What Is Security Analysis?

Security analysis refers to analyzing the value of securities like

shares and other instruments to assess the business's total value,
which will be useful for investors to make decisions. There are three
methods to analyze the value of securities – fundamental, technical,
and quantitative analysis.

Even though the process has its own negative and positive effects, it is
essential to do it so that investors can actively participate in the financial
market. Market conditions, currency and interest rate fluctuations, and
political changes influence the analysis. However, it is necessary to diversify
the portfolio to earn a maximum return.

 Security analysis involves diligently determining the intrinsic value of

securities, such as stocks and financial instruments, to help investors make
well-informed decisions for optimal returns.

 The three primary types of security analysis are fundamental, technical, and
quantitative, each employing distinct methodologies to assess securities'
worth and market trends.

 Security analysis serves the pivotal purpose of enhancing individuals' net

worth by strategically investing their earnings in diverse financial instruments
to achieve profitable outcomes.

 Ethical conduct, competence, and dedication are the guiding principles for
security analysts, ensuring clients' interests are safeguarded and prioritized
throughout the investment process.

Security Analysis Explained

The security analysis process involves the analysis and evaluation of
different financial instruments like bonds, stock, or any other
security where funds can be invested to earn good returns. The
study helps determine the risk and return opportunity, allowing
investors to decide whether they should put their money in them to
make returns or whether there are better opportunities available.
Investing is necessary after considering factors like time horizon,
return expectation, investment objective, and, most importantly,
risk appetite. It is possible to invest funds in an opportunity that is
worth only when proper security risk analysis and evaluation are
done. This can be done by individual investors, analysts, or
professional portfolio fund managers, who are well-informed about
the assessment process and have the necessary competence to
calculate the return and risk.

But even though good analysis is done, there is no guarantee of success in

the process. There may be risks and uncertainties that are not always
possible to predict. Therefore, it is important to diversify the portfolio is order
to minimize risk of losses.

Features
Let us identify and understand the various features of security analysis.

 To value financial instruments like equity, debt, and company

warrants.

 To use publicly available information. The use of insider information is

unethical and illegal.

 Security analysts must act with integrity, competence, and diligence

while conducting the investment profession of doing security risk
analysis.

 Using various analytical tools, including fundamental, technical, and

quantitative approaches.

 Security analysts should place the interest of clients above their

interests.

The securities can broadly be classified into equity instruments (stocks), debt
instruments (bonds), derivatives (options), or some hybrid (convertible
bond). As per the nature of securities, security analysis can broadly be
performed using the following three methods: -

#1 - Fundamental Analysis

The fundamental security analysis is a type of security analysis that is an

evaluation procedure of securities where the primary goal is to calculate
the intrinsic value. It studies the fundamental factors that affect a stock's
intrinsic value, such as the company's profitability statement and position
statements, managerial performance, future outlook, present industrial
conditions, and the overall economy.

#2 - Technical Analysis

This type of security analysis is a price forecasting technique that considers

only historical prices, trading volumes, and industry trends to predict the
security's future performance. It studies stock charts by applying various
indicators (like MACD, Bollinger Bands, etc.), assuming every fundamental
input has been factored into the price.

#3 - Quantitative Analysis

This security analysis is a supporting methodology for both fundamental and

technical analysis, which evaluates the stock's historical performance
through calculations of basic financial ratios, e.g., Earnings Per Share (EPS),
Return on Investments (ROI), or complex valuations like Discounted Cash
Flows (DCF).

Objectives
The primary target of every individual is to increase their net worth by
investing their earnings into various financial instruments, i.e., the creation
of money using the money. Security analysis portfolio
management helps people achieve their ultimate goal, as discussed below:
-

#1 - Returns

The primary objective of the investment is to earn returns in the form

of capital appreciation and yield.

#2 - Capital Gain

Capital gain or appreciation is the difference between the sale and purchase
prices.

#3 - Yield

It is the return received in the form of interest or dividend.

Return = Capital Gain + Yield

#4 - Risk

It is the probability of losing the principal capital invested. Security analysis

avoids risks, ensures capital safety, and creates opportunities to outperform
the market.

#5 - Safety of Capital

The capital invested with proper analysis; avoids the chance of losing
interest and money. Invest in less risky debt instruments like bonds.

#6 - Inflation

Inflation kills one's purchasing power. Inflation over time causes you to buy a
smaller percentage of goods for every dollar you own. Proper investments
provide you with a hedge against inflation. Choose common stocks or
commodities over bonds.

#7 - Risk-Return relationship

The higher the potential return of an investment, the higher the risk. But the
higher risk does not guarantee higher returns.

#8 - Diversification

"Just do not put all your eggs in one basket," i.e., do not invest your whole
capital in a single asset or asset class but allocate your wealth in
various financial instruments and create a portfolio pool of assets. But,
again, the goal is to reduce the volatility risk in a particular asset.

Note: Analyzing securities does not guarantee profits because research is

done with publicly available information. However, contrary to the Efficient
Market Hypothesis (EMH), markets do not reflect all the information
available. Thus security analysts can beat the market using technical and
fundamental approaches.

Risks
Some common risks involved in the process of fundamental security
analysis are as follows:

 Market Risk – Risk like changes in economic and political condition, changes
in interest rate and currency fluctuations and variation in overall market
sentiments influence the securities.
  Credit risk – This refers to the credit worthiness and risk of default by
companies or issuers. Investors may face the risk of not getting payments on
time.

 Liquidity risk – Some investment options may have lock-in period or strict
rules where the investor cannot break it till maturity.

 Risk or timing the market – The analyst may not be able to time the
market and identify the exact entry point where it will be worth investing.
Trying to predict market movement for short term may lead to losses of
missing of opportunity.

Thus, the above are some risks that the investor may face even after
thorough assessment or evaluation.

Security Analysis Vs Intelligent Investor

Both the above concepts refers to books that are written by Benjamin
Graham which cover investment strategies and principles that are interlinked
but at the same time different. Let us study the differences between the two
books.

 The former focuses on analyzing the securities and studying them in-depth to
understand the movements and opportunities of gain or possibility of loss on
investment. But the latter concentrates on investor behavior and the
important of financial discipline.

 In the former, the study covers accounting, fundamental and technical

concepts whereas in the latter, the study covers the mood and approaches of
investors while trading in financial instruments.

 The former stresses more of maintaining the margin of safety and avoiding
speculation. The latter emphasizes more on value investing and not trying to
time the market and, at the same time, looking for undervalued but strong
stocks.
What Are Real Assets?
Real Assets are tangible assets that have an inherent value due to
their physical attributes, and examples include metals,
commodities, land, factory, building, and infrastructure assets. They
are appealing to the investors as they provide good returns, hedge
against inflation, lower covariance with equity investments, and tax
benefits as they can claim depreciation on assets.

Real assets add to the investor’s portfolio value by maximizing

returns and diversifying risks as they have lower covariance with
other financial asset classes like shares and debt bonds. It is the
physical nature and characteristics of the underlying assets that
determine the value of these assets.

Real Assets Explained

Real assets are one of categories in which assets exist, the other
two being the financial assets and intangible ones. It provides a
steady and stable income to its investors, maximizing returns and
diversifying risks, which in many ways balances the portfolio of
investors as these assets have a negative correlation with other
assets. But it requires huge capital investments and other risks as
well.

Financial assets are liquid assets that hold value through ownership
rights in the paid-up capital of any company. They hold some
intrinsic value to a company or retail investor as they can be traded
for cash and hence are deemed assets. Intangible assets do not
have a physical form like brands, patents, or trademarks. Still, a
brand holds value to any business entity as it brings in patronage in
the form of customers and adds goodwill to a business because of
the brand identity through which it identifies itself in the market and
sets it apart from others in the market. Financial assets are liquid
assets that hold value through ownership right in the paid-up capital
of any company.

Stocks, Long term debt bonds, bank deposits, or cash are classic
examples of financial assets. Most companies hold a mix of tangible
and financial assets. For example, a company may own a motor car,
factory land, and building. However, it may also have certain
intangible assets like patents, trademarks, and intellectual property
rights. Lastly, the company may have investments in its subsidiary
companies, termed financial assets. Stocks, Long term debt bonds,
bank deposits, or cash are classic examples of financial assets. A
mix of assets provides a good hedge against market risks as
physical assets move in the opposite direction than financial assets.
Real assets provide more stability but less liquidity as compared to
financial assets.

Types
Real assets are properties that are tangible, i.e., can be touched,
have longevity, involve high transaction cost, and acquire a physical
location. The assets that exhibit these characteristics are
categorized as real property. Listed below are some of the types of
such assets. Let us have a quick look at the classification:

Land

When one owns a land, it is considered a significant tangible asset.

This can either be used to build one’s own residential or commercial
structure or building or it could be sold to real estate developers to
earn a lump sum at once. Homeowners can also have their own
house developed on the land, which they may put on rent for a
regular cash inflow. They have longer lifespan and in case of
damages, there is an option of renovation or repairs to increase
longevity.

Infrastructure

The next on the list is the architectural developments that are initiated from
time to time. Beginning from public facilities to transports, every single
structure that is built is a real tangible asset. Though it involves a lot
expenditure initially, they help in acquiring intangible assets in favor,
including goodwill and improved reputation.
Collectibles

Collecting antiques, art pieces, and vintage items is yet another type of real
property. These collectibles can be sold to authorities that want to preserve
such items in museums or share at exhibitions. In return, the owners get a
chance to earn significant cash flow.

Natural Resources

Natural resources, which seem to decline in quantity in the future, are the
next types of tangible assets on the list. These include energy resources,
minerals, etc. These help in capital appreciation and let investors hedge
against inflation whenever required.

Examples
Let us consider the following instances to understand the real assets
definition better:

Example 1

A company owns real estate properties, and the fleet of vehicles and office
buildings are real properties. However, it is a brand name that is not a
physical asset, even if it has a market value. For investors, these assets
become elements that provide hedging against inflation, currency value
fluctuation, and other macroeconomic factors.

Example 2

On October 3, 2023, a report claimed that the market is about to witness a

turmoil. Bank of America’s chief investment strategist Michael Hartness
advised individuals and entities to stay more in real assets than financial
assets as the former would be more dependable in the market trauma that is
about to hit the US dollar. He came to the above calculation after observing
how the government is spending high and making monetary policies more
accommodative. He specified that the current spending is even lower than
the level maintained during the COVID-19 pandemic. He added that the
levels of spending are similar to what was witness during the 2008 financial
crisis.

Advantages
Real assets are assets that exist in physical form and help investors earn
significantly whenever they invest in them. This is what make these assets
preferable in the market over other forms of assets. Let us have a look at
some of the vital benefits that these assets bring to the table:

 These assets have the advantage of stability as compared to financial assets.

Inflation, currency valuation, and macro-economic factors have more bearing
on finances than real.

 It has a strong negative correlation with financial markets.

 They are not dependent on financial market volatility. It is a profitable

investment alternative for risk diversification and offers profitability, not
related to or dependent on financial markets.

 They are a good hedge against inflation. When inflation is high, asset prices
go up.

 Unlike the capital market, the real asset market is complete with
inefficiencies. There is a lack of knowledge that makes the potential for profit
high.

 It can be leveraged wherein real physical assets can be bought with debt.

 Cash flow from physical assets like land, plant, and real estate projects
provides the investors with sound and steady income streams.

Disadvantages
Despite having multiple merits, there are some aspects, which when
considered restrict individuals and entities from investing in them. Below are
some of the points that clearly state the demerits of these asset types. Let
us have a look at them:

 It has high transaction costs. When we buy shares or stocks, the transaction
costs are lower. But when buying it, the transaction costs are relatively high.
The transaction costs can affect the value of investments, and it may not be
easy to make a profit. It has low liquidity.

 Unlike financial assets that can be traded within a few seconds, these assets
are comparatively less liquid as land and building capital assets can’t be
easily traded without significant loss in value.

 Capital gains tax is applicable on the sale of real physical assets at a higher
price. A property sold within three years of purchase will be subject to short-
term capital gains tax, but long-term capital gains tax is applicable if sold
after three years.

 The capital asset to be bought requires high capital investment. Because of

high capital costs buying and selling it becomes a challenge. It is why people
generally rely on borrowed funds to buy real tangible assets.
  They also have higher maintenance costs than other forms of assets. The real
assets investment is illiquid and locks up a huge sum of capital, which is
difficult to redeem.

Real Assets vs Financial Asset

Financial assets include stocks, bonds, and cash, while real ones are real
estate, infrastructure, and commodities. Assets are the backbone and
lifeblood of the economy, enabling us to create wealth.

Let us check out the difference between real assets and financial assets
below:

 Financial Assets are highly liquid assets that are either in cash or can be
fast converted to cash. They include investments such as stocks and bonds.
The major feature of financial assets is that it has some economic value that
is easily realized. However, by itself, it has lesser intrinsic value.

 On the other hand, real physical assets are value-driven physical assets that
a company owns. They include land, buildings, motor cars, or commodities.
Its unique feature is that they have intrinsic value by themselves and don’t
rely on exchanges to have value.

The similarities between real and financial assets are that their valuation
depends on their cash flow generation potential.

The difference between them is that the real ones are less liquid than
financial assets since the former are difficult to trade, and they don’t have a
competitive and efficient exchange. They are more location-dependent,
whereas financial assets are more mobile, making them independent of their
location.

Intangible Assets Meaning

Intangible asset is an asset which does not have any physical existence and
cannot be touched like goodwill, patents, copyrights, franchise etc. They are
long-term or long living assets as they are used included for more than 1
year by the company.

 It is very difficult to value the intangible assets on the balance sheet as it will
not be having any defined value like other tangible assets. It not recorded in
the balance sheet of the organization if it is internally created, but if they are
acquired, then it will be recorded in the balance sheet of the organization.

 If any organization spends more money on advertising and creating a brand

name for the organization, even after spending also, the asset will not be
considered in the balance sheet.
Intangible Assets Types

#1 - Goodwill

Below is the Goodwill amount reported by Google Inc from all its acquisitions.

It is a type of assets that are recognized and valued when one entity tries to
acquire the other entity. Goodwill is a separate kind of intangible assets
where goodwill is never amortized. But other intangibles are amortized.

Goodwill Formula =Acquiring cost of the business – Net asset value

of the company.

The management of the organization is responsible for the valuation of the

goodwill of the organization every year. When the company acquires another
company, then the acquired goodwill should be mentioned in the balance
sheet. For example company, A is purchasing company X for Rs 2000000,
and the net asset value is Rs 1500000. So the difference Rs 500000 is
treated as goodwill.

#2 - Copyrights

Copyright is a type of asset with the legal rights of the creator of the original
work. This exists in many countries. By obtaining this right, the original work
can be used by the one who obtains the right to use the work. E.g., journals,
books, magazines, etc.

#3 - Trademarks

source: Google 10K

Trademark is used to legally protect the logo, brand name, sign, and design
of a firm. The trademark owner can be an individual, partnership firm, or any
kind of legal entity. Trademark protects the trademark owners from others
using it.

#4 -Patent

Patents provide the owner right from others using, selling, importing from
using the invention or the product for years. Where one company can
purchase the patent from other companies and can use, invent, or develop
the product.

Characteristics
 Lack of existence, where it cannot be seen, touched, or even feel.

 It should be identifiable.

 Intangible assets can be acquired or purchased, and even they can be

licensed, leased, or rented.

Uses/Advantages
  General intangible assets can be purchased and sold like copyrights of the
musicians or artists sale copyrights of music or album.

 They are used to increase the sale value. Goodwill of the company can lead
to an increase in the price of the product of the company.

 Suppose the business has the patents and trademark. The company can
license the patents to others who can produce products for them.

 Amortization of the intangible assets: This allows spreading the expenses

across the life span of the intangible. The collective amortization expense of
several years reduces the business income during the year. Thus the
business tax will also get reduced. Amortization of it is used for both
accounting purposes and tax purposes.

 It provides identity to the company even if the value of the intangibles is

valued less when compared to the tangible assets. Where if the brand name
is stronger, it helps in creating a new set of customers to the products. The
value of intangibles is important for company growth and development.

Advertisement
Disadvantages
 Internally generated goodwill is not recorded in the balance sheet of the
business. It is difficult for all to understand the value of these intangible
assets.

 The exact value of these assets cannot be derived easily.

 Intangibles need to be constantly monitored like a half year or yearly so that

they can find an approximate value of those assets.

 Sometimes it can bring the overvalue to the organization.

Intangible Assets Valuation

The following are three major methods of intangible asset valuation.

#1 - Income Approach

This approach is mainly used on the assets which produce income or

generates cash flow. Income approach converts the total amount to a single
discounted amount for a particular period. Difficulty in this approach is to
distinguish the cash flow, which is linked to a particular intangible asset.
#2 - Cost Approach

The cost approach considers the historical cost and the estimated cost. It
usually ignores the amount, time, and risk of performance of a competitive
environment. This cost includes the new reproduction cost of the product
and the current cost of a similar new property.

#3 - Marketable Approach

This approach is based on the value of the similar intangible asset. This
market data is used in the income-based model as well. The direct market
source is available on the internet, which is very useful to compare the
market value. It involves buying, selling, leasing, and licensing.

Conclusion
The intangible asset on the balance sheet is one of the important parts of the
organization as they are the long-term assets that will be with the
organization until the end of the organization. It is very difficult to derive the
value of it as they cannot be seen or feel. It is very difficult to estimate or to
value the assets. This helps the organization to internally develop the assets
or acquire the assets from other organizations or even can take those assets
for lease or rent.

What Are Financial Markets?

Think of financial markets like big malls—but instead of buying clothes or groceries, people
buy and sell money-related items like:

 Stocks (shares of companies)

 Bonds (loans you give to companies or government)
 Currencies (foreign money)
 Commodities (gold, oil, corn, etc.)
 Cryptocurrencies (Bitcoin, Ethereum, etc.)
  Derivatives (contracts based on other financial things)

Why Are Financial Markets Important?

They help match two types of people:

 People who have extra money (investors or savers)

 People who need money (companies, governments, etc.)

💡 Example: You have ₱10,000 saved up. A company needs money to build a new store.
Through the stock market, you can buy shares in the company. Now you own a small piece, and
the company uses your money to grow!

Types of Financial Markets (With Simple Examples):

1. Stock Market

This is where you buy and sell company shares (called "stocks").

 Example: If you buy a share of Jollibee, you become part-owner. If the company earns
more, the value of your share increases.

2. Bond Market

This is where companies or the government borrow money from the public and promise to pay
it back with interest.

 Example: You lend ₱5,000 to the government by buying a bond. After a year, they pay
you back ₱5,000 plus interest.

3. Forex Market (Foreign Exchange)

This is where people trade different currencies.

 Example: A tourist exchanges US dollars for pesos. A business imports goods from
Japan and pays in yen.

4. Money Market

This market deals with short-term, low-risk investments (usually less than a year).

 Example: You put money in a money market account, and the bank lends it out overnight
to earn a small interest.
5. Derivatives Market

This is where people trade contracts based on the future price of something like stocks, gold,
or oil.

 Example: A farmer wants to lock in a price for his corn harvest, so he signs a contract
(called a future) to sell it later at today’s price.

6. Commodity Market

This is where physical goods like gold, oil, and crops are traded.

 Example: Coffee farmers sell coffee beans at market prices; companies buy oil for fuel.

7. Cryptocurrency Market

This is where people buy and sell digital money, like Bitcoin.

 Example: You buy Bitcoin for ₱3,000 today. If it becomes worth ₱5,000 tomorrow, you
can sell it and earn ₱2,000.

Real-Life Examples of Financial Markets in Action:

✅ Initial Public Offering (IPO)

 A company wants more money to grow.

 It offers shares to the public for the first time (IPO).
 People buy shares → company gets cash → investors get a piece of ownership.

❌ 2008 Financial Crisis (OTC Derivatives)

 Banks created complex contracts (called CDOs) based on risky home loans.
 When people couldn’t pay those loans, the value of the contracts dropped.
 Banks lost tons of money → economy crashed.

The Bottom Line

Financial markets are where money flows to grow. Without them:

 Businesses wouldn’t grow.

 Governments couldn’t fund projects.
 People couldn’t invest their savings.
📝 Think of it as a giant financial highway—moving money from where it’s saved to where it’s
needed most.