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Concept of
Fundamental Analysis
It is the examination of various factors such as
earnings of the company, growth rate and risk
exposure that affects the value of shares of a
company.
Fundamental analysis (E-I-C) consists of:
Economic analysis
Industry analysis
Company analysis
Economic Analysis
It is the analysis of various macro economic factors
that have a significant bearing on the stock market.
The various macro economic factors are:
Gross Domestic Product (GDP)
Savings and investment
Inflation
Interest rates
Budget
Tax structure
Economic Forecasting
Forecasting the future state of the economy is needed for
decision making.
The following forecasting methods are used for analyzing the
state of the economy:
Economic indicators: Indicate the present status, progress or slow
down of the economy.
Leading indicators: Indicate what is going to happen in the
economy. Popular leading indicators are fiscal policy, monetary
policy, rainfall and capital investment.
Coincidental indicators: Indicate what the economy is — GDP,
industrial production, interest rates and so on.
Lagging indicators: Changes occurring in leading and coincidental
indicators are reflected in lagging indicators. Unemployment rate,
consumer price index and flow of foreign funds are examples of such
indicators.
Diffusion index: It is a consensus index, which has been constructed
by the National Bureau of Economic Research in USA.
Industry Analysis
It is used to analyze the performance of the industries over the
years.
An industry is a group of firms that are engaged in the
production of similar goods and services.
Industries can be classified into:
Growth industry: Has high rate of earnings and growth is
independent of business cycle.
Cyclical industry: Growth and profitability of the industry move
along with the business cycle.
Defensive industry: It is an industry which defies the business cycle.
Cyclical growth industry: It is an industry that is cyclical and at the
same time growing.
An investor must analyze the following factors:
Growth of the industry Cost structure and profitability
Nature of the product Nature of the competition
Government policy
Company Analysis
In company analysis, the growth of the company is
analyzed by the investor so that the present and future
value of the shares can be known.
The present and future value of shares is affected by a
following number of factors such as:
Competitive edge of the company
Market share
Growth of sales