ANALYZING STOCKS – FUNDAMENTAL ANALYSIS

This type of looking at the problem consists of selecting the stocks based on information regarding the financial situations of the company, its area of activity, and also on comparing the price with other similar ones from the market. The fundamental analysis is useful when investing in stocks for a long period of time (at least a year). Those who use this type of analysis have themselves different objectives of evolution and profit, using mostly certain criteria.

Buying stocks – based on the fundamental analysis

Certain criteria are to be taken into consideration. There are three important categories that can be used alone or in combination.
1. Value investing: Some long term investors are determine the value of the business they are placing their money in, searching to buy the stock at the greatest discount possible compared to the calculated value. In other words, the question here is how much do the companies’ goods will be worth if they were to be sold? An estimated answer can be given evaluating active elements they posses (such as lands, fixed transportation means, floating actives) at a correct market price, adding to that the funds the company has. Investors who use this criterion think that the respective business has a future in efficiency if the stock holders are to be chanced, if the economic environment is changed and improved or any other major alteration, at which moment the company would value at least three times as much as in the beginning.

2. Growth Stocks are used by the investors preoccupied with identifying companies belonging to areas that tend to increase and to expand. They are focusing on the rhythm of evolution of the business figure and profit, determining the growth rate in real terms. This can be forecasted upon the future, but it is necessary to also identity the economic and legislative risk factors that could appear and alter the graph. Also investors reflect upon the quality of that company and their advantage or disadvantage compared to concurrent companies. Usually, growing companies don’t give dividends, the profit remaining just the difference between the buying price and the selling price of a stock. These companies are the most risky ones, especially because of the lack of dividends, which could’ve added some stability.
3. Income Stocks: Income stocks are dividend stocks. Investors prefer these stocks because they give them some stability and a clear benefit. These stocks are recommended if the stock price is lower than the estimated dividend price, and if they belong to mature companies. Usually, when investing in such stocks you are making a long-term investment.

Selling stocks – based on the fundamental analysis

A stock has to be sold if analyzing the situation fundamentally when the answer to the question Why am I buying this stock? is not true anymore. The following situations can also be reasons to sell:
– a newsflash about a company or about the entire economic area modifies initial expectations
– the price for the stock has been over evaluated
– over evaluation can be determined by comparing it with the ones from other companies

Listing Gains

IPO are generally priced at a discount, which means that if the intrinsic value of a share is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100. The difference between the two prices is known as Listing Gains, which an investor makes when investing in an IPO and making money at the listing of the IPO.

Types of Risk

Risk is a very important factor to be taken into consideration when deciding to invest in the stock market. Any investor thinks that big profits are a good thing and risk is a bad thing. The thing is that usually risk and profits go hand in hand, they are even some times directly proportional (the bigger the risk, the bigger the winning possibility).It’s known that investments on the stock market are risky investments, but building up an equilibrated portfolio can limit the risk. Its important to understand what you are dealing with and risk can be broadly categorised as follows:

Company RISK

Every company has its own risk that varies, of course, from organization to organization. So, we can find companies with low risks which usually are big stable companies, with shares worth a lot, and companies with a big risk factor or companies that never paid their dividends, that belong to an unstable economic area and their shares are worth less. To decrease the risk, even when the only intention is to speculate a little, it is recommended to invest part of the capital in low risk companies and the other part in high risk ones.
Studies conducted over the America market show that having a portfolio of at least 10-20 different types of stocks can almost eliminate the company risk.

Sector RISK

Diversifying your portfolio doesn’t only mean to own stocks from different companies, but also to own stocks from different economic sectors. The sector or industry risk threatens companies that produce similar or interdependent products, so that the investors in a certain sector have to be aware of the high risk factor. So, investing in independent sectors can be a method to diminuate the sector risk, with the possibility of conserving the initial value of the portfolio.

Market RISK

The market risk is also called the un-diversifying risk, because this risk can not be avoided no matter how many different stocks might be present in the portfolio.

In any country there are political and economical issues that can make the prices of stocks to be badly predicted and so the market risk increases. This is the only actual risk. All others can be avoided easily: lose a little with one company, but win a lot with all the others.

The market risk is to be anticipated sometimes if analyzing the situation of the country and economy itself. First determine expected political or economical changes. Then try to guess other unexpected measures that might occur. And only after that you will have to ask yourself in what way your companies will be influenced, witch sectors will grow and which fall.