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This is your go-to resource for demystifying the stock market from the scratch. Each day, we will present 10 carefully curated questions with answers that will cover essential concepts, strategies, and terminologies. Whether you have just entered into the market, or trying to starting your stock market journey, or looking to strengthen your foundation, our weekly post will guide you through the basics and beyond, making investing accessible and understandable for everyone. Happy reading.
Day 20: Basic Stock Market Concepts
Fundamental Analysis for Beginners:
1. What is the Dividend Yield in Fundamental
Analysis?
Dividend yield is the
annual dividend payment divided by the stock’s current price, expressed as a
percentage. It is a financial ratio that reflects the percentage of a company's
annual dividend paid compared to its stock price. This ratio is important to
the investors to guess how much return they can expect holding a stock. Higher
dividend yields can be attractive for investors who are looking for steady
income, although sustainability matters.
2. What are Intangible Assets and how do they
affect a Company’s Value?
Intangible assets
include non-physical assets like patents, trademarks, brand reputation, and
goodwill which are to be included in the balance sheet of a company. These
assets are different from tangible assets such as buildings, machinery etc.
These assets can add significant value to a company's goodwill, especially if
they contribute to the company’s competitive advantage. Investors analyze
intangible assets to determine how they might enhance future earnings.
3. What is meant by Economic Cycle?
Economic cycle refers
to the fluctuations in an economy in different periods due to some reasons. It
has four stages in a cyclical pattern: expansion, peak, contraction, and
trough. These cycles are determined by various factors such as GDP, Growth
rate, Employment rates, Interest rates, Consumer expenses etc. Economic cycle
can impact stock market directly.
Fundamental analysis
with the knowledge of economic cycles helps investors to assess how well a
company can navigate through different phases of the economic cycle.
4. What is book Value and why is it
Significant?
Book value refers to the net asset
value of a company, calculated by subtracting its liabilities from its total
assets. It represents the value of the company if it were liquidated. Investors
use book value to compare it with the company’s stock price (Price-to-Book
ratio) to determine if the stock is undervalued or overvalued.
If the book value of a share is
greater than its current market price, it indicates the share is undervalued.
If investors find any undervalued stock of sound fundamentals, they will try to
invest in it as an opportunity to earn profits. If the book value is lower than
its current market price of the share, then the share is overvalued. It is an
important financial indicator for the investors to look for good investment
opportunities.
5.
What is the Price to Sales Ratio?
The Price-to-Sales
(P/S) ratio is a valuation indicator of a company that compares a company’s
stock price to its revenues. It is calculated by dividing the total market
capitalization by its total sales or revenues. It’s useful for companies that
might not yet be profitable, such as startups or growth companies.
A low P/S ratio is
more attractive to the investors because, a lower P/S ratio indicates that the
stock is undervalued relative to its sales.
6. What is a Company's Balance Sheet, and why
is it Important?
A balance sheet is one
of the most important key factors after sh flow statement and income
statement which reflects a overall reports of a company's assets, liabilities
and shareholders equities at a specified point of time. It provides insights into
the company’s financial stability and ability to meet its debt obligations.
Investors use it to assess the company’s liquidity and capital structure to
take necessary investment decisions. It provides the clear picture of financial
snapshot of a company as on the date of publication.
7. What is a Company's Income Statement, and
what does it tell Investors?
An income statement,
also known as a profit and loss statement, shows a company’s revenues,
expenses, and profits over a specific period. It is an important financial
report which helps investors understand how efficiently the company is
generating profit from its operations, which is crucial for assessing
profitability.
Income
statement is important because it helps to track profitability, tax compliance,
important decision making process of a company and also assists to track the
company's planning for further improvement program.
8. What are Cash Flow Statements, and why are
they Important?
A
cash flow statement is an important financial tool out of the three key
financial factors after balance sheet and income statement that tracks
the inflows and outflows of cash within a company. It’s divided into three
sections: operating, investing, and financing activities. Investors use it to
assess whether a company generates enough cash to sustain operations, invest in
growth, and return value to shareholders through dividends or buybacks. It is
an important financial report to evaluate a company's performance.
9. What is the Significance of a Company's Revenue
Growth in Fundamental Analysis?
In a simple
language, Revenue growth denotes company's income for a specific period in
comparison with its income for the previous identical period of time. It
indicates how well a company is expanding its sales over time. Consistent
revenue growth is a positive sign that the company’s products or services are
in demand. The investors consider it as a key factor for assessing the
company’s long-term potential financial health.
10. What is Debt to Equity Ratio?
The debt to equity ratio(D/E) is a
financial data to measure how much debt a company has compared to its equity. It
compares a company’s total liabilities to its shareholders’ equity. It
indicates how much debt the company is using to finance its operations. A high
ratio suggests the company is heavily reliant on debt, which can be risky,
especially in economic downturns, while a low ratio shows a more conservative
financial structure.
Debt to equity ratio=Total liabilities ÷ Shareholders equity.
If you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
