what is stock market?// knowledge

HOW TO BUILD KNOWLEDGE :

• Fundamental analysis
• Introduction to Fundamental analysis
• Dividend
• Financial Result
• Book Value of a stock

Fundamental analysis

- Fundamental analysis means analyzing the well being of a company or an industry or an economy. There are no hard and fast rules but neglecting some of the key issues may be fatal for your investments. In this section we will be discussing in short many of the factors, ratios etc. to make you an able person to decide whether a company/industry/economy is healthy or not.

Introduction to Fundamental analysis

-The basic need for any type of analysis is to find the ways to make profit and cut losses. We will here talk about stock market related factors. so a good practice is to finalize the economy where you invest. Economy is the country's fundamentals. It involves the analysis of people behind making economic policies, their track record, the governing laws that drive the economy etc. Next, you better narrow down your focus on the industry buy analyzing the demand - supply gap, laws of the economy with respect to the chosen industry, the raw material and labor availability, the market for the products, forecast on the price movements of the end products in the industry etc. Now you need to narrow down your search to few companies, which will excel or continue to excel in the industry you have chosen. This involves looking into financial data, management background, the competition and the concepts they use. In the next topics we will cover all these in detail.

Dividend

- "diluted earnings per share" is the more trustworthy unit of knowing the worth of a stock. The diluted as the term suggests is the earnings per share calculated on today's net profit divided by the number of shares if all convertible securities are converted into equity shares on a future date. That is if the stock has reported a net profit of 20 millions this fiscal and has issued 5 million shares, then Earnings per share stand at 4. Now if comny has issued 1 million fully convertible debentures at a specified price on a future date which will be coverted to another 5 million shares then "diluted earnings per share' will stand at 2 per share. This is just an indication but the effect of equity dilution may be overcome by increase in revenues, reduction in interest paid on these debentures etc.

Use of Financial statements and results in analyzing a stock value.

- One may not become an accounts expert for investing in stocks. But it is a blunder to invest without atleast understanding few important terminologies. The basic need for our alalysis of balance sheet is to determine the maintainability of profits by a company in long run. So all our scruitiny mainly depend on the growth figures. For an example, if a company has earned a profit of say 20 million and out of this say 10 million has come from profits by selling a fixed asset. So we will be negating this 10 million for our purposes of calculating EPS and hence the PE Ratios because this income can not be repeated again in coming years. Another important factor is to look at operating margins. A company should have a fair profit margin. This means a minor fluctuation in selling prices can not greatly effet the net profits.

Book Value of a stock

- The book value of a stock is the actual worth of the stock as in company books. That is the net asset of a company after deducting all liabilities divided by the number of Stocks of the company. By general knowledge you may say that the company shares should be traded at the book value. But as a stock analyst this may not be a fair thing to say. You need to couple Book Value and EPS to arive at a fair price of a stock. Take for example, a stock has a book value of 100 and its EPS is 12. Also the company EPS is growing at a rate of 15% per year. This will mean that the company book value will be on rise in future too. So at the end of year 1 we are very sure that the book value will stand at 115, 2nd year 132.25 and so on. So you approximately know that by 4 years the book value will be around 200. Thus when your other investments may be at say 120, your BV will be 200. Thus you may discount the current book value by a fair factor.