STOCK SELECTION
Stock selection in stock analysis refers to the careful and
deliberate process of choosing specific company stocks
from a wide range of options and including them in an
investment portfolio. align with specific investment goals
and strategies.
Fundamental Analysis?
Fundamental analysis (FA) refers to the process of studying
any security’s intrinsic value with the object of making
profits while trading in it. The primary purpose of
fundamental analysis is to determine whether the security
or stock is undervalued or overvalued and thereby make
an informed decision to buy, hold, or sell it in order to
maximize the potential for gains.
Fundamental Analysis in simple terms in the art of
evaluating any business to its basics and getting an
accurate picture of how financially healthy and sustainable
it is. It involves studying a company’s potential for future
growth by considering various micro and macroeconomic
factors. This analysis assists in deriving at an intrinsic value
of stock that aids investment decisions.
Economic Analysis
Economic analysis refers to evaluating costs and benefits
to check the viability of a project, investment opportunity,
event, or any other matter. In other words, it involves
identifying, evaluating, and comparing costs and benefits.
In addition, there are many other significant concepts
involved.
The analysis process contributes to the optimal allocation
and use of resources, forming an important element in the
decision-making process. For example, the microeconomic
analysis makes an effort to describe how people and
organizations function in a certain economy,
macroeconomic analysis focus on GDP, unemployment,
and inflation, and techno economic analysis (TEA) involves
the study of the economic performance of an industrial
process.
EXAMPLE
Paul has a small factory producing specific bottled
products; currently, he has twenty workers, and the daily
output is 3000 bottled products for delivery. Paul plans to
employ heavy equipment and machinery and automate the
whole process. However, if he does, it will cost him a fixed
amount due to machinery purchase and automation
system installation costs.
However, the new step increases the production output
and reduces the variable labor costs. Evaluating the cost
and benefit associated with automated and manual
processes implies that the automated process is better. It
is a simple economic analysis example through which Paul
will assess and go forward with their decision to install new
equipment in his factory.
Industry Analysis
Industry analysis refers to the analysis of the industry’s
environment that guides the industry to grow and survive
in a competitive environment and gain a competitive edge
in the industry as it predicts the future and changes in the
market and analyzes the threats and opportunities in the
way ahead and making decisions and planning accordingly.
In simple terms, industry analysis reveals the industry
dynamics to the stakeholders. So it’s an essential part of
creating a competitive advantage for a company in the
competitive market.
Who Can Benefit From an Industry Analysis?
Industry analysis is for anyone who is interested in investing in a
company; large scale investors, institutional investors and even
retail investors.
Understanding the industry is a key component of understanding
a company. So it helps investors and other stakeholders to
position a company against other peers from the same industry. It
gives investors a picture of roadblocks and opportunities that
come in the way of the company and its industry
Before placing big bucks on any company, understanding the
industry is extremely important. Say you are investing in a
pharmaceutical company, there are a few things you will have to
keep in mind.
For example drug regulations and patenting, demand situation of
medicines, FDA regulations and more.
Such factors tell investors which are the threats that the pharma
industry faces, which factors go in favour and the competitive
landscape of the industry. Thorough industry analysis will help
you to understand such unique aspects of any industry.
Company analysis
Fundamental analysis’ is another name for it. A company analysis includes basic
information about the business, such as the mission statement and apparition, as well
as the organization’s goals and values. During the company analysis process, an
investor takes into account the firm’s history, focusing on events that have shaped the
company.
A company analysis investigates the company’s products and services. If the company
is involved in manufacturing, the study looks at the products it produces as well as the
demand for and quality of those products. In a service business, on the other hand, the
investor examines the services offered.
Company Analysis Methodologies:
There are two types of corporate analysis:
1. Top-Down Strategy:
When using the top down approach, investors begin by examining macroeconomic
fundamentals such as monetary policy, inflation, economic growth, and broader events
before delving into individual stocks. The investor searches for market conditions and
occurrences and tries to comprehend the opportunities that might be gained from them.
For example, The Elections in India is the most talked about event. Therefore, the
election is the event/theme which the investor in this approach will look at for capturing
the opportunity. Most top-down investors are macroeconomic investors, focused on
capitalizing on large cyclical trends rather ththan individual equities.
This means that their strategy is more about capitalizing on macro momentum and
short-term gains than any kind of value-based approach to find undervalued companies.
2. Bottom-Up Technique:
In this approach, we begin by examining individual companies and then constructing a
portfolio based on their distinctive characteristics.
In this approach of investing, investors tend to concentrate on microeconomic aspects.
They select their stocks on the basis of their stock selection criteria like price to earnings
multiples, debt to equity ratio, cash flows, management quality etc.
Investors can learn about a company’s overall health by looking at its financial situation.
Any serious investor trying to properly understand and value a company should conduct
a financial study of the company’s financial statements as well as the footnotes in the
annual report.
Graphical Pattern
Patterns are repeating elements in your graphic designs. In order to have a pattern,
you must have at least two elements working in concert with one another
Candlestick Pattern
A candlestick is a way of displaying information about an asset's price movement. Candlestick
charts are one of the most popular components of technical analysis, enabling traders to interpret
price information quickly and from just a few price bars.
It has three basic features:
The body, which represents the open-to-close range
The wick, or shadow, that indicates the intra-day high and low
The colour, which reveals the direction of market movement- a green (or white)
body indicates a price increase, while a red (or black) body shows a price
decrease
Over time, individual candlesticks form patterns that traders can use to recognise major
support and resistance levels. There are a great many candlestick patterns that indicate
an opportunity within a market - some provide insight into the balance between buying
and selling pressures, while others identify continuation patterns or market indecision
What does Red (or Black) Candlestick Mean?
The colour of the candlestick tells us whether that candle was formed by a positive
trading day (advance in price) or a negative day (decline in price). If the closing price is
lower than the day's opening price, then the body of the candle is red or black.
What does White Candlestick mean?
The white candle, also known as the "OPEN" Candlestick, shows the price has moved
up. Candlesticks will have a body and usually two wicks on each end. The bottom of the
white body represents the opening price and the top of the body represents the closing
price. The top and bottom tips of each wick are the day's highest and lowest price
respectively. Thus, this candle will represent a positive "CLOSE".
Indicators serve three broad functions: to alert, to confirm and
to predict.
An indicator can act as an alert to study price action a little
more closely. If momentum is waning, it may be a signal to
watch for a break of support. Alternatively, if there is a large
positive divergence building, it may serve as an alert to watch
for a resistance breakout.
Indicator Indicators can be used to confirm other technical
analysis tools. If there is a breakout on the price chart, a
corresponding moving average crossover could serve to
confirm the breakout. If a stock breaks support, a
corresponding low in the On-Balance-Volume (OBV) could
serve to confirm the weakness.
According to some investors and traders, indicators can be
used to predict the direction of future prices.
An oscillator is an indicator that fluctuates above and
below a centerline or between set levels as its value
changes over time. Oscillators can remain at extreme levels
(overbought or oversold) for extended periods, but they cannot
trend for a sustained period. In contrast, a security or a
cumulative indicator like On-Balance-Volume (OBV) can trend as
it continually increases or decreases in value over a sustained
period of time.
Risk and return in financial management is the risk
associated with a certain investment and its returns.
Usually, high-risk investments yield better financial
returns, and low-risk investments yield lower returns. That
is, the risk of a particular investment is directly related to
the returns earned from it.
The risk and return analysis aim to help investors find the
best investments. Hence, investors use many methods to
analyze and evaluate the market, industry, and company.
Diversification of the portfolio, i.e., choosing an optimal mix
of different investment options, can reduce the risk and
amplify returns.
Relationship Between Risk and
Return
The correlation between financial risk and return is fairly
simple to comprehend. The risk in choosing a certain
investment is directly proportional to the returns.
Therefore, selecting a high-risk investment can give higher
profits, while a low-risk investment will minimize the
returns.
Consider the example of Jane, who has been investing for
many years. However, she wants to get maximum returns.
She consults a money manager, John, for this purpose. John
advises her to diversify her portfolio.
He suggests the following:
Hold a FAANG stock.
Invest in stocks ranging from $100 to $150 like Volkswagen
or Walmart.
Invest in U.S. Treasury bonds.
Invest in mutual funds.
This would help her to get better returns and offset losses if
any.
