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face value market value and book value cover

What is the difference between Face Value, Market Value & Book Value?

Recently when I was navigating my Quora profile, I got an answer request for the question what is the difference between face value and market value of a company. Although both these are elementary terms related to stocks, however, they may be a little confusing for the beginners. Therefore, I decided to write a simple blog explaining the difference.

In this post, we are going to discuss the difference between Face Value, Market Value, and Book Value of a stock. Let’s start with the easiest.

Market Value

Market value per share is the current value of the stock. This is the price at which market values the stock. For example, if a stock is trading at a share price of Rs 100, then this is the market value per share of that company. The market value per share of a company fluctuates continuously throughout the trading time period.

Further, the total market value of a company, also referred as the market capitalization of the public company, is calculated by multiplying the current share price of the company by its total outstanding shares. 

face value and book value-minFace Value

Face value (also known as par value) is the value of a company listed in its books and share certificate. The company decides the face value when it offers shares at the time of issuance. The face value of a share is fixed (until the company decides to split or reverse-split the shares).

For example, during the IPO of Avenue Supermart (Parent company of D’mart Supermarkets), the management decided the face value per share to be Rs 10. Here is the details:

D mart IPO-min

(Source: Avenue supermart IPO details- Chittorgarh)

In general, the face value of a company is lower than its market value. For example, when a company goes public, it can have a face value of Rs 10. And it may trade at a market price of Rs 500.

However, this case is not always true. For example, in the case of penny stocks, the face value of the company may be higher than its market value. Penny stocks are those companies which trade at a share price less than Rs 10. Therefore, here the market price may be Rs 5 and the face value of the company may be Rs 10.

Further, the face value of a company is not affected by whether the market price goes up or down. However, the face value of a company will reduce in the case of a stock split. For example, if the current face value of a company is Rs 10 and it announces a stock split in the ratio of 1:1. Then, the face value of that company will split in the same proportion. Here, the face value will change to Rs 5 as the total number of share doubles after the stock split.

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

Book Value

In simple words, the book value of a company theoretically means the total value of the company’s assets that shareholders will receive in case the company gets liquidated i.e. when all company’s assets get sold and all the liabilities are paid back to all the debt-holders. Therefore, book value can be considered as the net value of the company reflected in its books.

The book value is calculated as total assets minus intangible assets (patents, goodwill) and liabilities. When you divide the book value of a company by it the total number of outstanding shares, you arrive at the book value per share.

You can compare the book value per share of a company with its market price to find whether the company is under or overvalued. Further, its always advisable to invest in companies with growing book value over time.

For example- here is the book value of ASIAN PAINTS:

face value and book value-min

(Source: Moneycontrol)

Where to find the face value, book value and market value of a company?

The face value, book value and market value of a company can be found on almost all financial websites.

Whenever you open the company page on any financial websites, the first thing that you’ll notice is its market value per share. However, just by cruising a little, you can easily find face value and book value per share of the company. For example, here is the face value, market value and book value per share for Asian Paints. (Source- Screener).

screener face value market value and book value-min

(Source- Screener)

You can also find this information on other popular financial websites like Yahoo Finance, Marketsmojo, Equitymaster etc.

Also read:

Bottom line

By now, the meaning of face value, market value, and book value should be clear to you. All these three terms are different and one should not get confused among them while studying any company.

Market value per share is the current value at which the stock is trading in the market. Face value is the value of a company listed in its books of the company and share certificate. And finally, the book value of a company is the total value of the company’s assets that shareholders will receive in case the company gets liquidated.

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

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

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How do oil prices affect the stock market?

Crude oil is considered to be one of the most important commodities in the global economy. It is versatile in its uses and helps industrialize economies. A variety of things from plastics to rubber and machinery uses crude oil or its byproduct, making it a crucial element in the raw materials for many businesses in the economy.

Hence it is no surprise that the stock market is often influenced by the price of oil. It can affect an individual investor or have a domino effect on the stock market. Here are some of the ways oil prices affect the stock market:

How do oil prices affect the stock market?

– Profitability of oil companies

The oil business has two main components to it, the upstream and downstream business.

The upstream business is involved in the drilling of oil wells and the manufacture of crude oil in industries. Examples of such businesses include Oil India and Shell.  When these companies are profitable it usually results in high stock market prices because the crude oil manufactured by these companies is the raw material for many businesses.

If upstream companies find it hard to drill for oil and face an increase in research and development costs, it could have an adverse effect on the value of the oil company’s stock.

The second type of oil business is the downstream business. These are corporations involved in the distribution and retail function of crude oil. They are in control of your local gas stations such as Indian Oil and Bharat Petroleum. These companies find low crude oil prices beneficial as they can now purchase crude oil at a low price from upstream companies.

– Consumer Demand

Almost everything that a person consumes is tied to oil such as electricity or fuel for their cars.

An increase in the price of oil can raise the daily living costs for people, reducing the amount of money they have available to spend on other goods and services such as electronics or clothing. The revenue of these companies decreases as consumer demand for their goods and services falls. The negative effect on the earning of firms lowers the value of their stock.

Alternatively, a decrease in oil prices has the opposite effect. When consumers spend less on fuel, it gives them more money for other goods and services. The increase in demand raises earnings and has a positive impact on the stock market.

How do oil prices affect the stock market cover

– Profitability of other industries

Since all businesses use a byproduct of oil, an increase or decrease in the price of oil can indirectly affect them as well.

If the price of oil increases, a delivery services company will face higher fuel costs. These costs will be translated to consumers as high prices for their services. The low earnings of the company will result in low stock prices for the industry.

Likewise, if oil prices decrease, the companies can charge lower prices to consumers and have high profitability and higher share prices. In reality, however, companies rarely lower the prices of goods and services if the price of raw materials has decreased.

– Impact on Inflation

The price of oil can directly or indirectly increase or decrease costs of goods and services in the economy and can result in inflation. In the United States, the price of oil is not considered a factor when the inflationary rate is calculated but its price can cause a ripple effect in the economy through industries that use crude oil as a raw material.

If oil prices rise, it can increase the cost of living for individuals, putting a pressure on wage rates to make up for this. The high labor costs increase the costs of goods and services and increase the rate of inflation in the economy as each dollar can now buy fewer goods and services. When inflation rises the stock prices of the industry decline.

Also read:

– Effect on Imports

For countries such as India that import almost 80 percent of its crude oil, a decrease in the price of oil is beneficial because it decreases imports expenditure and stabilizes the exchange rate of the currency.

However, a reduction in oil prices isn’t always great for the stock market. There is a positive relationship between the Foreign Direct Investment and the price of oil. When the price of oil goes up, oil-rich countries invest in emerging oil markets like India. However, when prices go down, they withdraw their investments.

Hence with a fall in oil prices, few foreign investors will invest their money in the Indian stock markets resulting in a negative impact on stock prices.

Conclusion

The versatility of the crude oil has made it an influential factor in the increase and decrease of stock prices. The price of oil not only affects the stock of oil companies but also the stocks of industries that use it a byproduct of it.

While the exact amount of influence it has on stock prices cannot be calculated, the price of this commodity can increase or decrease the total costs of production of many goods and services. This can affect the amount of goods people consume to exchange rate and the level of foreign direct investment which collectively affect the stock prices in an economy.

Needless to say, the price of crude oil has the ability to affect the level of investment in the economy and influence stock prices.

How to evaluate the cash of a business cover

How To Evaluate The Cash Of A Business?

You might have heard the phrase ‘Cash is the king’.

A cash-rich business means that the company has enough cash left after paying all its expenses and debts. For the company with high cash, it simply means more liquidity and opportunities for the business.

However, very high cash is also not good for a company as it means that the company is leaving potential investment opportunities. Overall, low cash can affect business stability and high cash can reduce its efficiency.

And therefore, it is really crucial to understand the cash position of business before investing. In this post, we are going to discuss how to evaluate the cash-rich businesses to understand whether the company has low, sufficient or excess cash.

Cash and cash equivalents

When it comes to evaluating the cash position of a company, the investors look into the cash and cash equivalents (CCE) section of the balance sheet.

These are the company’s assets that are cash or can be converted into cash fast. Here, cash equivalents can be defined as the assets that can be converted into cash within 3 months like Money market funds, Short-term Government bonds, Treasury bills, Marketable securities etc.

All cash and cash equivalents are recorded in current assets segment of the balance sheet and are the most liquid asset of a company. Now, let’s understand the two common scenarios with respect to the cash level of a business.

Case 1: Low cash

When a business has low cash, it can be little worrisome for the company as it may have or will face some problems to pay short-term obligations.

In case of sufficient cash, companies can easily settle short-term debts (obligations), make an in-time purchase of new inventories/equipment, buy into lucrative investments/new technology, grab mergers and acquisition opportunities, increase dividends etc.

However, lack of adequate cash may push the company towards potential short-term problems. As a thumb rule, avoid investing in companies with low cash balance.

too much cash

Case 2: High Cash

Although high cash helps a company in staying out of trouble of short-term obligations, supporting regular business operations in tough times, funding in its growth, superior performance etc. However, many times, excess cash be a little unfavorable.

Too much cash in company’s balance sheet simply means that the company is leaving potential investment opportunities to invest in the growth of its business operations or investments in other higher return instruments.

As Warren Buffett used to say- “Cash is the king. But it’s not much help if the king just sits there and does nothing.”

Too much cash reflects the inefficiency of the management to utilize it properly.

How to evaluate the cash of a business?

The cash position of a company can be evaluated using cash to current assets ratio. This ratio reflects the percentage of the total assets by cash and cash equivalents

Cash to current assets ratio = (Cash and cash equivalents)/(Current assets)

Although ideal cash and cash equivalents depend highly on the industry, however, as a thumb rule, cash to assets ratio of more than 40% can be considered to be excessive cash for the company.

Now, let us calculate the cash to current assets ratio of Hindustan Unilever (HUL) from its balance sheet.

HUL Balance sheet

(Source: Yahoo finance)

From the above statement, you can find the cash and cash equivalents (CCE) and total current assets of HUL over the years. For the year ending March 2018, the cash to current assets ratio turns out to be equal to 5.57%, which can be considered decent. (Quick note: You need to check this ratio over the past few years and compare with the competitors to better understand the cash position of HUL).

Also read:

A word of caution:

Although having high cash is good for businesses, but it is equally important to understand the source of that cash i.e. where that cash is coming from?

There are different ways for a company to pile up cash. Apart from the profitability of the business operations, a few other ways to build cash is by taking debt or selling its assets. And both of the later two ways to generate cash is not favorable for a company as a high debt means greater interest obligations. Further, selling the assets to pile up cash may affect the future profitability of the company.

Therefore, you should always check the source of cash for the cash-rich businesses. You can find out this by looking at the cash-flow statement of a company.

In the cash flow statement, check the cash from operating activities. If this is consistently increasing, it’s a positive sign and means that the company is able to generate profits from its core businesses operations. Further, also check the cash from investing activities to find out purchase or sale of assets. Finally, also look into the debt obligations of the company for the long-term and find out its trend over years.

Note: If you are new to the financial world and want to learn how to effectively read the financial statements of companiesfeel free to check out this awesome online course on Introduction to Financial Statements & Ratio Analysis.

Bottom line

The cash of a business can be roughly evaluated by navigating the cash and cash equivalent section in the company’s balance sheet. Here, cash to current assets ratio is used to check the cash level of a company.

A company should have sufficient cash to effectively run its short-term operations. However, huge cash can also be little troublesome for a company as it reflects the management’s inefficiency to use the cash productively.

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

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

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How to find the last 10 year financial statements of Indian Companies?

Reading the financial statements of a company is a key part of fundamental analysis which no investor should ignore.

Here, the investors need to read at least 5-10 years financial reports of the company in order to understand its performance, growth rate, trends, consistency etc. For example- a high profit for just one or two years is not sufficient to approach at any conclusion. However, if you can find that the bottom line of the income statement is consistently growing at a good pace for the last 5-10 years, this may be a healthy sign for the company.

In short, it’s imperative for the investors to read (and understand) the financial statements of a company before investing.

However, for the beginners, finding the last 10-year financial statements of Indian companies may look a tedious job. Besides, because of so many paid/subscription-based plans available for detailed financial statements of companies, it might be a little challenging for the newbies to decide whether to go for a paid plan or surf the internet to download the reports for free.

Paid plans are generally beneficial as they provide comprehensive reports and tools. However, they are often more useful to the professions, rather the retail investors. For the common investors, it’s better to use the free websites/resources to find the last 10 year financial statements of Indian companies.

In this post, we are going to discuss the free websites and resources to find and download the financial statements of Indian companies. Let’s get started!

How to find the last 10 year financial statements of Indian companies?

1. Company’s official website

The company’s website is the first and foremost source to find its financial statements. You can download the quarterly and annual reports of any company by visiting its official website and navigating to the ‘Investors’ or ‘Investor’s relations’ page.

tcs website

However, to arrange the last 10-year reports, here you might have to download the annual reports one-by-one manually. Nonetheless, this is the best source for the investors to download the financial statements of publically listed Indian companies.

2. Financial websites.

There are a number of free financial websites in India which provide the customized five to ten years financial statements of Indian companies, all at one place. Two of simplest financial websites that beginners should know are:

Screener is a simple, clean, yet powerful website. Here, you can also download the financial statements of a listed Indian company in the excel sheet.

For downloading the financial statements, simple go the screener website and search for your interested company in the search bar. Next, go to the company page where you can find ‘Export to Excel’ option.

screener asian paints

Quick Note: You need to create a login account on Screener in order to download the excel report.

Money control is probably one of the most popular financial websites in India for researching stocks and other financial instruments.

To download the financial statements of the Indian company, go to the company page on the money control website. Next, select the ‘financials’ option in the left tab and click on the financial statement (profit and loss statement, balance sheet or cash flow statement) that you would like to download.

moneycontrol

A few other websites that you can visit to find the financial statements of Indian companies are Yahoo Finance, Equity Master, Marketsmojo, Marketsmojo etc.

Also read: 7 Must-Know Websites for Indian Stock Market Investors.

3. Stock exchange websites

bseindia-min

Finally, you can always visit the stock exchanges (NSE/BSE) website to download the financial statements of an Indian company. The exchanges are continuously working to improve their website and its UI is far better compared to what it used to be a few years ago.

To download the financial statements, search for the company name in the top search bar and open the company page. You can find the annual results and reports in the financial section on the company page. 

Also read:

Closing Thoughts:

Although there are so many options for the investors to find the last 10 year financial statements of Indian companies, however, the easiest and best one is the company’s official website.

A notable problem with the financial websites is that they have to adjust the financial data a little to customize with their layout and hence the data shown on their website may not be exactly accurate. Moreover, there have also been cases where the financial data reflected on these financial websites doesn’t match with that of financial statements declared by the company (this may be because of human or computer error while gathering the data). Therefore, its always advisable to download the annual reports of the companies from their official website while researching the company as it is a more reliable source.

Nonetheless, an easier approach that investors can follow is to use these financial websites for a quick study and later download the annual reports from the company’s website/NSE/BSE while performing the detailed study.

That’s all for this post. I hope it is useful to you. Happy Investing!!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

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6 things you should NOT do when the stock market is Volatile!

Investing in the stock market is known to provide some of the highest long-term returns and can earn investors a profit in manifolds over the years.

People invest in stocks to reach their financial goals and earn a profit on their savings. It is a way to make money work for you rather than you working for the money.

What is stock market volatility?

Investing in stocks is a risky business. While investors can earn a high return on shares, we cannot overlook the volatility that comes with it.

Volatility can be described as the continuous change in the prices of stocks over a short period of time. Here, the price of stocks can rise on a certain day and can fall the very next day. For example, you may have seen situations where Sensex may have fallen over 400 points in a day and recovered on the very next. This can be considered as volatility.

High volatility also increases the VIX ratio (Volatility Index) also known as the Fear Index. It measures the amount of fear in the market as a result of the volatility.

The fear caused by a volatile market makes investors react in many different ways. Some start to panic as their investments get riskier and try to sell & exit the market. On the other hand, there are contrarian investors, who prefer investing only in situations when others are selling. Anyways, as shares start to lose value, investors often make hasty decisions that can result in terrible outcomes.

6 things you should NOT do when the stock market is volatile!

Here are six things investors should not do when the stock market is volatile:

1. Don’t Panic!

The number one reaction investors have when there is volatility in the market is to panic and make speculations. It is important not to be influenced by fear and do something irrational. Investors can consider buying a stock at a lower price but should not panic-sell. Instead, they should use this period of volatility to evaluate the stocks in their portfolio.

There are often many reasons why a person invests in a particular stock in the first place. If the fundamental values of why you invested in the stock are clear, then you should remain invested. However, if you are not sure of a particular investment, meet with your financial planner to decide a course of action to exit the market.

Remember, volatility in the market is only short-term, don’t panic-sell if your long-term objectives of investing in the market haven’t changed.

panic selling

2. Don’t buy JUST BECAUSE prices are low!

When there is volatility in the stock market it is not advisable to invest in the market just because prices are low. This is because there is no guarantee that a stock with a low price today will increase in value in the future. In fact, the price may go even lower and you could end up in a value trap. (Also read- What are value traps?)

You need to analyze the stock’s fundamentals and track record. Look into factors like revenue growth, profit margin, price to earnings, debt-to-equity ratio etc as well as its future potential. If the stock shows a history of riskiness and volatility it would be best not to invest in them. Don’t be a bottom fisher!

3. Don’t believe everything you see on the news!

A sudden ‘breaking news’ segment on the stock market can cause people to make investment decisions that can prove to be disastrous in the future. News reports are not always authentic and often mislead or misguide the investor which can affect the sustainability of a stock.

News reports about the volatility of stock markets are usually short-lived and stock prices will bounce back like a ping-pong ball before you know it. This short-term volatility is often due to a current event in the economy. Once the event has passed, your stock price should be back to normal. As a serious investor, be aware of ‘breaking news’ but don’t follow it blindly.

news

4. Don’t make decisions based on international markets!

During certain periods, there can be a correlation between local and international stock markets. For example, a change in the leadership of a country could affect numerous economies around the world. But statistically speaking, such a correlation does not exist most of the time.

Volatility in the stock market is a reflection of individual events in an economy or movements in the economic cycle. The stock prices are a result of the anatomy of the local economy. For example, the Dow Jones in the US is completely independent of the stock prices in NSE’s NIFTY. Hence, investors should not be influenced by volatility in international markets, there may be various factors that could affect these stock prices.

5. Don’t rush to invest in volatile sectors!

An important rule for investors is to study trends in the market before investing. If there are particular stocks that drive bear markets- avoid these.

A stock that has a financial risk and a low standard of corporate regulations often lead to long-term problems and has a low chance of recovering. These stocks will have short bursts of upward movements but will have a long-term downward trend.

Do a market analysis of the sector you are investing in, if the industry shows a history of high volatility- you should remain of cautious before you invest too much money into it.

6. Don’t put all your eggs in one basket- Diversify your portfolio!

diversification do not put all your eggs in one basket

One of the biggest mistakes an investor can make is not investing in a variety of stocks. If a certain industry shows potential for high returns, it is not a wise decision to invest all your money here. This is because if a certain economic event has a negative impact on the industry- it could result in a huge financial loss for the investor.

It is better to spread your risk and invest in different stocks that are stable, have a strong market presence and good growth potential. Here, even if you face volatility in one of your assets, you have a diverse portfolio of stocks to cover your losses.

An investor looking to reduce their risks and control losses should diversify their portfolio and not invest in too many volatile stocks. Greed can often take over fear and this can prove to be disastrous. Investors need to perform a thorough analysis of the stock market before picking stocks to invest in. If they do not have the bandwidth to do this, they can consult a financial advisor.

Also read:

Follow the tips listed above to help you get through a period of high stock market volatility. While it is important to safeguard your portfolio from the effects of a volatile market, remember the biggest risk is not taking any risk at all.

Measurement Scales Balance Swinging Swing Equality

Is Stock Market Investing a Zero-Sum Game?

One of the most debated questions regarding stock market is that- Is stock market investing a zero-sum game? If someone makes money in the stock market, does it means that someone else must be losing money?

In this post, we are going to demystify this question and try to answer whether stock investing is a zero-sum game or not.

What is a Zero-Sum Game?

A Zero-sum game is a situation where one person’s profit is equivalent to the another’s a loss so that the net change in wealth is Zero.

A few popular examples of zero-sum game is Poker and gambling. In poker, the amount won by one player is equal to the combined losses of the other participants. Please note that there can be two or multiple participants in such games.

Moreover, Zero-sum games are contrary to win-win situations.

poker

Is stock market investing a Zero-sum game?

When it comes to the stock market, the majority assumes that the market is a zero-sum game. After all, the money made by someone should come from a source and most believe that it costs from the other losing participant.

However, this is not true. Investing in stock can be mutually beneficial.

In the share market, trades are based on future expectations and because of the different risk tolerances of the participants.

Just because someone is selling their stock, doesn’t mean he is losing. He might have made substantial profits and willing to book profits. And similarly, if one sells, there’s no reason to think that the next investor can’t profit too. Here, both the parties can be winners.

Overall, a zero-sum game isn’t the right description of investing. As the company expands and becomes more valuable, the stock market can increase the wealth of both the participants & economy over time.

win win situation stocks Is Stock Market Investing a Zero-Sum Game?

Dividends…

An important factor which is invariably ignored while studying the stock market as a zero-sum game is the dividends. As corporations generate profits from the sales, they share a portion of this profits with their shareholders as the dividends.

(There are even cases where the investors get back more money than the original invested amount just as dividends over time.)

If the market was a closed system with just buyers and sellers, somewhere it could be possibly considered as a zero-sum game. However, it is not a closed system as money is consistently pumped into it as dividends by the companies.

Quick Note: The exception to these scenarios are the companies that do not pay dividends.

Also read:

Closing Thoughts

Investing is not a zero-sum game and both the parties can be winners.

Here, the profit for the participants doesn’t come from the stake of losses by other participants, but from the value created by the company. If one sells a stock, there’s no reason to think that the next investor can’t profit too. As long as the business is performing well, the stock will keep on increasing value without anyone losing the money.

Overall, there doesn’t need to be one winner and other losers. Stock market provides an opportunity for a win-win situation for all.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

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How Does The Stock Market Affect The Economy?

A stock is a type of security that represents an individual’s ownership in a company and a stock market is a place where an investor can buy and sell ownership of such assets.

Trading stock on a public exchange is essential for economic growth as it allows companies to raise capital through public funding, pay off debts or expand the business.

Why do we have a stock market?

The stock market exists for two main reasons, the first is to provide a company with the opportunity to raise capital that can be used to expand and grow the business.

If a company issues one million shares that can sell at $4 a share, this allows them to raise $4 million for the business. Companies find it favorable to raise capital this way so they can avoid incurring debt and paying steep interest charges.

The stock market also provides investors with the opportunity to earn a share in the company’s profit.

One way to do this is to buy stocks and earn regular dividends on its value- that is the investor earns a certain amount of money for each stock they own.

Another way is to sell the stock to buyers for a profit when the price of the stock increases. If an investor buys a share for $20 and the price eventually increases to $25, the investor can sell the stock and realize a profit of 25%.

Also read: Why do Stock Markets Exist? And Why is it So Important?

How the Stock Market affects the Economy?

The increase and decrease in stock prices can influence numerous factors in the economy such as consumer and business confidence which can, in turn, have a positive or negative impact on the economy as a whole. Alternatively, different economic conditions can affect the stock market as well.

Here are a few ways the stock market can affect the economy of a country:

Movements in the Stock Market

The movements in the individual prices of stocks give the stock market a volatile character. As stock prices move up or down, their volatility can have a positive or negative impact on consumers and businesses.

In the event of a bull market or a rise in the prices of stocks, the overall confidence in the economy increases. People’s spending also increases as they become more optimistic about the market. More investors also enter the market and this feeds into greater economic development in the nation.

When the prices of stock fall for a continuously longer period, also known as a bear market, it has a negative effect on the economy. People are pessimistic about the economic conditions and news reports on falling stock prices can often create a sense of panic. Fewer investors enter the market and people tend to invest in lower-risk assets which further depresses the state of the economy.

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

bull and bear market

(Image credits: 5paisa.com)

Consumption and the Wealth effect

When stock prices rise and there is a bull market, people are more confident in the market conditions, and their investment increases. They tend to spend more on expensive items such as houses and cars. This is also known as the wealth effect which is how a change in a person’s income affects their spending habits and eventually leads to growth in the economy.

In the case of a bear market or a fall in stock prices, there is a negative wealth effect. It creates an environment of uncertainty among consumers and a fall in the value of their investment portfolios decreases spending on goods and services. This affects economic growth as consumer spending is a major component of Gross Domestic Product.

A common situation of the wealth effect was during the US housing market crash of 2008, which had a large negative impact on consumers wealth.

what's the economy

(Image credits: Investopedia)

Impact on Business Investment

Apart from consumer spending, business investment is also a key indicator of economic growth.

When stock prices are high, businesses are likely to make more capital investments due to high market values. Many companies issue an IPO during this time as market optimism is high and it is a good time to raise capital through the sale of shares. There is also more mergers and acquisitions during a bull market and firms can use the value of their stock to buy out other companies. This increased investment feeds into greater economic growth.

When the stock market is bearish, it has the opposite effect on investment. Confidence in the economy decreases and businesses are no longer eager to invest in the economy. The decrease in share price makes it harder for companies to raise funding in the stock market.

Other factors

The stock market also affects the bond market and pension funds. A large part of pension funds are invested in the stock market and a decrease in the price of shares will lower the value of the fund and affect future pension payments. This can lower economic growth as people who depend on pension income will tend to save more and this lowers spending and eventually the GDP.

While a fall in share prices has a negative impact on economic growth and GDP of a nation, it has a positive effect on the bond market. When there is a depression in the stock market, people look for other assets to invest their money in such as bonds or gold. They often provide a better return on investment than shares in the stock market.

Remember, it is always important to diversify your investment portfolio and spread your risk. Don’t throw all your eggs into one basket.

The stock market and the economy are not the same

Contrary to popular belief, the stock market and the economy are two different things. The GDP of an economy and the stock market gains are incompatible and, in fact, there is little comparison between the two. The major reason for this discrepancy is the difference in the size of the two markets. The economy depends on millions of factors that can have both a positive and negative impact, while the stock market is only affected by one factor, the supply and demand of stocks.

Also read:

For investors in the stock market, it is better to err on the side of caution and focus on the fundamentals of each stock rather than on the economy as a whole. As the saying goes ‘an economist is a trained professional paid to guess wrong about the economy’.

why do stock market exists cover

Why do Stock Markets Exist? And Why is it So Important?

A stock market is a public market where people can buy and sell shares on the stock exchange. The stocks, also known as equities, represent ownership in the company.

Stock markets have existed for centuries. The oldest stock exchange was started in Belgium back in 1531. The brokers and moneylenders used to meet there to deal with the businesses. However, they never used actual stocks but traded in promissory notes and bonds. Later, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company and regarded as the first real stock exchange.

Since its inception, stock markets have served many purposes, the most important being to provide companies with a source to raise capital for investment and expansion.

Why do stock markets exist?

Stock markets exist to serve the wider economy. It helps individuals earn a profit on their income when they invest in the stock market and allows firms to spread their risks and receive large rewards. It also enables the government to increase spending through the tax revenue they earn from corporations that trade on the stock exchange. The government uses the revenue to increase re-investment and employment capacity.

The stock market plays an important role in the economy of a country in terms of spending and investment. Without stock markets, many countries would not be as developed as they are. Alongside, it has helped individuals become wealthy and increases the overall standard of living in many economies.

Following are some of the most important functions of a stock market in the economy:

It helps companies raise capital

If stock markets did not exist, companies would have to resort to borrowing from the bank to raise money for expansion. This would be a burden on the company as they would have to repay the loans with interest.

Fortunately, with stock markets, businesses have the ability to create an initial public offering and raise large amounts of cash without having to worry about repayment. Moreover, publicly traded companies have no obligation to pay dividends when they incur losses.

Capital raised this way can help companies expand operations and create jobs in the economy. From a greater economic perspective, consumer spending increases,  governments can benefit from tax revenues and there will be lower levels of unemployment.

It helps create personal wealth

One of the most important benefits of the stock market is its ability to help generate personal wealth in the economy.

For the individual investor, the stock market provides a way to invest your income to earn a share of the companies’ profits. The revenue they earn can increase spending in the economy that can have a multiplier effect. The increased spending by individuals leads to increased investment and employment.

It helps increase investment in the economy

One of the key drivers of Gross Domestic Product is the level of investment in the economy. Governments often create fiscal and monetary policies in the economy to promote greater investment. The stock market is considered to be one of the most prominent sources for people to invest money in.

Furthermore, investors are always looking to invest in companies with high growth potential. If the stock market is performing well, this not only increases investment from local investors but also attracts foreign direct investment as people abroad invest in the local stock exchange. For example, people in India can invest in the NYSE which helps increase GDP of the US economy or vice-versa.

It serves as an indicator of the state of the economy

sensex last 30 years

(Sensex last +30 years graph)

The performance of the stock market is a rough indicator of how well the economy is performing. This often depends on speculators and perceptions of investors in the market. A rise or fall in the price of shares represents what cycle the economy is in such as recession or a boom.

There is a symbiotic relationship between the state of the economy and the performance of the stock market. Economists use this as a way to analyze past performance of investment and spending which helps them in the creation of new economic policies. The stock market serves as a barometer for the economy.

Also read:

It also affects non-investors in the economy

All members of society are affected by the stock market performance regardless of whether or not they invest in stocks.

People with pension funds and retirement accounts are impacted by low stock prices as the value of their accounts is tied to the stock market. Companies can also reduce employee benefits (pensions) as they can no longer afford to spend money on this which can delay the retirement age. Furthermore, when a company’s share price goes down, it affects job security as firms cut back on spending and many people could end up losing their jobs.

The stock market also impacts the rate of taxes and interest rates set by the government. During the Great Depression, the US government lowered taxes to induce borrowing but once the economy was out of depression, the government increased interest rates to encourage investment. Interest rates can affect a non-investor because a person renting out a home does not have to pay interest on a home loan directly but the landlord is likely to increase the rent to cover the high-interest expense.

Closing Thoughts:

Stock market gives opportunities to the businesses and public to transfer capital and ownership in a controlled, secure and managed environment. In addition to providing a convenient way for companies to raise capital and for individuals to increase wealth, the stock market helps keep a check on corporate regulation and increases the economic growth and prosperity of the nation.

rule of 15*15*15 sip calculator cover

Why You Need to Know The Rule of 15*15*15?

When the newbies enter the world of investing, one of the biggest questions that they may face is ‘how much’ and ‘how long’ should they invest? Enter the rule of 15*15*15.

In this post, we are going to discuss what is the rule of 15*15*15 (and the rule of 15*15*30) and how it can help you to make your investment decisions.

The rule of 15*15*15

The rule of 15*15*15 says that if you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 15 years, you will build a final corpus of Rs 1,00,00,000 (One crore).

Here,

SIP Amount = Rs 15k per month
CAGR =15%
Time horizon =15 Yrs
Final corpus = Rs 1 Cr

rule of 15*15*15 sip calculator

(Source: SIP Calculator)

Interestingly, your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Rule of 15*15*30

The rule of 15*15*15 gets even better when we double the ‘time horizon’ keeping all the other factors the same.

Here, you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 30 years.

Can you guess the final corpus build in this case?

The final corpus built after 30 years will be Rs 10,00,00,000 (Rs 10 Crores). And yes, that’s right — not a typo error…

Here,

SIP Amount = Rs 15k per month
CAGR = 15%
Time horizon = 30 years
Final Corpus = Rs 10 Crores

the rule of 15*15*30 sip calculator

(Source: SIP Calculator)

Here your total invested amount is just Rs 54 lakhs. However, as the power of compounding is working in your favor, you will accumulate a final corpus of Rs 10 crores. Only by doubling the time horizon, you can get ten times the amount compared to the rule of 15*15*15.

And that’s why the power of compounding is considered the most substantial factor for wealth creation. Here’s a quote regarding the same by one of the greatest scientist of all time, Albert Einstein:

Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Quick Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. In the bull market, the returns can be as high as 30–40%. On the other hand, in the bear market, the performance can be as low as -10% to 5%. Here, the 15% is taken as the average of the returns over the 15 or 30 years.

Warren Buffett Wealth Creation

The name ‘Warren Buffett’ needs no introduction, especially for the people involved in the world of investing. His wealth creation story is an interesting topic to discuss in this post.

Fascinatingly, unlike the young tech billionaires of this century like Mark Zuckerberg, Evan Spiegel, Bobby Murphy, John Collison, etc. Warren Buffett did not build his wealth by creating a super-tech company like FB, Snapchat, Google, etc.

Warren Buffett built most of his wealth over time through their investments (and acquisitions) by his company Berkshire Hathaway. You may get surprised to know the fact that the World’s third richest person become a billionaire only in his 50’s.

warren buffett net worth growth over time

The biggest factor why Warren Buffett was able to build such a huge wealth was his amazing returns for a consistently longer period. His company, Berkshire Hathaway, give an average yield of around 21.7% per year for over five decades. This return for such an extended time period is way-way better than what we discussed above. The power of compounding played an important role in Warren Buffett’s wealth creation story.

Resources:

Closing Thoughts

The time period is a significant factor when you are investing.

In this post, you can notice how by doubling the time horizon from 15 to 30 years; you can get ten times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

To end this post, here’s an amazing quote by Mr. Buffett:

“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

7 Powerful New Year Resolutions For Equity Investors!

A new year always excites everyone. It’s a time for the people to make different personal and professional resolutions like to learn how to swim, join the gym, travel abroad, learn martial arts, create a new blog/youtube channel, learn a new language, maintain a journal etc.

Personally, I’ve always loved new years and enjoyed making plans for the next year. This time also I’ve made a few resolutions. On the top of the list is to travel all the 29 states and 7 union territories in India by the end of 2019 (Spoiler alert: I’ve already been to +20 entities).

Anyways, stock investors are ordinary people and hence, they also like to make resolutions for their new investing journey. However, if you an equity investor but do not have made resolutions for the new year yet, then we’ve got you covered.

In this post, we are going to discuss seven powerful new year resolutions for equity investors. All these resolutions are designed to make you a better investor by the end of the calendar year.

7 Powerful New Year Resolutions For Equity Investors

Here are the seven best new year resolutions for the Indian equity investors. I would recommend you to challenge yourself and accept as many as resolutions (out of seven) as possible.

1. Save enough, Invest more

This is something which most youngsters struggle with. Although the older generation is doing much better in the art of saving, however, when it comes to intelligent investing — they too are not much mature.

If you are struggling with savings, plan to optimize your expenses this year. Track your spendings and perfect them wherever possible in order to increase your savings. However, do not just stop there. Invest those savings in different investment options based on your needs and risk tolerance. For beginners, investing in blue-chip stocks are a good option to get started.

2. Start goal-based investing

investment goal

Goal-based investing is a new way of wealth management where the individuals focus on attaining specific objectives or life-goals through their investments. Here, before starting to invest, the individual tries to answer the question- “What exactly are you investing for?”. The best part about the goal-based investing is that here the investors do not focus on getting the highest possible returns. But the aim of this investment is to reach the desired returns that meet their goals.

This year, switch from the traditional investing to goal-based investing. Set a specific goal and start investing to achieve it. This goal can be owning your new house, funding your business venture, corpus for your kid’s education/marriage, retirement, travel fund etc.

3. Increase your circle of competence

circle of competence

Because of different background, qualification, or experience, everyone has built up a greater knowledge in a specific area. In this certain field, these people have the expertise and hence, have a significant advantage. This is called the circle of competence.

The circle of competence might vary from people to people depending on the criteria mentioned above. For example, a doctor might have an expertise in medicines, healthcare or pharmaceutical and he can consider this area as his circle of competence (COC).

This year, make a resolution to increase your circle of competence.

For example, let’s say you might have been ignoring tax saving mutual funds or ELSS or any other investment option just because you were not competent earlier. But this year, spend some time and efforts to get comfortable in those investments.

Even for stock investors, there might be different industries or sectors that you may be ignoring. This can be because you do not have good knowledge of that industry and hence not inside your circle of competence. This year, learn those new industries and expand your circle of competence.

4. Be consistent

Consistency is the key to build long-term wealth. If you invest in equities just in a bull market and shy off during the bear market, it’s definitely not a good strategy. Bulls and bears are the part of market and stocks are characterized to go up and down.

This year, make a resolution to become consistent in your investments.

If you have got a monthly SIP, then consistently keep investing in that plan. If you are a direct stock investor, then fix an allocation of money that you’ll invest in the market throughout the year, whenever you find the best opportunities. Overall, to win the game, you need to stay in the game. And that’s why you need to be consistent in your investment plans.

5. Become more Socially Responsible Investor

Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good. For example- investing in companies promoting health, cleaner energy, healthy foods etc. The companies are evaluated based on the ESG index: environment, social justice, and corporate governance.

Being an investor gives you a lot of power in the financial world. This year, make a resolution to realize the power and influence you have as share investors to make a positive impact on society.

solar panel cells

6. Continue your education:

The stock market is very dynamic and things keep on changing very fast here. New technology, a new sector, new research tool etc. And that’s why the biggest resolution that you need to make this year is to continue your education.

This doesn’t mean to go and enroll in a university. You simply have to keep learning more. Whether it’s through courses, seminars, workshops, books or youtube videos, it’s up to you. But make sure that you keep on learning. One best way to continue your education is by taking a resolution to read at least one investing book each month. This is not a tough resolution and easily achievable. If you are not sure which books to read, here is a list of ten must-read books for stock market investors.

7. Diversify

This is the last resolutions to make this year. No matter how good you are in equities, do not invest all your money in the market. Stock market investments are subjected to market risk. And if you’ve allocated all your money in the market and it doesn’t perform well (because of whatever reason)– you are doomed.

This year, make a resolution to expand your investment options and look into alternative investment options. Maybe investing in real estate or diving into startups as Angel investor. Diversify your investments and reduce the potential risks.

Closing Thoughts

The new year is the best times to ‘make the change’ or ‘be the change’. Whether you want to meet your needs/goals or become a better investor, this is a great time to start working on it. Through the new year resolutions, take your investing to the next level this year.

Wish you all the best!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

biggest mistake stock market

The Biggest Investing Mistake that 90% Beginners Make!

Suppose you bought two stocks- Stock A and Stock B. The buying price of both these stocks is the same, i.e. Rs 100.

After two years, you checked the returns from both these stocks and found that the current price of stock A has moved to Rs 180. On the other hand, the market price of company B has fallen to Rs 60. What would you do next?

Would you sell stock A and book a profit of 80%? Or Would you sell stock B to get rid of your losing stock?

scenario stocks

I will give the answer to this question in a few minutes. But first, let’s discuss another scenario in a similar context.

Let’s say, you have a garden where you’ve planted three vegetables- Ladyfinger, tomatoes, and Cabbage.

garden-min

Out of the three, Ladyfinger and tomatoes are doing exceptionally well. They are growing big and healthy. And that’s why you are able to make huge profits by selling them.

Anyhow, the third vegetable i.e. cabbage is just not doing well. It is not growing enough, no matter how much time, money and efforts you spend on planting those vegetables. It simply dies out without producing anything worthwhile to sell.

What’s the logical step here for you as the gardener?

Shouldn’t you get rid of the Cabbage which is not growing no matter how much efforts you put and focus more on growing the other two vegetables which are giving you awesome returns? After all, those two vegetables are the ones who are making you profits.

A similar concept should be applied in the stock market world.

Out of the two stocks- Stock A (which went up by 80%) and stock B (which fell down by 40%), it’s logical to hold the winning stock and get rid of the losing one.

Why do you want to sell Stock A to book a profit of just 80%, when it can get returns of 100%, 200%, 500% or even 1,000% in the future? If the company is fundamentally strong, selling its stocks just to book short-term profits doesn’t make much sense.

On the other hand, keeping the losing stock just to break even is also not a wise strategy. If you get rid of that stock and invest the same money in stronger companies, it can give you better returns. Holding the losers just to break even may lead you to loss of both time and money.

Here, the biggest lesson that every beginner should know is- “Hold your winners and cut your losers!!”.

But sadly, most people follow the totally opposite approach while investing. Even if the stock moves up by 30%, most beginners are eager to sell that stock, book profit and boast among their friends. 

The majority of the investing population would prefer to sell their winning stocks just for instant gratification of short-term profits. However, booking short-term profits should not be the goal of the investors if they want to build long-term wealth. After all, the consistent returns should always be preferred over a one-time profit.

The only reasons when you should sell your winning stocks is A) when the company’s fundamental changes and the stock is not as strong as when you originally invested, B) When you find a better stock to invest with bigger opportunity and C) when really need the money. For all the rest cases, you should stick with the stock.

Also read:

Besides, one more thing that most beginners ignore while booking short-term profits is taxes. When you sell your winning stock in short-term for booking profits, you are obliged to pay short-term capital gain (STCG) taxes of 15% on your profits.  Therefore, this portion of the profit is already gone to the government.

Nonetheless, you can easily avoid/delay this STCG gain tax by NOT selling your winning stocks and keeping it for the long term. After all, you only have to pay taxes when you book profits. Moreover, Long-term capital gain taxes are comparatively smaller (i.e. 10% of your gains). Therefore, by investing for long-term, you can save a few additional bucks.

Overall, whether you are investing in stocks, mutual funds or any other investment option, the first and biggest lesson is the same- “Cut your losers and hold your winners!”.

That’s all for this post. Happy Investing!!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

Financials Signals That A Company May Be Declining cover

3 Financial Signals That A Company May Be Declining.

Do you know that out of the 30 companies in the constituents of Sensex in 1992, only seven are still the part of it?

Yes, that’s true. The remaining companies couldn’t maintain their growth & value and hence were thrown out of the list of the biggest thirty companies in India with time. (Read more here: The Sensex story in the 25-year reform period —The Hindu Business Line) .

Although becoming a large-cap company is a dream of most of the businesses, however, after becoming a mature company, many companies find it a little challenging to maintain their growth.

Moreover, the problem arises when they are not able to sustain their profitability and starts declining. There are a number of examples of companies which were once a market leader, however, couldn’t keep a sustainable profit margin and later either shut down or went bankrupt. The most common example is Kingfisher. 

Declining companies do not have much growth potential left and even the returns (and value) of their existing assets keep on sinking.

Therefore, as investors, it’s really important for us to continuously monitor the growth of our invested company. And if we are able to find some signals that the company is declining, it might be the time for exit from them.

After all, no matter how much we love our invested company, the main goal of our investments is to make money and if the company is continuously declining, there’s no point remaining invested. It’s really difficult for the declining companies to reward their shareholders. Further, we as investors have thousands of other options available to invest in the market. Then, why to stick with the declining companies?

In this post, we are going to discuss three clear signals that you can study from the financial statements which show that a company may be declining.

Besides, these financial signals are very simple to identify (even for the beginners). Therefore, make sure that you read this post till the very end. Let’s get started.

3 Financial Signals that a company may be Declining.

Although evaluating the exact financial health of a company requires a serious study of the statements of profit & loss, balance sheet and cash flow statement of the company. However, there are a few financial tools which send an easy signal for the investors to identify the declining companies. If all these three financial signals are negative for a company, then the company might be in a little trouble.

Here are the three simple financial signals that you can study to evaluate if a company is declining:

1. Declining Revenue:

If a company’s revenue is continuously declining for the past multiple years, it may be a warning sign for the investors.

The revenue of a company is the TOP LINE of the income statement. And if the TOP LINE is declining, in general, all the lower levels will follow the same trend.

Even a stagnant (flat) revenue for a continued longer period of time is a sign of caution for the investor. After all, there’s a fixed extent up to which a company can control its expense. And if the company want to increase its profit, then it has to increase its revenue eventually.

A flat or declining revenues for past multiple years is an indicator of operating weakness. Moreover, if you can find that the revenue of the competitors (and the industry) is growing over the same perio, then it sends even a stronger signal of a weak management and poor health of the company.

For example- here is the income statement of Reliance communication for the last five years. Here, you can easily notice the declining net sales (and total revenue) for the past multiple years.

Reliance communication income statement
Source: Equity Master

And this decline is in line with the stock return of this company. In the last five years, Reliance communication’s share price has shrunk by over 88%.

2. Negative Profit margin:

Profit margin is calculated by dividing the net profits by net sales realized over a given time period. It represents how much percentage of sales has turned into profits. In other words, the percentage figure indicates how many cents of profit the business has generated for each rupee of sale.

If the profit margin of a company is negative, it shows that the company is not able to generate profit from its regular business. A negative or declining profit margin of the company for a continued longer period of time can be taken as a warning sign for the investors.

Declining companies generally lose their market share to their competitors. And in order to keep up their sales, they often have to either give bigger discounts or to cut their profits. Moreover, they also lose the pricing power which further leads to a fall in the margin.

While evaluating companies, you can look into the three levels of the profit margins- Gross profit margin (GPM), Operating profit margin (OPM) and Net profit margin (NPM), each being a more refined level of profitability. As a rule of thumb, avoid investing in companies with a negative profit margin.

Anyways, if you’ve already invested and now find that the profit margin of the company is continuously declining for the past multiple years, then it might be a signal that this company is declining.

3. Big dividend payouts:

Dividend payout is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

It can be calculated by dividing the dividend per share (DPS) by earnings per share (EPS) of a company in a year. For example, if the DPS of a company for the current year is Rs 2 and its EPS is Rs 10, then the payout ratio is equal to 2/10 i.e. 20%.

If a company gives a consistent dividend to its shareholder, it is a healthy sign.

However, the problem arises when the company starts paying a major portion of its net income as dividends. In such a scenario, the company is not retaining enough income for investment in its growth or future plans.

There should be a balance between rewarding shareholders and the retaining income for its own growth. After all, if the company is not investing enough in itself, it will eventually become difficult for them to increase (or to maintain) their profitability in the future.

Declining companies generally pay out large dividends to their shareholders as they have a very little need (or scope) of reinvestment. As a rule of thumb, payout ratio greater than 70% for a company can be a warning sign for the investors.

Other financial signals:

Another financial tool that can give you a better picture of the financial situation of a company along with the above three financial indicators is the company’s debt level.

If the debt level of a mature company is continuously increasing at a high pace, it is a sign that the company has been aggressively financing its growth with debt. You can use debt to equity ratio to evaluate the debt level of a company. A high debt to equity ratio (greater than one) can be considered a high risk for the company.

Apart, there are also a few handfuls of financial ratios like Return on assets (ROA), Return on equity (ROE), interest coverage ratio etc that you can also study to check if your company is declining. A continuously declining ROA, ROE and interest coverage ratio can be a warning sign.

Also read:

Closing thoughts:

Even big mature companies are capable of declining over time and losing their value. And that’s why it is important for the investors to continuously monitor the growth of their invested company.

In general, a flat or declining revenue, negative profit margin and huge dividend payout can be considered signs of a declining company.

Anyhow, if the company takes necessary steps, it may recover back on track or even become a turn-around. However, if the management doesn’t take the significant steps in time, the company may decline further destroying the shareholder’s investment. 

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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 intangible assets

What You Need To Know About Intangible Assets!

Evaluating the intangible assets of a company is a crucial part of the fundamental analysis, especially in a generation with a lot of leading companies in the technology and service-based industries.

However, most investors ignore this part and focus more the physical assets like land, building, equipment etc. One of the major reasons why people skip the part of studying intangible assets is because these assets are a little difficult to evaluate. After all, how would you correctly measure the value of a brand or non-physical assets of a company?

In this post, I’ll try to demystify intangible assets in simple words so that you can understand what exactly are intangible assets, why are they valuable for a company and how can you evaluate the intangible assets of a company.

Overall, it’s going to be an exciting post. Therefore, please read it till the end because I’m sure it will be helpful to you in assessing companies better.

What are intangible assets?

Intangible assets are those assets that are not physical in nature, yet are valuable because they contribute to the potential revenue of the company.

A few of the common examples of intangible assets are brand recogintion, licenses, customer lists, and intellectual property, such as patents, franchises, trademarks, copyrights etc.

Quick Note: Contrary to these, TANGIBLE Assets are those assets that have a physical form. For example- land, buildings, machinery, equipment, inventory etc. Further, financial assets such as stocks, bonds etc. are also considered tangible assets.

Although intangible assets do not have an obvious physical value such as land or equipment, however, they can be equally valuable for a company for its long-term success or failure. 

For example, companies like Apple or Coca-Cola are highly successful because of the significant brand equity. Since it is not a physical asset and tricky to calculate the exact value, still brand equity is one of the primary reasons for the high sales of these companies. In India, companies like Hindustan Unilever, Colgate, Patanjali, etc also enjoy benefits of enormous brand value.

Further, a few more examples of intangible assets can be marketing-based (ex- Internet domain names, non-competition agreements etc), artistic-based (ex- literary works, musical works, pictures etc), Contract-based (ex- franchise agreements, broadcast rights, use rights etc) and technology-based (example- computer software, trade secrets like secret formulas and recipes etc). [Credits: Examples of intangile assets- Accounting tools]

what you need to know about intangible assets cover

Moreover, in a few industries, intangible assets are more valuable.

Unlike manufacturing companies where inventories and fixed assets contribute to the majority of their total assets, in a few industries the intangible assets are more valuable:

  • Consumer product companies depend on the brand name. For example- Hindustan Unilever, Godrej, Colgate, etc. The bigger the brand name, the easier are the sales. 
  • Technology companies get the most success by their technical know-how and skilled human resource. Ex- Infosys, TCS, etc.
  • Banking companies have their computer software license, stock exchange cards and electronic trading platform (websites). Ex- HDFC bank.
  • Telecom industries use their bandwidth licenses (including spectrum) to enjoy benefits. Example- Bharti Airtel
  • Drugs and pharmacy companies protect their sales through patents, which means that they can sell unlimited medicines of patented drug and their competitors can’t enter or replicate the same. Ex- Dr. Reddy’s Laboratory, Glenmark Pharma etc.

And that’s why, the leading companies in these industries spend a lot of money in building these intangible assets. 

For example, in the IT industry, training and recruiting are more prominent than investing in physical assets like buildings.

Similarly, the pharmaceutical companies spend a lot of capital in the Research and development (R&D) which may help them get a patent on a revolutionary drug. And that’s why, while evaluating companies in this industry, the capital expenditure of the different companies/competitors in their R&D work should be carefully evaluated. 

If you look into the consumer product companies, they spend a lot of money in advertisement just for brand awareness. Although, this may not lead to instant sales and may add overhead expenses, However, over the long term. branding help these companies to generate more profit. 

Valuing Intangible Assets:

Intangible assets of a company can be found on the asset side of the balance sheet of a company. For example- here is the intangible assets for Hindustan Unilever (HUL)

hul balance sheet

Source: Yahoo Finance

You can use the intangible to total asset ratio to evaluate the worth of intangible assets in a company. For example- in the case of Hindustan Unilever, its intangible assets make around 2.05% percent of its total asset.

However, valuing intangible assets are easier said than done. One of the biggest reasons equipment high sales of HUL in India is its prominent brand recognition. A few of the popular brands of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality the and Pureit

Here, do you really think that the brand value of HUL contributes only around 2% of its net assets? I don’t think so. It must be worth more. However, there’s no easy way to correctly evaluate the worth of the brand recognition and other non-physical assets. 

Quick fact: According to Forbes, COCA COLA’s brand value amounted to 57.3 billion U.S. dollars. It is the only company in the top seven list that sells carbonated sugar water beverages. Rest all are technology companies with Apple and Google as leaders. This is the power of branding. Read more here: The world’s most valuable brands. 

Also read:

Bottom Line:

Although intangible assets do not have a physical presence, they add a huge value to the company. There may be even cases where the intangible assets are of far greater value than the market value of the company’s tangible assets. 

However, while valuing such companies, you may have to put some efforts to study these assets as the accounting conventions do not always value the exact worth of a few intangible assets and they may be reported below their true value in the balance sheet.

Any how, look for the intangible assets that are definite (i.e. stays with the company for as long as it continues operations) and difficult to replicate.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

top down and bottom up investing approaches

What is Top Down and Bottom Up approach in stock investing?

While performing the fundamental analysis of companies, two of the most common strategies to research stocks that are used by investors are top down and bottom up approach.

In this post, you’ll learn what exactly is top down and bottom up approach, how they work and which one may be more suitable to you.

Top down approach

Have you ever heard any investor/analyst saying something like- “The electric vehicle industry looks particularly promising now. The industry is growing at a fast pace and I should invest in this industry”.

Well, here the investor is following the top down approach to find stocks.

In the top down approach, the investors first look into the macro picture of the economy and later work down to research the individual stocks.

The overall steps involved in top down approach is to first look at the big picture of the world i.e. which economy is doing great, then look at the general market in that economy, next find the particular sector that may outperform and finally research the best stock opportunity to invest within that sector.

For example, let’s say you studied that the European economy is growing at a very fast rate. Next, when you looked further into the European market, you found that especially the biotechnology industry in outperforming. And finally, you researched some appealing stocks in that industry to invest. This is the top down approach for stock investing.

Here, you start with the big picture and ultimately move down to find the suitable investing opportunity. Top down approach looks at the performance of the economy & sector and believes that if the industry is doing good– the chances are that the stocks in that industry will perform too.

A few of the major areas where the top down analysts pay attention are economic growth, GDP, monetary policy, inflation, prices of commodities, bond yields etc before moving into the specific industry study.

top down approach investing

The biggest advantage of top down approach is that there’s no pre-conceived notion about what may work and the selection of economy, industry & stocks are based on the real-time studies. Further, as they focuses on the strong sectors, the chances of underlying companies performing well are favorable.

However, one of the major flaw of top down approach is that here you may miss out a few good bargain stocks in the eliminated industries.

Also read:

Bottom up approach

This approach is exact opposite of the top down approach. Here, you first start with company research and later move up to find the other details.

Bottom up approach tries to study the fundamental of the company regardless the market conditions, industry or the macroeconomic factors. While performing the bottom up approach, the investors studies how fundamentally strong the company is by focusing on its revenues, earnings, financial ratios, products/services, sales growth, management etc.

The key here is to find the potentially strong company which may outperform the industry and market in future. If the fundamental factors are good, then regardless of what the industry is doing, the bottom up investors will pick such companies to invest.

The biggest advantage of the bottom up approach is that the investors may find the best potentially strong company which can outperform even if the economy or industry as a whole declines. Bottom up approach helps in picking quality stocks.

On the other hand, one of the cons of bottom up approach is that the investor may have some pre-conceived notion of the company and in such condition, their investment decisions may be a little biased. Further, as these investors ignore the longer economic influence and market conditions, some investment returns may be adversely affected because of these factors.

Closing Thoughts

Top down and bottom up are entirely different approaches to analyze and invest in stocks. However, both have their own advantages and disadvantages.

The top down approach first looks at the broader economy and macroeconomic factors, and then move to the specific industry and the company within. On the other hand, bottom up approach starts at the company level and later moves up for the other important details.

In general, top down approach can be little easier for the less experienced investors as they do not have to perform the intense stock research and analysis. They can start studying the most appealing industry and find the companies within to invest.

Anyways, both approaches have their own effectiveness and hence, difficult to say which one is better. Moreover, it also depends on the knowledge and preference of the investor. My final advice would be to better try out both the approaches and find out which one suits you the best for your investment strategy.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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

swot analysis for stocks cover

SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

SWOT Analysis for stocks is one of the most widely used tools for performing the ‘qualitative’ study of the company. It helps to understand the company’s market position and competitive advantages.

In this post, we are going to discuss what is SWOT analysis and how to use this tool for qualitative analysis of a stock.

What is SWOT Analysis?

SWOT Analysis focuses on four important factor while evaluating the quality of a company. Here’s what SWOT Analysis for stocks looks at:

  • S—> Strength
  • W—> Weakness
  • O—> Opportunity
  • T—> Threat

swot analysis for stocks

Our of the four factors of SWOT analysis, ‘strength’ and ‘weakness’ are the internal factors of a company and hence are controllable.

On the other hand, ‘opportunities’ and ‘threats’ are external factors and it’s little difficult for a company to control these factors. However, using the SWOT analysis of stocks, the management can identify the threat and opportunities and hence can take proper actions within time.

For example, Bharat Stage (BS)- IV fuel was launched in India in April’2017. This means the ban on the sale of all the BS-III compliant vehicles across the country after the launch date.

Those automobile companies who have already realized this big opportunity might have started working on the BS-IV vehicles months before the expected launch date. On the other hand, companies who haven’t done the opportunity/threat analysis properly would have faced a lot of troubles. They cannot sale the old BS-III model vehicles. Hence, a big loss of the finished products and the inventories.

Also read: BS-III vehicles: Auto-industry to absorb losses over Rs 12,000 crore.

Why use SWOT Analysis for stocks?

Here are few reasons why SWOT analysis for stocks is beneficial:

  • SWOT analysis is one of the simplest yet effective approaches for the qualitative study of a stock.
  • It helps in identifying weak points of a company that may become an issue in future.
  • It helps in finding the durable competitive advantage i.e. moat that will help to protect your investment in future.

Quick Note: During swot analysis for stocks, only include valid/verifiable statements. Do not add rumor/misleading pieces of information in the study.

Components of SWOT Analysis for stocks:

1. Strength

The strength of a company varies industry-to-industry. For example, a low non-performing asset (NPA) can be the strength of a banking sector company. On the other hand, cheap supplier or cost advantages can a big strength for an automobile company.

Here are few other strengths of a company that you should take notice while performing SWOT analysis of stocks:

  • Strong financials
  • Efficient Management (People, employees etc)
  • Big Brand recognition
  • Skilled workforce
  • Repeat clients
  • Cost advantages
  • Scalable business model
  • Customer loyalty

Also read: Why You Need to Learn- Porter’s Five Forces of Competitive Analysis?

2. Weakness:

The ‘reverse’ of everything discussed in the ‘Strengths’ can be the weakness of a company. For example- Weak financials, in-efficient management, poor brand recognition, unskilled workforce, non-repetitive clients, un-scalable business and disloyal customers.

Besides, there are few other weaknesses that may affect the company:

  • Outdated technology.
  • Lack of capital
  • High Debt

For example- many companies in telecommunication industry ran out of business as they were using outdated 2G/3G technology. Similarly, in the energy sector, renewable power generation is the future technology and those companies who are ‘not’ working on the new technology might get outdated soon. In short, outdated technology adversely affects most of the industry.

3. Opportunity:

A company with a lot of opportunities has a lot of scopes to succeed and make profits in future. Here are few points that you need to consider while evaluating opportunities for a company:

  • Internal growth opportunity- (New product, new market etc)
  • External growth opportunity (Mergers & Acquisitions)
  • Expansion (Vertical or horizontal)
  • Relaxing government regulations
  • New technology (Research & Development)

4. Threats:

In order to survive (and moreover to remain profitable), it’s really important for a company to analyze its threats. Here are few of the biggest threats to a company:

  • Competition
  • Changing consumer preferences/ new trends
  • Unfavorable Government regulations

The changing consumer preferences are one of the repetitive threats that many industries face. Here, if no proper action is taken to retain the customer, then it might unfavorably affect the profitability of the company.

For example-  The new trend of ‘health awareness’ among the people may result in a decline in the sales of beverages/Soft drink companies. (These companies are fighting back this threat by introducing ‘DIET-COKE’).

Similarly, a preference towards ayurvedic products in India has already reduced the sales of non-ayurvedic FMCG companies (and a rise of PATANJALI).

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

How to use SWOT ANALYSIS of stocks to study companies?

Swot analysis of stocks is quite useful while performing the comparative study of companies. Using these analyses, you can study the comparative strengths and weaknesses of different companies.

Let’s say there are two companies- Company A & Company B.

‘Strength’ of COMPANY A can be the ‘Weakness’ of COMPANY B. Similarly, ‘Opportunity’ for COMPANY A can be a ‘Threat’ to COMPANY ‘B’. For example-

  1. The loyal customers can be the ‘strength’ of company A. Whereas, disloyal customers can be a ‘weakness’ for company B.
  2. A new Merger & Acquisition (M&A) is an opportunity for company A. However, it is a threat to company B.

Also read: SWOT Analysis of FORD Motors.

CONCLUSION:

SWOT Analysis of stocks is a useful tool to analyze stocks based on their strengths, weakness, opportunities, and threats. If done properly before investment, SWOT Analysis can help an investor to understand the competitive advantages/disadvantages in order to make a reasoned decision.

New to stocks? Want to learn how to invest in Indian stock market from scratch? Then, 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 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

winner's curse- investing psychology

Investing Psychology: Winner’s Curse

Investing Psychology- Winner’s Curse :

Have you ever had a chance to participate or witness an auction?

If yes, then you would relate to this better! As interesting as the name of this phenomenon sounds, the outcomes are pretty relatable too.

Many statisticians, mathematicians, and successful investors have discovered and scribbled a pretty common sequence of scenarios that happens mostly during the auction. Let’s try to give you an overview of this:

A bidder sitting in an auction and trying to repeatedly bid on an asset often gets intimidated to continue his bidding even if it is not profitable.

As obvious, in such scenarios, the last one to bid gets the asset and hence gets the title of “the winner”.

But has he actually won? What do you think? The inference can be a bit deeper than you are assessing it to be.

Such scenarios are quite noticeable everywhere – from IPL auctions to jewelry auctions to the real estate to the stock market, you might get to see this every time. The phenomenon could be explained clearly with the use of a couple of suitable examples in this article.

“Winner’s Curse” is quite noticeable in the domain of investing. Generally speaking, a newbie tends to fall in such pitfalls quite often! Keep reading this article to know more about the winner’s curse!

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

The Auction Scenario:

If you haven’t had a chance to witness an auction yourself then you have a chance to virtually experience it over here!

Basically, an auction is a set up organized by the “current owner” of an asset who is interested in selling the asset to one of the bidders who are participating in the auction. The owner can be a bank or any other financial institution as well.

A set of people who are interested in purchasing the “on sale” entity are called bidders who have the leverage of placing the bids on the entity. The bidding starts with a base price (the one put forward by the “current owner”) and the bidders have to one-up their biddings to own the asset/entity.

The mentioned set of actions is repeated until no bidder out rules the last bidding. As a result, the final bidder gets the asset – sound simple?

Where is the loophole?

Suppose if the real (true value) price for the asset was 1 hundred thousand dollars and if the final bidder claims it for two hundred thousand dollars, would he still be called as a winner?

Psychologically speaking, the overwhelming and competitive environment of bidding in an auction makes the bidder claim the entity at a higher price than what is profitable (admissible).

This overestimation of the final bid for an entity is actually the cause of “winner’s curse”.

winner's curse graph

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. 

What triggers this curse?

They say, “Emotional stability is one key factor when it comes to investing”.

You would have seen various collaborations of multinational companies. In fact, the whopping amount for which the shares for a certain company get sold is quite huge, right? Well, the winner’s curse is actually playing the cards for it sometimes.

In fact, various multinational giants get caught in this trap. Is it emotional friction or winning at any cost? I’d say both.

The human brain works in a pretty competitive way and the reason can be delved into the core of cognitive science. After the “successful bidding” one gets to realize the loss incurred but the dust gets settled by then.

A rapid increase in an entity’s price followed by its contraction is a sequence followed by various financial experts. The strategy works when a number of people get lured by the so-called “lower prices” of the assets and end up paying for it.

Also read: Efficient Market Hypothesis -The Only Theory That You Need to Read Today.

Winner’s Curse in the Stock Market:

Winner’s curse is not new to the stock market. You can notice multiple scenarios in the stock market where the investments of the people are influenced by the winner’s curse. Few of the best examples are:

1. Buying stocks at a high price.

In the stock market, every now and then, you may come across a storyline where people are buying expensive stocks because they don’t wanna lose the opportunity. Here, they are ready to bid a huge price to win that stock. However, purchasing an overvalued stock (only for the sake of winning) is never advantageous for the investors.

2. Investing in IPOs where the insiders are selling their stakes and public is bidding.

IPO is a scenario where a company offers its shares to the public for the first time. During an IPO, insiders like Promoters, Family, Early Investors- Angel capitalist, Venture capitalist etc are selling their stakes to the public.

However, do you really think that the insiders will sell their stakes to the public at a discount?

Anyways, in order to win, the public is ready to bid a high premium (most of the time) for that IPO. However, after the IPO gets allotted to the people, the winner’s curse starts playing its role.

Also read: Is it worth investing in IPOs?

stock market bidding

You might want to steer clear of this the next time you go for a hefty investment, right? Don’t worry you can try out some precautionary measures with which you should do fine at the “war zone”.

Things to Remember while Bidding:

1. Just as analysis and research are two important things to do before making an important investment. Similarly, knowing the true value of the asset you are bidding for is quite important before you even go for it. You should know that you stick to your actions even better once you have the basics cleared in mind.

There must be a fair standard price of the commodity you’d be bidding for. Get to know about it beforehand.

2. Draw a line: Putting aside an emotional mindset is the best thing that you can do while bidding for an asset as emotions and finance don’t mix well together. As soon as you start placing your first bid, you should know where to draw the line. This would help you hold your grounds in a much better way.

3. Know how important it is for you to win: Rational arguments are always better when you are in a confused state of mind. Ask yourself why does winning actually matter to you?

Also read: Loss Aversion- How it Can Ruin Your Investments?

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 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

Dupont Analysis - A powerful tool to analyze companies

Dupont Analysis: A powerful tool to analyze companies.

How to incorporate the Dupont analysis while researching stocks?

As investors in the stock markets, it is important to find high-quality along with fairly valued companies to invest our capital. The rationale behind this is simple. Our aim in the markets is to always preserve our capital first and then produce profits.

There are several robust tools that investors use during their stock analysis.

In this post, we will make an attempt to share one such powerful framework to assess the quality of stocks that we target for our portfolio -The Dupont Analysis.

The topics we shall aim to cover are as follows-

  1. What is the DuPont Analysis? Who made it?
  2. The technical background of the DuPont Analysis.
  3. Real world DuPont Analysis of Eicher Motors
  4. Conclusions

The post should be an easy read and we hope our readers find this to be of great value to their time. Feel free to reach out to us or post comments in case of any doubts or clarifications.

1. What is the DuPont Analysis? Who made it?

DuPont analysis was created around the 1920s by Donaldson Brown of Dupont Corporation. Initially, when Brown invented the framework it was used for assessing the managerial efficiency of the company before it got adopted by public market investors. His genius was breaking down the formula for Return on Equity (ROE) into its constituent parts to analyze the root cause of ROE.

2. The technical background of the DuPont Analysis

Breaking ROE into its constituents helps us investors analyze the company’s business model and how it manages to achieve excess returns for its shareholders.

Since most investors (including Warren Buffett) use ROE to judge the quality of a stock it would be of great use to us to understand how deep “Quality” actually runs within the business.

To understand how the analysis technique is used let’s start with the very basics. As most of us already know, Return on Equity (ROE) is calculated from the following formula –

ROE formula

Now, our friend Brown brown multiplied and divided the expression to get the following–

DuPont Analysis 1

This expression is now also summarised as below-

DuPont Analysis 2

But Brown did not stop there, he took this expression and went one step further. This time he multiplied and divided the expression with Total Assets to give us the DuPont formula-

DuPont Analysis 3

Which is again summarised as,

DuPont Analysis 4

From the last expression, it becomes clear that ROE is not merely a ratio (as per the formula we started with) but a framework to understand the business and capital position of the company as a whole.

Valuable insights can be derived from knowing which of the attributes drives the rise or deterioration of ROE over a period of time.

It can also be used to compare companies with their peer sets to get a deeper understanding of the differences in the business models between the companies.

Also read: How to read financial statements of a company?

3. Real world DuPont Analysis on Eicher Motors:

Let us perform the DuPont analysis on Eicher motors for the period 2014-2018.

The summary table and the evolution of the three attributes from the analysis is as given below.

Financial Ratio 2014 2015 2016 2017 2018 Net Effect
ROE 19.2 24.5 31.3 31.2 27.9 Increased
Net Profit Margin 5.8 7.0 21.9 23.7 21.9 Increased
Asset Turnover 203.3 222.4 105.5 100.3 94.1 Decreased
Leverage Ratio 162.9 156.2 135.2 131.1 135.5 Decreased

From the table, we can see that the company has improved its ROE from 19.2% to 27.9% in 5 reporting periods.

We can also see that the company decreased its leverage and asset turnover but this drop was offset by close to 3.7 times rise in the net profit margins.

Further, notice that the leverage ratio has been stable since 2016 while asset turnover has seen a drop in 2015-2016 and then moderate decreases from 2016-2018.

This analysis can now set the foundation for further analysis, the questions raised from the above figures could be as below ( this may not be very exhaustive but may give an idea as to how the framework is used)-

  1. What is causing the decrease in asset turnovers? Is it because of rising inventory? A fall in efficiency? Or perhaps a decrease in capacity utilisations at manufacturing facilities?
  2. Is the Net Profit Margins led by rise in prices or decrease in costs of goods sold?
  3. What caused the spike in net profits and the corresponding drop in asset turnover?

Answering the above questions in additions to questions generated by assessing the financial statements could help the investors analyze Eicher Motors in greater depth.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

4. Conclusion

Since ROE is used as a measure of the quality of management by many investors, the incorporation of DuPont Analysis could help quell any illusions developed by using ROE at face value.

According to DuPont formula, ROE is a function of net profit margins, asset turnover, and the leverage ratios. A rise or dip in ROE could be because of a corresponding rise/fall in any of these metrics and hence a high ROE doesn’t always indicates a better performance.

Our readers are advised to use DuPont Analysis along with the other stock evaluation frameworks and not to solely depend on data provided by the financial websites.

That’s all for this post. I hope it was helpful to you. Happy Investing!!

Levin is a former investment banker and a hedge fund analyst. He is an NIT Warangal graduate with around 5 years experience in the share market.

10 Best Blue Chip Companies in India that You Should Know.

… but blue chip companies are boring. It’s better to invest in growth stocks with huge upside potentials.”, Gaurav argued energetically.

Yes, blue chips are not the ‘hot’ stocks in the market. However, they are a good option for the investors who are looking for low-risk investments with decent returns.”, I replied.

Gaurav has been investing in the stock market for the last two years and he likes to discuss his investment strategies with me. Nevertheless, his investment style is totally different from that of mine. Gaurav loves to invest majorly in mid-caps and small-cap companies (including penny stocks) which can grow at a fast pace. On the other hand, I like investing in a diversified portfolio.

That’s true, dude. But most of these blue chip companies have already reached a saturation point. They can not continue to grow at the same pace and hence can’t similar returns as they used to give in the past. Once a company has sold a billion products, it’s difficult to find the next billion customers.”, Gaurav challenged me with his witty reply. 

I know the rule of large numbers, Gaurav. Thank you for reminding me. Moreover, I agree that the large-cap companies cannot maintain the same pace of growth forever. But bro, it doesn’t mean that they won’t be profitable in future or can’t give good returns to their shareholders… They have already established their brand. If they use their resources efficiently, they can make huge fortunes for themselves as well as for their shareholders… 

For example- take the case of Reliance Industries. Reliance is a market leader in its industry and has a lot of customers. But they are also using their capital efficiently to grow their business. Two years back, they entered a new market- Telecommunication Industries, and now they are also a leader in that industry.

Because of their strong financials- they were able to bring the latest 4G technology to the Indian market and hence were able to quickly acquire a lot of customers. As the initial set-up cost in this industry is very high, they have created an entry barrier for the small and mid-cap companies. This is what a blue-chip company can do if they use their resources properly.

Gaurav looked a little mind-boggled. That’s why I thought better to give him another example to make him understand the capabilities of blue chip companies.

Let’s discuss another example- Hindustan Unilever. If you think that HUL cannot grow any further because it is a large-cap company, then you might need to reconsider it. HUL already have popular products in the market like Lux, Lifebuoy, Surf Excel etc which are generating them a good revenue from those products. But, they still have a large rural area to cover. They are not so popular in the village areas, are they? So, they can definitely grow in the rural areas…”

…besides, as they have enough resources and financials, they are also continuously working on new product development in their Research & development (R&D) department. If they can make another great product, their profits will add-up in the future….

Finally, when Gaurav didn’t argue further, I concluded-

…a good blue chip company is like Rahul Dravid. If you want fast scorers (or T-20 players), then you may not like his batting style. However, if you are looking for dependable players, then you will definitely appreciate Rahul Dravid’s consistency.”

Blue Chip Companies in India:

If you start counting the numbers, you’ll find that the stocks can be categorized into many groups. Based on the market capitalization, they can be defined as small-cap, mid-cap, and large-cap companies. Based on the stock characteristics, there are categorized as growth stocks, value stocks, and dividends (income) stocks.

However, there is one particular type of stocks which gets a lot of attention from every kind of investors (beginners to the seasoned players)- and they are the BLUE CHIP stocks. In this post, we are going to discuss what are blue chip companies and the ten best blue chip companies in India. Here are the topics that we will cover in this post-

  • What are the blue chip companies?
  • Why are they called blue chips?
  • Key characteristics of blue chip companies.
  • 10 Best Blue chip companies in India.
  • Summary.

This is going to be a long post, but I promise that it will be worth reading. So, without wasting any further time, let us understand the blue chip companies in India.

What are Blue Chip companies?

Blue chip companies are large and well-established companies with a history of consistent performance.  These companies are financially strong (usually debt-free or very low debts) and are capable to survive in the tough market situations.

Most of the blue chip companies are the market leaders in their industry. Few of the common examples of blue chip companies in India are HDFC Bank, ITC, Asian Paints, Maruti Suzuki etc.

Top 10 Companies in India by Market Capitalization

Signature Characteristics of Blue Chip Companies-

Here are few signature characteristics which you can look forward while researching blue chip companies—

  1. They are large reputed companies.
  2. They have a widely used products/services.
  3. Most of these companies are listed in the market for a very long time.
  4. Blue chip companies have survived a number of bear phase, market crisis, financial troubles etc. But they are still going strong.
  5. Blue chip companies have a strong balance sheet (a large number of assets compared to liabilities) and a healthy income statement (revenues and profits continuously growing for the last few decades).
  6. These companies have a good past track record of stable growth.

Almost all blue chip stocks are older companies. You might already know many of the blue chip companies in India and have been using their products/services in your day-to-day life.

For example-  Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Wall’s and Pureit —- all these products are offered by the same blue chip company in India – Hindustan Unilever (HUL).

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. 

Why are they called blue chips?

Oliver Gingold- who worked at Dow Jones, is credited to name the phrase ‘Blue Chip’ in 1923. The term ‘blue chips’ became popular after he wrote an article where he used ‘Blue chips’ to refer the stocks trading at a price of $200 or more.  

Quick Note: There are other sets of investors who believe that blue chip companies got its name from the Poker game, as in that game- blue chips are relatively more valuable. Similar to the game, the stocks which are more valuable in the market are termed blue chip stocks.

Although Oliver Gingold used the term ‘blue chips’ for high priced stocks, however, later people started using this word more often to define high-quality stocks (instead of high priced stocks).

What are the financial characteristics of blue chip stocks?

Apart from the signature characteristics discussed above, here are few key financial characteristics of blue chip companies –

1. Blue chip companies have a large market capitalization -As a thumb rule, the market cap of most of the blue chip companies in India is greater than Rs 20,000 Crores.

2. Good past performance: Blue chip companies have a track record of good past performance (like consistently increasing annual revenue over a long-term).

3. Low debt to equity ratio: The bluest of the blue chips are (generally) debt free stocks. However, a lower and stable debt to equity ratio can also be considered as a significant characteristic of blue chip companies.

4. Good dividend history: Blue chip companies are known to reward decent dividends to their loyal shareholders.

5. Other characteristics: Apart from the above four- few other key characteristics of blue chip companies are a high return on equity (ROE), high-interest coverage ratio, low price to sales ratio etc.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

10 Best Blue Chip Companies in India:

Now that you have understood the basic concept, here is the list of top 10 best blue chip companies in India. (Disclaimer- Please note that the companies mentioned below are based on the author’s research and personal opinion. It should not be considered as a stock recommendation.) 

ITC

itcIndian Tobacco Company (ITC) is one of the biggest conglomerate company in India. ITC was formed in August 1910 under the name of Imperial Tobacco Company of India Limited. It has a diversified business which includes five segments: Fast-Moving Consumer Goods (FMCG), Hotels, Paperboards & Packaging, Agri-Business & Information Technology. Currently, ITC has over 25,000 employees.

As of 2016, ITC Ltd sells 81 percent of the cigarettes in India. Few of the major cigarette brands of ITC include Wills Navy Cut, Gold Flake Kings, Gold Flake Premium lights, Gold Flake Super Star, Insignia, India Kings etc.

Apart for the cigarette industry, few other well-known businesses of ITC are Aashirvaad, Mint-o, gum-o, B natural, Sunfeast, Candyman, Bingo!, Yippee!, Wills Lifestyle, John Players, Fiama Di Wills, Vivel, Essenza Di Wills, Superia, Engage, Classmate, PaperKraft etc.

HDFC BANK

hdfc bankHDFC Bank is India’s leading banking and financial service company. It is India’s largest private sector lender by assets and has 84,325 employees (as of March 2017).

HDFC Bank provides a number of products and services which includes Wholesale banking, Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal Loans, Loan Against Property and Credit Cards. It is also the largest bank in India by market capitalization and was ranked 69th in 2016 BrandZ Top 100 Most Valuable Global Brands.

Infosys

infosysInfosys Limited is an Indian multinational corporation that provides business consulting, information technology and outsourcing services. It has its headquarters in Bengaluru, Karnataka, India. Infosys is the second-largest Indian IT company by 2017 and 596th largest public company in the world in terms of revenue. On April 19, 2018, its market capitalization was $37.32 billion.

Infosys main business includes software development, maintenance, and independent validation services to companies in finance, insurance, manufacturing and other domains. It had a total of 200,364 employees at the end of March 2017.

HUL

hulHUL is one of the largest Fast Moving Consumer Goods (FMCG) Company in India with a heritage of over 80 years. It is a subsidiary of Unilever, a British Dutch Company. HUL’s products include foods, beverages, cleaning agents, personal care products, and water purifiers.

Few famous products of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality Walls and Pureit.

Nestle India

nestleNestle India is a subsidiary of Nestle SA of Switzerland- which is the world’s largest food and beverages company. It was incorporated in the year 1956. Nestle India Ltd has 8 manufacturing facilities and 4 branch offices in India.  The Company has continuously focused its efforts to better understand the changing lifestyles of India and anticipate consumer needs in order to provide Taste, Nutrition, Health and Wellness through its product offerings.

Few famous products of Nestle India are Maggi, Nescafe, KitKat, MUNCH, MILKY BAR, BARONE, NESTLE CLASSIC, ALPINO etc. (On 8 March 2018, Nestle Indias food brand MAGGI completed 35 years of existence in India.)

Eicher Motors

Eicher Motors is an automobile manufacturer and parent company of Royal Enfield, a manufacturer of luxury motorcycles. Royal Enfield has made its distinctive motorcycles since 1901 which makes it the world’s oldest motorcycle brand in continuous production. Royal Enfield operates in over 40 countries around the world.

The Eicher Group has diversified business interests in design and development, manufacturing, and local and international marketing of trucks, buses, motorcycles, automotive gears, and components.

Reliance Industries

reliance industriesThis company needs no introduction. Reliance Industries is an Indian conglomerate holding company and owns businesses across India engaged in energy, petrochemicals, textiles, natural resources, retail, and telecommunications.

In December 2015, Reliance Industries soft-launched Jio (Reliance Jio Infocomm Limited) and it crossed 8.3 million users as of January 2018.

Reliance is one of the most profitable companies in India and the second largest publicly traded company in India by market capitalization. On 18 October 2007, Reliance Industries became the first Indian company to reach $100 billion market capitalization. It is also the highest income tax payer in the private sector in India.

Asian Paints

Asian paint is one of the largest Indian paint company and manufacturer. Since its foundation in 1942, Asian paint has come a long way to become India’s leading and Asia’s fourth-largest paint company, with a turnover of Rs 170.85 billion. It operates in 19 countries and has 26 paint manufacturing facilities in the world, servicing consumers in over 65 countries.

Asian Paints is engaged in the business of manufacturing, selling and distribution of paints, coatings, products related to home decor, bath fittings and providing of related services.

TCS

Tata Consultancy Services Limited (TCS) is an Indian multinational information technology (IT) service, consulting and business solutions company. It was established in 1968 as a division of Tata Sons Limited. As of March 31, 2018, TCS employed 394,998 professionals.

TCS is one of the largest Indian companies by market capitalization (Rs 722,700 Crores as of June 2018). It is now placed among the most valuable IT services brands worldwide. TCS alone generates 70% dividends of its parent company, Tata Sons.

Bajaj Auto

bajaj autoBajaj Auto is a global two-wheeler and three-wheeler Indian manufacturing company. It manufactures and sells motorcycles, scooters and auto rickshaws. Bajaj Auto was founded by Jamnalal Bajaj in Rajasthan in the 1940s. It is the world’s sixth-largest manufacturer of motorcycles and the second-largest in India. 

Few of the popular motorcycle products of Bajaj Auto are Platina, Discover, Pulsar and Avenger and CT 100. In the three-wheeler segment, it is the world’s largest manufacturer and accounts for almost 84% of India’s three-wheeler exports.

Also read: Best Stocks for Long term Investment in India.

Summary:

Most people invest in blue chip companies become of their long history of consistent performance and a similar expectation of standard performance in the future. Blue chip companies are low-risk high return bet for the long term.

Many blue chip companies in India like Tata, Reliance, Infosys etc are considered as ‘Too-big-to-fail’ companies as they have survived and remained profitable for a very long time. Nevertheless, this is not always true!!

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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 should you invest in the stock Market in your 20s

Why Should You Invest in the Stock Market in Your 20s?

Why should you invest in the Stock Market in your 20s?

For the people who are in their 20s- stock market investing might seem too early. Plenty of years left to invest, right?  Why get involved in the complex world of the stock market so soon? Most youngsters believe that either it is too soon or they do not have too much money to start investing in their 20s.

However, both of these assumptions are wrong.

The best time to start investing in the stock market is when you are in your 20s. Why? Let’s find out!!

Why should you invest in the Stock Market in your 20s?

1. Stock market investing gives the best returns:

Do you know that if your parents have invested Rs 10,000 in the stocks like WIPRO or Infosys in the early 1990s, it’s worth would have been turned out to be over crores by now? (Here’s a case study on WIPRO and Infosys). Note that we are not even talking about hidden gems. Few other common stocks like Eicher Motors (Royal Enfield Parent Company), Symphony, Page Industries (Jockey) etc has given even better returns than Infosys and WIPRO.

Historically speaking, the stock market has outperformed all the other investment options in the long run. If you buy an amazing stock in your 20s and have the patience to hold it for long-term (20-30 years), you can also get a fantastic return. Here, you’re giving your investment enough time to grow.

2. You won’t require extra money anytime soon.

When you are in your 20s, you won’t need to worry about a lot of things like kids, house loans, kids college fees, retirement plan etc. Moreover, at this phase of time- most of the people do not have any dependents like spouse or kids. When you invest in your 20s, you won’t require to sell that stock anytime soon. You can easily invest and forget that money.

3. It’s a great way to plan your future goals.

Planning to buy a beach house by your 30s or become a millionaire by 40s or just having enough saving to retire early — all these can be achieved if you start investing early. Set a definite future goal in your 20s and invest systematically to attain it.

4. You can take a lot of risks.

When you are in your 20s, you can take a lot of risks while investing in stocks.

Instead of investing in just large caps or blue-chip stocks, you can also invest in small caps like promising startups which recently got listed in the stock exchange and have a huge upside potential. Although, the risk associated with small caps are relatively high compared to the well settled and trustable large caps- however, the rewards are also higher.

low risk low reward

When you are in your 20s – even if you incur some loss, you have plenty of time to learn and recover from your mistakes. At this stage of time, while you can handle more risks you can also earn great rewards.

Bottom line:

It’s always advantageous to start investing early. One of the greatest investors of all time started investing at an age of eleven.

“I made my first investment at age eleven. I was wasting my life up until then.” -Warren Buffet

Eleven might be a little soon for an average investor in India. However, the 20s is most suitable to start investing in the stock market. At this stage, most of the people have money with no responsibilities.

In the end, here is the golden rule of investing to make build amazing money in the long term—“Invest early, invest consistently and invest for the long term…” #HappyInvesting.

Hi, I am Kritesh, an NSE Certified Equity Fundamental Analyst 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