Unit – 1 Securities markets are the place where transactions of securities take
place. Securities markets exist in order to bring buyer and seller of
Introduction securities and financial services together. They provide mechanisms to
facilitate the trading of securities, thus adding to the liquidity of the
securities. Securities markets facilitate the flow of saving generated from
Securities one sector of economy to another, where there is the demand for funds.
People and organizations that need to borrow money are brought together
Meaning of Securities
with those having surplus funds in the securities markets.
Security is a legal document which is issued by government bodies in
Securities markets bring together suppliers and demanders of securities
behalf of Nepal Rastra Bank, state government and corporate to raise fund
directly or with the help of financial intermediaries. Lenders or suppliers
for development activity in the nation as well as to run smoothly the
of funds exchange money for securities that tend to provide a better future
organization. In another words a security is the legal representation of the
return. The development of securities markets in any economy
right that allows holders to receive prospective future benefits under
determines the degree of success of financial activities. Since securities
stated terms and conditions. For example, when a firm borrows money,
markets add to the liquidity of securities, investors are generally
loans are generally secured with specific property such as land and
interested to buy those securities for which a market exists.
building. Such loans are recorded by means of mortgage bonds. The terms
of repayment, interest rate, the particular assets pledged to the lender and Securities Analysis
other terms and conditions are specified in a legal document called bond
Concept of Fundamental Analysis and Technical Analysis
indenture. Further, a firm may issue shares of common stock to raise
equity capital. In this case, the firm may promise a right to share in its Fundamental analysis and technical analysis are two broad methods used
profits in return for investors’ funds. The holders of common stock can to analyze securities and make investment decisions. These two methods
exercise control over firm’s operation through the board of directors and of security analysis differ in their approaches. Fundamental analysis
their property right is represented by a certificate of common stock. involves studying overall economy, industry condition, financial
condition and management of companies to determine the value of
common stock. Technical analysis involves studying the past data on
stock prices and volume generated by market activities. In general,
technical analysis is used for trade whereas fundamental analysis is used
Securities Market
1
to make an investment. We describe these two methods of security fundamentals. This is the basic reason why technical analysis involves
analysis in this section. studying charts and figures that show the market statistics on trading
history of common stock under analysis.
Fundamental Analysis
Under technical analysis, past prices of common stocks are examined first
Fundamental analysis is a method of security analysis that attempts to
to identify the most recurring patterns in price movements. Then, more
measure intrinsic value of common stock by assessing fundamental
recent stock prices are also analyzed to identify emerging trends that are
qualitative and quantitative factors associated with broader economy,
similar to the past ones. The matching of emerging trends with past one
related industry and the companies issuing the stock. In other words, this
is done in the belief that trends in price movements will repeat
method analyzes the macroeconomic, industry and company specific
themselves.
factors to evaluate stock value. This method of common stock analysis is
based on the belief that value of shares of common stock is affected by
the financial performance of the company issuing the stock. Besides,
fundamental analysis also considers the risk exposure of the common
stock in determining the value. Therefore, this method focuses on the use
of financial statements of companies being evaluated.
Technical Analysis
Technical analysis involves forecasting future stock price movements
based on an examination of past price movements. It is based on the
assumption that future stock price movements will follow the recurring
movements in the past. In other words, it believes that past market trends
can predict the future behavior for the market as a whole and for
individual stocks. Technical analysts look at the history of stock trading
pattern in a chart so they are also called chartist. One basic principle of
technical analysis is that stock prices reflect all relevant information and,
thus, it is important to understand what investors think of known and
perceived information rather than to rely on other economic
