What is Security Analysis

Dimensions of Investment
Sacrifice – Today
Gain – Later
Time
Different views..
Layman – Monetary Commitment
Economist – Net Addition made to the nation’s capital
stock that consists of goods and services that are used
in the production process.
Financial investment is the allocation of money to
assets that are expected to yield some gain over a
period of time.
Features of Investment
Return
Risk
Time Period
Liquidity / Marketability
Safety
Objectives of Investment
Maximization of Return
1. Annual Income (Dividend, Interest etc)
2. Capital Appreciation
Minimization of Risk
Liquidity
Hedge against Inflation
Tax Considerations
Other…
Near-Term High Priority Goals
Long-Term High Priority Goals
Low Priority Goals
Entrepreneurial or Money - Making Goals
Features of an Ideal Investment
Safety
Liquidity
Regularity and Stability of Income
Stability of Purchasing Power
Capital Appreciation
Tax Benefits
Legality
Types of Investors
Individuals
Institutions
1. Insurance Companies
2. Mutual Funds
3. Banks
4. FII
Investment Constraints
Risk Tolerability
Liquidity / Marketability
Investors Age
Need for Regular Income
Tax Liability / Exemption
Errors While Investing
Inadequate comprehension of return and risk.
Vaguely formulated investment policy.
Naive extrapolation of the past.
Cursory decision-making.
Simultaneous Switching
Misplaced love for cheap stocks.
Over diversification and under-diversification.
Buying shares of familiar companies
Wrong attitude toward losses and profits.
Tendency to speculate.
 Investment vs. Speculation
Basis
1. Time Horizon
Investment
Plans for a longer time
Speculation
Plans for a very short
horizon period
2. Holding Period From 1 year to few years Varies from few days to
months
3. Risk Assumes moderate risk Willing to undertake high
risk
4. Return Likes to have moderate rate Likes to have high rate of
of return return
5. Decision Basis Considers fundamental Considers inside
factors and evaluates the information, hearsays and
performance of the market behavior
company regularly

6. Funds / Leverage Uses his own funds and Relies on borrowed funds
avoids borrowed funds to supplement his personal
resources
Investment vs. Gambling
Gambling is a very short term investment in a game.
Time horizon is shortest.
Results are determined by the roll of dice or turn of a
card.
Entertainment is primary, Earning income is secondary.
Employs artificial risks while investment involves
commercial risk.
No risk-return trade-off; Negative outcomes are expected.
Financial analysis does not reduce the risk proportion
involved in gambling
Approaches to Investment Decision Making
Fundamental Approach
Psychological Approach
Academic Approach
Eclectic Approach
Fundamental Approach
Most commonly advocated.
There is an intrinsic value of a security and this
depends upon the underlying fundamental factors.
Intrinsic value is based on EIC analysis.
At any given point of time, there are some securities
for which the prevailing market price would differ
from the intrinsic value.
Sooner or later, the market price would fall in line with
the intrinsic value.
Superior returns can be earned by buying under-
valued securities & selling over-valued securities.
Psychological Approach
Stock prices are guided by emotions rather than
reason.
Prices are influenced by the psychological mood of the
investors.
Investors use some form of technical analysis with a
view to develop trading rules aimed at profit making.
Based on certain persistent and recurring patterns of
price movements.
Uses a variety of tools like bar chart, point and figure
chart, moving averages analysis etc…
Academic Approach
Believes that stock markets are reasonable efficient in
reacting quickly and rationally to the flow of
information.
Stock prices reflect intrinsic value very well.
Prices behavior corresponds to random walk.
Successive price changes are independent.
There is a positive relationship between risk and
return.
Expected return from a security is linearly related to
its systematic risk.
Eclectic Approach
Based on all the three different approaches.
Fundamental approach is helpful in establishing basic
standards and benchmarks.
Technical analysis is useful in broadly gauging the
prevailing mood of the investors.
Despite many instances of misprices securities, there
appears to be a fairly strong correlation between risk
and return.
 Investment Process

Investment Portfolio Portfolio

Analysis Valuation
Policy Construction Evaluation
Sources of Investment Information
International Affairs
National Affairs
Industry Information
Company Information
Stock Market Information
Once upon a time, in a village, a man appeared and announced to the
villagers that he would buy monkeys for Rs.100 each. The villagers,
seeing that there were many monkeys around, went out to the forest
and started catching them. The man bought thousands at Rs100 and,
as supply started to diminish, the villagers stopped their effort. He
further announced that he would now buy at Rs.200 for a monkey.
This renewed the efforts of the villagers and they started catching
monkeys again. Soon the supply diminished even further and people
started going back to their farms. The offer increased to Rs.250 each,
and the supply of monkeys became so small that it was an effort to
even find a monkey, let alone catch it! The man now announced that
he would buy monkeys at Rs500! However, since he had to go to the
city on some business, his assistant would now buy on behalf of him.
In the absence of the man, the assistant told the villagers. 'Look at all
these monkeys in the big cage that the man has collected. I will sell
them to you at Rs.350, and when the man returns from the city, you
can sell them to him for Rs.500 each.' The villagers rounded up all
their savings and bought all the monkeys. They never saw the man
nor his assistant again, only monkeys everywhere! Now you have a
better understanding of how a stock Market works.