Download security analysis - Goenka College of Commerce and Business

MEANING
 Security analysis is the analysis of tradeable financial
instruments.
 It involves examination and evaluation of various
factors that can affect the prices of securities.
 The role of a security analyst is to gather market
information and advice the investors to adopt a
suitable market strategy.
INVESTMENT
Sacrificing current consumption in he
hope of getting future benefit
• Investment in financial assets and
investment in physical assets
TYPES OF INVESTORS
Long term
investors
Speculators
• To realize both the
capital appreciation and
dividends
• To realize only the quick
capital gain arising from
fluctuations in share
prices.
FUNDAMENTAL
ANLYSIS
SECURITY
ANALYSIS
TECHNICAL
ANALYSIS
RISK IN FUNDAMENTAL ANALYSIS
MEANING OF RISK
 It is the degree or probability of any loss.
 In risk the probable outcomes of all possible events are
listed.
 Once the events are listed, the derived probabilities
can be assigned to the entire possible events.
TYPES OF RISK AFFECTING THE
SECURITY PRICE
SYSTEMATIC
RISK
• MARKET RISK
• INTEREST RATE RISK
• PURCHASING POWER RISK
• BUSINESS RISK
UNSYSTEMATIC • FINANCIAL RISK
RISK
SYSTEMATIC RISK
 It affects the entire market.
 The economic conditions, political situations and the
sociological changes affect the security market.
 These factors are beyond the control of the corporate
and the investors.
1. Market Risk
 It is that proportion of total variability of return
caused by the alternating forces of bull and bear
market.
 The forces affecting stock market are tangible and
intangible.
 The tangible events are real events.
 The intangible events relate to market psychology.
2. Interest Rate Risk
 It is the variability caused by the fluctuations in the
market interest rate.
 The fluctuations are caused by the changes in the
government monetary policy and the changes in the
interest rate of the government bonds.
3. Purchasing Power Risk
 Variations in the returns are caused by the loss of
purchasing power of currency due to inflation in the
economy.
UNSYSTEMATIC RISK
 It is peculiar to a firm or an industry.
 It stems from managerial inefficiency, technological
change, availability of raw materials, change in consumer
preference, labour problems etc.
 This portion of the risk can be eliminated by an investor
while forming an efficient portfolio.
1.Business Risk
 It is caused by the operating environment of the
business.
 It arises due to inability of the firm to maintain its
competitive edge and the growth or stability of the
earnings.
 It might arise due to
 Fluctuations in sales.
 Faulty management policy.
 High fixed cost.
 Single product.
2. Financial Risk
 It is the variability in the return caused due to the
changes in the capital structure of the company.
 The presence of the debt capital increases the interest
obligation of the company.