INTRODUCTION

Investing in stocks is not just about picking companies at

random or following the latest trend. Successful investors,
such as Warren Buffett, have built their wealth by
thoroughly analyzing businesses to ensure they are
making wise, long-term investments. This e-book is
designed to help you understand the key factors you
should look at when evaluating a stock.

Each company is unique, but there are universal principles

that can guide you through the process. This guide breaks
down 15 essential elements of stock analysis, focusing on
business fundamentals, management, risks, profitability,
and valuation. By the end of this e-book, you’ll have a solid
foundation for making more informed investment
decisions.
1. GROSS DOMESTIC PRODUCT
(GDP)

Definition: The measure of aggregate output

in an economy, representing the total value of
final goods and services produced within a
specific period.

Final Goods vs. Intermediate Goods:

Final Goods: Goods and services sold to
their final users.
Intermediate Goods: Goods used to
produce other goods. These are not
counted in GDP to avoid double-
counting.
GDP Calculation: GDP includes only the value
of final goods produced in the economy
during a given period.
2. NOMINAL VS. REAL GDP

Nominal GDP
Also known as GDP at current prices.
It measures the value of output using the
prices in the year of production. It can be
affected by inflation.

Real GDP
Measures GDP in constant prices (base
year prices).
Adjusted for inflation, Real GDP shows the
true growth in goods and services.
3. OKUN'S LAW

Definition:
A relationship between unemployment
and GDP growth.

Principle

A reduction in the unemployment

rate generally leads to an increase in
GDP.
Conversely, rising unemployment
tends to indicate a decrease in GDP
growth.
4. UNEMPLOYMENT

Definition:
A relationship between unemployment
and GDP growth.

Unemployment Rate

Defined as the ratio of the number of

unemployed individuals to the total
labor force
Formula :
Unemployment Rate=
Unemployed Individuals
​×100
Labor Force
Discouraged Workers: Individuals who
have stopped looking for jobs and are no
longer counted in the labor force.

Participation Rate: The ratio of the labor

force to the total population of working-
age people.

Effects of Unemployment:
High Unemployment: Indicates
inefficient use of human resources.
Low Unemployment: May lead to
labor shortages, raising wages and
costs for businesses.
5. INFLATION

Inflation Rate:
A sustained rise in the general level of
prices in an economy

Measurement via GDP Deflator:

The GDP deflator measures the price
level of all domestically produced
goods and services in the economy.
Formula :
GDP Deflator= Nominal GDP
​×100
Real GDP
Effects of Inflation:
Rising Inflation: Reduces the
purchasing power of money and can
distort income distribution.
Deflation: A sustained decrease in
the price level, leading to reduced
economic activity.
6. PHILLIPS CURVE

Concept: Describes the inverse

relationship between unemployment and
inflation in the short run.

Implication: Lower unemployment can

lead to higher inflation, while higher
unemployment can reduce inflation.
7. COMPOSITION OF GDP

The components of GDP on the demand side

include:
1. Consumption (C): Spending by
households on goods and services.

2. Investment (I): Business investments,

including:
Non-Residential Investment:
Investment in factories, equipment,
etc.
Residential Investment: Spending on
housing.
Inventory Investment: Changes in
business inventories.
3. Government Spending (G): Expenditure
by the government on goods and services.

4. Net Exports (X - IM):

Exports (X): Goods and services sold

to foreigners.
Imports (IM): Goods and services
purchased from abroad.
Net Exports: Calculated as Exports
minus Imports.
8. DEMAND FOR GOODS

Total Demand in a Closed Economy:

Total demand for goods (Z) in a closed
economy is determined by: Z=C+I+GZ = C
+ I + GZ=C+I+G

Consumption Function: Consumption

depends on disposable income (Y - T),
where T represents taxes. The formula is:
C=C0+C1(Y−T)C = C_0 + C_1(Y - T)C=C0​
+C1​(Y−T)
C0C_0C0​: Autonomous
consumption (consumption
independent of income).
C1C_1C1​: Marginal propensity to
consume (fraction of additional
income spent on consumption).
9. EQUILIBRIUM IN THE GOODS
MARKET

Equilibrium Condition: In equilibrium,

production (Y) equals total demand (Z).
Y=ZY = ZY=Z

Savings and Investment: In a closed

economy, savings must equal
investment. The equilibrium condition is:
S=IS = IS=I

Multiplier Effect: An increase in

autonomous spending (e.g., government
spending) leads to a more than one-for-
one increase in output.
10. IS-LM MODEL

The IS-LM model integrates the goods and

financial markets:
IS Curve: Represents equilibrium in the
goods market, where savings equal
investment. It shows a negative
relationship between interest rates and
output.

LM Curve: Represents equilibrium in the

money market, where money demand
equals money supply. It shows a positive
relationship between income and interest
rates.
Shifts in the IS Curve:
Fiscal Expansion (Increase in G or
decrease in T) shifts the IS curve to the
right, increasing output.

Fiscal Contraction (Decrease in G or

increase in T) shifts the IS curve to the left,
reducing output.

Shifts in the LM Curve:

Monetary Expansion (Increase in money

supply) shifts the LM curve down,
lowering interest rates and increasing
output.

Monetary Contraction (Decrease in

money supply) shifts the LM curve up,
raising interest rates and reducing
output.
11. MONETARY POLICY AND
MONEY DEMAND

Demand for Money:

Money is demanded for transactions
and as a store of value.
The demand for money increases with
income (Y) and decreases with the
interest rate (i).
Formula:
Md=kY−hiM_d = kY - hiMd​=kY−hi
Money Supply: Determined by the central
bank and is independent of the interest
rate in the short run.

Open Market Operations: The central

bank can expand or contract the money
supply by buying or selling bonds.
12. POLICY MIX

Monetary Policy: Central banks use open

market operations to control the money
supply and influence interest rates.

Fiscal Policy: Governments adjust their

spending and taxation policies to
influence the level of economic activity..

Policy Mix: The combination of fiscal and

monetary policies used to achieve
economic objectives like controlling
inflation and promoting growth.
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Pieter Slegers
Compounding Quality