The use of technical and fundamental analysis in the stock market in emerging and developed economies

The Use of Technical and Fundamental Analysis in the Stock Market in
Emerging and Developed Economies


The Use of Technical and Fundamental Analysis
in the Stock Market in Emerging and Developed
Economies
By

Naveen B. Kumar
Indian School of Business, Hyderabad, India

Sanjay Mohapatra
Xavier Institute of Management, Bhubaneswar, India

United Kingdom – North America – Japan
    India – Malaysia – China


Emerald Group Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK
First edition 2015
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implied, to their use.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
ISBN: 978-1-78560-405-8


Contents
List of Tables
List of Charts
List of Abbreviations
Abstract

CHAPTER 1  Introduction
1.1. Securities Market in India: An Overview
1.1.1. Origin of Indian Stock Market
1.1.2. Assessment of Performance of Indian Securities Market (2000–2010)
1.1.3. Market Segments
1.1.4. Market Participants
1.1.5. Secondary Market
1.1.6. Cash Market
1.1.7. India and International Comparison
1.2. Definitions of Technical Analysis and Fundamental Analysis
1.3. Importance and Need of the Study
1.4. Objectives of the Study
1.5. Hypotheses
1.6. Research Methodology
1.6.1. Sources of Data
1.6.2. Sampling Plan
1.6.3. Methods of Data Collection
1.6.4. Data Analysis Tools and Techniques

1.7. Scope and Limitations of the Study
1.8. Organisation of the Study

CHAPTER 2  Introduction to Various Approaches
2.1. Introduction
2.2. Fundamental Approach


2.2.1. Discounted Cash Flow Valuation
2.2.2. Dividend Discount Models
2.2.3. Relative Valuation
2.2.4. Value-Added Methods
2.3. Technical Approach
2.3.1. The Dow Theory
2.3.2. Types of Charts
2.3.3. Trends
2.3.4. Price Pattern
2.3.5. Indicators
2.3.6. Other Tools and Techniques
2.3.7. Sentiment Indicators

CHAPTER 3  Review of Literature
3.1. Review of Existing Literature
3.2. Research Gap

CHAPTER 4  Data Analysis and Interpretation
4.1. Introduction
4.2. Demographic Analysis
4.2.1. Gender
4.2.2. Age Groups

4.2.3. Relevant Work Experience
4.3. Objective 1 – Time Period Analysis
4.3.1. ANOVA One Way Using SPSS
4.3.2. Kruskal–Wallis H Test Using SPSS
4.4. Objective 2 – Importance Factors’ Analysis
4.4.1. ANOVA One Way Using SPSS
4.4.2. Kruskal–Wallis H Test Using SPSSS
4.5. Objective 3 – Complementarity Analysis
4.6. Objective 4 – Demographic and Technical and Fundamental Tools Association Analysis
4.6.1. Chi-Square Tests
4.6.2. Gender versus Analytical Techniques


4.6.3. Gender versus Computer Graphics and Services
4.6.4. Gender versus Chartist Publication
4.6.5. Gender versus Chart Company or Analyst
4.6.6. Gender versus Sentiment Indicators
4.6.7. Gender versus Earnings Multiple Method
4.6.8. Gender versus Discounted Cash Flows Methods
4.6.9. Gender versus Dividend Discount Models
4.6.10. Gender versus Value Added Concept
4.6.11. Age versus Analytical Techniques
4.6.12. Age versus Computer Graphics and Services
4.6.13. Age versus Chartist Publications
4.6.14. Age versus Chart Company or Analyst
4.6.15. Age versus Sentiment Indicators
4.6.16. Age versus Earnings Multiple Methods
4.6.17. Age versus Discounted Cash Flows Methods
4.6.18. Age versus Dividend Discount Models
4.6.19. Age versus Value Added Concepts

4.7. Crosstabs
4.7.1. Experience (EXP) versus Analytical Techniques
4.7.2. Experience (EXP) versus Computer Graphics and Services
4.7.3. Experience (EXP) versus Chartist Publications
4.7.4. Experience (EXP) versus Chart Company or Analyst
4.7.5. Experience (EXP) versus Sentiment Indicators
4.7.6. Experience (EXP) versus Earnings Multiple Methods
4.7.7. Experience (EXP) versus Discounted Cash Flows Methods
4.7.8. Experience (EXP) versus Dividend Discount Models
4.7.9. Experience (EXP) versus Value Added Concepts

CHAPTER 5  Conclusions and Recommendations
5.1.
5.2.
5.3.
5.4.
5.5.

Objective 1 – Time Period
Objective 2 – Importance Factors
Objective 3 – Complementarity
Objective 4 – Demographic and Technical and Fundamental Tools Association
Scope for Future Research


Appendices
Bibliography
Index

List of Tables
Chapter 1
Table 1.1

Key Performance Indicators of Securities Market (2000–2010).

Table 1.2

Secondary Market – Selected Indicators.

Table 1.3

International Comparison of Global Stock Markets.

Table 1.4

Research Methodology Framework.

Table 1.5

Determination of Sample Size.

Chapter 4
Table 4.1

Gender Composition in the Sample.

Table 4.2

Age Groups of the Respondents.

Table 4.3

Relevant Work Experience.

Table 4.4

Descriptives of Time Period.

Table 4.5

One Way ANOVA of Time Period.

Table 4.6

Robust Tests of Equality of Means-Time Period.

Table 4.7

Post Hoc Tests of Time Period.

Table 4.8

Technicality Degree.

Table 4.9

Overall Means of Time Period.

Table 4.10

Descriptive Statistics – Kruskal–Wallis Test-Time Period.

Table 4.11

Kruskal–Wallis Ranks – Time Period.

Table 4.12

Kruskal–Wallis Test Statistics-Time Period.

Table 4.13

Mann–Whitney U Test (Intraday and 1 Week) Ranks.

Table 4.14

Mann–Whitney U Test (Intraday and 1 Week) Statistics.

Table 4.15

Mann–Whitney U Test (Intraday and 1 Month) Ranks.

Table 4.16

Mann–Whitney U Test (Intraday and 1 Month) Test Statistics.

Table 4.17

Mann–Whitney U Test (Intraday and 3 Months) Ranks.

Table 4.18

Mann–Whitney U Test (Intraday and 3 Months) Test Statistics.

Table 4.19

Mann–Whitney U Test (Intraday and 6 Months) Ranks.

Table 4.20

Mann–Whitney U Test (Intraday and 6 Months) Test Statistics.

Table 4.21

Mann–Whitney U Test (Intraday and 1 Year) Ranks.

Table 4.22

Mann–Whitney U Test (Intraday and 1 Year) Test Statistics.

Table 4.23

Mann–Whitney U Test (Intraday and beyond Year) Ranks.

Table 4.24

Mann–Whitney U Test (Intraday and beyond Year) Test Statistics.

Table 4.25

Mann–Whitney U Test (1 Week and 1 Month) Ranks.

Table 4.26

Mann–Whitney U Test (1 Week and 1 Month) Test Statistics.

Table 4.27

Mann–Whitney U Test (1 Week and 3 Months) Ranks.

Table 4.28

Mann–Whitney U Test (1 Week and 3 Months) Test Statistics.

Table 4.29

Mann–Whitney U Test (1 Week and 6 Months) Ranks.

Table 4.30

Mann–Whitney U Test (1 Week and 6 Months) Test Statistics.

Table 4.31

Mann–Whitney U Test (1 Week and 1 Year) Ranks.

Table 4.32

Mann–Whitney U Test (1 Week and 1 Year) Test Statistics.

Table 4.33

Mann–Whitney U Test (1 Week and beyond 1 Year) Ranks.

Table 4.34

Mann–Whitney U Test (1 Week and beyond 1 Year) Test Statistics.

Table 4.35

Mann–Whitney U Test (1 Month and 3 Months) Ranks.


Table 4.36

Mann–Whitney U Test (1 Month and 3 Months) Test Statistics.

Table 4.37

Mann–Whitney U Test (1 Month and 6 Months) Ranks.

Table 4.38

Mann–Whitney U Test (1 Month and 6 Months) Test Statistics.

Table 4.39

Mann–Whitney U Test (1 Month and 1 Year) Ranks.

Table 4.40

Mann–Whitney U Test (1 Month and 1 Year) Test Statistics.

Table 4.41

Mann–Whitney U Test (1 Month and beyond Year) Ranks.

Table 4.42

Mann–Whitney U Test (1 Month and beyond Year) Test Statistics.

Table 4.43

Mann–Whitney U Test (3 Months and 6 Months) Ranks.

Table 4.44

Mann–Whitney U Test (3 Months and 6 Months) Test Statistics.

Table 4.45

Mann–Whitney U Test (3 Months and 1 Year) Ranks.

Table 4.46

Mann–Whitney U Test (3 Months and 1 Year) Test Statistics.

Table 4.47

Mann–Whitney U Test (3 Months and beyond Year) Ranks.

Table 4.48

Mann–Whitney U Test (3 Months and beyond Year) Test Statistics.

Table 4.49

Mann–Whitney U Test (6 Months and 1 Year) Ranks.

Table 4.50

Mann–Whitney U Test (6 Months and 1 Year) Test Statistics.

Table 4.51

Mann–Whitney U Test (6 Months and beyond 1 Year) Ranks.

Table 4.52

Mann–Whitney U Test (6 Months and beyond 1 Year) Test Statistics.

Table 4.53

Mann–Whitney U Test (1 Year and beyond 1 Year) Ranks.

Table 4.54

Mann–Whitney U Test (1 Year and beyond 1 Year) Test Statistics.

Table 4.55

Descriptives of Importance Factors.

Table 4.56

One Way ANOVA of Importance Factors.

Table 4.57

Robust Tests of Equality of Means-Importance Factors.

Table 4.58

Post Hoc Tests of Importance Factors.

Table 4.59

Means of Importance Factors.

Table 4.60

Homogeneous Subsets of Importance Factors.

Table 4.61

Kruskal–Wallis Descriptive Statistics-Importance Factors.

Table 4.62

Kruskal–Wallis Test Ranks-Importance Factors.

Table 4.63

Kruskal–Wallis Test Statistics-Importance Factors.

Table 4.64

Mann–Whitney U Test (Risk Factors and Liquidity Factors) Ranks.

Table 4.65

Mann–Whitney U Test (Risk Factors and Liquidity Factors) Test Statistics.

Table 4.66

Mann–Whitney U Test (Risk Factors and Financial Factors) Ranks.

Table 4.67

Mann–Whitney U Test (Risk Factors and Financial Factors) Test Statistics.

Table 4.68

Mann–Whitney U Test (Risk Factors and Technical Factors) Ranks.

Table 4.69

Mann–Whitney U Test (Risk Factors and Technical Factors) Test Statistics.

Table 4.70

Mann–Whitney U Test (Risk Factors and Economic Factors) Ranks.

Table 4.71

Mann–Whitney U Test (Risk Factors and Economic Factors) Test Statistics.

Table 4.72

Mann–Whitney U Test (Risk Factors and Industry Specific Factors) Ranks.

Table 4.73

Mann–Whitney U Test (Risk Factors and Industry Specific Factors) Test Statistics.

Table 4.74

Mann–Whitney U Test (Risk Factors and Company Specific Factors) Ranks.

Table 4.75

Mann–Whitney U Test (Risk Factors and Company Specific Factors) Test Statistics.

Table 4.76

Mann–Whitney U Test (Risk Factors and Others) Ranks.

Table 4.77

Mann–Whitney U Test (Risk Factors and Others) Test Statistics.

Table 4.78

Mann–Whitney U Test (Liquidity Factors and Financial Factors) Ranks.

Table 4.79

Mann–Whitney U Test (Liquidity Factors and Financial Factors) Test Statistics.

Table 4.80

Mann–Whitney U Test (Liquidity Factors and Technical Factors) Ranks.

Table 4.81

Mann–Whitney U Test (Liquidity Factors and Technical Factors) Test Statistics.

Table 4.82

Mann–Whitney U Test (Liquidity Factors and Economic Factors Ranks.


Table 4.83
Table 4.84
Table 4.85

Mann–Whitney U Test (Liquidity Factors and Economic Factors Test Statistics.
Mann–Whitney U Test (Liquidity Factors and Industry Specific Factors) Ranks.
Mann–Whitney U Test (Liquidity Factors and Industry Specific Factors) Test Statistics.

Table 4.86

Mann–Whitney U Test (Liquidity Factors and Company Specific Factors) Ranks.

Table 4.87

Mann–Whitney U Test (Liquidity Factors and Company Specific Factors) Test Statistics.

Table 4.88

Mann–Whitney U Test (Liquidity Factors and Others) Ranks.

Table 4.89

Mann–Whitney U Test (Liquidity Factors and Others) Test Statistics.

Table 4.90

Mann–Whitney U Test (Financial Factors and Technical Factors) Ranks.

Table 4.91

Mann–Whitney U Test (Financial Factors and Technical Factors) Test Statistics.

Table 4.92

Mann–Whitney U Test (Financial Factors and Economic Factors) Ranks.

Table 4.93

Mann–Whitney U Test (Financial Factors and Economic Factors) Test Statistics.

Table 4.94

Mann–Whitney U Test (Financial Factors and Industry Specific Factors) Ranks.

Table 4.95

Mann–Whitney U Test (Financial Factors and Industry Specific Factors) Test Statistics.

Table 4.96

Mann–Whitney U Test (Financial Factors and Company Specific Factors) Ranks.

Table 4.97

Mann–Whitney U Test (Financial Factors and Company Specific Factors) Test Statistics.

Table 4.98

Mann–Whitney U Test (Financial Factors and Others) Ranks.

Table 4.99

Mann–Whitney U Test (Financial Factors and Others) Test Statistics.

Table 4.100 Mann–Whitney U Test (Technical Factors and Economic Factors) Ranks.
Table 4.101 Mann–Whitney U Test (Technical Factors and Economic Factors) Test Statistics.
Table 4.102 Mann–Whitney U Test (Technical Factors and Industry Specific Factors) Ranks.

Table 4.103 Mann–Whitney U Test (Technical Factors and Industry Specific Factors) Test Statistics.
Table 4.104 Mann–Whitney U Test (Technical Factors and Company Specific Factors) Ranks.
Table 4.105 Mann–Whitney U Test (Technical Factors and Company Specific Factors) Test Statistics.
Table 4.106 Mann–Whitney U Test (Technical Factors and Others) Ranks.
Table 4.107 Mann–Whitney U Test (Technical Factors and Others) Test Statistics.
Table 4.108 Mann–Whitney U Test (Economic Factors and Industry Specific Factors) Ranks.
Table 4.109 Mann–Whitney U Test (Economic Factors and Industry Specific Factors) Test Statistics.
Table 4.110 Mann–Whitney U Test (Economic Factors and Company Specific Factors) Ranks.
Table 4.111 Mann–Whitney U Test (Economic Factors and Company Specific Factors) Test Statistics.
Table 4.112 Mann–Whitney U Test (Economic Factors and Others) Ranks.
Table 4.113 Mann–Whitney U Test (Economic Factors and Others) Test Statistics.
Table 4.114 Mann–Whitney U Test (Industry Specific Factors and Company Specific Factors) Ranks.
Table 4.115 Mann–Whitney U Test (Industry Specific and Company Specific Factors) Test Statistics.
Table 4.116 Mann–Whitney U Test (Industry Specific Factors and Others) Ranks.
Table 4.117 Mann–Whitney U Test (Industry Specific Factors and Others) Test Statistics.
Table 4.118 Mann–Whitney U Test (Company Specific Factors and Others) Ranks.
Table 4.119 Mann–Whitney U Test (Company Specific Factors and Others) Test Statistics.
Table 4.120 Descriptives of Gender versus Analytical Techniques.
Table 4.121 Chi-Square Test Results (Gender vs. Analytical Techniques).
Table 4.122 Descriptives of Gender versus Computer Graphics and Services.
Table 4.123 Chi-Square Test Results (Gender vs. Computer Graphics and Services).
Table 4.124 Descriptives of Gender versus Chartist Publication.
Table 4.125 Chi-Square Test Results (Gender vs. Chartist Publications).
Table 4.126 Descriptives of Gender versus Chart Company or Analyst.
Table 4.127 Chi-Square Test Results (Gender vs. Chart Company or Analyst).
Table 4.128 Descriptives of Gender versus Sentiment Indicators.
Table 4.129 Chi-Square Test Results (Gender vs. Sentiment Indicators).
Table 4.130 Descriptives of Gender versus Earnings Multiple Method.

Table 4.131 Chi-Square Test Results (Gender vs. Earnings Multiple Methods).
Table 4.132 Descriptives of Gender versus Discounted Cash Flows Methods.
Table 4.133 Chi-Square Test Results (Gender vs. Discounted Cash Flows Methods).
Table 4.134 Descriptives of Gender versus Dividend Discount Models.
Table 4.135 Chi-Square Test Results (Gender vs. Dividend Discount Models).
Table 4.136 Descriptives of Gender versus Value Added Concepts.
Table 4.137 Chi-Square Test Results (Gender vs. Value Added Concepts).
Table 4.138 Descriptives of Age versus Analytical Techniques.
Table 4.139 Chi-Square Test Results (Age vs. Analytical Techniques).
Table 4.140 Descriptives of Age versus Computer Graphics and Services.
Table 4.141 Chi-Square Test Results (Age vs. Computer Graphics and Services).
Table 4.142 Descriptives of Age versus Chartist Publications.
Table 4.143 Chi-Square Test Results (Age vs. Chartist Publications).
Table 4.144 Descriptives of Age versus Chart Company or Analyst.
Table 4.145 Chi-Square Test Results (Age vs. Chart Company or Analyst).
Table 4.146 Descriptives of Age versus Sentiment Indicators.
Table 4.147 Chi-Square Test Results (Age vs. Sentiment Indicators).
Table 4.148 Descriptives of Age versus Earnings Multiple Methods.
Table 4.149 Chi-Square Test Results (Age vs. Earnings Multiple Methods).
Table 4.150 Descriptives of Age versus Discounted Cash Flows Methods.
Table 4.151 Chi-Square Test Results (Age vs. Discounted Cash Flows Methods).
Table 4.152 Descriptives of Age versus Dividend Discount Models.
Table 4.153 Chi-Square Test Results (Age vs. Dividend Discount Models).
Table 4.154 Descriptives of Age versus Value Added Concepts.
Table 4.155 Chi-Square Test Results (Age vs. Value Added Concepts).
Table 4.156 Descriptives of Experience versus Analytical Techniques.
Table 4.157 Chi-Square Test Results (Experience vs. Analytical Techniques).
Table 4.158 Descriptives of Experience versus Computer Graphics and Services.
Table 4.159 Chi-Square Test Results (Experience vs. Computer Graphics and Services).
Table 4.160 Descriptives of Experience versus Chartist Publications.

Table 4.161 Chi-Square Test Results (Experience vs. Chartist Publications).
Table 4.162 Descriptives of Experience versus Chart Company or Analyst.
Table 4.163 Chi-Square Test Results (Experience vs. Chart Company or Analyst).
Table 4.164 Descriptives of Experience versus Sentiment Indicators.
Table 4.165 Chi-Square Test Results (Experience vs. Sentiment Indicators).
Table 4.166 Descriptives of Experience versus Earnings Multiple Methods.
Table 4.167 Chi-Square Test results (Experience vs. Earnings Multiple Methods).
Table 4.168 Descriptives of Experience versus Discounted Cash Flows Methods.
Table 4.169 Chi-Square Test Results (Experience vs. Discounted Cash Flows Methods).
Table 4.170 Descriptives of Experience versus Dividend Discount Models.
Table 4.171 Chi-Square Test Results (Experience vs. Dividend Discount Models).
Table 4.172 Descriptives of Experience versus Value Added Concepts.
Table 4.173 Chi-Square Test Results (Experience vs. Value Added Concepts).
Table 4.174 Summary of Chi-Square (χ2 ) Test Results – Gender versus Chartist Methods and Services.
Table 4.175 Summary of Chi-Square (χ2 ) Test Results – Gender versus Valuation Techniques.
Table 4.176 Summary of Chi-Square (χ2 ) Test Results – Age Group versus Chartist Methods and Services.


Table 4.177 Summary of Chi-Square (χ2 ) Test Results-Age Group versus Valuation Techniques.
Table 4.178 Summary of Chi-Square (χ2 ) Test Results-Work Exp versus Chartist Methods and Services.
Table 4.179 Summary of Chi-Square (χ2 ) Test Results-Work Exp vs Valuation Techniques.


List of Charts
Chapter 1
Chart 1.1

Snapshot of Performance of Indian Securities Market during 2000–2010.

Chart 1.2

Saving of the Household Sector in Financial Assets.

Chart 1.3

Stock Market Capitalisation (% of GDP).

Chapter 2
Chart 2.1

Dow Theory.

Chart 2.2

Line Chart.

Chart 2.3

Bar Chart.

Chart 2.4

Point and Figure Chart.

Chart 2.5

Candlesticks.

Chart 2.6

Candlesticks-DJ-30.

Chart 2.7

Trend Line.

Chart 2.8

Support Line.

Chart 2.9

Resistance Line.

Chart 2.10

Head and Shoulders Pattern.

Chart 2.11

Double Top (Reversal).

Chart 2.12

Double Bottom (Reversal).

Chart 2.13

Triangle Formation.

Chart 2.14

Rectangle Formation.

Chart 2.15

Rate of Change.

Chart 2.16

Stochastic Oscillator.

Chart 2.17

Relative Strength Index.

Chart 2.18

Moving Average Line.

Chart 2.19

Moving Average Convergence Divergence.

Chart 2.20

Breakaway Gap.

Chart 2.21

Runaway Gap.

Chart 2.22

Exhaustion Gap.

Chart 2.23

Composite Figure Depicting all Three Gaps.

Chapter 4
Chart 4.1

Gender Composition in the Sample.

Chart 4.2

Age Groups of the Respondents.

Chart 4.3

Relevant Work Experience.

Chart 4.4

Forecasting Styles.

Chart 4.5

Means Plot of Importance Factors.

Chart 4.6

Degree of Complementarity-I.

Chart 4.7

Degree of Complementarity-II.

Chart 4.8

Bar Chart Gender versus Analytical Techniques.

Chart 4.9

Bar Chart Gender versus Computer Graphics and Services.

Chart 4.10

Bar Chart Gender versus Chartist Publications.

Chart 4.11

Bar Chart Gender versus Chart Company or Analyst.

Chart 4.12

Bar Chart Gender versus Sentiment Indicators.

Chart 4.13

Bar Chart Gender versus Earnings Multiple Methods.


Chart 4.14

Bar Chart Gender versus Discounted Cash Flows Methods.

Chart 4.15

Bar Chart Gender versus Dividend Discount Models.

Chart 4.16

Bar Chart Gender versus Value Added Concepts.

Chart 4.17

Bar Chart Age versus Analytical Techniques.

Chart 4.18

Bar Chart Age versus Computer Graphics and Services.

Chart 4.19

Bar Chart Age versus Chartist Publications.

Chart 4.20

Bar Chart Age versus Chart Company or Analyst.

Chart 4.21

Bar Chart Age versus Sentiment Indicators.

Chart 4.22

Bar Chart Age versus Earnings Multiple Methods.

Chart 4.23

Bar Chart Age versus Discounted Cash Flows Methods.

Chart 4.24

Bar Chart Age versus Dividend Discount Models.

Chart 4.25

Bar Chart Age versus Value Added Concepts.

Chart 4.26

Bar Chart Experience versus Analytical Techniques.

Chart 4.27

Bar Chart Experience versus Computer Graphics and Services.

Chart 4.28

Bar Chart Experience versus Chartist Publications.

Chart 4.29

Bar Chart Experience versus Chart Company or Analyst.

Chart 4.30

Bar Chart Experience versus Sentiment Indicators.

Chart 4.31

Bar Chart Experience versus Earnings Multiple Methods.

Chart 4.32

Bar Chart Experience versus Discounted Cash Flows Methods.

Chart 4.33

Bar Chart Experience versus Dividend Discount Models.

Chart 4.34

Bar Chart Experience versus Value Added Concepts.


List of Abbreviations

ANOVA

Analysis of Variance

APV

Adjusted Present Value Method

BSE

Bombay Stock Exchange

BV

Book Value

DCF

Discounted Cash Flow Analysis

DDM

Dividend Discount Models

DMA

Displaced Moving Average

EBIT DA

Earnings before Interest, T ax, Depreciation and Amortization

EMA

Exponential Moving Average

EV

Enterprise Value

EVA

Economic Value Added

FT E

Flow to Equity Method

GDP

Gross Domestic Product

LCF

Levered Cash Flow

MACD

Moving Average Convergence Divergence

MV

Moving Average

MVA

Market Value Added

NOPAT

Net Operating Profit after T axes

NPVF

Net Present Value of Financing Side Effects

NSE

National Stock Exchange of India Ltd.

P/BV

Price to Book Value Ratio

P/E

Price to Earnings Ratio

PSR

Price to Sales Ratio

PV

Present Value

ROC

Rate of Change

RSI

Relative Strength Index

S& P

Standard and Poor

SEBI

Securities and Exchange Board of India

SES

Singapore Stock Exchange

SMA

Simple Moving Average

ST II

Singapore Straits T imes Industrial Index

UCF

Unlevered Cash Flows

WACC

Weighted Average Cost of Capital Method


Abstract
s in all financial markets, the primary question in the stock market is how market participants
and stock traders forecast future market prices. The two general techniques for predicting
stock market prices used by market professionals are ‘chartist’ or ‘technical’ analysis and
fundamental or intrinsic value analysis. This study aims at finding out the usage of technical and
fundamental analysis in the Indian stock market (emerging market) by brokers and the perceived
importance attached to them by brokers.

A


CHAPTER

1
Introduction
How we value the stock market now and in the future influences major economic and social
policy decisions that affect not only investors but also society at large, even the world. If we

exaggerate the present value of the stock market, then as a society we may invest too much in
business startups and expansions, and too little in infrastructure, education and other forms of
human capital. If we think the market is worth more than it really is, we become complacent in
funding our pension plans, in maintaining our savings rate, in legislating an improved social
security system.
Shiller (2000)

1.1. Securities Market in India: An Overview
The last decade (2000–2010) had been the most eventful period for the Indian securities market
during which it took major strides to carve a niche for itself in the global securities markets. This
section discusses origin, structure and the developments of the Indian securities markets and broader
developments in the securities markets during 2000–2010.1

1.1.1. ORIGIN OF INDIAN STOCK MARKET
The origin of the stock market in India goes back to the end of the eighteenth century when long-term
negotiable securities were first issued. However, for all practical purposes, the real beginning
occurred in the middle of the nineteenth century after the enactment of the Companies Act in 1850,
which introduced the features of limited liability and generated investor interest in corporate
securities.
An important early event in the development of the stock market in India was the formation of the
Native Share and Stock Brokers’ Association at Bombay in 1875, the precursor of the present day
Bombay Stock Exchange (BSE). This was followed by the formation of associations/exchanges in
Ahmadabad (1894), Calcutta (1908) and Madras (1937). In addition, a large number of ephemeral
exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times
subsequently.
Stock exchanges are intricacy inter-woven in the fabric of a nation’s economic life. Without a
stock exchange, the saving of the community – the sinews of economic progress and productive


efficiency – would remain underutilised. The task of mobilisation and allocation of savings could be

attempted in the older days by a much less specialised institution than the stock exchanges. But as
business and industry expanded and the economy assumed more complex nature, the need for
‘permanent finance’ arose. Entrepreneurs needed money for long term, whereas investors demanded
liquidity – the facility to convert their investment into cash at any given time. The answer was a ready
market for investments, and this was how the stock exchange came into being.
The BSE and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in
India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have
established themselves as the two leading exchanges and account for about 90% of the equity volume
traded in India.

1.1.2. ASSESSMENT OF PERFORMANCE OF INDIAN SECURITIES MARKET
(2000–2010)
The last decade (2000–2010) has been the most eventful period for the Indian securities market
during which it took major strides to carve a niche for itself in the global securities markets. The
major developments which hastened this incredible journey are because of improved market
microstructure, introduction of new products and progressive changes in the regulatory framework.
The above initiatives have not only transformed the landscape of the securities market but also
contributed to its growth. This can be seen in the snapshot of the decadal performance of securities
market shown in Chart 1.1. It can be seen that during the decade, there has been a significant rise in
the market capitalisation ratio, turnover ratio and traded value ratio. The turnover in the cash market
has nearly doubled over the decade while the market capitalisation has become eight times the levels
that existed in 2000. The turnover in the Indian derivatives market has increased from US$0.086
trillion in 2000–2001 to US$3.92 trillion in 2009–2010 and has surpassed the cash market turnover in
India. The resource mobilisation in the primary market has increased dramatically, rising sixfold
between 2000 and 2010. Similarly, the resource mobilisation through euro issues has increased
significantly over the years. Table 1.1 shows the performance in the capital market in terms of certain
key indicators.


Chart 1.1: Snapshot of Performance of Indian Securities Market during 2000–2010. Source:

nseindia.com

Table 1.1: Key Performance Indicators of Securities Market (2000–2010).
Parameters

Compound Annual Growth Rate (2000–2001 to 2009–2010) (%)

Resource mobilisation in primary markets

17.15

Resource mobilisation through Euro Issues

43.89

All-India market capitalisation

23.15

All-India equity market

turnover a

All-India equity derivatives turnover

19.94
132.19

Assets under management of mutual funds

18.99

Net investments by foreign institutional investors

30.53

Net investments by mutual funds

54.07

Returns on Nifty 50

13.13

Source: nseindia.com
aCAGR

calculated from 2001 – 2002 to 2009 – 2010.

The securities markets in India have made enormous progress in developing sophisticated
instruments and modern market mechanisms. The key strengths of the Indian capital market include a
fully automated trading system on all stock exchanges, a wide range of products, an integrated
platform for trading in both cash and derivatives, and a nationwide network of trading through


corporate brokers. A significant feature of the Indian securities market is the quality of regulation.
The market regulator, Securities and Exchange Board of India (SEBI), is an independent and effective
regulator. It has put in place sound regulations in respect of intermediaries, trading mechanism,
settlement cycles, risk management, derivative trading and takeover of companies. There is a welldesigned disclosure-based regulatory system. Information technology is extensively used in the
securities market. The stock exchanges in India have the most advanced and scientific risk

management systems. The growing number of market participants, the growth in volume of securities
transactions, the reduction in transaction costs, the significant improvements in efficiency,
transparency and safety and the level of compliance with international standards have earned a new
respect in the world for the Indian securities market.

1.1.3. MARKET SEGMENTS
The securities market has two interdependent and inseparable segments, namely the new issues
(primary) market and the stock (secondary) market. The primary market provides the channel for
creation and sale of new securities, while the secondary market deals with securities previously
issued. Once the new securities are issued in the primary market they are traded in the stock
(secondary) market.

1.1.4. MARKET PARTICIPANTS
In every economic system, some units, individuals or institutions are surplus units which are called
savers, while others are deficit units called spenders. Households are surplus units and corporate and
Government are deficit units. Through the platform of securities markets, the savings units place their
surplus funds in financial claims or securities at the disposal of the spending community and in turn
get benefits like interest, dividend, capital appreciation, bonus etc. These investors and issuers of
financial securities constitute two important elements of the securities markets. The third critical
element of markets is the intermediaries which act as conduits between the investors and issuers.
Regulatory bodies, which regulate the functioning of the securities markets, constitute another
significant element of securities markets. The process of mobilisation of resources is carried out
under the supervision and overview of the regulators. The regulators develop fair market practices
and regulate the conduct of issuers of securities and the intermediaries. They are also in charge of
protecting the interests of the investors. The regulator ensures a high service standard from the
intermediaries and supply of quality securities and non-manipulated demand for them in the market.
The four important elements of securities markets are the investors, the issuers, the intermediaries and
regulators. Chart 1.2 shows Indian household investment in different investment avenues since 1990–
1991 till 2008–2009. It can be observed that the household investments in government securities and
mutual funds fell in the negative territory while investments in shares and debentures of private

corporates, banking and PSU bonds were at 4.4% at par with investments last year.


Chart 1.2: Saving of the Household Sector in Financial Assets. Source: nseindia.com

1.1.5. SECONDARY MARKET
Exchanges in the country offer screen-based trading system. There were 9,772 trading members
registered with SEBI as by the end of March 2010. The market capitalisation has grown over the
period indicating that more companies are using the trading platform of the stock exchange. The AllIndia market capitalisation was around 61,704,205 million (US$1,366,952 million) by the end of
March 2010. The market capitalisation ratio is defined as market capitalisation of stocks divided by
Gross Domestic Product (GDP). It is used as a measure to denote the importance of equity markets
relative to the GDP. It is of economic significance since market is positively correlated with the
ability to mobilise capital and diversify risk. The All-India market capitalisation ratio increased to
94.20% in 2009–2010 from 55.40% in 2008–2009 (Table 1.2). By the end of March 2010, NSE
market capitalisation ratio fell to 76.28% during 2009–2010, while BSE market capitalisation ratio
was 78.26%.
Table 1.2: Secondary Market – Selected Indicators.


Source: CSO, SEBI, CMIE Prowess and NSE.

1.1.6. CASH MARKET
During 2009–2010, the trading volumes on the equity segment of exchanges increased significantly by
43.26% y-o-y to ₹55,184,700 million (US$1,222,523 million) from ₹38,520,970 million
(US$756,054 million) in 2008–2009 (Table 1.2). The turnover during April 2010–September 2010 in
the equity markets was ₹23,547,240 crore (US$522,807 million).

1.1.7. INDIA AND INTERNATIONAL COMPARISON
The securities markets in India and abroad witnessed recovery during 2009. This was reflected in the
rising market capitalisation of stock exchanges of emerging and developing countries. The market

capitalisation of the emerging markets increased to 28.3% of world total market capitalisation in
2009, up from 25.9% in 2008. The market value of emerging markets increased by 48.8% in 2009.
The United States which accounted for 30.9% of the world total market capitalisation in 2009
registered a rise of 28.4% in its market capitalisation. However, neither the emerging countries nor
the developed economies were able to surpass the levels of growth witnessed in market
capitalisation and turnover during the year 2007. This is clearly exhibited in Table 1.3. The stock
markets worldwide have grown in size as well as depth over the years. As can be observed from
Table 1.3, the market capitalisation of all listed companies in developed and emerging economies
taken together on all markets stood at US$48.71 trillion in 2009 up from US$34.88 trillion in 2008. In
terms of market capitalisation, nearly all the countries showed an increase in the year 2009 as
compared with the year 2008. However, in terms of turnover, all the countries compared to the year
2009, the share of United States in worldwide market capitalisation remained at 30.9% at the end of
2009 as it was at the end of 2007. The stock market capitalisation for some developed and emerging
countries is shown in Chart 1.3.
Table 1.3: International Comparison of Global Stock Markets.


Source: S&P Global Stock Market Factbook, 2009 and World Development Indicators, World Bank.
Note: Market capitalisation ratio is computed as a percentage of GDP.

Chart 1.3: Stock Market Capitalisation (% of GDP). Source: nseindia.com

1.2. Definitions of Technical Analysis and Fundamental


Analysis
Cambridge Dictionaries Online defines Technical Analysis as, ‘a method used to calculate the future
value of shares by studying the patterns of their past behaviour rather than the fundamentals (= profits
of companies whose shares are traded, the real economy, etc.)’.2
Technical, or chartist, analysis of financial markets involves providing forecasts of asset prices

or buy/sell advice on the basis of visual observation and examination of the past history of price
movements (Edwards et al., 1967), perhaps with the aid of certain quantitative techniques such as
momentum indicators and moving averages (Murphy, 1986), without considering any fundamental
factors. Oxford Dictionaries Online defines Technical analysis or (Chartism) as, ‘the use of charts of
financial data to predict future trends and to guide investment strategies’.3
The technical approach to investment is essentially a reflection of the idea that prices move in
trends which are determined by the changing attitudes of investors toward a variety of
economic, monetary, political and psychological forces …. Since the technical approach is
based on the theory that the price is a reflection of mass psychology (‘the crowd’) in action, it
attempts to forecast future price movements on the assumption that crowd psychology moves
between panic, fear, and pessimism on one hand and confidence, excessive optimism, and
greed on the other.
Pring (1991)

Investopedia4 defines Technical Analysis as, ‘a method of evaluating securities by analysing
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 and other tools to identify
patterns that can suggest future activity’.
Another approach which is rather different from technical approach is fundamental analysis or the
intrinsic value method. The assumption of the fundamental analysis approach is that at any point in
time an individual security has an intrinsic value which depends on the fundamentals of the security
(earning potential of the security). The future earning potential of the security depends on factors like
quality of management, outlook for the industry and the economy. Through a careful study of these
fundamental factors the analyst should, be able to determine whether the actual market price of a
security is above or below its intrinsic value (Fama, 1965).
Investopedia5 defines Fundamental Analysis as, ‘a method of evaluating a security that entails
attempting to measure its intrinsic value by examining related economic, financial and other
qualitative and quantitative factors’. Fundamental analysts attempt to study everything that can affect
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.

1.3. Importance and Need of the Study