ASSIGNMENT

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

TOPIC: FUNDAMENTAL AND TECHICAL ANALYSIS OF STOCKS IN INDIA

SUBMITTED TO:
PROF. MADAN MOHAN

SUMITTED BY:
VIKASH JHUNJHUNWALLA FINANCE 2 PGDM 6114 PGDM 2010-12

Fundamental Analysis:
Fundamental analysis is a way of scientific analysis as it tries to estimate the intrinsic worth of the company. It analyses the basic fundamental criteria of the company like sales, profits, balance sheet studies. It involves assessing short and long term prospects of different industries and companies. It may also involve studying interest levels, capital market conditions and the out for national economy and also the economies of trading partner countries. One of the most important factors of affecting price of a corporate security is the actual / expected profitability of the issuing company. Fundamental analysis pays attention to a company's debt-equity ratio, profit margins, dividend payout, earning per share, sales penetration, market share, interest, asset and dividend coverage, product and market innovation and the promoters track record. Fundamental analysis conservative, non-speculative approach of evaluating equity shares on value based method. Fundamental analysis consists of three phases: economic analysis, industry analysis and company analysis.

Economic Analysis Economic Analysis:- The stock market does not operate in a vacuum. It is the integral part of the economy of a country, more so in a free economy like USA and to some extent in a mixed economy like India. After the new liberalized economic policy implementation say after 1991 India is also emerging as a free economy. To get an insight into the complexities of the stock market , one need to develop a sound economic understanding and be able to interpret the impact of important economic indicators on stock markets. Important economic analysis indicators:- Monsoon, War, inflation, foreign exchange reserves, public debt and foreign debt, budgetary deficit, domestic savings and capital output ratio, infrastructure. Government policy, interest rates, taxation policy, balance of trade, employment, political situation and international developments are some of the important economic indicators. a favorable monsoon has a positive impact on stock markets. In a good monsoon there is growth in agro base industries, fertilizers, seeds, edible oils, textiles and GDP goes up. The aggregate demand also goes up considerably.

Industry Analysis Industry Analysis: - The second face of fundamental analysis consists of a detailed analysis of a specific industry; its characteristics, its past record, its future prospects. The purpose of industry analysis is to identify those industries which are likely grow in the future and to invest in equity share of companies selected from such industries.Industry level analysis will help investors to select the industries on innovation, technology, cyclical blues, FERA or FMCG companies of consumer goods producers and all high demand oriented group of industries. All industries have various stages of growth: 1. Innovation, technological development, initial phase and cyclic phase. (pioneering stage) 2. Growth Phase. (expansion stage) 3. Competitive or Maturity Phase. (stagnation stage) 4. Declining Phase. (declining stage) Industry analysis can be of immense help to an investor. When a particular industry is booming, not only the leaders but even the laggards also benefit. For example consider the cement industry of India in 1990-91. Similarly when a particular industry is in doldrums the marginal firms become extinct and the leaders suffer as well. For example consider a picture tube industry of India in 1990-91. An intelligent investor, therefore, has to make a detailed industry analysis before he decides to buy or sell shares of any company in that industry. INDUSTRY GROUP COMPANIES Textlies
y y y y y y y y

Arvind Mills Abhisheik Industries Century Enka Garden Silk Mahavi Spinning Nahar Spinning Hindustan Construction Nagarjuna construction

Construction

Steel

y y

Tata Steel Kalyani Steel Steel Authority

Company Analysis Company Analysis:- Investors many times find that though a particular industry may be doing very well, certain companies in that industry may not be in good shape. On the other hand it is quite likely that one or two companies would do well in a slump industry. Hence selecting individual companies for investment in a given industry is equally important. There are two major components of industry analysis. a) Non financial aspects: - The scope of the non financial aspects covers the study about the history and track record of the promoters, relevant technology, brand image of products, industrial relations, industry reputation in the market, infrastructure, and market share of the company likewise. b) Financial Analysis: - Important fundamental criteria are covered in this column. There are some important fundamental factors one has to know in this analysis. Equity , sales, book value, operating profit, gross profit, net profit, earning per share, price earnings ratio, dividend, are some of the above factors to study. In the financial aspects an investor identifies an stock whether overpriced or under priced. say if a company's earnings per share is 5 and the market price of the stock is 90 rupees then the stock is (90 / 5) eighteen times over priced in the market. The PE ratio of the stock is mentioned as 18. Financial ratios are only tools. The utility of a tool largely depends on the manner and skill with in which it is used.

Techical Analysis:
The technical analysis is the market based method. There is a bye word "You cannot beat the market. The market will beat you. The market has its own way of correction. The bull market rally ignores fundamentals which fuelled by emotional investors take the stocks to unprecedented level and lead the market to overbuy. Especially in a

speculative zone prices zoom to dizzy high. On the other hand in a bear cycle the due to panic and fear fuelled by heavy selling pressure ignores even strong fundamentals and pushes down the prices lower and lower. This situation is called oversold market. The fundamental analysis has wide range of studies in various levels say economic analysis, industry level analysis and company level analysis. Even then there is no condition that the company's profit or growth may continue to the same previous level. The stock market always discounts the future. If so it never minds the past. The predictive knowledge of the future is more important than analyzing the past. The super timing of the market is nothing but a pure technical analysis. Fundamental say what to buy Technical say when to buy
About Technical analysis:-

In contrast to fundamental analysis the technical analysis is not concerned with the intrinsic worth of a share. On the other hand it deals with the forces of supply and demand for shares reflected in the behavior of the market. Technical analysis is a market oriented. Pure technical analysts often not worried about a company's assets, turnover, profits and dividends. He looks at his price chart in order to decide the potential of rise / fall in the immediate future. The word technical implies a study of the market itself and not various external factors which affect the market. According to technical analysts all relevant factors, whatever they may be, get reflected in the volume of the stock exchange transactions, and the level of share prices; or more generally the sum of statistical information generated by the market.
Basic assumptions of technical analysis:-

1. Market price is determined solely by the interaction of demand and supply of shares. 2. Supply and demand are in turn governed by many rational and irrational factors. 3. The primary trend of the market persists an appreciable time. Minor fluctuations are secondary.

4. Change in shift is caused by the demand and supply of position of shares. 5. Shifts in demand and supply which may change the direction of the primary market, no matter why they occur, can be detected sooner or later in the price charts of market action. 6. The trends, patterns of price charts tend to repeat themselves often.
Basic tools of technical analysis:Dow Theory

The Dow Theory was named after Charles Dow. Charles Dow published around the turn of the century 255 articles in the Wall Street Journal about the behavior of stock market movements. A year after his death Samuel A. Nelson selected fifteen articles by Charles Dow for his book The ABC of Stock Speculation and he commented Dow's observations. Nelson first used the term Dow Theory. Principles of the Dow Theory The six principles of the Dow Theory, summarized by Hamilton and Rhea: The Markets have three Trends The markets can be divided into three trends:
y y y

Primary Trend Secondary Trend Tertiary Trend

The Primary Trend can be a rising or falling market. The primary trend should last for more than a year and can endure for many years. Secondary Trends can be found within the primary trend. They represent correction phases. Their duration is usually three weeks to three months. These reactions are often 1/3 to 2/3 of the secondary movement of the previous trends. Short-term movements are Tertiary Trends, or insignificant trends, a period that can persist up to three weeks. Secondary trends consist of a series of minor trends. According the Dow Theory, short-term price movements can be influenced by

higher order volumes. Primary and secondary trends are excluded hereof. For this reason, Tertiary Trends are unimportant and do not need special attention. Primary Trends have three Phases The primary trend can be divided into three phases:
y y y

Accumulation Phase Participation Phase Distribution Phase

In the first phase (Accumulation Phase) shares were bought by informed investors which expect an economic recovery and anticipate a long-term growth. During this phase, most investors stood apposed to equities. In the accumulation phase, investors begin to build up stocks. The Participation Phase is characterized by rising corporate profits and better economic conditions. More and more Investors buy shares. In the third phase, the Distribution Phase, shares were sold. The distribution phase is marked by record profits of the companies. The masses feel confident to participate in equities. Investors always buy more shares and believe that the prices keep rising. In this phase, investors sell, that bought in the first phase, because they expect an economic slowdown. It is important that the three phases can be applied only to the primary trend.
Moving averages Theory

Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount of time. By plotting a security's average price, the price movement is smoothed out. Once the day-to-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favor.

Types of Moving Averages There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential. Simple Moving Average (SMA) This is the most common method used to calculate the moving average of prices. It simply takes the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As you can see in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend and the likelihood that it will reverse. Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages. Linear Weighted Average This moving average indicator is the least common out of the three and is used to address the problem of the equal weighting. The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods. For example, in a five-day linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on until the first day in the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

Exponential Moving Average (EMA) This moving average calculation uses a smoothing factor to place a higher weight on recent data points and is regarded as much more efficient than the linear weighted average. Having an understanding of the calculation is not generally required for most traders because most charting packages do the calculation for you. The most important thing to remember about the exponential moving average is that it is more responsive to new information relative to the simple moving average. This responsiveness is one of the key factors of why this is the moving average of choice among many technical traders. As you can see in Figure 2, a 15period EMA rises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it is an important factor to be aware of since it can affect returns. Major Uses of Moving Averages Moving averages are used to identify current trends and trend reversals as well as to set up support and resistance levels. Moving averages can be used to quickly identify whether a security is moving in an uptrend or a downtrend depending on the direction of the moving average. As you can see in Figure 3, when a moving average is heading upward and the price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend. Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longerterm average, the trend is up. On the other hand, a long-term average above a shorter-term average signals a downward movement in the trend. Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50 period moving average it is a sign that the uptrend may be reversing. The other signal of a trend reversal is when one moving average crosses through another. For example, as you can see in Figure 5, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase. f the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used

to suggest a long-term shift in trend. Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing. Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month and 10-day average of two weeks. Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. So far we have been focused on price movement, through charts and averages. In the next section, we'll look at some other techniques used to confirm price movement and patterns.
Odd Lot Theory

An odd lotter is an investor who purchases shares or other securities in small or unusual quantities. Stocks are typically traded in increments of 100 shares, a quantity known as a round lot or board lot. The cost of 100 shares of a security may be beyond the means of an individual investor, or may represent a larger investment than the investor wishes to make. Thus, the investor purchases an odd lot Odd lotters were central to a historical theory of technical analysis known as odd lot theory. Odd lot theory was predicated on the belief that one could outperform the stock market by identifying the least-informed investors and making investments opposite to them. (If the least-informed investors were selling, it was generally a good time to buy, and vice versa.) Assuming that odd lotters were generally smaller investors with little market knowledge, practitioners of odd lot theory identified the actions of odd lotters and did the opposite. The actions of odd lotters were interpreted as contrary signals. The theory is no longer popular as analysis of data shows little evidence that the method works.