Fundamental Analysis
Chapter: 12
FUNDAMENTAL ANALYSIS
The intrinsic value of an equity share depends on a multitude of factors. The earnings of the company, the growth rate and the risk exposure of the company have a direct bearing on the price of the share. These factors in turn rely on the host of other factors like economic environment in which they function, the industry they belong to, and finally companies’ own performance. The fundamental school of thought appraised the intrinsic value of the shares through * Economic Analysis * Industry Analysis * Company Analysis (I) ECONOMIC ANALYSIS The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profit of the firms. The analysis of macro-economic environment is essential to understand the behavior of the stock prices. The commonly analysed macro-economic factors are as follows: (1) Gross Domestic Product (GDP) GDP indicates the rate of growth of the economy. GDP represents the aggregate value of the goods and services produced in the economy. GDP consists of personal consumption expenditure, gross private domestic investment and government expenditure on goods and services and net export of goods and services. The estimates of GDP are available on an annual basis. The higher growth rate is more favorable to the stock maket.
(2) Savings and Investment It is obvious that growth requires investment which in turn requires substantial amount of domestic savings. Stock market is a channel through which the savings of the investors are made available to the corporate bodies. Savings are distributed over various assets like equity shares, deposits, mutual fund units, real estate and bullion.
FUNDAMENTAL ANALYSIS
The intrinsic value of an equity share depends on a multitude of factors. The earnings of the company, the growth rate and the risk exposure of the company have a direct bearing on the price of the share. These factors in turn rely on the host of other factors like economic environment in which they function, the industry they belong to, and finally companies’ own performance. The fundamental school of thought appraised the intrinsic value of the shares through * Economic Analysis * Industry Analysis * Company Analysis (I) ECONOMIC ANALYSIS The level of economic activity has an impact on investment in many ways. If the economy grows rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock prices are low, and when the level of economic activity is high, stock prices are high reflecting the prosperous outlook for sales and profit of the firms. The analysis of macro-economic environment is essential to understand the behavior of the stock prices. The commonly analysed macro-economic factors are as follows: (1) Gross Domestic Product (GDP) GDP indicates the rate of growth of the economy. GDP represents the aggregate value of the goods and services produced in the economy. GDP consists of personal consumption expenditure, gross private domestic investment and government expenditure on goods and services and net export of goods and services. The estimates of GDP are available on an annual basis. The higher growth rate is more favorable to the stock maket.
(2) Savings and Investment It is obvious that growth requires investment which in turn requires substantial amount of domestic savings. Stock market is a channel through which the savings of the investors are made available to the corporate bodies. Savings are distributed over various assets like equity shares, deposits, mutual fund units, real estate and bullion.