Monthly Archives: February 2008

Knowledge Matters

Its been long time since I have blogged and things changed a lot in meanwhile.One of them is I slowly started to invest in stock market.As a result of which I have also started to watch cnbc tv like my father did,I also read economic times as if I understand it completely(ofcourse not).Not sure how many days or months this passion is going to be,but I am enjoying it.

First I started to follow the market for few days,I saw a lot of market analysts predicting the power sector is going to show great signs of growth.So I have picked up a stock PowerGrid at 136 investing 3k in it.Why powergrid?,because I heard one my friend saying about that it would do great in long term(First mistake).Without knowing what the company is actually into,what is its turnover,profit,operating margin.The stock started to do good and it went upto 154.I was patting myself for how intelligent I am.Then I picked up one more power stock Ntpc at 255.It also started to move upto 270.There was no stopping for me.I was on top of the world.

I saw a website recommending that BirlaCorporation stock will go up a lot in near future.I looked into the stock compared it with its peers,saw that its at a very low price,so I picked it up.But to my dissapointment stock price fell badly.(Mistake — I haven’t done industry analysis and haven’t found out why the stock was quoting lower than its peers).

Then came the big crash of January 2008 whipping the market from 21k levels to 15k level.My portfolio crashed it was 30% down.Then I have invested double the value of my portfolio .Later market recovered to 18k levels at which I booked profit.As of now I am sitting with 10% profit.But there are so many things I have done wrong and so many things I have learnt.

With the experience I had in 2 months , I see two things are important before investing.Fundamental analysis and Technical analysis.

Fundamental analysis this is all about knowing the company.What is its business ,revenue , profit ,competition , market cap.Step wise following are the things one needs to look at.

  1. The Capitalization of the Company
  2. Revenue, Profit and Margin Trends
  3. Competitors and Industries
  4. Valuation Multiples
  5. Management and Share Ownership
  6. Balance Sheet Exam
  7. Stock Price History
  8. Stock Options and Dilution Possibilities
  9. Expectations
  10. Risks (Further reading can be found here).

By doing Fundamental analysis one may find out that company XYZ is having great prospects of growing,one may pick up the stock of XYZ company and expect its stock price to just head towards north but proving him wrong the stock price might be moving in opposite direction towards south.Even though fundamental analysis was 100% right that the company would do good.One who knows about Technical analysis could have predicted rightly why the stock price was falling.

Technical analysis is all about determining the price movements of the stock based on its past price movements.This would explain why even though the performance of the company does not change day by day but its stock price does.You can find good tutorial on Technical analysis here.

By having a good knowledge in the topics mentioned above one would be able to take wise decisions instead of just following the herd.

Hoping this would be of some help to people who are just 2 months behind me in this new world.Going ahead I would try to post my experience and things I learn in stock market.