Stock Market Tips India

The overall trends of the stock market are best described by the word BEAR MARKET and BULL MARKET.  In a bear market the market is seen to decline over a certain period and traders generally sell quickly to save big losses. The Great Depression during the 1930s saw huge losses to investors and hence investors and traders are very cautious during the bear run.

During the Bull Run, the prices of stocks increase steadily and sometimes steeply too. This builds up confidence and optimism in the investor. Stock prices rise dramatically and traders book profits too. The bear run and the Bull Run are influenced certainly by the economic conditions locally, domestically and internationally. The stocks take a beating during recession and the stocks rise during the economic boom.

If you are a new investor; be cautious while trading both in the bear market and bull market conditions. There are many sites available in the internet which will give you ample valuable information about the market and its stocks. You can ask for some expert or stock analysts to provide you with information about companies and their stocks.

Don’t forget that you have to be strong headed, patient and determined if you want to achieve success in the stock market. Patience pays off, and be persistent too. Losses are inevitable because the market itself is volatile but wait for the market to rise and trade carefully... Research and more research will help you stay grounded and fetch you good profits.

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This is the most popular theory in stock market investing . But the question is -– how would you know when a stock's price is ‘low’?

The key: Compare a stock's price with its ‘value’.

How is price different from value?
-- Price is what the market is willing to pay for the share at a given time. It fluctuates from minute to minute.

-- Value of a stock is the worth of its underlying business. It is more stable as fortunes of a company do not change overnight.

Buy when price is lower than value
If a share's value is Rs 150 and price is Rs 125, then you get the stock at a discount of Rs 25.

While there is no guarantee that the price will not go below Rs 125, the probability is low.

This principle is called the 'margin of safety' and finds it roots in the teachings of legendary investors -- Warren Buffet and Benjamin Graham.

How to find out a share's value?

To begin with, you can read financial statements and understand the nitty-gritties of stocks.

If you are willing to walk that extra mile, then pay heed to these valuation methods that Warren Buffet swears by:

Method 1:

Look at the net liquid assets per share.

Net liquid assets per share = [Current assets (cash, debtors, liquid investments etc) - liabilities] divided by Number of shares.

Thumb rule: Warren Buffet prefers paying not more than two-thirds of such value for a stock.

Method 2:

Look at the PE (Price to earnings) growth ratio.

PE growth ratio = (Market price/ Earnings per share) divided by Annual EPS growth

where Annual EPS growth = (Current year's EPS – previous year's EPS x 100) divided by Previous year's EPS'

Thumb rule: A PE growth ratio of 1 indicates a fairly valued share; less than 1 means undervalued; and more than 1 means overvalued.

PE: an indicator of margin of safety

Let's assume you buy a share at Rs 550 whose EPS is Rs 50. In one year, you earn Rs 50 on an investment of Rs 550, that is, a return of about 9 per cent.

You can earn 8-9 per cent risk-free returns on bank deposits as well. So, the margin of safety in this case is practically nil.

To reduce the risk, we must have a higher gap.

Thumb rule: Warren Buffett recommends this gap to be at least 1.25-1.5 per cent.

Last word: During a bull run, investors pay a high price for any and every share. So, it becomes difficult to find stocks with a high margin of safety.

It is in bear markets, as the one we are in now, that there are opportunities to spot the gems.