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Common Stock Types of A Common Stock: Q1. Define EIC Analysis. Discuss The Various Components of EIC Framework

EIC analysis examines the economic, industry, and company conditions to evaluate investment opportunities. It first analyzes the overall economic environment to determine attractive industries. Then it assesses industry dynamics like competitive forces and impact of suppliers and buyers. Finally, it analyzes specific companies within industries to evaluate strengths, products, profitability, and approach to investing like value or growth. The three components together provide a framework to identify investment opportunities with the best risk-return profile given economic and market conditions.

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Ashutosh Mohanty
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2K views

Common Stock Types of A Common Stock: Q1. Define EIC Analysis. Discuss The Various Components of EIC Framework

EIC analysis examines the economic, industry, and company conditions to evaluate investment opportunities. It first analyzes the overall economic environment to determine attractive industries. Then it assesses industry dynamics like competitive forces and impact of suppliers and buyers. Finally, it analyzes specific companies within industries to evaluate strengths, products, profitability, and approach to investing like value or growth. The three components together provide a framework to identify investment opportunities with the best risk-return profile given economic and market conditions.

Uploaded by

Ashutosh Mohanty
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Q1. Define EIC Analysis. Discuss the various components of EIC Framework.

EIC Analysis is nothing but Economic Industry Company analysis is in security selection process, a
traditional approach EIC analysis is the abbreviation of economic, industry and company. The person
conducting EIC analysis examines the conditions in the entire economy and then ascertains the most
attractive industries in the light of the economic conditions. At last, the most attractive companies within
the attractive industries are pointed out by the analyst.
Below are the further details of the components of EIC analysis, which analysts
always consider before choosing or reaching any decision about any business:
1. Economic Analysis: Every common stock is susceptible to market risk. This feature of almost all types
of a common stock indicates their combined movement with the fluctuations in the economic
conditions towards the improvement or deterioration. Stock prices react favourably to the low
inflation, earnings growth, a better balance of trade, increasing gross national product and other
positive macroeconomic news. Indications that unemployment is rising, inflation is picking up or
earnings estimates are being revised downward will negatively affect the stock prices.
When there is a recession in the economy, the prices of stocks move downward.
All the companies suffer the effects of recession despite the fact that these are high performing
companies or low performing ones. Similarly, the stock prices are positively affected by the boom
period of the economy. The main objective of economic analysis is to find out whether or not the
economic entity is allocating its resources most cost-effectively or not. Economic analyses factor in the
opportunity costs that people or companies employ. They measure, in monetary terms, what the
benefits of a project are to the economy or community.

2. Industry Analysis: It is clear there is a certain level of market risk faced by every stock and the stock
price decline during the recession in the economy. Another point to be remembered is that the
defensive kind of stock is affected less by the recession as compared to the cyclical category of stock. In
the industry analysis, such industries are highlighted that can stand well in front of adverse economic
conditions.
The bargaining power of suppliers has also a substantial influence on the
profitability of the company. The supplies for manufacturing products are required by the company and
it does not have sufficient control over the costs. The company can’t increase the price of its finished
products to cover the increased costs due to the presence of powerful buyer groups in the market of
substitute products. So while conducting industry analysis, the presence of powerful suppliers should
be considered as negative for the company. The above considerations of industry structure should be
analysed by the investor to estimate the future trends of the industry in light of the economic
conditions. When a potential industry is identified then comes the final step of EIC analysis which is
narrower relating to companies only.

3. Company Analysis: It is a process carried out by investors to evaluate securities, collecting info related
to the company’s profile, products and services as well as profitability. It is also referred as
‘fundamental analysis.’ A company analysis incorporates basic info about the company, like the mission
statement and apparition and the goals and values. During the process of company analysis, an
investor also considers the company’s history, focusing on events which have contributed in shaping
the company.
A company analysis looks into the goods and services proffered by the company. If
the company is involved in manufacturing activities, the analysis studies the products produced by the
company and also analyses the demand and quality of these products. Different analysts have different
approaches to conducting company analysis like:
 Value Approach to Investing
 Growth Approach to Investing

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