Investing in Stocks (NISM Series XXI-A Exam Preparation)

Introduction

Investing in equity means purchasing a percentage of a business.
No contractual obligation for the company to repay the investment.
Investors hold voting rights and can influence management if they hold significant shares.
Returns can be in the form of capital appreciation or dividend income.
Dividend payments depend on company profitability; capital appreciation depends on market conditions.

Market Risk:
- Price fluctuations of equity shares are driven by demand and supply.
- Can be measured using Beta; Market Beta is always 1.
Sector-Specific Risk:
- Risks specific to a sector; can be diversified away by avoiding investments in struggling sectors.
Company-Specific Risk:
- Influenced by elements specific to a single company.
- Managed by diversifying investments across different companies within the same sector.
Liquidity Risk:
- Measured by impact cost; lower market impact implies higher liquidity.

Diversification reduces risk by investing across multiple sectors and timeframes.
Cross-sectional and time-series diversification both aim to minimize risk by spreading investments across related and unrelated businesses.
The principle is “Don’t put all your eggs in one basket.”

Importance of equity research in identifying profitable stocks.
Fundamental analysis focuses on intrinsic value; technical analysis looks at price patterns and volume.
Fundamental Analysis:
- Examines economic factors, company financials, earnings, and market trends.
- Involves economic, industry, and company analysis.
Technical Analysis:
- Uses historical price and volume data to predict future trends.
- Involves trendlines, moving averages, and Bollinger bands.

Purpose: Determine a stock's intrinsic value and compare it with market value to make buy, hold, or sell decisions.
Approaches: Top-down (starts with macroeconomics) and Bottom-up (starts with individual companies).
Intrinsic Value Determination: Based on future earnings, cash flows, and the required rate of return.
Valuation Methods:
- Discounted Cash Flow (DCF) Method
- Free Cash Flow to Firm (FCFF)
- Free Cash Flow to Equity (FCFE)
- Asset-Based Valuation
P/E Ratio Analysis: Helps predict how much investors are willing to pay for each unit of earning.

Short-term focused; doesn’t necessarily require a thorough understanding of financial statements.
Key Elements:
- Price trends;
- Volume data;
- Historical price patterns.

Trendline Analysis:
- Indicates buy and sell points based on historical price movements.
- Includes upward (buy), flat, and downward (sell) trends.
Moving Averages:
- Calculate average prices over specific periods.
- Used to identify trends.
Bollinger Bands:
- Measure market volatility.
- Indicates overbought or oversold conditions.

Corporate governance includes rules, regulations, contracts, and ethical standards.
Varies across different countries and economic conditions.
Significant for evaluating company management and practices.

Cyclical Industries: Follow general economic activities closely compared to other industries.
Intrinsic Value Calculation: Derived from the dividend growth model.
Relative Valuation Techniques: Based on earnings, cash flow, and book value.
P/E Ratio: Compares stock price to earnings.
Market Risk: Arises from price dynamics in the market.

Comprehensive understanding of the key aspects of investing in stocks.
Fundamental and technical analyses are crucial tools for selecting the right stocks.
Diversification helps mitigate risks.

Note: For more information on Mutual Funds (NISM Series VA) or other chapters of NISM PMS, please refer to our respective playlists. Thank you!

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Note: Always consult with a financial advisor before making investment decisions.

Investing in stocks involves risks, and thorough research is essential for successful investments.

For further reading, refer to the provided books, articles, and papers from credible sources.
Utilize financial tools and dashboards for current market analysis.

End of Notes

Upcoming Topics: Next session will focus on a practical example of fundamental analysis using a real company's data.

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