Brailsford3eSM_Ch13

Brailsford3eSM_Ch13 - Chapter 13 Qualitative stock...

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Copyright © 2006 Nelson Australia Pty Limited Chapter 13 Qualitative stock selection Learning objectives After the completion of this chapter, you should be able to: understand the basic procedures involved in stock selection appreciate the different types of shares and their advantages and disadvantages in a portfolio context understand the nature and role of fundamental factors in the determination of the value of a share understand the differences between fundamental and technical analysis understand the basic purpose and mechanics of technical analysis in stock selection Key points 1 Shares can be classified in a number of ways. 2 Examples include blue or green chip, growth or value shares. 3 Share valuation approaches include fundamental and technical analysis. These approaches, rather than being competitors, are often used together. Chapter outline 13.1 Introduction 1 This chapter represents the last step in the top down analysis approach to investment. 2 Investors are concerned with firm-specific factors, consistent with stock selection. 13.2 Types of shares 1 Shares from different companies are never the same. For example, shares differ in terms of investment assets, financing structure, market share, management personnel, products and services. 2 In terms of financial characteristics, price to earning ratios and dividend yields will differ across shares. 3 Types of classifications of shares include growth versus value, which is based on the book to market ratio. Other examples include blue versus green chip shares, which is based on the low risk aspect of these companies, and speculative, neglected and glamour shares. 13.3 Fundamental influences 1 Fundamental influence on returns can be defined as factors associated with either the competitive or business environment. 2 The competitive environment is comprised of internal (culture, personnel and financing mix) and external (market conditions).
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2 Investments: Concepts and Applications Solutions Manual Copyright © 2006 Nelson Australia Pty Limited 3 Fundamental influences can also be investigated by analysing corporate strategy, and SWOT analysis. 13.4 Technical analysis 1 Involves the examination of historical data on prices and volumes to determine future prices. 2 Based on trends and trading rules, such as Elliot wave theory, upside-downside ratio and relative strength ratios. Solutions to text problems Problems and applications 1 The process of stock selection involves a consideration of many factors. It is often argued that there are three major forces affecting the level of stock prices: market forces, industry forces and firm-specific forces. Rather than attempting to consider all forces simultaneously, one approach to investment analysis is to consider each aspect separately. Top-down analysis involves such an approach. The first step is to consider issues relating to the impact of market forces and macro-economic factors on share prices. The second step is to consider the influence of industry factors on share prices. The final step is to consider the influence
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