Investment in shares has always been lucrative for some whereas risky and loss making business for others. When you earn, you think you know the rules of the game and when you lose, you put the blame on your luck. Let’s stop the practice and learn how to efficiently invest in shares so as to earn profits. Though the learning will not be a sure short trick for victory as it is almost impossible to predict the market with cent percent accuracy, but yes, it will definitely unfold the techniques of predicting the direction of shares.
Using Fundamental Analysis
A fundamental analysis is about the company’s financial soundness and reputation. By doing this analysis, you will get an answer to the question as to ‘which particular company’s share to buy’. This is more of a qualitative approach and therefore is often subject to subjectivity and bias ness. There are different metrics using which you can make a decision of what to buy:
1) Return on Equity – This is one of the most important tool of indicating financial performance of the company. It is calculated as ‘Earnings after interest, tax and preference dividend/ Equity’
2) Earning Per Share (EPS) – Calculated as
‘Equity earnings/ number of equity shares’.
Higher the EPS, higher will be the profit.
3) Dividend Per Share – Calculated as
‘Earnings per share * Dividend payout ratio’
Dividend payout ratio represents the part of equity earnings that are actually declared as dividend by the company and the other part will be retained by the company for investments or other purposes. Dividend payout ratio is calculated as
‘Equity dividends/ equity earnings’
4) P/E Ratio – It is one of the most popular and commonly used financial statistics. This ratio reveals the price that investors are ready to pay for EPS. It is calculated as
‘Price per share at the beginning of year n/ Earnings per share for year n’
However, apart from these financials, fundamentalists also look for other information related to the company. List of data that may prove fruitful for this analysis is as follows:
ü Current position of the company in terms of market reputation, tenders, projects, company’s accessibility to resources, clientele, licensing, policy framework and so on.
ü Future prospects of the company (on same terms as discussed in the preceding point)
ü Since a company stands on the shoulders of its management, a concrete evaluation of management of the company will also help.
Using Technical Analysis
A technical analysis makes use of charts, price trends, volume trends and many other indicators for the shares under consideration. A technical analysis acts mainly like a predictor about the price direction of a share. However, it must be noted that technical analysis is mainly capable of predicting short-term price movements. By using technical analysis, you can get an answer to the question as to ‘when an investment should be made in particular scrip’. It is imperative to pick up right scrip, but it is all the more important to know the perfect timing or perfect pricing of picking up. Following are some of the basic techniques followed by analysts while seeking a decision on whether to purchase a stock or not:
1) Price trends – Price trends reflect the direction of share prices, i.e. it will show whether the price of a share is going in upward direction or downward direction. People usually invest in shares with upward trend. A share which is following downward trend for a longer duration, it is considered to be a risky venture.
2) Volume – Price alone cannot tell the whole story. Studying the volume may deeper truth behind the changes in the stock prices. When an upturn phase begins, a decrease in trading volume is suggestive of price decline and vice-versa. And when the downturn phase begins, a decline in price will go hand-in-hand with increase in trading volume and vice-versa.
3) Moving averages – Moving averages is based on the most recent n observations which may be 5, 10, 20 or even 50. There can be a 30 days moving average or 10 weeks moving average. Technicians usually prefer to buy when the moving average trends upwards and stock price line falls below the moving average line.
4) Indicators – Apart from the charts, technicians also make use of breadth indicators and market sentiment indicators to predict the overall market situation.
Follow both the analyzing techniques with utmost care, take your decision prudently and I wish you to earn billions of rupees from the market.