Stock markets are a lucrative but riskier mode of investment option worldwide where average returns come to a cool 12 to 14% for long term investments. Investors look forward to accessing valuable data that may help them in taking an informed decision for investment in securities. Whether , it’s developing or the developed economies, the mindset of every investor remains more or less the same. There could be differences in the temperament or risk appetite between the investors coming from diverse backgrounds but they are all attuned to booking profits by curtailing their losses.
Despite turbulance and volatile nature of markets, the number of customers entering stock markets keeps surging every year. It will be premature to imagine that these customers enter this era after pursuing formal training or crash courses in stock trading or investments. My experience suggests that only a few customers come prepared with complete information on the salient features of stock markets. Ever-increasing number of customers need sophisticated tools as well as expert guidance to transact business for earning profits with an eye on protecting their capital.
We find hundreds of blogs and an equal number of Videos every day trying to impress upon the investors with their half-cooked stale stories. Business TV/ Youtube Channels have their own agendas to maximize profits by streaming programs that get maximum viewership. They end up serving the interests of the companies rather than the investors. However, there are still some superb websites and Channels which provide well-researched data for you to utilize analyzing important statistics. Morning star, Screener, investing.com, yahoo finance, Google finance etc. are some of the sites that provide authentic updated data for brainstorming by the investors.
Though it’s not an easy call to predict the movement of markets or offer foolproof advice on trading in the stock markets I will try to communicate in a simple and amenable language for you to comprehend and apply the knowledge while conducting business in the stock market. You are not going to become a complete professional with this brief piece of enlightenment but you will feel more comfortable and confident to conduct stock market business more prudenly in the future.
Let’s categorize the customers to understand the gamut of stock market business in a better way. There are generally two types of customers engaged in buying and selling shares/securities with the sole aim of earning profits:
- Traders: Any customer who enters the market for buying and selling of shares for earning profits by putting his money for some minutes/hours/days is known as a TRADER. He has nothing to do with the fundamentals of the company and acts only on any hot news about the company/Latest Govt.Policy/Political disturbances or any information that impacts the market movement. This is the riskiest type of stock market business as you may earn huge money in a few trades but likely to incur losses on some other occasions. Income from this type of activity is taxable under short term capital gain tax as applicable in the respective countries.
- Investors: A tribe of customers who try to understand the company by following its past performance, management and, future projections by committing his money for a longer period of time is called INVESTOR. These types of customers are likely to earn big profits by remaining invested for longer horizons. Historical data proves wealth creation for those investors who stay invested for a period of 10 years or more. A large number of millionaires or billionaires worldwide have found their way to stardom through this route only. Income generated by the investors is taxable under long term capital gain tax as applicable in the respective countries.
Remember!! Be patient!! Today is not the last day of the stock market. Take a well-researched decision before jumping into the market. Please don’t get tempted for buying or selling without reassuring yourself about the timing and value of a stock. Any hasty decision will land you in trouble and the hard- earned money may slip out of your hands. Trade in high volume scrips initially and lower priced stocks should be avoided.
In the following table, I have tried to incorporate a few ratios/terms along with their relevance for your reference and understanding in an easier way. You can save this table and utilize the data in case of need. Once you have shortlisted a few stocks for trading or investment, you need to collect and correlate data with the given table for taking a final call on buying the stock.
| Terminology/ Ratio | Formula | Benchmark | Relevance |
| Earnings per Share(EPS) | Net Income/Ordinary shares value | +ve | It should increase every year and any reverse trend must be analyzed properly. More the EPS(Earnings per Share) good for investors. In new companies like After pay, this may be negative also but you can see how this figure has been improving over the years. |
| Price to EPS (PE ratio) | Share Price/EPS | <15 | In simple words, PE ratio is the value by which multiple of EPS, the share price of any company is trading in the market. For example, if the share price of any company is 120$ and EPS is 8$, then the PE ratio will be 120/8=15. Normally value less than 15 is considered good for investment. However, some good companies have high valuations and it will be prudent to compare the PE ratio with other companies of the same industry. |
| (Return on Equity) ROE | Net Income/Equity | >15 | Value more than 15 is good for investment. Must compare this ratio for the past three quarters to have a clear picture of the company. The Increasing trend indicates the good health of the company even if the value is less than 15 |
| (Return on capital employed) ROCE | Net Income/Total capital employed | >15 | Value more than 15 is good for investment. Must compare this ratio for the past three quarters to have a clear picture of the company. The Increasing trend indicates good health of the company even if the value is less than 15 |
| D/E Ratio | Debt/Equity | <1 | D/E ratio is a calculation used to assess how much debt is being used to run a business compared to the equity of the business. valuation ranging from 1 to 2.5 is acceptable. For infrastructure companies, it could go beyond these figures |
| (Price to Book Value) P/B Ratio | Price/Book value | =1 | Any value around 3 looks satisfactory for good companies. However, this ratio is much higher in well established companies. More value of this ratio indicates lesser amount of money available in case the company goes into liquidation |
| Dividend | Surplus Profits or reserves/total shares | As per the profit | A sum of money paid regularly by a company to its shareholders out of its profits is known as a dividend. Though all companies don’t pay dividends this adds to the value of shares. |
| Promoter’s Capital | Preferably more than 50% | 50% and above | Refer shareholding pattern to see the %age of promoters capital and whether there is any pledging of shares by the promoters. Pledging of shares is not desireable. Have a look at the contribution in the share capital made by Mutual Funds and FIIs. Any such contribution is good for the investors. |
| Revenues or Sales | Must increase | Must increase | This is the figure which must increase every year for a robust healthy working of the company. Any decrease means there is a problem with the company management and study thoroughly before investing. |
To illustrate further, the relevance of these data and terminology used in the above table, a live example of Colgate India Ltd one of the top consumer goods companies in the world is being shown hereinbelow. You will see by yourself, how a good company demonstrates strength in all the parameters and ratios. Please go through the data as shown below and try to connect with the table shown above. This will help you in arriving at the correct decisons while investing in the stock market.
- Market Cap₹ 43,523 Cr.
- Current Price₹ 1,600
- High / Low₹ 1,630 / 1,065
- Stock P/E : 49.7
- Book Value: ₹ 60.0
- Dividend Yield: 1.75 %
- ROCE:: 67.4 %
- ROE: 53.7 %
ROE(Return on Equity)
| Return on Equity | |
|---|---|
| 10 Years: | 65% |
| 5 Years: | 53% |
| 3 Years: | 51% |
| Last Year: | 54% |
Disclaimer: The material and information contained on this website/Blog is for general purposes only. You should not rely upon the material or information on the website as a basis for making any business, legal or any other decisions. Any reliance you place on such material is strictly at your own risk and responsibility
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