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Analysis of Equity and Debt Instruments
Features of Bond:
• Issuer: Bond issuers borrow money from investors
against bonds
...
• Face Value: The face or par value of the bond is
the price of a bond repayable at maturity
...
• Coupon rate: The issuer of the bonds compensates
the bondholders by paying them interest
...
• Maturity: Except for perpetuity bonds, all the
bondholders get repaid at a specific date when the
bonds get matured
...
• Credit rating: Each bond holds the rating, provided
by credit rating agencies
...
If the
rating is lower, the risk involved in the bond is
higher along with higher returns
...
Types of Bonds:
1
...
• For example, An investor purchased a ten-year
fixed-rate government bond of Rs
...
5%
...
75,
annually every April, till 20th April 2023
...
Floating-rate bonds:
• do not pay fixed returns each period
• interest rates vary, depending on the set
benchmark, during the tenure
...
The bond pays
interest of 40 points higher than the prevailing
National Savings Certificate interest rate
...
3
...
The difference is the yield for
investors
...
1000, at Rs
...
At the end of 20 years, the issuer will pay Rs
...
4
...
• they keep paying steady coupon payments to the
bondholders till perpetuity
...
Corporate Bonds:
• Issued by corporate firms or companies
• Relatively risky
• Issued by companies in public or private sector
6
...
Govt Bonds:
• Issued by central or state govt
• Raise funds to finance projects aiming public
welfare
8
...
• investor can also opt to receive the principal
repayment at the maturity, if they do not want to
exchange it with shares
...
Callable Bonds
• high coupon paying securities that give the issuer
the right to call back the bonds at a pre-agreed
price and date
...
Puttable Bonds:
• give the bondholder the right to return the bond
and ask for repayment of principal at a pre-agreed
date before maturity
...
• For example, let’s say you want to buy a bond of
Company X
...
You most likely will not
invest if the score gives you the impression that
Company X may default on repayment
...
A
credit rating company evaluates the financial
health of the company with the goal of identifying
the level of its ability to make good on it’s debts
...
• Generally, AAA and AA (high credit quality) and A
and BBB (medium credit quality) are considered
investment-grade
...
) are considered low credit
quality, and are commonly referred to as junk
bonds
...
Equity analysis is that area which focuses on stock
selection based on scientific methods:
Stock selection can be done with help of:
1
...
Technical analysis
1
...
• evaluate the present and future earning capacity
of a share based on the economy, industry and
company fundamentals and thereby assess the
intrinsic value of the share
...
Economic analysis:
• performance of company - performance of the
economy
• The four stages of an economic cycle are
1
...
Inflation is often high and so
are interest rates
...
Recovery stage: Demand picks up leading to more
investments in the economy
...
3
...
Investments and
production are maintained at a high level to satisfy
the high demand
...
Recession: The boom phase gradually slowdown
...
Key economic variables that an investor must monitor
as part of his fundamental analysis:
a
...
• GNP, NNP, GDP are the different measures of the
total income or total economic output as a whole
...
b
...
• considerable impact on the performance of
companies
...
c
...
• A low interest rate stimulates investment by
making credit available easily and cheaply
...
d
...
• A depreciation of the rupee improves the
competitive position of Indian products in the
foreign markets, thereby stimulating exports
...
a
company more depending on imports may find it
devaluation of the rupee affecting its profitability
adversely
...
Infrastructure
• development of an economy - infrastructure
available
...
Economic and political stability
• A stable political environment is necessary for
steady and balanced growth
...
2
...
• The performance of companies would therefore,
be influenced by the fortunes of the industry to
which it belongs
...
”
Industry life cycle
• The industry life cycle theory is generally
attributed to Julius grodinsky
...
• This kind of segregation is extremely useful to an
investor because the profitability of an industry
depends upon its stage of growth
...
• rapid growth in demand for the output of industry
...
• Weak firms are eliminated and a lesser number of
firms survive the pioneering stage
...
Expansion stage
• established itself it enters the second stage of
expansion or growth
...
• Each company finds a market for itself and
develops its own strategies to sell and maintain its
position in the market
...
• Companies in the expansion stage of an industry
are quite attractive for investment purposes
...
• The ability of the industry to grow appears to have
been lost
...
• The transition of an industry from the expansion
stages to stagnation stages is very slow
...
• Ex: the black and white television industry in India
provides s a good example of an industry which
passed from the expansion stages to stagnation
stage
...
• New products and new technologies have come to
the market
...
• As a result, the industry become obsolete and
gradually ceases to decay of an industry
...
Company analysis:
• analyst tries to forecast the future earnings of the
company because there is strong evidence that the
earnings have a direct and powerful effect upon
share prices
...
• financial statements - profitability and financial
health of the company
...
• balance sheet - financial position of the company
on a particular date, namely the last day of the
accounting year
...
Elements of company’s financial performance:
Sales growth:
• a measure of the change in revenue over a fixed
period
• measures how quickly a company has been growing
its sales
...
• Organizations that are more efficient will realize
more profit as a percentage of its expenses than a
less-efficient organization, which must spend more
to generate the same profit
...
• Some companies pay out all their earnings to
shareholders, while some only pay out a portion of
their earnings
...
• When improving operational efficiency, the output
to input ratio improves
Cashflow analysis
• determines a company's working capital — the
amount of money available to run business
operations and complete transactions
...
2
...
• concentrates on the movement of share prices
...
• prices move in trends or waves which may be
upward or downward
• share price behaviour repeat itself over time and
analyst attempt to drive methods to predict this
repetition
...
Line chart
• simplest price chart
• closing prices of a share are plotted on the XY
graph on a day to day basic
...
• All these points would be connected by a straight
line which would indicate the trend of the market
...
Bar chart
• It is the most popular chart used by technical
analysts
...
• The top of the bar represents the highest price of
the day, the bottom of the bar represents the
lowest price of the day and a small horizontal hash
on the right of the bar is used to represent the
closing price of the day
...
3
...
• highest price and the lowest price of a day are
joined by a vertical bar
...
• each day’s activity is represented by a candlestick
...
Trends and trend reversal
• Trend is the movement of share prices in the
market
...
• prices move downwards, we have a falling trend or
downtrend
...
• change in the direction of trend is referred to as
trend reversal
...
This change
in the direction of movement represents a trend
reversal
...
Chart patterns
• When the price bar charts of several days are
drawn together, certain patterns emerge
...
Price Earning Multiple Approach:
• commonly used measures of relative value
...
• helps investors determine whether the stock of a
company is overvalued or undervalued compared
to its earnings
...
• company is trading at a high P/E ratio, the market
thinks highly of its growth potential and is willing
to potentially overspend today based on future
earnings
...
• This measure is arrived at by means of an
objective calculation or complex financial model
...
However, comparing it to that
current price can give investors an idea of whether
the asset is undervalued or overvalued
...
• In options trading world, the term refers to the
difference between the options strike price and
the market value of the underlying asset
...
Price to book value ratio:
• compare a firm’s market to book value by dividing
price per share by book value per share (BVPS)
• As assets book value is equal to its carrying value
on the B/S and companies calculate its netting the
asset against its accumulated depreciation
...
• For the initial outlay of an investment, Book value
may be net or gross of expenses such as trading
costs, sales turnover and service charges
...
TECHNICAL
ANALYSIS
future price of the
stock using charts to
identify the patterns
and trends
...
the market
...
evaluated
...
data
...