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Unit 2 part 2-BSAPM

Akhil Swami

1

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Intrinsic value using PE Ratio• Estimate the future EPS

• Based on correct forecasting of the PAT in the future based on growth assumptions etc)

• Establish a PE multiple – based on last years earnings or trailing 12 month PE or based

on some expected earnings also look out for similar companies PE

• Projected EPS X Projected PE = Value Anchor

• Always give a range

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Strategy for identifying securities

• Intrinsic Value > Market Value Buy

• Intrinsic Value < Market Value Sell

• Intrinsic Value = Market Value Hold

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Some keys to investing

• Establish Value Anchors

• Assess the market Price behaviour (Psychology)

• Combine fundamental and technical analysis

• Develop sound strategies for growth stocks

• Beware of games operators play

• Take Swift corrective action i.e. keep stop loss

• Have discipline

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Technical analysis

• Principle of technical analysis is that the market narrates its story.

• Job is to identify the trend and when the trend will move in the opposite direction.

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What is technical analysis

Technical analysis is the study of market action, primarily through the use of charts, for the purpose of forecasting future price trends.

Basic premises of technical analysisBasic premises of technical analysis

Market action discounts everything

Prices move in trends

History repeats itself. Primary trend cannot be manipulated.

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Ingredients of a Trading Plan

Criteria for selection Fundamental Technical Both

Know your capital at Risk Capital employed Risk in each trade Overall risk at any time

Trend following methods Fundamental Technical Both

System of booking Profits/Losses

Keeping an overall score – Net result is important and not few winners or few losers

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Basic Assumptions

Market value is determined solely by the interaction of supply of and demand for the shares

Supply and demand for the shares is governed by many rational and irrational factors

Basically demand and supply causes the change in trends

Share prices move in trend and persist for an applicable length of time.

Shift in demand and supply occurs gradually rather than suddenly

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Factors affecting Stock Prices

• Company Results• Merger/De-merger news• Stock split/bonus/dividend• War• Terrorist attack• Change in rate of interest• Inflation• Oil Prices• Political Instability• US/Asian/European markets• Budget/Fiscal/Monetary Policy• Metal Prices

Monsoon Derivative Settlement Raw Material Prices Court Cases FII Buying /Selling figures MF Buying / Selling Moving to trade to trade

settlement Suspension of trading Company Announcements News of Disinvestments by the

govt. Epidemics / Tsunami /

Earthquake

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Some Tools of Technical Analysis

Patterns of price movements

Averages and Trend Lines

Candle stick methods

Gaps, Supports & Resistances

Elliot Wave Rules

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Money Management Rules

Know your capital at riskTreat your entire capital as Risk Capital

Limit your gross exposure & exposure in single positionMaximum Risk at any point of time is 5% of the Capital

Maximum no. of positionDiversify over five position, not too many, not too little

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Chart construction

Line chart

Bar chart

Candlestick chart

Point and figure chart

Candle volume chart

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Line Chart

• Prices are plotted using closing prices. A closing price can be of any time frame.

• Sensex daily line chart