Tech & Fundamental Analysis Q&A

8/2/2019 Tech & Fundamental Analysis Q&A

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This is the place where the investor actually gets the SMC Diksha. The GlobalInvestment Solutions and Services Company wil l shower him with whatever insighthe thought was necessary to enter in the arena of excit ing world of investmentsolutions.Q. What is saving?A. In common usage, saving generally means putting money aside. For example,by way of putting money in the bank or investing in some avenue. Thus it is thatpart of the disposable income which is not spent on current consumption; i.edisposable income less consumption.Q. Why do I save at all?A. You need to save because when you do so you are putting something of yoursinto something else in order to achieve something greater. In simple words youneed to save because the money you save can be used for investment. When youinvest your savings in a stock, bond, mutual fund or real estate you do sobecause you think its value wil l appreciate over time.Q. What is an Investment?A. Investing money is putting that money into some form of "security" an oftquoted word for anything that is "secured" by some assets. Stocks, bonds, mutualfunds, certificates of deposit - al l of these are types of securit ies. As withanything else, there are many different approaches to investing. For the purposesof this explanation, there are three basic styles of investing: conservative,moderate, and aggressive. In brief, a conservative investor wants to protectprincipal and earn income; a moderate investor is wil l ing to take a certain amountof risk to achieve some stock price appreciation as well as current income; and anaggressive investor is primarily concerned with high overall returns even though itmeans taking more risk.Q. What are the different modes of Investment? A. There are three basic types of investments, also known as asset classes, all ofwhich we are going to discuss. These investments are stocks, bonds and cash.You can buy stocks and bonds as individual investments, or you can invest inthem by buying mutual funds that own stocks, bonds or a combination of the two.If you invest in cash, you can put money into bank accounts and money marketmutual funds or you can buy what are known as cash equivalents: Treasury bil ls,Certificates of Deposit and similar investments.While you may not think of bank accounts as investments because they currentlypay an abysmally low rate of interest. On the other hand, stocks and stock mutualfunds have been the most profitable investments over time.Q. What are the basic investment objectives, which drive the investor?A. The options for investing our savings are continually increasing, yet everysingle investment vehicle can be easily categorized according to three


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fundamental characteristics - safety, income and growth - which also correspondto types of investor objectives. While it is possible for an investor to have morethan one of these objectives, the success of one must come at the expense ofothers. Here we examine these three types of objectives, the investments that areused to achieve them and the ways in which investors can incorporate them indevising a strategy.SafetyProbably there is truth in the fact that there is no such thing as a completely safeand secure investment. Yet we can get close to ult imate safety for our investmentfunds through the purchase of government-issued securit ies, or through thepurchase of the highest quality commercial papers. Such securit ies are arguablythe best means of preserving principal while receiving a specified rate of return.IncomeHowever, the safest investments are also the ones that are l ikely to have thelowest rate of income return, or yield. Investors must inevitably sacrifice a degreeof safety if they want to increase their yields. This is the inverse relationshipbetween safety and yield: as yield increases, safety generally goes down, and viceversa. In order to increase their rate of investment return and take on risk abovethat of money market instruments or government bonds, investors may choose topurchase corporate bonds or preferred shares with lower investment ratings. Mostinvestors, even the most conservative-minded ones, want some level of incomegeneration in their portfolios, even if it is just to keep up with the economy's rateof inflation.Q. What is Inflation?A. Inflation is the rate at which the general level of prices for goods and servicesis rising, and, subsequently, purchasing power of money is fal l ing. As inflationrises, every rupee wil l buy a smaller percentage of a good. For example, if theinflation rate is 2%, then a Re.1 worth of a good wil l cost Rs.1.02 in a year.Growth of CapitalThis discussion has thus far been concerned only with safety and yield asinvesting objectives, and has not considered the potential of other assets toprovide a rate of return from an increase in value, often referred to as a capitalgain. Capital gains are entirely different from yield in that they are only realizedwhen the security is sold for a price that is higher than the price at which it wasoriginally purchased. (Sell ing at a lower price is referred to as a capital loss.)Therefore, investors seeking capital gains are l ikely not those who need a fixed,ongoing source of investment returns from their portfolio, but rather those whoseek the possibil ity of longer-term growth.Q. What is a Capital Gain?A. An increase in the value of a capital asset (investment or real estate) thatgives it a higher worth than the purchase price. The gain is not realized unti l the
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asset is sold. A capital gain may be short term (one year or less) or long term(more than one year) .It is to be noted that the money invested grows with thepassage of t ime. However the value of money received says n years later may notbe of same value as it is today. This concept is explained in Time Value of Money.Secondary ObjectivesTax MinimizationAn investor may pursue certain investments in order to adopt tax minimization aspart of his or her investment strategy. A highly-paid executive, for example, maywant to seek investments with favorable tax treatment in order to lessen his orher overall income tax burden.Marketabil ity / LiquidityMany of the investments we have discussed are reasonably i l l iquid, which meansthey cannot be immediately sold and easily converted into cash. Achieving adegree of l iquidity, however, requires the sacrifice of a certain level of income orpotential for capital gains.Q. Explain the Concept of Time Value of Money which you talked just a while ago.A. You have two payment options:(A) Receive Rs.10, 000 now OR (B) Receive Rs.10, 000 in three years. Which onewould you choose? If youre l ike most people, you would choose to receiveRs.10,000 now. After all, three years is a long time to wait. Why would anyprudent person defer payment into the future when he or she could have thesame amount of money now? For most of us, taking the money in the present isjust plain instinctive. So at the most basic level, the time value of moneydemonstrates that, al l things being equal, it is better to have money now ratherthan later.By receiving Rs.10,000 today, you can expect to increase the future value of yourmoney by investing and gaining interest over a period of t ime. For option B, youdon't have time on your side, and the payment received in three years would beyour future value. To i l lustrate, we have provided the diagram of the timeline.


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If you are choosing option A, your future value wil l be Rs.10, 000 plus anyinterest acquired over the three years. The future value for option B, on the otherhand, would only be Rs.10, 000. But l isten patiently to the subsequent part ofDiksha to find out how to calculate exactly how much more option A is worth,compared to option B.Future Value BasicsIf you choose option A and invest the total amount at a simple annual rate of4.5%, the future value of your investment at the end of the first year isRs.10,450, which of co urse is calculated by multiplying the principal amount ofRs.10,000 by the interest rate of 4.5% and then adding the interest gained to theprincipal amount:Future value of investment at the end of first year:= (Rs.10, 000 x 0.045) + Rs.10, 000= Rs.10, 450If the Rs.10, 450 left in your investment account at the end of the first year isleft untouched and you invested it at 4.5% for another year, how much would youhave? To calculate this, you would take the Rs.10, 450 and multiply it again by1.045 (0.045 +1). At the end of two years, you would have Rs.10,920:

Future value of investment at end of second year:= Rs.10, 450 x (1+0.045)= Rs.10, 920.25The above calculation is equivalent to the following equation:Future Value = Rs10,000 x (1+0.045) x (1+0.045)


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Think back to mathematics class in your high school, where you learned the ruleof exponents, which says that the multipl ication of l ike terms is equivalent toadding their exponents. In the above equation, the two l ike terms are (1+0.045),and the exponent on each is equal to1. Therefore, the equation can berepresented as the following:

Future Value=Rs.10,000x (1+0.05) (1+1)=Rs.10, 000x(1+0.045) 2=Rs.10,920.25We can see that the exponent is equal to the number of years for which themoney is earning interest in an investment. So, the equation for calculating thethree-year future value of the investment would look l ike this:Future Value=Rs.10,000x(1+0.05) (1+1+1)=Rs.10,000x(1+0.045) 3=Rs.11,411.66This calculation shows us that we don't need to calculate the future value afterthe first year, then the second year, then the third year, and so on. If you knowhow many years you would l ike to hold a present amount of money in aninvestment, the future value of that amount is calculated by the followingequation:Future Value=Original Amount x (1+Interest Rate per period) Number of periodsorP=1X(1+i)nPresent Value BasicsIf you received Rs.10, 000 today, the present value would of course be Rs.10, 000because present value is what your investment gives you now if you were tospend it today. If Rs.10, 000 were to be received in a year, the present value ofthe amount would not be Rs.10, 000 because you do not have it in your handnow, in the present. To find the present value of the Rs.10,000 you wil l receive inthe future, you need to pretend that the Rs.10,000 is the total future value of anamount that you invested today. In other words, to find the present value of thefuture Rs.10,000, we need to find out how much we would have to invest today inorder to receive that Rs.10, 000 inthefuture.To calculate present value, or the amount that we would have to invest today,you must subtract the (hypothetical) accumulated interest from the Rs.10, 000.To achieve this, we can discount the future payment amount (Rs.10, 000) by theinterest rate for the period. In essence, all you are doing is rearranging the


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future value equation above so that you may solve for P. The above future valueequation can be rewritten by replacing the P variable with present value (PV) asfollows:Original EquationFV=PV X (1+i)nFinal Equation:PV=

FV(1+i)n

Let's walk backwards from the Rs.10,000 offered in option B. Remember; theRs.10,000 to be received in three years is really the same as the future value ofan investment. If today we were at the two-year mark, we would discount thepayment back one year. At the two-year mark, the present value of the Rs.10,000to be received in one year is represented as the following:Present value of future payment of Rs.10,000 at end of two year:Rs.10,000 x (1+0.045) -1=Rs.9569.38Note that if today we were at the one-year mark, the above Rs.9, 569.38 wouldbe considered the future value of our investment one year from now.Continuing on, at the end of the first year we would be expecting to receive thepayment of Rs.10,000 in two years. At an interest rate of 4.5%, the calculationfor the present value of Rs.10,000 payment expected in two years would be thefollowing:Present value of Rs.10,000 in one year: Rs.10,000 x (1+0.045) -2=Rs.9157.30Of course, because of the rule of exponents, we don't have to calculate the futurevalue of the investment every year counting back from the Rs.10,000 investmentat the third year. We could put the equation more concisely and use the Rs.10,000 as FV. So, here is how you can calculate today's present value of the Rs.10,000 expected from a three-year investment earning 4.5%:PV of three year investment=Rs.10,000x(1+0.05) -3=Rs.8762.97So the present value of a future payment of Rs.10,000 is worth Rs.8,762.97 todayif interest rates are 4.5% per year. In other words, choosing option B is l iketaking Rs.8,762.97 now and then investing it for three years. The equations above


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i l lustrate that option A is better not only because it offers you money right nowbut because it offers you Rs.1,237.03 (Rs.10,000 Rs.8,762.97) more in cash!Furthermore, if you invest the $10,000 that you receive from option A, yourchoice gives you a future value that is Rs.1, 411.66 (Rs.11, 411.66 Rs.10,000)greater than the future value of optionMORALE OF THE STORY: A BIRD IN HAND IS WORTH TWO IN THE BUSH.These calculations demonstrate that t ime l iterally is money - the value of themoney you have now is not the same as it wil l be in the future and vice versa. So,it is important to know how to calculate the time value of money so that you candistinguish between the worth of investments that offer you returns at differenttimes.

Q. Would you please elaborate on the various Investment Options available forme?A Yes, one can go for the following options:-1) Investment in various instruments offered by Banks.2) Stocks.3) Derivatives.4) Commodities.5) IPOs.6) Mutual Funds. Any way do you think its necessary for me to tell you about theinvestment options in banks?NO THANKS SIR. O.K, then regarding other options I wil l be providing you withDeeksha in the subsequent pages.Q. Tell me more about Stocks.A Lets define what a stock is. Simply speaking, stock is a share in the ownershipof a company. Stock represents a claim on the company's assets and earnings.Holding a company's stock means that you are one of the many owners calledshareholders of a company. Generally, we are concerned with two types of stocksnamely common stock or equity shares and preferred stock or preference share.Stock prices are determined by market forces of supply and demand. The systemof trading stocks is an anonymous screen based order driven trading system,which eliminates the need for physical trading floors, i.e. open outcry systems.Brokers can trade from their offices, using fully automated screen basedprocesses. Their workstations are connected to a Stock Exchanges centralcomputer system via satell ite using Very Small Aperture Terminus (VSATs) Theorders placed by brokers reach the Exchanges central computer and are matchedelectronically. Such kind of trading system exists in two of the national level stockexchanges i.e, Natonal Stock Exchange (NSE)&Bombay Stock Exchange (BSE).


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Q. It seems investing in stock is purely speculation as it s quite uncertain that Iwil l have some return on my investment or I MAY EVEN LOOSE MY CAPITAL.Isntit?A. No, NOT AT ALL! Investing in stock is an art as well as science. Choosing astock requires lot of analysis and skil ls. Basically, share price movement isanalysed broadly by two approaches, namely fundamental Analysis & technicalAnalysis.Q. Explain me about the Fundamental and Technical Analysis.A. Fundamental analysis is the examination of the underlying forces that affectthe well being of the economy, industry, and companies. As with most analysis,the purpose is to derive a forecast and profit from future price movements. Thefundamental analysis is done on three levels namely economy, industry, andcompany. At the economy level, fundamental analysis focuses on economic datato assess the present and future growth of the economy. At the industry level,there is an examination of supply and demand forces for the products offeredentry or exit restrictions, etc. in that particular industry. At the company level,fundamental analysis involves examination of financial data, management,business concept and competit ion. Fundamental Analysis includes financialstatement analysis, shareholding pattern analysis, analysis of Company business& Competit ive environment, SWOT analysis & Risk associated.Q. It s seems to be interestingExplain me moreA. Well, Financial analysis includes analysis of Profit & loss statement & Balancesheet. It includes analyzing historical performance of the company & determiningwhat the company is presently doing to predict about the future prospects of thecompany. The profit & loss statement shows direct impact on the companys sharevalue. If the company is performing well & generating good profit the share valueof the company wil l be respectively higher than the loss making companies.General investors see net profit of the company but if we need to do in-depthanalysis of the companys actual performance then one should track the netoperating profit of the company. It is because the net operating profit is theactual profit which company generates from its actual business or operations. Netprofit includes other income, which is not generated from the actual operations ofthe business. Other income includes interest earned from the investment etc.Balance sheet analysis gives whole information about the companies assets &liabil it ies. Shareholding pattern also state that what amount of total outstandingshares different groups such as FIIs, Promoters, public etc are holding. Analysisof Companys business & the industry to which it belongs is yet another importantissue in fundamental analysis. With the help of the above analysis, an idea can bedrawn on the health of the company.Q. How can we proceed for such analysis?A. The analysis is done with either of the two approaches: Top Down Approach &Bottom UP Approach. In case of Top down approach, an investor looks at acountry's economy before considering an industry to invest in. After choosing theindustries or sectors that wil l provide return well because of the economicconditions, then the investor choose stocks from that particular industry or sector


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that are attractive within that industry/sector and are l ikely to provide betterreturns. The approach is quite useful in determining which sectors are attractivefor particular period of t ime. Bottom-up investing involves the investors attentionon a specific company rather than on the industry in which that company operatesor on the economy as a whole. The approach assumes that individual companiescan do well irrespective of the performance of the industry or economy even whenthe industry is not performing very well.In order to forecast future stock prices, fundamental analysis combines economic,industry, and company analysis to derive a stock's current fair value and forecastfuture value. In technical terms, this fair value is known as the intrinsic value.The purpose of analyzing a company's fundamentals is to find a stock's intrinsicvalue, as opposed to the value at which it is being traded in the marketplace. Ifthe intrinsic value is more than the current share price, your analysis is showingthat the stock is worth more than its price or the stock is undervalued and that itmakes sense to buy the stock. On the other hand, if the intrinsic value is lessthan the current share price, your analysis is showing that the stock is worth lessthan its price or the stock is overvalued and that it makes sense to sell the stock.There are various different methods available for finding the intrinsic value; thepremise behind all the strategies is the same i.e. a company is worth the sum ofits future cash flows discounted at an appropriate discount rate. If fair value isnot equal to the current stock price, fundamental analysts believe that the stockis either over or under valued and the market price wil l ult imately gravitatetowards fair value. Fundamentalists do not need the advice of the random walkersand believe that markets are weak form efficient. By believing that prices do notaccurately reflect all available information, fundamental analysts look to capitalizeon perceived price discrepancies. Fundamental analysis is the process of lookingat a business at the fundamental financial level. This type of analysis examineskey ratios of a business to determine its financial health and gives you an idea ofthe value its stock. Investors use fundamental analysis alone or in combinationwith other tools to evaluate stocks for investment purposes. The goal is todetermine the current worth and, more importantly, how the market values thestock.Q. Now I can understand how valuable fundamental analysis is? Can you tell mehow can one pick scrip for doing fundamental analysis?A There are various strategies for picking stock; the following are the generallyaccepted among the investors. Value investing is supposed to be the one of thebest-known method available for picking stocks. The method is based upon thesimple concept that invest in those companies that are trading below theirinherent worth. The value investing involves the picking those stocks havingstrong fundamentals l ike earnings, dividends, book value, and cash flow ,etc., andis sell ing at a low price. Value investing involves the selection of those companiesthat seem to be incorrectly valued by the market and therefore carries thepotential of price appreciation when the market corrects its error in valuation. Asthe method is revolved around the determination of the true value of theunderlying asset, value investors does not pay any attention to the externalfactors affecting a company. Value investing assumes that external factors are notinherent to the company, and therefore are not seen to have any effect on thevalue of the business in the long run. This is in contradiction with the Eff icientMarket Hypothesis (EMH), which claims that stock prices are always reflecting all


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relevant information, and therefore are already showing the intrinsic worth ofcompanies.Growth investing is yet another important strategy. It focuses on the futurepotential of a company and gives much less emphasis on its present price. Incontrast to value investing, growth investing suggests the picking of thosecompanies that are trading higher than their current intrinsic worth based on theassumption that the companys intrinsic worth wil l grow and therefore share pricewil l increase. Growth investing involves the picking of those stocks that are l ikelyto grow substantial ly faster than others. It is mainly concerned with youngcompanies. A growth investor looks for investments in rapidly expandingindustries. Objective of such investing is to earn profits by way of capital gainsbut not dividends as almost all growth companies reinvest their earnings and donot pay a dividend.The GARP (Growth at a Reasonable Price) investing is a combination of both valueand growth investing. The strategy involves the picking of those stocks that looksomewhat undervalued and have solid sustainable growth potential stored in. Thestrategy l ies right in between the value and growth investing strategies. GARPinvesting, l ike value investing, is concerned with the growth prospects of acompany and are l ike to see posit ive earnings numbers for the past few years,coupled with posit ive earnings projections for forthcoming years.GARP investing looks l ike the perfect strategy but it is not so easy as it soundsbecause combining growth and value investing is very tough when it comes topractice.CANSLIM acronym actually stands for a very successful investment strategy whichare elaborated hereunder:C = Current EarningsThe strategy emphasises on the importance of choosing stocks whose earningsper share in the most recent quarter have grown. The model maintains thatinvestors must study the companys financials deeply and should recognize thewindow dressing, if any, done in the balance sheet.A = Annual EarningsThe strategy also acknowledges the importance of annual earnings growth as thecurrent earnings. The system maintains that a company should have shownrespectable annual growth in past few years.N = NewThe next acronym stands for anything new happening to or in the company. Anychange for the betterment of the company is necessary for the company tobecome successful. The new may be anything l ike a new management team, anew product, a new market, or even a new high/low in its stock price.S = Supply and Demand


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The method takes into account the analysis of supply and demand. The methodassumes that keeping all other things unchanged, it is easier for a smaller firm,with a smaller number of shares outstanding or equity, to show outstandinggains. The reason oblivious that a large-cap company requires much more demandthan a smaller cap company to show the same percent of gains.L = Leader or LaggardThe method covers the important part of making distinction between the marketleaders and market laggards. In every sector or industry there are always certainstocks that lead, providing high returns to investors, and those that lag behind,providing relatively low returns.I= Institutional SponsorshipThe strategy recognised the importance of companies having some institutionalownership. The idea behind such a criteria is that if a company has noinstitutional sponsorship, al l of the thousands of institutional money managershave passed over the company. Other side of the interpretation is that if a verylarge portion of the companys stock is owned by institutions then the companycan be recognized as institutionally over-owned and it is too late to buy into thecompany.M = Market FancyThis criterion is based upon the overall market direction or conditions. It isimportant to consider the fact that the human psychologies do play its role instock market, so therefore it is necessary to recognize the overall mood of themarket and move consistent with the trend. This may be judged by the analysis ofthe price-volume chart of the stock.Q Is it enough for doing fundamental analysis?A Fundamental analysis could be as deep as possible depending upon how muchyou can extract from the financial number reported by the company & it alsoincludes doing Ratio analysis. Ratio analysis is a tool used to evaluate a firmsfinancial condition & performance.Q. Why bother with a ratio? Why not simply look at raw data?A. Ratio is calculated because we get a comparison that may prove more usefulthan the raw data. For different types of analysis, various kinds of Ratios areused.


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Q. Explain me in brief about P/E Ratio. A. P/E is simply the ratio of a company's share price to its earnings per-share.Mathematically it can be calculated as:


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P/E Ratio = Market Value per shareEarnings per shareTheoretically, a stock's P/E depicts how much investors are wil l ing to pay per Re.of earnings. Due to this very reason, the ratio is also termed as the "multiple" ofa stock. For example, a P/E ratio of 20 suggests that investors in the stock arewil l ing to pay Rs.20 for every Re.1 of earnings that the company generates. Themethod is simple to analyse but it fai ls to take into account the company's growthprospects and other fundamentals. Generally P/E is calculated using EPS from thelast four quarters. This is also known as the trail ing P/E. Sometime EPS iscalculated from estimated earnings expected over the next four quarters. Thiscalculation is known as the projected P/E. In third variation the PE is estimates ofthe next two quarters based on the EPS of the past two quarters. There isn't anysignificant difference between these variations. However, it is important to knowthat, the first calculation is based on the actual historical data. The other twocalculations are based on analyst estimates that may or may not be perfect orprecise.Although the EPS figure in the P/E is usually based on earnings from the last fourquarters, the P/E is somewhat more than a measure of a company's pastperformance. The ratio also takes into account market expectations for the futuregrowth of a company. The ratio helps us determine whether a company is over-valued or under-valued. A stock is supposed to be under valued if its PE ratio islower than the PE ratio of other stocks belonging to the same industry. In thesimilar way, a stock is supposed to be over valued if its PE ratio is higher thanthe PE ratio of other stocks belonging to the same industry. But P/E analysis isonly valid in certain circumstances and it has some shortcomings attached with it.Some of the shortcomings are as hereunder:Accounting policiesThe EPS can be manipulated, twisted, poked and squeezed into various numbersdepending upon the accounting policies. As a result of which, we often don't knowwhether we are comparing the same figures.InflationDuring the times of high inflation, inventory and depreciation costs tend to beunderstated because the replacement costs of goods and equipment rises with thegeneral level of prices. Thereby, P/E ratios look l ike lower during times of highinflation because the market believes earnings are artificial ly distorted upwards.AnalysisA High P/E ratio does not necessari ly imply that a company is overvalued. Rather,it could mean that the market believes the company is headed for good timeahead. Similarly, a low P/E ratio does not necessari ly imply that a company isundervalued. Rather, it could mean that the market believes the company isheaded for trouble in the near future. So, we can conclude that the P/E oftendoesn't tel l us much, but when it comes to comparing one company to another inthe same industry or to the market in general or to the company's own historicalP/E ratios, the same is quite useful. Stock analysis requires a great deal much


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more than understanding a few ratios. It should be kept in mind that the P/E isone part of the game.Q And what is this PEG Ratio?A While the PE ratio is a commonly used ratio, some investors for more analysismake use of the PEG ratio. The ratio helps in determining a stock's value whiletaking into account earnings growth. It can be mathematically calculated as:

PEG Ratio= PE ratioAnnual EPS GrowthThe ratio is a widely used analytical tool for determining the true potential of thestock. It is more acceptable as compared to the PE ratio because it also accountsfor growth. Similar to the P/E ratio, a lower PEG implies that the stock isundervalued and otherwise overvalued. The PEG ratio compares a stock's P/Eratio to its expected EPS growth rate. PEG ratio is equal to one implies that themarket price of the stock fully reflects the stock's EPS growth. PEG ratio greaterthan one indicates that the stock is overvalued or that the market expects futureEPS growth to be greater than what is in current. PEG ratio less than oneindicates that the stock is undervalued or that the market expects future EPSgrowth to be less than what is in current. As in PE ratio, here also we can use theratio for comparison in the peer group or industry. It is important to note that thePEG ratio should be used as additional information to get a clear perspective ofthe investment potential of a company. The ratio can give you a clear picture ifyou know how to handle it.Q. Then what is P/BV ratio? Ans: Likewise other ratios the P/BV ratio is also a useful tool in analyzing a stock.The ratio can be calculated mathematically as follows:

P/BV ratio= Current Market priceBook valueA P/BV ratio indicates how much investors pay for what would be left of thecompany if it went out of business immediately. If a stock is trading for morethan their book value or in other words P/BV ratio is more than 1, it generallyimplies that the stock is overvalued. However, it may also tell differently thatinvestors expect the company to have a very good return on its assets. Whereas,if a stock is trading for less than their book value or in other words P/BV ratio isless than 1, it generally implies that the stock is undervalued. It may also implythat investors expect the company to have a very poor return on its assets. P/BVratio may not be so meaningful if a company has a large percentage of intangibleassets, as they are very difficult to quantify, thereby making the book valueuncertain.Q. Now whats technical analysis?A. Technical analysis is a process of identifying trend reversals to formulate thebuying & sell ing strategies. Technical analysis includes various tools through


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which one can analyse the relationship between supply & demand for stocks & canpredict the future movement of the same. Technical analysis is based on thecharts of individual stocks. The market value of the stock is ascertained by thesupply & demand factors. The movement in security shows the sentiment ofmarket players in it. Basically we study trend of the stocks. Trends simplyindicate the change in investor expectation. It is a kind of direction of movement.The share prices either decreases, increases or remains flat. Technical Analysis isbased on three assumptions.1) The market value of the scrip is determined by Interaction of supply &Demand.2) Market discounts everything.3) Market always moves in a trend.Q. Trendis that something related to fashion? But what is the l ink betweenfashion & Stock market? A. Oh yes you can say that. Fashion also follows sometrend. Same with the stock market. It moves in a trend. Stock market trend isdivided into three parts i.e Primary waves, Secondary waves, Tertiary waves. Theprimary wave remains for a period of at least One year. The Secondary waveremains for at least 6 months. Time frame for the Tertiary waves is l imited to onemonth. For making a perfect trend l ine, one should consider whether whilemaking a trend l ine if more points are met, the more accurate would be the trendline. The bull ish trend can be drawn by joining lows of the waves whereas thebearish trend can be drawn by joining highs of the waves as depicted in thefollowing diagram. At least two points should be met while making trend l ine.Remember, Trend l ine cannot be horizontal or vertical. Always draw trend l inefrom lowest or from highest points, never from in between as shown in the graph.

Q. Do you know graphs plays an important role in technicalanalysis?A. How come?Well, technical analysis is based on companys price-volume chart.Q. Can you tell me how can we use charts to do Technical analysis?


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A. Well, technical analysis is basically a study of companys chart. The chart canbe represented in various forms such as bar charts, Candlestick chart etc. In barchart, the closing is displayed on the right side of bar & opening price is shownon the left side of the bar. Top of the bar represents the high of the bar anddown of the bar represents the low of the bar. It can be clearer with the help ofthe following bar.

Same is with Candlesticks pattern. It also displays the open, close, high and low.Bull ish candle and bearish candle can be differentiated by the color of the body ofthe bar. Generally green color represent bull ish candle whereas red colorrepresents bearish candle. These Japanese candles can send out warning signalsnot evident on bar charts. It can be clearer with the help of following diagrams.

Q I cannot understand the basis of the Technical Analysis? Can you explain this alitt le further?A. Yes the technical analysis is backed by various proven theories & principles.One of them is Dow Theory. Dow Theory was developed by Charles Dow. DowTheory is divided into 2 parts. Dow Theory part I states that the scrip moves in atrend & the trend of a scrip is divided into primary trend, intermediate trend &short-term trend. The primary trend may be in the upward or downward directionthat may last for a year or more than that. It can be understood with the help offollowing diagram. It s clear from this that movement of scrip is in trend.Whenever the scrip breaks its trend l ine, its trend gets reversed.


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Dow theory part II states that if the market is making successive higher-highsand higher-lows the primary trend is up. If the market is making successivelower-highs and lower-lows, the primary trend is down. It can be understood withthe help of following diagram.

Q. Thats interesting. I never had an Idea that there would be any field l ike this.Is there any other theory related to technical analysis?A. Yes, yet another widely recognized theory is Ell iot waves theory. It wasdeveloped by Ralph Nelson Ell iot. The theory believes that the market movementcan be divided into two types of waves i.e Primary Bull ish wave & Primary Bearishwave. A Primary wave (bull ish / bearish) consists of Secondary wave & tertiaryWave. Secondary waves are of two types of wave namely impulsive waves &Corrective waves Impulsive Wave consists of five tertiary waves & Correctivewave consist of three tertiary waves.


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Ell iot waves theory states that the movement of scrip occurs in five waves in thedirection of the primary bull ish trend & in three waves in primary bearish waves.The primary bull ish trend is followed by 5-3 waves movement divided intoImpulsive & Corrective waves. This 5-3 waves movement is further divided intotertiary waves. Waves 1, 3, and 5 are called Impulsive tertiary waves & 2 and 4waves are called Corrective tertiary waves. Waves a, b, and c are the tertiarytrend made by corrective waves. Acco rding to Ell iot waves theory, the third wavecan never be a shortest wave of the three waves.Q. But how can we know at what point to buy or sell? A. For this you need to know about support & Resistance levels also.Q. What is Support & Resistance!?Support & resistance levels are those levels, which help in determining the exactbuy & sell point in the scrips. A support level exists at a price where demand fora stock is expected to prevent further fal l in price levels. The fall in the price maybe stopped for the time being or it may result even in change in the trend ofscrip. Support levels are made taking in consideration the past trend of the scrip.A resistance level is the point at which sellers take control of prices and preventthem from rising further. At a resistance level the supply of the scrip is greaterthan the demand & further price rise is prevented. The sell ing pressure is greater& the increase in price is stopped for the time being. (Watch diagrams for moreinsight)


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When a stock touches certain level & drops down then the level is calledResistance level & when the stock reaches down to a certain level & then rises,that level is called support level. If the stock breaks the support level & thenmoves downward, it means that the sell ing pressure has overcome the potentialbuying pressure. If the scrip breaks its resistance level & price move further thenit means buying pressure would be more than the sell ing pressure. The support &resistance level need not to be formed only on tops or bottoms. They can also beformed on the trend l ines. Support levels represent the price where the majorityof investors feel that prices wil l move higher and resistance levels represent theprice at which a majority of investors feel that the prices wil l move lower.Q. How can we decide that is it a right t ime to buy or not? A. Yes, for this you need to know about the various indicators in technicalanalysis that wil l tel l you about the movement of the stock. Mainly there are twotypes of indicators: Lagging Indicators & Leading Indicators.Q. Can you explain me about Leading & Lagging Indicators?A. Well, Leading Indicators are those, which generate Buy or Sell signal beforethe stock starts to follow a particular pattern or trend whereas Lagging Indicatorsare those which generate Buy or Sell signal after the stock starts to follow aparticular pattern or trend. One should use leading indicators during tradingmarkets & lagging indicators during trending markets. Some popular laggingindicators include moving averages and MACD & some of the popular leadingindicators include Commodity Channel Index (CCI), Relative Strength Index (RSI),Stochastic Oscil lator and Will iamss %R.Q. Please explain to me about these lagging Indicators.A. One of the most popular lagging Indicator is Moving Average & MACD.Movingaverages are the average prices of scrip at a given time. The market indices donot rise or fal l in straight l ine. Moving average includes the recent data in itsobservation. For example if we are using 13 days moving average then on 14thday the data of the first day wil l automatically be eliminated from the firstobservation. When we calculate a moving average we used the closing price of


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the stock & while calculating moving average one must specify the time period tocalculate the average price. Through moving averages we study the movement ofthe market as well as the movement of the individual scrip. We use different timeperiod for moving average for analyzing scrip movement for different time period.For example for short-term trend we use 10 to 30 days moving average, formedium term we use 50 to 125 days moving average & for long term we generallyuse 200 days moving average. We can use combination of different movingaverage for predicting scrip movement. 5/13 days moving average is consideredto be the best combination for predicting market movement.The two most popular types of moving averages are:1) Simple Moving Average (SMA).2) Exponential Moving Average (EMA).1) Simple Moving Average (SMA)A Simple moving average is calculated by dividing the summation of securitysprices for the most recent "n" time period. For example, Summation of the closingprices of a security for most recent 13 days and then dividing it by 13 wil l resultin the average price of the security in the last 13 days.

2) Exponential Moving Average (EMA):Exponential Moving Average is similar to a simple moving average except thatmore weight is given to the latest data. EMA apply more weightage to recentprices as compared to older prices. The shorter the EMA's period, the moreweight that wil l be applied to the most recent price. We can calculate EMA withthe help of following formulaCurrent EMA = (K * (Current Price - Previous period's EMA) + Previous period'sEMA; where


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K = 2/(1+N) &N = Number of periods for EMAQ. And what about MACD?A MACD is trend-following momentum that shows the relationship between twomoving averages of prices. Mathematically, it is the difference between 26-daysexponential moving average (EMA) from the 12-days EMA of price. The l ine sodrawn is termed as MACD. There is another l ine called signal l ine or trigger l ineand is calculated as the 9-days EMA of the MACD. With the help of these two l inesone can easily generate buy and sell signals.The indicator can be interpreted in following ways:1. Crossovers - Whenever the MACD falls below the signal l ine, it is a bearishsignal, which indicates that it may be time to sell. On the other hand, when theMACD lies above the signal l ine, the indicator gives a bull ish signal, suggestingthat the price of the asset is l ikely to move u.2. Divergence - When the security price diverges from the MACD there is anindication of change in the current trend. In order to thoroughly understand theindicator one must closely watch the relationship between the two l ines i.e MACD& trigger l ine. The two l ines tend to crossover each other from time to timesignaling buy and sell action. It is clearly understood that crossovers wil l signalthe beginning of a new trend and end the current trend. There is another l inecalled average l ine and is helpful in determining the strength of the signalgenerated by the crossovers. If the MACD line crosses over the trigger l ine abovethe average l ine, it is understood that a bull ish trend wil l continue. If the MACDline crosses over the trigger l ine below the average l ine, it indicates a sl ightchange in price but not change in direction of the trend.Q. What about Leading Indicators? Explain me about them.A. Well, first of al l I l l explain you about CCI i.e Community Channel Index.Donald Lambert developed the Community Channel Index. The CommunityChannel Index evaluates the variance in the present stock price from its statisticalmean. The indicator in advance indicates that the stock is in the overbought zoneif the above 100 & in oversold zone when it is below 100. If it is above 100 thenit means that prices are high compared to its average prices & if it is below 100it means that prices are low compared to it s average prices. In short, itgenerates buy signal when it r ises above 100 & generates sell signal when itdrops below +100.Q. I got your point. What about other indicators?A. Next one is RSI.Developed by J. Welles Wilder, the Relative Strength Index(RSI) is a popular price momentum oscil lator. The indicator oscil lates in a rangebetween 0 and 100 representing a comparison of the magnitude of a stock'srecent gains to the magnitude of its recent losses.


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The Formula use for the calculation of the RSI is as follows:RSI = 100 - 100 / (1 + RS)RS is calculated as the ratio of two exponential ly smoothed moving averagesMathematically:RS = AG / ALWhere;AG = Average Gain over RSI PeriodGain = Price - Price.x (when Price > Price.x)AL = Average Loss over RSI PeriodLoss = Price - Price.x (when Price < Price.x)x is the Momentum PeriodOverbought / OversoldThe RSI indicator ranges in value from 0 to 100, with numbers above 7 0indicating overbought conditions and below 30 indicating oversold. If the RSIrises above 30, it is considered bull ish, while if the RSI falls below 70,it isconsidered bearish.

Crossing the Center LineDifferent investors have different views regarding the interpretation of RSI; someinvestors view a move above50 as a bull ish confirmation, and a move below 50 asa bearish confirmation. This is backed by the logic that a move above 50represents average gains overtaking average losses, while a move below 50signifies that average losses have taken the lead.Q. Are these indicators sufficient for doing technical analysis?A. Well, al l the indicators can be used for the second confirmation of the resultsgenerated by the first indicator. One of the most important indicators isStochastic Oscil lator. George Lane developed this indicator. It measures therelationship between an issue's closing price and its price range over apredetermined period of t ime. It is a technical momentum indicator that comparesa security's closing price to its price range over a given time period. Generally, 14days period is used while any time period can be used according to the perceptionof the analyst.The mathematical calculation involved is as hereunder:


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%K = (100) * [(C - L14) / (H14 - L14)]C = the most recent closing priceL14 = the lowest of the 14 previous trading sessionsH14 = the highest price traded during the same 14-day period.Transaction signals occur when the %K crosses through a three-period movingaverage called the "%D".The %D calculated as hereunder:%D = 100 * (H3/L3)The logic behind this indicator revolved around the theory that in an upward-trending market prices tend to close near their high, and during a downward-trending market, prices tend to close near their low. Analyst favors this indicatorthe indicator tells in advance when a stock has moved into an overbought oroversold territory. The indicator is highly popular as it is easy to perceive with ahigh degree of accuracy. There are two l ine namely K l ine & D l ine. The K l ine isthe fast l ine and the D l ine is the slow line. In order to generate signals from theindicator, the investor needs to see the movement of the D l ine and when theprice of the issue begins to change and move into either the overbought (over the80 l ine) or the oversold (under the 20line) posit ions.Q And what about Wil l iamss % R?A. It is also one of the interesting indicators to predicting stock movement.Wil l iams %R, developed by Developed by Larry Wil l iams, is a momentum indicatorthat works much l ike the Stochastic Oscil lator. The indicator is popular formeasuring overbought and oversold levels. The scale ranges from 0 to -100 withrange from 0 to -20 considered overbought, and range from -80 to -100considered oversold. It, is also sometime referred to as %R, shows therelationship of the close price in relation to the high-low range over a set periodof t ime. The nearer the close is to the top of the range, the nearer to zero(higher) the indicator wil l be. The nearer the close is to the bottom of the range,the nearer to -100 (lower) the indicator wil l be. If the close equals the high of thehigh-low range, then the indicator wil l show 0 (the highest reading). If the closeequals the low of the high-low range, then the result wil l be -100 (the lowestreading).The mathematical calculation involved is:%R = (high over period - close) / (high over period low over period)Generally, 14 days period is used while any time period can be used according tothe perception of the analyst. The indicator in advance indicates that the stock isin the overbought zone or in oversold zone. If it is in overbought zone then itmeans that prices are high compared to its average prices and hence time to exit


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& if it in oversold zone then it means that prices are low compared to its averageprices and hence time to enter.

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