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LE Paper 8 · Topic 6
Securities analysis is the most numerical topic in Paper 8. Expect to work out ratios and valuations from a few lines of company data (quick ratio, gearing, EPS, P/E, dividend yield and cover, P/B, the Gordon growth model, EV/EBITDA, PEG) and to read technical signals: trend lines, support and resistance, moving averages, RSI, MACD, Dow theory, Elliott waves and head and shoulders. Learn each formula with its usual trap, because the distractors are built from the standard mistakes: the wrong base, the dividend just paid, the inverted ratio.
13 min read8 sections
Standard securities analysis: ratio analysis and DuPont analysis; Gordon growth (constant growth dividend discount) model and sustainable growth rate; P/E-based valuation; Porter's five forces; industry life cycle; Dow theory; Elliott wave theory; J. Welles Wilder's RSI; MACD (12, 26, 9). Mapped to the HKSI LE Paper 8 syllabus Topic 6 (v3.6, effective 1 March 2026), checked October 2026. Independent prep, not endorsed by HKSI Institute or the SFC.
The two schools ask different questions. Fundamental analysis asks what a share is worth: it estimates intrinsic value from the economy, the industry and the company's financial statements, and buys when price is below value. Technical analysis asks when to trade: it studies past price and volume and assumes that market prices discount all known information, that prices move in trends that tend to persist, and that patterns repeat because investor behaviour repeats.
| Fundamental analysis | Technical analysis | |
|---|---|---|
| Question | What is the share worth? | When should I buy or sell? |
| Data | Economic data, industry data, financial statements | Historical prices and trading volume |
| Tools | Ratios, dividend discount model, P/E valuation | Charts, trend lines, moving averages, RSI, MACD |
| Time horizon | Generally longer term | Generally shorter term (timing) |
| Key assumption | Price moves towards intrinsic value over time | Prices discount everything, trend and repeat |
Trap: calling any numerical method fundamental. A moving average or RSI is built from past prices, so a signal from it is technical, and discounting cash flows is never a technical assumption.
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Takeaway: Fundamental asks what it is worth, from accounts and the economy; technical asks when to trade, from price and volume.
A top-down analyst works from the economy (GDP growth, interest rates, money supply, inflation, exchange rates, consumer spending) to the industries likely to benefit, and only then to individual companies. A bottom-up analyst starts with the individual company (management, products, competitive position, balance sheet) and gives little weight to the economic cycle.
Industry analysis looks at where an industry is in its life cycle, how sensitive it is to the business cycle, and how competitive it is.
| Life-cycle stage | Typical features |
|---|---|
| Introduction (pioneering) | Low sales, high costs, losses common, high risk |
| Growth | Sales rise rapidly, profits rise and attract new entrants, most earnings retained for expansion, low payouts |
| Maturity | Sales growth slows or flattens, competition on price, stable cash flows, higher dividend payouts |
| Decline | Falling sales as substitutes or changing tastes take over, firms exit |
Cyclical industries (property development, luxury goods, airlines, building materials) see demand swing with the economy. Defensive industries (electricity and other utilities, food, basic healthcare) sell necessities, so their sales are steadier in a recession.
Porter's five forces explain long-run industry profitability: the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitute products and the intensity of rivalry among existing competitors. Profits are protected by high barriers to entry, weak suppliers, weak buyers and few substitutes; they are eroded when buyers can switch cheaply between identical products or rivalry is intense.
Trap: placing company ratios in the economic stage of a top-down approach, or reading flat sales and price wars as the growth stage. Those belong to the company stage and to maturity.
Takeaway: Top-down: economy, industry, company. Growth stage: rising sales, new entrants, low payouts. Five forces: entrants, suppliers, buyers, substitutes, rivalry.