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Moneylife Stock Book For Beginers
Moneylife Stock Book For Beginers
Investment
Basics
for Beginners
s a v e r s. m o n e y l i f e. i n
Stock
Investment
Basics MONEYLIFE
ADVISORY
FIX YOUR FINANCES, FOREVER
Stock
Investment
Basics
I
f you want your money to grow,
there are hardly any better
options than investing in stocks.
For equity investors, certain stocks,
properly selected and discarded, can
become the road to unimaginable
riches. When banks pay you 9% per
annum, every few years a handful
of stocks fetch anything between
100%-200%. If stock investing is
that rewarding, why are most people
averse to investing in stocks?
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Stock
Investment
Basics MONEYLIFE
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What are
stocks and
shares?
Y our share of Reliance, Infosys or
any other company represents
a share of your ownership in the
company. You own a slice of every
rupee of profit that the company
makes and have a claim on its assets,
proportional to your stake. As your
share of ownership, you get one
vote per share of stock to elect the
directors and to express opinion
on some decisions. The real point
of owning shares is to share in the
growth, innovation and wealth that the
enterprise economy creates.
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Stock
Investment
Basics MONEYLIFE
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Stock
Investment
Basics MONEYLIFE
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Kinds of stocks
Companies can be classified by their market value, which is their
number of shares multiplied by market price. As defined by their
size, Moneylife divides stocks as mega, large, mid, small and micro
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Stock
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Others such as business newspapers, exchanges and mutual funds may follow a
different classification.
Value stocks:
Stocks of companies that have excellent assets and potential for growth but may be
down in the dumps temporarily are called value stocks. Their prices would be lower
than what seems fair. There is a powerful investment approach that only invests in value
stocks because these are seen to be bargains.
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Stock
Investment
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How to measure
corporate
performance
One of the first tenets of long-term investing is to find a way to value
stocks based on the corporate performance. How do you measure
corporate performance? To invest in stocks or stay away from them,
you have to understand the following set of basic financial numbers
that signify a company’s health and its earnings growth:
Operating Profit:
This measures the profitability of the core business operation and is expressed as sales
minus all costs except interest, depreciation and taxes.
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Cash Flow:
Reported PAT and EPS can be traps since PAT is an accounting number arrived at after
lots of adjustments. A company can show healthy PAT but may have a poor or negative
cash flow. A negative cash flow also indicates that there is a fundamental problem with
the company’s operations: either the profitability is too low or money is stuck in high
inventories and receivables.
Profit Margins:
While profits are important, equally important is profitability – expressed as a
percentage of sales. Expressed this way, margins allow us to compare companies
across sectors and within a sector indicating how profitable the operations are.
Dividends:
A key measure is regular dividends to shareholders that give them confidence that the
company is in sound financial health. When dividends are increased, the message is
that the company is prospering. When dividends are cut, investors receive the opposite
message and conclude that the company’s future prospects have dimmed.
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Stock
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T he best stocks are those that have excellent financial performance and are not
valued correctly. If the price is in an upward trend, it helps. This would combine
value with price action – an essential combination to win in the game of stock picking.
The three most important measures of performance are sales growth, growth in net
profit or Profit After Tax (PAT) and return on equity (RoE). PAT indicates the absolute
profitability of operations. EPS indicates the profit per share and RoE indicates overall
profitability on owners’ (shareholders’) funds invested. Once you have decided to
identify good stocks based on these parameters, you will have to estimate whether they
are overvalued or not. You must at all times avoid buying stocks with poor financials.
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Stock
Investment
Basics MONEYLIFE
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How to
invest in
stocks
Primary market
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Stock
Investment
Basics MONEYLIFE
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Fundamental analysis:
Theoretically, when you buy a share, you are buying a proportional share in a business.
So, to figure out how much the stock is worth, you should determine how much the
business is worth. To do this you have to make a detailed analysis of the financial
condition of the company. This is known as “fundamental” analysis. Some believe that
this is the only rational approach to valuing stocks.
Quantitative approach:
There is another approach to investing. It is using computers and mathematics to
detect patterns, capture the pattern in models/formula and teach computers to provide
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Stock
Investment
Basics MONEYLIFE
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buys and sells based on these models. This is the quantitative approach to investing.
Applying quantitative tools is also called data mining. Quants or data miners develop
a hypothesis defining a relationship among various past data (prices, seasons/months,
streaks of winning or losing days etc.), then look for how statistically significant that
relationship is. This includes testing the relationship within data in different time periods,
market environments, etc., in order to test the robustness of theory. Finally, they would
take investment/trading positions by presuming that those past relationships would
continue to hold in future. It is as close finance can come to a scientific approach.
Technical analysis:
Technical analysis is the study of market action, using price charts, to forecast future
price direction. The central belief in technical analysis is that all factors that influence
market prices (fundamentals, political events, natural disasters, and psychological
factors) are quickly discounted by the market and prices reveal everything. Investors
who focus on chart readings call themselves technical analysts or chartists
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Stock
Investment
Basics MONEYLIFE
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Stock
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Basics MONEYLIFE
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Count-down to
successful stock picking
10 Ignore Extremes: The central belief in technical analysis is that all
factors that influence market prices (fundamentals, political events, natural
disasters, and psychological factors) are quickly discounted by the market and prices
reveal everything. Investors who focus on chart readings call themselves technical
analysts or chartists.
09 Avoid Big Losses: If a stock falls 90%, it has to rise by 900% to get
you back to where you were and that will not happen. So you can never allow
yourself a catastrophic loss. Put predetermined stop losses to avoid being wiped out.
Do whatever it takes to keep your downside limited and your upside unlimited.
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Stock
Investment
Basics MONEYLIFE
ADVISORY
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Stock
Investment
Basics MONEYLIFE
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16 Timeless
Tips for
profitable
stock
investment
Here is some timeless advice on stock investing
culled from experts:
01 An attempt at
making quick
money leads to losses
02 If stocks don’t
seem cheap by
historical standards, stand
03 Buy and hold does
not work always
Never average down a losing
far higher than the initial aside or invest in very small investment unless it is part of a
investment. amounts. well-thought out method.
04
a hot tip.
The best tip: there
is no such thing as 05 Don’t fall in love
with your stock; it
will never fall in love with you.
06 Valuations don’t
matter in the short
run and “short run” can last
It will fall with the market. for months and even beyond a
year.
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Stock
Investment
Basics MONEYLIFE
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10
patience.
Develop a method,
stick to it and have 11 Lots of humility
helps. A rising tide
raises all ships and so you may
12 Stocks fall more
than you think
and rise higher than you can
have been just lucky. possibly imagine.
13 Investing in what
popular stocks, fad
industries and new ventures
14 Bear markets start
in good times. Bull
markets start in bad times.
15 Neglected sectors
often turn out to
offer good values.
are riskier than they seem.
16 Don’t assume
either the media
or fund managers know more
than you. Their record shows
they don’t.
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Stock
Investment
Basics MONEYLIFE
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6 Stupidest Things
People Say about stock
investments
How much lower can it go?
After the bust of 2000, the four hottest stocks met with the following fate. Pentamedia
fell from Rs 2109 to Rs 4, DSQ Software fell from Rs 2820 to Rs 6. DSQ Software has
been now delisted from the exchanges and the promotor of the company is absconding.
Himachal Futuristic fell from Rs 2552 to Rs 7 and SSI with which the famous US stock
exchange Nasdaq even had a joint venture, fell from Rs 7200 to Rs 40.
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Stock
Investment
Basics MONEYLIFE
ADVISORY
FIX YOUR FINANCES, FOREVER
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Stock
Investment
Basics MONEYLIFE
ADVISORY
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This ebook is part of the finest knowledge base on personal finance in India which Moneylife
group has developed since 2006. Moneylife Advisory Services is not a financial planner or
distributor. We research and shortlist safe and smart products for members but don’t charge
commissions for recommending. To know our unique ethical and commission-free model click
here.
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