Equity investment is a must have in one's portfolio if he is serious on accruing wealth. Lots of time time to research and good amount of patience required (read this article, the Requirement of patience by an investor) to an equity investor to succeed. Here are some best practices for investors who's serious on direct equity investment. For simplify, these practices divided to three, self assessment, fundamental research and profit analysis as well as some best practices:
Self assessment
1. What is your investment objective?
2. What is your perspective? Long term or short term? (To get profit from equity investment, one should have a long term perspective. It is advisable to have a 5 to 10 years time perspective for a successful investor to double his money or receive proper returns from his stock investments. Building wealth is not an hour, a day or some months process. It is a time taken process)
3. What is your risk profile? Can you bear a lose of 35 to 45% of capital in case of fluctuations and market volatility? If not, direct stock investment is not yours. You can go with debt instruments that is providing guarantee to capital but low returns.
4. What is you goal while investing in equities? It may be higher study, marriage of your daughter, buying a home, vehicle or even a holiday in later years.
5. Do you have enough knowledge about stock market, how it is working and its various cycles?
6. Are you starting your investment in early years? Ideally, subtract your age from 100 and the resulted percentage of your money should be in equity. If you are near to the pension age, it is not your choice but go for debt or secure investments like fixed deposits, debt funds etc.
Fundamental Research
While selecting a company to invest in their stock, you should acquire reasonable knowledge about the company, product, management, competitors, market status etc.. Below self assessment questionnaire help you to identify and decide whether the company is best to invest or not?
1. Are you better aware about the company? When did the company established and what is their history?
2. What are their businesses/services portfolio? Is that legal?
3. Is the product or services portfolio diversified well enough to confirm market status in case any produce or service failure occurred in future?
4. Is the company's business/service quality is enough to retain market trust for long term compare with similar product or services in the market?
5. Who are the main competitors?
6. How competitors product or service compare with? Is that better or less compare with?
7. How well the company management?
8. How innovative the company is, for product and services?
9. How many locations the company have factories or manufacturing units?
10. Do they have an international business and in that case do they have any facilities other than your country as well as how well their product movement in other markets?
11. What are their major profit source?
12. What is the share holding status? Do any foreign investments made on the company? Is there any reputed financial institutions/banks holding their shares?
13. How well the management completing the future plans declared in the company annual general meetings?
14. Do they have an investor friendly atmosphere?
15. Do they providing proper informations to investors about major activities as well as respecting their investors?
16. Is there any legal actions against the company or any pending cases against them?
17. In case of legal proceedings in the past, what are the reason and how company faced them?
18. do they have received any resistance or rejection from govt authorities in the past or present about any of their product or services?
20. Is there any labor issues within the company?
21. How the satisfactory level of staff those who working with company? This information you can receive by approaching those who are working with company. Always ask to 5 or more people.
As a most important factor, you should be well aware about companies business style and the network all over country and internationally.
Profit Analysis
To analyze the profit, you are required to collect informations from the companies or stock exchanges. This includes the Annual Report and financial reports for last few years (minimum 5 years). This will be available from various financial sites too.
1. What are the profit sources to an investor from the company in the past?
2. Are they a consistent dividend payer? (Check the dividend history for last 20 years and find out any failure occurred in any years withing this 20 years. A history of paying dividend continuously these 20 years, you can confirm that the company is a good dividend payer.)
3. What is the dividend percentage and is that increasing or decreasing year to year?
4. Does the company giving bonus issues to their investors?
5. What are the sales growth for last five years at least? Are they maintaining the sales growth consistency year to year?
6. What is the profit growth rate in an year to year? Are they maintaining the year to year profit consistency continuously? (If the company continuously have a minimum 25% growth in sales and net profit year to year, it can be a considerable point to buy the stock)
7. What is the Debt to Equity Ratio? This is a measure of the total debt a company owes compared to the equity of the shareholders. It tells you just how much of the capitalization is the owners vs. the creditors
8. What is the ROE (Return on Equity) ratio? This reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For those of you interested in long-term investing with rich rewards, companies that have high return on equity ratios can provide the biggest payoff.
9. What are the Current Ratio? It serves as a test of a company's financial strength and relative efficiency
10. What is the Asset Turnover Ratio? The asset turnover financial ratio calculates the total sales for each dollar of asset a company owns. It measures a company's efficiency in using its assets.
11. What is the PBR (Price to Book value) Ratio? (A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.)
An in depth details of all these ratios available here
As well as the above, find out the PE ratio (A valuation ratio of a company's current share price compared to its per-share earnings. This is calculating by dividing the Market Value per share with EPS (Earning per share). An Example: if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). Compare this ration with competitor companies will give you an exact idea about the stock is under values or over valued.
12. Wheather the EPS, Earning Per Share, of the company increasing and year to year basis?
There are more ratio analysis available for understand a companies growth and profit screening. As an ordinary investor with less financial background, you can research the above mentioned ratios and that will give you the required information about the company and the possibility of profit in a long term run.
Some Don't while investing in Equity
1. Don't believe the analysts and tips from public
2. Don't follow public
3. Market will fluctuate always. Required enough patience to have good profit in the future.
4. Buy when others are selling and sell when others are buying.
5. Don't over diversify. Have enough diversification between Large, mid and small cap companies as well as among multiple industries.
6. Don't buy small number for stocks to test. Once if you found a very good company, go an buy the maximum possible buy you.
7. Don't buy any stocks without doing proper research from all angles.
If possible, buy and read some very good books available in the market. For starters, "Buffet: Making of an American Capitalist" is a good buy. Peter Lynch's "Once upon the Wall Street" will give you good ideas that an investor must have. Read my article "One up on wall street by Peter Lynch - The investors best friend" to have a look on what he said in this best seller.
Have better idea about Margin of Safety advice from Benjamin Graham. Read his Last will and Testament, a set of best available advices from Legend investor to investors those who investing in equities. The great book: Interpretation of Financial Statements from Benjamin Graham will be a very good guide for you to properly analyze the financial ratios.
Be a conscious and intelligent investor all the time.
Self assessment
1. What is your investment objective?
2. What is your perspective? Long term or short term? (To get profit from equity investment, one should have a long term perspective. It is advisable to have a 5 to 10 years time perspective for a successful investor to double his money or receive proper returns from his stock investments. Building wealth is not an hour, a day or some months process. It is a time taken process)
3. What is your risk profile? Can you bear a lose of 35 to 45% of capital in case of fluctuations and market volatility? If not, direct stock investment is not yours. You can go with debt instruments that is providing guarantee to capital but low returns.
4. What is you goal while investing in equities? It may be higher study, marriage of your daughter, buying a home, vehicle or even a holiday in later years.
5. Do you have enough knowledge about stock market, how it is working and its various cycles?
6. Are you starting your investment in early years? Ideally, subtract your age from 100 and the resulted percentage of your money should be in equity. If you are near to the pension age, it is not your choice but go for debt or secure investments like fixed deposits, debt funds etc.
Fundamental Research
While selecting a company to invest in their stock, you should acquire reasonable knowledge about the company, product, management, competitors, market status etc.. Below self assessment questionnaire help you to identify and decide whether the company is best to invest or not?
1. Are you better aware about the company? When did the company established and what is their history?
2. What are their businesses/services portfolio? Is that legal?
3. Is the product or services portfolio diversified well enough to confirm market status in case any produce or service failure occurred in future?
4. Is the company's business/service quality is enough to retain market trust for long term compare with similar product or services in the market?
5. Who are the main competitors?
6. How competitors product or service compare with? Is that better or less compare with?
7. How well the company management?
8. How innovative the company is, for product and services?
9. How many locations the company have factories or manufacturing units?
10. Do they have an international business and in that case do they have any facilities other than your country as well as how well their product movement in other markets?
11. What are their major profit source?
12. What is the share holding status? Do any foreign investments made on the company? Is there any reputed financial institutions/banks holding their shares?
13. How well the management completing the future plans declared in the company annual general meetings?
14. Do they have an investor friendly atmosphere?
15. Do they providing proper informations to investors about major activities as well as respecting their investors?
16. Is there any legal actions against the company or any pending cases against them?
17. In case of legal proceedings in the past, what are the reason and how company faced them?
18. do they have received any resistance or rejection from govt authorities in the past or present about any of their product or services?
20. Is there any labor issues within the company?
21. How the satisfactory level of staff those who working with company? This information you can receive by approaching those who are working with company. Always ask to 5 or more people.
As a most important factor, you should be well aware about companies business style and the network all over country and internationally.
Profit Analysis
To analyze the profit, you are required to collect informations from the companies or stock exchanges. This includes the Annual Report and financial reports for last few years (minimum 5 years). This will be available from various financial sites too.
1. What are the profit sources to an investor from the company in the past?
2. Are they a consistent dividend payer? (Check the dividend history for last 20 years and find out any failure occurred in any years withing this 20 years. A history of paying dividend continuously these 20 years, you can confirm that the company is a good dividend payer.)
3. What is the dividend percentage and is that increasing or decreasing year to year?
4. Does the company giving bonus issues to their investors?
5. What are the sales growth for last five years at least? Are they maintaining the sales growth consistency year to year?
6. What is the profit growth rate in an year to year? Are they maintaining the year to year profit consistency continuously? (If the company continuously have a minimum 25% growth in sales and net profit year to year, it can be a considerable point to buy the stock)
7. What is the Debt to Equity Ratio? This is a measure of the total debt a company owes compared to the equity of the shareholders. It tells you just how much of the capitalization is the owners vs. the creditors
8. What is the ROE (Return on Equity) ratio? This reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For those of you interested in long-term investing with rich rewards, companies that have high return on equity ratios can provide the biggest payoff.
9. What are the Current Ratio? It serves as a test of a company's financial strength and relative efficiency
10. What is the Asset Turnover Ratio? The asset turnover financial ratio calculates the total sales for each dollar of asset a company owns. It measures a company's efficiency in using its assets.
11. What is the PBR (Price to Book value) Ratio? (A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. A lower P/B ratio could mean that the stock undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.)
An in depth details of all these ratios available here
As well as the above, find out the PE ratio (A valuation ratio of a company's current share price compared to its per-share earnings. This is calculating by dividing the Market Value per share with EPS (Earning per share). An Example: if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95). Compare this ration with competitor companies will give you an exact idea about the stock is under values or over valued.
12. Wheather the EPS, Earning Per Share, of the company increasing and year to year basis?
There are more ratio analysis available for understand a companies growth and profit screening. As an ordinary investor with less financial background, you can research the above mentioned ratios and that will give you the required information about the company and the possibility of profit in a long term run.
Some Don't while investing in Equity
1. Don't believe the analysts and tips from public
2. Don't follow public
3. Market will fluctuate always. Required enough patience to have good profit in the future.
4. Buy when others are selling and sell when others are buying.
5. Don't over diversify. Have enough diversification between Large, mid and small cap companies as well as among multiple industries.
6. Don't buy small number for stocks to test. Once if you found a very good company, go an buy the maximum possible buy you.
7. Don't buy any stocks without doing proper research from all angles.
If possible, buy and read some very good books available in the market. For starters, "Buffet: Making of an American Capitalist" is a good buy. Peter Lynch's "Once upon the Wall Street" will give you good ideas that an investor must have. Read my article "One up on wall street by Peter Lynch - The investors best friend" to have a look on what he said in this best seller.
Have better idea about Margin of Safety advice from Benjamin Graham. Read his Last will and Testament, a set of best available advices from Legend investor to investors those who investing in equities. The great book: Interpretation of Financial Statements from Benjamin Graham will be a very good guide for you to properly analyze the financial ratios.
Be a conscious and intelligent investor all the time.
1 comments:
A must read for all who want to Learn to Invest Money wisely and safely because you happen to explain about equity in a comprehensible yet nevertheless in an educational level.
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