Basics of stock market for novice. DISCLAIMER: I am NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell stocks.

1. Stock Investments for Beginners
Natesh Bhargav

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided here is to be
interpreted as a suggestion to buy or sell stocks.

3. What are stocks?
 Stock is a share in the ownership of a company
 Claim on the company's assets and earnings
 More Stocks = Greater Stakes in the company
 Shares = Equity = Stocks = All are same
 Stock certificate = piece of paper that is proof of your ownership
 Demat account = No “stock certificates”. Everything will be done though the computer
electronically

4. Holding = Stock ownership
 Means that you are one of the many owners (shareholders) of a company
 You have claim to everything the company owns - tiny little piece of all the furniture, every
trademark, Profit etc…
 You are entitled to your share of the company's earnings as well
 Shareholder = No say in the day-to-day running of the business
 Shareholder = Voting rights to elect (or remove) Board of Directors
 Limited liability = as a stock owner not liable for companies debts

5. Why does company issue stocks?
 Methods of raising funds
 Equity financing = Raise money through stocks = No need to pay back money or interest
 Debt financing = taking loan from bank or bonds = has to pay back to bank
 IPO (Initial Public Offering) = The first sale of stock
 Equity Investment = No guarantees, Risk of losing the money
 Debt Investment (Bond) = Guaranteed principal + interest

6. Why does Stock prices go up/down?
 Because of supply and demand
 Demand = More people want to buy than sell = Prices goes up
 Supply = More people want to sell than buy = Prices goes down
 Sell and Buy depends on how company is performing & market sentiments
 Earnings of a company = Profit
 Company Results beats Dalal Street = Stocks goes up else goes down
 Market sentiments high = Stocks goes up else goes down

7. Sensex & Nifty
 NSE = National Stock Exchange (in Mumbai) , BSE = Bombay Stock Exchange (in Mumbai)
 Many other stock exchanges in India, but most of the trading done in NSE & BSE
 Sensex is an “index” = Indicator
 Gives an idea “most” of the stocks have gone up or down
 Sensex = Indicator for all major companies in BSE
 Nifty = Indicator for all major companies in NSE

8. Other Indexes
 Large Cap Index = Indicates how large cap companies doing
 Mid Cap Index = Indicates how mid cap companies doing
 Small Cap Index = Indicates how mid cap companies doing

9. New Investor – Ground Rules & Things to Remember
 Invest money you can afford to lose
 Use your brain = don’t completely rely on others advice
 Do your home work & examine facts about the company
 Stock Market = Full of Savvy investors
 98% of people lose money
 Some people are promoting wrong stocks (because they have invested)
 Buy the stock at a fair price and hold the stock for long-period.
 The stock will ultimately go up if a business does well
 Invest in good companies when everyone is fearing
 Don’t try to time the market – it is not possible

10. Stock Picking – Analysis
 Fundamental Analysis
 Based on core financials (Market cap, P/E ratio, Management etc…)
 Technical Analysis
 Based on the study of prices and volume
 Looks at stock chart, buying behavior etc..
 More complicated than fundamental analysis

11. Fundamental Analysis
 Based on financial and economic analysis to predict stock movement
 Analysis include – financial reports, non-financial info like product demand, govt policies etc…
 It is all about finding the “Real” or “Intrinsic” value of stock (Not easy!!)
 If Real value of stock < Current Market Price (CMP) = SELL
 If Real value of stock > Current Market Price (CMP) = BUY

12. How to find “Real” value of a stock?
 First, Analyze the overall economy then the company you are interested in
 Find out about company & products as much as possible
 Competitive Advantage – Management experience, Performance history, Product lines, Growth potential,
brand name, low cost production etc…
 Market share – How big? It is growing or shrinking?
 Financial Parameters & Ratios – EBITDA, EPS, P/E, PAT etc…
 Not only do we want our stock price to rise, we want it to rise FAST!
 The price of the stock does not make a stock good to buy
 Important = How much is the stock likely to rise & how fast?

13. % Rise of Stock is important not the price
 If the Rs.500 stock becomes worth Rs.540, then that is a 8% rise. This 8% rise only makes us Rs.40.
On the other hand when we invest the same Rs.500 in the 50paise stock and the stock price goes
up to Rs.1, it is a 100% rise as the stock price has doubled. This 100% rise makes us Rs.500.
 So, picking a company = Whose stock price will rise by a large percentage
 Challenges:
 How do you compare a stock worth Rs.500 to a stock worth 50paise and figure out which one will have a
higher percentage rise?
 How do you compare two companies that are in different fields and different industries?
 How do you know which one is fundamentally strong and which one is weak?
 Solution: Use fundamental analysis tools & ratios

14. Tools & Ratios
 EPS = Earnings Per Share
 Even comparing the earnings of one company to another really doesn’t make any sense because it will not
tell how many shares company has
 Because you do not know how many shares a company has, you do not know how many parts that
companies earnings have to be divided into
 If the company has more shares, the earnings will be divided into more parts.
 For example, companies A and B both earn Rs.100, but company A has 10 shares outstanding, so
each share holder has in effect earned Rs.10. If B has 20 shares, each share holder earns Rs 2
 EPS = Net Earnings / Outstanding shares
 EPS is not the only basis for comparing companies

15. P/E Ratio
 P/E Ratio tells what market thinks of a stock = market likes or dislikes the stock
 The P/E looks at the relationship between the stock price and the company’s earnings. The P/E is the
most popular stock analysis ratio, although it is not the only one you should consider
 P/E Ratio = Stock Price / EPS
 A company with a share price of Rs.40 and an EPS of 8 would have a P/E of: (40 / 8) = 5
 P/E Ratio tells:
 High P/E ratio looked as as “over priced” stock
 Market has high hopes for this stock’s future and has bid up the price
 Low P/E ratio looked as “vote of no confidence” by market
 Market has overlooked this stock

16. PEG Ratio = Price to future growth ratio
 The market is usually more concerned about the future than the present
 Always looking for some way to figure out what is going to happen in the companies future
 A ratio that will help you look at future earnings growth is called the PEG ratio
 PEG = (P/E) / Project Growth in Earnings
 E.g. stock with a P/E of 30 and projected earning growth next year of 15% would have a PEG of 30 / 15 = 2
 Technically speaking: The lower the PEG number, the less you pay for each unit of future earnings growth.
 So even a stock with a high P/E, but high projected earning growth may be a good value.
 To put it very simply, we are interested in stocks with a low PEG value
 PEG ratio relies on the projected % earnings. These earnings are not always accurate and so the PEG ratio is not always
accurate.

17. Picking the “Right” Stock – Criteria
 Market Cap of the company should be >1000 Crores
 Good management & governance in place
 Major shareholders of the company should be institutional investors
 Share capital - number of shares given by company should NOT be increasing drastically
 Cash flow - operating activity should positive and healthy growth
 Company should be a leader in the segment and should have unique strengths
 Profit After Tax (PAT) trend should be increasing
 The company should be giving higher dividends on regular basis
 P/E Ratio: A low P/E stock is preferable over high PE assuming other factors of the company are
same.
 EPS should be high compared to competitors

18. Thank You