CSC Vol.2 Chapter 13

Analysts use statistical, market, and industry information for security valuations.
Methods discussed: Fundamental analysis, Technical analysis.

Compare fundamental and technical analysis.
Explain the impact of three macroeconomic factors on investor expectations and security prices.
Understand industry classification and its effect on stock valuation.
Describe tools used in technical analysis.

Blue-chip, Chart analysis, Continuation pattern, Contrarian investors, Cycle analysis, Cyclical industry, Defensive industries, Economies of scale, Efficient market hypothesis, Emerging growth industries, Fundamental analysis, Growth industry, Head-and-shoulders formation, Mature industries, Moving average, Neckline, Quantitative analysis, Random walk theory, Rational expectations hypothesis, Resistance levels, Reversal pattern, Sentiment indicators, Speculative industry, Support levels, Technical analysis.

A plethora of information aids in investment decision-making: market and economic data, stock charts, industry and company characteristics, and financial statistics.
Fundamental and technical analysis often misinterpreted; understanding is crucial for investment recommendations.

Fundamental Analysis: Evaluates capital market, economic, and company conditions to find the intrinsic value of a security.
- Focuses on macroeconomic factors, industry dynamics, and the issuer's profitability.
Technical Analysis: Studies historical stock price movements to predict future trends.
- Analyze market sentiment and patterns, rather than fundamentals.

Fundamental analysis determines the intrinsic value of securities by evaluating economic conditions, which can predict over or undervaluation.
Analysts focus on macroeconomic indicators (e.g., economic outlook) and industry characteristics (e.g., growth stage).
Profitability ratios are essential to gauge a company's ability to service debt and pay dividends.

Technical analysts predict future prices based on past movements; emphasize market sentiment over fundamentals.
Patterns in price movements can signal future trends, yet uncertain times can cause irrational investment behavior, influenced by mass psychology and computerized trading.

Efficient Market Hypothesis: Prices reflect all available information, implying consistent market behavior.
Random Walk Theory: Price changes are random, based solely on current stock price, minimizing predictability.
Rational Expectations Hypothesis: Investors act rationally, processing all available information for their decisions.

Government spending and tax levels significantly influence economic performance and industry profitability.
Tax Changes: Higher taxes decrease disposable income; lower taxes can spur economic activity.
Government Spending: Stimulating spending boosts economy; cutbacks harm it.

The Bank of Canada controls monetary policy, impacting inflation and credit availability through interest rate adjustments.
Rising bond yields indicate economic expansion, while falling yields suggest slower growth.

Inflation creates uncertainty, leading to higher interest rates and lower corporate profits.
Future cash flow value declines during inflation, thus lowering corporate price-earnings ratios.

Industry Classification: Key to understanding company stock valuation; can be based on products or market life cycles.
Competitive Forces: Porter's Five Forces analyze industry attractiveness and growth potential.

By Product/Service, Life Cycle Stage (Emerging, Growth, Maturity, Decline), Competitive Forces, and Economic Cycle Reaction.

Chart Analysis: Visual representation of market data helps identify price patterns (e.g. support and resistance levels).
- Support Level: Price point where demand is strong enough to stop the price from falling further.
- Resistance Level: Price point where selling pressure overcomes buying pressure.
Quantitative Analysis: Uses statistics to identify behaviors in stock price movements, including moving averages.
Sentiment Indicators: Gauge market mood, enabling contrarian investment strategies.
Cycle Analysis: Forecasts market timing by examining cyclical trends.

Fundamental and technical analysis aids in predicting security price changes; fundamental focuses on causes, while technical focuses on effects.
Macroeconomic factors (fiscal, monetary, inflation) shape investment strategies.
Industry classifications (cyclical, defensive, speculative) and competitive forces inform stock valuation.
Tools for technical analysis comprise chart analysis, quantitative statistics, and sentiment assessments.