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Stock Market Operations
Notes
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Caution The use of an analytical framework does not guarantee an actual decision. However,
it does guarantee an informed and considered investment decision, which would hopefully
be better as it based on relevant and crucial information.
7.1.1 Fundamental Analysis and Efficient Market
Before elaborating in detail on the economy-industry-company framework, it is pertinent to
mention that doubts are expressed about the utility of this approach in the contest of efficient
stock market set-up. Briefly, the market efficiency relates to the speed with which the stock
market incorporates the information about the economy, industry and company, in the share
prices, rather instantaneously.
The above given view about share market efficiency implies that no one would be able to make
abnormal profits given such a set-up. Some research studies in the literature also support the
above view. Practitioners, however, do not agree to such conclusions of an empirical nature.
Self Assessment
Fill in the blanks:
1. The market …………………….. relates to the speed with which the stock market
incorporates the information about the economy, industry and company, in the share
prices, rather instantaneously.
2. The price prevailing in market is called “…………………….. price’
3. In …………………….. approach, the investor attempts to look at fundamental factors that
affect risk return characteristic of the security.
4. In the …………………….. approach, the investor tries to identify the price trends that
reflect these characteristics.
7.2 Economy - Industry - Company Analysis: A Framework
The analysis of economy, industry and company fundamentals is the main ingredient of the
fundamental approach. The analyst should take into account all the three constituents that form
different but special steps in making an investment decision. These can be looked at as different
stages in the investment decision-making. Operationally, to base the investment decision on
various fundamentals, all the three stages must be taken into account. In this unit, we will
concentrate on economy analysis. In the next units, we shall focus on industry and company
level analyses.
7.2.1 Economy Analysis
In actual practice, you must have noticed that investment decisions of individuals and the
institutions made in the economic set-up of a particular country. It becomes essential, therefore,
to understand the star economy of that country at the macro level. The analysis of the state of the
economy at the macro level incorporates the performance of the economy in the past, how it is
performing in the present and how it is expected to perform in future. Also relevant in this
context is to know how various sectors of the economy are going to grow in the future.
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