Hiral, Pragnesh Karvy Stock Broking

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    Introduction to

    Share Market

    &

    Fundamental Analysis

    Of 3

    IT Stocks

    Pragnesh Rabari Hiral MistryRoll No. 38 Roll no. 24

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    PREFACE

    October is one of the peculiarly dangerous months to speculate

    in stocks. The others are July, January, September, April, November, May,March, June, December, August and February!

    The market is weird. Every time one guy sells, another onebuys, and they both think they're smart.

    A market analyst is an expert who will know tomorrow why thethings he predicted yesterday didn't happen today!

    The above-mentioned quotes are not only interesting but relateto the realities an investor faces at the time of making investments; lack ofknowledge of the stock market, the various so-called analyst or broker andthe investment opportunities and periodicity. Fundamental analysis is a self-assessment tool that helps an investor while making any investment.Generally fundamental analysis considers the long-term perspective on thecontrary to the technical analysis that takes a short-term view whileinvesting in stocks.

    IT is a booming sector and is rocking Indian economy. Demandfor Information Technology is ever rising and so does the value of the stocksof IT companies. Computers have brought a change over in the way ofworking and Indian companies have contributed to a greater extent in theworld of Information Technology. The fundamental analysis of the IT stockshas been represented in our report stating the example about the factuality ofhow the analysis is done.

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    The National Stock Exchange of India Ltd. (NSE), set up inthe year 1993, is today the largest stock exchange in India and a preferredexchange for trading in equity, debt and derivatives instruments byinvestors. NSE has set up a sophisticated electronic trading, clearing andsettlement platform and its infrastructure serves as a role model for thesecurities industry. The standards set by NSE in terms of market practices;

    products and technology have become industry benchmarks and are beingreplicated by many other market participants. It provides a screen-basedautomated trading system with a high degree of transparency and equalaccess to investors irrespective of geographical location. The high level ofinformation dissemination through the on-line system has helped inintegrating retail investors across the nation. The exchange has a network inmore than 350 cities and its trading members are connected to the central

    servers of the exchange in Mumbai through a sophisticatedtelecommunication network comprising of over 2500 VSATs. NSE hasaround 850 trading members and provides trading in over 1000 equity sharesand 2500 debt securities. Besides this, NSE provides trading in variousderivative products such as index futures, index options, stock futures, stockoptions and interest rate futures.

    At NSE, it has always been our endeavor to continuouslyupgrade the skills and proficiency of the Indian investor. Since, financiallyliterate investors are the backbone of the securities market, knowledge andawareness about the securities market is of the foremost concern to us,starting with the most basic of information being made available as the firststep. This booklet has therefore been prepared for those of you who are keento acquire some basic but key information about the stock markets as aninitial step towards becoming a more informed investor. We hope this

    booklet will act as a means of satisfying some of your initial queries on thestock markets.

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    BSE

    Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a

    rich heritage. Popularly known as "BSE", it was established as "The NativeShare & Stock Brokers Association" in 1875. It is the first stock exchange inthe country to obtain permanent recognition in 1956 from the Government ofIndia under the Securities Contracts (Regulation) Act, 1956.The Exchange's

    pivotal and pre-eminent role in the development of the Indian capital marketis widely recognized and its index, SENSEX, is tracked worldwide. Earlieran Association of Persons (AOP), the Exchange is now a demutualised andcorporatised entity incorporated under the provisions of the Companies Act,1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme,2005 notified by the Securities and Exchange Board of India (SEBI).

    With demutualisation, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflictsof interest. The Exchange is professionally managed under the overalldirection of the Board of Directors. The Board comprises eminent

    professionals, representatives of Trading Members and the ManagingDirector of the Exchange. The Board is inclusive and is designed to benefitfrom the participation of market intermediaries.

    In terms of organization structure, the Board formulates larger policy issuesand exercises over-all control. The committees constituted by the Board are

    broad-based. The Managing Director and a management team ofprofessionals manage the day-to-day operations of the Exchange.

    The Exchange has a nation-wide reach with a presence in 417 cities andtowns of India. The systems and processes of the Exchange are designed tosafeguard market integrity and enhance transparency in operations. Duringthe year 2004-2005, the trading volumes on the Exchange showed robustgrowth.

    The Exchange provides an efficient and transparent market for trading inequity, debt instruments and derivatives. The BSE's On Line Trading System(BOLT) is a proprietary system of the Exchange and is BS 7799-2-2002certified. The surveillance and clearing & settlement functions of theExchange are ISO 9001:2000 certified.

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    incorporate qualitative analysis into your evaluation of a company is to do itonce you have done the quantitative analysis.

    The conclusion you come to on the qualitative side can put yourquantitative analysis into better perspective. If when looking at the companynumbers you saw good reason to buy the company, but then found manynegative qualities, you may want to think twice about buying. Negativequalities might include potential litigations, poor R and D prospects or a

    board full of insiders. The conclusions of your qualitative analysis eitherreconfirm or raise questions about the conclusions of your quantitativeanalysis. Fundamental analysis is not as simple as looking at numbers andcomputing ratios; it is also important to look at influences and qualities thatdo not have a number value.

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    Using Dividend Discount Model:

    When using the dividend discount model, the type of industryinvolved and the dividend policy of the industry is important in choosingwhich of the dividend discount models to employ. As mentioned earlier, theintrinsic value of a share is the future value of all dividend cash flowsdiscounted at the appropriate discount factor. For those familiar with thecalculation of yield in fixed income analysis, the concepts are similar.

    For constant dividends:

    P=Dt/ke Where:

    P = intrinsic value D t= expected dividend ke = appropriate discount factor for the investment

    This method is useful for analyzing preferred shares where the dividend isfixed. However, the constant dividend model is limited in that it does notallow for future growth in the dividend payments for growth industries. As aresult the constant growth dividend model may be more useful in examininga firm.

    For constant dividend growth:

    P=Dt/(ke-g) Where: P = intrinsic value D t= expected dividend ke = appropriate discount factor for the investment g= constant dividend growth rate

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    The constant dividend growth model is useful for matureindustries, where the dividend growth is likely to be steady. Most mature

    blue chip stocks may be analyzed quickly with the constant dividend growthmodel. This model has its limitations when considering a firm, which is inits growth phase and will move into a mature phase at some time in thefuture. A two-stage growth dividend model may be utilized in suchsituations. This model allows for adjustment to the assumptions of timingand magnitude of the growth of the firm.

    For the two stage growth model;

    P=n t=1[D0(1+g1)t/(1+ke)

    t]+ t=n+1[Dn(1+g2) /(1+kt-n

    e) ]t

    Where: P = intrinsic value D0= expected initial period dividend Dn= expected dividend during mature period ke = appropriate discount factor for the investment g1= expected dividend growth rate for initial growth period g2= expected dividend growth rate for mature period

    The two-stage model allows for greater flexibility in the testing

    of scenarios for the investor looking at a firm in its infancy or in a newindustry.

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    Fundamental Analysis Tools:

    These are the most popular tools of fundamental analysis. They focus onearnings, growth, and value in the market.

    Earnings per Share EPS

    Price to Earnings Ratio P/E

    Projected Earning Growth PEG

    Price to Sales P/S

    Price to Book P/B

    Dividend Payout Ratio

    Dividend Yield

    Book Value

    Return on Equity

    No single n

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