10 Questions to Ask Before You Buy a Stock

10 Questions to Ask Before You Buy a Stock

Before you buy individual stocks, you should be able to answer these questions.

It may seem like a given that you should do your homework before plunking down your hard-earned cash on a company's stock -- but many people don't.

"There are some investors who simply don't carefully weigh their stock-investment decisions,"

As stock market crashes have taught us, a carefree investing style doesn't work forever. In fact, its success usually comes to an abrupt end. It would behoove investors to relearn that painful lesson before the next crash. 

With that in mind, here are 10 questions investors should ask -- and answer -- before buying a stock. 

Of course, knowing all the answers doesn't guarantee a winning stock. Nothing can do that. But over the long haul, taking the time to consider these questions will make one a better, more well-informed investor.

1. What Does the Company Do?

Warren Buffett famously says he doesn't invest in what he doesn't understand. If the greatest investor of the past 60 years is brave enough to acknowledge that he doesn't understand all companies, we should all probably take heed. This first basic question is a simple one, but that doesn't mean it's easy. To answer the question, there are plenty of places to look, including the company's Web site.

2. Is the Company Profitable? 

This is also a simple question, which can be made more complicated by all sorts of variations on a company's earnings. Investors can read the quarterly and annual earnings reports to check out how much net income the company reported, in dollars and in per-share earnings. Later down in this column we'll address ways to mine for red flags in earnings.

3. What Is the Company's Earnings History and Outlook?

A quick scan of older news stories and the company's past quarterly statements help answer this question. Does the company have a history of steady earnings growth? Are earnings volatile? Remember, all trees don't grow to heaven: If the company is a maturing tech company, can it sustain the heady growth of its days as a spry, young growth company?

4. How Richly Is the Company's Stock Valued?

It's wonderful to find a company whose earnings are growing exponentially, but the other side of the equation is the value the market pays for that growth and the prospect of future growth. There are several basic methods of determining a company's valuation, including price to earnings and price to sales. These numbers can be easily found online. Price-to-earnings, or P/E, multiples aren't the perfect gauge, but investors do need to consider how much they are paying for a stock.

5. Who Are the Company's Competitors?

Companies don't operate in a vacuum. For every Coke  (KO), there's a Pepsi  (PEP) -- and a host of other competitors as well. Companies are constantly trying to take business from one another. Investors should know where their companies stack up: Does this company have the biggest market share in its industry? Is it a small but growing niche player in a competitive industry? Is it an industry dominated by one company, or is it a fragmented industry where even the biggest player controls less than 10% of the market -- such as in the supermarket business? Also, investors should increasingly pay attention to foreign competition, where lower-cost competition can put pressure on profit margins.

6. Who Runs the Company?

Unlike professional money managers, individual investors don't have the ability to drop by a company's headquarters and chat up the management before making an investment decision. However, that doesn't mean there aren't plenty of ways to find out about the leadership. Any company worth its salt will have a Web site that lists the senior managers, how long they have been with the company, their background and the company's history. If the company's executive suite has a rotating door, that may not reflect positively on the company's stability. Beyond the company line on the executive suite, investors should research articles about the executives. Often, trade publications from any given industry are useful in digging into a company. 

7. How Clean Is the Company's Balance Sheet?

Serious-minded long-term investors need to be able to read over a company's balance sheet. Is the company saddled with a huge amount of debt compared with how much it earns? Checking out a company's earnings alone doesn't tell you if the company has borrowed to the moon to achieve those earnings. It's also useful to see how much the company is spending on research and development and how large its inventory levels are. (If they are growing from last year, that may mean business is slowing down.) This brings us to question No. 8. 

8. Have You Read the Company's 10-K and 10-Q Annual Reports?

The 10-K report is the annual report every company is required to file to the Securities and Exchange Commission. It's much more in-depth than the more sanguine annual reports that companies file during earnings season. The 10-Q is the quarterly report -- similar to the 10-K report except that it is required on a quarterly basis. 

9. Are There Any Red Flags That Call Into Question the Company's Integrity?

This is where the 10-Q and 10-K filings come in handy. First off, every company needs to detail the risk factors that may undermine its prospects. Second, the explanations of the company's accounting practices and operating assumptions on matters ranging from depreciation rates on its assets to assumed rate of growth for its pensions tell you a great deal about whether the company is getting too aggressive.

10. Is the Company's Competitive Position Sustainable?

Run-and-gun investors looking for short-term gains might not need to answer this question, but serious-minded long-term investors do.

What is Cover Order????

Cover Order is a facility where the clients can trade in Futures Market with minimum margin, even less than 1%.

At the time of taking intraday cover order position client has to place stop loss order also.

The margin required is lot size or quantity multiplied by 2 times of the difference between buy/sale price and stop loss price , decided by the clients as per their requirement.

For example – If client wants to take a intraday long position in nifty futures. Currently Nifty Dec 2016 futures trading at 8000 and client decided to set the stop loss at 7990, then the margin will be required 1000 Rs only ( difference of buy price 8000 – stop loss price 7990 = 10 points * 2 times * 50 lot size of nifty).

The client has option to exit from the position before the stop loss is triggered.

If the market is stable, client does not exit from the position or stop loss also not trigger then all the Cover Order positions will be auto squared off at 3.15 P.M.

All Cover Orders will be executed at current market price only. Limit order is not permitted.

Cover Order facility is available on selected future contracts as per liquidity.

This facility can be available between 9.15 A.M to 3.10 P.M only.

Stop loss price or order cannot be modified from any branch or admin terminal.

Client cannot carry or convert the Cover Order position after giving addition margin also.

In this case the clients need to exit from current Cover Position then take fresh position selecting CNC or NRML.

Cover Order facility is also subject to market conditions. If the market is very volatile on a particular day, the company can disable the facility for that day.

 This facility will be available for both online and offline clients.

Five Important Elements in Fundamental Analysis

Having a basic knowledge of fundamental analysis will give you a better foundation for your investment decisions. Learn five core elements in Fundamental Analysis and understand why you should use it when investing. You will learn how to find relevant information in earning reports from the listed companies. 

This article provides a guideline on where to start when doing fundamental analysis. It covers the following aspects and elaborates on the principles:

·         What is fundamental analysis?

·         Why use fundamental analysis?

·         The true value of a stock?

·         Five key factors to look for

·         Buying at the right price

Fundamental analysis is critical component in stock analysis. It is quite accessible, extremely valuable and you actually don't need a finance degree to get a basic understanding of it. The problem of fundamental analysis is however that it can very easily get quite complicated, but it doesn't have to be.

 What is a Fundamental Analysis?

 A fundamental analysis is all about getting an understanding of a company, the health of its business and its future prospects. It includes reading and analyzing annual reports and financial statements to get an understanding of the company's comparative advantages, competitors and its market environment.

Why use fundamental analysis?

Fundamental analysis is built on the idea that the stock market may price a company wrong from time to time. Profits can be made by finding underpriced stocks and waiting for the market to adjust the valuation of the company. By analyzing the financial reports from companies you will get an understanding of the value of different companies and understand the pricing in the stock market.

After analyzing these factors you have a better understanding of whether the price of the stock is undervalued or overvalued at the current market price. Fundamental analysis can also be performed on a sectors basis and in the economy as a whole.

The true value of a stock?

 For a fundamental analyst, the market price of a stock tends to move towards its 'intrinsic value', which is the 'true value' of a company as calculated by its fundamentals. If the market value does not match the true value of the company, there is an investment opportunity.

Example of this is that if the current market price of a stock is lower than the intrinsic price, the investor should purchase the stock because he expects the stock price to rise and move towards its true value. Alternatively, if the current market price is above the intrinsic price, the stock is considered overbought and the investor sells the stock because he knows that the stock price will fall and move closer to its intrinsic value. To determine the true price of the company's stock, the following factors need to be considered.

Five key factors to look for

 1. Earnings

The key element all investors look after is earnings. Before investing in a company you want to know how much the company is making in profits. Future earnings are a key factor as the future prospects of the company's business and potential growth opportunities are determinants of the stock price.

Factors determining earnings of the company are such as sales, costs, assets and liabilities. A simplified view of the earnings is earnings per share (EPS). This is a figure of the earnings which denotes the amount of earnings for each outstanding share.

2. Profit Margins

Amount of earnings do not tell the full story, increasing earnings are good but if the cost increases more than revenues then the profit margin is not improving. The profit margin measures how much the company keeps in earnings out of every dollar of their revenues. This measure is therefore very useful for comparing similar companies, within the same industry.

Net Profit Margin =      Net Profit

                                         Revenue

Higher profit margin indicates that the company has better control over its costs than its competitors. Profit margin is displayed in percentages and a 10 percent profit margin denotes that the company has a net income of 10 cents for each dollar of their revenues.

To get better understanding of profit margins it is good to compare two companies with alternative margins, see table below.

Company	@Price (Rs.)	Revenue	Cost	Net Profit	Net profit Margin
A	100 @ 5	500	50	50	10%
B	100 @ 5	500	100	100	20%

3. Return on Equity (ROE)

Return of equity (ROE) is a financial ratio that does not account for the stock price. Since it ignores the price entirely it is by many thought of as THE most important financial measure. It can basically be thought of as the parent ratio that always needs to be considered.

This ratio is a measure of how efficient a company is in generating its profits. It is a ratio of revenue and profits to owners' equity (shareholders are the owners). Specifically it is: 

             Return on Equity =         Net Income

                                               Shareholder's Equity

 

An easy example of this is that if company A and company B both generate net profits of Rs.10L but company A has equity of Rs.1cr but company B has equity of Rs.10cr. Their ROE would be 10% and 1% respectively meaning that company A is more efficient as it was able to produce the same amount of earnings with 10 times less equity. 

Company	Net Profit (Rs.)	Equity (Rs.)	ROE
A	10L	1cr	10%
B	10L	10cr	1%

The reason for why this measure is so important is because it contains information about several factors, such as:

Leverage (which is the debt of the company)

Revenue, profits and margins

Returning values to shareholders

Good approximation is that ROE should be 10-40% greater than its peer.

4. Price-to-Earnings (P/E)

When taking the current market price into consideration, the most popular ratio is the Price-to-Earnings (P/E) ratio. As the name suggest it is the current market price divided by its earnings per share (EPS). It is an easy way to get a quick look of a stock's value.

A high P/E indicates that the stock is priced relatively high to its earnings, and companies with higher P/E therefore seem more expensive. However, this measure, as well as other financial ratios, needs to be compared to similar companies within the same sector or to its own historical P/E. This is due to different characteristics in different sectors and changing markets conditions.

This ratio does not tell the full story since it does not account for growth. Normally, companies with high earnings growth are traded at higher P/E values than companies with more moderate growth rate. Accordingly, if the company is growing rapidly and is expected to maintain its growth in the future this current market price might not seem so expensive.  This is the reasoning for the existence of different investment styles; Value vs. Growth Stocks.

Example:

While some sectors normally have low P/E measures, other sectors commonly have higher ratios. For example, utilities commonly have P/E ranging from 5 to 10 while technology companies commonly have a P/E ratio ranging from 15 to 20 or above. This is due to expectations in the market about the sector and its earnings-growth possibilities. The utility sector has stable earnings and is not expected to grow rapidly while technology companies are expected to grow faster and tend to need less capital for its growth. 

In order to simplify, the following table illustrates four companies in two sectors with alternative figures.

Company	Sector	Current stock Price (rs)	EPS	P/E	Growth Rate
A	Technology	420	27	16	66%
B	Technology	580	26	22	25%
C	Utilities	16	3,5	5	13%
D	Utilities	20	2,5	8	6%

It is not very appropriate to compare A with D as A has a growth rate of 11 times more than D. It is more appropriate to compare A with B. In that relation, A seems cheaper than B by the look of the P/E. Now you should ask why that could be? -is this bargain or are some other reason why A is priced lower than B. One suggestion might be that the market expects B to have more earnings-growth in the coming future and A's previous earnings growth is not expected to grow much further. 

In order to account for growth, the P/E ratio can be modified into the Price/Earnings to Growth (PEG) ratio. A PEG ratio is calculated by dividing the stock's P/E ratio by its expected 12 month growth rate. A common rule of thumb is that the growth rate ought to be roughly equal to the P/E ratio and thus the PEG ratio should be around 1. A relatively low PEG ratio indicates an undervalued stock and a PEG ratio much greater than 1 indicates an overvalued stock.

The PEG ratio can be very informative figure, especially for fast growing and cyclical companies. In this one ratio you get an understanding of the company's earnings, growth expectations and whether it is trading at a reasonable price relative to its fundamentals.

5. Price-to-Book (P/B)

A price-to-book (P/B) ratio is used to compare a stock's market value to its book value. It can be calculated as the current share price divided to the book value per share, according to previous financial statement. In a broader sense, it can also be calculated as the total market capitalization of the company divided by all the shareholders equity.

This ratio gives certain idea of whether you are paying too high price for the stock as it denotes what would be the residual value if the company went bankrupt today.

A higher P/B ratio than 1 denotes that the share price is higher than what the company's assed would be sold for. The difference indicates what investors think about the future growth potential of the company.

Buying at the right price?

 In the long run the stock price should reflect its fundamental true value. However in the short run a stock might have great fundamentals but still be moving in wrong direction. This can be due to other factors, such as news releases and changes in future outlook, which also have effect on the price. Trends in the market and investors emotions also effect the short-term fluctuation in stock prices resulting in the current market price deviating from its true value.

One question that is important to consider is: "What is the difference between a great business and a great investment?" -the answer is "price". If you pay too high price for even the best stock in the world, you will never make a good return on your investment. Therefore, a great investment does not likely have a high price. The point of this question is that the price you pay for a stock does matter enormously; it is the most important factor in your return. Accordingly, doing your fundamental analysis (thoroughly) is of a great importance when making your investments.

Gold ETF – Exchange Traded Fund – What is and How to?

What is a Gold ETF?

A Gold ETF is an exchange traded fund, having the underlying asset as Gold. Thus the Gold ETF represents physical gold which may be in paper or in the dematerialised form. The advantage here is that the buyer of a Gold ETF doesn’t have to deal with the delivery of physical gold, but still can buy and sell it in the Stock market.

Smart Way To Invest In Gold

Not all the Gold ETFs have purely gold as their sole asset. In most of the cases, apart from having gold as a major asset, these funds might also have some Debt instruments and Cash as an asset. The proportion and the holding of these assets varies from every fund to the other.

What is the advantage of Gold ETF?

There are many advantages of investing in a Gold ETF rather than investing in Physical Gold. ETFs provide a completely transparent and convenient way of trading in gold for the investors. They provide a hassle free way of trading the yellow metal without incurring the costs associated in other forms of gold trade.

What does the price of 1 unit signify?

Theoretically, each unit of the Gold ETF represents 1 gram of gold. As the price of Gold increases or decreases, the unit price of the Gold ETF also fluctuates accordingly.

However the fund might also have other types of assets other than gold, as described in the previous section. Thus the prices of the Gold ETF units will vary from fund to fund.

Another major contributor to the variation of the unit prices, is the Expense Ratio for the fund. The operating expenses for every fund will vary widely. This factor will also affect the unit price of a Gold ETF.

How to buy and sell Gold ETF?

As with any other stock that is listed on the Stock exchange, Gold ETFs can also be bought or sold during the market hours of the exchange. Using the same mechanism for buying stocks, Gold ETFs can be bought and sold from the Stock Market.
Once purchased, the units of Gold ETFs will also be stored in the dematerialized form in your Demat account. You can sell it from this account

If You Want To Keep The Money You Made In Stocks, You Should Invest In Bonds.

What Are Bonds?

A bond is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time.

When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period of time.

Why Invest In Bonds?

If you want to make the most money, you should invest in stocks. But if you want to keep the money you made in stocks, you should invest in bonds.

It's ironic, but true: The most important asset class, bonds, is the one that has the lowest expected rate of return. At their core, bonds are quite simple. Yet decade after decade, investors tie themselves in rational and emotional knots trying to deal with bonds.

These days, most people are concerned that interest rates will soon rise. (This has been the case for much of the past 20 years, by the way.) Most investors know that higher interest rates will mean lower bond prices. So how can it make sense to buy bonds now?

Actually, it makes very little sense right now to buy or own bonds in the hope that you'll be able to sell them later at a higher price.

And that's exactly the problem that gets investors into trouble. They think that if you can't sell an investment at a profit, that investment is a bum deal. However, the truth is this: Making a profit isn't why you should own bonds.

For an analogy, think about an automobile. The reason to own a car is to go places. As everybody knows, that requires an engine. The moneymaking engine in most portfolios is made up of equities.

But would you drive a car that had no brakes? I doubt it. Bonds are like the brakes in a car. The analogy is imperfect, but the point is valid. Like the brakes in a car, bonds let you control the risk of owning equities.

For most people, the reason to own bonds is to mitigate equity losses during major market declines. Without this mitigation (and sometimes even with it), investors tend to panic when stock prices fall.

Instead of considering the possibility of buying more stocks at depressed prices, these skittish investors sell. They usually do so only after they have sustained major losses that they will never recover.

Here's why you should love bonds: They make the bad times better. Let me show you this with a few numbers.

From 1970 through 2014, a 100% bond portfolio had a compound return of 6.3%. A 100% equity portfolio, widely diversified, had a compound return of 11.8%. Obviously the equity portfolio had a much more powerful moneymaking "engine."

But the risk or volatility of the bond portfolio, measured in standard deviation, was only 4.1%; the figure for the all-equity portfolio was much less comfortable: 14.8%.

The all-equity portfolio was all engine, without any brakes. Its ultimate long-term returns were great. But without any brakes, that portfolio gave investors such a rough ride that many would have wound up on the sidelines.

The all-bond portfolio, on the other hand, had plenty of safety, but its engine was so weak that it would have failed to meet the long-term needs of many investors.

I said earlier that bonds are for the bad times — when stocks are losing money. The following examples illustrate this.

In the 45 calendar years from 1970 through 2014, the worst years for the diversified all-equity portfolio were 1974 (a loss of 22.6%) and 2008 (a loss of 41.7%). In 1974, bonds were up 6.5%. In 2008, they were up 7.1%.

Now, let's look at just those two very challenging calendar years and consider a portfolio that was split 50/50 between stocks and bonds.

In 1974, the loss in the 50/50 portfolio would have been 8.8% instead of 22.6%. In 2008, the loss would have been 19.9% instead of 41.7%.

In those bad years, bonds put on the brakes. And what about the good times? The two very best years for the all-equity portfolio were 1975, when it was up 44.5%, and 2003, when it was up 47.3%. A 50/50 portfolio returned 24.9% in 1975 and 23.3% in 2003.

Both those returns should be perfectly acceptable, in fact quite welcome, for long-term investors.

Peter Lynch and Warren Buffett both have said you shouldn't invest in equities unless you are willing to lose half your money along the way.

Even though most investors know about this risk, they try to put such unpleasant things out of their minds. When the market goes into a serious decline, many investors panic and wish for safety.

That safety is easily at hand, in the form of bond funds. If you have the right percentage of your portfolio in bonds, you're much more likely to stay the course. And if you stay the course, you're much more likely to be in the market when it's going up.