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To determine the intrinsic value of an equity share, the security analyst must forecast the earnings and dividends expected from the stock and choose a discount rate which reflects the risk of the stock. This is what is involved in the fundamental analysis, perhaps the most popular method used by investment professionals.
HOW?
Understanding of the macroeconomic environment and developments. Analyzing the prospects of the industry to which the firm belongs Assessing the projected performance of the company and the intrinsic value of its shares.
MACRO ECONOMY
It includes the following
CONTND.
World GDP at market exchange rates expanded 3.6% in 2010. GDP growth rate has decreased from 3.6% to 3.1% in 2011 at market exchange rates, said the WTO.
Output of developed economies rose 3.7% in the latest year after falling 2.6% in 2009.
It dominates the world economic sense and hence developments in the US like employment figures , housing, interest rates , and current account deficits are keenly watched by economists , businessmen , and investment analysis all over the world.
FISCAL POLICY
Fiscal policy is concerned with the spending and tax initiative of the government. It is perhaps the most direct tool to stimulate or dampen the economy. An increase in government spending stimulates the demand for goods and services, whereas decrease deflates the demand for goods and services. By the same sense, if tax rates decrease the consumption of goods and services increases
Standard rate of excise duty held at 10 percent
Personal income tax exemption limit raised to Rs 180,000 from Rs 160,000 for individual tax payers For senior citizens, the qualifying age reduced to 60 years and exemption limit raised to Rs 2.50 lakh. Citizens over 80 years to have exemption limit of Rs 5 lakh.
MONETARY POLICY
Monetary policy which is concerned with the manipulation of money supply in the economy is the other main plank of demand side economics. Monetary policy affects the economy mainly through its impact and interest rates. An expansionary monetary policy lowers short term interest rates thereby stimulating investment and consumption demand. A contractionary monetary policy has the opposite effects.
9.40
7.30
5.40
7.20
Manufacturing and mining sectors pulled down the industrial growth rate to 7.8 per cent in 2010-2011. 13 out of 17 industry groups posted positive growth in march this year, the official data shows that the annual growth in manufacturing declined to 8.1 per cent in 201011 from 11 per cent in the previous fiscal.
For the month of march alone also, the sector's production increase was lower at 7.9 per cent as compared to the16.4 per cent expansion achieved in march 2010-11 from 10.5 per cent in 2009-10
Capital goods were one of the worst affected to register a growth of 9.3 per cent in 2010-11 as against a healthy 20.9 per cent increase in the previous fiscal.
The mining sector also witnessed a fall in growth to 5.9 per cent in 2010-11 from 9.9 per cent in 200910. The growth in electricity generation also slowed down to 5.6 per cent in 2010-11 from 6 %in 200910
Investment analysts generally examine the government budget to assess how it is likely to impact stock market. They generally classify this into favourable and unfavourable.
Favourable A reasonably balanced budget A level of debt which can be serviced comfortably A tax structure which provides incentive for stock market investment Unfavourable A budget with high surplus and deficit A level of debt both internal and external which is difficult to service A tax structure which provides disincentive for stock market investments
MONEY SUPPLY
This growth rate can be attributed to 3 factors Growth in the real economy Monetization of a portion of deficit financing Financial deepening of the economy
INTEREST RATE
Interest rate varies with maturity , default risk , inflation rate, productivity of capital and special features and so on. The interest on money market instruments are risk free and are lowest.
A rise in the interest rates decrease the corporate profitability and also leads to increase in the discount rate applied by equity investors , both of which have an adverse impact on stock prices and vice versa.
FOREIGN INVESTMENT
Foreign investments in India comes in two forms , a) Foreign direct investment b) Foreign portfolio investment The former represents investment for setting up new projects and hence is long term in nature. The latter is in the form of purchase of outstanding securities in the capital market and hence can be reversed easily