How To Perform Fundamental Analysis of Indian Shares?

In previous blog “How to perform Fundamental Analysis in share market” you have seen how valuation of equity shares is done using –

Present value model

Relative value model

Asset-based model

How To Perform Fundamental Analysis of Indian Shares

Moving ahead in this blog we will see how fundamental analysis can be done by going through Financial Statements.

Valuation through Financial Statement

Introduction – Financial statements are one of the important indicators and basis of all business. From which sources the company is generating income, what are its expenses, how efficient is it in using funds, debtors and creditors, assets and liabilities, profit and loss etc. These statements are presented in annual reports of the company vis-à-vis income statement, balance sheet, and cash flow statement. One can also get an overview of Indian stock market and the upcoming trends of sectors.

  1. Income statement

One can know income (revenues) and expenditure for a period of one year through income statement of the company. Profit generated can be arrived upon by deducting expenses from income.

Stability and future growth potential of income and expenses should be looked into while analyzing the income statement. One should analyze a company from the income generated through its core business. Income so generated will be stable and truly represent company’s efficient operations, and not through its income from other sources. Income from other sources cannot be stable.

If income is the important part of the business so are its expenses. One should look into categories of expenses made by the company and their recurrence and is it at its minimum level. They should be of necessity and not wasteful in nature.

  1. Cash flow statement

Cash flow in and out of the company shows the liquidity of the company. Company activities are divided under three heads – operating, investing and financing. Companies will be best placed if they can generate enough cash from operations so as to finance their investing activities. That is able to generate their own funds without depending on external sources for financing.

  1. Balance Sheet

To make money in Indian stock market one should minutely go through the balance sheet, profit, and loss account of peer industries in that sector. The balance sheet reflects the state of assets and liabilities of the business entity at a particular date of time (usually year-end or quarter end) and not over a period of time. It gives a snapshot of year-end and not the video of the whole year.

The income generated from assets should be more than the amount the business has to pay as liabilities than only it will make a profit.

You should try to figure out from balance sheet the nature of assets and their future income-generating capacity, and whether the debt is sustainable or not. If the debt is high and beyond the company’s capacity to repay than it is in the dangerous position. It is better to sell shares of such company, make profit or book loss earlier and exit.


Why should you diversify your share portfolio?

Dictionary meaning of diversification is – having variety of character or form or components; or having increased variety

It is a familiar term for many investors. In a nut shell “Do not put all eggs in one basket”. An investor diversifies his portfolio as a vital part of financial planning and also to maximize return on capital. One can diversify his investments into different shares or different asset classes like real estate, bonds, gold, bank deposits etc. When one asset class fails to give proper returns it is balanced by another asset class. For example, when stocks are moving down gold moves up and vice versa.

diversify investment portfolio

We will see the advantage of diversification and how we can profit by diversifying our capital and minimizing (containing) our risk.

  1. Economic crises – Portfolio diversification can prevent you against the risk of economic crises (mostly during external aggression or war). When financial market crashes (Lehman Brothers) suddenly assets like gold are seen as safe heaven to park your investments. And when the bull market is on run assets like stocks give a good return on your investments as compared to gold. So if you have diversified into gold and shares your loss in one asset class is covered up by another asset class. Diversification can be used as a safety net.
  2. Tax advantage – It is a great way to save taxes on profit earned. Investment in stock for more than one year is not taxed. Similarly, there are tax saving mutual funds (3 years lock-in period). Also, deposits in PPF (deposit, accrued interest, and withdrawal, 15 year period) are also tax-free to the certain extent. So diversifying your portfolio into stocks, mutual fund, and PPF (and many other) you can save on tax from your investments.
  3. Sectorial advantage – When the government announced schemes/policy like home for all, affordable housing, decrease in housing loan interest rates, etc construction sector will get the boost. As part of a diversified portfolio if you have shares of companies dealing in construction and allied field you will get good returns on investments. Trump’s announcement gave the boost to American IT sector companies and demoralized Indian IT sector. How to make money in Indian stock market and in which sectors to invest in so as to diversify your risk to the minimum.

You can diversify your share portfolio across various sectors like banks, cement, automobiles, pharma, telecom, energy, IT, FMCG, consumer goods, metals, media, and entertainment etc, and also across large, mid. small micro and mini caps, that is market capitalization. See Indian stock market overview for more sectorial details.

  1. Overexposure – One should not be overexposed to one sector or asset class. Say you keep on regularly buying shares of one company says ABC which is in pharmaceutical sector deriving most of its revenue from the USA. Now USA changes its policy and ABC cannot sell to the USA and suffers the huge loss. Since you have been accumulating shares of ABC for a long time your return on investment wipes out. There are many myths about Indian stock market which should be dispelled among the general public. Across asset class, those who have invested their lifelong income only into reality, because of demonetization, RERA, other policy have suffered a huge loss on their returns. Had the investor diversified into shares, gold, bank deposits etc. he would have lessened the loss on return. One should know when to sell shares to make profit.

Purpose of diversification is to minimize risk and provide meaningful gain, so as the financial goals are achieved and can have a comfortable retirement and a life one dreams of.

How to control investment loss in share market?

Everyone knows that investing is buying shares at the low price and selling it at the high price. But everyone forgets that it is not possible consistently, and practically not possible to time the market.

How to control investment loss in share market

Emotions sway our judgments, and we cannot take losses easily. Losses not only bring us financially down but also hurt our egos. Though every time we sell our stocks which have appreciated in value and book profit, but whenever the stocks dive we hold on to it thinking that it will appreciate sufficiently and we will not incur any loss (and neither profit), this way we wait and then come to know that our returns are not even the fraction of our purchase value. You can see there are many benefits of intraday trade

This situation can be virtually avoided or loss impact can be lessened. The best way is to trade in a disciplined way and adopt profit/loss plan. We will discuss a strategy of this profit/loss plan.

  1. Introduction to profit/loss plan

Profit/loss plan is overlooked by most of the investors and day traders. It sets the upper gain limit and lower loss limit. In other words, the upper limit is maximum gain and the lower limit is the maximum loss (usually called stop loss) an investor can withstand. Limiting the losses is a very important part for an investor which has an effect on overall portfolio and hence this plan is one of a crucial part while making a sound investment strategy.

Everyone (including professional investors) make mistake while picking up a stock and lose money. But experienced investors have the ability to recognize their mistake, and learn from their mistake, for their future stock picking.

Profit/loss plan helps you to separate your emotions from your investing strategy, once you recognized your mistake. If you are not too possessive (emotional) of your gains and see to it as increasing your cash flow you will not be sad of your losses and therefore you can control them. A proverb in this context goes like this “be neither proud of your success nor sad of your defeat”.

  1. Planning your profit/loss plan

First and the foremost thing one should set a limit of maximum gain, and maximum loss that you can withstand for your investment. This maximum and the minimum limit will vary from stock to stock. Say for large caps (which are less volatile) it can be 10 percent (gain and loss) in a year, and for small caps, you can keep 20 – 25 percent gain and 10 percent loss limit. Similarly, you can limit for mid caps too. Each stock should be analyzed on an individual basis. Go through Indian stock market overview to know what range is large, mid and small caps are.

You can use fundamental or technical or both analyses to determine the upper and lower limits.

One can also take into account the designated performance benchmark for each stock by going through their past performance or index. Your risk tolerance factor should also be taken into account while devising the plan. Are you risk averse or risk lover? Accordingly, you set your loss limit.

  1. Plan Execution

Once you have decided on your gain and loss limits, you have to put your plan into action. Remember you have to sell your stock once it has reached upper or lower limit. A double requirement. Certain brokers will not take two different sell orders for the same script. So the best thing is to trigger sale order once it reaches your stop loss threshold. This ensures that you do not burn a large hole in your pocket. Now if the price appreciates to the upper limit, just change the price of your stop loss order, which in turn activate immediate sale of your stock.

Try to stick to your proposed plan. You will get a heartache that once you sell your stock at the upper limit and share prices keep increasing, but it will be better to sell stock on their way up than to wait and dump stock when the price collapse after its peak. This is a way to make money in Indian stock market.


How to choose the right stock broker?

For investments in stocks, one should have broking account. This can be opened at any brokerage house. Hence one should take almost care with whom you are opening your account with. This impacts your overall returns, ease of doing business with and increasing your wealth in long run through proper guidance and research.

How to choose the right stock broker

There are two types of brokers


A) Full service – They provide a variety of services like buying, selling, IPO investments, demat account opening, research, advice on market trends, retirement planning, tax planning etc. They charge brokerage as a percentage of trade value and are bit expensive compared to discount brokers.


B) Discount – They provide basic necessary facility services like buying and selling. They charge brokerage on basis of per trade and are cheaper compared to full-service brokers.


Before hiring services of any type of brokers, you have to decide how often you will trade. If you are investor and trade very rarely than take services of the full-service broker but if you trade very frequently than better go for a discount broker.


Before finalizing any broker there are certain points you should analyze. One should also have Indian stock market overview before analyzing the broker.


  1. Stockbroker reputation

If the stockbroker is highly experienced and has up to date knowledge of present market trends and inner working, you will be saving quite a few bucks in a long run. To list these types of brokers you can go through official website of SEBI and few stock investment websites. One must also see any issues of complaints or check on their reputation from personal experience of other investors in the market who are/were in contact with the stockbroker.


  1. Brokerage fee

Fees like the commission, account opening, transaction, maintenance, transferring money, etc should be taken into account and should be compared with other brokers along with services in each category provided. These fees are associated while working with the broker. For few transactions per month/year, one should opt for brokers who have low maintenance fee and for very frequent transaction per day/month one should opt for a low transaction fee. These fees will impact your overall returns.


  1. Technology and software tools

Brokerage firms are increasing capacity and speed by using advanced technology. They are also using these technology models and developing such software tools for market research which gives them more and more perfect trends and up to date information on market conditions to take better and reliable decisions. Choosing these types of brokers to help you make an informed decision and because of speed, real-time executing of your trade will be possible (especially for day traders).


  1. Your investing type

If you are a day trader, where your trading volume will be high, a flat fee on transactions which are low should be preferred. Better choose discount brokers.

If you are an investor, who holds his script for a considerable period of time, low maintenance fee brokers should be preferred. Better choose full-service brokers.


  1. Local office

If you prefer to talk to an advisor, face to face or on phone for buying/selling your script see to it that brokerage firm has an office or a franchise in your city/town. But if you are comfortable with doing things on your own then local office or franchise does not matter.  Certain brokers have online facilities can be used from anywhere in India.

How to use derivative market for your advantage?

Different countries have different national currencies which have different values at different period of time. To trade internationally there had to be a system how all these things can be accounted for all these differences.

How to use derivative market for your advantage

A derivative is a contract that is used to safeguard or protect impartially the fluctuating exchange rates of goods that are traded internationally. In other words, it is a “security of the price” that is derived from underlying assets between two or more parties. This contract based upon the assets. Underlying assets can be bonds, stocks, currencies, commodities, interest rates, and market indexes.

There are many kinds of derivatives in existence. Depending upon the type, they are a variety of functions and applications.

Lets us understand this with an example. Let us say a farmer (one party) in July (during sowing season) agrees (contract agreement) to sell 1 metric ton of rice (underlying asset commodity) in October (after harvesting season) to a miller (second party) for Rs.32,000/- (price consideration) per metric ton. Current price being Rs.35,000/- per metric ton. Now if by October per metric ton of rice costs Rs. 33,000/- Still the farmer will have to sell at Rs 32,000/- per metric ton. In this case, the farmer was at loss of Rs 1000/- and miller is at a profit of Rs 1000/-. What if October price were Rs. 31,000/- in that case farmer would have made profit and miller would have made a loss by Rs 1000/-.

From the above example, we can conclude that whatever will be the price in open market farmer will get Rs 32,000/- per metric ton and miller too knew that he will buy rice for Rs 32,000/- irrespective of market condition. Both knew their rates in July itself.

Certain types of derivatives are used for hedging against risk on the asset. They can be also used for speculation on the future price of underlying asset.

How can you use derivatives? Futures and options are standardized contracts and can be freely traded on exchanges.

  1. Stocks

One can earn money on stocks which are kept ideal for too long. The advantage of price fluctuation can be taken in this case. Derivative markets allow you to conduct transactions. No need to sell shares physically.

  1. Arbitrage

Taking advantage of the difference in prices in different exchanges is called arbitrage. Benefitting by purchasing low from one exchange and selling at high in another exchange.

  1. Protecting securities

One can protect his securities against fluctuating prices. That is you can hedge your securities against falling market by the products that are offered in derivative markets. They also protect you from the rise in prices if you are purchasing securities.

  1. Risk transfer

This is one of the most important uses of the derivative market. It transfers market risk from non-risk taking investor to risk taking investor. Non-risk taking investors use derivatives to increase their safety, whereas risk taking investor conducts risky business to improve his profit. There are many strategies and products available that help in transferring risk both ways.

Derivative participants, types of derivative contracts, trading in derivative market in another blog.

How to earn regular second income from stock market?

In these days the cost of living is increasing day by day and so is inflation. It is not possible to predict what will be a day to day living costs 10 or 15 or 20 years down the line. To overcome this problem it has become necessary to have a second source of income which can be used to supplement the primary source.

How to earn regular second income from stock market

One of the good sources is to earn money in future through investing in dividend-paying stocks.

Company’s net profit is shared among its shareholders by way of dividend. The dividend is decided by the board of directors and it can be in form of cash payment or as additional shares as bonus shares.

Investing in dividend paying is a time-honored strategy. It can be a plus point for individual investor’s source of income. But an investor should keep on monitoring his plans regularly to avoid big losses and build a regular income.

  1. Dividend-paying stocks

This is the first step. There are many companies that do not pay dividends. So first step is to segregate companies which are paying a dividend and which are not. Secondly, out of dividend paying company segregate which are paying a dividend on regular basis and which are paying once in a while or in a random way or irregularly.

One can get all the required information through internet or business newspaper (where monthly or yearly) information is given.

  1. High dividend stocks

Certain companies share most part of the profit and certain companies even if they had good profit will share the only fraction of their profit as dividends and use the balance part as per the wishes of the board of directors either reinvesting balanced profit to promote further growth or some other use. Boards of directors have a choice of increasing or lowering company’s dividend. One should choose a stable dividend paying company and better still if the amount of dividend paid per share is in increasing order.

  1. Other factors

One should research few other factors before investing in dividend yielding shares.

One should invest in a company that has fewer liabilities or less liability than concerned (peer) industry average.

Go through company’s EPS (earning per share). Compare this EPS with its dividend per share. See to it that company’s dividend per share should be nearly 80 percent of its EPS.

Company’s current ratio should be more than 1 (one). In other words, it has a lot of cash to meet its short-term obligations and is financially sound.

The dividend yield is also one of the good measures that can be taken into consideration before investing. Though it can be poor at times with company’s temporary problems.

How To Perform Fundamental Analysis In Share Market?

Stocks in the share market can be analyzed by fundamental and technical analysis. Fundamental Analysis uses financial reports (balance sheet, profit and loss account etc.), economic indicators, industry comparison and demand of the goods produced to predict the present and future performance of the company and hence to predict the movement of share prices.

How To Perform Fundamental Analysis In Share Market

Once an investor measures out the intrinsic value then the next step is to find in which shares there is much difference between its intrinsic and current market value. So as to say that if there is a wide difference, intrinsic value too high than market value, then there is quite a space for appreciation of shares. In short, the stock is highly undervalued.

In fundamental analysis, it is important to analyze the intrinsic or true value of the share. This intrinsic value is compared with the market value. If the intrinsic value is below the current market value then the investor will not buy the stock as he knows that sooner or later the market share prices will fall, that is the stock is overvalued and vice versa.

Investors like to invest in those companies which are fundamentally strong, which has a good order book, which has good prospects for growth in future and its present stock is undervalued.

Intrinsic value can be found by the fundamental analyzer makes an examination of the future and current, to gauge the holistic health of the economy as a whole.

The fundamental analyst needs few data to come to a conclusion. Firstly previous years data or historical data, secondly data that is available in public domain such as annual reports, and/or press release of the company, and thirdly private information which he gathers from sources inside the company and which is known by the selected few people.

Valuation of equity shares:

  1. Present value model

We all know that the value of money changes with time (usually decreases). In other words, what we can buy today with a certain amount, after 5 to 10 years its value will not the same. Same applies to future income.

To account for this the future incomes is divided by discounted rates and that value can be calculated as of today. Technically it is called time value of money. These calculations include dividend (if any), bonuses, and residual income and free cash flows.

Value the company as the sum of its discounted future cash flows.

  1. Relative value models

The share value of one company should be compared with other companies in same industry or sector. Comparing the market price of shares with peers, along with sales, net income, book value etc. The ratios so obtained are compared and conclusion can be drawn whether the present price is justifiable or not.

Value companies based on the price multiples of their competitors.

  1. Asset-based valuation model

The company is valued based on the market value of the assets and liabilities. Value of the equity can be calculated by subtracting market value of liabilities from the market value of assets. Here while calculating liabilities equity is excluded. One should bear in mind that when calculating assets, they should be tangible long-term ones.

Value of a company = Market value of Assets – Liabilities

More in further blogs….

Best 5 stock exchanges in India where you can invest your money

Stock exchange or bourse or a place of exchange where stock brokers and traders can buy/sell tradable financial assets like bonds, bank notes, debentures, deposits, notes, commercial papers, shares of stock, etc. Stock exchanges also provide facilities for issue and redemption of tradable financial assets (securities), payment of dividends, etc.

Financial instruments traded on a stock exchange are stock issued by listed companies, unit trusts, derivatives etc. Exchanges are places where there is a continuous auction taking place, where buyers and sellers complete the transaction at a location called floor of the exchange.

Major stock exchanges of India.

1 Bombay Stock Exchange

Bombay Stock Exchange

Popularly known as BSE, it was established as The Native Share & Stock Brokers’ Association in 1875 under a banyan tree in front of Town Hall (presently Horniman Circle). As the number of brokers kept increasing they shifted to another banyan tree at a junction of Meadows Street (presently Mahatma Gandhi Road). At present, it is located in Phiroze Jeejeebhoy Towers, Dalal Street, Fort, Mumbai.

Its vision is “Emerge as the premier Indian stock exchange with best-in-class global practice in technology, products innovation, and customer service.”

It is one of the oldest and leading stock exchanges in Asia.

  1. National Stock Exchange

National Stock Exchange

Popularly known as NSE, it was established in 1992 and started its operation in 1994 with the launch of the debt market. Its corporate office is located presently at Exchange Plaza, C-1, Block G, Bandra Kurla Complex, Bandra (East), Mumbai with branch offices at Kurla (Mumbai), Chennai, Hyderabad, Ahmedabad, Delhi, and Kolkata.

Their vision is to constantly lead, to establish global presence, and facilitate the financial well being of people

It is one of the leading stock exchanges.

  1. Multi Commodity Exchange of India Limited

Popularly known as MCX, it was established in 1992 and incorporated in 2002 and started operations in November 2003. It is situated at CTS No. 255, Exchange Square, Suren Road, Gundavali, Chakala, Andheri (East), Mumbai.

Their vision is to unify Indian commodity market which will be driven by market forces and that continually provides level playing field for all stakeholders that are a primary producer to the end-consumer, correct the historical aberrations in the system, leverages the technology to achieve best efficiencies and ultimately lead to a common world market. The brand image of MCX, that identifies itself as the Exchange of choice, not only by direct participants in the commodity ecosystem but also by the general public at large.

  1. National Commodity & Derivatives Exchange Limited

Popularly known as NCDEX, It was incorporated in 2003, and started its operation from 2003. It is situated at 1st floor, Akruti Corporate Park, Near G. E. Garden, LBS Marg, Kanjurmarg (West) Mumbai. Branches at Santacruz (Mumbai), Delhi, Kolkata, Hyderabad, Ahmedabad, Jaipur, and Indore.

  1. Other stock exchanges

There are other stock exchanges like Bombay Commodity Exchange, Calcutta Stock Exchange, Cochin Stock Exchange, Inter-Connected Stock Exchange of India, OTC Exchange of India, Pune Stock Exchange etc.

How To Learn Technical Analysis Through Charts?

Graph or chart is a graphical representation of data. They are often used for the large quantity of data which is easy to understand. It is often used in varieties of field and situations.

As far as stock market charts are concerned they are mostly used to represent series of prices over time. They show share price movement for a day, or 5 days, one month or one year. Usually, the price is denoted on Y axis and time on the X axis.

Analyzing charts used in Stock Market - An Overview

Though there are many types of charts, generally used charts by traders and investors are of four types.

  1. Line charts

They are one of the basic types of a chart which is simple and easy to understand. They depict only the price movement (closing price) over a set of the time period. The line is formed by connecting closing prices of each day. Since they are simple they do not provide any detail information which can be useful for an intraday trader. Hence they are not of much use to a day trader. Reading the charts one can get information on trends, which way the market is moving.

  1. Bar charts

They give more information than line chart. One can get information regarding opening price, closing price, highest and lowest price in a period (day, week or month). They are made up of series of vertical lines depicting price range for a given period. A horizontal dash on each side depicting opening and closing price. Dash on left side depicts opening price and on right side depicts closing price.

  1. Candlestick Charts

These charts are used more by day traders. These charts give more information than line and bar chart and hence are more popular with traders and investors. They are the more advanced form of the bar chart, in a way that colored vertical lines show whether the share ended higher or lower.  The width of the bar shows the difference between opening and closing prices. In other words, if the line is thin it indicates there is not much difference between opening and closing and if broad then there is a significant difference between opening and closing.

Candlestick chart conveys information regarding highest/lowest price of the day, opening/closing price, the filled color of the body indicates higher/lower closing, and width indicates the difference between opening/closing.

  1. Point and Figure Charts

These charts are mostly used by long term investors for determining entry and exit points. They are not too popular. The closing price is given more importance.  It shows the larger picture and is not much affected by minor ups and downs. These charts are made up of series of X’s and O’s. Charting X’s shows upward price trends and O’s show downward price trends. They are marked in a box. Each box represents price scale. These price scales adjust depending upon the price of the share. Support and resistance levels are the two important principles for further study.

How to make money in share market without investment?

Many individuals cannot resist the temptation of riding the wave of the bull market. If you have all the knowledge and required skills that one needs to invest and trade in the stock market, then you can make money in share market without investment. In other words, you have the talent but no funds for investment.

How to make money in share market without investment.

Here are some methods, you can choose the appropriate method which suits you most, either full-time or part-time. Most of the methods will help you earn from someone else’s stock investment.

  1. Job at stock brokerage house

In the initial period, you may have difficulty in acquiring clients. So the best way is to join some stock brokerage house. This will give you experience, with your communication skills you can be in good books of your present clients which will help you in your future endeavors when you start on your own. Your post can be customer service executive or relationship manager.  Your role will provide your clients with timely and valuable services as to in which stock to invest in. It will be mostly one to one contact.

  1. Providing investment tips

There are many new and unskilled investors or traders who need proper guidance in the stock market before trading. You can become their stock analyst and manage their portfolio. You can start providing best investments tips. These investment tips will help them to tackle market speculations. You can also help them in identifying multi-bagger stocks, chose right IPO, MF or bonds. This can be a paid subscriber service through SMS, E-mails, or your own website etc.

  1. Sharing of profit/loss

There is a different strategy for day to day share trading and long-term investments. If you have skill sets to track and trade stocks than you can do this for your clients. You can go in for a written agreement for sharing of profit/loss with your client for long-term investments. Once you are successful in generating regular profits, you can broaden your client base, that is, have a written agreement with multiple clients on same profit/loss sharing basis.

  1. Become a broker or sub-broker

A stockbroker is a professional agent who executes buy and sell orders and is a trading member of the stock exchange. He gets his fee or commission for his services. He passes the exam to become one or purchases the ticket to become one.

Sub-broker works in assisting the broker but is not a trading member. He is required to obtain a registration certificate from SEBI in India. A stockbroker can have many sub-brokers assisting him. Usually, sub-brokers are in direct touch with the clients.

  1. Paid teaching classes

You can start your classes teaching eager new and unskilled investors and traders for making strategies for stock trading and investments. You can provide them with good solutions, so as to how to use their money to gain better returns in bull and bear market phases. Many can be first-time investors too. You may have to invest money for class rent and other office expenses.

There are many other methods which we will discuss in the forthcoming blog.

You will have to read the newspaper regularly, follow minutely news on TV, internet etc. and upgrade your knowledge regularly and sharpen your information gathering skills, so as to give the best advice to your clients.