Topic Outline o o o o o o o o Economic Analysis Approaches to Security Analysis Economic concepts Factors Influencing Future Real Economic Growth

Forecasting Tools Expectation Analysis Industry Analysis Financial Statement Analysis

Equity Securities Definition An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. Ownership in the company is determined by the number of shares a person owns divided by the total number of shares outstanding. For example, if a company has 1000 shares of stock outstanding and a person owns 50 of them, then he/she owns 5% of the company. Most stock also provides voting rights, which give shareholders a proportional vote in certain corporate decisions. Only a certain type of company called a corporation has stock; other types of companies such as sole proprietorships and limited partnerships do not issue stock. Also called equity or stock or corporate stock.

Economic Analysis Definition A systematic approach to determining the optimum use of scarce resources, involving comparison of two or more alternatives in achieving a specific objective under the given assumptions and constraints. Economic analysis takes into account the opportunity costs of resources employed and attempts to measure in monetary terms the private and social costs and benefits of a project to the community or economy. Approaches to Security Analysis Security Analysis For making proper investment involving both risk and return, the investor has to make a study of the alternative avenues of investment their risk and return characteristics and make a proper projection or expectation of the risk and return of the alternative investments under consideration. He has to tune the expectations to this preference of the risk and return for making a proper investment choice. The process of analyzing the individual securities and the market as a whole and estimating the risk and return expected from each of the investments with a view to identifying undervalued securities for buying and overvalued securities for selling is both an art and a science that is what called security analysis.

Security: The security has inclusive of share, scripts, stocks, bonds, debenture stock or any other marketable securities of a like nature in or of any debentures of a companyor body corporate, the government and semi government body etc.

Analysis of securities Security analysis in both traditional sense and modern sense involves the projection of future dividend or ensuring the intrinsic value of a security based on the forecast of earnings or dividend. Security analysis in traditional sense is essentially on analysis of the fundamental value of shares and its forecast for the future through the calculation of its intrinsic worth of the share.Modern security analysis relies on the fundamental analysis of the security,leading to its intrinsic worth and also rise return analysis depending on the variability of the returns, covariance, safety of funds and the projection of the future returns. If the security analysis based on fundamental factors of the company, then the forecast of the share price has to take into account inevitably the trends and the scenario in the economy, in the industry to which the company belongs and finally the strengths and weaknesses of the company itself.

Approaches to Security Analysis: Fundamental analysis Technical analysis Efficient market hypothesis

Economic concepts (Term) Scarcity - there exist only a limit amount of resources Economics - Studying how individuals make choices about the use of resources in order to satisfy needs. Scarcity requires Choice. Economics is the study of how we make those choices. Microeconomics - Study of the economic behaviour of households and firms and how prices of goods and services are determined. Macroeconomics - Study of economy wide phenomena resulting from group decision making in entire markets. Deals with economy as a whole.

Factors Influencing Future Real Economic Growth Economic growth is an increase in real GDP. Any investor with an exposure to the futures market needs a grasp of the various factors that affect futures. Here is an overview: General Factors As investment, the general economic condition of the country plays an important role in establishing the futures market sentiment. A booming economy is the basis for expectation of price rise. Factors Influencing Commodity Futures Commodities form an important segment of the futures markets. Any factors affecting the supply or cost of production of a particular commodity affects its futures contracts. Factors Influencing Currency Futures Currency futures are influenced by many factors, most important being the policies of the Federal Reserve and the US Treasury regarding money supply. Government policies regarding taxation and other decisions to bring down inflation will also have an effect on currency futures. Forecasting Tools Economic forecasting involves estimating the value of a variable of interest, such as gross domestic product (GDP), the unemployment rate or the price of a commodity. Effective planning and economic policy making depends on accurate forecasts.

Expectation Analysis Expectation analysis enables analysts to forecast the economys future direction based on current data or trends. Expectation Analysis is concluded in four stages. First, Expectation Analysis forecasts broader economic, political and demographic trends. (monetary and fiscal policy, political conditions and initiatives, trade partnerships). Second, Expectation Analysis relates the macroeconomic forecasts to certain sectors of the economy. The aim is to identify GDP components such as consumption, investment, government spending & net exports. Third, Expectation Analysis relates the macro and sector forecasts from the previous stages to industry analysis. The microeconomic analysis estimates price elasticity, competitive positioning . Fourth, Expectation Analysis adapts economic and industry analysis to the individual firm. Within this context, analysts use the Porters Five Forces Model which identifies five forces that could affect the competitive structure of the firm.

Industry Analysis Industry analysis involves reviewing the economic, political and market factors that influence the way the industry develops. The purpose to help find profitable opportunities. There are many factors in the macro-environment (tax changes) that will affect the decisions of the managers of any organisation. To help analyse these factors managers can categorise them using the PESTEL model. The industry analysis should take into account the following factors among others as influencing the performance of the company, whose shares are to be analyzed. They are as followed: Product line Raw materials and inputs Capacity installed and utilized Industry characteristics Demand and market Government policy with regard to industry Labor and other industrial problems Management

PESTEL Model Political factors. These refer to government policy such as the degree of intervention in the economy. What goods and services does a government want to provide? To what extent does it believe in subsidising firms? What are its priorities in terms of business support?

Economic factors. These include interest rates, taxation changes, economic growth, inflation and exchange rates. For example: Higher interest rates may deter investment because it costs more to borrow Strong currency may make exporting more difficult because it may raise the price in terms of foreign currency

Social factors. Changes in social trends can impact on the demand for a firm's products and the availability and willingness of individuals to work.

Technological factors: new technologies create new products and new processes. MP3 players, computer games, online gambling and high definition TVs are all new markets created by technological advances. Technology can reduce costs, improve quality and lead to innovation.

Environmental factors: environmental factors include the weather and climate change. Changes in temperature can impact on many industries including farming, tourism and insurance.

Legal factors: these are related to the legal environment in which firms operate. In recent years in the UK there have been many significant legal changes that have affected firms' behaviour. The introduction of age discrimination and disability discrimination legislation, an increase in the minimum wage and greater requirements for firms to recycle are examples of relatively recent laws that affect an organisation's actions. Legal changes can affect a firm's costs

Porters Five Forces Model

Force 1: Barriers to entry Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example: o o o o o o o Cost advantages (economies of scale, economies of scope) Access to production inputs and financing, Government policies and taxation Production cycle and learning curve Capital requirements Access to distribution channels Patents, branding, and image also fall into this category.

Force 2: Threat of substitutes Every top decision makes has to ask: How easy can our product or service be substituted? The following needs to be analyzed: o o o How much does it cost the customer to switch to competing products or services? How likely are customers to switch? What is the price-performance trade-off of substitutes?

Force 3: Bargaining power of buyers Now the question is how strong the position of buyers is. For example, can your customers work together to order large volumes to squeeze your profit margins? The following is a list of other examples: o o o o o o o o o Buyer volume and concentration What information buyers have Can buyers corner you in negotiations about price How loyal are customers to your brand Price sensitivity Threat of backward integration How well differentiated your product is Availability of substitutes Having a customer that has the leverage to dictate your prices is not a good position.

Force 4: Bargaining power of suppliers This relates to what your suppliers can do in relationship with you. o o o o o o o o How strong is the position of sellers? Are there many or only few potential suppliers? Is there a monopoly? Do you take inputs from a single supplier or from a group? (concentration) How much do you take from each of your suppliers? Can you easily switch from one supplier to another one? (switching costs) If you switch to another supplier, will it affect the cost and differentiation of your product? Are there other suppliers with the same inputs available? (substitute inputs)

Force 5: Rivalry among the existing players Finally, we have to analyze the level of competition between existing players in the industry. o o o o o o o o Is one player very dominant or all equal in strength/size? Are there exit barriers? How fast does the industry grow? Does the industry operate at surplus or shortage? How is the industry concentrated? How do customers identify themselves with your brand? Is the product differentiated? How well are rivals diversified?

Industry Life-Cycle Analysis A method for analyzing industries based on the idea that they go through a series of identifiable life cycle phases. Stages Of The Life Cycle Introduction Growth Maturity Decline

Financial Statement Analysis The best source of financial information about a company is its own financial statements. This is a primary source of information for evaluating the investment prospects in the particular companys stock. The statement gives the historical and current information about the companys information aids to analysis the present status of the company. The main statements used in the analysis area. A) B) C) D) Balance sheet Profit and loss account. Income Statement Statement of Cash Flows

Balance Sheet: The balance sheet shows all the companys sources of funds (liabilities and stock holders equity) and uses of funds at a given point of time. The balance sheet provides an account of the capital structure of the company. The net worth and the outstanding long-term debt are known from the balance sheet. The use of debt creates financial leverage beneficial or detrimental to the shareholders depending on the size and stability of earnings. It is better for the investor to avoid accompany with excessive debt components in its capital structure. Profit and loss account: Income statements report the flow of funds from business operations that take place in between two points of time. It lists down the items of income and expenditure. The difference between the income and expenditure represents profit or loss for the period. It is also called income and expenditure statement. Limitations of financial statements: The financial statements contain historical information. This information is useful, but an investor should be Financial statements are prepared on the basis of certain accounting concepts and conventions. The statements contain only information that can be measured in monetary units. For example, the loss incurred by a firm due to flood or fire is included because it can be expressed in monetary terms. Purpose To evaluate the current management performance & to provide insight that will help project future management performance, specifically: Profitability Efficiency Risk