Essay: MOTILAL OSWAL SECURITIES LIMITED

EXECUTIVE SUMMARY
There are few points that everybody agrees upon in this world. The stock market irregularity is certainly one of them. Even people with several years of experience are not always able to track the stock market dynamics, thus falling target to defective decisions.
Now a day there is a tough competition in financial opportunities due to increase in the investment products. People can get many investment options to invest their savings. Selecting one from the many available options considering many associated factors is a very complex process.
INTRODUCTION ABOUT THE INTERNSHIP:
India is one of the top five economies in the world in terms of market potential and ranked as the third biggest economy in Asia in terms of gross domestic product. All these make investment in India a creative option for the investors across the world. The capital market of India forms an important part of the development of the nation. Nowadays people are showing more interest to invest in shares or derivatives. Investors are more conscious about the fluctuations in the stock market. In order to minimize the risk, the investors should know about the past performance of the company, market fluctuations, reason for fluctuation, economic policy and inflation etc., before making an investment in securities. Otherwise, the investors can be prefer security analysis. There are two alternative approaches for security analysis such as technical and fundamental analysis. Technical analysis is a method of estimating securities by analyzing the statistics created by marketplace activity, such as historical charges and capacity.
Chapter 1
Topic chosen for study
A Study on Technical Analysis of selected Stocks of Automobile & IT and ITES at
Need for the study
 To understand present and past price movement
 To interpret and analyze data using MA, RSI, ROC.
 To smoothen the data for easy evaluation using charts
 To find out support level and resistance level of shares
Objective of study
 To understand historical and current price fluctuations
 To gain the practical knowledge of technical analysis
 To study charts and patterns for for data analysis
 To find out how resistance level and support level projects future buying price
 To forecast future price movements by analyzing historical price movement
Scope of technical analysis
 The study is related to technical analysis to predict the future behavior of the stocks
 The analysis is been done on 6 selected stocks of sensex
 The analysis involves use of limited technical tools out of multiple number of tools available.
Methodology adopted
Type of research
The research design is based on “analytical research”. In analytical research, researcher has to use facts or information already existing for making evaluation.
Time period
Internship duration Dec 14th 2015 to Feb 17th 2016 (10 weeks)
Data used for analysis -6 months share price history (Aug 2015 to Jan 2016)
Method of collection
The study is purely based on secondary data. The secondary data are those which already exist (historical data)
Sources of data
Books
Articles and journals
Reports
Firms share price
Tools used for analysis
Moving averages
Roc
RSI
Limitations of the study
 Analysis involves use of limited technical tools
 The study is restricted only to six selected stocks listed on sensex
 The study is only for academic purpose
 The study depends more on secondary data rather than primary data.
 Technical analysis is not applicable to newly listed companies
 The projections made may no be a perfect prediction of the future as technical analysis is not fully reliable tool.
 External factors may adversely affect the industry as well as its share price.
Chapter 2
INTRODUCTION
A stock broker is a person who buys and sells stocks on behalf of investors for the predetermined commission. The stock broker basically works as an agent coordinating the activities of the buyers and sellers on stock exchange.
Historical Evolution
The equity brokerage industry in India is one of the oldest in the Asian region. India had an active stock market for about 150 years that has played a significant role developing risk market and also promoting enterprise and for supporting the growth of industry.
The roots of a stock market in India began in 1860s during the American Civil War that lead to sudden search in demand for cotton from India resulting in the setting up of number of joint stock companies that had issued securities to raise finance. This trend has lead to the rapid growth of securities in Europe and North America in the background of expansion of rail routes, exploration, natural resources and land development.
Securities Exchange Board of India
Securities Exchange Board of India overseas the operations of exchanges and the broker has watch dog. It is the regulatory body in charge of the country’s capital market. In every way possible, professionalism has come into existence in the stock market business. The securities and already redefined themselves and have introduced the compilation of a database to identify avenues of investments in industries.
The Indian securities markets has evolved continuously to become one of the most dynamic, modern and efficient securities market in Asia. Today, Indian market conform to international standards both in terms of structure and in terms of operating efficiency.
Markets
In tune with global stock markets that began to recover from the second half of 2003, Indian stock markets too witnessed rapid growth. India’s two leading indices, the most popular BSE Sensex, and the one most used by the markets the National Stock Exchanges S & P CNX Nifty rose to record levels.
Both primary and secondary market activity experienced sharp surge. Much progress was made in further strengthening and stream lining risk management, market regulation and supervision. A few aspects of the major developments in the India’s stock markets are described below.
Market Structure
Indian Securities market is fairly large as compared to several other emerging markets. There are 24 stock exchanges in the country, through the entire liquidity is shared between the country’s to national level exchanges namely, the National Stock Exchange of India and the Bombay Stock Exchange Ltd. The regional stock exchanges are in pursuit of business models that make them viable and vibrant. Meanwhile, these exchanges have become members of the national level exchanges through formation of subsidiaries whose business is showing continuous growth and progress.
With the abolition of the deferral products and introduction of uniform T+2 settlement cycle, the liquidity in this exchanges flow to the national level system consisting of NSC and BSE.
BSE was established in 1875 as “The Native Share and Stock Brokers Association”. It is the oldest one in Asian region, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making association of the persons and is currently young aged in the process of converting itself into a demutualized and corporate entity. It is first stock exchange in our country to have obtained a permanent recognition in 1956 from the Government of India under securities contracts Act 1956.
Today, BSE the world’s No.1 exchange in terms of the number of listed companies and the world’s fifth in handling of transactions through its electronic trading system. The BSE is the world\’s 11th largest stock exchange with an overall market capitalization of $1.7 trillion as of January 23rd, 2015. Over 5500 companies are publicly listed ; with over 7745 scrip’s being traded as on 31st December 2010.
Sensex indicator of Bombay stock exchange projects the performance of 30 most actively participating companies scrips of different sectors
The high powered study group on establishment of new stock exchanges popularly known as Pherwani Committee had in 1991 recommended the promotion of new stock exchange at new Bombay as a model stock exchange and to act as National Stock Exchange.
In order to provide nation wide stock exchange facilities to investors, upgrading the facilities and to bring the Indian capital market inline with the International markets in 1992, the National Stock Exchange was established. The exchange has two separate segments which is Capital Market Segment and Money Market Segment. Capital Market Segment would cover trading in equities, convertible debentures, non convertible debentures. NSE provides access to investors from across the country and works as an integral component of National Stock Market system.
The growth of business on NSE in the recent years have been very impressive since the time when exchanges started its operations that is on November 3 1994. Over the period, the average trading volume has increased manifold.
The value of traded scrip’s during the year 1999 to 2000 and NSE was Rs.8,39,052 crores (40% of the total turnover of all stock exchanges combined in India) compared to Rs.3,69,052 crores (30.49% of the total turnover of all stock exchanges in India) on the country’s premium bourse the BSE.
Company profile
Background and inspection
MOTILAL OSWAL SECURITIES LIMITED was established by two people MR .MOTILAL OSWAL and MR. RAAMDEV AGARWAL as a small sub broking unit, in the year 1987 and laid the foundation for motilal oswal financial services limited(MOFSL).it is headquarter in Mumbai having one of india’s biggest networks spreading over 600 towns and cities which comprises 2,217 business locations operated by business partners. As of December 2015 it has 870,000 registered customers.
Motilal oswal securities limited acquires BSE membership in 1990, 3 years after the establishment . in 1996 mosl undertook study on wealth creation to identify biggest, fastest and the most consistent wealth creating companies. Motilal oswal financial services limited reaches billion dollar market capitalization in 2008. Motilal oswal financial services group consist of 5 subsidiaries which are as follows
• Motilal Oswal Investment Advisors Private Ltd. (MOIAPL)
• Motilal Oswal Securities Ltd.(MOSL)
• Motilal Oswal Asset Management Company (MOAMC)
• Motilal Oswal Commodities Broker Private Ltd. (MOCBPL)
• Motilal Oswal Private Equity Advisors Private Ltd. (MOPEAPL)
WHY MOTILAL
Industry Leader
• Motilal oswal is awarded as “Best performing equity broker” 4 years in a row from 2011 to 2014
• Established in 500 cities and 1900+ locations
• As of 2015 motilal reaches 8.5 laskh+ customer base with depository assets of 200 billion cr
• 29 years of wealth creation through the philosophy of solid research , solid advice
Solid Reasearch
• Zee business awarded mosl as india’s best market analyst award for it and fmcg sector
• Mosl has prepared 30,000+ research reports across 225+ companies and 25+ sectors
Solid Advise
• Mosl provides advicery service across equity, derivatives, commodity, currency and mutual funds
• Service avilable through all mediums- mobiles, tablet, desktop and web
Solid Technology
• Powerful, fast and secure technology across all platforms-mobile, tablet, desktop and web
• Perform multiple functions through single login (trde, invest, track, and review)
• LIVE streaming quotes and technical charts to make the right decision
PROMOTERS
SRI. MOTILAL OSWAL- Chairman,CEO,CFO & MD at MOFSL
• Chairman and managing director of motilal oswal financial services limited
• He served on the governing board of the Bombay Stock Exchange (BSE) as a director.
• He is currently a member of the National Stock Exchange (NSE) committee for F&O(futures and options)
• Member of the Managing Committee of Indian Merchants\’ Chamber (IMC).
• He is also a board member and a Director of Jain International Trade Organisation (JITO)
• He was conferred the “Udyog Rattan Award” for his outstanding performance in the industrial development of the country by the Institute of Economic Studies, New Delhi.
• Oswal is a member of Institute of Charted Accounts of India
• He has received the Rashtriya Samman Patra awarded by the Government of India for being amongst the highest income tax payers in the country for a period of 5 years from FY1995–Fy1999.
SRI. RAAMDEO AGARWAL- Joint managing director, executive director of MOSFL
• Mr. raamdeo agarwal is the man behind the strong research capabilities at mosl ltd
• Mr. agarwal specializes in equity research and has been writing the annual ‘motilal oswal wealth creation study’ since its inception in 1996
• Raamdeo mantra on how to create wealth is “buy right sit tight”
• He is the member of the National Committee on Capital Markets of the Confederation of Indian Industry
• Raamdeo is an associate member of Institute of Charted Accounts of India
• Agarwal wrote book the book “the corporate numbers game” along with co-author Mr. Ram K Piparia
• He has also featured on `Wizards of Dalal Street on CNBC TV 18`
• Mr. Agrawal has received the “Rashtriya Samman Patra” awarded by the Government of India for being amongst the highest Income Tax payers in the country for a period of five years from FY1995 to FY1999.
CORE PURPOSE AND VALUES
VISSION AND MISSION: To be a well- respected and preferred global financial services organization enabling the wealth creation for all customers.
EXCELLENCE IN EXECUTION: Time bound results within the framework of companies value system.
TEAM WORK: Attaining collectively and collaboratively
PASSION AND ATTITUDE: Highly energetic and self-motivated with a do it attitude and entrepreneurial spirit.
INTEGRITY: A company honoring commitment with ethical and business practices.
VALUES: Our core purpose is complemented by our organizational values. Living these values, we believe, help us achieve our core purpose.
MERITOCRACY: Performance differentiated along with recognized and rewarded in an apolitical environment.
PRODUCTS AND SERVICES
MOSL understands customer profile and uses a combination of the following products and services to serve the customer needs.
• Commodities –NCDX/MCX
• Private Equity
• Mutual Funds
• Equities-BSE&NSE
• Derivates –NSE- CASH and F&O and BSE –CASH and F&O
• Online trading
• Portfolio management services
• IPO’S
• Asset management
• Depository services
• Loan against shares
• Wealth management
• Invest banking
Commodities
Motilal Oswal Commodities Broker provides commodity broking facilitates through its membership of ncdex and mcx. They trade for their clients in wide variety of 63 commodities, including agricultural products, industrial products, bullion, oil and oilseeds and energy products. Mosl brokerage clients have access to exclusive customized trading advice and reports on highly traded commodities.
Equity
Mosl is a member of nse and bse, has a network of above 480 branches in india as well as abroad, rendering quality equity trading services. Mosl not only has a strong offline presence but also provide automated online trading services. Motilal oswal securities ltd is retail spread caters to the need of individual investors. Trading in equities has been made simple, safe and interesting with a smart advice from the research desk through daily sms alerts, market pointers, periodical researches, stock recommendations and customer needs organized frequently.
Mutual funds
A mutual fund offers the platform to participate in the equity and debt market indirectly through the professional management. Motilal oswal provides services regarding client profiling, asset allocation plan, scheme selection, re-balancing. It offers need based advisory fully backed by solid research, it understands the needs and builds a prudent portfolio, it reviews the portfolios on a monthly basis.
Derivatives
A derivative is a financial contract between two or more parties ,which is derived from the future value of an underlying asset. At any point of time there will always be
AREAS OF OPERATION
As a part of MOFSL, Motital Oswal Securities Limited located in Bengaluru. Almost 10% of the revenue is invested in equity research and they hire and train best resources to become advisors. MOSCL has the highest credit rating for 4.0 billion short term debt program. Credit rating agency “CRISIL” has assigned the highest rating of P1+ to the company’s short term debt program. Geographic reach through:
• Branch Network
• Franchise Network
• Alliances with banks dedicated HNI channel brand
INFRASTRUCTURAL FACILITIES
MOTITAL OSWAL FINANCIAL SERVICES LTD is located at Bellary road, Sadashiva Nagar, Bengaluru. Office Total Area rented by company is 2400 sq.ft with very good technology support available. Cleanliness is given utmost importance in the company. There are proper lighting, air conditioners and ventilation and telecommunication facilities. The company also provides travel allowances and medical allowance facilities to the employees and parking facility is also available. There is a Relationship Manager cabin, a Conferrence Hall, a Training room, a Dealing room, back office department, a reception hall.
The software’s used for trading activity are:
 Online trading – Fast Trade software also known as My Broker
 Offline trading – Light Desktop provided by 3i InfoTech.
Following are some of the important infrastructural facilities in Motilal Oswal
Branch Network
Motital Oswal has a wide network of branches and franchises spread across India to fulfill all investment needs. They have an extremely strong footprint in various parts of India.
VSAT
All offices at various locations are integrated with private VSAT network and internet connectivity, which enables an access to their back office and the depository data on a real time basis. Their clients can also access their back office and depository reports from their website.
Private VSAT
This network is powered by Bharti with Internet Backups for the worst case scenarios.
ACHIEVEMENTS AND AWARDS
• Motilal Oswal Wealth Management Ltd participated in the CNBC TV18 Financial Advisory Awards 2014 – 15; and in the very first year of its participation has been adjudged Best Performing National Financial Advisor.
• Motilal Oswal Securities bagged the Best Performing Equity Broker (National) Award at CNBC TV18 Financial Advisor Awards 2013 held in Mumbai.
• Motilal Oswal Financial Services Ltd\’s Analyst Mr. Jinesh Gandhi bagged the Best Market Analyst Award for the categories Equity-Auto at ‘India`s Best Market Analyst Awards 2013 organized by Zee Business.
• Motilal Oswal Securities was declared “Best Equity Broker” at Bloomberg UTV Financial Leadership Awards in April 2012.
• Motilal Oswal Securities bagged Best Performing National Financial Advisor Equity Broker Award in 2012, second time in a row.
• Motilal Oswal Financial Services was honoured with an award for Best Use in PR in Financial Services Category at India PR & Corporate Communications Awards 2012.
• ‘Best Equity Broking House’ award for financial year 2011 at Dun and Bradstreet Equity Broking Awards 2011
• ‘Best Capital Markets and Related NBFC’ award at the CNBC TV18 India Best Banks & Financial Institution Awards 2011
• ‘Excellence in HR through Technology’ and ‘Excellence in Health Care’ Awards at Asia’s Best Employer Brand Awards at 2011 in Singapore
• ‘Most Innovative Fund of the Year’ award at CNBC TV18 – CRISIL Mutual Fund Awards – 2011
• Adjudged the ‘Best Performing Equity Broker’ at CNBC TV18 Financial Advisors Awards – 2010
• Investment Banking bagged ‘Asia Pacific Cross-Border Deal of the Year’ and ‘India M&A Investment Banker’ Award
• Rated No.1 – ‘Best Recommendations Mid and Small Caps’ and won awards in 3 out of 4 categories at the Star Mine India Broker Rankings 2009 from Thomson Reuters
• Alliance with Axis Bank for offering Online Trading Services
• MOSL Awarded the best Franchiser Service by Franchise World Magazine – 2007
• MOSL Commodities Broker Pvt Ltd (MOCBPL) bagged Global India’s Prestigious ‘Outstanding Commodity Broking House 2007’ Award
• MOSL bagged the No.1 Broker Award in ET Now-Star Mine Analyst Award 2009
• Awarded India’s Best Performing Equity 4 times in a row (2011 to 2014) by CNBC TV 18 Financial Advisory Awards
• Awarded ‘India’s Best Market Analyst Award’ for IT & FMCG sector by Zee Business.
FUTURE GROWTH AND PROSPECTS
• Leverage research and Advisory
• Investor awareness and education
• Grow distribution networks in India
• Increasing customer awareness through Mobile apps
• Focus on wealth solution and new product offering
• Grow investment banking business
• Judicious use of capital ensures high return on Equity and low leverage
• Flexible cost structure to maintain profitability across market cycles
• Build stronger institutional relationship through wider and quality research
• Increase research support
• Grow institutional derivative business
• Building Principal Strategies group to maximize returns using risk free arbitrage strategies
• Grow margin funding book size
COMPETITOR’S INFORMATION
• Geojith
• India Infoline
• Karvy Securities
• Share Khan Ltd
• ICICI Direct
• India Bulls
• Religare securities Ltd
• HDFC securities
• Kotak
SWOT ANALYSIS
The strength, weakness, opportunities and threats of Motilal Oswal can be stated as follows:
Strength of MOSL
1. Large and diverse distribution network
2. Strong research and sales teams
3. Original Research
4. Integrated Technology Platform
5. User friendly software to its customers to facilitate online trading on their own
6. Brand recognition
7. Strong private equity operations
8. Strong investment culture
9. Strong risk management practices
10. Leadership in the franchise business
Weakness of MOSL
1. Charges are high compared to other companies in the industry
2. No service in rural segment
3. Less penetration in developing cities
4. Lack of advertising causes low awareness amongst investors
Opportunities of MOSL
1. Growing Financial Services industry’s share of wallet of disposable income.
2. Huge market opportunities for wealth management service providers as Indian wealth management business is transforming from only a wealth safeguarding to growing the wealth
3. Favorable government policies which motivate public to invest money in share market
4. Increasing awareness about the stock exchange among the public
5. Leveraging the technology to enable best practices and processes
6. Growing rural market
7. Earning Urban Youth looking for investments.
Threats Of MOSL
1. Market fluctuations
2. Government policies
3. Increasing intensity of competition from local as well as global players
4. Unfavorable economic conditions
5. High inflation and interest rates
6. Entry for Foreign finance funds in Indian market
Motilal Oswal Financial Services Previous Years »
Standalone Profit & Loss account ——————- in Rs. Cr. ——————-
Mar \’15 Mar \’14 Mar \’13 Mar \’12 Mar \’11
12 mths 12 mths 12 mths 12 mths 12 mths
Income
Sales Turnover 128.71 69.72 70.01 46.43 49.60
Excise Duty 0.00 0.00 0.00 0.00 0.00
Net Sales 128.71 69.72 70.01 46.43 49.60
Other Income 0.49 26.72 8.52 35.52 14.74
Stock Adjustments 0.00 0.00 0.00 0.00 0.00
Total Income 129.20 96.44 78.53 81.95 64.34
Expenditure
Raw Materials 0.00 0.00 0.00 0.00 0.00
Power & Fuel Cost 0.00 0.00 0.00 0.00 0.00
Employee Cost 7.57 6.53 6.31 6.47 2.64
Other Manufacturing Expenses 0.00 0.00 0.00 0.00 0.00
Selling and Admin Expenses 0.00 0.00 0.00 0.00 0.00
Miscellaneous Expenses 18.56 17.68 5.00 7.43 4.02
Preoperative Exp Capitalised 0.00 0.00 0.00 0.00 0.00
Total Expenses 26.13 24.21 11.31 13.90 6.66
Mar \’15 Mar \’14 Mar \’13 Mar \’12 Mar \’11
12 mths 12 mths 12 mths 12 mths 12 mths
Operating Profit 102.58 45.51 58.70 32.53 42.94
PBDIT 103.07 72.23 67.22 68.05 57.68
Interest 29.58 19.01 13.45 0.90 1.14
PBDT 73.49 53.22 53.77 67.15 56.54
Depreciation 8.17 8.32 8.36 0.93 0.01
Other Written Off 0.00 0.00 0.00 0.00 0.00
Profit Before Tax 65.32 44.90 45.41 66.22 56.53
Extra-ordinary items 0.00 0.00 0.00 0.00 0.00
PBT (Post Extra-ord Items) 65.32 44.90 45.41 66.22 56.53
Tax 4.83 5.59 6.65 9.92 13.88
Reported Net Profit 60.49 39.31 38.75 56.30 42.66
Total Value Addition 26.14 24.21 11.31 13.90 6.65
Preference Dividend 0.00 0.00 0.00 0.00 0.00
Equity Dividend 41.96 27.32 29.05 21.77 20.23
Corporate Dividend Tax 0.55 0.01 1.18 -2.09 3.28
Per share data (annualised)
Shares in issue (lakhs) 1,401.63 1,381.66 1,452.36 1,451.23 1,444.19
Earning Per Share (Rs) 4.32 2.84 2.67 3.88 2.95
Equity Dividend (%) 300.00 200.00 200.00 150.00 140.00
Book Value (Rs) 41.01 37.93 39.12 38.48 35.49
Motilal Oswal Financial Services Previous Years »
Balance Sheet of Motilal Oswal Financial Services ——————- in Rs. Cr. ——————-
Mar \’15 Mar \’14 Mar \’13 Mar \’12 Mar \’11
12 mths 12 mths 12 mths 12 mths 12 mths
Sources Of Funds
Total Share Capital 14.02 13.82 14.52 14.51 14.44
Equity Share Capital 14.02 13.82 14.52 14.51 14.44
Share Application Money 0.00 0.00 0.00 0.00 0.00
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 560.76 510.32 553.61 543.93 498.13
Networth 574.78 524.14 568.13 558.44 512.57
Secured Loans 220.00 18.83 25.00 0.00 0.00
Unsecured Loans 223.14 156.08 125.30 0.00 0.00
Total Debt 443.14 174.91 150.30 0.00 0.00
Total Liabilities 1,017.92 699.05 718.43 558.44 512.57
Mar \’15 Mar \’14 Mar \’13 Mar \’12 Mar \’11
12 mths 12 mths 12 mths 12 mths 12 mths
Application Of Funds
Gross Block 178.05 177.60 160.67 164.25 16.82
Less: Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Less: Accum. Depreciation 25.79 17.62 8.41 0.94 0.01
Net Block 152.26 159.98 152.26 163.31 16.81
Capital Work in Progress 0.00 0.18 0.00 0.00 120.49
Investments 357.37 122.12 119.69 98.70 83.26
Inventories 0.00 0.00 0.00 0.00 0.29
Sundry Debtors 0.00 0.00 0.00 0.00 0.00
Cash and Bank Balance 6.33 2.10 11.22 1.16 1.61
Total Current Assets 6.33 2.10 11.22 1.16 1.90
Loans and Advances 550.08 461.40 469.89 364.63 328.57
Fixed Deposits 0.00 0.00 0.00 0.00 0.00
Total CA, Loans & Advances 556.41 463.50 481.11 365.79 330.47
Deferred Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 24.29 21.17 8.71 54.49 10.75
Provisions 23.83 25.57 25.92 14.87 27.71
Total CL & Provisions 48.12 46.74 34.63 69.36 38.46
Net Current Assets 508.29 416.76 446.48 296.43 292.01
Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00
Total Assets 1,017.92 699.04 718.43 558.44 512.57
Contingent Liabilities 151.67 66.80 158.64 140.62 47.59
Book Value (Rs) 41.01 37.93 39.12 38.48 35.49
Theoretical background of the study
India is one of the top five economies in the world in terms of market potential and ranked as the third biggest economy in Asia in terms of gross domestic product. All these make investment in India a creative option for the investors across the world. The capital market of India forms an important part of the development of the nation. Nowadays people are showing more interest to invest in shares or derivatives. Investors are more conscious about the fluctuations in the stock market. In order to minimize the risk, the investors should know about the past performance of the company, market fluctuations, economic policy, reason for fluctuation and inflation etc., before making an investment in securities. Otherwise, the investors can prefer security analysis. There are two alternative approaches for security analysis such as Fundamental and Technical analysis.
FUNDAMENTAL ANALYSIS
A method of estimating a security that involves attempting to measure its intrinsic value by examining associated economic, financial and other qualitative and quantitative factors. Fundamental analyst’s effort to study everything that can disturb the security\’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management). The end goal of performing fundamental analysis is to produce a value that an investor can compare with the security\’s current price, with the aim of figuring out what sort of position to take with that security (under-priced = buy, overpriced = sell or short).
TECHNICAL ANALYSIS
A method of evaluating securities by analyzing 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 to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
Technical Analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst’s belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, Price levels are predictable.
Investors successfully trade securities using only their knowledge of the security’s chart, without even understanding what the company does. Although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.
DOW THEORY
According to t this theory the trend is divided into primary, intermediate and short term trend.
The primary trend may be the broad upward or downward movement that may last for the year or two. The intermediate trend are corrective movements, which may last for three weeks to three months. The primary trend may be interrupted by intermediate trend. The term trend refers to the day to day price movements. It is also known as oscillations or fluctuations. These three types of trends are compared to tide, waves and ripples of the sea.
BULLISH TREND
When the market exhibits the increasing trend or the indication of higher tops and higher bottoms is called bull market. Bullish trend indicates an upward movement in the price of a stock. Each peak and bottom in bullish trend is higher than the previous peak and bottom.
BEARISH TREND
Bearish trend generally indicates the downward movement of stock price.Bearish market is indicated by lower tops and lower bottoms.
Principles of technical analysis
Technicians say that a market\’s price reflects all relevant information, so their analysis looks more at “internals” than at “externals” such as news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior — hence technicians\’ focus on identifiable trends and conditions.
Market action discounts everything
On most of the sizable return days the information that the press cites as the cause of the market move is not particularly important. Press reports on adjacent days also fail to reveal any convincing accounts of why future profits or discount rates might have changed. Our inability to identify the fundamental shocks that accounted for these significant market moves is difficult to reconcile with the view that such shocks account for most of the variation in stock returns.
Prices move in trends
Technical analysts believe that prices trend. Technicians say that markets trend up, down, or sideways (flat). An example of a security that had an apparent trend is AOL from November 2001 through August 2002. A technical analyst or trend follower recognizing this trend would look for opportunities to sell this security. AOL consistently moves downward in price. Each time the stock rose, sellers would enter the market and sell the stock; hence the “zig-zag” movement in the price. In other words, each time the stock edged lower, it fell below its previous relative low price.
History tends to repeat itself
Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. Technical analysis is not limited to charting, yet is always concerned with price trends. For example, many technicians monitor surveys of investor sentiment.. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment.
Rule-based trading
Rule-based trading is an approach to make one\’s trading plans by strict and clear-cut rules. Unlike some other technical methods or most fundamental analysis, it defines a set of rules that determines all trades, leaving minimal discretion. For instance, a trader might make a set of rules stating that he will take a long position whenever the price of a particular instrument closes above its 50-day moving average, and shorting it whenever it drops below.
CHARTING TYPES
Technical Analyst predict the price movements in the form of charts to identify the trend and trend reversal in advance to plan their investment decision and to trade profitably.
Line chart
Line chart is the most basic and simplest type of stock charts that are used in technical analysis. The line chart is also called a close-only chart as it plots the closing price of the underlying security, with a line connecting the dots formed by the close price. Line charts are useful to help visualize the direction of prices.
Bar chart
Open-High-Low-Close (OHLC) bar charts provide volatility information that line charts lack. The attributes of an OHLC bar are shown below. The chartist can evaluate volatility by the height of the bars and the conviction of the buyers and sellers by the price range between the open and close marks.
The following inference can be drawn from each bar:
• Bottom point of each Bar – lowest price for the day
• Top point of each Bar – highest price for the day
• Indication right – closing price for the day
• Indication left – opening price for the day
• Red Bar – opens high, closes low, Bearish trend
• Green Bar – opens low, closes high, Bullish trend
Japans Candle Stick
This charting technique has become very popular among traders. Candlestick is a chart that displays the high, low, opening and closing prices of a security for a single day. Candlestick charting is a very compound and sometimes difficult system to understand. Candlesticks reveal the investors\’ emotions on security prices and are used by technical analysts to determine when to enter and exit trade activity.
The following inference can be drawn from each bar:
• Bottom wick of the candle – lowest price for the day
• Top wick of the candle – highest price for the day
• Top surface of the empty candle – closing price for the day
• Bottom surface of the empty candle – opening price for the day
• Top surface of the filled candle – opening price for the day
• Bottom surface of the filled candle – closing price for the day
CHART PATTERNS
Resistance and support level
When the stock touches a certain level and then drops, this is called resistance and if the stock reaches down to certain level and then increases this is called support level. Resistance levels are also regarded as a ceiling because these price levels prevent the market from moving prices upward. Support level also regarded as floor as it prevents further fall in scrip price. Every time a support is broken it becomes the new resistance line.
REVERSAL PATTERN
Head & Shoulders (H&S)
A Head & Shoulder (H&S) pattern indicates the end of a Bull phase. After this pattern is identified the prices will fall. Hence a H&S pattern is a caution to sell. The above H&S pattern for SENSEX for the period May 2013 shows a range of 19735.77 to 20215.4 after which the market declined to 19177.76.
Inverse Head and Shoulder
An Inverse H&S pattern indicates the end of a Bear phase. After this pattern is identified the prices will increase. Hence an inverse H&S pattern is a signal to buy. The above inverse H&S pattern for SBI for the period October 2012 to December 2012 shows a price range of Rs. 2350 to Rs. 2050 after which the market has increased to Rs. 2550 in February 2013.
METHODOLOGY:
The data collected for the research purpose are secondary data. Closing, open prices high, low of scrip’s were collected through National Stock Exchange website. The data used in this study comprises of six month observations on selected scrips. Daily data are preferred in this study. The choice of daily closing price is realistic and helpful to calculate and testing the results in technical analysis.
Statistical Tools Used:
1. Day Moving Average.
2. Relative strength index.
3. Rate of change method.
1. Day Moving Average:
Day Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
The two most popular types of moving averages:
gains (losses) is divided by the total number of RSI periods in the calculation (7 in this case). The Average Loss is computed in a similar manner. Calculation of the First RS value is straightforward: divide the Average Gain by the Average Loss. All subsequent RS calculations use the previous period\’s Average Gain and Average Loss for smoothing purposes.
Rate of change method:
The Rate of Change (ROC) indicator is a very simple yet effective oscillator that measures the percent change in price from one period to the next. The ROC calculation compares the current price with the price n periods ago.
ROC = Today’s Close-Close n periods ago * 100
Close n periods ago
The plot forms an oscillator that fluctuates above and below the zero line as the Rate of Change moves from positive to negative. The oscillator can be used as any other momentum oscillator by looking for higher lows, lower highs, positive and negative divergences, and crosses above and below zero for signals.
ROC can be plotted using different periods such as 10 days or 30 days by changing the value. The longer the time span used, the greater the fluctuation in the indicator (in terms of both magnitude and duration).