Investment
The three major parts of security analysis are economic analysis, industry analysis, and fundamental analysis. Security analysis is important because it enables the investor to establish the expected return and risk for a stock and to evaluate its desirability in a logical, rational manner.
2. Intrinsic value, the end product of security analysis, is the measure of the underlying worth of a stock and provides a standard for helping investors to judge whether a particular stock is undervalued, fairly priced, or overvalued. If the intrinsic value of a stock is more than the market price, then the stock might be a good buy under the assumption that the stock will rise up to its intrinsic value. The converse would be true if the intrinsic value is less than the stock price. The stock might be a good sell.
3. A satisfactory investment is one that offers an expected return, from the combination of current income and capital gains, that is commensurate with its perceived exposure to risk. The three steps in security analysis should enable investors to identify satisfactory investment s. First, economic analysis assesses the general state of the economy and its potential effects on security returns. Industry analysis examines specific industries and the characteristics and outlook of those industries. Finally, fundamental analysis looks at the financial condition and operating results of a particular company in depth. Together, they enable the investor to develop expectations about a stock’s future course of behavior—what kind of return to expect and what kind of risk is likely to be involved. By examining variables such as future earnings, dividends, and so on, the security analyses process allows investors to develop a feel for the stock and what to expect of it in the future.
4. If the stock market is efficient in the strongest form, then securities are never substantially mispriced and hence there would be no need for security analysis. But in reality, the financial
2. Intrinsic value, the end product of security analysis, is the measure of the underlying worth of a stock and provides a standard for helping investors to judge whether a particular stock is undervalued, fairly priced, or overvalued. If the intrinsic value of a stock is more than the market price, then the stock might be a good buy under the assumption that the stock will rise up to its intrinsic value. The converse would be true if the intrinsic value is less than the stock price. The stock might be a good sell.
3. A satisfactory investment is one that offers an expected return, from the combination of current income and capital gains, that is commensurate with its perceived exposure to risk. The three steps in security analysis should enable investors to identify satisfactory investment s. First, economic analysis assesses the general state of the economy and its potential effects on security returns. Industry analysis examines specific industries and the characteristics and outlook of those industries. Finally, fundamental analysis looks at the financial condition and operating results of a particular company in depth. Together, they enable the investor to develop expectations about a stock’s future course of behavior—what kind of return to expect and what kind of risk is likely to be involved. By examining variables such as future earnings, dividends, and so on, the security analyses process allows investors to develop a feel for the stock and what to expect of it in the future.
4. If the stock market is efficient in the strongest form, then securities are never substantially mispriced and hence there would be no need for security analysis. But in reality, the financial