What is Technical Analysis?
Technical Analysis is a method where one studies the market statistics to evaluate the worth of a company. Instead of assessing the health of the company by relying on its financial statements, it relies upon market trends to predict how a security will perform.
It is a method of evaluating stocks by analyzing stock market related activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. They believe in the momentum that the scrips/markets gather over a period of time and cashing in on the same. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
This method enables 'short-term' investors to gauge companies who have very good potential to gather increased earnings in the near future.
What is a Fundamental Analysis?
A method of evaluating a stock by attempting to measure its intrinsic value. Fundamental analysts study everything from the overall economy and industry conditions, to the financial condition and management of companies. A fundamental analyst would most definitely look into the details regarding the balance sheets, profit loss statements, ratios and other data that could be used to predict the future of a company.
In other words, fundamental analysis is about using real data to evaluate a stock's value. The method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth.
What is an Overvalued Stock or an Undervalued Stock?
An overvalued stock can be understood as an inflated hope that a company will do well. Thus, a stock is overvalued if its current price exceeds the intrinsic value of the stock. The market may temporarily price stocks too high or too low and that's how investors determine whether stocks are being overvalued or undervalued. If a stock is overvalued, the current price of the stock exceeds its earnings ratio (PE ratio*) and hence investors expect the price of the stock to drop. A high PE in relation to the past PE ratio of the same stock may indicate an overvalued condition, or a high PE in relation to peer stocks may also indicate an overvalued stock.
Thus the PE ratio is one of the many ways to determine whether a stock is overvalued. *A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings.
For example, a P/E ratio of 10 means that the company has Rs1 of annual, per-share earnings for every Rs10 in share price.
A stock is undervalued when, if is selling at a much lower price than what it is actually worth. This can be determined based on fundamentals like earnings and growth prospects. One of the best-known measures for finding an undervalued stock is the price earnings ratio (P/E).
Consider Colgate and Pepsodent, which are in the same industry and have similar fundamentals. If Colgate has a P/E of 15 and Pepsodent's is 20, Colgate could be an undervalued stock.
What does Value Investing mean?
Value investing is an investment style, which favors good stocks at great prices over great stocks at good prices. Hence it is often referred to as "price driven investing". A value investor will buy stocks he believes the market is undervaluing, and avoid stocks that he believes the market is overvaluing. Warren Buffet, one of the world's best-known investment experts believes in Value investing.
Value investors see the potential in the stocks of companies with sound financial statements that they believe the market has undervalued; as they believe the market always overreacts to good and bad news, causing stock price movements that do not correspond with their long-term fundamentals. Value investors profit by taking a position on an undervalued stock (at a deflated price) and then profit by selling the stock when the market corrects its price later.
Value investors don't try to predict which way interest rates are heading or the direction of the market and the economy in the short term, but only look at a stock's current valuation ratios and compare them to their historical range. In other words they pick up the stocks as fledglings and cash in on them when they are valued right in the markets.
For example, say a particular stock's P/E ratio has ranged between a low of 20 and a high of 60 over the past five years, value investors would consider buying the stock if it's current P/E is around 30 or less. Once purchased, they would hold the stock until its P/E rose to the 50-60 ranges before they consider selling it or even higher if they see further potential for growth in the future.
What is Contrarian Philosophy?
Investing with a value philosophy can be considered as one form of contrarian investing. Buying stocks that are out of favor in the marketplace, and avoiding stocks that are the latest market fad is a contrarian investing strategy. Thus it is an investment style that goes against prevailing market trends, where investors buy scrips that are performing poorly now and sell them in future when they perform well. Contrarians believe in taking advantages that arise out of temporary set backs or other such reasons that have caused a stocks price to decline at the moment.
A simple example of Contrarian Philosophy would be buying umbrellas in winter season at a cheap rate and selling them during rainy days.
Saturday, September 26, 2009
Friday, September 25, 2009
Chapter 4: Annual Report
What is an annual report and why is it useful to investors?
An annual report provides a company's shareholders with information about its operations. This is an obligation stipulated by law. This is extremely beneficial to investors because it helps make informed decisions.
The report tells you how well the company is doing while also forecasting its future earnings and dividends. The Chairman's letter in the report also profiles the company's future goals.
Inside the Annual Report
Here is what comprises an annual report:
* A letter from the chairman on the high points of business in the past year with predictions for the next year.
* The company philosophy: A section that describes the principles and ethics that govern a company's business.
* An extensive report on each section of operations within the company, describing the company's services or the products.
·Financial information that includes the profit and loss (P&L) statements and a balance sheet. Depending on its income and expenses, the company will either make profits or show losses for a year. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations.
* An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by independent accountants.
How do I obtain an Annual Report?
Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company web site, or search the Internet; as there are several sources on the Internet providing information on public companies.
All publicly listed companies are required to submit the financial reports available in the public domain as per SEBI regulations.
What are quarterly and other financial reports?
Besides the annual report, companies provide several other financial reports such as quarterly reports (issued every three months) and statistical supplements. These however are not as comprehensive as the annual report of the company.
Quarterly reports are very similar to the annual reports except they are issued every three months and are less comprehensive. They may be obtained in the same way as an annual report. What are Company Earnings?
Earnings are a company's net profit. It is the surplus left with the company after it has cleared all its expenses, i.e. Money paid to employees, utility bills, costs of production and other operating expenses The manner in which a company makes its earnings, is defined by the very nature of its business.
For e.g., a cement manufacturer produces cement for sale to its customers.
Two sources of company earnings are:
Ø Income from sales of goods or services
Ø Income from investment.
Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of investment property.
Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations.
Why are Earnings important to you as an investor?
As an investor who holds shares of the company, you have part ownership of company.When you invest in a company's shares, you become a 'part owner' of the company and you get to share a part of the company's profit as dividend. Thus if the company does well and earns more profit, you in turn to well. If the company reinvests its earnings towards future growth, you are assured of higher dividends in the future.
Meanwhile, if you lend money to the company by investing in its bonds, the company uses part of its earnings to repay interest and principle on the bonds. The more earnings the company has, the more secure you can be that the company will be able to make your interest payments. So, company earnings are important to you because you make money when the business you invest in, makes money.
How do you use earnings information to make an investment decision?
Your investment goals determine how you use information about company earnings. If you are an income investor, interested in earning immediate income from your investments, you probably want to invest in a company that is paying dividends. If you have a long-term investment strategy, dividends may not be as important to you. The "financials" indicate whether a company is oriented for income, growth, or a bit of both. By comparing the financials for different companies in the same industry, you can find characteristics best suited to your investment goals.A convenient way to compare companies is through Earnings per share (EPS). EPS represents the net profit divided by the number of outstanding shares of stock.
When you compare the EPS of different companies, be sure to consider the following:
Ø Companies with higher earnings are stronger than companies with lower earnings.
Ø Companies that reinvest their earnings may pay low or no dividends but may be poised for growth.
Ø Companies with lower earnings, and higher research and development costs, may be on the brink of either a breakthrough or a disaster, making them a risky proposition.
Ø Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger.
How do I use Fundamentals to make an investment decision?
Fundamental Analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. But this research can never accurately predict how the company will perform in the stock market. It can however be used as a good comparative framework to know which company will be a better investment choice.
As an investor, you are interested in a corporation's earnings because earnings assure higher dividends and potential for further growth. You can use profitability ratios to compare earnings for prospective investments. These are measures of performance showing how much the firm is earning compared to its sales, assets or equity.
You can quickly see the difference in profitability between two companies by comparing the profitability ratios of each. Let us see how ratio analysis works.
What is Ratio Analysis?
The ratio analysis technique is also called cross-sectional analysis, providing you with important information about a company's financial strength. Cross-sectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business. Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are:
1) Price-Earnings Ratio((P-E ratio):
It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period.
2) EPS (Earnings Per Share):
It is that portion of a company's net income, which corresponds to each share of that company's common stock which is issued and outstanding. EPS gives an indication of the profitability of a company. It is calculated using the formula:
EPS = (Net Income-Dividends on Preferred Stock)/ Average Outstanding Shares
3) Current Ratio:
Companies need a surplus supply of current assets in order to meet their current liabilities. They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts. It is a type of Liquidity ratio.
Current Ratio = Current Assets/ Current Liabilities
Leverage Ratios:
Traditionally, leverage is related to the relative proportions of debt and equity, which fund a venture. The higher the proportion of debt, the more leverage.
It is a ratio that measures a company's capital structure, indicating how a company finances their assets. Do they rely strictly on equity? Or, do they use a combination of equity and debt? The answers to these questions are of great importance to investors.
Leverage= Long Term Debt /Total Equity
A firm that finances its assets with a high percentage of debt is risking bankruptcy, higher borrowing costs and decreased financial flexibility; if its performance cannot help fulfill its debt payments. If a company is highly leveraged, it is also possible that lender's may shy away from providing further debt financing fearing the viability of their investment.
The optimal capital structure for a company you invest in, depends on which type of investor you are. A bondholder would prefer a company with very little debt financing because of it lowers the risk of him losing his money.
When a firm becomes over leveraged, bankruptcy can result.
Shareholder's Equity:
Shareholders' equity is calculated as the value of a company's assets less the value of its liabilities. It is the value of a business to its owners, after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners invested, plus any profits that the company generates.
Bankruptcy
Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer has the ability to meet its financial obligations. Both stock and bond fear bankruptcy. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible.
When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. If a firm's liabilities exceed the liquidation value of their assets, (the value of assets converted into cash), creditors also stand to lose money on their investments.
Understanding the Balance Sheet
The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that the accounts are always in balance and all the company funds can be accounted for. It is reported to investors at least once a year. You may also receive quarterly, semiannually or monthly balance sheets. The contents of a balance sheet include:
What the company owns (its assets)
What it owes (its liabilities)
The value of the business to its stockholders (the shareholders' equity).
Why should the Balance Sheet be important to you?
As an investor you need to ensure that the company you have invested in, has good potential for future growth and will yield good returns. The balance sheet helps you get answers to questions like:
·Will the firm meet its financial obligations?
· What amount of funds have already been invested in this company?
· Is the company overly indebted?
· What are the different assets that the company has purchased with its financing?
These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance.
What are Assets?
Assets are any items of economic value owned by a corporation that can be converted into cash.
Types of Assets:
Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. Also incase the company goes bankrupt, assets can be easily liquidated into cash and help prevent loss of your investments. Current assets are important to most companies, as they are a source of funds for day-to-day operations. It is thus evident, that the more current assets a company owns, the better it is performing.
Cash equivalents are not cash but can be converted into cash so easily that they are considered equal to cash.
Cash equivalents are generally highly liquid, short-term and very safe investments.
Accounts Receivable
Accounts receivable is the money customers (individuals or corporations) owe the firm in exchange for goods or services that have been delivered or used but not yet paid for.
As more and more business is being done today with credit instead of cash, this item is a significant component of the balance sheet. Accounts receivable is however recorded as an asset on the balance sheet as it represents a legal obligation for the customer to remit cash.
Inventory
A firms inventory is the stock of materials used to manufacture their products and the products themselves for future sale. A manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory generally will consist only of products purchased that are still to be stored. Inventory is recorded as an asset on a company's balance sheet.
Long-term Assets:
Long-term assets are grouped into several categories like:
A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.
Fixed assets are long-term, tangible assets held for business use and will not be converted into cash in the current or upcoming year.
Eg. Items such as equipment, buildings, production plants and property. On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all, except land. Fixed assets are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the company’s earnings.
Depreciation gives you an estimate of the decrease in the value of an asset, caused by 'wear and tear' or obsolence. It appears in the balance sheet as a deduction from the original value of the fixed assets; as the value of the fixed asset decreases due to wear and tear.
Intangible assets are non-physical assets such as copyrights, franchises and patents. Being intangible, it becomes difficult to estimate their value. Often there is no ready market for them. Sometimes however, an intangible asset can be the most valuable asset a company possesses.
What are Liabilities?
Liabilities are a company's debt to outside parties. They represent rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt. Eg. Bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into Current Liabilities and Long-Term Liabilities.
Types of Liabilities:
Current liabilities
Current liabilities are debts currently owed for taxes, salaries, interest, accounts payable* and notes payable, that are due within one year.
A company is considered to have good financial strength when current assets exceed current liabilities.
*Accounts Payable
Accounts payable is one of a series of accounting transactions covering payments to suppliers whom the company owes money for goods and services. Therefore, you will often see accounts payable on most balance sheets.
Long-term debt is a long-term loan, for a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.
An annual report provides a company's shareholders with information about its operations. This is an obligation stipulated by law. This is extremely beneficial to investors because it helps make informed decisions.
The report tells you how well the company is doing while also forecasting its future earnings and dividends. The Chairman's letter in the report also profiles the company's future goals.
Inside the Annual Report
Here is what comprises an annual report:
* A letter from the chairman on the high points of business in the past year with predictions for the next year.
* The company philosophy: A section that describes the principles and ethics that govern a company's business.
* An extensive report on each section of operations within the company, describing the company's services or the products.
·Financial information that includes the profit and loss (P&L) statements and a balance sheet. Depending on its income and expenses, the company will either make profits or show losses for a year. The balance sheet describes assets and liabilities and compares them to the previous year. The footnotes will also give you reveal important information, as they discuss current or pending lawsuits or government regulations that may impact the company operations.
* An auditor's letter in the annual report confirms that the information provided in the report is accurate and has been certified by independent accountants.
How do I obtain an Annual Report?
Annual reports are mailed automatically to all shareholders on record. If you wish to obtain the annual report about a company in which you do not own shares, you can call its public relations (or shareholder relations) department. You may also look at the company web site, or search the Internet; as there are several sources on the Internet providing information on public companies.
All publicly listed companies are required to submit the financial reports available in the public domain as per SEBI regulations.
What are quarterly and other financial reports?
Besides the annual report, companies provide several other financial reports such as quarterly reports (issued every three months) and statistical supplements. These however are not as comprehensive as the annual report of the company.
Quarterly reports are very similar to the annual reports except they are issued every three months and are less comprehensive. They may be obtained in the same way as an annual report. What are Company Earnings?
Earnings are a company's net profit. It is the surplus left with the company after it has cleared all its expenses, i.e. Money paid to employees, utility bills, costs of production and other operating expenses The manner in which a company makes its earnings, is defined by the very nature of its business.
For e.g., a cement manufacturer produces cement for sale to its customers.
Two sources of company earnings are:
Ø Income from sales of goods or services
Ø Income from investment.
Investments generate income for businesses by way of either interest on loans, dividends from other businesses, or gains on the sale of investment property.
Thus, company earnings are the sum of income from sales or investment left after the company has met its obligations.
Why are Earnings important to you as an investor?
As an investor who holds shares of the company, you have part ownership of company.When you invest in a company's shares, you become a 'part owner' of the company and you get to share a part of the company's profit as dividend. Thus if the company does well and earns more profit, you in turn to well. If the company reinvests its earnings towards future growth, you are assured of higher dividends in the future.
Meanwhile, if you lend money to the company by investing in its bonds, the company uses part of its earnings to repay interest and principle on the bonds. The more earnings the company has, the more secure you can be that the company will be able to make your interest payments. So, company earnings are important to you because you make money when the business you invest in, makes money.
How do you use earnings information to make an investment decision?
Your investment goals determine how you use information about company earnings. If you are an income investor, interested in earning immediate income from your investments, you probably want to invest in a company that is paying dividends. If you have a long-term investment strategy, dividends may not be as important to you. The "financials" indicate whether a company is oriented for income, growth, or a bit of both. By comparing the financials for different companies in the same industry, you can find characteristics best suited to your investment goals.A convenient way to compare companies is through Earnings per share (EPS). EPS represents the net profit divided by the number of outstanding shares of stock.
When you compare the EPS of different companies, be sure to consider the following:
Ø Companies with higher earnings are stronger than companies with lower earnings.
Ø Companies that reinvest their earnings may pay low or no dividends but may be poised for growth.
Ø Companies with lower earnings, and higher research and development costs, may be on the brink of either a breakthrough or a disaster, making them a risky proposition.
Ø Companies with higher earnings, lower costs and lower shareholder equity, might go in for a merger.
How do I use Fundamentals to make an investment decision?
Fundamental Analysis is a method used to evaluate the worth of a security by studying the financial data of the issuer. But this research can never accurately predict how the company will perform in the stock market. It can however be used as a good comparative framework to know which company will be a better investment choice.
As an investor, you are interested in a corporation's earnings because earnings assure higher dividends and potential for further growth. You can use profitability ratios to compare earnings for prospective investments. These are measures of performance showing how much the firm is earning compared to its sales, assets or equity.
You can quickly see the difference in profitability between two companies by comparing the profitability ratios of each. Let us see how ratio analysis works.
What is Ratio Analysis?
The ratio analysis technique is also called cross-sectional analysis, providing you with important information about a company's financial strength. Cross-sectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business. Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are:
1) Price-Earnings Ratio((P-E ratio):
It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period.
2) EPS (Earnings Per Share):
It is that portion of a company's net income, which corresponds to each share of that company's common stock which is issued and outstanding. EPS gives an indication of the profitability of a company. It is calculated using the formula:
EPS = (Net Income-Dividends on Preferred Stock)/ Average Outstanding Shares
3) Current Ratio:
Companies need a surplus supply of current assets in order to meet their current liabilities. They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts. It is a type of Liquidity ratio.
Current Ratio = Current Assets/ Current Liabilities
Leverage Ratios:
Traditionally, leverage is related to the relative proportions of debt and equity, which fund a venture. The higher the proportion of debt, the more leverage.
It is a ratio that measures a company's capital structure, indicating how a company finances their assets. Do they rely strictly on equity? Or, do they use a combination of equity and debt? The answers to these questions are of great importance to investors.
Leverage= Long Term Debt /Total Equity
A firm that finances its assets with a high percentage of debt is risking bankruptcy, higher borrowing costs and decreased financial flexibility; if its performance cannot help fulfill its debt payments. If a company is highly leveraged, it is also possible that lender's may shy away from providing further debt financing fearing the viability of their investment.
The optimal capital structure for a company you invest in, depends on which type of investor you are. A bondholder would prefer a company with very little debt financing because of it lowers the risk of him losing his money.
When a firm becomes over leveraged, bankruptcy can result.
Shareholder's Equity:
Shareholders' equity is calculated as the value of a company's assets less the value of its liabilities. It is the value of a business to its owners, after all of its obligations have been met. This net worth belongs to the owners. Shareholders' equity generally reflects the amount of capital the owners invested, plus any profits that the company generates.
Bankruptcy
Bankruptcy is a legal mechanism that allows creditors to assume control of a firm when it can no longer has the ability to meet its financial obligations. Both stock and bond fear bankruptcy. Generally, the firm's assets are sold in order to pay off creditors to the largest extent possible.
When bankruptcy occurs, stockholders of a corporation can only lose the amount they have invested in the bankrupt company. This is called Limited Liability. If a firm's liabilities exceed the liquidation value of their assets, (the value of assets converted into cash), creditors also stand to lose money on their investments.
Understanding the Balance Sheet
The balance sheet is one of the most important financial statements of a company. The logic behind producing a balance sheet is to ensure that the accounts are always in balance and all the company funds can be accounted for. It is reported to investors at least once a year. You may also receive quarterly, semiannually or monthly balance sheets. The contents of a balance sheet include:
What the company owns (its assets)
What it owes (its liabilities)
The value of the business to its stockholders (the shareholders' equity).
Why should the Balance Sheet be important to you?
As an investor you need to ensure that the company you have invested in, has good potential for future growth and will yield good returns. The balance sheet helps you get answers to questions like:
·Will the firm meet its financial obligations?
· What amount of funds have already been invested in this company?
· Is the company overly indebted?
· What are the different assets that the company has purchased with its financing?
These are just a few of the many relevant questions you can answer by studying the balance sheet. The balance sheet provides a diligent investor with many clues to a firm's future performance.
What are Assets?
Assets are any items of economic value owned by a corporation that can be converted into cash.
Types of Assets:
Current assets are assets that are usually converted to cash within one year. Bondholders and other creditors closely monitor a firm's current assets since interest payments are generally made from current assets. Also incase the company goes bankrupt, assets can be easily liquidated into cash and help prevent loss of your investments. Current assets are important to most companies, as they are a source of funds for day-to-day operations. It is thus evident, that the more current assets a company owns, the better it is performing.
Cash equivalents are not cash but can be converted into cash so easily that they are considered equal to cash.
Cash equivalents are generally highly liquid, short-term and very safe investments.
Accounts Receivable
Accounts receivable is the money customers (individuals or corporations) owe the firm in exchange for goods or services that have been delivered or used but not yet paid for.
As more and more business is being done today with credit instead of cash, this item is a significant component of the balance sheet. Accounts receivable is however recorded as an asset on the balance sheet as it represents a legal obligation for the customer to remit cash.
Inventory
A firms inventory is the stock of materials used to manufacture their products and the products themselves for future sale. A manufacturing company will often have three different types of inventory: raw materials, works-in-process, and finished goods. A retail firm's inventory generally will consist only of products purchased that are still to be stored. Inventory is recorded as an asset on a company's balance sheet.
Long-term Assets:
Long-term assets are grouped into several categories like:
A long-term, tangible asset held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture.
Fixed assets are long-term, tangible assets held for business use and will not be converted into cash in the current or upcoming year.
Eg. Items such as equipment, buildings, production plants and property. On the balance sheet, these are valued at their cost. As the value of the asset declines over the years, depreciation is subtracted from all, except land. Fixed assets are very important to a company because they represent long-term investments that will not be liquidated soon and can facilitate the company’s earnings.
Depreciation gives you an estimate of the decrease in the value of an asset, caused by 'wear and tear' or obsolence. It appears in the balance sheet as a deduction from the original value of the fixed assets; as the value of the fixed asset decreases due to wear and tear.
Intangible assets are non-physical assets such as copyrights, franchises and patents. Being intangible, it becomes difficult to estimate their value. Often there is no ready market for them. Sometimes however, an intangible asset can be the most valuable asset a company possesses.
What are Liabilities?
Liabilities are a company's debt to outside parties. They represent rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt. Eg. Bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into Current Liabilities and Long-Term Liabilities.
Types of Liabilities:
Current liabilities
Current liabilities are debts currently owed for taxes, salaries, interest, accounts payable* and notes payable, that are due within one year.
A company is considered to have good financial strength when current assets exceed current liabilities.
*Accounts Payable
Accounts payable is one of a series of accounting transactions covering payments to suppliers whom the company owes money for goods and services. Therefore, you will often see accounts payable on most balance sheets.
Long-term debt is a long-term loan, for a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.
Wednesday, September 23, 2009
Stock Market FAQs
Chapter 3:Stock Market FAQS
What are the instruments traded in the stock markets?
There are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options.
Why would I choose stocks?
Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.
How can I track stocks?
Tracking stocks lets you gain from the best stock opportunities available in the market while also letting you know how the stocks in your portfolio are performing. Our website is designed to empower you with all the tools you might require to invest wisely. The portfolio tracker section of the website in which you have an account, lets you regularly monitor your portfolio.
Where do I buy stock?
Stock trading happens on Stock Exchanges, but one cannot individually buy stocks off the exchange. To do so, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission.
What are some of the orders I can place?
You can place different orders such as Market orders, Limit Orders, Stop Loss Orders, Cover Orders, and Normal Orders etc.
What is a Market Order?
A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.
What is a Limit Order?
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the scrip might not reach the desired price on that particular trading day owing to Market related factors.
What is a Stop Loss Order?
A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defense mechanism- an amount at which you will be able to sustain yourself against such unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. Naturally, this price cannot be more than the price of the stock you are trading.
For eg. If you bought a stock at Rs 10, you place a stop loss order with your broker to sell it, if it reaches Rs 8. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.
Good-till-canceled (GTC) or Day Order Or Normal Orders
Day orders are orders given to your broker that hold true only during the period of the trading day for which the orders have been given. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus they are orders that are only "good until it is canceled" or "good for the day."
For eg. You place a stop loss order with your broker to sell a stock, if its price reaches to level X. Now, if it does not reach limit X, your broker will not sell the stock. However, the stop loss order given to your broker will not hold true for the next day. For, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again.
What are advances and declines?
Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction.
As the name suggest ' advances' will inform you how the market has progressed.'Declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical Analysis tool that indicates market movement. Advance Decline ratio is calculated using the formula:
Number of stocks that advanced/number of stocks that declined.
Generally, it is seen that in Bullish markets the number of stocks that advance is more than the ones that declined and the converse can be said to hold true in a bearish market. The breadth of market indicator is used to gauge the number of stocks advancing and declining for the day.'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day.
Advances and declines are calculated from the previous days closing results. However, a market that is significantly on one side either in terms of advances or declines may have a hard time reversing out of that direction the next day.
What are the instruments traded in the stock markets?
There are various types of instruments in the stock market. They include Shares, Mutual Funds, IPO's, Futures and Options.
Why would I choose stocks?
Stocks are one of the most effective tools for building wealth, as stocks are a share of ownership of a company. You thus have great potential to receive monetary benefits when you own stock shares. Owning stocks of fundamentally strong companies simply lets your money work harder for you since they appreciate in value over a period of time while also offering rich dividends on a periodic basis.
How can I track stocks?
Tracking stocks lets you gain from the best stock opportunities available in the market while also letting you know how the stocks in your portfolio are performing. Our website is designed to empower you with all the tools you might require to invest wisely. The portfolio tracker section of the website in which you have an account, lets you regularly monitor your portfolio.
Where do I buy stock?
Stock trading happens on Stock Exchanges, but one cannot individually buy stocks off the exchange. To do so, you need to find a suitable broker who will understand your needs and buy stocks on your behalf. You can think of them as agents who will conduct transactions for you without actually owning any of the securities themselves. In exchange for facilitating or executing a trade, brokers will charge you a commission.
What are some of the orders I can place?
You can place different orders such as Market orders, Limit Orders, Stop Loss Orders, Cover Orders, and Normal Orders etc.
What is a Market Order?
A market order is an order to buy or sell a stock at the current market price. It signals your broker to execute the order at the best price currently available. However, as market prices keep changing, a market order cannot guarantee a specific price.
What is a Limit Order?
To avoid buying or selling a stock at a price higher or lower than you wanted, you need to place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. You could use a limit order when you want to set the price of the stock. In other words, you want to sell/buy particular scrip at a price other than the Current Market Price. However, a limit order guarantees a price but cannot guarantee execution of the trade, because the scrip might not reach the desired price on that particular trading day owing to Market related factors.
What is a Stop Loss Order?
A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price Trigger Price. Sometimes the market movements defy your expectations. Such market reversals often result in loss bearing transactions. The stop loss trigger price is your defense mechanism- an amount at which you will be able to sustain yourself against such unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. Naturally, this price cannot be more than the price of the stock you are trading.
For eg. If you bought a stock at Rs 10, you place a stop loss order with your broker to sell it, if it reaches Rs 8. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.
Good-till-canceled (GTC) or Day Order Or Normal Orders
Day orders are orders given to your broker that hold true only during the period of the trading day for which the orders have been given. If the order has not been executed on that day, it will not be passed on to the next trading day. Thus they are orders that are only "good until it is canceled" or "good for the day."
For eg. You place a stop loss order with your broker to sell a stock, if its price reaches to level X. Now, if it does not reach limit X, your broker will not sell the stock. However, the stop loss order given to your broker will not hold true for the next day. For, even if the stock reaches level X on Day 2, he will not execute the trade till you instruct him to do so again.
What are advances and declines?
Advances and declines give you an indication of how the overall market has performed. You get a good overview of the general market direction.
As the name suggest ' advances' will inform you how the market has progressed.'Declines' signal if the market has not performed as per expectations. The Advance-Decline ratio is a technical Analysis tool that indicates market movement. Advance Decline ratio is calculated using the formula:
Number of stocks that advanced/number of stocks that declined.
Generally, it is seen that in Bullish markets the number of stocks that advance is more than the ones that declined and the converse can be said to hold true in a bearish market. The breadth of market indicator is used to gauge the number of stocks advancing and declining for the day.'Remains unchanged' is a term used if the market scenario shows no advancement or decline compared to the earlier day.
Advances and declines are calculated from the previous days closing results. However, a market that is significantly on one side either in terms of advances or declines may have a hard time reversing out of that direction the next day.
Saturday, September 19, 2009
Chapter 2: Getting Familiar with Market Related Concepts
Once you enter the Stock market, you will frequently come across terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks and Large-Cap Stocks. In this section you will get an understanding of what these terms mean in the context of stock markets.
Let us first understand MARKET CAPITALIZATION
MARKET CAPITALIZATION
"Cap" is short for capitalization, the market value of a stock, indicating the size of the stock available.
Calculating a stock's capitalization
Market Capitalization = Market Price of the stock x The number of the stock's outstanding* shares
*Outstanding means the shares held by the public
For example, if Stock A has a Current Market Price of Rs 20 per share, and there are 1,00,000 shares in the hands of public investors, then Stock A has a capitalization of 20,00,000.
The company's capitalization is an effective parameter to group corporate stocks.
In the US, mid-cap shares are those stocks that have a market capitalization ranging from Rs 9,000 crore to Rs 45,000 crore. In India, these shares would be classified as large-cap shares. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in that particular country. The total market capitalization of US markets is $15 trillion. In India, the market capitalization of listed companies is around $600bn.
SMALL-CAP STOCKS
The stocks of small companies that have the potential to grow rapidly are classified as small-cap stocks. These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. Generally companies that have a market Capitalization in the range of upto 250 Corores are small cap stocks.
As many of these companies are relatively new, it is difficult to predict how they will perform in the market. Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring.
On the other hand, the stocks of these companies tend to be volatile and may decline dramatically.
Most Initial Public Offerings are for small-cap companies, although these days large companies do tend to source the capital markets for expansion plans. Aggressive mutual funds are also enthusiastic about adding small-cap stocks in their portfolios. Because they have the advantage of being highly growth oriented, small-cap stocks can forego paying dividends to investors, which enables the profits earned to be reinvested for future growth.
MID-CAP STOCKS
Mid-cap stocks are typically stocks of medium-sized companies. These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Generally companies that have a market Capitalization in the range of 250-4000 crores are mid cap stocks.
Mid-cap stocks also include baby blue chips; companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack their size. These stocks tend to grow well over the long term.
LARGE-CAP STOCKS
Stocks of the largest companies (many being blue chip firms) in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities.
The sheer volume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time. Investors, however gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks while also ensuring the long-term preservation of their capital.
What drives bull and bear markets?
The uses of "Bull" and "bear" to describe markets have been derived from the manner in which each of these animals attacks its opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a Bull market. And if the trend is down, it is considered a Bear market.
The supply and demand for securities largely determine whether the market is in the Bull or Bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.
How can you qualify the market as bull or bear?
Bull and Bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements, lasting days, as they may only indicate corrections or short-lived movements.
What are stock symbols?
A stock symbol is a unique code that is given to all participating companies in securities trading. Once you know the stock code/symbol of the company (sometimes referred to as a ticker symbol) you can easily obtain information about the company. This is important, as a wise investor will always do a financial analysis before purchasing a stock.
For ex- tcs stands for Tata Consultancy Services. Infy stands for Infosys
Note: - While placing orders with Kotaksecurities.com you need to type in just the first three alphabets of the company and our site will display all possible combinations, from which you may select the stock that you wish to invest in.
What are rolling settlements?
Let us understand Rolling Settlements with an example.Supposing your friend agrees to buy a book for you from a bookshop, you will have to pay him for it eventually. Similarly, after you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is just the process whereby payment is made by all those who have made purchases and shares are delivered by all those who have made sales.A Rolling Settlement implies that all trades have to settle by the end of the day. Hence the entire transaction, where the buyer has to make payments for securities purchased and seller has to deliver the securities sold, have to complete in a day.
In India, we have adopted the T+2 settlements cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 2 working days, when funds pay in or securities pay out takes place.
'T+2" here, refers to Today + 2 working days.
For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.
Hence, a settlement cycle is the period within which the settlement is made.For arriving at the settlement day, all intervening holidays -- bank holidays, Exchange holidays, Saturdays and Sundays are excluded. From a settlement cycle taking a week, the Exchanges have now moved to a faster and efficient mode of settling trades within T+2 Days.
What is the meaning of the term selling short?
An investor sells short when he anticipates that the price of the shorted stock will fall from the existing price. He borrows a share and sells it. As the share price dips, he buys the same share at a lower price and returns it back, while pocketing a profit in the bargain. An adage that describes short selling is ("selling high and buying low'.) Selling Short (Shorting) is an effective tool for traders as it allows us to profit from declining stock and index prices.
A definition of "Selling Short"
Selling short implies establishing a market position by selling a security one does not own, in anticipation that the price of the security will fall.
For eg. Trader anticipates stock ABC will decline.
Trader enters order to SELL 2000 shares of ABC at market price and later buys the 2000 shares of ABC at a much-reduced price. The difference in the prices of the selling and buying is his profit. However if the share prices increase after he has sold at a reduced price earlier, then he ends up with a loss. Hence Shortselling is something that is speculatory to a certain extent and is done in anticipation of quick profits.
What is margin trading?
Margin trading is trading with borrowed funds/securities. It is almost like buying securities on credit.
Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities it also subjects you to a number of unique risks such as interest payments charged for the borrowed money.
What are Circuit filters & trading bands?
In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters. Under this, Sebi has specified the fixed price bands for different securities within which they can move on a given day.
Recently, in a bid to check the rampant price manipulation in small-cap stocks (known as penny stocks), stock exchanges reduced the circuit filter maximum permissible rise in prices in a day to 5 per cent. Earlier, stocks were allowed to rise up to 20 per cent in a session.
The NSE has also reduced the circuit filter in all the stocks, which are traded on a trade-to-trade basis to 5 per cent. As the closing price on BSE and NSE can be significantly different, this means that the circuit limit for a share on BSE and NSE can be different.
What is Badla financing?
As the term itself signifies, 'Badla' means 'something in return'. Badla is the charge, which the investor pays for carrying forward his position. This hedge tool lets the investor take a position in a scrip without actually taking delivery of the stock, thus carrying forward his position on the payment of small margin. The badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai and serves 3 needs of any stock exchange:
A) Quasi-hedging:If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share.
B) Stock lending:If a stock lender wishes to short sell without owning the underlying security, he employs the badla system and lends his stock for a charge.
C) Financing mechanism:If he wishes to buy the share without paying the full consideration, the financier steps into the CF system and provides the finance to fund the purchase The scheme is known as "Vyaj Badla" or "Badla" financing.
For example, X has bought a stock and does not have the funds to take delivery he can arrange a financier through this carrying-forward mechanism. The financier would make the payment at the prevailing market rate and would take delivery of the shares on X's behalf. X will only have to pay interest on the funds he has borrowed. Vis-à-vis, if you have a sale position and do not have the shares to deliver, you can still arrange through the stock exchange for a lender of securities. An investor can either take the services of a badla financier or can assume the role of a badla financier and lend either his money or securities.
How the Badla system works?
On every Saturday, a CF system session is held at the BSE. The scrips in which there are outstanding positions are listed along with the quantities outstanding. The CF rates are determined depending on the demand and supply of money. There is more demand for funds when the market is over bought, and consequently the CF rates tend to be high.
However, when the market is oversold the CF rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same.
The scrips that have been put in the Carry Forward list are all 'A' group scrips, which have a good dividend paying record, high liquidity and are actively traded. The scrips are not specified in advance, as it then gets difficult to get maximum return. The Trade Guarantee Fund of BSE guarantees all transactions; hence, there is virtually no risk to the badla financier except for broker defaults. Even if the broker through whom you have invested money in badla financing defaults, the title of the shares would remain with you and the shares would be lying with the "Clearing house". However, the risk of volatility of the scrip will have to be borne by the investor.
What is Insider Trading?
In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading is 'the trading of shares based on knowledge not available to the rest of the world.
Insider trading has 2 connotations.
Corporate personnel of a company buying and selling stock in their own company. When corporate insiders trade in their own securities, they must report their trades to the exchange. Illegal insider trading refers to buying or selling a security after receiving 'tips' of confidential securities information. Thus it is considered as a breach of confidence while in possession of non-public information about the company.
Examples of insider trading
· Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
· Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
· Government employees who learned of such information because of their employment by the government; and
· Other persons who misappropriated, and took advantage of, confidential information from their employers.
Market Risk
This is the risk of investing in the stock market in general. It refers to a chance that a securities value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affecting by market risk.
Industry Risk
This is risk that affects all companies in a certain industry. For eg. Utility companies, are often viewed as relatively low in risk because the utility industry is stable and operates in a predictable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. The dotcom bubble burst in the 90s affected the valuation of all stocks in that industry.
All stocks within an industry are subject to industry risk.
Regulatory Risk
Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations, which will dramatically affect a business.
Business Risk
These are the risks unique to an individual company. It refers to the uncertainty regarding the organizations ability to perform business or provide service Products, strategies, management, labor force, market share, etc.,Which are among the key factors investors consider in evaluating the value of a specific company.
Once you enter the Stock market, you will frequently come across terms like Market Capitalization, Small-Cap Stocks, Mid-Cap Stocks and Large-Cap Stocks. In this section you will get an understanding of what these terms mean in the context of stock markets.
Let us first understand MARKET CAPITALIZATION
MARKET CAPITALIZATION
"Cap" is short for capitalization, the market value of a stock, indicating the size of the stock available.
Calculating a stock's capitalization
Market Capitalization = Market Price of the stock x The number of the stock's outstanding* shares
*Outstanding means the shares held by the public
For example, if Stock A has a Current Market Price of Rs 20 per share, and there are 1,00,000 shares in the hands of public investors, then Stock A has a capitalization of 20,00,000.
The company's capitalization is an effective parameter to group corporate stocks.
In the US, mid-cap shares are those stocks that have a market capitalization ranging from Rs 9,000 crore to Rs 45,000 crore. In India, these shares would be classified as large-cap shares. Thus, classification of shares into large-cap, mid-cap, small-cap is made on the basis of the relative size of the market in that particular country. The total market capitalization of US markets is $15 trillion. In India, the market capitalization of listed companies is around $600bn.
SMALL-CAP STOCKS
The stocks of small companies that have the potential to grow rapidly are classified as small-cap stocks. These stocks are the best option for an investor who wishes to generate significant gains in the long run; as long he does not require current dividends and can withstand price volatility. Generally companies that have a market Capitalization in the range of upto 250 Corores are small cap stocks.
As many of these companies are relatively new, it is difficult to predict how they will perform in the market. Being small enterprises, growth spurts dramatically affect their values and revenues, sending prices soaring.
On the other hand, the stocks of these companies tend to be volatile and may decline dramatically.
Most Initial Public Offerings are for small-cap companies, although these days large companies do tend to source the capital markets for expansion plans. Aggressive mutual funds are also enthusiastic about adding small-cap stocks in their portfolios. Because they have the advantage of being highly growth oriented, small-cap stocks can forego paying dividends to investors, which enables the profits earned to be reinvested for future growth.
MID-CAP STOCKS
Mid-cap stocks are typically stocks of medium-sized companies. These are stocks of well-known companies, recognized as seasoned players in the market. They offer you the twin advantages of acquiring stocks with good growth potential as well as the stability of a larger company. Generally companies that have a market Capitalization in the range of 250-4000 crores are mid cap stocks.
Mid-cap stocks also include baby blue chips; companies that show steady growth backed by a good track record. They are like blue-chip stocks (which are large-cap stocks) but lack their size. These stocks tend to grow well over the long term.
LARGE-CAP STOCKS
Stocks of the largest companies (many being blue chip firms) in the market such as Tata, Reliance, ICICI are classified as large-cap stocks. Being established enterprises, they have at their disposal large reserves of cash to exploit new business opportunities.
The sheer volume of large-cap stocks does not let them grow as rapidly as smaller capitalized companies and the smaller stocks tend to outperform them over time. Investors, however gain the advantages of reaping relatively higher dividends compared to small- and mid-cap stocks while also ensuring the long-term preservation of their capital.
What drives bull and bear markets?
The uses of "Bull" and "bear" to describe markets have been derived from the manner in which each of these animals attacks its opponents. A bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a Bull market. And if the trend is down, it is considered a Bear market.
The supply and demand for securities largely determine whether the market is in the Bull or Bear phase. Forces like investor psychology, government involvement in the economy and changes in economic activity also drive the market up or down. These combine to make investors bid higher or lower prices for stocks.
How can you qualify the market as bull or bear?
Bull and Bear markets signify relatively long-term movements of significant proportion. Hence, these runs can be gauged only when the market has been moving in its current direction (by about 20% of its value) for a sustained period. One does not consider small, short-term movements, lasting days, as they may only indicate corrections or short-lived movements.
What are stock symbols?
A stock symbol is a unique code that is given to all participating companies in securities trading. Once you know the stock code/symbol of the company (sometimes referred to as a ticker symbol) you can easily obtain information about the company. This is important, as a wise investor will always do a financial analysis before purchasing a stock.
For ex- tcs stands for Tata Consultancy Services. Infy stands for Infosys
Note: - While placing orders with Kotaksecurities.com you need to type in just the first three alphabets of the company and our site will display all possible combinations, from which you may select the stock that you wish to invest in.
What are rolling settlements?
Let us understand Rolling Settlements with an example.Supposing your friend agrees to buy a book for you from a bookshop, you will have to pay him for it eventually. Similarly, after you have bought or sold shares through your broker, the trade has to be settled. Meaning, the buyer has to receive his shares and the seller has to receive his money. Settlement is just the process whereby payment is made by all those who have made purchases and shares are delivered by all those who have made sales.A Rolling Settlement implies that all trades have to settle by the end of the day. Hence the entire transaction, where the buyer has to make payments for securities purchased and seller has to deliver the securities sold, have to complete in a day.
In India, we have adopted the T+2 settlements cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 2 working days, when funds pay in or securities pay out takes place.
'T+2" here, refers to Today + 2 working days.
For instance, trades taking place on Monday are settled on Wednesday, Tuesday's trades settled on Thursday and so on.
Hence, a settlement cycle is the period within which the settlement is made.For arriving at the settlement day, all intervening holidays -- bank holidays, Exchange holidays, Saturdays and Sundays are excluded. From a settlement cycle taking a week, the Exchanges have now moved to a faster and efficient mode of settling trades within T+2 Days.
What is the meaning of the term selling short?
An investor sells short when he anticipates that the price of the shorted stock will fall from the existing price. He borrows a share and sells it. As the share price dips, he buys the same share at a lower price and returns it back, while pocketing a profit in the bargain. An adage that describes short selling is ("selling high and buying low'.) Selling Short (Shorting) is an effective tool for traders as it allows us to profit from declining stock and index prices.
A definition of "Selling Short"
Selling short implies establishing a market position by selling a security one does not own, in anticipation that the price of the security will fall.
For eg. Trader anticipates stock ABC will decline.
Trader enters order to SELL 2000 shares of ABC at market price and later buys the 2000 shares of ABC at a much-reduced price. The difference in the prices of the selling and buying is his profit. However if the share prices increase after he has sold at a reduced price earlier, then he ends up with a loss. Hence Shortselling is something that is speculatory to a certain extent and is done in anticipation of quick profits.
What is margin trading?
Margin trading is trading with borrowed funds/securities. It is almost like buying securities on credit.
Margin trading can lead to greater returns, but can also be very risky. While it lets you actively seize market opportunities it also subjects you to a number of unique risks such as interest payments charged for the borrowed money.
What are Circuit filters & trading bands?
In order to check the volatility of shares, SEBI has come up with the concept of Circuit Filters. Under this, Sebi has specified the fixed price bands for different securities within which they can move on a given day.
Recently, in a bid to check the rampant price manipulation in small-cap stocks (known as penny stocks), stock exchanges reduced the circuit filter maximum permissible rise in prices in a day to 5 per cent. Earlier, stocks were allowed to rise up to 20 per cent in a session.
The NSE has also reduced the circuit filter in all the stocks, which are traded on a trade-to-trade basis to 5 per cent. As the closing price on BSE and NSE can be significantly different, this means that the circuit limit for a share on BSE and NSE can be different.
What is Badla financing?
As the term itself signifies, 'Badla' means 'something in return'. Badla is the charge, which the investor pays for carrying forward his position. This hedge tool lets the investor take a position in a scrip without actually taking delivery of the stock, thus carrying forward his position on the payment of small margin. The badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai and serves 3 needs of any stock exchange:
A) Quasi-hedging:If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible volatility of the share.
B) Stock lending:If a stock lender wishes to short sell without owning the underlying security, he employs the badla system and lends his stock for a charge.
C) Financing mechanism:If he wishes to buy the share without paying the full consideration, the financier steps into the CF system and provides the finance to fund the purchase The scheme is known as "Vyaj Badla" or "Badla" financing.
For example, X has bought a stock and does not have the funds to take delivery he can arrange a financier through this carrying-forward mechanism. The financier would make the payment at the prevailing market rate and would take delivery of the shares on X's behalf. X will only have to pay interest on the funds he has borrowed. Vis-à-vis, if you have a sale position and do not have the shares to deliver, you can still arrange through the stock exchange for a lender of securities. An investor can either take the services of a badla financier or can assume the role of a badla financier and lend either his money or securities.
How the Badla system works?
On every Saturday, a CF system session is held at the BSE. The scrips in which there are outstanding positions are listed along with the quantities outstanding. The CF rates are determined depending on the demand and supply of money. There is more demand for funds when the market is over bought, and consequently the CF rates tend to be high.
However, when the market is oversold the CF rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same.
The scrips that have been put in the Carry Forward list are all 'A' group scrips, which have a good dividend paying record, high liquidity and are actively traded. The scrips are not specified in advance, as it then gets difficult to get maximum return. The Trade Guarantee Fund of BSE guarantees all transactions; hence, there is virtually no risk to the badla financier except for broker defaults. Even if the broker through whom you have invested money in badla financing defaults, the title of the shares would remain with you and the shares would be lying with the "Clearing house". However, the risk of volatility of the scrip will have to be borne by the investor.
What is Insider Trading?
In your dealings with the stock world, you will often come across the term 'insider trading'. In simple words, the meaning of insider trading is 'the trading of shares based on knowledge not available to the rest of the world.
Insider trading has 2 connotations.
Corporate personnel of a company buying and selling stock in their own company. When corporate insiders trade in their own securities, they must report their trades to the exchange. Illegal insider trading refers to buying or selling a security after receiving 'tips' of confidential securities information. Thus it is considered as a breach of confidence while in possession of non-public information about the company.
Examples of insider trading
· Corporate officers, directors, and employees who traded the corporation's securities after learning of significant, confidential corporate developments;
· Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded;
· Government employees who learned of such information because of their employment by the government; and
· Other persons who misappropriated, and took advantage of, confidential information from their employers.
Market Risk
This is the risk of investing in the stock market in general. It refers to a chance that a securities value might decline. Although a particular company may be doing poorly, the value of its stock can go up because the stock market value is collectively going up. Conversely, your company may be doing very well, but the value of the stock might drop because of negative factors inflation, rising interest rates, political instability etc that are effecting the whole market. All stocks are affecting by market risk.
Industry Risk
This is risk that affects all companies in a certain industry. For eg. Utility companies, are often viewed as relatively low in risk because the utility industry is stable and operates in a predictable environment with relatively little change. In contrast, internet and other technology industries are usually viewed as high in risk because the industry is changing so quickly and unpredictably. The dotcom bubble burst in the 90s affected the valuation of all stocks in that industry.
All stocks within an industry are subject to industry risk.
Regulatory Risk
Virtually every company is subject to some sort of regulation. It refers to the risk that the government will pass new laws or implement new regulations, which will dramatically affect a business.
Business Risk
These are the risks unique to an individual company. It refers to the uncertainty regarding the organizations ability to perform business or provide service Products, strategies, management, labor force, market share, etc.,Which are among the key factors investors consider in evaluating the value of a specific company.
Thursday, September 17, 2009
Stock Market Fundamentals
Section 1: EQUITY
Chapter 1: Stock Market Fundamentals
What are the basics of financial instruments?
Let us understand the two fundamental types of investments, namely bonds and stocks with an example. Eg. Imagine you want to start your own grocery store. You will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond (IOU) by lending money to your company.
Thus a bond is a means of investing money by lending money to others. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates).
There are several Pro's and Con's to investing in bonds
Pro's
Ø Bonds give higher interest rates compared to short-term investments.
Ø Bonds are less risky when compared to stocks.
Con's
Ø Selling bonds before they're due, may result in a loss, known as a discount.
Ø If the issuer of the bond declares bankruptcy; you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.
Now, let us continue with the same example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company.
Thus, to explain stocks:Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends. Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings.
This example covers the 2 major types of investments: bonds and stocks
Rewinding back to the Stock Market Trading history of India
In the earlier days, stockbrokers kept scouting for 'natural' sites to conduct their trading activities, shifting from one set of Banyan trees to another. As the number of brokers kept increasing and the streets kept overflowing, they simply had no choice but to relocate from one place to another. Finally in 1854, trading in India found a permanent address, Dalal Street, now synonymous with the oldest stock Exchange in Asia, The Bombay Stock Exchange. With a heritage that goes back to over 130 years, BSE was the first stock exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The exchange has played a pioneering role in the development of the Indian Securities Market - one of the oldest in the world. After India gained independence, the BSE formulated a comprehensive set of guidelines adopted by the Indian Capital markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian Economy and finance is measured. The trading scenario in India then underwent a paradigm shift in 1993, when NSE or National Stock Exchange was recognized as a Stock Exchange. Within just a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment. Today, the Indian Securities market successfully keeps pace with its global counterparts through the use of modern day technology.
Stock market milestones
1875 BSE established as 'the native Share and Stock Brokers Association'
1956 BSE became the first stock exchange to be recognized under the Securities Contract Act.
1993 NSE recognized as a stock exchange.
2000 Commencement of Internet trading at NSE.
2000 NSE commences derivatives trading (Index futures)
2001 BSE commences derivatives trading
Primary and Secondary Markets
Primary Market
An Issuer/Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor (buyer). If the Issuer is selling securities for the first time, these are referred to as initial public offerings (IPO). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital.Eg. If the promoters of a private company, say XYZ makes its shares available to investors, company XYZ is said to have entered the primary market.
Secondary Markets
Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI).For eg. If one of the investors who had invested in the shares of company XYZ sold it to another at an agreed upon price, a Secondary Market transaction is said to have taken place. Normally investors transact in securities using an intermediary such as a broker who facilitates the process
Introduction to SEBI
The Government of India established the Securities and Exchange Board of India, the regulatory body of stock markets in 1988. Within a short period of time, SEBI became an autonomous body through the SEBI Act passed in 1992, with defined responsibilities that cover both development & regulation of the market while also giving the board independent powers. Comprehensive regulatory measures introduced by SEBI ensured that end investors benefited from safe and transparent dealings in securities.
The basic objectives of the Board were identified as:
To protect the interests of investors in securities
To promote the development of Securities Market
To regulate the Securities Market
SEBI has contributed to the improvement of the Securities Market by introducing measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders (including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc) transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD has been a real landmark.
What are Stock Exchanges?
A Stock Exchange is a place that provides facilities to stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier Stock Exchanges are the Bombay Stock Exchange and the National Stock Exchange.
Chapter 1: Stock Market Fundamentals
What are the basics of financial instruments?
Let us understand the two fundamental types of investments, namely bonds and stocks with an example. Eg. Imagine you want to start your own grocery store. You will need a capital amount to get started. You acquire the requisite funds from a friend and write down a receipt of this loan ' I owe you Rs 1, 00,000 and will repay you the principal loan amount plus 5% interest'. Your friend has just bought a bond (IOU) by lending money to your company.
Thus a bond is a means of investing money by lending money to others. When you invest in bonds, the bond you buy will show the amount of money being borrowed (face value), the interest rate (coupon rate or yield) that the borrower has to pay, the interest payments (coupon payments), and the deadline for paying the money back (maturity dates).
There are several Pro's and Con's to investing in bonds
Pro's
Ø Bonds give higher interest rates compared to short-term investments.
Ø Bonds are less risky when compared to stocks.
Con's
Ø Selling bonds before they're due, may result in a loss, known as a discount.
Ø If the issuer of the bond declares bankruptcy; you may lose your money. Hence you must critically evaluate the credibility of the issuer of the bond, ensuring that he has the capability to repay the bond amount.
Now, let us continue with the same example. To accrue more capital for your new grocery store, you sell half your company to your brother for Rs 50,000. You put this transaction in writing 'my new company will issue 100 shares of stock. My brother will buy 50 shares for Rs 50,000.' Thus, your brother has just bought 50% of the shares of stock of your company.
Thus, to explain stocks:Stocks, also known as Equities, are shares in a company. It is the certificate of ownership of a corporation. In simple terms, when you invest in a company's stock or buy its shares, you own part of a company. Thus, as a stockholder, you share a portion of the profit the company may make, as well as a portion of the loss a company may take. As the company keeps doing better, your stocks will increase in value and yield higher dividends. Dividend: A sum of money, determined by a company's directors, paid to shareholders of a corporation out of its earnings.
This example covers the 2 major types of investments: bonds and stocks
Rewinding back to the Stock Market Trading history of India
In the earlier days, stockbrokers kept scouting for 'natural' sites to conduct their trading activities, shifting from one set of Banyan trees to another. As the number of brokers kept increasing and the streets kept overflowing, they simply had no choice but to relocate from one place to another. Finally in 1854, trading in India found a permanent address, Dalal Street, now synonymous with the oldest stock Exchange in Asia, The Bombay Stock Exchange. With a heritage that goes back to over 130 years, BSE was the first stock exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The exchange has played a pioneering role in the development of the Indian Securities Market - one of the oldest in the world. After India gained independence, the BSE formulated a comprehensive set of guidelines adopted by the Indian Capital markets. Even today, the BSE Sensex remains one of the parameters against which the robustness of the Indian Economy and finance is measured. The trading scenario in India then underwent a paradigm shift in 1993, when NSE or National Stock Exchange was recognized as a Stock Exchange. Within just a few years, trading on both the exchanges shifted from an open outcry system to an automated trading environment. Today, the Indian Securities market successfully keeps pace with its global counterparts through the use of modern day technology.
Stock market milestones
1875 BSE established as 'the native Share and Stock Brokers Association'
1956 BSE became the first stock exchange to be recognized under the Securities Contract Act.
1993 NSE recognized as a stock exchange.
2000 Commencement of Internet trading at NSE.
2000 NSE commences derivatives trading (Index futures)
2001 BSE commences derivatives trading
Primary and Secondary Markets
Primary Market
An Issuer/Company enters the Primary markets to raise capital. They issues new securities in Exchange for cash from an investor (buyer). If the Issuer is selling securities for the first time, these are referred to as initial public offerings (IPO). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital.Eg. If the promoters of a private company, say XYZ makes its shares available to investors, company XYZ is said to have entered the primary market.
Secondary Markets
Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI).For eg. If one of the investors who had invested in the shares of company XYZ sold it to another at an agreed upon price, a Secondary Market transaction is said to have taken place. Normally investors transact in securities using an intermediary such as a broker who facilitates the process
Introduction to SEBI
The Government of India established the Securities and Exchange Board of India, the regulatory body of stock markets in 1988. Within a short period of time, SEBI became an autonomous body through the SEBI Act passed in 1992, with defined responsibilities that cover both development & regulation of the market while also giving the board independent powers. Comprehensive regulatory measures introduced by SEBI ensured that end investors benefited from safe and transparent dealings in securities.
The basic objectives of the Board were identified as:
To protect the interests of investors in securities
To promote the development of Securities Market
To regulate the Securities Market
SEBI has contributed to the improvement of the Securities Market by introducing measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders (including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc) transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD has been a real landmark.
What are Stock Exchanges?
A Stock Exchange is a place that provides facilities to stock brokers to trade company stocks and other securities. A stock may be bought or sold only if it is listed on an exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier Stock Exchanges are the Bombay Stock Exchange and the National Stock Exchange.
Friday, September 11, 2009
Facts about insurance
Insurance is must for everyone because it will help financially to the dependants of the insured person after death of the insured person. Insurance means only insurance but not the savings. Maximum policies offering by insurance companies having both the insurance and savings. The reason behind this is to improve their business turnover. The returns for an average policy holder from these policies works out a less than 8% interest on maturity.
A wise person takes term policy for insurance. For savings he/she invests money in the financial instuments like mutual funds SIP(i.e. Systematic Investment Plan), bonds, banks' fixed deposits, postal recurring deposits, stocks, buying land or house with the help of loan etc.
Moreover from these instruments better returns can be enjoyed and withdraw money very easily for urgent needs.
A wise person takes term policy for insurance. For savings he/she invests money in the financial instuments like mutual funds SIP(i.e. Systematic Investment Plan), bonds, banks' fixed deposits, postal recurring deposits, stocks, buying land or house with the help of loan etc.
Moreover from these instruments better returns can be enjoyed and withdraw money very easily for urgent needs.
Wednesday, September 9, 2009
PEG Ratio in Stocks
Learning about stock market investing is a never-ending quest. There are several metrics that an investor can look at while selecting stocks. In this article, we discuss one of the many parameters that could help in making better investment decisions – Price-earnings to growth ratio (PEG ratio).
It can be called a cousin of the price-to-earnings (P/E) ratio which is perhaps the most popular yardstick used to value stocks globally. The PEG ratio is also another method used to evaluate the attractiveness of a stock. It is calculated by dividing a company's P/E ratio by its expected growth rate.
In his book 'One up on Wall Street', the star manager of the Fidelity Magellan Fund, Peter Lynch says, "In a fully and fairly valued situation, a growth stock's price-to-earnings ratio should equal the percentage of the growth rate of its company's earnings per share".
It therefore follows that a P/E ratio should be more or less equal to a company's earnings growth rate over the long term. It is rightly said that valuing a stock purely on the basis of historical earnings is not the right way. And given that the process of investing must be done on a forward-looking basis, the PEG ratio adequately factors this into its analysis.
Let us take up an example. Company XYZ is expected to grow its earnings by around 15% to 20% in FY10. The company’s stock is currently trading at a P/E ratio of 22 times its trailing twelve month earnings. On dividing 22 (P/E ratio) by 20 (assumed growth in earnings), the ratio is slightly above 1. This may mean that the stock is fairly valued. On the other hand, if a P/E of a company is 10 and if the expected growth rate in earnings is 15%, the resultant PEG of 0.67 could mean that the stock is attractively valued. Thus, the greater the PEG ratio than a value of 1, the more expensive the stock and vice versa.
However, one must also take into account the industry in which the company operates. For example, the capital goods industry is a high growth industry with strong visibility in earnings over the medium term. It should also be noted that the top-tier companies from any industry may trade at a premium to the overall market.
One of the biggest drawbacks of PEG is with respect to the surety of the growth in earnings in the long-term. What if the expected earnings growth does not materialise? Also, one cannot use PEG for all sectors. Take the case of the steel sector. The industry is cyclical in nature. In times of a downturn, the P/E ratio gets inflated due to lower earnings. As a result, the PEG ratio may not accurately reflect as to whether the investment is attractive or not, particularly if the markets expect the company's earnings to remain subdued, going forward. Similarly, in an upturn, the P/E ratio tends to be lower due to considerably higher earnings and accordingly, the PEG ratio may seem lower and the stock attractive despite the fact that earnings may be headed downwards.
Therefore, it must be understood that the PEG ratio is a good way of comparing stocks in similar or growth-oriented industries, rather than across industries. Also, using only the PEG ratio or the P/E ratio would not be appropriate while evaluating an investment opportunity. One must also look at other ratios, such as return on equity, return on assets, interest coverage, price-to-sales, price-to-book, free cash flows, dividend-paying record and operating margins in order to get a more holistic view of the company.
It can be called a cousin of the price-to-earnings (P/E) ratio which is perhaps the most popular yardstick used to value stocks globally. The PEG ratio is also another method used to evaluate the attractiveness of a stock. It is calculated by dividing a company's P/E ratio by its expected growth rate.
In his book 'One up on Wall Street', the star manager of the Fidelity Magellan Fund, Peter Lynch says, "In a fully and fairly valued situation, a growth stock's price-to-earnings ratio should equal the percentage of the growth rate of its company's earnings per share".
It therefore follows that a P/E ratio should be more or less equal to a company's earnings growth rate over the long term. It is rightly said that valuing a stock purely on the basis of historical earnings is not the right way. And given that the process of investing must be done on a forward-looking basis, the PEG ratio adequately factors this into its analysis.
Let us take up an example. Company XYZ is expected to grow its earnings by around 15% to 20% in FY10. The company’s stock is currently trading at a P/E ratio of 22 times its trailing twelve month earnings. On dividing 22 (P/E ratio) by 20 (assumed growth in earnings), the ratio is slightly above 1. This may mean that the stock is fairly valued. On the other hand, if a P/E of a company is 10 and if the expected growth rate in earnings is 15%, the resultant PEG of 0.67 could mean that the stock is attractively valued. Thus, the greater the PEG ratio than a value of 1, the more expensive the stock and vice versa.
However, one must also take into account the industry in which the company operates. For example, the capital goods industry is a high growth industry with strong visibility in earnings over the medium term. It should also be noted that the top-tier companies from any industry may trade at a premium to the overall market.
One of the biggest drawbacks of PEG is with respect to the surety of the growth in earnings in the long-term. What if the expected earnings growth does not materialise? Also, one cannot use PEG for all sectors. Take the case of the steel sector. The industry is cyclical in nature. In times of a downturn, the P/E ratio gets inflated due to lower earnings. As a result, the PEG ratio may not accurately reflect as to whether the investment is attractive or not, particularly if the markets expect the company's earnings to remain subdued, going forward. Similarly, in an upturn, the P/E ratio tends to be lower due to considerably higher earnings and accordingly, the PEG ratio may seem lower and the stock attractive despite the fact that earnings may be headed downwards.
Therefore, it must be understood that the PEG ratio is a good way of comparing stocks in similar or growth-oriented industries, rather than across industries. Also, using only the PEG ratio or the P/E ratio would not be appropriate while evaluating an investment opportunity. One must also look at other ratios, such as return on equity, return on assets, interest coverage, price-to-sales, price-to-book, free cash flows, dividend-paying record and operating margins in order to get a more holistic view of the company.
Sunday, September 6, 2009
7secrets of TRUE financial success
I am a true labourer; I earn that I eat, get that I wear; owe no man hate, envy no man's happiness; glad of other men's good, content with my harm. -- Shakespeare, As You like It.
We do not know any magic formulae for making a quick fortune. Not only do we not know any of them, we would advise you to stay away from any scheme which is touted as an instant-fortune one.
The only real formula for prosperity is to work hard, save regularly and invest wisely. It is a long-drawn process; but the most enduring one.
If you aim at too high a profit, you may tend to take very risky -- even speculative -- decisions about investments, and go astray. Like Harshad Mehta, who said in early 1992: "I have come out of nowhere and I don't mind going back there."
In less than six months, his words proved to have been prophetic. Make it always a principle not to aim for very high returns; always aim for reasonable ones. A reasonable return, under the present circumstance, is 10 per cent to 12 per cent per year.
Whenever inflation is down, interest rates also decline. At such times, your expectations should also be revised downwards.
1. Be careful, particularly after 40
When you are around 30 to 35 years of age, you still having the time to start all over again if need be. You can afford to lose what you have and start from scratch. But once you cross 40, you should avoid major risks and mistakes.
This may sound conservative. It is. For it is better to be conservative in financial matters after 40 or so. We have seen many broken lives of 50, 55 or 60 years as a result of wrong investment decisions made after 40.
If you aim at peaceful retirement after all your commitments are over, such as the marriage and education of children, don't make risky investments. Every one need not invest in highly speculative shares all the time to make a lot of money.
2. Don't speculate, you'll lose in the end
Get over the 'quick rich' psychology and build a good balanced portfolio. Remember, you are an investor; you should not become a speculator. Most speculators end up miserably; you don't hear of them.
All the innocents who entered the market at the height of the boom of 1985-86 were massacred. So is the case of the guys who charged into the market during the 1992, 1994 and 1998 booms.
Very few speculators are successful in the long run. Don't be tempted that the other man is making more money through speculation. In all probability he will envy you after 10 years if you invest without getting involved in speculation.
Mark Twain said in 1894 that "there are two times in a man's life when he should not speculate: when he can't afford it and when he can."
In 1902, Andrew Carnegie warned that "there is scarcely an instance of a man, who has made a fortune by speculation and kept it." You should always remember what happened to Haridas Mundhra in 1957, and to Harshad Mehta in 1992.
Why does it happen that way? The answer is provided by Bernard Baruch in 1916: "A speculator is one who thinks and plans for a future event -- and acts before it occurs. And a speculator must always be right." How can anyone always be right?
While we are giving a warning, we know it is unlikely to always be heeded. As Lord Overstone said in 1846, "No warning can save a people determined to grow rich suddenly".
3. Maintain a balanced portfolio at all times
In order to minimize your overall risk, you must try to invest your money in different ways. Don't put all your eggs in one basket. You must aim at having a diversified portfolio of investments which balances the risk and the return on one side, and the liquidity and the profitability on the other.
If you go in search of very high speculative returns, your portfolio will be stuffed with junk bonds and junk stocks. Be careful of the quality of your portfolio.
4. Cultivate profitable hobbies
You may like to cultivate some profitable hobbies like collecting stamps, old and rare coins, and other items like antiques. A friend of ours has developed a hobby of collecting old locks; he has now over 100 such locks.
Since you are living in a crazy world, a rare piece of postal stamp may make your child a millionaire. The latest souvenir in the West is a piece of 'Berlin Wall' which was pulled down in 1990.
Whenever you go on tours, you may go round the antique shops and start accumulating genuine antiques. Since you are living in an ancient land, you will come across antiques everywhere.
5. Do not despair in times of financial difficulty
Life may not always be on an even keel. Some ups and downs are inevitable. When you are going through a bad financial patch, do not despair. Be patient and try hard to find solutions. If you become despondent, you will only add to the problems.
Maintain a positive attitude and try to convert your problems into opportunities. There will always be a silver lining to a dark cloud. Remember what the Quran says: 'God is with those who persevere.' You also know that by sheer perseverance the snail reached the Ark.
6. Invest in the best assets you have
The best assets you have are your family members: spouse, children and parents. Invest your time in them. This is the investment which will give you the best returns in the world.
There is no point in neglecting them in your anxiety to build a fortune for them. They need your attention, love and affection. Do not neglect them. Invest in them; not merely for them.
7. Giving is a great pleasure
The ultimate satisfaction comes not from the accumulation of money; but by giving it. You must have some cause dear to your heart. You can donate a small portion of your income to such charities and get a sense of satisfaction.
Money should be earned so that surplus can be donated. Life's objectives are clearly spelt out in a Sanskrit sloka:
Education should give humility, which, in turn, should give character. Through good character you can earn money. Use money for charity. That is how you can derive real pleasure.
Real progress comes in a steady and gradual manner. Patience and perseverance are the two major winning strategies to be followed.
Let us share a secret with you. Knowledge, however unique it may be, is worthless if it is not tempered by common sense. You may read many books such as this and acquire theoretical expertise in investment and tax planning. But you will never become a successful investor if you do not also apply your common sense which is the most valuable -- and tax-free -- asset you have.
One pound of learning requires ten pounds of common sense to apply it.
Let us conclude with ancient biblical wisdom:
Blessed is the man, who finds wisdom,The man who gains understanding,For she is more profitable than silverAnd yields better returns than gold.She is more precious than rubies;Nothing you desire can compare with her.Long life is in her right hand;In her left hand are riches and honour. -- (Proverbs 3:13-16)
We do not know any magic formulae for making a quick fortune. Not only do we not know any of them, we would advise you to stay away from any scheme which is touted as an instant-fortune one.
The only real formula for prosperity is to work hard, save regularly and invest wisely. It is a long-drawn process; but the most enduring one.
If you aim at too high a profit, you may tend to take very risky -- even speculative -- decisions about investments, and go astray. Like Harshad Mehta, who said in early 1992: "I have come out of nowhere and I don't mind going back there."
In less than six months, his words proved to have been prophetic. Make it always a principle not to aim for very high returns; always aim for reasonable ones. A reasonable return, under the present circumstance, is 10 per cent to 12 per cent per year.
Whenever inflation is down, interest rates also decline. At such times, your expectations should also be revised downwards.
1. Be careful, particularly after 40
When you are around 30 to 35 years of age, you still having the time to start all over again if need be. You can afford to lose what you have and start from scratch. But once you cross 40, you should avoid major risks and mistakes.
This may sound conservative. It is. For it is better to be conservative in financial matters after 40 or so. We have seen many broken lives of 50, 55 or 60 years as a result of wrong investment decisions made after 40.
If you aim at peaceful retirement after all your commitments are over, such as the marriage and education of children, don't make risky investments. Every one need not invest in highly speculative shares all the time to make a lot of money.
2. Don't speculate, you'll lose in the end
Get over the 'quick rich' psychology and build a good balanced portfolio. Remember, you are an investor; you should not become a speculator. Most speculators end up miserably; you don't hear of them.
All the innocents who entered the market at the height of the boom of 1985-86 were massacred. So is the case of the guys who charged into the market during the 1992, 1994 and 1998 booms.
Very few speculators are successful in the long run. Don't be tempted that the other man is making more money through speculation. In all probability he will envy you after 10 years if you invest without getting involved in speculation.
Mark Twain said in 1894 that "there are two times in a man's life when he should not speculate: when he can't afford it and when he can."
In 1902, Andrew Carnegie warned that "there is scarcely an instance of a man, who has made a fortune by speculation and kept it." You should always remember what happened to Haridas Mundhra in 1957, and to Harshad Mehta in 1992.
Why does it happen that way? The answer is provided by Bernard Baruch in 1916: "A speculator is one who thinks and plans for a future event -- and acts before it occurs. And a speculator must always be right." How can anyone always be right?
While we are giving a warning, we know it is unlikely to always be heeded. As Lord Overstone said in 1846, "No warning can save a people determined to grow rich suddenly".
3. Maintain a balanced portfolio at all times
In order to minimize your overall risk, you must try to invest your money in different ways. Don't put all your eggs in one basket. You must aim at having a diversified portfolio of investments which balances the risk and the return on one side, and the liquidity and the profitability on the other.
If you go in search of very high speculative returns, your portfolio will be stuffed with junk bonds and junk stocks. Be careful of the quality of your portfolio.
4. Cultivate profitable hobbies
You may like to cultivate some profitable hobbies like collecting stamps, old and rare coins, and other items like antiques. A friend of ours has developed a hobby of collecting old locks; he has now over 100 such locks.
Since you are living in a crazy world, a rare piece of postal stamp may make your child a millionaire. The latest souvenir in the West is a piece of 'Berlin Wall' which was pulled down in 1990.
Whenever you go on tours, you may go round the antique shops and start accumulating genuine antiques. Since you are living in an ancient land, you will come across antiques everywhere.
5. Do not despair in times of financial difficulty
Life may not always be on an even keel. Some ups and downs are inevitable. When you are going through a bad financial patch, do not despair. Be patient and try hard to find solutions. If you become despondent, you will only add to the problems.
Maintain a positive attitude and try to convert your problems into opportunities. There will always be a silver lining to a dark cloud. Remember what the Quran says: 'God is with those who persevere.' You also know that by sheer perseverance the snail reached the Ark.
6. Invest in the best assets you have
The best assets you have are your family members: spouse, children and parents. Invest your time in them. This is the investment which will give you the best returns in the world.
There is no point in neglecting them in your anxiety to build a fortune for them. They need your attention, love and affection. Do not neglect them. Invest in them; not merely for them.
7. Giving is a great pleasure
The ultimate satisfaction comes not from the accumulation of money; but by giving it. You must have some cause dear to your heart. You can donate a small portion of your income to such charities and get a sense of satisfaction.
Money should be earned so that surplus can be donated. Life's objectives are clearly spelt out in a Sanskrit sloka:
Education should give humility, which, in turn, should give character. Through good character you can earn money. Use money for charity. That is how you can derive real pleasure.
Real progress comes in a steady and gradual manner. Patience and perseverance are the two major winning strategies to be followed.
Let us share a secret with you. Knowledge, however unique it may be, is worthless if it is not tempered by common sense. You may read many books such as this and acquire theoretical expertise in investment and tax planning. But you will never become a successful investor if you do not also apply your common sense which is the most valuable -- and tax-free -- asset you have.
One pound of learning requires ten pounds of common sense to apply it.
Let us conclude with ancient biblical wisdom:
Blessed is the man, who finds wisdom,The man who gains understanding,For she is more profitable than silverAnd yields better returns than gold.She is more precious than rubies;Nothing you desire can compare with her.Long life is in her right hand;In her left hand are riches and honour. -- (Proverbs 3:13-16)
Introduction
My Name is Rajasekhar.
I have been observing the shares since my school days(from 1985). Nowadays every person is investing money in stocks, mutual funds, bonds, insurance etc. directly or indirectly. Especially this blog is created for sharing the information about the financial matters for the benifit of investors. Financial education is must for everyone who should grow financially. But individual stocks are not recommended in this blog. Shares buying and selling decision depends upon the individuality. So have a happy financial future.
I have been observing the shares since my school days(from 1985). Nowadays every person is investing money in stocks, mutual funds, bonds, insurance etc. directly or indirectly. Especially this blog is created for sharing the information about the financial matters for the benifit of investors. Financial education is must for everyone who should grow financially. But individual stocks are not recommended in this blog. Shares buying and selling decision depends upon the individuality. So have a happy financial future.
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