Page 111 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Therefore your first step in selecting a stock for your portfolio is to see where there are gaps (if
you’re just beginning, then pick a stock that is appropriate for your age and risk tolerance).
Understanding What Affects Stock Prices: Some Market-Moving Trends More Important to Stock Prices
than Others
When a person buy’s a company’s stock, he/she is investing in the future growth of the company.
Yet, the stock’s price may float up or down based on some broad market or economic factors that
may only indirectly affect the company.
For example, the possibility (not certainty) of increased inflation will send the overall market
into a slump, especially if the Reserve Bank of India expresses its concern.
That concern is seen as translating into higher interest rates to head off any rise in inflation
before it gets started. Increased interest rates are bad news for most businesses. Likewise,
pronouncements that the economy is expected to grow at a robust rate is usually a bad sign for
the market because it means the Central Bank-RBI will probably be less inclined to cut interest
rates, to avoid overheating the economy and fueling inflation.
The trick for investors is to understand which market-moving factors may also directly affect
the company and its stock. Major demographic changes may have a much more permanent
effect on a company than temporary fluctuations in interest rates, for example. Aging baby
boomers will create opportunities for some companies and problems for others. Knowing the
difference will mean investment mistakes avoided.

How do you know what is a major problem or opportunity for a company you own or are
considering buying?
In order to get an answer to this question you need to study the company, its products and
markets with the help of the company Web site and its annual report. And it is the future growth
of the company that will generate the earnings to benefit shareholders.

Step 2: Analysing the Financial Ratios

Investors can use financial ratios to evaluate a company, especially as it compares to others in
the same industry. This type of analysis will help you understand where the company ranks
among its peer and if it is properly priced by the market as reflected in its stock’s price.

Tools of Fundamental Analysis

Fundamental analysis is the process of looking at a business at the basic or fundamental financial
level. This type of analysis examines key ratios of a business to determine its financial health
and gives you an idea of the value its stock.

Many investors use fundamental analysis alone or in combination with other tools to evaluate
stocks for investment purposes. The goal is to determine the current worth and, more importantly,
how the market values the stock.
This topic focuses on the key tools of fundamental analysis and what they tell you. Even if an
investor doesn’t plan to do in-depth fundamental analysis themselves, it will help them follow
stocks more closely if they understand the key ratios and terms.
Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and
value in the market.

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