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6 Security Analysis

This document discusses security analysis and stock valuation. It explains that security analysis involves gathering information to determine a stock's intrinsic value based on estimates of future cash flows, the discount rate, and risk. It also discusses fundamental analysis, which examines a company's financial statements and performance to understand the business and assess whether the stock is under or overvalued. Finally, it covers technical analysis, which studies market forces and uses charts to identify trends and make predictions about stock prices.

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Yahia Marah
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39 views4 pages

6 Security Analysis

This document discusses security analysis and stock valuation. It explains that security analysis involves gathering information to determine a stock's intrinsic value based on estimates of future cash flows, the discount rate, and risk. It also discusses fundamental analysis, which examines a company's financial statements and performance to understand the business and assess whether the stock is under or overvalued. Finally, it covers technical analysis, which studies market forces and uses charts to identify trends and make predictions about stock prices.

Uploaded by

Yahia Marah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Dr.

Yahia Fares University


Business Faculty
Economic Department
Master 1
Teacher: Mrs. ARAB HERICHE

Security Analysis

Security analysis consists of gathering information, organizing it into a


logical framework, and then using the information to determine the inherent or
intrinsic value of a common stock. That is, given a rate of return that’s
compatible to the amount of risk involved in a proposed transaction, intrinsic
value provides a measure of the underlying worth of a share of stock. It provides
a standard for helping you judge whether a particular stock is undervalued, fairly
priced, or overvalued. The entire concept of stock valuation is based on the
belief that all securities possess an intrinsic value that their current market or
trading value must approach over time.

Ultimately, intrinsic value depends on several factors:


1. Estimates of the stock’s future cash flows (the amount of dividends you
expect to receive over the holding period and the estimated price of the
stock at time of sale).
2. The discount rate used to translate these future cash flows into a present
value.
3. The amount of risk embedded in achieving the forecasted level of
performance.

I. Fundamental Analysis:
Fundamental analysis is the study of the financial affairs of a business for
the purpose of better understanding the nature and operating characteristics of
the company that issued the common stock. Fundamental analysis rests on the
belief that the value of a stock is influenced by the performance of the company
that issued the stock. If a company’s prospects look strong, the market price of
its stock is likely to reflect that and be bid up. However, the value of a security
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depends not only on the return it promises but also on the amount of its risk
exposure. Fundamental analysis captures these dimensions and conveniently
incorporates them into the valuation process. It begins with a historical analysis
of the financial strength of a firm. Using the insights obtained, along with
economic and industry figures, an investor can then formulate expectations
about the future growth and profitability of a company.

In the historical (or company analysis) phase, the investor studies the
financial statements of the firm to learn the strengths and weaknesses of the
company, identify any underlying trends and developments, evaluate operating
efficiencies, and gain a general understanding of the nature and operating
characteristics of the firm. The following points are of particular interest:

1. The competitive position of the company.


2. Its composition and growth in sales.
3. Profit margins and the dynamics of company earnings.
4. The composition and liquidity of corporate resources (the company’s
asset mix).
5. The company’s capital structure (its financing mix).

II. Technical analysis:

Analyzing the stock market is known as technical analysis and involves a


study of the various forces at work in the marketplace itself. For some investors,
it’s another piece of information to use when deciding whether to buy, hold, or
sell a stock; for others, it’s the only input they use in their investment decisions;
and for still others, technical analysis, like fundamental analysis, is regarded as a
big waste of time.

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Charting:
Charting is perhaps the best-known activity of the technical analyst.
Technicians - analysts who believe it is chiefly (or solely) supply and demand
forces that establish stock prices - use various types of charts to plot the
behavior of everything. Charts are popular because they provide a visual
summary of activity over time and, perhaps more important, because (in the eyes
of technicians, at least) they contain valuable information about developing
trends and the future behavior of the market and/or individual stocks.

Bar Charts:
The simplest and probably most widely used type of chart is the bar chart.
Market or share prices are plotted on the vertical axis, and time is plotted on the
horizontal axis. This type of chart derives its name from the fact that prices are
recorded as vertical bars that depict high, low, and closing prices. A typical bar
chart is shown in the figure below. Note that on January 17th, this particular
stock had a high price of 44, had a low of 20, and closed at 28.

60
Key
50

40 High price

30 Closing price
20
Low price
10

The main advantage of using a bar chart is that it shows results very
clearly. At a glance the reader can get a general feel of the information and
identify any trends or changes over the time period.

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Terminology:

Security analysis analyse des titres ‫تحليل األوراق المالية‬

Intrinsic value la valeur intrinsèque ‫القيمة الجوهرية‬

The discount rate le taux d’actualisation (d’escompte) ‫معدل الخصم‬

Fundamental analysis analyse fondamentale ‫التحليل األساسي‬

The performance la performance ‫األداء‬

The financial statements états financiers ‫القوائم المالية‬

Technical analysis analyse technique ‫التحليل الفني‬

Closing price le prix de clôture ‫سعر اإلغالق‬

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