Stock Valuation and Investment Strategies

• Equity investments represent ownership in a company, offering potential returns through dividends and capital appreciation.
• Stock valuation involves determining the intrinsic value of a company's stock.
• Portfolio management is the process of making decisions about what assets to invest in, with the goals of maximizing returns and minimizing risk.
• Financial analysis is the assessment of the viability, stability, and profitability of a business, sub-business or project.
• Market risk assessment involves evaluating potential losses due to market fluctuations.
• Investment strategies are the approaches investors use to select and manage investments.

Stock Valuation

• Stock valuation aims to estimate the fair value of a stock.
• Common valuation methods include discounted cash flow (DCF) analysis, relative valuation, and asset-based valuation.
• DCF analysis projects future cash flows and discounts them back to present value.
  • The formula typically uses: Free Cash Flow to Firm (FCFF) or Free Cash Flow to Equity (FCFE).
  • The discount rate is usually the Weighted Average Cost of Capital (WACC) for FCFF or the cost of equity for FCFE.
• Relative valuation compares a company's valuation multiples to those of its peers.
  • Common multiples include Price-to-Earnings (P/E), Price-to-Sales (P/S), and Enterprise Value-to-EBITDA (EV/EBITDA).
• Asset-based valuation determines a company's value based on the net asset value of its assets.

Portfolio Management

• Portfolio management involves constructing and managing a collection of investments to meet specific goals.
• Key steps include setting investment objectives, determining asset allocation, selecting securities, and monitoring performance.
• Asset allocation is the distribution of investments across different asset classes.
  • Common asset classes include stocks, bonds, and cash.
• Diversification is a key strategy to reduce risk by spreading investments across various assets.
• Active portfolio management involves actively trading securities to outperform a benchmark.
• Passive portfolio management involves replicating the performance of a benchmark index.

Financial Analysis

• Financial analysis assesses a company's financial performance and health.
• It involves analyzing financial statements: the income statement, balance sheet, and cash flow statement.
• Ratio analysis is used to evaluate various aspects of a company's performance.
  • Profitability ratios measure a company's ability to generate profits (e.g., Net Profit Margin, Return on Equity).
  • Liquidity ratios measure a company's ability to meet short-term obligations (e.g., Current Ratio, Quick Ratio).
  • Solvency ratios measure a company's ability to meet long-term obligations (e.g., Debt-to-Equity Ratio, Times Interest Earned).
  • Efficiency ratios measure how efficiently a company uses its assets (e.g., Inventory Turnover, Asset Turnover).
• Trend analysis involves examining financial data over time to identify patterns and trends.

Market Risk Assessment

• Market risk is the risk of losses due to changes in market conditions.
• Types of market risk include:
  • Equity risk: the risk associated with changes in stock prices.
  • Interest rate risk: the risk associated with changes in interest rates.
  • Currency risk: the risk associated with changes in exchange rates.
  • Commodity risk: the risk associated with changes in commodity prices.
• Beta measures a stock's volatility relative to the overall market.
  • A beta of 1 indicates that the stock's price will move in line with the market.
  • A beta greater than 1 indicates that the stock's price will be more volatile than the market.
  • A beta less than 1 indicates that the stock's price will be less volatile than the market.
• Value at Risk (VaR) is a statistical measure of the potential loss in value of an asset or portfolio over a specific time period.
• Stress testing involves simulating extreme market scenarios to assess the potential impact on a portfolio.

Investment Strategies

• Investment strategies are plans for how to allocate and manage investments to achieve specific goals.
• Common investment strategies include:
  • Value investing involves buying stocks that are undervalued by the market.
  • Growth investing involves buying stocks of companies with high growth potential.
  • Income investing involves buying investments that generate regular income (e.g., dividends, interest).
  • Momentum investing involves buying stocks that have recently experienced high price appreciation.
  • Contrarian investing involves buying stocks that are out of favor with the market.
• Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of the price.
• Tactical asset allocation involves making short-term adjustments to asset allocation based on market conditions.
• Strategic asset allocation involves setting a long-term target asset allocation and rebalancing periodically.