4. Fundamentals of Research

Table of Contents

What is Investing?

Investment activity focuses on the potential of an asset’s value to increase over a period. In the context of the securities market, the value of an asset can increase if it can generate higher cash flow without a proportionate increase in risk or if the risk associated with the asset decreases without a proportionate decrease in the cash flow. Investment activity is generally undertaken by investors with the aim of making a return on their investment.

Active Investing Passive Investing
Definition Involves identifying specific securities to buy or sell, evaluating each security in the portfolio, and making decisions based on market conditions and individual company performance. Involves investing in a broad set of securities that represent an asset class or index, and earning the rate of return that the asset class or index provides.
Approach Requires a lot of research, analysis, and monitoring of individual securities, and attempts to generate returns that outperform the market. Seeks to match the market returns by investing in a diversified portfolio of securities.
Strategy Seeks to identify securities that are undervalued and have the potential to provide higher returns than the market average. Selling securities that are overvalued and reinvesting in undervalued securities. Follows an indexing strategy, where the investor buys all securities that are part of an index or a basket of securities that represent an asset class.
Risk Carries higher risk as it requires making frequent buy and sell decisions based on market trends and individual company performance. Carries lower risk as it involves investing in a diversified portfolio of securities that broadly represent the market or an asset class.
Fees Typically higher fees as it requires active management, research, and monitoring of individual securities. Typically lower fees as it requires passive management and follows an indexing strategy.
Investor Types Suited for investors who have a high risk tolerance, are willing to devote time to research and analysis, and seek higher returns. Suited for investors who prefer a low-risk, low-maintenance investment strategy, and who are satisfied with market returns or the returns of a specific asset class.

The Role of Research in investment activity

As an essential part of investment activity, fundamental research plays a critical role in informing investment decisions. The fundamental research analyst has two main responsibilities: (i) Research and (ii) Analysis.

Research:
The fundamental research analyst is responsible for researching the companies and industries they cover. This involves conducting comprehensive research on various aspects of a company, including its financials, management, industry trends, competitive landscape, and overall performance. The research analyst uses multiple sources of information, such as company websites, financial databases, industry reports, and analyst research notes, to obtain the necessary information for analysis.

Analysis:
Once the research is gathered, the fundamental research analyst analyzes the company’s performance and future prospects. This involves making sense of the data and using it to identify trends and draw conclusions. Based on the results of the analysis, the analyst then provides investment recommendations and advice to clients. Additionally, the analyst may provide commentary on market and sector developments.

Insider Information:
Insider information is information obtained from people who are directly involved in the business operations of a company, such as employees, managers, and executives. This type of information is typically not accessible to the general public and is illegal to use for trading purposes.

Mosaic Analysis:
Mosaic analysis is the process of using publicly available information to build a picture of a company or industry. This involves collecting and analyzing various data points, such as financial reports, news stories, and market trends, to gain insight into how a company or industry is performing. Unlike insider information, mosaic analysis is available to anyone with access to public data.

Technical Analysis:
Technical analysis is a method of trading in which past price movements and trading volume of securities are analyzed to make predictions about future price movements. This type of analysis focuses on chart patterns, indicators, and other technical tools to identify trends and forecast future prices.

Fundamental Analysis:
Fundamental analysis is a method of trading in which a company’s financial performance is analyzed to make predictions about future price movements. This type of analysis focuses on financial statements, such as balance sheets, income statements, cash flow statements, and more, to identify trends and forecast future prices.

Mock-Test-

0 votes, 0 avg
16

NISM Series-XV: Research Analyst Certification

CHAPTER 4- FUNDAMENTALS OF RESEARCH

1 / 24

1. What is the primary difference between investing and trading?

2 / 24

2. Technical analysis focuses on forecasting the direction of prices through the study of patterns in:

3 / 24

3. Technical analysis identifies support and resistance levels, which represent:

4 / 24

4. What is the role of research in investment activity?

5 / 24

5. Which parameter is important to confirm a trend in technical analysis?

6 / 24

6. According to technical analysis, which of the following provides indications of the underlying trend and its direction?

7 / 24

7. Which type of analysis converts price and volume data into charts to identify trends and triggers for buying or selling a stock?

8 / 24

8. What is mosaic analysis?

9 / 24

9. The time span over which price and volume are observed factors in the impact of long term factors that influence prices over a period of time. State whether True or False

10 / 24

10. Which type of investors and traders largely rely on technical signals?

11 / 24

11. What is the primary characteristic of passive investing?

12 / 24

12. In technical analysis, impact of day to day fluctuations in prices is annulled by which of the following factors?

13 / 24

13. Which element factors in the impact of long-term factors that influence prices over a period of time in technical analysis?

14 / 24

14. The primary limitation of applying a pure quantitative research approach in fundamental analysis is:

15 / 24

15. Fundamental analysis is primarily focused on:

16 / 24

16. Quantitative research in equity analysis involves:

17 / 24

17. According to fundamental analysis, if the market price of a share is below its fair value, it represents:

18 / 24

18. What is the objective of active investing?

19 / 24

19. Which of the following statement about limitation of quantitative approach to fundamental analysis is correct?

20 / 24

20. What is insider information in the context of investment?

21 / 24

21. Speculation is calls made with leveraged funds, unlike investing money which is disciplined activity for creating wealth.

22 / 24

22. Fundamental analysis includes which of the following?

23 / 24

23. Technical analysis may be less suitable for long-term investing because:

24 / 24

24. Which of the following is NOT studied in fundamental analysis?