THE BASICS OF STOCK VALUATION

Over time, the stock market’s returns come from two key components: investment return and speculative return. As Vanguard founder John Bogle has pointed out, the investment return is the appreciation of a stock because of its dividend yield and subsequent earnings growth, whereas the speculative return comes from the impact of changes in the price-to-earnings (P/E) ratio

Price Multiples

A. Price-to-Sales (P/S)

P/S ratio = current price of the stock / sales per share

The good thing about P/S ratio is that sales are typically cleaner than reported earnings because companies that use accounting tricks usually seek to boost earnings. In addition, sales are not as volatile as earnings. Thus, P/S ratio useful for quickly valuing companies with highly variable earnings, by comparing the current P/S ratio with historical P/S ratios. Also the P/S ratio can be used when earnings are negative (P/E ratios cannot be calculated - indicated as N/A).

Biggest flaw: Sales may worth a little or a lot, depending on a company profitability. A company may post billions in sales, but still losing money.

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

P/B ratio = stock’s market value / book value (also known as shareholder’s equity or net worth).

The main weakness for P/B is that there is increasing trend in intangible assets worth, which may limit the usefulness of P/B ratio. For service firms which depends on brand, dedicated employees, strong customer relationship, efficient internal process, P/B has little meaning.

P/B is tied to ROE (equal to net income / book value), in the same way that P/S is tied to net margin (equal to net income / sales). Given two companies that are otherwise equal, the one with a higher ROE will have a higher P/B ratio. Therefore, when you are looking at P/B, make sure you relate it to ROE. A firm with a low P/B relative to its peers or to the market and a high ROE might be a potential bargain, but you’ll want to do some digging before making that assessment based solely on the P/B.

P/B is useful for valuing financial services firms because most financial firms have considerable liquid assets on their balance sheets. Financial firms trading below book value (a P/B lower than 1.0) are often experiencing some kind of trouble.

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

The Good: accounting earnings are a much better proxy for cash flow than sales, and they’re more up-to-date than book value. Moreover, it is readily available.

The easiest way to use a P/E ratio is to compare it to a benchmark, such as another company in the same industry, the entire market, or the same company at a different point in time.

The Bad: Relative P/E has one drawback, a P/E of 12, for example, is neither good nor bad in a vacuum. Using P/E ratios only on relative basis means that your analysis can be skewed by the benchmark you’re using.

Risk, growth, and capital needs are all fundamental determinants of a stock’s P/E ratio:

* higher growth firms should have higher P/E ratios,
* higher risk firms should have lower P/E ratios,
* and firms with higher capital needs should have lower P/E ratios.

When you’re using the P/E ratio, remember that firms with an abundance of free cash flow are likely to have low reinvestment needs, which means higher P/E. Also:

* If a firm has recently sold off a business or perhaps a stake in another firm, it’s going to have an artificially inflated E, and thus lower P/E.
* If a firm is restructuring or closing down plants, earnings could be artificially depressed, which would push the P/E up. For valuation purposes, it’s useful to add back the charge to get a sense of the firm’s normalized P/E.
* If the firm cyclical? Firms that go through boom and bust cycles - semiconductor companies and auto manufacturers are good examples - require a bit more care. Your best bet is to look at the most recent cyclical peak, make a judgment whether the next peak is likely to be lower or higher than the last one, and calculate a P/E based on the current price relative to what you think earnings per share will be at the next peak.
* Does the firm capitalize or expense its cash-flow generating assets? A firm that makes money by building factories and making products gets to spread the expense of those factories over many years by depreciating them bit by bit. On the other hand, a firm that makes money by inventing new products like drug, has to expense all of its spending on R&D every year. Arguably, it’s that spending on R&D that’s really create value for shareholders. Thus, the firm that expenses assets will have lower earnings - and therefore a higher P/E - in any given year than a firm that capitalizes assets.
* Which type of P/E? There are two kinds of P/Es-a trailing P/E, which uses the past four quarters’ worth of earnings to calculate the ratio, and a forward P/E, which uses analysts’ estimates of next year earnings to calculate ratio. In general, forward P/E < peg =" P/E" yield =" 1" return =" Free">

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Discounted Cash Flow:STOCK VALUATIONS

What is the Discounted Cash Flow Model

DCF analysis calculates the present value of a company’s future earnings. In other words, what is the value of a company’s stock assuming their earnings grow at a certain rate over a given time period. We can figure out what an investment is worth to us today by entering 4 parameters into our model.

Four DCF Parameters

• Earnings Per Share over the past 12 months - we enter the latest EPS as our earnings starting point.
• Earnings Growth Rate over next 5 years - we use the earnings growth rate to calculate a company’s forward EPS for the next 5 years. Also known as the analyst’s projected earnings growth estimates.
• Growth Rate after 5 years- In order to generate an rational stock price, we enter a conservative growth rate after the initial 5 years. I usually enter 0% as the leveling off growth rate because you should never assume EPS growth for more than 5 years in advance. Companies produce negative earnings all the time, so we must enter a conservative value to make our discounted stock price more precise.
• Discount Rate - This is the most difficult number to derive because it differs between small, mid, and large-cap stocks. The discount rate is the expected return on your investment in 5 years time if purchased during present times. I use annual index returns as my discount rates because these indices represent a large number of securities which produce actionable average return values. An index return will keep your discounted cash formula from returning outliers. I use 15%+ for small-caps, 11% to 15% for mid-caps, and 8% to 11% for large-cap stocks.

When we enter these 4 factors into our discounted cash flow calculator, it returns a present day value of future earnings. Anytime investors like Benjamin Graham highlight the importance of evaluation formulas, we pay attention. Now that you know about discounted cash flow, you can add another useful model to your arsenal of investing tools.

Take Discounted Cash Flow With A Grain of Salt

DCF analysis is a tool and should not be the sole reasoning for a particular investment. Formulas and metrics are only as good as the numbers and values we enter into them. If you find an investment that’s highly discounted, try to figure out why the stock is so discounted and look over your values again. It’s easy to make a mistake and compute an irrational number as well.

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STOCK PARAMETERS

Stock parameter is the factors that eventually control the stock price at the stock exchange. A better understanding of these parameters will help you to trade in stocks. Here we are presenting definitions of some of the most important parameters.

Face Value – Face value of a stock represents the nominal value that the issuer of the stock decided for that stock.

Book Value - Book Value of stock is determined by dividing the net worth of the company divided by the number of shares outstanding. The net worth of the company is total asset of the company minus the liabilities.

Market Price – Market price indicates the last traded price at a particular stock exchange where the stock is listed at a given day.

Market Capitalization – market capitalization of company is determined by multiplying the market price of the stock with the total number of issued and outstanding stock in the market.

Volume – Volume of stock is average of total traded stocks at the exchange over a period of time.

52 weeks High/Lows – The highest and lowest point of the price of a stock at the exchange in the immediately preceding 52 weeks.

Price to 52 Week High/Lows - It is determined by dividing the current market price of the stock by 52 Week High/Low. This value is the indicator of the fact how the stock has performed in the period of 52 weeks.

Earning per share - EPS is determined by dividing the net profit of the company, the aggregate net profit of the last four quarters, by fully diluted equity capital.

Price to Earning Ratio (P/E) – P/E ratio is determined by dividing the closing price of a stock with the Earning per Share or EPS of the stock.

Beta – Beta shows the sensitivity of stock to the market. It indicates how much the scrip moves at a unit change in the market. The Beta for a stock can be negative or positive. When the Beta for a stock is negative it means that the share moves in the opposite direction that of the market.

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OPTION TRADING STRATEGIES

There are 3 simple option strategies .Straddle, Strangle and Gut.

1. Straddle is a volatile option strategy or what we call Market Neutral Strategy. Being market neutral means that a long Straddle profits no matter if the underlying asset goes up or down. Yes, a Long Straddle allows you to simply put on the position and then totally take your mind off the stock as you will be in profit no matter if the underlying asset goes up or down.(Example: when nifty is around 4100 buying 1 lot 4100 call and 1 lot 4100put)

2. Strangle is a volatile option trading strategy that profits when the stock goes up or down strongly. The Strangle is a cousin of the long Straddle and the Long Gut, making up a family of basic volatile options strategies. Learning the Straddle first makes the Strangle easy to understand.(Example: when nifty is around 4100 buying 1 lot 4200 call and 1 lot of 4000 put)

3. Gut Spread is a volatile option trading strategy designed to profit when the underlying stock moves strongly upwards or downwards. The Long Gut Spread is a cousin of the Long Straddle and the Long Strangle with the only difference being that in the money options are used instead. The Long Gut Spread is useful when no at the money options are available when you want to use a Straddle. In fact, since exactly at the money options are so rare, the Long Gut Spread using in the money options and the Long Strangle using out of the money options are far more commonly used than the Straddle. (Example: when nifty is around 4100 buying 1 lot 4000 call and 1 lot 4200 put)

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GROWTH STOCKS

A stock is said to be growth stock when it appreciates more than the market average. In most cases companies that reinvest major share of its earnings have stocks that rise above the overall industry trend of appreciation in the market. Therefore, the growth stocks hardly pay any dividends to the investors but bring high returns for them. Remember that not all the growth companies’ stocks are not growth stocks. In reality the stocks of the growth companies are in most cases overvalued in the market rather than being growth stocks.

Technically speaking, a stock can be termed as growth stock when it has the return on equity or ROE of 15% or above. ROE is a measurement that is used by the experts to determine the growth stocks. It is calculated by dividing the net income of the company with the number of equity it has. Growth stocks have high ROE and give high returns to its investors compared to the other stocks in that particular sector and in comparison to the overall average in which the stock market appreciates at that particular time.

Growth stocks are excellent investment if as an investor you want to see your investment rise at a faster rate than the market average. But while investing in growth stocks you must be prepared for a long term investment to get the maximum benefit of the investment. While buying the growth stocks and holding the stocks for significant period of time you must always remember that growth stocks will not pay you dividends even if the companies post a good profit at the end of the year.

So, if you are looking forward to have a good profit from the stock market investment, growth stocks are really a viable investment opportunity for you. But as with any other stock market investment, while investing in the growth stock you must always remember that the basic for gaining form stock market investment remains the same for the growth stocks as well. That is, you have to pick the right stocks for gaining from your investment.

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UNDERVALUED STOCKS

A stock is said to be undervalued when it is being traded at a much lower price than its usual worth. Usually an undervalued stock has a lower PE ratio but as an investor you must always remember that a lower PE ratio does not necessarily mean that the stock is undervalued. It may be a poor stock as well. So there are some points that needs to be judged to determine if a stock is actually undervalued or not.

There are many principles and methods that are used by the experts to determine whether a stock is undervalued or not. In most cases it is the present financial condition of the company and prediction about the future of the company decides whether it is an undervalued stock or not. For example if the stock of an excellent company is priced at Rs. 38 and it can be easily predicted that the company has a good future ahead then the stock of that company is determined as undervalued stock. It is the prediction about the future profit and future interest rate that have a vital part in determining if a stock is actually undervalued or not.

There are some basic points that are used to determine undervalued stocks. When a stock has a low PE ratio these factors need to be judged to find out if the stock is actually an undervalued stock or is it basically a weak stock.

• The company has a fairly good earning history and seems stable.
• The business of the company is not based on specialization of high technology that can be obsolete overnight.
• The company is not going through a financial scandal.
• The low PE ratio of the company is not the result of the profit realized from the capital gains.
• The low PE ratio is not for the major decline in the profitability of the company.

At the end undervalued stock is a viable investment option for the investors as they are all set to rise to their potential in future.

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TRADING VS. INVESTING

Many people confuse trading with investing. They are not the same.

The biggest difference between them is the length of time you hold onto the assets. An investor is more interested in the long-term appreciation of his assets, counting on that historical rise in market equity.

He’s not generally concerned about short-term fluctuations in prices, because he’ll ride them out over the long haul.

An investor relies mostly on Fundamental Analysis, which is the analytical method of predicting long-term prospects of a particular asset. Most investors adopt a “buy and hold” approach to assets, which simply means they buy shares of some company and hold onto them for a long time. This approach can be dangerous, even devastating, in an extremely volatile market such as today’s BSE or NSE Indexs Show.

Let’s consider someone who bought shares of XYZ Company at their peak value of around Rs.650 per share at the beginning of the year 2000. Two years later, those shares are worth Rs.100 each. If that investor had spent Rs. 65,000/-, his net loss would be Rs.55000/- ! I don’t know about you, but losing Fifty Five Thousand Rupees would be a relatively big loss for me.

Many investors suffer such losses regularly, hoping that in five or ten or fifteen years the market will rebound, and they’ll recoup their losses and achieve an overall gain.

What most investors need to remember is this: investing is not about weathering storms with your “beloved” company – it’s about making money.

Traders, on the other hand, are attempting to profit on just those short-term price fluctuations. The amount of time an active trader holds onto an asset is very short: in many cases minutes, or sometimes seconds. If you can catch just two index points on an average day, you can make a comfortable living as an Trader.

To help make their decisions, Traders rely on Technical Analysis, a form of marketing analysis that attempts to predict short-term price fluctuations.

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What is NAV?

The Term Net Asset Value (NAV) is used by investment companies to measure net assets. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.

The value of a collective investment fund based on the market price of securities held in its portfolio. Units in open ended funds are valued using this measure. Closed ended investment trusts have a net asset value but have a separate market value. NAV per share is calculated by dividing this figure by the number of ordinary shares. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV.

Value or purchase price of a share of stock in a mutual fund. NAV is calculated each day by taking the closing market value of all securities owned plus all other assets such as cash, subtracting all liabilities, then dividing the result (total net assets) by the total number of shares outstanding.

Calculating NAVs - Calculating mutual fund net asset values is easy. Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. So if a fund had net assets of Rs.50 lakh and there are one lakh shares of the fund, then the price per share (or NAV) is Rs.50.00.

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STOCK MARKET TIPS

The stock markets are at all time highs and just like the last time around when the market was at its previous high every one thinks that nothing can go wrong and there is just one way where the market can go which is UP. Nothing could be farther from the truth and this will be clear from the way the market behaves in the next few months. Here are a few tips that would hopefully save you from losing a lot of cash in the current frenzy.

Time and again investors have burnt their fingers in the markets and here are some tips to you so that you do not end up burning your fingers in this market.

The number one tip at this point would be to sell if you have stocks and not to buy them if you have cash. The golden principle in the markets is “Buy when everyone else sells and sell when everyone else buys”. Simple enough right? Not really.

Why? Because of peer pressure pure and simple. When everyone else around you seems to be having a ball at the markets you would feel like a fool if you didn’t participate now.

OK so you can’t resist buying at this time then at least do yourself a favor and stay away from unknown Penny Stock and hot tips that your barber gave you. True that the stock has tripled in the last fifteen days but that was before people like your barber started buying the stock. Chances are that the Promoter of the company have started buying into the stock and have spread rumors like acquisition or a big export order to fool investors and sell out to them at a later date.

Another tip that would serve useful is to value a stock based on its future growth and not its past performance. For instance many investors say that I will not buy stocks of X company because it has doubled in the last year. Well it may have doubled in the last year but that should not be the thing you should be telling yourself. Rather you should ask yourself why has this doubled in the last year and can it do so again? There should be a solid answer to your question like the launch of a new product or reduction in the prices of raw material. And indeed if the answer is in the positive then by all means go ahead and buy that stock regardless of what has happened in the last year.

Another tip would be to remember what you are buying. Quite simply investors often forget that when buying a stock they are simply buying ownership in the companies. Most of you would know that nothing spectacular would happen in the company that you work for, in a month, they are not going to double their revenues and certainly not double your salary every month. Then why expect anything different from the companies that you are investing in. Why expect the prices to double in a month or two. Give time to your investments; don’t reduce it to a gamble. Only when you invest in fundamentally sound companies and then give the investments sufficient time to grow will you see some healthy returns on your investments. Ideally a minimum horizon of one year is a good time.

Hope these tips will prove helpful and you will make a lot more in the stock markets than you have already been making.

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FINDING FUNDAMENTAL GOOD STOCKS

Fundamental analysis is the process of looking at a company’s basic or fundamental financial level. This type of analysis examines important terms of a companies to determine its financial health and gives you an idea of the value its stock. Many investors use fundamental analysis alone or in combination with other technical tools to evaluate stocks for investment purposes. The idea behind this is to determine the current worth and, more importantly, how the market values the stock in coming future.The following points are based on important tools of fundamental analysis and what they tell you. Even if you don’t plan to do in-depth fundamental analysis yourself, it will help you to follow stocks more closely which will give you good returns in future/long term investments.

Earnings
It’s all about earnings. When you come to the bottom line, that’s what investors want to know. How much money are the companies making and how much is it going to make in the future. Importance of Earnings - Earnings are profits. Quarterly or yearly companies increasing earnings generally makes its stocks price to move up and in some cases a pay out of regular dividend. This is Bullish sign and indicates that the companies in growth phase.When the companies declare low earnings then the market may see bearishness in the stock which may affect the stock price in negative manner.
Every quarter, companies report its earnings.
There are 4 quarters.
Quarter 1 - (April to June and earnings will be declared in July)
Quarter 2 - (July to Sept and earnings will be declared in Oct)
Quarter 3 - (Oct to Dec and earnings will be declared in Jan)
Quarter 4/final - Also called as financial year end - (Jan to Mar and earnings will be declared in April)
Now by this time you may be come to know how earnings are important for a stock price to move up or down. But depending only on earnings one should not make investment or trading decision. To make decision more risk free you should look into more tools as mentioned below so that your investment decision becomes more solid and you should get excellent returns in future.
Conclusion - Keep a close watch on quarterly earnings and trade accordingly.

Make use of following tools to find excellent growth stocks
Following are the most popular and important tools to find excellent growth stocks which focuses on earning, growth, and value of the company’s. To make you understand more easily we have explained in very simple steps.
Following are 10 simple steps.
1) Earning per share - EPS
2) Price to Earnings Ratio - PE
3) Projected Earning Growth - PEG
4) Price to Sales Ratio - PS
5) Price to Book Ratio - PB
6) Dividend Yield
7) Return on Equity
8) Debit ratio
9) Company’s announcements
10) Profit after Tax - PAT
Note - No need for you to do any calculation or to calculate any ratios, you will get all ratios easily available.-
Note - Any single tool should not be used to make your investment or trading decision nor will they provide you any buy or sell recommendation. All tools should be used to find growth and value stocks. After making use of above all tools you will get excellent stocks which will give you excellent returns in mid term to long term.
You will find all these ratios in any financial website.

Understanding Earning Per Share - EPS
EPS plays major role in investment decision.
EPS is calculated by taking the net earnings of the companies and dividing it by the outstanding shares.
(Nowadays you will get this ready made, no need for you to do calculation.)
That is EPS = Net Earnings / Outstanding Shares
For example - If Company A had earnings of RS 1000 crores and 100 shares outstanding, then its EPS becomes 10 (RS 1000 / 100 = 10).
Second example - If Company B had earnings of RS 1000 crores and 500 shares outstanding, then its EPS becomes 2 (RS 1000 / 500 = 50). So which companies stock do you want to buy?It’s not advisable to make your investment decisions based on only single tool analysis.
Conclusion - You should look for high EPS stock/company. The higher the better.
Note - You should compare the EPS from one company to another, which are in the same industry/sector and not from one company from Auto sector and another company from IT sector.
But it doesn’t tell you what the market thinks of it. For that information, we need to look at some more ratios as following.
Before we move on, you should note that there are three types of EPS numbers:
Trailing EPS - Last year’s EPS which is considered as actual and for ongoing current year.· Current EPS - Which is still under projections and going to come on financial year end· Forward EPS - Which is again under projections and going to come on next financial year end.
EPS is the base for calculating PE ratio.

Understanding Price to Earnings Ratio - PE ratio
PE ratio is again one of the most important ratio on which most of the traders and investors keep watch.
Important - The PE ratio tells you whether the stock’s price is high or low relative to its earnings.
The high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. but, the P/E ratio doesn't tell us the whole story of the company. It's more useful to compare the P/E ratios of one company to other companies in the same sector/industry and not in other industry.
The PE ratio is calculated by taking the share price and dividing it by the companies EPS.
That is PE = Stock Price / EPS
For exampleA company with a share price of RS 40 and an EPS of 8 would have a PE ratio of 5 (RS 40 / 8 = 5).
Importance - The PE ratio gives you an idea of what the market is willing to pay for the companies earning. The higher the P/E the more the market is willing to pay for the companies earning. Some investors say that a high P/E ratio means the stock is over priced on the other side it also indicates the market has high hopes for such company’s future growth and due to which market is ready to pay high price. On the other side, a low P/E of high growth stocks may indicate that the market has ignored these stocks which are also known as value stocks. Many investors try finding low P/E ratios stocks of high value growth companies and make investments in such stocks which may prove real diamonds in future.

Which P/E ratio to choose?
If you believe that the companies has good long term prospects and good growth then one should not hesitate to invest in high P/E ratio stocks and if you are looking for value stocks which prove real diamonds in future then you can go with low PE stocks provided that companies has good growth and expansions plans.At all if you would like to do PE ratio comparison then it has to be done in same sectors/industry stocks and not like one stock from banking sector and other stock from pharmacy sector.So now you would have come to know how to choose stocks based on PE ratio.

Understanding the Projected Earning Growth - PEG
Because the market is usually more concerned about the future than the present, it is always looking for companies projected plans, financial ratios, and other future announcements.
The use of PEG ratio will help you look at future earnings growth of the company.
PEG is a widely used indicator of a stock's potential value.
Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.You calculate the PEG by taking the P/E and dividing it by the projected growth in earnings.
That is PEG = P/E / (projected growth in earnings)
For example, a stock with a P/E of 30 and projected earning growth for next year is 15% then that stock would have a PEG of 2 (30 / 15 = 2).
In above example what does the “2” mean?
Lower the PEG ratio the less you pay for each unit in future earning growth. So the conclusion is you can invest in high P/E stocks but the projected earning growth should be high so that companies can provide good returns. Looking at the opposite situation; a low P/E stock with low or no projected earnings growth is not going to give you returns in future. Because its PE is low means investors are not ready to pay high and its PEG is also low because companies do not have any good future growth or expansion plans.So investment in such stocks could prove less or no returns.
A few important things to remember about PEG:
1.It is about year-to-year earnings growth ·
2.It relies on projections, which may not always be accurate.

Understanding Price to Sales Ratio
is it that companies having no earnings are bad investments? Not necessarily, because such companies may be new and trying to grow and expand but you should approach such companies with precaution.
The Price to Sales (P/S) ratio looks at the current stock price relative to the total sales per share. You can calculate the P/S by dividing the market cap of the company by the total revenues of the company. You can also calculate the P/S by dividing the current stock price by the sales per share.
That is P/S = Market Cap / Revenues or P/S = Stock Price / Sales Price per Share Conclusion - To find under valued stocks you can look for low P/S ratios.The lower the P/S ratio the better is the value of the company.

Understanding Price to Book Ratio - PB ratio
Basically PB ratio is mostly utilized by value investors to find real wealth when they are at their lower prices. So investing in stocks having low PB ratio is to identify potential candidates for future growth.
A lower P/B ratio could mean that the stock is undervalued
Book value - It is the total value of the company’s assets that share holders would receive if a company closed down.Like the PE, the lower the PB, the better the value of the stock for future growth. Some of the investors become quite wealthy by holding stocks for the long term of such companies whose growth is based on their businesses instead of market and one day when every one notices this stock the value investor’s pockets are full of profit.
PB ratio is calculated as
PB ratio = Share Price / Book Value Per Share.

Understanding Dividend Yield
If you are a value investor or looking for dividend income then you should look for Dividend Yield figure of the stock.This measurement tells you what percentage return a companies pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent. You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price.
That is Dividend Yield = annual dividend per share / stock's price per share
For example, if a company’s annual dividend is RS 1.50 and the stock trades at RS 25, the Dividend Yield is 6%. (RS 1.50 / RS 25 = 0.06).

Understanding Return on Equity - ROE
Return on Equity (ROE) is one measure of how efficiently a company uses its assets to produce earnings. The healthy companies may produce an ROE in the 13% to 15% range. To get better view Compare Company’s in the same industry/sector.
ROE - It is calculated by dividing Net Income by Book Value.
Note - While ROE is a useful measure, it does have some flaws that can give you a false picture, so never rely on it alone. For example, if a company carries a large debt and raises funds through borrowing rather than issuing stock it will reduce its book value. A lower book value means you’re dividing by a smaller number so the ROE is artificially higher. There are other situations such as stock buy backs that reduce book value, which will produce a higher ROE without improving profits. It may also be more meaningful to look at the ROE over a period of the past five years, rather than one year.

Debit Ratio
This is one the very important ratio as this tells you how much company relies on debit to finance its assets.The higher the ratio the more risk for company to manage. So look for company’s having low debit ratio.
Generally look for ratio less then 1.
If company has fewer debits then company can make more profit instead paying for its debits like interests rates, loans etc.

Company’s announcements
Always keep a close watch on stocks you are interested to buy or you already bought for any mergers, take over’s, acquisitions, stake sells, new product launch etc. This would make the major impact on company. It’s very important point.
For live market news and latest happenings Please CLICK HERE.


Last but not Least
Check out company’s PAT (profit after tax) of every quarterly if you are short term to mid term trader and if you are long term investor then check out its yearly PAT. It should be in consistent growth

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TECHNICAL ANALYSIS:Basics

The Foundation of technical analysis is the chart.

Charts
Mainly there are 2 types of charts
Line Chart and Candlestick Chart

Line charts
A chart shown below is the Line chart is the simplest type of chart.
As shown in the chart the single line represents the stocks closing price on each day. Dates are displayed along the bottom of the chart and prices are displayed on the side(s).
Line charts are typically displayed using stocks closing prices.

Candlestick charts
A candlestick chart displays stocks open high, low, and closing price.
These type of charts are the most popular type of all charts.
As shown below the top of each vertical bar represents the highest price of the stock and the bottom of the bar represents the lowest price of the stock it reached on that day. A closing price (last price) is displayed on the right side of the bar.
The red bar indicates that stock has closed lower then its open price and white bar indicates that the stock has closed above its open price. At the bottom you can see time frame.

Support and Resistance
Support and Resistance prices are very important in stock market and in technical analysis.
Support - The support level is considered when the stock is falling down. The support is the level at which the stock price gets support when the stock is falling down, and if the support breaks then that stock may witness further down movement.
Resistance - The Resistance is taken into picture when stock price is moving up. The resistance level is the price at which stock price get stoppage and if this stoppage/resistance breaks then further upside is expected in that stock price.
Generally, stocks comes to support and resistance points and get constant before further movement and further movement either down side or upside depends on buyers expectation and other technical aspects.
The breaking of support and resistance levels can also be triggered by fundamental changes, and that is up to investor expectations (fundamental changes like changes in profits, expansion, takeover, management etc).

Supply and demand
There is nothing strange about support and resistance levels. It is just supply and demand.
The supply is the number of shares that sellers are willing to supply (sell) at a given price.
The demand is the number of shares that buyers are willing to buy at a given price.
The investor expectations keeps on changing and so do the prices of stocks.
A breakout above a resistance level is evidence of an upward move as more buyers (demand) are willing to buy at higher prices. Similarly, the failure of a support level indicates that more supply (seller) is available and ready to sell at lower levels.
The Basic foundation of technical analysis tools is in the concept of supply and demand. So Charts provide us the best view and analysis of these levels in action.

Traders Regret (unhappy) Level
After the break out of a support/resistance level, it is common for stock traders to think on the new price levels, whether this price is suitable or not which results in further upward or downward movement. So in other words we can call this as traders regret. So due to this the price may come back to support/resistance level.
In such scenarios one of the two things can happen. Either the stock prices will move back to their previous level OR investors/traders will accept the new price and the stock price will keep moving up in the direction of breakout

How to understand what is going to happen and when?
A breakout generally happens with the support of huge volumes. If the price breaks through the support/resistance level with a large increase in volume and the traders regret period is on relatively low volume then this indicates that the new price up lift will keep ongoing.
Conversely, if the breakout is on moderate volume and the traders regret period is on increased volume then this indicates that very few investor expectations have changed and hence return to the original price.
Changes in price are the result of changes in investor expectations of the stocks future price.

Trends
In the earlier chapter, we saw how support and resistance levels can be penetrated by a change in investor expectations which results in shifts of the supply/demand and hence change in stock price. This type of a change is always based on News.
In this TRENDS section, we will see what is trend and how it influences stock prices.
A trend represents a consistent change in prices. A trend is different from support/resistance levels. Trends represent change, whereas support/resistance levels represent barriers to change.
Upper Trend = A rising trend is defined as stock prices keep touching higher prices. A rising trend can be thought of as a rising support level and the bulls are in controls which are pushing the stock prices higher and higher.
Falling trend = It is defined as stock prices keep touching lower prices. A falling trend can be thought of as a falling resistance level and bears are in controls which are pushing the stock prices lower and lower.
The break out takes place when investor’s expectations change in support with increase in volumes.
As in support/resistance, in trend lines also Volumes plays a major role in continuing the trend or in break out of the trend.

Moving Averages
Moving averages are one of the oldest and most popular technical analysis tool. This section describes the basic of moving average and interpretation.
Nowadays you get moving averages readily available on most of the websites.
To brief you moving average is calculated by adding the closing prices of a stock for most recent 15 days and then dividing by 15 the result what you get is the 15 day moving average.

How to trade on moving average
Suppose If the stock price is above its 25 day moving average, it means that investor's current expectations (the current price of the stock) are higher than their average expectations over the last 25 days, and that investors are becoming increasingly bullish on this stock and result is that the stock price may go up.
Conversely, if today's price is below then its 25 day moving average, it shows that current expectations are below average expectations over the last 25 days and this may bring stock price lower.
The moving average is used to observe changes in prices. Investors typically buy when a stock price rises above its moving average and sell when the price falls below its moving average.

Indicators
Indicators are used to predict or analyze future changes in stock price.
There are hundreds of indicators but in this section we will discussed the indicators which are most widely used and important ones.
MACD
This is one of the widely used indicator. MACD stands for Moving Average Convergence Divergence.
This indicator is based on moving averages
Nowadays MACD is readily available on any web sites. No need to sit and calculate. But just to understand let us brief about it.
The MACD is calculated by subtracting a 26-day moving average (long term) of a security's price from a 12-day moving average (short term) of its price. The result is that MACD is an indicator that goes above and below zero.

How to trade on MACD indicator?
Have a look on following chart of MACD -
Red line is short term moving average and blue line is long term moving average.
When the short term moving average crosses above the long term moving average (as shown in following chart) in the upward direction, it means investor expectations are becoming bullish and there may be rise in stock price. As it is shown in following chart with green lines how price increases.
When the short term moving average crosses below the long term moving average (as shown in following chart) in the downward direction, it means investor expectations are becoming bearish and there may be decrease in stock price. As it shown in following chart with red lines lines how orice decreases

Relative Strength Index (RSI)
The RSI is another one of the most used and well-known leading momentum indicators in technical analysis. The main use of RSI is used to find whether the stock is overbought or oversold.
The RSI indicator is plotted in a range of between 0 and 100. If RSI is reached above 70 then it is considered that stock is overbought and if it reaches below 30 then it is considered that the stock is oversold.
The bullish signal

How to trade on RSI Indicator
Basically the RSI is a price-following indicator used to look for a divergence in which the stock is making a new high, but the RSI is failing to exceed its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and starts falling.
To put more light, have a look on following chart.

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PIVOT,SUPPORT& RESISTANCE:Intraday Trading

Pivots, support and resistance are based on the prior day's high, low, and close. These values suggest where the commodity will pivot up or down and hit levels of support or resistance. Below we will show you how to calculate pivots, support and resistance and suggest ways to use them in your trading.

Before we get into how the levels are calculated, let's briefly discuss support and resistance. These can best be understood using the analogy of jumping up and down in a high-rise building. The floor beneath your feet is your "support" and the ceiling above is the "resistance." You would encounter resistance as you hit the ceiling and support as you landed back on the floor. If the floor gave way, the next lower floor would be the next support level. If you continued jumping, the ceiling above you, which used to be the old floor (prior support), would now be resistance.

For instance, suppose a market trades between 90 and 100 for some time. At 90 buyers would be expected to come into the market as prices are perceived to be cheap. By the same token, at 100, sellers would be expected to come into the market as prices are perceived to be expensive. Once the support (90) is broken decisively, the target for the commodity then becomes the next level of support. Also, the former support level becomes resistance (and vice versa). This is only natural because those who bought the commodity at the original support level (90) may be looking to get out at breakeven.

Support and resistance levels are normally found through chart analysis. If a market trades at a certain level for some time (i.e., bases) and then begins to rally, that level will provide support, should the market come back in. On a smaller scale, pivots, support and resistance levels attempt to project where intraday support and resistance will likely occur based on the prior day's range and close.

The math

To calculate the pivot point, support and resistance levels for the next trading day, you need today's high, low and close. The pivot point is simply the average of the high plus low plus close, or (H + L + C)/3. Support level 1 is calculated by multiplying the Pivot by 2 and then subtracting the day's high. Resistance level 1 is calculated by multiplying the Pivot by 2 and then subtracting the day's low. Finally, the secondary support (S2) and resistance (R2) levels are calculated by using the numbers (P, S1 and R1) created in step one. These are the calculations:

Pivot (P)	= (H + L + C)/3
Resistance level 1 (R1)	= (2*P) - L
Support level 1 (S1)	= (2*P) - H
Resistance level 2 (R2)	= (P - S1) + R1
Support level 2 (S2)	= P - (R1 - S1)

For example, On April 8, 1999, the June S&P futures traded as follows:

High	= 1357.00
Low	= 1331.00
Close	= 1355.60

The pivot, support and resistance levels would be:

Pivot (P)	= (1357 + 1331 + 1355.60)/3 = 1347.87
Support 1 (S1)	= (2 * 1347.87) - 1357 = 1338.74
Resistance 1 (R1)	= (2 * 1347.87) - 1331 = 1364.74
Resistance 2 (R2)	= (1347.87 - 1338.74) + 1364.74 = 1373.87
Support 2 (S2)	= 1347.87 - (1364.74 - 1338.74) = 1321.87

These levels are illustrated in Figure 1.

Figure 1. Source: Omega Research

Trading the Pivots, Support and Resistance

Based on an article written by William Greenspan,¹ the general idea behind pivots is to go long above the pivot and short below the pivot. Greenspan also notes the mode of the market (bull or bear) should be used when deciding whether to go long or short at the pivot point. In addition, the first time the pivot point is violated (to the upside or downside) is the most important crossing of the pivot. Subsequent crossings are less meaningful.

Trading support and resistance levels

The interpretation of the support and resistance levels can be used for profit targets and setting stops. If you trade off the pivot point, then you might look to begin taking profits on the long side at R1 and profits on the short side at S1. The secondary profit targets would then be R2 and S2.

Breakout traders may look to go long if a market can break through R1 with a target of R2 (or short the market if it falls through S1 with a target of S2). Because resistance becomes support once it is violated, and vice versa, you also could place stops near the breakout level (R1) for longs and near breakdown levels (S1) for shorts. Countertrend traders may look to fade (go against) the market by buying at support levels (S1, S2) and sell (or take profits) as the market approaches resistance levels (R1, R2).

Referring to Figure 2, those who go long or short at the pivot point (P) may look to begin taking profits at support one (S1) for shorts or resistance one (R1) for longs. Countertrend traders may look to go long as S1 is approached and look to go short (and/or take profits) as R1 is approached. Breakout traders may look to go short below the violation of S1 (A) with an initial profit target of S2. By the same token, they would look to go long as R1 is broken (B) with a profit target of R2.

Figure 2. Source: Omega Research

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Because pivot points can potentially generate numerous trade signals on any given day, they should only be considered by the most active traders. (This is why they are popular among floor traders, where execution is fast and transaction costs are small.) Less active traders may consider using bigger-picture technical analysis to determine if a market is range-bound or in a longer-term trend.

For example, breakout traders may want to avoid trading until they have a strong market bias (trend) and then use the pivot points, support and resistance as entry and stop points. Likewise, contrarian traders may want to wait until the market is reversing or range-bound before fading the market through support and resistance. In addition, bigger-picture systems, set-ups or patterns can be used as a reason to be long or short a market, and the pivot points, support and resistance can be used to set entry points and protective stops.

Other considerations

Markets with wider ranges tend to generate more meaningful numbers than those with narrower ranges. Therefore, use of pivot points, support and resistance levels would most likely work better in markets such as the S&P futures, Dow Jones Futures or T-bond futures, and would be less meaningful in markets like corn or sugar, which tend to trade in narrower ranges.

Summary

Pivots, support and resistance are calculated based on the prior day's high, low and closing price. Active traders look to go long above the pivot point and short below the pivot point. The support and resistance levels can be use for profit taking or initiating trades. Less active traders can use bigger-picture technical analysis to help establish a market bias and then use the pivot points, support and resistance to help them enter and manage a trade. Finally, markets with wider ranges tend to provide more meaningful numbers than those with narrower ranges.

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