Three Levels of Fundamental Analysis

      Fundamental Analysis of stocks in done at three levels as described briefly below:

1.     Economic Analysis :  Economic Analysis and forecasting a company’s performance and returns is necessary for making returns. Availability of money and flow of information influence the decisions regarding buy and sell orders in stock market. If the economy is in recession or stagnation performance of corporate sector will be adversely affected. On the other hand, if the economy is booming, incomes are arising and aggregate demand is good, then the industries and the companies in general may be prosperous.

                                    Monetary policy and trends in money supply have a major impact on industrial growth. Interest rates in free markets and the degree of inflation do have a major role to the influence of economy and the performance of industry.

                                    The stock market is the barometer of the economy and changes in economic policies as well as politically significant events immediately affect the stock market.

2.     Industry Analysis : It is basically a study of the Industry environment. The key factors to be looked into are :

ü  Industry characteristics

ü  Competitive forces

ü  Past sales and earnings performance

ü  Industry share prices

ü  Relative EPS

                                           The industry financials to be looked into in industry analysis are :   

ü  Operating Margins (OPBIT/ Operating Income)

ü  Return on Capital Employed

ü  Earnings Growth – Also susceptibility of earnings to various sources

ü  Analysis of Fixed Assets

ü  Industry peculiarities – seasonality, stocking, requirements, debtors, etc.

ü  P/E ratios – Trends

ü  Industry trends

                                        Each industry has a life cycle of its own, viz, pioneering stage, expansion stage and stagnation stage. Industries in pioneering stage generate super profits and beat the market average. Industries in expansion stage diversify their business and offer stable returns. For industries in stagnation stage, growth prospects and capital appreciation may be poor. Some units in these category may become sick due to changes in tastes, technology, high labour costs and stagnant demand.

                                     Most investors would choose to invest in companies at pioneering stage/ expansion stage.

3.     Company Analysis :

                                  Share prices depend partly on the company’s intrinsic worth for which financial analysis of a company is necessary for the investor to make buy or sell decisions. Financial analysis is the analysis of the financial statements of a company to assess its financial health. The overall objective of all business is to secure funds at low cost and their effective utilization in the business for profit. The funds so utilized must generate an income higher than the cost of procuring them.

                  

Steps in Fundamental Analysis

                            Equity researchers have provided evidence to show that security prices could deviate from their equilibrium values due to psychological factors, fads and noise trading. That's where investors through Fundamental Analysis and a sound investment objective can achieve excess returns and beat the market.
Steps in Fundamental Analysis:
                                   It involves looking at the revenue, expenses, assets, liabilities and all the other financial aspects of the company. Fundamental analysts look at these information to gain an insight into the company's future performance. The steps in fundamental analysis are:
(i) Macroeconomic Analysis : which involves analysing capital flows, interest rate cycles, currencies, commodities, indices,etc.
(ii) Industry Analysis : which involves the analysis of industry and the companies that are a part of the sector.
(iii) Situational Analysis of a company
(iv) Financial Analysis of the Company
(v) Valuation


Source: www.nseindia.com

Fundamental Versus Technical Analysis

                                In stock market analysis, there are two major schools, fundamental analysis and technical analysis. Fundamental analysis is the traditional way of analysing a stock. In technical analysis you try to predict the stocks movement by looking at the historical data. The thought is that history will repeat itself. Technical analysis does not work in reality. By looking at a chart, you can see how a stock has moved in the past. But to use this information to predict the future is a waste of time. Fundamental Analysis becomes a necessity to determine the company’s present status. Technical analysis methods are very popular but if you rely on technical analysis you might as well use astrology to forecast the markets.

Three Basic Rules of Investing in Stock Markets

       

                                                These three are some of the most simple but most logical and wise rules which I had chanced to read upon recently. It will be useful to each and every investor in selecting the stocks to invest.

Rule 1: Don’t buy unlisted shares:

                                            Stock exchanges do not permit trading in unlisted shares, nor do they permit their registered members to deal in unlisted shares. If you want to buy unlisted shares you won’t get the protection of the stock exchange authorities nor will you be able to use the services of your stockbroker in handling such transactions. You won’t be able to access the market price of the unlisted share also. All these factors create complications and risks, which you are not likely to be in a position to handle.

Rule 2: Don’t buy inactive shares:

                                           An inactive share is defined as one which is transacted less than two times a month, or not at all. The main reason why shares are inactive is because there are no buyers for them. They are mostly shares of companies which are not doing well and whose future prospects appear to be dim. The simplest way to find whether a particular share is inactive or not is to regularly scrutinise the stock market quotations which appear in the daily newpapers. If you find that a particular share has not been quoted for a long time, you can presume it is inactive.  Every time you buy a share, you must remember that one day you will want to sell it. If you think you are likely to face difficulty in selling it – don’t buy it! This is a sound investment principle which you should never lose sight of, no matter how cheap or attractive a particular investment may appear to be.

Rule 3: Don’t buy shares in closely held companies:

                                               Shares of closely held companies tend to be less active than those of widely held ones since they have a fewer number of shareholders and, thus, a smaller floating stock of shares. Shares of such companies tend to be ignored by the general public. It is always to manipulate the share prices of a closely held company that those of a widely held one. Share prices of closely held companies tend to be more volatile than others. Investing in such shares requires a high degree of expertise, knowledge, alertness and quick thinking which take years of active investing to acquire.

Source: Profitable investment in shares by SS & Navjot Grewal

Investment Vs Speculation

Why is investment in shares very often confused with Gambling and Speculation? Is there a line of difference between these three? Yes, The difference between investment and speculation lies in the degree of risk that you are willing to accept for attaining your goal. The investor takes calculated risks and plays safe in return for moderate profits. The speculator deliberately takes high risks in the expectation of getting disproportionately greater profits. In the stock markets, the speculator generally tries to make short-term profits out of price fluctuations and usually ignored dividends. In addition, he often plays around with borrowed money instead of using his own funds. On the other hand, an investor generally uses his own money, and buys shares with the intention of earning both long-term capital gains and dividends. These are the essential differences between investment and speculation. When you buy a share after making proper assessment of a company’s future prospects, your risk is minimal and limited. When you do so on the basis of insufficient knowledge, incomplete analysis, a “hunch” or a “feeling”, the risks are naturally much greater. The former is investment, the latter speculation. Gambling is only an extreme form of speculation.