Understanding the Beast- Chapter 2

Fundamental Analysis

I hope all of you must have familiarized yourself with the moneycontrol.com. Now let us get started with the most basic part of Fundamental Analysis. As I had earlier mentioned the financials of a company consists of balance sheet, cash flows etc. We will tackle each of these financials separately

Let us get started with the balance sheet of a company first.

What is a Balance Sheet?

A balance sheet is fundamentally a sheet showing the assets and liabilities of the company as on a particular date. The balance sheet is prepared on the last date of the financial or calendar year, whichever followed by the company (Try recollecting the definition of an asset and a liability).Now it cannot be so simple otherwise everyone would understand it right? So companies include complicated terms to make it confusing. I will try making it as simple as I can.

This is the link to the balance sheet of the company Infosys
http://www.moneycontrol.com/financials/infosys/balance-sheet/IT
Now I will be explaining the most fundamental terms, we will get to the technical terms later.

·        Equity Share Capital- This refers to sum total of all the money that was raised by issuing shares. This means that when the company issues shares, the money it receives comes under this category.

·        Reserves-This means the amount of money (not necessarily liquid) that the company has from the previous years.

·        Networth-This is basically the total value of the company.

·        Secured and Unsecured loans- Secured loans are those in which money is lent against a collateral while unsecured loans are those in which money is lent on the promise of returning the money. In Unsecured loans as the loan is given against a promise of paying the rate of interest is higher than the Secured loans.

·        Total liabilities- This is the sum total of all the money that the company owes. This is always numerically equal to the Total Assets. (Because money cannot be destroyed)

·        Net Block-This refers to Current value of the fixed assets. This basically is the resale/salvage value of the assets owned by the company.

·        Sundry Debtors- These are the ordinary customers of the company who  have taken goods on credit. This basically means that the goods have been delivered by the company to these people but the company is yet to receive payment for their goods.

·        Inventories- These refer to those goods of the company that haven’t been sold yet but the company is stocking them to sell at a later date.

·        Current Assets- This term basically refers to the liquid assets of the company. This means that if the company was to dissolve or go broke and they could sell these assets and get money. This would refer to the fixed deposits and money in the bank etc. It is actually a superset of liquid assets and includes all the assets other than fixed assets.

·        Net current assets- This basically is Current Assets-Current Liabilities. This means that it is the balance left if all the current assets were used to take care of the current liabilities. 

·        Total Assets- It is the total value of all the assets held by the company

·        Book Value- This basically means that because of the balance sheet the value of the company should be that much. This does not mean it is the ideal price of the company it just gives us an indication on the company’s performance year on year as well as versus other peers.

These are the basic terms of the balance sheet. If you have a problem understanding any term please provide a feedback I will explain it again or in more detail.

Cheers,

Shail

Understanding the Beast-Chapter 1

Let’s start with the two popular styles followed by investors to invest in the stock market. They namely are:

• Fundamental  analysis
• Chart Analysis

Some investors choose to analyze a stock using only one of the above, but according to me you need both of the  above mentioned skills to get a clear picture.

Fundamental Analysis

Fundamental analysis basically refers to analyzing the financials, performance. In lay man’s terms this means that you are finding out how the company has been performing, has it been making a loss or a profit, is the company in too much debt, is the company utilizing its money and the most important one-“Is the company growing”. You can find out all of this by looking at the financials of the company. The most important parts of a company’s financials are:

• Balance Sheet
• Profit and Loss Account[P&L]
• Cash Flow
• Quarterly Results

These are the basic financials of the company one must analyze before investing in it. I’ll be explaining more about this in my next post.

Chart Analysis

Now as we all know that the financials of the company aren’t all that need to be analyzed. The movement of a stock on the stock market is also because of investor sentiment. This is a big factor in the stock market; investor sentiment plays a major factor on the direction of a particular stock. We can judge investor sentiment to a certain extent using the charts of the basic stocks. The Basic tools we must familiarize ourselves with in order to successfully analyze stocks are:

• Moving Averages [Simple and exponential]
• Volume
• Trendlines
• Chaikin Money Flow
• OHLC Chart type
• Gaps and Basic Chart Patterns

As we familiarize ourselves with this we will delve deeper into chart analysis and learn more complicated stuff.

For now this will be all, my next post will explain Fundamental analysis more clearly. Till then I want every one of you to get to know the site www.moneycontrol.com, create an account and a portfolio because trust me while you learn stock market investing, this site will be your best friend.