Fundamental Analysis

Top-down approach
Economy Analysis
Industry Analysis
Company Analysis

Economy Analysis Factors
Growth Rate of National Income (GDP
Growth Rate)
Inflation
Interest Rate
Foreign exchange rate
Demographic date
Political stability

Industry Analysis Factors
INDUSTRY CHARACTERISTIC
Demand Supply Gap
Competitive Conditions in the Industry
Barriers to Entry
Industry life cycle
Cost structure in industry

COMPANY ANALYSIS
Important Financial Statements
Income Statement (P&L Account)
Statement of Financial position (Balance
Sheet)
Fund Flow Statement
Cash Flow Statement
Financial ratio analysis is also a part of
company analysis
Traditional fundamental analysis
Traditional fundamental analysis begins with the financial statement
analysis to evaluate the financial solvency and profitability of the
firm.

The investor also looks at
- the firms product lines
- the economic outlook for the products (including
existing and potential competitors), and
- the industries in which the company operates.
- the quality of management, brand image etc.

Based on the growth prospects of earnings (or cash flows), the
fundamental analysts attempts to determine the fair value or
intrinsic value using P/E ratio (or DCF Technique).

Technical Evaluation

Theoretical Foundation
Edwards & Magee (1997) state the basic
assumptions of technical analysis
A securitys market price is based on supply and
demand
Supply and demand are based on both rational and
irrational factors
Security prices tend to move in persistent trends
Changes in trends occur due to shifts in supply and
demand
Shifts in supply and demand can be detected using
charts of market transactions
Some chart patterns tend to repeat themselves


Theoretical Foundation
Technicians believe past patterns will
recur
Therefore can be predicted
Technical analysts estimate prices
Whereas fundamental analysts estimate value
Technicians tend to ignore issues such as
a firms risk and earnings growth
Instead focus on barometers of supply and
demand


Theoretical Foundation
Technicians argue that when using fundamental analysis
Must wait until market realizes a stock is undervalued
Must rely on inadequate accounting statements
It is hard work
Must use ambiguous estimates of growth
Technicians claim technical analysis is
Easier
Faster
Can be applied simultaneously to more stocks than fundamental
analysis
But, does technical analysis work?