Stock Market There are basically three aspects worth examining before jumping into the stock market

they are: Fundamental analysis Technical analysis Market psychology

Fundamental Analysis An investor must examine the current and future overall health of the economy as a whole. Next must gain an understanding of the industry involved, the maturity of the industry, and the effect of macroeconomic factors on the industry. Then analyze the individual firm, where one look at the factors that give the firm a competitive advantage in its sector. This is known as the SWOT analysis. Finally take an in-depth look at the firms management experience and competence, history of performance, growth potential. The above steps give a qualitative overview of the firms position within its sector and the economy as a whole. On top of that, one needs financial ratios to help determine the true value of the firm. GDP figures or reports not only can determine how well economy is doing but also helps in learning each sector of the economys performance.

Inflation Rate Refers to a persistent increase in the general price level, it is generally measured by the Consumer Price Index (CPI). With high level of inflation, the business community will lose confidence in the economy and may scale down any future investment and expansion. More over citizens will become poorer as the money in their bank accounts is worth much less than before, the Central Bank will raise the interest rate. High interest rate simply means the cost of borrowing is high, which in turn hurts those companies with large dept. This translates to low Earnings Per Share (EPS) and high PE ratios for firms listed in the stock market.

Interest Rate There is an inverse relationship between interest rates and stock markets, when the interest rate is low investors are reluctant to put their money in the bank, they rather put their money in the stock market. Conversely, when the interest rate is up, the stock market will perform poorly, as investors are attracted by the high interest or returns offered by banks.

Balance of Payment (BOP) BOP is the method countries use to monitor all internationally monetary transaction at a specific period of time. Usually BOP is calculated every quarter, BOP should be zero meaning credits and debits should balance. But in practice, this is rarely the case and thus the BOP can tell us if a country has deficit or surplus and from which part of the economy the discrepancies are stemming. There are three categories: 1. Current account 2. The capital account 3. The financial account The criteria that attract foreign fund investors to invest in a particular stock market is that the country must be financially sound with a healthy BOP.

Using Financial Ratios to Analyze Stocks Repco Holdings who went from boom to bust, from $140.50 in 1997 to $7.10 in 2001, it was later delisted from the second board. There were signs before it crashed in 1997. Its PE ratio was high as 370, the shareholders equity was negative and its net tangible assets were negative as well. To know if a stock is undervalued, overvalued, or trading at fair market value, we need to rely on financial ratios. Earnings Per Share (EPS) Diluted Earnings Per Share (Diluted EPS) Earnings Per Share Growth (EPS Growth) just compare the current earning are better than previous year

These ratios need to be compared with industrial average to get a true picture of the situation.

Price Earnings Ratio (PE) The lower the PE ration, the more attractive the stock is, as it means a shorter time period to recoup your investment. Another good thing about low PE stock is that during stock market crashes, these low PE stock are more resilient. It is more meaningful if you compare the PE ratio within the same industry to see if the stock is overpriced. Sometimes high PE ratio does not mean the stock is expensive because the stock may have high growth prospects in its future earnings, so investors snap up the shares in anticipation of the future. This is especially true for tech stocks.

When analyzing the financial ratios for a particular stock we have to compare the data with other players within the same industry.

Return on Equity (ROE) ROE measures the companys ability to make use of its assets to generate profits; a company that has a strong management who use its resources effectively should have a minimum of 10 on its Return on Equity for a period of at least Five Years. ??? Requires his stocks to have at least 15% ROE.

Debt Equity Ratio / Gearing Debt Ratio If a company, A has Debt Equity ratio of 0.5, It means this company has $0.50 in debt for every $1 in assets. Another company, B with a gearing ratio of 1, means for every $1 in assets, the company has $1 in debt. Which company is financially stronger? Company A is financially stronger because it has less debt compared to B. When times are tough, highly geared companies like B are seen as vulnerable. This is especially true when profits are falling or where interests rates are rising. Imagine how much cash flow needs to be generated to cover the interest expenses. When making comparison should look at industry average to give a true and fair view of the company

Net Tangible Assets (NTA) If you want to know the net worth of a company refer to its net tangible assets. Investors are recommended not to pay for a share price that is more than its NTA. However stocks from service and financial industries usually can command higher share prices with respect to their NTA.

Dividend Yield (DY) Measures the actual cash return you receive from a company, when you put $10 000 in the bank, how much money do you get each year? For 3% per annum. You will receive $300 similarly, for the same amount you can invest in 10 000 shares for XXX company at $1 each. If XXX company gives $0.03 per share on hand you will receive $300 as well. Technical analysis tracks the psychology of the market, and gives the direction of the stock price. Fundamental analysis helps us to study the financial health of the company.

When To Buy Stock Use acronym PRINCE D: Price Earnings Ratio should be less than 15 Return on Equity Not less than 15 Institutional Support Net Tangible Assets Current Environmental scan Earnings per Share At least 25% growth in annual EPS over the last 3years Dividend Yield Investor prefer companies that give a good dividend and compare it with bank which gives 3% if high then put your capital where there is high dividend yield.