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Contributor‘Simplify Finance for Everyone.’ This is the common goal of our team, as we try to explain any topic with relatable examples. From personal to business finance, managing EMIs to becoming debt-free, we do extensive research on each and every parameter, so you don’t have to. Scroll up and have a look at what 15+ years of experience in the BFSI sector looks like.
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One evening, Ramesh, a 30-year-old software engineer from Bengaluru, decided to invest ₹7,000 from his savings in the stock market. He turned to his friend, Anjali, a seasoned investor, and said, "Anjali, I have ₹7,000 and I want to invest in shares, but I don't know how to analyse them. Can you guide me?"
Anjali smiled and replied, "Of course, Ramesh! Analysing stocks is essential before investing. Let's start with the basics."
Stock analysis involves evaluating a company's financial health, performance, and market position to make informed investment decisions. There are two primary methods:
Anjali explained, "Fundamental analysis helps determine a share's true value. Here's how you can approach it:"
Ratio | Formula | Purpose |
Earnings Per Share (EPS) | Net Income / Outstanding Shares | Measures profitability per share |
Price-to-Earnings (P/E) | Market Price per Share / EPS |
Beyond numbers, consider:
Anjali continued, "Technical analysis focuses on price movements and trading volumes. Here's how to get
started:"
Identify the share's direction:
Indicator | Purpose |
Moving Averages (MA) | Smooth out price data to identify trends |
Relative Strength Index (RSI) | Measures speed and change of price movements |
MACD (Moving Average Convergence Divergence) |
Anjali emphasised, "Using both analyses provides a comprehensive view."
Anjali emphasised, "Using both analyses provides a comprehensive view."
Let's apply the analysis to a hypothetical company, ABC Ltd.
Anjali reminded Ramesh, "Analysis is great, but risk assessment is equally important."
Risk Type | Description |
Example
Overall market movements affect stock prices.
Ramesh invested ₹1,000,000 in Nifty 50 stocks in January.
Due to a global recession, the index fell by 15% in three months.
His investment decreased to ₹85,000 by April.
This demonstrates how general market changes impact returns.
Sectorial Risk
The industrial slowdown affects all companies
Evaluate the share valuation |
Debt-to-Equity (D/E) | Total Debt / Shareholders' Equity | Assesses financial leverage |
Return on Equity (ROE) | Net Income / Shareholders' Equity | Indicates efficiency in generating profits |
Current Ratio | Current Assets / Current Liabilities | Checks short-term liquidity |
Shows the relationship between two MAs
Bollinger Bands | Indicates volatility and overbought/oversold conditions |
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He invested ₹50,000 in pharmaceutical stocks in May.
A new government regulation has impacted the pharmaceutical business.
Within a month, the sector index dropped 20%, reducing his value to ₹40,000.
His portfolio was damaged by the industry's overall decline.
Company-Specific Risks
Internal difficulties, such as management fraud or legal
Ramesh purchased shares of a corporation at ₹500 each.
The following week, a fraud lawsuit against the CEO emerged.
The stock fell to ₹320, resulting in a loss of ₹36,000 on the investor's equity of ₹1,000,000.
This was due to risk at the firm level rather than the market.
Difficulty in buying and selling without a major price change
He bought 1,000 shares of a small-cap business for ₹30 each.
Buyers gave only ₹24 per share due to poor volume.
He had to exit at ₹24,000, resulting in a ₹6,000 loss.
Low liquidity made it difficult to sell at a reasonable price.
Her advice was: "Avoid companies with these red flags no matter how tempting they seem."
Red Flag | Implication |
Consistent Revenue declines | Possible business difficulties |
Rising Debt Levels | Financial instability |
Promoter Shareholding Decreasing | Possible lack of confidence |
Sudden Management Changes | Potential internal conflict or crisis. |
After weeks of learning, analysing, and applying both fundamental and technical analysis, Ramesh felt confident. He selected a few stocks based on their strong financials, industry leadership, and upward price tendencies. He did not simply follow stock advice; he made data-driven selections.
Ramesh smiled and added, "Thank you, Anjali. I now know how to properly evaluate equities. "It's not gambling; it's intelligent investing."
Anjali smiled, "Exactly!" Investing is a journey. Continue to study, keep informed, and never panic during turbulent conditions."
Which is better: fundamental or technical analysis?
Both have their applications. Fundamental analysis assists in selecting the proper investment, whilst technical analysis advises on the time of your entry and departure.
How frequently should I evaluate my stocks?
Ideally, you should examine your portfolio every quarter when financial results are announced, or sooner if there is significant economic or company-specific news.
Can beginners rely solely on stock screeners?
Screeners are a good place to start, but you should always read more about reports, ratios, and news before investing.
Is technical analysis beneficial in long-term investing?
While technical analysis is more commonly employed for short-term transactions, it can also help long-term investors identify appropriate entry positions.
How to Guides – Investing, Trading & Wealth Building | ||
