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Security Analysis and Valuation – Meaning, Features, Types, Benefits and more

Last Updated Date - Mar 21, 2023

Investing in different securities brings a lot of exposure to your portfolio. However, before investing comes security analysis and valuation. Such an analysis will help the investor in understanding if the security’s objectives are in line with your interests.

Also, this assessment is very important as it provides a complete database on the stock or any other asset. Many times, these inputs help in predicting the upcoming trends in the stock market.

In this article, we will touch base by discussing different analysis tools and their benefits. Continue reading if you are also a novice investor looking to start your journey with the stock market.

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What is Security Analysis?

By applying security market analysis, investors can determine an asset’s intrinsic value before committing to it.

The term refers to the process of determining a company’s entire value by examining the value of its securities, such as shares and other instruments, which can help investors make judgments.

The value of securities can be analyzed using the-

  • Fundamental,
  • Quantitative, or
  • Technical Methods

All of these methods and more are discussed below.

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    Features of Security Market Analysis

    The features of the security analysis highlight the important parts of the tools.

    Role of the analyst

    Security analysts should prioritize the interests of their clients over their own. Now, this analyst can be the investor themselves or a third-party professional.

    Analytical tools

    The research cannot be conducted without the knowledge of proper tools. Thus analytical tools such as basic, technical, and quantitative approaches are used.

    Observing professional standards

    While conducting the investment profession, security analysts must act with integrity, expertise, and diligence. There should not be the use of any unlawful method to reach the desired financial goals.

    Determine the appropriate value

    Another purpose of conducting security analysis is to determine the worth of financial instruments such as equity, debt, and company warrants. This will in turn provide an in-depth report on the performance of the security.

    Use of public information correctly

    The analysis is conducted by using publicly available data such as financial statements, presentations, and newsletters. Using insider knowledge is both unethical and unlawful.

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    Types of Security Market Analysis Tools

    Security analysis can be performed in three ways, depending on the type of securities: –

    Fundamental Analysis

    The main objective of this kind of security analysis is to determine the intrinsic worth of the securities being evaluated.

    Fundamental Analysis investigates the key elements that determine an asset’s intrinsic value, including financial statements and the profitability of the firm, the performance of the management team and their outlook for the future, current economic status, and the state of the industry.

    Quantitative Analysis

    This security analysis is a supporting tool for fundamental and technical analysis, which assesses the past performance of the stock by the computation of fundamental financial statistics, such as Return on Investments (ROI), Earnings Per Share (EPS), or sophisticated valuations methods, such as Discounted Cash Flows (DCF).

    Technical Analysis

    Technical Analysis is a price forecasting technique that uses solely past prices, trading volumes, and industry trends to forecast a security’s future performance.

    It analyses stock charts using numerous indicators (such as Bollinger Bands and MACD), presuming that all fundamental inputs have been integrated into the price.

    Financial Ratios- Key Pillars of Analysis

    Most times, investors start the analysis by using financial ratios. It is a part of the fundamental analysis but can be used as a support material for other analysis tools as well. Some of the most applied fundamental analysis ratios are:

    Earnings Per Share (EPS)

    One such helpful metric that investors constantly search for is earnings per share. It displays the profit the company is making on each share. For a corporation to demonstrate exceptional management performance, its EPS must consistently improve.

    Earnings Per Share (EPS) are calculated as EPS= (Net Income – Preference Dividend)/Weighted Average Number of Outstanding Shares.

    Investors frequently choose businesses with consistently rising earnings per share.

    Debt to Equity Ratio (DER)

    The debt-to-equity ratio reveals the percentage of debt that is being used to finance the company’s assets. It shows how much money the company’s owners and debtors have contributed. This ratio can be written as a percentage or as a number.

    Similarly, the ratio is calculated as: Debt-to-equity (D/E) ratio= Total Debt/Total Equity

    Choose the company with a debt-to-equity ratio lower than the other peers in the industry and is steadily declining when comparing them.

    Price to Earnings Ratio (PER)

    This ratio contrasts the share’s current market price with its earnings per share. According to the actual earnings, it informs you of the price that investors prepare to pay for the share.

    Price to Earnings Ratio is calculated as Price to Earnings Ratio = Current Share Price/Earnings Per Share.

    This ratio also shows how long it will take for the initial investment to generate enough returns to cover the cost. Stocks with a low price-to-earnings ratio are what you should be looking for.

    Return On Equity (ROE)

    Return on Equity provides information on how much a company makes from its shareholders’ equity. It provides you with information beyond just a profit amount and demonstrates whether or not the company’s operations are effective.

    Similarly, Return on Equity is calculated as follows: Return on Equity = [(Income – Preference Dividend) / (Average Shareholders’ Equity)] *100

    A steady, high, and rising ROE is the ideal one to look for when evaluating this metric.

    Apart from these ratios, seasoned investors will also be able to use technical analysis and tools to study the price of the assets.

    Benefits of Security Analysis

    Every individual’s principal goal is to enhance their net worth by investing their earnings in various financial instruments, i.e., creating wealth by investing wealth. Some of the major benefits of security analysis are as follows:


    One’s purchasing power declines due to inflation. Over time, inflation allows you to purchase a lesser proportion of items with each home currency you possess.

    You may protect yourself against inflation by making wise investments and to select these investments, first perform the security analysis.


    Avoid investing all of your money in one asset or asset class; instead, divide it up among a variety of financial instruments to build a portfolio of different assets. But once more, the aim is to lessen the volatility risk in a specific asset.


    Since, there is always a chance of losing the initial investment due to stock market volatility. Investment Risks can be avoided by security research, which also assures the safety of investors’ funds and offers chances to outperform the market.

    Better Returns

    The investment’s main goal is to generate returns in the form of capital growth and yield and if done in the right manner using the support of the security analysis, the returns will be higher.

    Capital Security

    The risk of losing interest and money reduces when they invest cash after careful examination. A pro tip: try investing in debt securities with lower risk, such as bonds.

    Security Valuation- An important part of Security Analysis

    Security Valuation is crucial when choosing an investor’s portfolio just like security analysis. Every investment choice must be based on a rigorous appraisal of the share’s fair market value.

    Consequently, it is crucial to understand the valuation of securities. Always remember that shares should be purchased at a discount and sold at a premium by investors. Thus, share pricing is a crucial component of trading.

    Security Valuation in India

    To set the premium on fresh issuance of existing corporations, the CCI utilizes to value securities in India. These standards, which CCI followed, were valid until May 1992.

    Right now, there are two main categories of stock valuation: absolute and relative.

    Since, the Relative methodology evaluates a company’s position with its competitors and industry norms, whereas the Absolute methodology analyses a company’s fundamentals and financials to determine the stock’s actual value.

    Relative Valuation

    The relative valuation method entails analyzing major financial statistics of comparable companies and obtaining the same measures for the company under consideration.

    Absolute Valuation

    When determining a stock’s value using the absolute method, the discounted cash flow model (DCF), dividend discount model (DDM), residual income model, and asset-based model must all be computed.


    Analysis of securities does not ensure profits because research is based on information that is readily available to the public.

    Contrary to popular opinion, however, markets do not reflect all of the knowledge that is currently accessible, but security analysts can outperform the market by employing technical and fundamental strategies.

    Hope this article has clarified your multiple inquiries on security analysis and stock valuation.

    The best way of flourishing in the stock market is to constantly monitor it and study the change in trends. This will help you figure out the turning points in the stock market.

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