NISM RA Notes Chapter 4

Parth Verma The Valuation School
Chapter 4
FUNDAMENTALS OF RESEARCH
Learning objectives
You will know about the terms like

• Investing
• Role of Research in Investing Academy
• Technical analysis
• Fundamental Analysis
• Quantitative Analysis ( Econometric approach)
• Behavioural Finance Approach
4.1 WHAT IS INVESTING?
• Investing in market means a long term holding of an asset to make a good

return.
The valuable things which you own and generates cash/
money/ wealth.
• Investing is like , " Paise se Paisa Banta hai. "

but not always because it contains RISK also.
Kisi bhi cheez mai jab aapko
pocket se Paisa Lagta hai
whether it is for starting
your own business , buying/
1. You will loose your entire principal amount
investing and many more
2. You will loose SOME money from principal and get
things which fall under ,
the remainings.
" Paise se Paisa Banta hai"
3. You will get your Principal amount back (breakeven)
category, it has the
4. You will get some profit or even huge profits following outcomes
• Therefore ,studying and analysing your stocks in investing to ensure safety is a must.
• Investing is different from trading Investing : For long time (5-15+ years )
& speculative activities. Trading : For short time (Intraday kind of )
Speculative activities : Buying selling because of your
emotions or prediction or you have heard over news.
• Trader earns profit by the
difference in prices for a
specific stock.
# There is no news in the market for ABC stock.

# Still ABC stock prices are continuously moving
# This is because some traders wants to buy that stock at different levels and,
# Some traders wants to sell that stock at different levels.
Hence a trader earns profit by this spread of prices between buyers and sellers. Also it
doesn't affect the value of that stock.
fundamentally
fundamentally
• Investing focuses on Assets value to increase over a period.

2 ways to increase the value of the asset
By generating high CASH FLOW without increase Risk decrease without any
in risk. decrease in Cash Flow
# Comapny k pass kitna Paisa aa raha hai and Like bad mgmt, heavy
kitna Paisa ka raha( cash ka flow ) debt, etc.
# other way, company kitna Paisa generate kar

Rahi hai and kitna Paisa kharcha kar raha hai
Investment is a complicated task. You have to analyse the company properly in which you wish
to invest. Analysis can be done of broad asset class
individual stock
ACTIVE INVESTING PASSIVE INVESTING
• It involves buying or selling of stocks with constant • It involves investing

evaluation and tracking of portfolio. in the stocks /
securities which are
• Investors sell stocks where stocks are overvalued. part of Index, it is
( Market Price > Fair Price ) called as Indexing
strategy.
• Investors buy stocks where stocks are undervalued.
( Market Price < Fair Price ) • Objective is to earn
the return of the
• Fair price = Real worth asset class
( actual mai stock ki kimat kitni hai )
• Their analysis is
• Market price = Price decided by the market forces such limited to broader
as demand and supply. It is not the actual value. It's asset class
the price at which people are willing to buy / sell the
stock. • Passive investing
requires less effort
• Active investing requires a lot of efforts.
• Transaction size is
• Here the transaction size / number is greater compared less here.
to passive investing..
• Objective here is to earn more return than broader

asset class.
4.2 ROLE OF RESEARCH IN INVESTING ACADEMY
• The fundamental research consists of 2 parts
RESEARCH ANALYSIS
Involves collection of all the Analysing the information for

necessary information results / conclusion

✅
• Annual Report of a company
Treasure of information here
But annual reports information must be carefully checked ( info in AR is not always
adequate )
Because AR is published once a year , the info becomes outdated
Also information about economy is not covered in depth in AR
Therefore, fundamental research analyst spend good amount of time in researching

about economy, industry, competitors and gaining reports from other firms.
They also visit company's office, communicate with customers, dealers, suppliers to
give more accurate data.
Note : Research analyst should not be involved in Insider Trading.
Price sensitive information about company which can potentially

fluctuate the share price of the company if made public.
Research analyst should avoid leaking this type of info to general public
Then what is MOSAIC ANALYSIS ?
• When analyst collect different information from different source and the impact
of any individual data from the collected information is negligible but if you
combine them all, it can create a significant impact.
• Mosaic analysis is accepted.
Eg : CEO talking about some unpublished news/ information about the company
Insider Trading/ leaking of unpublished data
Employee talking about heavy workload in office

Not an insider trading data
Analyst must be careful to distinguish between Mosaic Information and Insider Trading Info.
4.3. TECHNICAL ANALYSIS
• It is based on the assumption that price discounts everything.
• All the information that affect the share like company fundamentals and etc are
reflected in stock price itself.
• Technicians / Chartists use price trends to forecast the direction and magnitude of
stock price movements.
• They study historical market data and observe pattern based on price and volume.
• 3 main elements of technical analysis to understand price behaviour
History of Past prices ( history repeats itself )

The Volume of trading ( higher the vol, higher the chances of price movement )
Time duration is also a factor that influences prices ( time is money)
• These 3 elements are used in price charts to observe
Support Resistance Price trends
The zone from which prices The zone from which prices
bounces back to upside falls to downside
I.e , a lot of buying I.e , a lot of selling
• Technical analysis includes study of trends, support and resistance and past price
movements
• Technical analysis converts Price And Volume into charts like
Line chart
Bar chart
Candlestick Chart
• Charts are used to identify price trends, reversal, buying or selling point.
• Short terms investors heavily rely on technical signals because fundamentals rarely
changes price movement in short term.
📍
4.4 FUNDAMENTAL ANALYSIS
• It's focused on long term investing
• In this, the fair price plays an important role ( as discussed earlier about
undervalued and overvalued stock)
• Profits in investment not only comes from good investment but also making
the investment at right price.
• This things also contradicts the EFFICIENT MARKET HYPOTHESIS (EMH )
It states that share price reflect / certain all information and excess
returns to beats the market are near to impossible
• Fundamental analysis includes the following questions :
How macro economic trend impacts the industry ?

How is the competition within the industry?
Comparison of your company with peers. Is it doing good or bad ?
What is the cost structure of the company & how it impacts profit under
different business environment ?
It's an aggregation of all types of cost that
makes the company's overall expenses
How strong is the financial position of the

company ? Is it strong enough All the above Qs can be put
to withstand any crisis? within 3 subtopic :
What are the capabilities of Economic Analysis
management ? Are they executing right
Industry Analysis
strategy for growth while avoiding any risk ?
Company Analysis
Whether the right governance is present
or not that act in the best
(more on this in upcoming chapters )
interest of the shareholders.
💸
Parth Verma I The Valuation School
4.5. QUANTITATIVE RESEARCH
Fundamental Analysis = Quantitative + Qualitative

But,
Some analysts use quantitative approach only for equity analysis using econometric
analysis.
Quantitative analyst looks for financial and operational metric of the company.
↓
like sales , revenue, gross profit margins, net profit margins,etc
These metric can either be used independently or together with other metrics.
Time series and regression of historical data helps to determine future earnings.
L >
Analysing data over a period Technique that relates dependent variable to one
of time or more independent variable
Quantitative analyst use complex econometric approaches to refine their results.

↓
It uses economic theory combines with maths

and stats to quantify economic event.
But pure econometric approaches is not ideal in fundamental analysis as frequent

changes in accounting standards and business models makes data less useful in
current market.
Therefore quantitative research is not often used for fundamentals.
4.6. BEHAVIOURAL APPROACHES TO EQUITY INVESTING
• Behavioural biases such as heard mentality, fear, greed, overconfidence ,etc prevent
investors from making profit.
• Decision influenced by behavioural biases often leads to bad/ wrong choices

[more on chapter 11]

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Parth Verma The Valuation School

You will know about the terms like

4.1 WHAT IS INVESTING?

• Investing in market means a long term holding of an asset to make a good

• Investing is like , " Paise se Paisa Banta hai. "

# There is no news in the market for ABC stock.

• Investing focuses on Assets value to increase over a period.

# other way, company kitna Paisa generate kar

• It involves buying or selling of stocks with constant • It involves investing

• Objective here is to earn more return than broader

4.2 ROLE OF RESEARCH IN INVESTING ACADEMY

• The fundamental research consists of 2 parts

Involves collection of all the Analysing the information for

Parth Verma The Valuation School

Treasure of information here

Because AR is published once a year , the info becomes outdated

Also information about economy is not covered in depth in AR

Therefore, fundamental research analyst spend good amount of time in researching

Note : Research analyst should not be involved in Insider Trading.

Price sensitive information about company which can potentially

Then what is MOSAIC ANALYSIS ?

• Mosaic analysis is accepted.

Employee talking about heavy workload in office

4.3. TECHNICAL ANALYSIS

• It is based on the assumption that price discounts everything.

• 3 main elements of technical analysis to understand price behaviour

History of Past prices ( history repeats itself )

• These 3 elements are used in price charts to observe

Support Resistance Price trends

• Technical analysis converts Price And Volume into charts like

Parth Verma The Valuation School

4.4 FUNDAMENTAL ANALYSIS

• It's focused on long term investing

• This things also contradicts the EFFICIENT MARKET HYPOTHESIS (EMH )

• Fundamental analysis includes the following questions :

How macro economic trend impacts the industry ?

How strong is the financial position of the

Fundamental Analysis = Quantitative + Qualitative

Quantitative analyst use complex econometric approaches to refine their results.

It uses economic theory combines with maths

But pure econometric approaches is not ideal in fundamental analysis as frequent

Therefore quantitative research is not often used for fundamentals.

4.6. BEHAVIOURAL APPROACHES TO EQUITY INVESTING

• Decision influenced by behavioural biases often leads to bad/ wrong choices

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