Stock markets and securities

1.

STOCK MARKETS AND SECURITIES

2.

Recommended literature:
1.
Сохацька О.М., Роговська-Іщук І.В., Вінницький С.І. Фундаментальний та
технічний аналіз цін товарних та фінансових ринків. Київ: Кондор, 2012.
2.
Shiller R. J. Irrational Exuberance. Princeton: Princeton University Press, 2000.
3.
Mladjenovic P. Stock Investing For Dummies. Indianapolis: Wiley Publishing, Inc.,
2006.
4.
Fisher Ph. A. Common Stocks And Uncommon Profits And Other Writings. New
Jersey: Wiley Publishing, Inc., 2003.
5.
Найман Е. Мала Енциклопедія Трейдера – 3-е вид. – 2003. – 378 С. (Розділ 1, С.
20-34).
6.
Graham В. and Dodd D. Securities Analysis – 6-th Edition. – 2009. – 766 p.
7.
Benjamin Graham. The Intelligent Investor: The Definitive Book on Value Investing.
(або укр. версія) - Грем Б. Розумний інвестор. Стратегія вартісного інвестування.
(із коментарями Джейсона Цвейга) – К.: Наш формат, 2019. – 544 с.
Базилевич В.Д., Шелудько В.М., Ковтун Н.В. Та Ін. Цінні Папери. Київ: Знання,
2011.
8.

3.

TOPIC 1. BASICS OF FUNDAMENTAL
ANALYSIS (part 1)
1. The essence and stages of fundamental analysis.
2. Analysis of the influence of international environment factors.
3. Analysis of macroeconomic indicators.
4. The industry level factors.

4.

1. The essence and stages of fundamental analysis
There are three main methods of analyzing financial markets:
fundamental (FA);
technical (TA);
intuitive.
The need to use fundamental analysis in investment decisions was first theoretically and practically
justified by the American economists Benjamin Graham and David Dodd ("Securities Analysis") (1934).
FA studies the movement of prices at the macroeconomic level and helps to determine the main
market trend.
Trend - the main direction of the dynamics of market prices.
"Fundamental analysts study all the information about the fundamental economic relationship supply and demand, which ultimately determines all prices," said John Marshall, a professor of finance
in the United States.

5.

Based on the analysis of this information, they try to determine market prices.
if the current asset price < the price predicted by the fundamental analyst,
the asset is undervalued,
if the current asset price > the price predicted by the analyst - the asset is
overvalued.
Fundamental analysts advise buying undervalued assets and selling overvalued
ones.
The purpose of FA is the analysis and forecasting of fundamental factors and
their influence on the trend dynamics of prices.
FA is used by strategic investors who are interested in long-term investment.

6.

Tools used in fundamental analysis
Investors use a lot of different tools to determine the actual worth of a stock.
This includes:
Financial reports (balance sheets, income statement, cash flow statement)
Earnings (quarterly earnings and projected future earnings)
Financial ratios (Earnings per share, price to earnings ratio, return on equity)

7.

Difference between Fundamental
analysis and Technical analysis
Both fundamental and technical analysis are techniques used by investors to make
investment decisions in the stock market. However, the approach is completely
different.
In fact, they are considered to be opposite of each other.
Fundamental analysis
Technical analysis
Analyses stock value based on economic
and financial factors
Analyses historical stock movement to
predict the future price of a stock
Long-term approach
Short-term approach
Uses financial statements for analysis
Uses price movement charts for analysis
Incorporates new market information
Focuses mainly on past performance

8.

News and life cycles of fundamental factors
News:
accidental and unexpected (political and natural, such as wars,
earthquakes, sometimes economic)
planned and expected (economic, rarely political)
Life cycles of fundamental factors:
short cycle (usually by unexpected events, not more than 1 day)
long cycle (from a few weeks to several years) (all factors related to the
general state of the national and world economy, such as interest rates,
inflation, unemployment, etc.)

9.

Options for the impact of market expectations:
I.
when expectations come true - the dynamics of prices
will not change much;
II.
when expectations are not met due to only one factor
that was not taken into account - the price continues
the current dynamics with acceleration at the time of
the message;
III.
when expectations are completely wrong - the price
becomes a strong change of course in the opposite
direction.

10.

If the fundamental news contradicts the existing trend -
then the time of its influence on the market dynamics
is limited to an hour or several hours;
if ... confirms the trend - there is some acceleration of
the trend followed by a certain pullback.

11.

All fundamental factors are evaluated
from two points of view:
How will this news affect the discount rate?
What is the state of the national economy?

12.

Discount rate
The most common rumor in the stock and currency market
is the expectation of a change in the discount rate.
If the interest rate is expected to rise:
stock market – will decrease,
currency market – the national currency will growth.

13.

Discount rate is expected to ↑
stock market will decrease
"Fed model" - relationship between 10-year interest rate and stock market level.
Price to earnings
ratio (P/E)
Long-term interest rate
Long-term interest rate
Price to earnings ratio (P/E)
This model was fashionable to use in the 1990s and early 2000s to explain the market
situation.

14.

Scheme of carrying out fundamental
analysis "from top to bottom"
analysis of the economy and the market as a whole;
industry analysis;
regional analysis;
analysis of investment attractiveness of the objects of
investment;
formation of investment strategy;
formation of investment portfolio.

15.

2. Analysis of the influence of international
environment factors.
Purpose - study of the main trends in the development of the world economy
to predict the prospects for the investment process in the countries of the
world.
the state of the international economy → on the export activities of
companies, price competition from foreign companies, the size and
profitability of foreign investments.
- economic crisis of 1997-1998 caused by the problems in the Asian countries
(South Korea, Thailand, Indonesia) → on other countries (e.g. devaluation of
Hryvnia against US dollar by almost 2,5 times);
- global economic crisis of 2008-2010 → decrease of investment activity →
decrease of GDP (e.g. real GDP decrease in the 1st quarter of 2009
compared to the 1st quarter of 2008 was 4.7% in the EU-27 and 20.3% in
Ukraine).
(During the same period, gross fixed capital formation decreased by 10.7%
in EU-27 and by 48.7% in Ukraine).

16.

international political events:
- in the late 1990s in Hong Kong, due to its subordination to China, significant
price fluctuations were observed in the stock market;
- election of 2008 Obama as president of the USA → liberalization of trade and
economic relations of the USA with many countries - a positive factor in the
economic development of these countries.
demand on the international markets:
-
2008-2009 ↓ demand in international markets → ↓ both export production and
related production in different countries → ↓ GDP → ↓ investment;
prices of imported fuel and energy commodities:
-
affect production capacity and production costs;
-
↑ prices of these goods → ↑ inflation rates → ↓ returns on securities and ↓ stock
indices.
international sports and cultural events → attract foreign investment →
develop infrastructure, ↑ competitiveness in international markets, improve the
investment climate at ↑ the value of securities.

17.

3. Analysis of macroeconomic indicators.
Classification of fundamental factors by the degree of
their influence on the stock and currency market
The first group of factors (I) are strong factors, which have a high degree of
independence, that is, they do not have a secondary character. Their
installation in the market is (except for the first indicator) objective in nature,
does not depend on anyone's subjective evaluations and actions.
The factors of the second group (II) are of a similar nature, but their influence
is not as obvious and significant as for the factors of the first group.
Finally, the factors of the third group (III) are the least self-sufficient, subject to
significant influence from the factors of the first group.

18.

Classification of fundamental factors by the degree of their
influence on the stock and currency market
The most likely vector
of the influence of the
growth factor on the
exchange rate of the
national currency
The most likely
vector of the
influence of the
growth factor on the
stock index
Official discount rates
↑
↓
GDP
↑
↑
State budget deficit
↓
↓
Trade balance (balance of payments) deficit
↓
↓
Inflation rate
↓
↓
Unemployment rate (growth above the
effective or natural level)
↓
↓
Money supply, aggregate M2
↓
↓
Group
І
Factor
Real exchange rate of national currency
Size of foreign direct and portfolio investments
↓
↑
↑

19.

Group
II
III
The most likely vector
of the influence of the
growth factor on the
exchange rate of the
national currency
The most likely
vector of the
influence of the
growth factor on
the stock index
Size of retail sales
↑
↑
Amount of private income
↑
↑
Volume of orders in industry
↑
↑
Industrial production index
↑
↑
Level of labor productivity in the
economy
↑
↑
The level of world prices for major
export commodities
↑
↑
Production inventory level
↓
↓
Forward rates of national currency
↑
↑
The volume of industrial and ...
construction
↑
↑
The level of deposit rates
↑
↓
Government bond rates
↑
↑
Factor
Note: The table refers to the most likely vector of influence, not the real response of the object under study; the
response prediction is given, all other things being equal

20.

if GDP ↑ - the economy is developing, ↑ sales volumes,
company profits are growing, ↑ investment in the stock
market, ↑ demand for securities, ↑ their market prices
(market value), ↑ stock index (the stage of high
conjuncture).
if the unemployment rate ↑ - negative trends in the
economy (↓ GDP, ↓ purchasing power of the
population, ↓ level of demand, ↓ corporate profits) → ↓
investment, supply of securities > demand of securities
and available capital in the stock market → ↓ their
market prices (market value) (stage of low conjuncture).

21.

inflation rate – stock prices (or securities rates/
market value) are formed not only under the
influence of supply and demand for securities, but
also taking into account the expected price
increases.
if ↑ inflation rate → ↑ interest rates → ...
if ↑ interest rates → loans become more expensive, ↓
demand for products, ↓ corporate profits, ↓
dividends, ↓ stock market activity.

22.

Fiscal policy (FP):
Restrictive or restraining FP:
↓ public expenditure → ↓ demand for goods and services → …
and/or ↑ tax rates → ↓ purchasing power of consumers, ↓ consumption
→ ...
Expansionist or stimulative FP:
↑ public expenditure →
and/or ↓ tax rates →
↑ investments and
growth of the economy → ...
if the budget deficit is large → ↑ public debt, ↑ inflation → ↑ interest rates
→ ...

23.

Monetary policy (MP):
Expansionary or stimulative MP:
↓ interest rates → ↑ investment, ↑ demand for credit and
consumer demand, ↑ demand for securities, ↑ stock prices
(market value), ↑ stock indices.
Restrictive or restraining MP:
the other way around.

24.

4. The industry level factors.
The economy has a cyclical nature of development:
-
recession,
-
bottom,
-
rise,
-
top.
When investing, it is important to identify which sectors of
the economy will be investment-attractive and most
affected in a particular macroeconomic situation.

25.

Comparative characteristics of stock prices
depending on the state of the industry

26.

The main characteristics of shares depending on
the industry affiliation of the company
Industry
features
Dividend
level
Market value
Riskiness
(Risks)
Liquidity
Emerging
industries
Low
Low
Very high,
high
Low
Growth
industries
Is growing
Medium, is
growing
Medium,
low
Medium,
high
Cyclical
industries
Stable
industries
It fluctuates
It fluctuates
High when
according to according to
business
the stages of
the stages of activity drops,
the economic the economic very low when
cycle
cycle
the industry
picks up
High,
stable
Medium,
high,
permanent
Low
Medium,
high
High

27.

Industry
features
Dividend
level
Market value
Riskiness
(Risks)
Liquidity
Industries that
provide
livelihoods
High,
Is growing
High,
Is growing
Very low
High
Industries
determining
scientific and
technological
progress
Low at the
emerging of the
industry, high
during
development
Low at the
emerging of the
industry, high
during
development
Medium
Medium,
high
Industries that
are aging
Medium,
is decreasing
Medium,
is decreasing
High
Medium,
low
Industries to be
liquidated
Low, or no
dividends are
paid at all
Low
Exceptionally
high
Very low

28.

Dependence of stock prices on the company's
place in the market

29.

The main characteristics of shares depending
on the company's place in the market
Company's
place in the
market
Dividend
level
Market
value
Riskiness
(Risks)
Liquidity
Orientation
investors
Monopolist
High,
medium
Stable
Very low
High
On high dividends, stable market
value, minimal risk
Leader
High,
medium
Stable or is
growing
Low
High
On high dividends, stable market
value, low risk
Middling
company
Medium,
low
Stable or is
decreasing
Medium
High,
medium
On the expectation of possible
high dividends and growth of the
market value of the shares, which
gives us hope for an increase in
the market share of the company
in the near future

30.

Company's
place in the
market
Dividend
level
Market value
Riskiness
(Risks)
Liquidity
Orientation
investors
Outsider
Low
or no
dividends
are paid at
all
Is
decreasing
High,
very high
Low,
very low
To increase influence
over the company in
order to buy and
reorganize it in the
future
Scammer
Advertised
very high
Advertised
very high
by low face
value
Extremely
high
No
liquidity
On quick riches,
unreasonably

31.

Dependence of stock prices on the stages of the life
cycle of an enterprise

32.

The main characteristics of shares depending on the
stages of the life cycle of an enterprise
The stages of
the life cycle
Dividend
level
Market
value
Riskiness
(Risks)
Liquidity
Orientation
investors
Market entry
preparation
Low, unstable
or no
dividends are
paid at all
Low
Extremely
high
Very low
Orientation towards very
high risks in expectation of
growth of market value of
the company and dividends
Start of
growth
Low, unstable
Low
Very high
Low
Orientation towards high risks
in expectation of growth of
market value of the
company and dividends
Is growing,
stable
Is
growing
Medium
Medium
Orientation towards
significant risks in expectation
of growth of market value of
the company and dividends
Establishing

33.

The stages of
the life cycle
Dividend
level
Market value
Riskiness
(Risks)
Liquidity
Orientation
investors
Maturity
High,
stable
Stable
Low
High
Orientation towards low
risks, stable market
value of the company
and high dividends
Activity
decline
Is decreasing,
unstable
Is decreasing
Very high
Low
Focus on strengthening
its influence on the
company with the
intention of buying and
reorganizing it
Cessation of
activity
Very low or no
dividends are
paid at all
Very low
Extremely
high
Very low
The same

34.

Indicators that allow you to assess future industry
profits:
order intake (the first signal about the change in demand);
volume of industrial production (changes only after the
change of indicator 1, it is a little delayed, so it is not very
suitable for the formation of leading forecasts of the
dynamics of exchange rates).

35.

Thank you for your attention!