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Wednesday, 28 December 2011

What is Balance Sheet and the importance of it

If you are a share holder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.
What is Balance Sheet?
Balance Sheet is a financial statement of a company.
There are three segments summarizes in this Balance Sheet.
1.Company's Assets
2.Company's Liabilities
3.Share Holders Equity
Balance sheet always follows the following formula.

Asset=Liabilities+Share holder's equity

By using this Balance Sheet investors will get an idea as to what the company owns and owes as well as the amount invested by the share holders.
Assets are what a company uses to operate its business.
There are two types of assets.
1.Current Assets: Current Assets have a life span of one year or less,they can easily converted into cash.
They are
Cash: Non restricted bank accounts and checks.
Cash equivalents: These are very safe assets that can be readily converted into cash.
Accounts receivable:It consists of the short term obligations owed to the company by its clients.
Inventory:This represents the raw materials, work-in -progress goods and the company's finished goods.
2.Non-Current Assets: Non-current assets are assets that are not turned easily into cash.
They are
Tangible assets: machinery,computers,building and land.
Intangible Assets:Good will,patents or copy right.
In tangible assets: Good will,patents or copy right.


Liabilities are the financial obligations a company owes to outside parties.
There are two types of liabilities
Current liabilities: Current liabilities are the company's liabilities which will come due or must be paid, with in one year.
Example: Accounts payable, current portion of longer term borrowing such as the latest payment on a 10 year loan.
Long-term liabilities: These are debts and other non-debt financial obligations.

Share Holder's Equity 

Share holder's equity is the amount of money initially invested into the company plus any retained earnings.This is the source of funding for the business.This account represents a company's total net worth.

Wednesday, 21 December 2011

RBI,Interest Rates,Stock Market

Now a days we are listening much about interest rate hike by RBI to tame inflation. What exactly interest rates are? How these are related to inflation? How  interest rates  effect the stock market? These are the questions arosed in your brain. Am I right? Here I am going to give you some details

What exactly interest rates are?

An interest rate is the rate at which interest is paid by a borrower to lender for the use of money that he borrows from a lender. These interest rates have been set by national governments or Central Banks. For united states it is Federal reserve. England's bank of England and funds rates varied from 0.5% to 15% from 1989 to 2009.For India's RBI(Reserve Bank of India) and the interest rates varied from 3.25% to 14.50% from 2000 to 2010.
Repo Rate: When ever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI.
When the Repo rate increases borrowing from RBI becomes more expensive.
When the Repo Rate decrease then it is helpful to banks to get money at a cheaper rate.
CRR Rate: Cash Reserve Ratio is the amount of funds that the banks have to keep with RBI.
If RBI decide to increase the percentage of this, the available amount with the banks comes down.
Reverse Repo Rate: Reverse Repo Rate is the rate at which RBI borrows money from banks.
Banks are always happy to lend money to RBI since their money are in safe hands with good interest.
Increase in reverse Repo Rate can cause the banks to transfer more funds to RBI. It can cause the money to be drawn out of the banking system.
SLR (Statutory Liquidity Ratio): SLR is the amount a commercial bank needs to maintain in the form of cash or gold or govt. approved securities(bonds) before providing credit to its customers. SLR is determined and maintained by RBI in order to control the expansion of bank credit.

How interest rates are related to inflation?

Bank interest rates depends on many other factors out of that the major one is inflation.
Whenever you see an increase on inflation there will be an increase of interest rate also.
Inflation may be recognized as of money goes up, the supply of goods goes down, demand for money goes down or demand for goods goes up.
Our Indian government gets involved in it to control the inflation by adjusting the level of money in our economical system. 
Factor like rates of import and export, the production cost of farms, value of dollar, price of oil(crude oil), market movements of other overseas markets cause global liquidity. RBI needs to control this excess liquidity in our economic system. For this RBI increases the Repo Rate which makes Costly credits and thus increases the CRR rate . This kind of measures by RBI can only control the inflation to a certain extent only.

How interest rates effect the stock market?
When RBI increases the funds rates, it does not have an immediate impact on the stock market.
It influence both individual and businesses.
How individual affected?
Individuals are affected through increase to credit card and mortgage interest rates, if they carry a variable interest rate(an interest rate that moves up and down on the changes of an underlying interest rate index)
This has the affect of decreasing the amount of money consumers can spend. After all,people still have to pay the bills, and those bills become more expensive. This means people will spend less discretionary money(The amount of an individuals income that is left for spending , investing or saving after taxes and personal necessities have been paid).
How businesses affected?
Businesses also indirectly affected by an increase in the RBI rates as a result of the actions of individual consumers. Business is also affected direct way as they borrow money from banks to run and expand their operations. Less business spending can slow down the growth of a company, resulting in decreases in profits.
How stock market affected?
RBI funds rate affect the behavior of consumers and businesses as well as the stock market also.

Valuing a company is to take the sum of all the expected future cash flows from that company. If a company is seen as cutting back on its growth spending or is making less profit- either through higher debt expenses or less revenue from consumers then the estimated amount of future cash flows will drop. This will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market or the indexes will go down.
For many investors, a declining market is not desirable out come. to invest.They wanted to see their money to increase in value. When RBI raises funds rates ,newly offered government securities, such as treasury bills and bonds are often viewed as the safest investments. making these investments more desirable.

Friday, 16 December 2011

Gross Domestic Product(GDP)

In a given period of time, GDP of any country refers to the the market value of all final goods and services produced within a country.
The real GDP per capita of an economy is often used as an indicator of a country's standard of living.
Economic growth is the increase in the value of the goods and services produced by an economy or growth of potential output. Economic growth is there fore often seen as indicating an increase in the average standard of living.

GDP can be determined in three ways.

1.Product(output) approach
2.Income Approach
3.Expenditure approach

GDP=Private consumption+gross investment+government spending+(exports-imports).

Consumption: Consumption is normally the largest GDP component in the economy. 
Example:food,rent,gasoline,medical expenditures,jewelry etc

Investment: Investment includes business investment in equipments.
Example:Buying houses,savings,buying stocks,bonds etc.

Government spending:This is the sum of government expenditures on final goods and services.
Example:Salaries of public servants,purchase of weapons for the military and investment expenditure by a government.

Exports:Exports represents the gross exports to other countries.

Imports: Imports represents the gross imports from other countries.

Usually GDP is expressed as a comparison to the previous quarter or year.
For example , if the year-to-year GDP is up 4% means the economy has grown by 4% over last year.

The GDP in India expanded 6.9% in the third quarter of 2011 over the previous quarter. From 2000 until 2011, India's average quarterly GDP growth was 7.45%. It reached the historical high of 11.80% in December 2003 and a record low of 1.60% in December 2002.
Indian economy hurt by high local borrowing costs and a deepening euro-zone crisis.
GDP grew 6.9% from a year earlier. The economy had expanded 7.8% in the January-march quarter.

Thursday, 15 December 2011

What is happening in India?

India is a developing country and economically we are very strong and fundamentals of domestic company's are very strong if GDP goes down no problem.This is the confidence we have so far.

Uncertain things happening in India.

1.Our inflation will goes up and down with out any reason.

2.To tame inflation we need FDI in multi retail's sentiment created by government then some of investors started to invest in the market but opposition doesn't like it.After rolled back the decision, suddenly inflation came down to 6.6%. How strange it is? It is 4.35% now, suddenly our farmers started to grow much vegetables and cereals.

3.RBI raised interest rates 13 times to bring down the inflation.Now inflation 4.35 % lowest in nearly four years then why should not RBI cut the rates? due to interest rates hike and exports and imports our IIP index shocked us.Now FII's are again started to sell with the fear. What this government wanted to do?
There is no certainty in their words and their monetary actions.
Related links:
Crunch time for indian companies
Rupee fall spells big troubles for FIIs in Indian market

Sunday, 11 December 2011

Why India is struggling with depreciation of rupee and how effective it is?

In the first half of fiscal 2010-11 the Indian economy grew at a healthy rate of 8.9%. India's economy has become increasingly interlinked with global markets.
The USD-INR Exchange rate is an important indicator of investor sentiment and can significantly impact not only the fortunes of individual firms and sectors but also the government.This Exchange rate has been very stable overall for the last five years. On April 24 2006 it was 44.86 and on April 2011 it was 44.34. USD-INR moved from 40 to 52 from March 2008 to November 2011.

There are significant factors to increase USD-INR Exchange rate (or) fall of rupee against dollar.

1. Inflation is at an all-time high: The Consumer Price Index (CPI) increased by 10.88% in 2009 and by 13.19% in 2010.The monetary policy changes undertaken by the government to control inflation have been ineffective. We believe this is because inflation is being driven primarily by structural supply side challenges such as lack of agricultural infrastructures, low crop yields and the obsense of organized retail.

2.Decline of FDI for long term prospects: India is one of the fastest growing economies and is considered a favored destination for investment. But we have seen the decline of FDI in the year 2010. FDI is an important indicator of investors faith in a long-term prospects, but FII(Foreign Institutional Investors) provides short -term portfolio investment money inflows.

3.Corruption: Recent widespread corruption scandal have reinforced the negative perception of governance deficit in India. Regulatory and tax uncertainty will deter many foreign investors.

4.Decline of Remittances: Another major source of foreign currency inflow to India is remittances. India received USD 55 billion in remittances during 2010.Remittances from countries like Saudi Arabia and UAE experience a decline as unemployment in these nations rises.The Indian abroad leave the region due to security concerns.

5.Government failure: The government finances are in a bad shape and the combined central and state government deficit has stubbornly stayed around 10% of GDP .Experts believe that oil prices will remain high in the near future. This is a major concern for India as it imports about 70% of its oil and efforts to increase the production capacity of Petroleum and natural gas domestically have not been successful.

6.Deficit level:India's current deficit is about 3%, the level it reached during the crisis of the 1990's. India's rising import bill and threat to remittances, the deficit will remain high in the near future creating pressure on the Indian Rupee.

How it is effecting our economy?

Unstable Rupee is always a case of concern for both exports and imports.

Exports:In case of exporters ,Rupee depreciation means short-term advantage. Those exports who hold their products would be benefited. However the Euro zone crisis and global meltdown have affected exports from making the desired profit.Demand slowdown in US and Europe . The government is focusing more on Africa and Latin American markets.
India's total exports in the year 2009-2010 is 84,553,364.38 and in the year 2010-2011 is raised to 114,264,897.18. Growth rate is 35.14%.
Our max exports to the countries UAE, and USA.

Imports: Imports are losing ground owing to the devaluation. Indians imports are about 70% of its oil. Experts believe that oil prices will remain high in the near future.Coal and some raw materials are also importing from other countries
India's growth of importing rate rises to 35.63%. Our max imports from the countries china,UAE,Switzerland etc. 
Related links:

Billionaire investors strategy of 2011

Retail investors are confused and watching at the Europe countries and the crisis which is making them worse. At the same time many rich people are enjoying the situation and investing in the market.Billionaire investors like Warren Buffett and Bill Gates have been loading up on these stocks for years. Warren Buffet recently invested $2.5 billions, Bill Gates invested $4.0 billion and the richest man in the world Carlos Slim invested $14.5 billion.

Buffet and the world richest men following the Value Investing strategy or some other?

This time Buffet is not following the Value Investing strategy.All rich people are following the particular type of investment. They are investing in the stocks which are the basic building blocks of economic growth that you dig,drill or pump out of the ground. 
Yes i am talking about the Natural Resources like oil,gold,natural gas and metals.

Warren Buffett owns 29.1 million shares of oil power house Cono Cophillips(NYSE:COP). He invested $2 billion in this company .

Bill Gates has piled $570 million into oil stocks.He recently bought $5.8 million shares of the largest cement company in the world CEMEX(NYSE:CX)

Carlos Slim has invested $7.1 billion in a mining company called Minere Frisco.

A third of the world's 100 richest people made their fortunes in the Natural Resources.
Mega fortunes were made in natural resources than in Technology or real estate or any other business. Many more billionaires are storing their wealth in natural resources.

Sunday, 4 December 2011

How to read the report card of a company

If you want to analyze the company's fundamentals and the report card of a company, you need to know some metrics.
Following are some very best metrics to tell you about the company 1.EPS(Earn per share)
2.P/E(Price earning ratio)
3.Face value
4.Net profit Margin
5.Bonus shares

EPS(Earn per share): EPS is the amount of earnings per each outstanding share of a company's stock.
Comparing the earnings of one company to another doesn't make any sense because the two companies have a different number of outstanding shares.

EPS=(Net Earnings-Dividends on Preferred stock)/Out Standing Shares.

There are three types of EPS.
1. Trailing EPS: last years number and the only actual EPS.
2.Current EPS: This year numbers which are still projections.
3.Forward EPS: Further number, which are obviously projections.
EPS is helpful in comparing one company to another, assuming they are in the same industry. But it doesn't tell you whether it is a good stock to buy or not.

P/E ratio(Price earning ratio): P/E is the most popular metric of stock analysis. It looks at the relationship between the stock price and the company's earning.It gives you an idea of what the market is willing to pay for the company's earnings.
P/E Ratio=Stock Price(Market Value per Share)/EPS(Earn per share).
A high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with lower P/E.
It would not be useful for investors using the P/E ratio as a basis of their investment to compare the P/E ratio of a technology company(high P/E) to a Utility company(low P/E) as each industry has much different growth prospects.
many investors think that the lower P/E always a better investment than a stock with a higher one. But it is wrong. It always depends. P/E ratio's tend to vary from industry to industry. Mature industries which have more moderate growth potential have lower P/E ratios than company's in relatively young,quick growing industries with more robust future potential.

Face value:Face value is the real value of the share offered in the primary market and shown on the certificate.Face value is fixed by the company.In the case of Common stock face value is largely symbolic. In the case of preferred stocks, dividends may be expressed as a percentage of face value.
The issuing company promised not to issue further shares below face value, So investors could be confident that no one else was receiving a more favorable issue price.
The face value is a nominal value of a security which is determined by an issuing company as a minimum.

Net profit Margin(%): Net Profit Margin tells you how much profit a company makes for every $1 it generates in revenue(or)sales.Profit Margin is an indicator of a company's pricing strategies and how well it controls costs.

Net Profit Margin =(Net income after taxes/revenue)*100.

Higher profit margin indicates a more profitable company that has better control over its costs.
Increased earnings does not mean that the profit margin of a company improving. For instance ,if a company has costs that have increased at a greater rate than sales. It leads to a lower profit margin. This is an indication that costs need to be under control.

Bonus shares: When the additional shares are allotted to the existing share holders with out receiving any additional payments from them. It is known as issue of Bonus Shares.
Issue of Bonus shares results in the conversion of the company's profits into Share Capital.
Bonus issue tends to bring the market price per share with in a more reasonable range.
It increases the number of outstanding shares. This promotes more active trading.
Share Holders regard a bonus issue as a strong indication that the prospects of the company have brightened and they can reasonably look for an increase in total dividends.
it improves the prospects of raising additional funds.

Dividends:Stock dividend is distribution of profit among the investors as share rather than cash which increases the ownership right of holder of shares as well. Dividend giving stock are normally a healthy stock.

Sales: If the sales of a company increases then their net profit margin increases. The company's which have growth rate of 15 % every year then they are called growth stocks.