Fundamental Analysis

What is Fundamental Analysis?

In the simplest form 'Fundamental Analysis' is the process of analyzing the financial reports of  an economy, industry or a company. Since this is the Stock Market, it's always about the companies. As always the aim of Fundamental analysis is to forecast the future price movements of the company and also a long term investor may look at features such as stability, growth etc.

Unlike Technical Analysis which determines price fluctuations based on the real-time information like price trends, charts etc., Fundamental analysis is concerned on more solid grounds. Those include, company profitability, company performance (quarters, annually, semi-annually), goodwill, stability, management etc.

Criteria for Fundamental Analysis

As the above picture shows, there are three main parts of Fundamental analysis. 

1. Economy Analysis
2. Industry Analysis
3. Company Analysis

Economy Analysis -  this is the analysis of the annual reports published by the Central Bank of a country and other relevant incidents, events and transactions that might affect the economy.

Industry Analysis - this is the analysis of the industry a specific company is in. For an example a hospital belongs to the healthcare industry and almost all the events that occur within the industry will have an impact on the said company.

Company Analysis - this is the analysis of the company you have or hoping to invest in. This might look as if the most relevant analysis for an investment, but the other two are as equally important. 

Company Analysis

Analysis a specific company can be done in many ways. The more analyse the better chances you have in making a sound decision. Company analysis can be discussed in following topics.

Financial Analysis.

This is the most common for of Fundamental analysis. In-fact most people think this is the only form of Fundamental analysis. But this is just a small part of a bigger chain. Financial analysis includes the analysis of financial statements, reports, past financial data and so on. This is purely of financial nature. This makes more sense since at the end of the day the financial situation of a company is what really decides the price of the share tomorrow. In financial analysis we will mostly look for information like 'debtors, creditors, acid ratios, current ratios, price earning ratio, total revenue, total current and non current expenditure, total debt capital, total equity capital, gearing ratio, liquidity, price, taxes, dividends, cash flows, working capital management etc, and the list goes on. However these information will directly relate to the price of a share of the company.

Management

Another important aspect of the company analysis would be the 'management' or the board of directors of the company who actually makes the decisions on behalf of the company. A 'good' management will give a more positive outlook for the company and vice versa. 

Business Plan

This is the document that provides all stakeholders the information relating to the company as to what it does, what are it's objectives, what are the growth prospects and so forth. A sound business plan with sound goals and objectives and a good management to support that will give the investor confidence to believe the company would perform well in the future.

All these put together, Fundamental Analysis will become a much stronger tool for your decision making process. 

Averaging

What is Averaging?

We used to 'average' in our mathematics lessons when we were small. Remember? Well this is basically the same thing. You take two prices, add them together and divide by two (since we took only two prices). That's what averaging is.

What's the big deal?

Well, averaging may seem easy. And yes, it is. But it's implications are what that counts. As we may understand averaging is used to bring the 'average cost' of a stock down. This is called 'Averaging Down'. (there's nothing called averaging up OK?). Say we buy 100 shares at $10, the total cost would be $1000 right? So the average cost per share would be again $10 (1000/100). Say now the prices of this particular stock is going down. Alas! So we see this as an opportunity to bring our average cost down. This is how it's done. Say the price goes down to $8, we buy another 100 shares at a total cost of $800. So we add up both the investments; that would total up to $1800 ($1000+$800).  So if we calculate the average cost per share it would come to $9 (1800/200). Seems pretty good huh? Well that depends. Read further and find out why.

Good Move or BAD Move?

This is a very controversial part of the investment process. In a quick glance, reducing the average cost of a share seems the wisest thing to do. But most experts absolutely PROHIBIT to do this. Of course there are reasonable reasons. The main argument against averaging down is that you're continuously investing or blocking money on a failing stock. The more the price goes down the longer it will take to recover, so actually you'd be stuck with a bunch of loss shares till it bounces back. Positive side is that when the stock price starts to climb again, averaged down stock would have a lower break-even point. That is a lower point from where anything above that point is profits. That has a magnifying effect on profits. And on the downside, if the prices continue to dip further, that too tends to have a magnifying effect of losses. 

Should you do it?

This is not really a question I could answer for you. You should be the overlord of your investment portfolio. However for Investors, averaging down doesn't make any sense at all. Investors look at the long term and a sudden dip in the price wouldn't affect their decisions. For a trader, who looks at the short term, this could be vital. At the end of the day it all comes down to risk management. The higher the rick higher the gain. But that doesn't mean you should burn your fingers in hot water either.

Dealing with today's distinctly dicey market - 15 Rules For Investing Success In Any Market

Keep the following 15 rules in mind that could help you hold your head high in times of sudden losses or for general investing purposes:

1) Think twice protecting against the downside (price downs), before daring to look up (price ups) when picking shares.

2) The norm is "Volatility does not represent risk, but creates opportunity". This is true. But go through the numbers (financial statements) and decide on your free will.

3) Investing when a share is neglected or out of focus is the best. The prices will be low and will produce you with enough gains in the long run.

4) Buy companies with excess cash flow.

5) Watch out for value, then make sure the basic figures tell you a clear story about the future of the company.

6) When digging further, use a Warren Buffet-like discounted cash-flow method to help determine underlying value.

7) Ask yourself if you're prepares to buy the whole company for yourself if you could. If the answer is 'NO', probably you should move on.

8) Don't fall for the reputation of the company or the centuries of years it has been in existence. The market has numerous examples for incidents where such companies have fell overnight. Always look at the current performance.

9) Don't listen to the directors if the reports show a complete over turn. If the numbers do stack up, take what the directors say with a healthy dose of salt. The same goes for brokers' forecasts.

10) If directors are buying shares, keep your eyes open.

11) No matter how hard you try and no matter the market condition, you will make losses. Accepting that will ease your pain. The general norm is that in stock trading you should always be prepared to take 20% loss anytime.

12) Make sure you understand how the company makes its profits and the essence of what it does.

13) Stick to your investment strategy. Pay less attention to market gossip and hush hush..

14) John Maynard Keynes said: "The market can stay irrational longer than you can stay solvent". But this is only true if you've overdone it. Don't invest more than you can truly afford to lose. (Margin trading is really not necessary)

15) Last but not the least... BE PATIENT.. You bought a stock, it's prices are not moving? Hold on. A price can never stay the same forever. If there's nothing interesting to buy. Just wait. Don't just go tie yourself in some good-for-nothing shares. Always be patient. 

Published in Investing Strategy

Investing or Day Trading?

Investor or a Day Trader?

We may have heard these terms numerous times from numerous people. It may have everything to do with the Share Market, but still it's two totally different approaches to the market. Lets see in depth what these two terms mean.

Investing/Investor

Basically Investor approaches the Share market with a more long term view and plan in mind. The contrasting factor between the Investor and a Day Trader IS the Time factor. So an Investor will seek for shares/stocks that will generate large profits or benefits in the long run. He will sacrifice his current income in view of a much larger and a profitable flow of cash in the long term. The long term here may refer to a period of usually over 5 years. They will take into consideration of the long term business plan or model of the business, it's Vision and Mission and stably factors. Investing requires a lot of long term vision and patience.

Day Trading/Day Trader

This means the exact opposite of what Investing is. That is, Day Trading involves buying and selling shares/stocks within one business day. Yes! All buying and selling activities should be completed within the same day. No shares should be held for the next day in view of better profits and such. So this is a very tricky business. Day Trader has to be extremely vigilant of the behavior of the market or could end up loosing everything earned in one single day. But in turn, if done correctly Day Trading is the most profitable and successful way of earning easy money. Don't let that last statement ease the weight of the risk of this form of trading. As I've said before Day Trading is an extremely risky business. And equally benefiting if you know the game.

What are Stocks and Shares!!!

First, What is a "stock/share"??

Ok, what is a Stock? A stock can be identified as the smallest portion of ownership of a company. Meaning, if you own a stock/share of a company, congratulations!! you're a proud OWNER of a company. Yes, an owner. But this is conditional, let us see how.

There are basically two main types of stocks/shares. Namely;

1) Ordinary Shares (we don't call 'Ordinary Stocks') and'

2) Preference Shares (not 'Preference Stocks')

Let us a look a little deeper into these two types.

Ordinary Shares

This is the most important type of shares in a company. Because holders/investors of Ordinary Shares are the REAL OWNERS of a company. Yes, Ordinary Shares give the investor the opportunity to participate in company meetings, vote at such meetings and most importantly be eligible to be voted as a director of the company. The only catch with Ordinary Shares is that it involves a little risk of not being eligible for a fixed dividend (Dividend is a payment made by a company to both Ordinary and Preference shareholders based on the profit made by the company during a financial year) If by misfortune the company ends up making losses, Ordinary shareholders may not be eligible for any dividends for that year. Simply it's a waving rate of dividends. No profits, no dividends; small profits, small dividends; high profits, high dividends. Unlike Preference shares, Ordinary shareholders will be eligible for high dividends when the company makes high profits. Other than that an investor should always eye for Ordinary shares.

Preference Shares

This is a more non-risky mode of investment. Preference shareholders are eligible for a fixed amount of dividends for a financial year. Even though the company makes profits or losses they will receive their share of dividends without trouble. But, preference shares lack all other benefits offered by Ordinary Shares, such as attending for company meetings, voting power and being elected for the director board. So an investor who likes peace at mind should eye for Preference shares.

Issuing Shares

Only one type of business organization is allowed to issue shares to the public. That is a "Public Limited Company". A Public Limited Company (PLC) by definition is described as a company that is authorized to issue shares to the public. It's not like that other companies cannot issue shares, Private Limited Companies, Co-operative Societies etc can too issue shares, but NOT to the general public. General public is basically the population of a country like you and me. :) Even not all PLCs issue shares to the public. PLCs are of two types;

1) Quoted Public Limited Companies

2) Unquoted Public Limited Companies

"Quoted" refers to the state of enlisting at the stock market of a related country. So basically only Quoted PLCs issue shares to the public. 

Share/Stock Value

At first shares are issued at their "Par Value", that is the value at which the founders of the company issue the shares at the formation of the company thought an Initial Public Offering (IPO). The based on the performance of the company, with time and with the demand to the shares, the share price may increase or decrease. If it's increased, the increased amount is considered as a "Premium Value".

This article should give the reader enough basic idea about Shares/Stocks. We'll look into more of the stocks and stock trading in future articles.