Lecture 7: Valuation of Shares (Fundamental Analysis)
Introduction Fundamental Analysis It helps us determine the value of a share by studying the intrinsic factors such as earnings potential, dividend growth, required rate of return, and factors relating to company, the industry, and the economy. Analysis of a company’s financial data helps us to predict the movement of that company's stock price. A potential (or current) investor uses fundamental analysis to examine a company’s operations and the market in which the company is operating to understand the stability and growth potential of that company. Company factors to examine include the dividends that company issues, the way a company manages its cash, the amount of debt a company has, and the growth of a company's costs and income. Fundamental analysis adherents believe a company’s “intrinsic value” will be eventually be reflected in the stock price through market forces, but that, while the market is efficient, some stocks (for any number of reasons) are either over- or under-valued in the short run. However, some experts suggest that a monkey throwing darts at the financial pages of a newspaper may do just as well. (see efficient market hypothesis and random walk hypothesis) Technical Analysis The study of price action in securities markets helps us determine the value of a share by many different methods and tools, but they all rely on the same principles, such as studying patterns of price movement, trends, and transaction volume in the past. The premises of technical analysis were derived from empirical observations of financial markets. Fundamental analyst can take profit by buying or selling the mispriced security. A technical analyst, contrastingly, is not so much interested in a security’s “fair” or “correct” price. He or she is only interested in the price action. The analyst looks at how the price