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Unit 2 part 2-B

SAPM
Akhil Swami

Intrinsic value using PE Ratio

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Estimate the future EPS

Based on correct forecasting of the PAT in the future based on
growth assumptions etc)
Establish a PE multiple
based on last years earnings or trailing 12 month PE or based
on some expected earnings also look out for similar companies
PE
Projected EPS X Projected PE = Value Anchor
Always give a range

Strategy for identifying securities

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Intrinsic Value > Market Value

Buy

Intrinsic Value < Market Value

Sell

Intrinsic Value = Market Value

Hold

Some keys to investing

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Establish Value Anchors

Assess the market Price behaviour (Psychology)
Combine fundamental and technical analysis

Develop sound strategies for growth stocks

Beware of games operators play

Take Swift corrective action i.e. keep stop loss

Have discipline

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Technical analysis
Principle of technical analysis is that
the market narrates its story.
Job is to identify the trend and when
the trend will move in the opposite
direction.

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What is technical analysis

Technical analysis is the study of market action, primarily through the

use of charts, for the purpose of forecasting future price trends.

Basic premises of technical analysis

Market action discounts everything

Prices move in trends

History repeats itself.

Primary trend cannot be manipulated.

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Ingredients of a Trading Plan

Criteria for selection
Fundamental
Technical
Both
Know your capital at Risk
Capital employed
Risk in each trade
Overall risk at any time
Trend following methods
Fundamental
Technical
Both

System of booking
Profits/Losses

Keeping an overall score

Net result is important and not
few winners or few losers

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Basic Assumptions
Market

value is determined solely by the interaction of

supply of and demand for the shares
Supply

and demand for the shares is governed by many

rational and irrational factors
Basically

demand and supply causes the change in trends

Share

prices move in trend and persist for an applicable

length of time.
Shift

in demand and supply occurs gradually rather than

suddenly

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Factors affecting Stock Prices

Company Results
Merger/De-merger news
Stock split/bonus/dividend
War
Terrorist attack
Change in rate of interest
Inflation
Oil Prices
Political Instability
US/Asian/European markets
Budget/Fiscal/Monetary Policy
Metal Prices

Monsoon
Derivative Settlement
Raw Material Prices
Court Cases
FII Buying /Selling figures
MF Buying / Selling
Moving to trade to trade
settlement
Suspension of trading
Company Announcements
News of Disinvestments by the
govt.
Epidemics / Tsunami /
Earthquake

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Some Tools of Technical Analysis

Patterns of price movements
Averages and Trend Lines
Candle stick methods

Gaps, Supports & Resistances

Elliot Wave Rules

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Money Management Rules

Know your capital at risk

Treat your entire capital as Risk Capital

Limit your gross exposure & exposure in single position

Maximum Risk at any point of time is 5% of the Capital
Maximum no. of position
Diversify over five position, not too many, not too little

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Chart construction

Line chart

Bar chart

Candlestick chart

Point and figure chart

Candle volume chart

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Line Chart

Prices are plotted using closing prices. A closing price can be of any time frame.

Sensex daily line chart