Stock market analysis
There are two ways to pick stocks the top-down approach and the bottom-up approach. The top-down approach means selecting a specific country that is experiencing high growth. Then, you choose a sector within that country that is expected to grow in the future. Finally, you pick the best company within that sector. The bottom-up approach involves starting directly with a specific company and then analyzing its industry and the overall economy. When someone recommends a stock to you, it is referred to as the bottom-up approach because you receive a direct tip about a company. Analyzing good stocks in detail takes time. Before investing in any stock, it is essential to understand four things:
1. Business: Understand what the company does and its business model.
2. Financial performance: Analyze the company's financial statements to assess its profitability and growth rate.
3. Management: Evaluate the quality of the company's management team.
4. Valuation: Understand the company's valuation by determining whether it is priced low or high.
Future research: Initially, you need to find out what the company's business is. Without knowing the company's business, it is challenging to predict its future direction. If you don't know whether the market will go up in the future, it will be difficult to hold such stocks. In such cases, investing becomes more like gambling. Here, we use "Tickertape" to filter stocks easily and analyze their fundamentals. As an example, let's consider Vodafone Idea. First, we read the company's financials.
While past performance can be observed, predicting the future requires analyzing the company's financials.
Hence, we examine the company's income statement, where we observe the amount of profit the company earns and the growth rate of that profit. Vodafone Idea's record of the past 8 years shows a declining trend, which we know is due to increased competition. The company has been incurring losses since 2017, having generated its last profit in 2015. If you want to analyze it further, we will look at its balance sheet, where we examine the company's solvency ratio. This ratio indicates how much money the company has and how much debt it still needs to repay. When a company is heavily indebted, the chances of bankruptcy increase. In such cases, your entire investment can sink. This reveals that the company's situation is deteriorating, as it continues to generate losses, and it has to make interest payments each year. Consequently, its equity keeps decreasing, indicating that the company is currently highly risky.
Risk: Risk can be of two types: calculated risk and stupidity. Taking a calculated risk means conducting thorough research, while taking a risk without any basis is simply foolishness. If you don't know how the company's future will unfold, it's better to reject it. However, it doesn't necessarily mean the company will fail in the future; it could potentially generate substantial profits. Nevertheless, you need to consider your own risk tolerance and desired rewards, aiming for low risk and high rewards.
Management: Even if you find a company that appears profitable, you need to read about its past management because a company that has committed fraud in the past might do so in the future as well. Management also plays a significant role in long-term investments.
Valuation:Valuation is a crucial aspect when analyzing stocks. It involves determining the intrinsic value of a company's stock and assessing whether it is overvalued, undervalued, or fairly priced in the market. Valuation techniques vary and can include methods such as discounted cash flow (DCF) analysis, price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and other financial ratios. These techniques help investors understand the relationship between a company's financial performance and its market price. A comprehensive valuation analysis takes into account factors such as the company's growth prospects, industry trends, competitive landscape, and macroeconomic conditions. By evaluating a stock's valuation, investors can make informed decisions about buying, selling, or holding shares, based on whether the current price offers a favorable risk-reward ratio. However, it's important to note that valuation is not an exact science and involves subjective judgments, making it essential for investors to conduct thorough research and consider multiple factors before making investment decisions.
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