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                            Hanxiao Zhang
                          Lead Coordinator
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SECURITIES VALUATION

The market for financial securities is thronged by several types of investors that pursue a set of investment approaches which may be divided into categories:

  • Fundamental Analysis
  • Quantitative Analysis
  • Sentiment Analysis

Fundamental Analysis

For several 100 years, fundamental analysis has commonly been used by the majority of investors, researchers, and Advisers. True financial experts know how to calculate the securities intrinsic value, and knows what economic (fundamental) factors the intrinsic value depends upon. Ultimately insightful corporate finance analysts will understand how fundamental factors determine the outlook for the company, its sector, and the economy.

It is not unreasonable to believe that the market price of a security differs from its intrinsic value in some cases and at certain periods of time. In fact, financial theories support the view that some securities are less analyzed and, for example, that the market price can lag changes of the intrinsic value. Good amount of returns can be earned by systematically buying undervalued securities (securities whose intrinsic value exceeds its market price) and selling overvalued securities (securities whose intrinsic value is less than its market value).

Quantitative Analysis

Over the recent decades, the academic community in developed economies has suggested comparatively sophisticated research methods to assist you to examine various aspects of the financial market. Despite numerous unsolved issues and controversies, the empirical results provide substantial support for the belief that asset prices reflect the intrinsic value fairly well. The financial market is practically efficient and responds promptly and reasonably to the flow of information.

Therefore, the quantitative analysis uses the so-called random walk theory as a benchmark, when more advanced theories are evaluated. In the park that means past prices cannot be used to predict future prices, more advanced theories strongly suggest that price changes are dependent ('autocorrelated' and 'heteroskedastic'). More advanced theories are consistent with the idea that future returns are both linearly and non linearly associated the assets systematic and non-systematic risk because there is a positive relationship between risk and return.

Sentiment Analysis

The collective psychological mood of the investors, the market sentiment, and even more broadly the social mood are believed to influence securities prices. Therefore the psychological and sociological approach is based on the idea that the stock market is not only guided by reason and logic, but that emotions and the sentiment is a leading factor. Prices boom during periods of social greed and euphoria and crash and spread fear and despair.

While fundamental analysis determines the intrinsic value, psychology seems to explain why prices deviate from intrinsic values. It has therefore been suggested that the psychological and sociological approaches tend to analyze how investors are swept by waves of optimism and pessimism.

The psychological approach can be said to encompass technical analysis, which involves analyzing the market data and to recognize persistent and recurring price patterns and to build trading rules that have been beneficial at least historically. In addition to patterns, a variety of technical indicators, such as moving averages, point and figure and bar chart, breadth of market analysis etc, are used in technical analysis.

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