Stock market blog

Earning per share analysis

2011-01-26T16:53:00.003+12:00

Ratio analysis plays an important role in the investment decision making process. ROA, ROE, ROI, PE, EPS etc. are the crucial ratios, which must be understood before investment. EPS ( Earnings per share) is one of the most important financial ratio.

WHAT IS EPS

EPS = Net Profit (or loss) - Dividends on preference shares / weighted average of number of shares outstanding at given point of time.

It gives you the profitability of the company on the basis of per share.

Due to the corporate actions like rights and bonus,buyback of shares etc, the number of available shares can differ,diluting the value of holdings. The concept of diluted EPS was developed to make good the affects of these actions. Let us understand this with the help of an example:-

The EPS of the stock X is Rs. 8.

The company issues bonus shares in the ratio of 1:1.

The number of outstanding shares increases, bringing down the value of EPS in the above formula. Hence you can see how your earnings are affected by dilution of the equity. There can be difference in the actual EPS and diluted EPS. Companies must report both, the basic EPS as well as diluted EPS in the financial reports.Trailing EPS is the EPS calculated from the company’s earnings of the previous year.

Points to remember

1. EPS should not be used as a standalone indicator of company’s performance.

2. It should be used to compare the company’s operating in the same industry by examining the rate of change of EPS during the final two quarters and compare this difference with the rate of change of EPS during the last 3-5 years.

3. Do not compare the EPS of companies operating in different sectors.

Nomination of demat securities

2011-01-15T04:55:00.000+12:00

Individuals holding single or joint beneficiary accounts can appoint a nominee.Karta of HUF and other non individual investors can not appoint a nominee.Only an individual can be a nominee.
Transmission of demat securities
   Transmission is the process of transferring demat securities of a deceased account holder to the account of the nominee.Transmission process is easier in case of dematerialised securities,as the formalities can be completed by submitting the documents to the DP.But in the case of securities held in the physical form,the process becomes a bit tedious because the nominee has to apply to each company separately.
   In case there is no nomination of the account of the deceased person,the legal heirs of the account holder shall make an application to the DP to transmit the securities to the account of the legal heirs.The application should be supported with the following documents:-
  1. Notarized copy of death certificate.
  2. Copy of succession certificate.

What is a Straddle?

2011-01-07T04:33:00.000+12:00

Buying both a put and a call on the same stock at the same time, is called a straddle. This allows you to make profit from a wide swing in the stock price in either direction. A straddle may prove profitable whichever way the price moves, provided the swing is big enough. You can profit from any one of the call or put and let the other contract expire worthless.

Sometimes it is also possible that you cash in on both contracts of a long-term straddle.

Sortino ratio

2010-12-19T16:23:00.000+12:00

Sortino ratio is a financial ratio which measures the risk adjusted returns of the portfolios. Unlike sharp ratio it uses downside volatility instead of standard deviation.As the sharp ratio uses standard deviation as a measure of volatility, it does not differentiate between positive and negative volatility.Sortino ratio uses downside volatility,which is defined as the Volatility of returns below a Minimum Acceptable Return (MAR).The MAR is generally set to 0%.Here the data for the volatility is calculated only from the period where it is below the MAR.

Both sharp and sortino ratios are the measures of risk adjusted returns, the only difference being the use of volatility measure.Sharp uses standard deviation which is the square root of volatility and takes into consideration both the positive and negative volatility.The use of standard deviation has been criticized as it treats the positive and negative volatility equally.Sortino ratio hence uses only the negative volatility in the denominator.High Sortino ratio indicates the less risky portfolio.

Use sharp ratio to select mutual funds

2010-12-19T03:13:00.002+12:00

Sharp ratio developed by William Sharpe, indicates the risk adjusted returns. It also indicates the consistency of the returns as it takes into account the volatility of returns as measured by the standard deviation. The returns of a mutual fund are compared with a benchmark return. Higher Sharpe Ratio means higher returns, relative to the risk taken.

Calculating the sharp ratio
First, the average returns for the fund are calculated, and then the average returns for the benchmark index are also calculated for the same period. If this difference is positive, it means the fund has generated higher returns than the benchmark.

Now the standard deviation of the fund’s returns is calculated. The difference calculated above is divided by this standard deviation to find out the risk assumed.

Consider the performance of following funds:-

Fund	Return%	Standard deviation%
A	15	10
B	17	16

The return of the benchmark index is 10% for the same period.
Sharp ratio of fund A is (15-10)/10=0.50
Sharp ratio of fund B is (17-10)/16=0.44
Without the use of Sharp ratio fund B seems to be more attractive as it has generated more returns. But the ratio indicates that the fund A is better because it has better risk adjusted returns.
So do not buy a fund just because it has generated more returns,use sharp ratio to find out better risk adjusted returns.

Punjab and sind bank IPO

2010-12-13T04:20:00.000+12:00

Punjab and sind bank is a nationalized bank serving more than 0.60 crore customers and has 926 branches.The business operations of the bank
include retail banking,corporate banking,priority banking,treasury operations,mutual funds, insurance etc.

Financial performance 2006-2010

Total consolidated income is Rs4,326.30 crore (FY2010) vs Rs1,401.93 crore (FY2006)

Net profit is Rs506.82 crore (FY2010) vs Rs285.68 crore (FY2006).

CAGR of 21.1% in net total income, 35.6% in operating income and 15.1% in net

profit over the period 2006-2010.

The issue opens on 13 dec 2010 and closes on 16 dec 2010.Lot size is 50 shares and multiples thereof.Price band Rs 113 to Rs 120 and the issue size is Rs 480 crore.The CARE IPO grade is 4/5, which means above average fundamentals.

A2Z maintenance and engineering services limited IPO

2010-12-09T04:37:00.000+12:00

A2Z maintenance and engineering services limited is an engineering,procurement and construction company.It provides services to power transmission and distribution
sector and diversifying its business in the road and telecommunication sectors.
Other business
Other business of the company include,developing IT solutions for power utilities,generating power from renewable energy sources etc.The consolidated income from Engineering,procurement and construction business in 2008,2009 and 2010 was Rs 4537.47 million,Rs 6644.22 million and Rs 11227.83 million.

Issue opens - 08 dec 2010
Issue closes- 10 dec 2010
lot size - 15 shares and in multiples thereof
Price band - Rs 400 -Rs 410
Issue size - Rs 675 cr
CRISIL rating - 4/5, means above average fundamentals.

Understanding beta of a stock

2010-12-04T05:48:00.000+12:00

Beta of a stock is a measure of stock’s performs relative to the market as a whole. It is observed that in a rising market the prices of the most stocks tend to increase with it, while in a falling market it tends to decrease. The beta is a measure of correlation between them.

The market itself has been assigned a beta value of 1, because, its movement is exactly equal to itself. The beta for a stock may have a value less than, equal to, or greater than one.

Beta is more than one

If the beta of a stock is 1.25,the stock will move up and down with the market at a rate of 25% more than the market. These securities will outperform the market in the up trending markets but will fall more sharply when the markets fall.

Beta of less than one

Such stocks fluctuate less than the market. If a stock has a beta of 0.85, it will react 15 percent less to the average ups and downs of the market.

stocks with negative beta

These securities would tend to move in the opposite direction of the market.

SCI FPO

2010-12-01T18:45:00.000+12:00

The FPO of shipping corporation of Inda ltd.is open for subscription
from 30 Nov to 03 Dec 2010.The issue size is 1185 cr and the price band is Rs 135-Rs 140.The Shipping corporation of India is a Navratna company.The customers are primarily government agencies, large companies and international oil companies.The company will receive 26 vessels during next two years and planning to acquire another 20 vessels.From a long term perspective company has a sound expansion plan for the next five years.

What is short selling

2010-12-01T05:49:00.000+12:00

Short selling means,selling a stock that you do not own.This is used to profit from the stock which is about to fall.The stock is purchased back when
the price falls and the difference is your profit.
Short selling is particularly useful in the bear markets or the downward trending stocks.It is a well known fact that the declines in the markets are sharper than the increase.And it proves to be more profiting than going long if you pick the right stock at the right time.

In fact, it is always easy to predict a fall than an up move.There are many instances when the sentiment is negative or simply the sentiment is "not positive",viz.,just before the quarterly results of the company or the annual union budget or the elections or any other event related to the company or economy.These are the times when the stock becomes reluctant to move upward and a short selling can be considered.
Short selling is riskier than conventional trading.When you buy a stock,your risk is limited to the capital you have invested,but when you sell a stock it may increase to infinity, thus increasing your risk to unlimited level.However it does not happen in practice,and can be controlled effectively by using stop loss orders.

MOIL IPO subscribed 2.37 times

2010-11-30T03:01:00.000+12:00

The MOIL IPO has subscribed 2.37 times till 2nd day of the issue.The retail investor portion of the issue is subscribed 1.96 times,while the employees portion is subscribed only 0.13 times.MOIL is the largest producer of manganese in India.Shipping corporation of India will be the next company with the public issue.The FPO of SCI will be open for subscription after MOIL.

portfolio rebalancing to control risk

2010-11-28T05:58:00.000+12:00

Portfolio rebalancing is an important risk management tool. It involves buying or selling assets to restore the original asset allocation of the portfolio. The value of the different assets tend to change over time hence changing the risk profile of the portfolio.
Disciplined investing involves creating a portfolio and rebalancing it with time, so that the very purpose of creation is not defeated. For example, if you have created a portfolio with a mix of bonds, mutual funds, and stocks, and the value of the stocks increase significantly as compared to the value of other two assets, the percentage of stocks in the portfolio is increased. This will make your portfolio more exposed to the risk. In other words it will make your portfolio more aggressive. This is the time to rebalance your portfolio, by selling some of your stocks and buying some bonds or mutual funds to match the asset allocation as closely as possible with the original allocation. In other case if the markets fall and the value of the stocks decline more than other assets, it will make your portfolio a conservative one. This is the time to buy some stocks and selling other assets to keep your allocation plan as original.

Changing market will change the risk profile of your portfolio frequently. Though you are not advised to do it too frequently, at least once in a year you should rebalance your portfolio. Because rebalancing too frequently will lead to added up transaction costs.

Pshychologically,it is not easy to sell the assets which are increasing in value, and acquiring assets which are out of flavor, but you can think it in such a way that you are booking profits of the increasing assets, and acquiring assets which are undervalued. This way you are following the very basic rule of trading-‘sell high, buy low’.

MOIL diversification plan

2010-11-25T15:21:00.000+12:00

MOIL,the biggest manganese ore company in India is planning to diversify its business.It is looking forward for a joint venture with mining leader NMDC in the field of iron ore,and also planning to diversify in the thermal power sector.Presently MOIL is lined up for the IPO, and carries out business only in one sector.The joint venture will help the company to diversify its business which will reduce the risk.

housing finance scam

2010-11-25T06:51:00.000+12:00

Central Bureau of Investigation (CBI), has informed a press conference,that it has arrested some top officials of PSUs.The PSUs and banks are LIC housing finance,Bank of India,Central bank of India and Punjab national bank.The officials have been arrested for the charges of bribery and corruption, in sanctioning the housing loans to builders.
The involvement of top level officials of the top banks in such activities is not a good sign for the India growth story.However, as of now, it does not look like a bad news for the realty sector,because it is only a case of bribe and may not affect the sector in the long run.But a short term negative sentiment can be seen,till a clear picture emerges,and may also turn into a panic selling.The stocks of the affected institutions will also witness a fall ,on the expectations of some more malpractices.And the possibility of a bigger scam can not be denied, so it is advised to trade cautiously in the early hours of trading.Fresh investment is to be avoided,till a clear picture emerges.Hope,all is well........

growth investing:picking the leaders of tommorrow

2010-11-23T07:02:00.000+12:00

Apart from value investing,which I have discussed in another post, there is one more philosophy of picking profitable stocks. Popularly known as growth investing, basically it means investing in the stocks,which have a high growth potential.The stock of the companies which are in the early stage of their growth cycle and have a better product or technology are chosen.In this method of investing,even if the share price of the company has appreciated,the investment is made given the high growth prospect,and here it differs from the value investing approach.Value investing is about finding the the stocks trading below intrinsic value and has low risk.

More risk more reward.

   In this approach the fundamentals of the company are overlooked and basics of the investing are forgotten.This is about betting on a particular aspect of the company, which may lead to rapid appreciation of the stock price.The stock price of such companies exhibit high volatility. During bullish market conditions these stocks can outperform the market and during a down trend these stocks may fall more than any other stock.
  If you want to be a growth investor,have the heart to take the big losses.Because it is all about identifying tomorrow's winners. The chances of picking a loser are more,and you need a lot of effort and research to find the right one. The penny stocks of today can be the blue chips of the future.
   In the next post..... how to find a growth stock.........

MOIL IPO

2010-11-22T00:01:00.000+12:00

MOIL Ltd. formerly known as Manganese ore India ltd is entering capital market with a IPO of 3.3 crore shares will open on 26 November for and will close on 30 Nov for institutional investors and on Dec 1 for retail investors.MOIL is the largest producer of manganese ore in India,and this IPO is the part of the Government divestment plan.A company with a strong fundamentals is worth subscribing.

Creating wealth through value investing

2010-11-19T19:44:00.000+12:00

Value investing is the method of selecting stocks, those are trading below their intrinsic value. This is the method used by warren buffett for selecting stocks.This method of selecting stokcs is useful when the market is going through a bear phase or has reacted to some bad news.Because this is time when,even the good stocks react to the bad news and trade significantly below their intrinsic value.Selecting stocks with this strategy is a process that takes time,because you have to wait for the stocks to fall below their fair value,specially when the markets are in the up trend.

So it is wise to prepare a list of the stocks of companies which are leaders in their respective sectors,calculate their intrinsic value,and wait for the right opportunity.Once these stocks trade around 60to 75% of intrinsic value,buy them.This difference is called the margin of safety,to avoid loss in case the markets fall some more.

This approach of value investing will yield profits only if you have a long term investment horizon.Have patience and wait for the stocks to bounce back,because it will not start moving up just because you have picked it.

One place to find the stocks below the intrinsic value is the 52 week low list, where you may find some value stocks,but not always.Be careful here because you may end up picking a poor stock .Differentiate among value stocks and poor stocks by analyzing the fundamentals of the company.

How to decide if the company is a value stock? Following are some points to be checked for value picks:-

Return on equity-should be high as compared to the other companies in the sector.
Low PE than other leaders in the sector.
PEG is less than 1.
Company should rely less on debt financing.
Debt to equity ratio is less than 1.
Current ratio and quick ratio more than 1.
Price to BV ratio less than 1
Earnings of the company are attractive.

Remember there is no single measure of the intrinsic value.Every analyst may calculate a different value of the stock.So the definition of the value is subjective and should be double checked before making investments. Lastly sell the stock when you feel that it is trading above its intrinsic value.

Use stop loss order to control risk

2010-11-19T04:57:00.000+12:00

There is only one method to avoid risks completely in the stock markets-stay away fro the markets.

But controlling the risk up to a extant is always possible.Risk and returns in the market go hand in hand.Even the best of the techniques you have learned and the best of the strategies you follow can get you into the loosing situations.Trading in the stock market can be considered as a clash between you and the 'market',where market is always trying to go against you,and you always try to beat the market.Remember,market can gulp all your money and will demand for more,and you have only a smaller amount that you can not afford to loose.Because loosing your capital means you are no more in the game.

So protecting your capital is of paramount importance for survival in this profession,and learning risk control techniques is more important than any other thing. There are so many ways you can limit your risk,and use of stop loss order is the most important. It helps to limit losses or protecting your profits,in case the market moves against you.This is the order that is placed below the price of entry order or above the price of exit order,that will get triggered in case market moves adversely.This will limit your loss and save your capital from a complete erosion.

Adjust your orders to protect profits.

Now when you have placed your stop loss order, it is required to adjust it in the direction of the trend so that your profits do not turn into losses.In case of a up trend the stop loss is to be moved up to the just below of the most recent trough, and in case of a down trend the stop loss order is to be moved down to just above the recent peak.

One more thing you must keep in mind that the stop loss order should not be placed at the resistance or support level,because you will be stopped out by the market fluctuations.One more rule,the round number rule says that do not place stop loss orders of round numbers (Rs 100, 50, 85 etc).Instead place your order 10 or 10 paise up or down from these points to make your order unique and get triggered easily.

I will discuss some more risk control techniques later, till then happy trading!

Axis bank Enam deal

2010-11-18T21:37:00.000+12:00

Axis bank will take over the investment banking and equity business of Enam securities by a 2067 crore all stock deal.5.7 shares of Axis bank will be exchanged for 1 share of Enam.Enam will become a wholly owned susidiary of Axis bank.This deal will prove to be a profitable one for both Axis and Enam.After this deal Enam securities will own 3.3% equity stake of Axis bank.The capital market and investment banking devision of Axis bank will get a boost from this deal,and it is worth considering for investment at current valuations.
Rec-BUY

What is Put Call Ratio

2010-11-18T05:09:00.000+12:00

Put call ratio is a sentiment indicator which is calculated as follows:

put/call ratio = put volume/call volume.
In other words it is the ratio of number of puts traded to the number of calls traded.When the market sentiment is bearish the trading volume increases in the put options and when the market sentiment is bullish the trading of call options increases.Each market has a different range of put call ratio which may change from time to time.
When this ratio touches the upper range,the market is considered over pessimistic and upward reversal is likely,and when it reaches the lower range the upward reversal is possible.

Power grid FPO allotment

2010-11-17T23:37:00.000+12:00

The expected allotment for the retail investors will be in the ratio of 1:4,because the issue is subscribed 3.85 times.Hopefully the shares will be credited to the demat account on 24 Nov 2010.

Trading stock options with covered put strategy

2010-11-17T22:45:00.000+12:00

This strategy is opposite to a Covered Call. This is used when you are neutral to bearish on a stock and feel that the price of the stock will remain range bound or move down. Writing covered Put basically involves taking a short position in a stock with a short put on the options on the stock.

The Put that is sold is an OTM Put. You short a stock because you are
bearish about it, and can buy it back at a target price with some profit. This target price is the strike price of the put option.
The following are the possible scenarios:

Stock falls below the Put strike, the buyer will exercise and you will have to buy the stock at the strike price . You make some profit because it was your target price. And your keep the premium.

If the stock price does not change you will keep the premium. This strategy can be used for an income in a neutral market.

Trading with key reversal day pattern

2010-11-17T04:45:00.000+12:00

Key reversal day pattern is one of the easiest technical patterns to identify.

It is a one day trading pattern that can signal a reversal of the current trend. This pattern can help early entry by timely prediction of the reversal.
Bullish reversal. The day on which the prices make a new low after a prolonged down trend, and then moves up to close near the day’s high.
Bearish reversal. The day on which price makes a new high after a prolonged up trend and then falls to close near the day’s low.
The volume activity at the reversal should be high to confirm the trend reversal. In fact, the higher the volume the stronger the signal will be.
Another way to find the reversals is to see if the closing price is near the previous day’s high or low for bullish or bearish reversal:-
Bearish reversal – price hits a new high and closes near the previous day’s low.
Bullish reversal - price hits a new low and closes near the previous day’s high.
However, this is less reliable than the previous pattern.
Trading rules. A day trader should short the stock after a bearish reversal and place a stop loss above the reversal high. A position trader should confirm from other indicators before taking a decision.

stock options: covered call strategy

2010-11-16T22:43:00.000+12:00

Stocks options are the most complicated financial instruments,and serves three important functions in the stock markets,hedging,speculating and arbitraging. All three functions deserve a separate discussion in their own right.

Options trading involves a number of strategies,each having its own distinguished features and use. Covered call

strategy is one of these trading strategies, which involves writing the call option for the stock one holds.It generates income in the form of premium while continuing to hold the stock.

When to use covered calls

This strategy is used by the trader who holds a stock and is neutral or moderately bullish on this stock. He is bullish about the stock in the long term but in the near term he is either bearish or neutral on the stock. He will write a call option at a strike price which is out of money and at which he will get some profit if the option is exercised.

Now, if the stock price remains below the stock price at the expiration the buyer of the option will not exercise the option, and the trader will retain the premium. And in case if the stock price moves above the strike price, the buyer will exercise the option, the trader will make delivery of the stock at a price where he is still making a profit.

power grid FPO listing

2010-11-16T17:14:00.000+12:00

The FPO shares of power grid corp will list on the exchanges on 23rd Nov.
The issue was subscribed 14.88 times.