security analysis

The evaluation of an organisation and its prospects from the perspective of an investors in the firm's shares
One step closer to maximising an investor's objectives
1. investor objectives must be matched with the appropriate investment. Savers depend on risk tolerance, tax rates, stages of life, other assets, income and age.
2. Managed funds have become popular investment vehicles for savers to achieve their investment objectives. They sell shares in a professionally managed portfolios
  1. Sell side analysts are within an investment bank which constraints their choices of firms to follow. However fun managers have freedom to focus on any firm
conducted by an analyst to identify mispriced shares in the hope of generating more returns to compensate investors for risk.
1. However some analysts just gain an appreciation of how a security affects the risk of a portfolio & whether it fits the profile of the portfolio instead.
2. Identifying mispricing requires a comparison of the analysts' expectations with those of the market
Analysts use financial statements. Thus the users are:
1. Buy side Analysts: Final owners of securities because they have funds to invest. The money comes from mutual funds, units trust, insurance
2. Sell side analysts: These are brokers that generate commission and increase trading activity. They have an incentive to make every stock look goods. e.g. investment banks
  1. optimistic with their forecasts because they are compensated for their trading activity thus encourage buying.
    1. they have Superior performance because they recommend purchasing small, less liquid shares. focus on short term perfomance
3. Individuals: can do their own evalutions
4. Valuers/consultants: give info on a trasnaction
5. tax authorities
6. credit managers: lending officers. Determine how much credit to lend
Efficient market hypotheis posits that security prices incorporate new information immediately upon release
1. The expected return on any equity security is enough to compensate investors for the unavoidable risk the security involved. Such a risk cannot be diversified away by holding the portfolio
2. Cannot represent equilibrium because this hypothesis means investors have no need to identify mispricing of stock but accept that info is already reflected in prices thus mispricing goes uncorrected and markets are inefficient
  1. Mispricing should be present to provide incentive for investment of resources representing equilibrium. It also means security analysis is subject to the laws of supply and demand
3. Advantages : prices are fair, not too high or too low. Share prices adjust quickly to new prices.
  1. Disadvantages: it assumes information is free thus we all have equal access to it. Costlessly translated into demand for buys or sells, no friction such as transactions costs, commissions, taxes and homogenous expectations.
4. Evidence: hard to identy analyst who have had constant abnormal returns. Athough response is quick, initial reaction tends to be incomplete
5. It says you cant beat the market because all information is incorporated into the price already. Thus be a passive investor who buys funds that mimic the market at a low cost.Weak form(past information - public), semi strong form(past and present - market info), strong form (public and private). EMH is believed to be the strong form cos all info is incorporated whether past, private or public.
  1. can be incorrect because all investors view information differently thus diff stock valuation, stocks take time to respond new info thus investors who react first can take advantage, stock prices be affected by human error. Info is not free either and easily accessible, so is the benefit> cost?
6. Approaches to management of funds
  1. Active management: keeps the market honest. believes funds managers can make good choices, cover costs and beat the market. there is also a fee. Relies heavily on security analysis to identify mispriced securities. it sues approaches such ...
    1. fundamental analysis evaluates current prices relative to projections of a firm's future earnings and cash flow generating potential. it involves bsns, accounting and financial analysis
      1. Fundamental preferred bc of human judgement
    2. Quantitative approaches uses techniques such as regression analysis to predict future share returns
    3. Technical analysis predicts future share price based on past information of price movements
  2. Passive manager serves as a price take, avoiding all costs of security analysis
  3. Informal valuations are consensus forecasts (the avg forecasts on individuals analysts at a point in time - diversifies away individual errors)
After forecasts and further analysis has been made, final product is a recommendation from the analysts to buy, sell or hold.
1. They are often short term recommendations because of investment risks associated with long term
Behavioural finance:These people believe markets are not efficient because of systematic biases in people's interpretive information. Rational people think at the border thus consider past information, and buy assets When past returns have good and sell when the past returns have been bad.
1. Contrarian strategy: An unpopular decision to buy assets when they are performing poorly, and then selling when they are performing good. When stock prices are going down this investor sees he stock prices at misprices that they can capitalize on. Thus they buy when they are doing badly then sell when performing well. to gain profits.

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	Created by Cicii over 8 years ago