Chapter 13 - Fundamental and Technical Analysis (Done) Flashcards
What is fundamental analysis?
Fundamental analysis assesses short, medium, and long-range prospects of industries and companies to shed light on security prices. It uses profitability measures or ratios to determine a stock’s value. For example, evaluating a company based on its industry, life cycle, or the economy to predict whether the security price is overvalued or undervalued is a type of fundamental analysis.
What is technical analysis?
Technical analysis studies historical stock prices and stock market behavior to predict future prices and behavior. An example is analyzing price patterns to predict future stock prices.
What is the Efficient Market Hypothesis (EMH)?
EMH suggests that stock prices fully reflect all available information and represent the best estimate of the stock’s true value at any given time. It has three variations:
- Weak Form: Assumes all past market information is fully reflected in the current price.
- Semi-Strong Form: Assumes all publicly available information is fully reflected in the current price.
- Strong Form: Assumes all information, both public and insider, is fully reflected in the current prices.
What is the Random Walk Theory?
Random Walk Theory states that new information about a stock is disseminated randomly over time, making price changes random and unrelated to previous prices. This implies that past price changes contain no useful information.
What is the Rational Expectations Hypothesis?
This theory assumes people are rational, have access to all necessary information, and use it intelligently to make decisions in their self-interest. The conclusion is that past mistakes can be avoided by using available information to anticipate changes.
What are some examples of sector and industry groups?
- Communication Services: Includes telecommunications, media, and entertainment companies like Bell Canada and Rogers.
- Consumer Discretionary: Includes automobiles, apparel, services, and retailing.
- Consumer Staples: Includes food, beverage, tobacco, household, and personal products.
- Energy: Includes oil, gas, and natural gas companies.
- Financials: Includes banks, diversified financials, and insurance companies.
- Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities are other sectors with specific examples in each.
How are industries classified by life cycle?
- Emerging Growth Industries: Unprofitable at first but with promising future prospects.
- Growth Industries: Consistently expanding at a faster rate than most.
- Mature Industries: Slower, more stable growth in sales with positive earnings and cash flow.
- Declining Industries: Companies stop growing and begin to decline due to reduced demand and competition.
What are Porter’s Five Forces?
- Threat of New Entry: Evaluates how easy it is for new competitors to enter the market.
- Competitive Rivalry: Measures the degree of competition with existing competitors.
- Threat of Substitutes: Assesses the risk of better alternatives replacing a product.
- Bargaining Power of Buyers: Evaluates the power of buyers to negotiate lower prices.
- Bargaining Power of Suppliers: Looks at the power suppliers have over the prices of goods and services.
How are industries classified by economic cycle?
- Cyclical Industries: Do well during recoveries but suffer during downturns. Examples include commodities and consumer discretionary items.
- Defensive Industries: Provide stable returns and perform well during recessions. Examples include bank stocks and utility companies.
- Speculative Industries: High risk and uncertainty, often involving emerging industries with potential for high profit but lacking definitive information.
What are the main assumptions of technical analysis?
- All influences on market action are accounted for in price activity.
- Prices move in trends that persist for long periods.
- The future repeats the past.
What are support and resistance levels?
- Support Level: A price level where stocks typically stop decreasing and start increasing.
- Resistance Level: A price level where stocks typically stop increasing and start decreasing.
What is a moving average and its significance in technical analysis?
A moving average is calculated as the sum of the closing prices for each period divided by the number of periods. It helps in identifying buy and sell signals:
- Buy Signal: Occurs when an increasing price and high volume of trades move upwards through the moving average.
- Sell Signal: Occurs when a falling price and high volume of trades move downwards through the moving average from above.
