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An investor should follow the listed basic investment principles for a sound investment and hope for a good return in the future.
1. The sector in which the COMPANY deals.
2. The economic factors that will influence the sector.
3. The financial statements of the company. ie. Fund and Cash flow of the company.
4 The Ratio Analysis.ie. C.RATIO , EPS PAT ,ROI etc
5 The sales of the company ,its trend.
6 The profit the company is earning annually.
7 The flow of dividend the company announces annually.
8 Whether the company is going for expansion or req0uires money to pay off its past loans.
9 The future of the company as regards to the competition it may face from its peer companies.
10 The Management of the company ,its efficiency experience and qulifications.
FINANCIAL STATEMENT DOES NOT REVEAL ALL INFORMATION ABOUT A COMPANY Financial Statement states how sound and successfully a business is generating its profit. It provides us with the information about how the operations and profit of the business is growing. But Financial Statement sometimes does not reveals all information of a company. Following are the information which may be misstating and misleading from the investors point of view in a Financial Statement:1. Based on Historical Cost: All transactions are recorded at historical cost in the balance sheet are considered less informative. Thus, the balance sheet could be misleading as most of the items are not recorded at market price. 2. Time Constraint: The financial statement may not contain financial results and cash-flows for a large number of consecutive financial years. So, this can give us incorrect and brief view about the financial results. 3. Not always comparable with peers: Since different companies in an industry follows different accounting policies and practices, it is difficult to compare the results of different companies. Some companies follows cash basis of accounting while others follow accrual basis of accounting. 4. It is subjected to manipulated figures: Due to pressure for performing excellent and outstanding results, management of a company may cook the books deliberately. This can be detected when the company’s reported result exaggerate the industry benchmark. 5. No discussion of non-financial issues: A Company’s financial results maybe sound, whereas its presence in corporate social responsibility may not be addressed or might be overlooked or ignored in the financial statement. The best example is the Satyam Computer Services scam which is a corporate scandal, worked in the year 2009 in which the company chairman Mr. Ramalinga Raju confessed that the company books and financial statement were falsified and cooked up which resulted in siphoning of funds, instead of utilizing it for the purpose of business. Thus, we must read the financial statement very carefully before we make any investment decisions. We can also test out the economy, sector / industry, company analysis in which the company operates to verify whether the company is weak or strong. We can also perform fundamental analysis and check whether the company security is overvalued or undervalued thereby making a prudent investment decision.
Stock Market has always been a financial style status of the era we live in. We hear people bragging about making a fortune out of it but it’s not as easy as it seems. It also has lessened many zero`s from people’s balance sheet. So, we should be more careful before betting on a stock. Though we have got wonderful results after checking various parameters of company like profitability, industry growth, market share, standalone growth of company in comparison to its previous balance sheet but what we usually don’t stress much about is of the management running the entire show. We have seen many renowned companies which scored well in many areas of finance but their share prices plummeted or crashed after a scam perpetrated by management popped out. To ensure that our safety belts are in place, we need to keep in mind various points while running a check on management:1) First of all we should vouch for the competence of management or persons presiding board or those who have power to take strategic decisions. They must have the requisite knowledge and experience about the company’s object, mission and the industry to which it belongs. What adds more to their credibility are recognized degrees of qualification and exceptional education which makes them stands apart from other managers. 2)We should also check that if any person from management is involved in any legal battle whether civil or criminal. And if not, had he been sentenced or penalized in recent past. Negative result reflects loss of credibility of management. 3) It’s also important to find out the number of years for which management has served the company It has been seen that longer relationship of management with organization tends to reflect their honest and one-pointedness in efforts. 4) Top level executives are being paid as huge amount in compensation for running the organization and taking it to the next level. We just need to check whether they are being paid on fixed basis or their compensation is being tied to the growth of the organization; For example, compensation linked to the profit an organization makes. 5) Insider trading also is usually being fueled by management or from persons at higher levels of organization because they know some information which is not available in public realm. And thus they make fast money out of it. We should keep an eye on these transactions too. Profitability does show good management endeavor but it cannot provide character certificates at all. So, it’s better to keep a questioning mind while analyzing a company even though it posts good results. There are no straight forward rules to make a security check on management but above mentioned points can serve you good in your efforts.
At some point of age almost everyone thinks about investing in stock market usually because of higher returns or as a shortcut to become rich. But on the contrary, stock market turns out to be battle field where majority is being marred by their lack of preparedness. To counter this, one of the safest ways to earn returns in stock market is to become an investor and to watch your investments grow rather than becoming a trader for a short term period. For selection of a stock yielding higher return, one can follow various tools. Amongst them is one of the most popular and effective tool is to apply porters five force model to evaluate industry and the company to invest in.Porters five force model was developed by Harvard Professor “Michael Porter” in 1980 and was published in his book “Competitive Strategy; Technique for Analyzing Industries and Competitors.” His model focuses on five forces which makes or breaks a particular industry or company. 1) Barriers to Entry: It simply means that how easily can a new venture enter into an industry and eat out profits which were earlier enjoyed by old players so, probability of earning better returns in future gets hazy for these companies. Only those industries are being saved which have high barriers to entry like huge capital expenditure, patents or copyrights, governments regulations or geographical barriers. Higher cost of entry sums up to lower competition and substantial market share leading towards good profit. 2) The rivalry among the existing competitors: Presence of large numbers of rivals also poses threat to company’s profitability in a long run. Heavy competition forces companies to reduce costs for keeping their market shares intact and results in lower profits. So, it’s always better to choose industry where market players are scarce. 3) Bargaining Power of Suppliers: Certain industries are heavily backed upon their supplier’s whims. In case there is a monopoly and an organization does not have any other way to procure raw materials. So firstly, an organization loses its bargaining power ending up paying heavy costs and secondly, lack of raw material can impact its future viability. 4) Bargaining Power of Buyers: Sometimes an industry supplies to fixed or few buyers like in Defense Sector. Here again, organization sustains at the mercy of its purchasers and can go out of business in case where buyer no longer requires their product. 5) Threat of Substitutes: Similar products also sometimes poses threat if they can satisfy needs of buyers and are cheap as well. So, in order to sustain marketability of a product they should be unique in their product range. lesser substitutes provide higher market share and flowing profits. An investor can be in a much better position to choose and invest in a company by going through all the above mentioned points and can create wealth in long run. SWOT Analysis along with Porter`s Model enhances the capability of selecting a company, providing handsome returns in a long run and thus advisable.
IntroductionStock Market is one of the most popular in the world. Almost most of the world’s population invest in this market to earn higher returns. But there is higher risk as well to higher returns. Many people end up losing their money . So to minimize their risk and earning higher returns from investing in stock and derivative market there are certain analysis to be done before making any decision whether to invest or not. The analysis is mainly classified into 2 types:
Fundamental AnalysisFundamental Analysis is the analysis of company’s cash flow, profit and loss, balance sheet and financial ratios. Fundamental Analysis is done to determine and also to verify the valuation of the company. It is used for comparison with peer companies for selecting the best company to invest and earn.
Technical AnalysisTechnical Analysis is a study of charts containing rise and fall in prices of stocks which may comprise certain events of that stock, sector and economy. This helps in determining the market valuation of that stock on that particular point of time. It only includes the shares which are traded on free float basis excluding promoter’s holdings. Advantage of Fundamental Analysis over Technical Analysis
Advantages of Technical Analysis over Fundamental Analysis
ConclusionTechnical Analysis and Fundamental Analysis do have certain advantages and disadvantages over each other. Therefore neither of them alone are superior in concept because both. But when both of them are used together makes a superior concept and helps to make good investments.