Blog

Let’s start by understanding the different ways of trading. The main differences between the two ways of trading are investment, commitment, and time. Traders choose different trading strategies based on time, money, and psychological factors.

Intraday Trading

The Financial Regulatory Authority (FINRA) says that day traders are people who do many “round trips,” at least four of which happen every five days. Day trading might be the most common way to trade. Most traders are day traders, which means they make money from the price changes on the market during the day. All-day trading takes place in a single day, as the name suggests. Traders open a number of positions during trading hours, which they all close before the end of the day.

Day traders use technical analysis and tools to get real-time updates. They often trade full-time and keep a close eye on the market for business opportunities. At least in terms of percentages, day trading gives people with small trading accounts more chances to make money. They don’t try to make a lot of money from one trade. Instead, they should do a number of transactions to make enough money.

In the end, day trading is a type of high-frequency trading that involves small amounts and always buys stocks for less than what they sell for.

Swing Trading

The main difference between day trading and swing trading is the length of time. During a swing trade, days or weeks can go by. Swing traders don’t make a trade until they see a pattern. They don’t trade full-time, but they use both fundamental and technical research to spot trends as they happen and trade in line with them. They would look for stocks that could make them the most money quickly. There is more risk, but there is also more chance of making money.

Differences between day trading and swing trading that are important to know

Swing trading and day trading are both types of trading, but they are not the same. Here are some of the most important differences between the two ways of trading.

• Day traders buy and sell a lot of different stocks in the same day. Swing traders buy and sell a number of stocks over a longer time period (usually between two days to several weeks). So that they have a better chance of making money, they look for a pattern of trends.

• Day traders will close out all of their positions before the closing bell rings. Swing traders would hold their position for at least one night before settling it the next day.

• Swing traders only work for a few hours each day. They don’t spend the whole day tied to their computers. Day trading takes a lot of time and commitment.

• Day traders make a lot of trades every day, which increases their odds of making money. Gains and losses, on the other hand, are smaller. Swing trading has fewer wins and losses, but they are often bigger.

• Day traders need the newest hardware and software. Day traders must have extremely rapid trigger fingers. You don’t need complicated or cutting-edge software to do swing trading.

A trader’s main goal is to make as much money as possible. So, between swing trading and day trading, which is better?

Even though both ways of trading have many pros, you should be aware of their cons before choosing one. The list that follows goes over the pros and cons of each one.

• Swing trading needs less attention because it takes place over a longer period of time. Day trading, on the other hand, requires regular market watching and quick decisions.

• Day traders try to make as many trades as possible to make the most money in a single day, while swing traders try to make a big profit.

• Swing traders take on more risk when they leave their position open overnight. On the other hand, day traders close their trades at the end of the day. So, there is no longer any risk.

• Swing traders wait until a deal has been going on for a while before using that time to watch how the market moves. It helps make things safer. Day trading is easier for most traders to do because it needs less capital than swing trading. Day traders have to make trades quickly because one loss could wipe out their whole day’s profit.

An index future is a futures contract on a market-wide or sectoral index. For example, the NSE has futures on the market-wide Nifty index and liquid futures on the Bank Nifty index (which is a sectoral index of liquid banks). Both of these indices are very liquid, which means that they are traded a lot by both individual and institutional investors. Why are index futures becoming very popular in India? What are the pros of trading in index futures? The once-famous Badla system on the BSE, which involved trading in stock futures, led to the growth of index futures trading in India. Let’s talk about how to trade index futures, but let’s also think about how trading index futures might help traders.

1. Stock risk can be avoided by taking a broad view of things.

Let’s say you’ve decided to invest in banking stocks, but it’s hard to know which ones to buy. Private banks are having trouble with valuation, and PSU banks may be worried about nonperforming assets (NPA). A better plan would be to look at the banking industry as a whole, which will naturally diversify your portfolio. You can do that by buying Bank Nifty Futures and joining the trend of banks going up. The benefit is that you can keep this position open for as long as you want by rolling it over every month for a marginal cost of about 0.50%.

2. You can trade both long positions and short positions.

If you are long, which means you are buying, it is fine. What if you don’t like banks? You can sell short banking stocks on the stock market, or you can sell the stocks you already own. But because rolling settlements are used on Indian markets, you can only short stocks during the day. The other option is to sell stock futures of specific banks, but this time you run the risk of losing money on a specific bank. All of these problems might be solved if you just sold the Bank Nifty index futures. If you think the Indian market as a whole will go down, you can just sell Nifty futures.

3. You can trade index futures with less money

When you trade futures, keep in mind that you need to trade on margin. But margins on indices like the Nifty and the Bank Nifty are usually lower than margins on individual stocks. This is because an index is made up of several stocks, which gives it a natural way to spread out risk. Because there is less risk, you need less margin to buy an index futures position. By doing this, it will be made sure that less money will be locked up.

4. You can lower your risk with index futures.

This is a very important part of how you manage your portfolio. As a private or institutional investor, you can hold a large number of stocks in your portfolio. You think that the market will correct by 10% to 12% once the US Fed raises interest rates. You are also sure that the drop in the value of your stocks will only last a short time and that they will go back up in value in a few months. You could keep your money, but selling Nifty futures would be the best way to lower your risk. When the market goes down, you can make money by selling Nifty futures contracts. This will lower the average cost of the stocks you own. You will be in a better place in three months, for sure.

5. The risk of not being able to sell these index futures is low

We frequently observe liquidity problems in particular equities or stock futures. Index futures, on the other hand, almost never have liquidity risk because institutional investors like them. Because of this, the bid-ask spreads are also not very big. Because of this, it’s usually safe to trade in these index futures because you won’t run out of cash. This is one of the main reasons why people trade index futures all over the world.

6. Index futures can help you spread out your investments.

Even though this point is more about taking advantage of opportunities, it is related to the one about minimising risks. You have a portfolio that is mostly made up of financial assets right now. You think the RBI rate hikes pose some risk, so you want to make your money safer by investing in industries that don’t change as much, like FMCG and IT. Even though it is possible to buy these stocks, it will cost money and tie up money if this is a short-term opportunity. A better plan is to use FMCG index and IT index index futures to spread out your portfolio. You can structure your portfolio to be more diverse in this way with little risk and cost.

7. Trading in index futures costs a lot less.

This doesn’t need to be said again. The commission and STT rates for index futures are much lower than those for stocks or even stock futures. In fact, most brokers also offer fixed brokerage packages for indices, which makes them cheaper than stock futures. Take full advantage of the fact that index futures cost less.

You might do well trading index futures because they have less risk and could give you a bigger return. But index futures are useful for more than just trading!

An investor can use a stock market index to measure the performance of a market, like the Bombay Stock Exchange or the National Stock Exchange, or a sector, like the energy, infrastructure, or real estate markets. In India, SENSEX and NIFTY are the two most important stock market indices that are used to measure the market. Indian investors can keep an eye on how the index value changes over time and use it as a benchmark to measure how well their own portfolios are doing.

Investors now talk about the stock market as having indices for different parts of the market that don’t always move together. Because if they did, there would be no need for different stock market indices. By learning how stock market indexes are made and how they change, you can make sense of the daily changes on the Indian market.

SENSEX S&P BSE (also called BSE 30 or SENSEX)

SENSEX was the first stock market index for equities. It was created in 1986. It is made up of shares from 30 companies that are listed on the BSE and are well-known and financially stable. These companies are a good example of the major industrial sectors of the Indian economy.

How to measure the SENSEX

SENSEX has switched to the market capitalization weighted method, which gives weights to companies based on how big they are. The weight goes up as the size goes up.

Now, it is thought that the total market share was 100 points when the index was made. This shows the change in terms of % in a way that makes sense. So, if the market capitalization goes up by 10%, the index goes up by 10% as well, from 9 to 10.

Let’s imagine that there is only one stock on the market. Let’s say that the stock is now trading at 200 and that its basic value is 100. If the price of the stock is 260 tomorrow, it has gone up by 30%. So, the index will go from 100 to 130, a 30 point jump. If the stock price goes down from 260 to 208, that’s a 20% drop. To reflect the drop, the SENSEX will be changed from 130 to 104.

CNX NIFTY S&P (also called NIFTY 50 or NIFTY)

The National Stock Exchange has 50 shares of NIFTY, which was started in 1996. It gives investors access to the Indian market through a single portfolio and includes 24 different parts of the Indian economy.

NIFTY calculation

The same formula that the Bombay Stock Exchange uses to figure out the SENSEX is also used to figure out the NIFTY. But there are three major differences:

NIFTY is made up of 50 stocks that are actively traded on the NSE (SENSEX is calculated on 30)


On both the SENSEX and the NIFTY, there is a separate index for each sector. This makes it easier for investors to keep track of changes in the market every day.

Please think about this helpful advice: if you want to play on the stock market, you need to learn how to keep an eye on the scorecard, which is made up of two stock market indices. Zebu’s platforms give you real-time price moves about all of Nifty and Sensex’s prices. Open a trading account with us to find out more.

Buying the breakout is a strategy in which you wait for an asset’s price to turn around and then try to invest in the early stages of its rise. (Some traders also use the word “breakout” to describe sharp price drops that happen after a time when prices went up or were stable.) When the decline stops and things start to get better again, this is called a “breakout.” The goal is to come together before the asset gains a lot of value.

A retest happens when a stock price breakthrough is followed by a trend reversal and a return to a predetermined price range, such as the area around its 21-day simple moving average. Most of the time, the price goes back to where it was before the breakout. After that, it goes back to the way it moved before it broke out.

When you buy the retest, you wait until after the breakout and buy the asset when it goes back into the range it was in before the breakout. This is helpful because it lets you move more methodically. You don’t have to invest right away because you don’t want to miss out. A retest also usually means that prices will be more stable in the future. The second breakthrough price range is more likely to hold.

The problem with buying the breakout is, of course, that you can’t be sure when a breakout will happen until it has already happened. Even if an asset continues to lose value, its price can change from time to time. Sometimes, though, the asset has been revalued over a long period of time. In this case, any price changes will be made within a range of the new normal. You try to be right by making the best guess you can about what will happen to the price.

And the problem with waiting for a retest is that it may never come. A very powerful breakout might be so strong that the price might breakout of a range and never move back inside if it. That is why, it is important for you to perform your own backtests and ensure that you choose a versatile strategy that lets you make the most of it.

The most common indicator that intraday traders use to trade retest breakouts is the VWAP. It is the Volume Weighted Average Price that the price often moves to before moving again. For example, you mark the high and low of the 15 minute range of Nifty, and see a breakout happening at the high, then wait for it to come back to the VWAP before initiating a long trade. This will give you an attractive Risk:Reward Ratio.

If you would like to start trading breakout strategies, open your best trading account with Zebu today.

Sharpe Ratio: The risk-adjusted returns, or reward-to-risk ratio, is found by dividing the annualised return by the annualised volatility.
With the Kindino Ratio, negative returns are taken into account by dividing the annualised return by the annualised volatility of negative returns.

In the last section, we talked about how volatility was a way to measure risk. We have these two measurements because we know that not all risks are bad. Sharpe looks at all kinds of volatility, while Sortino only looks at downside volatility. Here is where they part ways. Most of the time, you want a high Sharpe and a high Sortino.

The right way to count costs

When analysing trading techniques, it’s also important to think about how much it costs to make the trades that need to be made. One of the main reasons for this is that beginners often think their techniques are better than they really are.

Many quants think that the only costs of a trading strategy are the commissions that have to be paid to brokers. Two more important examples are:

Commissions

As you may already know, it’s hard to trade without a broker. In exchange for money, brokers provide transaction services and act as an exchange. Brokers sometimes add on extra costs and fees that you might not expect. This includes any extra services, fees set by the exchange, and taxes the government might charge for the financial transaction.

Slippage

Slippage is a key feature that is often overlooked when evaluating. Slippage is when the price you wanted to trade at is different from the price you actually trade at.

Why do these prices vary from each other? There could be many things going on. For example, you might have wanted to buy 100 shares of Apple at $100 each, but only 50 people were willing to sell at that price and another 50 at $101. Your loss would have been 50 cents, and the price you would have traded at is 100.50.

Slippage, which is part of transaction costs, can quickly turn a strategy that should be profitable in theory into one that doesn’t work. In the previous example, if you had planned to sell your shares for 102 dollars, slippage would have cut your profit by 25%. Slippage can be reduced by making a good plan for execution, but it’s important to know how it might affect your deals.

A few words about the biases we all have

Everything comes from within, including both profit and loss. Even though the market and how volatile it is play a big role in how much money we make or lose, we always let an inner voice guide us when we make a trade. Some of these voices can be helpful, but most of the time they come from people’s biases. We often feel a wide range of emotions and have to make decisions we weren’t supposed to make because of these kinds of personal biases. We need to control our emotions and personal preferences if we want to know when to stop a trade and when to keep going with it.

We can’t make good decisions when we’re feeling a lot of different emotions, so these are important things to look at when judging a trading strategy. Some emotions that can make it hard to think straight are excitement, thrill, hope, fear, worry, and panic. These are the emotions that drive us, so keeping an eye on them when it makes sense will always help us do better in a trade.

If you want more information on this, we also have a page about biases in backtesting and risk management. This will tell you more about your own biases and how to avoid them so you can trade better.

Most of the time, these are some of the things that are used to judge a trading strategy. Don’t be afraid to write things down as you try to use them in your plan. Once you’ve looked at the results, you can start making changes to improve the way your transactions work.

Backtesting is a very useful way to figure out how our trading algorithms might work in real life (might is the key word). But it can be hard for a data scientist who doesn’t have a background in finance to understand what it all means. Sharpies or Sortinos? Returns or profitability with money? This shouldn’t stop you, though, because some of the best funds in the world are run by people who aren’t in finance. Instead, it’s time to learn.

In this article, we’ll talk about some of the most important ways to tell if your trading strategy is working or not. If you really understand these basic indicators, you’ll have a good basis for judging different strategies.

Setting Up Performance Measures

These are some of the first criteria or measures you could use to figure out how well your trades are going. Most of the time, the measurements focus on two important parts of a strategy: the change in the value of the portfolio and the risk of making those gains or losses. By understanding these two things, you can figure out what it does well and where it falls short.

Financial metrics

All of the metrics in this section tell you how much money you made (or lost) when you used a certain strategy. The final amount of money is a good place to start, but there are other signs that give us more information:

Annualized Return: The average annual percent profit from your trading strategy (or loss).

Win/Loss, Average Win/Loss: Total (or Average) (or Average) Profits from Trades That Work The total (or average) amount of money lost on trades that go wrong.

% Profitability is the number of profitable trades out of all of them.

When we talk about return on capital as a percentage, we usually mean that the strategy is a multiplier on your initial capital. This is helpful most of the time, but we should remember that it’s only partly true.

Next, if we want to fully understand a strategy, we need to know how we are making money. For instance, do we consistently make tiny wins or do we consistently make small wins followed by massive losses? By looking at different combinations of profitability, win/loss, and profit/loss, we might start to understand how our plan will work.

Metrics that focus on risk

It’s just as important to see big profits as it is to know that the method could lose money in the long run. “No risk, no reward” is a saying that only winners use. The vast majority of people whose risky bets didn’t pay off don’t say it. Here, the following crucial metrics are important:

Annualized Volatility: The standard deviation of the model’s daily return over a year. Since volatility is used to quantify risk, a model with a higher vol indicates greater risk.

Highest Drawdown: The most negative change in the value of the whole portfolio or the biggest drop in PnL. It is based on the biggest difference between the high and the next low before a new high is set.

Since our backtest will always cover the whole period, drawdown is an important risk factor to think about, but we’re much less likely to keep a losing trade open in real life. If you had bought Amazon stock in 1998, it would have been smart to keep every share and buy as much as you could during the dotcom bust. In reality, not many people would keep going with a deal if their money dropped by 10%, 20%, 40%, 80%, etc.

The power of compounding is surprising

Making versus saving money “To make money, you have to take risks, have faith, and stand up for yourself. But taking risks needs to be stopped if money is to be kept. It requires humility and the fear that everything you’ve worked for could be taken away from you just as quickly. You can’t always count on repeating past success, so you have to be thrifty and realise that at least some of what you’ve made is due to luck.

Money management is different from money management. To make money, you have to take risks, work hard, and keep a positive attitude. Keeping money is a different skill. It requires you to take less risk, not be greedy, and remember that things could be taken away from you at any time.

Money is not the enemy

A plan is only useful if it can stand up to the real world. The truth is that everyone has a future that is full of unknowns.

If you’re still young and have more income than expenses, the best way to get the most out of your long-term investments is to put most of your money into a diversified portfolio of low-cost index funds. Cash loses value over time, so it’s not smart to keep more than a small amount of your net worth in cash. Instead, you should invest in assets like stocks, which have historically grown at a rate of 10-11% per year.

Even though it might seem appealing to invest in ways that will give you the best returns, these ideas often don’t take your personality into account. Think about having 95% of your money in stocks and bonds and only 5% in cash. The market falls 20 to 25%. Having such a small amount of cash on hand may make you more likely to sell some of your stocks in a panic when the market goes down, depending on how that drop makes you feel. And if you sell in a panic, you can lose out on a lot more money than if you kept a bigger part of your portfolio in cash and didn’t sell because you felt safer.

Spreadsheets are not like people!

Even though the models say you should only keep 1% to 5% of your assets in cash, you may want to keep 10% to 20% to protect yourself from having a bad attitude when bad things happen. It can also be the best choice for your portfolio if having more cash on hand keeps you from making one big mistake.

Long Tail

In finance, a small number of events can be responsible for most of the outcomes. This is where long tails, or the ends of a distribution of outcomes, have a big effect.

Most of the time, your choices about investing don’t matter. What happens depends on the choices you make on a few days when something important happens, like a severe downturn, a frothy market, a speculative bubble, etc. Warren Buffet has held between 400 and 500 stocks over the course of his life. Most of his money came from just 10 of them.

Highest level of wealth

Having the freedom to do what you want, when you want, with who you want, and for as long as you want is very valuable. This is the best return that money can buy.

Being more flexible and in charge of your own time is much more useful than staying up late or making risky bets that keep you from sleeping just to boost your returns by 2%.

In The Psychology of Money, Morgan Housel shows you how to get along better with money and make better financial decisions. He doesn’t try to make people seem like machines that can maximise their return on investment. Instead, he shows how psychology can both help and hurt you.

Main Points

The real world isn’t a theory – the problem is that studying or having an open mind can’t really make us feel the same way that fear and uncertainty do.

We’re not like mathematical equations. Reading about historical events like stock market crashes or how stocks have gone up and to the right over time can teach us a lot, but it’s not the same as actually going through them. So be careful. You might think you can hold on to your stocks during a 30% drop in the market because you know that only fools sell at the bottom. However, you won’t know what to do until you actually go through a drop of that size.

Risk and reward

It’s easy to think that the quality of your decisions and actions is the only thing that affects your finances, but that’s not always the case. You can make smart decisions that lead to bad financial results. You could also make bad decisions that turn out to be good for your finances. You have to think about how chance and risk will play a role.

To make it less likely that people will stress how much individual effort affects results:

Be careful of the people you both look up to and look down on. Those at the top may have gotten lucky, while those at the bottom may have lost money because they took more risks.

Pay less attention to individual people and more attention to larger trends. It’s hard to copy what successful people have done, but you might be able to join larger patterns.

But what’s more important is that even if we agree that luck plays a role in success, we shouldn’t be too hard on ourselves when we fail because risk also plays a role.

Be kind to yourself when you make a mistake or find yourself in a dangerous situation. Since the world is unpredictable, if something goes wrong, it might not even be your fault.

What Buffett Says

According to legendary investor Warren Buffet, there’s no reason to put our needs and resources at risk for something you don’t need.

It’s easy to make a goalpost that can be moved. When you reach one of your goals, you move on to the next one. The cycle will never stop. Often, you do this because you’re comparing yourself to others, and most of the time, you’re comparing yourself to someone higher up on the ladder.

Someone else will always have more money than you do. Not a problem. It’s fine to look for ways to make more money, but don’t risk what you already have to get something you don’t need.

More lessons from the book follow on the next article.

The acid test ratio, which is also called the quick ratio, is a financial measure of how quickly a company can pay off its current debts. Current obligations are debts that have to be paid back within a year. For example, a credit card balance is a current obligation.

The ratio shows how well the business is doing financially right now.

If a company’s acid test ratio is less than one, it usually means that its current assets are not enough to pay off its short-term debts and liabilities. A very high ratio suggests that money has been saved up and is just sitting there, not being put to good use.

It’s important to know that when figuring out the ratio, the company doesn’t count current assets that are hard to sell quickly.

How to find the acid test ratio

The acid-test ratio is calculated by dividing current liabilities by (cash + accounts receivable + short-term investments). Cash and assets that can be used as cash must be included. There must also be marketable securities and other assets that can be used quickly. Accounts receivable are usually covered, but not in every business. If assets on a balance sheet, like loans to suppliers, prepayments, and deferred tax assets, can’t pay off liabilities in the near future, they must be taken off. The denominator should include all current liabilities, which are debts and commitments due within a year.

The limits of the Ratio

If the company’s financial data is inaccurate, it will have accounts receivable that require longer than usual to be collected.

Also, it gives a false picture of the current liabilities that are due but won’t be paid for a while.

A low acid test ratio doesn’t always mean that a business strategy that depends on stock is in bad financial shape.

The acid test ratio is different from the current ratio

The current ratio, also called the working capital ratio, shows how quickly a company can make enough cash to pay off all its debts if they all come due at once.

On the other hand, the acid test ratio is a more cautious measurement.
While the current ratio includes assets that can be converted to cash within a year, the acid-test ratio only includes assets that can be done so within 90 days or less.

In continuation of our series about important financial ratios that everyone should know about, here are a few more that will help you become a better investor.

EV/EBITDA

People often use the P/E ratio and the enterprise value (EV) by EBITDA to figure out how much a company is worth. Market capitalization plus debt less cash equals EV. It gives a much more accurate takeover valuation because it takes into account debt. This is its main advantage over the price-to-earnings ratio, which can be thrown off by very high earnings that come from debt, as we’ve seen. EBITDA stands for earnings before taking into account interest, taxes, depreciation, and amortisation.

This ratio shows how much a business with a lot of debt is worth. As EV/EBITDA is not affected by the capital structure, it can be used to evaluate businesses with different amounts of debt. A lower ratio shows that a company is undervalued. It is important to note that the ratio is high for industries with fast growth and low for industries with slow growth.

RATIO OF PRICE TO EARNINGS GROWTH

The PEG ratio is used to figure out how the price of a stock, its earnings per share (EPS), and the growth of the company are all linked.

A high P/E ratio is often a sign of a business that is growing quickly. This could mean that something is worth too much. The P/E ratio is divided by the expected growth rate to see if a high P/E ratio makes sense given the expected growth rate in the future. The end result can be compared to that of peers who grew at different rates.

A PEG ratio of 1 means that the price of the stock is fair. If the number is less than 1, it could mean that the stock is undervalued.

RETURN ON EQUITY

The main goal of any investment is to make money. Return on equity, or ROE, is a way to measure how much money shareholders get back from the company’s operations and profits as a whole. Investors can use it to figure out how profitable businesses in the same industry are. Having a number is always better. The ratio shows how good the management is. ROE is the ratio of net income to shareholder equity.

Even though businesses with a lot of growth should have a higher ROE, a ROE of 15-20% is still good. The biggest benefit is when earnings are put back into the business to make a higher ROE, which leads to a faster growth rate. But it’s important to keep in mind that a rise in debt will also lead to a rise in ROE.

INTEREST COVERAGE RATE

It is found by dividing interest costs by EBIT, which stands for earnings before interest and taxes. It tells how healthy a company’s finances are and how many interest payments it can make through its activities alone.

When comparing businesses in different industries with very different depreciation and amortisation costs, EBITDA can be used instead of EBIT. Or, if you want a more accurate picture of a company’s ability to pay its bills, you could look at its earnings before interest but after taxes.

CURRENT RATIO

This shows the liquidity situation of the company, or how ready it is to pay its short-term debts with its short-term assets. If the number is higher, it means that working capital problems won’t affect how the company runs. Red flags go up when the current ratio is less than one.

The ratio can be found by dividing the current liabilities by the current assets. Receivables and stock are examples of what are called “current assets.” Businesses can find it hard to turn receivables into cash and inventory into sales. This could make it harder for it to meet its obligations. In this case, the investor may look at the acid-test ratio, which is similar to the current ratio but doesn’t include inventory and receivables.

ASSET TURNOVER RATIO

It shows how well the management makes use of resources to make money. The better the ratio, the more money the business makes for every rupee it spends on an asset. The ratio is better if it is higher. Experts say that the comparison should be made between businesses that work in the same industry. This is because the ratio could be different in different industries. Asset-heavy industries like telecommunications and power have a low asset turnover ratio, while retail has a high one (as the asset base is small).

DIVIDEND YIELD

Dividends per share are based on how much each share is worth. If the number is high, that means the business is doing well. But penny stocks, which are low-quality but have high dividend yields, and businesses that sometimes make a profit or have extra cash they can use to pay special dividends should be avoided. In a similar way, a low dividend yield may not always mean that an investment is a bad one. For example, businesses (especially those just starting out or growing) may decide to reinvest all of their profits in order to give their shareholders good long-term returns.

Financial ratio research helps evaluate things like profitability, effectiveness, and risk. Before investing in a stock, you should also look into the macroeconomic environment, the quality of the management, and the outlook for the industry.