One of the most debatable matters between Fundamental and Technical analyst has been the very need of doing an analysis. Why should we care about the monetary policy or fiscal policy of a country, why analyze a whole Industrial sector, why analyze a company’s management their accounts, forecast their future etc.? When we can buy/sell a stock and buy/sell it as soon we realize our profits (on the basis of demand and supply of stock or volume and trend of a stock or technical reasons discussed latter, I have written buy/sell here because in stock market you can sell a stock first even when you don’t own any stock and buy it latter at lower price and give the shares back, realizing the profit known as shorting).
Well this can be done purely on technical basis but not for a long term basis (I cannot predict what will be volumes or number of shares been traded in the market a year down the line) and by buying today selling tomorrow and repeating this over a period of time even in a stock which is doing good and is in upward trend we are reducing our profitability and exposing our self to the trading risk, only making our brokers rich.
The primary and most important reason for analyzing with such details and precision is to get the Fair value of a stock and the company that we are about to buy to be able to realize its future gains? This is the crux of value investing/Equity analysis. It’s actually more important for an investor that what price are you buy something than what are you buying. That is why Brand such as Reliance power was a bad buy when it was listed at 540 levels & satyam computers was a good buy at 40 levels even after all the hassle it has gone through.By saying that we need to buy something at fare price I mean the actual value of the shares or the company should be equal to market price. (Please note I am using value and price as two different terms as they are never the same, price is defined as the markets willingness to pay you “x” amount against one share of a company, by Value I mean fair price that I should receive today considering the future potential of a business).This makes it our Rule number 1 for our Investment
1) FAIR VALUATION
Now how to calculate the fair value of a share will be discussed over the topic before which I need to cover some prerequisite for arriving at fair valuation, which will be discussed in my next post.
Other Applications of Analysis
In financial world, Analysis is one of the most important aspects of the industry, not only in stock market/Equity market but also as a part of Economic research and forecast, Industrial research, Private Equity market (space where venture capitalist/other companies acquire other non-listed private company)
Well this can be done purely on technical basis but not for a long term basis (I cannot predict what will be volumes or number of shares been traded in the market a year down the line) and by buying today selling tomorrow and repeating this over a period of time even in a stock which is doing good and is in upward trend we are reducing our profitability and exposing our self to the trading risk, only making our brokers rich.
The primary and most important reason for analyzing with such details and precision is to get the Fair value of a stock and the company that we are about to buy to be able to realize its future gains? This is the crux of value investing/Equity analysis. It’s actually more important for an investor that what price are you buy something than what are you buying. That is why Brand such as Reliance power was a bad buy when it was listed at 540 levels & satyam computers was a good buy at 40 levels even after all the hassle it has gone through.By saying that we need to buy something at fare price I mean the actual value of the shares or the company should be equal to market price. (Please note I am using value and price as two different terms as they are never the same, price is defined as the markets willingness to pay you “x” amount against one share of a company, by Value I mean fair price that I should receive today considering the future potential of a business).This makes it our Rule number 1 for our Investment
1) FAIR VALUATION
Now how to calculate the fair value of a share will be discussed over the topic before which I need to cover some prerequisite for arriving at fair valuation, which will be discussed in my next post.
Other Applications of Analysis
In financial world, Analysis is one of the most important aspects of the industry, not only in stock market/Equity market but also as a part of Economic research and forecast, Industrial research, Private Equity market (space where venture capitalist/other companies acquire other non-listed private company)
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