Investment chapter detaile2 ppt (1).pptx

Its a detailed ppt for any body who studies the subject investment in accounting

1. Chapter Two Investment Management Chapter contents Basics of investment management Investment(security) analysis Fundamental analysis Economic analysis Industry analysis and company analysis Technical analysis PESTEL analysis

2. Basics of investment management Investment management: professional administration of various securities and investment assets to meet investment goals for the benefit of the investors. Pillars of investment management- Philosophy, process and people 1. Philosophy: overall beliefs of investment organization. 2. Process : how the philosophy is implemented. 3. People: refers to the staff, especially the fund managers Growth or value s h ares ( co m bination) Believe in market timing? External Vs internal researcher Types of assets explored How to buy and when? what to sell and when? Who are they? How are they selected? How deep is the team(understanding of the above two)

3. Investment(Security) analysis S ec u rit y a na l y s i s : p r o c ess of ana l yzing p r ospect s and shortcomings in an investment. Conducted to determine intrinsic values of these assets. Intrin s i c v alue: R eal v alue s of a n y asse t d e t e rmine d by fundamental analysis without reference to market value. Market price < Intrinsic value = Underpriced= Buy. Market price > Intrinsic value = Overpriced= don’t buy.

4. Continued….. The analytical framework to determine intrinsic values is k n o w n a s E I C f r am e w o r k, or E c ono m y – Ind u stry – Company analysis. Fundamental analysis involves three steps: Economic analysis, Industry analysis, Company analysis.

5. Economy analysis(6 variables) 1. Growth rate of national economy: Recovery(Expansion) stage: the economy begins to revive. Boom(peak): high GDP, and low unemployment Recession: The boom phase gradually slowdown Depression: Decline in output, GDP, and high unemployment.

6. Continued(economic analysis)…. Interest rates: A low interest rate stimulates investment by making credit available cheaply. Government revenue, and expenditure : high government expenditure stimulates the economy by creating jobs and generating demand. Exchange rate: devaluation of home currency For import based company devaluation hampers profitability F or e xp o rt base d co m pa n y d e v aluat i on e n hanc e s competitiveness and profitability

7. Continued(economic analysis)…. 5. Infrastructure: Availability of infrastructure facilities like power, transportation, and communication systems affects the performance of companies. 6. E c on o mi c a nd pol i tica l s t abi l it y : Indu c es investment by establishing favorable environment

8. Industry analysis(2 variables) An industry “is a group of firms producing similar products. CBE DGB AIB Banking indu s try Industry analysis measures 2 variables: Industry life cycle & Industry characteristics

9. Industry analysis- continued… Industry life cycle: Proposed by Julius Grodinsky. According to the theory, the life of an industry can be segregated into to the four stages. Pioneering Ex p an s i on stage St a g n a t i on stage Dec a y stage

10. Continued(Industry analysis)…. Industry characteristics: assess the status of the industry. A. Demand-supply gap: If DD>SS If SS>DD B. Competitive conditions in the industry: rivalry among competitors(Strong Vs Weak) C . P e r m a ne n c e : th e nee d f or a p a r t ic u la r i n dustry might vanish in a short period.

11. Continued(Industry characteristics)…. D. Attitude of government: Encourage certain industries and disfavor on certain other industries. Ex: tourism industry & Cigarette industry E. Supply of raw materials: Easiness/difficulty in getting major raw material. Ex: Agro industries in jimma town F. Labor conditions If the labor in a particular industry is rebellious and strikes frequently, the prospects of that industry cannot become bright. EX: Leather industries.

12. Company analysis Evaluates performance at company level depending on Financial statements. Financial statements help to assess the profitability and financial health of the company. Basically uses balance sheet and the profit and loss account.

13. Technical analysis Technical analysis: employed to evaluate investments by analyzing price movement and volume. Unli k e fun d ame n ta l ana l y s i s i t d o e s n ’t m e a s u r es i n t r in s ic v a l u e indicators such as EIC analysis. Technical analysis can be used on any security with historical trading data.

14. Technical analysis philosophy: 3 basic tenets 1. Market price tells everything : I t d isc a r d t he ne e d f o r fundam e n t a l an a l y sis o f E f f i c ien t M a r k et Hypothesis (EMH); 2 . Pric e s m o v e in t r e n d s : pr i c es o f s e cu r i t i e s t end t o m o v e in observable trends with a tendency to stay in the trend 3. History repeats itself : what has happened to the price of a security in the past with the expectation that history tends to repeat itself

15. Fundamental vs Technical analysis Parameter Fundamental analysis Technical analysis Indicators EIC variables Price movements Data Financial statements Charts Users Long-term investors Short term investors Time r e q u i r em e nt Time taking Quick Nature of study Study the cause Study the effect

16. PESTEL Analysis

17. Political factors The f ac t ors t o be studied are: Government policies Tax laws and tariff Stability of government Entry mode regulations

18. Economic factors The determinant variables are: The inflation rate The interest rate Disposable income of buyers Credit accessibility The foreign exchange rate

19. Social factors Some of the social factors are: The cultural implications The social lifestyles Educational levels Distribution of Wealth

20. Technological factors New discoveries Rate of technological obsolescence (outdates) Rate of technological advances Innovative technological platforms

21. Legal factors Employment regulations Competitive regulations Patent infringements Health and safety regulations

22. Environmental factors Chan g e s i n climat i c c h an g e s c a n affect the trade. Some environmental factors you can study are: Geographical location The climate and weather Waste disposal laws Energy consumption regulation P eopl e ’s a t t i t ud e t o w a r ds t he environment

23. End of chapter two