Professional Documents
Culture Documents
Capital Market and Debt Market
Capital Market and Debt Market
Debt market refers to the financial market where investors buy and sell debt securities, mostly in
the form of bonds. These markets are important source of funds, especially in a developing economy
like India.
The most distinguishing feature of the debt instruments of Indian debt market is that the return is
fixed. This means, returns are almost risk-free. This fixed return on the bond is often termed as the
'coupon rate' or the 'interest rate'. Therefore, the buyer (of bond) is giving the seller a loan at a fixed
interest rate, which equals to the coupon rate.
Government Securities Market (G-Sec Market): It consists of central and state government
securities. It means that, loans are being taken by the central and state government. It is also the most
dominant category in the India debt market.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and
Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost and
hence remove uncertainty in financial costs.
The following eligibility criteria have been prescribed effective August 1, 2006 for listing of companies on BSE,
through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs):
1. Companies have been classified as large cap companies and small cap companies. A large cap
company is a company with a minimum issue size of Rs. 10 crore and market capitalization of not less
than Rs. 25 crore. A small cap company is a company other than a large cap company.
i. The minimum post-issue paid-up capital of the Company shall be Rs. 3 crore; and
ii. The minimum issue size shall be Rs. 3 crore; and
iii. The minimum market capitalization of the Company shall be Rs. 5 crore (market
capitalization shall be calculated by multiplying the post-issue paid-up number of
equity shares with the issue price); and
iv. The minimum income/turnover of the Company shall be Rs. 3 crore in each of the
preceding three 12-months period; and
v. The minimum number of public shareholders after the issue shall be 1000.
vi. A due diligence study may be conducted by an independent team of Chartered
Accountants or Merchant Bankers appointed by BSE, the cost of which will be borne
by the company. The requirement of a due diligence study may be waived if a
financial institution or a scheduled commercial bank has appraised the project in the
preceding 12 months.
a. In respect of the requirement of paid-up capital and market capitalization, the issuers shall be
required to include in the disclaimer clause forming a part of the offer document that in the
event of the market capitalization (product of issue price and the post issue number of shares)
requirement of BSE not being met, the securities of the issuer would not be listed on BSE.
b. The applicant, promoters and/or group companies, shall not be in default in compliance of the
listing agreement.
c. The above eligibility criteria would be in addition to the conditions prescribed under SEBI
(Disclosure and Investor Protection) Guidelines, 2000.
The money market is used by a wide array of participants, from a company raising money by
selling commercial paper into the market to an investor purchasing CDs as a safe place to park
money in the short term. The money market is typically seen as a safe place to put money due
the highly liquid nature of the securities and short maturities, but there are risks in the market
that any investor needs to be aware of including the risk of default on securities such as
commercial paper.
What is Bank rate? Bank Rate is the rate at which central bank of the country (in India
it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank
uses for short-term purposes. Any upward revision in Bank Rate by central bank is an
indication that banks should also increase deposit rates as well as Prime Lending Rate.
This any revision in the Bank rate indicates could mean more or less interest on your
deposits and also an increase or decrease in your EMI.
What is Bank Rate ? (For Non Bankers) : This is the rate at which central bank (RBI)
lends money to other banks or financial institutions. If the bank rate goes up, long-term interest
rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all
likelihood banks will hikes their own lending rates to ensure and they continue to make a profit.
What is CRR? The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and
has come into force with its gazette notification. Consequent upon amendment to sub-Section
42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the
country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate
or ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the
RBI Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and
20 per cent of total of their demand and time liabilities].
RBI uses CRR either to drain excess liquidity or to release funds needed for the economy
from time to time. Increase in CRR means that banks have less funds available and money is
sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures
that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the
system, and thereby, inflation by tying the hands of the banks in lending money.
What is CRR (For Non Bankers) : CRR means Cash Reserve Ratio. Banks in India are
required to hold a certain proportion of their deposits in the form of cash. However,
actually Banks don’t hold these as cash with themselves, but deposit such case with
Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to
holding cash with themselves.. This minimum ratio (that is the part of the total deposits to
be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve
Ratio. Thus, When a bank’s deposits increase by Rs100, and if the cash reserve ratio is
9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use
only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e.
CRR), the lower is the amount that banks will be able to use for lending and investment.
This power of RBI to reduce the lendable amount by increasing the CRR, makes it an
instrument in the hands of a central bank through which it can control the amount that
banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.
What is SLR? Every bank is required to maintain at the close of business every day, a
minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of
cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and
time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced
w.e.f. 8/11/208, from earlier 25%) RBI is empowered to increase this ratio up to 40%. An
increase in SLR also restrict the bank’s leverage position to pump more money into the economy.
What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. This
term is used by bankers and indicates the minimum percentage of deposits that the bank
has to maintain in form of gold, cash or other approved securities. Thus, we can say that it
is ratio of cash and some other approved to liabilities (deposits) It regulates the credit
growth in India.
Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the
banks. When the repo rate increases borrowing from RBI becomes more expensive.
Therefore, we can say that in case, RBI wants to make it more expensive for the banks to
borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate
Reverse Repo rate is the rate at which banks park their short-term excess liquidity
with the RBI. The RBI uses this tool when it feels there is too much money floating in the
banking system. An increase in the reverse repo rate means that the RBI will borrow money
from the banks at a higher rate of interest. As a result, banks would prefer to keep their
money with the RBI
Thus, we can conclude that Repo Rate signifies the rate at which liquidity is
injected in the banking system by RBI, whereas Reverse repo rate signifies
the rate at which the central bank absorbs liquidity from the banks .
6. Types of Rating
A short term debt rating rates an organisation's general unsecured creditworthiness over the
short term (i.e. over a 12 month period). Such a rating provides an indication of the
probability of default on any unsecured short term debt obligations, including commercial
paper, bank borrowings, BA's and NCD's.
High Grade
Highest certainty of timely payment. Short-term liquidity, including internal
A1+ operating factors and/or access to alternative sources of funds is outstanding, and
safety is just below that of risk-free treasury bills.
Very high certainty of timely payment. Liquidity factors are excellent and supported
A1
by good fundamental protection factors. Risk factors are minor.
High certainty of timely payment. Liquidity factors are strong and supported by good
A1-
fundamental protection factors. Risk factors are very small.
Good Grade
Good certainty of timely payment. Liquidity factors and company fundamentals are
A2 sound. Although ongoing funding needs may enlarge total financing requirements,
access to capital markets is good. Risk factors are small.
Satisfactory Grade
Satisfactory liquidity and other protection factors qualify issues as to investment
A3
grade. However, risk factors are larger and subject to more variation.
Non-Investment Grade
Speculative investment characteristics. Liquidity is not sufficient to insure against
B disruption in debt service. Operating factors and market access may be subject to a
high degree of variation.
Default
C Issuer failed to meet scheduled principal or interest payments.
A long term debt rating rates the probability of default on specific long term debt instruments
over the life of the issue. It is possible that different issues by a single issuer could be
accorded different ratings, depending on the underlying characteristics of each issue (e.g. is it
a senior or a subordinated debt instrument, is it secured or unsecured and, if secured, what is
the nature of the security).
Investment Grade
AAA Highest credit quality. The risk factors are negligible, being only slightly more than
for risk free government bonds.
AA+ Very high credit quality. Protection factors are very strong. Adverse changes in
AA business, economic or financial conditions would increase investment risk although
AA- not significantly.
A+ High credit quality. Protection factors are good. However, risk factors are more
A variable and greater in periods of economic stress.
A-
BBB+ Adequate protection factors and considered sufficient for prudent investment.
BBB However, there is considerable variability in risk during economic cycles.
BBB-
Such ratings are exclusively accorded to insurance/reinsurance companies and rate the
probability of timeously honouring policyholder obligations over the medium term (i.e. over
the next 2 to 3 years)
AAA Highest claims paying ability. The risk factors are negligible.
AA+ Very high claims paying ability. Protection factors are strong. Risk is modest, but
AA may vary slightly over time due to economic and/or underwriting conditions.
AA-
A+ High claims paying ability. Protection factors are above average although there is
A an expectation of variability in risk over time due to economic and/or underwriting
A- conditions.
BBB+ Adequate claims paying ability. Protection factors are adequate although there is
BBB considerable variability in risk over time due to economic and/or underwriting
BBB- conditions.
BB+ Moderate claims paying ability. The ability of these organisations to discharge
BB obligations is considered moderate and thereby not well safeguarded in the event of
BB- adverse future changes in economic and/or underwriting conditions.
B+ Possessing substantial risk that policyholder and contract-holder obligations will
B not be paid when due. Judged to be speculative to a high degree.
B-
CCC Company has been, or is likely to be, placed under an order of the court.
7. Bond
A Bond is simply an 'IOU' in which an investor agrees to loan money to a company or
government in exchange for a predetermined interest rate.
If a business wants to expand, one of its options is to borrow money from individual
investors, pension funds, or mutual funds. The company issues bonds at various
interest rates and sells them to the public. Investors purchase them with the
understanding that the company will pay back their original principal (the amount the
investor loaned to the company) plus any interest that is due by a set date (this is
called the "maturity" date).
A bond is debt instrument which guarantees to repay the principal of the loan plus interest
to the bondholder. Bonds are considered to be long-term debt and have to be paid back on
their maturity date. Usually bonds have fixed interest rate, which is paid to the bondholder
during the term of the bond.
Bonds can be issued by both governments and corporations. When you buy bonds you are in
effect lending money to the bond issuer, who agrees to repay the loan in the future and to
pay interest during the life of the bond.
8. Yield to Maturity
What Does Yield To Maturity - YTM Mean?
The rate of return anticipated on a bond if it is held until the maturity date. YTM is
considered a long-term bond yield expressed as an annual rate. The calculation of YTM takes
into account the current market price, par value, coupon interest rate and time to maturity.
It is also assumed that all coupons are reinvested at the same rate. Sometimes this is simply
referred to as "yield" for short.
9. Equity Market
The market in which shares are issued and traded, either through exchanges or over-the-
counter markets. Also known as the stock market, it is one of the most vital areas of a
market economy because it gives companies access to capital and investors a slice of
ownership in a company with the potential to realize gains based on its future performance.
This market can be split into two main sectors: the primary and secondary market. The
primary market is where new issues are first offered. Any subsequent trading takes place in
the secondary market.
2)preference share holders are not owners of the company and do not enjoy any
voting right. Where as Equity Shares has voting right & they are the real owners of
company.
3)Preference Shares have a finite tenure and carry a fixed rate of dividend where as
dividend to equity shares is payable rest of the dividend payable after preference share
holders.
Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.
12 . Derivative Market
Derivative markets are investment markets that are geared toward the buying and selling of
derivatives. Derivatives are securities, or financial instruments, that get their value, or at least part of
their value, from the value of another security, which is called the underlier. The underlier can come
in many forms including, commodities, mortgages, stocks, bonds, or currency. The reason investors
may invest in a derivative security is to hedge their bet. By investing in something based on a more
stable underlier, the investor is assuming less risk than if she invested in an risky security without an
underlier.
There are actually two distinct forms of the derivative market. It is possible to purchase and sell
derivatives in the form of futures or as over-the-counter offerings. It is not unusual for investors who
are interested in derivatives to actively participate in both of these financial markets.
In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what
type of security to issue (common or preferred), the best offering price and the time to bring it to
market.
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will
do on its initial day of trading and in the near future because there is often little historical data with
which to analyze the company. Also, most IPOs are of companies going through a transitory growth
period, which are subject to additional uncertainty regarding their future values.
A security offering in which investors may purchase units of a closed-end mutual fund. A new fund
offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing
securities.
A new fund offer is similar to an initial public offering. Both represent attempts to raise capital to
further operations. New fund offers are often accompanied by aggressive marketing campaigns,
created to entice investors to purchase units in the fund. However, unlike an initial public offering
(IPO), the price paid for shares or units is often close to a fair value. This is because the net asset
value of the mutual fund typically prevails. Because the future is less certain for companies engaging
in an IPO, investors have a better chance to purchase undervalued shares.
16. Examples
Insurance Product :
ICICI Lombard: ICICI Lombard has come up with a superb product for our farmers who
are the most important and yet the most neglected segment of our society. Lombard Insurance
along with Weather Risk Management Services has come up with hybrid weather cum
satellite imagery based insurance product for farmers in India. Although weather based crop
insurance products are not new to Indian agriculture but the distinctive feature of this product
is that it uses satellite based imagery to assess crop yields. With the help of this product
farmers would take relatively lesser time to estimate the yield of an area by conducting crop
cutting experiments. This new product would also help crop monitoring and predicting more
accurate food grain production, thus benefitting the farmers tremendously to plan their sales
and also the government to avert the possibility of any shortage in food grain production.
Navkalyan Yojna: An initiative of a first of its kind taken by Tata AIG Life Insurance
specially made to suit the needs of the rural sector. Navkalyan Yojna is a five year Micro
Insurance plan that provides financial protection to the rural policy holder at reasonable
rates. The policy also has the facility of adding an Accidental Death benefit rider that will
provide additional benefit less than or equal to the sum assured in the case of an unfortunate
event.
Sampoorn Bima Yojna: Another attempt to provide assistance to the rural policy holder
Tata AIG Life Insurance has come up with the Sampoorn Bima Yojna which promises to
pay the policy holder a cover for 15 years on payment of a premium for 10 years.
Ayushman Yojna: Once again an attempt by Tata AIG Life Insurance to protect the rural
segment of our country by coming up with the Ayushman Yojna policy.On the payment of a
single premium at the beginning of the policy term for a period of 10 years the policy holder
gets back 25% extra at the end of the plan.
Secure Dreams: The latest product lauched by Max New York Life Insurance is known as
'Secure Dreams'. This product as claimed by the company is the only procuct in the entire
universe that offers the best of Unit Linked Life Insurance and Traditional products. The
premium collected from this policy would not be invested in equities rather they would be
invested in government or corporate bonds. For the first 3 months the customers would get
an interest of 6.5% of the product, which would make it a fast moving product in the
insurance market.
Smart Ulip: The life insurance arm of State Bank of India SBI Life Insurance Co Ltd has
come up with an innovative unit linked product called Smart Ulip. The product promises to
return a Net Asset Value of 168 fortnightly NAVs during the first seven years or NAV after
maturity whichever is higher. The Smart Ulip also provides to its customers the benefit of
shorter premium paying terms which could be as short as 3 - 5 years and further also give
them the facility of tax benefit under section 80 C and section 10 (10 D) of the Income Tax
Act.
Free Cover Plan: The latest product offered by Aviva Life Insurance is meant for new
parents, which is known as Free Cover Plan. This plan provides life cover to new parents up
to Rs 6, 70,000 approximately if their new born baby is not more than 6 months old. This
policy would last until the child's first birthday. The basic idea behind taking such a step to
provide free insurance to new parents is basically a way to tell young parents that the
necessity of financial protection starts early.
New Accelerated Critical Illness Policy: Future Generali India Insurance Company Ltd
has launched its latest health insurance product which is termed as New Accelerated Critical
Illness Policy. The extra ordinary feature about this product is that if claimed before the end
of the term period the assured sum is paid to you. To be a little more precise in the event of
a diagnosed critical illness a person can claim the amount assured to him so that the
treatment can start off immediately. It is a comprehensive plan with low rates of premiums
to be paid. However the policy covers 12 critical illnesses.
5 Star Rated MF
17. Definitions
In the above formula "gains from investment", refers to the proceeds obtained from selling the
investment of interest. Return on investment is a very popular metric because of its versatility and
simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities
with a higher ROI, then the investment should be not be undertaken.
For example, a marketer may compare two different products by dividing the gross profit that each
product has generated by its respective marketing expenses. A financial analyst, however, may
compare the same two products using an entirely different ROI calculation, perhaps by dividing the
net income of an investment by the total value of all resources that have been employed to make
and sell the product.
This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's
purposes, and the result can be expressed in many different ways. When using this metric, make
sure you understand what inputs are being used.
Calculated as:
When calculating, it is more accurate to use a weighted average number of shares outstanding over
the reporting term, because the number of shares outstanding can change over time. However, data
sources sometimes simplify the calculation by using the number of shares outstanding at the end of
the period.
Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in
the outstanding shares number.
For example, assume that a company has a net income of $25 million. If the company pays out $1
million in preferred dividends and has 10 million shares for half of the year and 15 million shares for
the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net
income to get $24 million, then a weighted average is taken to find the number of shares
outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).
An important aspect of EPS that's often ignored is the capital that is required to generate the
earnings (net income) in the calculation. Two companies could generate the same EPS number, but
one could do so with less equity (investment) - that company would be more efficient at using
its capital to generate income and, all other things being equal, would be a "better" company.
Investors also need to be aware of earnings manipulation that will affect the quality of the earnings
number. It is important not to rely on any one financial measure, but to use it in conjunction with
statement analysis and other measures.
Also known as Profit Before Interest & Taxes (PBIT), and equals Net Income with interest and taxes
added back to it.
EBIT was the precursor to the EBITDA calculation, which takes the process further by removing two
non-cash items from the equation (depreciation and amortization).
Beta
Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks
have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more
risk.
In a shopping mall, a fundamental analyst would go to each store, study the product that was
being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit
on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of
the products in the store, the technical analyst's decision would be based on the patterns or
activity of people going into each store
.
19. Japanese Candlestick
It is a combination of a line-chart and a bar-chart, in that each bar represents the range of
price movement over a given time interval. It is most often used in technical analysis of
equity and currency price patterns. They appear superficially similar to error bars, but are
unrelated.
Candlestick charts are thought to have been developed in the 18th century by Japanese rice
trader Homma Munehisa. The charts gave Homma and others an overview of open, high,
low, and close market prices over a certain period. This style of charting is very popular due
to the level of ease in reading and understanding the graphs. The method was picked up by
Charles Dow around 1900 and remains in common use by today's traders of financial
instruments.
Candlestick charts are a visual aid for decision making in stock, forex, commodity, and
options trading. For example, when the bar is white and high relative to other time periods, it
means buyers are very bullish. The opposite is true for a black bar.
ELLIOT WAVES
The Elliott Wave Principle is a form of technical analysis that investors use to forecast trends in the
financial markets by identifying extremes in investor psychology, highs and lows in prices, and other
collective activities. Ralph Nelson Elliott (1871–1948), a professional accountant, developed the
concept in the 1930s. He proposed that market prices unfold in specific patterns, which practitioners
today call Elliott waves, or simply waves.
The wave principle posits that collective investor psychology (or crowd psychology) moves
from optimism to pessimism and back again in a natural sequence. These swings create
patterns, as evidenced in the price movements of a market at every degree of trend.
From R.N. Elliott's essay, "The Basis of the Wave Principle," October 1940.
Elliott's model says that market prices alternate between five waves and three waves at all
degrees of trend, as the illustration shows. Within the dominant trend, waves 1, 3, and 5 are
"motive" waves, and each motive wave itself subdivides in five waves. Waves 2 and 4 are
"corrective" waves, and subdivide in three waves. In a bear market the dominant trend is
downward, so the pattern is reversed—five waves down and three up. Motive waves always
move with the trend, while corrective waves move against it.
The Elliott Wave Theory is named after Ralph Nelson Elliott. Inspired by the Dow Theory
and by observations found throughout nature, Elliott concluded that the movement of the
stock market could be predicted by observing and identifying a repetitive pattern of waves. In
fact, Elliott believed that all of man's activities, not just the stock market, were influenced by
these identifiable series of waves.
Elliott based part his work on the Dow Theory, which also defines price movement in terms
of waves, but Elliott discovered the fractal nature of market action. Thus Elliott was able to
analyze markets in greater depth, identifying the specific characteristics of wave patterns and
making detailed market predictions based on the patterns he had identified.
In the 1930s, Ralph Nelson Elliott found that the markets exhibited certain repeated patterns.
His primary research was with stock market data for the Dow Jones Industrial Average. This
research identified patterns or waves that recur in the markets. Very simply, in the direction
of the trend, expect five waves. Any corrections against the trend are in three waves. Three
wave corrections are lettered as "a, b, c." These patterns can be seen in long-term as well as in
short-term charts. Ideally, smaller patterns can be identified within bigger patterns. In this
sense, Elliott Waves are like a piece of broccoli, where the smaller piece, if broken off from
the bigger piece, does, in fact, look like the big piece. This information (about smaller
patterns fitting into bigger patterns), coupled with the Fibonacci relationships between the
waves, offers the trader a level of anticipation and/or prediction when searching for and
identifying trading opportunities with solid reward/risk ratios.
There have been many theories about the origin and the meaning of the patterns that Elliott
discovered, including human behavior and harmony in nature. These rules, though, as applied
to technical analysis of the markets (stocks, commodities, futures, etc.), can be very useful
regardless of their meaning and origin.
When the analysis is not clear, why not find another market conforming to an Elliott Wave
pattern that is easier to identify?
From years of fighting this battle, we have come up with the following practical approach to
using Elliott Wave principles in trading.
The whole theory of Elliott Wave can be classified into two parts:
• Impulse patterns
• Corrective patterns
Relative Strength Index - RSI
100
1 + RS
As you can see from the chart below, the RSI ranges from 0 to 100. An asset is deemed to be
overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a
good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset
may be getting oversold and therefore likely to become undervalued.
The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of
directional price movements. Momentum is the rate of the rise or fall in price. The RSI
computes momentum as the ratio of higher closes to lower closes: stocks which have had
more or stronger positive changes have a higher RSI than stocks which have had more or
stronger negative changes.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100,
with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are
used for alternately shorter or longer outlooks. More extreme high and low levels--80 and 20,
or 90 and 10--occur less frequently but indicate stronger momentum.
Fundamental analysis has a core purpose to produce a value that an investor can then
compare with the current stock price of a given company. That value then becomes a
“buy, sell, hold” type rating. But technical analysis? There are no such things as buy,
sell, and hold ratings.
Fundamental analysis will focus on the economy, typically macroeconomics to help
determine intrinsic value. What that means in 101 terms is this, “hey, interest rates
may be affected later this year, this will surely affect xxxxxxxxxxx”. Technical
analysis on the other hand does not care what the economy is up to. 10% Gap ups are
more important than interest rate hikes and war.
Fundamental analysis focuses on financial ratios and numbers such as debt, EPS, cash
flow forecasts, etc. where as technical analysis focuses on historical price movements
to determine possible short term or long term moves to come.
Difference between technical & Fundamental analysis
Technical analysis and fundamental analysis are the two main attentions in the financial
markets. Mainly, technical analysis looks at the price movement of a security and uses this
data to predict its future price movements. Fundamental analysis, on the other hand, looks at
economic factors, known as fundamentals. Let’s see how it works to determine the correct
value of stock and how technical and fundamental analysis can be used together to analyze
securities.
Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a
fundamental analyst starts with the financial statements. By looking at the balance sheet,
cash flow statement and income statement, a fundamental analyst tries to determine a
company’s value. In financial terms, an analyst attempts to measure a company’s
fundamental value. In this approach, investment decisions are fairly easy to make - if the price
of a stock trades below its intrinsic value, it’s a good investment.
Technical traders, on the other hand, believe there is no reason to analyze a
company’s fundamentals because these are all accounted for in the stock’s price.
Technicians believe that all the information they need about a stock can be found in
its charts.
Time approach for both the technique
Fundamental analysis takes a relatively long-term approach to analyzing the market
compared to technical analysis. While technical analysis can be used on a timeframe of
weeks, days or even minutes, fundamental analysis often looks at data over a number of
years.
The different timeframes that these two approaches use is a result of the nature of the
investing style to which they each adhere. It can take a long time for a company’s
value to be reflected in the market, so when a fundamental analyst estimates intrinsic
value, a gain is not realized until the stock’s market price rises to its “correct” value.
This type of investing is called value investing and assumes that the short-term market
is wrong, but that the price of a particular stock will correct itself over the long run.
This “long run” can represent a timeframe of as long as several years, in some cases.
Furthermore, the numbers that a fundamentalist analyzes are only released over long
periods of time. Financial statements are filed quarterly and changes in earnings per
share don’t emerge on a daily basis like price and volume information. Also
remember that fundamentals are the actual characteristics of a business. New
management can’t implement sweeping changes overnight and it takes time to create
new products, marketing campaigns, supply chains, etc. Part of the reason that
fundamental analysts use a long-term timeframe, therefore, is because the data they
use to analyze a stock is generated much more slowly than the price and volume data
used by technical analysts.
In building up an investment portfolio a financial institution will typically conduct its own
investment analysis, whilst a private individual may make use of the services of a financial
advisor or a financial institution which offers portfolio management services.
Portfolio management is all about strengths, weaknesses, opportunities and threats in the
choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other
tradeoffs encountered in the attempt to maximize return at a given appetite for risk.
Advantages:
It reduces the risk of uncorrelated assets. So by combing assets that are distinctive from each other
it reduces the overall risk.
Minimises risk
Diversified investment
Have a check on the markets before investing
See the performance of the stock for a period before investing
Have a check on the share performance