Willing to invest in the stock market but have no idea? If you are a beginner in the stock market but want to venture into this field you need to understand how the stock market functions.
The purpose of your understanding could be different maybe you are a beginner, working as a broker, or as an investment advisor.
Don’t trade in the stock market unless you have a basic idea of how to stock market performs. Otherwise, you will only see losses.
Here are some of the things that you need to understand when you are willing to invest in the stock market-
Know about the company
Before buying stocks you must know in detail about the company. There are lots of things to know such as-
- About the company and what it manufactures or services provided by the company
- About the key persons in the company
- Fundamental growth of the company
- Carefully observing the balance sheet of the company, look at the profit margins, cash flow statements.
- There are certain ratios to see such as EPS or earning per share, P/E ratio or price to earnings ratio, etc.
- Knowing about the intrinsic value of the company
It is the method of price forecasting and price movements of a stock based on the past behavior of a stock.
There are many tools used for technical analysis such as understanding behavioral economics, trends of consumer patterns, and quantitative analysis. The technical analysis finds out whether stock prices will push up or go down based on current price and volume.
This is the research you do when you look at the company’s statements. As mentioned above these statements are profit and loss statements, balance sheets, cash flow statements.
This analysis helps you to determine the intrinsic value of an asset. It is based entirely on the company’s performance such as sales, earnings, EBITDA.
Importance of finding out the ratios-
Earnings Per Share (EPS)
As understood by the name of the ratio it is the amount of earning for the company per share.
The company calculates this by dividing the total income in a financial year by the total number of outstanding shares of the company.
The EPS being positive is a good indicator for the company. If the value of EPS is zero or negative that means the company has suffered loss and has more outstanding shares and this is concerning.
Price to Earnings ratio (P/E ratio)
This can be found by calculating the current price of the share and dividing it by the EPS.
Higher the P/E ratio the more amount the investors have to invest in buying a single share.
Although this means more money spent from the investor point of view, a company with outstanding growth and future prospects has a higher P/E ratio. The investors are also willing to invest in such stocks despite the high P/E ratio, attracted by the future earning potential of the company.
This is one of the important parameters to judge the financial health of a company.
Simply put this is the amount of total debt of a company divided by the amount of total shareholder equity.
The lower the debt-to-equity ratio for a company the better it is for the company and the investors.
There are other details that you need to observe such as total capital of the company, percentage of shareholder’s capital, and promoters capital, if there are any pledged shares by the promoters, percentage of shares held by the FIIs, mutual fund companies, and insurance companies.
To learn the basics of the stock market there are lots of different sources that you can take help of. You can join offline or online courses, learn it from various sources on the internet, follow various blogs, watch YouTube videos, etc.