When an investor thinks of investing or trading in any stock. He has to choose from thousands of available stocks in the market. Investors cannot blindly invest in any stock. Investors should analyze the various aspects related to stock before making a final decision. Investors should do a fundamental analysis of stocks before investing. Fundamental analysis is all about studying different fundamental parameters of stock. The investor can check the following fundamentals of stocks, analyze them, and make decisions.
Fundamentals of Stocks: Understanding fundamentals of stocks
Main Factors consider in fundamental analysis of stocks.
1. Market Capitalization:- Market capitalization is the current valuation of the company. It is calculated by the current share price multiplied by the number of outstanding shares. The company’s Market cap keeps changing with the change in its share price. Large-cap blue-chip companies have more Market capitalization than Mid or small-cap companies. Market cap gives you an idea about the size, reputation, and goodwill of the company in the market.
2. Revenue and Profit:- Investors should check the last 5 years’ revenue and profit of the company in which they are planning to invest. This will give investors an idea about the performance and year-on-year growth of the company.
3. Share Price:-Investors should check the company’s last 5 years’ share price movement in the stock market. They should check for 5 years of low and high share prices of the company. Also, compare the initial share price and the current share price of the company. It will give them an idea about the share price fluctuation of the company and help to analyze the yearly growth of the company. Ultimately helps the investor in making buying and selling decisions.
4. Shareholders’ pattern:- Shareholders’ pattern tells us about the ownership holding in the company. Investors should check the shareholder patterns of the company. It will give investors an idea about “who the investors are in the company” and in what ratio they have invested. What is the promoter’s capital holding in the company? Are there any foreign institutions holding shares in the company? What percent of investment is done by Mutual Funds and retail investors? If promoters hold a substantial amount of stake in the company, they will take an interest in making it a profitable venture as their money is at stake. Before investing, Foreign Investors and Mutual Fund Houses make an in-depth analysis of stocks. So, it is good to have foreign investors and Mutual Funds holding the shares in the company.
5. ROE: Return on Equity (ROE) is calculated by dividing the net income of the company by shareholders’ equity. ROE is used to judge the financial position of the company. A higher ROE indicates a better ranking for the company.
6. PE Ration (TTM): Price to Earnings Ratio and TTM means Trailing Twelve months.
The PE ratio is the most widely used in the share market. The P/E ratio is used to judge whether the company’s share price is overvalued or undervalued. The company’s PE ratio is compared with that of the industry’s PE ratio. If the Company’s PE ratio is more than that of the Industry PE ratio, it means the company is overvalued, and if it is less, then it is undervalued. If the company’s PE ratio is more or less equal to the industry’s PE ratio, then the company’s share price is fairly valued.
7. Industry PE Ratio:- It is the average PE ratio of all stocks from any particular sector. For different sectors, different P/E ratio is considered healthy.
8… PB Ratio:- The PB Ratio. The Price to Book Ratio is the ratio of a company’s share price divided by its book value of the company. Any value under 1.0 is considered a good PB value.
9. Book Value: – The amount of money that a company’s shareholder gets in case of its liquidation and after paying all its liabilities is called Book Value. A book value under 1 is considered as good because it indicates the undervalued stock.
10.. Dividend Yield:- The dividend yield is the financial ratio that shows how much a company pays as dividends to its share price per year.
Dividend Yield = Cash Dividend per share / Market Price per share * 100.
High dividend yield stocks are good for investors who prefer short-term gains over long-term capital gains. A dividend yield of 2 % to 6 % is considered a good dividend yield. Investors should not consider it as a single factor while selecting the stock. There are many other deciding factors. If an investor is looking for long-term capital appreciation, then a low dividend yield company is a good option. If the Investor is looking for short-term capital gain, then high dividend yield companies are a better option.
11..EPS:- Earnings per Share. Earnings per share can be calculated by dividing the Net profit of the company by the number of outstanding shares. EPS shows how much money a company makes for each share of its stock.
The higher the EPS number indicates the more profitable the company.
12. Face value:-The original value of stocks is written in its book of accounts and its share certificates. It is also called par value. It is fixed when stock is first issued.
13. Debt-to-equity is the percentage of the total liability of a company (Debt) to its shareholders’ equity. A higher debt-to-equity ratio indicates the company is using more debt funds than equity funds, and a lower debt-to-equity ratio means more equity than debt funds.
All the above fundamentals about stocks can be easily found by following any mobile app or site.
You have to log in to these apps and sites. Register in it with your mobile number and email id. You can easily get the fundamental information about the company. GROWW // ETMONEY // Zerodha are online trading apps, so they require some formalities to register with them. Ample information is available on Google and YouTube to study and cross-check the information
Conclusion:Investors should thoroughly study all the fundamentals of a stock before investing. He should also decide on the goal of his investment. What is the purpose of his investment? The amount of money he is expecting on maturity and the period in hand. He should take the help of online apps and sites to extract the required fundamentals of data about the company. Investors should also try to understand the above fundamentals of the company on their own. Do not rely on any online or offline tips from any source. Investors should consult a professional financial advisor in case of doubt.
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