Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 2
Equity Stock Markets: Concepts, Instruments, Risks andDerivatives
Week 02 – Summary
Fundamental Analysis
World over equity stock prices are estimated or predicted using
1. Fundamental Analysis
2. Technical Analysis
Fundamental Analysis
Fundamental Analysis involves analysing a company’s Equity Stock, or any security for that matter, by
determining its intrinsic value.
The major assumption underlying Fundamental Analysis is that you can profit by purchasing
undervalued stock i.e. a stock whose the market price is lower than intrinsic value, because in the long
run stock prices correct themselves to very nearly the intrinsic value of the stock.
Fundamental analysis is more commonly used by long-term investors since their investment strategy is
to identify assets that will increase in value over a long-time frame.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 1
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 2
Factors determining Intrinsic value
How is this analysis used for taking investment decisions?
If the prevailing market price of the equity stock is greater than its intrinsic value, then the equity
stock of that company is considered to be overvalued and therefore said to be trading at a ‘premium’.
Hence, unless there are definite reasons that can be attributed to the premium commanded by that
equity stock, it would perhaps be appropriate to sell thatstock.
If the market price of the stock is less than the intrinsic value, then the stock is undervaluedand said
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 2
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 2
to be trading at a discount. Hence, unless there are definite reasons that can be attributed to the
discount on the market price, it would be appropriate to buy that stock.
Technical Analysis
Technical Analysts focuses on analysing the trends in the movements in the price of the stockand the
volumes traded over time. The decision to buy or sell the stock is based on an analysisof these trends.
Technical analysts take a short-term view and is used by some segment of investors such as ‘day-
traders’.
Charts used in Technical Analysis
1. Line Chart
It is based on the daily closing price of the stock.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 3
Prof. P C Narayan
Week 2
Equity Stock Markets: Concepts, Instruments, Risks andDerivatives
Week 02 – Summary
Fundamental Analysis
World over equity stock prices are estimated or predicted using
1. Fundamental Analysis
2. Technical Analysis
Fundamental Analysis
Fundamental Analysis involves analysing a company’s Equity Stock, or any security for that matter, by
determining its intrinsic value.
The major assumption underlying Fundamental Analysis is that you can profit by purchasing
undervalued stock i.e. a stock whose the market price is lower than intrinsic value, because in the long
run stock prices correct themselves to very nearly the intrinsic value of the stock.
Fundamental analysis is more commonly used by long-term investors since their investment strategy is
to identify assets that will increase in value over a long-time frame.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 1
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 2
Factors determining Intrinsic value
How is this analysis used for taking investment decisions?
If the prevailing market price of the equity stock is greater than its intrinsic value, then the equity
stock of that company is considered to be overvalued and therefore said to be trading at a ‘premium’.
Hence, unless there are definite reasons that can be attributed to the premium commanded by that
equity stock, it would perhaps be appropriate to sell thatstock.
If the market price of the stock is less than the intrinsic value, then the stock is undervaluedand said
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 2
, Equity Stock Markets: Concepts, Instruments, Risks and Derivatives
Prof. P C Narayan
Week 2
to be trading at a discount. Hence, unless there are definite reasons that can be attributed to the
discount on the market price, it would be appropriate to buy that stock.
Technical Analysis
Technical Analysts focuses on analysing the trends in the movements in the price of the stockand the
volumes traded over time. The decision to buy or sell the stock is based on an analysisof these trends.
Technical analysts take a short-term view and is used by some segment of investors such as ‘day-
traders’.
Charts used in Technical Analysis
1. Line Chart
It is based on the daily closing price of the stock.
© All Rights Reserved. This document has been authored by Professor P C Narayan and is permitted for use only within the course "Equity Stock Market:
Concepts, Instruments, Risks and Derivatives" delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic, mechanical,
photocopying, recording or otherwise – without the prior permission of the author.
pg. 3
