Every body enters the stock market to earn money but not everyone makes a profit out of their investments. There is risk involved which one should accept before we start to trade. Warren Buffet the investment guru has said ‘Risk comes from not knowing what you're doing.’ So lets us know what we are doing and how safely we can do it.
With the advent of the Online based trading investors have the markets at their finger tips. Gone are the days of calling the broker and wait for the phone line to connect to place your order.
Online trading has the following advantages
On the spot decision making.
Tracking your investment.
Maintaining your portfolio.
Some trading accounts provide alerts thereby you can receive alerts about stocks on your mobile; you do not miss an opportunity if you are busy in some other work.
We can list many advantages of an online account but there are some disadvantages too.
Obviously you need to have a good internet connection.
The age old problem of availability of electricity.
The broker’s advice. Usually if you have a good relationship with a broker they tend to advice you about stocks and trends. This is invaluable.
The Technical jargon of stocks
There are some Key financial terms and indices that help us to know how good a stock is. Some of the few are listed below. However these solely do not define the stocks performance, they need to be taken in conjuncture.
Earnings per Share: Or EPS as the name suggests it is how much you earn per share.
It can be calculated as:
Net Income –Dividends on Preferred Stock
Average Outstanding Shares
For Ex:
For example, assume that a company has a net income of 30 Lakh Rs. If the company pays out 1 Lakh in preferred dividends and has 15 Lakh shares for half of the year and 15 million shares for the other half, the EPS would be 1.93 Rs (29/15). First, the 1 lakh is deducted from the net income to get 30 Lakh, the number of shares outstanding (15 lakh).
Obviously the higher the EPS the better is the stock.
Price-to-Earnings Ratio: Known as PE ratio is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share.
P/E ratio = Price per share / Annual Earnings per Share
For Ex:
If the PE of a stock is 20 it means that the investor is willing to pay 20 Rs for 1Rs of current earnings.
The lower the PE ratio the better is the stock
Usually there is a possibility that the P/E for a share is negative. This can happen only if the Annual earnings per share is negative, since the price of a share can never be negative. Usually companies do not report a negative P/E instead they get displayed as ‘Not applicable’ NA.
Return on Equity: Known as ROE it is a measure of profit generated by a company by the money invested by the shareholders.
ROE = Net Income / Shareholders equity.
This index depicts the profitability of a company when compared with its competitors in the same space. The higher the ROE the better is the company’s performance.
Face Value: The face value of a stock is its value as stated by its issuer. This value does not change. Only if a company decides to split a share it can do so by splitting the shares face value. The market value of a share may vary due to market conditions but the face value does not change.
For Ex:
A company share can have a Face Value of 10 Rs and its market value could be 30 Rs.
Also a company share can have a Face Value of 10 Rs and its market value could be 4Rs.
These above mentioned indices help us in deciding whether a stock is a good stock or not but they do not tell us whether it is the appropriate time to invest in this stock. The 52wk H/L index is a very important index to decide the timing of investment. Lets see the below mentioned example that will give us a clear picture.
For Ex:
If the current market value of a share is 30 Rs.
And the 52wk H/L index is (50/20)
It means that in the span of past 52 weeks i.e. 1 year the highest market value for that share is 50Rs and the lowest that it has traded is 20 Rs.
So if we want to invest in this stock there is a possibility that this share could go to a high of 50 Rs in the future. Also there is a possibility that this stock can trade at 20 Rs in the future.
Now if we want to invest in this stock we can expect a profit of 20 Rs and a loss of 10 Rs per share.
Now take another case where in the current market value of a share is 45 Rs and the 52wk H/L index is (50/20)
In this case we need to be careful that the stock is nearing its 52wk high price and there
Is a very less margin of profit that only 5Rs per share.
While trading in equities one should also know when to sell his shares to avail maximum profits. To make this decision the 52wk H/L index helps us a lot.
A buy @ a price of 52wk Low and a Sell @ a price of 52wk High is a very good bargain which is a rarity.
Quick Notes:
One should keep in mind that the return should be greater than the brokerage charges and the other service chargers levied.
Invest in stocks whose business you can understand and believe in.
Keep in touch with other investors and Brokers to get updates on stocks.
Do not go by others ideas, have your own research before buying or selling a stock.
Go for long term investments. Short term investments may be lucrative but risks are higher.
Happy Trading
