
 Supply of raw materials
 Cost structure
 The cost structure that is the fixed and variable cost, affect the cost of production and
profitability of the firm.
Industry characteristics

11. In company analysis, the analyst tries to forecast the future earnings of
the company because there is a strong evidence that the earnings have a
direct and powerful effect upon share prices.
 Analysis of financial statements
 Ratio analysis
 Fund flow
 Cash flow
 Common size
 Comparative
 Budget
Company analysis

12. The future prospects of the company would also depend upon the number
of other factors. Some of which is given below:
1. Company’s market share
2. Capacity utilization
3. Modernisation and expansion plans
4. Order book position
5. Availability of raw material
.

13. • A technical analysis believes that the share prices are determined by the
demand and supply forces operating in the market.
• The basic premise of technical analysis is that prices move in trends or
waves which may be upward or downward.
• According to the technical analysis the present trend influence the past
trend and the projection of future trends is possible by an analysis of the
past price trend.
Technical Analysis
Technical Analysis can be defined as an art and science of forecasting
future prices based on an examination of the past price movements.

14. Technical analysis uses price and volume data shown in charts to
determine the possible future price of a security. Some technical analysts
do not consider whether a stock is undervalued or overvalued, they only
look at the security's past trading data and what this information can
provide with respect to where the price might move in the future.
Technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself
Cont…………..
Principles of technical analysis

15. The market discounts everything.
This principle explains that any information available in the market is
already reflected in the price of stocks and indices. This includes all data
such as earnings announcements by companies, rise (or fall) in inflation or
even sentiments of investors.
Price moves in trends.
The price moves in trends
Price movements are believed to follow trends. This means that after a
trend has been established, the future price movement is more likely to be
in the same direction as the trend until the major trend changes and a
new trend is established.
History Tends To Repeat Itself
Technical analysis is that history tends to repeat itself, especially in terms
of price movement for the overall market and with individual stocks as
well.
.

16.  The theory was derived from 255 editorials in The Wall Street Journal written
by Charles H. Dow (1851–1902), journalist, founder and first editor of The Wall
Street Journal and co-founder of Dow Jones and Company
 Dow Theory is really a collection of theories about how financial markets move
over time.
 The Dow theory is based on the analysis of maximum and minimum market
fluctuations to make accurate predictions on the direction of the market.
 The theory explains how the stock market can be used by investors to understand
the health of the business environment.
 It was the first theory to explain that the market moves in trends.
Dow Theory

17. There are 3 kinds of market trends
These three types of trend are split by the length of time they occupy.
Primary trend
 Primary trends is long term cyclical trend last a year or more and are the
major market trends.
 They can be bull markets (price travelling up), bear markets (price trending
down) or sideways ranges.
Secondary tend
 Secondary reactions restraining force of on the primary trend.
 These are the opposite direction to the primary movement
 It longs a few weeks or perhaps months and usually counter-trend
corrections.
Dow Theory

18. Minor trend
Minor trends are not significant and have no analytical value as they are
of very short duration, Minor trends last less than three weeks.
Dow Theory

19. .

20. Accumulation phase
When the market comes down, the big investors do inform buying and
start purchasing the shares. That is called the accumulation phase. Here,
traders enter the market to buy (or sell) stocks against common market
opinions.
Public participation phase
In the public participation phase, when the market brings good business
news, the small investors initiate the purchase of stocks with the growth
in buying prices.
Panic phase
In panic phase takes place when the economy reaches its peak, and the
newspapers start publishing the bullish stories, the public participation
increases with volume. The big investors begin selling the shares bringing
the market down and then the bear market phases start..
Three trends in primary trend

21. Dow Theory

22.  The primary trend cannot be manipulated
Individuals or group or institutions cannot influence on the major trend
of the market
 The average discount everything
The price of the stocks includes everything to know about the markets.
Everything incorporates revenue potential, competitive edge,
management skills of the company, changes in the inflation rate, news of
natural calamity, along with the emotions of the investors in the stock
price. Future events are also included in the stock price to avoid risk.
 The theory is not infallible
The trend of the market and has no forecasting value as regards the
duration or the likely price target the peak or bottom of the bull and bear
markets
Assumptions of Dow Theory

23.  market value of the security related to demand and supply factor.
 There are both rational and irrational factors which surrender the supply
and demand factor of a security
 Security price behave in a manner that their movement is continues in a
particular direction for some length of time.
 Trend have been change when there is a shift in demand and supply
factor.
 Shift in demand and supply can be detected through charts prepped
specially to show market action.
 Patterns which are projected by charts record price movement and these
records patterns are used by analysts to make forecasts about the
movement of price in future.
Principles of Dow Theory

24.  A chart is a graphical representation of price and volume movements of a
stock over a certain period of time.
 Charts plot historical data based on a combination of price, volume as well
as time intervals.
 The use of charts is so prevalent, that technical analyst is often referred to
as chartists, there are three types of charts that are most commonly used.
Chart Types used in Technical Analysis
Line Chart
Bar Chart
Candle sticks
Types of Chart

25.  A line chart is probably the most common type of chart. This chart tracks
the closing prices of the stock over a specific period.
 Each closing price point is represented by a dot. And all the dots are
connected by lines to get the graphical representation.
 A line chart helps traders to spot trends in the price movement. However,
since it tracks closing prices, it does not offer much information regarding
intraday price movements.
Line chart

26. Line chart

27.  Bar charts enable traders to discover patterns more easily as they take
into account all the prices, open, high, low and close.
 The opening price is the horizontal dash on the left side of the horizontal
line and the closing price is located on the right side of the line.
 If the opening price is lower than the closing price, the line is often
colored black (or green) to represent a rising period. The opposite is true
for a falling period, which is represented by a red color.
Bar chart

28. Bar chart

29.  The price movements for each day are represented in the shape of a
candlestick.
 It is similar to a bar chart because it represents the four data points: high,
low, open and close.
 While bar charts give volatility information only for a single trading day,
candlestick charts can offer this information for a much larger time period.
In addition, the candlesticks come in different colors based on the price
movements.
 A falling candlestick is generally represented by a black or red body while a
rising candlestick is represented by a white or clear body.
Candlestick

30. Candlestick

31.  A chart pattern is a shape within a price chart that helps to suggest what
prices might do next, based on what they have done in the past.
 Chat patterns can be classified as
 Support and resistance pattern
 Reversal pattern
 Continues pattern
Support and resistant
Support level: This is a level at which the price of a stock does not fall
down any further. The price is likely to bounce back and moves up in the
opposite direction.
 Demand from buyers is expected to be much higher than that of sellers.
 The support level is always below the current market price.
Chart Patterns

32. Resistance level: A resistance level is the opposite of a support level. It is a
price point (ceiling) at which the stock price is not expected to rise any
higher.
 This is a price point at which there are more sellers than buyers in the
market for the particular stock.
 The resistance level is always above the current market price.
Trading strategy
 Buying when the price is closing in on the support level
 Sell when the price is moving closer to the resistance level.
 However, traders should wait for some confirmation that the market
is still following the trend.
.

33. Chart…

34. Reversal chart patterns indicate that a trend may be about to change
direction.
The most important reversal patterns are:
 Head and Shoulders & Inverse Head and Shoulders
 Double Tops and Bottoms
 Triple Tops and Bottoms
 Spike (V)
 Rounding (or saucer) Bottom
Reverse Patterns

35.  The head and shoulders pattern tries to predict a bull to bear market
reversal.
Characterised by a large peak with two smaller peaks either side ( The left
shoulder and Right shoulder), all three levels fall back to the same support
level. The trend is then likely to breakout in a downward motion.
 A horizontal line joining the bottom of this formation as the neckline ,
after breaking the neck line the price is expected to decline sharply.
 The header and shoulder formation usually occur at the end phase and
indicative of a reversal trend.
Head and Shoulders & Inverse Head and Shoulders

36. The Inverse Head and Shoulders (informally known as the 'Reverse Head
and Shoulders pattern) resembles the same structure as the standard
formation but reversed. The Inverse Head and Shoulders is observable in a
downtrend and indicates a reversal of a downtrend as higher lows are
created.
• When the price rise the above neck line the formation of the pattern is
completed and the price is expected to go up’
• This pattern indicate a n upcoming bullish trend.
Inverse Head and Shoulders

37. Double Bottom
A double bottom looks similar to the letter W and indicates when the
price has made two unsuccessful attempts at breaking through the
support level.
It is a reversal chart pattern as it highlights a trend reversal. After
unsuccessfully breaking through the support twice, the market price shifts
towards an uptrend.
Continues pattern

38. Opposite to a double bottom, a double top looks much like the letter M.
The trend enters a reversal phase after failing to break through the
resistance level twice. The trend then follows back to the support
threshold and starts a downward trend breaking through the support line.
Double Top

39. The ascending triangle is a bullish ‘continuation’ chart pattern that
signifies a breakout is likely where the triangle lines converge. To draw this
pattern, you need to place a horizontal line (the resistance line) on the
resistance points and draw an ascending line (the uptrend line) along the
support points.
Ascending triangle

40. The descending triangle represents a bearish market downtrend. The
support line is horizontal, and the resistance line is descending, signifying
the possibility of a downward breakout.
Descending triangle

41.  The efficient market hypothesis (EMH) or theory states that share prices
reflect all information ( both public and privet)
 stocks always trade at their fair value on exchanges ( Intrinsic value)
*****
 Share price fluctuation are random and do not follow any regular pattern
 It is the proposition that current stock prices fully reflect available
information about the value of the firm, and there is no way to earn
excess profits, (more than the market overall), by using this information.
 It suggests that profiting from predicting price movements is very difficult
and unlikely. “no one can predictably outperform the market”
Efficient Market Theory

42. Market efficiency :The accuracy and speed with which in which market
translates the expectation into prices are termed are market efficiency.
 market is said to be “efficient” if prices adjust quickly and,on average,
without bias, to new information
Example;
A-one Ltd released 1 Lakhs shares at Rs.10 per share. In an efficient
market, this would mean that A-Once Ltd ‘s actually worth about Rs.10
Lakhs when accounting for its total holdings, all of its debts and a realistic
projection of its future growth. If shares fall to Rs.8, traders will have an
incentive to hold their shares or even buy more because the market will,
sooner than later, efficiently reflect the stock’s actual value of Rs10.

43. Inefficient Market
 Inefficient markets tend to create bubbles.
 Traders buying and selling stocks based more on how they think other
traders will react than on any analysis of the asset itself.
For example,
if the market is inefficient, a jump of A- One shares to Rs.20 would reflect
traders buying the shares not because they believe A-One’s fairly valued at
Rs.20 per share but because they believe other traders will pay Rs.21 for
it.

44. THREE VERSIONS OF THE EFFICIENT MARKETS HYPOTHESIS

45. Weak efficiency -
 This type of EMH claims that all past prices of a stock are reflected in
today's stock price.
 Under this theory, no trader can capture gains from technical analysis
because every trader has access to the same historic information and has
priced this into their position.
Semi-strong-form market efficiency
 Reflect all public data (including all historical data and all current financial
statement data) in a stock’s current market price.
 Neither technical analysis nor fundamental analysis can be utilized to
outperform the overall market.
 Allow for security mispricing due to private information. So investors with
access to private information may be able to earn excessive returns.
THREE VERSIONS OF THE EFFICIENT MARKETS HYPOTHESIS

46. Strong
 The strong form of market efficiency hypothesis states that the current
price fully incorporates all existing information, both public and private
 A trader might occasionally capture unusual gains, this is almost always
because of short-term inefficiency.
 This form of market efficiency implies that there is no way to achieve
excessive returns in financial markets.
 Even inside trading no longer work because security analysis and portfolio
managers who have access to information more quickly than ordinary
investors would not be able to use it to earn more profit

47. 1. market is perfect and free without market restrictions
2. Market absorb all the information quickly and effectively
3. Information is free and costless and is quickly available to all at same
time
4. Information is unbiased and correct
5. Market players can analyse the information quickly and the information
absorbed in the market through buy and sell signals.
6. Demand and supply pressure are absorbed in the market through price
change .
Assumptions

48. .
Thank you
Department of Management Studies
MACFAST