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Fundamental Analysis is a study of factors (company specific and external environment) that affect the value of stock. This program will help you to understand the impact of factors on the valuation of the stock, analysis of the environment and interpretation of financial statement.<br>For more information visit : https://simplehai.axisdirect.in/learn/eclasses
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Why to invest in Equity? Cumulative Annualized Returns • Returns • Long Term Investment • Flexibility and Liquidity • Tax Benefits • No Minimum Investment • Diversification
How to invest in Equity? InvestmentEquities DirectInvestments IndirectInvestments Mutual Funds Portfolio Management Services Primary market(IPO) Secondary Market (NSE/BSE)
How to invest in Equity? • IPO: Is the first stage when the company initially issues securities to the public to raise money for the business. Investors or traders generally buy the shares in the primary market and resell them in the secondary market. • Secondary Market: Once listed the shares are available for trading for the investors. Like any other marketplace, there are buyers and sellers of shares in the market. There is no interaction between them, as the orders are placed online and is settled by the stock exchange. The buying and selling of shares is done through a stock brokers. • Mutual Funds: Investing in shares directly in the stock markets is certainly exciting but not every one may have knack of choosing right stocks. For those people, investing in an equity fund is the answer. Investors give their money to the experts (fund managers) to invest on their behalf. These funds are split into 'units' and an investor can purchase as many units at the current Net Asset Value (NAV) as he or she requires. • Portfolio Management Services (PMS): PMS allows you to delegate the responsibility of managing your investments to a team of experts who understand your investment objectives and work towards achieving them. They will take complete responsibility for managing your investments and take investment decisions in your best interests.
Investment Horizons • Intraday trading: Buying and selling of stocks to square off on the same day is called day trading this is also called as Intra day trading. • Short Term Trading: Stock trading done from one week to couple of months is called short term. Companies or sectors having some breaking news will be used for short term trading. • Mid term Trading: Stock trading done from one month to couple of months, say six to eight months is called mid term trading. Companies announcements of quarterly results or some big foreign acquisitions will be used for mid term trading. • Long term trading: Stock trading done form couple of months to couple of years is called long term trading. Companies whose fundamentals are good and have good future plans then the stocks of these companies are used for long term trading. Generally traders having good capital go for long term trading.
Importance of stock picking • By becoming a good stock-picker, you can protect/increase your personal wealth • For example :- Eicher Motor from 2001 to 2017 • Fundamental analysis is often a great starting point to picking good companies
What is fundamental analysis • Fundamental analysis is the process of determining a stock or company’s intrinsic value. Intrinsic value of a stock represents the company's actual value . The actual value is often different from the share price. Helps you Pick the Right Stocks. For Long Term Investing. Gives the True Value of the company.
How to do Fundamental Analysis…. There are two type of approaches :- Top-down and bottom-upapproaches Investors using fundamental analysis can use either a top-down or bottom-up approach. • The top-down investor starts their analysis with global economics, including both international and national Indicators. These may include GDP growth rates, Inflation Interest Rates, Exchange Rates. • The bottom-up investor starts with specific businesses, regardless of their industry/region, and the proceeds in reverse of the top-down approach. Fundamental Analysis thus involves 3 steps • Economic analysis • Industry analysis • Company analysis
Economic analysis • GDP • Savings And Investment • Inflation • Agriculture • Rates Of Interest • Govt. Revenue, Expenditure & Deficits • Infrastructure • Political Stability
Industry Analysis Competitive Rivalry Govt. Policies & regulation Industry Growth Demand & Supply Market Share
Company Analysis Corporate Governance Managerial Experience & Competence Promoters Back ground & Integrity Treatment of Minority Shareholders Accuracy of Financial Statements
Financial Statement Component:- Balance Statement Income Statement Cash Flow Statement
When to buy and when to sell • The objective of uncovering a stock or company’s intrinsic value is to make one of the following decisions: • Hold or Not to Sell: When the market price of a stock equals the intrinsic value of a business, the value investor may buy it. • Buy: When the market price of a stock is less than the intrinsic value of a business, the value investor should buy the stocks. • Sell or Not Buy: When the price of the stocks soars well beyond the value of the company, the investor should sell or simply avoids such stocks. • In other words: • Intrinsic Value > Market Value Buy • Intrinsic Value < Market Value Sell • Intrinsic Value = Market Value Hold/Buy
Key fundamental parameters • EPS (Earnings Per Share) • P/E Ratio (Price/ EPS) • PEG (Price to future growth ratio) • Dividend yield • Price/ Book value • Return on equity
Key parameters - Earnings per share • EPS (Earnings Per Share) : The portion of a company's profit allocated to each outstanding share of. The amount is computed by dividing net earnings by the number of outstanding shares of common stock. • For example, a company that earned Rs. 10 Crs net profit after minority interest and has 1 Crs shares outstanding would report earnings per share of Rs. 10. • PAT / No. Of shares= 10,00,00,000/ 100,00,000 = Rs. 10
Key parameters - Price/ EPS • P/E Ratio (Price/ EPS) : Also called "earnings multiple", current price of a stock divided by its earnings per share. • For example, a company is trading at CMP of Rs. 350 and has EPS of Rs. 15 , then its P/E is 23.33 • CMP/EPS = 350/15 = 23.3 times • The P/E ratio may either use the reported earnings from the latest (trailing earnings) year or use an analyst's forecast of next year's earnings (forward earnings). • P/E gives investors an idea of how much they are paying for a company's earning power. • It is to be noted that the P/E ratio should not be used in isolation; a high P/E ratio might show an overvalued stock, but it might reflect a company with high growth potential. • P/E is usually dependent on the industry you are analyzing, for example, a utility company will probably have a lower PE ratio generally, than tech companies.
Key parameters - PEG (Price to future growth ratio) • The market is more concerned about the future than the present, A ratio that will help you look at future earnings growth is called the PEG ratio. • You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings. • PEG = (P/E) / projected growth in earnings • For example, a stock with a P/E of 40 and projected earning growth next year of 20% would have a PEG of 40 / 20 = 2. • The lower the PEG number, the less you pay for each unit of future earnings growth. So even a stock with a high P/E, but high projected earning growth may be a good value. • Important note: You must understand that the PEG ratio relies on the projected % earnings. These earnings are not always accurate and so the PEG ratio is not always accurate. • From value investing perspective PEG should be less than one.
Key parameters - Dividend yield • Dividend is an amount of the profits that a company pays to its share holders. • When a company earns a profit, some of this money is reinvested in the business and called retained earnings, and some of it can be paid to its shareholders as a dividend. • In the absence of any positive movement in share price, the dividend yield is the return on investment for a stock. • Dividend yield is calculated as • In an example below, if all other things are equal an investor should invest in stock B as it has higher dividend yield
Key parameters - Price/ Book value • Book Value: It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated • By being compared to the company's market value, the book value can indicate whether a stock is under or overpriced. A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. • A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. • From value investing perspectives stock price should be no more than tangible book value
Key parameters - Return on equity • Return on equity measures a company’s profitability by revealing how much profit a company generates with the money shareholders have invested. • ROE is calculated as = Net Income/Shareholder's Equity • The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
Risk involved in Investing Equities Investing in stocks is a risky business. There are some risks you have some control over and others that you can only guard against. • Types of Risk :- Unsystematic And systematic Risk • Unsystematic risk/ Specific risk / Diversifiable risk/ Residual risk :- is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. • Systematic risk/market risk/ un-diversifiable risk :- is the uncertainty inherent to the entire market or entire market segment.
Risk involved in Investing Equities • Company Risk: The risk that is specific to the company, its management and internal working which may affect the growth and share price of the company. • Industry Risk: The changes in technology, regulations, fashions, etc. will affect the performance of an industry and hence the company directly. • Market Risk: Change in stock prices due to change in investor’s preferences, bear market, political and economic instability, exchange rate fluctuations are covered in market risk. • Social/Political Risk: Risk associated with the possibility of unfavorable government action or social changes resulting in a loss of value is called social or political risk. • Interest Rate Risk: Change in interest rate directly affects the prices of the company’s share. Companies with higher debt or heavy expansion plans may get impacted due to higher interest rates. • Concentration Risk: when you invest in single company or single fund you are actually taking a huge risk.
Overcoming the investment risk • Diversification: Diversify your portfolio across various sectors and stocks. So if there is adverse environment for any stock or sector the impact will be limited on over all portfolio. • Value Investing: One should invest in stocks which are available at attractive valuations and have good growth prospects. Unless confident about the growth prospects of a company investor should avoid over valued stocks. • Invest with Discipline: Invest in tranches on regular basis to overcome market volatility. • Promoter's Shareholding: Avoid investing in stocks where promoter’s holding less. Less promoters holding indicates less commitment on part of promoters.
Common mistakes • Lack of Strategy: You should know when to buy a stock, what is selling price and how long you will hold the shares. When choose a strategy follow its principles. • Not taking the Profit: When a reasonable profit has already been made, overcome greed and sell the stock fully or partially for taking the profit. • Trading with money you can't afford to lose: Don't use money that you really can't afford to lose. • Falling in love with a Stock: Some people stick to a stock because they believe it is a good stock. They even lose much money, but don't sell it. • Don't even consider "tips" that tell you about "hot stocks”: Do not invest on tips of some one, he might have a vested interest. Take guidance from the trusted experts. • Always use your own judgment: You must always use your own brain. Relying on the advice of others, no matter how well intentioned it may be, is always a complete disaster.
