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Learn basics about FundamentalAnalysis

The definition of Fundamental

Analysis

Fundamental analysis is a stock valuation method that uses financial andeconomic analysis to predict the movement of stock prices.

The fundamental information that is analyzed can include a company'sfinancial reports, and non-finanical information such as estimates of thegrowth of demand for competing products, industry comparisons, andeconomy-wide changes.

Main StrategyTo a fundamentalist, the market price of a stock tends to move towardsits intrinsic value. If the intrinsic value of a stock is above the currentmarket price, the investor would purchase the stock, and if the intrinsicvalue of a stock was below the market price, the investor would sell thestock.

To start a fundamentalist makes an examination of the current and futureoverall health of the economy as a whole. In this step you should attemptto determine the direction and level of interest rates.

After you analyzed the overall economy then analyze firms individually.You should analyze factors that give the firm a competitive advantage in

its sector such as management experience, history of performance,growth potential, low cost producer, and etc.

Some expressions of Stock

Fundamental Analysis

For beginning I describe some stock fundamental analysis expressionsthat are more important:

#1- EPS: (Earnings Per Share)

The portion of a company's profit allocated to each outstanding share of

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common stock. The amount is computed by dividing net earnings by thenumber of outstanding shares of common stock. For example, acorporation that earned $10 million last year and has 10 million sharesoutstanding would report earnings per share of $1.

#2- P/E Ratio: (Price/ EPS)

Also called its "earnings multiple", Price of a stock divided by its earningsper share. The P/E ratio may either use the reported earnings from thelatest year or employ an analyst's forecast of next year's earnings. P/Egives investors an idea of how much they are paying for a company'searning power.

An important notice here is that the P/E ratio is ultimately not an objectivemeasure; a high P/E ratio might show an overvalued stock, or it mightreflect a company with high potential for growth.

#3- Dividend

Dividend is an amount of the profits that a company pays to people whoown shares in the company. When a company earns a profit, some of thismoney is typically reinvested in the business and called retainedearnings, and some of it can be paid to its shareholders as a dividend.

#4- Book Value

The book value of an asset or group of assets is sometimes the price atwhich they were originally acquired ( historic cost ), in many cases equalto purchase price.

#5- Growth Stocks

Growth Stocks in finance , are stocks that appreciate in value and yield a

high return on equity (ROE). Analysts compute ROE by taking thecompany's net income and dividing it by the company's equity. To beclassified as a growth stock, analysts expect to see at least 15 percentROE.

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What is an IPO and how to go

about investing in it?

An initial public offering (IPO) occurs when a company first sellscommon shares to investors in the public. Generally, the company offers

primary shares this way, although sometimes secondary shares are also

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IPO?

Why companies go for IPO?

Why IPOs are said to be attractive for investors?

An initial public offering (IPO) occurs when a company firstsells common shares to investors in the public. Generally, thecompany offers primary shares this way, although sometimessecondary shares are also sold as IPOs. For a company to offerIPOs, they need to hire a corporate lawyer as well as aninvestment banker to underwrite the offer. The actual sale of theshares is generally offered by stock exchange or by regulators.When the company starts to offer IPOs, they are usuallyrequired to reveal financial information about the company sothat investors know whether the companies a good investmentor not.

Being able to answer the question what is an IPO? And knowing

what IPO stands for is important if you're going to be investingin stocks or companies. Once you understand the definition ofIPO and of stock market IPO, you can begin learning how to usethis investment opportunity to make a profit. Initial publicofferings make a good opportunity to make a profit because theyare so inexpensive. In fact, many of the dot com millionaires ofthe 1990s made their money simply through IPOs.

Why Do Companies Offer IPOs?In general, companies offer IPOs in order to raise money thatthey need for business expansion and new businessopportunities. By offering shares to investors, a company stands

to bring in a lot of money. They can then use this money togrow their business. The more their business grows, in turn, thehigher the share prices grow and the more money is generated

by investors purchasing shares. Unlike business loans, whichneed to be repaid with interest, IPOs do not have thisdisadvantage. It is investors who take the risk -- although also a

potential gain -- buying shares. If the company loses money andthey will not have to repay their investors, although investors ingeneral demand high accountability from a company they are

buying stocks from.

Many companies simply see offering IPOs as the next stage in

business growth. Since public companies often enjoy largerprofits and can draw on a larger capital base than privatebusinesses, IPOs seem like the logical way to grow a companyfor many CEOs.

Who Can Join the IPO Program?Public investors can purchase IPOs through their regularinvestment channels, although they will need to act fast to takeadvantage of the initial low IPO costs. Businesses can takeadvantage of IPOs simply by offering public shares on themarket. To do this, they require a corporate lawyer, transparent

business and financial practices, and an investment banker.

They also need a medium -- usually a stock exchange -- toactually sell the shares. Most businesses additionally hire

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marketers or someone who can advertise or market the stock.

What are the Benefits of IPOs?For businesses, stocks and shares are a fast way to raise revenuefor business expansion and growth. They also can take a

business to the next level. By becoming a publicly tradedcompany a business can take advantage of new, largeropportunities and can start working towards incorporation andeven worldwide expansion. IPO gives a company fast access to

public capital. Even though public offering can be costly andtime consuming, the tradeoffs are very appealing to companies.IPOs are also a relatively low risk for businesses and have the

potential for huge gains and for huge opportunities. The moreinvestors wish to invest in a company, the more the companystands to or from IPOs and other stock offerings.

For the investor, IPOs are attractive mainly because they may beundervalued. Initially, to make IPOs more attractive, manycompanies will offer their initial public offering at a low rate.This helps to encourage investors, and investors will often buyIPOs, thinking that the new company or the newly publiccompany will be the next big thing with a huge profit margin.As prices grow and demand for the IPOs grows, early investorsstand to make a lot of profit -- and very quickly.

If you hope to invest in companies, understanding the answer tothe question what is an IPO? is essential to your success. Aninitial public offering, the first time a company offers shares tothe general public, is a great way to start building profit. SinceIPOs are in some cases undervalued they can often be sold with

it a short period for good profit.

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The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical

analysis today.

Dow created the Industrial Average, of top blue chip stocks, and a second average of toprailroad stocks (now the Transport Average). He believed that the behavior of the averages

reflected the hopes and fears of the entire market. The behavior patterns that he observed

apply to markets throughout the world.

Dow TheoryThree Movements

Market has a tendency to fluctuate. Markets fluctuate in more than one time frame at the same

time:

There are three well defined movements in market which fit into each other.

The first is the daily variation due to local causes and the balance of buying and selling at that particular time(Ripple).

The secondary movement covers a period ranging from days to weeks, averaging probably between six toeight weeks (Wave).

The third move is the great swing covering anything from months to years, averaging between 6 t o 48

months. (Tide).

Bull markets are broad upward movements of the market that may last several years, interrupted bysecondary reactions. Bear markets are long declines interrupted by secondary rallies. These movements arereferred to as the primary trend.

Secondary movements normally retrace from one third to two thirds of the primary trend since the previous

secondary movement.

Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad marketmovements.

Various cycles have subsequently been identified within these broad categories.

Dow TheoryPrimary Movements have Three Phases

Some General Conditions in the market.

Bull markets

Bull markets commence with reviving confidence as business conditions improve.

Prices rise as the market responds to improved earnings

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Rampant speculation dominates the market and price advances are based on hopes and expectations ratherthan actual results.

Bear markets

Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.

Prices decline in response to disappointing earnings.

Distress selling follows as speculators attempt to close out their positions and securities are sold withoutregard to their true value.

Ranging Markets

A secondary reaction may take the form of a line which may endure for several weeks.

Price fluctuates within a narrow range of about five per cent.

Breakouts from a range can occur in either direction.

Advances above the upper limit of the line signal accumulation and higher prices;

Declines below the lower limit indicate distribution and lower prices;

Volume is used to confirm price breakouts.

Dow TheoryTrends

Bull Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point of the

previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

Successive higher highs and higher lows.


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8/27

The start of an up trend is signaled when price makes a higher low (trough), followed by a rally

above the previous high (peak):

Start = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous low

(trough):

End = lower High + break below previous Low.

What if the series of higher Highs and higher Lows is first broken by a lower Low? There are two

possible interpretations - see Large Corrections.

Bear TrendsEach successive rally fails to penetrate the high point of the previous rally. Each decline

terminates at a lower point than the preceding decline.

Successive lower highs and lower lows.


9/27

A bear trend starts at the end of a bull trend: when a rally ends with a lower peak and then

retreats below the previous low. The end of a bear trend is identical to the start of a bull trend.

What if the series of lower Highs and lower Lows is first broken by a higher High? This is a gray

area - see Large Corrections.

Dow TheoryLarge Corrections

A large correction occurs when price falls below the previous low (during a bull trend) or where

price rises above the previous high (in a bear trend).

Some purists argue that a trend ends if the sequence of higher highs and higher lows is broken.

Others argue that a bear trend has not started until there is a lower High and Low nor has a bull

trend started until there is a higher Low and High.

For practical purposes: Only accept large corrections as trend changes in the primary

trend:


10/27

A bull trend starts when price rallies above the previous high,

A bull trend ends when price declines below the previous low,

A bear trend starts at the end of a bull trend (and vice versa).


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What are bear and bull markets?A bull market is one where prices are rising, whereas a bear market is one where prices are

falling. The two terms are also used to describe types of investors. These terms gives a general

impression of how the market is doing. This article covers:

What drives bull and bear markets?

How to predict bull and bear markets?

What do you about the conditions in bull and bear markets?

The media as well as investors often use terms such as bull market and bear market. They give a generalimpression of how the market is doing. A bull market is one where prices are rising, whereas a bear market is

one where prices are falling. The two terms are also used to describe types of investors. A stock market bull issomeone who has a very optimistic view of the market; they may be stock-holders or maybe investors whoaggressively buy and sell stocks quickly. A bear investor, on the other hand, is pessimistic about the market andmay make more conservative stock choices. Sometimes, the terms are used to refer to specific funds or stocks.

Bear market funds, for example, are those that are falling and faring poorly. Investors sometimes refer t o bullstocks to describe securities that are aggressively rising and making their investors money.

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can start to make investors more conservative and therefore lead to bear markets. Of course, again thisbecomes a self-perpetuating trend. As the economy slows down, companies begin downsizing. Increasedunemployment makes people far less willing to gamble on the stock market. Sometimes, a panic caused by direpredictions about the market can also create bearish conditions.

How To Predict Bear and

Bull Markets?The easiest way to predict both types of markets i s to realize that what goes up must come down. That is, if themarket is rising, then you know that at some point it will start to fall again. Similarly, if the market is currentlyfalling, you can be certain that eventually it will pick up again. There are no precise ways to predict either bul l or

bear markets, although general social economic situations can help you to determine what will happen. Acountry which wages a war will experience bullish market conditions as government contracts create more jobsand boost investor confidence if their expectation is to win. Sudden international crises push the marketdownward and create bearish conditions. News is very often a good indicator of where investors are headed. Thereports will inform about l oss of investor confidence as well as sudden economic downturns that may affect the

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bearish market.

The investor's behavior is another condition prevalent in both markets. In bullish markets, there's a sudden

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increase interest in the stock market. More people are hopeful about possible profits on the stock market andmost people are optimistic about economic conditions. In a bearish market, investors are not very confident andtherefore invest less.

Investing During Bear andBull MarketsNew investors often assume that they need to avoid investing during bear markets, and invest heavily duringbull markets. This is not t he case. Experienced investors know that you need to be able to invest in any sort ofmarket condition, provided that you do so wisely. Each investor has a different strategy for dealing with a bullmarket or bearish markets. Many investors try to take advantage of bull markets by buying stocks as soon as

the market gets bullish, and then starting to sell when prices seem to have reached their peak. The difficulty, ofcourse, is that it is almost impossible to tell when the trend is beginning and when it will peak. In general,investors can take more chances with the market during a bullish phase. Since overall prices wil l rise, thechances of making a profit are good.

In bearish market conditions, prices are falling and the possibility of loss is pretty good. What is worse, it is notalways possible to tell when bearish conditions will end. Therefore, if you invest during such market conditions,you may have to suffer some losses before bulli sh times return and you're able to realize a profit. For this

reason, many investors decide on short selling or fixed income securities and other more conservative types ofinvestment. Defensive stocks are another good option that remain stable during bearish conditions. On the otherhand, some investors see bearish market conditions as an ideal time to invest in more stocks. Since manypeople are selling off their stocks -- including valuable blue-chip stocks -- at low prices, it is possible to set up

long-term investments that will prove valuable during bulli sh times.

While every investor loves to see the upswing in prices during a bull market, the wise investor will be able tohandle a bear market as well. Whether you are just beginning to invest or are an experienced investor, learning

to deal with various market conditions you neen not panic but decide patiently on investment.


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Stock MarketTechnical Analysis

Technical Analysis is the study of prices and volume, for forecasting of future stock price or

financial price movements.Technical analysis can help investors anticipate what is "likely" to

happen to prices over time.

Technical analysis is not an exact science. It's an art and takes considerable experience. But

don't worry everyone with each knowledge can learn it.

Basic Principles

Technical Analysis is based on these three basic principles:

#1 - Price Discounts Everything

Technical analysts believe that the current price fully reflects all information. Because all

information is already reflected in the price, it represents the fair value, and should form the

basis for analysis. After all, the market price reflects the sum knowledge of all participants,

including traders, and

Stock Market Technical analysis utilizes the information captured by the price to interpret

what the market is saying with the purpose of forming a view on the future.

#2 - Prices Move in Trends

Technical analysts or chartists believe that profits can be made by following the trends. In

other words if the price has risen, they expect it to continue rising; if the price has fallen, they

expect it to continue falling. However, most technicians also acknowledge that there are

periods when prices do not trend.

#3- History Repeats Itself

Technical analysts believe that investors en masse repeat their behavior and they assume

that there is useful information hidden within price histories; that it is a way of analyzing the

past actions of people in a particular market as reflected by their actual transactions.

Technical Analysis Tools

Every technical analyst needs charts and indicators to study market. Three common types of

charts are used by investors: Line Chart, Bar Chart and Candlestick Chart.

Line Chart is formed by plotting one price point, usually the close, of a security over a period

of time. Connecting the dots, or price points, over a period of time, creates the line.

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14/27

Learn basics about Fundamental Analysis

The definition of Fundamental Analysis

Fundamental analysis is a stock valuation method that uses financial and economic analysis topredict the movement of stock prices.

The fundamental information that is analyzed can include a company's financial reports, and non-finanical information such as estimates of the growth of demand for competing products, industrycomparisons, and economy-wide changes.

Main StrategyTo a fundamentalist, the market price of a stock tends to move towards its intrinsic value. If theintrinsic value of a stock is above the current market price, the investor would purchase the stock, andif the intrinsic value of a stock was below the market price, the investor would sell the stock.

To start a fundamentalist makes an examination of the current and future overall health of theeconomy as a whole. In this step you should attempt to determine the direction and level of interestrates.

After you analyzed the overall economy then analyze firms individually. You should analyze factorsthat give the firm a competitive advantage in its sector such as management experience, history ofperformance, growth potential, low cost producer, and etc.

Some expressions of Stock Fundamental Analysis

For beginning I describe some stock fundamental analysis expressions that are more important:

#1- EPS: (Earnings Per Share)

The portion of a company's profit allocated to each outstanding share of common stock. The amountis computed by dividing net earnings by the number of outstanding shares of common stock. Forexample, a corporation that earned $10 million last year and has 10 million shares outstanding wouldreport earnings per share of $1.

#2- P/E Ratio: (Price/ EPS)

Also called its "earnings multiple", Price of a stock divided by its earnings per share. The P/E ratiomay either use the reported earnings from the latest year or employ an analyst's forecast of nextyear's earnings. P/E gives investors an idea of how much they are paying for a company's earningpower.

An important notice here is that the P/E ratio is ultimately not an objective measure; a high P/E ratiomight show an overvalued stock, or it might reflect a company with high potential for growth.

#3- Dividend

Dividend is an amount of the profits that a company pays to people who own shares in the company.When a company earns a profit, some of this money is typically reinvested in the business and calledretained earnings, and some of it can be paid to its shareholders as a dividend.

#4- Book Value

The book value of an asset or group of assets is sometimes the price at which they were originallyacquired ( historic cost ), in many cases equal to purchase price.

#5- Growth Stocks
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15/27

Growth Stocks in finance , are stocks that appreciate in value and yield a high return on equity (ROE).Analysts compute ROE by taking the company's net income and dividing it by the company's equity.To be classified as a growth stock, analysts expect to see at least 15 percent ROE.


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Valuation of Equities

Dividend Capitalisation Approach:

The intrinsic value (P0) of the stock paying a dividend 'D' and theexpected price of 'P1' and the required rate of return 'Rr' is given by P0 =(D+ P1)/(1+Rr)

Therefore from the above formula, we can derive the required rate ofreturn (Rr) as

Rr = (D/P0) + g

where (D/P0) is called as Dividend Yield.

The expected price 'P0' of the equity share which has a price growth of'g' and the required rate of return 'Rr' is given by P0 = D/(Rr-g)

Example 1:

The dividend per share of ABC Ltd. is Rs.5.00. It is expected to grow ata rate of 4% per year. What is the expected rate of return for the investorwhen the current market rate of the share is Rs.50

Rr = (5/50) + 4%

i.e. 10% + 4% = 14%

In case of companies having the Earnings as the only source of income,then the required rate of return is given by

Intrinsic Value = (Earning per share * Dividend payout ratio) * 100

(Discount rate - Growth rate)

Example 2:

What is the intrinsic value per share of scrip XYZ Ltd. given the following

?

Earning per share = Rs.3.00

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16/27

Richard Rhodes


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Dividend payout ratio = 0.6Discount rate = 15%Growth rate = 6%

Solution:

Intrinsic Value = (Earning per share * Dividend payout ratio) * 100(Discount rate - Growth rate)= (3.00 * 0.6)*100 / (15 - 6) = Rs.20

Earning per share & Price-earnings Approach

The other approach used in financial analysis is the Price-Earnings (P/E)ratio approach, the value as per the P/E approach is given by

Value = Earning per share (EPS) * Price Earnings ratio

where EPS = (profit after Tax / no. of equity shares outstanding)P/E = (Market Price of the share / EPS)

Example:

What is the Price-Earnings ratio of the company if the Profit after tax isRs.100 crore. The current market rate of the share is Rs.250 /-

EPS = (PAT - Preference Dividend)/ Issue capital

= (Rs.100 Cr. - Rs.10 Cr.)/ 90 lakh shares= 100

Therefore, P/E = Market Price/EPS= Rs.250 / 100= 2.5

Book Value Approach:

Book value per share of a company is

Book Value = (net worth of the company / no. of sharesoutstanding)

where net worth includes equity capital of the company, reserves andsurplus. The intrinsic value thus arrived may vary due to the accountingpolicy followed by the company.

Example:

What is the book value of the firm having a net worth of Rs.2500 croreand the number of shares outstanding is 50 crore?Intrinsic Book Value = Rs.2500 crore / 50 crore= Rs.50

Liquidation Value of the Share Approach :

The value of the shares on liquidation of the company is the company iscalculated after deducting the amount to be paid to the creditors & thepreference shareholders.

Thus the value of the share is given byValue = (Liquidation value of the company - Amount paid to be the creditors

& preference shareholders) / no. of equity shares outstanding.

Example:

The company XYZ LTD. is liquidated realizing Rs.10 crore from

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liquidation of it assets. The company had to pay Rs.1 crore to thecreditors. What is the value of the shares, if the total outstanding numberof share is 45 lakh.Value of each share = (Rs.10 crore - Rs.1 crore)/ 45 lakh share= Rs.20

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Valuation of Equities

Dividend Capitalisation Approach:

The intrinsic value (P0) of the stock paying a dividend 'D' and theexpected price of 'P1' and the required rate of return 'Rr' is given by P0 =(D+ P1)/(1+Rr)

Therefore from the above formula, we can derive the required rate ofreturn (Rr) asRr = (D/P0) + g

where (D/P0) is called as Dividend Yield.

The expected price 'P0' of the equity share which has a price growth of'g' and the required rate of return 'Rr' is given by P0 = D/(Rr-g)

Example 1:

The dividend per share of ABC Ltd. is Rs.5.00. It is expected to grow ata rate of 4% per year. What is the expected rate of return for the investorwhen the current market rate of the share is Rs.50

Rr = (5/50) + 4%

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