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How To Make Money From Dividends -The Right Way

How To Make Money From Dividends -The Right Way?

How To Make Money From Dividends -The Right Way?

Everyone who enters the stock market wants to make money from their investments. And in order to do that, first, they need to understand how people really make money from stocks. Basically, there are two ways to make money from the stock market.

  1. Capital Appreciation (Buy low and sell high)
  2. Dividends

When it comes to capital appreciation, most of the people knows this method to make money from stocks. Purchase a good stock at a low valuation and wait until the price goes up. The difference in the purchase and selling price is the profit (capital appreciation).

buy low and sell high

This is the core principle of value investing. Find an amazing stock at a cheap valuation and hold it for a long time until the market realizes its true/real value.

However, there is also a second method to make money from the stock market which is (generally) ignored by most newbie investors. It is called dividends.

In this post, we are going to discuss how to make money from dividends -the right way.

Important terms to learn regarding dividends:

Before we dig deeper, first you need to learn few important terms regarding dividends-

Dividends: Dividends are the profits that a company shares with its shareholders as decided by the board of directors.

Dividend yield: Dividend yield is the ratio of annual dividend per share divided by the price per share. The formula for dividend yield is given below:

             Dividend yield = (Dividend per share/ price per share)

For example, if a company gives an annual dividend of Rs 10 and its current market price is Rs 200, the dividend yield of the company will be 10/200 = 5%.

Also read: Dividend Dates Explained – Must Know Dates for Investors

Here are the annual dividends of few famous companies in India (2017).

  • Hdfc bank – Rs 11 per share
  • Coal India – rs 19.90 per share
  • Hindustan Unilever – Rs 17.00 per share
  • Reliance Industries- Rs 11 Per share
  • Ongc- Rs 6.05 per share

dividends

Now, if you calculate the dividend yield given by the above companies, you may find it very small.

If a company gives a dividend yield of 2% per year, it’s really difficult to build a livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs in dividends, then you have to invest Rs 1 Crore in that stock. This is not feasible for most of the average Indian investors.

However, there’s an important lesson that you need to learn here—

Dividends increase over time…

This means that a good fundamentally strong company will increase its dividends with time.

For example, if a healthy company gives a dividend of Rs 10 this year and makes more profit in upcoming years, then it will increase its dividends in future.

Another important lesson to learn here is that– your dividends are going to increase. But your purchase price is going to remain constant throughout your holding time frame.

Therefore, if you look at the dividend yield, the numerator (dividends) is going to increase with time. But the denominator (purchase price of the stock) is going to remain constant for you. In short, the dividend yield for that stock is going to increase in future.

Also read: How to Earn Rs 13,08,672 From Just One Stock?

Let us understand this better with the help of an example.

How To Make Money From Dividends?

Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments. 

Nevertheless, let us assume that the company is fundamentally healthy and going to give a consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.

Dividend Purchase Price Dividend Yield Total Annual Dividends
YEAR1 Rs 10 Rs 200 5% Rs 1,000
YEAR2 Rs 12 Rs 200 6% Rs 1,200
YEAR3 Rs 15 Rs 200 7.5% Rs 1,500
YEAR4 Rs 18 Rs 200 9% Rs 1,800
YEAR5 Rs 21 Rs 200 10.5% Rs 2,100

Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say Rs 500), the dividend yield for them might be low. However, for you have purchased that stock long ago at a decent price, the dividend yield will be quite high (even higher than the fixed deposits).From the above table, you can notice the increase in the dividend yield as the dividend increases.

In short, here dividends are allowing you to receive a healthy income without selling your original assets.

Also read: 11 Must-Know Catalysts That Can Move The Share Price.

Few points of concerns regarding dividends:

The biggest point of concern regarding dividend stocks is that dividends are not obligations. This means that the company may reduce or discontinue the dividends in future.

For example, if a company suffers a heavy loss in a year or if the company is planning to invest its profit in some new project/plant, then it might reduce the dividends or do not give any dividends to its shareholders.

Therefore, if you are investing in any dividend stock, then first make sure to look at the dividend history of that company. A consistently increasing dividend for the last 10-12 years can be considered a healthy sign.

Also read:  10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

Conclusion:

Buy low and sell high is not the only way to make money from the stocks. There are many long-term investors who are generating big wealth through their annual dividends.

If you want a good consistent return on your stocks without selling it, then investing in a healthy dividend stock can be a good strategy.

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

Tags: Dividend Investing, make money from dividends, dividend stocks, how people make money from dividends, dividend

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Buy when there's blood in the streets cover

Buy when there’s blood in the streets, even if the blood is your own.

Baron Rothschild, a British banker and politician from the wealthy international Rothschild family, once said that the best time to buy is “when there is blood in the streets.”

In simple words, when everyone else is selling, it’s a great time to purchase. However, this advise is far easier said than done. Although it seems logical advice, yet very few people follow it. (Btw, by streets we are referring wall street/ Dalal street or just the stock market.)

Why are people afraid to invest when the market is down?

Before diving more in-depth, let’s first understand why people are afraid to invest when the market is down.

For the beginners, they are simply scared that the market may go further down and hence, it might not be the right time to invest. Sounds legit, right?

However, here the problem is that even the most experienced investors can’t time the market correctly and repeatedly. If you are planning to invest in the stocks at the bottom most price, you would most probably fail. The better approach would be to buy when they are cheaper, not the cheapest.

On the other hand, the existing investors are afraid to invest further because they are already bathing in their blood. As many of the stocks in their portfolio may be in red, these investors might be scared to make further investments. However, this approach doesn’t sound correct, does it?

I mean, let’s assume that you bought some seeds to plant in your field which may produce big returns in the long-term. However, after a few months, the price of those seeds dropped significantly. What would you do? Would you buy more of those seeds so that you can enjoy a bigger discount and secure your future even further? Or will you just stay out of the market, even though you have a larger field left to sow?

In my opinion, it would be a better outlook to buy more seeds at a cheaper price which might produce a greater return in the future.

The Law of supply and demand

supply and demandThe laws of supply and demand say that whenever demand is lower, the price must come down.

Now, when there is blood in the streets, there is a panic selling and a majority of people tends to sell their stocks. In such scenarios, the demand of the stocks decreases a lot compared to the supply.

And obviously, when demand is less (and the supply is more), you can buy stuff at a better discount. (On the contrary, when the market is high — the demand goes higher and hence the buyers have to purchase the same stock at a premium).

That’s why bad times make for good buys. Invest in the market when there’s blood in the street and you can get great bargains.

Also read:

The market always gives opportunities, but only a few are brave enough to take it.

If you look at the stock market history, you can find that the market always gives opportunities to purchase shares at a lower price. Whether it was correction during March 2018 (after the announcement of re-introduction of LTCG tax) or the demonetization, the market has always given amazing opportunities to the buyers.

However, most people miss out these opportunities as they are busy following the crowd. Nevertheless, buying when the market is high and trying to sell during the lows can never be profitable for the investors.

Moreover, making emotional decisions to sell stocks when the market is down is always a mistake.

The history says that market rebounds, and over the long term, it always gives decent returns (And this is a fact). Even during the worst economic crisis of 2008 (when the market fell around 60%), the market bounced back to the same points within two years. The biggest losers at that time were ‘not’ the ones who bought the stocks at the highs of 2008, but the ones who ‘bought at high’ and ‘sold at low’ (just because they didn’t have patience).

Sensex 2008-09 Crash

And if the market can survive such a big crisis, then it will definitely recover short-term corrections (or bears) and give good returns for the long-term investors. The intelligent investors should consider these times as opportunities, rather than threats.

The Time To Act is NOW!

In one of my previous post, I had suggested starting building your watchlist as the market was high then. And if you’ve followed my suggestion then, you might already have a list of a few amazing companies with terrific return potential in the future. (Btw, I believe everyone should keep a watchlist so that they do not miss out opportunities like these).

Next, look into your watchlist and find out the current valuation of those stocks. If any of them are currently undervalued or even trading at a decent valuation, then it is the right time to act.

(Quick Note: You can also use the Trade Brains’ free online calculator to find the intrinsic value of the stocks. Here is the link to the calculator).

Final tip: The best stocks to invest are the ones already existing in your portfolio.

I learned this lesson years back when I read ‘One up on wall street’ by Peter Lynch. And I believe it is a necessary lesson to share in this post.

The best stocks to invest are the ones already existing in your portfolio. Maybe they are trading at a lower valuation, and your portfolio is in red. However, they are still the best options available to you.

You have already researched those stocks, and they are still in your portfolio only because you’re confident that it will perform well in the future. Then, why not to invest more in such stocks when they are selling even at a better discount. Look into your portfolio and find out those stocks which are currently trading at a cheaper price.

Quick Note: This tip doesn’t work for the newbie investors. If you’re new to stocks and haven’t yet researched or invested in stocks, then this article that can help you to pick winning stocks.

At last, here’s an amazing quote by Warren Buffett to end this post:

“I’ll tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful”— Warren Buffett

warren buffett quote be fearful

That’s all. I hope this post was useful to you. Happy Investing.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

value investing in india

A complete guide on Value investing in India.

A complete guide on Value investing in India.

“Price is what you pay. Value is what you get.” -Warren Buffett

There are many successful strategies in the stock market. However, three of the most popular investing strategies are- Value investing, growth investing and dividend investing. It’s really difficult to say which one is better as it totally depends on the investor’s knowledge, style, and preference.

Nevertheless, value investing is one such proven strategy which has created a huge wealth for many investors who has followed this strategy with discipline. In fact, one of the biggest followers of value investing is the legendary investor- Warren Buffett.

In this post, we are going to discuss the principles of value investing. Here are the topics that we are going to cover today:

    • What is value investing?
    • A brief history of value investing.
    • Fundamental philosophies of value investing.
    • Does value investing in India works (w.r.t. Indian stock market)
    • Best books to learn value investing in India.
    • Conclusion

It’s going to be a captivating post for the long-term investors who are trying to understand the concept of value investing in India. So, without wasting any further time- let’s get started.

What is value investing?

The basic strategy of value investing in very simple.

You find an amazing company, calculate its true (intrinsic value) and pay a lot less to purchase the stock (when it is on sale in the market). As you have bought the stock at a discount, you can make a profit by selling the stock when the price reaches its true value.

Few common tools that value investors use in order to find undervalued stocks are- lower than average price to book value, a low PE ratio or higher dividend yields.

Quick Note: I’ve already covered important financial ratios and valuation methods like relative valuation, DDM etc in my earlier posts. Further, if you want to learn different valuation tools (in details), feel free to check out my online course: ‘HOW TO PICK WINNING STOCKS?’

A brief history of value investing:

“It is much better to buy a wonderful company at a fair price than a fair company at a wonderful price.” -Benjamin Graham

Although value investing is a very old strategy of investing in stocks, however more than anyone else, Benjamin Graham is credited for popularising this concept. Graham developed the value-investing philosophy after surviving the great depression of 1929-30s -when the Dow lost an unbelievable 89% over a three-year span.

Graham was the professor of finance at Columbia business school and authored the book ‘The Intelligent Investor’ in 1947. Coincidently, Benjamin Graham was also the mentor of the ace investor-Warren Buffett. After inheriting the concept of Value investing from Graham, Buffett further popularised it among the investing population.

Like Graham, Warren Buffett also looked for undervalued companies that have a steady cash flows driven by straightforward models. His company- Berkshire Hathaway has generated an average annual return of above 20% for more than 50 years, making Buffett one of the richest people in this world.

Fundamental philosophies of Value investing

Value investors believe that the market overreacts to good and bad news and hence they do not correspond with the company’s long-term fundamentals. Therefore, at a specific time in the market, stocks can be overvalued, undervalued or decently valued.

The strategy of value investing is to find the undervalued stocks -which are trading at a discount because of short-term reasons or market not yet realizing their true potential. Here are the three fundamental philosophies of value investing:

1. Companies have intrinsic value.

What distingue value investing from other popular strategies is that value investors believe that stocks have an intrinsic or true value. They find this concrete number using different valuation methods like discounted cash flow analysis. When the market value of that stock is below the calculated value, the value investors purchase that stock. Further, as these investors have bought the stock at a discount, they sit back and relax until the stock reaches its true value.

Quick Note: Value investors do not believe in the Efficient Market Hypothesis (EMH).

2. Always have a Margin of Safety.

The margin of safety is the guiding philosophy of value investing to reduce risk and avoid loss. Here, the value investor gives a benefit of doubt to themselves by purchasing a stock with a margin of safety.

For example, let’s assume that an investor calculated the true value of a company to be Rs 100. Here, buying the stock at any price below Rs 100 can be considered as an undervalued price. However, if the investor wants a margin of safety of 20%, then he/she will buy that stock at Rs 80 or less. Here, the value investor is safeguarding his investment by adding a significant margin of safety in his/her purchase price.

3. Don’t follow the herd

“Be greedy when others are fearful and be fearful when the other’s are greedy.” -Warren Buffett

Interestingly, you can find a large population of investing community following herd mentality psychology in making various financial decisions like buying new property or investing in the stock market. Seeing others getting profited with an investment, our brain tells us to go for it without a second thought.

However, the value investors avoid herd mentality. They do not believe in group thinking or buying a stock just because everyone else is buying. That’s why, many a time- the value investing strategies looks similar to the contrarian investing

charlie munger quote value investing

Does value investing in India works?

Yes, Definitely!!

Tell me one thing- If I offer you to purchase a brand new iPhone X at a discount of 50%- Isn’t this deal profitable to you?

Yes!!!. Even if you don’t plan to keep the iPhone, still you can sell it for a price way higher than your original purchase price. There are a number of online websites like Olx or Quickr where you can easily find a buyer for this phone.

Value investing works on the same concept. Here, you buy terrific stocks at a price below their intrinsic value (i.e. discount price) and hold it till they reach their true value.

So, does value investing in India works?

Absolutely!! Value investing is a time-tested strategy. From Benjamin Graham to Warren Buffett to Joel Greenblatt to Raamdeo Agrawal -all have made a massive fortune by following the strategies of value investing.

Best books to learn value investing in India.

Although, I tried to cover most of the critical points related to value investing in India in this post. However, there are still many concepts yet to learn for the beginners. Here are the best books to learn value investing in India. (Note that few of the books mentioned below are written by foreign authors, but the concepts are applicable everywhere)-

Also read: 7 Best Value Investing Books That You Cannot Afford to Miss.

Bottomline:

Value investing is a proven strategy to build wealth. And value investing in India definitely works for those who apply this strategy with discipline.

However, value investing is subjective and depends on the investor’s style of investing. While many value investors only look for undervalued stocks, few also consider the future earnings expectations and cash flows to determine the future value. For example, the star fund manager Peter Lynch (Author of One up on wall street) was more interested in undervalued stocks with good growth prospects. That’s why he preferred PEG ratio over PE ratio.

Whatever the approach- the underlying principle of value investing is the same– find an amazing company and pay less than what its true worth with a significant margin of safety.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Why Do Shares Fall on Good News

Why Do Shares Fall on Good News?

Why do shares fall on good news?

On 23 April 2018, HDFC bank announced its Q4 results for the year 2017-18. The net profit in the March quarter stood at Rs 4,799 crore, up 20% on a year-on-year basis (y-o-y).

Good news for the investors. Right?

And bam!! Next day the share price fell -1.03%.

Why did this happen? Why do shares fall on good news?

This is one of the most common questions asked by the stock market beginners.

In this post, we are going to discuss why do shares fall on good news? Why a good news may not always be a good news for the investors?

Let’s first understand the basics. Why stock price fluctuates?

We all know that stock market works on demand and supply. If the demand of a stock is greater than the supply, then its price will go up. On the other hand, if the supply is high and the demand is less then the share price will fall.

Further, the reason for increase/decrease in the demand or supply of a stock depends on a number of factors.

For example, negative news like bad earnings reports, failed products, resignation in top-level management, lawsuits etc can decrease the demand for the stock which will further lead to the decrease in its share price.

On contrary, positive news like increased earnings report, favorable government regulations, significant dividends, bonus etc can increase the demand for that stock and push the price high.

Besides, the reactions for some news might depend on the interpretation. For example, during mergers and acquisitions, the public need to figure out which company will get more benefits- Acquiring company or the target company. And the share price of that company will move accordingly.

Overall, the price movement seems simple, right?

However, the share price movement is not always that straightforward. There are many things happening underneath that you need to understand as they might the driving the prices.

Why do shares fall on good news?

Good news may not always be good for the shareholders. There can be a couple of situations when good news can be a bad news for the investors.

So, why do shares fall on good news? One of the simplest factors can be the phase of the economy. Whether the economy is in expansion phase or contraction phase right now?

For example, if the whole economy is going down- globally or locally, then it might be dragging the stock down in spite of the good news.

This can be easily understood, right?

Nevertheless, many a time market is good and the economy is doing perfectly. Still, the stock goes down after a good news. How to explain such scenarios?

Here, the reason for that stock to go down maybe stock specific (and might doesn’t have to do much with the economy).

Also read: Why do stock prices fluctuate?

Here are few reasons why stocks may fall on good news.

 When earnings report does not meet the expectations.

If you go to yahoo finance and enter a stock- you can find the estimates by the analysts. It’s inside the ‘analysis’ section.

maruti suzuki earnings expectations

Maruti suzuki growth expectations

Source: Yahoo finance

Here you can read the quarterly and yearly estimates by the analysts regarding the company’s earnings, revenue, growth etc.

There are a couple of more similar websites where you can find the estimates by the analysts.

Anyways, coming back to the original question- Why do shares fall on good news?

The stock price may fall if the company is not able to meet these expectations.

For example, if a company/management forecasted its next quarterly EPS to be Rs 40.

However, the analysts are expecting the EPS to be Rs 45.

Now, in next quarter, the actual earnings turn out to be Rs 42.5. Then it’s good, right? Better than what forecasted by the company.

However, here the price may fall as it doesn’t meet the public expectations.

Conversely, if a company posts loss in a quarter, but the loss is less than what expected by the public, then the share price may go up.

Here, whether the price will move up or down depends a lot on the actual report vs the estimates.

— Future expectations

The stock market is all about the future expectations. Current or past ‘good’ news is good for the investors but the comments about the future can easily scare them (no matter how good was the past).

For example, suppose you got your electricity bill today where the total bill turns out to be Rs 1400 (which is way less than the last month). Good, right?

However, you also received a notice that the ‘price per unit’ is going to significantly increase from next month.

Here the current news is good but the future is scary and hence instead of celebrating, you might be worried about the next month electricity bill.

In the same way, if a company announced a good result for the last quarter. However, in the same quarterly report/announcement, they also highlighted some issues which might affect the profitability of the company in upcoming months/years.

In such scenarios, instead of enjoying a good result for last quarter, the shareholders might take the news adversely and it may lead to a fall in the share price.

Also read: What is the Right Time to Exit a Stock?

— Missing parts

Sometimes the stock price of a company may even fell after a good news because of something announced/reported in the annual/quarterly report by the management/board of the directors of the company that you ‘missed’.

For example, the board of directors saying something negative/fearful regarding the future or some setbacks in the quarterly/annual report which you missed to read/notice.

Here, something is hidden underneath the big positive news that scares the people.

For example, if we go back to the original discussion that we started at the beginning of this article-

“HDFC bank announced its Q4 results for the year 2017-18 where the net profit in the March quarter stood at Rs4,799 crore, up 20% on a y-o-y basis. And the share price the share price fell -1.03%.”

If you read the report, you will find that although Q4 result was good, however, HDFC Bank’s unsecured loans have grown at a rapid pace, and the home loan segment hasn’t grown much. And these trends may cause some concern for the investor. That’s why HDFC Bank’s share price fell a little next day.

Read more here: HDFC Bank Q4 Profit Up 20%; Asset Quality Remains Stable- Bloomberg

In short, if the stock falls down on good news, there can be some part that you missed which might be scaring the people.

Noise Traders:

With the boom in online trading, the noise trader has increased a lot over the last decade. They are those traders who sell on technicals i.e price trend and momentum.

Here, they simply copy what the others are doing. They do not analyze the fundamentals of the company but make their trades based on news/technicals.

For example- in scenarios of sell-offs in a stock due to whatever reason, these noise traders will sell their shares too and leave their position.

Many a time, noise traders drag the share price further down.

Also read: 7 Types of Risk Involved in Stocks that You Should Know.

Few addition reasons why shares fall on good news –

  • The market anticipates the results and prices already starts adjusting before the actual announcement. This simply means that before even the company announces its result, the market might be anticipating the outcome and hence, the prices might already by rising high before the announcement. As the prices keep rising since past few days/weeks, it might take a little rest/correction on the day on the result and the share price may fall a little.

  • Profit booking by the early investors: Many investors who might be holding the stock for a long time, may opt to book profit on the good news. This may further push the stock price down.

How should you react in such scenarios?

Fairly simple!!

If the stock is fundamentally strong, hold the stock despite the stock price going down. It won’t matter much in the long term if the company. Most of the great companies focus on their long-term goals. This means that few times, they might miss the short-term expectations.

Although, short-term concerns shouldn’t be ignored completely by the company or investors. However, if the company is overall performing good in the long run, then there’s no point of worry. In any business, there will be few setbacks in the short run.

Besides, do not get attached to the short-term expectations. Analysts will keep on making expectation every quarter. It’s their job and this is what they are paid for. If a company keeps on working for the short-term goals, it might never be able to focus on the long-term growth.

Overall, if the temporary setbacks are not going to affect the long-term profitability of the company, then ignore the short-term fluctuations and hold your stock ‘tightly’.

New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.

TAGS: Why Do Shares Fall on Good News, how earnings affect stock price, Why Do Shares Fall on Good News on earnings

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

How to Invest Your First Rs 1,000 in The Stock Market

How to Invest Your First Rs 1,000 in The Stock Market?

Learning how to invest your first Rs 1,000 in the stock market is a significant step towards starting your financial journey and future investments. You might be surprised to know that even less than 2.5% population of India participates in the Indian stock market (although Indian economy is one of the fastest growing economies in the world).

Nevertheless, investing your first Rs 1,000 will help you to get prepared for your journey ahead.

In this post, I’m going to tell you the simplest answer of how to invest your first Rs 1,000 in the stock market. It’s a no-brainer way. Further, for the method described here, you don’t need to be an expert or any help from the financial advisors to invest your first Rs 1,000 in the stock market.

Quick Note: Here, I’m not going to discuss how to open brokerage accounts. I’m assuming that you have already had set up your demat and trading accounts. If you haven’t, then read this post to learn how to choose the best stock broker.

A little advice:

While interacting with my blog readers and subscribers who are new to the stock market, I learned that most of the first-time investors like to wait until they have amassed thousands of rupees to invest. However, that’s a mistake. You can start investing with an as little amount as Rs 1,000. Further, you can increase the investment amount in future when you have increased your savings. By following this strategy, you can utilize the time efficiently to learn the stock market so that you will be prepared when you invest a big amount in future.

Second, you do not need to be an expert to invest your first Rs 1,000 in the market. You can invest this money while you are learning or even if you just started a few weeks ago.

Third, the point here is to learn- not to earn. Rs 1,000 is not a very large money that will get you bankrupt if you lose this amount. However, Rs 1,000 is more than enough to make you enter the exciting world of stock market and enhance your financial knowledge.

In addition, do not worry about the technicalities like how to buy/sell using your trading account initially. Once you are ready to invest, you can learn all these within 20 minutes using different sources on the internet. (I have also written a couple of articles on how to invest using ICICI direct, SBI smart etc). These days, purchasing stock is even a lot easier compared to booking an online train ticket on IRCTC. All you need is a phone/laptop, internet connection, brokerage accounts and some cash in your saving account.

Now that I’ve cleared the basics, let’s learn how to invest your first Rs 1,000 in the stock market. Further, please read this post till the end as there is a bonus in the last section of this article.

How to invest your first Rs 1,000 in the stock market?

1. Invest in Just One Stock: 

Rs 1,000 is not a big amount. If you are buying a stock worth Rs 300, then you will be able to buy just three units of that stocks. Moreover, those stocks which are trading at a market price above Rs 1,000 are already ruled out here. Therefore, if you are planning to invest your first Rs 1000 in the stock market, then you need to widen your selection criteria to the stocks pricing between Rs 1 to Rs 1,000. Otherwise, you might have to reject many good stocks whose market price is high (Say 800-900), if you are planning to purchase multiple stocks.

Further, for such investment amount, you do not need to waste time diversifying your portfolio. Selecting multiple stocks takes time and it’s not worth the value.

Also read: How Many Stocks Should you own for a Diversified Portfolio?

2. Invest in what you already know-

The easiest approach of stock selection for the beginners is to invest in what you know. There are a number of companies that you might have heard from childhood and might already know a lot about it. For example- Maruti Suzuki, HDFC Bank, ITC, Yes Bank, HPCL, Bata, Coal India, Colgate India, Hindustan Unilever etc.

There are tons of companies whose products/services you already have been using and might be more than happy with them. Find out those companies and investigate them. Visit the company website, check its portfolio (product/services), know who is the boss of the company, its future products/plans etc.

Top 10 Companies in India by Market Capitalization

You’ll be surprised to know that how many common companies has given uncommon profits.

For example Eicher Motors- Royal Enfield bikes parent company (over 80 times returns in last 10 years), MRF Tyres (over 17 times return in last 10 years), Symphony- coolers (over 12 times return in last 5 Years) etc

The bottom line is to look around yourself and find some popular companies worth investing.

Search for the companies that you already know that they are doing great (like expanding at a fast rate) for the last couple of years or provide excellent product/services or has an amazing business model (easy to scale).

If you are a working guy/girl, it will be quite easy for you to find such companies. Just look in your industry and find which one is leading. For example, if you are in the banking sector, you might already know which bank is expanding fast in urban and rural areas, opening new branches every week and has low non-performing assets (NPA) etc.

If you are a doctor, you might already know few good pharmaceutical companies which are producing the best medicines at a cheap price or are working on the medicines for a rare disease.

Even if you are a housewife, you can find a number of good companies that manufacture day-to-day life products like soap, shampoo, towels, edible oils etc.

In short, the idea here is to invest in what you already know rather than wasting too much time reading financial magazines to search hidden companies.

Also read: Why Warren Buffet Suggests- ‘Price Is What You Pay, Value Is What You Get’?

3. Don’t spend weeks on researching your first stock: 

Although I’m confident that you find a good company using step 2, however, if you are unable to find any company that you have good knowledge, then invest in blue-chip stocks.

Blue chips are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company) etc. Few other examples of blue chip stocks are Reliance Industries, Sun Pharma, State bank of India etc. Here is the list of few top blue chips stocks in the Indian stock market:

Here is the list of top 10 blue chips stocks in Indian stock market

The idea here is to ‘not’ waste too much time researching for stocks. This is your first investment and the investment amount is also small. It’s not worth your time spending weeks to research a stock just to invest Rs 1,000.

4. Don’t make it a very big deal.

To be frank, do not make this investment a very big deal of your life. The investment amount is too small to hurt you financially. Even if you lose 50% of your investment amount, you won’t go broke.

Don’t worry too much thinking what if the stock price goes down. IT’S NOT A BIG DEAL!

Here your motive should be to learn, not to earn. If you are able to learn today, you can make tons of money in future. However, if you want to ‘save’ Rs 1,000 today and are not willing to take any risk, you might save this 1,000 rupee, but miss opportunities to earn lakhs in future.

Stay calm and enjoy the ride.

Also read: #9 Things I Wish I had Avoided During my Initial Days in Stock Market.

warren buffett quote its not necessary to do extraordinary

Bonus lessons: 

Stay away from penny stocks:

Penny stocks are those stocks which trade at a very low market price (less than Rs 10) and have a very low market capitalization (typically under 100 crores) are called penny stocks in Indian stock market.

These are the darlings of the new investors. The low market price of these stocks makes them quite attractive to the beginners.

However, these stocks are very risky. You might have never heard the names of most of these companies and very limited information about the company is available to the public. The stock prices of these companies are easy to manipulate. Overall, penny stocks are difficult to investigate for a newbie investor.

My advice, stay away from penny stocks until you have got good knowledge and experience in the stock market.

Also read: What are Penny stocks? And should you buy it?

Don’t expect high returns:

This is my final advice. Do not expect high returns while investing your first Rs 1,000 in stocks. Stocks are not ‘lottery’ tickets.

Even if you get a return of 100% in 6 months, still you will make a profit of only Rs 1000 (Rs 166 per month on an average).

This isn’t going to affect your life financially. Until the investment amount is large or the principal is invested for a long duration (power of compounding), the returns won’t be too big to affect you financially.

That’s why mark my words and set a realistic expectation for your first Rs 1,000 investment.

Bonus Quiz:

Before you invest your first Rs 1,000 in the stock market, why not to find out how good is your investing instincts? Try it out with this FREE Quiz NOW…!!

Do you consider yourself a ‘Smart Investor’?

Well, your success in the stock market depends on how you invest and react to different market situations.

Here are 10 questions to put your 'Investing Instincts' to test.

Answer Wisely!!

Conclusion:

One thing I can take guarantee is that your experience after buying your first stock will be amazing!

Trust me, you’ll get more involved in the market if you have some money is invested in it, no matter how small it is. By investing your first Rs 1,000 in the market, you will learn ‘fast’ and learn ‘efficiently’.

Moreover, as discussed in the post, investing is not a rocket-science, rather it’s quite simple to invest your first Rs 1,000 in the stock market if you follow the steps described above.

I hope this post on- “How to invest your first Rs 1,000 in the stock market?” is useful to you.

If you have any questions or doubts, feel free to comment below. I’ll be happy to help you out.

New to stocks? Confused where to start? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount. #HappyInvesting

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

What are Multi-Bagger Stocks

What are Multi-Bagger Stocks? And How to Find Them?

What are Multi-Bagger Stocks? And How to Find Them?

This may be one of the most awaited posts that I’ve ever written. Since I started writing about stock market investing, I have received at least a million emails asking recommendations/ suggestions regarding multi-bagger stocks.

Most of the emails covered a content similar to this- “Tell me the name of a stock which can give 10 times returns in next few years” Or “Which stocks can give multiple time returns like that of Eicher Motors in Future”.

Instead of recommending stocks, I decided to cover an entire post of multi-bagger stocks and how to find them.

“Give a Man a Fish, and You Feed Him for a Day. Teach a Man To Fish, and You Feed Him for a Lifetime.”

Here are the topics that we are going to cover in this post:

  1. What are Multi-bagger stocks? 
  2. Recent Examples of Multi-bagger stocks.
  3. Things to know about multi-bagger stocks.
  4. Known traits to find Multi-bagger stocks.
  5. How to find multi-bagger stocks?
  6. Summary.

Further, please read this article completely as you may find a number of valuable contents in between. Now, without wasting any more time, let’s understand what are multi-baggers stocks and how to find them.

1. What are Multi-bagger stocks? 

The Multi-bagger stocks are those stocks who give several times return compared to their original purchase price.

For example, if you bought a stock at Rs 100 and after a few years, you sold it for Rs 600, then this is a multi-bagger stock. In fact, this is a 6-bagger as you earned 6 times return.

Similarly, if you get 2 times return compared to your original investment amount, then it is a 2-bagger stock. if you get 10 times return compared to your original investment, then it is a 10-bagger stock. And obviously, the higher the bagger, the better it is.

2. Recent Examples of Multi-bagger stocks.

Few of the recent examples (*June’18) of multi-bagger stocks are given below:

  • HEG Limited (+2,138.98% returns in the last 5 Years)

heg limited share price

  • Swaraj Auto (+3,865.42% returns in the last 5 Years)

swaraj auto share price

  • Dolat Investments (+1,492.72% returns in the last 5 years)

dolat investment share price

  • Balaji Amines (+1528.5% returns in the last 5 years)

balaji amines share price

  • Graphite India (+1,172.86% returns in the last 5 years)

graphite india share price

Also read: How To Invest Rs 10,000 In India for High Returns?

3. Things to know about multi-bagger stocks.

Before you start researching multi-bagger stocks, here are few things that you should know about them:

  • Multi-baggers are those companies who are financially strong and has a good business model that can be scaled within a short period of time.
  • What really makes a stock multi-bagger is “Time + Continuous growth”. If a company is delivering continuous growth for a longer sustainable period of time, then it would turn out to be a multi-bagger in the future.
  • These stocks take a long interval of time (5-15 years) to become a multi-bagger. That’s why you need to have a high degree of patience while investing in these stocks. If you are gonna book a profit of 60-70% after 10-12 months, then you might never be able to get a multi-bagger stock. Maybe, you’ll find it but you’ll not be able to get maximum profit out of it.
  • In order to hold multi-bagger stocks, you need to understand the business. Only after doing so, you can be confident and patient enough to hold the stock for several years.
  • Historically speaking, small and mid-cap companies have given the most number of multi-bagger stocks. However, this doesn’t mean that large-cap companies cannot become multi-bagger stocks.
  • Don’t feel bad if you missed a few multi-baggers in the past. Even if you are able to find and hold one multi-bagger stock in your portfolio, your overall returns will be amazing.

4. Known traits to find Multi-bagger stocks.

Here are few known traits that can help you find multi-bagger stocks:

  1. Growth at a reasonable price (GARP) stocks: Instead of investing in entirely ‘growth’ or entirely ‘value’ stock, select growth at a reasonable price (GARP) stocks, which has the mixed characteristics of both growth and value stocks. This can help you find a growing company without overpaying for it.
  2. Turn-around stocks: These are those companies who once got beaten badly by the market, however, now are getting back on the track.
  3. Mis-priced opportunities – You can find multi-baggers returns by investing in those companies who have a good potential, however, either ignored by the market or is out of flavor for the investors.
  4. Structural or management change in the organization: If there’s a major structural or management change in the organization that can drive the growth of the company, then it may be a potential multi-bagger.
  5. High Return on Equity: ROE shows how good is the company in rewarding its shareholders. A higher ROE means that the company generates a higher profit from the money that the shareholders have invested.
  6. Sustainable competitive advantage: If the company is one of the kind or have created an entry barrier for the competitors, then definitely it can give multiple times return in the future.

5. How to find multi-bagger stocks?

First of all, you need to understand that it’s not easy to find and hold multi-bagger stocks. Else, most of the stock market investors would have been a millionaire by now.

However, finding multi-bagger isn’t even ‘rare’. Ask any investor who has been investing in the stock market for few years, and he will easily name at least 5 stocks that he has come across during his investing career.

In short, it’s ‘difficult’ but ‘do-able’. You too can find multi-bagger stocks if you are willing to spend your time and energy in an ‘intelligent’ approach.

Here are the smart steps to find multi-bagger stocks:

1. Initial Screening:

If you start reading the financials of each and every listed company, then it might take years. There are over 5,500 listed public companies.

For the initial screening, you can use a few simple financial ratios to shortlist stocks on the basis of high performance, low debt, price to earnings multiples and liquidity.

  • ROE > 20%,
  • Debt/Equity < 1,
  • PE Ratio (less than industry avg),
  • Current Ratio>1.5.

Note: You can find the list of few other significant financial ratios to check here. This can help you to reduce the number of shortlisted companies (in case the list is too big).

2. Fundamental Analysis:

After initial screening, read the financials of the company find out the revenue, sales, profit, book value, cash flows etc. Few crucial points that you should check to find potential multi-bagger stocks are:

  • Is the company’s sales, revenue, and profit stable or growing over time?
  • Are earnings per share stable or growing over time?
  • Are free cash flows stable or increasing over time?
  • Is book value per share steadily growing or not?
  • Has the ROE been consistently high?

If you want to read more, I have written a detailed blog post on how to do the fundamental analysis of a stock which you can read here.

3. Qualitative analysis:

Apart from the fundamentals, it’s important to check the quality of the company which includes finding out your circle of competence, moat, management etc.

This is the most important aspect to check in order to find a multi-bagger stock. Here are a few questions that you should ask during the qualitative analysis:

  • Do you understand the company/ Is the company inside your circle of competence?
  • What is the business model of the company? Is it scalable?
  • Does the company has a ‘Moat’ (sustainable competitive advantage)?
  • Is management capable to drive the growth and allocate the capital wisely?

A significant point that you shouldn’t ignore here is that the competitive advantage should be ‘sustainable’. If it can be copied or the company has a short-term advantage, then it won’t get benefits for the long-run.

4. Valuation:

While evaluating the stock, you’ll need to find a reasonable estimate of the intrinsic value of the company. You can use relative valuation or absolute valuation approach (dividend discount model, discounted cash flow (DCF) model etc).

After a conservative estimate, check whether the stock is trading at a decent margin of safety (discount to the intrinsic value). If the company is trading at a discount, choose that stock to invest.

Further, please note that most of the growth companies generally trade at a high PE. This is because their growth is consistently higher compared to the industry average and competitors. Therefore, if you are able to find a few good stocks, do not ignore the company just because they are trading at a high PE ratio. If this ratio is decent enough and the other factors are extremely favorable, then you can select that company to invest.

Also read: Growth Stocks vs Value stocks – A logical Comparison

6. Summary:

The most important ingredient of a multi-bagger stock is “Time + Continuous growth of the company”. You need to remain invested for the long-term and the company should consistently grow its earnings.

Further, finding a multi-bagger stock might seem too much work, however, it’s definitely worth doing. In addition, if you’re able to find good stocks to invest, then later you can easily sit back and relax in future with just a few minor monitoring.

That’s all. I hope this post is useful to the readers.

If you have a doubt or need any help, then feel free to comment below. I will be glad to help you out. Happy Investing.

New to stocks? Want to learn how to invest in Indian stock market from scratch? Here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

11 Catalysts That Can Move The Share Price

11 Must-Know Catalysts That Can Move The Share Price.

11 Catalysts that can move the share price:

While investing in the stock market, a number of times you may find that a new announcement regarding any company drastically spikes its share price within a few months. These are called catalysts.

The catalysts are the certain special events (actual or potential) that are capable to push the share price of a company upwards or downwards in a short (accelerated) time period.

These catalysts may ‘not’ always push the share price upwards. However, most of the times, these catalysts allow the investors to get a fast profit by holding the share for a shorter period of time.

Moreover, the outcomes of these catalysts are comparatively easier to predict. Depending on the catalyst type, you can analyze whether the share price will go up or down.

In this post, we are going to discuss top 11 must-know catalysts that can move the share price of a company.

DISCLAIMER: Although most of the times these catalysts can move the share price of the company, however, there is no guarantee that the things will always work out as expected. Sometimes these catalysts may not be able to move the share price as much as logically predicted.

11 Must-Know Catalysts That Can Move The Share Price:

1. Earnings release:

A strong earnings report (which is above than what expected by the market experts) can be really good for the stock. The public takes this report enthusiastically and hence, the company’s share price is pushed higher. Further, this also raises the ‘bar’ for the future earning potentials of the company.

2. Mergers & Acquisitions

A merger occurs when two separate entities combine together to form a new joint organization. You can consider merger as a corporate ‘marriage’. Whereas, when a company takes over another company and establishes itself as a new owner, then this action is called acquisition.

Mergers and acquisitions can push the share prices of the ‘acquiring’ and the ‘target’ company. However, here do take care which company will get more benefits after the merger.

Read more here: What are Mergers and Acquisitions (M&A)?

3. Stock buybacks (Repurchases)

A share buyback is a situation when a company buys its own share back. This means that the company will purchase the outstanding shares and hence will reduce the total number of shares available in the market.

As stock buyback increases the value of the remaining shares. Hence, it increases the demand for the stocks of that company and pushes its share price in the upward direction.

4. Significant dividend announcement

A significant dividend announcement by the board of directors means that every shareholder will get a greater dividend per share. This will increase the demand for the stock and hence a rise in the share price can be expected.

However, in such scenarios, many times the share prices increase till the ex-dividend date of the company and might move a little downwards after the record date.

Also read: Dividend Dates Explained – Must Know Dates for Investors

5. Product launches

If a company announces the launch of a new product or the opening of a new plant which can help to generate more revenue in future, then it will be taken positively by the public.

6. Stock splits

In a stock split, the company splits the share price into different parts. For example, in a stock split of 1:1, stock price splits into two parts.In a stock split of 1:5, stock splits into 5 parts. The fundamentals of a company remain same in a stock split. There is neither increase or decrease in the share capital or reserve in a stock split.

Stock splits make the company more affordable for an average investor. Further, it also increases the liquidity of the stock and its trading volume.

7. Bonus  

The bonus shares are the additional shares given to the shareholders by the company. This is a method of rewarding the shareholders.

Although, there will be no noticeable difference in the wealth of shareholder as the share price of the company will fall in the same proportion after bonus date. However, the announcement of the bonus shares is considered a positive news as it will increase the dividends that you’ll receive in future (as you will hold more stocks which will be added as the bonus in future).

That’s why bonus announced by the company is taken eagerly by the crowd resulting in an increase in the share price.

Also read: Stock split vs bonus share – Basics of stock market

8. Spinoffs

What are spinoffs? – A company may have several products or services. When a larger company ‘Spins off” a division and split the company up in two, then it is called spin-offs. Shareholders receive stocks from both companies.

Here, the independent companies perform better as the management can focus more on the individual company. In addition, after spinoffs, there’s a better stock valuation for each company sedately as opposed to one big entity. The announcement of spinoffs will easily move the share price of the company.

9. Liquidation

Liquidation is a bad news as it means that the business went bankrupt and will be terminated. While liquidation, the company sells everything it owns.

The shareholders who are owning this company might want to get rid of it or start selling their shares to some other people. Hence, liquidation announcement acts as catalysts that can move the share price in the negative direction.

10. Lawsuits and investigations

Many public companies are sometimes investigated. There can be various outcomes while dealing with lawsuits and investigations. The company share price can move in different directions once the public finds out about it.

In general, during the investigation time, the share price of that company moves in the downward direction. It declines further if the company is found guilty. However, if the company is found ‘not guilty’, then its share price may jump in the upward direction.

11. Addition to the index

When a company is added to the index (such as nifty or Sensex), then the index funds have to purchase that company. This increases demand and pushes the share price.

Also read: What is Nifty and Sensex? Stock Market Basics for Beginners

Bonus:  Few other catalysts that can move the share price are ‘change in management’, takeovers, a spike in interest rates, political reasons, global issues etc.

What can you do with this information?

Usually, most of these catalysts are ‘unpredictable in nature‘. It’s really difficult to predict when the company will announce next bonus or a significant dividend (although few of these catalysts can be predicted by the experts, however, the exact news is known only after the announcement).

That’s why don’t make an entire investing strategy just based on this info. Take these catalysts into account and be ready for it.

In addition, you also need to follow the news regarding these catalysts in a ‘smart’ way. There are a lot of fake news or rumors in the market. Filter out the correct news before processing. You can use google alerts to get the relevant news.

Also read: How to Use Google Alerts to Monitor Your Portfolio?

Summary:

There are a number of catalysts in the market that can accelerate the share price. These are the bonus information if known to the investors, can help to get profit within a short time period.

Here are the top 11 Catalysts that can move the share price which we studied today.

  1. Earning release
  2. Mergers & Acquisitions
  3. Stock buybacks (Repurchases)
  4. Significant dividend announcement
  5. Product launches
  6. Stock splits
  7. Bonus  
  8. Spinoffs
  9. Liquidation
  10. Lawsuits and investigations
  11. Addition to index

Also read: Why do stock prices fluctuate?

That’s all. I hope this post is useful to you.

Feel free to leave a comment below if you have any doubt or want to ask any questions. I’ll be happy to help you out. #HappyInvesting.

New to stocks? Want to learn how to select good stocks for long-term investment? Check out my amazing online course: HOW TO PICK WINNING PICKS? The course is currently available at a discount.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

How to read financial statements of a company

How to read financial statements of a company?

How to read financial statements of a company?

If you want to invest successfully in the stock market, you need to learn how to read and understand the financial reports of a company. Financial statements are tools to evaluate the financial health of the company.

In this post, I am going to teach you the basics of how to read financial statements of a company.

To be honest, you won’t find this post very interesting. Many of the points might sound complex.

However, it’s really important that you learn how to read financial statements of a company. Reading and understanding the financials of a company differentiates an investor from a speculator.

So, let’s get started.

First of all, a few things that you need to know.

Where can you get the financial statements of a company?

You can find the financial statements of a company in any of the following sites:

  1. BSE/NSE Website
  2. Company’s website
  3. Financial websites (like screener, money control, investing etc)

Further, if you are using any other source, make sure that the reports are correct and not tempered.

In India, Securities exchange board of India (SEBI) regulates the financials announced by the company and try to keep it as fair as possible.

Now, let us understand the different financial statements of a company.

The financials of a company are split into three key sections. They are:

  1. Balance sheet
  2. Income statement (Also called profit & loss statement)
  3. Cash flow statement.

Let’s understand each statement one-by-one.

How to read financial statements of a company?

1. Balance Sheet

A balance sheet is a financial statement that compares the assets and liabilities of a company to find the shareholder’s equity at a specific time.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders’ Equity

Here, do not get confused by the term ‘shareholder’s equity’. It is just another name for ‘net worth’.  The above formula can be also written as:

Assets – Liabilities = Shareholder’s Equity

You can easily understand this with an example from day to day life. If you own a computer, car, house etc then it can be considered as your asset. Now your personal loans, credit card dues etc are your liabilities. When you subtract your liabilities from your assets, you will get your net worth.

The same is applicable to companies. However, here we define net worth as the shareholder’s equity.

Now, why are balance sheets important?

The balance sheet helps an investor to judge how a company is managing its financials. The three balance sheet segments- Assets, liabilities, and equity, give investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.

Key elements of a balance sheet:

Assets and liabilities are the key elements of a balance sheet. Let’s define both of these to understand them in details:

Assets:

It is an economic value that a company controls with an expectation that it will provide future benefit. Assets can be cash, land, property, inventories etc

Assets can be broadly categorized into:

  • Current (short-term) assets: These are those assets that can be quickly liquidated into cash (within 12 months). For example cash and cash equivalents, inventories, account receivables etc.
  • Non-Current (Fixed) assets: Those assets which take more than 12 months to converted into cash. For example- Land, property, equipment, long-term investments, Intangible assets (like patents, copyrights, trademarks) etc.

The sum of these assets is called the total assets of a company.

Liabilities: 

It is an obligation that a company has to pay in future due to its past actions like borrowing money in terms of loans for business expansion purpose etc

Like assets, it can also be broadly divided into two segments:

  • Current liabilities: These are the obligations that need to be paid within 12 months. For example payroll, account payable, taxes, short-term debts etc.
  • Non-current (Long-term) liabilities- There are those liabilities that need to be paid after 12 months. For example long-term borrowings like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments, trade payable etc.

Now, let us understand these segments with the help of the balance sheet of a company from the Indian stock market.

Here is the balance sheet of ASIAN PAINTS for the fiscal year 2016-17. I have downloaded this report from the company’s website here.

Please note that there are always at least 2 columns on the balance sheet for consecutive fiscal years. It helps the readers to monitor the year-on-year progress.

balance sheet asian paints 201617

Source: https://www.asianpaints.com/more/investors/annual-reports.html

Although the balance sheet looks complicated, however, once you learn the basic structure, it’s easy to understand how to read financial statements of a company.

Few points to note from the balance sheet of Asian Paints:

  1. There are three segments in the balance sheet of Asian paints: Assets, equity, and liability.
  2. It adheres the basic formula of the balance sheet: Assets = Liabilities + Shareholder’s equity. Please note that the first column of asset (TOTAL ASSETS = 9335.60) is equal to the second & third column of equity and liabilities (TOTAL EQUITY & LIABILITY = 9335.60).

There are much more points to cover in balance sheet topic, however, it’s not possible to explain everything in a single blog post. You can learn in great depth about balance sheet in my online course- HOW TO PICK WINNING STOCKS? Check it out now.

Now, let us move to the second important financial statement of a company.

2. Income Statement:

This is also called profit and loss statement.

An income statement summarizes the revenues, costs, and expenses incurred during a specific period of time (usually a fiscal quarter or year).

The basic equation on which a profit & loss statement is based is:

Revenues – Expenses = Profit

In simple words, what a company ‘takes in’ is called revenue and what a company ‘takes out’ is called expenses. The difference in the revenues and expenses is net profit or loss.

The fundamental structure of an income statement:

Revenue
– Cost of goods sold (COGS)
——————————————-
= Gross Profit
– Operating expenses
——————————————-
= Operating Income
– Interest expense
– Income taxes
——————————————–
= Net Income

Note: The revenue is called TOP LINE and net income is called the bottom line in the income statement.

Most of the investors check the income statement of a company to find its earning. Moreover, they look for the growth in the earnings. It’s preferable to invest in a profit-making company. A company cannot grow if the underlying business is not making money.

Here is the Income statement of Asian paints for the Year 2016-17:

profit and loss statments asian paints 201617

Here are a few points that you should note form the income statement of Asian Paints:

  1. The top line (revenue) increased by 8.04% in the fiscal year 2016-17.
  2. On the other hand, the bottom line (net profit) increased by 11.84% (Rs 1802.76 Cr –> Rs 2016.24 Cr) in the from the fiscal year 2015-16 to the fiscal year 2016-17.
  3. This shows that the management has been able to increase the profits are a better pace compared to the sales. This is a healthy sign for the company.

For Asian paints, the diluted EPS also increased from Rs 18.19 in the year 2015-16 to Rs 20.22 in year 2016.17. This is again a positive sign for the company.

Also read: #19 Most Important Financial Ratios for Investors

3. Cashflow statement:

Last part of a company’s finances is its cash flow statement.

Cash flow statement (also known as statements of cash flow) shows the flow of cash and cash equivalents during the period under report and breaks the analysis down to operating, investing and financing activities. . It helps in assessing liquidity and solvency of a company and to check efficient cash management.

Three key components of Cash flow statements:

  • Cash from operating activities: This includes all the cash inflows and outflows generated by the revenue-generating activities of an enterprise like sale & purchase of raw materials, goods, labor cost, building inventory, advertising, and shipping the product etc.
  • Cash from investing activities: These activities include all cash inflows and outflows involving the investments that the company made in a specific time period such as the purchase of new plant, property, equipment, improvements capital expenditures, cash involved in purchasing other businesses or investments.
  • Cash from financial activities: This activity includes inflow of cash from investors such as banks and shareholders by getting loans, offering new shares etc, as well as the outflow of cash to shareholders as dividends as the company generates income. They reflect the change in capital & borrowings of the business.

In simple words, there can be cash inflow or the cash outflow from all three activities i.e. operation, investing and finance of a company. The sum of the total cash flows from all these activities can tell you how much is the company’s total cash inflow/outflow in a specific period of time.

Here is the Cash flow statement of Asian paints for the fiscal year 2016-17.

Asian Paints Annual Report 2016-17 cash flow statement1

Asian Paints Annual Report 2016-17 cash flow statement 2

From the Asian paints cashflow statement, we can notice that the net cash from operating activities has declined from Rs 2,242.95 Crores to Rs 1,527.33. This may be little troublesome for the company as the net cash from operating activities shows how much profit the company is generating from its basic operations.

As a thumb rule, an increase in the net cash from operating activities year over year is considered a healthy sign for the company. However, while comparing also look at the data for multiple years.

Quick note: In financial statements, generally accountants do not use the negative sign. For example, if the expense is to be deducted, it is not written as -40. When writing minus sign, accountants use parentheses (—). For the same example, it will be written as (40), not -40.

Summary:

It’s important to read and understand all the three financial statements of a company as they show the health of a company from different aspects.

  1. The balance sheet shows the assets and liabilities of a company.
  2. The income statement shows how much profit/loss the company has generated from its revenues and expenses.
  3. Cash flow statement shows the inflows and outflows of cash from the company.

While investing in a company, you should pay special attention to all these financial aspects of a company. As a thumb rule, invest in a company with high-income growth, large assets compared to its liabilities and a high cash flow.

That’s all! This is how to read financial statements of a company.

Although it’s not enough, however, this post aims to give a basic idea to the beginners about the financial statements of a company.

If you want to learn (in details) about where to find the financial statements of an Indian company and how to effectively study the reports, feel free to check out my online course on HOW TO PICK WINNING STOCKS here. I have explained everything about financial statements in this course.

Further please comment if you have any questions. I’ll be happy to help you out.

Happy Investing!

Tags: How to read financial statements of a company, how to read financial statements, which financial statement is most important to investors, how to read financial statements India, company financial statements examples, How to read financial statements of a company

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Investing vs Trading

Investing vs Trading: What’s the difference?

Investing vs Trading: What’s the difference?

There are two common approaches to make money from the stock market. The first one is investing and second is trading.

While investing aims to create wealth over the long term by buying good companies and holding it for a long duration, trading is quite opposite of it. Trading aims at generating profits by frequently buying and selling companies.

Also read: #27 Key terms in share market that you should know

Examples: Investing vs Trading

Example 1:  if you buy a stock today and commits to holds the stock for the next 5 years, then you are investing. Here you believe that the price of that stock will be way higher after 5 years than what it is today.

Example 2: If you buy a stock today morning and commits to sell the stock by evening (before the market closes), then you are trading. Here you believe to make a profit by the difference in your buying and selling price.

The time period for investing is long term and many a time the holding period is more than even decades. You can find many peoples investing for their grandchildren. Many people inherit the stocks that were bought by their parents and worth’s millions today.

On the other hand, the time period for trading is short-term. It can be minutes, hours, day or few weeks. Sometimes the trading period is even less than a minute when traders buy/sell stocks with explosive movements and book profit soon enough.

Further, the attitudes of the people who follow these approaches are different.

The investors are inclined towards stress-free sound investment for wealth creation over longterm.

The traders tend to make big profits in a short period of time. They also have a love for the game of trading and find it entertaining.

Investors tend to make sound investments and relax. On the other hand, traders are actively involved in the market and require their time & presence to make profits.

Also read: How to Invest in Share Market? A Beginner’s guide

Investing vs Trading

Investing Trading
Aim Creating wealth over a long period of time by buying and holding. Generating profit by frequent buying and selling of stocks.
Daily market fluctuations Daily market fluctuations do not affect investors as they aim for long-term. They tend to get benefit of the daily market fluctuations by buying and selling stocks
Add on benefits Investors enjoys perks like the bonus, dividends, stock split etc Trades hold the stocks only for short interval and hence doesn’t enjoy these perks.
Protective element Investing in the fundamentally strong company that will bounce back to true value over time and losses will be recovered. Stop loss is used to limit the losses.
Indicators Fundamental indicators like Earnings per share, Price to earnings, current ratio etc are used. Technical indicators like moving averages, stochastic oscillators, RSI etc are used.
Period Long term Short term- day/week
Strategy Creating wealth by compound interest and dividend Timing the market (finding the right time to enter and exit a stock)
Risk Low risk but low potential return in short term. Good returns in long term.  High risk but higher potential return in short term.
Factors affecting the approach. Business fundamentals like industry, economy, financials, market, competitors etc. Technical indicators, the psychology of the market, money management, risk-reward etc
Belief The company will perform well in the future and will reward its shareholders. Share price will move in a direction to achieve the target profits.
Expected return 15-20% return per annum (compounded). 8-10% return per month.
Brokerage charges Very fewer brokerage charges are involved due to buying and holding strategy. Trading involves high brokerage due to frequent buying and selling.
Involvement required Investors make the sound investment after deep study of a company and relax afterward. Require active involvement in the market to find the correct time to enter and exit in order to book profits.

Conclusion:

Both these approaches are a successful way to make money from the stock market.

However, if you planning to choose one approach, think about the time that you can spend ‘daily’ on market activities. If you can daily spend hours in the market, then trading suits you. Otherwise, investing is a better approach for you.

Moreover, it also depends on your knowledge. If you have interest in reading financials, accounting, news, economy etc then investing is good for you. On the other hand, if you are good with trends and charts, trading makes more sense.

Finally, comes your preference. As discussed in the post many people enjoy the game of trading while many wants to be relaxed once they invested their money. Your personal preference has a high weight for selecting your style.

If you are new to stocks and want to learn stock market investing, here is an amazing online course for the beginners: How to pick winning stocks? Enroll now and start your financial journey today #Happy Investing.

Tags: investing vs trading, trading vs investing which is better, which is better trading or investing, trading vs investing returns, investing vs trading difference, trading investment meaning, trading investment definition, investing vs trading India

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

Is it worth investing in IPOs

Is it worth investing in IPOs?

Is it worth investing in IPOs?

Everyone gets excited about new things. The new clothes, new bike, new car, new job etc. always attract the public.

Investors are also like ordinary people and hence they are also tempted by the word ‘NEW’. Be it a new technology, a new industry or a new company.

In this post, we are going to discuss whether it’s worth investing in these new companies which enter the market for the first time.

Here are the contents that we are going to discuss in this post:

  • What is an Initial Public Offering (IPO)?
  • What does ‘Going public’ mean?
  • Why do companies conduct IPOs?
  • What are the disadvantages of conducting IPOs?
  • Why do many IPOs come in the bull market?
  • Who gets benefits of IPOs?
  • Why are people excited about IPOs?
  • Is it worth investing in IPOs?

What is an Initial Public Offering (IPO)?

When a privately held company offers its shares for the first time to the public, then it is called Initial public offering (IPO). It is a way for companies to enter the stock market.

Until a company offers IPO, the public is not able to buy the company’s share.

Before IPO of a company, its shareholders include limited people like founders, co-founders, relatives, friends and initial investors (like an angel investor, venture capitalist etc). However, after the company offers its IPO, anyone (public, institutional investors, mutual funds etc) can buy the shares of the company.

Few of the famous IPOs of 2017 are BSE, CDSL, Avenue supermarket (Dmart), SBI Life insurance etc.

What does ‘Going public’ mean?

Going public means that a ‘privately owned company’ is conducting an initial public offer (IPO) to the public in order to enter the stock market as a ‘public company’.

In short, when a company is offering an IPO, it is said that the company is going public.

Also read: #27 Key terms in share market that you should know

Why do companies conduct IPOs?

There can be a number of reasons why any company offer an IPO. Here are few of the top ones:

  • For a new project or expansion plan of the company
  • To raise capital (financial benefit)
  • For carrying out new research and development works
  • To fund capital expenditures
  • To pay off the existing debts or reduce the debt burden
  • For a new acquisition
  • To create public awareness of the company
  • For the group of initial investors desiring to exit the company by selling their stakes to the public.

In addition, IPOs generate lots of publicity for the company and hence helps in creating market exposure, indirect exposure and brand equity.

Why are the disadvantages of conducting IPOs?

Here are the few disadvantages for the companies who offer their IPOs:

  1. Public disclosure: When a privately held company offers its IPO, it has to disclose a number of documents to the public like its financials, promoters list, debts etc.
  2. Entering a regulated market: Indian stock market is highly regulated by Securities and exchange board of India (SEBI) and hence the newly public company has to play by the rules of SEBI. There has been a number of cases of companies getting delisted by SEBI as they do not follow the norms of the market.
  3. Market pressure: The companies performance are closely scrutinized by the public and investors. Hence, the company’s management is consistently is pressure. Sometimes the companies focus more on short-term performance over long-term due to market pressure.
  4. Loss of control: As the shares are distributed among the investors, the decision making power is now in the hands of the shareholders.
  5. Failing of IPO: Many companies fail to attract investors during its IPO and the offered shares might remain under-subscribed. In such a scenario, the company is not able to raise enough capital that is expected to achieve the goal of IPO.

Why do many IPOs come in the bull market?

bull market ipo

The promoters of the company sell their stakes only when they are confident of getting a good price. This generally happens only in a bull market.

During a bull market, the owners of the company can raise enough fund for their cause as the public is optimistic. People are willing to pay good prices to buy the shares of the company.

Why do not many IPOs come in bear market? During bear market, people are pessimistic and are not willing to pay a good price for the shares of a newly public company. The owners feel that they won’t be getting the right price for their shares and hence most owners do not introduce their IPO during a bear market

Also read: What is Bull and Bear market? Stock Market Basics

Who get benefits of IPOs?

There is a common myth that the company’s shares are undervalued during its IPO and hence the early subscribers of the IPO feel that they have made a very good deal.

However, IPOs are the by-products of a bull market and they are generally over-priced.

The owner and the initial investors of the company (like angel investors, venture capitalist etc) are the ones who get maximum profits during an IPO as they are able to sell the shares at a good price.

Why are people excited about IPOs?

There are a few common reasons why people are excited about IPOs. They are:

  1. Under-pricing myth: When a company announces its IPO, it’s presumed that the offered price is less than its true value. People are excited about the fact that they are the first one to buy the stock and will be rewarded handsomely when the company’s true price will be realized by the market. However, it’s very rare that the owners will be willingly underpricing the shares.
  2. Herd-mentality: As everyone they know will be applying for the IPO, people do not want to be missed out.
  3. Overhype by media/ underwriters: Media gets a high advertisement fee for the promotion of the IPO. Moreover, IPOs are intentionally overhyped by the investment banker and the underwriters. They make sure that these IPO’s get enough attention as this is their job to promote and sell the shares.
  4. ‘The Next …’ strategy: People compare the upcoming IPO with the Winners in the same industry and conclude that it will perform the same. ‘The next Eicher motors’, ‘The next symphony’, ‘The next Infosys’ etc. This ‘Next’ philosophy makes a lot of people excited about the upcoming IPO.

Is it worth investing in IPOs?

A lot of investors has made huge wealth be investing in IPOs. Had you invested in ‘INFOSYS’ when it got listed, you might have been sitting at a huge pile of wealth today.

Also read:

However, the performance of the majority of the IPOs in the Indian stock market is under-satisfactory. The number of IPOs underperforming in long-term are comparatively quite larger than the number of IPOs that performs well in the market.

Further, IPOs are never priced in the benefits of the public.

In the case where few IPOs are fairly priced, it gets a lot of demand from the public during its offerings and gets over-subscribed. Moreover, it soon becomes over-priced once it starts trading in the market.

Few IPOs might give you a good return in the 1-2 months of its listing as they are introduced in the bull market, however, for the long run, their performance is quite poor.

If you are willing to invest for long-term, then be cautionary about investing in IPOs. Focus on the quality of the company, not the hype generated by media or underwriters.

Nevertheless, you can always pick these companies from the secondary market once the hype is over and the price is attractive.

There are over 5,500 companies listed in Indian stock market. It’s better if you pick a good one among them than picking the upcoming hyped (5,500+1)th company.

New to the stock market? Confused where to begin? Here is an online video crash-course for beginners: How to pick winning stocks?

Footnote:

Tags: Is it worth investing in IPOs, IPO good or bad, Is it worth investing in IPOs in India, should I invest in IPO, Is it worth investing in IPOs for long, IPO pros and cons

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst. I’m 23-year old and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting