Before you jump to Share Market for investment, you must be aware about different terminology used while analysing a company and what role they should play in making investment decision. In this article, my effort is to simplify all those terms and how to calculate those figures. To explain these terms, I will use a BSE/NSE traded company named GMM Pfaudler Ltd. (this is not a recommendations to buy or sale).
To demonstrate these terms, I am going to use StockEdge mobile app that I generally use.
Price is a number at which one share of a company is traded in the exchange. For example, if price displayed for GMM stock is 2600, ie. to buy 1 share of GMM you will have to pay 2600 + brokerage charges and other charges levied by government (These charges varied between brokers to brokers).
Generally it is assumed that a company with 1 digit or 2 digit price is better as you get more quantity of shares in less amount. However this is wrong and a company quality should not be judged by its price amount.
For eg. You buy 1000 quantity share of ABC company @2 per share so your total investment is 2000. If this company share price increase by 10%, you get 200 benefit.
If you buy 2 quantity share of XYZ company @1000 per share so your total investment is again 2000. If this company share price also increase by 10%, you still get 200 benefit.
So the price of share should not determine its quality and profitability and your investment decision. General misconception and belief is the low price stock may move higher more quicker than high priced stock. But this is wrong in most of the cases. The price of the share moves up and down based on their fundamentals, quality of managemet, market share, performance etc.
Deliveries as shown in the picture below shows that how many quanity of the company share was traded and how many were taken for delivery (generally means for investment purpose) and how many were traded as Intra-day purpose (buy and sell on the same day). In below picture 33.1% or 13435 shares is the delivery quantity. It means this many shares were bought for investment purpose.
Generally, more delivery % (like 60%+) are considered good as that shows the confidence of the investors. It also indicates that more and more people are buying this company shares for long term. However, this alone can't be an indicators to buy a stock.
52W is considered almost a year, so this basically tells that what was the lowest and highest price in last one year. General perception is when the price of a stock is at 51w low, it is good price to buy and 52w high its good price to sell, however this is not correct. There are many strong stocks that keep making 52w high and if someone sells at 52w high, they regret. Similarly, weak stocks keep making 52w low and people keep buying.
This can be treated as indication of a good stock or bad stock. If a company is keep making 52w high price, there must be some news around or its business potential is good. If a company is good in all aspect and because of some external factors, it trading at 52w low price, it can be treated as an opportunity to buy it. If a company is keep making 52w high because of no reason or bull run, it can be considered to sell.
However, this is just an indication and a investment decision can't be derived from it.
Market cap is derived by multiplying the stock price of the day by number of share subcribed. In above example, 1.46 cr is the no. of shares subscribed and the price is 2600. So market cap will be 1.46*2600=3796 crores.
Based on Market cap, companies are categorized into three types
|Types of companies||Market cap based||Top Market Cap based|
|Large Cap||Greater than 28000 cr market cap||Top 100 companies based on last 6 months average market cap|
|Mid Cap||Between 8500 cr to 28000 cr market cap||Top 101-250 companies based on last 6 months average market cap|
|Small Cap||Less than 8500 cr market cap||Beyond 250 stocks based on last 6 months average market cap|
As the market cap is derived by multiplying the current traded price of the company, so a company market cap changes on each trading day.
Generally, Large cap stocks are considered safe stocks as they are big and proven companies however the rate of return might be moderate to low as they are already grown companies.
Mid cap companies are considered risky however the rate of return might be better than Large cap companies as they are still young companies and there might be a lot of room of growth left in the sector or company.
Small cap companies are considered very risky however the rate of return can be better than Mid and Large cap companies. A normal investors should stay away from these types of companies unless he is very well aware about the business model, management etc. as these companies are new and they have to still prove their survivals. However if its management and business prospects are good, these types of companies can become really a dark horse in your portfolio.
As the name suggest, it is the earning per outstanding share of the company. It is arrived by dividing net profit of last year (last 4 quarters) by outstanding shares (no. of share subscribed).
In case of GMM, last 4 quarter net profile is 13.3+17.69+20.79+21.05=72.83 crores and no. of shares subscribed is 1.46 cr. so EPS will be 72.83/1.46=49.
EPS indicates how much money a company is making for each shares. A higher EPS of the same sector companies indicates more valuable and robust company. That is why, a company having higher EPS in the same sector gives better return than remaining companies of that sector as investors pays more for these types of companies.
PE ratio is one of the key ratio used to value and analyse a stock. PE ration is calculated by dividing share price by EPS.
So in above example, the share price is 2600 and EPS is 49.83 so PE will be 2600/49.83 = 52.
PE ratio is also called a earnings multiple, price multiples etc.
Generally, high PE companies are considered risky investments as they are already trading at high price so margin of safety (in case company doesn't perform as per expectation, the chances of price going down is very high, so chances of loosing money is high). Low PE companies are considerd good as they are available at cheap price.
High PE is given to the growth oriented companies, where growth is visible and investors are willing to pay high price by factoring the future growth and its potential.
Low PE companies are considered undervalued companies as though they are performing better but for some reason market is not giving them enough value. Sometimes, this happens when market is in bear phase (downturn).
However PE should not be considered as only parameter to select a company. In general if a company is trading at high PE for last several years, that shows that investors have full confidence on the company potential, its management etc. and generally these kinds of companies continue to trade at high PE.
Low PE companies are always not good as chances are their future potential might not be good, management might have some problems etc.
Industry P/E is average P/E ratio of stocks in a particular Industry. For example, GMM is categorized in Capital Goods sector so as per above image, the Industry PE of capital goods sector is 16.35 however GMM PE is 52.11.
This shows the position of a company among other company of the same Industry or sector. Generally similar PE of a company in comparison with its Industry PE is considered rightly valued company.
Book value of a company is its Assets minus Liabilites divided by number of shares. This is the amount that will be distributed for each share if the company is liquidated.
This value is entired different than Market value (market price in which the share is traded in share market). This value is given in company's balance sheet.
Book value is used to derive Price to Book Value (explained below) so this is one of the important number to analyse the company.
The PBV ratio is calculated by dividing market price per share by Book Value. So for GMM, the market price is 2600 and Book value is 220.10 so the PBV will be 2600/220.10=11.80. PBV is also called price-equity ratio.
If PBV is lower in comparison with other stocks in the same Industry, this company is considered undervalued company. However, it also means that there might be temporary or permanent problem in this company that is why market is not giving good valuation. Higher PBV also indicates that an investor is paying too much price for the company.
Dividend should be very important parameter in selection of a stock. An investor gets nothing but dividend when he/she buys a particular company stock. Of course, when price appreciates for a particular company, he gets appreciation of the capital he has invested but that remains on the paper till he/she sells a share.
Generally, a company is not considered good if it does't pay dividend to its investor. However there might be specific situation where company is using the cash generated from business in expanding its business and do not want to pay dividend temporarily. In that, its good.
Dividend yield = (Cash dividend per year per share / Current Market Price) * 100
As the market price changes every trading day so dividend yield also changes.
Company whose dividend yield is more, is generally good for investors. It also indicates that a company is generating a lot of cash from business that it is meeting business requirments as well as paying dividend to its shareholders.
There are some companies that pays dividend by taking loan just to maintain the continuity and keep common man trust on the company, in ideal scenario we should stay away from these types of companies.
Growth companies (company that is still growing) generally do not pay good dividend as they use cash generated from business in expansion or acquisition.
It is also called company Equity base. This indicates that how many quantity of shares are available for trade in the market. Generally low quanity is not considered good as there will be less people willing to sell or buy shares. In this case, if the company is performing good, its price shoots up quickly however if the company performs bad, there will be very less people willing to buy the shares so its price fall quickly. It is also termed as less liquidity stock.
If a company is good and its number of shares subscribed are less, its very good combinations. Generally, most of the MNC's companies comes in this criteria that is why their price is very high and they are costly.
A normal investor should not allocate too much capital in low liquidity (less number of shares subscribed) based companies, because when you want to sell you may not get desired number of buyes at the price you want to sell.
When a company raise capital, it breaks down the amount into number of small units to make it affordable. This is called unit value or nominal value or face value of each share of the company. This value is different than market value. Generally face value of the company at the time of IPO (Initial Public Offering) is 10.
For normal investors, it has no significance. However many investors consider a company good having face value as 10 so that it will have scope to split of its shares into 5, 2 or 1 face value. When the market price becomes high of a company share, it becomes not affordable for many retailers so company splits the shares.
In above case, GMM price is 2600 and its face value is 2 for each share. 2600 is not affordable for many small investors to buy in quanity so it may prefer to split the share into half ie. 1 face value and the market price will become 2600/2 = 1300.
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