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Unit-Ii Stock Analysis and Valuation Topics Covered

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UNIT-II STOCK ANALYSIS AND VALUATION TOPICS COVERED Online trading of stocks Understanding stock quotations Types and placing of order Risk: its valuation and mitigation Analysis of the company: Financial characteristics . ratio analysis . future prospects of the company . assessing quality of management using financial and non-financial data . balance sheet and quarterly results . cash flows . capital structure . comparative analysis of companies Non-Financial characteristics Stock valuations: using ratios . PE ratio . PEG ratio . Price Revenue ratio Use of Historic prices . simple moving average . basic and advanced interactive charts Examining the shareholding pattern of the company Pitfalls to avoid while investing: . high P/E stocks . low price stocks . stop loss . excess averaging 1. ONLINE TRADING OF STOCK The act of buying and selling of security through on-line platform is on-line trading of stock. Online trading generally requires an online trading platform offered by most online brokers for order execution. The online trading platform for NSE is national automated trading (NEAT) and for BSE is Bombay stock exchange on – line trading (BOLT). On-Line Trading of Stock-Process: following are the steps in on-line trading: Selection of a broker: The buying and selling of securities can only be done through SEBI registered brokers who are members of the Stock Exchange. The broker can be an individual, partnership firms or corporate bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor. Opening De-Mat Account with Depository: Second step in trading procedure is to open a De-Mat account. De-Mat (De-Materialized) account refer to an account which an Indian citizen must open with the depository participant to trade in listed securities in electronic form. The securities are held in the electronic form by a depository. Depository is an institution or an organization which holds securities. At present in India there are two depositories: NSDL (National Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.) There is no direct contact between depository and investor. Depository interacts with investors through depository participants only. Depository participant will maintain securities account balances of investor and intimate investor about the status of their holdings from time to time Placing the Order: After opening the De-Mat Account, the investor can place the order. The order can be placed to the broker (DP) either personally or through phone, email, mobile App etc. Investor must place the order very clearly specifying the range of price at which securities can be bought or sold. Executing the Order: As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the securities. Broker prepares a contract note for the order executed. The contract note contains the name and the price of securities, name of parties and brokerage (commission) charged by him. Contract note is signed by the broker. Settlement: This means actual transfer of securities. This is the last stage in the trading of securities done by the broker on behalf of their clients. There can be two types of settlement. On the spot settlement: It means settlement is done immediately and on spot settlement follows i.e. T + 2 rolling settlement. This means any trade taking place on Monday gets settled by Wednesday. Forward settlement: It means settlement will take place on some future date. It can be T + 5 or T + 7, etc. All trading in stock exchanges takes place between 9.15 am and 3.30 pm. Monday to Friday. Advantages of on-Line Trading It is convenient: In online trading, you only need to open a trading account via internet and you’re good to go. You’re not bound by time and place as long as you have an internet connection. Hence, online trading is convenient and accessible from anywhere with limited hassle. It also saves time. It is cheaper: In online stock trading, the stock broker fee which you will have to pay is lower when compared to the commission charged by traditional method. If you trade in a sufficiently large volume of stocks, it is possible for you to be able to negotiate your broker’s fees. Monitor of investments anytime: Online trading allows you to buy or sell shares according to your convenience. It offers advanced interfaces and the ability for investors to see how their money is performing throughout the day. You can use your phone or your computer to evaluate your profit or loss. It almost eliminates the middleman: Online trading allows you to trade with virtually no direct broker communication. Apart from reducing the overall trading cost, this benefit also makes the trading hassle free, making this service much more lucrative. Investor has greater control: Online traders can trade whenever they wish to. On the other hand, in traditional trading, an investor may be stuck until he or she is able to contact their broker or when the broker is able to place their order. Online trading allows nearly instantaneous transactions. Also, investors are able to review all of their options instead of depending on a broker to tell them the best bets for their money. They’re able to monitor their investments, make decisions and buy/sell stock on their own without any outside interference; thus, giving them greater control over their investment. Faster Transactions: Online banking is fast and efficient. Funds can be transferred between accounts almost instantly, especially if the two accounts are held at the same banking institution. All it takes to be able to buy or sell stocks is a single click of the mouse. Through this, a quicker exchange can be made which may also ensure quicker earnings. Better understanding of one’s money: This is a hidden advantage of online trading which you wouldn’t want to pass up on. Just like conventional stock trading, you can predict the market behavior and use this to predict a rise or fall in price of the stock. You’ll be handling your own finances and be responsible for them. Over time, you become more experienced in understanding the market, and good investment opportunities from the bad ones. This knowledge about money is very useful, and having this on your resume makes you more marketable to companies looking to fill a well-paying position in the finance department. Disadvantages of Online Trading Technical Problems: Online trading platform are only as good as the underlying servers and software. High volumes on volatile trading days can slow processing speeds and information flow. Software bugs can lead to delays in getting price quotes and information on order status. This also could result in trading losses, because you might enter orders based on incorrect price quotes or delayed order-execution reports. Investors depend on Internet and cellular service providers for researching information and placing trades Customer Service: Online brokers have a lean cost structure, which allows them to offer discounts on commissions. You might need to place certain trades over the phone if your online portal malfunctions or your Internet connection is down. In addition, you might not be able to place certain types of orders over the phone, such as spread orders involving options. Feedback Mechanisms: Online trading means that you are your own investment manager, but this independence comes at a price. You do not have the benefit of a professional feedback loop, such as a reliable sounding board for your investment decisions. Online brokers typically do not provide buy-sell recommendations. You have to set aside time for research, such as reviewing financial statements on corporate investor relations websites and price charts on financial websites Addictive nature: Online traders can experience a certain high when trading that is similar to what people experience when gambling, according to a recent study on excessive trading published in the journal Addictive Behaviors. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also significant losses. a) Understanding Stock Quotations A stock quote is the price of a stock as quoted on an exchange. A basic quote for a specific stock provides information, such as its bid and ask price, last-traded price and volume traded. Bid price represents the maximum price that a buyer or buyers are willing to pay for a security. Ask price represents the minimum price that a seller or sellers are willing to receive for the security. A trade or transaction occurs when the buyer and seller agree on a price for the security. b) Types and Placing of Orders There are four different types of orders: Market order - this order is designed to be executed immediately, at the current market price - no price is specified on the order. Limit order - this order does specify the price desired; however, there is no guarantee that the order will be filled. There are two types of limit orders: . Buy limit order - this order is entered at a price below the current market price. Sell limit order - this order is placed above the current market price. Stop order this order is used to trigger an execution only if the market reaches a certain level; when this limit is reached, the stop order becomes a market order. As a result, there is no way to predict the actual price the security will receive. As with limit orders, there are two types: . Buy stop order these are used to limit losses on short stock positions and are always placed above the current market price and filled only if the market rises. Sell stop order - these are used to limit losses on long stock positions and are always placed below the current market price and filled only if the market fails.
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