Zebu blog

Tag: Long-term Investing

  • What Are Value Stocks?

    Growth stocks are companies that have a lot of room to grow. By buying shares in these kinds of companies, investors can make a lot of money through capital appreciation. However, investing in growth stocks requires the right research before you can buy them.

    Features

    People who like to take risks and want to make a lot of money on their investments should buy growth stocks. By looking at the following things, investors can easily find the best growth stocks and the companies that make them:

    Price to earnings ratio

    On the market, companies with a lot of growth potential are found, and shares of those companies have a high bid value. These companies’ growth stocks have a high price-to-earnings (P/E) ratio, which means they give a high return on total investment.

    People see a company’s full potential and think it will grow at a fast rate in the future if it has a high price-to-earnings ratio. But in some situations, a high P/E ratio can be misleading because it could mean that a business is overvalued. The performance of these kinds of businesses is caused by a boom, persistent inflation, or the growth of a financial bubble.

    One of the first things that the best growth stocks in India tend to have is a ratio of 1 or more.

    Price earnings to growth ratio
    Because the P/E ratio has some limitations, investors in India also look at the price-earnings to growth ratio to tell growth shares from standard equity shares. The main benefit of the PEG ratio over the P/E ratio is that it takes into account how much a company’s total earnings per share are growing each year.
    PEG Ratio = Market value of unit shares divided by the growth rate of earnings per share

    When a business has a high PEG ratio, it means that it has done very well. It is a better way to analyse a stock than the price-to-earnings ratio because it doesn’t give you false information.

    Strength of the company

    Companies can only give out growth stocks if they have a lot of room to grow and expand in the future. This can only be done if the company has a strong base, a good plan for business growth, and good management to reach the goals that have been set.

    It can be seen in the return on equity (RoE) value that is published every year. In India, companies that raise money through growth stocks usually have a record return on total equity of 15% or more per year.

    Why should you buy stocks that can grow?

    Capital appreciation
    Investing in the best growth stocks is done to make sure that a lot of money is made through large capital gains. These companies grow faster than the industry they are in, which means they make more money.

    Investing in growth stocks is only a way to make money in the long run. The long-term capital gains tax (LTCG), which is lower than the short-term taxation policy, applies to any capital gains made during this time. There is also a provision for indexation, which lowers people’s tax burdens even more.

    Prepare for rising prices
    The best growth stocks have returns that are much higher than the rate of inflation in an economy. In the long run, people’s purchasing power goes up, which means that their standard of living goes up because they have more money.

    Risks of growth stocks

    Growth companies look to make money by using aggressive business strategies to get a big share of the market. Investors lose a lot when these kinds of companies don’t pay dividends because they want to use the money instead to grow.

    During the lock-in period, investors don’t get any dividends, so if a business keeps losing money, in the long run, investors will lose all the money they put into it.

    Growth stocks are usually issued by companies that are still growing and changing, so they are very risky. They are very sensitive to changes in the market because they are volatile. Even though this feature lets businesses make huge profits when the market goes up, even a small change in price can cause losses. Investing in the best growth stocks should depend on how the market is doing. The underlying performance of growth stocks can also be caused by a country’s stable economy. If there is a financial bubble, companies that work in that sector tend to do better than they should. This kind of growth can be deceiving because it is caused by a strange thing in the economy.

    In order to make enough money, investing in growth shares in India requires a thorough analysis of both the companies chosen and the social and economic conditions at the time.

  • How To Choose Between Value and Growth Stocks?How To Choose Between Value and Growth Stocks?

    When it comes to making investments, investors have a lot of choices, such as debt vs. equity, active vs. passive funds, mutual funds vs. stocks, value vs. growth investing, and so on. Investors can choose between growth investing and value investing when they put money into the stock market.


    Both strategies help investors make more money on the stock market, but they do so in different ways and are widely used.

    Fundamental research is a good way to tell the difference between value stocks and growth stocks. Let’s look closely at each type before we say what makes them different.

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    Investment in growth stocks
    The Growth Investing strategy looks for companies that have a higher chance of outperforming their earnings and are expected to keep giving high returns on profit growth. Small-cap, mid-cap, and large-cap funds all have growth stocks. Investors are willing to put money into something and pay a higher price if they think it will grow or give them a higher return soon.

    Investors are optimistic about the company’s business plan and its chances of growth in the near future. Several things, like the company’s position in the market or the belief that its next line of products will be well received, can give investors confidence.

    Also, these stocks are more “expensive” than those of their competitors because their price-to-earnings ratio is higher. This is why investors are willing to pay more for these stocks than they are currently making because they think the price will be worth it in the long run.

    Investment in value stocks

    The value investing method usually looks for stocks that are undervalued, or whose current market price is lower than what they are really worth. So, they move along slowly, but they are worth more in the long run. The idea is that the market will quickly see how valuable it is, and the share price will then “catch up,” leading to big profits. So, if the actual value of a share of stock is Rs. 100, but it is currently trading at Rs. 75, an analyst will think this is a good value pay.

    There are many things that can cause value stocks to be undervalued, such as the economy, legal problems, bad press, disappointing earnings, etc. All of these things make us question how well the company will do in the long run. But they come back slowly. Value stocks are best for investors who want to hold them for a long time, and their prices may be more likely to change than those of growth stocks.

    DIFFERENCE BETWEEN VALUE V/S GROWTH INVESTING

    An important difference between value stocks and growth stocks is that value stocks have a better chance of beating their peers when interest rates go down and corporate earnings go up. But when the economy slows down, it will be the first to pay the price. Value stocks, on the other hand, may do well in the early stages of an economic recovery, but they are more likely to do poorly in a long-term bull market, when constant media coverage, a rumor, or a news story about the company’s management could cause a panic sell-off.

    VALUE V/S GROWTH INVESTING: WHICH IS BETTER?

    There is no right or wrong way to choose between growth investing and value investing when investing in the stock market. Instead, each method has its own set of goals, benefits, and risks. Because of this, it is best to use a combination of investment styles instead of just one, since both have their pros and cons.

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  • Fundamental Analysis 101 – 5 Things To Get You Started

    Fundamental analysis is about getting to know a company, its business, and its future plans better. It includes reading and analysing annual reports and financial statements to get a sense of the company’s strengths and weaknesses, as well as its competitors.

    Before you get started on your journey of investments, we believe that you deserve one of the best trading accounts from one of the top brokers in share market. With Zebu, you get access to a state-of-the-art online trading platform with which you can perform comprehensive fundamental and technical analysis.

    A few of the important parameters while doing fundamental analysis are:

    1. Net Profit
    Net profit can mean different things to different people. Net means “after all the deductions.” It’s common to think of net profit as profit after all the operating costs have been taken out, especially the fixed costs or overheads. Gross profit gives investors the difference between sales and direct costs of goods sold before operating costs or overheads are taken into account. This is not the case here. It is also called Profit After Tax (PAT), which is the profit figure that is left after taxes are taken out of the profit.

    2. Profit Margins
    The earnings of a company don’t tell the entire story. Earning more money is good, but if the cost goes up more than the revenue, the profit margin doesn’t get better. The profit margin shows how much money the company makes from each rupee of sales. This measure is very useful when you want to compare businesses in the same industry.
    On the basis of a simple formula:
    Net income / Revenue = Profit margin
    In this case, a higher profit margin means that the company is better able to control its costs than its competitors are. The profit margin is shown in percentages.
    If a company makes 10 paise for every rupee they make, then the profit margin is 10%. This means that the company makes 10 paise for every rupee they make.

    3. Return on Equity Ratio
    Return on Equity (ROE) shows how well a company does at making money. It is a ratio of revenue and profits to the value of the company’s stock. Find out how much profit a company can make with the money its shareholders have put into it. A simple way to do this is to look at the return on equity ratio,

    The Return on Equity Ratio is calculated as shown.

    Return on equity = Net Income / Shareholder’s Equity

    It is calculated in rupees.

    This factor is important because it tells you about a lot of other things, like leverage (debt of the company), revenue, profits and margins, returns to shareholders.

    For example, a company called XYZ Ltd. made a net profit (before dividends) of Rs. 1,00,000. During the year, it paid out dividends of Rs. 10,000. XYZ Ltd. also had 500, Rs.50 par common shares on the market during the year, as well. That’s how the ROE would be calculated then.

    ROE = 1,00,000–10,000/500*50 = Rs. 3.6.

    Simply put, those who own shares in the company will get back Rs. 3.6 for every rupee they invest in the company.

    4. Price to Earnings (P/E) Ratio

    People often use the Price-to-Earnings (P/E) ratio to figure out how much a share of a company is worth. It tells us how much money the company makes per share in the market today.
    We can figure out the Price of earnings, or PE ratio, as shown below.
    In simple terms, PE = Price per Share / Earnings per Share
    This also helps when you want to compare businesses. Then companies should figure out their EPS and then figure out how much their PE ratio value is.
    A high P/E means that the stock is priced high compared to its earnings. Companies with higher P/E seem to be more expensive. However, this measure, as well as other financial ratios, must be compared to other companies in the same industry or to the company’s own P/E history to be useful.
    If company XYZ has a share that costs 50 rupees, and its earnings per share for the year are 10 rupees per share.

    The P/E Ratio is 50/10, which is 5.

    5. Price-to-Book (P/B) Ratio
    A Price-to-Book (P/B) ratio is used to compare a stock’s value on the market to its value on the books. Calculating the P/B ratio is the way to figure out if you’re paying too much for the stock because it shows how much money the company would have leftover if it were to close down today.
    P/BV Ratio = Current Market Price per Share / Book Value per Share
    Book Value per Share = Book Value / Total number of shares
    Having a higher P/B ratio than 1 means that the share price is higher than what the company’s assets would be sold for, which means that the share price is higher. The difference shows what investors think about the future growth of the company.

    XYZ company, for example, has 10,000 shares trading at Rs.10 each. This year, the company recorded a net value of Rs. 50,000 on its balance sheet. The price-to-book ratio of the corporation would be as follows:

    50,000 / 10,000 = Book Value per Share

    P/BV Ratio = 10 / 5

    P/BV Ratio = 2

    The company’s market price is two times its book value. This signifies that the company’s stock is worth twice as much as the balance sheet’s net worth. Also, because investors are ready to pay more for the business’s shares than they are worth, this company would be called overvalued.

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  • The Quick Guide To Index Funds

    An index fund, also known as an index-tied or index-tracked fund, is a mutual fund that mimics an index’s portfolio.

    What is an Index Fund


    Investors think of index funds as an instrument to diversify their portfolio – they simply give the same returns that you might get if indices were purchasable. Since popular indices are not susceptible to rapid movements, index funds are a safe bet for risk-averse investors.They simply ensure a performance that is theoretically similar to the index movements.

    Because index funds are not actively managed, they are less expensive. They will not outperform an index but simply replicate its movements. They help investors diversify and balance the risk in their portfolio.

    How Do They Work?


    If you consider an index fund that mirror’s Nifty 50, it will contain the same stocks as the index and with the same weightage. Index funds are called as passive fund management because they simply monitor the movement of an index. Based on the composition of the underlying index, a fund manager divides your funds with the right weightage for certain stocks. Index funds, unlike actively managed funds, do not have their own team of research experts to find opportunities and pick stocks.

    While an actively managed fund aims to outperform its benchmark, an index fund’s goal is to mirror its index’s performance. Index funds usually produce returns that are similar to the benchmark. However, there will be a marginal difference between the returns of both. This is the tracking error and it is the fund manager’s job to reduce this error as much as possible.

    Who Should Put Their Money in Index Funds?


    As with any investment, you need to first understand your risk tolerance and investment objectives. Index funds are for those who do not want high risk but are also realistic about lower returns. If you do not have a lot of time to monitor the stock markets every year, then this one is for you. You can choose a highly liquid Sensex or Nifty index fund if you want to invest in stocks but don’t want to accept the risks associated with actively managed equity funds. While index funds will give you returns that are comparable to an index’s movements, you need to opt for more actively managed funds if you want to outperform the market.

    What to Consider as an Investor


    As with any investment, one of the first things to consider is the platform that you are going to buy these funds on. With Zebu’s lowest brokerage fees, and our credibility as one of India’s best share market brokers, we guarantee that you will have access to the best trading accounts in the country.

    Risk

    Index funds are less susceptible to equity-related volatility and dangers because they track an index. If you want to make a lot of money in a bull market, index funds are a great place to start. During a market downturn, though, you’ll have to switch to actively managed funds. Because during bear markets, index funds tend to lose value. As a result, having a mix of actively managed funds and index funds in your portfolio is recommended.

    Return

    As we have mentioned before, the returns from index funds will be very similar to index benchmarks as it simply replicates its moves. These funds aren’t trying to outperform the benchmark, but rather to copy it. However, due to tracking issues, the results generated may not be on par with the index. There may be differences in actual index returns. As a result, before investing in an index fund, it is recommended to select funds with the lowest tracking error. The smaller the errors, the better the fund’s performance.

    Investment cost

    Since index funds are passively managed, their expense ratios are much lower than that of actively managed mutual funds. This is because there is no investment strategy from a fund manager – they simply monitor the weightage of stocks in an index and manage that in an index fund. As a result, the expense ratio differs. Any two index funds that track the Nifty will produce similar returns. The expense ratio will be the only change. Because the fund has a reduced expense ratio, it will yield larger returns on investment.

    Time frame

    Individuals with a long-term investment horizon will generally benefit from index funds. Typically, the fund sees a lot of volatility in the short run, but over time, say more than seven years, it averages out to generate returns in the 10% -12% level. Those who invest in index funds must have the patience to wait at least that long. Only then will they be able to appreciate its returns.

    Goals

    Long-term financial goals, such as wealth accumulation or retirement planning, may be best achieved using equity funds. These funds are high-risk, high-return sanctuary and can help you build wealth and possibly retire early. Therefore, if your objective is to earn more than the index benchmark, then index funds might not be the one for you.

    Taxation


    Because index funds are a type of equity fund, they are taxed similarly to other equity fund plans. An index fund’s dividends are added to your overall income and taxed at your marginal tax rate. Index funds are taxed at different rates depending on how long they are held. Short-term capital gains are realised when you redeem your units during a one-year holding period. These profits are taxed at a 15 per cent flat rate. Long-term capital gains are gains realised when you sell your fund units after a one-year holding period. However, if your gains are under Rs 1,00,000 per year, they are tax-free. Any gains in excess of this amount are subject to a 10% tax rate, with no indexation.

    If you choose to go for an index fund, there are several options for you to choose from. A few of them include ICICI prudential NV20 ETF, UTI Sensex ETF and SBI ETF Nifty Next 50. You can explore these options and more with Zebu. Our lowest brokerage fees allow you to purchase the index fund of your choice effortlessly, making yours one of the best trading accounts. As one of India’s leading share market brokers, we will help you make the right decision when it comes to index funds.