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’
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