This is a continuation of my previous blogs FIRST STEPS FOR INVESTING IN SHARE MARKET and JAPANESE CANDLESTICK CHART
In the previous blogs, we covered the Technical Analysis that needs to be done before and after investing in the Stock Market. It is equally important to look at the fundamentals of a company in relation to the sector it belongs to.
Here is a simple guide on how you can do it.
First, do a Technical Analysis of your preferred company.
Then you move on to the Financial Statements of the company. A comparison of items has to be made within the financial statements. Following items need to be compared in each financial statement over a number of years:-
Profit and Loss Statement
- Sales figure (revenue) – to identify growth
- Net Profit
- Non-operating expenses
- Salaries (withdrawn by Directors) – this needs to be compared on a yearly or quarterly basis.
- Reserves and Surplus / Share Capital / Market Capitalization (quarterly)
*Market Capitalization = Number of outstanding shares X Current market price
- Current Liabilities (half-yearly)
- Short-term borrowings
- Differed revenue expenditure
- Always read the footnote of the Balance Sheet, specially the Litigation part.
Cash Flow Statements
Compare the net cash flow figure on a quarterly basis. If quarter to quarter cash flow is increasing or stable, it is a positive sign for the company. It indicates that the management of the company is maintaining good relations with the suppliers. But, if the cash flows are turning negative, there could be many possibilities. However, the major ones are:
- Either the company is spending a lot of money
- Or the company’s credit policy is not favorable with the business cycle.
Employment Turnover Ratio
This ratio should be compared on a yearly basis. It indicates the motive of the management team of a company. If the employment generation is increasing, the company is expanding. If the employment generation is decreasing, the company is shifting from man-power to machine-power or the company is not able to bare the expenses of the employees.
Apart from Technical and Fundamental Analysis, it is also important to check the indices of foreign countries which are connected to the particular sector in which you wish to invest. Also, reading each and every news related to the sector, our economy in general and also the international market is equally important. This is because every country is dependent on each other and hence, a major change in the market of one country affects the market of other countries (the best example is the effect of BREXIT).
Hence, investing in stock market is not as easy as you thought it was. It requires a lot of research and after investing a lot of presence of mind and knowledge about the sector.
*I hope the three articles on how to invest properly in a stock market were useful.
By Ria Vaghela (student at Narsee Monjee College of Commerce and Economics)