Course Content
MARKET ORGANIZATION AND STRUCTURE
This chapter is covered in Reading 36 of Study Session 12 of the institute. After reading this chapter, the candidate should be able to: a. explain the main functions of the financial system; b. describe classifications of assets and markets; c. describe the major types of securities, currencies, contracts, commodities, and real assets that trade in organized markets, including their distinguishing characteristics and major subtypes; d. describe types of financial intermediaries and services that they provide; e. compare positions an investor can take in an asset; f. calculate and interpret the leverage ratio, the rate of return on a margin transaction, and the security price at which the investor would receive a margin call; g. compare execution, validity, and clearing instructions; h. compare market orders with limit orders; i. define primary and secondary markets and explain how secondary markets support primary markets; j. describe how securities, contracts, and currencies are traded in quote-driven, order-driven, and brokered markets; k. describe characteristics of a well-functioning financial system; l. describe objectives of market regulation.
0/11
LOS A: Main Functions of Financial System
LOS B: Classification of Assets and Markets
LOS C: Types of Assets
LOS D: Financial Intermediaries
LOS E: Positions of Investors
LOS F: Margin
LOS G and H: Order Types
LOS I: Primary and Secondary Markets
LOS J: Trading
LOS K: Well Functioning System
LOS L: Objectives of Market Regulations
SECURITY MARKET INDEXES
This chapter is covered in Reading 37, of Study Session 12 of the material provided by the institute. After reading this chapter, a student should be able to: a. describe a security market index; b. calculate and interpret the value, price return, and total return of an index; c. describe the choices and issues in index construction and management; d. compare the different weighting methods used in index construction; e. calculate and analyze the value and return of an index given its weighting method; f. describe rebalancing and reconstitution of an index; g. describe uses of security market indices; h. describe types of equity indices; i. describe types of fixed-income indices; j. describe indices representing alternative investments; k. compare types of security market indices.
0/9
LOS A: Security Market Index
LOS B: Index Return
LOS C: Index Construction
LOS D and E: Index Weightings
LOS F: Rebalancing and Reconstitution of Indices
LOS G: Uses of Security Market Indices
LOS H: Types of Equity Indices
LOS I: Fixed Income Indices
LOS J and K: Alternative Investment’s Indices
MARKET EFFICIENCY
This chapter is covered in Reading 38, of Study Session 12 of the material provided by the institute. After reading this chapter, a student should be able to: a. describe market efficiency and related concepts, including their importance to investment practitioners; b. distinguish between market value and intrinsic value; c. explain factors that affect a market’s efficiency; d. contrast weak-form, semi-strong-form, and strong-form market efficiency; e. explain the implications of each form of market efficiency for fundamental analysis, technical analysis, and the choice between active and passive portfolio management; f. describe market anomalies; g. describe behavioral finance and its potential relevance to understanding market anomalies.
0/6
LOS A: Market Efficiency
LOS B: Market Value Vs. Intrinsic Value
LOS C: Factors That Affects the Market Efficiency
LOS D and E: Weak, Semi-Strong, & Strong Form of Market Efficiency
LOS F: Market Anomalies
LOS G: Behavioral Finance
OVERVIEW OF EQUITY SECURITIES
This topic is covered in the reading 39 of study session 13 of the study material provided by the institute. After reading this chapter a student should be able to: a. describe characteristics of types of equity securities; b. describe differences in voting rights and other ownership characteristics among different equity classes; c. distinguish between public and private equity securities; d. describe methods for investing in non-domestic equity securities; e. compare the risk and return characteristics of different types of equity securities; f. explain the role of equity securities in the financing of a company’s assets; g. distinguish between the market value and book value of equity securities; h. compare a company’s cost of equity, its (accounting) return on equity, and investors’ required rates of return.
0/7
LOS A and B: Equity Securities
LOS C: Public & Private Equity Securities
LOS D: Non-Domestic Equity
LOS E: Risk and Return Characteristics of Different Types of Equity Securities
LOS F: Role of Equity Securities in Financing of Company’s Assets
LOS G: Market Value Vs. Book Value
LOS H: Cost and Return on Equity
INTRODUCTION TO INDUSTRY AND COMPANY ANALYSIS
This topic is covered in reading 40 of study session 13 of the study material provided by the institute. After reading this chapter a student should be able to: a. explain uses of industry analysis and the relation of industry analysis to company analysis; b. compare methods by which companies can be grouped, current industry classification systems, and classify a company, given a description of its activities and the classification system; c. explain the factors that affect the sensitivity of a company to the business cycle and the uses and limitations of industry and company descriptors such as “growth,” “defensive,” and “cyclical”; d. explain how a company’s industry classification can be used to identify a potential “peer group” for equity valuation; e. describe the elements that need to be covered in a thorough industry analysis; f. describe the principles of strategic analysis of an industry; g. explain the effects of barriers to entry, industry concentration, industry capacity, and market share stability on pricing power and price competition; h. describe industry life cycle models, classify an industry as to life cycle stage, and describe limitations of the life-cycle concept in forecasting industry performance; i. compare characteristics of representative industries from the various economic sectors; j. describe macroeconomic, technological, demographic, governmental, and social influences on industry growth, profitability, and risk; k. describe the elements that should be covered in thorough company analysis.
0/9
LOS A: Industry Analysis
LOS B and C: Grouping and Classification of Company
LOS D: Peer Group
LOS E: Components of Industrial Analysis
LOS F: Principles of Strategic Analysis of Industry
LOS G: Effects of Various Factors
LOS H: Life Cycle Models
LOS I and J: Industry Comparison
LOS K: Elements of Thorough Company Analysis
EQUITY VALUATION: CONCEPTS AND BASIC TOOLS
This topic is covered in reading 41 of study session 13 of the study material provided by the institute. After reading this chapter a student should be able to: a evaluate whether security, given its current market price and a value estimate, is overvalued, fairly valued, or undervalued by the market; b describe major categories of equity valuation models; c describe regular cash dividends, extra dividends, stock dividends, stock splits, reverse stock splits, and share repurchases; d describe dividend payment chronology; e explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models; f calculate the intrinsic value of a non-callable, non-convertible preferred stock; g calculate and interpret the intrinsic value of equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate; h identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate; i explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables; j calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value; k describe enterprise value multiples and their use in estimating equity value; l describe asset-based valuation models and their use in estimating equity value; m explain the advantages and disadvantages of each category of the valuation model.
0/12
LOS A : Intrinsic Value and Market value
LOS B: Categories of Equity Valuation Model
LOS C: Dividends, Stock Splits, and Share Repurchases
LOS D: Dividends Payment Chronology
00:00
LOS E: Present Value Models
00:00
LOS F: Intrinsic Value of Non-Callable Non-Convertible Preferred Stock
00:00
LOS G: Gordon Growth Model
00:00
LOS H: Multi-Stage Dividend Discount Models
00:00
LOS I and J: Price Multiples
00:00
LOS K: Enterprise Value Multiples
00:00
LOS L: Asset Based Valuation
00:00
LOS M: Advantage and Disadvantages of Each Model
00:00
Equity Investments
About Lesson

A thorough industrial analysis should cover all the factors, both internal and external, which impact an industry.

1.         External Factors Affecting Industries

1.1.     Macroeconomic Influence

a.  The macroeconomic factors such as structural economic trends, stage of the business cycle, longer-term growth pattern, etc. are some of the most important features of industrial analysis.

b.  Under the top-down approach, this is the first factor that is considered in making an industry’s analysis.

c.  The macroeconomic influence can either make the industry ‘cyclical’ or ‘structural’.

d.  The ‘cyclical’ industry is one, which is business cycle-related.

e.  Whereas ‘structural’ influence brings permanent changes to the industry.

f.  External factors such as GDP, interest rates, credit availability, and inflation have an impact on the industries. Following are the major impacts noted due to rise and fall in such factors:

Factors

Rise

Fall

GDP

Positive

Negative

Interest

Negative

Positive

Availability of Credit

Positive

Negative

Inflation

Negative

Positive

1.2.     Governmental Influence

The tax structure, the jurisdictional restrictions, the government’s attitude, regulations, etc. towards any particular industry are important factors that help in industry analysis.

1.3.     Technological Influence

a.  Some industries are hugely impacted by technological changes and some are less affected. The impact of technology on the industry must be analyzed while making the industry analysis.

b.  During the lifecycle of the industry, new products may replace older products. The new products may also change the way other industries operate.

c.  The technological changes may bring about new ways of organizing and producing in an industry.

1.4.     Social Influence

a.  The impact of social factors on the industry should also be reviewed during the industry analysis.

b.  Social factors such as how people value work/ leisure, money, health, and wellness, etc. have a huge impact on the industry.

1.5.     Demographic Influence

a.  The impact of the demographic structure should also be analyzed.

b.  The size, age distribution, and gender distribution of the industry location do affect its functioning and profitability.

c.  A young and growing population brings positive influence for the growth, profits, and risk capacity of the industry. And vice-a-versa for a stable and aging

2.         Internal Factors Affecting Industry

Some of the ‘within the industry’ external factors that affect the companies in the industry are:

2.1.     Threats of New Entrants

The ease with which any new entrant can enter an industry impacts the level of competition within an industry. This depends, to a large extent on the restrictions or entry barriers within an industry. These must be analyzed necessarily for complete industry analysis.

2.2.     Supplier’s Bargaining Power

The supplier’s bargaining power is affected by a number of industries buying supplier’s product, the number of supply substitutes, switching cost of supplier’s customers, industry, and customer’s ability to enter an industry.

2.3.     Customer’s Bargaining Power

This is affected by the number of suppliers, the number of purchasers, their size/power, switching cost to the other supplier, the number of contracted suppliers, customer’s ability to produce the product themselves.

2.4.     Product/Service Substitution Threat

It is the threat that a product might get substituted by another product.

There are other economic and industry factors such as a group of complementary industries etc. that must be analyzed for thorough industry analysis.

Apart from these ‘within the industry’ external factors, some other internal factors that affect the industries directly are:

2.5.     Internal Competitive Forces

These are affected by the economies of scale, cost advantages, other brand loyalty, customer’s switching cost, product government regulation, industry’s competitive structure, corporate rivalries, cost conditions, entry and exit barriers, etc.

2.6.     Life Cycle Analysis

 A complete analysis of different stages of the life cycle of a company and industry such as embryonic, growth, shakeout, nature, declining, etc., should be made.

2.7.     Business Cycle Sensitivity

The degree of cyclicality, whether an industry/company is leading, lagging, or coincident, and whether it is a defensive or growth industry, etc. must also be analyzed.

The analyst must also make an analysis by the position on the experience curve of the industry.

Previous
Next