Definition of Technical Analysis Technical analysis is the process of utilizing past trading information and stock price trends related to a specific security, and then equating those to how other likewise investments have responded throughout history to similar patterns. Further, when a pattern is identified, the investor can predict that the future pricing of the target investment is likely to respond in a similar manner to patterns observed earlier. Technical analysis of stocks assumes that current prices should represent all known information about the markets. Prices not only reflect intrinsic facts, they also represent human emotion and the pervasive mass psychology and mood of the moment. Prices are, in the end, a function of supply and demand. However, on a moment to moment basis, human emotions,fear, greed, panic, hysteria, elation, etc. also dramatically affect prices. Markets may move based upon people’s expectations, not necessarily facts. A market “technician” attempts to Continue reading
Investment Analysis
The National Stock Exchange of India Limited (NSE)
The National Stock Exchange of India Limited (NSE) was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices and procedures. The National Stock Exchange of India Limited has played a catalytic role in reforming the Indian securities market in terms of micro-structure, market practices and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualisation of stock exchange governance, screen based trading, compression of settlement cycles, dematerialisation and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing Continue reading
Risk and Return in Portfolio Investments
Risk in Portfolio Investments The Webster’s New Collegiate Dictionary definition of risk includes the following meanings: “……. Possibility of loss or injury ….. the degree or probability of such loss”. This conforms to the connotations put on the term by most investors. Professional often speaks of “downside risk” and “upside potential”. The idea is straightforward enough: Risk has to do with bad outcomes, potential with good ones. In considering economic and political factors, investors commonly identify five kinds of hazards to which their investments are exposed. The following are different components of risks associated with portfolio investments: A. Systematic Risk Systematic risk refers to the portion of total variability in return caused by factors affecting the prices of all securities. Economic, Political and Sociological changes are sources of systematic risk. Their effect is to cause prices of nearly all individual common stocks or security to move together in the same Continue reading
Arbitrage Pricing Theory (APT) – Definition and Formula
A substitute and concurrent theory to the Capital Asset Pricing Model (CAPM) is one that incorporates multiple factors in explaining the movement of asset prices. The arbitrage pricing model (APT) on the other hand approaches pricing from a different aspect. It is rarely successful to analyze portfolio risks by assessing the weighted sum of its components. Equity portfolios are far more diverse and enormously large for separate component assessment, and the correlation existing between the elements would make a calculation as such untrue. Rather, the portfolio’s risk should be viewed as a single product’s innate risk. The APT represents portfolio risk by a factor model that is linear, where returns are a sum of risk factor returns. Factors may range from macroeconomic to fundamental market indices weighted by sensitivities to changes in each factor. These sensitivities are called factor-specific beta coefficients or more commonly, Continue reading
Fundamental Analysis of Stocks
Definition of Fundamental Analysis Fundamental analysis of stocks is defined as the practice of examining the fundamentals of an organization in order to determine if a business has turned out to be a good investment. Fundamental analysis aims are answering questions related to the business finance and capital investment, such as “what are the probabilities that this business investment is going to fail or become bankrupt” and “how sure can a portfolio manager be that the stock continues to pay dividends?” In other words, fundamental analysis involves detailed study in regards to financial statements like the balance sheet. It is considered as a complete contrast to technical analysis of stocks. Fundamental analysis of stocks deals with the analysis of the financial, economic, as well as other quantitative and qualitative elements associated with a security with the sole intention of determining its intrinsic value. Even though this technique is employed for Continue reading
Portfolio Selection and Revision in Investment Portfolio Management
Portfolio Selection Portfolio analysis provides the input for the next phase in portfolio management, which is portfolio selection. The proper goal of portfolio construction is to generate a portfolio that provides the highest returns at a given level of risk. A portfolio having this characteristic is known as an efficient portfolio. The inputs from portfolio analysis can be used to identify the set of efficient portfolios. From this set of efficient portfolios the optimum portfolio has to be selected for investment. Harry Markowitz portfolio theory provides both the conceptual framework and analytical tools for determining the optimal portfolio in a disciplined and objective way. Portfolio Revision Once the portfolio is constructed, it undergoes changes due to changes in market prices and reassessment of companies. Portfolio revision means alteration of the composition of debt/equity instruments, shifting from the one industry to another industry, changing from one company to another company. Any Continue reading