Share Market

There are two types of investors. One set those who do not understand what stock market is or think it just too risky and therefore remain satisfied by buying mutual fund or certificates of deposits. The second group understand what stock is and also to analyze them before investing on them. There are basically three ways in which stock analysis is done:

1. Fundamental analysis

2. Technical analysis and

3. Quantitative analysis

In Fundamental analysis, the investors study the stock as a business. This is because they are buying a part of a business of that company. Therefore they try to find out the value of that business and try to find out what worth that stock is. This is done by assessing the financial per value share of the business.

The few things that an analyst has to look into this type of analysis are value, growth, income, GARP (Growth at reasonable price) and quality.

In Technical analysis the investors look only at the all the financial details available in the market which are disclosed by the company and then try to figure out whether it is a good buy or not. To do this the use different tools such as point and figure charts, logarithmic chart, Japanese candlestick and so on. The technical analyst also tries to study the psychology of the investors at a particular time.

Quantitative analysis as the name suggest is purely based on numbers. It does not believe in things like business, management expertise, competition, market potential etc. This is because analysts following this method think that these parameters are subjective and are inferred in varied manner by the investors. Their main concern is the company size. Investors might adopt screen base investing. In this method they apply some filters on the numbers, like company momentum which takes into account companies that are doing well for a few quarters or CANSLIM in which C and A stand for current and annual earning, N new product, S and L for small and large volumes, I for institutional ownership and M for market momentum. All these factors are used to decide the buy and sell of a company.

A blending of all the above methods would work best for investors. To invest knowledge about the company and its business value is necessary. Use charts and graphs to buy and sell stocks.

A point and figure chart is a charting technique used in technical analysis. Unlike plotting price against time in other techniques, it plots price against change in direction by plotting a column of Xs as the price rise and a column of Os as the price falls.

The technique is hundred years old and was first written and showed by “Hoyle” in his book in 1898. The first book/manual dedicated to point and figure was written by Victor Devilliers in 1933. There was a time when traders kept track of price rise by writing them in columns and later referred to them as ‘figure charts’. They also used Xs instead of numbers and these charts came to be known as ‘point charts’. Traders started using both figure and point charts and therefore the technique came to be known as ‘figure and point chart’.

It is difficult to draw a figure and point chart for a large number of stocks. Therefore chartists use the summary prices at the end of each day. Some prefer to use the day’s closing price and some use the day’s high or low depending on the direction of the last column. The charts are prepared by deciding on the value of Xs and Os. Any change below the decided value is ignored. So ‘figure and point chart’ act as filters to filter smaller price change. The chart changes columns when the price changes direction by the value of a certain number of Xs or Os. The most commonly used is the 3 box reversal chart.

Figure and point charts are drawn on squared papers and therefore 45 degree lines may be used to indicate up trends and down trends from important highs and lows in the chart allowing objective analysis of the trend.

It is used to study price target, both vertical and horizontal. The vertical method measures the length of the thrust and horizontal method measures the width of a congestion pattern for price target.

With the computerization of the share market, it has become convenient for traders to view a number of charts and also alter them simultaneously. Presently the value of Xs and Os are set to a percentage than just price. This allows the sensitivity of figure and point charts to remain constant no matter what the price level is.

In the financial market ‘stock valuation’ is the method of calculating theoretical values of a company stocks. The main use of these methods is to predict future and potential market prices, and thus to profit from price movement. Stocks that are undervalued are brought with the expectation that their value will rise with time. While stocks that are overvalued are sold as their value will fall as a whole.

The most theoretical stock valuation method, called income valuation or discounted cash flow (DCF) method involves discounting the profits (dividend, earnings or cash flow) the stock will bring to the stock holders in future and a final value on disposal.

Stock valuation according to fundamentals analysis aims at giving an estimate of the intrinsic value of the stock, based on the prediction of the cash flow and profitability of the business. Fundamental analysis may be replaced by market criteria, which means what the market will pay for the stock without any necessary notion of the intrinsic value. These can be combined as “prediction of cash flow /profit”, together with “what the market pay for these profits?” These can be seen as ‘supply and demand’ – what underlies the supply of stock, and what drives the demand of stock?

Earnings per share (EPS) are the total net income of a company divided by the number of shares outstanding. The most important thing to look in the EPS is the overall quality of earnings. Considering the net income of the company and researching on fundamental investment, investors can arrive at their own EPS forecast, which can be applied to other valuation techniques.

The P/E (Price to earnings ratio) is perhaps the most commonly used valuation method in the stock brokerage industry. To compute this figure, take the stock price and divide it by the annual EPS figure. For example if the stock is trading at Rs10/share and the EPS is Rs0.50p, the P/E is 20 times. By using comparison firms, a target pricing/earnings ratio is taken for the company, and then the future earnings of the company is estimated. To get a good feeling of what P/E multiple a stock trades at, take a look at the historical and forward ratio.

Valuation depends on the growth rate of a company, price to annual sales of stocks (P/S ratio), market capitalization, and enterprise value.

Thus, market based valuation of a stock is very important.

Fundamental Analysis is the corner stone of investing. With the subject of investment being very broad, having a number of different strategies the use of fundamentals becomes inevitable.

The biggest part of fundamental analysis is delving into the ‘financial statement’. Also known as quantitative analysis this involves looking at the revenue, expenses, assets, liabilities and other financial aspects of a company. This information is important both for the investor and analyst to get an insight into the future performance of the company. The economic well being becomes more important as opposed to the movement of prices.

Quantitative and Qualitative

The various fundamental factors can be grouped into two categories- quantitative and qualitative. Quantitative fundamentals are numeric and measureable characteristics of a business. The biggest source of quantitative fundamental is the financial statement of a company.

While the qualitative fundamental looks into the less tangible factors surrounding a business such as the quality of its board of management and key executives, its brand names recognition, patents or propriety technology.

Qualitative and quantitative are interlinked. Neither is better than other. For example take the example of Coca cola Company, an analyst may look at its stock’s annual dividend payout, earning per share etc, but the qualitative factor, its brand name is equally important to attract investors.

Intrinsic Value

One of the primary assumptions of fundamental analysis is that the price at the stock market does not reflect the “real” value of the stock. In financial jargon this true value is known as intrinsic value. This brings in the need for a financial analysis. The intrinsic value is of utmost importance to the investor because, an investor always wants to buy stocks priced at a much lower value from the real value. By focusing on a particular business an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well the investments will pay off well as the market catches up with the fundamentals.

Criticism of Fundamental analysis

The biggest criticism of fundamental analysis comes from proponents of Technical analyses and believers of ‘efficient market hypotheses. For the technical analyst everything depends on the price of stock in a company.

According to efficient market hypothesis content, it is impossible to produce market beating returns in for stocks either through fundamental or technical analysis.

Different companies offer a wide variety of stocks and bonds, but it is difficult to choose a good and profitable one from the bad ones. At times the investor may not have the time to keep track of the different stocks and the rise and fall of prices in the share market. Thus he does not know when to sell or buy a share. It is here that the help of a market analyst becomes necessary.

A stock market analyst is an individual who keeps track of the performance of shares in the share market. His work is to inform the investor about the shares that are performing well. However an analyst is sometimes a part of a firm working for some companies, this makes the work of the investor more difficult. He has to brush up his knowledge about the share market before heading for investment.

The first step is to hire a stock analyst from your locality. The telephone directory, news daily, financial advertisers and financial companies and also banks in India can be helpful. The internet can also be a good source that provides a variety of analyst list.

Once an analyst is found it is essential to find out the services that are offered and finding the one that is best for your investment. Compare the price and services offered by different analyst. When you have selected an analyst who offers the best services for a reasonable price, try to find out how good is he at his work.

Try contacting his references to confirm his reputation as an analyst, if he has any complaint against him and a statistics about their guidance to sell and buy share/stocks. If you think that he would be good in advising you on your stock choice, then go head and hire him.

With the improvement in technology, stock market today works on internet connectivity. It is therefore necessary that the stock analyst should not only have a sound knowledge on the subjects related to the share market like – economics, finance and mathematics, he should also be computer savvy to give an updated information about the stock market. The frequent change in the market price can be followed through the internet. It is for the stock analyst to keep himself and his clients well informed and well connected.

Selecting the right stock is important in the stock market, but more important is the time when one should invest in that stock. Stocks have price movement every day at the stock market. An investor has to decide what is the exact time or more precisely the optimum price range for investing in the stock.

This is because every stock has a potential price for a given point of time and it takes certain time to reach this point after which it is likely to fall or stand still. Investing on a stock that has reached its optimum price is not profitable.

Technical analysis helps in giving an idea about the future price movement of a stock. Certain information like, past performance of the stock, current price of the stock, trading volume of the stock are considered. Basing on these information graphs and charts are prepared. By comparing these graphs of price movement with the previous year’s technical experts decide the future performance of the stock. So, technical analysis is a scientific way of predicting the movement of stock prices in the stock market. It is logically valid and has got predictive power. It is a useful model of analysis that works. The random movement of prices of stock is due to investors. It is they who control the rise and fall in prices indirectly.

The influence of analytical factor over market price is both partial and indirect. Partial because it frequently competes with purely speculative factors that influences the prices in the opposite direction and indirect because it acts through the intermediary of the people’s sentiments and decisions. In other words the market is not a weighing machine on which the value of each issue is recorded; rather it is like a voting machine whereon countless individuals register choices which is the product of partly reason and partly emotion.

Though data has an indirect effect on prices but the cause and effect of movement of prices is the result of buying and selling. Therefore stock prices are the effect of purposeful human action. This action is analyzed by the technical analyst and categorized under different heads to study the market and provide guidelines for the investors to follow. Different principles are followed by the analyst to prepare these graphs and charts which are mathematically transformed data derived from the prices of stocks and trading volume

Before one is capable of analyzing the stock market, one has to know what a stock is. It is a share of ownership of the company, into which the investor invests his money and there by gains some kind of profit, called as dividend depending on the percentage he invests. Now before investing the investor has to do a study of the sale, profit and capital investments in the market of the company. In other words they have to analyze the trading instrument. This evaluation of a particular trading instrument, an investment sector or the market as a whole is called stock analysis.

Stock analysts attempt to determine the future activity of the instrument, sector or market. There are two basic types of stock analysis: 1.fundamental analysis and 2.technical analysis. Fundamental analysis concentrates on data from sources like financial records, economic reports, company assets and market share. While technical analysis focuses on the past performance of the market and predicts the future price movement.

Fundamental Analysis:

Fundamental analysis of a business is its financial statement and health, its management and competitive advantage. This involves both its competitors and the market. It focuses on the overall state of economy, interest rates, production earnings and management. When analyzing stocks using fundamental analysis there are two basic approaches: bottom up analysis and top down analysis. The top down investors starts his analysis with global economy both international and national. The bottom up investor starts with specific businesses regardless of their industry or region. The top down investor therefore has to be well informed about the national economic indicators, GDP growth rates, inflation, interest and exchange rates, productivity and energy prices.

Technical Analysis:

Technical Analysis takes a completely different approach. It does not take into account the value of a company or commodity. It follows only the price movement in a market that is technicians /investors study the supply and demand in a market. In other words technical analysis studies the market itself.

Unlike fundamental analysts technical analysts only care about the securities past trading data and its movement in future. They believe that the stock prices discounts for everything, the present trend may follow into the future and that the history of a market trend may be repeated and therefore they refer to price charts.

For an investor the best is to invest, blending both type of analysis

The percentage that a company earns by selling its products over a period of time is called ‘market Share’. Supposing if India allots one million worth business to the different companies/industries here, and one of the companies gets an allotment of 500 crores. This means that particular company has a market share of 500 crores.

A company calculates its market share by taking its sale over a period of time and dividing it by the total sale of the industry for the same period. If the company is a pharmaceutical it shall take into account the total sale of products related to this industry and calculates its sale percentage. A company is said to grow in size and revenue if its market share increases.

Increase of market share allows a company to achieve greater scales in its operation and improve its profitability. Hence a company always looks forward to expand its share in the market.

Investors look at the increase and decrease of market share of a company because that is the barometer that measures the relative competitiveness of the company’s product and services. Therefore companies are always looking forward to increasing their market share and there by their size by appealing to larger demographics, lower prices or through advertisement.

Market share is the key indicator of competitiveness of a company as it grows with it. Not only how well a company is doing against its competitors should be the criteria, but the primary and selective demand of products in the market should be evaluated to judge market growth and decline as well as trends in customer selections among competitors. Generally sales growth from primary demands (total market growth) proves to be more beneficial in increasing market shares than capturing share from competitors.

Market shares may be in ‘dollar market share’ or ‘unit market share’. In India ‘unit market share’ is the trend. It is the unit sold by a company as a percentage of the total market sales, measured in the same unit or currency.

The main advantage of using market share as measure of business performance is that it is less dependent on the macro environmental variables such as state economy and tax policies of a country. However companies selling products outside their countries have the risk of being subject to market share liability a legal doctrine unique especially in the US for plaintiffs.