SATURDAY? time to have Kingfisher?!! but will the king-fissure fly?? Pl comment Mr. Mallya.
Friday, 14 September 2012
This is YOUR Life.
Do what you love and do it OFTEN. If you don't like something, CHANGE IT, If you don't like your job, QUIT. If you don't have enough time, STOP WATCHING TV. If you are looking for the love of your life, STOP. THEY WILL BE WAITING FOR YOU WHEN YOU START DOING THINGS YOU LOVE.
STOP OVER ANALYZING. LIFE is SIMPLE. OPEN YOUR MIND, arms and hearts to new things and people. We are united in our differences. TRAVEL OFTEN. Getting lost will help you find yourself.
SOME OPPORTUNITIES come only ONCE, Seize them! LIFE IS ABOUT THE PEOPLE YOU MEET, AND the things you create with them. SO go out and start creating!. LIFE IS SHORT. LIVE your DREAM and SHARE your PASSION.
Conquer LIFE.
Do what you love and do it OFTEN. If you don't like something, CHANGE IT, If you don't like your job, QUIT. If you don't have enough time, STOP WATCHING TV. If you are looking for the love of your life, STOP. THEY WILL BE WAITING FOR YOU WHEN YOU START DOING THINGS YOU LOVE.
STOP OVER ANALYZING. LIFE is SIMPLE. OPEN YOUR MIND, arms and hearts to new things and people. We are united in our differences. TRAVEL OFTEN. Getting lost will help you find yourself.
SOME OPPORTUNITIES come only ONCE, Seize them! LIFE IS ABOUT THE PEOPLE YOU MEET, AND the things you create with them. SO go out and start creating!. LIFE IS SHORT. LIVE your DREAM and SHARE your PASSION.
Conquer LIFE.
Don't try to make a profit on a bad trade. Just find the best way to get out.
We are taught from young age that "winning isn't everything; it's the only thing." When we lose, we feel ashamed and humiliated- which is why we do everything possible to prove to our families and the world that we are winners. This type of thinking shows up in every area of our lives, including our jobs, relationships
We are taught from young age that "winning isn't everything; it's the only thing." When we lose, we feel ashamed and humiliated- which is why we do everything possible to prove to our families and the world that we are winners. This type of thinking shows up in every area of our lives, including our jobs, relationships
and trading.
The bottom line is this: We all want to win and succeed because it is ingrained in our collective psyches.
If we are winning, we are "on a roll" and give ourselves positive messages to keep winning. If we are losing, we try harder and harder, but a subtle shift occurs. We move from trying to win to trying not to lose. Ironically, the more we try not to lose and tell ourselves that we must stop losing, the more we lose.
Winning traders feel happy, confident and good about themselves. Contrast this with the losing trader who is constantly trying not to lose. These traders have a tendency to dig themselves deeper into losses because they do not yet understand a fundamental tenet of trading success: It is both necessary and natural to lose
The beginning trader believes every trade must be a winner.
Trading is a game of probabilities; thus, it is paramount to understand that is it perfectly natural to lose. Successful traders always make more money than they lose. One major reason for this is that they understand the game they are playing. They also do one critical thing that losing traders do not do -- they embrace and manage risk. In other words, they identify the risk involved in every trade and they quickly cut losses when the ratio of risk to reward is no longer favorable. At the same time, they hold on to profits and may even increase position size if the risk/reward remains favorable. Winning traders do less of what is not working and more of what is working. They are trying to win, rather than trying not to lose.
The more you resist taking a loss, the larger the loss becomes and more desperate you become not to lose. Once you totally relax into the trade, let your rational brain take over from the grasping, clutching emotional brain, you see that the best way to win is to let go.
The takeaway from this is simple. Winning is not the same as trying not to lose. Great traders may struggle, but not to the point where they are in the vise of the Chinese Finger Cuffs. They know and understand completely that losing is often the only way to win. They have learned to surrender, accept and move on. Once you practice doing this with your own trading, you will find a new sense of freedom and a new happiness. Moreover, you will preserve your capital to play the game another day.
The bottom line is this: We all want to win and succeed because it is ingrained in our collective psyches.
If we are winning, we are "on a roll" and give ourselves positive messages to keep winning. If we are losing, we try harder and harder, but a subtle shift occurs. We move from trying to win to trying not to lose. Ironically, the more we try not to lose and tell ourselves that we must stop losing, the more we lose.
Winning traders feel happy, confident and good about themselves. Contrast this with the losing trader who is constantly trying not to lose. These traders have a tendency to dig themselves deeper into losses because they do not yet understand a fundamental tenet of trading success: It is both necessary and natural to lose
The beginning trader believes every trade must be a winner.
Trading is a game of probabilities; thus, it is paramount to understand that is it perfectly natural to lose. Successful traders always make more money than they lose. One major reason for this is that they understand the game they are playing. They also do one critical thing that losing traders do not do -- they embrace and manage risk. In other words, they identify the risk involved in every trade and they quickly cut losses when the ratio of risk to reward is no longer favorable. At the same time, they hold on to profits and may even increase position size if the risk/reward remains favorable. Winning traders do less of what is not working and more of what is working. They are trying to win, rather than trying not to lose.
The more you resist taking a loss, the larger the loss becomes and more desperate you become not to lose. Once you totally relax into the trade, let your rational brain take over from the grasping, clutching emotional brain, you see that the best way to win is to let go.
The takeaway from this is simple. Winning is not the same as trying not to lose. Great traders may struggle, but not to the point where they are in the vise of the Chinese Finger Cuffs. They know and understand completely that losing is often the only way to win. They have learned to surrender, accept and move on. Once you practice doing this with your own trading, you will find a new sense of freedom and a new happiness. Moreover, you will preserve your capital to play the game another day.
Market Cycles.
How the markets REALLY work.
In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets always work in this ironic way.
The Start of a Bull Market
The bottom of the market starts at a ti
How the markets REALLY work.
In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets always work in this ironic way.
The Start of a Bull Market
The bottom of the market starts at a ti
me when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks is eventually noticed by institutional investors, as billions are introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as "investors" think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Up trends are fueled by greed , but down trend is only fueled by fear.Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
Markets are never risky.Its your attitude, beliefs,thought and behavior in the markets that are risky.The only way to correct these points are by continuous education.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks is eventually noticed by institutional investors, as billions are introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as "investors" think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Up trends are fueled by greed , but down trend is only fueled by fear.Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
Markets are never risky.Its your attitude, beliefs,thought and behavior in the markets that are risky.The only way to correct these points are by continuous education.
Thursday, 13 September 2012
The ways rich think and work.
1. Average people think MONEY is the root of all evil. Rich people believe POVERTY is the root of all evil.
2. Average people think selfishness is a vice. Rich people think selfishness is a virtue.
3. Average people have a lottery mentality. Rich people have an action mentality.
4. Average people think the road to riches is paved with formal education. Rich people
1. Average people think MONEY is the root of all evil. Rich people believe POVERTY is the root of all evil.
2. Average people think selfishness is a vice. Rich people think selfishness is a virtue.
3. Average people have a lottery mentality. Rich people have an action mentality.
4. Average people think the road to riches is paved with formal education. Rich people
believe in acquiring specific knowledge.
5. Average people long for the good old days. Rich people dream of the future.
6. Average people see money through the eyes of emotion. Rich people think about money logically.
7. Average people earn money doing things they don't love. Rich people follow their passion.
8. Average people set low expectations so they're never disappointed. Rich people are up for the challenge.
9. Average people believe you have to DO something to get rich. Rich people believe you have to BE something to get rich.
10. Average people believe you need money to make money. Rich people use other people's money.
11. Average people believe the markets are driven by logic and strategy. Rich people know they're driven by emotion and greed.
5. Average people long for the good old days. Rich people dream of the future.
6. Average people see money through the eyes of emotion. Rich people think about money logically.
7. Average people earn money doing things they don't love. Rich people follow their passion.
8. Average people set low expectations so they're never disappointed. Rich people are up for the challenge.
9. Average people believe you have to DO something to get rich. Rich people believe you have to BE something to get rich.
10. Average people believe you need money to make money. Rich people use other people's money.
11. Average people believe the markets are driven by logic and strategy. Rich people know they're driven by emotion and greed.
Some of the mistakes I have made as a trader in the past,learnt AND have changed my style.Which ones are you making right now???
* Traded blindly without any homework or trading plans (poor discipline).
* Traded without Stop Loss or with too big Stop Losses (poor Risk Management).
* Traded way too many trades in a day resulting net losses (poor Risk and Money Management).
* Traded against the
* Traded blindly without any homework or trading plans (poor discipline).
* Traded without Stop Loss or with too big Stop Losses (poor Risk Management).
* Traded way too many trades in a day resulting net losses (poor Risk and Money Management).
* Traded against the
prevailing trend and then booked losses (poor Plan and Risk Management).
* Traded with the trend but booked small profit and too early.
* Traded with good plan (mm, rm, plan, discipline) but with no conviction in the plan resulting less profit to cover other big losses.
* Traded booking small profits and big losses.
* Traded at Market Price in less volume scrips resulting big losses.
* Traded on speculations, rumour or news and getting traped in Market Makers game resulting big losses.
* Traded within fear/greed barrier and without knowing risk/reward ratio.
* Traded on tips resulting huge losses.
* Traded getting psyched from CNBC or US/Europe speculations and resulted huge losses.
* Traded not even realizing after loosing lots of money & time in markets, Not Knowing which Time frame suits my personality.
* Averaging and overleveraging to losing position and selling in panic.
* Converted intraday or swing trades into short term and long term without reasons.
* Committed some or all of above - again and again.
* Was unable to bare the loss and then traded more and more to recover the loss..ultimately completely or nearly wiped out the account.
* Traded with the trend but booked small profit and too early.
* Traded with good plan (mm, rm, plan, discipline) but with no conviction in the plan resulting less profit to cover other big losses.
* Traded booking small profits and big losses.
* Traded at Market Price in less volume scrips resulting big losses.
* Traded on speculations, rumour or news and getting traped in Market Makers game resulting big losses.
* Traded within fear/greed barrier and without knowing risk/reward ratio.
* Traded on tips resulting huge losses.
* Traded getting psyched from CNBC or US/Europe speculations and resulted huge losses.
* Traded not even realizing after loosing lots of money & time in markets, Not Knowing which Time frame suits my personality.
* Averaging and overleveraging to losing position and selling in panic.
* Converted intraday or swing trades into short term and long term without reasons.
* Committed some or all of above - again and again.
* Was unable to bare the loss and then traded more and more to recover the loss..ultimately completely or nearly wiped out the account.
Know your Fundamental analysis.
Fundamental analysis is used to determine the value of a stock by analyzing the financial data that is 'fundamental' to the company. It takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of the market nor does it in
Fundamental analysis is used to determine the value of a stock by analyzing the financial data that is 'fundamental' to the company. It takes into consideration only those variables that are directly related to the company itself, such as its earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of the market nor does it in
clude behavioral variables in its methodology. It focuses exclusively on the company's business in order to determine whether or not the stock should be bought or sold.
Critics of fundamental analysis often charge that the practice is either irrelevant or that it is inherently flawed. The first group, using efficient market hypothesis, say that FA is a useless practice since a stock's price will always already take into account the company's financial data .They argue that it is impossible to learn anything new about a company by analyzing its fundamentals that the market as a whole does not already know, since everyone has access to the same financial information. These critics charge that fundamental analysis is too unscientific a process, and that it's difficult to get a clear picture of a company's value when there are so many qualitative factors such as a company's management and its competitive landscape.Also , FA uses past data to determine the direction in the future and markets only discount the future.
Most individual investors and investment professionals believe that fundamental analysis is useful, either alone or in combination with other techniques. it's probably a good idea for you to familiarize yourself with some of the valuation measures it uses
Earnings
Earnings are the "bottom line" when it comes to valuing a company's stock, and indeed fundamental analysis places much emphasis upon a company's earnings.Earnings are how much profit (or loss) a company has made after subtracting expenses. Earnings are important to investors because they give an indication of the company's expected dividends and its potential for growth and capital appreciation. That does not necessarily mean, however, that low or negative earnings always indicate a bad stock; for example, many young companies report negative earnings as they attempt to grow quickly enough to capture a new market, at which point they'll be even more profitable than they otherwise might have been.
Earnings Per Share
Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don't take into account how many shares of stock are outstanding . In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a company's earnings per share (EPS). EPS is calculated by taking a company's net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports RS.100 cr in net earnings for the previous year and has 5 cr. shares of stock outstanding, then that company has an EPS of Rs. 20 per share. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Last year's EPS would be actual, while current year and forward year EPS would be estimates.
P/E Ratio
EPS is a great way to compare earnings across companies, but it doesn't tell you anything about how the market values the stock. That's why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a company's earnings. You can calculate a stock's P/E ratio by taking its price per share and dividing by its EPS. For instance, if a stock is priced at Rs.50 per share and it has an EPS of Rs.5 per share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing the company's total market cap by the company's total earnings; this would result in the same number.) P/E can be calculated for the previous year ("trailing P/E"), for the current year ("current P/E"), or for the coming year ("forward P/E"). The higher the P/E, the more the market is willing to pay for each dollar of annual earnings. last year's P/E would be actual, while current year and forward year P/E would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. For those companies you may want to calculate the price-to-sales ratio (PSR) instead .
PEG
So is a stock with a high P/E ratio always overvalued? Not necessarily. The stock could have a high P/E ratio because investors are convinced that it will have strong earnings growth in the future and so they bid up the stock's price now. Fortunately, there is another ratio that you can use that takes into consideration a stock's projected earnings growth: it's called the PEG. PEG is calculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth for the next year. So, a stock with a P/E ratio of 40 that is expected to grow its earnings by 20% the next year would have a PEG of 2. In general, the lower the PEG, the better the value, because you would be paying less for each unit of earnings growth.
Dividend Yield
The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends . It is calculated by taking the amount of dividends paid per share and dividing by the stock's price. For example, if a stock pays out Rs.2 in dividends over the course of a year and trades at Rs.40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.
Dividend Payout Ratio
The dividend payout ratio shows what percentage of a company's earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out Rs.1 per share annually in dividends and it has an EPS of Rs.2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends. Companies that distribute dividends typically use about 25% to 50% of their earnings for dividend payments. The higher the payout ratio, the less confidence the company has that it would've been able to find better uses for the money it earned. This is not necessarily either good or bad; companies that are still growing will tend to have lower dividend payout ratios than very large companies, because they are more likely to have other productive uses for the earnings.
Book Value
The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their book value would suggest. For this reason, book value is of more interest to value investors than growth investors. In order to compare book values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.
Price / Book
A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at Rs.100 and has a book value per share of Rs.5, then that company has a P/B ratio of 20. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. Price-to-book ratio is of more interest to value investors than growth investors.
Price / Sales Ratio
As with earnings and book value, you can find out how much the market is valuing a company by comparing the company's price to its annual sales. This measure is known as the price-to-sales ratio (P/S or PSR). You can calculate the P/S by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). That means that a company whose stock trades at Rs.1 per share and which had Rs.2 per share in sales last year will have a P/S of 0.5. Low P/S ratios (below one) are usually thought to be the better investment since their sales are priced cheaply. However, P/S, like P/E ratios and P/B ratios, are numbers that are subject to much interpretation and debate. Sales obviously don't reveal the whole picture: a company could be selling dollar bills for 90 cents each, and have huge sales but be terribly unprofitable. Because of the limitations, P/S ratios are usually used only for unprofitable companies, since such companies don't have a P/E ratio .
Return on Equity (ROE)
Return on equity (ROE) shows you how much profit a company generates in comparison to its book value . The ratio is calculated by taking a company's after-tax income (after preferred stock dividends but before common stock dividends) and dividing by its book value (which is equal to its assets minus its liabilities). It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with ROEs that are high and growing.
Critics of fundamental analysis often charge that the practice is either irrelevant or that it is inherently flawed. The first group, using efficient market hypothesis, say that FA is a useless practice since a stock's price will always already take into account the company's financial data .They argue that it is impossible to learn anything new about a company by analyzing its fundamentals that the market as a whole does not already know, since everyone has access to the same financial information. These critics charge that fundamental analysis is too unscientific a process, and that it's difficult to get a clear picture of a company's value when there are so many qualitative factors such as a company's management and its competitive landscape.Also , FA uses past data to determine the direction in the future and markets only discount the future.
Most individual investors and investment professionals believe that fundamental analysis is useful, either alone or in combination with other techniques. it's probably a good idea for you to familiarize yourself with some of the valuation measures it uses
Earnings
Earnings are the "bottom line" when it comes to valuing a company's stock, and indeed fundamental analysis places much emphasis upon a company's earnings.Earnings are how much profit (or loss) a company has made after subtracting expenses. Earnings are important to investors because they give an indication of the company's expected dividends and its potential for growth and capital appreciation. That does not necessarily mean, however, that low or negative earnings always indicate a bad stock; for example, many young companies report negative earnings as they attempt to grow quickly enough to capture a new market, at which point they'll be even more profitable than they otherwise might have been.
Earnings Per Share
Comparing total net earnings for various companies is usually not a good idea, since net earnings numbers don't take into account how many shares of stock are outstanding . In order to make earnings comparisons more useful across companies, fundamental analysts instead look at a company's earnings per share (EPS). EPS is calculated by taking a company's net earnings and dividing by the number of outstanding shares of stock the company has. For example, if a company reports RS.100 cr in net earnings for the previous year and has 5 cr. shares of stock outstanding, then that company has an EPS of Rs. 20 per share. EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS"). Last year's EPS would be actual, while current year and forward year EPS would be estimates.
P/E Ratio
EPS is a great way to compare earnings across companies, but it doesn't tell you anything about how the market values the stock. That's why fundamental analysts use the price-to-earnings ratio, more commonly known as the P/E ratio, to figure out how much the market is willing to pay for a company's earnings. You can calculate a stock's P/E ratio by taking its price per share and dividing by its EPS. For instance, if a stock is priced at Rs.50 per share and it has an EPS of Rs.5 per share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing the company's total market cap by the company's total earnings; this would result in the same number.) P/E can be calculated for the previous year ("trailing P/E"), for the current year ("current P/E"), or for the coming year ("forward P/E"). The higher the P/E, the more the market is willing to pay for each dollar of annual earnings. last year's P/E would be actual, while current year and forward year P/E would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all. For those companies you may want to calculate the price-to-sales ratio (PSR) instead .
PEG
So is a stock with a high P/E ratio always overvalued? Not necessarily. The stock could have a high P/E ratio because investors are convinced that it will have strong earnings growth in the future and so they bid up the stock's price now. Fortunately, there is another ratio that you can use that takes into consideration a stock's projected earnings growth: it's called the PEG. PEG is calculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth for the next year. So, a stock with a P/E ratio of 40 that is expected to grow its earnings by 20% the next year would have a PEG of 2. In general, the lower the PEG, the better the value, because you would be paying less for each unit of earnings growth.
Dividend Yield
The dividend yield measures what percentage return a company pays out to its shareholders in the form of dividends . It is calculated by taking the amount of dividends paid per share and dividing by the stock's price. For example, if a stock pays out Rs.2 in dividends over the course of a year and trades at Rs.40, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and most small growing companies don't have a dividend yield at all because they don't pay out dividends.
Dividend Payout Ratio
The dividend payout ratio shows what percentage of a company's earnings it is paying out to investors in the form of dividends. It is calculated by taking the company's annual dividends per share and dividing by its annual earnings per share (EPS). So, if a company pays out Rs.1 per share annually in dividends and it has an EPS of Rs.2 for the year, then that company has a dividend payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends. Companies that distribute dividends typically use about 25% to 50% of their earnings for dividend payments. The higher the payout ratio, the less confidence the company has that it would've been able to find better uses for the money it earned. This is not necessarily either good or bad; companies that are still growing will tend to have lower dividend payout ratios than very large companies, because they are more likely to have other productive uses for the earnings.
Book Value
The book value of a company is the company's net worth, as measured by its total assets minus its total liabilities. This is how much the company would have left over in assets if it went out of business immediately. Since companies are usually expected to grow and generate more profits in the future, most companies end up being worth far more in the marketplace than their book value would suggest. For this reason, book value is of more interest to value investors than growth investors. In order to compare book values across companies, you should use book value per share, which is simply the company's last quarterly book value divided by the number of shares of stock it has outstanding.
Price / Book
A company's price-to-book ratio (P/B ratio) is determined by taking the company's per share stock price and dividing by the company's book value per share. For instance, if a company currently trades at Rs.100 and has a book value per share of Rs.5, then that company has a P/B ratio of 20. The higher the ratio, the higher the premium the market is willing to pay for the company above its hard assets. Price-to-book ratio is of more interest to value investors than growth investors.
Price / Sales Ratio
As with earnings and book value, you can find out how much the market is valuing a company by comparing the company's price to its annual sales. This measure is known as the price-to-sales ratio (P/S or PSR). You can calculate the P/S by taking the stock's current price and dividing by the company's total sales per share for the past year (or equivalently, by dividing the entire company's market cap by its total sales). That means that a company whose stock trades at Rs.1 per share and which had Rs.2 per share in sales last year will have a P/S of 0.5. Low P/S ratios (below one) are usually thought to be the better investment since their sales are priced cheaply. However, P/S, like P/E ratios and P/B ratios, are numbers that are subject to much interpretation and debate. Sales obviously don't reveal the whole picture: a company could be selling dollar bills for 90 cents each, and have huge sales but be terribly unprofitable. Because of the limitations, P/S ratios are usually used only for unprofitable companies, since such companies don't have a P/E ratio .
Return on Equity (ROE)
Return on equity (ROE) shows you how much profit a company generates in comparison to its book value . The ratio is calculated by taking a company's after-tax income (after preferred stock dividends but before common stock dividends) and dividing by its book value (which is equal to its assets minus its liabilities). It is used as a general indication of the company's efficiency; in other words, how much profit it is able to generate given the resources provided by its stockholders. Investors usually look for companies with ROEs that are high and growing.
Subscribe to:
Comments (Atom)