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Portfolio Management: How to Assess a Stock Before Buying

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One cannot eliminate risk but you can use basic financial techniques to reduce risk if you are considering making the investment in shares.

Angel Investing Reviews

Angel Investing Reviews

Introduction: Stock Performance Analysis

It is not a science but art like driving and swimming. This is why the art of investing in stocks is not a very difficult thing.

People with proper know-how are using Angel Investors, for-profits in PSX.

Although the jargons of this subject seem to be difficult, it's not rocket science. Its an art and once you have the know-how. It becomes really easy to manage the stock exchange business.

Public limited companies are trading stocks on the stock exchange to raise finance or money for the operations or business of the company.

As a beginner, this article will facilitate you with the essential information required for investment in stocks.

Public Limited Company:

A public limited is the one whose shares are being traded on the stock exchange. It is also called a public limited company because the shares are with the general public.

SECP:

The SECP or securities and exchange commission of Pakistan is the regulator for the regulations of these Public limited companies.

SECP looks into matters like declarations and ensures that the declarations are genuine and in accordance with the regulatory requirements.

SECP also substantializes information like profitability, sales, etc. In order to penalize false window dressing of the financials.

Data Portal:

The data portal website of Pakistan stock exchange has the required information on the financials. Stocks are usually depicted by their symbols on the website.

For example, the OGDCL (One of the giants in the Oil Sector of Pakistan) has a symbol OGD.

Similarly, the symbols of the bank of Punjab are BOP.

Using these symbols on the data portal you can download the financials of the company in which you want to invest.

The financials comprise off

1. Balance Sheet: This is the first component of financials and it exhibits the business equation or balance sheet equation.

It includes short term and long term liabilities, short term and long term assets, equity or capital, etc. at a specific point in time.

2. Assets:

Current assets or short term assets are cash, debtors, or accounts receivable and inventory.

Whereas fixed assets are land, buildings, plant & machinery, equipment.

Intangible assets are assets that don't have physical existence such as patents and other intellectual property.

3. Liabilities

In simple words, this is the Financial snapshot or business equation of the company.

The balance sheet equation is one of the most important notions of accounting.

Some of the common Liabilities of business are debt. (What is an Asset? What is a Liability? 2020)

  • Mortgage debt.
  • Money owed or Accounts payable to Suppliers
  • Wages Payable of the labor
  • Taxes Payable

Balance Sheet Or Business Equation

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ASSETS = SHAREHOLDERS' EQUITY + LIABILITIES

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Both sides of the equation are required to be equalized.

(Meimoun, 2020)

How to compute earnings per share

How to compute earnings per share

Income Statement:

The second component of the financials is the income statement. This is the income and expense account of the company.

After the accountability of all expenses including tax, interest, advertising, and marketing, etc. This account shows the net profit of the company.

Cashflow Statement:

The third component of the financials under consideration is the cash flow statement.

This shows the financing activities, investing activities with operations (working capital).

Notes to Accounts:

The fourth component is noted in the accounts. It provides further detail about the first three parts of the financials.

These financials have intelligent information about the company that you need to know before investing in the company stocks.

Stock Market News

Stock Market News

Analysis before Investment

How Warren Buffett Choose Stocks?


  • The company with Consistent Performance: The company in which you are interested to invest must be stable and understandable. A lot of people are attracted to shares which are volatile. Because these might have huge rewards. Warren Buffet is always attracted to companies that are growing with stability. This is because he knows stable on an understandable stock is something that you can actually depend on. So when the company growing stably and constantly increasing earnings over the past ten years or so, and they consistently grow equity at a consistent rate e.g. 10% a year whatever the case may be. So invest in a company that is stable and something that you can understand.
  • Long Term Prospects: The company must have long-term prospects what I mean by that is he’s not investing in a company that sells TV antennas. He is the type of person that looks a company and he says how this company will be around 30 to 40 years from now. Is their product still going to be something that the world still needs? He buys such stocks and holds them because when he holds it grows. When that company is actually growing at the market price, he is not required to pay any taxes on that group which is another long term benefit.
  • Company leadership should be vigilant and stay away from the company that has a lot of debt.
  • Avoid stocks that are overvalued and you have a clear perception of that with PEST, SWOT, and another environmental scanning. Buy only the stocks that are clearly undervalued.

All four of these rules are always recommended to check before buying the stocks.

PEST Analysis:

Along with this before the investment in the stock exchange, macro analysis of the Political Economy, Social-cultural, and technological advancements are also important.

If the company seems to be in a very good position but the economy is facing political instability or security concerns. Then due to such reasons, you cannot invest in the stocks.

Such risks can make the investment very ineffective and dangerous.

The examples of the companies which are discussed in this article or not for the purpose of investment.

Earning Per Share:

The first important thing to analyze before investing in stocks is earning per share. This shows the relationship between the profit and shares of the company.

For example, if the company has 100,000 shares and the company is earning a profit of 200,000 dollars. This means that the company is earning up to $2 profit with one share.

Higher the EPS the better the company is considered for investment. Apparently, some companies might fail even with high EPS And some might be able to become successful with Low EPS.

For Example, a company is doing research and development in artificial intelligence and comes up suddenly with an innovation that has a very high potential demand.

There are further important details in earning per share but we are not considering preferred stocks and other complex information just to simplify things.

Warren Buffet Investing Wealth

Warren Buffet Investing Wealth

Seven Things to consider while Picking Stocks

1. Earnings Per Share.

2. Stability.

3. Relative rank and vigor in the industry.

4. Debt-equity Ratio.

5. Price-earnings Ratio.

6. Board and the history of its members.

7. Dividends. (Marquit, 2020)

Conclusion:

Detailed initial analysis before investing in share/stocks of a company, requires the analysis of financials and ratio analysis. The advice of experts is also very important.

Don't bombard yourself with information to overburden yourself. There are never-ending information and news, just stick to basics while investing in stocks.

Bibliography

1. Meimoun, M., 2020. The Business Equation - Accounting - Ludu. [online] Ludu.co. Available at: <https://www.ludu.co/course/accounting> [Accessed 7 August 2020].

2. Marquit, M., 2020. Iinvestors Decide Whether To Buy Shares. [online] Money.usnews.com. Available at: <https://money.usnews.com> [Accessed 7 August 2020].

3. Digit.business. 2020. What Is An Asset? What Is A Liability?. [online] Available at: <https://digit.business/financial-literacy> [Accessed 8 August 2020].

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2020 Mohsin

Comments

Kuldeep on September 20, 2020:

Really good

Techycb on September 20, 2020:

Very nice information keep it up.