SECURITY ANALYSIS

Security analysis is the evaluation and assessment of stocks or securities to determine

their investment potential. It involves analyzing various factors, such as financial
statements,
industry trends, market conditions, and company-specific information, to make informed
investment
decisions.
Classification of Security Analysis:
 Fundamental Analysis - evaluation of securities with the help of certain fundamental
business factors such as financial statements, current interest rates as well as
competitor’s products and financial market. It is kind of analysis that focuses on
analyzing the fundamental factors that can influence a company’s intrinsic value.
Intrinsic value refers to the perceived or estimated value of an asset, such as a stock or
a company. This value is crucial in the decision-making of the investors regarding what
and when to invest in securities.

 Technical Analysis - is a price forecasting technique that considers only historical prices,
trading volumes, and industry trends to predict the security’s future performance.
Technical analysts use different technical indicators such as Relative Strength Index (RIS)
and Moving Average Convergence Diligence (MACD) to make mathematical computations
using price and volume data.

 Quantitative Analysis - This security analysis is a supporting methodology for both

fundamental and technical analysis, which evaluates the stock’s historical performance
through calculations of basic financial ratios, e.g., Earnings Per Share (EPS), Return on
Investments (ROI), or complex valuations like Discounted Cash Flows (DCF).
It is an approach that focuses on the application of mathematical and statistical models in
order to analyze financial data and make predictions out of it. Insights are generated
through employing mathematical models, statistical analysis, and computational
techniques. It may include the elements of both the fundamental and the technical analysis
but it is way broader and more complex.

Difference between Fundamental Analysis and Technical Analysis

Fundamental analysis is done with the help of financial statements, competitor’s market,
market data and other relevant facts and figures whereas technical analysis is more to do
with the price trends of securities.

Characteristics of Securities:

Securities are tradable and represent a financial valueSecurities are fungible- Fungible’s
meaning boils down to “the ability to be copied or replicated, and thus, interchangeable.”
or units that are effectively identical in terms of their attributes such that one can be
exchanged for the other with no loss of value. Most of the types of assets traded in online
brokerage accounts. Classification of Debt Securities:
A debt instrument is any financial tool used to raise capital. It is a documented, binding
obligation between two parties in which one party lends funds to another, with the repayment
method specified in a contract. Some are secured by collateral, and most involve interest, a
schedule for payments, and time frame to maturity if it has a maturity date.
A debt instrument typically focuses on debt capital raised by governments and private or
public companies.

Debt Securities Tradable assets which have clearly defined terms and conditions are called
debt securities. Financial instruments sold and purchased between parties with clearly
mentioned interest rate, principal amount, maturity date as well as rate of returns are
called debt securities.
Bonds (government, corporate, or municipal) are one of the most common types of debt
securities.
Other examples: preferred stock, collateralized debt obligations, euro commercial paper, and
mortgage-backed securities.

Coupon rate – This refers to the interest rate that issuers need to pay. Coupon rates can be
fixed throughout the life of the security or vary depending on inflation and the economy.

Issue date/price – This refers to the price and date at which the debt security was first
issued.

Maturity date – This refers to the date that the issuer needs to repay the principal and
remaining interest. It’s important to note that term length will have an effect on price and
interest rates as investors look for higher returns with longer investments.

Yield-to-maturity – This refers to the annual rate of return that investors expect to earn if
the debt is held to maturity. It’s used to compare debt securities with different maturity dates.
Equity Securities Financial instruments signifying the ownership of an individual in an
organization are called equity securities. An individual buying equities has an ownership
in the company’s profits and assets.
The most prevalent type of equity security is common stock,in the event of a liquidation. A
less-common equity security is preferred stock, which may also provide its owner with a
periodic dividend.

Equity securities represent ownership in a company and offer the potential for high returns
but also come with a higher level of risk. On the other hand, debt securities represent loans
made to a company with lower risk levels but lower potential returns.

DerivativesDerivatives are financial instruments with specific conditions under which

payments need to be made between two parties. A derivative is a security with a price
that is dependent upon or derived from one or more underlying assets.
Its value is determined by fluctuations in the underlying asset. The most common underlying
assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Complex type of financial security that is set between two or more parties. Considered a
form of advanced investing.
Examples of common risks associated in the process of fundamental security analysis:
Market Risk – Risk like changes in economic and political condition, changes in interest
rate
and currency fluctuations and variation in overall market sentiments influence the securities.

Credit risk – This refers to the credit worthiness and risk of default by companies or issuers.
Investors may face the risk of not getting payments on time.

Liquidity risk – Some investment options may have lock-in period or strict rules where the
investor cannot break it till maturity.

Risk or timing the market – The analyst may not be able to time the market and identify
the exact entry point where it will be worth investing. Trying to predict market movement
for short term may lead to losses of missing of opportunity.

Investment Environment
The investment environment refers to the economic, political, and social conditions that
affect the investment market and the performance of financial instruments. As part of
treasury management, understanding the investment environment is critical to making
informed investment decisions and managing investment risks.

Key factors that affect the investment environment include:

Economic conditions: such as interest rates, inflation rates, and GDP growth, can have a
significant impact on the investment market. For example, rising interest rates may reduce
the demand for stocks and increase the demand for bonds.
Political conditions: such as changes in government policies, can also affect the investment
market. For example, changes in tax laws or regulations may impact the attractiveness of
certain investments.
Social conditions: such as changes in consumer behavior or demographic trends, can also
impact the investment market. For example, shifts in consumer preferences may affect the
performance of certain industries or companies.
Global conditions: The global investment environment can also have a significant impact on
the
investment market. For example, changes in global economic conditions or geopolitical risks
may impact
the performance of international investments.

Elements of Investment Environment

Assets and investment vehicles: an investor usually has a plethora of existing types of
assets to choose from – which include stocks, corporate bonds, (government bonds -
Treasury Bills are usually very safe in terms of default risk) municipal bonds, money market
instruments (which are shortterm, highly marketable and usually very low risk) derivatives,
currencies, real estate and commodities. Further, an investor can choose among varied
investment vehicles – mutual funds, hedge funds and Exchange Traded Funds (ETF’s)
among others. Investors utilize to allocate and grow their capital.
Financial markets: it is a market where buyers and sellers of assets (such as stocks, bonds,
currencies and derivatives) trade with each other. Financial markets include stock markets
(primary and secondary markets), bond markets, money markets, cash or spot markets,
derivatives markets (options, futures, swap agreements etc.), foreign exchange and interbank
markets, and over-the-counter (OTC) markets. Traded, facilitating the buying and selling of
assets between investors and participants.

Market structure: the same refers to the structure of the financial markets, which include
the equity, debt, foreign exchange, mortgage and the derivatives markets. The most widely
followed market in the US is the stock market and from the point of view of economic
activity, the debt market is very important as investors and borrowers in this market play a
pivotal role in determining interest rates. Comprises the organization and arrangement of
participants, rules, and technology that define how securities are bought and sold,
determining factors such as liquidity, transparency, and efficiency of the market.
Market intermediaries: the same include insurance and pensions companies, investment
banks, commercial banks (banks participate in the money and capital markets). And are
institutions or individuals that facilitate the trading of securities and provide various
services including primary dealers, brokers, financial advisors and stock exchanges
among others.

Investment process: the same essentially outlines the steps required in creating an
investment portfolio based on determining an investor’s investment objectives and risk
profile, asset allocation policy i.e. how an investor’s investments are diversified among
varied asset classes, which has a major influence on the overall performance of a portfolio,
implementing an investment strategy and rebalancing of portfolio (that is consistent with an
investor’s chosen or desired asset allocation strategy).

Regulation: of securities markets is a very important element of the investment

environment. Across countries such as the US, the UK and others, trading in the financial
markets is regulated through a plethora of laws, to ensure that investors and traders have
adequate information to take well-informed investment-related decisions and to prevent
fraudulent activities. For example, in the US, there are two government bodies for general
regulatory oversight of financial markets – Securities and Exchange Commission (SEC) and
the Commodity Futures Trading Commission. In addition, exchanges have their own
regulatory groups. Regulation of stock and corporate bond markets are the most prominent
examples of financial market [Link]: developments in the domestic economy
and the global economy relating to GDP, inflation, interest rates, fiscal deficit and monetary
policy have a major impact on the prices of assets and related volatility (prices of financial
assets, particularly stock prices are often very volatile). Further, asset allocation is the most
important decision in the realm of asset management and contributes significantly to the
performance of portfolios. Moreover, asset allocation and related investment decisions are
critically based on analyzing both the global and domestic economy, and constructing
various forward looking macroeconomic scenarios.
An investment is an asset or item acquired with the goal of generating income or
appreciation.
Appreciation refers to an increase in the value of an asset over time. When an individual
purchases a good as an investment, the intent is not to consume the good but rather to use it
in the future to create wealth.

Following factors affecting investment:

a. Interest rates (the cost of borrowing) The interest rate is the cost of debt for the borrower
and the rate of return for the lender. The money to be repaid is usually more than the
borrowed amount since lenders require compensation for the loss of use of the money during
the loan period.
b. Economic growth (changes in demand) Overall, demand for consumer goods increases
when the economy producing the goods is growing. An economy showing good overall
growth and continuing prospects for steady growth is usually accompanied by corresponding
growth in the demand for goods and services.
c. Confidence/expectations. The Investor Confidence Index is a measure of investor
sentiment that reflects the level of confidence or risk appetite among institutional investors.
It provides insights into their outlook on market conditions and investor willingness to take
on investment risk.
d. Technological developments (productivity of capital) Technological change or progress
refers to the discovery of the new and improved methods of producing goods. Sometimes
technological advances result in the increase in available supplies of natural resources. But
more generally technological changes result in increasing the productivity of labour, capital
and other resources. The productivity of combined inputs of all factors is called total factor
productivity. Thus technological progress means increase in total factor productivity. As a
result of technological advance, it becomes possible to produce more output with same
resources or the same amount of product with less resource.
e. Availability of finance from banks. Availability of Funds means that the Lender is
satisfied, in the Lender's entire discretion, that the Lender has funds available in sufficient
amounts for the continuing operation of the Scheme and the provision of finance to the
Borrower.
f. Others (depreciation, wage costs, inflation, government policy)

Types of investments:
a. Stocks (Preferred & Common) The main difference between preferred and common stock
is that preferred stock gives no voting rights to shareholders while common stock does.
Preferred shareholders have priority over a company's income, meaning they are paid
dividends before common shareholders.
b. Bonds - is a type of security under which the issuer owes the holder a debt, and is obliged
–depending on the terms – to provide cash flow to the creditor.
c. Funds - a fund is a pool of money that is allocated for a specific purpose. A fund can be
established for many different purposes: a city government setting aside money to build a
new civic center, a college setting aside money to award a scholarship, or an insurance
company that sets aside money to pay its customers’ claims
d. Investment Trusts An investment trust is a public limited company that aims to make
money by investing in other companies. Owning shares in an investment trust.
e. Derivatives are financial contracts, set between two or more parties, that derive their value
from an underlying asset, group of assets, or benchmark. A derivative can trade on an
exchange or over-the-counter. Prices for derivatives derive from fluctuations in the
underlying asset.
f. Commodities are basic goods and materials that are widely used and are not meaningfully
differentiated from one another.
Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of
electricity.

Investment Strategy:
a. Growth Investing Growth investing is investing in stocks of companies with good future
growth potential, usually in any rapidly expanding sector. These companies have a better
capacity to increase their profits and are in a better position to survive the competition.
b. Value Investing Value investing is an investment strategy that involves picking stocks
that
appear to be trading for less than their intrinsic or book value.
c. Quality Investing Quality investing is an investment strategy based on a set of clearly
define fundamental criteria that seeks to identify companies with outstanding quality
characteristics.
The quality assessment is made based on soft (e.g. management credibility) and hard criteria
(e.g. balance sheet stability). Quality investing supports best overall rather than best-in-class
approach
d. Index investing Index investing is a passive investment technique that attempts to
generate returns similar to a broad market index. Investors use this buy-and-hold strategy to
replicate the performance of a specific index—generally an equity or fixed-income index—
by purchasing the component securities of the index, or investing in an index mutual fund or
exchange traded fund
(ETF) that itself closely tracks the
e. Buy and hold investing Buy and hold is a passive investment strategy in which an
investor buys stocks (or other types of securities such as ETFs) and holds them for a long
period regardless of fluctuations in the market. An investor who uses a buy-and-hold strategy
actively selects investments but has no concern for short-term price movements and
technical indicators. Many legendary investors such as Warren Buffett and Jack Bogle
praise the buy-and-hold approach as ideal for individuals seeking healthy long-term returns.