INVESTMMENT MANAGEMENT

BBA
V - SEMESTER

(Prepared by G. RAMANUJAM)

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 UNIT- 1
INREODUCTION TO INVESTMENT
MEANING OF INVESTMENT
Investment is the employment of funds with the aim of getting return on it. In general
terms, investment means the use of money in the hope of making more money. In finance,
investment means the purchase of a financial product or other item of value with an
expectation of favorable future returns.
Thus investment may be defined as “a commitment of funds made in the expectation of
some positive rate of return “since the return is expected to realize in future, there is a
possibility that the return actually realized is lower than the return expected to be realized.
This possibility of variation in the actual return is known as investment risk. Thus every
investment involves return and risk.

Definition
”investment is sacrifice of certain present value for some uncertain future values”.
--Sharpe

There are two concepts of Investment:

1) Economic Investment: The concept of economic investment means addition to the
capital stock of the society. The capital stock of the society is the goods which are used
in the production of other goods. The term investment implies the formation of new
and productive capital in the form of new construction and producers durable
instrument such as plant and machinery. Inventories and human capital are also
included in this concept. Thus, an investment, in economic terms, means an increase in
building, equipment, and inventory.

2) Financial Investment: This is an allocation of monetary resources to assets that are

expected to yield some gain or return over a given period of time. It means an exchange
of financial claims such as shares and bonds, real estate, etc. People invest their funds
in shares, debentures, fixed deposits, national saving certificates, life insurance policies,
provident fund etc. in their view investment is a commitment of funds to derive future
income in the form of interest, dividends, rent, premiums, pension benefits and the
appreciation of the value of their principal capital.

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 ELEMENTS OF INVESTMENT
The Elements of Investments are as follows:

1. Return:
Investors buy or sell financial instruments in order to earn return on them. The return on
investment is the reward to the investors. The return includes both current income and capital gain or
losses, which arises by the increase or decrease of the security price.
2. Risk:
Risk is the chance of loss due to variability of returns on an investment. In case of every
investment, there is a chance of loss. It may be loss of interest, dividend or principal amount of
investment. However, risk and return are inseparable. Return is a precise statistical term and it is
measurable. But the risk is not precise statistical term. However, the risk can be quantified. The
investment process should be considered in terms of both risk and return.
3. Time:
Time is an important factor in investment. It offers several different courses of action. Time
period depends on the attitude of the investor who follows a ‘buy and hold’ policy. As time moves on,
analysis believes that conditions may change and investors may revaluate expected returns and risk
for each investment.
4. Liquidity:
Liquidity is also important factor to be considered while making an investment. Liquidity
refers to the ability of an investment to be converted into cash as and when required. The investor
wants his money back any time. Therefore, the investment should provide liquidity to the investor.
5. Tax Saving:
The investors should get the benefit of tax exemption from the investments. There are certain
investments which provide tax exemption to the investor. The tax saving investments increases the
return on investment. Therefore, the investors should also think of saving income tax and invest
money in order to maximize the return on investment.
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INVESTMENT OBJECTIVES
The objectives can be classified on the basis of the investors approach as follows:
a. Short term high priority objectives: Investors have a high priority towards achieving
certain objectives in a short time. For example, a young couple will give high priority to buy a
house. Thus, investors will go for high priority objectives and invest their money accordingly.

b. Long term high priority objectives: Some investors look forward and invest on the
basis of objectives of long term needs. They want to achieve financial independence in long
period. For example, investing for post retirement period or education of a child etc.
investors, usually prefer a diversified approach while selecting different types of investments.

c. Low priority objectives: These objectives have low priority in investing. These
objectives are not painful. After investing in high priority assets, investors can invest in these
low priority assets. For example, provision for tour, domestic appliances etc.

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d. Money making objectives: Investors put their surplus money in these kinds of
investment. Their objective is to maximize wealth. Usually, the investors invest in shares of
companies which provide capital appreciation apart from regular income from dividend.

Depending on the life stage and risk appetite of the investor, there are three main
objectives of investment: safety, growth and income.

1. Safety
While no investment option is completely safe, there are products that are preferred by
investors who are risk averse. Some individuals invest with an objective of keeping their
money safe, irrespective of the rate of return they receive on their capital. Such near-safe
products include fixed deposits, savings accounts, government bonds, etc.
2. Growth
While safety is an important objective for many investors, a majority of them invest to
receive capital gains, which means that they want the invested amount to grow. There are
several options in the market that offer this benefit.
These include stocks, mutual funds, gold, property, commodities, etc. It is important to
note that capital gains attract taxes, the percentage of which varies according to the number of
years of investment.
3. Income
Some individuals invest with the objective of generating a second source of income.
Consequently, they invest in products that offer returns regularly like bank fixed deposits,
corporate and government bonds, etc.
4.Tax-exemption
Some people invest their money in various financial products solely for reducing their
tax liability. Some products offer tax exemptions while many offer tax benefits on long-term
profits.
5.Liquidity
Many investment options are not liquid. This means they cannot be sold and converted
into cash instantly. However, some people prefer investing in options that can be used during
emergencies. Such liquid instruments include stock, money market instruments and
exchange-traded funds, to name a few.
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INVESTMENT AND SPECULATION
Investment
Investment refers to the acquisition of the asset, in the expectation of generating
income. In a wider sense, it refers to the sacrifice of present money or other resources for the
benefits that will arise in future. The two main element of investment is time and risk
Investments are majorly divided into two categories i.e. fixed income investment and
variable income investment. In fixed income investment there is a pre-specified rate of return
like bonds, preference shares, provident fund and fixed deposits while in variable income
investment, the return is not fixed like equity shares or property.

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Speculation
Speculation is a trading activity that involves engaging in a risky financial transaction, in
expectation of making enormous profits, from fluctuations in the market value of financial
assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is
offset by the probability of significant profit. Although, the risk is taken by speculators is
properly analysed and calculated.
The person who speculates is called a speculator. A speculator does not buy goods to
own them, but to sell them later. The reason is that speculator wants to profit from the
changes of market prices. One tries to buy the goods when they are cheap and to sell them
when they are expensive.
DIFFERENCE BETWEEN INVESTMENT AND SPECULATION

BASIS FOR
INVESTMENT SPECULATION
COMPARISON

Meaning The purchase of an asset with Speculation is an act of conducting a

the hope of getting returns is risky financial transaction, in the
called investment. hope of substantial profit.

Basis for Fundamental factors, i.e. Hearsay, technical charts and

decision performance of the company. market psychology.

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Intent to profit Changes in value Changes in prices

Expected rate of Modest rate of return High rate of return

return

Funds An investor uses his own A speculator uses borrowed funds.

funds.

Income Stable Uncertain and Erratic

Behavior of Conservative and Cautious Daring and Careless

participants

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 INVESTMENT PROCESS
The process of investment is explained from following points.

1. Determining investment objectives: First of all an investor should clearly spell her/his
investment objective before making investment. The investment objective is the motive that
guides investor in choosing investment alternatives. Investment objective should be stated in
terms of both risk tolerance and return preference.
Simply stating investment objective as to make money is not enough. The investor
should be clear why s/he needs to make money. It may be for children education or for
retirement life or for safety and liquidity. Accordingly, the investor can go for the alternatives
that best suit her/his investment objective.

While determining investment objective it should be noted that there may be more than
one set of investment objective. For example, the investor may invest simultaneously for
wealth maximization and liquidity. Similarly, the investment objective once set does not
remain static rather it changes over the time as per the change in personal and family
circumstances of investors.

2. Developing investment plan: After setting investment objective, investor should

develop formal investment plan consistent to the investment objective. The investment plan
must specify the investor’s return preference, risk tolerance along with the period of
investment.

3. Evaluating and selecting investment alternatives: After developing proper plan for
investment, an investor should analyze the alternatives available. There is wide range of
investment alternatives available for investment. Each available alternative must be evaluated
in terms of comparative risk-return relationship. The expected return and risk associated with
each alternative should be preciously measured and they should be assessed in the light of
investment objective.
After the assessment of investment alternatives, the investor should select the suitable
alternatives that best suit her his investment objective. While selecting among the investment
alternatives, investors should gather the information and use the information to select
suitable investment vehicles. Along with risk-return preferences, the investors should assess
the factors like tax considerations.

4. Constructing a portfolio: The investor should form an investment portfolio by

including the securities that are qualified in terms of risk-return relationship, tax
considerations and other factors. In constructing portfolio, the investor should pay attention
to the diversification of risk. The portfolio of investment should maximize return and
minimize the risk.

5. Evaluating and revising the portfolio: The securities included in the portfolio may
not perform as predicted or may not satisfy the investment objective. Therefore, investor

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should make periodic evaluation of the performance of the portfolio against the investment
objective. Some securities in the portfolio which stood attractive may no longer be so
attractive. Thus, investors should delete such securities from the portfolio and add new ones
that are attractive. Thus evaluating and revising the portfolio is an ongoing process.
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INVESTMENT AVENUES/ALTERNATIVES/TYPES
Investment avenues are mainly two types. They are 1. Financial investments and

2. Non-financial investments.

FINANCIAL INVESTMENTS
1. Equity shares
2. Debentures/bonds
3. Money market instruments
4. Mutual funds
5. Life insurance
1. EQUITY SHARES
Equity investments represent ownership in a running company. By ownership, we
mean share in the profits and assets of the company but generally, there are no fixed returns.
It is considered as a risky investment but at the same time, they are most liquid investments
due to the presence of stock markets. Equity shares of companies can be classified as follows:

2. DEBENTURES OR BONDS
Debentures or bonds are long-term investment options with a fixed stream of cash
flows depending on the quoted rate of interest. They are considered relatively less risky. An
amount of risk involved in debentures or bonds is dependent upon who the issuer is. For
example, if the issue is made by a government, the risk is assumed to be zero. Following
alternatives are available under debentures or bonds:
 Government securities
 Savings bonds
 Public Sector Units bonds
 Debentures of private sector companies

3. MONEY MARKET INSTRUMENTS

Money market instruments are just like the debentures but the time period is very less.
It is generally less than 1 year. Corporate entities can utilize their idle working capital by
investing in money market instruments. Some of the money market instruments are
 Treasury Bills
 Commercial Paper
 Certificate of Deposits

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4. MUTUAL FUNDS
A mutual fund is a pooled investment vehicle managed by an investment manager that
allows investors to have their money invested in stocks, bonds or other investment vehicles as
stated in the fund’s prospectus.
Mutual funds are an easy and tension free way of investment and it automatically
diversifies the investments. A mutual fund is an investment mix of debts and equity and ratio
depending on the scheme. They provide with benefits such as professional approach, benefits
of scale and convenience. In mutual funds also, we can select among the following types
of portfolios:
 Equity Schemes
 Debt Schemes
 Balanced Schemes
 Sector Specific Schemes etc.

5. LIFE INSURANCE AND GENERAL INSURANCE

They are one of the important parts of good investment portfolios. Life insurance is an
investment for the security of life. The main objective of other investment avenues is to earn a
return but the primary objective of life insurance is to secure our families against unfortunate
event of our death. It is popular in individuals. Other kinds of general insurances are useful
for corporate. There are different types of insurances which are as follows:
 Endowment Insurance Policy
 Money Back Policy
 Whole Life Policy
 Term Insurance Policy
 General Insurance for any kind of assets.

6. POSTAL SAVINGS

Post office saving schemes carries the least risk among all investment options. As these
saving schemes are issued and managed by the Government of India, the amount invested
and returns generated are backed by sovereign guarantee. There is, thus, no doubt that if you
are looking for risk-free investments, then these schemes score high. In fact, they are great for
tax-saving as well. However, they may not necessarily be the best choice if you are looking to
build wealth over a short to medium tenure.

NON-FINANCIAL INVESTMENTS

1. Real estate
The real estate market offers a high return to the investors. The word real estate means
land and buildings. There is a normal notion that the price of the real estate has increased by
more than 12% over the past ten years. Real estate investments cannot be enchased quickly.
Liquidity is a problem. Real estate investment involves high transaction cost. The asset must
be managed, i.e. painting, repair, maintenance etc.

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2. Commodities
Commodities have emerged as an alternative investment option now a days and
investors make use of this option to hedge against spiraling inflation-commodities may be
broadly divided into three. Metals, petroleum products and agricultural commodities .
Metals can be divided in to precious metals and other metals. Gold and silver are the
most preferred once for beating inflation.
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CONCEPT OF RISK
Risk The dictionary meaning of risk is the possibility of loss or injury; risk the
possibility of not getting the expected return. The difference between expected return and
actual return is called the risk in investment. Investment situation may be high risk, medium
and low risk investment. Risk can be referred as the chances of having an unexpected or
negative outcome. Any action or activity that leads to loss of any type can be termed as risk.
There are different types of risks that a firm might face and needs to overcome.

In finance, different types of risk can be classified under two main groups, viz.,

A. Systematic risk
B. Unsystematic risk.

A. SYSTEMATIC RISK
Systematic risk is due to the influence of external factors on an organization. Such
factors are normally uncontrollable from an organization's point of view.
It is a macro in nature as it affects a large number of organizations operating under a similar
stream or same domain. It cannot be planned by the organization.

The types of systematic risk are depicted and listed below.

1. Interest rate risk,

2. Market risk and
3. Purchasing power or inflationary risk.

1. Interest rate risk

Interest-rate risk arises due to variability in the interest rates from time to time. It
particularly affects debt securities as they carry the fixed rate of interest.
Price risk
Price risk arises due to the possibility that the price of the shares, commodity,
investment, etc. may decline or fall in the future.

Reinvestment rate risk.

Reinvestment rate risk results from fact that the interest or dividend earned from an
investment can't be reinvested with the same rate of return as it was acquiring earlier.

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2. Market risk
Market risk is associated with consistent fluctuations seen in the trading price of any
particular shares or securities. That is, it arises due to rise or fall in the trading price of listed
shares or securities in the stock market.

3. Purchasing power or inflationary risk

Purchasing power risk is also known as inflation risk. It is so, since it emanates
(originates) from the fact that it affects a purchasing power adversely. It is not desirable to
invest in securities during an inflationary period. This risk is due to demand and cost
inflation.
Demand inflation risk arises due to increase in price, which result from an excess of
demand over supply. It occurs when supply fails to cope with the demand and hence cannot
expand anymore. In other words, demand inflation occurs when production factors are under
maximum utilization.

Cost inflation risk arises due to sustained increase in the prices of goods and services. It
is actually caused by higher production cost. A high cost of production inflates the final price
of finished goods consumed by people.

B. UNSYSTEMATIC RISK
Unsystematic risk is due to the influence of internal factors prevailing within an
organization. Such factors are normally controllable from an organization's point of view.
It is a micro in nature as it affects only a particular organization. It can be planned, so that
necessary actions can be taken by the organization to mitigate (reduce the effect of) the risk.

1. Business risk
Risk inherent to the securities, is the company may or may not perform well. The risk
when a company performs below average is known as a business risk. There are some factors
that cause business risks like changes in government policies, the rise in competition, change
in consumer taste and preferences, development of substitute products, technological
changes, etc.
2. Financial risk
Alternatively known as leveraged risk. When there is a change in the capital structure of
the company, it amounts to a financial risk. The debt – equity ratio is the expression of such
risk.
3. Operational risk
Operational risks are the business process risks failing due to human errors. This risk
will change from industry to industry. It occurs due to breakdowns in the internal procedures,
people, policies and systems

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 MEASUREMENT OF RISK
The risk associated with a single asset is measured from both a behavioral and a statistical
(quantitative) point of view.
The behavioral risk view is measured using:
1. Sensitivity analysis and
2. Probability distribution
The statistical risk view is measured using:
1. Standard deviation and
2. Coefficient of variation.
Behavior Risk views:
1. Sensitivity analysis
Sensitivity analysis is one of the simplest ways of handling risk. It consists of
examining the magnitude of change in the rate of return for the project, for a small change in
each of its components which are uncertain. Some of the key variables are cost, price, project
life, market share etc. Sensitivity analysis takes into account a number of possible outcome
estimates while evaluating an asset risk.
In order to have a sense of the variability among return estimates, a possible approach
is to estimate the worst(pessimistic), the expected(most likely) and the best(optimistic) returns
associated with the asset. The difference between the optimistic and the pessimistic outcomes
is the range, which according to the sensitivity analysis is the basic measure of risk. The
greater the range, the more is the risk and vice versa.
2. Probability distribution
Probability may be described as the measure of likelihood of an events occurrence. The
risk associated with an asset can be assessed more accurately by the use of probability
distribution than sensitivity analysis.
For example, if the expectation is that a given outcome or return will occur six out of
ten times, it can be said to have sixty percent chance of happening; if it is certain to happen,
the probability of happening is 100%. An outcome which has a probability of zero will never
occur. So, on the basis of the probability distributed or assigned to the rate of return, the
expected value of the return can be computed.

Statistical risk views:

1. Standard Deviation:
The most common statistical measure of risk of an asset is the standard deviation from
the mean or expected value of return. It represents the square root of the average squared
deviations of the individual returns from the expected returns.

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The standard deviation can be represented as thus:

σ = √∑ n (Ri - R)2 x Pri

i=1
Where:
Return for the ith possible
Ri =
outcome
mean of the returns ( Pri and
R =
n as given above)
If the standard deviation is greater, the variability and thus risk is also greater and vice versa.
2. Coefficient of variation:
It is a measure of relative dispersion or a measure of risk per unit of expected return. It
converts standard deviation of expected values into relative units and thus facilitates
comparison of risks associated with assets having different expected values. It is calculated by
dividing the standard deviation of an asset by its expected value.
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INVESTMENT ANALYSIS
Investment analysis means the process of judging an investment for income, risk, and
resale value. It is important to anyone who is considering an investment, regardless of type.
Investment analysis involves the use of relevant ratios, trend analysis, and the opinions of
researchers to decide how to allocate funds in various investment vehicles. Investment
analysis can help determine how an investment is likely to perform and how suitable it is for
a given investor.

Investment analysis can be done in following ways.

1. Fundamental analysis
2. Technical analysis

1. FUNDAMENTAL ANALYSIS
Fundamental analysis is really a logical and systematic approach to estimating the
future dividends and share price. It is based on the basic premise that share price is
determined by number of fundamental factors relating to the economy, industry and
company fundamentals have to be considered while analyzing a security for investment
purpose. Fundamental analysis is, in other words detailed analysis of the fundamental factors
affecting the performance of companies.

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 The purpose of fundamental analysis is to evaluate the present and future earning
capacity of a share based on the economy, industry and company fundamentals and thereby
assess the intrinsic value of the share. The investor can then compare the intrinsic value of the
share with prevailing market price to arrive at an investment decision. If the market price of
the share price is lower than its intrinsic value, the investor would decide to buy the share as
it is under-priced.
On the contrary when the market price of a share is higher than its intrinsic value, it is
perceived to be overpriced. The market price of such a share is expected to come down in
future and hence, the investor would decide to sell such a share. Fundamental analysis thus
provides an analytical framework for rational investment decision.

Fundamental analysis includes:

1. Economy analysis
2. Industry analysis
3. Company analysis
1. ECONOMY ANALYSIS:
Economy analysis occupies the first place in the financial analysis top down approach.
When the economy is having sustainable growth, then the industry group (Sectors) and
companies will get benefit and grow faster. The analysis of macroeconomic environment is
essential to understand the behavior of the stock prices. The commonly analyzed macro
economic factors are as follows.
A. Gross domestic product (GDP): GDP indicates the rate of growth of the economy.
GDP represents the value of all the goods and services produced by a country in one year.
The higher the growth rate is more favorable to the share market.
B.Savings and investment: The economic growth results in substantial amount of
domestic savings. Stock market is a channel through which the savings of the investors are
made available to the industries. The savings and investment pattern of the public affect stock
market.
C. Inflation: Along with the growth of GDP, if the inflation rate also increases, then the
real rate of growth would be very little. The decreasing inflation is good for corporate
sector. Interest rates: The interest rate affects the cost of financing to the firms. A decrease
in interest rate implies lower cost of finance for firms and more profitability.
D. Budget: Budget is the annual financial statement of the government, which deals
with expected revenues and expenditures. A deficit budget may lead to high rate of inflation
and adversely affect the cost of production. Surplus budget may result in deflation. Hence,
balanced budget is highly favorable to the stock market.

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E. The tax structure: The tax structure which provides incentives for savings and
investments. The balance of payment: The balance of payment is the systematic record of all
money transfer between India and the rest of the world. The difference between receipts and
payments may be surplus or deficit. If the deficit increases, the rupee may depreciate against
other currencies. This would affect the industries, which are dealing with foreign exchange.
F. Monsoon and agriculture: India is primarily an agricultural country. The importance
of agricultural in Indian economy is evident. Agriculture is directly and indirectly linked with
the industries. For example, Sugar, Textile and Food processing industries depend upon
agriculture for raw material. Fertilizer and Tractor industries are supplying input to the
agriculture. A good monsoon leads better harvesting; this in turn improves the performance
of Indian economy.
G. Infrastructure: Infrastructure facilities are essential for growth of Industrial and
agricultural sector. Infrastructure facilities include transport, energy, banking and
communication. In India even though Infrastructure facilities have been developed, still they
are not adequate.
H. Demographic factors: The demographic data provides details about the population by
age, occupation, literacy and geographic location. This is needed to forecast the demand for
the consumer goods.
I. Political stability: A stable political system would also be necessary for a good
performance of the economy. Political uncertainties and adverse change in government policy
affect the industrial growth.

2. INDUSTRY OR SECTOR ANALYSIS

The second step in the fundamental analysis of securities is Industry analysis. An
industry or sector is a group of firms that have similar technological structure of production
and produce similar products. These industries are classified according to their reactions to
the different phases of the business cycle. They are classified into growth, cyclical, defensive
and cyclical growth industry.
The industry analysis should take into account the following factors.
A. Characteristics of the industry: When the demand for industrial products is seasonal,
their problems may spoil the growth prospects. If it is consumer product, the scale of
production and width of the market will determine the selling and advertisement cost. The
nature of industry is also an important factor for determining the scale of operation and
profitability.
B. Demand and market: If the industry is to have good prospects of profitability, the
demand for the product should not be controlled by the government.

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C. Government policy: The government policy is announced in the Industrial policy
resolution and subsequent announcements by the government from time to time. The
government policy with regard to granting of clearances, installed capacity, price,
distribution of the product and reservation of the products for small industry etc are also
factors to be considered for industrial analysis.
D. Labor and other industrial problems: The industry has to use labour of
different categories and expertise. The productivity of labour as much as the capital efficiency
would determine the progress of the industry. If there is a labour problem that industry
should be neglected by the investor. Similarly when the industries have the problems of
marketing, investors have to be careful when investing in such companies.
E. Management: In case of new industries, investors have to carefully assess the
project reports and the assessment of financial institutions in this regard. The capabilities of
management will depend upon tax planning, innovation of technology, modernization etc. A
good management will also insure that their shares are well distributed and liquidity of
shares is assured.
3. COMPANY OR CORPORATE ANALYSIS
Company analysis is a study of variables that influence the future of a firm both qualitatively
and quantitatively. The fundamental nature of the analysis is that each share of a company
has an intrinsic value which is dependent on the company's financial performance.
If the market value of a share is lower than intrinsic value as evaluated by fundamental
analysis, then the share is supposed to be undervalued. The basic approach is analyzed
through the financial statements of an organization. The company or corporate analysis is to
be carried out to get answer for the following two questions.
1 How has the company performed in comparison with the similar company in the same
Industry?
2 How has the company performed in comparison to the early years?
Before making investment decision, the business plan of the company, management,
annual report, financial statements, cash flow and ratios are to be examined for better returns.

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 TECHNICAL ANALYSIS
Technical Analysis is the forecasting of future financial price movements based on an
examination of past price movements. Like weather forecasting, technical analysis does not
result in absolute predictions about the future. Instead, technical analysis can help investors
anticipate what is “likely” to happen to prices over time. Technical analysis uses a wide
variety of charts that show price over time.

Three Important Assumptions of Technical Analysis

 Price discounts everything.
 Prices usually always move in trends and
 History repeats itself over time
The three important assumptions of technical analysis include that
1. Firstly the market accounts for everything in it. That is the prices in the stock markets are
self contained and include all information. That is, there is no need to look at the economic
factors or the condition of the company. The price data contain all this information.
2. Second assumption states that the prices tend to move with the trend. That is the prices will
move either in an uptrend or in a down trend. Thus a trader must take the advantage of the
present trend and should always trade with the present trend. It is not advisable to trade
against the trend.
3. The third assumption states that the history repeats itself, especially in the case of market
prices. Thus, regular patterns are identified in the market and are expected to repeat itself.
Methods Used in Technical Analysis
1) Trend Method
2) Indicators Method
3) Pattern Methods
1. Trend Method: In trend method the general trend or the price movements are identified. It
is always advisable to trade with the trend and not against the trend. The trend line method is
a detailed method of deciding trend of the price movements. It is an effective way of trading.
2. Indicators Methods: In this method various indicators are calculated and are plotted on the
charts. Indicators like moving averages are assumed to provide adequate information about
the price movements and price reversals. These also have been considered by many as the
best way to anticipate the price movements
3. Pattern Methods: It depends on the hypothesis that history repeats itself in the case of price
movements and thus specific patterns have been found to repeat it again and again. Thus,
some common patterns are extensively studied in the technical analysis domain.
Trading in the stock market or the commodity market is an art.
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 Comparison chart
Fundamental Analysis Technical Analysis

Definition Calculates stock value using Uses price movement of security

economic factors, known as to predict future price
fundamentals. movements

Data Financial statements Charts

gathered
from

Stock bought When price falls below intrinsic When trader believes they can
value sell it on for a higher price

Time horizon Long-term approach Short-term approach

Function Investing Trade

Concepts Return on Equity (ROE) and Dow Theory, Price Data

used Return on Assets (ROA)

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