Chapter 13 Flashcards
1
Q
What are the two methods of analysis are used to evaluate equities?
A
- fundamental analysis
2. Technical analysis.
2
Q
What is a fundamental analysis?
A
Fundamental analysis is a method of assessing the short-, medium-, and long-range prospects of different industries and companies to shed light on security prices.
3
Q
What is technical analysis?
A
Technical analysis is the study of historical stock prices and stock market behaviour to predict future prices and behaviour
4
Q
Which areas does fundamental analysis evaluate and why?
A
- capital market conditions,
- economic conditions (both domestic and global)
- industry conditions
- the condition of individual companies
- > in order to measure the intrinsic or fundamental value of a security
5
Q
What is the ultimate goal of fundamental analysis?
A
compare the intrinsic value against a security’s current price so that you can determine whether the security is overvalued or undervalued
6
Q
What are the factors affecting a security’s price?
A
- Macroeconomic factors
- Industrial factors
- the actual or expected profitability of the issuer (use profitability ratio to see if the company can service its debts and pay a current dividend).
7
Q
Which factor affect a security’s price the most?
A
the actual or expected profitability of the issuer (use profitability ratio to see if the company can service its debts and pay a current dividend).
8
Q
What is the main idea of the technical analysis method?
A
determining future price direction based on past price -> look at the recurring pattern.
9
Q
According to the technical analysis method, why do identifiable patterns exist?
A
Because price action shows the emotions and psychology of investors and most investors fail to learn from their mistakes so identifiable pattern exists.
10
Q
According to the technical analysis method, under times of uncertainty, what can happen?
A
Investors can act irrationally under influence of mass psychology -> buy and sell quickly in mass. (Program trading or high-frequency trading also can have an unintended effect on the market price in the way that is unrelated to the expected earnings or historical price movements)
11
Q
What are the market theories?
A
- Efficient market hypothesis
- random walk theory
- rational expectations hypothesis
12
Q
What is the general idea of all three market theories?
A
all suggest that stock markets are efficient and stock’s price is the best available estimate of its true value -> investors cannot consistently beat the market.
13
Q
What are the assumptions of efficient market hypothesis?
A
- Profit-seeking investors in the marketplace react quickly to the release of information.
- When new information about a stock appears, investors reassess the intrinsic value of the stock and adjust their estimation of its price accordingly
14
Q
What are the conclusions of efficient market hypothesis?
A
A stock’s price fully reflects all available information and represents the best estimate of the stock’s true value.
15
Q
What are the assumptions of random walk theory?
A
New information concerning a stock is disseminated randomly over time. Price changes are therefore random and bear no relation to previous prices.
16
Q
What are the conclusions of random walk theory?
A
Past price changes contain no useful information because any developments affecting the company have already been reflected in the current price of the stock.
17
Q
What are the assumptions of rational expectations hypothesis?
A
People are rational and have access to all necessary information. People use information intelligently in their own selfinterests and make intelligent decisions after weighing all available information.
18
Q
What are the conclusions of rational expectatons hypothesis?
A
Past mistakes can be avoided by using available information to anticipate change.
19
Q
How many variations (các biến thể) are there in the efficient market hypothesis?
A
three and each variation assumes that a different amount of information is reflected in the price of securities.
- Weak
- semi-strong
- Strong
20
Q
What does the Weak form in the efficient market hypothesis assume?
A
Assuming that all past market information is fully reflected in the current price -> technical analysis is considered to have little or no value
21
Q
What does the Semi-strong form in the efficient market hypothesis assume?
A
Assuming that all publicly available information is fully reflected in the current price -> both fundamental and technical analysis have little or no value
22
Q
What does the Strong form in the efficient market hypothesis assume?
A
Assuming that all information is fully reflected in current prices, including both publicly available and insider information. No single investor has information that provides an advantage over any other investor.
23
Q
Some evidence did not support the efficient market hypothesis, why?
A
- New information is not available to everyone at the same time.
- Investors do not react in the same way to the same information
- Not everyone can make accurate forecasts and correct valuation decisions
- Mass investor psychology and greed may at times cause investors to act irrationally.
24
Q
What is the investment strategy of investors who believe in the efficient market hypothesis?
A
they favour a passive investment approach -> follow a buy-and-hold strategy or invest in market indexes and exchange-traded funds.
25
What is the investment strategy of investors who reject the efficient market hypothesis?
They like to use a more active approach which involves more buying and selling in an attempt to beat the stock market's average returns.
26
What are the three macroeconomic factors affecting investor expectations?
1. fiscal policy
2. Monetary policy
3. Inflation
27
What are the most important tools of fiscal policy and why?
1. Government expenditure
2. Taxation
- > b/c they affect overall economic performance and influence the profitability of individual industries.
28
What is the reason for taxation in fiscal policy to be less effective?
Time lag required to get parliamentary approval for tax legislation and between the action to the effect in the economy.
29
What is the advantages of fiscal policy measures?
they can target certain sectors of the economy.
30
What are the consequences of high government debt?
restrict both fiscal and monetary policy options
31
Which factors in the economy that fiscal and monetary policies can affect?
1. interest rate
2. rate of economic growth
3. rate of corporate profit growth
- > therefore, they affect the valuation of stocks.
32
What is the primary role of The Bank of Canada?
to promote Canada's economic and financial welfare through monetary policy.
33
What are the goals of the Bank of Canada?
1. Preserve the value of the Canadian dollar
| 2. Keeping inflation low, stable and predictable.
34
What would happen if the goals of the Bank of Canada are threatened?
It takes corrective action by changing the rate of monetary growth, thereby encouraging interest rates to reflect the change.
35
what happens when economic growth begins to accelerate?
bond yields tend to rise -> if inflation begins to rise during an expansion, the Bank most often raises short-term interest rates to slow economic growth and contain inflationary pressures -> moderate economic growth or even a growth recession.
36
What happens to long-term bond yields when the Bank raises short-term rates to slow the rate of economic growth?
long-term yield bond will fall which signal the investors of the degree of economic slowing.
37
What does tilting of the yield curve (độ nghiêng của đường cong lợi suất)?
Happen when short-term yields rise and long-term yields fall.
38
How the process of raising short-term rate and declining long-term rate happen?
1. The Bank increse short-term interest rates -> long-term bond yields continue to rise but at a slower pace.
2. short-term rates rise -> economic growth usually slows. -> Long-term bond prices begin to stabilize and briefly fall below those of equities.
3. Suddenly, with each short-term interest rate increase, long-term bond yields fall. Investors purchase long-term bonds under the assumption that a slower economic growth rate will alleviate (xoa dịu) the need for higher interest rates in the near future. The increased purchase of long-term bonds pushes their yields lower.
39
What happens when long-term rates reduce?
- Creating competition between equities and bonds.
40
What is the impact of inflation?
1. higher interest rate
2. lower corporate profit
3. lower price-earnings multiples
41
what can inflation lead to?
High inventory and labour cost for manufactures -> to maintain the profit, business es need to pass the higher costs on to consumers in form of higher price, But higher costs cannot be passed on indefinitely; buyers eventually resist. The resulting squeeze on corporate profits is reflected in lower common share prices.
42
What is the relationship exist between the rate of inflation and price-earning multiples?
When inflation rises, the value of future cash flows paid by the corporation will fall. Therefore, if inflation
is rising, an investor is more likely to pay a lower price for the earnings of the company
43
Does a company's profitability depend more on the structure of the industry or on the product and services it sells?
Structure of the industry.
44
How many ways are there to classify industries?
1. by product or service
2. by life cycle
3. by competitive forces
4. by reaction to the economic cycle
45
How many industries are there according to the Global Industry Classification Standard (GICS) created by Standard & Poor's and Morgan Stanley Capital International?
11 sectors, 24 industry groups, 69 industries, and 158 sub-industries
46
What are the sectors and industry groups according to GICS?
1. Communication services (Telecommunication Services; Media and Entertainment)
2. Consumer Discretionary (Automobiles and Components; Consumer Durables and Apparel; Consumer Services; Retailing)
3. Consumer Staples (Food and Staples Retailing; Food, Beverage, and Tobacco; Household and Personal Products)
4. Energy (Energy)
5. Financials (Banks; Diversified Financials; Insurance)
6. Health Care (Health Care Equipment and Services; Pharmaceuticals, Biotechnology, and Life Sciences)
7. Industrials (Capital Goods; Commercial and Professional Services; Transportation)
8. Information Technology (Software and Services; Technology Hardware and Equipment; Semiconductors and Semiconductor Equipment)
9. Materials (Materials)
10. Real Estate (Real Estate)
11. Utilities (Utilities)
47
What is the problem with classifying an industry by the product or service it sells?
then some companies would operate in more than one industry.
48
How many stages are there for industries that is classified by life cycle?
1. emerging growth
2. growth
3. maturity
4. decline
49
Does the life cycle the same in all industries?
No, some take 150 years some take a few year to finish their life cycle
50
Why it is important to determine where an industry is in its life cycle?
to do valuation process and pricing strategies.
51
What are Emerging growth industries when classifying industries by life cycle?
- New industries are continually developing to provide products and services that meet society’s changing needs and demands. (software and hardware development).
52
What is the financial characteristic of Emerging growth industries?
they are unprofitable at first, although future prospects may be promising. Large start-up investments may even
lead to negative cash flows. It is sometimes impossible to predict which companies will ultimately survive in a new industry.
53
Is it easy for investors to access Emerging growth industries companies?
No, sometimes privately-owned companies dominate the industry.
54
What are Growth industries when classifying industries by life cycle?
- sales and earnings are consistently expanding at a faster rate than in most other industries.
55
How do they call companies in Growth industries and their stocks?
growth companies and growth stocks.
56
What are the characteristics of Growth companies?
- Having above-average rate of earnings on invested capital over a period of several years.
- Can continue to achieve similar or better earnings on additional invested capital.
- Show increasing sales in terms of both dollars and units, coupled with a firm control of costs.
- > High price-to-earnings ratios and low dividend yields.
57
What are the characteristics of Growth companies that survive during the Growth period?
- Companies that survive experience increased consumer awareness, lower costs of production, increased competition, rising demand, and growth in profits. Cash flow may or may not remain negative.
58
What are the characteristic of Growth stocks?
- Growth stocks typically maintain above-average growth over several years, and growth is expected to continue. - - Normally not pay out large dividends because their growth is often financed through retained earnings.
59
What will happen to the Growth companies in a specific growth industry that the marketplace expects that future growth will not meet expectations?
The companies within that industry are likely to have an above average risk of a price decline.
60
What are Maturity industries when classifying industries by life cycle?
- Experience slower, more stable growth in sales and earnings that more closely matches the overall rate of economic growth.
- Both earnings and cash flow tend to be positive. Within the same industry, it is more difficult to identify differences in products between companies -> price competition increases, profit margins usually fall, and some companies expand into new businesses with better growth prospects.
- During recessions, stable growth companies usually demonstrate a decline in earnings that is less than that of the average company. Companies in the mature stage usually have sufficient financial resources to weather difficult economic conditions
61
What are Decline industries when classifying industries by life cycle?
- they tend to stop growing and begin to decline.
- Declining industries produce products for which demand has declined because of changes in technology, an inability to compete on price, or changes in consumer tastes.
- Cash flow may be large, because there is no need to invest in new plant and equipment.
- Profits may be low
62
What are the Porter's five competitive forces?
1. Threat of new entry
2. Competitive rivalry
3. Threat of substitutes
4. Bargaining power of buyers
5. Bargaining power of suppliers
63
what is the factor affect Threat of new entry?
1. the amount of capital required
2. opportunities to achieve economies of scale
3. the existence of established distribution channels.
4. regulatory factors and product differences
64
What is Competitive rivalry about?
- About the degree of competition between existing firms
- Depends on the number of competitors, their relative strength, the rate of industry growth, and the extent to which products are unique (rather than simply ordinary commodities).
65
What is Bargaining power of buyers about?
- The extent to which buyers can put pressure on the company to lower prices
- degree of buyers' sensitivity to price
66
What is Bargaining power of suppliers about?
- The extent to which suppliers can put pressure on the company to pay more for the resources they supply
- The costs of suppliers’ raw materials or inputs affect profit margins or product quality
67
What are the industries that are classified by reaction to the economic cycle?
1. Cyclical industries
2. Defensive industries
3. Speculative industries
68
What are Cyclical industries?
- immune from the adverse effects of an overall downturn in the business cycle (all industries are cyclical to a degree). However, the term cyclical industry is reserved for industries in which the effect on earnings is most pronounced.
- Most cyclical industries benefit from a declining Canadian dollar because their exportable products become cheaper for international buyers.
69
what are the three main group of cyclical industries when classifying industries by reaction to the economic cycle?
* Commodity basic cyclical, such as forest products, base metals, and chemicals
* Industrial cyclical, such as transportation, capital goods, and basic industries (steel and building materials)
* Consumer cyclical, such as merchandising and automobile industries
70
What are defensive industries?
- Stable return on investor equity and do relatively well during recessions.
- The term blue-chip denotes shares of top investment-quality companies, which maintain earnings and dividends through good times and bad. This record usually reflects a dominant market position, strong internal financing, and effective management.
71
Are the major Canadian banks blue-chip industries?
No, bank stock prices are typically sensitive to changes in interest rates. As interest rates rise, banks must raise the rate they pay on deposits to attract funds. At the same time, a large part of their revenue is derived from mortgages with fixed interest rates. The result is a profit squeeze -> Bank stock prices are particularly sensitive to changes in long bond yields.
72
Are the shares of utility companies (gas, water, electricity) considered defensive and blue-chip stocks?
Yes because of their ability to generate consistent earnings over most economic cycles. (However, utility stocks that carry large amounts of debt tend to be sensitive to interest rates)
73
What are speculative industries?
- Industries in which risk and uncertainty are unusually high because analysts lack definitive information (thông tin chính xác).
- Shares in these companies are called speculative shares.
- Emerging industries are often considered speculative. The profit potential of a new product or service attracts many new companies, and initial growth may be rapid. Inevitably, as the industry consolidates, many of the original participants are forced out of business, and a few companies emerge as the leaders. The success of these leaders in weathering the developmental period may result from better management, better financial planning, better products and services, or better marketing.
- The term speculative can also describe any company, even a large one, whose shares are treated as speculative.
74
What are the primary sources of information for technical analysis?
price, volume, and time
75
What are the assumptions involving the three sources of information (price, volume, and time) that technical analysis has?
1. All influence on the market action are automatically accounted for or discounted in price activity
2. Prices move in trends, and those trends tend to persist for relatively long periods of time
3. The future repeats the past
76
What is the assumption "All influence on the market action are automatically accounted for or discounted in price activity" about? (in technical analysis)
- All known market influences are fully reflected in market prices.
- All that is required is that you study the price action itself.
- By studying price action, technicians attempt to measure market sentiment and expectations.
- The market itself indicates the direction and the extent of its next price move
77
What is the assumption "Prices move in trends, and those trends tend to persist for relatively long periods of time" about?
Given this assumption, the primary task of a technical analyst is to identify a trend in its early stages and carry positions in that direction until the trend reverses itself.
78
what is the assumption "The future repeats the past" about?
- Markets essentially reflect investor psychology and that the behaviour of investors tends to repeat itself.
- Investors tend to fluctuate between pessimism, fear, and panic on one side, and optimism, greed, and euphoria on the other. By comparing current investor behaviour as reflected through market action with
comparable historical market behaviour, the analysts attempt to make predictions. Even if history does not repeat itself exactly, we can still learn a lot from the past.
79
What are the main difference between technical analysis and fundamental analysis?
The subject of study.
1. Technical analyst studies the effects of supply and demand (reflected in price and volume) (can give sense of when and at what level to enter or leave a market)
2. Fundamental analyst studies the causes of price movements. (can give sense of long-term price prospects)
80
What are the commonly used tools in technical analysis?
1. Chart analysis
2. quantitative analysis
3. Analysis of sentiment indicators
4. cycle analysis
81
What is the tool called Chart analysis?
- Is the analysis of graphic representations of relevant market data.
- Offer visual sense of where the market has been -> help to project where it might be going.
82
What are the most common type of Chart in Chart analysis?
The one that graphs the high, low, and close of a particular asset.
Activity may be tracked hourly, daily, weekly, monthly, or even yearly. (often called bar chart with the volume of trading at the bottom, also have candlestick charts, line charts, and point and figure charts)
83
What do technical analysts use price charts for?
To identify support levels and resistance levels, along with regular price patterns.
84
What is the support level when analyzing a price chart?
- The support level is the bottom price of the trading range for security.
- Is the price at which most investors sense value and are willing to buy the security -> demand begins to grow
- Most holders are unwilling to sell at this price -> supply is low
- > price tend to rise
85
What is the resistance level when analyzing a price chart?
- A resistance level is the top price of the trading range, where most investors are willing to sell a security and most buyers are unwilling to buy it -> supply > demand -> prices tend to fall.
86
What does a chart formation reflect?
It reflects market participant behavioural patterns that tend to repeat themselves.
87
What are the market participant behavioral patterns?
1. Trend reversal (reversal pattern)
| 2. pause in an existing trend (continuation pattern)
88
What is reversal pattern (mo hinh dao chieu)?
- Reversal patterns are formations (su hinh thanh) on charts that usually precede (truoc) a sizeable advance (tang dang ke) or decline in stock prices.
89
What is the most frequently observed pattern of reversal pattern?
- Head-and-shoulders formation.
90
When can head-and-shoulders formation occur?
1. At a market top, where it is called a head-and-shoulders top formation
2. At a market bottom, where it is called either an inverse head-and-shoulders or a head-and-shoulders bottom formation.
91
In the bottom Head-and-shoulders formation, What does the left shoulder indicate?
- The first decline in price occurs, volume may increase
| - A minor recovery in price, no substantial increase in volume.
92
In the bottom Head-and-shoulders formation, What does the head indicate?
- Price declines again, often on increased volume and below the level of left shoulder
- Second recovery may not consist of any significant increase in volume
93
In the bottom Head-and-shoulders formation, What does the right shoulder indicate?
- Another decline occurs, volume may or may not increase
- further recovery occurs, the greater the symmetry (doi xung) of the right shoulder to the left shoulder, the greater the reliability of the pattern.
94
What is the neckline of head-and-shoulders formation?
- The line joining the two recovery points.
| - Can extend out to the right of the chart pattern.
95
What is the final step that confirm a reversal pattern in head-and-shoulders formation?
- Final step that confirms a reversal pattern is a price move that carries the stock either below the neckline on increased volume (in a top formation) or above the neckline on increased volume (in a bottom formation). At this point, we see either a downside break-out (in a top formation) or an upside break-out (in a bottom formation)
96
What is the symmetrical triangle pattern?
- Establishing a clearly defined symmetrical triangle during a period from 3 weeks to 6 months or more.
- In most cases, it is just a pause in a bull or bear market trend.
97
How symmetrical triangle pattern represents a fairly equal struggle between buyers and seller?
- The buyers move into the stock at the bottom line and the sellers move out of the stock at the top line.
- This activity repeats itself back and forth until one side proves stronger and the stock price breaks out of the triangle
98
Does the symmetrical triangle pattern indicate a continuation or reversal pattern?
both. When it is confused between the two, you must pay close attention to the direction of the break-out
99
What is quantitative analysis?
- Is a form of technical analysis that replies on statistics and has been improved by computer technology.
- One general category of quantitative analysis tools used to supplement chart analysis is the moving average.
100
What is moving average in Quantitative analysis?
- Is a device for smoothing out fluctuating values in an individual stock or in the aggregate market as a whole.
- In doing so, either week-to-week or day-to-day, it shows long-term trends. By comparing current
prices with the moving average line, you can see whether a change is signaled
101
How to calculate the moving average?
- By adding the closing prices for a stock over a predetermined period and dividing the total by the number of days or weeks in the period selected.
102
How is the moving average line when the overall trend has been down?
The moving average line will be above the current individual price.
103
What is the buy signal in Quantitative analysis?
If the price breaks through the moving average line from below on heavy volume, and if the moving average line itself starts to move higher, it means that the declining trend has reversed.
104
How is the moving average line when the overall trend has been up?
The moving average line will be below the current individual price.
105
What is the sell signal in Quantitative analysis?
If the price breaks through the moving average line from above on heavy volume, and if the moving average line itself starts to fall, it means that the upward trend has reversed.
106
What is sentiment indicators?
- Sentiment indicators (chỉ số cảm xúc) are a measure of investor expectations.
- Contrarian investors (Các nhà đầu tư phản đối) use it to determine what the majority of investors expect prices to do in the future so that they can move in the opposite direction.
- The contrarian believes that if the vast majority of investors expect prices to rise, then there probably is not enough buying power left to push prices much higher.
107
How should the sentiment indicators be used?
Sentiment indicators should only be used as evidence to support other technical indicators
108
What is cycle analysis in technical analysis?
- Cycle analysis can forecast when the market will start
moving in a particular direction and when it will ultimately reach its peak or trough.
- The theory of cycle analysis is based on the assumption that cyclical forces drive price movements in the marketplace.
- Cycles can last for periods as short as a few days or as long as decades
109
What are the general categories of cycle lengths?
1. Long-term (> 2 y)
2. Seasonal (1y)
3. Primary/ Intermediate (9-26w)
4. Trading (4w)
110
What is cycle analysis useful at?
- In identifying a time window when a market peak or trough is expected.
(when it come to trading, cycle analysis must be used with other technical tools such as trend analysis and chart formation)
111
Is cycle analysis complicated?
yes because at any given point, a number of cycles may be operating.
