SIMPLE WAY TO SUCCESSFUL INVESTMENT WITH HELP OF FUNDAMENTAL ANALYSIS.
There are loads of money to be made in stock market. But not everyone knows how to make money in stock market in India. In the past, people have lost fortunes in the stock market. There are only handful of examples about whom we can say that they have made stock market dance to their tunes.
The performance in stocks market is very unpredictable, and this confuses majority of people. On one day one can make money in stock market, and the other day all can be lost. If you will ask me how to make money in stock market, I will say there is no set rule. This becomes specially true if we speculate in stock market.
Best alternative to speculation is to practice long term investing in stocks. This type of investing is more reliable and can ensure long term returns. Long term investing prevents people from thinking about speculative methods. A company which is capable of generating steady long term returns are best stocks. Doing fundamental analysis of helps investors to gauze if a company is good long term buy.
Basically there are two types of personalities who play stock market. One type include people like Warren Buffett who does fundamental investing. Other types are speculators like famous Harshad Mehta.
The main difference between fundamental investor and speculator is how theysee ‘stock price’. Fundamental investor gives less importance to stock price than speculators. For speculators, the stock price is everything about investing in stocks. For fundamental investors, the stock price is the last thing they see before buying stocks. They are more concerned about fundamental strengths of the company. Once they are satisfied with fundamental strengths of a company then they shift their focus to ‘valuation’. Only while doing stock valuation that fundamental investor sees the stock price. In order to make money in stock market, people must practice fundamental investing. Speculation is too risky and common men shall avoid it till they have all tools and expertise to practice it.
In order to make money in the stock market when fundamental investors start selling, that’s a buying-start for speculators. Speculators make money from stock market taking advantage of the price momentum. During bull phases when prices are only going up, speculators make money taking advantage of up-trend. During bear phases when prices are only going down, speculators make money taking advantage of falling trend. For fundamental investors, making money from stocks is based on taking advantage of the future earning a potential of fundamentally strong companies. A fundamentally strong company shares its appreciating earning with its shareholders. Earning is shared as dividend income (in short term), and as long-term stock price appreciation.
For the fundamental investor, making money in the stock market can happen if they hold stocks for long term. But for speculators, the target is to make money by holding stocks for the shortest possible time. Fundamental investors are long term players (holding time more than 3 years), and speculators hold stocks for days, week or maximum.
HOW TO PRACTICE FUNDAMENTAL INVESTING?
To make money from the stock market it is important to know basic stock evaluation techniques. Stocks needs to be evaluated in term of its fundamental strengths and also in terms of its price valuations. In the world of internet, the information that is available about stock evaluation is huge. But here we will pick and choose the most valuable information’s that investors can use for selecting good stocks for investing. Before booking any stock, investors must ensure that is not overvalued. All across the world majority people lose money in stock market because they purchased stocks which are overvalued.
The first step — Check stocks price short-term trend.
This can be done in variety of ways. The easiest is by looking at market price of stock. Open the price chart and see how the stock price has changed in last 6 months. Just note from where to where the price has appreciated to depreciated.
After looking at price chart we shall check the stocks simple moving averages. Note the current stocks price and its simple moving average for last 50 days.Suppose stocks current price is Rs 1735 and its SMA50 is Rs 1452, it means that stock is in rising trend.
The second step — Check how strong in the companies fundamentals
A fundamentally strong stocks exhibit variety of features based on which we can rate them as quality stock. So common features are companies liquidity of funds, profitability of company and debt levels of company. A fundamentally strong company often shares its profit with its shareholders in form of dividends. Companies which has been paying consistent dividends to its shareholders in last 7–10 years is a sign of great fundamental. Dividend yield in the range of 2% to 3% can be treated as excellent.
The strategies used by mutual fund companies to buy or sell stocks are more intelligent than we can do it our-self. So stocks which mutual fund companies buying or selling gives a great hint about fundamental strengths of a company. If mutual fund companies are buying heavily at a certain price levels then we can safely decide to buy at that price level.
The third step — Check valuation of stocks price
We can start with checking how stock price has behaved in the last 2–3 years. Suppose in year 2007 the stock price was Rs 35 and in three years time it has climbed to Rs 50 it means the company has a growing tendency. But it is also important to check if stock price has touched overvalued levels? One can know this in variety of ways.
We can start by comparing stock price with its book value. If Price to Book Value ratio is less than 1.5, we can say that stock has not touched overvalued levels. If the book value of a stock is Rs 100 and its market price is Rs 160, it means its P/B ratio is 1.6. This is a hint that stock price has touched overvalued levels.
We can also compare stock price with its earning per share (EPS). If Price to EPS ratio (P/E) is less than 15, we can say that stock has not touched overvalued levels. If the EPS of a stock is Rs 8 and its market price is Rs 160, it means its P/E ratio is 20. This is a hint that stock price has touched overvalued levels.
After checking P/E ratio, we must also check EPS growth rate. A company which is able to grow its earnings at a faster levels, can afford to maintain higher P/E levels still prove to be undervalued. Suppose a stock has EPS growth rate of 25% since last five years. Divide P/E ratio with EPS growth rate ( P/E=20, EPSG=25%, PE/EPSG = 0.8) to get PEG ratio. If PEG ratio is less than 1.2 you can call that stock as undervalued.
I know that my valued reader will see several contents on the internet that that will guide them about how to make money in stock market. They may be well researched and useful articles. But what I have provided to my readers here is something that I personally practice to make money in stock market. I have made my suggestions simple and understandable for all types of reader. I know this advice will work as I am personally using them for quite some time now. My idea was not to make, money-making in stock market look too complicated, so my suggestions are easy and quick to apply. Have a happy investing.