Unit 3: Fundamental & technical analysis
Security Analysis & Portfolio Management notes · PTU syllabus (BCOP 611-18)
On this page
Unit summary
How do investors decide what to buy? Fundamental analysts study the economy, industry and company; technical analysts study price charts; and market efficiency theories ask whether either can beat the market. This unit covers economic, industry and company analysis, charting techniques and indicators, fundamental vs technical analysis, the Efficient Market Theory and the Random Walk Theory.
After this unit you can
- Explain economic, industry and company analysis (EIC framework)
- Explain charting techniques and technical indicators
- Compare fundamental and technical analysis
- Explain the Efficient Market Hypothesis and Random Walk Theory
PTU syllabus topics
- Economic
- industry and company analysis
- charting techniques and indicators
- fundamental vs. technical analysis
- Efficient Market Theory
- Random Walk Theory
- Economy analysis
GDP, inflation, interest rates
- Industry analysis
Growth, competition, life cycle
- Company analysis
Management, financials, valuation
Topic 1
Fundamental analysis: economic and industry analysis
- Economy analysis
GDP, inflation, interest rates, fiscal and monetary policy
- Industry analysis
Life cycle, competition, regulation, demand
- Company analysis
Financials, management, valuation
Economic analysis
- Key variables: GDP growth, inflation, interest rates, fiscal deficit, balance of payments, exchange rate, monsoon (for India), industrial production (IIP), corporate earnings outlook, political stability.
- Leading, coincident and lagging indicators of the business cycle.
Industry analysis
- Industry life cycle: pioneering, expansion (growth), stabilisation (maturity), decline.
- Factors: demand and growth, cost structure, competition (Porter's Five Forces), government policy, technology, labour, raw materials, cyclicality.
- Classification: growth (renewables, EVs), cyclical (auto, metals), defensive (FMCG, pharma), sunset industries.
Topic 2
Company analysis
- Qualitative: management quality and governance, competitive advantage (moat), brand, business model, promoter holding and pledging.
- Quantitative: financial statement analysis and ratios.
EPS
Net profit for equity ÷ Number of shares
P/E ratio
Market price ÷ EPS
P/B ratio
Market price ÷ Book value per share
Dividend yield
DPS ÷ Market price × 100
ROE
Net profit ÷ Shareholders' equity × 100
Intrinsic value (DDM)
D1 ÷ (k − g)
Example
EPS ₹25, industry P/E 18 → fair price ≈ ₹450; if the market price is ₹380, the share appears undervalued (buy signal, if fundamentals are sound).
Topic 3
Technical analysis: charts and indicators
Technical analysis studies past prices and volumes to forecast future price movements. Assumptions (Dow Theory roots): market action discounts everything; prices move in trends; history repeats.
Dow Theory
Primary, secondary and minor trends
Charts
Line, bar, candlestick, point and figure
Patterns
Head and shoulders, double top/bottom, triangles, flags
Support and resistance
Price floors and ceilings
Indicators
Moving averages (SMA, EMA), RSI, MACD, Bollinger Bands
Market breadth
Advance–decline ratio, volume
- Moving average crossover: short-term MA crossing above long-term MA (golden cross) — buy; below (death cross) — sell.
- RSI: above 70 overbought, below 30 oversold.
- Volume confirms price trends.
Topic 4
Fundamental vs technical analysis
Focus
Intrinsic value — economy, industry, company
Price and volume patterns
Time horizon
Long term
Short to medium term
Data
Financial statements, economic data
Charts, market statistics
Question answered
What to buy
When to buy or sell
Users
Investors
Traders
Topic 5
Efficient Market Theory and Random Walk Theory
Efficient Market Hypothesis (Eugene Fama, 1970): security prices fully reflect all available information; hence consistently earning above-normal returns is not possible.
- Strong form
Prices reflect all information, public and private (insider) — even insiders cannot earn excess returns
- Semi-strong form
Prices reflect all public information — fundamental analysis cannot beat the market
- Weak form
Prices reflect all past prices and volumes — technical analysis cannot beat the market
- Tests: weak form — serial correlation, runs tests, filter rules; semi-strong — event studies (earnings, splits, bonus); strong form — performance of insiders and fund managers.
- Random Walk Theory (Malkiel): successive price changes are independent and random, so past prices cannot predict future prices — consistent with weak-form efficiency.
- Evidence and anomalies: January effect, small-firm effect, momentum, value premium, bubbles — and behavioural finance explanations (overconfidence, herding).
- Implications: passive investing (index funds), diversification, low-cost strategies.
Key terms
- Fundamental analysis
- Valuation based on economy, industry and company factors
- Technical analysis
- Forecasting prices from past price and volume data
- Support level
- Price at which demand tends to stop a fall
- Efficient market
- Market where prices reflect available information
- Random walk
- Price changes are independent and unpredictable
Quick revision
- EIC: economy → industry → company.
- Industry life cycle; Porter's five forces.
- Company: management, moat, ratios, intrinsic value.
- Technical: Dow theory, charts, patterns, MA, RSI, MACD.
- EMH weak, semi-strong, strong; random walk supports weak form.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is EIC analysis?
- Q2.State the stages of the industry life cycle.
- Q3.What is a candlestick chart?
- Q4.What is RSI?
- Q5.State the three forms of market efficiency.
- Q6.What is the Random Walk Theory?
Long-answer questions
- Q1.Explain economic and industry analysis in fundamental analysis.
- Q2.Explain company analysis and valuation ratios.
- Q3.Explain technical analysis tools and compare fundamental and technical analysis.
- Q4.Explain the Efficient Market Hypothesis and Random Walk Theory.
Stuck on this unit?
Message SBS on WhatsApp for help with Security Analysis & Portfolio Management, or to ask about studying B.Com at Synetic.