You are on page 1of 4

security analysis is primarily concerned with the analysis of a security with a view

to determine the value of the security, so that appropriate decisions may be made
based on such valuation as compared with the value placed on the security in the
market.
odd lot trading shares are generally sold in a lot of hundred. shares, sold in smaller
lots, fewer than 100 are called odd lot.
futures contracts , better known as futures constitute an important instrument for
managing or hedging the risk in commodity and financial markets due to price
fluctuations in the markets.
it is an agreement between two parties to buy or sell an assets at a certain time in
the future for a certain price.
Systematic Risk: It arises out of external and uncontrollable factors, which are not
specific to a security or industry to which such security belongs. It is that part of risk
caused by factors that affect the price of all the securities. Systematic cannot be
eliminated by diversification.
a. Market Risk:
Interest Rate Risk:
Purchasing Power Risk: Purchasing Power Risk is the erosion in the value of money
due to the effects of inflation.
2. Unsystematic Risk: These are risks that emanate from known and controllable
factors, which are unique and/or related to a particular security or industry. These
risks can be eliminated by diversification of portfolio.
(a) Business Risk:
(b) Financial Risk (RTP):
Default Risk:
Economic Analysis
1. Meaning: An Entity is essentially a subsystem of an economic system. The
behavior of the other systems in an economy has vital bearing on the performance
o the Entity. Macro- economic factors such as historical performance of the economy
in the past, present and future expectations, growth of different sectors of the
economy in future, lead and lag indicators etc. should be assessed while analyzing
the overall economy.
2. Purpose: The Aggregate Demand and Supply and Total Income of an Economy
affect corporate profits and consequently. share prices.
3. Factors relevant in Economic Analysis::
(a) Growth Rates of National Income and Related Measures: (b) Growth Rates of
Industrial Sector: (c) Inflation: (d) Climatic conditions.
Techniques used in economic analysis
Used in Economic Analysis — Anticipatory Surveys,Barometer-indicator Approach: a.
Leading Indicators: (b) Roughly Coincidental Indicators: (c) Lagging Indicators:(d)
Diffusion/composite index: Economic Model Building Approach, Gross National
Product
Markowitz Model

Dow is the inventor of technical analysis. discounts everything known. (c) Investors base their investment decisions on two criteria i. Charles H. For a given expected return he prefers to take minimum risk. when each intermediate decline carries prices to successively lower levels and each intervening rally fails to brings them back up to the top level of the preceding rally. hence it can be predicted. Conversely. The Three Trends : The “Market. 2. for a given level of risk the investor prefers to get maximum expected return. are the broad. So long as each successive rise (price advance) reaches a higher level than the one before it. 4. as aforesaid. They are the Intermediate declines or “corrections” which occur during Bull Markets or the intermediate rallies or “recoveries” which occur in the . overall up and down trends which usually (but not invariably) last for more than a year and may run for several years. The Secondary Trend : These are the important reactions that interrupt the progress of prices in the Primary direction. 4. expected return and variance of return (Risk). Tenants of Dow Theory :1. the Primary Trend is deemed to be Up. the primary Trend is Down . has propounded the Markowitz Model of Risk Return optimization.Propounded By: Harry Markowitz. and each secondary reaction stops (i. Assumptions of the Model: (a) Return on an investment adequately summarises the outcome of the investment. Movements in the direction of the Primary trends are interrupted at intervals by Secondary correction in the opposite direction-. swings in trends. (e) Investors are risk averse. and every condition which can affect the supply or the demand of corporate securities.reactions or “corrections” which occur when the primary move has temporarily “ gotten ahead of itself.and that is called a Bear Market. These are the phases of up or down trend which usually last for a year or more. 3.e. the price trend reverses from down to up) at a higher level than the previous reaction. (c) Investor& risk estimates are proportional to the variance of return they perceive for a security or portfolio. (except the act of God).e. The Primary Trend : These. DOW THEORY : The Dow theory is the grandfather of all technical studies. regarded as the father of modern portfolio theory. Mr. Dow found that market movements have rhythm and it is not random.” meaning the price of stocks in general. . This is called a Bull Market. The Market ( The Index ) Discounts Everything :Because they reflect the combined market activities of thousands of investors including those possessed of the greatest foresight and the best information on trends and events. (b) Investors can visualise a probability distribution of rates of return.”. everything foreseeable. Application: The model is used to address the following portfolio selection problems / questions (a) Finding the mean variance efficient portfolios and (b) Selecting one such portfolio. of which the most important are its Major or primary Trends.

but not always. They relate to the time series data of the variables that reach high/low points in advance of economic activity. on which both portfolios and individual securities lie. however. The Minor Trends :These are the brief fluctuations which are so far as the Dow Theory is concerned meaningless in themselves. Secondary and Minor trends are compared with the tidal waves. . 5. that result when Expected Returns and Beta Coefficients are plotted across a graph. doubtful if under present conditions even that can be purposely manipulated to any important extent ). retracing 50% of the preceding Primary swing. Quite Often. that the one-third/two thirds rule is not an unbreakable law. The Primary. Purpose: SML helps to determine if the investment is offering a return that is appropriate for its level of risk. they retrace the previous move from one-third to twothirds of the gain (or loss . Leading Indicators: They lead the economic activity in terms of their outcome. Given its risk class. many of them stop very close to the halfway mark. Barometer-indicator Approach: Various indicators are used to find out how the economy shall perform in the future. In a high tide every next wave reaches higher and higher points . They reach their turning points after the economy has reached its own already. The indicators have been classified as under: a. whether a secondary or the segment of a primary between successive secondaries. this is the Primary trend . is made up of a series of distinguishable Minor waves. it is simply a statement of probabilities. make up the Intermediate trends. as the case may be ) in prices registered in the preceding swing in Primary direction. Security Market Line (SML) Meaning: Security Market Line (SML) reflects the linear relationship between Systematic Risk and Expected Return in financial markets. SML is the relationship between Expected Return and Beta. Most Secondaries are confined within these limits. The Primary. The Minor trend is only one of the three trends which can be “ manipulated” (although it is. 2. in fact. Note. Usually. Inferences drawn from these day-to-day fluctuations are quite apt to be misleading. (c) Lagging Indicators: They are time series data of variables that lag behind in their consequences vis-a-vis the economy. Secondary and Minor Trends are marked. an Intermediate swing. (b) Roughly Coincidental Indicators: They reach their peaks and troughs at approximately the same time as the economy. in toto.the ripples. a security’s return should be on the SML. while one can see the tide receding during the high tide movements which is the secondary trend which is against the primary trend .Bear Markets. Primary trends cannot be manipulated. it would strain the resources of the Apex bank of any country . and the minor trend can be compared with the small waves movements . but which.