UNIVERSITY OF MYSORE

PORTFOLIO MANAGEMENTSEMINAR ON FUNDAMENTAL ANALYSIS

PRESENTING TO: PROF. B. NAGARAJU. FACULTY. DOS IN COMMERCE. MANASAGANGOTHRI. MYSORE.

INTRODUCTION

• Fundamental Analysis is to evaluate a lot information about the past performance and the expected future performance of companies, industries and the economy as a whole before taking the investment decision. Such evaluation or analysis is called fundamental analysis.

• Fundamental analysis is really a logical and systematic approach to estimating the future dividends and share price. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts.

There are several possible objectives:

• To conduct a company stock valuation and predict its probable price evolution.

• To make a projection on its business performance.• To evaluate its management and make internal

business decisions.• To calculate its risk.

• · Fundamental analysis is a method of evaluating a security or asset by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.

• · Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors.

• · The fundamental approach is based on an in-depth and all-around study of the underlying forces of the economy, conducted to provide data that can be used to forecast future prices and market developments.

• · Fundamental analysis can be composed of many different aspects: the analysis of the economy as the whole, the analysis of an industry or that of an individual company.

• · A combination of the data is used to establish the true current value of the underlying asset, to determine whether they are over- or under-valued and to predict the future value of the underlying asset based on this information.

• · As far as short-term trading is concerned, fundamental analysis cannot be used as a "tactical", short-term decision-making method.

• · It helps an investor obtain information about the overall state of the market, attractiveness and state of a specific security as compared to other securities, However, when and how to react to the information, derived through fundamental analysis, is determined using technical analysis.

• · Though the basic approach is the same while doing fundamental analysis, the various factors that affect the value of the underlying asset keep changing depending upon the class and nature of the asset under focus.

• · For example weather may not play a major factor while analyzing the value of the share of a company, which is in the business of Information technology.

• · Thus it is important for an analyst to identify the factors that are likely to affect the value of the underlying asset and then resort to the study of the said factors.

• · Fundamental analysis seeks to identify the fundamental economic and political factors that determine a commodity’s price. It is basically an analysis of the (current and future) demand and supply of a commodity to determine if a price change is imminent, and in which direction and by how much prices are expected to change. This approach requires gathering substantial amounts of economic data and political intelligence, assessing the expectations of market participants, and analyzing these information to predict futures price movement

• · The end goal of performing fundamental analysis is to produce a value that an investor can compare with the underlying assets current price in hopes of figuring out what sort of position to take with that security(under priced = buy, overpriced = sell).

• · Fundamental analysis focuses on cause and effect — causes external to the trading markets that are likely to affect prices in the market. These factors may include the weather, current inventory levels, government policies, economic indicators, trade balances and even how traders are likely to react to certain events. Fundamental analysis maintains that markets may misprice a commodity in the short run but that the "correct" price will eventually be reached.

-Profits can be made by trading the mispriced commodity and then waiting for the market to recognize its & quot ; mistake & quot ; and correct it.

• · Various Techniques of Fundamental Analysis The Demand-Supply Framework Price Elasticity The Balance Table Stocks-to-Disappearance Ratio The Tabular and Graphic Approach The Regression Analysis Econometric Models Seasonal Price Index

• · • Market Demand: Market demand represents how much people are

willing to purchase at various prices. Thus, demand is a relationship between price and quantity demanded, with all other factors remaining constant.

TYPES OF FUNDAMENTAL ANALYSIS• Although it is generally accepted that the aim fundamental analysis is to

determine the economic value of a security, it is the practice of fundamental analysis that gives raise to two sub types namely,

• 1. Macro fundamental analysis,• The top down approach

• 2. Micro fundamental analysis• The bottom up approach

1. MACRO FUNDAMENTAL ANALYSIS:• Macro fundamental analysis focuses on broad economic factors that affect

the stock market as a whole or industry groups of securities. This approach is known as the top down approach of macro fundamental analysis. The practice of macro fundamental analysis starts at the over all performance of the economy, its impact on industry groups and finally down to specific companies in the industry groups.• It is noteworthy that macro fundamental analysis has a more formal and

structured approach and as such this approach is much favored by research department of investment management companies and brokerage houses.

2. MICRO- FUNDAMENTAL ANALYSIS:• Micro fundamental analysis starts by considering the current price of a stock

and compares it to measures of value. Hence the current price of stock is compared to its dividend yield, price to earnings ratio and its price to asset ratio. The resultant valuation enable comparison to be made amongst stocks are identified by comparison to the industrial norm. after this phase of analysis, the micro fundamental analysis attempts to predict industry and economic developments that may positively or negatively the stocks current price.• It is pertinent to note that investment icon such as Benjamin Graham, his

prodigies Warren Buffet, Charles Munger and William Ruane tend toward Micro fundamental analusis.

EIC FRAMEWORK:

ECONOMY

INDUSTRYCOMPANY

EIC FRAMEWORK:

The analysis is a 3 layer analysis wherein the analysis of economy, industry and company is carried out. The logic behind 3 layer is that the performance of the company depends on the performance of the industry and economy as a whole. The multitude of factors affecting the intrinsic value of an equity share can be broadly categorized into 3 factors namely:

1. economic related factors such as growth rate of GDP, industrial growth rate, inflation, interest rate, government budget and deficit etc.

2. Industry related factors such as demand and supply conditions in the industry, existence of substitutes, government policy etc. these factors affect only those companies which belong to a specific industry.

3. Company related factors include financial performance, operating efficiency, capital structure, competitive edge of the company etc.

CONCLUSION:

fundamental analysis is a structured and formal approach to research on a stock value and its potential growth. The analytical procedure facilitates the identification of overvalued and undervalued stocks relatives to their earnings potential, dividend income potential and to their asset values, against the backdrop of the economic and the industry environment. On the basis of research, investment decisions are made such that the odds are stacked in our of the fundamental analyst.

REFERENCE:

www.indiahowto.com

www.nse-india.com

www.investopedia.com

Presented By: MAHADEVA PRASAD.M. 1st YEAR MFM. DOS IN COMMERCE. MANASAGANGOTHRI. UOM, MYSORE.

Thank you