Zebu blog

Tag: Investment Strategy

  • What exactly is the intrinsic value of a stock?

    Have you ever thought about why one stock might sell for Rs 200 and another for Rs 20? How do these prices get set? In this article, we’ll talk about what intrinsic value is.

    What Does Internal Value Mean?

    The true value of a stock is called its “intrinsic value.” This is calculated based on anticipated monetary benefits. Let’s put it this way: it is the most you can pay for the asset without losing money when you sell it later.

    Technical analysis helps you figure out how the price of a stock will move and what price levels it may reach. But the price is still very closely tied to what the stock is really worth. So, technical analysis only helps figure out where and how much a stock’s price will move.

    Prices have to start from somewhere before they can move in a certain direction. Say that the price of stock right now is Rs 300. Based on your technical analysis, it looks like it might go up to Rs 330. But how did the price of Rs 300 get there? There is a way to figure it out.

    Let’s use the example of buying a house. The main reason for building this apartment is to rent it out.

    Let’s say you want to keep it for 10 years. You shouldn’t pay more than you can make from it. In other words, the total amount of rent you could get in 10 years plus the price you could get if you sold it after 10 years. The value found in this way would be the flat’s true value.

    This value is adjusted for things like inflation and different kinds of risks to make sure it is correct. This will come up again in the section. The discounted cash flow model or the present value model is a way to figure out the true value of something. It can also be used to figure out what a stock is really worth.

    So, the bottom line is that a stock’s “intrinsic value” is the total amount you could make from it in the future.

    The question then is: How much money can you expect to make in the future from shares? When you buy stocks, the company gives you a piece of its annual profit. We call this a dividend. If you add up the value of the dividends and the price at which the share will be sold in the future (called the “terminal value”), you can figure out what the share is really worth.

    However, does Rs 200 in dividends today have the same value as Rs 200 in dividends 10 years from now? The value of Rs 100 in ten years is less than the value of Rs 100 today. In other words, inflation makes money worth less over time.

    To account for this change in value, you will have to use a method called “discounting” on each future dividend. In this step, you will divide each of the future dividends by a certain rate and then add them all up. Add the values to get the intrinsic value.

    RELATIVE VALUE METHOD: Now, let’s talk about the second way to figure out what a stock is really worth. This is done by comparing the price of the stock with one of the most important things about the company.

    Some key fundamentals include sales revenue, net income or profit (also called earnings), book value of equity shares, etc. When you buy shares of a company, you own a piece of the company’s core assets. For instance, you might get a share of the company’s sales or profits. This is because when you buy shares, you become a part-owner of the business.

    Now, it makes sense that you should always try to buy something at a good price and pay as little as possible. The less these shares cost on the market, the less you have to pay per unit to buy these fundamentals.

    Let’s look at a specific case. The price to earnings (PE) ratio is one of the ratios you can use to compare prices. In this ratio, you compare the price of a company’s share to how much it earns per share. If the price per share is Rs 300 and the earnings per share (EPS) is Rs 30, the PE will be Rs 10. This means that you pay Rs 10 for each rupee that the company makes.

    How do you know whether or not this price is fair? To find this, you must compare it to the PEs of the company’s competitors. If, for example, the average PE of your competitors is 15, you are paying less for your shares. This is because you have to pay an average of Rs 15 per unit of earnings for a share of one of the competitors. But you only pay Rs 10 for your company. Because of this, this method is called the relative value method.

    You can also use this method to figure out how much a company’s stock is really worth. By rearranging the formula for PE, you can see that the stock’s real value is the sum of PE and EPS. Now, take the average PE of your competitors, which is 15, and multiply it by the EPS of your company, which is 10. This will give you the intrinsic value of your stock. It adds up to Rs. 150. This means that Rs 150 is a fair price for your stock. Since you can buy it in the market for only Rs 120, it is a great deal. You can buy it with the expectation that it will go up to this fair value.

    The relative value method is important because it uses both the fundamentals of the company and market trends to figure out how much a stock is really worth. This makes it more real, but also more likely to be wrong. If fundamentals change a lot in the future, your estimate of the stock’s true value could be wrong.

  • 10 Things You Should Consider Before Investing In An IPO

    Investing in an IPO can be a great way to build wealth with promising companies. However, if last year is anything to go by, IPOs can be extremely tricky to invest in. If you are purely investing in an IPO to benefit from the listing gains, we suggest that you find promising companies, apply to the IPO and sell your shares on the day that it gets listed. However, if you are a long term investor, you can hold on to your gains.

    In this blog, we’ll talk about what an IPO is and the 10 Things to Check Before Investing in them.

    1. Read the Red Herring Prospectus. A company files the Draft Red Herring Prospectus with SEBI when it wants to sell its shares to the public to raise money. This document explains how the company plans to use the money it gets from the public and what risks investors might face. So, people who want to invest in an IPO must read this document first.

    2. Reasons for Raising Money: It’s important to know what the company plans to do with the money it gets from the Initial Public Offering. One should find out if the company wants to pay off its debts or if it wants to raise money to grow the business, or use the money for other business purposes. This shows that the money will be used well in the business, which is a good sign for an investor.

    3. Know the business model: Before investing in the Initial Public Offering, investors should know what kind of business model the company has. Once they know what kind of business the company is in, the next step is to find a new market opportunity. This is because the size of the opportunity and the company’s ability to get a share of the market can make a big difference in the company’s growth and shareholder returns. If investors don’t understand what the company does for business, they shouldn’t buy into its IPO.

    4. Analyzing the background of the company’s management and promoters: It’s important to find out who runs the business since they are the company’s backbone. Investors should look at both the people who started the company and the people who run it since both play important roles in how the company works. The company’s management is a big part of what moves the business forward. One should look at the qualifications and length of time that the company’s top management has been there. This gives an idea of how the company works.

    5. The company’s strengths and weaknesses: Before putting money into a company’s IPO, you should do a SWOT analysis of the company. The DRHP can be used to figure out what the company’s biggest strengths and weaknesses are. Investors should find out where the company stands in the industry it is in. People who want to invest in a business should try to learn as much as they can about the company and the strategies it uses.

    6. The company’s valuation: Investors should also check the company’s valuation, since the offer price could be too low or too high depending on the industries it works in and its financial ratios.

    7. The company’s health: It’s important to look at how well the company has done financially over the past few years to see if the company’s sales or profits have been growing steadily. If the company’s sales are going up, it might be a good idea to invest in its Initial Public Offering. Before putting money into an IPO, investors need to know how healthy the company’s finances are.

    8. Investment Horizon: An investor should know what their investment horizon is before putting money into an IPO. They should decide if they want to buy shares in the IPO just to trade them on the day it is listed or if they want to keep them for a longer time. The reason for this is that a trading strategy would depend on how the market is doing right now, while a long-term strategy would depend on how the company is doing in its core areas.

    9. Comparable Peers: Investors should also look at who the company’s competitors are. The DRHP compares the company to its peers in terms of both its finances and its value. Investors can look at how the company is valued compared to its peers to see if it is priced fairly.

    10. The company’s potential in the market: Investors should also look at the company’s opportunities and threats in the sectors where it operates. This is important for long-term investors to determine if the investment is worth it.

  • Everything You Need To Know About Diversified Equity Mutual Fund

    A well-diversified equity fund, which is usually just called a “diversified equity fund,” invests in companies of all sizes, no matter how big or small they are.

    Diversified Equity Mutual Fund: What is it?
    A diversified equity fund puts its money into companies of all sizes and in all industries. It spreads investments across the stock market so that investors can make the most money possible while minimising risk. Unit-linked insurance plans (ULIPs), mutual funds, and other investment firms all offer them.

    There are many different types and sizes of companies on the stock exchange.

    1)large caps
    2)mid caps,
    3)small caps.

    How does a fund with a wide range of stocks work?

    A diversified equity fund also invests in companies from different sectors and industries. So, it can take part in the growth of the whole economy and isn’t tied to any one sector or industry.

    They can choose to put their money into businesses from –
    Pharmaceuticals
    Technology
    Engineering
    Automobiles
    Power/Services
    Services for banking and finance
    Gas and oil

    Simply put, a diversified equity fund invests in companies from different sectors, industries, and sizes of the market.

    Diversified equity funds, which include both ULIPs and mutual funds, are created so that investors can profit from the financial growth of companies of all sizes and in all industries and sectors. The rules for investing in ULIPs and mutual funds are different, and investors are told this in product literature and on company websites.

    Who does it work best for?
    Diversified equity funds can be helpful for investors who like stocks and have long-term goals like planning for retirement or saving for a child’s education or wedding. They can be used on their own or as part of a portfolio with other investments.

  • What Are Unlisted Stocks And Should You Invest In Them?

    We all know that investing in stocks can be good because, if done right, it can give you a huge return. We buy our stocks from the companies listed only on the stock market. However, there are companies that are not listed on the market whose shares you can buy. These are called unlisted stocks. Many of us don’t know that there are many benefits to investing in shares that aren’t on the stock market.

    1. Diversification of risk

    Unlisted shares have different risks than listed shares and can be a good addition to a portfolio of listed shares. They can be a good way to spread out your investments. Unlisted shares have the same or a better chance of making money than listed ones. There’s a chance that these stocks will go public at some point in the future. When they do, there’s a good chance that they’ll go up a lot. But whether you buy listed or unlisted shares, it’s important to look at the valuation metrics along with the price and buy stocks that are undervalued but have a good chance of growing earnings.

    2. Undervaluation:

    Since most unlisted shares can’t be sold quickly, they can only be bought by people who are willing to keep their money invested for a long time. Since there is less interest in these investments and fewer people want to join this community, the valuations are usually lower. There are many chances to invest in a stock that is undervalued. To find these opportunities, you need to be smart and know what to look for. For a beginner, it may be best to hire a professional who can give them the help they need.

    3. Lower volatility

    Because the shares aren’t easily sold, there are a lot fewer worries about their volatility. The standard deviation, which is a technical way of talking about how volatile something is, is much lower than listed shares. But if the wrong investment is made, the amount of money lost can be very high. Demand and supply for these stocks are not tracked every day, so the price would not change every day. When compared to listed shares, this investment will be less stressful in terms of money because the prices are fairly stable.

    How much should you spend on unlisted stocks?
    One should only buy unlisted shares if they are a good fit with the rest of their portfolio. Going overboard can make things a lot more dangerous. It is important to figure out your risk-appetite and how risky the investment is. Then, you can choose an investment that fits your risk profile. The risk of losing a lot of money in unlisted stocks is very high, so it’s important to only buy as much as fits your risk tolerance.

    We suggest that if you are a beginner investor you should keep away from unlisted stocks but if you are an experienced investor, that you still take the help of a financial advisor before investing in unlisted stocks.

  • What Is a Follow-On Public Offer and How Does It Work?