The document provides an overview of various analysis methods used to evaluate investments, including fundamental analysis, quantitative analysis, technical analysis, and market theories like the efficient market hypothesis. It then discusses several types of fundamental analysis, including macroeconomic analysis and how fiscal and monetary policy can impact industries. Different market theories are also examined, suggesting markets are generally efficient but may not perfectly reflect all available information at once. Both technical and fundamental analysis are seen as valid approaches to help understand how markets move in response to different factors.

1. Fortuna Favi et Fortus LtdFortuna Favi Fortus

2. Overview of Analysis Methods
Overview of Analysis Methods
• Fundamental Analysis
• Quantitative Analysis
• Technical Analysis
• Market Theories
Efficient market hypothesis
Random walk theory
Rational Expectations Hypothesis
Fundamental Macroeconomic Analysis
• The Fiscal Policy Impact
• The Monetary Policy Impact
• The Flow of Funds Impact
• The Inflation Impact

3. Fundamental Industry Analysis
Fundamental Valuation
• Classifying Industries by Product or Service
• Classifying Industries by Stage of Growth
• Classifying Industries by Competitive Forces
• Classifying Industries by Stock Characteristics
• Dividend Discount Model
• Using the Price-Earnings Ratio
Technical Analysis
• Comparing Technical Analysis to Fundamental Analysis
• Commonly Used Tools in Technical Analysis

4. Analysis Methods
• Lots of information available when making an investment decision. Such as:
– market and economic,
– Data & stock charts,
– industry and company characteristics etc
– Including a wealth of financial statistical data.
there are different branches of analysis which helps to organize the information.
• Fundamental Analysis
• Quantitative Analysis
• Technical Analysis
You need a clear understanding of what the techniques measure, how they are
determined, and what they infer/mean.

5. This involves a study of everything, other than the trading on the securities markets,
that can affect on a security’s value: macroeconomic factors, industry conditions,
individual company financial conditions, and qualitative factors such as management
performance.
Fundamental analysis pays attention to the following in a company:
Fundamental Analysis
Debt/Equity Ratio Market Share
Profit Margins Interest
Dividend Payout Asset Coverage
Earnings Per Share Dividend Coverage
Sales Penetration Product Or Marketing Innovation
Quality Of Management

6. The most important single factor affecting the price of a
corporate security is the actual or expected profitability of
the issuer.
That is, are profits sufficient to service debt, to pay
current dividends, or to pay larger dividends?
Fundamental Analysis

7. - Study of interest rates, economic variables, and industry or stock valuations using
computers, databases, statistics and an objective, mathematical approach to
valuation.
Normally a search is done for patterns and the reasons behind these patterns, in
order to identify and profit from anomalies in valuation.
Quantitative techniques often rely on the use of statistics to determine the likelihood
of a particular investment outcome.
Thus:
Fundamental analysis is the use of quantitative and
qualitative measures to determine future market trend.
Quantitative Analysis

8. Studies historical stock prices and stock market behavior
to identify recurring patterns in the data. It requires large
amounts of information, can be time consuming and
cumbersome.
Technical analysts study price movements, trading
volumes, and data on the number of rising and falling
stock issues over time looking for recurring patterns that
will allow them to predict future stock price movements.
Technical Analysis

9. It is believed that by studying the “price action” of the
market, analysts can have better insights into the emotions
and psychology of investors. The contention is - because
most investors fail to learn from their mistakes, identifiable
patterns exist. Factors such as mass investor psychology
and the influence of program trading affects market prices.
E.g., Greed can force prices to rise to a level far higher than
warranted by anticipated earnings.
Also, uncertainty can cause investors to overreact to news
and sell quickly, causing prices to drop suddenly.
Technical Analysis

10. Market Theories - Financial
Three theories are applicable in providing explanations of
the behavior of stock markets. They are:
• Efficient Market Hypothesis
• Random Walk Theory
• Rational Expectations Hypothesis

11. Efficient Market Hypothesis
Assumes that profit-seeking investors in the marketplace
react quickly to the release of new information.
As new information about a stock appears, investors
reassess the intrinsic value of the stock and adjust their
estimation of its price accordingly.
Therefore, at any given time, a stock’s price fully reflects all
available information and represents the best estimate of
the stock’s true value.

12. Example: Food for thought!
Based on the efficient-market hypothesis, if all investors have
the same information, values and behave rationally (conditions
which don’t always hold...), all assets will be priced “correctly”.
i.e …, it is impossible to ‘beat the market’ by finding
undervalued stocks or selling stocks at a higher price than
they’re worth.
Thus when taking the efficient market hypothesis into account:
– look for the things you value in places that other people
have systematically failed to look.
– be aware that if something looks too good to be true, it
probably is.

13. Random Walk Theory
Postulation that new information concerning a stock is
disseminated randomly over time. Therefore, price
changes are random and bear no relation to previous price
changes.
If this is true, then past price changes contain no useful
information about future price changes because any
developments affecting the company have already been
reflected in the current price of the stock.

14. Rational Expectations Hypothesis (REH)
..states that rational expectations will not differ from optimal
forecasts using all available information.
Thus it is reasonable to assume that people act rationally because it
is costly not to have the best forecast of the future
(REH) assumes that people are rational and make intelligent
economic decisions after weighing all available information.
Also that people have access to necessary information and will use it
intelligently in their own self-interest.
Thus, past mistakes can be avoided by using the information to
anticipate change.

15. Market Theories: Summary
The efficient market hypothesis, the random walk theory
and the rational expectations hypothesis all suggest that
stock markets are efficient.
But studies exist that support these theories but also support
the existence of market in efficiencies. E.g., it is unlikely
that:
• New information is available to everyone at the same time
• All investors react immediately to all information in the
same way
• All investors make accurate forecasts and correct
decisions.

16. E.g., investors do not react in the same way to the similar
information. Some may buy a security at a certain price
hoping to receive income or make a capital gain and
another sell for profit.
Also, not everyone can make accurate forecasts and
correct valuation decisions.
Market Theories: Summary

17. Conclusion:
• Both Technical analysis and fundamental analysis are
valid approaches when interpreting markets.
• Both methods can provide helpful insight at
understanding how the market moves and reacts to
certain stimulants

18. Macro
Economic
Analysis

19. Macro-Economic Factors
Investor expectations and the prices of securities can be
influenced by a myriad of factors. This factors can be
grouped under the following:
• Fiscal Policy
• Monetary Policy
• International Factors e.g. war, unexpected election
results, regulatory changes, technological innovation
etc.
• Business Cycles

20. Definitions
The policy pursued by the federal
government to influence economic growth through the use
of taxation and government spending to smooth out/
influence fluctuations of the business cycle. Or means by
which a government adjusts its spending levels and tax rates
to monitor and influence a nation's economy.
Deliberate manipulation/regulation of the
demand and supply of money in order to influence the
economy or Economic policy designed to improve the
performance of the economy by regulating money supply
and credit.
Fiscal Policy
Monetary Policy

21. A graph showing the relationship between
yields of bonds of the same quality but different
maturities.
A normal yield curve is upward sloping depicting the fact
that short-term money usually has a lower yield than
longer-term funds. When short-term funds are more
expensive than longer term funds the yield curve is said to
be inverted.
Definitions
Yield Curve

22. Fiscal Policy & Its Impact
The two most important tools of fiscal policy are levels of
government expenditures and taxation because they affect
overall economic performance and influence the
profitability of individual industries.
• Tax Changes: governments can alter the spending power
of individuals and businesses.
An increase in sales or personal income tax leaves
individuals with less disposable income, which curtails
their spending; a reduction in tax levels increases net
personal income and allows them to spend more.

23. Tax Changes (contd)
• Higher taxes on profits, generally speaking, reduce the
amount businesses can pay out in dividends or spend on
expansion. Increases in corporate taxes also limit
companies’ incentive to expand by lowering after-tax
profit levels.
It is noteworthy to mention that several factors limit the
effectiveness of fiscal policy.
E.g., the time-lag between the time fiscal action is taken
and the time taken for the action to affect the economy.
Fiscal Policy & Its Impact

24. • Government Spending: can influence aggregate spending
in the economy by increasing or decreasing government
spending on goods, services and capital programs. - an
increase in government spending stimulates the economy
in the short run, while a cutback in spending has the
opposite effect.
Equally, tax increases lower consumer spending and
business profitability, while tax cuts boost profits and
common share prices and thereby spur the economy.
Also, Import quotas and tariffs have been used to shield
domestic shoe, clothing and automobile producers from
foreign competition.
Fiscal Policy & Its Impact

25. • Government Debt: Fiscal and monetary policy choices
affect the general level of interest rates, the rate of
economic growth and the rate of corporate profit growth,
and all of them affect the valuation of stocks. With high
levels of government and consumer indebtedness, the
government’s ability to reduce taxes or increase
government spending is impaired.
Presently, consumer debt is at record-high levels as
consumers have been spending more and saving less.
This could have the long-term effect of increasing
interest rates and dampening future economic growth.
Fiscal Policy & Its Impact

26. Monetary Policy & Its Impact
The Central Bank is responsible for maintaining the external
value of the currency and encouraging real sustainable
economic growth by keeping inflation low, stable and
predictable.
If these goals are threatened, the bank should take corrective
action by influencing the rate of monetary growth and
encourage interest rates to reflect the change.
If, during a period of economic expansion, demand for credit
grows and prices move upwards too quickly, the central
Bank will try to lessen the pressure by restraining the rate of
growth of money and credit.
This usually leads to higher short-term interest rates.

27. On the other hand, if the economy appears to be slowing
down, the CBN may pursue an easier monetary policy that
increases the money supply and the availability of credit,
leading to lower short-term interest rates.
Changes in monetary policy affect interest rates and corporate
profits, the two most important factors affecting the prices of
securities.
Thus, market participants try to gauge the impact of each piece
of economic news
Monetary Policy & Its Impact

28. Monetary Policy And The Bond Market
When economic growth begins to accelerate, bond yields
rise rapidly, thereby tempering higher inflation.
If nothing is done nothing to calm the bond market’s fear of
inflation, then bond yields may soar, possibly leading to a
crisis in debt markets affecting Billions of dollars of debt.
Thus steps must be taken to raise short-term interest rates to
slow economic growth and contain inflationary pressures.
This may lead to a more moderate economic growth rate or
even a growth recession (a temporary slowdown in
economic growth that does not lead to a full recession).

29. If long-term rates now fall while short-term rates rise, then
the bond market might temporarily be signaling its
approval of the degree of economic slowing.
E.g, if short term interest rates is raised to slow down
economic growth and bond yields fall simultaneously,
reflecting the perceived success of this policy, then the
balance between economic growth and the needs of the
bond market would have been maintained.
Monetary Policy And The Bond Market

30. Monetary Policy & The Yield Curve
When long-term bond yields fall while short-term rates rise,
this is called an inverting or a tilting of the yield curve. It
suggests a temporary reprieve from short-term interest rate
pressure and less competition for equities from the level of
bond yields. The general process is:
• Rapidly rising bond yields cause a collapse in bond
prices. (Recall the inverse relationship between bond
prices and yields.)
• As short-term interest rates rise, the rate at which bond
yields increase slows down.

31. • As this rise in short-term rates continues, the economy
usually slows, bonds begin to stabilize and briefly fall
less than equities. >> due to the fact that a slowing of
economic growth benefits bonds at the expense of stocks.
• Suddenly, with each short-term interest rate increase, the
long-term rate begins to fall. This is crucial evidence that
the bond market is satisfied with the slowing of economic
growth.
A decline in long-term rates not only reduces competition
between equities and bonds, it may also result in lower
short-term rates.
Monetary Policy & The Yield Curve

32. On the other hand, higher real bond yields over time
increase the degree of competition between bonds and
equities and slowly undermine equity markets.
A tilting yield curve is, however, very different from
periods in which the whole yield curve is falling, as it
does in the late stages of a recession.
Monetary Policy & The Yield Curve

33. The Flow Of Funds Impact
When the relative valuation of stocks and bonds or stocks
and T-bills changes, capital flows from one asset class to
the other.
These flows are determined largely by shifts in the
demand for stocks and bonds on the part of Nigerian retail
and institutional investors and of foreign investors. These
shifts are caused largely by changes in interest rate levels.
However, understanding why these shifts occur is
important to determining if a rise or fall in stock market
levels is sustainable.

34. • Net Purchases Of Nigerian Equity Mutual Funds: Net
purchases of Canadian equity mutual funds influence the
TSX. Falling interest rates tend to improve the value of
stocks relative to bonds, equity mutual fund purchases
should rise as interest rates fall.
• Non-resident Net Purchases: the direction of the
markets is also influenced by new demand by foreign
investors for Nigerian stocks and bonds. Foreign
investors tend to view an appreciating market and a
strengthening currency as good reasons to buy that
country’s stocks.
The Flow Of Funds Impact

35. The Inflation Impact
Widespread uncertainty and lack of confidence in the future
is what inflationary conditions create. These factors tend to
result in higher interest rates, lower corporate profits, and
lower price-earnings multiples.
Thus, there is an inverse relationship between the rate of
inflation and price-earnings multiples.
Inflation also means higher inventory and labour costs for
manufacturers which is usually passed on to the final
consumer in the form of higher prices. This cannot be done
indefinitely for consumer resistance develops, reducing
corporate profits.

36. Industry
Analysis

37. Fundamental Industry Analysis
It is believed that industry and company profitability has
more to do with industry structure than with the product
that an industry sells.
Industry structure results from the strategies that companies
pursue relative to their competition. Companies pursue
strategies that they feel will give them a sustainable
competitive advantage and lead to long-term growth.
Pricing strategies and company cost structures affect not
just long-term growth, but the volatility of sales and
earnings.

38. Therefore, industry structure affects a company’s stock
valuation. It is a framework that can easily be applied to
virtually every industry.
This framework can be applied to virtually every industry.
Investors and investment analysts rely on research
departments and other sources of information on industry
structure.
Thus, industries can be classified by Product or Service,
Stage Of Growth, Competitive Forces and Stock
Characteristics,
Fundamental Industry Analysis

39. Industry Classification by Product or Service
Most industries are identified by the product or service they
provide. E.g., U.S. market has about 90 different industry
groups.
However, an astute investor can understand the competitive
forces within an industry by classifying industries based on
their prospects for growth and their degree of risk.
These two factors help determine stock values.

40. • Estimating Growth: involves the study of an industry’s
reported revenues and unit volume sales over the last
several years, preferably over more than one business
cycle. Three key questions should be asked:
How does the growth in sales compare with the rate of
growth in nominal Gross Domestic Product (GDP)?
How does the rate of change in real GDP compare with
the industry’s rate of change in unit volumes?
How does the industry’s price index compare with the
overall rate of inflation?
Industry Classification by Product or Service

41. • Estimating Growth contd
An extension of this approach to all companies in the same
industry should enable an assessment of how effectively any
one company is competing.
E.g., is the company acquiring a growing share of a growing
industry / a growing share of a stable industry / a growing
share of a declining industry or a declining share of a
declining industry?
Also, a company’s revenues result from a combination of
the prices they charge and the volume of unit sales. Revenue
growth may result from higher prices or increased sales
volume.
Industry Classification by Product or Service

42. • Estimating Growth contd
Is recent revenue growth improving? How stable are prices
or volume?
The degree of stability is also important in understanding the
degree of investment risk and the possible timing of the
investment during a business cycle.
Industry Classification by Product or Service

43. • Laws Of Survivorship: All industries exhibit a life-cycle
characterized by Initial or Emerging Growth, Rapid
Growth, Maturity and Decline. But length of each stage
varies from industry to industry and from company to
company.
Each stage in the industry life cycle affects the
relationship between a firm’s pricing strategies and its
unit cost structure, as sales volume grows or declines.
Often, as the size of a market increases, a decline in unit
costs occurs due to economies of scale. These may result
from experience gained in production or volume price
discounts for raw materials used in production.
Industry Classification by Product or Service

44. Companies constantly strive to establish sustainable
competitive advantage, and firm usually become either:
• A low-cost producer capable of withstanding price
competition and otherwise generating the highest
possible profit margins; or
• A producer of a product that has real or perceived
differences from existing products. These differences
may make it possible to achieve higher profit margins
while avoiding intense price competition.
Industry Classification by Product or Service

45. Smaller market segments or niches are left un-serviced by
firms who focus on either of these strategies are usually
filled by smaller, specialized companies, known as niche
players.
Industry Classification by Product or Service

46. Classifying Industries By Stage Of Growth
• Emerging Growth Industries: New products or services
are being developed at all times to meet evolving needs
and demands- e.g., rapid innovation is particularly
evident in software and hardware development in the
computer industry.
Emerging growth industries may not always be directly
accessible to equity investors if privately owned
companies dominate the industry, or if the new product or
service is only one activity of a diversified corporation.
They maybe unprofitable at first, although future
prospects may appear promising. Large start-up
investments may even lead to negative cash flows.

47. • A growth industry - one in which sales and earnings are
consistently expanding at a faster rate than most other
industries. - these industries are referred to as growth
companies and their common shares as growth stocks.
They should have an above-average rate of earnings on
invested capital over a period of several years. It should
also be possible for the company to continue to achieve
similar or better earnings on additional invested capital,
showing increasing sales in terms of both Naira and units,
with a firm control of costs. Usually they have able,
aggressive managements willing to take risks with use of
capital.
Classifying Industries By Stage Of Growth

48. • There might be substantial spending on research to
develop new products. During the rapid growth period,
companies that survive lower their prices as their cost of
production declines and competition intensifies. Much of
their expansion is with the use of retained earnings – not
paying out large dividends. Investors are usually willing
to pay more for securities that promise growth of capital
i.e. growth securities are characterized by relatively high
price-earnings ratios and low dividend yields. They have
an above average risk of a sharp price decline if, the
marketplace comes to believe that future growth will not
meet expectations.
Classifying Industries By Stage Of Growth

49. • Mature Industries: characterized by a dramatic slowing
of growth to a rate that more closely matches the overall
rate of economic growth. Both earnings and cash flow
tend to be positive, but within the same industry, it is
more difficult to identify differences in products between
companies.
Price competition increases, profit margins usually fall,
and companies may expand into new businesses with
better prospects for growth.
Usually they experience slower, more stable growth rates
in sales and earnings.
Classifying Industries By Stage Of Growth

50. Mature Industries contd:
Though their share prices are not immune to decline, during
recessions, stable growth companies usually demonstrate a
decline in earnings that is less than that of the average
company.
Classifying Industries By Stage Of Growth

51. • Declining Industries: As industries move from the stable
to the declining stage, they tend to grow at rates
comparable to overall economic growth rate, or they stop
growing and begin to decline.
They produce products for which demand has declined
due to changes in technology, an inability to compete on
price, or changes in consumer tastes.
Cash flow may be large, because there is no need to invest
in new plant and equipment.
At the same time, profits may be low.
Classifying Industries By Stage Of Growth

52. According to M. Porter, there are five basic competitive
forces determine the attractiveness of an industry and the
changes that can drastically alter the future growth and
valuation of companies within the industry. These are:
• Ease of entry for new competitors to that industry
• Degree of competition between existing firms
• Potential for pressure from substitute products
• Extent to which buyers of the product or service can put
pressure on the company to lower prices:
Classifying Industries By Competitive Forces

53. • The extent to which suppliers of raw materials or inputs
can put pressure on the company to pay more for these
resources; these costs affect profit margins or product
quality.
Thus, companies can thrive only if they meet customers’
needs. Therefore, profit margins can be large only if
customers receive enough perceived value.
Classifying Industries By Competitive Forces

54. Classifying Industries By Stock Characteristics
Industries can be broadly classified as either Cyclical or
Defensive.
Few, if any, industries are immune from the adverse effects
of an overall downturn in the business cycle, but the term
cyclical applies to industries in which the effect on earnings
is most pronounced.
• Cyclical Industries: They usually are sensitive to global
economic conditions, swings in the prices of international
commodities markets, and changes in the level of foreign
exchange. When business conditions are improving,
earnings tend to rise dramatically.

55. Cyclical Industries contd
Interest expenses on the debt of cyclical industries can
accentuate these swings in earnings. Cyclical industries fall
into three main groups:
• Commodity basic cyclical, such as forest products, mining,
and chemicals
• Industrial cyclical, such as transportation, capital goods,
and basic industries (steel, building materials)
• Consumer cyclical, such as merchandising companies and
automobiles
Classifying Industries By Stock Characteristics

56. Cyclical Industries contd
• Most cyclical industries benefit from a declining Naira
value, since this makes their exportable products
cheaper for international buyers.
Classifying Industries By Stock Characteristics

57. • Defensive Industries: they have relatively stable return
on equity (ROE) and tend to do well during recessions.
this category includes blue-chip and income stocks.
These are actually overlapping categories.
For example, the term blue-chip denotes shares of top
investment quality companies, which maintain earnings
and dividends through good times and bad. This record
usually reflects a dominant market position, strong
internal financing and effective management.
Classifying Industries By Stock Characteristics

58. • Speculative Industries: Though all investment in
common shares involves some degree of risk because of
ever-changing stock market values, the word speculative
is usually applied to industries (or share) in which the risk
and uncertainty are unusually high due to a lack of
definitive information - Emerging industries are often
considered speculative.
Profit potential of a new product or service attracts many
new companies and initial growth may be rapid. But a
shakeout occurs and many of the original participants are
forced out of business as the industry consolidates and a
few companies emerge as the leaders.
Classifying Industries By Stock Characteristics

59. Speculative Industries contd
The term speculative can also be used to describe any
company, even a large one, if its shares are treated as
speculative.
E.g, shares of growth companies can be bid up to high
multiples of estimated earnings per share as investors
anticipate continuing exceptional growth. Should investors
begin to doubt expectations, the price of the stock will fall.
Thus, investors are “speculating” on the likelihood of
continued future growth which ‘may’, not materialize
Classifying Industries By Stock Characteristics

60. • Return On Equity (Roe): This ratio is important to
shareholders because it reflects the profitability of their
capital in the business. It is key to understanding/
comparing defensive to cyclical industries. It is calculated
as:
During economic downturns, defensive industries also
demonstrate falling ROE, but their ROE falls less
dramatically than those of cyclical industries.
Classifying Industries By Stock Characteristics
(Net Earnings before extraordinary Items) X 100
Total Equity

61. During economic upturns and periods of prolonged
economic growth, the ROE of defensive industries tends not
to rise as much as that of cyclical industries.
Defensive industries tend to outperform cyclical industries
during recessions. Because the ROE of a cyclical industry
falls faster than the ROE of a defensive industry during
recessions, cyclical stock prices also fall faster.
Thus, stocks with a stable ROE demonstrate defensive price
characteristics. But, during periods of sustained economic
growth, the superior growth in the ROE of cyclical
industries tends to produce superior price performance in
those industries.
Classifying Industries By Stock Characteristics

62. Fundamental Valuation Models
• Dividend Discount Model (DDM): it shows how
companies with stable growth are priced (in theory). It
relates a stock’s current price to the present value of all
expected future dividends into the indefinite future. It
assumes:
– there will be an indefinite stream of dividend
payments, whose present values can be calculated.
– that these dividends will grow at a constant rate (g –
the growth rate in the formula).

63. The discount rate used is the market’s required or
expected rate of return for that type of investment i.e. rate
of return as the return that compensates investors for
investing in that stock, given its perceived riskiness.
Fundamental Valuation Models

64. It is represented in a mathematical formular as:
Where:
• Price is calculated as the current intrinsic value of the
stock in question
• Div0 - dividend paid out in the current year
• Div1 - expected dividend paid out by the company in 1yr
• r is the required rate of return on the stock
• g is the assumed constant growth rate for dividends
Price = Div0 (1+g) = Div1
r-g r-g
Fundamental Valuation Models

65. Example: ABC Company is expected to pay a N1 dividend
next year. It has a constant long-term growth rate (g) of 6%
and a required return (r) of 9%. Based on these inputs, the
DDM will price ABC at a value of:
(N1)/(0.09-0.06) = N33.33
Thus ABC stock has an intrinsic value of N33.33.
Interpretation: If ABC is selling for $25 in the market, the
stock is considered undervalued because it is selling below
its intrinsic value. Alternatively, if ABC is selling for $40,
the stock is considered overvalued because it is selling
above its intrinsic value.
Fundamental Valuation Models

66. It is noteworthy to mention that this is an over simplification
and future stock dividends are not predictable.
Also, a stock does not have a defined maturity, like a bond.
Fundamental Valuation Models

67. Price Earnings Ratio (P/E Ratio)
• Price Earnings Ratio (P/E Ratio): this allows investors
compare a companys’ prospects - a high P/E ratio suggests a
company has strong growth potential.
E.g., assume that earnings growth is constant and that the rate
at which dividends are paid out is constant
- (the percentage of earnings paid out as dividends is known
as the dividend payout ratio).
Then the price of the stock, divided by next year’s earnings,
will be equal to the payout ratio divided by r – g, which is the
same denominator used in the Dividend Discount Model
(DDM) calculation.

68. For information purposes the formular is represented below
as it is essential to be able to interpret the ratio.
Given two similar companies that pay out a large proportion
of earnings, the company that can maintain these payout
levels has a more dependable earnings stream.
…, all things being equal, a company with more stable
earnings should have a higher P/E ratio than a similar type
of company with less stable earnings.
…, a growth company will have a higher P/E only if the
long-run growth rate (g) is expected to accelerate.
Price Earnings Ratio (P/E Ratio)
P/E = Payout Ratio/(r-g)

69. it is assumed that when confidence is high, P/E ratios are
also high, and when confidence is low, P/E ratios are low.
However, P/E levels are strongly inversely related to the
prevailing level of inflation and, therefore, to the prevailing
level of interest rates.
P/Es are volatile, because earnings vary. In some cases,
highly cyclical or economically sensitive companies may
have losses or low levels of earnings that produce unrealistic
or unusable P/Es.
To the extent the market is efficient, a low P/E may result
from the market’s ability to correctly anticipate an imminent
decline in earnings.
Price Earnings Ratio (P/E Ratio)

70. Technical Analysis
It is is the process of analyzing historical market action in
an effort to determine probable future price trends.
Technical analysts focus on the market itself, whether it be
the commodity, equity, interest rate or foreign exchange
market.
They study, and plot on charts, past and present
movements of prices, the volume of trading, statistical
indicators – trying to identify recurrent and predictable
patterns that can be used to predict future price moves.

71. Attempts to probe the psychology of investors collectively
or, i.e. the “mood” of the market. Market action is
dependent on 3 primary sources of information – price,
volume and time. It is based on three assumptions:
• That all influences on market action are automatically
accounted for or discounted in price activity – believing
known market influences are fully reflected in market
prices. That there is little advantage to fundamental
analysis. What is required is to study the price action. i.e.
“Letting the market talk,” -that the market will indicate
the direction and the extent of its next price move.
Technical Analysis

72. • Prices move in trends and those trends tend to persist
for relatively long periods of time. Thus, the primary
task of a technical analyst is to identify a trend in its early
stages and carry positions in that direction until the trend
reverses itself. - not as easy as it may sound.
• The future repeats the past. - belief that markets reflect
investor psychology and that the behavior of investors
tends to repeat itself. Investors tend to fluctuate between
pessimism, fear and panic, and optimism, greed and
euphoria. Comparing investor behavior as reflected in
market action with historical market behavior, the analyst
attempts to make predictions
Technical Analysis

73. Technical Analysis vs. Fundamental Analysis
Main difference: the technician studies the effects of supply
and demand (price and volume), while the fundamental
analyst studies the causes of price movements.
E.g. a fundamental analyst might suggest a bull market in
equities will likely come to an end due to rising interest
rates, a technical analyst would say that the appearance of a
head-and-shoulder top formation indicates a major market
top.

74. Studying fundamentals gives investors a sense of the long-
term price prospects for an asset … this serves an initial step
in investment decision-making.
>>at the point of deciding when and at what level to enter or
leave a market, technical analysis can serve a vital role,
particularly when investing or trading leveraged investment
products such as futures or options.
Technical Analysis vs. Fundamental Analysis

75. Tools of Technical Analysis
Four main methods used by a technical analyst to identify
trends and possible trend turning points are:
• Chart Analysis – graphs, candlestick charts, line charts,
point and figure charts, reversal & continuation patterns
etc.
• Quantitative Analysis - statistical tools i.e. moving
averages and oscillators, Moving Average Convergence-
divergence (MACD)
• Analysis of Sentiment Indicators – used by contrarian
investors in determining what the majority of investors
expect prices to do in the future

76. • Cycle Analysis- Long-term (<2yrs), Seasonal (1yr),
Primary/intermediate (9 to 26 weeks) and Trading cycles
(four weeks), reflected in the Elliot wave theory that that
there are repetitive, predictable sequences of numbers and
cycles found in nature and similar predictable patterns in
the movement of stock prices.
Additional tools used include:
Volume Changes: used to confirm other indicators in
bull/bear markets
Breadth of Market: monitors the extent or broadness of a
market trend using the cumulative advance-decline line
Tools of Technical Analysis

77. Summary
• Fundamental Analysis focuses on assessing the short-,
medium- and long-range prospects of different industries
and companies to determine how the prices of securities
will change.
• Quantitative Analysis involves studying interest rates,
economic variables, and industry or stock valuation using
computers, databases, statistics and an objective,
mathematical approach to valuing a company.
• Technical Analysis looks at historical stock prices and
stock market behavior to identify recurring and
predictable price patterns that can be used to predict
future price movements.

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Compiled by: Olufemi Feyisitan