In this blog we will break what all constitutes fundamental analysis. Fundamental analysis is usually used by investors and is a useful skill to master.
Introduction - Fundamental Analysis
Annual Report
1. Qualitative
Corporate governance
Moat of the business
Competition landscape
Regulatory environment
Promoter background
2. Quantitative:
Profit & Loss
Balance Sheet
Cash Flow
Mindset of Investor
Trader: Design trade.
Speculator: Gut feel, Friend told.
Investor: Does deep down fundamental analysis.
How to read annual report of a Company
Download from the company website.
Includes financial and non-financial.
Figure out your main area 1. Management Discussion & Analysis. 2. General Shareholder Information. 3. Consolidated Financial Statements.
Management Discussion & Analysis 1. Business Strategy of the Company 2. Growth Prospects of the Company 3. Risk that the company faces.
Revenue (Top Line) Total Income = Revenue from operation + Other Income
Expense: Raw materials + Salary paid to the Employees + Depreciation & Amortization + Interest Payments + Electricity & Rent + Power & Advertisement.
Operating Profit = Revenue − Expenses
Tax: Profit after Tax (PAT: Final Profit or Bottom Line) PAT = Operating Profit − Tax
Understanding Balance Sheet
Year on Year basis
Two broad sections: Assets & Liability (Both are sub-divided into Non-current and Current)
Non-Current Assets 1. Have a long-term economic benefit to the company. 2. Includes: Tangible Assets (Like — Property, Plant & Machinery) and Intangible Assets (Like — Trademark, Patent & Certificate, Financial Instruments)
Current Assets: Economic output within a year time frame. 1. Inventories: Finished goods ready to be sold. (Dig Deep) 2. Trade Receivables 3. Repayment of Loan by others to them 4. Cash & cash balance held with the Bank
Non-current Liabilities: Financial obligations which can be fulfilled within a few years.
Current Liabilities: This should be fulfilled within a year.
Equity Liabilities: 2 Parts — Share Captial + Reserves & Suplusses(Profit from P&L)
The Cash Flow Statement
It gives the exact cash position of a company
Three Activities a company can conduct: Operating + Investing + Financing. Sum total forms cash statement
Generate or consume cash
Operating Cash: Represent the core operation of the company.
Investing: Capital expenditure: New plant, acquisitions.
Generate Cash: Positive Cashflow
Consume Cash: Negative Cashflow
Financing: Borrowing from banks, paying out dividends.
The Connection between Balance Sheet, P&L and Cash Flow Statement
All three are deeply connected.
P&L: Revenue + Significant Expense + Effective Tax Rates+ PAT
Balance: Borrowings +Account receivables + Cash available at hand or banks
Cashflow: Cashflow from Balance + Investing + Financing Activities
Financial Ratio Analysis
Metric that helps in understanding the financial health of a company. It is divided into 3 broad categories — Profitability ratio, leverage (or solvency) ratio, and valuation ratio.
The profitability ratio helps us understand the profitability of the business. Profits are important to expand the business and pay dividends to shareholders. To analyze a company on the basis of this ratio, ensure that the PAT margin and EBIDTA Margin are trending upwards and are stable.
Some of the Profitability ratios are:
Operating Profit Margins (OPM) Percentage of profit a company produces from its core operations. Calculated by calculating the EBITDA (Earning before Tax, the interest cost, depreciation & amortization) of a company. EBITDA = Total Income − Total Expenses OPM = EBITDA ÷ Revenue from operation
Net Profit Margin Calculate the percentage of profit a company produces from its total revenue. PAT Number ÷ Total Income
Return on Equity (ROE) The ratio measures the efficiency with which a company generated profits from each unit of shareholder’s equity or capital invested. The higher the ROE, the better it is (>25%). A company should not have much debt as it can skew the ROE number. It is different for different sectors. Like IT company has a very high ROE as they don’t have to re-invest more as compared to a manufacturing company which has a low ROE. ROE = Net Profit after Tax ÷ Shareholder’s Equity
Theleverage in the context of the balance sheet refers to the debt that a company has taken from the bank to run its operation. It is also called the Solvency ratio. This ratio measures the operational efficiency of the business. Some of the leverage ratios are:
Interest Coverage Ratio Helps us understand how much the company is earning wrt the interest burden it has. This ratio determines how efficiently a company repays interest on its outstanding debt. Higher the better(>1). Interest coverage ratio = EBIDTA ÷ Finance Costs (Interest Obligations)
Debt to Equity Ratio D/E = DEBT ÷ EQUITY A measure of the total debt of the company against the total shareholder’s equity in the company. Minimum the best. Lower than 1 is better.
The valuation ratiocompares the stock price with the valuation of the company to get a sense of how cheap or expensive a company’s stock is. Popular valuation ratios are:
Price to Sales Helps to compare the stock price of the share with the sales per share. Higher associated with PAT margins. Ratio = Current Share Price ÷ Sales per share
Price to Book Book value = Tangible Asset − Liabilities It is simply the amount of money that is left on the table after a company pays off all its obligations. Book value = Total Equity ÷ Total Outstanding Shares PB = Share Price ÷ Book value A higher price to book value ratio signifies that the firm is overvalued wrt the company’s equity/book value. A lower price to book value signifies that the firm is undervalued wrt the company’s equity/book value.
Price to Equity Earnings per Share (EPS) = PAT ÷ Total Outstanding Shares PE = Share Price ÷ EPS For every unit of profit that a company generates the market participants are willing to pay PEx (times) more to acquire the share. Compare to industry-specific.
Compare the financial ratios of a company to its peers to have a better understanding.
How to value a company
Very elaborate process. The different techniques used
Intrinsic valuation Discounted Cash Flow analysis Model (DCF): It considers Free cash Flow and Growth rate of cash flow and risk.
Relative valuation Used when there is no positive free cash flow.
New Fund offers in mutual funds are like IPO for shares, where the fund houses come up with an investment proposal and public can subscribe to it.
What are NFOs?
An NFO or New Fund Offer is offered by Asset Management Company (AMC).
It is an invitation to the investors to subscribe to the units of a newly launched fund.
These are launched to introduce a new investment theme that any of AMCs existing funds do not offer.
A contribution is made to the pool of investment that is yet to be invested by subscribing to NFO.
How to Analyse an NFO (Checklist)
Asset Management Company (AMC): Good experience (At least 10 years), Good growth in its Asset Under Management (AUM), Lower expense ratio, Good portfolio of existing funds.
Fund Manager
Investment Strategy: Does the offering meets your investment needs (theme).
What is a Marubozu candlestick? In this blog we learn about Marubozu candles and the psychology behind trading the pattern.
In technical analysis of the stock market, traders look for patterns in the price and volume of securities to make predictions about future price movements. One such pattern is the marubozu, which is a single candle on a candlestick chart that has no shadow or wick on one end, signifying strong buying or selling pressure.
A bullish marubozu is a candlestick that has a long green body with no upper wick, indicating that buying pressure was strong throughout the trading session, pushing the price up from the open to the close. This pattern is usually seen as a strong bullish signal and traders may interpret this as a bullish trend reversal or a continuation of an existing bullish trend.
When a bullish marubozu forms, traders interpret it as a sign of strong buying pressure and confidence in the market. This may lead to increased optimism and a sense of security among traders, leading them to take long positions in the stock. The bullish sentiment may also lead to increased demand and further price appreciation, thus continuing the positive cycle.
First and Second green candles are Bullish Marubozu while fourth candle (Red) is an example of bearish Marubozu.
On the other hand, a bearish marubozu is a candlestick that has a long black body with no lower shadow, indicating that selling pressure was strong throughout the trading session, pushing the price down from the open to the close. This pattern is usually seen as a strong bearish signal and traders may interpret this as a bearish trend reversal or a continuation of an existing bearish trend.
When a bearish marubozu forms, traders interpret it as a sign of strong selling pressure and bearish sentiment in the market. This may lead to increased fear and caution among traders, leading them to take short positions or exit long positions in the stock. The bearish sentiment may also lead to decreased demand and further price depreciation, further worsening the selling pressure.
It is important to note that market psychology is not always rational and can be influenced by various factors, such as news events, economic data releases, and rumors. Therefore, traders should not solely rely on candlestick patterns and should always consider multiple factors before making a trading decision.
The other common single candlestick patterns are Bullish Engulfing, Bearish Engulfing, and Inverted Hammer. Please click on respective links to access the blog.
What are Doji and Spinning top candlestick patterns? In this blog, we will look into two very important candle patterns.
Doji and spinning top candles are two important candlestick patterns that traders use to interpret market sentiment and make informed trading decisions. In this article, we’ll discuss what doji and spinning top candles are, how they are formed, and how traders use them to make trading decisions.
What is a Doji Candle?
A doji candle is a candlestick pattern that signals indecision in the market. It is formed when the opening and closing price of a security is almost the same, resulting in a candle with long wicks on both the upper and lower end. The long wicks show that both buyers and sellers have attempted to push the price in opposite directions, but neither side was able to gain control. This results in a candle with a small real body that is often situated near the middle of the candle’s high and low range.
What is a Spinning Top Candle?
A spinning top candle is a similar pattern to the doji candle, but it is formed when the real body of the candle is larger and the upper and lower wicks are still relatively long. The spinning top candle also signals indecision in the market, as the larger real body shows that both buyers and sellers have taken control of the price at some point during the trading session, but neither side was able to gain a sustained advantage.
How to Use Doji and Spinning Top Candles in Trading
Doji and spinning top candles are most effective when used in conjunction with other technical analysis tools, such as trend lines, support and resistance levels, and moving averages. Traders often look for doji and spinning top candles at key levels of support and resistance, as they can signal a potential reversal in the trend.
Doji and Spinning top candles
In the pic above, the first green candle is close to what doji would look like. The third red candle which has a thicker body is close to what a spinning top would look like.
For example, if a doji or spinning top candle forms at a key resistance level, it may indicate that the price has reached a top and that a downward trend could soon follow. On the other hand, if a doji or spinning top candle forms at a key support level, it may indicate that the price has reached a bottom and that an upward trend could soon follow.
The other common single candlestick patterns are Marubozu and Inverted Hammer. Please click on respective links to access the blog.
A candlestick is a type of chart that is commonly used in technical analysis to display the price movements of a financial instrument, such as a stock, currency, or commodity, over a specific period of time. Each candlestick is represented by a “real body” which displays the open and close prices and “tails/wicks”, which display the highest and lowest prices reached during the period.
A bearish Candlestick
The red rectangular part as seen in the image above is called body and the thin line on top and bottom of body is called tail/wick/shadow.
In a candlestick pattern, the body represents the area between the open and close prices of a financial instrument during a specific period of time. The body is typically shown as a rectangle and its color can indicate the direction of price movement. A white or green body indicates that the closing price was higher than the opening price, indicating a bullish movement, while a black or red body indicates that the closing price was lower than the opening price, indicating a bearish movement.
The tail/wick is the line above or below the body that represents the high or low price for the period. A tail above the body is called an upper tail or upper wick, and it represents the highest price reached during the period. A tail below the body is called a lower tail or lower shadow, and it represents the lowest price reached during the period.
In a candlestick chart, the upper and lower tails can provide insight into market sentiment. For example, a long upper tail on a candle can indicate that bears (sellers) tried to push the price down and were ultimately successful, indicating that bulls (buyers) lost the grip. Similarly, a long lower tail on a candle can indicate that bears(sellers) tried to push the price down but were ultimately unsuccessful, indicating that bulls (buyers) tightened the control.
It’s worth noting that the length and position of the tails can provide additional information about the market sentiment and can be used to identify potential buying and selling opportunities.
In other blogs we will look into most common single candlestick patterns like Hammer and Shooting star, Marubozu, spinning top, Doji and Hanging Man.
What are single candlestick patterns? How to trade them?
Single candlestick patterns are a popular tool used in technical analysis to predict future price movements in financial markets. These patterns are formed by a single candlestick and can provide insight into the sentiment of market participants.
There are several single candlestick patterns that are commonly used in technical analysis: We will look into hammer and shooting star in this blog.
Hammer
One of the most well-known single candlestick patterns is the “hammer” pattern. This pattern forms when the market opens at a high price, falls during the trading session, and then closes near the opening price. The long lower tail of the candlestick indicates that bears (sellers) were pushing prices down during the session, but bulls (buyers) ultimately stepped in to bring prices back up. The hammer pattern is considered a bullish reversal pattern, indicating that a downtrend may be coming to an end and that prices are likely to rise in the future.
Hammer candle formation after a downmove. Stock starts rallying after hammer formation
Shooting Star
Other popular single candlestick pattern is the “shooting star” pattern. This pattern forms when the market opens at a low price, rises during the trading session, and then closes near the opening price. The long upper tail of the candlestick indicates that bulls (buyers) were pushing prices up during the session, but bears (sellers) ultimately stepped in to bring prices back down. The shooting star pattern is considered a bearish reversal pattern, indicating that an uptrend may be coming to an end and that prices are likely to fall in the future.
A shooting star is formed after market rally. Stock starts down move after forming shooting star
It’s important to remember that these patterns should be used in conjunction with other forms of technical analysis and fundamental analysis to make more accurate predictions. Also, it’s important to look for confirmation of these patterns through the formation of other patterns or indicators.
In this blog, we will talk about Descending triangle – How to trade it?
A descending triangle is a bearish chart pattern that is formed when the price of an asset creates a series of lower highs and a flat support line. This pattern is typically seen as a sign that the asset’s price is likely to decrease.
The descending triangle pattern is formed by two trendlines. The first trendline is a horizontal support line that connects the lows of the asset’s price and it can be an area of support too instead of the trendline. The second trendline is a downward-sloping line that connects the highs of the asset’s price. As the price of the asset approaches the support line or support area, it is unable to break through and instead bounces off, creating lower highs.
One of the key characteristics of a descending triangle is the decrease in volume as the pattern forms. We can see that in the chart of Tata motors, the volume has nearly died off. This decrease in volume is a sign that there is a lack of buying pressure and that the bears are in control.
Descending Triangle Pattern – Tata motors
It is often considered a bearish pattern and it is believed that the price of the asset will eventually break through the support line, leading to a significant price decline.
Traders often use the descending triangle pattern as a signal to enter a short position. It is important to note that the descending triangle pattern is not always accurate and it should be used in conjunction with other technical analysis tools to confirm the price direction.
Ascending triangle is by far the most reliable pattern, out of multiple continuation patterns. In this blog, we will learn to identify an Ascending triangle pattern, and will also try to decode the underlying psychology. Let us understand the pattern in brief.
An ascending triangle is formed when the price is restricted between an upward sloping trendline (support) and a horizontal trendline or area (resistance).
Look at the picture below.
Godfrey Phillips – Ascending Triangle Breakout
The green trendline is upward sloping trendline and it acts as support. The price bounced up several times from this trendline and is demand zone.
The Rectangular highlighted area in the chart acts as resistance or the supply zone. Price tried to cross this area several times, but it had to face rejections.
As the upward sloping trendline(support) comes closer to Rectangular area (Resistance), we are nearing a possible indecision zone. Whenever support and Resistance zone converge, the probability of breakout increases.
Since Ascending triangle is a continuation pattern, the price keeps moving in the same direction as before the formation of Ascending triangle. The patten might not always give decent breakout, but we can combine Ascending triangle with other indicators like Volume, MACD, RSI to improve the win probability.
Depending on the risk appetite, stoploss can be placed either below upward sloping trendline or below the breakout Candle.
We should stick to buy trades after breakout on the higher side. This will improve our win probability, as the momentum before the breakout was on the same direction. Always trade in the direction of momentum, and you will end up on winning side in longer run.
I am often asked, how did I pick up trading and how did I learn trading? At the end of conversation, I would forward some link. The links often depend on the questions asked. I will update this blog with all the questions possibly asked and answers to them.
Q. How do I select a broker to open my account.
The answer to this question varies depending on what the person is looking for. For beginners, Zerodha is great. I would also recommend Fyers since it has some cool features for advanced traders.
I started trading in 2016 and back then we had very few reliable sources to learn. I had put my time into multiple youtube videos but I found zerodha varsity blog to be complete and concise. Please check this out.
Q. Where from one can learn about Options, Premium, Put Call etc?
You can learn about basic terminologies from on of the youtube video here. His language is simple and easy to understand. You can also read this article here.
Q. What are tradable patterns and how do I learn about them?
