Saturday, June 2, 2018

How Warren Buffet Identifies Value Stocks to Invest?

How-Warren-Buffet-Identifies-Value-Stocks

Four most powerful tools that Warren Buffett uses to identify value stocks. If you understand them all then you can easily pick value stocks for wealth creation.

Suppose you are sitting in a beer bar with some of your friends. While drinking the beer you got idea to start your business. The business of printing T-shirts. It requires ₹1,000 to open and start that business but you have only ₹250. You convinced one of your friends sitting with you and he is agree to pay you remaining ₹750.

Now you have ₹250 as equity ( Investor’s original money invested) and ₹750 is your debt that you have to pay back. You started your business and in very first year your company has generated

Revenue = ₹200

Expenses = ₹80

Operating Profit or EBIT = ₹200- ₹80 = ₹120

Net Profit (After deduction of TAX and Interest say 20rs.)= ₹100

Now some of the important terms are as follows:

Equity or Shareholder’s equity : ₹250

Debt or Total liability : ₹750

Total Asset = Asset + Liability i.e. ₹750 + ₹250 = ₹1000

Now here we go:

ROE ( Return On Equity) : Many people don’t really understand the real meaning of ROE, they just say, divide net profit to shareholder’s equity and your ROE is ready. I am not saying they are lying but the fact is you need to understand the terms so that you can use it in your analysis part.

Now in this business

ROE = Net Profit / Shareholders Equity

ROE = 100/250 = 40%

Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

The ROE is useful for comparing the profitability of a company to that of other firms in the same industry. It illustrates who effective the company is at turning the cash put into the business into greater gains and growth for the company and investors. The higher the return on equity, the more efficient the company's operations are making use of those funds.

ROA ( Return On Asset):

ROA = Net Income / Total Assets

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. Here is a twist, Remember that a company's total assets is the sum of its total liabilities and shareholder's equity. Both of these types of financing are used to fund the operations of the company. Since a company's assets are either funded by debt or equity.

The company has no retained earnings so Reserves and Surplus would be zero.

So,

ROA = 100/(250+750+Reserves and surplus)

ROA = 100/(250+750+0)

ROA = 10%

A higher ROA represents how efficiently the company is using its total asset in its core business to generate profits.

ROA is most useful for comparing companies in the same industry, as different industries use assets differently.

ROCE ( Return of Capital Employed)

Return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed.Here Capital Employed is not the total asset, this capital is the total capital that has been used to generate profits in the company.

ROCE is calculated as:

ROCE = EBIT / Capital Employed

EBIT = Total Revenue - Expenses i.e. 200 - 80 = ₹120

Total Capital Employed = Equity + Liabilities - Reserves & Surplus

In this example Total Capital Employed = 250 + 750 - 0 = ₹1000

ROCE = 120 / 1000 = 12%

For a company, the ROCE trend over the years is also an important indicator of performance. In general, investors tend to favor companies with stable and rising ROCE numbers over companies where ROCE is volatile and bounces around from one year to the next.

Debt to Equity Ratio :

This is very important parameter that simply determines that how much debt the company has on every 1 Rs. invested by original investors

Debt to Equity Ratio : Total Debt / Shareholder's equity

Debt to Equity Ratio : 750/250 = 3

So Debt/Equity should always be less than or equal to .5

Sunday, April 22, 2018

{NSE|BSE} Stock Market {Open|Closing} Timings In India

If you ask any trader about the Stock Market Timings in India, you could easily get the answer as 09:15 am to 03:30 pm from Monday to Friday. But there are some few more things to discuss about the stock market timings in India such as Pre Market Open Session, Trading Session as well as Post Market Closing Session if you look deep into the topic. That's what I am about to discuss in this post.

Stock Market Timings in India

Stock Market Timings in India

Trading on the Indian Equities segment takes place on all weekdays except Saturday, Sunday and on Stock Market Holidays declared by Indian Stock Exchanges in advance. You could get much more details about the holidays in link here: NSE Market Timing Holidays

Pre-Market Session

The Pre-Open Trade session is a 15 minute trade session from 09:00 am to 09:15 am on the 50 stocks of NIFTY Index. Only 50 stocks of the NIFTY Index can be traded in this session. Normal trading for all other stocks will commence from 09:15 am till 03:30 pm.

What is the Need for Pre-Market Session?

In case a major event or announcement comes overnight before market opens, such events are likely to bring heavy volatility on the next day when the market opens. Special events include merger and acquisition announcements, open offers, delistings, debt-restructurings, credit-rating downgrades etc which may have a deep impact on investors wealth. In order to stabilize this, pre open call auction is conducted to discover the right price and to reduce volatility.
This Pre-Open Session is further divided into 8+4+3 minutes sessions.

  • 09:00 AM to 09:08 AM
    • During this session investors can place/ modify /cancel orders on the basis of which the exchanges would determine the rates at which trading would happen. Orders are not accepted after this initial 8 minutes.
  • 09:08 AM to 09:12 AM
    • In this four minutes, orders are matched, executable price is discovered and trades are confirmed. This session is used to determine the Opening Price of the stock in the normal trading session. You will not be able to cancel the orders here.
  • 09:12 AM to 09:15 AM
    • This 3 minutes is just a buffer period for transmission from pre-market session to normal market session.

Normal Market Session

This is the session where most of the trading activities takes place. You can Buy and Sell stocks in this session. It follows Bilateral matching session, where if buying price is equal to selling price, transaction is said to be complete. Here transactions are as per price and time priority.

Closing Session

The time between 03:30 pm and 03:40 pm is used to calculate the closing price of the stock. It is calculated as the weighted average of the price between 03:00 pm to 03:30 pm. Index closing price is also calculated by their constituent stocks closing price between 03:00 pm to 03:30 pm. 

Intraday Trading With Gann Square of 9 Calculator (Live Case Study)

Please Enter below the LTP (after 9.30 a.m) of the NSE/BSE Nifty or any Index or Stock script for which you need to calculate Intraday Resistance and Support levels as well as Stock Targets and Stoploss recommendation based on Gann's Square of Nine method. Also see below Casestudy if you want to know how it worked for me.
Gann Online Calculator
Enter LTP: >>
Gann Square of 9

The Gann's calculated Resistance and Support levels for the provided LTP value above is as given below for Intraday only.
Gann Resistance and Support Levels
Resistance & Support Levels
Resistance 1 Resistance 2 Resistance 3 Resistance 4 Resistance 5
Support 1 Support 2 Support 3 Support 4 Support 5

You can use the below Gann's Recommended Targets and Stoploss for the stock/Index for Intraday only.
Gann Recommendation for Targets and Stoploss
Recommendation:
Buy at / above:     Targets:  
Stoploss :  
Sell at / below:     Targets:  
Stoploss :  

Sample Trading Casestudy using the above Gann Suare of Nine Method

I took BHARTIARTL on NSE as on 17th October, 2017

Also Read: NSE/BSE Opening Closing Timings in India

I checked for the LTP as on 9:35 am and found it to be 458.05 and entered the same in above Gann Square of Nine Intraday Calculator.
Gann Square of Nine Calculation LTP Selection
As soon as I entered the LTP, I got Resistance and Support levels, and as well as the Target and Stoploss Recommendation also.
Gann Square of Nine Calculation Resistance Support Target Stoploss
As for the day, Open and Low was same, I did not want to short the stock and waited for it to break the 462.25 levels, so that I can enter to buy the stock.

At around 12.55 pm, it touched the 462.5 levels, and the stock was bought with a stop loss order of 456.89.
Gann Square of Nine Calculation Buy Level Breaks
The first target was given as 467.4 as per the above Gann Square of Nine method and it was achieved at around 2:45 pm as the scrip went upto 469 levels. As the first target was achieved, the stop loss order was re modified as 467.4 and waited for next Target 472.82. But, within few minutes, it came back to 467.25 and triggered the stop loss order and the scrip was sold at  467.4 levels.
Gann Square of Nine Calculation Target1 Achieved
Totally, The trade made a profit of Rs.450+ following the Gann's square of Nine method for Intraday.
Gann Square of Nine Calculation Profits
Thus, you could see from the above case study that, The target as suggested by Gann's square of Nine method worked. But let me make you clear you with some details on how you could have lost money in this trade.

*You could have shorted at the 456.89 once it went below it. As I was sure that it will increase due to open and low are same, I did not short it.

*Once it reached the Target1, the stoploss order was re modified. If it was not done in a timely manner, you could have lost profits, since the stock came down from top within few minutes.

Also Read: Nifty Monthly Expiry and BankNifty Weekly Expiry Option Pain Cheat Sheet

Finally, I want to suggest is that, Gann Square of Nine method is a profitable method if and only if you are clear with the direction in which the stock moves and you are quick enough to trade according to the situation and handle it properly. This method is just like a torch light in a dark cave. All the risk must be borne by you before you implement or use the above method.