Post Updated , Read it again if you read it before .
This is a follow up post on Akruti City saga .
While I write this post on Friday Evening 20th Mar 09 , Prices of Akruti City has crashed by 28% with better than average volumes on NSE , and may even fall more . This is happened because SEBI banned it from F&O from next month . In my previous post I mentioned that retail investors must stay away from these kind of companies .
The scrip has gained more than 250% from Jan 09 , and has doubled in just 5 sessions . this kind of behaviour is unjustified and hence it had become a dangerous scrip to trade in .
There was a Evening Star Pattern seen today , which is a bearish Signal . This tell that its something to be cautious of .Though its a signal to sell , but dont just go and sell , wait for the first sign of confirmation again . Overall markets upmove can again take it high again .
So wait for next downmove to consider selling incase you have made your mind to do so . The better thing would be to stay away .
In my earlier post I had mentioned about this , Read it here
Though the reasons are not directly related to company inside news or anything . the point is simple , Whenever it comes down , it will be a heavy move and it has happened . Any one who had invested 1 lac a day before has now worth of Rs 75k. It may go further down or again go up . that’s is not the point .
The Point is Was it a Good investment ? Think 🙂
Read detailed new about Akruti City’s Drop in Prices here
If you are watching Markets , you must have seen the movements of Akruti City . This company is a Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1 week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that’s roughly a week .
Note : Please vote on the question asked on the upper – left hand side of this blog .
Also see the update on Jaiprakash Associates after todays markets action on my analysys blog , click here
So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , just next to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!
see list of real estate companies with market capitalization
My God !! , whats going on !!
90% of the equity is with promotors , and a very small fraction is with retail public , you can understand that everything going on is just the “kartut” (hindi word) of minority public .
Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back has made exceptional profits , But is it a right decision to invest in this as of now for short term gain or to ride the trend . A big NO!!
For sure some insider trading is going on with company , that’s the reason why stocks has gone mad . Retail Investors must not get very excited with these kind of things , These kind of sharp moves are not sustainable , to move in a healthy way , the stock must form a base (spend some time in a range ) and then start its up move slowly and with some corrections in between .
These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready to explode .
If like someone who just entered the trade 1 week back and made 100% gains , other person can also loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investing now , its Gambling !!
Suggestion : please stay away , Dont forget the mantra of “Not loosing money” rather than “Trying to get fast money” in stock markets . If you are bothered about lost opportunity , I can bet there more opportunities in market every day than all the combined opportunity in the world in all other aspects of life . Wait for just 1 day and you will get thousands of opportunities again .
see detailed news on :
Note : Please vote on the question asked on the upper – left hand side of this blog .
Long term investments are the investments that are suppose to be held for an extended time period which will be considered to be more than 1 year.
There is no exact definition for long term investments. Let’s see how it is different from short term and medium term investments.
How long is long term ?
There are mainly 3 time frame in markets
Short term (6 months – 2 yrs)
Medium term (2 yrs – 8 yrs)
Long Term (8+ yrs)
We are taking about long term investing from point of view of Investor , which invests in a company on the basis of fundamentals and valuations .
Time Frame is a relative term , Short term for some one can be medium term for some one and long term for other . similarly if some time duration is long term for you , it can be short term for someone else .
I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it
But here we are talking about an average investor . So lets look at predefined tenures .
from my understanding, any time frame less than 6 months shall be considered as trading Time frame . Traders are people who like to take advantage of short term price movements based on news , Charts patterns etc .
One thing you must understand before hand is that Risk and returns are proportional , If you take high risk , there are chances of high Returns.
Now , lets see different time frames .
Short Term (6 months – 1 yrs) :
Any investment made from 1-3 yrs should be considered as short term .
Risk/Return Potential :
VERY HIGH .
Investing for short term :
Invest for short term only if you can afford take the risk. Its always good, not to invest for short term for any goals which are very important. Like for example, if you are going to have an operation or a marriage after 1 years, don’t put your money in stock markets for less than a year to gain extraordinary gains .
Its for professionals , not for an average investor. do it if you can afford to risk loosing it.
Low risk Short term investment option :
Corrections in a BULL RUN : If there is a BULL Run, wait for a correction, It happens many times that there is some correction in stock markets , At that time you can do some investments for short term like 6 months – 1 yrs. Invest only when markets start rising again .
Have a level in mind where you will take loss if it goes against you. There is no guarantee of profits ever. If you are in profit after 6 months, take your profits and get out, don’t convert your short term investment in long term one, One who can not be loyal to his plan in markets will eventually loose it all some day.
Same thing can be applied to short selling in corrections in Bear markets.
Example : In April 2005 , Oct 2005 , June 2006 , there was very good correction, after which it gave 30-40% returns within 6 months – 1 yrs.
If you want to understand the short term and long term in share market, watch the video given below:
Medium Term (1 yrs – 3 yrs) :
Any investment made from 2-8 yrs should be considered as Medium term .
Risk/Return Potential : HIGH/Medium :
Higher the tenure , lesser the risk .
Also it depends on the situation , there is again no guarantee , There can be some time , when there can be high risk in 3 yrs and some time it can less , but over all it should be less than the short term investment .
Investing for Medium Term :
You should invest for medium term for goals like Car , Vacations , etc and some part of portfolio for House , etc (close to 5+ yrs , not 2 yrs) . Choosing well diversified portfolio and investing in strong fundamentals is extremely important . Good timing is always important in any time frame .
But its difficult to time the market .
Low risk Medium Term Investment Time :
After a Bear Market is there for some time around, and markets have fallen considerably, you can start accumulating good stocks with good valuations every month in installment. Don’t jump and put all your money at once ,just because you feel, “now markets have fallen much”, Markets are supreme and you are no one to “feel” or “tell” markets movements.
Just expect it to come back soon and now start accumulating good shares , or start a SIP. There is no guarantee of any profits, we are just discussing the low risk opportunities here.
Read why SIP helps in falling and Volatile markets , Part 1 and Part 2
Example : Current time . This is an excellent time to start accumulating fundamentally good stocks in installments over next couple of months , especially a big chuck should be invested when there October lows are breached within some days ,which is expected with high chances .
Long Term (8+ yrs) :
Any investment made from 2-8 yrs should be considered as Long term .
Risk/Return Potential :
LOW , By Low do not think that we are saying you will get lower return , we are talking about CAGR, obviously the CAGR you can expect over long term is lower than the CAGR which you can expect in short term or medium term, but more important is the risk, the loss potential, and that is extremely low here, almost Nil i would say, This I am saying on the basis of past historical data.
Loss is possible but chances are very bleak .
Investing for Medium Term :
You should invest for Long Term for goals like Retirement , Child Education , Children Marriage or any financial goal which is to be taken care of after 8+ years , Do it using SIP .
Low risk Long Term Investment Time :
Ideally speaking, you can start doing this any time without seeing the current situation of market, because over long term it would matter less that when you entered markets. This does not mean that timing is not important in growth of money, obviously, If you enter neat the end of bear market or at some other important time, it would help .
But the point here is that , it would not harm if you start investing for long term at any time frame assuming that you are diversifying it well across sectors and stocks and also apply some extremely beneficial techniques like Portfolio rebalancing over this long tenure .
Don’t get scared by these words ,they are extremely easy to understand things and can be applied by anyone , and it does not take much time also , The only thing required from investor is the his share of determination to do all this .
What ever i have talked about here are my personal views and my own idea of short term, medium term and long term. It can differ from people to people with different risk – appetite. Also understand that deciding your time frame is important to deal with the situation in markets after investments.
For example: if you decide that you are investing your money for your retirement which is going to come after 25 yrs, then it would be really easy for you to digest the volatility of markets and to see it going down while you invest. So know your time frame and invest it smartly at correct time.
Don’t try to get smart and get greedy. Markets are the place where Albert Einstein and Issac Newton also failed and returned to try what there were good at. That does not mean we will also fail. try to made fast money, in fact try to make smart money.
For new comers in this area, its advisable not to enter through Direct equity, better go though mutual funds, and please listen to people when they tell you all this, don’t get smart, else you will be ruined like millions others.
I have also written a small post on IDBI FORTIS WealthAssurance ULIP, Read it
This post is for people who are interested in Stock markets trading, SudarshanSukhani has posted an excellent presentation on Swing Trading here, please go through it and use it incase you want to do it.
Who should use this presentation for Trading ?
This presentation is only for people, who are already experienced with Trading, no matter they make Profit or Loss. You must have some level of knowledge and experience before.
Especially for people who are trading and are yet to succeed in Trading (Whether its Stocks , Futures or Options , it may be currency or Commodities also). I also come in this “overall loss making” category of traders till now. I am yet to break even and start making some profits in Trading.
Who should not start using this presentation just after seeing this presentation ?
Anyone who is not at all related to trading and just want to start Trading. If you have not done it before, Just look at it and stay away as of now. You are yet to gain more knowledge and then enter this world, You yet need to understand what is Money Management, Trading Psychology, Technical Analysis etc etc.
If you don’t listen to me and start using the techniques given in this presentation, there is extremely high possibility that you loose blow up your account at some point of time, Just see this presentation, get the feel and save it for future reference.
I see many people who want to try there hands in trading .
Trading means buying and selling something with a short tenure in mind. Short tenure can be day, week or months. You can trade Stocks, Derivatives like Futures or Options or you can try out Commodities or currencies too.
The sad part is that many people just enter this trading business without much preparation and knowledge and burn there hands like anything. they continue loosing money every day, week, month and cant figure out why they are loosing.
Understand some things :
Trading is a profession, and its highly rewarding in every ways. BUT !! Trading is one of the hardest thing one can ever attempt, trading is simple but not easy. It takes years for one to master it and become successful as a trader.
If you are trying to learn trading and want to do this in your life. I can suggest somethings:
Start Learning about markets and do it for at least 1 year (not 1 month)
Read good books and make sure you have read it really well.
Once you have done this. Then you should paper trade for some time, may be 2 months. After you have paper traded and can see that you can trade well on paper, then start with small money (you must be ready to loose this money) … Do some real trading with this money and see how you perform.
Trading is a highly rewarding and satisfying profession. You can earn good money and you are your own boss. Trading can be fun and challenging. But Trading is the most challenging and highly risky profession one can attempt as I already said.
Technical analysis helps in taking much better decisions for buying and selling. Its a must for short term traders, however it also helps people who have longer time horizon, With Technical Analysis you can make better entries, exits and manage your decisions well.
Some reading Material for people who want to learn technical Analysis is here
Lets play a game, the name of the game is “Game of Trading”. I am stock market and you are investor. You have got 2 chances of investing you money, One time I will give you 200% return and other time I will give you -80%, or in reverse order, so it can either be
200%, -80%
OR
-80%, 200%
You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital), you have to decide for both the times in the start only.
Lets analyse different cases.
Case A : You choose invest capital as 100% first time and 20% for next chance
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time .
Case B : You choose invest capital as 20% first time and 100% for next chance
Case B.1 : Return was -80% first time and 200% next time.
Case B.2 : Return was 200% first time and -80% next time.
You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …
What should you do?
100% and 20% choice will always loose in long run, if you play this game over and over again for long run, Understand that in this game, you can make it “high risk high return” Game or “Extremely no risk, low return game”, And your choice of your invest percentage will decide which game is it.
Characteristic of “High return High risk game” : Its possible to make great money in short term, but in long run you will loose.
Characteristic of “Low risk, low return game” : You will Not make great return in short term, but with compounding effect, you are bound to be a winner in long run.
Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order.
Lets choose 25% invest capital :
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time.
You can see that in any case your 100 becomes 120, which is 20% return.
What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself). So what should be the best percentage capital to deploy each time in this game.
I tried to make an Equation, with all variables
p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means, 25% of the capital will be invested at any time)
We want to find optimum T, given any p and l (assuming that the trade will be done 2 times)
So, If you calculate the total capital after the 2 trades (do the math), you will get
Total capital = C (1 + pT) * (1 + lT)
So our original capital is getting multiplied by (1+pT)*(1+lT), and we have to maximize this number.
lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT
If we do some differentiation here with respect to T (people who don’t know differentiation, just leave it), and put dI/dT = 0
2plT + p + l = 0
T = – (p + l) / 2pl
So the best valeuof T is -(p+l)/2pl ..
For our earlier example , p = 2 , l = -.8
we get – (2 – .8)/ (2 * 2 * -.8) = .375
Which means, 37.5% of capital will be invested everytime, and with that our capital will become 122.5 and that is the max you can make without risk.
What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36, means investing capital will be 30.555% always and that will give us max return.
What is the point i am trying to make?
In any given situation of making money, there may be a big risk of loosing it, we should always use these kind of tools and always be safe. Don’t try to be very bold in stock markets.
People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term.
Summary
When you do Investment or do trading, you should never put all your capital into it, one bad trade or investment and you will be ruined forever, better to risk only that much capital which can not take out of of the game, but just hurts a bit.
Take small and risk-less profits if possible, Investing and trading is all game of probabilities. Use math’s and logic to take smart decisions like discussed in this article.
“There are old investors and there are bold investors, but not both”.
One of my friend is fond of shares and options trading , from a capital of Rs.50,000 , he grew it to Rs 2,00,000 , whereas I am almost at the same place from where I had started because I do some thing called “Risk Management” … Every time I take a trade or invest in anything . This is how I go about it .
– Either I don’t take the trade
– Or I take the trade, but work on risk management, I hedge it using PUTS or invest less in that.
Because of these two things I either miss big profits or make very small profits. managing risk involves cost and that’s the cost you have to pay for trying to be “safe”.
Last week we both purchased some thing which gave him 50% return, but gave me just 7-8% return over my investment. The reason was that I also hedged my position and tried to be “smart”, which my friend didn’t Acknowledge.
There are many incidents like this, because of which I always lag behind him when it comes to performance, and I am always ahead of him in being safe which never helped until now.
Jan 7 2008 :
10:30 AM :
Markets were a bit up and things looked good , He bought Satyam’s Calls with almost all of his capital, He has good intuition of which options may work and which may not, but I tried to convince him that buying a PUT on a lower strike price will save him in case he is wrong.
But to my expectation, he was “sure” that it would work, He put SL at 175 just to show me because of the fact that he knew it wont be touched at least today.
11:30-12:00 PM :
Satyam Fiasco news came in and within no time Share was down 30-40%, No surprise that even SL was not entertained … because prices never stopped .. everyone was just in a rush … With in some time Share plunged to 60-70, My friends calls were worthless and It doesn’t look that it will now move up from this point.
In short He is dead … He is out of this game now … He has 20,000 cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 – 5,000.
Price of Satyam 120 PA Jan 29
11:00 AM : Rs.1
2:30 PM : Rs.90
Return : 9,000% in 3 hrs.
What is the point I’m trying to make?
Everybody likes to make big profits and we should but not at the cost of risk of blowing up all our capital. Its not just related to Share markets or options. It also applies to Debt market, Mutual funds.
Do everything you can do to minimize or avoid the risk. Its very true that returns comes with risk. I am not saying “not to take risks”, i am talking about “managing risk”.
“Managing Risk” is the biggest measure you should take if you are in this field.
In some of the next posts we will try to see what are the different kind of “risk management” techniques and its importance.
This is a time when long term investing should be done. If you have spare cash for long term, Equity is for you. But how do you do it? How do you choose them? What are the important things you should look at while buying shares for long term?
There are some key things we will have a look at today, these are the key ratios discussed in book Profitable Investment in Shares, by S.S Grewal and Navjot Grewal.
But, before reading them understand that they are ratios which good indication of share prospects and are not guarantee about share price rise in long term, Share markets always run on Emotions and perspective which can change anytime…
Also periodic review is necessary, just buying today and looking after 10 years is not the idea… Buying is always the first step, Periodic review is the next.
8 Ratios to look before buying a share
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts — dividends and ploughback.
Dividend is that portion of a company’s profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company’s reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders’ funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company’s books of accounts.
The company’s books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders’ funds.
If you divide shareholders’ funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders’ funds / Total number of equity shares issued
The figure for shareholders’ funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn’t reflect the current market value of the company’s assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company’s shares. It can, at best, give you a rough idea of what a company’s shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs.10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs.6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share.
This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback.
This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend and 20 per cent (Rs 4 per share), the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company’s shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.
4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company’s share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company’s EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment.
P/E ratio is a reflection of the market’s opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilizing the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company’s future prospects.
If it is low compared to the future prospects of a company, then the company’s shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 doesn’t summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth.
On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company’s future indicates sharply declining sales and large losses.
5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends — capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money — it doesn’t really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment — he doesn’t really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends.
Watch this video to know more detailed information about dividend and yield :
In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company’s shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs.2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.
6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
While analyzing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders’ funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders’ funds) are valuable financial ratios for evaluating a company’s efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company’s business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company’s operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company’s efficiency, financial viability and its ability to earn returns on shareholders’ funds and capital employed.
8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company’s share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company’s future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.
Trading and investing are two different things which confuses lot of beginner investors. In this article I’m going to tell you what is trading and investing and how they are different from each other.
What is an Index?
NIFTY and SENSEX are the Index, they are the indicator of how Markets are performing. An Index is created for measuring a particular section of stocks. When the Index goes up or down, they represent the group of Stocks they comprise of.
So if an Index is up you can say with high probability that most of the stocks under them have done well.
What is Nifty and Sensex?
There are many Stock Exchanges in INDIA, BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are most famous and biggest of all and with maximum business happening there .
Nifty : Nifty is the Index of NSE. Nifty has 50 biggest companies of India representing the companies from almost all of the sectors, Each stock has there own weightages. Like Reliance, Infosys have High Weightage and Ranbaxy has less.
Sensex : Sensex is a Index of BSE, It is comprised of 30 shares.
What are different Indices on Exchanges?
There are different kind of Indices on Stock Exchanges like for NIFTY.
NIFTY : Basket of all the sectors, Represents all the whole Economy CNX IT : For IT stocks CNX 100 : Top 100 Stocks CNX MIDCAP : For Midcap Stocks BANK NIFTY : For Banks
Each Index represents a sector or a group, if you track a Index you can understand how the sector is performing overall.
What is difference between a Trader and Investor?
Trader : A Trader is a person who tries to earn profit from small movements in price, there time horizon is very small like 1 day or a week or some weeks. For example, A trader will buy something @100 and will sell it at 105 and make a profit of 5. He will try to take advantage of volatility.
His main tools will be Charts, News, sector outlook for short term etc. He will not concentrate much on Company fundamentals, Long term sector outlook.
Investor : A Investor is someone who tries to invest money for long term. Long term can be anything from 1 year to 10-15-20 years.
Investor is more concerned about the fundamentals for the companies, its growth and factors like those which are going to drive the share price in long term not short term … Investor is not concerned about the short term volatility. There focus is long term.
How to Begin Trading?
Trading is one of the toughest things to master. Its a better idea to first learn and read about Trading for some months, Watch the markets for some months and try to paper-trade first. paper trade means just trading on paper and seeing how you perform.
Read about Technical Analysis also. Try to gather more and more info on Trading. Read good Books and Learn as much as you can.
Knowledge and your intelligence has very less contribution in your success as Trader. The main things are Money Management, Discipline, Control over GREED And FEAR, and Risk Management.
Once you are very confident you can start, Start with very small Cash and take big bets only when you have made some progress to cheer about.
Have a plan and targets for your Trading. Take Trading seriously as your business and not as hobby, else with high probability you will Fail.
Watch this video to learn about stock trading at beginners level:
How to Begin Investing?
Read How to analyse stocks and Read books. Have a long term horizon and don’t be afraid of your share coming down …
Should you be a trader or an Investor or nothing?
It depends on your personality, the time you want to give in this and your goals. If you find fun with dealing in markets in short term basis, Be a trader.
If you can devote time to markets in daily or weekly basis, then you can be an Investor.
If you are not interested in Either, just don’t be anything .. Do what you are doing right now 🙂
It was a fast written post, I hope thing are clear.
If there is anything in world which can make you instant rich, it’s Options Trading !!! What is instant Rich here !! Instant can indicate anytime from 10 days to 5-10 yrs. It depends on you how much risk you want to take. Options can deliver returns which you can never imagine.
You can get returns in a day equivalent to what you get in 8 years in Fixed Deposit !! 10% return in a week is what I call a realistic average return in long term after risk management.
Just to give an example, if you start with 15,000 and take 10% profit each week, you can generate 1 Crore in 1 year (compounded basis).
How to Trade options?
To just like people trade in Stocks, shares, they can trade in Options .. Buy them at a cost and selling it later at some profit or Loss. The main difference in options trading and Stock trading is that Options trading also has time limit attached to it. That’s makes them more dangerous.
There are some selected shares which have options for them. Almost all the well known stocks have their options. Nifty index also has an option for it.
Almost 85-90% options trading happen in NIFTY options … Each stock option have lot size, like NIFTY lot size are 50. So if the price for NIFTY 2600 CA is 90, 1 lot will cost you 4500. And suppose the price reaches to 200, you can sell it and get 10000, 5500 of profit – brokerage charges.
Some other very good stocks for options trading are RELIANCE, ICICIBANK, CHAMBAL FERTILIZER, JAIPRAKASH ASSOCIATES and many more.
Watch this video to learn more about Options trading:
Some Experiences I can remember
I have often seen an option rise anywhere from 2 times – 50 times.
Just 2 days before NIFTY made the lowest of 2250 in OCT, NIFTY was at 3000, and I bought NIFTY 3000 PA at 60 (NIFTY was at 3000 and 3 days left to expiry). Within 5 min, it went up to 90 and started coming back down .. I sold it at 88 and took good profit of 40% …
Just after I sold it market starting going down and it went up to 200.
Next day market tanked heavily and the price was now 500.
Next to Next day market again tanked heavily and option price was now 750.
Something I bought at 60 was at 750 after 2 days and I sold it at 88. Anyways .. I made good profit and I was happy (It’s a white lie, you know that)
This is a little extreme case, but in general options can give close to 50% – 200% return in short duration. Scenario is very different at the starting of month and at the end of month because of Options expiry. At the time of options expiry, the change in price is significant because of the time value and uncertainty.
How Risky Options Are?
If you don’t fear anything in World, better you fear Options .. It can wipe you out within days … It’s a Money eating machine. You can lose all your money if you are not focused or don’t have knowledge or good money management.
If you are trying hard to lose money and you are not successful, try options ..Warren Buffet calls Derivatives as “Weapons of mass destruction”, I agree with him, but I also differ on the fact that options have the power to make you super rich if you can use it effectively and with intelligence and without GREED.
Advice
If you want to try options trading, first learn about it heavily .. Read books, read stuff .. Watch it for 1-2 months .. See the behavior and once you are confident that you can make some money .. enter with small money (because you are going to lose) …
Don’t feel back after losing money, think of it like “Guru-Dakshina” … everyone has to give it in the start, you are no exception. Now go back .. Again read some more books, Do some virtual trading, and once you are confident again start with small money (which you can afford to lose) .. And start doing the trading slowly step by step … Don’t put all your money in one go .. Else you will cry later.
Disclosure
I have been trading options from last 6 months and still I am in loss and way far than break even .. Please don’t take it as my advice to trade option; it’s just for informational and sharing purpose .. You are yourself responsible for your losses.
“I thought Women are complicated and tough to handle, then I met Options” 🙂
