An investor usually shows interest to invest in scrips whose price will appreciate according to his expectation. Appreciation in the price of the scrip will be possible only when investor make decision related to two things.
1. Where to invest i.e. in which company scrip and at what market price.
2. When to invest i.e. the period during which he has to make the investment.
There are two types of analyses that help in making these two decisions.
1. Fundamental analysis
2. Technical analysis
Fundamental analysis tells where to invest and at what market price and technical analysis tells when to invest.
In this article we will discuss,
1. Fundamental Analysis:
i) Economic Analysis
ii) Industry Analysis
iii) Company Analysis
Fundamental analysis focuses on certain basic factors relating to,
This analysis helps to determine what ought to be the price of the equity stock. The basic principles of this approach are as follows:
There is an intrinsic value for each stock and this value can be determined by an analysis of the fundamental factors relating to the company, industry and economy.
At any given point of time due to temporary market price fluctuations the current market price of a stock can be at variance with its intrinsic value. Therefore superior returns (abnormal profit) can be earned by buying undervalued securities (securities whose intrinsic value exceeds the market price) and selling over valued securities (securities whose intrinsic value is less than the market place).
Economic analysis consists of analysis of present economy using economic indicators and measuring the impact of the economic indicators on the performance of the company in which the investor wishes to participate. There are many economic indicators which determine and help in predicting the state of the economy. The state of the economy has strong influence on the market prices. When a recession in the economy is likely, or underway, then one can observe steep fall in stock prices. Similarly when there is boom in the economy one can observe sharp rise in stock prices.
The economic indicators are classified:
1. Lead indicators
2. Coincidental indicators
3. Lag indicators
Lead indicators help in the prediction of the economy. Examples of the Lead indicators are the unemployment position, rainfall and agricultural production, fixed capital investment, corporate profits, money supply, credit position and stock market indices.
Coincidental Indicators highlight the current position of the economy. Some examples of coincidental indicators are Gross domestic product, growth rate of industrial production, money market rates, interest rates and reserve funds with commercial banks.
Lag Indicators explain what has already taken place. Some examples of lag indicators are large scale unemployment, piled up inventories outstanding debt, interest rates of commercial loans etc.
Recession: Fall in the country’s economic activity, for at least two consecutive quarters, as shown by lowering of gross lowering of gross domestic product.
Lead indicator: A lead indicator reaches a turning point (peak or bottom) before the economy as a whole changes its direction.
Stock Market Indices: Stock market Indices (or) Stock market indicators provide a summary measure of the behavior of security prices and stock market.
Coincidental Indicator: A coincidental indicator moves at the same time as other important variables to which it is related.
Gross Domestic Product: Gross Domestic Product is the sum of all final goods and services produced during a specified period.
Lag Indicator: A lag indicator follows the other important variables to which it is related.