SECURITY ANALYSIS A topdown approach

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SECURITY ANALYSISA top-down approach

• Macroeconomic analysis -- examine factors related
  to the economy. Global as well as domestic
  economy should be considered.
• Industry analysis -- examine the specific
  industry in which the firm operates.
  Consideration of industry outlook, technological
  advancement, opportunities and threats, etc.
• Firm specific factors -- analysis of firms
  financial statements, competitive position in its
  industry, strengths and weaknesses, etc.,
• Valuation models -- the above analyses lead to a
  sensible forecast of future cash flows. With
  appropriate valuation models, firm value can be
  determined.

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Macroeconomic Analysis

• The global economy -- Globalization of economy
  links individual country economy to the rest of
  the world. International trades become very
  important to a countrys economic health.
• Domestic economy -- country specific factors are
  considered to evaluate the firms economic
  environment.
• GDP (gross domestic product)
• Employment
• Inflation
• Interest rates
• Budget deficit
• Sentiment

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Macroeconomic Analysis

• The demand and supply shocks -- Shifts in
  aggregate demand and supply due to macroeconomic
  factors are examined.
• reduction (increase) in tax rates
• increases (decreases) in money supply
• increases (decreases) in government spending
• increases (decreases) in foreign export demand
• Federal government policy -- Federal government
  often intervenes by setting its fiscal and
  monetary policies.
• Fiscal policy government spending and tax
  policy. This can affect aggregate demand either
  directly or indirectly.

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Macroeconomic Analysis

• Monetary policy manipulation of money supply
  through changes in interest rates. This affects
  the aggregate demand in the economy.
• Supply-side policy The use of tax incentives to
  increase aggregate supply.
• Business cycle -- understanding patterns of
  economic expansion and contraction help to
  predict industry as well as firm performance.

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Industry Analysis

• Industry life cycles -- investigation of
  industry life cycle to determine the growth
  prospects.
• Start-up stage
• Consolidation stage
• Maturity stage
• Relative decline
• Industry structure and performance
• threat of entry
• rivalry between existing competitors
• competition from substitution products
• bargaining power of buyers
• bargaining power of suppliers