Uni

t-2
SECURI
TYANALYSI
S
Fundament
alanal
ysi
s:
Introduct i
on:
Fundament alanal y sisi samet hodofev al uatingasecur ityi nanat temptt o
measur ei t
s int rinsicv alue,by exami ning r elat ed economi c,f inanci aland ot her
qual it
at i
v eand quant itativ ef actor s.Fundament alanal ystsst udyany thi ng t hatcan
af fectt he secur ity'sv al ue,i ncludi ng  macr oeconomi cf actor s such as t he ov erall
economy and i ndust ry condi t
ions,and mi croeconomi cf act or s such as f i
nanci al
condi tionsandcompanymanagement .Theendgoaloff undament alanal ysisi st o
pr oduceaquant itat i
vev al uet hatani nv est orcancompar ewi thasecur ity
's  currentpr ice,
thusi ndi cat ingwhet hert hesecur ityi sunder valuedorov ervalued.
Meani ng:
Fundament alanal ysi st ypical lyr eferst oamet hodofanal yzi ngandev aluating
equi ti
es, thoughi tmayal soappl yt oanyki ndofsecur it
y.Awhol esl ewofdat ai ncl udi
ng,
butnotl imi tedt o,f i
nanci alst atement s,economi cs,heal th,management ,i nterestr ates,
pr oduct ion,ear nings,compet it
iv eadv ant ages,compet i
torsandmanyot herqual i
tati
ve
andquant itativef act orsar econsi der ed.
Def i
nit
ion:
Fundament alAnal ysisisamet hodofev aluat ingasecur i
tybyat tempt ingt omeasur ei t
s
i
nt rinsicv alue byexami ning r elated economi c,f inancialand ot herqual itative and
quant i
tat i
v ef act or s.Fundament alanal yst sat temptt ost udyev er ythi ngt hatcanaf f
ect
thesecur i
t y’
sv al ue,i ncl udi ngmacr oeconomi cf act ors( li
ket heov eralleconomyand
i
ndust rycondi tions)andi ndiv i
dualspeci fi
cf act or s( l
iket hef i
nanci alcondi tionand
managementofcompani es) .
OBJECTI VESOFFUNDAMENTALANALYSI S
To pr edi ctt hedi rect ion ofnat ionaleconomybecauseeconomi cact i
vity
af fect st hecor por at epr of it,inv est orat titudesandexpect ationandul timat ely
secur itypr i
ces.
Toest i
mat et hest ockpr icechangesbyst udy i
ngt hef orcesoper atingi nthe
ov er all economy ,aswel lasi nf l
uencespecul i
art oindust r
iesandcompani es.
Tosel ectt her ightt i
meandr i
ghtsecur i
tiesf orthei nv est ment
THREEPHASESOFFUNDAMENTALANALYSI S
• Under st andi ng of t he macr o- economi c env ir
onment and dev elopment s
(Economi cAnal y sis)
• Anal yzingt hepr ospect soft hei ndust ryt owhi cht hef irm bel ongs( Indust ry
Anal ysis)
• Assessi ngt hepr oject edper for manceoft hecompany( CompanyAnal ysis)
Thet hreephaseexami nat ionoff undament al anal y sisisal socal ledasanEI C(Economy
-Indust ry-Companyanal ysi s)f ramewor korat op-downappr oach-
Her ethef inanci al analy stf irstmakesf or ecast sfort heeconomy ,thenf ori ndust riesand
finallyf orcompani es.The i ndust ryf or ecast sar e based on t he f orecast sf ort he
economyandi nt urn,thecompanyf orecast sar ebasedont hef or ecast sf orbot hthe
i
ndust ryandt heeconomy .Al soi nt hi sappr oach, indust rygr oupsar ecompar edagai nst
ot herindust rygr oupsandcompani esagai nstot hercompani es.Usual l
y ,compani esar e
compar edwi thot her sint hesamegr oup.
Thus, thef undament alanal ysisi sa3phaseanal y sisof
•Theeconomy
•Thei ndust ryand
 •Thecompany

Tools and
Phase Natur
eof Pur
pose techni
ques
Analy
sis

FI
RST Economi
c To access t he gener al Economi cindicator
s
Economisi tuatio
Anal
ysi
s c n ofthe
nati
on.
To assess the pr ospectsI ndustr
y l
ife cycle
SECOND of analysi
s,
analysi
I
ndustr
yAnal
ysi
s vari
ousindustrygroupings.Compet it
ives of
i
ndust r
ies
etc.
To analyse the Fi nancial
THI
RD and Analysis of Financi
al
Company Non-fi
nanci
al aspect s of
Anal
ysi
s a aspects: Sal es,
t
Company odet er
mi ne Profi
tabil
it
y, EPS et c.
whethertobuy, sel
l orhold AnalysisofNon- fi
nancial
thesharesofacompany . aspect s:management ,
corporatei
mage,pr oduct
quali
ty
etc.

STRENGTHSOFFUNDAMENTALANALYSI S
Long- t
erm Tr ends
Fundament alanal y
si sisgood f orl ong t erm inv estmentsbased on l ong- t
erm
trends.The abi li
tyt oi dent i
fy and pr edi
ct l ong-term economi c,demogr aphic,
technol ogicalorconsumert rendscanbenef i
tinv estorsandhel psi npicki
ngt her ight
i
ndust rygroupsorcompani es.
Val ueSpot ting
Soundf undament al analy si
swillhelpident i
fycompani esthatrepresentagoodv alue.
Someoft hemostl egendar yinv
est orst hi
nkf orlong- t
erm andv alue.Fundament al
anal ysiscanhel puncov erthecompani eswi t
hv aluableasset s,astrongbal ancesheet ,
stabl eearnings, andst ay i
ngpower .
Busi nessAcumen
Oneoft hemostobv i
ous,butl esst angiblerewar dsoff undament alanalysisist he
dev elopmentofat hor oughunder standingoft hebusi ness.Af t
ersuchpai nstaking
resear chandanal ysis,ani nv est
orwi l
lbef ami l
iarwi t
ht hekeyr evenueandpr ofi
tdr i
vers
behi ndacompany .Ear ningsandear ningsexpect ati
onscanbepot entdriversofequi ty
prices.Agoodunder st andingcanhel pi nvestorsav oi
dcompani est hatarepr onet o
shor tfal
lsandi denti
fythoset hatcontinuet odel i
ver.
Val ueDr iver s
Inaddi ti
ont ounder st andi ngt hebusi ness,f undament alanal ysisal l
owsi nv est orst o
dev elopanunder st andi ngoft hekeyv al uedr iver swi thint hecompany .Ast ock’ spr i
cei s
heav i
lyi nf l
uencedbyt hei ndust rygr oup.Byst udy i
ngt hesegr oups, inv est orscanbet ter
posi tiont hemsel vest oi dent ifyoppor tuni t i
est hatar ehi gh- risk( tech) ,low- risk( util
ities),
growt hor ient ed( comput er),v aluedr i
v en( oil),noncy clical( consumerst aples) ,cy clical
(tr
anspor tat i
on)et c.
Knowi ngWhoi sWho
St ocksmov easagr oup.Knowi ngacompany ’
sbusi ness,i nv est or scanbet ter
cat egor izest ockswi thint hei rr elev anti ndust rygr oupt hatcanmakeahugedi fference
i
nr elativev aluat ions.Thepr i
mar ymot iv eofbuy ingashar ei st osel l i
tsubsequent l
yata
higherpr ice.I nmanycases,di videndsar eal sot obeexpect ed.Thus,di vi
dendsand
pricechangesconst itutet her et ur nf rom i nvest ingi nshar es.
Consequent l
y ,ani nv est orwoul dbei nter est edt oknowt hedi videndt obepai don
theshar ei nt hef ut ureasal sot hef ut ur epr iceoft heshar e.Thesev aluescanonl ybe
est i
mat edandnotpr edi ct edwi thcer t ainty.Thesev al uesar epr imar ilydet er mi nedby
theper for manceoft hecompanywhi chi nt ur ni si nfluencedbyt heper formanceoft he
i
ndust r
yt owhi cht hecompanybel ongsandt hegener aleconomi candsoci o- political
scenar iooft hecount ry.
Economi cAnal ysis
A par ticularf irm orcompanyi sa mi cro uni toft heeconomyasa whol e.
Fluct uat i
ons i n secur ity mar ket s ar er elated t o changes i n expect at i
ons f ort he
aggr egat eeconomy .Pr ospect soft hef irmsar et iedt ot hoseoft hebr oadereconomy
event hatofi nter nat i
onaleconomy .Forsomef i
rms,macr oeconomi cand i ndust ry
circumst ancesmi ghthav eagr eat eri nf l
uenceonpr of i
tsandcashf l
owst hatt hef irm’ s
relativeper for mancewi thini tsi ndust ry.
Commonl yAnal yzedFact or sinEconomi canal y sis:
GlobalEconomy :Theeconomi canal y sisshoul dst ar tf rom t hegl obaleconomy .Si nce
theeconomi esar ei nt er r
el ated–t hust hef irmsacr osseconomi es,t hei nt ernat ional
economycanaf fectaf ir
m’ spr ospect s.I taf fectst hepr icecompet iti
oni tf acesf rom
compet itor s, orthepr of itsi tmakesoni nv estment sabr oad.Atapar ticularpoi ntoft ime,
ther e can be v ar iations i nt he economi c per for mance acr oss count ries.Si mi l
ar l
y,
pol i
ticalr iskscanbeofgr eat ermagni tudei not hercount r
iescompar edt odomest ic
pol i
ticalenv ir
onment . Fl uctuat i
ons i n cur rency exchange r ate al so af fect t he
per formanceofcompani es.Fi gur e13. 1depi ctst her ealGDPgr owt hofdev el opedand
emer gingeconomi es.Onecanseet hatt r
endi snotal way ssi mi larandt hepat terni n
rateofgr owt hi sal so di ffer ent .Theemer ging economi esshow hi ghergr owt hi n
compar isont odev el opedeconomi es.Oneneednotbesur pr isedaboutat tract i
onof
i
nv est or st owar dsemer gi ngeconomi es.I fexpl or edf ur t
her ,di f
fer entcount riesi na
par ti
cul argr oup[ emer gi ngordev eloped]woul dal soshow v ariedGDP gr owt hand
pat tern.
Domest icMacr oEconomy : Ananal y stshoul dbeabl et of or ecastaboutdomest i
cmacr o
economybet tert han ot heranal y sts.Byt hi s,t he anal yst[ f ort hatmat ter ,a f und
manager ]can out smar tt he peer si n showi ng i nv est mentper for mance.The key
macr oeconomi cv ar iabl est hatananal y stshoul dlookatar e:
• Gr ossDomest icPr oduct :Measur eoft heeconomy ’
st ot alpr oduct ionofgoods
andser v i
ces.Gr owt hi nGDPr ef l
ect soppor tuni tiesf oraf irmt oi ncr easei ts
rev enuebysel lingmor epr oduct sorser v i
ces.
• I ndust rialGr owt hRat e:Al thoughpar tofGDP gr owt h,i ndust r
ygr owt hr ates
 i
ndi catest heact i
v i
tyinmanuf act ur
ingsect oroft heeconomy .
• MonsoonandAgr i
cul ture:Foragr arianeconomi est heset wof actorsar e
per t
inent.Sev eralindust riesalsodependonagr icultureforinputs.Levelof
monsooni ndicatest hel ikel
yper formanceofagr icult
uresect or.
• Empl oy mentandCapaci tyUti
lizati
on:Theempl oymentofl abouraswel las
otherf act orsofpr oduct i
on[ l
ikemachi necapaci t
y]indicatest helev elof
economi cact i
vityint hecount ry .
• PriceLev elandI nfl
at i
on:Thegener allevelofpr i
cer i
sei sknownasi nfl
ati
on.
When demand f orpr oduct s and ser vices ar e hi ghert han t he product i
ve
capaci ty,therecanbehi ghinfl
at i
on.Thegov ernment sandmonet aryregul at
ors
l
ikeReser veBankofI ndi atr
yt odr aw abal ancebet weeni nfl
ation,growt hand
unempl oy ment.
• InterestRat es:Sect or sl i
keconsumerdur ables,aut omobi l
esandhousi ngar e
highlysensi t
ivetoi nt erestrates.Hi ghint erestr atesalsor educet hepr esent
valueofi nvestment .
 • BudgetDef i
cit
:Thisi st he dif
fer
ence bet
ween gov ernmentspendi ng and
rev
enues.Theshor tf
allistakencar ebygovernmentbor rowing.Gov ernment
borr
owing can impacti nt
erestrat
esaswel lasr estr
ictthe pri
vate sect or
borr
owingsfrom market.
• Senti
ment:Dependingupont helevelofconfi
denceofconsumer si nf uture
i
ncomel evel
s,theywilll
iketospendmor einf ut
urewhichi nturnaffectst he
confi
denceofproducers.Accordi
nglypr
oducersplanthei
rinvestmentact i
vi
ty.

I
ndust r yAnal y sis
Indust ryanal ysisi sat oolt hatf acili
tatesacompany '
sunder standing ofi ts
posi ti
on r elativet o ot hercompani es t hatpr oduce si milarpr oducts orser v i
ces.
Under standi ngt hef orcesatwor kintheov erallindust ryisani mpor t
antcomponentof
effect i
v est r
at egi cplanni ng.I ndustryanal y si
senabl essmal lbusinessowner st oi
dent i
fy
thet hr eat sandoppor tunitiesf acingt heirbusi nesses,andt of ocust hei rresourceson
dev elopi nguni quecapabi l
iti
est hatcoul dl eadt oacompet i
tiv
eadv antage.
Indust ry  
Fact ors & Tr ends
Descr i
bef actor sandt r
endsaf fecti
ngy ouri ndust ryandconsi dert heirimpl i
cat i
onsf or
yourbusi ness.I ssuest ot hinkabouti ncl ude:
 De mogr aphi c -The basi c charact eri
st i
cs t haty ourcust omer st end t o hav ei n
common, l
ikeage, i
ncomel evel,
geogr aphyorgender
 So ci al 
-Fadsorshi f
tsi npopul aropi ni on,of t enst ronglyinfluencedbyt hemedi a,
includi ngt el evisionshowsandcommer cials,spor tsteamsandi cons,magazi nes
andpeerpr essur es
 E conomi c -Thest ateoft heeconomy ,bot honal ocal andnat ional l
ev el.
 Te chnol ogi cal  
-Howt echnol ogyisaf f
ect i
ngy ouri ndust ry
 Re gul atory -Ther olegov ernmentorot herr ule- maki ngbodi espl ayiny ouri ndustry
.
 E nv i
ronment al 
-Youri ndust ry
'srelationshi pwi t
ht heenv i
ronment .
 Consi dertrends,
li
keacal lforenv ironment ally-
fri
endl ypr oduct s.

Commonl yAnalyzedFactor
sinIndustryanalysi
s:
Mar ketSi
ze
Imaginey ouhav enocompet it
ion,andy ourcustomers'onlyopti
onist obuyy our
productorservice. How manycust omer swouldy ouhave? How muchmoneywoul d
yourbusinessmake?  That'
sthesizeofy ourmarket.
Whenest imati
ngt hesizeofyourmar ket,consi
derindust
ryfactor
sandtrends,andpay
specialat
tenti
ont othoseyouthinkpresentspecialopport
unit
iesorchal
l
engesf ory
our
business.
DemandShocks SupplyShocks
•Reducti
oninTaxrates •Nat ur
alcalami t
y
•Increaseinmoneysuppl
y •Changesineducat i
onall
evelofworkfor
ce
•Increasesingov
ernmentspendi
ng •Changesinthewager at
es
•Changesi nt hepri
ceofimportedoil
Gov ernmentPol icy:Gov ernmentsandmonet aryaut hor iti
esdev i
sepol i
ciesaf fecting
bothdemandandsuppl ycondi ti
onsi nt heeconomy .
Demand- si
dePol iciesar eexpect edt ost imul at et het ot
aldemandf orgoodsand
services.Thet womaj ordemand- sidepol iciesar efiscal andmonet arypol icies.
Fiscalpol i
cydenot est hespendi ngandt axact ionsoft hegov er
nmentandi spar tof
demand- si
demanagement .Gov ernmenthast ost riket hedel i
catebal ancebet ween
politi
calconditionandeconomi cst abi l
ity.Gov ernmentmayhesi tatei ncur tail
ingt he
spendi nginsoci alsect orbecauseofel ector alcompul sion.
Increasei ntaxr atescandecr easet hedi sposabl eincomeoft heconsumer s.Butt he
i
ncr easedt axcol lect i
oncanf aci l
itat egr eat erspendi ngbyt hegov ernmentf ort he
economy .Withoutappr opr
iatetaxcol lection,t hedef icitwi l
lincreaset husl eadi ngt o
borrowi ngbythegov ernment.
Monet ar ypoli
cyi ntendst oregulat et hemoneysuppl yt oaf f
ectt hemacr oeconomy .
Primar i
lytheeffectofmonet arypol icyi sseeni nt ermsofchangei ni nterestr at e.
Expansi onarymonet arypoli
cylower st hei nterestr at eandst i
mul atesi nvest mentand
consumpt i
ondemandi nshor trun.Buti tcanal sol eadt ohigherpr ices, thusi nfl
ation
i
nl ongr un.
Fiscalpol i
cyisdesi gnedbyt hegov ernmentwhi lemonet arypol i
cyi sdesi gnedand
i
mpl ementedbyt hemonet aryaut hor ityi.e.t hecent ral bankoft hecount r
y.

I
nconclusi
on, i
tisi
mperativef
orthei
nvestor
sandanalyst
stodevisemodel st o
for
ecastthemar ketandtakeinvest
mentdecisi
onortweaktheexi
sti
ngi nvestments.
Inthesecondpartofthemodul eonEconomicAnalysi
s,weshal
ldi
scusst hetoolsfor
economicf or
ecasti
ngf ocusi
ngmor eont hebusinesscycl
e,economici ndicator
s,
i
ndicesetc.

CompanyAnal
ysi
s
Intr
oduct iont ocompanyanal ysis
Companyanal y sis 
isapr ocesscar ri
edoutbyi nv estorst oev aluatesecur i
ties,
collecting i nfor el
ated t ot hecompany ’
spr of
ile,pr oduct sand ser vi
cesaswel las
profitabilit
y .Iti s al so r efer r
ed as ‘ fundament alanal ysis.
’A company anal y sis
i
ncor por at esbasi cinfoaboutt hecompany ,li
ket hemi ssionst atementandappar i
tion
andt hegoal sandv alues.Dur ingt heprocessofcompanyanal ysi
s,ani nv est
oral so
consi derst hecompany ’
shi story ,focusi
ngonev entswhi chhav econtri
but edi nshapi ng
thecompany .
Also,acompanyanal ysisl ooksintot hegoodsandser vi
cespr offeredbyt he
company .I fthecompanyi si nv olvedinmanuf act ur
ingact ivit
ies,theanal y sisstudies
thepr oduct spr oducedbyt hecompanyandal soanal yzest hedemandandqual it
yof
thesepr oduct s.Conv er sely,ifitisaser vicebusi ness,thei nv estorstudiest heser vices
putf orwar d.
Pr oceedur e:
I
ti sessent ialforacompanyanal ysi
st obecompr ehensi vetoobt ainstrategi c
i
nsi ght .Bei ngat horoughev aluat i
onofanor ganizati
on,t hecompanyanal ysi sprovi
des
i
nsi ghtt or ati
onal i
zepr ocessesandmaker evenuepot ential
sbet t
er.
Thepr ocessofconduct ingacompanyanal ysisinvolvest hef oll
owi ngsteps:
 Th epr i
maryst epi stodet er minethet ypeofanal ysiswhi chwoul dwor kbestf or
 yourcompany .
 Re searchwel laboutt hemet hodsf oranal ysis.Inor dertoper form acompany
analysis,i
tisimpor tantt ounder standt heex pect edoutcomef ordoi ngso.
 Th eanal ysisshoul dpr ov ideansweraboutwhati sdoner ightandwr ongont he
basisofat horoughev aluat i
on.Itis,theref ore,important6t omaket heri
ghtchoi ce
fortheanal ysismet hods.
 Th enextst ep inv olvesi mpl ement i
ng t hesel ected met hod forconduct ing the
financialanalysis.I tisi mpor tantf ort heanal ysistoincludei nternalandext ernal
factorsaffectingt hebusi ness.
  Asanextst ep,all themaj orfindi
ngsshoul dbesuppor t
edbyuseofst at
isti
cs.
 Th efinalstepinv olvesr ev i
ewingt her esults.Theweaknessesar et henattempt edt o
becor r
ected.Thecompanyanal ysisi susedi nconcl udingissuesanddet ermi ni
ng
thepossi blesolut ions.Thecompanyanal ysisi sconduct edt opr ov i
deapi ctureof
thecompanyata speci fi
ct ime,t huspr oviding t
hebestwayofenhanci ng a
company ,i
nternal l
yaswel lasexter nall
y .
Commonl yAnalyzedFact orsi nIndust ryanal ysis:

1.Mar ketshar e:Themar ketshar eoft hecompanyhel pstodet ermi neacompany ’

s
relativ eposi tionwi t
hint hei ndustry.Ift hemar ketshar eishigh,thecompanywoul dbe
ablet omeett hecompet i
tionsuccessf ull
y.Thesi zeoft hecompanyshoul dal sobe
consi der edwhi l
eanal yzingt hemar ketshar e,becauset hesmal l
ercompani esmayf ind
i
tdi fficul ttosur viveint hef uture.
2.Growt hofannualsal es:I nvestorgener allypref erstost udythegr owt hinsal esbecause
thel ar gersi zecompani esmaybeabl et owi thst andt hebusinesscy cler atherthant he
companyofsmal l
ersi ze.Ther api dgr owthkeepst heinvestori nbet terposi ti
onas
growt hi nsal esisf oll
owedbygr owt hi npr ofit.Thegr owthinsal esoft hecompanyi s
anal yzedbot hinr upeet er msandi nphy sicalter ms.
3.Stabi lityofannualsal es:Ifaf i
rm hasst ablesal esr ev enue,otherthingsbei ngr emai ning
const ant ,willhav emor est ableear nings.Wi dev ariationinsal esleadst ov ari
ationi n
capaci tyut i
lizati
on,f i
nanci alpl anning and di vidends.Thi s affectst he Company ’
s
posi tionandi nvestor’sdeci siontoi nvest .
4.Ear nings:  
Theear ningoft hecompanyshoul dal sobeanal yzedal ongwi t
ht hesal es
l
ev el .Thei ncomeoft hecompanyi sgener ated t hrough theoper ating ( in service
i
ndust ryl i
kebanks-i nt erestonl oansandi nv estment )andnon- operat i
ngi ncome( ant
company ,rent alsf r
om l ease,di videndsf r
om secur i
ties).Thei nvestorshoul danal yze
thesour cesofi ncomepr oper l
y.Thei nv estorshoul dbewel lawar ewi ththef actthatt he
ear ningsoft hecompanymayv aryduet of oll
owi ngr easons:
 Ch angei nsal es.
 Ch angei ncost s.
 De pr eciat i
onmet hodadopt ed.
 Invent oryaccount ingmet hod.
 Wa ges, salariesandf ri
ngebenef its.
 Incomet axandot hert axes.
 5.Capi talSt ructure:  
Capitalstructur ei scombi nat ionofownedcapi t
aland
debtcapi talwhi chenabl est omaxi mi zet hev al ueoft hef ir
m.Undert his,
wedet ermi net hepr oporti
oni nwhi cht hecapi tal shouldber aisedf rom t he
dif
f erentsecur ities.Thecapi talst r
uct uredeci sionsar er elatedwi tht he
mut ualpr opor tionoft helongt erm sour cesofcapi tal.Theownedcapi tal
i
ncl udesshar ecapi tal
1.Preferenceshar es:Pr eferenceshar esar et hoseshar eswhi chhav epr eferentialr i
ght s
regarding the pay ment of di v
idend and r epay ment of capi talov er t he equi ty
sharehol der
s.Atpr esentmanycompani esresor tpref erenceshar es.
2.Debt:Iti sani mpor t
antsour ceoff i
nanceasi thast hespeci fi
cbenef itofl ow costof
capitalbecause i nt
eresti st ax deduct ible.The l ev erage ef fectofdebti s hi ghl y
advant ageoust ot heequi tyshar eholders.Thel imi t
sofdebtdependupont hef i
rm’ s
earningcapaci tyandi tsf i
xedasset s.
6.Management : 
Justasanar myneedsagener alt ol eadi tt ov ictory ,a
companyr el
iesuponmanagementt ost eeri ttowar dsf inancialsuccess.
Somebel i
ev et hatmanagementi s the mosti mpor tantaspectf ori nv esting
i
nacompany .Itmakessense-ev ent hebestbusi nessmodel isdoomedi f
thel eadersoft hecompanyf ailtopr oper l
yexecut ethepl an.
7.PastPer formance

Anot hergoodwayt ogetaf eelformanagementcapabi li

tyi stocheckandsee
how execut iveshavedoneatot hercompani esi nthepast .Youcannor mallyfind
bi
ogr aphiesoft opexecut i
vesoncompanywebsi tes.Identifyt hecompani est hey
wor kedati nthepastanddoasear chont hosecompani esandt heirperfor
mance.
8.Oper ati
ngEffici
ency:
Cor por at
egov er
nancedescr ibest hepoliciesinpl acewi thinanor ganizat
ion
denot i
ngt her el
ati
onshi
psandr esponsibil
i
tiesbet weenmanagement ,dir
ectorsand
stakeholder s.Thesepoli
ciesaredefinedanddet erminedint hecompanychar terandits
bylaws,al ong wi t
h corporatelaws and r egulati
ons.The pur pose of corporate
gov ernancepol iciesi st oensur et hatpr operchecksandbal ancesar ei npl ace, maki ngi t
mor edi fficultf orany onet oconductunet hical andi llegal act ivities.
Goodcor por at egov er nancei sasi tuat i
oni nwhi chacompanycompl ieswi t
hal l
ofi t
sgov ernancepol iciesandappl icabl egov er nmentr egul at ionsi nor dert olookoutf or
thei nter estsoft hecompany 'si nv est orsandot herst akehol der s.
Although,t her ear ecompani esandor ganizat ionst hatat temptt oquant itativelyassess
compani esonhowwel lt heircor por at egov er nancepol iciesser v est akehol ders, mostof
theser epor tsar equi teexpensi v ef ort heav er agei nv estort opur chase.
For tunat ely,cor por ategov ernancepol iciest y pical lycov eraf ew gener alar eas:
structur eoft heboar dofdi rect ors,st akehol derr ight sandf i
nanci alandi nf ormat ion
transpar ency .Wi thal i
ttl
er esear chandt her ightquest ionsi nmi nd,inv est orscangeta
goodi deaaboutacompany '
scor por at egov ernance.
Financi alandI nf ormat i
onTr anspar ency
Thisaspectofgov er nancer el atest ot hequal it
yandt imel i
nessofacompany 'sf inanci al
disclosur es and oper ationalhappeni ngs.Suf fici ent t ranspar ency i mpl i
es t hat a
company '
sf inanci alr el
easesar ewr it
teni namannert hatst akehol derscanf ol l
owwhat
managementi sdoi ngandt her efor ehav eacl earunder standi ngoft hecompany 's
cur r
entf inanci al situat i
on.
Stakehol derRi ght s
Thisaspectofcor por ategov ernanceexami nest heext entt hatacompany '
spol i
ciesar e
benef itingst akehol deri nt erest s, not abl yshar ehol deri nt erest s.Ul t
imat ely ,asowner sof
thecompany ,shar eholder sshoul dhav esomeaccesst ot heboar dofdi rector si ft hey
hav e concer ns orwantsomet hing addr essed.Ther ef or e compani es wi th good
gov ernancegi veshar ehol der sacer tainamountofowner shi pv oting r i
ght st o cal l
meet i
ngst odi scusspr essi ngi ssueswi t
htheboar d.
Anot herr elev antar eaf orgoodgov er nance,i nt ermsofowner shi pr i
ght s,i swhet heror
notacompanypossessesl ar geamount soft akeov erdef enses( suchast heMacar oni
Def enseort hePoi sonPi l
l)orot hermeasur est hatmakei tdi ff
icultf orchangesi n
management ,direct or sandowner shi pt ooccur .( Tor eadmor eont akeov erst rat egi es,
seeTheWackyWor l
dofM&As. )
Structur eoft heBoar dofDi r
ect ors
The boar d ofdi rect or si s composed ofr epr esent at ives f r om t he company and
represent at i
vesf r
om out sideoft hecompany .Thecombi nat ionofi nsideandout si de
director s at tempt s t o pr ov ide an i ndependent assessment of management 's
per f
ormance, maki ngsur et hatt hei nt erestsofshar ehol der sar er epresent ed.
Thekeywor dwhenl ooki ngatt heboar dofdi rect orsi si ndependence.Theboar dof
director si sr esponsi bl ef orpr otect ingshar ehol deri nterest sandensur i
ngt hatt heupper
managementoft hecompanyi sdoi ngt hesame.Theboar dpossessest her ightt ohi re
andf iremember soft heboar donbehal foft heshar ehol der s.A boar df ill
edwi th
i
nsi derswi llof tennotser veasobj ect i
vecr iti
csofmanagementandwi lldef endt hei r
actionsasgoodandbenef i
cial ,regar dlessoft heci rcumst ances.
Informat ionont heboar dofdi rect orsofapubl iclyt radedcompany( suchasbi ogr aphi es
ofi ndiv i
dualboar dmember sandcompensat i
on- rel atedi nf o)canbef oundi nt heDEF
14Apr oxyst atement .
 We' v enow goneov ert hebusi nessmodel ,managementandcor por at egov ernance.
Theset hr eear easar eal li mpor tantt oconsi derwhenanal y zinganycompany .Wewi l
l
nowmov eont ol ookingatqual itativef act or si nt heenv i
r onmenti nwhi cht hecompany
oper ates.
 Financi al Per formance:
1.Bal anceSheet :Thel ev el,t rends,andst abi l
ityofear ningsar epower f ulf or cesi nt he
det er minat ionofsecur i
typr ices.Bal ancesheetshowst heasset s, l
iabilitiesandowner ’
s
equi tyi nacompany .I tist heanal y st’spr i
mar ysour ceofi nf ormat i
onont hef i
nanci al
strengt hofacompany .Account ingpr inci plesdi ctat et hebasi sf orassi gni ngv aluest o
asset s.Li abi l
ityv aluesar esetbycont ract s.Whenasset sar er educedbyl iabi lit
ies,t he
bookv al ueofshar ehol der ’sequi tycanbeascer tained.Thebookv al uedi f f
ersf rom
cur rentv aluei nt hemar ketpl ace,si ncemar ketv aluei sdependentupont heear nings
powerofasset sandnott hei rcostofv aluesi nt heaccount s.
2.Prof itandLossaccount :I tisal socal l
edasi ncomest atement .Itexpr essest her esul ts
off inanci aloper at i
onsdur inganaccount ingy eari .e.wi tht hehel poft hi sst atementwe
canf indouthowmuchpr of itorl osshast akenpl acef rom t heoper at i
onoft hebusi ness
dur ingaper i
odoft ime.I tal sohel pst oascer t
ainhow t hechangesi nt heowner ’
s
i
nt er esti nagi venper iodhav et akenpl aceduet obusi nessoper ations.Lastofal l,for
anal y zi
ngt hef i
nanci alposi tionofanycompanyf ollowi ngf act or sneedt obeconsi der ed
forev aluat ingpr esentsi tuat ionandpr ospect sofcompany .
COMPANYANALYSI S:THESTUDYOFFI NANCI ALSSTATEMENTS
The massi v e amountofnumber si n a company 'sf inanci alst atement s can be
bewi lderingandi nt i
mi dat ingt omanyi nv est ors.Ont heot herhand,i fy ouknowhowt o
anal y zet hem, thef inanci al st atement sar eagol dmi neofi nfor mat i
on.
Financi alst atement s ar et he medi um bywhi ch a companydi scl oses i nformat ion
concer ni ngi tsf i
nanci al per for mance.
Follower s off undament alanal y sis use t he quant i
tativ ei nformat ion gl eaned f rom
fi
nanci alst atement st omakei nv est mentdeci sions.Bef or ewej umpi nt ot hespeci fics
oft het hr eemosti mpor tantf inanci alst atement s–i ncomest atement s, balancesheet s
andcashf lowst atement s-wewi llbr ief l
yi ntroduceeachf inanci alst at ement 'sspeci fi
c
funct i
on, al
ongwi thwher et heycanbef ound.
Themai nt echni quesoff inanci al anal y sisar e:
1.Compar at i
veFi nanci al Stat ement s
2.TrendAnal y sis
3.CommonSi zeSt atement
4.FundFl owSt atement
5.CashFl owSt atement
6.Rat ioAnal ysis
1.Compar at i
veFi nanci alSt atement s: 
Fi nanci alst atement soft woormor ef irmsmaybe
compar edf ordr awi ngi nfer ences.Thi si sknownasi nt er-firm compar ison.Si mi larly,
ther emaybei nter-per i
odcompar i
son,i .
e. ,compar isonoft hef inanci alst atement sof
thesamef i
r m ov eraper iodofy ear sknownast rendanal ysis.Thi si sal soknownas
hor izont alanal ysis,si nceeachaccount ingv ariablef ort woormor ey ear si sanal yzed
hor izont al l
y.I nter-fir
m ori nter -
per iodcompar isonsar ev erymuchf aci li
tat edbyt he
prepar ationofcompar at i
vest atement s.I npr epar ingt hesest atement s,t hei temsar e
 placedi nt her owsandt hef irmsofy earsar eshowni nt hecol umns.Suchar rangement
faci l
itat eshi ghl i
ght ingt hedi fferenceandbr ingsoutt hesi gni fi
canceofsuchdi ffer ences.
2.Thest atemental sopr ov idesf orcol umnst oi ndicat et hechangef or m oney eart o
anot heri nabsol ut et ermsandal soi nper cent agef orm.I ncal cul atingper centages, ther e
i
sonedi ffi
cul ty ,namel y,i ft hef i
gur ei snegat ive,per cent agescannotbecal cul at ed.
Likewi se,i ft hechangei sf rom ort oazer obal ancei naccount ,iti snotpossi bl et o
cal cul atet heper cent age.
Adv ant ages
 Th esest at ement si ndi cat et r endsi nsal es,costofpr oduct ion,pr ofits,et c.,hel pingt he
anal y stt o ev al uat et he per f
or mance,ef fici ency and f i
nanci alcondi ti
on of t he
under taki ng.Forexampl e,i ft hesal esar ei ncr easi ngcoupl edwi t ht hesameorbet t
er
pr ofitmar gi ns, iti ndi cat esheal t
hygr owt h.
 Co mpar ativ est at ement scanal sobeusedt ocompar et heposi tionoft hef ir
m wi tht he
av erageper for manceoft hei ndust r
yorwi t
hot herf i
rms.Suchacompar isonf aci li
t ates
thei dent ifi
cat i
onorweaknessesandr emedy ingt hesi tuat ion.
Di sadv antages
3.Inter -fir
m compar isonmaybemi sleadi ngi ft hef irmsar enotoft hesameageandsi ze,
follow di ffer entaccount i
ngpol iciesi nr elat iont odepr eciat i
on,v aluat ionofst ock,et c.,
anddonotcat ert ot hesamemar ket .Inter -
per iodcompar i
sonwi l
lal sobemi sleadi ngi f
theper iodhaswi tnessedf requentchangesi naccount i
ngpol icies.
4.Tr endAnal ysi s:Foranal y zingt het rendofdat ashowni nt hef inanci alst atement si tis
necessar yt o hav e st at ement sf ora numberofy ear s.Thi s met hod i nv olv es t he
cal cul ationofper cent ager el ationshi pt hateachst atementi tem bear st othesamei tem
i
nt he“ basy ear ” .Tr endper cent agesdi scl osechangesi nt hef i
nanci alandoper at ing
dat abet weenspeci fi
cper iodsandmakepossi blef ort heanal ystt of or m anopi ni onas
towhet herf av or abl eorunf av orabl et endenci esar er eflectedbyt hedat a.
5.CommonSi zeSt at ement :
 
Financi alst at ement swhenr eadwi thabsol ut ef iguresar enoteasi l
yunder st andabl e,
somet imest heyar eev enmi sleadi ng.I tis,t her ef ore,necessar yt hatf i
gur esr epor tedi n
thesest at ement s, shoul dbeconv ertedi nt oper cent aget osomecommonbase.I npr ofit
andl ossaccountsal esf igur ei sassumedt obeequalt o100andal lot herf igur esar e
expr essedasper cent ageofsal es.
Simi lar ly,inbal ancesheett het ot alofasset sorl i
abiliti
esi st akenas100andal lt he
figur esar eexpr essedasper cent ageoft het otal .Thi st ypeofanal ysisi scal ledv er ti
cal
anal y sis.Thi si sast at icr el at i
onshi pbecausei ti sast udyofr el ationshi pexi st i
ngata
par ticul ardat e.Thest at ement ssopr epar edar ecal l
edcommon- si zest atement s
6.Fund Fl ow St at ement :I ncome St atement or Pr of i
t or Loss Account hel ps i n
ascer tainmentofpr ofitorl ossf oraf ixedper iod.Bal anceSheetshowst hef i
nanci al
posi tionofbusi nessonapar ti
cul ardat eatt hecl oseofy ear .Incomest atementdoes
notf ullyexpl ai nf undsf rom oper ationsofbusi nessbecausev ariousnon- f
undi temsar e
showni nPr of itorLossAccount .Bal anceSheetshowsonl yst at icf i
nanci alposi tionof
busi ness and f inanci alchangesoccur red dur ing a y earcan’ tbe known f r om t he
financi alst at ementofapar ticulardat e.Thus,FundFl owSt at ementi spr epar edt of ind
outf i
nanci alchangesbet ween t wo dat es.I ti sat echni queofanal yzing f i
nanci al
stat ement s.Wi tht hehel poft hisst atement ,t heamountofchangei nt hef undsofa
busi nessbet weent wodat esandr easonst her eofcanbeascer tained.Thei nv est or
 coul
dseeclear
lyt
heamountoff undsgener
atedorl
osti
noper
ati
ons.Theser
evealt
he
real
pict
ureoft
hefi
nanci
alposi
ti
onofthecompany.

7.CashFl ow St atement :Thecashf low st atementshowshow muchcashcomesi nand

goesoutoft hecompanyov ert hequar terorthey ear.Atf i
rstglance,t hatsoundsal ot
l
iket hei ncomest atementi nt hati tr ecordsf inanci alper for
manceov eraspeci fi
ed
period.Butt her eisabi gdiffer
encebet weent het wo.
8.RatioAnal ysis:Rat i
oi sar el
ationshi pbet weent wof igur esexpr essedmat hemat i
call
y.It
i
squant it
ativer elati
onshi pbet weent woi temsf ort hepur poseofcompar ison.Rat i
o
analysisisat echni queofanal y zingf i
nanci alstatement s.Ithelpsi nest i
mat ingf i
nancial
soundnessorweakness.Rat i
ospr esentt herelationshi psbet weeni t
emspr esentedin
profit and l oss account and bal ance sheet .I t summar ies t he dat af or easy
under st
anding,compar isonandi nterpretati
on.Ther atiosar edi videdi nt hef oll
owing
group:
Liquidit
yRat ios
Liquidit
yratios  prov i
dei nfor
mat i
onaboutaf i
rm'sabi litytomeeti tsshor t-t
ermf i
nancial
obli
gat i
ons.Theyar eofpar ti
cul arinterestt othoseext endingshor t-
term cr edittothe
fi
rm.Twof requent l
y-usedl i
qui dityratiosar ethe  currentr atio 
(or workingcapi t
alrati
o)
andt he qui
ckr atio.
Thecur rentr ati
oi st her ati
oofcur rentasset stocur r
entl i
abil
iti
es:

Short
-ter m cr editorspreferahi ghcur r
entr ati
osi nceitreducest heirri
sk.Shar ehol
ders
maypr ef eral owercur rentr ati
osot hatmor eoft hefir
m' sassetsar ewor kingtogr ow
thebusi ness.Ty picalvaluesf orthecur rentratiov ar
ybyf ir
m andi ndustry
.Forexampl e,
fi
rmsi ncy clical i
ndust r
iesmaymai ntainahi ghercur r
entratioi
nor dert
or emai nsolv
ent
duri
ngdownt ur ns.
Onedr awbackoft hecur rentr at
ioist hati nventorymayi ncl
udemanyi t emst hatare
dif
fi
cultt oliqui datequicklyandt hathav euncer tai
nliqui
dat i
onv alues.Thequi ckrati
ois
analternativemeasur eofl iquidit
ythatdoesnoti ncl
udei nvent
or yinthecur rentassets.
Thequi ckr atioi sdefinedasf oll
ows:

Thecur r
entasset susedinthequi ckrati
oar ecash,accountsr ecei
vabl
e,andnotes
receivable.Theseasset sessenti
all
yarecur r
entassetslessinventory
.Thequickrat
io
ofteni sr eferredtoast aci
he  dt est.Fi
nally
,t cashr
he  ati
o i
st hemostconservati
ve
l
iquidi
t yr atio.Itexcl
udesallcurr
entasset sexceptthemostl iqui
d:cashandcash
equivalent s.Thecashrati
oisdefi
nedasf ol
lows:
Thecashr at
ioi
sani ndicati
onoft hef i
rm'sabil
it
yt opayof fit
scurrentli
abil
iti
esi ffor
somer easonimmedi atepaymentwer edemanded.
AssetTurnov erRat i
os:Assetturnoverrat
iosindi
cateofhow ef fi
cientl
yt hef i
rm
uti
li
zesitsassets.Theysomet i
mesar erefer
redtoasef fi
ciencyrat
ios,assetutili
zati
on
rati
os,orassetmanagementr ati
os.Two commonl y used assett urnoverr ati
os
are r
eceivabl
esturnov er
 and i
nventorytur
nover.
Receivablestur
nov eri sani ndicati
onofhow qui ckl
ythef i
rm coll
ectsitsaccount s
receiv
ablesandisdef inedasf oll
ows:

Ther eceivablesturnoveroft
eni srepor
tedint er
msoft henumberofday sthatcredi
t
salesremai ninaccount sr
eceivabl
ebeforetheyarecoll
ected.Thi
snumberisknownas
the col
lecti
onper i
od.Itistheaccountsreceiv
ablebalancedivi
dedbytheaveragedail
y
creditsales,cal
culatedasfol
lows:

Thecol
l
ect
ionper
iodal
socanbewr
it
tenas:

Anot
hermaj
orassett
urnov
err
ati
ois 
inv
entor
yt ur
nover.I
tisthecostofgoodssol
dina
ti
meperi
oddi
vi
dedbytheaver
ageinv
entor
yleveldur
ingthatperi
od:

Theinvent
oryturnoverofteni
srepor
tedasthe 
i
nvent
oryper
iod,whi
chist
henumberof
dayswor t
hofi nventoryonhand,cal
cul
atedbydivi
dingt
hei nv
ent
orybytheav
erage
dai
lycostofgoodssol d:
Thei
nvent
oryper
iodal
socanbewr
it
tenas:

Ot
herassett
urnov
err
ati
osi
ncl
udef
ixedassett
urnov
erandt
otal
assett
urnov
er.

Pr
ofi
tabi
l
ityr
ati
os

Prof
it
abi
li
tyr
ati
osoff
ersev
eraldi
ff
erentmeasur
esoft
he successoft
he f
ir
m at
gener
ati
ngpr
ofi
ts.

The 
grossprof
itmar gi
n i
sameasureoft hegrossprofi
tearnedonsales.Thegross
prof
itmargi
nconsidersthef
ir
m'scostofgoodssold,butdoesnoti
ncl
udeothercosts.
I
tisdefi
nedasfol
lows:

Retur
nonassets 
isameasur eofhow ef
fect
ivel
ythef
ir
m'sasset
sar
ebei
ngusedt
o
gener
atepr
ofi
ts.I
tisdef
inedas:

Ret
urnonequity
 i
sthebottom l
i
nemeasuref
ortheshar
ehol
ders,measur
ingthepr
ofi
ts
ear
nedforeachdoll
ari
nvestedi
nthef
ir
m'sst
ock.Ret
urnonequit
yisdefi
nedasfol
l
ows:
 FORECASTI NGEARNI NGS
Thereisst rongev i
dencet hatear ningshav eadi rectandpower fuleff
ectupondi vi
dends
andshar epr i
ces.Sot hei mpor tanceoff orecasti
ngear ningscannotbeov erstated.
Theser ati
osar egener all
yknownas‘ Retur
nonI nvestmentRat ios’
.Theser ati
ohel pin
evaluati
ngwhet herthebusi nessi searningadequat er et
urnont hecapit
alinv estedor
not.Wi tht hehel poft hef oll
owi ngratiost heper formanceoft hebusinesscanbe
measur ed.Theear ningsfor ecastingrati
osar e:
 ReturnonTot alAssets:
 Ar at i
othatmeasur esacompany 'sear ningsbefor
ei nterestand
taxes( EBIT)againstitst otalnetasset s.Ther atioisconsi deredani ndicatorofhow
eff
ect i
velyacompanyi susi ng itsassetst o generateear ningsbef or
econt ractual
obli
gationsmustbepai d. 

Tocal
cul
ateROTA:

 
Wher eEBI T=NetI ncome+I ntrestExpense+t axes
 Thegr eat eracompany 'sear ningsi npr opor tiont oi tsasset s( andt hegr eatert he
coef f
ici entf rom t hiscal cul at i
on) ,themor eef f ect ivelythatcompanyi ssai dt obeusi ng
i
t sasset s.
Tocal cul ateROTA,y oumustobt aint heneti ncomef iguref r
om acompany '
sincome
statement ,andt henaddbacki nter estand/ ort axest hatwer epaiddur i
ngt hey ear.The
resultingnumberwi llr ev ealt hecompany '
sEBI T.TheEBI Tnumbershoul dt henbe
divi
dedbyt hecompany 'st ot alnetasset s
 Re t
ur nonEqui ty: 
Theamountofneti ncomer et urnedasaper centageofshar eholders
equity .Ret urnonequi tymeasur esacor por at i
on' spr ofit
abili
tybyr ev ealinghow much
profitacompanygener at eswi tht hemoneyshar ehol der shav einvest ed.
ROEi sexpr essedasaper cent ageandcal culat edas:
Retur nonEqui ty=NetI ncome/ Shar ehol der'sEqui ty
Neti ncomei sf ort hef ul lfiscaly ear( bef oredi videndspai dt ocommonst ockhol ders
butaf t erdi v i
dendst opr efer redst ock. )Shar ehol der '
sequi tydoesnoti ncludepr eferred
shares.
Alsoknownas" r
eturnonnetwor th"( RONW) .TheROEi susef ulf orcompar ingt he
profitabi l
ityofacompanyt ot hatofot herf i
rmsi nt hesamei ndustry.
Ther ear esev eral variationsont hef ormul athati nv estor smayuse:
1.Invest or swi shi ngt oseet her eturnoncommonequi t
ymaymodi fythef ormul aabov eby
subt r
act i
ngpr eferreddi videndsf rom neti ncomeandsubt ractingpr ef erredequi tyfrom
sharehol der s'equi ty,gi v ing t hef ollowi ng:r et urn on common equi ty( ROCE)= net
i
ncome-pr efer reddi vidends/commonequi ty .
2.Retur n on equi ty may al so be cal cul ated by di vi
ding net i ncome
by av
  er age  shar eholder s'equi t
y .Av erageshar ehol ders'equi tyiscal culatedbyaddi ng
theshar ehol der s'equi t
yatt hebegi nningofaper iodt otheshar ehol der s'equityat
period' sendanddi vidingt her esul tbyt wo.
3.Invest or s mayal so cal cul atet he change i n ROE f ora per i
od byf irstusi ng t he
sharehol der s'equi tyf i
gur ef rom t he begi nni ng ofa per i
od as a denomi natort o
determi net hebegi nningROE.Then,t heend- of -per iodshar eholders' equi tycanbeused
ast hedenomi nat ort o det ermi net heendi ng ROE.Cal culati
ng bot hbegi nning and
endi
ngROEsal
l
owsani
nvest
ort
odet
ermi
net
hechangei
npr
ofi
tabi
l
ityov
ert
heper
iod.

TECHNI
CALANALYSI
S

Fundament alanal ysisandTechni calanal ysisar et hetwomai nappr oachest o

secur it
yanal ysis.Techni calanal ysisi sfrequentlyusedasasuppl ementt ofundament al
anal ysisrathert hanasasubst it
utet oi t.Accordingt ot echnicalanal ysis,thepr i
ceof
stockdependsondemandandsuppl yint hemar ketpl ace.Ithasl i
ttlecor r
elati
onwi th
thei ntri
nsicv alue.Allf i
nanci aldat aandmar ketinformat ionofagi venst ocki salready
reflectedini t
smar ketpr i
ce.
Techni calanal ystshav edev el
opedt oolsandt echni quest ost udypastpat terns
andpr edictfuturepr ice.Techni calanal ysisisbasi callyt hestudyoft hemar ketsonl y.
Techni calanal ystsstudyt het echnicalchar acteri
sticswhi chmaybeexpect edatmar ket
turningpoi ntsandt hei robject iv
eassessment .Thepr ev i
oustur ningpoi ntsar estudied
withav i
ew todev elopsomechar acteri
st i
csthatwoul dhel pini dent i
fi
cationofmaj or
mar kettopsandbot toms.Humanr eact i
onsar e,byandl argeconsi stenti nsimi l
ar
thoughnoti dent i
calr eacti
on; withhi svarioustools, t
het echnicianat tempt stocor rectly
catchchangesi ntrendandt akeadv antageoft hem.
Techni calanal ysisisdi r
ectedt owar dspr edictingt hepr i
ceofasecur i
ty.The
priceatwhi chabuy erandsel lerset t
leadeali sconsi der edtobet heonepr ecisefigure
whi ch sy nthesis,wei ghs and f inally expresses al lf actor
s,r ationaland i rr
ational,
quant i
fi
ableandnon- quant i
fiabl eandi st heonlyf i
guret hatcount s.

Thus,t
hetechni
calanaly
sispr
ovi
desasimpli
fi
edandcompr ehensi
vepict
ureof
whati
shappeningtothepr i
ceofasecuri
ty.Li
keashadow orref
lect
ionitshowsthe
br
oadoutli
neofthewholesit
uati
onandi
tactual
l
yworksi
npracti
ce.
ASSUMPTIONSOFTECHNI CALANALYSI
S

Themar ketv al
ueofasecur it
yi ssolelydet er
mi nedbyt heinteract
ionofdemandand
supplyf actor soper at
ingi nthemar ket.
Thedemandandsuppl yfactor sofasecur i
tyar esurroundedbynumer ousf act ors;
thesef actor sarebot hr ati
onal aswel lasi rr
ati
onal .
Thesecur itypricesmov eint rendsorwav eswhi chcanbebot hupwar dordownwar d
dependi ngupont hesent iment s,psychologyandemot ionsofoper atorsort r
ader s.
Thepr esentt r
endsar einfluencedbyt hepastt rendsandt hepr oj
ectionoff uture
trendsispossi blebyananal y
si sofpastpr i
cetrends.
Exceptmi norv ar i
ati
ons,st ockpr i
cest endt omov ei nt r
endswhi chcont i
nuet o
persistforanappr eci
abl elengt hoftime.
Changesi nt rendsi nstockpr icesar ecausedwhenev erthereisashi ftinthedemand
andsuppl yf actors.
Shiftsindemandandsuppl y,nomat terwhenandwhyt heyoccur ,canbedet ect ed
throughchar tspr eparedspeci allytoshowmar ketact i
on.
Somechar tt r
endst endt or epeatt hemsel ves.Pat ternswhi char epr oj
ectedby
chartsr ecor dpricemov ement sandt hesepat ternsar eusedbyt echnical anal
ysisf or
maki ngf orecast saboutt hef uturepat t
er ns.
TOOLSANDTECHNI QUESOFTECHNI CALANALYSI S
Therear enumer oust oolsandt echniquesf ordoi ngt echnicalanal y si
s.Basi cal
lyt his
analy
sisi sdonef r
om t hef oll
owingf ourimpor t
antpoi ntsofv iew:-
1)Pr i
ces:Whenev erther eischangei npr icesofsecur i
ti
es,iti sr efl
ect edint he
changesi ninvestorat ti
tudeanddemandandsuppl yofsecur i
ties.
2)Ti me:Thedegr eeofmov ementi npr i
ceisaf unctionoft i
me.Thel ongeri ttakes
forar ev er
sal i
nt r
end, greaterwi l
lbethepr icechanget hatfollows.
3)Vol ume:Thei ntensityofpr i
cechangesi sr ef
lect
edi nt hev olumeoft ransactions
thataccompanyt hechange.I fani ncreasei npr i
cei saccompani edbyasmal l
changei ntransactions, i
timpliesthatthechangei snotst rongenough.
4)Wi dth:Thequal i
tyofpr icechangei smeasur edbydet erminingwhet herachange
i
nt rendspr eadsacr ossmostsect orsandi ndust ri
esori sconcent ratedi nf ew
secur it
iesonl y.Studyoft hewi dthoft hemar keti ndicatest heext entt owhi ch
pricechangeshav et akenplacei nthemar ketinaccor dancewi thacer tainover al
l
trends.

DOW THEORY
TheDow Theor y,or i
ginall
ypr oposedbyChar lesDow i n1900i soneoft heol dest
technicalmet hodsst il
lwi delyf ollowed.Thebasi cpr inci
plesoft echnicalanalysis
originatefr
om t hi
st heor y.
Accor ding to Char les Dow “ The mar keti s al ways consi dered as hav ing three
mov ements,allgoi ngatt hesamet i
me.Thef ir
sti sthenar rowmov ementf rom dayt o
day .Thesecondi st heshor tswi ng,runni ngf rom t woweekst oamont hormor eandt he
thirdisthemai nmov ement ,cov eri
ngatl eastf oury earsinitsduration”.
TheTheor yadv ocat est hatst ockbehav iouri s90%psy chologicaland10%l ogical
.Itis
themoodoft heCr owdwhi chdet ermi nest hewayi nwhi chpricesmov eandt hemov e
canbegaugedbyanal ysingt hepr i
ceandv olumeoft ransactions.
TheDowTheor yonl ydescr ibest hedi rectionofmar kettrendsanddoesnotat t
emptt o
forecastfuturemov ement sorest imat eei thert hedur ati
onort hesi zeofsuchmar ket
trends.Thet heor yusest hebehav iouroft hest ockmar ketasabar omet erofbusiness
condi t
ionsrathert hanasabasi sf orf orecast i
ngst ockpr icesthemsel ves.I
tisassumed
thatmostoft hest ocksf oll
owt heunder lyi
ngmar kettrend,mostoft het i
mes.

At rendshoul dbeassumedt ocont inueinef fectunt ilsucht i

measi tsr ev ersalhas
beendef ini
tel
ysi gnall
ed.Theendofabul lmar keti ssi gnall
edwhenasecondar y
react i
on ofdecl inecarriespr icesl owert han thel evelr ecorded dur ing theear li
er
react i
onandt hesubsequentadv ancef ail
stocar r ypr i
cesabov ethet opl eveloft he
precedi ng r
ecov ery.The end ofa bearmar keti ssi gnalled when an i ntermedi ate
recov erycarri
espr i
cestoal ev elhigherthantheoner egisteredinthepr ev i
ousadv ance
andt hesubsequentdecl inehal tsabov ethelevel r
ecor dedi ntheearlierreaction.
CHARTI NG
Chart
ingi sthebasi ctoolint echnicalanalysis,whi chpr ovi
desv isualassi st
ance
i
ndef ecti
ngchangi ngpat t
ernofpr i
cebehav i
our.Thet echni calanalysti ssomet imes
calledt heChar t
istbecauseofi mpor t
anceoft hist ool.TheChar ti
stsbel ievet hatst ock
pricesmov einf air
lypersistenttrends.Ther eisani nbui l
tinerti
a,thepr i
cemov ement
cont i
nuesal ongacer tai
npat h(up,downorsi deway s)unt i
litmeetsanopposi ngf orce
duetodemand-suppl
ychanges.Char
ti
stsal
sobeli
evet
hatgener
all
yv ol
umeandt r
end
gohandinhand.Whenamaj or‘
up’t
rendbegi
ns,t
hevol
umeoft r
adingincr
easesand
al
sothepr
iceandv i
ce-
ver
sa.

TheessenceofChar ti
sm i st hebel ieft hatsharepr i
cest raceoutpat ternsov ertime.
Thesear ear eflect i
onofi nvestorbehav i
ourandi tcanbeassumedt hathistorytendst o
repeatitsel fint hest ockmar ket.Acer tainpat ter
nofact iv
ityt hatinthepastpr oduced
certai
nr esul tsi sl i
kelytogi veriset othesameout comeshoul ditreappeari nthef uture.
Thev arioust ypesofcommonl yusedchar tsare:
a)Li neChar t
b)BarChar t
c)Poi ntandf i
gureChar t
LineChar ts:Thesi mpl estf orm ofchar ti sal inechart.Linechar tsar esimpl egr aphs
drawnbypl ottingt hecl osingpr i
ceoft hest ockonagi v endayandconnect ingt he
pointsthuspl ot tedov eraper i
odoft i
me.Li nechar tst akenonot i
ceoft hehighsand
l
owsofst ockpr i
cesf oreachper iod.
BarChar ts:I tisasi mplechar tingt echni que.I nthischar t
,pr icesar eindicatedont he
verti
calaxi sandt hetimeonhor izontalaxi s.Themar ketorpr icemov ementf oragi ven
session( usual lyaday )isr epresent edononel ine.Thev erti
cal partoft heli
neshowst he
highandl owpr icesatwhi cht hest ockt radedort hemar ketmov ed.Ashor thori
zont al
ti
ckont hev ertical l
ineindi catest hepr i
ceorl evelatwhi cht hest ockormar ketclosed.
PointandFi gur eChar t( PFC) :Thought hepoi ntandf igurechar tisnotascommonl y
usedast heot hert wochar t
s,itdi ffer
sf rom theot hersi nconceptandconst r
uction.In
PFCt her eisnot imescal eandonl ypricemov ement sarepl ot t
ed.Asashar epri
cer ises,
av ert
ical columnofcr ossesi spl ott
ed.

Wheni tf
all
s,aci
rcleispl
ott
edinthenextcolumnandt hi
si sconti
nueddownwar dwhil
e
thepri
ceconti
nuest ofal
l
.Whenitri
sesagain,anewv ert
icall
ineofcrossesi
splott
edin
thenextcol
umnandsoon.Apoi ntandfi
gurechartthatchangescolumnonev erypri
ce
rever
sali
scumber someandmanyshowar ev er
salonl
yforpr i
cechangesofthreeuni
ts
ormor e(
aunitofplotmaybeapr i
cechangeofsayoner upee) .
MOVI NGAVERAGEANALYSI S

Thest atisti
calmet hod ofmov ing averagesi sal so used byt echnicalanal ystsf or
forecast i
ng t hepr i
cesofshar es.Whi let r
endsi nshar epr i
cescanbest udi ed for
possi bl
epat terns,somet imesi tmaysohappent hatthepr icesappeart omov er ather
haphazar dl
y and be v eryv ol
at i
le.Mov i
ng av erage anal ysis can hel p undersuch
circumst ances.
A mov i
ngav erageisasmoot hedpr esentati
onofunder lyi
nghi stori
caldat a.I tisa
summar ymeasur eofpr i
cemov ementwhi chreducest hedi storti
onst oami nimum by
eveningoutt hef l
uctuati
onsi nshar epr ices.Theunder l
yi
ngt rendi npr i
cesi scl earl
y
disclosedwhenmov i
ngav eragesar eused.
Toconst ructamov i
ngav eraget hetimespanoft heav eragehast obedet er
mi ned.A10
daymov i
ngav eragemeasur est heav erageov erthepr ev i
ous10t r
adingday s,a20day
mov i
ngav eragemeasur est heav eragev aluesov erthepr evious20day sandsoon.
Regar dlessoft heti
meper i
odused,eachdayanew obser v ati
oni si ncl
udedi nt he
calculationandt heol desti sdr opped, soaconst antnumberofpoi ntsar eal way sbei ng
averaged.
RELATI VESTRENGTH
The empi ricalev idence shows t hatcer tain secur it
ies per form bet tert han ot her
secur i
tiesi nagi v enmar ketenv i
ronmentandt hi sbehav iourr emai nsconst antov er
tme.Rel
i at i
v est r
engt hi st het echni calnamegi vent osuchsecur i
ti
esbyt het echni cal
analysts because t hese secur i
ties hav e st abilityand ar e abl et o wi thstand bot h
depressi onandpeakper iods.I nv estor sshoul di nv esti nsuchsecur i
ti
es, becauset hese
hav econst antst rengt hint hemar ket .Ther elat i
vest rengt hanal y si
smaybeappl iedt o
i
ndi vi
dualsecur it
iesort owhol ei ndust ri
esorpor tf oli
osconsi stingofst ockandbonds.
Ther elativest rengt hcanbecal cul atedby :
i. Measur ingt her ateofr etur nofsecur ities
i
i. Cl assi fyingsecur iti
es
ii
i. Fi ndi ngoutt hehi ghav erager et urnofsecur ities
iv. Usi ngt het echni queofr atioanal ysist of indoutt hest rengthofani ndi vidual
secur i
ty.Techni calanal yst smeasur er elativest rengt hasani ndi cationf orf i
ndi ngout
ther eturnofsecur i
ties.Theyhav eobser vedt hatt hosesecur itiesdi spl ayinggr eat est
rel
ativest rengt hi n good mar ket s( bul l
)al so show t hegr eat estweaknessi n bad
mar kets( bear ).Thesesecur it
ieswi llr
iseandf all fast erthant hemar ket.
Techni calanal y stsexpl ainr el
at i
v est rengt hasar elationshipbet weenr iskandr et urnof
asecur it
yf ollowi ngt het rendsi nt heeconomy .Af terpr eparingchar tsf rom di fferent
secur i
tiesov eral engt hoft i
me,t het echni cianwoul dsel ectcer t
ainsecur i
ti
eswhi ch
showedr elativest rengt htobet hemostpr omi singi nv estmentoppor tunities.
RESI STANCEANDSUPPORTLEVELS
Thepeakpr i
ceoft hest ocki scal ledt her esi stancear ea.Resi stancel ev elist hepr ice
l
ev eltowhi cht hest ockormar ketr isesandt henf allsrepeat edly.Thi soccur sdur ingan
uptrendorasi dewayt rend.I tisapr icel ev elt owhi cht hemar ketadv ancesr epeat edly
butcannotbr eakt hr ough.Att hi slev el, sell
ingi ncr easeswhi chcausest hepr i
cef all.
Suppor tl ev elshowst hepr ev i
ousl ow pr iceoft hest ock.Iti sapr i
cel ev elt owhi cha
stockormar ketpr icef all
sorbot tom outr epeat edl yandt henbounceupagai n.
Demandf ort hest ocki ncr easesast hepr iceappr oachesasuppor tlev el.Thebuy ing
pressur eort hedemandsuppor tst hepr i
ceofst ockpr eventingitf rom goi ngl ower

Fundament
alv
s.Techni
cal
Anal
ysi
s
I
nvestors use techniques of fundament alanalysis 
or 
technicalanalysis 
(or
oftenbot h)tomakest ocktradingdeci sions.Fundament alanalysisattemptst o
calculat
et hei ntr
insi
cv al
ueofa  stock using data such asr ev enue,expenses,
growt hprospectsandt hecompet it
ivelandscape, whil
et echnicalanalysi
susespast
mar ketacti
vit
yandst ockpr i
cetrendst opr edictact
ivi
tyinthef ut
ure.