Page 173 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes decisions given his goal maximization. For earning profits, investors apply a simple and common
sense decision rule of maximization. That is:

Buy the share at a low price
Sell the share at a high price
The above decision rule is very simple to understand, but difficult to apply in actual practice.
Huge efforts are made to operationalise it by using a proper formal and analytical framework.
To begin with, problems faced by the investor are: how to find out whether the price of a
company’s share is high or low? What is the benchmark used to compare the price of the share?
The first question becomes easier if some benefits are agreed upon with which the prevailing
market price can be compared. In this respect, fundamental analysis provides the investor a real
benchmark in terms of intrinsic value. This value is dependent upon industry and company
fundamentals. Out of these three, company level analysis provides a direct link to investor’s
action and his investment goal in operational terms. This is because an investor buys the equivalent
of a company and not that of industry and economy. This framework indeed provides him with
a proper background, with which he buys the shares of a particular company. A careful
examination of the company’s quantitative and qualitative fundamentals is, therefore, very
essential. As Fischer and Jordan have aptly put it: “If the economic outlook suggests purchase at
the time, the industry analysis will aid the investor in selecting the proper industry in which to
invest. Nonetheless, when to invest and in which industry is not enough. It is also necessary to
know which companies industries should be selected.”

The real test of an analyst’s competence lies in his ability to see not only the forest but also the
trees. Superior judgment is an outcome of intelligence, synthesis and inference drawing. That is
why, besides economic analysis and industry analysis, individual company analysis is important.

9.1 Framework of Company Analysis

The two major components of company analysis are:
1. Financial
2. Non-financial

A good analyst gives proper weightage to both these aspects and tries to make an appropriate
judgment. In the process of evaluating the investment-worthiness of a company’s securities, the
analyst will be concerned with two broad categories information: (i) internal and (ii) external.
Internal information consists the data and events relating to the enterprise as publicized by it.
External information comprises the reports and analyses made by sources outside the company
viz. media and research agencies.

9.1.1 Non-financial Aspects

A general impressionistic view is also important in evaluating the worth of a company for
investing in securities. This could be obtained by gathering and analyzing information about
companies, publicized in the media, the stock exchange directory, annual reports and prospectus.

1. History and business of the company
2. Top management team
3. Collaboration agreements
4. Product range

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