The Price to Earnings (P/E) Ratio is one of the most widely employed valuation statistic of a company. This important ratio is also referred to as Price Multiple or Earnings Multiple of a company.

Before beginning, you might be interested to read the Part I of this series - What is the P/E ratio ?

In this tutorial, we shall see how we can use this important ratio to valuate the companies or stocks belonging to them.

• Significance of the P/E ratio
• How to use the P/E ratio for investment valuation ?
• Comparing P/E ratios
• Higher P/E or lower P/E ?
• How P/E ratios can be in-effective?

Significance of the P/E ratio ?

• The PE Ratio is the most important of all valuation tools.
• The PE Ratio gives an investor a better understanding of a company’s value.
• Essentially the PE Ratio calculates the “Payback Period” of an investment.
• The Price/Earnings Ratio (”PE”) is used by investors to assess how many years it will take them to get the value of their investment back. P/E ratios are a quick way to sort out the leaders within the same sector.

How to use P/E ratio for investment valuation ?

A low P/E ratio, shows that the company has high earnings relative to the current market price of its stock. Thus it may indicate that the market has currently undervalued the stock. Hence such stocks can be seen as potential buys at its current price. A P/E between 10 and 20 is usually considered reasonable by most investors’ standards.

A two fold advantage is seen with choosing lower P/E stocks by cautious investors:

• If a stock is currently trading at a low market price relative to its earnings, and if the research shows that it is fundamentally in a good sector, then its price will probably eventually go up.
• Again, if the market conditions are very turbulent and if it falls drastically, the price of the lower P/E stocks may not fall as much as the price of the stocks with higher P/E ratios.

Similarly the higer the P/E ratio, the riskier the stock is likely to be. Hence when P/E rises to 50 to 60 or even higher, it clearly indicates that the current price has become unrealistic.

Comparing P/E ratios

It’s usually a practice to make a comparison of the P/E ratios of one company to other companies in the same industry. For example consider two companies A and B, that are both trading at Rs.100 per share. Suppose that company A has got a Rs.10 as its EPS and company B has got Rs. 5 as its EPS. Then we find that Company A has a P/E ratio of 10, while Company B has a P/E ratio of 20. This means that company A is clearly cheaper when compared to company B. If all other factors for these companies are found to be equal, then the investors have to choose company A for investing there money in.

It doesn’t really work out if one makes a comparison of P/E ratios between companies belonging to different industry sectors. Different industries have different average P/E ratios. For example, technology companies may sell at an average of 40 p/e, while textile stocks may only trade at an average of 8. It is very important to understand these differences when comparisons are made. Tech stocks in the past usually had a higher growth rate and thus high returns on equity, while other sectors like textile, or auto ancillaries might trade at a much smaller earnings multiple.

It is also a practice to compare the current P/E of a company with its own historical P/E ratios. This comparison indicates how expensive the stock has become over the past year or any other period for which the comparisons are made. If the current P/E ratio is significantly less than the average of the past P/E ratios for the same company, it could indicate that by historical standards the stock is undervalued.

Higher P/E or Lower P/E ?

It is really difficult, to make a rule on what is high or what is low, for P/E ratios of companies. Companies might have a low P/E for a reason, and the trick is finding out whether that reason is likely to be short-term or permanent. Conversely, not all companies with a high P/E are overvalued. A high P/E says that investors expect the stock to be a strong performer and are willing to pay a premium. A lower P/E might indicate that the market has less confidence in the company’s long-term potential.

How P/E ratios can be in-effective ?

Many believe that a stock should never be bought solely because its P/E ratio is lower. There might be various reasons for why market has discounted the price of the stock currently.

Higher P/E ratios are generally found to be occuring as a result of bull markets. Thus in a continuing bull market, many stocks could be overlooked by investors, just because its P/E seems to be too high.

Similarly lower P/Es might have occurred as a result of bear markets. There is no protection rule that protects a stock trading at 8 to 10 times earnings, from falling further and trade at 3-4 times earnings.

Fundamentally, P/E ratios can be inaccurate, because of an inaccurate earnings measure. Many times, financial statements may themselves be distorted or manipulated, giving rise to faulty earnings estimations.

Often, P/E ratio calcuations become outdated. For example, if the latest earnings report of the company was published more recently, then the P/E will be based on this information. However, if that report was published many months ago, then the P/E is also outdated. Also P/E gets outdated, if the number of shares outstanding might have changed, because of a change in shareholding pattern of the company.

Also see : What is the P/E ratio ?

The Price to Earnings (P/E) Ratio is one of the most widely employed valuation statistic of a company. This important ratio is also referred to as Price Multiple or Earnings Multiple of a company. Many believe that the most important thing you need to know about a stock is its price-to-earnings (P/E) ratio. It is also widely believed that the P/E ratio can be the most convenient method of comparing one stock’s value with another’s.  In layman’s terminology the P/E ratio signifies how expensive a stock is.

Let us get to know more about this important figure that any value investor would be looking at.

• What is Price to Earnings (P/E) Ratio ?
• Types of P/E ratios
• How to make use of the P/E ratio ?

What is the P/E ratio ?

The P/E ratio is the relationship between the stock prices and the earnings. It is computed simply by dividing the market price of the stock by its earnings per share or EPS.  Earnings Per Share means simply the company’s after-tax profit divided by its number of outstanding shares.

Hence one can get the company’s market price by multiplying the P/E ratio with the EPS of the same company.  More specifically the P/E ratio can signify the actual multiple that an investor is willing to pay for a Rupee of the company’s earnings.

Example

For example, if the current stock price of the company A is Rs. 1000 and its EPS is known to be Rs. 100, then the

P/E ratio for company A is calculated as 1000/10, which is equal to 10.

Types of P/E ratios

All though there are many types of P/E ratios used by various researchers and valuation experts, the most frequently used among them are the following three :

• Trailing P/E ratio

This is by far the most readily available type of P/E ratio that is available in the financial world.  This ratio is based on the EPS for the previous periods. Hence the word ‘trailing’.

Usually it is a practice to calculate the trailing P/E based on the EPS of the past four quarters or one year.  Although not common, it can also be calculated for any specific period other than these including half yearly and quarterly calculations.

• Forward P/E ratio

The Forward P/E ratio is based on the projected EPS of the company for the future periods.  This projection is usually done by research analysts and valuation experts based on the order book and other various financial data available regarding the business and its operation environment.

Again it is a practice to calculate the forward P/E ratio for the coming four quarters or one year.

Another less common type of P/E ratio is called the Rolling P/E ratio :

• Rolling P/E ratio

This ratio is based on both past and the future projected earnings of the company. For example many people consider earnings in the previous two quarters and the next two quarters to determine the Rolling P/E ratio.

Since inherently both the Forward and Rolling P/E ratios are based on future projected earnings of the business, they are assumed to be less accurate when compared to the Trailing P/E. which is based on the factual earnings of the company in the past.

Next : How to make use of the P/E ratio ?

Market Live brings in the Stock Market Tutorial which explains the basics of the Share Market. Demat Account, IPO, Secondary Market - All your Stock market jargons being explained in a simple manner here.

• What is a Stock ?
• How do you make profits with stocks ?
• What is the Stock Market ?
• What is the Demat Account ?
• Who is the Stock Broker ?

What is a stock ?

A stock is a partial ownership in a company or an industry, with rights to share in its profits. When an investor buys a stock of a company, he is called a shareholder or a stockholder of that company. The benefit of buying a share is that when the company profits, the shareholders also profit. The company distributes the profit among its shareholders, which is called the ‘dividend‘.

How do you make profits with stocks ?

But many traders make real profit in stocks using the market price of the stocks. Stocks are traded in the stock markets. The face value is the nominal value of the stock that is determined by the issuer of the stock. ‘Market price‘ of a stock is the price at which currently a stock is traded in the market. This price may be at premium or lesser than the ‘face value’ of the stock, depending on the company’s performance and prospects, investors’ interests in the company and a lot of other factors.

Market price of a stock keeps varying as traders trade the stock in the market. Traders often make money using these variations in the market price of the stock. Stocks are bought at lower market prices and sold at higher prices later. This is referred to as ‘long‘ positions in market terms. Similarly stocks can be sold at a higher market price and bought at a lower price later. Thiis is referred to as ‘short‘ positions in market terms. In these cases, the difference in the market prices at the time of buying and selling will be seen as profit by the traders.

What is the Stock Market ?

Basically it is an exchange place or a market that facilitates the trading of stocks. People participating in the stock markets range from some casual traders and investors who trade as a hobby, to large fund traders.

In India the most famous exchanges or markets are the Bombay Stock Exchange(BSE) and the National Stock Exchange (NSE). Globally there are many markets including the famous New York Stock (NYSE), NASDAQ, London Stock Exchange, Hong Kong Stock Exchange etc..

Any market can be thought of with two functionalities:

Primary Market: Here the companies and industries raise long term funds for their operations by issuing shares. Companies come up with an initial price, mostly with premium for the face value of the shares, which will be distributed to the investors. This is called the Initial Public Offer or the IPO.

Secondary Market : After a Company has finished its IPO, it is listed in the markets. After getting listed and issued shares to investors, the shares can then be sold to other investors in the stockmarket. Here the people can buy the shares at a current price as determined by other investors in the market.

What is the Demat Account ?

Like opening a bank account for doing your personal financial transactions, you have to open a Demat account to trade in the stock market. Demat account refers to Dematerialized account. This account helps you to buy and sell stocks without the need for physical paper shares.

A Demat Account is a must for trading the stocks these days. To open a demat account, you should select a Depository Participant (DP). These days most of the banks are also DPs. So you can contact any of the DPs with your identity, address proof and PAN documents for opening a demat account for a prescribed fee by the DP. The registered DPs are also listed in NSDL (http://www.nsdl.co.in/) and CDSL (http://www.cdslindia.com/) websites.

Who is the Stock Broker ?

Stock Brokers are members of the Stock Exchanges. Only these members can conduct transactions in the exchange on behalf of the individuals and companies. So if you want to buy or sell shares in the exchange, you have to contact a stock broker for doing so. This normally requires the individuals to open an account with the Stock Broker. So the individual becomes a client for the stock broker.

Once the client wishes to buy a stock, the broker would place the order in the stock exchange on behalf of the client. When the transaction is done, the broker places the price to the client. The client pays for the stocks he bought and the broker transfers the stocks into the demat account of the client by following the transaction and settlement procedures.

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Market Live brings in the Stock Market Tutorial which explains the essentials that you need to know before starting to trade. Whether it is about Placing Orders or about Buying / Selling online - Get all the trading jargons being explained in a simple manner here.

Basics of Stock Trading

• Where can I trade Stocks ?
• Do I have to be physically present in the stock market to trade stocks ?
• What is Online Trading ?
• What other services are offered in Online Trading ?

Where can I trade Stocks ?

Stocks are traded in the Stock Market or the Stock Exchange. In India, the two most popular exchanges are the Bombay Stock Exchange (BSE - Located in Mumbai) and the National Stock Exchange (NSE - Located in New Delhi).

Do I have to be physically present in the stock market to trade stocks ?

Not necessarily. You do not have to be physically present in the stock market to start trading. For trading in stocks, you can open an account with a Stock Broker, who is a registered member of the BSE or the NSE. Once you have opened the account, you can start trading in the stocks through your local Stock Broker. The Broker charges a fee called the Brokerage or Commission from you for every trade that you do in the stock market.

What is Online Trading ?

Online Trading is a fairly new and popular mechanism for trading Stocks, wherein the you can buy and sell the stocks over the Internet. With the flexibility that Online trading offers to the clients, this mechanism of trading has become hugely popular among the investors and traders in the recent times.

When you buy or sell stocks online, you will be interacting with an Online Stock Broker, in contrast to the Human Broker in the conventional trading system. The Online system places the orders on your behalf, gets them executed in the exchange and inform the order status to the clients. Like the older system of trading, a fee is charged as Brokerage or Commission for every trade executed using the Online system.

What other services are offered in Online Trading ?

Apart from providing a platform for trading stocks, many Online systems provide integrated packages that link your Trading account with your Bank Account.
This helps you to buy and sell stocks and get the money transferred to your Bank account in a hassle free manner.

Apart from this, many Online Systems also offer Stock Research and Tips from Market Analysts to the clients, over the Trading Platform. This will help you to choose and value your trade calls in the Stock Market.

]]> http://marketlive.in/stock-market-tutorials/stock-market-tutorial-essentials-of-trading.php/feed http://marketlive.in/stock-market-tutorials/stocks-tutorial-technical-analysis-basics.php http://marketlive.in/stock-market-tutorials/stocks-tutorial-technical-analysis-basics.php#comments Sun, 15 Feb 2009 09:04:51 +0000 admin http://marketlive.in/new-tutorial/?p=62

Market Live brings in the Stock Market Tutorial which explains the basics of Technical Analysis. Whether it is about Reading Charts or about Technical Indictors - Get all the technical jargons being explained in a simple manner here.

Basics of Technical Analysis

• What is Technical Analysis?
• What are Charts ? Why do we need them ?
• How are Charts Plotted ?
• What are Technical Indicators ?

What is Technical Analysis ?

Technical Analysis (TA) is one of the methods used to predict the movement of the price of a stock or an index in the future. The prediction is derived based on a careful analysis of the previous price movements of the stock or index. To put is simply, the future trend is derived based on the past movements of the stock.

Technical Analysis does not yield absolute results always. As is the case with any forecasting system, the TA can give you a hint on what might be expected. But the expectations might prove to be false in extreme market conditions.

So TA will not help you totally overcome the risks involved in the markets, but if used properly, it can help you to predict and take precautionary measures to a large extent.

What are Charts ? Why do we need them ?

Charts are graphical representations of the movement of the stock price or the index value, over a period of time. Along with the price or value, the charts can also be used to depict other related indicators such as the Volume or total traded quantity of stocks. Based on the stock prices or values, statistical indicators are used to obtain values, which can also be plotted on the charts.

Charts offer a very convenient way to visually analyze the movement of the stock price or value. Rising and Falling trends can be easily found out looking at the charts. Repeating Visual Patterns in the charts are also used to forecast the movement. Charts can also be used to spot and trace the effect of key events in the history of the price of the stock.

How are Charts Plotted ?

Financial Charts are generally 2D Charts. There are of course 3D and other higher dimensional charts used in advanced analysis.

The X-axis (Horizontal axis) is generally used to depict the Time Frame. The Y-Axis (Vertical Axis) is used to depict the price or the value that varies with time.

What are Technical Indicators ?

Technical Analysts often rely on some Statistical and Mathematical functions that are applied on the price or value of the stock. These are generally called as ‘Technical Indicators’ . The resultant values, after applying these functions to the price of the stock, are again plotted on the Chart. Analysts can get further hints from analyzing the movement of these indicator values.

There is no consensus or a prescribed set of indicators that have to be used. Each Technical Analyst uses a custom set of these indicators depending upon his / her Trading strategy.

Some of the most commonly used indicators include Relative Strength Index (RSI), Moving Averages (MA), Moving Average Convergence Divergence (MACD) and others.

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Market Live brings in the Stock Market Tutorial explaining the basic and essential terms involved during Online Trading in the Share Market. Buy/Sell Orders, Limit Prices, Stop Loss Prices, Trigger Prices - All the Stock market Trading jargons are explained in a simple manner here.

• How do I Buy / Sell Stocks with my Online Account ?
• What is a Limit Order ?
• What is a Market Order ?
• Why didn’t my Limit Order get executed ?
• Why didn’t my Market Order get executed ?
• What is Stop Loss / Trigger Price ?

How do I Buy / Sell Stocks with my Online Account ?

Buying or Selling stocks is done by placing ‘Orders‘. You can place a ‘Buy Order‘ to buy the stocks at a particular price. Similarly to sell a stock at a particular price, you have to place a ‘Sell Order‘.

Each Online platform has different ways to place these orders. But generally, all of these provide the following basic options when placing an order:

• Option to choose whether you wish to Buy or Sell a particular stock
• The name / symbol of the particular stock which you want to either Buy or Sell
• The Number of stocks (Quantity) that you want to either Buy or Sell
• The Price at which you would like to either Buy or Sell this stock.

After you have confirmed the order, it is placed in the Stock Exchange through the Online System. Your stocks are actually bought or sold once this order gets executed in the exchange.

What is a Limit Order / Limit Price ?

A Limit Order is a Buy / Sell order which you want to get executed at a pre-determined desired price. This is the most common type of order that investors and traders place in the market.

Buy Order with Limit Price

For example, if you want to buy the stocks of company ‘A’ at a price of Rs.300. However the current price of the stock might be higher than your desired price. But you feel that the price of this stock would come down sooner and reach Rs. 300. In such a case, you can place a Buy order with a limit price of Rs. 300. This means that you are instructing the system to buy the stocks of company A, only if the price reaches Rs. 300 or lesser.

So if a Buy Order gets executed with the Limit Price specified, then you could be assured that the actual price at which the stocks are purchased by you will always be either equal to or lesser than the Limit Price specified by you.

Sell Order with Limit Price

Similarly you may have the stocks of company ‘B’ in your demat account, which you would like to sell at a price of Rs.500. But currently the market price of the stock is lesser than 500 and you expect that sooner the price will reach Rs. 500. In such a case you can place a Sell order with a limit price set to Rs. 500. In this case, the stocks will be sold only if the price reaches Rs.500 or above.

So if a Sell Order gets executed with the Limit Price specified, then you could be assured that the actual price at which the stocks are sold by you will always be either equal to or greater than the Limit Price specified by you.

What is a Market Order ?

Market Orders are placed, when you are not concerned too much about the current price of the stock, but you want to get assured that the stocks are either bought or sold immediately. So a Market Order can be placed only during the Market Trading Hours. You cannot place a Market Order when the Markets are closed.

Market Order for Buying

For example, consider an instance where in you know the fact that company ‘A’ will be making a big announcement in the afternoon today and so the price of the stocks of this company will definitely rise after this event. So you are looking for buying this stock desperately now, irrespective of its current traded price. In such a case, you can place a ‘market order’ for this stock. This will place an order for buying the stocks at the Last Traded Price in the Stock Market. So the chances of buying the stocks increase, as you are trying to buy the stock very close to its Last Traded Price in the market.

Market Order for Selling

Similarly suppose that you know the price of stocks of company ‘B’ will go down later in the day when the company comes out with its Earnings report of Losses for the Quarter. So you would want to sell the stocks of this company immediately, before the price of the stocks fall drastically. In such a case, you can place a Market Order for Selling. This will place an order for selling the stocks at the Last Traded Price in the Stock Market. So the chances of selling the stocks increase, as you are trying to sell the stock very close to its Last Traded Price in the market.

]]> http://marketlive.in/stock-market-tutorials/stocks-tutorial-terms-involved-in-share-trading-1.php/feed http://marketlive.in/stock-market-tutorials/stocks-tutorial-terms-involved-in-share-trading-2.php http://marketlive.in/stock-market-tutorials/stocks-tutorial-terms-involved-in-share-trading-2.php#comments Fri, 13 Feb 2009 08:54:00 +0000 admin http://marketlive.in/new-tutorial/?p=56

Market Live brings in the Stock Market Tutorial explaining the basic and essential terms involved during Online Trading in the Share Market. Buy/Sell Orders, Limit Prices, Stop Loss Prices, Trigger Prices - All the Stock market Trading jargons are explained in a simple manner here.

Look here for Part 1 of this Series

• Why didn’t my Limit Order get executed ?
• Why didn’t my Market Order get executed ?
• What is Stop Loss / Trigger Price ?

Why didn’t my Limit Order get executed ?

There may be multiple reasons for your order not getting executed in the Stock Market. We will discuss the common problems due to which your order might not get executed. However we will not cover the reasons which include the Online system failure, Server Failure, Error in processing your order by the system etc.

The most common reason for a Limit Order not to get executed, is the fact that the price of the stock did not actually reach the limit price during the market trading hours. You can actually check the ‘Day High’ and ‘Day Low’ prices of your stock to verify that your specified Limit price was not reached indeed, and you were over optimistic in choosing the Limit Price.

In some cases you might notice that the ‘Day High’ or ‘Day Low’ prices indicate that your Limit price is actually reached, but your order is not executed. This may happen due to the fact that there were more pending orders placed in the Stock Market, prior to your order, at the same limit price as specified by you, and the price of the stock overturned again and moved in the opposite direction before your order was executed.

In any case there should be sellers in the market who wish to sell the specified quantity of stocks at your desired price, if your buy order needs to get executed. Similarly there should be buyers who wish to buy the stock at the price specified by you, if your sell order needs to get executed. So your order might not get executed if there aren’t enough buyers or sellers for this stock at the price specified by you. Sometimes if there are limited buyers or sellers, then your order can get ‘Partially executed’, meaning that a partial portion of the number of stocks specified by you might be bought or sold at the specified Limit price.

Why didn’t my Market Order get executed ?

As explained previously, when you place a Market order, an order will be placed in the Stock Exchange for either buying or selling the stock at the Last Traded Price of the stock. However in some instances, the market orders may not get executed completely or partially. The most common reason for this would be a steep rise or fall in the price of the stock within a short duration. In such a case the price of the stock shoots up or falls down very rapidly and moves up or down the Last Traded Price very rapidly. So in these cases the orders do not get executed. Also if such huge movements are seen, then the orders can also get partially executed depending on the current price and the Last traded price when you ordered.

What is Stop Loss / Trigger Price ?

As the name itself implies ‘Stop Loss’ prevents you from incurring more losses. When you place a buy order or sell order you can specify the Stop Loss Price for your order. This price will actually act as a ‘trigger’ as to when your order needs to get executed. This is explained in detail below.

Stop Loss for a ‘Buy’ Limit Order

When you are placing a Buy order, you can specify a Stop Loss Amount. Generally the Stop Loss Amount for a Buy order should be equal to or greater than the Last Traded Price of the Stock in the Exchange.

For example suppose that you had stocks of company ‘A’ and you have sold these stocks at Rs.300, in anticipation that the price of this stock will come down in the future. You would wish to buy the stocks at a lower price (lesser than Rs 300) so as to make a profit in the trade. But after selling, now you see that the price of the stock is increasing, rather than falling down. So currently you are under a loss. If the price of the stock continues to increase, then your loss deepens. But it may also happen that this increase is a temporary blip and later on the price may again come down. Under such circumstances, you can place a Stop Loss Price for Buy order to minimize the losses.

Let us assume that you do not want to take losses greater than Rs. 25 per stock. Then your Stop Loss Price becomes Rs. 300 + Rs. 25 = Rs. 325. So, until the price of the stock is lesser than Rs.325, your buy order will not get triggered. In case the price of the stock is rising above Rs.325, then the buy order gets activated and gets executed if there are sellers at the specified price. If the order is executed, you will be under a loss of Rs.25 per stock.

Assume that after your buy order has been executed, the stock price has rised further and reached Rs. 350. In this case, the ‘Stop Loss’ order has saved you from incurring an additional loss of Rs.25 per stock.

Stop Loss for a ‘Sell’ Limit Order

When you are placing a Sell order, you can specify a Stop Loss Amount. Generally the Stop Loss Amount for a Sell order should be equal to or lesser than the Last Traded Price of the Stock in the Exchange.

For example suppose that you have bought stocks of company ‘A’ at Rs. 325, in anticipation that the price of this stock will rise above Rs. 325. You would wish to sell the stocks at a higher price (higher than Rs. 325) so as to make a profit in the trade. But after buying, now you see that the price of the stock is decreasing, rather than gaining up. So currently you are under a loss. If the price of the stock continues to fall, then your loss deepens. But it may also happen that this fall is a temporary blip and later on the price may again come up. Under such circumstances, you can place a Stop Loss Price for Sell order to minimize the losses.

Let us assume that you do not want to take losses greater than Rs. 25 per stock. Then your Stop Loss Price becomes Rs. 325 - Rs. 25 = Rs. 300. So, until the price of the stock is greater than Rs.300, your sell order will not get triggered. In case the price of the stock is falling below Rs. 300, then the sell order gets activated and gets executed if there are buyers at the specified price. If the order is executed, you will be under a loss of Rs.25 per stock.

Assume that after your sell order has been executed, the stock price has fallen further and reached Rs. 250. In this case, the ‘Stop Loss’ order has saved you from incurring an additional loss of Rs.50 per stock.

Balance Sheet

The balance sheet statement is one among the most important financial documents of an organization. It thus becomes very important for every business owner or would be business owner to understand just what goes into this important document. By buying the shares of a company, you indeed own and invest in the company in some units. As a shareholder of a company, you are indeed one of the many similar small owners of the company. Thus it becomes very crucial for investors or prospective shareholders of a company to carefully analyze this important financial statement called the Balance Sheet.

A balance sheet is actually a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. More specifically, a Balance Sheet is a statement of those assets and liabilities of a business enterprise that can be given a value in terms of money; it shows both the assets and how the assets are financed.

Who should read the Balance sheet ?

• The present and potential stakeholders of the company,
• Creditors to the company such as the banks and money lenders,
• The Company’s Board of Directors, in their role as appointees of shareholders, monitoring the management’s actions.
• Financial analysts who closely track the financial health of the company,
• Economists and government regulatory agencies which use this information for a wide variety of financial statistics and also ponder over it to police the capital market system in general.

What does the Balance Sheet contain ?

A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity.

Every balance sheet must include the name of the enterprise and the date to which the figures in the balance sheet refer.

The balance sheet is one of the financial statements of a company and needs to be supported by:

• The profit and loss account (income statement)

• The sources and uses of funds statement (funds flow statement)

• Notes to the financial statements

• The auditor’s certificate

Assets and Liabilities

Assets are the things that the business or company owns. Liabilities are what the company owes. The liabilities indicate what money has been made available to the enterprise, and from where.
The assets show how the enterprise has used the money made available to it.

Total assets must always equal total liabilities to creditors and shareholders.

Assets can further be grouped as :

• Current assets - examples of current assets include Cash, Accounts receivable, Inventory and merchandise, Prepaid rent, Prepaid Insurance etc
• Fixed assets - These are things that aren’t held for resale such as furniture and equipment, land and buildings.

Similarly, Liabilities can further be grouped as :

• Current liabilities - These are liabilities that are due within a year, such as accounts payable, short-term loans, overdrafts, taxes, and wages.
• Fixed liabilities or long-term liabilities - These are liabilities that are due for more than a year, such as the notes payable that have a five-year maturity.

Also, it has to be kept in mind that :

Assets = Liabilities + Owners’ Equity

• Financial Accounting
• What are Financial Statements ?
• What are the different Financial statements prepared ?
• When are the financial statements prepared ?

Financial Accounting

Every organization or company running a business needs accounting for its operations. Accounting is thus called the language of business, as it acts as the medium for reporting financial information about a company to many different groups of people.Financial accounting thus often includes providing information to groups including

• The present and potential stakeholders of the company,
• Creditors to the company such as the banks and money lenders,
• The Company’s Board of Directors, in their role as appointees of shareholders, monitoring the management’s actions.
• Financial analysts who closely track the financial health of the company,
• Economists and government regulatory agencies which use this information for a wide variety of financial statistics and also ponder over it to police the capital market system in general.

What are Financial Statements ?

To report the outcomes of the financial accounting, the company produces Financial Statements, which will be made available to all the above mentioned interested user groups. Financial Statements are a means of showing how a business, or any organization or individual is progressing in a manner which should help comparison of operation over the years and comparison with other enterprises.

What are the different Financial statements prepared ?

Generally most of the companies will prepare and publish the following three important financial statements :

• The Balance Sheet
• The Income Statement and
• The Cash Flow Statement

Of course, there are other numerous detailed financial statements prepared by the accounting personnel. But of all these, the three statements mentioned above are generally of interest to most of the investors and prospective share holders of the company.

The Balance Sheet captures the assets and liabilities of the company. The Balance sheet is like a snapshot of the assets and liabilities existing at balance date.
The Income statement is a summary of all the revenues generated and expenses incurred during the period of the statement.
The Cash Flow statement shows the Cash coming in and the cash going out – that is the cash receipts and cash payments.

When are the financial statements prepared ?

Financial statements are prepared at the end of a period in the financial calendar – typically quarterly or annually in practice. These statements update listings of financing and investing activities, and also summarize the operating activities for the most recent period(s).

Market Live brings in the Stock Market Tutorial which explains the basics of Technical Analysis of the Stocks. Technical Indicator - Relative Strength Index - (RSI) is explained in a simple manner here.

• Relative Strength Index (RSI)
  • Definition and Calculation
• How to Make Profit with RSI

RSI Definiton and Calculation

RSI is a popular technical indicator that was developed by Welles Wilder. It is very popular because its very simple to interpret this indicator. It is an oscillator indicating the overbought and oversold conditions of the stock.

RSI is based on the comparison of the magnitude of the gain to the loss. It is the ratio of the EMA of Upward(U) and Downward(D) movements, which is then normalized to values between 0 to 100.

So, if

Pc represents the current Closing price

Pp represents the previous Closing price,

then on a day when the stock has closed up, U = Pc - Pp and D = 0

Similarly on a day when the stock has closed down, D = Pp - Pc and U = 0

Then EMA is calculated for U and D for a period n , represented respectively by EMAup and EMAdn.

Now RSI is calculated as follows:

RSI = 100 x (EMAup / (EMAup + EMAdn) )

How to trade with RSI ?

Generally a 14 period RSI is plotted for the close prices of the stock. RSI Value of 70 and above is considered to indicate that the stock is in Over Bought condition. Similarly an RSI value of 30 and below is considered to indicate that the stock is in Over Sold condition.

The Over Bought condition indicates that the stock price may be getting over valued and in the next trend may be a candidate for pullback in the downward direction. Similarly the over sold condition indicates that the stock may be getting under valued and in the next trend may be a potential candidate for a pullback rally in the upward direction.

Example : Consider this chart of the Infosys Technologies stock in the NSE:

The yello line at the top indicates the Close price of the stock over a period of time. The bottom line in torquoise blue indicates the 14 day RSI for the Close price of the stock.

As you can see in the chart, when the RSI values have crossed the 70 value, the stock enters the Overbought zone and becomes a candidate for pulldown thus giving a sell signal. Thus a downtrend in the price of the stock is seen after this condition.

Similarly when the RSI values have come below 30, the stock enters the Oversold zone and becomes a candidate for pullback thus giving a buy signal. Thus an uptrend in the price of the stock is seen after this condition.

However large surge and drops in the price of the stock will affect the RSI heavily and can lead to erratic buy and sell signals. So RSI should always be used in conjunction to other technical indicators to confirm the buy and sell signals.

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