Financial Market Analysis
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Unit3financialanakysis.pdf
U N I T 3 – C A P I T A L & M O N E Y M A R K E T A N A L Y S I S
Financial Market Analysis ACCT3602
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Importance of Money Markets
The Money Market
the component of financial markets that involves short-term borrowing/lending, or the buying and selling of financial assets with original maturities of one year or less.
Are used by governments, banks, and other large institutions for the raising of short term finance to fund short-term cash flow needs;
sometimes for loans that are expected to be paid back as early as overnight.
Funds borrowed from the money markets are typically used for general operating expenses or to cover brief periods of illiquidity.
Money markets also allow individual investors to invest small amounts of money in a low-risk setting, usually through a money market fund.
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Functions of the Money Market 3
Financing Trade: Money Market plays crucial role in financing both internal as well as international trade.
Commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market.
The acceptance houses and discount markets help in financing foreign trade.
Financing Industry - Money market contributes to the growth of industries in two ways:
Money market helps the industries in securing short-term loans to meet their working capital requirements through the system of finance bills, commercial papers, etc.
The short-term interest rates of the money market influence the long-term interest rates of the capital market; as it serves as the benchmark.
Functions of the Money Market 4
Self-Sufficiency of Commercial Bank - money market enables the commercial banks to use their excess reserves in profitable investment and become self sufficient. Commercial banks can earn income from its excess reserves as well as maintain
liquidity to meet the uncertain cash demand of the depositors.
In the money market, the excess reserves of the commercial banks are invested in near-money assets (e.g. short-term bills of exchange) which are highly liquid and can be easily converted into cash. Thus, the commercial banks earn profits without losing liquidity.
In situations of emergency and commercial banks have scarce funds, they don’t have to borrow from the central bank at higher interest rates.
They can meet their requirements by recalling their old short-term loans from the money market.
Functions of the Money Market 5
Help to Central Bank: Though the central bank can function and influence the banking system in the
absence of a money market, the existence of a developed money market smoothens the functioning and increases the efficiency of the central bank.
Money market helps the central bank in two ways: The short-run interest rates of the money market serves as an indicator of the
monetary and banking conditions in the country and, in this way, guide the central bank to adopt an appropriate banking policy.
The sensitive and integrated money market helps the central bank to secure quick and widespread influence on the sub-markets, and thus achieve effective implementation of its policies.
The Importance of Capital Markets 6
Capital Markets are financial markets for the buying and selling of long-term debt or equity-backed securities.
These markets channel the wealth of savers to those who can put it to long-term productive use
such as companies or governments making long-term investments.
Capital Market securities includes: Stocks/Equities Corporate Bonds Long-term Government Bonds
The Importance of Capital Markets 7
Capital market plays an important role in mobilizing saving and channelling them into productive investments for the development of commerce and industry. thereby helping capital formation and economic growth of the country.
The capital market acts as an important link between savers and investors. The savers are lenders of funds while investors are borrowers of funds. The savers who do
not spend all their income are called. “Surplus units” and the borrowers are known as “deficit units”.
The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit units.
Surplus units buy securities with their surplus funds and deficit units sells securities to raise the funds they need.
The Importance of Capital Markets 8
Funds flow from lenders to borrowers either directly or indirectly through financial institutions such as banks, unit trusts, mutual funds, etc.
Funds flow into the capital market from individuals and financial intermediaries which are absorbed by commerce, industry and government. It thus facilitates the movement of stream of capital to be used more productively
and profitability to increase the national income.
The borrowers issue primary securities which are purchased by lenders either directly or indirectly through financial
institutions.
The Importance of Capital Markets 9
The capital market provides incentives to savers in the form of interest or dividend and transfers funds to investors for capital formation.
It diverts resources from wasteful and unproductive channels such as gold, jewellery, real estate, conspicuous consumption, etc. to
productive investments.
A well-developed capital market comprising expert banking and non-banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy at reasonable interest rates
and helps in minimizing speculative activities.
The Importance of Capital Markets 10
The capital market encourages economic growth. The various institutions which operate in the capital market give quantitative and
qualitative direction to the flow of funds and bring rational allocation of resources.
They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby inducing economic growth.
In underdeveloped or developing countries where capital is scarce, the absence of a developed capital market is a great hindrance to capital formation and economic growth. Even though people are poor, they do not have any inducements to save.
Those who save, invest their savings in wasteful and unproductive channels, such as gold, jewellery, real estate, conspicuous consumption, etc.
Such countries can induce people to save more by establishing banking and non- banking financial institutions for the existence of a developed capital market.
Importance of Capital Markets 11
Capital market activities results in increase productivity within the economy leading to more employment, increase aggregate consumption and hence economic growth and development.
It diffuses stress on the banking system by matching long-term investments with long-term capital.
It encourages the broader ownership of productive assets by small savers and encourages a thrift culture that is essential for rapid industrialization.
It allows for risk dispersion between investors (diversifiable risks), risks that could be realized by the help of different market operations or market orders or derivatives.
Importance of Capital Markets 12
It provides not only equity capital but also infrastructure capital that has strong socio-economic benefits through development of roads, water, housing, telecommunications, transport, etc.
Capital markets promote public-private sector partnerships by encouraging participation of private sector in productive investment by closing the financial resource scarcity gap.
It also attracts foreign portfolio investors who are critical in supplementing the domestic savings levels; thereby facilitating foreign inflows.
Functions of Capital Markets 13
Link between Savers and Investors
Encourage to Savings
Encourage to Investments
Promotes Economic Growth
Stability in Security Prices The capital market tends to stabilise the values of stocks and securities and reduce the
fluctuations in the prices to the minimum.
The process of stabilisation is facilitated by providing capital to the borrowers at a lower interest rate and reducing the speculative and unproductive activities.
Primary Market
Primary Market is that market in which shares,
debentures and other securities are sold for the first
time when raising long-term capital.
This market is concerned with new issues.
Therefore, the primary market is also called NEW ISSUE
MARKET.
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In this market, the flow of funds is from savers to borrowers (industries), it helps directly in the capital formation of the country.
The money collected from this market is generally used by the companies to modernize their plants, machinery and buildings, for extending business, and for setting up new business unit.
Primary Market 15
Methods of Raising Capital in the Primary Market
The following are the methods of raising capital in the primary market:
Public Issue - the company invites subscription from the public through the issue of prospectus (and issuing advertisements in news papers). Public issue is of two types, namely, initial public offer (either a fresh issue
of securities or an offer for sale of existing securities or both by an unlisted company for the first time in its life to the public), and follow-on public offer (an offering of either a fresh issue of securities or an offer for sale to the public by an already listed company).
Offer For Sale - securities are offered to the public through an intermediary such as issue houses, merchant bank, investment bank or firm of a stock broker. The intermediary will buy from the firm at an agreed price and then sell to the public at market prices.
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Methods of Raising Capital in the Primary Market 17
Private Placement - the issue of securities of a company direct to one investor or a small group of investors. Generally the investors are the financial institutions or other existing companies or
selected private persons such as friends and relatives of promoters. Company law defines a privately placed issue to be the one seeking subscription from 50 members. In a private placement, no prospectus is issued
Right Issue – an existing company issues shares to its existing shareholders in proportion to the number of shares already held by them. Thus, a right issue is the issue of new shares in which existing shareholders are given pre-emptive rights to subscribe to the new issue on a pro-rata basis. If the shareholders neither subscribe the shares nor transfer their rights, then the
company can offer the shares to public.
Electronic-Initial Public Offer - Electronic Initial Public Offers (e- IPOs) allow investors to bid for shares through internet.
Secondary Market
The secondary market is that market in which the buying and
selling of the previously issued securities are done.
The transactions of the secondary market are generally done
through the medium of stock exchange.
The chief purpose of the secondary market is to create liquidity
in securities.
To sell or purchase through the stock exchange requires the
services of a broker.
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Features of Secondary Markets
It creates liquidity.
It comes after primary market.
It has a particular place.
It encourages new investments.
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Economic and Industry Analysis 20
The following factors will affect the prices of shares on the stock market. Demand and Supply - The trend of the stock market trading directly
affects the price. When people are buying more stocks, then the price of that particular stock
increases. On the other hand, if people are selling more stocks, then the price of that stock falls. This is also the trend in individual stocks.
The price is directly affected by the trend of stock market trading.
Market Cap - If you are trying to guess the worth of a company from the price of the stock, you are making a huge mistake. It is the market capitalization of the company, rather than the stock, that is
more important when it comes to determining the worth of the company. You need to multiply the stock price with the total number of outstanding
stocks in the market to get the market cap of a company and that is the worth of the company.
Economic and Industry Analysis 21
Earnings Per Share - Earning per share is the profit that the company made per share in the last quarter.
It is mandatory for every public company to publish the quarterly report that states the earning per share of the company.
This is perhaps the most important factor for deciding the health of any company
they influence the buying tendency in the market, resulting in the increase/decrease in the price of that particular stock.
So, if you want to make a profitable investment, you need to keep watch on the quarterly reports that the companies publish and scrutinize the possibilities before buying stocks of particular companies.
Economic and Industry Analysis 22
Price-Earnings Ratio or the P/E ratio gives you a fair idea of how a company's share price compares to its earnings. If the price of the share is much lower than the earning ratio of the company, the stock is
undervalued and it has the potential to rise in the near future. On the other hand, if the price is way higher than the actual earning of the company, then the stock is said to overvalued and the price can fall at any point.
However, there are many other reasons behind the fall or rise of the share price.
Economic Growth Data- stock prices react in a positive way if the growth of all the sectors of the economy is consistent otherwise they will react by falling sharply. Sectors such as automobiles, banking and financial services, metal and commodities, capital
goods and infrastructure depend largely on economic conditions.
In times such as economic recession, you will get stocks cheaper than they were in times of market highs.
Systemic and Engineering Effects on Prices 23
News Positive news about a company can increase buying interest in the market while a
negative press release can ruin the prospect of a stock.
Always remember that often times, despite amazingly good news, a stock can show least movement. It is the overall performance of the company that matters more than news. It is always wise to take a wait and see approach in a volatile market or when there is mixed reaction about a particular stock.
Dividend
Dividends act as a signalling device for share price movement. If companies announce dividends, generally share prices of those companies tend to increase. An important point to note is, if the rate of dividend announced is less than what was expected by investors, share prices would decline, whereas if they are up to or more than expectations, share prices would increase.
Systemic and Engineering Effects on Prices 24
Bonus Issue Bonus issues are additional shares distributed by the company to its shareholders. The
advantage is that, the company is able to reinvest the dividend cash for better earnings growth while awarding their loyal shareholders. Increasing the number of outstanding shares decreases the stock’s price; making the stock more affordable for investors.
Company Performance Future expansion policies of the company, present acquisitions, the kind of management
of the company, revenues, free cash flows generated, all determine the stock prices. Finding companies with impressive performance, will help you emerge successful in markets
which are hard to predict.
Investor Behaviour Investors will first of all look for profitable bets. They will be booking profits at every level
which can bring down stock prices. So, investor behaviour in stock markets affect stock prices greatly.
Stock prices see an all time high in times of bull market, while they can correct to a great extent in a bearish market trend.
Bull vs Bear Markets 25
A bull market is a market that is on the rise and is economically sound, while a bear market is a market that is receding, where most stocks are declining in value.
Although some investors are "bearish," the majority of investors are "bullish." The stock market, as a whole, has always posted returns.
A bear market is more dangerous to invest in as many equities lose value. Since it is hard to time a market bottom, most investors withdraw their money from the
markets and sit on cash until the trend reverses.
The most recent U.S. bear market started in 2020. The stock market crashed in March, with the Dow Jones Industrial Average and the S&P 500 Index both falling more than 20% from their 52-week highs in February. Prior to that was 2007-2009 - down 57% over 1.4 years.
Systemic and Engineering Effects on Prices 26
Foreign Institutional Investor Behaviour
These are the institutions which buy and sell stocks in huge quantities.
So, any kind of buying will be positive for stock prices and selling will affect them negatively.
By imposing restrictions on the foreign investors, many stock exchanges across the word have brought in more transparency and regulations for the benefit of retail investors. This also helps you in knowing how to predict future stock prices.
Political Conditions
For a steady economic growth, a stable and effective government is required.
In absence of conducive political environment, the entire stock market is expected to take a hit.
Valuations of Stocks
Investors consider the valuations of stocks before purchasing them and they may postpone buying stocks if the current valuations are not good enough.
This can affect the price of the stock in a negative manner.
Economic & Industry Influences: Inflation
High Inflation
slows sales and reduces profits
higher prices will also often lead to higher interest rates
these changes will tend to bring down stock prices.
High inflation also causes investors to think that companies may hold back on spending
this encourages investors to lock in their cash from equities to more attractive, less risky securities, like money market funds which will cause a fall in stock prices.
Stocks can beat inflation over time because companies can raise prices to account for rising costs brought about by inflation.
For example, when cost of sales and wages increases due to inflation, companies can simply pass on the higher cost to consumers by raising prices over time. When companies increase their prices, their revenues and earnings also increase.
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Economic & Industry Influences: Interest Rates
Slowly rising interest rates can have a beneficial effect on stock prices.
Rates generally creep up when the economy is booming.
Higher market interest rates can also create a "buyers' boycott" of the stock market, as more attractive investment opportunities emerge.
For example, Treasury bonds are considered a "risk-free" asset. Many investors will choose Treasury bonds over the stock market.
While stocks have a higher long-term average return, they are also volatile and carry much higher risks than Treasury bonds.
Fewer buyers mean less money to push up stock prices.
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Economic & Industry Influences: Interest Rates
Higher interest rates also increase the cost of borrowing for companies. This directly reduces corporate earnings.
Furthermore, higher rates make bonds more compelling to investors compared to stocks. Bonds are generally safer, and a higher rate generally increases demand for bonds and may hurt
demand for stocks.
Higher rates increase the cost of cash. This makes investors more impatient with companies with high cash reserves like Apple.
Investors will demand clear, compelling plans to grow or else demand cash be returned via share buybacks and higher dividends.
If this doesn't happen, stock prices in cash rich companies will go lower and stay lower than they would if the cash was freed up.
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Economic & Industry Influences: Savings
Savings, according to Keynesian economics, are what a person has left over when the cost of his or her consumer expenditure is subtracted from the amount of disposable income earned in a given period of time.
For those who are financially prudent, the amount of money left over after personal expenses have been met can be positive;
for those who tend to rely on credit and loans to make ends meet, there is no money left for savings.
Savings can be used to increase income through investing in different investment vehicles.
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Economic & Industry Influences: Savings
If disposable income increases
the resultant increase in consumption could increase corporate sales and corporate earnings which will increase the value of individual stocks.
The increase in individual share price valuations could then lead to a market- wide increase in value and potentially leads to an economic boom.
If disposable income decreases
consumers become thriftier and the decreased consumption could then decrease corporate sales; corporate earnings and hence the value of individual stocks.
This decrease in individual share price valuations could then lead to a market-wide decrease in value and potentially leads to a depression or recession.
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Economic & Industry Influences: Savings
Increases in disposable income don't always result in an increase in value of the stock market, and vice versa.
Banks offer savings accounts as means of enticing depositors to provide extra cash so bankers can make loans.
When banks want extra deposits
they can raise the interest rate offered on saving accounts to attract cash
which can contribute to a decrease in prices in the stock market
some customers would now be interested in opening savings accounts or depositing larger sums of money into banks rather than purchasing shares of stock.
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Industry Indicators
Industry Indicators are key variables that are used by businesses to measure their performance and success against the industry in which they operate.
These indicators can be used to compare a company’s performance between periods to determine whether the company against the industry has performed favourably, unfavourably or indifferent.
Note again that the stock price of the companies in the same industry will move in tandem with each other. This is because market conditions generally affect the companies in the same industry the same way.
But sometimes, the stock price of a company will benefit from a piece of bad news from its competitor if the companies are competing for the same market.
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Overvalued or Undervalued Stocks 34
Investors may be willing to pay more for stocks with superior growth potential, but they don’t want to overpay for a company whose growth prospects don’t justify its current price.
P-E Ratio: A stock might be overvalued if the Price-to-Earnings Ratio is high. The ratio is calculated by dividing the market value price per share by the company's
earnings per share
The average P/E for the S&P 500 has historically ranged from 13 to 15. For example, a company with a current P/E of 25, trades at 25 times earnings. The high
multiple indicates that investors expect higher growth from the company compared to the overall market.
A high P/E does not necessarily mean a stock is overvalued. Any P/E ratio needs to be considered against the backdrop of the P/E for the
company's industry.
Overvalued or Undervalued Stocks 35
PEG ratio: One way to determine whether a stock may be overvalued is to look at the price-to-earnings-growth ratio. The price-to-earnings-growth ratio is the estimated price-to-earnings ratio (the
current price divided by the earnings per share forecast for the next 12 months) divided by the median long-term earnings growth forecast.
A stock is considered to be fairly valued if the PEG ratio is 1 (in which case the P/E equals the estimated earnings growth) and possibly overvalued if the PEG is over 1.
P/E Ratio = stock price EPS
PEG Ratio = P/E Ratio Earnings Growth Rate
Growth Rate = Current EPS - 1 X 100 Last EPS
Overvalued or Undervalued Stocks 36
Cyclical industry: A stock might be overvalued if it is in a cyclical industry and profits are at all time highs.
Dividend yield: the dividend amount divided by the stock price. It tells you what percentage of your purchase price the company will return to you in
dividends. When stocks are cheap, dividend yields are high.
Interest rates: Interest rates are important, because they determine, amongst other things, the return investors get on government bonds. Government bonds are, in theory at least, the most secure way to invest your money, since
the government guarantees your returns. Therefore, the yield on government bonds is sometimes referred to as the risk-free rate.
If bonds yield more than stocks, investors will naturally put their money in the risk-free bonds instead of in volatile stocks, therefore creating less demand for stocks which inevitably results in lower stock prices.
Overvalued or Undervalued Stocks 37
Market capitalization to GDP: Buffett's personal favourite!
He said that the Market Cap to GDP ratio is "…probably the best single measure of where valuations stand at any given moment." The idea is that when the market cap is higher than GDP, the stock market is
overvalued.
If the market cap is below the GDP, the stock market is undervalued.
Liquidity and Illiquidity of Securities Market 38
Market liquidity: is a market's ability to facilitate an asset being sold quickly without having to reduce its price very much (or even at all).
Asset's market liquidity (or simply "an asset's liquidity"): is the asset's ability to sell quickly without having to reduce its price very much.
Liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for. In a relatively liquid market, the trade-off is mild: selling quickly will not reduce the price
much. In a relatively illiquid market, selling it quickly will require cutting its price by some amount.
Liquid asset: this has some or all of the following features: It can be sold rapidly, with minimal loss of value, and any time within market hours.
Liquidity and Illiquidity of Securities Market 39
Speculators and market makers are key contributors to the liquidity of a market, or asset. Speculators and market makers are individuals or institutions that seek to profit from
anticipated increases or decreases in a particular market price.
By doing this, they provide the capital needed to facilitate the liquidity.
Liquidity Risk 40
Financial institutions and asset managers that oversee portfolios are subject to what is called "structural" and "contingent" liquidity risk.
Structural Liquidity Risk sometimes called funding liquidity risk, is the risk associated with funding asset
portfolios in the normal course of business.
This is the risk affecting or potentially affecting results or capital as a result of the Bank being incapable of meeting its payment obligations upon maturity, without incurring unacceptable losses
Mismatched maturities
Contingent Liquidity Risk the risk associated with finding additional funds or replacing maturing liabilities under
potential, future stressed market conditions.
When a central bank tries to influence the liquidity (supply) of money, this process is known as open market operations.
Characteristics of Liquid Markets 41
The essential characteristic of a liquid market is that there are always ready and willing buyers and sellers.
It is similar to but distinct from market depth: market depth relates to the trade-off between quantity being sold and the price it can
be sold for;
rather liquidity relates to the trade-off between speed of sale and the price it can be sold for.
A market may be considered both deep and liquid if there are ready and willing buyers and sellers in large quantities.
Effects of Liquidity on Asset Value 42
The market liquidity of assets affects their prices and expected returns.
Investors require higher return on assets with lower market liquidity to compensate them for the higher cost of trading these assets. That is, for an asset with given cash flow, the higher its market liquidity, the higher its
price and the lower is its expected return.
Risk-averse investors require higher expected return if the asset’s market-liquidity risk is greater. This risk involves the exposure of the asset return to shocks in overall market
liquidity, the exposure of the asset own liquidity to shocks in market liquidity and the effect of market return on the asset’s own liquidity.
Here too, the higher the liquidity risk, the higher the expected return on the asset or the lower is its price.
Effects of Liquidity on Asset Value 43
One example of this, is the comparison of assets with and without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such
assets, like the difference between newly issued U.S. Treasury bonds compared to off the run treasuries with the same term to maturity.
Initial buyers know that other investors are less willing to buy off-the-run treasuries, so the newly issued bonds have a higher price (and hence lower yield).
The Stock Market and Liquidity 44
The market for a stock is said to be liquid if the shares can be rapidly sold and the act of selling has little impact on the stock's price. Generally, this translates to where the shares are traded based on the level of interest that
investors have in the company.
Another way to judge liquidity in a company's stock is to look at the bid-to- ask spread. For liquid stocks, such as Microsoft or General Electric, the spread is often just a few
pennies - much less than 1% of the price. For illiquid stocks, the spread can be much larger, amounting to a few percent of the trading price. In today's stock market, high-frequency trading firms are said to contribute to nearly 50% of all liquidity.
Liquidity positively impacts the stock market. When stock prices rise, it is said to be due to a convergence of extraordinarily high levels of
liquidity on household and business balance sheets, combined with a simultaneous normalization of liquidity preferences. On the margin, this drives a demand for equity investments.
The Futures Market and Liquidity 45
In the futures markets, there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more
trading activity and have higher liquidity than others.
The most useful indicators of liquidity for these contracts are the trading volume and open interest.
There is also dark liquidity; referring to transactions that occur off-exchange and are therefore not visible to
investors until after the transaction is complete.
It does not contribute to public price discovery.
Dark Pool Liquidity 46
Dark pool liquidity is the trading volume created by institutional orders executed on private exchanges and which are mostly unavailable to the public.
The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges.
It is also referred to as the "upstairs market," "dark liquidity" or "dark pool.
Illiquidity Asset 47
This is an asset which is not readily saleable (without a drastic price reduction and sometimes not at any price) due to uncertainty about its value or the lack of a
market in which it is regularly traded.
The mortgage-related assets which resulted in the subprime mortgage crisis are examples of illiquid assets, as their value was not readily determinable despite being secured by real property. Before the crisis, they had moderate liquidity because it was believed that their
value was generally known.
The risk of illiquidity need not apply only to individual investments- whole portfolios are subject to market risk.
Role of Financial Advisor 48
A Financial Advisor is a professional who renders financial services to clients.
Financial Advisors are more specific in their approach, as well as the content of their work. They provide consulting and advice about an individual’s or entity’s finances as
well as help individuals and companies reach their financial goals sooner by providing their clients with strategies and ways to create more wealth, reduce costs, or eliminate debts.
For example, the financial advisors work with their clients in order to get an idea about the financial requirements of their clients, as well as finding out ways by which to address the situation.
Role of Investment Banker 49
This is an individual who works in a financial institution that is in the business primarily of raising capital for companies, governments and other
entities,
or who works in a large bank's division that is involved with these activities.
Investment bankers may also provide other services such as mergers and acquisition advice, or advice on specific transactions, such as a
spin-off or reorganization.
In smaller organizations that do not have a specific investment banking arm, corporate finance staff may fulfil the duties of investment bankers.
Role of Financial Analyst 50
A financial analyst researches macroeconomic and microeconomic conditions, gathers financial information along with company fundamentals in order to make business, sector and industry recommendations to the company.
Traditionally, analysts use fundamental analysis principles but technical chart analysis and tactical evaluation of the market environment are also routine.
Often at the end of the assessment of analyzed securities, an analyst would provide a rating, recommending an investment action, e.g. to buy, sell, or hold the security.
Financial analysts are often employed by mutual and pension funds, hedge funds, securities firms, banks, investment banks, insurance companies, and other businesses, helping these companies or their clients make investment decisions.
Role of Financial Analyst 51
Financial analysts employed in commercial lending perform "balance sheet analysis," examining the audited financial statements and corollary data in order to assess lending risks.
In a stock brokerage house or in an investment bank, they read company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates in order to determine a company's value and project future earnings.
In any of these various institutions, the analyst often meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Usually, financial analysts study an entire industry, assessing current trends in business practices, products, and industry competition. They must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings.
Financial analysts use spreadsheet and statistical software packages to analyze financial data, spot trends and develop forecasts.
Qualification 52
At an increasingly large number of firms it is preferred that analysts earn the Chartered Financial Analyst (CFA) designation.
There are also many regulatory requirements. For example, in the United States, sell-side or Wall Street research analysts must register with the Financial Industry Regulatory Authority (FINRA).
In addition to passing the General Securities Representative Exam, candidates must pass the Research Analyst Examination (series 86/series87) in order to publish research for the purpose of selling or promoting publicly traded securities.
