Fundamental Analysis This book is aimed at students who have only an elementary knowledge of financial concepts. It considers the following big decisions that all companies

Fundamental Analysis This book is aimed at students who have only an elementary knowledge of financial concepts. It considers the following big decisions that all companies

1. FUNDAMENTALANALYSIS

2. Objective
This part explains the well known theory called EMH (Efficient
Market Hypothesis). It also explains certain biases why markets
are not completely perfect and why mispricing does occur in share
prices.

3. •Amethodofevaluatingasecuritythatentailsattemptingto
measureitsintrinsicvaluebyexaminingrelated
economic
financial
otherqualitativeandquantitativefactors
•Endgoalofperformingfundamentalanalysisistoproducea
valuethataninvestorcancomparewiththesecurity'scurrent
price
•Usingrealdatatoevaluateasecurity'svalue
Fundamental Analysis

4. Market Hypothesis

5. •Marketinwhichsecuritypricesadjustrapidlytothearrivalofnew
informationandthereforecurrentpricesofsecuritiesreflectall
informationaboutthesecurity
•Informationefficientmarket
Largenumberofprofitmaximizingparticipantsanalyzeandvalue
securitiesindependently
Newinformationaboutsecuritiescomeinrandomfashion
Profitmaximizationinvestors,adjustsecuritypricesrapidlytoreflectthe
effectofnewinformation
Securitypricesshouldreflectallinformationprovidedatanypointin
themarket
Expectedreturnsimplicitincurrentpricesshouldreflectitsimplicitrisk
Efficient Capital market

6. •Weak-FormEfficientMarketHypothesis
Fullyreflectallsecuritymarketinformation
•Semi-StrongEfficientMarketHypothesis
FullyreflectsallPublicsecuritymarketinformation
Rapidlyadjusts
•Strong-FormEfficientMarketHypothesis
FullyreflectsallPublicandPrivatesecuritymarketinformation
Alternate Efficient Capital Market Hypothesis

7. BiasesexplainwhyEfficientMarketHypothesis(EMH)doesn’t
workperfectly.Psychologyofpeopleimpactthestockpricesin
thefollowingways
•Prospecttheory:Winninginvestmentcutshort,losingtrades
heldforlong
•ConfirmationBias:Investorlooksforinformationthatsupports
theirpreviousdecision
•EscalationBias:Moremoneyinloserthantheyexpectedto
•FusionInvesting:Fundamentalvalueandinvestorsentiments,
Averagingdown
Biases

8. •Marketefficiencyreferstoinformationalefficiencyofmarkets
importanttoInvestor,CompaniesandGovernmentasithelps
theminpricerecovery
•Marketpricesarenotfullyefficientbecauseofthefollowing
reasons:
CostofInformation:Allinformationisnotavailablefreely.Togainaccess
toquickinformation,itincreasesthecostoftrading
CostofTrading:Commissionsandbrokerages
LimitsofArbitrage:unlimitedquantityisnotavailableandhenceeven
thougharbitrageopportunitiesexist,theymaynotbecompletely
exploited
Reasons for Mispricing

9. •Though EMH says that prices are always efficient, why
mispricing occurs is never fully understood. Most analysts
attribute this to the psychological behavior of the traders and
investors
•Arbitrage costly due to transaction cost
•Profit potential may be insufficient due to these costs
•Trading Restriction (IPOs) for some entities restrict complete
price discovery
Reasons for Mispricing

10. Credit Ratings

11. •Creditratingestimatesthecreditworthiness
•Evaluationmadebycreditbureausofaborrower’soverall
credithistory
•Creditratingsarecalculatedfromfinancialhistoryandcurrent
assetsandliabilities.Typically,acreditratingtellsalenderor
investortheprobabilityofthesubjectbeingabletopaybacka
loan
•Inrecentyears,creditratingshavealsobeenusedtoadjust
insurancepremiums,determineemploymenteligibility,and
establishtheamountofautilityorleasingdeposit
Credit Ratings

12. •Major Credit rating Agency
Standard and Poor (S&P)
Fitch
Moody’s
•In India
CRISIL
ICRA
CARE Ratings
•Used by Central banks for using marketable securities
Credit Ratings