Corporate Accounting and Financial Management · Security Analysis

Security Analysis: Meaning and Approaches

Q: What is security analysis in financial management?

It is the process of valuing securities such as shares and bonds to judge their worth, risk and expected return. The investor compares intrinsic value with market price to decide whether to buy, hold or sell.

Q: What is the main difference between fundamental and technical analysis?

Fundamental analysis values a security from the company's earnings, finances and the economy. Technical analysis predicts price movement from past prices and trading volume. The first asks what a security is worth and the second asks where its price is heading.

Q: How does the efficient market hypothesis relate to security analysis?

It questions whether analysis can earn above-market returns. If prices already reflect information, mispriced securities are hard to find. The weak form challenges technical analysis and the semi-strong form challenges fundamental analysis.

Q: Can I use both fundamental and technical analysis together?

Yes. Many investors use fundamental analysis to pick good securities and technical analysis to time purchases and sales. This is a useful point for the conclusion of a comparison answer.

Updated 11 October 2026 · Fact-checked

Security analysis is the study of shares, bonds and other securities to judge their true worth, risk and return before you invest. It has three approaches: fundamental analysis (value from financial data), technical analysis (price and volume patterns) and the efficient market approach (prices already reflect information). In answers, define, compare, then conclude.

Understand Security Analysis: Meaning and Approaches

Security analysis means examining a security to estimate its intrinsic value, its risk and the return it can give. An investor uses it to decide whether to buy, hold or sell. The security may be an equity share, a preference share, a debenture or a bond.

The main objective is to find mispriced securities. If the market price is below your estimate of intrinsic value, the security looks undervalued and may be worth buying. If the market price is above it, the security looks overvalued and may be worth selling. Other objectives are to assess risk, to match investments with the investor's goals, and to support portfolio building.

Fundamental analysis says a security's value depends on the earning power of the company behind it. You study three layers: the economy (growth, inflation, interest rates, policy), the industry (demand, competition, regulation) and the company (earnings, dividends, management, financial position, ratios). The result is an intrinsic value that you compare with the market price. It suits long-term investors.

Technical analysis ignores the company's financial details. It studies past prices and trading volumes, usually through charts and indicators, to predict future price movement. Its core belief is that prices move in trends and that history tends to repeat itself. It suits short-term traders. Dow Theory is a well-known part of it.

The efficient market approach asks whether either method can beat the market. The Efficient Market Hypothesis says that in an efficient market, prices already reflect available information, so it is hard to earn consistently higher returns by analysis alone. It comes in weak, semi-strong and strong forms. If the weak form holds, technical analysis fails. If the semi-strong form holds, fundamental analysis using public information fails as well.

Key rules to remember

Undervalued security: Intrinsic value > Market price; Signal to buy. Intrinsic value comes from fundamental analysis.
Overvalued security: Intrinsic value < Market price; Signal to sell or avoid.
Fairly priced security: Intrinsic value = Market price; No gain expected from trading on valuation alone.
Fundamental analysis layers: Economy → Industry → Company (EIC); Top-down order. State all three layers in answers.
Forms of market efficiency: Weak: past prices | Semi-strong: all public information | Strong: all information including private; Each form includes the one before it.

How to solve Security Analysis: Meaning and Approaches questions

Use this method for definition, differentiate and short-note questions on security analysis.

1Read the verb. 'Explain' needs meaning and approaches. 'Differentiate' needs a comparison on several points. 'Discuss' needs a view at the end.
2Open with a one-line definition: security analysis is the valuation of securities to judge worth, risk and return.
3State the objective in one line: to compare intrinsic value with market price and decide to buy, hold or sell.
4Explain each approach asked: its basis, tools, time horizon and who uses it.
5For a comparison, list at least five points: basis, data used, tools, time horizon, objective, and view of the market.
6Bring in the efficient market view where relevant: weak form challenges technical analysis; semi-strong form challenges fundamental analysis.
7Close with a conclusion: many investors combine fundamental analysis to choose what to buy and technical analysis to choose when to buy.

Quickest way: Three-line recall: Basis, Tool, Horizon

When to use it: When you have about five minutes for a short note or a comparison.

Write the definition line first.
For each approach, note Basis (what it studies), Tool (how it studies) and Horizon (how long).
Fundamental: company and economy data, ratios and valuation, long term.
Technical: price and volume, charts and indicators, short term.
Efficient market: information in prices, weak, semi-strong and strong forms, tests whether analysis can beat the market.
End with one sentence on combining the approaches.

Common mistakes in Security Analysis: Meaning and Approaches

Saying technical analysis studies the company's financial statements.
Both methods are called 'analysis', so students blur them.
Fix: Remember: technical looks at prices and volume only. Financial statements belong to fundamental analysis.
Writing intrinsic value and market price as the same thing.
Both are called the 'value' of a share.
Fix: Intrinsic value is your estimate of worth. Market price is what the share trades at. The gap between them drives the decision.
Leaving out the economy and industry layers in fundamental analysis.
Students think only of company ratios.
Fix: Always write the EIC framework: economy, industry, company.
Treating the efficient market approach as a third valuation tool like the other two.
It is listed alongside them in the syllabus.
Fix: Present it as a view on whether analysis can beat the market, and link each form of efficiency to the method it challenges.
Writing a one-sided answer in a comparison question.
Students describe one method fully and the other briefly.
Fix: Give matching points for both methods in parallel, then a conclusion.
Claiming that technical analysis is always for the short term and fundamental analysis is always for the long term.
It is a handy rule of thumb.
Fix: Write 'generally' or 'usually'. These are typical uses, not strict rules.

Worked examples

Example 1

Differentiate between fundamental analysis and technical analysis.

Show the solution

Define the base: security analysis estimates the worth, risk and return of securities. Both are approaches within it.
Basis: fundamental analysis values a security from the earning power and financial position of the company. Technical analysis uses past price and volume data.
Data: fundamental uses economic, industry and company information such as earnings, dividends and ratios. Technical uses price charts and trading volumes.
Tools: fundamental uses valuation models and ratios. Technical uses chart patterns, trend lines and indicators.
Horizon: fundamental is generally used for long-term investing. Technical is generally used for short-term trading.
Objective: fundamental finds intrinsic value to compare with market price. Technical predicts the direction of price and the timing of entry and exit.
Conclude: the two are complementary. Fundamental analysis helps decide what to buy and technical analysis helps decide when.

Answer: Fundamental analysis values a security from company and economic data to find intrinsic value, usually for long-term investors. Technical analysis studies price and volume patterns to forecast price movement, usually for short-term traders. They differ in basis, data, tools, horizon and objective, and are often used together.

Example 2

A share of Aryan Textiles Ltd trades at ₹240. After studying the economy, the industry and the company, an analyst estimates its intrinsic value at ₹300. What does security analysis suggest, and what does the efficient market approach say about this?

Show the solution

Compare intrinsic value with market price: ₹300 against ₹240.
Gap = ₹300 − ₹240 = ₹60. The gap as a share of market price is 60 ÷ 240 = 25%.
Since intrinsic value is greater than market price, the share appears undervalued. Fundamental analysis suggests buying or holding.
The efficient market approach adds a caution. If the market is semi-strong form efficient, the ₹240 price already reflects all public information, so the analyst's estimate would likely be wrong or based on information the market has already used.
The conclusion depends on the quality of the estimate. If the analyst has better insight than the market, the share may be a good buy. If not, ₹240 may be the fair price.

Answer: The share appears undervalued by ₹60 (25% of the market price), so fundamental analysis suggests buying. Under a semi-strong efficient market, such mispricing should not persist, so the estimate must be tested before acting.

Exam tips

Learn the comparison of fundamental and technical analysis as a five-point list. It is the most likely written question on this topic.
Always include economy, industry and company when you explain fundamental analysis.
Link each efficiency form to the method it challenges. This shows depth beyond definitions.
Write a short conclusion on combining the approaches. ICSI-style answers reward a clear closing line.
Keep short notes to about one third of a page. Use headings for each approach and bullet points for tools.

Practice questions from Security Analysis