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Chapter 7 - Forecasting share price movements. After studying this chapter you will be able to understand the factors that determine the price of a firm’s shares, contrast fundamental analysis techniques with technical analysis, explain the theoretical concepts of the random walk and efficient market market hypotheses. | Chapter 7 Forecasting Share Price Movements Learning Objectives Understand the factors that determine the price of a firm’s shares Contrast fundamental analysis techniques with technical analysis Explain the theoretical concepts of the random walk and efficient market market hypotheses Chapter Organisation 7.1 Introduction 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Fundamental Analysis: Top-down Approach 7.4 Technical Analysis 7.5 Program Trading 7.6 Random Walk and Efficient Market Hypothesis 7.7 Summary 7.1 Introduction Share price is determined by supply and demand of a company’s shares Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price Similarly expectation of good company performance increases demand and leads to an increase in share price 7.1 Introduction (cont.) What causes the shifts in demand and supply of a company’s securities on the secondary market? Three approaches taken in analysing this question | Chapter 7 Forecasting Share Price Movements Learning Objectives Understand the factors that determine the price of a firm’s shares Contrast fundamental analysis techniques with technical analysis Explain the theoretical concepts of the random walk and efficient market market hypotheses Chapter Organisation 7.1 Introduction 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Fundamental Analysis: Top-down Approach 7.4 Technical Analysis 7.5 Program Trading 7.6 Random Walk and Efficient Market Hypothesis 7.7 Summary 7.1 Introduction Share price is determined by supply and demand of a company’s shares Expectation of bad company performance causes investors to sell their shares, increasing supply and reducing the price Similarly expectation of good company performance increases demand and leads to an increase in share price 7.1 Introduction (cont.) What causes the shifts in demand and supply of a company’s securities on the secondary market? Three approaches taken in analysing this question Fundamental analysis: bottom-up Fundamental analysis: top-down Technical analysis Chapter Organisation 7.1 Introduction 7.2 Fundamental Analysis: Bottom-up Approach 7.3 Fundamental Analysis: Top-down Approach 7.4 Technical Analysis 7.5 Program Trading 7.6 Random Walk and Efficient Market Hypothesis 7.7 Summary 7.2 Fundamental Analysis: Bottom-up Approach Fundamental analysis Considers macro and micro factors that impact upon future share price changes Macro factors include interest rates, economic growth, business investment Micro factors are firm-specific and relate to management’s impact on company performance 7.2 Fundamental Analysis: Bottom-up Approach (cont.) Focuses on ratios and other measures of the firm’s financial characteristics and performance Considers such factors as Accounting ratios which consider a company’s capital structure, liquidity, debt servicing, profitability, share price and risk (see Chapter 6), and make comparisons with firms in the same industry 7.2 .
