CU-BCOM-SEM-IV-Fundamental and Technical Analysis in Stock Market-Second Draft

between a “growth” and a “defensive” label difficult. Moreover, “defensive” cannot be understood as necessarily being descriptive of investment characteristics. Food supermarkets, for example, would typically be described as defensive but can be subject to profit-damaging price wars. So-called defensive industries/companies may sometimes face industry dynamics that make them far from defensive in the sense of preserving shareholders’ capital. Threat of New Entrants First focus for analysis Intensity of Rivalry Bargaining Power of Suppliers Bargaining Power of Customers: Discuss the principles of strategic analysis of an industry. Pages Analysis of the competitive environment with an emphasis on the implications of the environment for corporate strategy is known as strategic analysis. Michael Porter’s “five forces” framework is the classic starting point for strategic analysis. Porter focused on five determinants of the intensity of competition in an industry:  The threat of substitute products, which can negatively affect demand if customers choose other ways of satisfying their needs. For example, consumers may trade down from premium beers to discount brands during recessions. Low-priced brands may be close substitutes for premium brands, which, when consumer budgets are constrained, reduces the ability of premium brands to maintain or increase prices.  The bargaining power of customers, which can affect the intensity of competition by exerting influence on suppliers regarding prices (and possibly other factors, such as product quality). For example, auto parts companies generally sell to a small number of auto manufacturers, which allows those customers, the auto manufacturers, to be tough negotiators when it comes to setting prices.  The bargaining power of suppliers, which may be able to raise prices or restrict the supply of key inputs to a company. For example, workers at a heavily unionized company may have greater bargaining power as suppliers of labour than workers at a comparable nonunionized company. Suppliers of scarce or limited parts or elements often possess significant pricing power.  The threat of new entrants to the industry, which depends on barriers to entry, or how difficult it would be for new competitors to enter the industry. Industries that are easy to enter will generally be more competitive than industries with high barriers to entry.  The intensity of rivalry among incumbent companies (i.e., the current companies in the industry), which is a function of the industry’s competitive structure. Industries that are fragmented among many small competitors, have high fixed costs, provide undifferentiated (commodity-like) products, or have high exit barriers usually experience more intense rivalry than industries without these characteristics. 10.2 ANALYSISOFGROWTHANDVALUECOMPANIES 101 CU IDOL SELF LEARNING MATERIAL (SLM)

On the face of it, a point of margin looks much more valuable: 100% of extra margin drops to the bottom line, while, most respondents agree, only 7% to 8% of an extra point of growth turns to profit—and that’s assuming the profit margin is sustained. But experienced businesspeople also know that growth has a compounding effect over time that amplifies the long-term benefit. So, most of the 30 or so people I spoke with concluded by estimating that a point of growth and a point of margin probably contribute about equally to shareholder value. I admit that my survey is not scientific. Nevertheless, I find it striking that experienced business leaders and advisers don’t have a clear sense of the relative impact that growth and extra margin have on shareholder value. My more formal research suggests that growth and margin are anything but equivalent. Growth often is far more valuable than managers think. And it’s a mistake to assume that profitability always must be sacrificed to achieve growth (though there certainly are cases where it does). For some companies, convincing the market that they can grow by just one additional percentage point can be worth six, seven, or even ten points of extra margin. In practice, the choice of whether to adopt a growth strategy or a margin improvement strategy is seldom obvious and depends very much on industry and company-specific factors. Some firms routinely underweight the value of growth and therefore risk compromising their performance and sustainability. Others pull growth levers when shareholder value is best served by boosting margins and cash flow. And some doggedly fight the last war, staying with an approach whose time has passed. If managers are to make the right decisions in allocating their resources and energies across growth projects and margin improvement initiatives, they will need to better understand the relative value of growth. With that information, they can identify the appropriate targets for their companies and build the right organizational skills to achieve those goals. In the following article, I present a new metric, called the relative value of growth (RVG), and the analytic framework that supports it. First, I will examine the RVGs of several well- known companies and explain why the numbers differ and what they say about the strategies of those companies. As these analyses will show, many organizations would benefit more from giving the market reason to expect extra growth than from improving their cost structures. Next, I will address the unspoken assumption that growth and profitability are incompatible over the long term and show that many companies are effective at delivering both. Finally, I will show how managers can use the RVG framework to help them define strategies that balance growth and profitability for their organizations at both the corporate and business-unit levels. 10.3 REALTIMEONLINE SHARETRADINGSTRATEGIES Intraday trading is a riskier way to invest money in the stock market and is much different from what investors do in the stock market. As a beginner in Intraday trading, it is important 102 CU IDOL SELF LEARNING MATERIAL (SLM)

to realize the basic and best strategies inside out to avoid any kind of losses and gain many profits in a shorter span. Meanwhile, a quick tip for beginners in Intraday trading is it is important to invest only as much as one can afford without disturbing the financial situation or conditions. In Intraday trading, either the investor is making good profit or good losses based on how well the stock market's strategies and basics are used. One of the best parts about Intraday trading is how well it lures investors to leverage price fluctuations. Invest and watch it; that's it. But if the right strategies are not used and in the right way, intraday trading can result in loss  Technical analysis and statistical modelling of trading strategies is a key strength of the Trade Station platform. The brokerage grew out of technical analysis software development firm Omega Research, so technical analysis is in its DNA.  The downloadable Trade Station 10 platform offers incredible charting capability based on tick data. Automated technical analysis is built into the charting package, displaying technical patterns on the charts as they form. Web charting capabilities closely match Trade Station 10, including a new toolbar with access to adjust time frames, drawing tools, sessions, and styles.  This is one of the best charting applications available from any broker, and it is especially notable for how well it is integrated with Trade Station’s order management system.  Trade Station users can also create and back test a trading system based on technical events. Trade Station’s trading simulator has all the tools you'll find on a large historical database for back testing strategies.  This platform to one's online brokerage account isn't new—quite a few of the brokers mentioned above can do it too—but Tardier is the first broker to make it the centre of its business model.  We will note in the next section whether a standalone technical analysis site can be bolted onto Trader’s brokerage management platform, enabling transactions while using analytical tools. Slope of Hope was founded in 2005 after creator and perma-bear Tim Knight sold his charting site, Prophet.net, to TD Ameritrade, to share charts and trading experiences with a few of his fans. It is now a destination for technical analysis, trading ideas, charts, and discussions with traders of all stripes. Many of the features, including a very powerful technical charting package, are free to use, and rival the capabilities of much more expensive sites. A key feature of Slope Charts is Slope Rules, which lets you create and test a trading system using technical rules. Drag and drop the rules you’d like to use on a chart and test them, then set up an alert to let you know when the conditions have been met. 103 CU IDOL SELF LEARNING MATERIAL (SLM)

An integrated virtual trading system is available that starts off with an account with $100,000 to help you learn how to hone your trading skills. Options traders will find some terrific analytical tools. Premium membership levels ($14.95–$79.95 per month, two months free with an annual subscription) offer access to additional data, powerful options analysis, and access to exclusive trading ideas. Slope has Launched Native Mobile Ticker Tucker, launched in 2018, offers users a wide variety of trading services, including education, research, and automated trading resources. You can follow other members who are signed in as Leaders or use the strategy creation tools to generate your own trading system. You can back test the strategies you've created with historical data to see how they would have performed. The charting system built-in allows you to overlay price charts with technical indicators. The site also includes Ticker Tucker’s in-platform and syndicated trading TV channel, Ticker Tucker TV. The platform is compatible with brokers including Interactive Brokers, E*TRADE, TD Ameritrade, Tardier, Fidelity Investments, and Trade Station. You can join and use many of the features at no charge, though there are fees for premium services and access to experts. Founded in 2016, Trend Spider has an impressive array of technical analysis tools designed to help you find, plan, and time your trades with greater efficiency and precision. You can generate dynamic watch lists using the Market Scanner, which can search across time frames ranging from 1 minute to 1 month. There are several dozen scanners built-in, or you can design your own. Real-time market data and 20+ years of historical data are included at no extra charge. The platform is web-based with your customizations stored in the cloud. The charting package includes the ability to back test (for Premium and Elite customers) the strategies you’ve created. Subscriptions range from $33–$97 per month, with discounts for prepaid annual plans. Meterstick is another one of the long-time players in the technical analysis industry having been founded in the late 1980s. There are several versions of the software available; the most useful for frequent traders is Meterstick R/T which utilizes real-time trading data from your choice of exchanges. It includes over 150 indicators and line studies plus indicator interpretations that help you understand how to trade each indicator. For advanced users, the indicator builder lets you write your own indicators. You can build and back test trading strategies on your own or work through the strategies that are included in the package. 104 CU IDOL SELF LEARNING MATERIAL (SLM)

Meterstick can identify more than 30 candle patterns on a chart, giving you advice on how to interpret and use them. A Meterstick R/T subscription is $100/month; data feeds are additional. Meterstick connects via API to Interactive Brokers and other online brokers. Market Gear's charting capabilities allow you to analyse customizable indicators, view your trades, draw permanent trendlines, review past trades, and select from an array of time frames. The scanner lets you sort through over 100 customizable technical indicators to find trading opportunities based on technical data. Write as many scans as you want and set your favourites for quick access. Market Gear connects through APIs to TD Ameritrade, E*TRADE, and Ally Invest. Pricing starts at $38 per month. Market Gear's charting capabilities allow you to analyse customizable indicators, view your trades, draw permanent trendlines, review past trades, and select from an array of time frames. 10.4 RELEVANCE Company analysis is a process carried out by investors to evaluate securities, collecting info related to the company’s profile, products, and services as well as profitability. It is also referred as ‘fundamental analysis.’ A company analysis incorporates basic info about the company, like the mission statement and apparition and the goals and values. During the process of company analysis, an investor also considers the company’s history, focusing on events which have contributed to shaping the company. Also, a company analysis investigates the goods and services proffered by the company. If the company is involved in manufacturing activities, the analysis studies the products produced by the company and analyses the demand and quality of these products. Conversely, if it is a service business, the investor studies the services put forward. Comparable Company Analysis Comparable company analysis starts with establishing a peer group consisting of similar companies of similar size in the same industry or region. Investors are then able to compare a particular company to its competitors on a relative basis. This information can be used to determine a company's enterprise value (EV) and to calculate other ratios used to compare a company to those in its peer group. Valuation and Transaction Metrics Used in Comps Comps can also be based on transaction multiples. Transactions are recent acquisitions in the same industry. Analysts compare multiples based on the purchase price of the company rather than the stock. If all companies in a particular industry are selling for an average of 1.5 times 105 CU IDOL SELF LEARNING MATERIAL (SLM)

market value or 10 times earnings, it gives the analyst a way to use the same number to back into the value of a peer company based on these benchmarks. Relative vs. Comparable Company Analysis There are many ways to value a company. The most common approaches are based on cash flows and relative performance compared to peers. Models that are based on cash, such as the discounted cash flow (DCF) model, can help analysts calculate an intrinsic value based on future cash flows. This value is then compared to the actual market value. If the intrinsic value is higher than the market value, the stock is undervalued. If the intrinsic value is lower than the market value, the stock is overvalued. Threat of Potential Entrants This indicates the ease with which new firms can enter the market of a particular industry. If it is easy to enter an industry, companies face the constant risk of new competitors. If the entry is difficult, whichever company enjoys little competitive advantage reaps the benefits for a longer period. Also, under difficult entry circumstances, companies face a constant set of competitors. Bargaining Power of Buyers The complete opposite happens when the bargaining power lies with the customers. If consumers/buyers enjoy market power, they can negotiate lower prices, better quality, or additional services and discounts. This is the case in an industry with more competitors but with a single buyer constituting a large share of the industry’s sales. 10.5 STEPS I. SWOT Analysis S.W.O.T.-stands for Strength, Weakness, Opportunities, and Threats. This is the most important technique used in business analysis. It is conducted by a group of people with different mindsets and perspectives in the company to access a changing environment and react accordingly. It is kind of the business framework in which strengths and weaknesses are internal data factors whereas opportunities and threats are the external data factors. Strength of the company can be classified as the actions that work well for different problems and confers the key advantages to the company. Some examples of strengths are the company name, company location, trusted employees, great reputation, customer support, brand name, product, etc. Weakness of the company is the different activities or disadvantages which create problems for the growth or policies of the company. Examples of weaknesses are 106 CU IDOL SELF LEARNING MATERIAL (SLM)

bad reputation, incomplete product, lazy employees, department rivalry, persistent negativity, office politics, etc. II.MOST Analysis M.O.S.T. stands for Mission, Objective, Strategy, and Tactics. MOST analysis is also a powerful technique to do business analysis. MOST analysis always works from the top. Business Analyst should ensure that it retains the focus towards goals which are most important for the organization. It gives a better understanding of the organization’s capabilities and vision (purpose) and to provide answers to the interrogation such as what does the organization wants to achieve in terms of mission and objectives, how these actions can be implemented in strategies and tactics. Mission should be an organization’s enduring process. Each department of the organization equally contributes to the mission statement. It clears an overall reason for being in business and what will be the outcomes to accomplish. The clearer the business is about its mission, the more likely it will succeed. Objectives are the one step down after mission. These are defined as specific aims for each department to achieve its mission. Objectives should be smart and specific for decision making. They should also be measurable and realistic. III.PESTLE Analysis In any organization, there are many external macro-environmental factors that can affect its performance. PESTLE analysis is sometimes also referred to as the PEST analysis and has used in various business application. PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental. These forces or factors can create opportunities or threats to any organization, so it is a very powerful tool or technique of business analysis. Political factors determine how a government’s policies and regulation act influence an organization.It is also related to the government’s intervention in the economy. All the factors that influence business by the government can be classified here such as tax policies, tariffs, law, trade control, import restrictions, etc. Economic factors have a significant impact on how organizations run their business and how profitable business is. Economic factors include economic growth, exchange rate, inflation rate and interest rate. Social factors include health consciousness, population growth rate, age distribution, cultural trends etc. These factors help marketers to understand their customer’s requirements. IV.System Analysis 107 CU IDOL SELF LEARNING MATERIAL (SLM)

System analysis is a systematic problem-solving method for collecting and interpreting facts, looking system’s weaknesses, identify business problems, or decomposition of the system into smaller parts. It is an approach to minimize the error of different issues. System analysis is the process of studying the company’s perspective, identifying its goals, creating a process together to make an efficient system. For instance, a problem can be solved in a few hours without analysing a system completely but sometimes it creates many other irrelevant issues. So, the better you understand the system, chances are less for any problem to arise. V.Business Model Analysis The business model analysis helps us to understand the business of the company and clears the policies, market approaches, and techniques. It gives a better understanding of many things like revenue model, value offering to which customer’s segment, cost involved in value offering, effects on the company if the business model changes. In the Business model analysis, we also try to grasp the insight on the important factors such as cost of production, marketing, and management. With the complete study of design, production cost, marketing strategy, and effect on possible upcoming changes, A business analyst ensures the growth of company status and revenue. VI.Brainstorming Brainstorming is a useful technique to generate diverse ideas, to resolve or find a solution for the complex problems and to analyse business properly. It is defined as “a group problem-solving technique that involves the spontaneous contribution of ideas from all members of the group.” In brainstorming, each idea of an individual person whether it is out of the box idea is encouraged. Brainstorming done by one person only could be considered as independent brainstorming, some business analysts might advocate for this type of brainstorming because it would take less time to achieve a conclusion, but in the large organization, group brainstorming is practiced. Brainstorming targets creative thinking about a problem to come up with a new set of ideas, approaches, and options. It is a group activity having a completely different purpose of generating solutions for the problems. VII. Mind Mapping Mind Mapping is a very useful and effective business analysis technique that gives us a clear and visual understanding of different problems, ideas, thoughts, etc. Structure of Mind Mapping is very similar to the structure of neurons in the brain (one of the prominent reasons why it is called so), It keeps expanding with the addition of new ideas and resources 108 CU IDOL SELF LEARNING MATERIAL (SLM)

10.6SUMMARY  Company Analysis is among one of the famous forms of assignments that are provided to management students. The task is a test of a candidate's potential to size up a particular company in terms of its growth, establishment, and probable future.  When you are conducting a company analysis, it is obvious that you will be first required to introduce the company. In the introductory paragraph itself, the readers should know about the company, a brief of its contribution to its respective industry, and a recent affair in relation to the company. This will arouse interest among the readers, and they will look forward to going ahead with your report. Contrarily, a dull introduction about a company can kill the desire of the readers to move ahead with your analysis.  Once the company has been introduced, it is time to move ahead with the company details. The immediate paragraph following the introduction should be able to highlight the history of the company along with its cherished achievements. History should include the date of establishment of the company, major changes faced by the company, and the impact of the company in its respective niche. To conclude the overall status, the recent status of the company should be placed that indicates a continuous growth rate (if applicable).  Internal and external factors to a company are often expressed in terms of financial benefits or losses. Management Analysis and Financial Analysis play a key role in determining the exact position of a company in a particular industry. A statement such as Cash Flow and Fund Flow gives an absolute idea of the monetary flows whereas, on the other hand, key ratios such as return on investment (ROI), Stock turnover ratio, etc., provides a valuable source of comparison.  To end a company analysis, you will have to predict the future of the company based on the growth of the company and the growth of its respective industry. The derived cash flow statements and key ratios will also play a major role in contributing to the given conclusion.  Every business and industry carry its own set of risks and concerns which might impact the performance and profitability of the company.  So, as an investor, it is very important to get an idea as to the risks the company is exposed to in case of any eventualities. For example, crude oil is an important component in the manufacturing of paints which constitutes around 55% of the raw materials, so the fluctuations in the crude prices will likely impact the EBITDA and the margins of the company manufacturing paints. 109 CU IDOL SELF LEARNING MATERIAL (SLM)

 So, we need to check and analyse, to which extent will that particular risk affect the business and can the company overcome it. For example, Currency volatility is an important risk for the IT industry as it generates most of the revenues from other countries. Here we need to check that how and to what extent will currency appreciation or depreciation impact the company’s performance.  These factors take into consideration the business model, competitive advantage, Management, and corporate governance. Under the business model, we need to see what the company does, what does it sell along with the prices at which it sells. 10.7KEYWORDS  SWOT Analysis: The SWOT framework helps you evaluate the internal (Strengths and Weaknesses) and external factors (Opportunities and Threats) that impact your business or a course of action.  Porter’s Five Forces: Porter’s Five Forces is a framework that examines the competitive market forces in an industry or segment. It helps you evaluate an industry or market according to five elements: new entrants, buyers, suppliers, substitutes, and competitive rivalry. According to Michael Porter’s model, these are the key forces that directly affect how much competition a business faces in an industry.  Strategic Group Analysis: Strategic Group Analysis is a competitive analysis framework that lets you analyse organizations in clusters based on the similarity of strategy. By identifying the cluster your firm falls into for any given strategic dimension, you can get a sense of the impact of the different strategic approaches. You can also see those you are most closely competing with.  Growth Share Matrix: The Growth Share Matrix is an analysis framework that classifies the products in your company’s portfolio against the competitive landscape of your industry. Developed by the founder of the Boston Consulting Group (BCG) in 1970the model gained widespread acceptance for helping companies decide which products to invest in based on competitiveness and market attractiveness.  Perceptual Mapping: Perceptual mapping is a visual representation of perceptions of your product relative to competing alternatives. It’s also called positioning mapping, because it shows the position of your brand, product, or service mapped against that of your competitors. The first step is to determine two attributes you’ll use as the basis for comparison. Next, you plot where your product and those of your competitors fall on the spectrum of those two attributes. 10.8LEARNING ACTIVITY 110 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Achieving innovation requires the coordinated efforts of many different actors and the integration of activities across specialist functions, knowledge domains and contexts of application. How company analysis performs? ___________________________________________________________________________ ___________________________________________________________________________ 2. Extant literature on organizational innovation is very diverse and can be broadly classified into three streams. Organizational design theories focus predominantly on the link between structural forms and the propensity of an organization to innovate. Define diverse organizational design theories? ___________________________________________________________________________ ___________________________________________________________________________ 10.9UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Does your organization’s corporate responsibility strategy match the availability of your current resources? 2. How often does your organization assess its strengths, weaknesses, opportunities, and threats to understand the current business climate? 3. How effectively does your organization form and make profitable use of partnerships? 4. If you oversaw strategic planning for your organization, what changes would you make? 5. How efficient is your organization from an operational standpoint? Long Questions 1. What’s the difference between company analysis and business analysis? 2. Do the company’s KPIs focus on a range of relevant indicators beyond revenue and EPS growth, such as profitability, leverage, liquidity and investment? 3. Is existence of internal audit function in a firm leads to minimal agency costs, positive organizational behaviour and better information disclosures? 4. How often does your organization analyse the competition in order to understand competitive advantages and disadvantages as well as identify areas for investment or needs for improvement? 111 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Is your organization pursuing growth and new business/market development with as much passion as it does operational efficiency? B. Multiple Choice Questions 1. What does Interpretation of Financial Statements include? a. Criticisms and Analysis b. Comparison and Trend Study c. Drawing Conclusion d. All of these 2. What is Horizontal Analysis also known as? a. Dynamic Analysis b. Structural Analysis c. Static Analysis d. None of these 3. What is Vertical Analysis also known as? a. Static Analysis b. Dynamic Analysis c. Structural Analysis d. None of these 4. What are Comparative Statements also known as? a. Dynamic Analysis b. Horizontal Analysis c. Vertical Analysis d. External Analysis 5. What are the most used tools for financial analysis? 112 a. Comparative Statements b. Common-size Statement c. Accounting Ratios d. All ofthese Answers CU IDOL SELF LEARNING MATERIAL (SLM)

1-d, 2-a, 3-a, 4-b, 5-c 10.10REFERENCES References  Shantharaj, Indrazith. (31 October 2020). A Simple Stock Market Book for Beginners - Technical Analysis on Positional Trading - Price Action Trading. Self-Published.  Paul, Prasenjit.(14 July 2015). How to Avoid Loss and Earn Consistently in the Stock Market: An Easy-to-understand and Practical Guide for Every Investor. Partridge Pub; 3rd Edition.  Palat, Raghu.(1 January 2015). Fundamental Analysis for Investors: How to Make Consistent, Long-term Profits in the Stock Market. Vision Books; 4th edition. Textbooks  Gujral, Ashwani. (30 December 2008). How To Make Money Trading Derivatives: An Insider's Guide. 3rd Edition. Vision Books Pvt Ltd.  Gujral, Ashwani. Khemariya, Prasanna. (21 June 2018). How to Make Money Trading with Charts. Vision Books; New Delhi 110024, India. Third edition.  Weir, Deborah. (22 November 2005). Timing the Market: How to Profit in the Stock Market Using the Yield Curve, Technical Analysis, and Cultural Indicators. Wiley; 1st edition. Websites  https://www.elearnmarkets.com/blog/how-investors-evaluate-a-company/  https://www.readyratios.com/reference/analysis/company_analysis.html#:~:text=Com pany%20analysis%20is%20a%20process,services%20as%20well%20as%20profitabil ity.&text='%20A%20company%20analysis%20incorporates%20basic,and%20the%2 0goals%20and%20values.  https://www.edelweiss.in/investology/fundamental-analysis-218cf3/best-books-to- learn-fundamental-analysis-24cb8b 113 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 11 VALUATION METHODOLOGIES STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Top-down Valuation(EICAnalysis) 11.3 Sum of the Parts (SOTP) 11.4 Discounted Cash Flow Model 11.5 Du-Pont Analysis 11.6 Price Multipliers 11.6.1 Price/ Earnings Ratio Price/Sales Ratio, 11.6.2 Price/Book ValueRatio 11.7Summary 11.8Keywords 11.9Learning Activity 11.10Unit End Questions 11.11References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Describe the top-down valuation.  Explaindiscounted cash flow model.  IllustrateDu-Pont Analysis  Describe Price Multipliers 11.1 INTRODUCTION When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis (2) comparable company analysis (3) precedent transactions. 114 CU IDOL SELF LEARNING MATERIAL (SLM)

These are the most common methods of valuation used in investment banking. Next is the Market Approach, which is a form of relative valuation and frequently used in the industry. It includes Comparable Analysis and Precedent Transactions. Finally, the discounted cash flow (DCF) approach is a form of intrinsic valuation and is the most detailed and thorough approach to valuation modelling. We will describe the methods used in the Market and DCF approaches below. Method 1: Comparable Analysis (“Comps”) Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method. The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current. Method 2: Precedent Transactions Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired. The values represent the en bloc value of a business. They are useful for M&A transactions but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples. Method 3: DCF Analysis Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC). A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis.It is the most detailed Of the three approaches and requires the most estimates and assumptions. However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios and even perform a sensitivity analysis. For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modelled individually and added together. 115 CU IDOL SELF LEARNING MATERIAL (SLM)

Additional Valuation Resources To learn more about how to value a business or to prepare for a career in corporate finance, we’ve got all the resources you need! Here are some of our most popular resources relate to valuation methods:  Valuation Info graphic  Terminal Value  Weighted Average Cost of Capital  How to Get a Job in Investment Banking  Excel Formulas for Finance All these valuations are the technique of estimation or determining the fair price or value of the property such as building, a factory, other engineering structures of various types, land, etc. By valuation, the present value of a property is defined before. 11.2 TOP-DOWN VALUATION (EICANALYSIS) It is intriguing to consider the layperson’s general impressions as to the breadth of analysis that is necessary to value a privately held company. In many instances, they presume that the value of a business can be simplistically determined or that the valuation of a specific business can be performed by focusing on a very narrow aspect of the company. However, valuation is a process that requires a consistent approach and incorporates certain specific steps and analyses. If the overall valuation process is better understood and each valuation is judged in the context of the overall process, I believe that this will lead to a more informed understanding of the value conclusion. There are a significant number of factors to consider when estimating the value of any business entity. These factors vary for each valuation assignment depending on the unique circumstances of the business enterprise and general economic conditions that exist at the effective date of the valuation. Valuation is essentially a top-down process that starts with a broad analysis of the overall economic trends and ends with a check of the reasonableness of the overall value conclusion. This philosophy is embodied in the most used valuation guideline, IRS Revenue Ruling 59-60, which states that in the valuation of the stock of closely held businesses, certain factors are fundamental and require careful consideration in each case. The following factors provide a useful framework that can be applied to the valuation of an operating business. One of the keys to successfully managing your investment portfolio is to use any number of investment analysis strategies. Investment analysis is a way you can evaluate different kinds of assets and securities, industries, trends, and sectors to help you determine the future 116 CU IDOL SELF LEARNING MATERIAL (SLM)

performance of an asset. Doing so will help you figure out how well it will fit in with your investment goals. Top-down investing involves looking at big picture economic factors to make investment decisions, while bottom-up investing looks at company-specific fundamentals like financials, supply and demand, and the kinds of goods and services offered by a company. While there are advantages to both methodologies, both approaches have the same goal: To identify great stocks. Here's a review of the characteristics of both methods. The top-down approach is easier for investors who are less experienced and for those who don't have the time to analyse a company's financials. The top-down approach to investing focuses on the big picture, or how the overall economy and macroeconomic factors drive the markets and, ultimately, stock prices. They will also look at the performance of sectors or industries. These investors believe that if the sector is doing well, chances are, the stocks in those industries will also do well.  Economic growth or gross domestic product (GDP) both in the U.S. and across the globe  Monetary policy by the Federal Reserve Bank including the lowering or raising of interest rates  Inflation and the price of commodities  Bond prices and yields including U.S. Treasuries Bank Stocks & Interest Rates A top-down investor may look at rising interest rates and bond yields as an opportunity to invest in bank stocks. Typically, not always, when long-term yields rise and the economy is performing well, banks tend to earn more revenue since they can charge higher rates on their loans. However, the correlation of rates to bank stocks is not always positive. It's important that the overall economy is performing well while yields rise. Home Builders & Interest Rates Conversely, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the homebuilding industry would benefit the most from lower rates since lower rates might lead to a spike in new homes purchases. As a result, you might buy stocks of companies in the homebuilding sector. Commodities & Stocks If the price of a commodity such as oil rises, the top-down analysis might focus on buying stocks of oil companies like Exxon Mobil (XOM). Conversely, for companies that use large quantities of oil to make their product, a top-down investor might consider how rising oil prices might hurt the company's profits. At the onset, the top-down approach starts looking at 117 CU IDOL SELF LEARNING MATERIAL (SLM)

the macroeconomy and then drills down to a particular sector and the stocks within that sector. Countries & Regions Top-down investors may also choose to invest in one country or region if its economy is doing well. For example, if the European economy is doing well, an investor might invest in European exchange-traded funds (ETFs), mutual funds, or stocks. Outperforming Stocks Bottom-up investors also believe that if one company in a sector does well, that does not mean all companies in that sector will also follow suit. These investors try to find the companies in a sector that will outperform the others. That’s why bottom-up investors spend so much time analyzing a company. Bottom-up investors typically review research reports that analysts put out on a company since analysts often have intimate knowledge of the companies they cover. The idea behind this approach is that individual stocks in a sector may perform well, regardless of poor performance by the industry or macroeconomic factors. However, what constitutes a good prospect, is a matter of opinion. A bottom-up investor will compare companies and invest in them based on their fundamentals. The business cycle or broader industry conditions are of little concern. Many investors struggle with the art of picking stocks. Should they base their decisions solely on what the company does and how well it does it? Or should they focus more on larger macroeconomic trends, such as the strength of the economy, to determine which stocks to buy? There is no right or wrong answer. However, investors should develop systems that help them achieve their investment goals. The second option mentioned is referred to as the top-down investing approach to the market. This method allows investors to analyse the market from the big picture all the way down to individual stocks. This differs from the bottom-up approach, which begins with individual stocks' fundamentals and eventually expands to include the global economy. Start at the Top: The Global-View Because the top-down approach begins at the top, the first step is to determine the state of the world economy. This is done by analyzing not only the developed countries but also emerging countries. A quick way to determine the state of an economy is to look at gross domestic product (GDP) growth over the past few years and the estimates going forward. Often, the emerging market countries will have the best growth numbers when compared with their mature counterparts. Unfortunately, because we live at a time in which war and geopolitical tensions are heightened, we must be mindful of what is currently affecting each region of the world. A 118 CU IDOL SELF LEARNING MATERIAL (SLM)

few regions and countries throughout the world will fall off the radar immediately and will no longer be included in the remainder of the analysis due to the amount of financial instability that could wreak havoc on any investments. Analyze the Trends After determining which regions present a high reward-to-risk ratio, the next step is to use charts and technical analysis of macro trends. By looking at a long-term chart of the specific countries' economic indicators and broad stock market index, we can determine whether the corresponding stock market is in an uptrend and worth analyzing, or is in a downtrend, which would not be an appropriate place to put our money at this time. These first two steps can help you discover the countries that would match your wants and needs for diversification. A Top-Down Approach to Investing Many investors struggle with the art of picking stocks. Should they base their decisions solely on what the company does and how well it does it? Or should they focus more on larger macroeconomic trends, such as the strength of the economy, to determine which stocks to buy? There is no right or wrong answer. However, investors should develop systems that help them achieve their investment goals. The second option mentioned is referred to as the top-down investing approach to the market. This method allows investors to analyse the market from the big picture all the way down to individual stocks. This differs from the bottom-up approach, which begins with individual stocks' fundamentals and eventually expands to include the global economy. Start at the Top: The Global-View Because the top-down approach begins at the top, the first step is to determine the state of the world economy. This is done by analyzing not only the developed countries but also emerging countries. A quick way to determine the state of an economy is to look at gross domestic product (GDP) growth over the past few years and the estimates going forward. Often, the emerging market countries will have the best growth numbers when compared with their mature counterparts.1 Unfortunately, because we live at a time in which war and geopolitical tensions are heightened, we must be mindful of what is currently affecting each region of the world. A few regions and countries throughout the world will fall off the radar immediately and will no longer be included in the remainder of the analysis due to the amount of financial instability that could wreak havoc on any investments. Analyze the Trends After determining which regions present a high reward-to-risk ratio, the next step is to use charts and technical analysis of macro trends. By looking at a long-term chart of the specific countries' economic indicators and broad stock market index, we can determine whether the 119 CU IDOL SELF LEARNING MATERIAL (SLM)

corresponding stock market is in an uptrend and worth analyzing, or is in a downtrend, which would not be an appropriate place to put our money at this time. These first two steps can help you discover the countries that would match your wants and needs for diversification.2 Look to the Economy The third step is to do a more in-depth analysis of the U.S. economy and stock market's strength. By examining the economic numbers such as interest rates, inflation, and employment, we can determine the current market strength and have a better idea of what the future holds. There is often a divergence between the story the economic numbers tell and the trend of the stock market indexes. The final steps in microanalysis are to analyse the major U.S. stock indexes such as the S&P 500 and Nasal. Both fundamental and technical analysis can be used as barometers to determine the robustness of the indices. The market's fundamentals can be determined by such ratios as price-to-earnings, price-to-sales, and dividend yields. Comparing the numbers to past readings can help determine whether the market level is historically overbought or oversold. Technical analysis will help ascertain where the market is in relation to the long- term cycle. Use charts showing the past several decades and zone down the time horizon to a daily view. For example, indicators such as the 50-day and 200-day moving averages help us find the current market trend and whether it is appropriate for investors to be invested heavily in equities.3 So far, our process has taken a macro approach to the market and has helped us determine our asset allocation. If, after the first few steps, we find that the results are bullish, there is a good chance most of the investment-worthy assets will be from the equities market. On the other hand, if the outlook is bleak, the allocation will shift its focus from equities to more conservative investments such as fixedincome and money markets. Microanalysis: Is This Investment Right for You? Deciding on asset allocation is only half the battle. The next integral step will help investors determine which sectors to focus on when searching for specific investments such as stocks and exchange-traded funds (ETFs). Analyzing the pros and cons of specific sectors (i.e., health care, technology, and mining) will narrow the search even further. The process of analyzing the sectors involve tactics used in the prior approach, such as fundamental and technical analysis. In addition to the mentioned tools, investors must consider the long-term prospects of the specific sectors. For example, the emergence of an aging baby boomer generation over the next decade could serve as a major catalyst for sectors such as health care and leisure. Conversely, the increasing demand for energy coupled with higher prices is another long- term theme that could benefit the alternative energy and oil and gas sectors. After the entire amount of information is processed, several sectors should rise to the top and offer investors the best opportunities. 120 CU IDOL SELF LEARNING MATERIAL (SLM)

The emergence of ETFs and sector-specific mutual funds has allowed the top-down approach to end at this level in certain situations. If an investor decides the biotech sector must be represented in the portfolio, they have the option of buying an ETF or mutual fund composed of a basket of biotech stocks. Instead of moving to the next step in the process and taking on the risk of an individual stock, the investor may choose to invest in the entire sector instead. However, if an investor feels the added risk of selecting and buying an individual stock is worth the extra reward, there is an additional step in the process. This final phase of the top- down approach can often be the most intensive because it involves analyzing individual stocks from several perspectives. Fundamental analysis includes a variety of measurements such as price/earnings to growth ratio, return on equity and dividend yield, to name a few. An important aspect of individual stock analysis will be the company's growth potential over the next few years. Ideally, investors want to own a stock with a high growth potential because it will be more likely to lead to a high stock price. Technical analysis will concentrate on the long-term weekly charts, as well as daily charts, for an entry price. At this point, the individual stocks are chosen, and the buying process begins. 11.3 SUM OF THE PARTS (SOTP) The value of each business unit or segment is derived separately and can be determined by any number of analysis methods. For example, discounted cash flow (DCF) valuations, asset- based valuations and multiples valuations using revenue, operating profit or profit margins are methods utilized to value a business segment. What Does the SOTP Tell You? Sum-of-the-parts valuation, also known as breakup value analysis, helps a company understand its true value. For example, you might hear that a young technology company is \"worth more than the sum of its parts,\" meaning the value of the company's divisions could be worth more if they were sold to other companies. Example of How to Use the Sum-of-the-Parts Valuation – SOTP Consider United Technologies (NYSE: UTX), which said it will break the company into three units in late 2018—an aerospace, elevator and building systems company. Using the 10- year median enterprise value-to-EBIT (EV/EBIT) multiple for peers and 2019 operating profit projections, the aerospace business is valued at $107 billion, the elevator business at $36 billion and building systems business $52 billion. Thus, the total value is $194 billion. Lessing out net debt and other items of $39 billion, the sum-of-the-parts valuation is $155 billion. 121 CU IDOL SELF LEARNING MATERIAL (SLM)

In situations such as this one, larger companies have the ability to take advantage of synergies and economies of scale unavailable to smaller companies, enabling them to maximize a division's profitability and unlock unrealized value. The SOTP valuation is most used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue. It is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts. It is also possible to use this valuation in situations where a company is being revalued after a restructuring. The Difference between the SOTP and Discounted Cash Flow – DCF While both are valuation tools, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, valuing a segment of a company may be done with a DCF analysis. Meanwhile, the DCF uses discounted future cash flows to value a business, project, or segment. The present value of expected future cash flows is discounted using a discount rate. Limitations of Using Sum-of-the-Parts Valuation – SOTP The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs. As well, SOTP valuations do not consider tax implications, notably the implications involved in a spinoff. 11.4 DISCOUNTED CASH FLOW MODEL Let us take a simple, discounted cash flow example. If you have an option between receiving $100 today and obtaining $100 in a year’s time. Which one will you take? Here the chances are more than you will consider taking the money now because you can invest that $100 today and earn more than $100 in the next twelve months’ time. Obviously, you considered the money today because the money available today is worth more than the money in the future due to its potential earning capacity (time value of money concept) Now, apply the same calculation for all the cash you expect a company to be producing in the future and discount it to arrive at the net present value, and you can have a good understanding of the company’s value.  The thumb rule states that if the value reached through discounted cash flow analysis is higher than the current cost of the investment, the opportunity would be attractive.  Please note that DCF model entails you to think through various factors that affect a firm likes of future revenue growth and profit margins, cost of equity and debt, and a discount rate that largely depends on the risk-free rate. All these factors drive the share value and thus enable the analysts to put a more realistic price tag on the company’s stock.  Assuming that you understood this simple DCF stock example, we will now move the practical Discounted Cash Flow Example of Alabama IPO. 122 CU IDOL SELF LEARNING MATERIAL (SLM)

7 Step of Discounted Cash Flow Valuation Model As a professional Investment Banker or an Equity Research Analyst, you are expected to perform DCF comprehensively. Below is a step-by-step approach of Discounted Cash Flow Analysis (as done by professionals). Here are the seven steps to Discounted Cash Flow (DCF) Analysis – 1. Projections of the Financial Statements 2. Calculating the Free Cash Flow to Firms 3. Calculating the Discount Rate 4. Calculating the Terminal Value 5. Present Value Calculations 6. Adjustments 7. Sensitivity Analysis 11.5 DU-PONT ANALYSIS The DuPont analysis (also known as the DuPont identity or DuPont model) is a framework for analyzing fundamental performance popularized by the DuPont Corporation. DuPont analysis is a useful technique used to decompose the different drivers of return on equity (ROE). The decomposition of ROE allows investors to focus on the key metrics of financial performance individually to identify strengths and weaknesses. A DuPont analysis is used to evaluate the component parts of a company's return on equity (ROE). This allows an investor to determine what financial activities are contributing the most to the changes in ROE. An investor can use analysis like this to compare the operational efficiency of two similar firms. Managers can use DuPont analysis to identify strengths or weaknesses that should be addressed. There are three major financial metrics that drive return on equity (ROE): operating efficiency, asset use efficiency, and financial leverage. Operating efficiency is represented by net profit margin or net income divided by total sales or revenue. Asset use efficiency is measured by the asset turnover ratio. Leverage is measured by the equity multiplier, which is equal to average assets divided by average equity DuPont Analysis Components The basic DuPont Analysis model is a method of breaking down the original equation for ROE into three components: operating efficiency, asset efficiency, and leverage. Operating efficiency is measured by Net Profit Margin and indicates the amount of net income generated per dollar of sales. Profitability and ROE 123 CU IDOL SELF LEARNING MATERIAL (SLM)

Profitability is a measure of a business’s ability to generate earnings relative to its expenses and other costs. It is one of the most important metrics for the evaluation of a business’s success. Return on Equity (ROE) is a commonly used accounting ratio that assesses a company’s profitability. It represents the amount of profit returned as a percentage of the amount of money that the shareholders invested. ROE may provide useful insights about the company’s performance, as we can easily define the benchmark for this measure. For example, if you are an investor looking for new investment opportunities, you can easily compare the ROE of different companies and choose the one with the highest metric as it promises to return you the biggest profit for money invested. Basic DuPont Model The basic DuPont Analysis model is a method of breaking down the original equation for ROE into three components: operating efficiency, asset efficiency, and leverage. Operating efficiency is measured by Net Profit Margin and indicates the amount of net income generated per dollar of sales. Asset efficiency is measured by the Total Asset Turnover and represents the sales amount generated per dollar of assets. Finally, financial leverage is determined by the Equity Multiplier. The first two components assess the operations of the business. The larger these components, the more productive the business is. However, it is worth mentioning that, depending on the industry in which the company operates, Net Profit Margin and Total Asset Turnover tend to trade-off between each other. For example, a machinery manufacturer is likely to generate a low turnover of assets and require some heavy investments; thus, this company will probably see a high-profit margin to offset the low turnover. On the other hand, a fast-food restaurant is likely to see high asset turnover but a much smaller profit margin due to the lower prices. The last component, financial leverage, captures the company’s financial activities. The more leverage the company takes, the higher the risk of default. Nevertheless, even if the company operates in a world in which there is no probability of default, additional leverage still results in a negative effect on ROE. Additional leverage means that the company needs to pay more interest, which lowers the net income. Subsequently, the company sees a lower Net Profit Margin. A Five-Step DuPont Model The basic DuPont Analysis model does not isolate the operating activities from the financing activities. This was obvious from our observation regarding the relationship between leverage and profit margin. 124 CU IDOL SELF LEARNING MATERIAL (SLM)

A five-step DuPont model helps to solve this problem. In this model, to isolate operations and financial impacts on ROE, we will further break down the components used in the basic model Net Profit Margin The net profit margin is the ratio of bottom-line profits compared to total revenue or total sales. This is one of the most basic measures of profitability. One way to think about the net margin is to imagine a store that sells a single product for $1.00. After the costs associated with buying inventory, maintaining a location, paying employees, taxes, interest, and other expenses, the store owner keeps $0.15 in profit from each unit sold. That means the owner's profit margin is 15%, which can be calculated as follows: 11.6 PRICE MULTIPLIERS A price multiple is any ratio that uses the share price of a company in conjunction with some specific per-share financial metric for a snapshot on valuation. The share price is typically divided by a chosen per-share metric to form a ratio. Price multiples enable investors to evaluate the market value of a company's stock in relation to a fundamental metric, such as earnings, cash flow, or book value Understanding Price Multiples A price multiple gives investors an opportunity to make a simple valuation of a company. Price multiples are understood by investors around the world and are accepted as a standard by all interested parties in a stock. Investors commonly express a price multiple ratios in the following format: Price multiple = share price / per-share metric. The numerator in the ratio is the share price, which is the price a single share of a company's stock sells for at a specific time. A company's share price is easily determined simply by looking at a price chart for the company's stock. The denominator is the per-share metric used for the specific price multiple calculations. The metric measures some aspect of a company's performance. Investors can calculate these metrics by using data from a company's financialstatement or by finding the metrics as part of a company's historical data on a brokerage site. Benefits of Price Multiples Price multiples serve an important purpose in providing a static and forward glance at a stock's valuation. The multiples are used to compare present and future (forecasted) valuation multiples of a company with its historical figures and with those of its peers. 125 CU IDOL SELF LEARNING MATERIAL (SLM)

Price multiples can assist investors in determining if a stock is overvalued, undervalued, or valued. These ratios appeal to investors because they are generally easy to understand and use. Price multiples help investors figure out what a share buys in terms of a measure of value, such as cash flow or earnings. Where to Find Price Multiples Most financial websites display basic price multiples such as P/E, P/B, or P/S. The ratios are typically calculated on a trailing twelve month (TTM) or last calendar period basis. For the more serious investor, hand calculations of multiples that are relevant to a particular industry can be done with data provided by companies in their financial reports. 11.6.1 Price/ Earnings RatioPrice/Sales Ratio: The price-to-earnings ratio (P/E) is one of the most widely used metrics for investors and analysts to determine stock valuation. In addition to showing whether a company's stock price is overvalued or undervalued, the P/E can reveal how a stock's valuation compares to its industry group or a benchmark like the S&P 500 index. The P/E ratio helps investors determine the market value of a stock as compared to the company's earnings. In short, the P/E shows what the market is willing to pay today for a stock based on its past or future earnings. A high P/E could mean that a stock's price is high relative to earnings and possibly overvalued. Conversely, a low P/E might indicate that the current stock price is low relative to earnings. However, companies that grow faster than average typically have higher P/Es, such as technology companies. A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future. The average P/E for the S&P 500 has historically ranged from 13 to 15. For example, a company with a current P/E of 25, above the S&P average, trades at 25 times earnings. The high multiple indicates that investors expect higher growth from the company compared to the overall market. A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio needs to be considered against the backdrop of the P/E for the company's industry. Investors not only use the P/E ratio to determine a stock's market value but also in determining future earnings growth. For example, if earnings are expected to rise, investors might expect the company to increase its dividends as a result. Higher earnings and rising dividends typically lead to a higher stock price. Calculating the P/E Ratio The P/E ratio is calculated by dividing the market value price per share by the company's earnings per share. Earnings per share (EPS) is the amount of a company's profit allocated to each outstanding share of a company's common stock, serving as an indicator of the company’s financial 126 CU IDOL SELF LEARNING MATERIAL (SLM)

health. In other words, earnings per share is the portion of a company's net income that would be earned per share if all the profits were paid out to its shareholders. EPS is used typically by analysts and traders to establish the financial strength of a company. 11.6.2 Price/Book Value Ratio “Price Book value Ratio” is defined as the net asset value of a company and is calculated by adding up total assets and subtracting liabilities. Book value per share is arrived at by dividing book value by the number of stock shares outstanding. This can be thought of as the amount that shareholders would theoretically receive per share of stock held if the company went out of business and all the assets were liquidated. The “Price/Book Value” Ratio (P/BV) is calculated by dividing the price of a share of stock by the book value per share. So, if a company has $100 million dollars in net assets and 10 million shares outstanding, then the book value for that company is $10 a share ($100 million in assets / 10 million shares). If the price of the stock stands at $20 a share, then the price to book value ratio is 2.0 ($20 price divided by $10 book value). If the stock price subsequently rises to $30 a share, then the P/BV would be 3.0. What traders look for? Some stocks tend to trade at a relatively low P/BV level. Others have a history of trading at much higher P/BV levels. As a result, it is not always possible to look at a given company’s current P/BV and deem it “high” or “low.”Therefore, it is typically best to compare a company’s current P/BV to its own historical range to get some historical perspective. Similarly, the stocks in some industry groups such as manufacturing, typically trade at relatively low P/BV ratios. This may be due in part to the fact that manufacturing companies tend to own a lot of hard assets such as equipment and buildings. Equipment and machinery will typically not grow in value over time and may in fact depreciate. Buildings may grow in value but will tend to do so slowly over time. The stocks of some other industry groups such as technology stocks typically trade at relatively high P/BV ratios. This may be due in part to the perception that a breakthrough technology might allow Tech Company to expand its earnings very quickly. So, it can also be helpful to compare a given company’s current P/BV to that of the average P/BV for stocks in the same industry group. All, some traders who focus on value factors to select stocks will start their search by focusing on stocks presently trading below book value, i.e., at stocks with a P/BV below 1.00. The underlying theory is to start by looking for stocks that allow you to buy $1 worth of assets for less than $1. What traders look out for? Sometimes companies suffer serious misfortunes. Whether their product becomes obsolete, or they lose a lot of money on a company they have acquired, or a competitor launches a new 127 CU IDOL SELF LEARNING MATERIAL (SLM)

product that takes a large portion of their market share, a company’s business can go south quickly and dramatically. Generally, the company’s stock will often follow as traders try to assess the true value. When this happens a stock can suddenly appear to be very cheap based on its sharply lower P/BV. However, if there is a significant change to the underlying business model the stock may not be as undervalued as suggested by the P/BV. This situation is often referred to as a “value trap”, where a company appears to be undervalued but is reality investors have simply not yet recognized the underlying negative change in the company’s fundamentals. Likewise, because stock prices can move to extremes, it is possible for a stock to fall to an extremely undervalued level and then stay there for an extended period. On the other end of the spectrum, when the P/BV for a stock reaches a significantly higher level than the stock has experienced in the past it may signal over-exuberance on the part of traders. This can often serve as a warning sign that the stock is overvalued. Still, remember that just because a stock sports a higher-than-normal P/BV, this does not necessarily mean that it won’t continue to advance nor that a sharp price decline is imminent. A stock with a high P/BV may imply that investors anticipate strong earnings growth as compared to the rest of the industry. 11.7SUMMARY  Investment banks perform two basic, critical functions for the global marketplace. First, investment banks act as intermediaries between those entities that demand capital (e.g., corporations) and those that supply it (e.g., investors).This is mainly facilitated through debt and equity offerings by companies.Second, investment banks advise corporations on mergers & acquisitions (M&A), restructurings, and other major corporate actions. Most investment banks perform these two functions, although there are boutique investment banks that specialize in only one of the two areas (usually advisory services for corporate actions like M&A).  In providing these services, an investment bank must determine the value of a company. How does an investment bank determine what a company is worth? In this guide you will find a detailed overview of the valuation techniques used by investment bankers to facilitate these services that they provide.  When a Business or Shares are transferred from one party to another, it becomes very important for both buyer as well as seller to know what is the worth of that particular asset which is being transferred. The process which is undertaken to know the worth is nothing but \"Valuation\". It is popularly said that \"Price\" is what you pay, and \"Value\" is what you get. \"Value\" refers to the worth of an asset, whereas \"Price\" is the result of a negotiation process between a willing but not an overeager buyer and a willing but not an overeager seller. In simple terms, valuation is a process of 128 CU IDOL SELF LEARNING MATERIAL (SLM)

determining value of a company or an asset. Valuation is an art and not exact science. What the buyer thinks is whether the product is \"worth the price\" he has paid, this \"worth\" itself is the value of the product. Depending on the structure of the transaction, the management may want to value the entire business or a component of a business - such as division, a brand, distribution network, etc.  The importance of intangible assets such as brands, patents, intellectual property rights, human resources, etc. is increasing and the valuation of such assets is also becoming a more common phenomenon. Some of the instances for which valuation is called for are listed below: Purchase/Sale of Business /Shares, Corporate Restructuring such as Merger / Demerger, Purchase/Sale of Equity stake by joint venture partners, Family Settlement.  To comply with the requirements of Accounting Standards issued by the ICAI - Impairment testing, Purchase price allocation, Determining the Portfolio Value of investments, to comply with certain statutory requirements e.g., Transfer Pricing, Other instances as required under the Companies Act, 2013.  It is important to understand the purpose for which the valuation is being attempted before commencement of any valuation exercise. The structure of the transaction also plays a very important role in determining the value. The 'general purpose' value may have to be suitably modified for the special purpose for which the valuation is done. The factors affecting that value with reference to the special purpose must be judged and brought into final assessment in a sound and reasonable manner 11.8 KEYWORDS  Capital Asset Pricing Model (CAPM): The Capital Asset Pricing (CAPM) Model is the most widely used risk/return model used to calculate the equity cost of capital.  Comparable Company Analysis: Comps or Comparable Company Analysis involves identifying valuation multiples from comparable listed companies and applying these to the financials of the company to be valued.  Compounding: The ability of an asset to generate earnings, which are then reinvested to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.  Discounted Cash Flow (DCF) Valuation Approach:Discounted Cash Flow (DCF) valuation is a method of valuing a company using the concept of the time value of money. All future cash flows are estimated and discounted to give their present values. The sum of all future cash flows, both incoming and outgoing, is the net present value (NPV), which is taken as the value or price of the cash flows in question. 129 CU IDOL SELF LEARNING MATERIAL (SLM)

 Enterprise Value: Enterprise Value (EV), also known as Total Enterprise Value (TEV), Entity Value, or Firm Value (FV) is a measure reflecting the market value of a whole business. It is the sum of claims of all the security-holders: debt holders, preferred shareholders, minority interest, common equity holders, and others. 11.9 LEARNING ACTIVITY 1. How do bankers determine how much a company is worth—in other words, what valuation techniques are typically used? ___________________________________________________________________________ ___________________________________________________________________________ 2. What are the advantages and disadvantages of each valuation technique, andwhenshouldwhichtechnique be used? ___________________________________________________________________________ ___________________________________________________________________________ 11.10UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Realistic consideration of factors responsible for valuation? 2. Ensuring unbiased considerations and avoiding short-cat attempts? 3. Transparency of the valuation process? 4. What are the Main Valuation Methods? 5. What other Valuation methodologies are there? Long Questions 1. What are the different methods of valuation? 2. What are the various sources of referring information for undertaking valuation? 3. What is the relevance of valuation in merger and acquisition (M & A)? 4. Rank the 3 valuation methodologies from highest to lowest expected value? 5. When would you not use a DCF in a Valuation? B. Multiple Choice Questions 1. Which of the following activities can increase cash flow from investing activities? 130 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Purchasing production equipment with cash. b. Selling products and receiving cash. c. Paying out cash dividends. d. Selling an office building and receiving cash. 2. Identify the right option: ABC Company has a debt-to-equity ratio of 25% and a marginal tax rate of 25%. The average unlevered β of comparable companies is 1.1. The levered β of the company. Should be:- a. 0.89. b. 1.16. c. 1.27. d. 1.31. 3. Given the following information, which of the following is correct: On Dec 31, 2013, ABC Company purchased equipment for RMB55 million. Using the straight-line method, the equipment has 10 years of depreciable life and no salvage value. Using a sum-of-the-years-digits method for tax computation, the equipment has 10 years of depreciable life and no salvage value. The income tax rate was 25%? a. Deferred tax assets increase by RMB1.125 million. b. Deferred tax assets increase by RMB4.5 million. c. Deferred tax liabilities increase by RMB1.125 million. d. Deferred tax liabilities increase by RMB4.5 million. 4. What is the value of the firm usually based on? a. The value of debt and equity. b. The value of equity. c. The value of debt. d. The value of assets plus liabilities. 5. Which of the following defines the market to book value? a. The ratio of stock market valuation divided by the value of its NAV. b. The ratio of NAV value divided by stock market valuation. c. The market value of tangible assets divided by the book value of tangible assets. d. The market value of intangible assets divided by the book value of intangible assets. 131 CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-d, 2-d, 3-d, 4-b, 5-a. 11.11REFERENCES References  Damodaran, Aswath. (25 April 2011). The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit. Wiley; 1st edition.  Chacko, George. Evans, Carolyn, L.(9 April 2014). Valuation: Methods and Models in Applied Corporate Finance. Financial Times/ Prentice Hall.  Dorsey, Pat. (29 February 2008). The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments. Wiley; 1st edition. Textbooks  Damodaran, Aswath. (29 March 2011). The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit (Little Books. Big Profits) Kindle Edition. Wiley; 1st edition.  Greenblatt, Joel. Tobias, Andrew. (16 July 2010). The Little Book That Still Beats the Market (Little Books. Big Profits 29) Kindle Edition. Wiley; 1st edition.  Larrabee, David, T. Voss, Jason, A. (7 December 2012). Valuation Techniques: Discounted Cash Flow, Earnings Quality, Measures of Value Added, and Real Options. Wiley; 1st edition. Websites  https://www.investopedia.com/terms/d/dupontanalysis.asp  https://www.analyticssteps.com/blogs/guide-fundamental-analysis  https://www.streetofwalls.com/finance-training-courses/investment-banking- technical-training/valuation-techniques-overview/ 132 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 12 TECHNICAL ANALYSIS 133 STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 PremisesonTechnicalAnalysis 12.3 Technical vs. Fundamental 12.4 TheoriesSupportsTechnicalAnalysis 12.4.1 DowTheory 12.4.2 ElliotWaveTheory 12.4.3 GANNTheory 12.5 SimpleMovingAverage(SMA) 12.6 Exponential Moving Average (EMA) 12.7 Market Indicators 12.8 SpecificStockIndicatorsIncludingBollingerBands 12.9 GlobalIntermarketAnalysis with TheHelp Of TechnicalAnalysis 12.10 Summary 12.11 Keywords 12.12 Learning Activity 12.13 Unit End Questions 12.14 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Identify trends, resistance & support.  Identify the importance of analyzing volume.  Describe calculative and interpretive moving average indicators.  Describe traders to identify the proper entry and exit points.  Examine the usage of technical trading oscillators. 12.1 INTRODUCTION CU IDOL SELF LEARNING MATERIAL (SLM)

Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Despite all the exotic tools it includes, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. It attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor. As wave already mentioned in previous chapters, technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic data, known as fundamentals. Technical analysis can be used on any security with historical trading data. This includes Forex, stocks, futures and commodities, fixed-income securities, etc. In this part of the tutorial, well emphasize analyzing Forex in our examples, but keep in mind that these concepts can be applied to any type of instrument. In fact, technical analysis is more frequently associated with commodities and Forex. A Brief History of Technical Analysis Some aspects of technical analysis began to appear in Amsterdam-based merchant Joseph de la Vega’s accounts of the Dutch financial markets in the 17th century. However, many credits technical analysis to Munshis Homma, (1724-1803), also referred to as Skye Homma or SkyeHonda. He was a wealthy rice merchant and trader from Sakata, Japan who lived during the Tokugawa Shogunate. The reason why he is credited as a pioneer of technical analysis is that he invented Candlestick Charting, which is a backbone of technical analysis to this very day. Initially, in Japan, only physical rice was traded, but beginning in 1710 a futures market was established where coupons representing future delivery of rice were traded. Homma was a successful trader in this secondary market of trading rice coupons. Renowned for his ability in trading the rice market, Homma became a financial advisor to the government and was even awarded the rank of honorary Samurai. In 1755, he wrote The Fountain of Gold – The Three Monkey Record of Money, a text focused on market psychology. Centuries later, the 134 CU IDOL SELF LEARNING MATERIAL (SLM)

Candlestick Charting technique has been brought to the western world and is now used by many traders all over the world. Key Definitions and Philosophy of Technical Analysis Before we get more in-depth into technical analysis, we do need to clearly define what it is. In this article, we will hold, that technical analysis isthestudy of market action, primarily using charts for the purpose of forecasting future price trends. The term “market action” includes three main sources of information available to technicians: price, volume, and open interest (open interest is only used in futures and options markets). There are three premises upon which technical analysis is based:  Market action discounts everything  Prices move in trends  History repeats itself Market action discounts everything . The statement “market action discounts everything” forms the basis of technical analysis. Many other principles follow from this idea. What it means is basically that anything that can possibly affect the market price (fundamentally, politically, psychologically, and otherwise) is reflected in the market price. In other words, for instance, if a price rises, it must mean that demand outweighs supply. Conversely, if the price falls, it must mean that supply outweighs demand. Therefore, a study of price action is all that is required. A technician doesn’t believe that knowing the reasons why the price rises, or falls is necessary. That may seem rather analysis extreme, and this is the exact reason why many traders prefer to use a combination of technical and fundamental Prices move in trends Another premise that is crucial to technical analysis is that prices move in trends. That is, a price in motion is more likely to persist than to reverse. The entire trend-following approach is predicated on riding an existing trend until it shows signs of reversal. If prices did not move in trends, then there would be no point in studying price patterns at all. That is as all price movements would simply be random and unpredictable. History repeats itself Another assumption of technical analysis is that human nature does not change. Therefore, since market action is based on human psychology, history tends to repeat itself. So, there are a lot of things we can learn from market history and analysis. 12.2 PREMISESONTECHNICALANALYSIS Three Premises of Technical Analysis 135 CU IDOL SELF LEARNING MATERIAL (SLM)

There are three premises on which the technical approach is based: 1) Market action discounts everything. 2) Prices move in trends. 3) History repeats itself. 1. Market Action Discounts Everything: The statement “market action discounts everything” forms what is probably the cornerstone of technical analysis. Unless the full significance of this first premise is fully understood and accepted, nothing else that follows makes much sense. The technician believes that anything that can possibly affect the price-fundamentally, politically, psychologically, or otherwise-is reflected in the price of that market. It follows, therefore, that a study of price action is all that is required. The technician is claiming that price action should reflect shifts in supply and demand. If demand exceeds supply, prices should rise. If supply exceeds demand, prices should fall. This action is the basis of all economic and fundamental forecasting. The technician then turns this statement around to arrive at the conclusion that if prices are rising, for whatever specific reasons, demand must exceed supply and the fundamentals must be bullish. If prices fall, the fundamentals must be bearish. 2. Prices Move in Trends The concept of trend is essential to the technical approach. The whole purpose of charting the price action of a market is to identify trends in early stages of their development for the purpose of trading in the direction of those trends. In fact, most of the techniques used in this approach are trend-following in nature, meaning, that their intent is to identify and follow existing trends. There is a corollary to the premise that prices move in trends-a trend motion is more likely to continue than to reverse. This corollary is, of course, an adaption of Newton’s first law of motion. Another way to state this corollary is that a trend in motion will continue in the same direction until it reverses. -following approach is predicated on riding existing trend until it shows signs of the entire trend reversing. 3. History Repeats Itself Much of the body of technical analysis and the study of market action has to do with the study of human psychology. Chart patterns, for example, which have been identified and categorized over the past one hundred years, reflect certain pictures that appear on price charts. These pictures reveal the bullish or bearish psychology of the market. Since these patterns have worked well in the past, it is assumed that they will continue to work well in the future. They are based on the study of human psychology, which tends not to change. Another way of saying this last premise-that history repeats itself-is that the key to 136 CU IDOL SELF LEARNING MATERIAL (SLM)

understanding the future lies in a study of the past, or that the future is just a repetition of the past. 12.3 TECHNICALVS.FUNDAMENTAL An Overview: Fundamental and technical analysis are two major schools of thought when it comes to approaching the markets yet are at opposite ends of the spectrum. Investors and traders use both to research and forecast future stock prices. Like any investment strategy or philosophy, both have advocates and adversaries. Fundamental Analysis Fundamental analysis evaluates stocks by attempting to measure their intrinsic value. Fundamental analysts’ study everything from the overall economy and industry conditions to the financial strength and management of individual companies. Earnings, expenses, assets, and liabilities all come under scrutiny by fundamental analysts. Technical Analysis Technical analysis differs from fundamental analysis, in that traders attempt to identify opportunities by looking at statistical trends, such as movements in a stock's price and volume. The core assumption is that all known fundamentals are factored into price, thus there is no need to pay close attention to them. Technical analysts do not attempt to measure a security's intrinsic value. Instead, they use stock charts to identify patterns and trends that suggest what a stock will do in the future. What is Fundamental Analysis? Fundamental analysis in the stock market is a method of evaluating a company and determining the intrinsic value of its stock. Companies are valued as though they were unlisted, with no regard for their market prices. Buy and sell decisions are then made based on whether a stock is trading at a discount or a premium to its fair value. Although a stock’s value is ultimately an opinion, relatively undervalued companies can outperform over the long term. Fundamental analysis can also be applied to other markets including currencies and commodities. In that case any factors that affect the value of the asset are considered. What is Technical Analysis? Technical analysis is based only on stock price or volume data. The objective is not to predict the future, but to identify the most likely scenarios. Price action is used as an indication of how market participants have acted in the past and how they may act in the future. 137 CU IDOL SELF LEARNING MATERIAL (SLM)

Technical analysts use chart patterns and trends, support and resistance levels, and price and volume behavior to identify trading opportunities with positive expectancy. Technical analysis does not consider the underlying business or the economics that affect the value of a company. The difference between the two approaches comes down to what determines a stock’s value and price. Fundamental analysis considers the value of the company. This ultimately depends on the value of its assets and the profits it can generate. Fundamental analysts are concerned with the difference between a stock’s value, and the price at which it is trading. Understanding the Difference Technical analysis is concerned with price action, which gives clues as to the stock’s supply and demand dynamics – which is what ultimately determines the stock price. Patterns often repeat themselves because investors often behave in the same way in the same situation. Technical analysis is concerned with price and volume data alone. Tools used for Fundamental and Technical Analysis Fundamental analysts consider a company’s financial positions and performance, the market in which it operates, competitors and the economy. The most important source of data for fundamental analysis is the company’s financial statements. These include the income statement, balance sheet and cash flow statements. Data from these statements can be used to calculate ratios and metrics that reflect the company’s performance, health, and growth rates. Industry data and economic factors, like interest rates and retail spending, are also used to forecast future growth rates. Ultimately, a fair value is arrived at after comparing several models and ratios. Technical analysis is a lot broader than many people realize. All chartists use price charts – usually either line charts, bar charts or candlestick charts. Apart from price charts, the tools used can vary widely. Some analysts use indicators like moving averages and oscillators calculated from stock prices. Others use price patterns and complex analysis frameworks like Elliott Waves and Market Profile. Trend followers use other tools to identify price trends and measure momentum. Fundamental vs. Technical Analysis: Which is Better? The debate over fundamental and technical analysis is contentious. Proponents of either form of analysis often write the alternative off but misunderstand that they can both have their place. Fundamental analysis is most useful for long term investments, while technical analysis is more useful for short term trading and market timing. Both can also be combined to plan and execute investments over the medium and long term. Short-term price movements are determined by supply and demand, which are in turn affected by a lot more than what typically goes into fundamental analysis. Market sentiment 138 CU IDOL SELF LEARNING MATERIAL (SLM)

and the effect of emotion on market activity can only be analysed by using price and volume data. On the other hand, charts cannot be used to determine whether a stock is under or overvalued and what its value may be years into the future. Charts reflect what has happened in the past, and their value diminishes the longer the time horizon. Pros and Cons of Fundamental Analysis Analysis based on a company’s financial and competitive position has several advantages. Analyzing the environment in which it operates is also of value. Focusing only on the business, rather than on the stock price, gives investors an idea of what the company is worth. This is invaluable for long term investing. Investing during market bubbles can be rewarding – but it’s still important to know when the market is in a bubble. Portfolio risk can be managed by calculating the premium to fair value at which stocks are trading. Asset allocation decisions can then be made to reduce the potential downside of a portfolio. The biggest profits are usually made by the investors that are correct when the rest of the market is wrong. This can only be achieved with fundamental analysis. Also, decisions based on fundamental analysis typically have a higher probability of being correct, particularly over the long term. There are also several drawbacks to fundamental analysis. It’s important to be realistic about its limitations. Fundamental analysis is time consuming – each company must be studied independently and in detail. Most of the information used in fundamental analysis is widely available. To gain an edge with fundamentals, you need to find unique datasets that aren’t available to most investors. Fundamental analysis tells you very little about what might happen in the short term. Short term price movements and volatility cannot be forecast by looking at financial statements. Fundamental analysis is a lot less precise than often perceived. Valuation models like the discounted cash flow model are based on numerous assumptions which are seldom very accurate. Target valuations can be useful on a relative basis but are limited when it comes to valuing a company more than one or two years into the future. Pros and Cons of Technical Analysis One of the major advantages of technical analysis is that stocks can be analysed quickly. Also, some tasks can be automated which saves time. This means a technical analyst can cover more stocks and draw ideas from a larger universe. Technical analysis can also be used to identify price targets, and levels at which an idea is obviously wrong. This allows traders to create investment strategies with clearly defined risk and reward profiles. In the short term, price action is affected by several factors that fundamental analysis cannot pick up. The effects of market sentiment, market psychology, and supply and demand can all be observed by looking at a chart. Technical analysis can be used to improve timing, and to trade strategies appropriate to market conditions. 139 CU IDOL SELF LEARNING MATERIAL (SLM)

It can improve hedging strategies by improving your timing when short selling or buying options. By looking at a chart you can quickly see whether a stock price is in a trading range or a trend. Some technical strategies can be back tested. This means they can be scientifically tested and applied. Strategies that can be back-tested form the basis of many algorithmic trading strategies. Technical analysis does of course have its drawbacks. First amongst these is that while some technical approaches can be back tested, many cannot. Pattern trading, Elliott Wave analysis and other forms of technical analysis are subjective and rely on judgement. Using charts is often regarded as more of an art than a science. Technical analysis frequently results in ambiguity. Two technical analysts can come to very different conclusions about the same stock by using different approaches. Charts often appear very different on different time frames. And, with the large number of analysis methods, indicators, and time frames available, forming a single view can be a challenge. This happens often and is known as analysis paralysis. Technical trading setups have a relatively low win rate. While a pattern or setup may have an edge, the win rate is often less than 60%. To trade setups like this profitably requires many trades. 12.4 THEORIESSUPPORTSTECHNICALANALYSIS Technical analysis attempts to understand the market sentiment behind price trends by looking for patterns and trends rather than analyzing a security's fundamental attributes. Charles Dow released a series of editorials discussing technical analysis theory. There are certain important theories of technical analysis that are helpful in conducting technical analysis of the market. These include….  Dow Theory  Fibonacci Numbers  Kondratev Wave Theory  Chaos Theory  Neural Networks  Technical Analysis Theories One of the founders of Dow Jones & Co. was Charles Dow. He is also sometimes considered as the inventor of point & figure chart. According to Dow Theory, movement of stock prices includes three components. The most important one is the primary trend which represents the long-term direction of the market. This primary trend indicates the terms bull & bear. The temporary reversal in the primary trend is referred to as secondary trend. The secondary trend 140 CU IDOL SELF LEARNING MATERIAL (SLM)

does not continue for a long term and due to this reason, it cannot become primary trend. The third component includes daily fluctuations in the prices of stock which does not contain any useful information and are meaningless. There are certain important theories of technical analysis that are helpful in conducting technical analysis of the market. These include 12.4.1 DowTheory One of the founders of Dow Jones & Co. was Charles Dow. He is also sometimes considered as the inventor of point & figure chart. According to Dow Theory, movement of stock prices includes three components. The most important one is the primary trend which represents the long-term direction of the market. This primary trend indicates the terms bull & bear. The temporary reversal in the primary trend is referred to as secondary trend. The secondary trend does not continue for a long term and due to this reason, it cannot become primary trend. The third component includes daily fluctuations in the prices of stock which does not contain any useful information and are meaningless. Ocean analogy is mostly used as an illustration for the Dow Theory. The tide in the ocean is either coming in or going out which reflect the primary trend. When their tide going out, the waves still wash ashore which is representation of secondary trend. In certain situation ripples are produced from the waves that reach the sand with no apparent reason and soak the things on the sand. The price movements of Dow Jones Industrial Average provide the basis for Dow Theory. Dow Jones Transportation Average confirms the changes in the primary trend of the DJIA. The logic is that the products are manufactured by industrial companies & shipped by transportation companies. The economy is in good shape when both averages are advancing. The technical points of this famous market technique are better explained in the books in most public libraries. The Dow Theory was not much developed by the Charles Dow. It is suggested by the Wall Street Journal that distortion & selective editing of ideas of Mr. Dow provides the basis for the entire field of the technical analysis. It is argued by another financial historian that Dow Theory only explains the statistical nature of trends from the averages. Also, the Dow did not suggest the prediction of price through interpretation of charts. 12.4.2 ElliotWaveTheory The first soviet five-year plan was made with his assistance. He was Director of the study of business activity from 1920 to 1928 at the Timiriazev Agriculture Academy. He studied the Western capitalist economies during his service at agriculture academy. He pointed out the long-term business cycles with duration of 50 to 60 years in the economies of Great Britain and United States. After the US crash of 1870, he became well known. He proposed the long- 141 CU IDOL SELF LEARNING MATERIAL (SLM)

term business cycle of 50 to 60 years hypothesis which is referred to as Kondratev Wave Theory. Kondratev theory is obvious from the real example of crash of 1987, which happened after 58 years from the crash of 1929. Some modern economists have considered that important macroeconomic changes make the business cycle less predictable like floating exchange rates, the reduction of barriers to free trade, the elimination of gold standard etc. Despite this modern view, there are many market analysts who access the stock market & its risks with the help of Kondratev Wave Theory. Why is itAppealing? The Elliot Wave theory proves that the upward and downward price swings caused by the collective psychology always reflect the same repetitive patterns. Elliot observed that all financial markets move in a zigzag formation, which he termed Wave cycles. With this theory, Elliot was able to analyse markets in greater depth by identifying the specific characteristics of wave patterns and was able to make detailed market predictions based on these patterns. This is what makes the Elliott Wave theory so appealing to traders as it provides them with a method to spot precise price points where the market is likely to reverse. In simpler words, Elliott came up with a system that enables traders to catch tops and bottoms. Basic Principals of the Theory The Elliott Wave theory states that the market is fractal in nature i.e., it forms the same patterns that are observed on larger degree charts on smaller timeframe as well, and that it can be used to predict future price movement. The theory states that it does not depend on the timeframe one analyses as a similar price pattern is observed across all time frames. The theory claims that that market action among the participants produces wave patterns and trends, defined by Elliott as the physical sign of mass psychology. The complete cycle of the Elliot Wave development consists of eight waves that make up two phases: 1) An impulse wave sub-divided into five waves 2) A corrective wave sub-divided into three waves Price Movement According to the theory, price movement in the direction of the main trend is defined as the impulse or motive phase, which unfolds in five waves. Three of those waves (1, 3, and 5) move in the direction of the underlying trend, while the two intervening waves (2 and 4) act as counter-trends or minor retracements within the phase. 142 CU IDOL SELF LEARNING MATERIAL (SLM)

Wave 5’s up move is followed by a correction 3, which traders usually label as A, B, and C. The 5-3 wave pattern can be seen across all timeframes. The corrective phase consists of two waves (A and C) that move in the opposite direction of the motive phase, and an intervening retracement wave (B) that moves in the same direction of the motive phase. The 5-3 wave pattern establishes a complete Elliot wave cycle. The theory tends to get more complicated as more degrees of waves get added. The key to using the Elliot wave successfully lies in counting the waves correctly and identifying the wave in which the market is currently trading in. Wave Degrees Elliott identified nine degrees of waves that could range from a multi-century timeframe to short-term intraday movements. A labelling convention is used to identify the degree of each wave. The largest degree wave is labelled as Grand Super cycle, followed by Super cycle, while the smallest degree wave is labelled as ‘sub-minute’.  hierarchy of the nine degrees of waves Here is the hierarchy of the nine degrees of waves:  A Grand Super cycle is made up of Super cycle waves  Super cycle waves are made up of Cycle waves  Cycle waves are made up of Primary waves  Primary waves are made up of Intermediate waves  Intermediate waves are made up of Minor waves  Minor waves are made up of Minute waves  Minute waves are made up of Minute waves, and  Minute waves are made up of Sermonette waves  Timeframe for each of these nine degrees of waves Here is the timeframe for each of these nine degrees of waves:  Grand Super cycle (multi-century)  Super cycle (about 40–70 years)  Cycle (one year to several years)  Primary (a few months to a couple of years)  Intermediate (weeks to months) 143 CU IDOL SELF LEARNING MATERIAL (SLM)

 Minor (weeks)  Minute (days)  Minute (hours)  Sub-Minute (minutes) An example Most chartists use only 1-4 wave degrees, as applying all nine degrees of waves while trading tends to get quite complicated. The labelling convention is shown in the table below. An example of how Roman characters are used to represent the different waves. 12.4.3 GANNTheory Gann Theory – Stock trading is not everyone’s cup of tea. It requires right set of knowledge and skills. In fact, indulging in intraday trading without good knowledge is like fighting in the battlefield without arms and ammunition. Therefore, it is not wrong to say that traders need to be more careful and try to take a right position to earn more in the stock market. One such way to make good gains with trading is learning the Gann trading strategies. An American trader and market theorist, William Delbert Gann, developed Gann trading theory in 1935. The theory given by him are popular and reliable among the traders. In fact, most of the traders take their position by looking at the price and rely on the Gann angles. In this article, we shall learn the basics of Gann theory and much more. What is Gann Theory? Gann theory predicts the movement of stocks after considering the past, present, and future of the markets. By analysing and assessing the information of the different period including the short-term market highs and long-term market highs, angles are drawn to determine the future market trend. Gann was a believer that mathematical relationships and geometrical angles can predict the future price movements. The whole theory of Gann is based on angles. In this segment of the story, we shall study the Gann angles. 12.5 SIMPLEMOVINGAVERAGE(SMA) What Is Simple Moving Average (SMA)? A simple moving average (SMA) calculates the average of a selected range of prices, usually closing prices, by the number of periods in that range. Understanding a Simple Moving Average (SMA) A simple moving average (SMA) is an arithmetic moving average calculated by adding recent prices and then dividing that figure by the number of time periods in the calculation 144 CU IDOL SELF LEARNING MATERIAL (SLM)

average. For example, one could add the closing price of a security for several time periods and then divide this total by that same number of periods. Short-term averages respond quickly to changes in the price of the underlying security, while long-term averages are slower to react. There are other types of moving averages, including the exponential moving average (EMA) and the weighted moving average (WMA A simple moving average is customizable because it can be calculated for different numbers of time periods. This is done by adding the closing price of the security for several time periods and then dividing this total by the number of time periods, which gives the average price of the security over the time. A simple moving average smooths out volatility and makes it easier to view the price trend of a security. If the simple moving average points up, this means that the security's price is increasing. If it is pointing down, it means that the security's price is decreasing. The longer the time frame for the moving average, the smoother the simple moving average. A shorter-term moving average is more volatile, but its reading is closer to the source data. Special Considerations Analytical Significance Moving averages are an important analytical tool used to identify current price trends and the potential for a change in an established trend. The simplest use of an SMA in technical analysis is using it to quickly identify if a security is in an uptrend or downtrend. Another popular, albeit slightly more complex, analytical use is to compare a pair of simple moving averages with each covering different time frames. If a shorter-term simple moving average is above a longer-term average, an uptrend is expected. On the other hand, if the long-term average is above a shorter-term average, then a downtrend might be the expected outcome. Popular Trading Patterns Two popular trading patterns that use simple moving averages include the death cross and a golden cross. A death cross occurs when the 50-day SMA crosses below the 200-day SMA. This is considered a bearish signal, that further losses are in store. The golden cross occurs when a short-term SMA breaks above a long-term SMA. Reinforced by high trading volumes, this can signal further gains are in store. Simple Moving Average vs. Exponential Moving Average The major difference between an exponential moving average (EMA) and a simple moving average is the sensitivity each one shows to changes in the data used in its calculation. More specifically, the EMA gives a higher weighting to recent prices, while the SMA assigns an equal weighting to all values. The two averages are similar because they are interpreted in the same manner and are both commonly used by technical traders to smooth out price fluctuations. Since EMAs place a higher weighting on recent data than on older data, they are more reactive to the latest price 145 CU IDOL SELF LEARNING MATERIAL (SLM)

changes than SMAs are, which makes the results from EMAs timelier and explains why the EMA is the preferred average among many traders. Limitations of Simple Moving Average (SMA) It is unclear whether more emphasis should be placed on the most recent days in the time or on more distant data. Many traders believe that new data will better reflect the current trend the security is moving with. At the same time, other traders feel that privileging certain dates than others will bias the trend. Therefore, the SMA may rely too heavily on outdated data since it treats the 10th or 200th day's impact just as much as the first or second. Similarly, the SMA relies wholly on historical data. Many people (including economists) believe that markets are efficient—that is, that current market prices already reflect all available information. If markets are indeed efficient, using historical data should tell us nothing about the future direction of asset prices. What is a Simple Moving Average? A simple moving average is a technical indicator that equals a range of prices, often closing prices, divided by the number of time periods. Often, the simple moving average is used to show a security’s price trend. If the simple moving average is trending upwards, for example, this indicates its price is rising. The opposite is true if a security’s price trend is declining. How Do You Calculate a Simple Moving Average? To calculate a simple moving average, the number of prices within a time is divided by the number of total periods. For instance, consider shares of Tesla closed at $10, $11, $12, $11, $14 over a five-day period. The simple moving average of Tesla’s shares would equal $10 + $11 + $12 + $11 + $14 divided by 5, equalling $11.6. 12.6 EXPONENTIAL MOVING AVERAGE (EMA) An exponential moving average (EMA) is a type of moving average (MA) that places a greater weight and significance on the most recent data points. The exponential moving average is also referred to as the exponentially weighted moving average. An exponentially weighted moving average reacts more significantly to recent price changes than a simple moving average (SMA), which applies an equal weight to all observations in the Calculating the EMA Calculating the EMA requires one more observation than the SMA. Suppose that you want to use 20 days as the number of observations for the EMA. Then, you must wait until the 20th day to obtain the SMA. On the 21st day, you can then use the SMA from the previous day as the first EMA for yesterday. 146 CU IDOL SELF LEARNING MATERIAL (SLM)

The calculation for the SMA is straightforward. It is simply the sum of the stock's closing prices during a time, divided by the number of observations for that period. For example, a 20-day SMA is just the sum of the closing prices for the past 20 trading days, divided by 20. Next, you must calculate the multiplier for smoothing (weighting) the EMA, which typically follows the formula: [2 ÷ (number of observations + 1)]. For a 20-day moving average, the multiplier would be [2/ (20+1)] = 0.0952. Finally, the following formula is used to calculate the current EMA: EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier) The EMA gives a higher weight to recent prices, while the SMA assigns equal weight to all values. The weighting given to the most recent price is greater for a shorter-period EMA than for a longer-period EMA. For example, an 18.18% multiplier is applied to the most recent price data for a 10-period EMA, while the weight is only 9.52% for a 20-period EMA. There are also slight variations of the EMA arrived at by using the open, high, low, or median price instead of using the closing price period. What Does the Exponential Moving Average Tell You? The 12- and 26-day exponential moving averages (EMAs) are often the most quoted and analysed short-term averages. The 12- and 26-day are used to create indicators like the moving average convergence divergence (MACD) and the percentage price oscillator (PPO). In general, the 50- and 200-day EMAs are used as indicators for long-term trends. When a stock price crosses its 200-day moving average, it is a technical signal that a reversal has occurred. Traders who employ technical analysis find moving averages very useful and insightful when applied correctly. However, they also realize that these signals can create havoc when used improperly or misinterpreted. All the moving averages commonly used in technical analysis are, by their very nature, lagging indicators. Consequently, the conclusions drawn from applying a moving average to a particular market chart should be to confirm a market move or to indicate its strength. The optimal time to enter the market often passes before a moving average shows that the trend has changed. An EMA does serve to alleviate the negative impact of lags to some extent. Because the EMA calculation places more weight on the latest data, its “hugs” the price action a bit more tightly and reacts more quickly. This is desirable when an EMA is used to derive a trading entry signal. Like all moving average indicators, EMAs are much better suited for trending markets. When the market is in a strong and sustained uptrend, the EMA indicator line will also show an uptrend and vice-versa for a downtrend. A vigilant trader will pay attention to both the direction of the EMA line and the relation of the rate of change from one bar to the next. For 147 CU IDOL SELF LEARNING MATERIAL (SLM)

example, suppose the price action of a strong uptrend begins to flatten and reverse. From an opportunity cost point of view, it might be time to switch to a more bullish investment. Examples of How to Use the EMA EMAs are commonly used in conjunction with other indicators to confirm significant market moves and to gauge their validity. For traders who trade intraday and fast-moving markets, the EMA is more applicable. Quite often, traders use EMAs to determine a trading bias. If an EMA on a daily chart shows a strong upward trend, an intraday trader’s strategy may be to trade only on the long side. 12.7 MARKET INDICATORS Market indicators are quantitative in nature and seek to interpret stock or financial index data to forecast market moves. Market indicators are a subset of technical indicators and are typically comprised of formulas and ratios. They aid investors' investment/trading decisions Understanding Market Indicators Market indicators are like technical indicators in that both apply a statistical formula to a series of data points to draw a conclusion. The difference is that market indicators use data points from multiple securities rather than just a single security. Often, market indicators are plotted on a separate chart rather than appearing above or below an index price chart. Most stock market indicators are created by analyzing the number of companies that have reached new highs relative to the number that created new lows, known as market breadth, since it shows where the overall trend is headed. The two most common types of market indicators are:  Market Breadth indicators compare the number of stocks moving in the same direction as a larger trend. For example, the Advance-Decline Line looks at the number of advancing stocks versus the number of declining stocks.  Market Sentiment indicators compare price and volume to determine whether investors are bullish or bearish on the overall market. For example, the Put Call Ratio looks at the number of put options versus call options during a given period. 12.8 SPECIFICSTOCKINDICATORSINCLUDINGBOLLINGERBANDS Bollinger Bands are a type of price envelope developed by John Bollinger Opens in a new window. (Price envelopes define upper and lower price range levels.) Bollinger Bands are envelopes plotted at a standard deviation level above and below a simple moving average of the price. Because the distance of the bands is based on standard deviation, they adjust to volatility swings in the underlying price. 148 CU IDOL SELF LEARNING MATERIAL (SLM)

Bollinger Bands use 2 parameters, Period and Standard Deviations, StdDev. The default values are 20 for period, and 2 for standard deviations, although you may customize the combinations. Bollinger bands help determine whether prices are high or low on a relative basis. They are used in pairs, both upper and lower bands and in conjunction with a moving average. Further, the pair of bands is not intended to be used on its own. Use the pair to confirm signals given with other indicators How this Indicator Works  When the bands tighten during a period of low volatility, it raises the likelihood of a sharp price move in either direction. This may begin a trending move. Watch out for a false move in opposite direction which reverses before the proper trend begins.  When the bands separate by an unusual large amount, volatility increases, and any existing trend may be ending.  Prices tend to bounce within the bands' envelope, touching one band then moving to the other band. You can use these swings to help identify potential profit targets. For example, if a price bounces off the lower band and then crosses above the moving average, the upper band then becomes the profit target.  Price can exceed or hug a band envelope for prolonged periods during strong trends. On divergence with a momentum oscillator, you may want to do additional research to determine if taking additional profits is appropriate for you.  A strong trend continuation can be expected when the price moves out of the bands. However, if prices move immediately back inside the band, then the suggested strength is negated. Calculation First, calculate a simple moving average. Next, calculate the standard deviation over the same number of periods as the simple moving average. For the upper band, add the standard deviation to the moving average. For the lower band, subtract the standard deviation from the moving average. Typical Values Used: Short term: 10 day moving average, bands at 1.5 standard deviations. (1.5 times the standard dev. +/- the SMA) Medium term: 20 day moving average, bands at 2 standard deviations. Long term: 50 day moving average, bands at 2.5 standard deviations. 149 CU IDOL SELF LEARNING MATERIAL (SLM)

12.9 GLOBALINTERMARKETANALYSIS WITH THEHELP OF TECHNICALANALYSIS What Is Intermarket Analysis? Intermarket analysis is a method of analyzing markets by examining the correlations between different asset classes. In other words, what happens in one market could, and probably does, affect other markets, so a study of the relationship(s) could prove to be beneficial to the trader. Understanding Intermarket Analysis Intermarket analysis looks at more than one related asset class or financial market to determine the strength, or weakness, of the financial markets, or asset classes, being considered. Instead of looking at financial markets or asset classes on an individual basis, intermarket analysis looks at several strongly correlated markets, or asset classes, such as stocks, bonds, currencies, and commodities. This type of analysis expands on simply looking at each individual market or asset in isolation by also looking at other markets or assets that have a strong relationship to the market or asset being considered. For example, when studying the U.S. market, it is worthwhile to look at the U.S. bond market, commodity prices, and the U.S. Dollar. The changes in the related markets, such as commodity prices, may have an impact on the U.S. stock market and would need to be understood to obtain a greater understanding of the future direction of the U.S. stock market. Intermarket analysis should be considered fundamental analysis in that it relies more on relationships to provide a general sense of direction, but, it is often classified as a branch of technical analysis. There are different approaches to intermarket analysis, including mechanical and rule-based. Intermarket Analysis Correlations Performing an analysis of intermarket relationships is relatively simple where one would need data, widely available and free these days, and a spreadsheet or charting program. A simple correlation study is the easiest type of intermarket analysis to perform. This type of analysis is when one variable is compared with a second variable in a separate data set. A positive correlation can go as high as +1.0, which represents a perfect and positive correlation between the two data sets. A perfect inverse (negative) correlation depicts a value as low as - 1.0. Readings near the zero line would indicate that there is no discernible correlation between the two samples. Perfect correlation between any two markets for a very long period is rare, but most analysts would probably agree that any reading sustained over the +0.7 or under the –0.7 level (which would equate to approximately a 70 percent correlation) is statistically significant. Also, if 150 CU IDOL SELF LEARNING MATERIAL (SLM)