Monday, September 17, 2007

Share basics

Once you've decided to invest in shares and have set yourself some goals, the next task is to select some shares to buy.
These are some of the basics I apply.
  1. Knowledge: How does the company generate revenue? i.e. what does it do, where does it do it and how does it do it? What are its strengths and weaknesses compared to rivals and given what it does?
  2. Financials: For a non-banking/insurance company, I'll look at what is the percentage increase in turnover/sales; costs/expenses;  financing costs; PBT; PAT; EPS (PAT divided number of shares); current liabilities/current assets. How has net cash flow moved over time and why? Compare these to its rivals if there are any at the NSE. For the banking sector, see this post and another to follow. For insurance sector, look at growth in premium income and investment income.
  3. Forward looking: Review the company-specific research and news stories from here, here, here and kathalika for future developments and strategy going forward. Also build up understanding of its market by looking at opportunities and threats that are represented by changes in rivals' fortunes, legislation, economy, social and political changes.
  4. Share price: Decide on an entry and Exit strategy before you buy the share. Both should be determined by your expectations of future share price performance. For guidance on this, look at past share performance with mystocks being particularly good at this and then extrapolate based on knowledge build in 1-3 above.
  5. Quantity: If buying for long-term (thus have gone through 1-4 above), avoid hedging your bets by buy a few here, there and everywhere. We've all heard the story of the hyena that couldn't decide which path to take to the meat and ended up with two shorter hind-legs. Buy a few quality shares whose perfomance you can track over time and buy in huge quantities rather than buying some now and adding some later on.

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