What are stock markets? What is getting traded there? Stock markets are nothing but selling the ownership of the company. What is valued here? Here it all depends on how you evaluate a company. If you go to a grocery shop you will buy fruits. How do you decide the value of the fruit? It all depends on your needs, also relation between demand and supply. If you get more fruits in the market and if there is a less demand obviously the rate would be lesser. It is same here in stock markets too. More the buyers for a stock in company, more price of the scrip. Why there will be more buyers for a company in the stock market? It all depends on how the buyers give valuations to the company. If they think the company will get more valued in the coming years then the current prince of the company is cheaper and they want to buy.
Still a question hangs, what is the value of a company? A company is of higher value if the net assets of the company are higher. How to value the net assets of a company? Assets of a company means everything that’s owned by the company, includes land, building, infrastructure to even a smaller thing like a pen owned by the company too. So valuations of a company depends upon valuations of many other things that’s owned by the company. valuations of other things depends on the market that those goods are traded. So essentially giving value to a company needs identifying,giving valuations to each of the products that’s traded in the market. How the net assets of a company going to increase? The net assets of a company can increase if the company makes profit. What is the way of making profit? It could be by gains on the capital owned by the company or it could be operating profit. Sometimes value of the land owned by the company increases, that’s a capital gain. They gained profit just because they own that property.
What about operating profit? Each company has its own set of clients, customers. If the company serves its clients or sells its products to lots of customers very well, then the company will make more profit. That’s an operating profit. That’s highly valued in calculating valuations of a company. Higher the operating profit higher the chances of company adding more net assets. How the operating profits can be increased? As it was discussed operating profit of a company depends upon how they serve their clients or how they sell their products to their customers. How a company serve their clients? A company will serve its clients by its employees. How it can be optimized? The way a company serve its clients depends on the process or business model of the company. How those processes are built? How those business model is created? That is created by the leaders in the company.
Who are those leaders in the company? Those are the persons who are chosen to lead the company. There will be CEO, and CFO, HR and many more departments to support him. Who will choose the CEO? It is the directors of the company. Now the final question is who’ll choose the directors? It is chosen by the shareholders of the company. If the shareholders of a company are wise then they’ll choose better directors, better directors will choose better leaders in company like CEO, CFO etc. The team of CEO will make better decisions in serving clients of selling its products to customers, which results in better operating profit. and better operating profit results in adding more to net assets of a company. More the net assets of a company means more the value of scrip of that company in stock markets. It boils down to the fact that it is the persons who owns the shares of the company will decide the share value of that company in the future. It is the shareholders who decide the value of the share in the stock market. Here is another thing to note. Whoever owns more shares int the company has more rights in making decisions in the company.
Now what’s more important is share holding patterns in the company. It is very important to look at the factor who owns most in a company. The future of the company will be decided by those shareholders. What are the important qualities for those shareholders that we should look for? One of the most important thing is how much we can trust them. The trust matters everywhere. Also the person’s ability to perceive business, ability to choose right persons. Finally a fundamental analysis on stock markets needs a better analysis on the person who owns the most shares in a company. It will be more personality analysis, more about the amount of trust he generates, amount of wise decisions he makes for the company. What are stock markets? Stock markets are deciding the shareholders of the company. Essentially stock markets decide the fate of the company.
To put everything together Shareholders -> directors-> CEO and his team -> Way of serving clients and selling products -> Employees -> Operating profit -> Net asset gain -> Value of the stock in stock markets What’s most important in deciding the price of a company? It is the shareholders itself. Better the shareholders, better the prospects of the company. If you think you are better, you deserve to own more in the company Still what happens most of the time is that the most of the time the is that values of each stock deviates from its original price. Then why the fundamental analysis fails? To answer these question we have to examine the new financial instruments that are traded in the stock markets these days. These days stock markets are traded mostly on technical charts rather than the fundamental value of the stock. Let us examine few of those instruments that disturbs the value of a stock artificially. Let me explore these in short here.
- Day Trading. Day traders just trade on daily basis. The basis of the trade is to either book profit or loss for the day only. Normally brokers give clients large amount of margin money up to 10 times the money they had for the day traders. How the day traders trade normally? They just buy on dips. If they cannot make profit on that day, they just convert into cash and wait for the day they are making profit. If the person has holdings in cash and if he wants to sell, he just sell it as day trade. If his day trade doesn’t make him profit he’ll just convert into cash. Thus it gives him the profit
- Buy Today Sell Tomorrow( BTST) BTST products are like day trade but with the option of holding the stocks for margin for few days to week. Thus they can take advantage of the fluctuation in the stock markets more efficiently. In these instruments also traders get margin money from brokers
- Futures and options. In these days futures and options play a very important role in deciding the value of stock markets. These are the instruments that used to hedge the stock market as much as possible. Using these instruments traders make huge amount of money either if the market goes upwords or goes downwords. Thus making them unexpected trade in cash market resulting in stock prices deviating away from their fundamental prices.
Every movement of stock price depends on fundamental factors as well factors that are mentioned here, These technical factors that make traders huge amount of money. So how should the investor look about it? How can he decide the right stock to invest? In these days to make money in stock markets an investor has to take positions in futures and options,even if he is a long term investor.