Effective investment in stocks or successful stock trading is impossible without the use of stock and market analysis. If you do not use the tools of analysis and evaluation, then the purchase of shares will result in losses. This is especially true of the Russian stock market. He is still too young and unpredictable.
Stocks as an object of investment
A stock is a security that gives its owner the right to receive a share of the company's income and the right to manage. Also, the owner of the share can make a profit from the sale, provided that the sale price is higher than the purchase price and operating expenses. This type of securities has one indisputable advantage over others - they are secured by the assets of the issuing company.
Types of shares
There are two types of shares: preferred and ordinary. The difference between them is that dividend payments in the first form have a fixed amount and are paid in the first place, while ordinary payments are made from the remaining funds. This feature should be considered when analyzing stock returns.
Kinds. The financial analysis
There are three types of study: financial, fundamental and technical. Together they form an investment analysis of stocks. Financial to a greater extent relates not so much to the formation of the price of a share as to its material support. The financial analysis of shares includes:
- Profitability calculation.
- Calculation of liquidity of assets.
- The ability of an enterprise to pay for its short-term and long-term obligations.
- Financial stability, probability of bankruptcy.
- The ratio of the book value and market value of the company.
- The ratio of current and non-current assets.
In order to correctly conduct such an analysis, the investor needs to have knowledge of accounting.
Fundamental
A fundamental analysis of the stock market is the collection and processing of economic and political information relating not only to a particular company, but also to the economy of the country in which the issuing company is located. It includes the study of:
- economic and political news;
- prospectuses published by a company or exchange;
- country statistics: inflation rate, unemployment rate, etc.
You also need to study the information about litigation and lawsuits against the issuing company by partners or customers.
Technical
Technical analysis of stocks is an analysis based on a graphic representation of the market price of a security. Over their nearly hundred-year history of use, speculators and investors have developed special methods of working with charts. They include recognition of graphic shapes - head and shoulders, double and triple tops and troughs, as well as methods for determining trends.
Technical analysis of the stock market is notable for its universal application, but in the stock market its use in isolation from financial and fundamental analysis is risky. If you fail to notice the financial problems of the enterprise in time, you can lose money. In the event of bankruptcy of the company, investors get only crumbs.
Training
Preparation for the analysis of the shares of companies is the collection of information on the work of enterprises whose shares are planned to be purchased. Even if an investor is not going to invest in all the shares that are quoted on the market, he will have to evaluate as many companies as possible. The larger the sample, the higher the chance to collect a successful investment portfolio. Preparation includes the collection and processing of the following data:
- annual financial statements for several years;
- prospectuses on the additional issue of shares and their total volume;
- Company Charter;
- accounting policy;
- news reports, newspapers, magazines;
- graphs of stock quotes;
- rating agency data.
Modern computers with Internet access make it possible to find the information you need quickly and almost for free. Open joint-stock companies whose shares are traded on the stock exchange are required to publish financial statements and documents that the investor will need to conduct a stock analysis.
Used formulas and methods
When analyzing stocks, the investor calculates the ratio of various indicators of the financial activity of the issuing company. Below are the odds that most professional investors use:
- P / E - the ratio of profit and market value of the stock. The most popular ratio. It is used to identify overvalued or undervalued stocks.
- P / S - the ratio of profit and current assets. This ratio shows how the company is provided with easily tradable assets and is able to maintain its solvency in the short term.
- D = N * (d + r) - calculation of stock returns, where N is the amount of investment, r is the difference between the purchase price and the current price, d is the amount of dividend per share.
- D / k - coefficient used in the analysis of stock returns, in comparison with other, less risky investment instruments. k is the highest interest rate on bank deposits or bonds applied in the country.
These are the main coefficients used in the analysis. To make the calculations, the investor will need to take data from the balance sheet and the profit and loss statement, as well as the prospectus on the number of shares issued by the company. When determining the value of the issuing company and the rate of return, such methods of stock analysis as comparison with similar enterprises are used, or they are calculated on the basis of the book value and income of the company for several years.
Payment
The amount of dividends paid depends on the type of shares and the amount of profit that goes to dividend payments to shareholders. For preferred shares, they are fixed and must be paid in profitable years, and provided that the Council has not adopted a decision on reinvestment of funds. However, it should be borne in mind that Russian companies rarely issue dividends, since most of them need investments, and finding an investor is a big problem.
The following is an example calculation.
The Board of Directors decided to send 15% of the dividend income. The total number of shares is 10,000, of which 2,000 are preferred. The fixed amount of dividends on preferred shares is 2500 rubles per share. The amount of profit was 100 million rubles, respectively, 15 million rubles will be allocated for the payment of dividends. 5 million rubles will be spent on paying dividends. The dividend per ordinary share will be 1,250 rubles (10 million rubles for 8,000 shares).
Possible risks
Stocks yield high returns, and, as you know, it is always associated with the level of risk. With skillful and timely stock analysis, serious losses as a result of investing or speculation should not be. But no one will give a 100% guarantee. The following are the main risks that arise when buying and holding shares:
- stock price reduction;
- bankruptcy of the issuer;
- changes in tax legislation that entail an increase in taxes or complexity and additional costs for their payment;
- economic crisis;
- broker fraud risk;
- political risks, for example, nationalization of the issuing company.
These risks are associated with conditions that are independent of the investor’s actions, but he can lose money through his own fault. If he did not conduct a stock analysis, did not check the financial statements or missed important information and did not get rid of unreliable assets in time, then losses are inevitable. Professional investors are always careful, and at the first sign of danger to their capital, they try to quickly sell unreliable shares and transfer money to more reliable assets.
Russian market
The most trusted exchange is located in Moscow. A stock analysis is also needed here. Access to the exchange can be obtained through a bank or brokerage firm. At the first public offering of the company, it carries out an analysis with the help of its specialists. The exchange has its own securities index - MICEX. The index consists of the most successful Russian open joint stock companies.
Trading on the exchange is conducted on weekdays from 9:00 to 17:00 hours. Access conditions depend on the selected broker. Shares of Russian companies can be purchased on the stock exchange through a special terminal remotely or at a bank branch. Mostly, stocks of oil and mining companies are listed on the Moscow Exchange, followed by engineering plants and a small number of high-tech companies (Yandex, Rostelecom) and banks (Sberbank). If we compare the Russian stock market with similar foreign platforms, then it is generally not too large.
Problems an investor may face in the Russian market
The main problem that almost all investors face when preparing for the analysis of Russian stocks is inconvenient financial statements.
Most textbooks and tutorials on stock trading are written by Western authors and mostly by Americans. In the United States and Western Europe, completely different methods and standards for preparing financial statements are applied. The transition to these standards and even the publication of reports prepared in accordance with international reporting standards is difficult. The thing is that in Russia for a long time there was a different model of the economy, and developed its own methods and standards of accounting, according to which most accountants work. Retraining will take a lot of time and money, while “as in the West” will still fail. Therefore, investors have to put up with the fact that it is necessary to search for the necessary information on all published documents of the enterprise.
Another problem investors face when analyzing the Russian stock market is inadequate market behavior. Hypersensitivity to negative news, high market volatility - this indicates the instability of the financial system. When investing in shares of Russian companies, the risks are higher than when investing in American or Japanese.
Tips & Tricks
The main problem in analyzing the stocks of Russian companies is the shortage of information necessary for the investor. Although the law requires the publication of financial statements, copies of the Charter and accounting policies, as well as decisions on the additional issue of shares, many Russian enterprises do not do this or present information in such a terrible form that even professional investors cannot figure it out. If the statements are prepared clumsily, then it is worth considering whether to purchase such shares? Below are recommendations and tips on how to analyze:
- Try to use information from reliable and trusted sources.
- Do not buy shares of companies that do not have an audit report attached to their reports, but remember that a positive audit report does not guarantee fraudulent actions by company managers. But this is at least some kind of check.
- Periodically review the investment portfolio.
- Conclude agreements only with those banks and brokers that are on the exchange list.
- Do not succumb to rumors, but do not ignore them. Base your decisions on facts.
- Do not use leverage, but if you do use it, then its size should not exceed 10: 1.
- Hedge trades with options.
- Watch out for other markets. For example, if an investor owns shares in oil companies, the analysis of prices for oil and oil products should be included in the analysis of shares, since these are the main goods produced by such companies, and the volume of revenue depends on their prices.
- Carefully read the Charter of the enterprise, if it is not written there that it undertakes to pay dividends from profit, then it is more likely to say that it will not pay them. Young companies almost never pay dividends, when analyzing this feature should be taken into account.
When buying stocks, it is important to exercise caution and analyze them before purchasing the asset, and not after. You also need to pay attention to what are the prospects of the industry in which the enterprise has been operating, how many years it has been operating, and its business reputation.