Security Analysis Reviewer PDF

Security Analysis Reviewer (Lesson 1-4) International traders needed an accounting system to lock their different national currencies at a specific exchange Lesson 1: Introduction to Security Analysis...

Security Analysis Reviewer (Lesson 1-4) International traders needed an accounting system to lock their different national currencies at a specific exchange Lesson 1: Introduction to Security Analysis rate. “The Fundamental Concepts & Objectives of Security 4 Main Types of Derivative Securities: Analysis” 1. Futures – futures contract is an agreement to buy or sell Concepts Objectives an asset at a future date. Fundamental analysis is a Fundamental analysis method of assessing the helps investors 2. Forwards – Forwards are futures contracts that don’t intrinsic value of a stock. understand the true value trade on an open exchange. Each forward contract is a It combines financial of a stock by looking at its custom contract between the two parties. statements, external financial health and influences, events, and economic factors. 3. Options – The stock option gives you the right, but not the industry trends. It guides them in deciding obligation, to buy or sell the stock at the strike price by the It is important to note that if a stock is priced fairly, expiration date of the option. the intrinsic value or a fair too low, or too high, so value of a stock does not they know whether to 4. Swaps – Swaps are typially used to hedge interest rates. change overnight. buy, keep, or sell it. Type of Securities Hybrid Securities – Hybrid security refers to a security approach that combines different methods, technologies, 1. Debt Securities or strategies to enhance overall protection. 2. Equity Securities 3. Derivative Securities This concept can apply to various areas, including: 4. Hybrid Securities > Cybersecurity – combining traditional security meaures Debt Securities - differ from equity securities in an (like firewalls and antivirus software) with newer important way; they involve borrowed money and the technologies (such as machine learning and AI) to ptovide a selling of a security. They are issued by an individual, more robust defense against evolving cyber threats. company, or government and sold to another party for a > Physical & Digital Security – Integrating physical security certain amount, with a promise of repayment plus interest. measures (like access controls and surveillance systems) They include a fixed amount (that must be repaid), a with digital security measures (such as encryption and specified rate of interest, and a maturity date (the date network monitoring) to protect both physical assets and when the total amount of the security must be paid by). digital information. > Hybrid Security Models – Using a combination of on- Equity Securities - Equity almost always refers to stocks premises and cloud-based security solutions. For example, and a share of ownership in a company (which is possessed a company might use cloud-based threat detection by the shareholder). Equity securities usually generate systems in conjunction with on-premises firewalls and regular earnings for shareholders in the form of dividends. endpoint protection. An equity security does, however, rise and fall in value in accord with the financial markets and the company's > Hybrid Identity Management – Integrating different fortunes. identity management solutions, such as combining single sign-on (SSO) with multi-factor authentication (MFA), to Derivative Securities - are financial instruments whose enhance user verification and reduce the risk of value depends on basic variables. The variables can be unauthorized access. assets, such as stocks, bonds, currencies, interest rates, market indices, and goods. “Role of Security Analysis in Investment Decision- Making” The main purpose of using derivatives is to consider and minimize risk. It is achieved by insuring against price Evaluating Intrinsic Value – this allows investors to assess movements, creating favorable conditions for speculations whether the security is undervalued, overvalued, or fairly and getting access to hard-to-rea markets. priced in the market. Formerly, derivatives were used to ensure balanced Assessing Risk – it enables investors to understand the exchange rates for goods traded internationally. risks associated with a security. Identifying Growth Opportunities – this involves Cash Flow Statement summarizes the amount of cash and examining a company’s business strategies, market cash equivalents entering and leaving a company. Divided position, innovation capabilities, and industry trends to in three main sections: determine whether it is likely to grow and increase its value Operating Activities: this section includes cash over time. transactions related to the core operations of the Making Comparative Analysis – by comparing financial business. ratios, valuations, and performance metrics across Investing Activities: This part reflects cash flows companies or industries, investors can allocate their related to the acquisition and disposal of long-term resources to the most promising opportunities. assets. Financing Activities: This section details cash flows Informing Investment Strategies – security analysis associated with funding the business. informs various investment strategies such as val,ue investing, growth investing, or dividend investing. “Significance & Uses of Financial Statements” Prediciting Future Performance – investors use security Income Statement shows a company's financial analysis to predict the future performance of securities by performance over a specific period, detailing revenues, evaluating past financial performane, industry trends, expenses, and net income, which helps assess profitability macroeconomic conditions, and market sentiment. and operational efficiency. Supporting Portfolio Management – security analyss Balance Sheet provides a snapshot of a company’s assists in portfolio construction and management by financial position at a specific point in time, listing assets, ensuring a well-diversified and balanced portfolio. liabilities, and shareholders’ equity, offering insights into liquidity, solvency, and capital structure. Maximizing Returns – the ultimate goal of security analysis is to help investors maximize returns while managing risk. Cash Flow Statement tracks cash inflows and outflows across operating, investing, and financing activities, helping evaluate a company’s cash-generating abilities and Lesson 2: Financial Statements & Ratio Analysis its capacity to manage debts, invest in assets, and sustain operations. Together, these financial statements give a “Financial Statement” – is a report that shows the comprehensive view of a company’s financial health. financial activities and performance of a business. It is used by lenders and investors to check a business’s financial “Ratio Analysis” Financial ratio analysis is the technique health and earnings potential. of comparing the relationship (or ratio) between two or more items of financial data from a company’s financial There are three main types: statements. 1. Income Statement It is mainly used as a way of making fair comparisons across 2. Balance Sheet time and between different companies or industries. 3. Cash Flow Statement Liquidity Ratios – determine whether an entity can be able Income Statement shows the profitability of your to pay for current liabilities as they become due with the use business. It details how much money your business earned of current assets. and spent. The income statement is also sometimes referred to as a profit-loss statement or an earnings statement. Balance Sheet is also known as Statement of Financial Position. Profitability Ratios – measures how well does an entity It is based on the equation: generates income that relates to their revenues, operating Assets = Liabilities + Shareholders’ Equity cost, assets and capital. Three main sections: 1. Assets 2. Liabilities 3. Owner’s Equity Solvency Ratio – determines whether an entity has more Key Economic Factors: ownership rather than debts. It is also called leverage ratios. These ratios involve comparisons of debt, assets, equity, 1. Economic Analysis and interest. o Unemployment o Inflation Efficiency Ratio – measure how well an entity utilizes their o Interest Rates assets and resources to generate income. o Consumer Confidence Interest Coverage Ratio – is a debt and profitability ratio 2. Industry Analysis shows how easily a company can pay interest on its o Life Cycle outstanding debt. It is calculated by dividing a company’s o Competition earnings before interest and taxes (EBIT) by its interest o Supply Chain expense during a given period. o Technology 3. Government Impact on the Economy Formula: o Fiscal Policy: Spending and taxes affect economic growth o Monetary Policy: Interest rates and inflation Market Prospect Ratio – are used to compare publicly influence economic activity. traded companies’ stock prices with other financial o Regulations Stabilize or constrain economic measures like earnings and dividend rates. Investors uses growth. Market Prospect Ratios to analyze stock price trends and 4. Government Impact on the Industries help figure out a stock’s current and future market value. o Subsidies/Incentives: Support specific sectors. o Tariffs/Trade Policies: Protect domestic industries and impact import costs. Lesson 3: Economic and Industry Analysis o Infrastructure: Boost industries reliant on logistics. “Why Is It So Important To Understand The Economy o Labor Laws: Affect labor costs. Condition And Industry Trend For Security Analysis And Investment Decisions?” Industry Analysis Essentials: Economic Conditions affect stock prices, bond yields, and overall market performance in terms of: Industry Trends – explain how to evaluate industry health and growth potential, considering factors like innovation, 1. Economic Indicators regulation, and consumer demand. 2. Interest Rates 3. Corporate Earnings o Innovation – check how new technologies and 4. Market Sentiments ideas are changing the industry. 5. Geopolitical Events o Regulation – look at the rules and laws that affect 6. Industry and Sector Trends the industry. 7. Monetary And Fiscal Policies o Consumer Demand – study what consumers want 8. Global Economic Conditions and how their preferences are shifting. Industry Trends affect stock prices, bond yields, and Competitive Dynamics – highlight how to competition and overall market performance in terms of: market share influence a company's stock performance. 1. Consumer Demand o Market Share (Current Distribution) – 2. Regulatory Environment understanding how market share is divided among 3. Technological Advancement companies. 4. Competitive Landscape o Shifts in Market Share – track changes in market 5. Global Events and Geopolitical Risks share to see which companies are gaining or losing 6. Supply Chain Disruption ground. o Stock Performance (Competitive Advantage) – look at what makes a company stand out, like unique products or lower costs. o Competitive Pressures – consider how competition affects pricing and profits. Investment Analysis – researching and evaluating a “Here are some suggestions to help investors make security or an industry to predict its future performance and better investment decisions.” determine its suitability to a specific investor. Diversify Your Portfolio – spreading your investments It also involves evaluating or creating an overall across different asset classes, industries, and geographies. financial strategy. Do Your Research – taking the time to understand different Example: If an analyst wants to invest in Company A, they investment options and how they might into your goals and might look at its price to earnings ratio. If the price to risk tolerance. earnings ratio is lower than other similar companies in the Set Realistic Goals – means aiming for achievable industry, the analyst might consider Company A's stock as outcomes that align with your financial situation and undervalued, which could suggest it's a good investment timeline. opportunity. Economic Changes that can impact the value of specific securities: Lesson 4: Discounted Cash Flow (DCF) o Interest Rates Discounted Cash Flow – it is a type of method that o Inflation estimates a company's stock value by predicting its future o Economic Growth earnings. It calculates the present value of these earnings using a discount rate that reflects the company's risk. Industry Shifts that can impact the value of specific securities: By comparing this intrinsic value to the current market price, investors can assess whether the stock is o Technological Advancements undervalued or overvalued, aiding in informed investment o Regulatory Changes decisions. o Market Demand What is Discounted Cash Flow (DCF) Analysis? Investment Opportunities based on economic and industry analysis: o Estimates the value of return that investment generates after adjusting for the time value of o Economic Growth money. o Low-Interest Rates o It can be applied to any projects or investments o Emergency Industries that are expected to generate future cash flows. Investment Risks based on economic and industry Key Components of DCF analysis: o Free Cash Flow (FCF) o Economic Downturn o Discount Rate (WACC) o High Inflation o Terminal Value o Regulatory Changes o Present Value Conclusion: In today's unpredictable market, investors Advantages and Limitations must be careful. Economic and industrial changes are continually influencing investment performance. By Advantages: tracking these changes, investors can: o Accounts for the time value of money. Spot Opportunities – identify promising sectors before o Provides a detailed intrinsic value of an investment. they become mainstream. o Fundamental analysis considers future performance. Mitigate Risks – anticipate potential challenges and adjust Limitations: portfolios accordingly. o Sensitive to assumptions, complex, relies on long- Make Informed Decisions – gain a deeper understanding term forecasts. of market forces to make better investment choices. o Small changes in cash flow projections or discount rates can significantly affect outcomes. o Estimating cash flow accurately over long periods can be challenging due to market volatility and economic factors. Formula: Example: A company requires a $150,000 initial investment for a project that is expected to generate cash inflows for the next five years. It will generate $10,000 in the first two years, $15,000 in the third year, $25,000 in the fourth year, and $20,000 with a terminal value of $100,000 in the fifth year. Assuming the cost of capital is 5%, and no further investment is required during the term, the DCF of the project can be calculated as below: $9,523.81 + $9,070.29 + $12,957.56 + $20,567.56 + $94,023.14 = $146,142.36 Present Value – $146,142.36 Initial Investment – $150,000 Advantages: o Investment evaluation o Applicable to variety of projects o Adjustable scenarios Disadvantages: o Involves estimates o Unforeseen economic changes