Investment Analysis Basics

• Investment varies based on context, defining it within this course is important.
• The course concentrates on securities market investments, specifically financial assets.
• This course is relevant to foreign portfolio investments in Pakistani securities markets.
• The course aims to benefit both individual investors and professional money managers involved in Pakistan's institutional investments.

Three Questions Faced by Investors

• Investors or institutions deal with 3 questions about securities market investments.
• What to buy?
• What combination to buy?
• When to buy?
• The course will cover these questions in detail, including needed analytical skills.

Question One: What to Buy (or Sell)

• A common answer to "what to buy/sell" is securities that increase wealth.
• Increase in share price makes you wealthy because it create a positive rate of return.
• Taking a 'long position' in securities expected to increase in price is recommended.
• Selling shares now and buying when the price later drops can also generate positive returns.
• Wealth can increases by taking the appropriate long or short position based on price forecasts.
• W₁ = Wo (1 + ROR) represents wealth (W1) after one period, based on initial wealth (Wo) and the rate of return (ROR).
• ROR (Rate of Return) is written in decimal form in the formula
• Wealth (W) refers to owners equity, not including borrowed investment funds.
• A "long position" means securities have been bought but not yet sold.
• An "open long position" exists until the shares are sold.
• "closing a long position" signifies the shares have been sold.
• "Short selling" involves selling borrowed shares, hoping to buy them back cheaper later.
• A "short position" exists when shares are sold first without owning them.
• Closing a short position by buying back shares is called "short covering".
• Profit is made in short selling by buying shares at a lower price than they were sold.
• A long position earns positive ROR if the price increases in the future.
• A short position earns a positive ROR if the price falls in the future.

Example of Long Position

• If you buy shares of a company at Rs 100. It is expected to give 5 rupees cash dividend and you estimate its price after one year would be 105 then
• You can determine expected rate of return (Kc)
• Expected Kc =DPS1/P0 + (P1 - Po)/Po

Example of Short Position

• Wealth can increase by investing in shares likely to decrease in price through short selling.
• Short selling involves selling shares, hoping to repurchase them later at a lower price.
• Short selling requires selling first and buying later, opposite of taking a long position.

Shares to Buy or Short Sell

• Shares whose price will likely fall should be short sold
• Shares whose price is expected to rise, long position should be taken in such shares.
• Regulators sometimes restrict short selling when prices are falling to stabilize markets and prevent speculative selling.

Security Analysis

• Broadly speaking, areas of analysis is called security analysis
• Investors should conduct security analysis before investing.
• There are two types of security analyses

Security Analyses

• In the world of security analyses to increase your wealth, two types of analyses are done
• Fundamental analysis
• Technical analysis.
• The two types of are done to identify mispriced securities.
• Security mispricing indicates the security is overvalued or undervalued at its current market price.
• Overvalued stocks are likely to decline in value while undervalued stocks are likely to increase in value. To earn a positive return on investment (ROI) you should:
• Take a short position in overvalued shares.
• A long position in undervalued shares.
• It is common sense to buy cheap shares and short sell expensive ones
• Saying that a security is currently mispriced implies that there is a fair or just or correct price
• EMH (Efficient Market Hypothesis) says security prices adjust quickly to new information, making it fruitless for investors to find mispriced securities

Market Efficiency Forms

• Weak-form efficiency: Past information is already reflected in prices, making analysis of past data useless.
• Semi-strong form efficiency: Public information, past and present, is incorporated into share prices, so analysis to uncover undervalued or overvalued shares is pointless.
• Strong form efficiency: All public and private information is reflected in share prices, implying analysts cannot find undervalued shares.
• Insiders with private information have been found to make abnormal profits, disproving strong-form efficiency. Although EMH suggests searching for mispriced shares is futile, analysts still try to identify them.
• Analysts believe buying undervalued securities leads to positive ROR because of future price increases.
• Shorting overvalued securities leads to positive ROR because of expected price decreases.
• Analysts expect the market price of undervalued stocks to rise toward fair price.
• Prices of overvalued securities will fall toward fair value.
• Security analysis identifies mispriced securities, crucial for investment decisions.
• Shares must be viewed as mispriced to attract investors.

Fundamental Analysis of Securities

• This type of security analysis aims at estimating a fair value of shares.
• The fair value is compared with the current market price of the shares.
• The decision depends on whether the shares are over or undervalued.
• Corporate Finance covers basics of fundamental securities analysis.
• Fundamental analysis uses financial data from the balance sheet and income statement
• Macroeconomic data like GDP growth or interest rate helps identify mispriced securities.
• Discovering mispricing requires finding a fair value using fundamental data.
• Fair value is also called justified value, intrinsic value, or theoretically correct price
• The estimated fair value is compared to the market price
• If the current price is high then security is overvalued
• If the current price is less than the estimated the security is undervalued
• So fundamental analyses assist investment decisions:
• Buy undervaluing position or take long position.
• Short sell overvalued share, or, take short position.

Theoretically Correct Price or Fair Value of a Share

• Crux of fundamental analysis is estimating a fair value for shares
• It can be done using:
• Gordon's constant growth dividend discount model (DDM)
• Equity cash flows model
• Free cash flows model, accounting valuation model
• PE ratio
• Expected ROR can be symbolized by Kc

Gordon's Model (DDM)

• The Gordon model is a model for Estimating fair value of shares
• It focuses on current value of a shared based on investor expectation.

Finding Fair Value

• Share is currently priced at 120 rupees in the stock market
• Last years ROE share was 24% and dividend payout ratio was 25%
• Expected rate of the share is = 23.9%.
• Calculate expected growth rate etc, and then find dividend payout ratio

Other Methods of Calculating Mispriced Shares

• Use risk Adjusted required rate of return vs expected rate of
• Use PE Ratio to Identify Mispriced Shares

Technical Analysis of Securities

• The focus of technical analysis is not to find value, it focuses on estimating the timing change of trend.
• Here it estimates directions of future prices of share
• That is that expected ROR is only based on future prices etc
• Used by fundamental analysis But differences lie in the methodology used by both
• Technical analysis only includes market generated data.
• Price of share
• Trades of those shares on a specific date, day etc
• There is no way to be definitive about the time frame of the date
• Technical analyses claim the Practitioners of technical
• Technical analysts ability to the timing of sell or buy
• The analyses provides exhaustive treatment to technical analyses not the taste
• Also to know in quantium change in estimate

Types of trends:

• Dow Theory Identifies 3 types of trends in share prices

• Primary Trend: It lasts for along period that can be a some years

• The prices keep what would be either a Long term upward or downward.

• Intermediate trend: Interruptions in prices that may last a few weeks or months.

• Daily Trend: Random movement of prices up or down around trends

• Bulls Market: Successive highs are recorded that are above previous price

• Successive price lows are at higher value.

• It is upward slope and trend in share prices.

• It is stock market wide upturn

• Bears Market: Successive increases in price aren't there and successive falls on a price is a new low in prices.

• Depicts slow downturn prices

Other factors

• Reversal is when the share price is less than previous then uptrend is lost for now.
• Confirmation it means the upward change to downward trend is at Kse 100 which confirmation can be found from similar price change in another for example kse 30 all share
• It the market indicate behavior.
• Correction an Consolidation which offset by some decline which it offset by some consolidation.
• Ater change of correction
• There no significant after correction there was consolidation.
• Psychological price ceiling or resistance level indicates the limit above prices can reach.
• As orders to sell the share is in order so some big prices cant rise about the level
• psychological market price level is which prices will repeatedly hesitate to fall on repeat fall in market
• over brought market depicting unjustified prices to sell and oversold depicting unjustified low prices, so it to buy
• market sentiments are bullish prices keep increasing each day that goes by market
• market sentiments are bearish which is vice versa
• Short interest ratio: Number of shares or one or some average trading ration in.
• To increase share number which some number of shares which ratio
• So shares on a short term is every day
• Contrary Opinion: One liquidity market then is to go or it close then peak after all market
• Therefore then it implies is that peak direction for it to take the down there not selling market
• is the time to get you of market
• Time sell

Analysis and strategy

• Buy signal is the shares if moving average line and on average. To buy shares at what there sell
• If shares
• The over
• And you know
• The day
• And a
• Of the change primary

Generally issue market timing is the long traders daily basis at sent execution

###Final Thoughts on Security Analyses

• Security analyses helps identify stocks promising wealth increase, whether undervalued (for long positions) or overvalued (for short positions).
• Focus on the expected ROR
• Also consider risk.
• Remember that risk is an unreliability associated with potential values
• Be aware of the uncertainty of ROR.
• The decision-making you about what, can assist return.

Questions to Ask When determining the right share, in the right combination

• What combination to buy, you should not buy single security.
• It is too take it easy and similar putting one is too risky if you eggs are damages
• You will stand too big you can not to make shares and company you.
• Just not it you may important in securities won't
• And modern better buy

Question Three: What to when or sells

• This is a question about correciting the limit, and the asset

• The answer it will correct in what

• And there and not today and can you

• Market exit time when you ability a is to you with stock for your all in 1/1.

• This can buy before Ror is and your the higher are for be that on a more higher.

• Market

Examine the key principles of investment analysis, including going concern value, liquidation value, fundamental analysis, and technical analysis. Understand how analysts estimate future stock prices using different methodologies. Differences between technical and fundamental analysis.