#ANALYZES

THE

BASIC

EXCHANGE-HIGHLIGHTING

PARAMETER
DHAKA

OF

STOCK

STOCK

EXCHANGE

(DSE):
Share market is an important part of economy of a country. It plays an
important role in growth of an industry that in due course affects economy of
a country. Stock market is common podium for companies to raise funds for
company by allowing customers to buy shares at an agreed price. Many
methods have been applied for stock market prediction ranging from times
series forecasting, statistical analysis, fundamental analysis and technical
analysis. But due to non-linear nature of stock market prediction is very
difficult task. But to have considerably good prediction ability it is important
to train network properly with sufficiently large data so that on exposing it to
real world considerable accuracy can be achieved.
In the task of training it is important to consider proper set of input variable
because input set represents factors that will be used & factors that are
going to affect prediction and nonlinear mapping. So in this paper me
assessment different input parameters that can be used for input variables
for stock market prediction. Firstly we will see the two types of analysis that
are important 1) Fundamental Analysis 2) Technical Analysis.

Fundamental Analysis:
A fundamental analysis is all about getting an understanding of a company,
the health of its business and its future prospects. It includes reading and
analyzing annual reports and financial statements to get an understanding of
the company's comparative advantages, competitors and its market
environment.
Fundamental analysis mainly depends on statistical data of a company. It
may include, audit reports, financial status of the company, the quarterly
balance sheets, the dividends and policies of the companies whose stock are
to be observed. It also includes analysis of sales data, strength and
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investment of company, plant capacity, the competition, import/export

volume, production indexes, price statistics, and the daily news or rumors
about company. Along with these parameters other parameters like book
value, P/E ratio, earnings, return on investment (ROI), etc. are very carefully
observed to arrive at an estimate of future business conditions. Fundamental
analysis find an intrinsic value of a stock and generates a buy signal if
current value of stock is below intrinsic value. In fundamental analysis it is
believed that market is defined 90 percent by logical and 10 percent by
physiological factors. Main problem with fundamental analysis is that it
helpful for long term trading.
Technical Analysis:
In stock market analysis there are two approaches first approach includes
analysis of graphs where analysts try to find out certain patterns that are
followed by stock but this approach is very difficult and very complex to be
used with ANN. In second approach analyst make use of quantitative
parameters like trend indicators, daily ups and downs, highest and lowest
values of a day, volume of stock, indices, put/call ratios, etc. It also includes
some averages which is nothing more than mean of prices for particular
window. Simple Moving Average (EMA) of last n days and Exponential Moving
Average (EMA) where price of recent days has more weight in average.
Analyst tries to find out some mathematical formula which can map these
inputs to the desired output. This approach is easy compared to previous
approach is suitable for ANN/Machine learning methods. That why most of
the machine learning techniques prefer technical analysis data over
fundamental analysis data as input to system. Now a days Artificial Neural
Networks are regularly applied to financial domain which tries to learn
pattern in financial data to do prediction.
The Dhaka Stock Exchange (DSE):

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The Dhaka Stock Exchange (DSE) is registered as a Public Limited Company

and its activities are regulated by its Articles of Association rules &
regulations and bye-laws along with the Securities and Exchange Ordinance,
1969, Companies Act 1994 & Securities & Exchange Commission Act, 1993.
1.1 Background of Dhaka Stock Exchange:

East Pakistan Stock Exchange Ltd was finally named as Dhaka Stock
Exchange (DSE) on 14 May 1964.

Although incorporated in 1954, formal trading started in 1956.

Prior to independence in 1971, the number of listed companies in DSE

was 196 with a total paid up capital of Tk. 4 billion.

The total number of listed securities is now

515.

Analyzing the basic parameter of a stock exchangehighlighting Dhaka stock exchange (DSE):
Why use fundamental analysis?
Fundamental analysis is built on the idea that the stock market may price a
company wrong from time to time. Profits can be made by finding
underpriced stocks and waiting for the market to adjust the valuation of the
company. By analyzing the financial reports from companies you will get an
understanding of the value of different companies and understand the
pricing in the stock market. After analyzing these factors you have a better
understanding of whether the price of the stock is undervalued or overvalued
at the current market price. Fundamental analysis can also be performed
on a sectors basis and in the economy as a whole.
The true value of a stock?
For a fundamental analyst, the market price of a stock tends to move
towards its 'intrinsic value', which is the 'true value' of a company as

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calculated by its fundamentals. If the market value does not match the true
value of the company, there is an investment opportunity.
Example of this is that if the current market price of a stock is lower than the
intrinsic price, the investor should purchase the stock because he expects
the stock price to rise and move towards its true value. Alternatively, if the
current market price is above the intrinsic price, the stock is considered
overbought and the investor sells the stock because he knows that the stock
price will fall and move closer to its intrinsic value. To determine the true
price of the company's stock, the following factors need to be considered.
1. Earnings:
The key element all investors look after is earnings. Before investing in a
company you want to know how much the company is making in profits.
Future earnings are a key factor as the future prospects of the company's
business and potential growth opportunities are determinants of the stock
price. Factors determining earnings of the company are such as sales, costs,
assets and liabilities. A simplified view of the earnings is earnings per
share (EPS).
2. Profit Margins:
Amount of earnings do not tell the full story, increasing earnings are good
but if the cost increases more than revenues then the profit margin is not
improving. The profit margin measures how much the company keeps in
earnings out of every dollar of their revenues. This measure is therefore very
useful for comparing similar companies, within the same industry.

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Higher profit margin indicates that the company has better control over its
costs than its competitors. Profit margin is displayed in percentages and a 10
percent profit margin denotes that the company has a net income of 10
cents

for

each

dollar

of

their

revenues.

To get better understanding of profit margins it is good to compare two

companies with alternative margins, see table below.

3. Return on Equity (ROE)

Return of equity (ROE) is a financial ratio that does not account for the stock
price. Since it ignores the price entirely it is by many thought of as THE most
important financial measure. It can basically be thought of as the parent
ratio that always needs to be considered.
This ratio is a measure of how efficient a company is in generating its profits.
It is a ratio of revenue and profits to owners' equity (shareholders are the
owners). Specifically it is:

An easy example of this is that if company A and company B both generate

net profits of $1 Million but company A has equity of $10 Million but company
B has equity of $100 Million. Their ROE would be 10% and 1% respectively
meaning that company A is more efficient as it was able to produce the same
amount of earnings with 10 times less equity.

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The reason for why this measure is so important is because it contains

information about several factors, such as:

Leverage (which is the debt of the company)

Revenue, profits and margins

Returning values to shareholders

Good approximation is that ROE should be 10-40% greater than its peer.
4. Price-to-Earnings (P/E):
When taking the current market price into consideration, the most popular
ratio is the Price-to-Earnings (P/E) ratio. As the name suggest it is the current
market price divided by its earnings per share (EPS). It is an easy way to get
a quick look of a stock's value.
A high P/E indicates that the stock is priced relatively high to its earnings,
and companies with higher P/E therefore seem more expensive. However,
this measure, as well as other financial ratios, needs to be compared to
similar companies within the same sector or to its own historical P/E. This is
due to different characteristics in different sectors and changing markets
conditions.
This ratio does not tell the full story since it does not account for growth.
Normally, companies with high earnings growth are traded at higher P/E
values than companies with more moderate growth rate. Accordingly, if the
company is growing rapidly and is expected to maintain its growth in the
future this current market price might not seem so expensive. This is the

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reasoning for the existence of different investment styles; Value vs. Growth
stocks.
Example
While some sectors normally have low P/E measures, other sectors
commonly have higher ratios. For example, utilities commonly have P/E
ranging from 5 to 10 while technology companies commonly have a P/E ratio
ranging from 15 to 20 or above. This is due to expectations in the market
about the sector and its earnings-growth possibilities. The utility sector has
stable earnings and is not expected to grow rapidly while technology
companies are expected to grow faster and tend to need less capital for its
growth. In order to simplify, the following table illustrates four companies in
two sectors with alternative figures.

It is not very appropriate to compare Apple with GDF Suez as Apple has a
growth rate of 11 times more than GDF. It is more appropriate to compare
Apple with Google. In that relation, Apple seems cheaper than Google by the
look of the P/E. Now you should ask why that could be. -is this bargain or are
some other reason why Apple is priced lower than Google. One suggestion
might be that the market expects Google to have more earnings-growth in
the coming future and Apple's previous earnings growth is not expected to
grow much further.
In order to account for growth, the P/E ratio can be modified into the
Price/Earnings to Growth (PEG) ratio. A PEG ratio is calculated by dividing
the stock's P/E ratio by its expected 12 month growth rate. A common rule of
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thumb is that the growth rate ought to be roughly equal to the P/E ratio and
thus the PEG ratio should be around 1. A relatively low PEG ratio indicates an
undervalued stock and a PEG ratio much greater than 1 indicates an
overvalued stock. The PEG ratio can be very informative figure, especially for
fast growing and cyclical companies. In this one ratio you get an
understanding of the company's earnings, growth expectations and whether
it is trading at a reasonable price relative to its fundamentals.

5. Price-to-Book (P/B)
A price-to-book (P/B) ratio is used to compare a stock's market value to its
book value. It can be calculated as the current share price divided to the
book value per share, according to previous financial statement. In a broader
sense, it can also be calculated as the total market capitalization of the
company divided by all the shareholders equity.
This ratio gives certain idea of whether you are paying too high price for the
stock as it denotes what would be the residual value if the company went
bankrupt today.A higher P/B ratio than 1 denotes that the share price is
higher than what the company's assed would be sold for. The difference
indicates what investors think about the future growth potential of the
company.
6. Buying at the right price?
In the long run the stock price should reflect its fundamental true value.
However in the short run a stock might have great fundamentals but still be
moving in wrong direction. This can be due to other factors, such as news
releases and changes in future outlook, which also have effect on the price.
Trends in the market and investors emotions also effect the short-term

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fluctuation in stock prices resulting in the current market price deviating

from its true value.
Technical Analysis:
In stock market analysis there are two approaches first approach includes
analysis of graphs where analysts try to find out certain patterns that are
followed by stock but this approach is very difficult and very complex to be
used with ANN. In second approach analyst make use of quantitative
parameters like trend indicators, daily ups and downs, highest and lowest
values of a day, volume of stock, indices, put/call ratios, etc. It also includes
some averages which is nothing more than mean of prices for particular
window. Simple Moving Average (EMA) of last n days and Exponential Moving
Average (EMA) where price of recent days has more weight in average.
Analyst tries to find out some mathematical formula which can map these
inputs to the desired output. This approach is easy compared to previous
approach is suitable for ANN/Machine learning methods. That why most of
the machine learning techniques prefer technical analysis data over
fundamental analysis data as input to system. Now a days Artificial Neural
Networks are regularly applied to financial domain which tries to learn
pattern in financial data to do prediction.
When determining whether a company's stock is a good investment,
fundamental analysis is a great toolbox to reach a conclusion.
Conclusion:
In this complex task of stock market prediction input parameters plays an
important factor as the choice of improper input variable may lead to lower
accuracy. Some parameters have big influence on stock price while some
have less influence and hence it is important to select correct set of inputs.
Mostly Technical analysis variables are used predominantly in machine
learning techniques. Some tried to use different variable like fundamental
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variables, microeconomic indicators, news articles, etc. We found that while

predicting

stock

market

index

microeconomic

indicators

have

major

influence over other. On the other hand while predicting stock prices other
factors have major influence. In case of using news articles it is important to
find correct meaning that news article otherwise it will worsen prediction
ability. From this survey I can conclude that hybridized parameters like
combination of technical and fundamental variable give better prediction
accuracy over application of standalone parameters.

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