#5 What is the Index (Sensex/Nifty/DJIA)
#6 DividendsFriday, December 22, 2006
Tuesday, March 28, 2006
Saturday, March 25, 2006
Fundamental vs. Technical Analysis.
Fundamental Analysis is the study of the whole company in depth and is an attempt to find the future earnings, say one/two/five years down the line, thus trying to predict the share prices.
Fundamental analysis involves studying balance sheets, cash flow statements, Profit and Loss account, Fututre growth prospect, order book of the company, commodity cycle etc.. Much of this data cannot be analysed by most small investors(Including any of us). Such predictions are made by analysts who specialise in a particular field (eg. Oil companies or textile or retail or Construction companies)
Fortunately, what is available to a small investor is good enough to differentiate between a good and a bad company, or to compare two companies in the same sector. This is good enough and definitely worth knowing, to say the least.
On the other hand, technical analysis is the study of the price and volume trend over a decent length of time and trying to predict the future price movements. This analysis does not consider any events that have occured. It is strictly based on just the Chart of the share price and volume. A technical analyst should not be governed by any kind of developments that have taken place around him, but should only restrict himself to what he infers from the chart of the share price.
Technical analysis is based on the fact that the share price move stictly on the basis of the developments that have taken place on ground. ie on the fundamentals. If u agree to this principal, then technical analysis can be justified, otherwise, this is not for you. This is a very interesting field of study, specially for those who are from a science background.
I have a personal opinion, that Fundamental analysis is for an Investor, while Technical analysis is for traders. This may not be agreed by many people.
Fundamental analysis involves studying balance sheets, cash flow statements, Profit and Loss account, Fututre growth prospect, order book of the company, commodity cycle etc.. Much of this data cannot be analysed by most small investors(Including any of us). Such predictions are made by analysts who specialise in a particular field (eg. Oil companies or textile or retail or Construction companies)
Fortunately, what is available to a small investor is good enough to differentiate between a good and a bad company, or to compare two companies in the same sector. This is good enough and definitely worth knowing, to say the least.
On the other hand, technical analysis is the study of the price and volume trend over a decent length of time and trying to predict the future price movements. This analysis does not consider any events that have occured. It is strictly based on just the Chart of the share price and volume. A technical analyst should not be governed by any kind of developments that have taken place around him, but should only restrict himself to what he infers from the chart of the share price.
Technical analysis is based on the fact that the share price move stictly on the basis of the developments that have taken place on ground. ie on the fundamentals. If u agree to this principal, then technical analysis can be justified, otherwise, this is not for you. This is a very interesting field of study, specially for those who are from a science background.
I have a personal opinion, that Fundamental analysis is for an Investor, while Technical analysis is for traders. This may not be agreed by many people.
Thursday, March 23, 2006
#7 EPS (Earnings per share)
It is the profit retained by the company per share issued by it. By profit retained, we mean the amount of profit that is put back into business.
In some sense it is the money that a shareholder makes(though he does not recieve it) for every share that he holds.
Care should be taken to compare the EPS with that of previous year by removing 'ExtraOrdinary' income wherever it applies. Extraordinary Income is the income earned from non-business activities.
It is a figure that the companies publish in their Annual Report and with their quarterly results and we will never have to calculate it. Nonetheless it is very important to know how it is calculated and will become more and more clear as we move ahead.
The earnings per share could be quoted in many different forms and it is very important to understand what EPS is being quoted. There is a huge difference between the Forward and Trailing EPS. Also it is important in Fundamental Analysis that we know which EPS we are dealing with. There is another set of terms, consolidated and standalone EPS. We will deal this later.
Here is a link to a site where EPS is explained in greater details but I think that for the time being it is enough to know what I have written, otherwise you may get confused.
In some sense it is the money that a shareholder makes(though he does not recieve it) for every share that he holds.
Care should be taken to compare the EPS with that of previous year by removing 'ExtraOrdinary' income wherever it applies. Extraordinary Income is the income earned from non-business activities.
It is a figure that the companies publish in their Annual Report and with their quarterly results and we will never have to calculate it. Nonetheless it is very important to know how it is calculated and will become more and more clear as we move ahead.
The earnings per share could be quoted in many different forms and it is very important to understand what EPS is being quoted. There is a huge difference between the Forward and Trailing EPS. Also it is important in Fundamental Analysis that we know which EPS we are dealing with. There is another set of terms, consolidated and standalone EPS. We will deal this later.
Here is a link to a site where EPS is explained in greater details but I think that for the time being it is enough to know what I have written, otherwise you may get confused.
Wednesday, March 22, 2006
#6 Dividends
Dividend is a fraction of the profit of the company that the management decides to give to the shareholders. Most of the old companies that have a regular business and are no longer expanding pay good dividends.
A dividend of 10% means that on a stock with a face value of Rs 10 a Dividend of Rs. 1 will be recievable by the shareholder.
One important thing is to look for is the Dividend Yield.
Generally, for a a company with no growth in terms of sales and net profit, one should prefer stocks with dividend yields at atleast as much as the prevailing interest rates.
For growing and expanding companies cash is needed to expand the business and the company may decide not to pay a dividends at all.
Remember that a dividend is sometimes an important factor(in terms of management credibility) when chosing a stock, though it should not be the only parameter.
Note that the dividend yield is almost never more than 4-5% even though the dividend declared may be sometimes 1000% and even more ! ! !
A dividend of 10% means that on a stock with a face value of Rs 10 a Dividend of Rs. 1 will be recievable by the shareholder.
One important thing is to look for is the Dividend Yield.
Generally, for a a company with no growth in terms of sales and net profit, one should prefer stocks with dividend yields at atleast as much as the prevailing interest rates.For growing and expanding companies cash is needed to expand the business and the company may decide not to pay a dividends at all.
Remember that a dividend is sometimes an important factor(in terms of management credibility) when chosing a stock, though it should not be the only parameter.
Note that the dividend yield is almost never more than 4-5% even though the dividend declared may be sometimes 1000% and even more ! ! !
Penny Stocks...
These are the stocks that trade at less than 1 rupee. Most small invetors fall prey to such investments. The stock price has a reason to it. Either very bad financials, management or future prospects. Something really bad in the past has happened that has taken the stock price southward. Try to avoid such stocks unless you fully understand what you are buying. It may end up like buying garbage (would you ever buy garbage?)
But these are the 'Very High Risk Very High Reward' Stocks. It is like buying a lottery ticket with very low probability of a win. Another problem is that these stocks have very very low volumes most of the time that makes the price manipulation that much easier.
But these are the 'Very High Risk Very High Reward' Stocks. It is like buying a lottery ticket with very low probability of a win. Another problem is that these stocks have very very low volumes most of the time that makes the price manipulation that much easier.
Wednesday, March 15, 2006
Some Myths that you need to forget right away.
1) Rs. 1000 is costly and Rs 10 is cheap.
Always remember that a share being costly or not is never indicated by its share price. (PE ratio is the tool needed to compare cheap or costly) It is only indicative of how successful a company has been to the present day. If two stocks had a price of Rs. 10 per share in 1990, and the first one is at Rs 10 today while the second one at Rs. 100. This only means that the first company is a stupid one and not that it is a cheap one. It only means that the company has not increased in size or income for the last many years. Thus it is not worth investment either. While, the other company has grown 10 times in size and earnings and that investors are ready to pay 10 times more for the company than they were 15 years back. If one were to choose which company to invest in, given only this data above, it would be very very stupid to invest in the first company saying that the stock is cheap. Chances are that you will be sitting on a share of Rs. 10 even 10 years down, not gaining any money, but losing the interest that you would have earned otherwise.
2)By getting Bonus or by a Stock Split, you have gained.
A stock split is like giving 10 one rupee coins for a one rupee note. Period.
A bonus is a bit different, but for an investor it makes no value addition.
I will try to explain Bonus issues later.
Actually this is one misconception that I have found the toughest to get out of the heads of people
3)Buy 52 week lows.
How many times have you searched the papers for the 52 week lows trying to find a stock that was worth a buy!!! Never ever buy a 52 week low. It is like trying to catch a falling dagger. Stock prices don’t fall or rise without a reason. If some stock is at a 52 week low there is a reason. Chances are that the fall is not over and the stock may fall further.
Always remember that a share being costly or not is never indicated by its share price. (PE ratio is the tool needed to compare cheap or costly) It is only indicative of how successful a company has been to the present day. If two stocks had a price of Rs. 10 per share in 1990, and the first one is at Rs 10 today while the second one at Rs. 100. This only means that the first company is a stupid one and not that it is a cheap one. It only means that the company has not increased in size or income for the last many years. Thus it is not worth investment either. While, the other company has grown 10 times in size and earnings and that investors are ready to pay 10 times more for the company than they were 15 years back. If one were to choose which company to invest in, given only this data above, it would be very very stupid to invest in the first company saying that the stock is cheap. Chances are that you will be sitting on a share of Rs. 10 even 10 years down, not gaining any money, but losing the interest that you would have earned otherwise.
2)By getting Bonus or by a Stock Split, you have gained.
A stock split is like giving 10 one rupee coins for a one rupee note. Period.
A bonus is a bit different, but for an investor it makes no value addition.
I will try to explain Bonus issues later.
Actually this is one misconception that I have found the toughest to get out of the heads of people
3)Buy 52 week lows.
How many times have you searched the papers for the 52 week lows trying to find a stock that was worth a buy!!! Never ever buy a 52 week low. It is like trying to catch a falling dagger. Stock prices don’t fall or rise without a reason. If some stock is at a 52 week low there is a reason. Chances are that the fall is not over and the stock may fall further.
What’s Your style??
The first few questions you need to ask yourself before venturing in the market are….. Are you an investor or a trader? Do you have a good risk appetite? Can you wait with your money invested for 10 more years?
Make sure that you know before hand what you are, an investor or a trader. If you are trying both, then separate your investments from your trades, because this might substantially lower the profits that you could have otherwise made.
One should invest only surplus money in the markets. If you don’t have a surplus, don’t invest. Sometimes you might get hold of a stock that you think is the find of a lifetime and you invest huge amounts of money in the particular stock. It might surprise you that the stock price does not rise for a few years at a stretch. Actually this is very much possible. So never ever invest more than 10% of the total investment in a single stock. Diversify.
Do you have the courage to see half of you money in the drains? If you don’t, never invest in ‘Small Caps’, ‘Penny Stocks’ or on the ‘hot tip’ your neighbor just gave you. Always remember the old rule… ‘No risk No reward’
Make sure that you know before hand what you are, an investor or a trader. If you are trying both, then separate your investments from your trades, because this might substantially lower the profits that you could have otherwise made.
One should invest only surplus money in the markets. If you don’t have a surplus, don’t invest. Sometimes you might get hold of a stock that you think is the find of a lifetime and you invest huge amounts of money in the particular stock. It might surprise you that the stock price does not rise for a few years at a stretch. Actually this is very much possible. So never ever invest more than 10% of the total investment in a single stock. Diversify.
Do you have the courage to see half of you money in the drains? If you don’t, never invest in ‘Small Caps’, ‘Penny Stocks’ or on the ‘hot tip’ your neighbor just gave you. Always remember the old rule… ‘No risk No reward’
Friday, March 10, 2006
#5 What is the Index (Sensex/Nifty/DJIA)
Because there are more than 5000 stocks listed and traded on the Indian Stock Markets, it is in general not possible to say what the overall market movement was, on a particular day. One might suggest to take the advance/decline ratio (ie the number of stocks that increased to those decreased) But it is very much possible that most of the stocks that increased on a particular were traded in a very small quantity (say 1,000 shares on an average), though the trades on the shares whose value decreased were traded in a large quantity(say an average of 1,00,000 shares). In this case we would have jumped to a wrong conclusions.
So, the Indises are created. These indices generally cover 30-500 shares. In India the Sensex has 30 shares and Nifty has 50. Each stock is given a weightage, which may change on a daily basis.(though very slightly) In most of the cases, the weightage is dependent on the market capitalisation of the individual stock. The weighted average of the share prices of these shares give the value of sensex. (Sometimes there is a multiplicative factor multiplied to the final weighted average as well)
The way in which the stocks are chosen for a particular index depends on the market cap and 'beta value'(related to standard deviation in the share price). Also, sometimes sectoral weightage is also kept in mind before deciding the final list.
So, the Indises are created. These indices generally cover 30-500 shares. In India the Sensex has 30 shares and Nifty has 50. Each stock is given a weightage, which may change on a daily basis.(though very slightly) In most of the cases, the weightage is dependent on the market capitalisation of the individual stock. The weighted average of the share prices of these shares give the value of sensex. (Sometimes there is a multiplicative factor multiplied to the final weighted average as well)
The way in which the stocks are chosen for a particular index depends on the market cap and 'beta value'(related to standard deviation in the share price). Also, sometimes sectoral weightage is also kept in mind before deciding the final list.
# Fast Forward!!
This one can be skipped!!!!
I am posting this one just for fun. Specially those who have been tracking some financial papers and some of the financial channels.
How many of these terms you have heard of and how many you understand exactly.(Don't give a shit even if you dont understand a single topics here, actually these are the terms we will be discussing in the time to come!!)
EPS, PE, PEG, GDP, Debt, Equity, Merger, Demerger, Registrar, Face Value, Buy Back, Bonus, Rights, Dividend, OPM, NPM, Mutual Funds, Shareholder's reserves, Dividend Yield, Bull, Bear, Smart money, ULIP, SIP, LTCG tax, Charts, growth rate, Insider trading, private placement, IPO, QIB, Bonds, ROCE, RONW, ROI, Beta value, Annual Report, Fully paid up share capital, Put, Call, Short, Badla, derivatives, futures, options.
If I have got your blood pumping faster, then I think I have struck the right chord. If u understand each of these terms properly, I believe this is not the best place for you to try and improve your understanding of the markets! May be you should start a similar forum for others :)
#4 Tables and Tickers
All Financial Papers have a table showing the shares traded along with a few columns besides them. The image here is self explanatory. More often than not, the newpaper will carry a small header/footer explaining the relevant details. The most important ones are Open, High, Low, Close, Volume.
Apart from all these they also carry one term called P/E ratio. This is the foundation for the understanding of the stock markets. I have omitted this one because I have not dealt with this topic yet.
The TV channels show a strip, which shows the last traded price during the market hours, delayed by a few minutes(usually 2-15 minutes). In the off market hours, They show the last closing price of the stock.
#3 The Share Price
Share price is the single most important thing that makes a shareholder jump, dance, run cry, laugh, commit suicide or whatever. It is therefore apt to discuss this first.
Most simply, (and perhaps most efficiently) if the market(the overall share investors) values a company at Rs. 10,00,00,000 and the number of issued shares are 10,00,000 then the share price will be 10,00,00,000/10,00,000 = Rs. 100. This said, is not necessarily the prevailing market price. The price fluctuates on every news and every event that directly or indirectly affects the
company's earnings.
Another way is the normal demand-supply arguement that applies to all commodities. Shares of a company are treated as a commodity and the changes in the price depends on the demand-supply scenario at a particular time.
Share price is the direct function of the earnings of the company and many many other factors. These factors could run in 3 digits if ennumerated. I will try to list some important ones in a later post.
One thing that is necessary to understand is that even the management might not be able to value its own company properly, forget analysts and share holders!!! Sometimes the Projected earnings (and hence the share price targets) vary by more than 100% by different analysts at a point in time!!! Does this mean that there is no hope in the markets unless one gambles? The answer is that the risks are always there, even in the best companies, but these can be minimised by 'Portfolio Diversification' and by 'Systematic Investment Plans'. These are at the second stage and I will try to discuss these topics after I have covered some of the more basic topics.
Most simply, (and perhaps most efficiently) if the market(the overall share investors) values a company at Rs. 10,00,00,000 and the number of issued shares are 10,00,000 then the share price will be 10,00,00,000/10,00,000 = Rs. 100. This said, is not necessarily the prevailing market price. The price fluctuates on every news and every event that directly or indirectly affects the
company's earnings.Another way is the normal demand-supply arguement that applies to all commodities. Shares of a company are treated as a commodity and the changes in the price depends on the demand-supply scenario at a particular time.
Share price is the direct function of the earnings of the company and many many other factors. These factors could run in 3 digits if ennumerated. I will try to list some important ones in a later post.
One thing that is necessary to understand is that even the management might not be able to value its own company properly, forget analysts and share holders!!! Sometimes the Projected earnings (and hence the share price targets) vary by more than 100% by different analysts at a point in time!!! Does this mean that there is no hope in the markets unless one gambles? The answer is that the risks are always there, even in the best companies, but these can be minimised by 'Portfolio Diversification' and by 'Systematic Investment Plans'. These are at the second stage and I will try to discuss these topics after I have covered some of the more basic topics.
Sunday, March 05, 2006
#2 Trading of Stocks.
The stock market/Exchange is a place where all the transactions are made. (Image: The Bombay Stock Exchange)
In India, to trade in stocks, u need to get a demat account (In most developed markets, Demat account is compulsory) These accounts are like bank accounts, the only diffence being that your bank account holds money, while a demat account holds Stocks. This makes sure that u dont need to keep the share certificates safely. There is no tension of lost certificates. Also it makes the business much faster with deliveries directly from one account to another in a matter of one or two days. Just 15 years back one single transaction could take as many as 10 days to complete.
You also need to get in touch with a broker in your locality. A broker is geneally a person whom you can trust and who could trust you. Otherwise, The broker would like to have some advance deposited with him before he does some transaction on your behalf. With technology, over the last 20 years the role of a broker has become much more confined. Earlier he used to find a buyer for a seller and vice-versa, now he just needs to sit in fornt of his computer and technology does the rest.
The role of the stock market has remained as important as it was 100 years back, except that the transactions can take place through the internet without the physical presence of the broker. They have become much more sophisticated with different kinds of trades, specially the futures and options and stock Borrowing(Stock borrowing is still not allowed in India while futures and options are allowed in a selected few stocks)
You just need to call your broker and ask him to make a transaction in a particular script on your behalf. One is required to pay a Brokerage(generally between 0.45 to 1%) to the broker depending on the volume of business that you give to the broker. This is mutually negotiated at the time a sharetrader enters the business.
I will post more about how the stocks are actually traded at a later date, otherwise one might lose interest in the subject.
In India, to trade in stocks, u need to get a demat account (In most developed markets, Demat account is compulsory) These accounts are like bank accounts, the only diffence being that your bank account holds money, while a demat account holds Stocks. This makes sure that u dont need to keep the share certificates safely. There is no tension of lost certificates. Also it makes the business much faster with deliveries directly from one account to another in a matter of one or two days. Just 15 years back one single transaction could take as many as 10 days to complete.
You also need to get in touch with a broker in your locality. A broker is geneally a person whom you can trust and who could trust you. Otherwise, The broker would like to have some advance deposited with him before he does some transaction on your behalf. With technology, over the last 20 years the role of a broker has become much more confined. Earlier he used to find a buyer for a seller and vice-versa, now he just needs to sit in fornt of his computer and technology does the rest.
The role of the stock market has remained as important as it was 100 years back, except that the transactions can take place through the internet without the physical presence of the broker. They have become much more sophisticated with different kinds of trades, specially the futures and options and stock Borrowing(Stock borrowing is still not allowed in India while futures and options are allowed in a selected few stocks)
You just need to call your broker and ask him to make a transaction in a particular script on your behalf. One is required to pay a Brokerage(generally between 0.45 to 1%) to the broker depending on the volume of business that you give to the broker. This is mutually negotiated at the time a sharetrader enters the business.
I will post more about how the stocks are actually traded at a later date, otherwise one might lose interest in the subject.
Wednesday, March 01, 2006
#1 What's a Stock/Share?
A stock is basically a certificate, that certifies one's ownership in a company.
If there are in total 10,00,000 shares issued by a company, owning one stock means the ownership of 1/10,00,000 of the company. It includes the ownership in the assets, the debts, the trademark,earnings etc.
Basically the ownership of a stock does not mean that one gets a say in the working of the company on a day to day basis, but that one has the right to cast the vote in the Annual General Meeting where the company decides on the major issues and on the way the company is to be run.
The stock could be of two kinds, Common and Preference. A preference stockholder gets a fixed dividend, no matter whether the companies makes profit or not! Also, in the case of liquidation, they get a right to the assets before the Common shareholders. To a reader it might seem stupid to buy a Common stock, but then because the dividend is fixed, the share price is also generally fixed!!! thus the preference stock holder does not get much return(Golden Rule: No risk, No return!!) . Actually many consider preference stock to be a kind of bank deposit. Note that the share price of common stock is no way related to that of the preference stock
More often than not a small investor will only trade or invest in normal shares. So, throughout this Blog we will deal with Common stocks and not Preference Stock, unless specified otherwise.
If there are in total 10,00,000 shares issued by a company, owning one stock means the ownership of 1/10,00,000 of the company. It includes the ownership in the assets, the debts, the trademark,earnings etc.
Basically the ownership of a stock does not mean that one gets a say in the working of the company on a day to day basis, but that one has the right to cast the vote in the Annual General Meeting where the company decides on the major issues and on the way the company is to be run.
The stock could be of two kinds, Common and Preference. A preference stockholder gets a fixed dividend, no matter whether the companies makes profit or not! Also, in the case of liquidation, they get a right to the assets before the Common shareholders. To a reader it might seem stupid to buy a Common stock, but then because the dividend is fixed, the share price is also generally fixed!!! thus the preference stock holder does not get much return(Golden Rule: No risk, No return!!) . Actually many consider preference stock to be a kind of bank deposit. Note that the share price of common stock is no way related to that of the preference stock
More often than not a small investor will only trade or invest in normal shares. So, throughout this Blog we will deal with Common stocks and not Preference Stock, unless specified otherwise.
Tuesday, February 28, 2006
A newbie myself...
To start with, I am trying to create a blog that helps all those newbies in this field who are either interested in this field or are fascinated by the big bucks and who are finding it difficult to find a place to get the proper study material to study the stuff.
I will post some of the better sites to study the stuff, specially for the beginners.
Any suggestions or pointing of mistakes are always welcome.
I will post some of the better sites to study the stuff, specially for the beginners.
Any suggestions or pointing of mistakes are always welcome.
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