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

The Big Giant

The stock market is a dangerous big animal that is capable of marvelous feats. It can be a generous queen who can make you a fortune as well as a high maintenance girlfriend which can cost you a fortune. The one important thing we must learn before venturing into the stock market is that believe in yourself.

We all know that the stock market can go either up or down depending on factors we cannot control. You must be wondering, if the stock market is this volatile then how can you make money?

Now contrary to ‘popular belief’, a lot of people are of the opinion that the stock market is rigged and controlled by a few big, rich and powerful men. If your one of the few who doesn’t believe so, then you’re one of the smart ones. The primary reason why the stock market cannot be rigged is because the stock market is too big a beast to be controlled. Basically on an average millions of shares are traded on the stock exchange and controlling such a volume of shares is impossible. Now there can be a few exceptions but that can only happen in small cap companies (Small cap companies refer to small companies with a lesser number of shares traded on an intraday basis).

Now the most commonly used way to make money in the stock market that I personally use is not intraday trading but medium term trading. Now the stock market as a long term investment might not be a good idea as it keeps going up and down so the net return you would receive is not very high. For example, The Dow from 2000 to 2010 moved up effectively by around 200 points while the Sensex in the last 3 years has visited the 16000 range thrice.

From these examples it is quite clear that long term investing is risky(As opposed to the popular belief that long term investing is safe). At this point I would like to quote something about the stock market which my father still tells me, “The market has the capability to remain irrational for a far longer time than you being able to stay solvent”.  Thus the one thing that we must never do is get carried away.

When investing in any stock have your exits clearly marked. As in you need to set a stop loss (this means that if the share price falls below this value then you sell the stock and bear the loss) and at the same time you need to set a price at which you will book your profits and sell the shares. Both of the above mentioned values depend on personal risk appetite.

Now it is up to you to set those values and it is important that you stick to these values, so make it a point you decide your risk appetite today.

Cheers,

Shail.