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Strategic Financial Management · Fundamental Analysis and Technical Analysis

Security Analysis and Investment Approaches for CMA Final SFM

Updated 11 October 2026 · Fact-checked

Security analysis is the study of securities to judge their value, risk and return before you invest. You follow the investment process: set objectives, analyse securities, build a portfolio, then review it. Fundamental analysis estimates intrinsic value, technical analysis studies price and volume patterns, and the efficient market view says prices already reflect available information.

Understand Security Analysis and Investment Approaches

Security analysis means studying a security, such as a share or bond, to estimate what it is really worth and how risky it is. The aim is to decide whether to buy, hold or sell. It is the first half of investment management. The second half is portfolio management, where you combine securities and manage them over time.

The investment process runs in a logical order. First, you set the investor's objectives, constraints and policy: return needed, risk tolerance, time horizon, liquidity needs, tax position and legal limits. Second, you analyse securities and markets. Third, you construct the portfolio by selecting securities and deciding how much to put in each. Fourth, you revise the portfolio as conditions or the investor's needs change. Finally, you evaluate performance against a benchmark, adjusted for risk.

There are three main approaches to analysis. Fundamental analysis says every security has an intrinsic value that depends on earnings, growth, dividends and risk. It works top-down through economy, industry and company. If market price is below intrinsic value, the security is undervalued and a buy. If above, it is overvalued.

Technical analysis ignores intrinsic value. It studies past prices and trading volumes, using charts and indicators, to predict future price movement. Its core belief is that price reflects all information, that prices move in trends, and that history tends to repeat. It tells you when to trade rather than what a security is worth.

The efficient market view challenges both. It holds that prices quickly reflect available information, so consistently beating the market is hard. In its weak form, past prices carry no useful signal, which undermines technical analysis. In its semi-strong form, public information is already priced, which undermines fundamental analysis. Know the contrast, and be ready to say what each approach assumes.

Key rules to remember

Undervalued / overvalued test
Intrinsic value > Market price → undervalued (buy); Intrinsic value < Market price → overvalued (sell)
This is the decision rule of fundamental analysis. If the two are equal, the security is fairly priced.
Top-down fundamental order
Economy analysis → Industry analysis → Company analysis
A bottom-up approach reverses this and starts from the company.
Investment process order
Objectives and policy → Security analysis → Portfolio construction → Portfolio revision → Performance evaluation
Use this sequence when asked for steps. Revision and evaluation feed back into the earlier stages.
Holding period return
Return = (Dividend + Closing price − Opening price) ÷ Opening price
Used for simple return comparisons when judging a security.

How to solve Security Analysis and Investment Approaches questions

Most questions on this topic are either descriptive (explain, differentiate, list steps) or a short case where you must pick an approach. Use the same method for both.

  1. 1Read the question and mark the keyword: meaning, steps, difference, or which approach suits the case.
  2. 2Define the term in one or two lines before anything else.
  3. 3If asked for the process, list the stages in order and add one line on what happens at each stage.
  4. 4If asked to compare, choose clear heads such as basis, focus, tools, time horizon, and belief about price, and address both approaches on each head.
  5. 5For a case, identify the data given. Earnings, growth and valuation data point to fundamental analysis. Price charts, trends and volumes point to technical analysis.
  6. 6Link to the efficient market view where relevant: state which form of efficiency would weaken the approach.
  7. 7End with a clear conclusion or recommendation, for example that investors often combine both approaches.

Quickest way: Four-line comparison frame

When to use it: Use when you have little time on a 'differentiate' or 'explain approaches' question.

  1. Write one-line definitions of fundamental and technical analysis.
  2. Give four contrast points: what is studied, tools used, objective, and time horizon.
  3. Add one line each on the efficient market view and its effect on both.
  4. Finish with a one-line conclusion that the approaches can complement each other.

Common mistakes in Security Analysis and Investment Approaches

  • Saying technical analysis finds intrinsic value.

    Both approaches are called analysis, so students assume both value the security.

    Fix: Remember that technical analysis studies price and volume to time trades. Only fundamental analysis estimates intrinsic value.

  • Listing investment process steps in the wrong order.

    Students jump to security selection and forget that objectives come first.

    Fix: Start with investor objectives and constraints, then analysis, construction, revision and evaluation.

  • Claiming the efficient market view says analysis is useless in every case.

    The idea is oversimplified into 'you cannot beat the market'.

    Fix: State it by form. Weak form challenges technical analysis, semi-strong challenges fundamental analysis on public data, and strong form says even private information is reflected.

  • Confusing top-down and bottom-up approaches.

    The names sound similar and students learn them without the sequence.

    Fix: Top-down begins with the economy and ends at the company. Bottom-up begins with the company.

  • Writing a one-sided answer in a differentiate question.

    Students describe one approach in detail and give the other a line.

    Fix: Use points where both approaches are covered side by side, with equal weight.

Worked examples

Example 1

Explain the steps in the investment process and state how security analysis fits into it.

Show the solution
  1. Define the process: it is the sequence of decisions that takes an investor from setting goals to managing a portfolio.
  2. Step 1, investment policy: fix the investor's objectives, risk tolerance, time horizon, liquidity needs, tax position and constraints.
  3. Step 2, security analysis: study the economy, industry and company, or price behaviour, to find securities worth buying.
  4. Step 3, portfolio construction: choose securities and decide the proportion in each, so that risk is diversified.
  5. Step 4, portfolio revision: change holdings when markets or the investor's circumstances change.
  6. Step 5, performance evaluation: compare risk-adjusted return against a benchmark and feed the findings back.

Answer: The process runs from investment policy, to security analysis, to portfolio construction, to revision and evaluation. Security analysis is the second stage: it supplies the information on value, risk and return from which securities are chosen for the portfolio.

Example 2

A share of a company is quoted at ₹480. Your fundamental analysis of its earnings and growth gives an intrinsic value of ₹560. A chartist notes that the price has fallen below its recent trend line on rising volume. Advise how each approach would see the share and give an overall view.

Show the solution
  1. Fundamental view: intrinsic value ₹560 is greater than market price ₹480.
  2. The gap is ₹560 − ₹480 = ₹80, so the share is undervalued and the signal is to buy.
  3. Technical view: the price has broken below its trend line on rising volume. A chartist normally reads this as a bearish signal and would sell or avoid buying now.
  4. The two signals conflict because they use different information. Fundamental analysis looks at value. Technical analysis looks at price behaviour and timing.
  5. Efficient market view: if the market is semi-strong efficient, the price of ₹480 already reflects public information, so the gap may mean your estimate is wrong or the risk is higher than assumed.

Answer: Fundamental analysis says the share is undervalued by ₹80 and suggests buying. Technical analysis reads the trend break as bearish. A reasonable course is to check the inputs of the valuation, then use technical signals only to time entry, since the efficient market view warns that the apparent gap may not be a real mispricing.

Exam tips

  • For 'differentiate' questions, write in point form with equal coverage of both approaches. Four to six points with clear heads score well.
  • Keep the investment process in order. Examiners check the sequence, so number the steps.
  • In a case, quote the data that points to your choice, such as earnings and growth for fundamental and price charts for technical.
  • Link the efficient market view to the weak and semi-strong forms in one line. This shows you understand why the approaches are debated.
  • In MCQs, watch for statements that give intrinsic value to technical analysis. They are usually the wrong option.

Practice questions from Fundamental Analysis and Technical Analysis

Security Analysis and Investment Approaches in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Security Analysis and Investment Approaches: frequently asked questions

What is security analysis in simple words?

It is the study of a share or bond to judge its value, risk and expected return. The result tells you whether to buy, hold or sell. It is the base for building a portfolio.

What is the main difference between fundamental and technical analysis?

Fundamental analysis estimates intrinsic value using economic, industry and company data. Technical analysis studies past prices and volumes to predict price moves. One asks what a security is worth, the other asks where the price is heading.

What are the steps in the investment process?

The steps are setting objectives and policy, analysing securities, constructing the portfolio, revising it, and evaluating performance. Evaluation then feeds back into objectives and revision.

How does the efficient market view relate to these approaches?

It says prices already reflect available information. The weak form questions technical analysis because past prices carry no signal. The semi-strong form questions fundamental analysis based on public data.