Earnings per share (EPS) ratio & what it means!

Even comparing the earnings of one company to another really doesn’t make any sense, if you think about it. Earnings will tell you nothing about how many shares the 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.

On the other hand, if company B has 50 shares outstanding and they too have earned Rs.100 then each shareholder has earned Rs.2. So you see it is important to know what is the total number of outstanding shares are as well as the earnings.

Thus it makes more sense to look at earnings per share (EPS), as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.





EPS = Net Earnings / Outstanding Shares

So looking at the EPS ratio, you should go buy Company A with an EPS of 10, right? EPS is not the only basis of comparing two companies, but it is one of the methods used.

Note that there are three types of EPS numbers: 

• Trailing EPS – last year’s numbers and the only actual EPS
• Current EPS – this year’s numbers, which are still projections
• Forward EPS – future numbers, which are obviously projections 

Biggest falls in Indian stock market history

Following are the 10 biggest single-day falls at close:

• August 24, 2015:   1,624.51 points
• January 21, 2008:  1,408.35 points
• March 17, 2008:     951.03 points
• March 3, 2008 :      900.84 points

• January 22, 2008:   875.41 points
  
• February 11, 2008:  833.98 points
• May 18, 2008:         826.38 points
• March 13 2008:        770.63 points
• December 17, 2007:  769.48 points
• March 31, 2008:         726.85 points

Following are the 10 biggest intra-day falls for Sensex:

•     January 22, 2008:   2,272.93 points
•      January 21, 2008:   2,062.20 points
•      August 24, 2015 :   1,741.35 points
•      October 24, 2008:   1,204.88 points
•      October 10, 2008:   1,088.60 points
  
•      March 17, 2008:     1,022.25 points
•      February 11, 2008:  1,007.15 points
•      October 27, 2008:   1,003.68 points
•      October 8, 2008:    954.48 points
•      July 6, 2009:           953.61 points
  

What should you do after a stock market crash?

 Nothing

For long-term investors, the best thing to do when the stock market crashes is nothing.

Take a breath, turn off the news and — whatever you do — don't log in to view your account balances. 

Resist any urge to sell stocks

Selling stocks in panic is the worst thing you could do after a stock market crash. Successful investing is about buying low and selling high. When you sell after a crash, you do just the opposite

And if you think you can just cash out for now and then get back in when the market improves, consider this: You have no way of knowing when the market will swing back. And there is a big cost to missing just a few really good days in the stock market.

 Buy stocks (if you were going to anyway)

The best time to buy investments is when you have money to invest. The best time to sell investments is when you need money for something else.

That said, if you’ve wanted to invest but have been dragging your feet for whatever reason, you might see the stock market crash as a buying opportunity. No, you don’t know if the market is going to go back up or continue to go down. But you do know this: Stocks are about 10 percent cheaper than they were last week.

Summary

A sudden stock market crash is unnerving, but it’s not a sign of imminent financial collapse and it doesn’t mean that stocks are no longer a good long-term investment.

Unless you need cash immediately (in which case it shouldn’t have been in the stock market in the first place), do NOT sell off your stocks after a crash. The best thing to do is nothing. However, it is OK to buy some investments if you have money to do so. After things have cooled off, take time to review your investments and make any adjustments to bring your asset allocation back into balance.

What can we learn from Snakes & Ladders ?

If you ask anyone what game comes to their mind when some one say stock market, pat would come reply – Monopoly. Just because money is involved, many of us assume stock market is like Monopoly game. It is not correct. Monopoly is more like  running a business. I strongly think Snakes and Ladders depict Stock Market situation.

I am sure many of us would have played this game as child.

For those who are new to this game, these are the rules:

All players keep their token at number 1 in the beginning. First one to get to square # 100 wins the game.

Only one dice is used for roll. You must roll number #1 or #6 to leave the #1 square and move on to the game. Until you get #1 or #6, you stay in the square #1.

You move square by square to the count you roll. ( For example, if you roll #3, you move 3 squares). If the square you land has snake or ladder, do as below:

Snake: if a player lands at the tip of the snake’s head, his or her token slides down to the square at the snake’s tail.
Ladder: if a player lands on a square that is at the base of a ladder, his or her token moves to the square at the top of the ladder and continues from there.

First player reaching the square #100 is the winner. You should reach #100 exactly, none more, and none less. You skip your turn if you don’t get exact roll to reach #100.

What does this game teach Stock Market Investor ?

First it teaches about the risk and reward. Risk is like the snake and Reward is like the ladder. While dice is in your hand, the outcome is not !

In the same way, in stock market, the investor can control the risk, but the reward ( or portfolio return) can’t be predicted.

When a single roll can decide between ladder and snake, players get tensed up.

For example, in the board in the figure-2, if a player is at square #75, he can roll 2 and move to #77 and catch the ladder to end up in #95 OR roll 5, and get to #80 and catch the snake with nasty smile, to get all the way down to #2.

Facing this situation, I see children praying to all kind of Gods, before rolling the dice. They are not praying for Ladder, they are praying for the Snake not to catch them. Same goes for the stock investor.

In real life stock market the risk and rewards are not as clear as this board game. Nevertheless we pray to God when the risks are too high for our tolerance.

Smart players of this game know that catching ladder is not as important as missing the snakes. Since roll of dice always push you forward you tend to move up slowly, you will get to the target anyway, just avoid snake heads.

Like wise, Stock Market has upward bias. Smart investors know time is on their side, and helps them in getting compounded return, if they just hang on in the market !  Important lesson for the investor is missing snakes or missing the downside of the market. I am not talking about timing the market. But investor should learn to control the risk of the portfolio so much that they don’t get to lose the capital or large negative return in any year. Just like avoiding snake heads !

Any one looking at the figure-2 closely will see most dangerous snake is the Green one that has its head in #99. That can drag you down to #7. I saw kids caught by this snake throw their token and quit the game in disgust. Some of them so much frustrated, vouch not to play this game again ! But kids have short memory and within 24 hours, they will return to play – eager to take revenge on the snake.

But we grownups have problem. We have good memory. “Once bitten twice shy” is written with us in mind, and not the children.

A retiree saving and investing his portfolio should take enough precaution to safe guard his assets and slowly shift the money to safe fixed income instruments just before retirement. This is very much necessary. Investors risk tolerance does not matter in this case. They MUST do this adjustment to the portfolio couple of years before the retirement.

After all, portfolio safety is what matters, investor’s risk tolerance is not, just before retirement. Remember Risk can show up unexpectedly. If the capital is destroyed completely, few years before  withdrawal, risk tolerance of the investor, can’t get the capital back.

Any retiree who fail to do this adjustment due to ignorance or innocence or arrogance will taken down by the Green snake.

Another interesting square is #4. That ladder takes you to #79 in blink of an eye. A Lucky player rolling #3 at the beginning of the game tastes this success in one roll. It happens some time.It is not impossible to get. Look at this other way, out of 6 players, one has the probability of getting this lucky roll ! Not a bad probability. This roll gives lot of confidence to the player and he starts thinking he in invincible on that day and assume he would be the winner because Lady Luck is playing for him !

The same thing happens in the stock market too. Few investors gets lucky and they make money quickly and that boost their ego and they attribute this luck to their stock picking ability and enter the stock market with lot of arrogance and they get humbled in few rolls.

Ketan Parekh scam

Ketan Parkesh & Harshad Mehta, another big swindler of Indian stock exchange are the “infamous” alumni of the same school in Gujarat. God knows what is taught in that school!!!!!

Ketan Parekh-also known as the “Bombay Bull” was a known broker of Indian stock exchange. Over the years, Ketan built a network of companies mainly concentrated in Mumbai. According to market sources, although he was a big broker, he didn’t have enough funds to buy large stocks. He borrowed funds from various companies and banks for this purpose. He used to raise loan from the banks by offering shares as collateral security. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish NandyCommunications. He also had stakes in HFCL, Global Telesystems (Global), Zee telefilms, Crest Communications, and PentaMedia Graphics . Ketan selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks.

The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. 

He started trading of these shares within the network of his own companies at no profit no loss with the malafide intention of creating buying pressure for shares of K-10.Continuous trading by Ketan Parekh within the network of his own companies make other brokers in the market believe that something is happening inside K-10. Thus brokers started buying shares of K-10 for themselves and also urge their clients to buy these shares. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially. HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. 

Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges. HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion. 


As such huge amounts of money were being pumped into the markets, it became tough for KP to control the movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes. 


At that time Ketan thought of selling his shares but it is said that some senior officials of Zee telefilms told him to continue trading till the share value reach Rs 1000 mark and thus Ketan continued. He finally sold all his shares of zee at market price of Rs 1100. Though he earned enormous profits but due to sudden selling of huge number of shares and consequent fall in trading led to a fall in the markets and thus share price fall drastically to around 200 again. Investors lost heavily and many committed suicide. That was what Ketan did.
This scam created a historical impact on financial status of Bombay Stock Exchange and also on faith of investors in its working. Securities and Exchange Board of India (SEBI) was highly criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in shares over an 18-month period prior to February 2001. 


Analysts also opined that SEBI's market intelligence was very poor . Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled. Ketan Parekh was sent behind bars immediately though was later released on bail. Currently he has been prohibited from trading in the Indian stock exchanges till 2017. One would have thought that after this scam the regulatory authorities would have became more strict and effective and then we come across the Satyam scam!!!!!!!! 

Difference between fundamental analysis and Technical analysis

I have got many readers asking me which is better Fundamental or technical analysis ?
Well each one has got a different approach towards a stock

Lets take a small example here

All of us go out to the mall during the weekend with our family and friends

what if a Technical analyst and a fundamental analyst visited a mall ?

At the food court a fundamental analyst would go to each restaurant , study the food and beverages in the menu and then make a decision to eat there or not .

The Menu is like the P/E ratio ,return on equity , Debt-to-equity ratio and other fundamental metrics

By contrast  at the same food court  , a technical analyst would take a seat that allows him or her to oversee the whole food court . The Technical analyst will then watch the people go and eat at the restaurants .

Regardless of the food and beverages served in the menu ,his or her decision is based on the patterns and activities of the people going in and out of the restaurant . Moreover , never forget that the number of people performing the activity matters a lot . This is price action and market volume in action .

True inspiring story of How This Coolie’s Son Set Up A 100 Crore Company Will Inspire You To Follow Your Dream

P C Musthafa hails from a remote village in Wayanad, Kerala. His father was a coolie, and his mom a homemaker who never set foot in a school. He failed his class 6 and later quit school.

This same boy later went on to graduating from Regional Engineering College (now the National Institute of Technology), Calicut and the Indian Institute of Management, Bangalore. And today, he is the owner of a 100-crore company called ” ID Fresh” that delivers fresh idli and dosa batter to homes in Bengaluru, Chennai, Pune, Mumbai, Delhi, Hyderabad, Mangaluru and even Dubai.

 

Credit: rediff.com

So how did he do it?

Musthafa is the eldest in the house with three younger sister and he failed class 6 because of disinterest in studying. Also he couldn’t have studied anyway because at night there was no electricity at their home, only kerosene lamps.

The boy who had dropped out of school, later went back on the insistence of his maths teacher, Matthew sir. Being junior to his friends, Musthafa felt embarrassed and that fueled his will to work harder. He went on to top his school in class 7 and 10. And after that for the first time, he left Wayanad to pursue a higher education. Since his father could not afford his education, Musthafa survived his college life on the free meal and stay plan by his college. He cracked his engineering entrance exam and went on to study computer science at

Regional Engineering College (now the National Institute of Technology), Calicut.

After job opportunities at companies like Motorola and Citibank, in Ireland and Dubai, he came back to India to be with his parents and to give back to the society. “I sent Rs. 1 lakh in cash to my father through a friend. I was told he cried seeing so much cash in a bag sent by his son. He paid off his debts and started planning my sister’s wedding.” he told Rediff.com

He quit his job to study MBA at IIM, Bangalore. Musthafa’s cousin Shamshuddin had seen dosa batter being sold in plastic bags tied with a rubber band in nearby stores and suggested they make and supply dosa batter. That was an Aha! moment. He invested Rs 25,000 and started the company immediately. And that’s how “ID Fresh” or Idli Dosa Fresh was born.

From selling 10 packets a day to a 100 a day, the company has grown in leaps and bounds since their humble beginning in 2003. At ID Fresh, they make sure to employ people from the rural areas. Their education doesn’t matter as much as their hardwork and dedication does.

To budding entrepreneurs, this successful man has a few words of advice –

If you have the passion to start something, do it immediately. Don’t wait for tomorrow. I had the passion to be an entrepreneur, but it took me a few years make that decision. I still regret the delay. I wish I had started five years earlier.

My words may sound like management jargon, but it is very important to maintain the quality of the product to be successful.

The three things that worked for us were that we were in the right city with the right product at the right time.

Ask yourself this question :
"when will you work for yourself and make yourself rich ?" 

What is circuit limits for stocks in NSE or BSE?

Circuit limit/ daily price bands are nothing but the high and low limits within which the stock orders can be placed for the day. If you try to place order above or below the limit, the order won't be accepted.

In NSE, there are generally 4 types of bands.

2%

5%

10%

20%

Circuit limits of any stock will in one of the above. This limit is decided by the stock exchanges- NSE and BSE

(BSE has different categorisation. However, for individual stocks, the circuit limits in both BSE and NSE will more or less be equal or with negligible differences)

Based on the previous day's close price, the current trading day's circuit limit is calculated.

For eg, 

previous day's close is Rs.55.7

5% above this price is 58.45 which is the upper limit for the current day

5% below 55.7 is 52.9 which is the lower limit.

Hence, the circuit limit for the current stock is 5%

This circuit limit % is constant for the stock and will be reviewed by the exchanges periodically.

Need for Circuit limits:

Circuit limits curb the excessive volatility of a stock. News about the companies are watched by huge number of people and any news will affect the prices of the stock in either way. Some very bad/good news will create panic in the market and the urge to sell/buy will make the stock price go for a toss in either situation.

Generally,stock prices normally consolidate over a price that the market perceives as a   valid multiple of its Earnings per share(EPS). This multiple is what you will see as P/E ratio. Normally the P/E ratio is based on the industry and the expectations from the company.

So when some panic is there in the market, the volatility will affect the price soon before these ratios are calculated and a consensus is created in the market.

This price bands ensure that any erratic order(out of the bands) placed by any trader/investor doesn't get executed and create a sudden drop/jump in the price.

This circuit band is decided by the liquidity(number of shares traded per day) and the current trend in the stock.

If there are excess volatility in a stock, the price band will be reduced to 5% or even 2%. If the stock is a large cap one or blue chip ones, the value will be 10% or 20% as the liquidity of these ones are really high and panic wont affect the stock even with very big news.

Why a circuit hits its limits?

Bad news will create panic pushing many people to sell the stocks. When the panic extends for more time, the stocks price will go down soon and will hit the lower band. Some very good news will create enthusiasm in the market, pushing the price upwards. Prolonged enthusiasm will make the price reach the upper band.

On 22 Jan,2016, due to a bad news Interglobe Aviation(Indigo)'s share price tumbled by 20% and it couldn't go lesser than that. This allowed the market to settle, thus preventing the erosion of the rest investor's wealth.

On 11 Feb,2016, NSE reduced the circuit limit for Indigo to 10%.

As the panic got settled and consolidation started happening, from 11 Mar,2016, Indigo's limit was again raised to 20%

(This band limit change happened for 140 stocks in NSE and 346 in BSE in the same day)

In order to enhance the market integrity and to prevent excessive price movement in the securities listed on its trading platform, BSE as a pre-emptive surveillance measure has an additional framework of periodic price bands in addition to the aforesaid daily price band framework. These additional periodic price bands shall be applicable to securities exclusively listed and traded on BSE Equity Trading Platform including securities listed on SME and SME ITP platform. The periodicity of these price band shall be weekly, monthly, quarterly and yearly and the same is as follows;

Securities with daily price band as	Weekly  Price Band	Monthly Price Band	Quarterly Price Band	Yearly Price Band
20%	+/- 60 %	+/-100 %	+/-200 %	+/-400 %
10%	+/- 30 %	+/-60 %	+/-100 %	+/-200 %
5%	+/-20 %	+/-30 %	+/-60 %	+/-100 %
2%	+/-10 %	+/-20 %	+/-30 %	+/-50 %

In addition to the above, for monthly, quarterly and yearly limits a factor of 200 % of S & P BSE Midcap Index movement shall be applied for taking into account the overall movement in the market to the Monthly, Quarterly and Yearly price band limits. This factor shall be added in the direction of the movement of the index (rounded off to the nearest number) and the threshold of the opposite direction will remain unchanged.  

Illustration: a security having applicable price band of 20 % can move upward or downward upto 20 % in single day. In a week it can move upward or downward upto 60 % whereas in a month it can move upward or downward upto 100 % and so on. Further, if the S & P BSE Midcap has moved up by 5 % in the month, then the upper limit of monthly price band shall be adjusted by 10% i.e.  the upper monthly price band shall be 110 % whereas the lower price band shall remain as 100%.

In the event of any corporate action, the respective price of the security shall be adjusted as per the prescribed process.