Analysis of shares: methods of conducting, choosing methods of analysis, tips and tricks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Effective investing in stocks or successful stock trading is not possible without stock and market analysis. If you do not use the tools of analysis and evaluation, then the purchase of shares will result in losses. This is especially true for the Russian stock market. He is still too young and unpredictable.

Shares as an investment object

A share is a security that gives its owner the right to receive a share of the company's income and the right to manage. Also, the owner of the share can profit from the sale, provided that the sale price is higher than the purchase price and operating costs. This type of securities has one indisputable advantage over others - they are secured by the assets of the issuer.

Types of shares

There are two types of shares: preferred and ordinary. The difference between them lies in the fact that dividend payments for the first type have a fixed amount and are paid first, while for ordinary dividends, payments are made from the remaining funds. This feature should be taken into account when analyzing stock returns.

Views. Financial analysis

There are three types of study: financial, fundamental and technical. Together they form an investment analysis of stocks. Financial to a greater extent refers not so much to the formation of the share price, but to its material support. Stock financial analysis includes:

• Calculation of profitability.
• Calculation of asset liquidity.
• The ability of an enterprise to pay its short-term and long-term obligations.
• Financial stability, probability of bankruptcy.
• The ratio of the book value and market value of the company.
• Ratio of current and non-current assets.

In order to competently conduct such an analysis, an investor needs to have knowledge of accounting.

Fundamental

Fundamental analysis of the stock market is the collection and processing of economic and political information relating not only to a particular enterprise, but also to the economy of the country in which the issuing enterprise is located. It includes studying:

• economic and political news;
• prospectuses published by a company or exchange;
• country statistics: inflation rate, unemployment rate, etc.

You should also study information about litigation and claims against the issuing company by partners or customers.

Technical

Technical analysis of stocks is an analysis based on a graphical representation of the market price ofsecurity paper. Over its almost century-long history of use, speculators and investors have developed special methods for working with charts. These include chart pattern recognition - head and shoulders, double and triple tops and bottoms, as well as ways to identify trends.

Technical analysis of the stock market is versatile, but in the stock market its use in isolation from financial and fundamental analysis is risky. If you do not notice the financial problems of the enterprise in time, you can lose money. In the event of the bankruptcy of the company, investors get only crumbs.

Preparation

Preparation for the analysis of shares of companies is the collection of information about the work of enterprises whose shares are planned to be bought. Even if an investor is not going to invest in all the shares that are listed on the market, he will have to evaluate as many companies as possible. The larger the sample, the higher the chance of collecting a successful investment portfolio. The preparation includes the collection and processing of the following data:

• annual financial statements for several years;
• prospectus on the additional issue of shares and their total volume;
• Charter of the enterprise;
• accounting policy;
• news reports, newspapers, magazines;
• charts of stock quotes;
• data from rating agencies.

Modern computers with Internet access make it possible to find the information you need quickly and practically free of charge. Open joint-stock companies whose shares are turned aroundon the stock exchange are required to publish financial statements and documents that the investor will need to analyze the shares.

Used formulas and methods

When analyzing shares, the investor calculates the ratio of various indicators of the financial performance of the issuing company. Below are the odds most professional investors use:

• P/E - the ratio of profit and market value of the share. The most popular ratio. It is used to identify overvalued or undervalued stocks.
• P/S - the ratio of profit and current assets. This ratio shows how the company is provided with marketable assets and is able to maintain its solvency in the short term.
• D=N(d+r) – calculation of return on shares, where N is the amount of investment, r is the difference between the purchase price and the current price, d is the amount of dividend per share.
• D/k is a coefficient used in the analysis of the profitability of a share in comparison with other, less risky investment instruments. k is the highest interest rate on bank deposits or bonds applied in the country.

These are the main coefficients used in the analysis. To make calculations, the investor will need to take data from the balance sheet and income statement, as well as a prospectus on the number of shares issued by the enterprise. When determining the value of the issuing company and the rate of return, such methods of stock analysis are used ascomparison with similar enterprises, or calculated on the basis of the book value and income of the firm for several years.

Calculation

The amount of dividends paid depends on the type of shares and the amount of profit that goes to pay dividends to shareholders. For preferred shares, they are fixed and must be paid in profitable years and provided that the Board has not taken a decision to reinvest the funds. However, it should be taken into account that Russian companies rarely pay dividends, since most of them need investments, and finding an investor is a big problem.

Below is an example calculation.

The Board of Directors decided to send 15% of the profit to pay dividends. The total number of shares is 10,000, of which 2,000 are preferred. The fixed amount of dividends on preferred shares is 2,500 rubles per share. The amount of profit is 100 million rubles, respectively, 15 million rubles will be allocated for the payment of dividends. 5 million rubles will be spent to pay dividends. The dividend per ordinary share will amount to 1,250 rubles (10 million rubles for 8,000 shares).

Possible risks

Stocks give high returns, and, as you know, it is always associated with the level of risk. With a skillful and timely analysis of stocks, serious losses as a result of investment or speculation should not come true. But no one can give you a 100% guarantee. Below are the main risks that arise when buying and holding shares:

• decrease in share price;
• issuer bankruptcy;
• changes in tax laws that result in increased taxes or complexity and additional costs in paying them;
• economic crisis;
• broker fraud risk;
• political risks, such as the nationalization of the issuing enterprise.

The listed risks are associated with conditions that do not depend on the actions of the investor, but he can lose money through his own fault. If he did not analyze the stock, did not check the financial statements, or missed important information and did not get rid of unreliable assets in time, then losses are inevitable. Professional investors are always cautious and, at the first sign of danger to their capital, they try to quickly sell unreliable shares and transfer money into more reliable assets.

Russian market

The most proven exchange is located in Moscow. Equity analysis is also needed here. Access to the exchange can be obtained through a bank or a brokerage firm. When a company first lists shares, it conducts analysis with the help of its specialists. The exchange has its own securities index - MICEX. The index consists of the most successful Russian open joint stock companies.

Trading on the stock exchange is conducted on weekdays from 9:00 to 17:00. Access conditions depend on the chosen broker. Shares of Russian companies can be purchased on the stock exchange through a special terminal remotely or at a bank branch. Basically, shares of oil and mining companies are listed on the Moscow Exchange, followed by machine-building plants and a small number ofhigh-tech companies (Yandex, Rostelecom) and banks (Sberbank). If we compare the Russian stock market with similar foreign sites, then it is generally not too big.

Problems an investor may face in the Russian market

The main problem that almost all investors face when preparing for the analysis of Russian stocks is inconvenient accounting reports.

Most textbooks and tutorials on exchange trading are written by Western authors and mostly Americans. In the US and Western Europe, there are completely different methods and standards for preparing financial statements. The transition to these standards and even the publication of reports prepared according to international reporting standards is difficult. The thing is that in Russia for a long time a different model of the economy operated, and its own methods and accounting standards were developed, according to which most accountants work. Retraining will take a lot of time and money, while "like in the West" will still not work. Therefore, investors have to put up with the fact that they need to search for the necessary information in all published documents of the enterprise.

Another problem that investors face when analyzing the Russian stock market is inadequate market behavior. Hypersensitivity to negative news, high market volatility - this indicates the instability of the financial system. When investing in shares of Russian companies, the risks are higher than when investing in American orJapanese.

Tips & Tricks

The main problem in the analysis of shares of Russian companies is the lack of information necessary for the investor. Although the law requires the publication of financial statements, copies of the Articles of Association and accounting policies, and decisions to issue additional shares, many Russian enterprises do not do this or present information in such a terrible way that even professional investors cannot understand it. If the reporting is prepared clumsily, then it is worth considering whether it is worth buying such shares? The following are guidelines and tips on how to conduct an analysis:

• Try to use information from reliable and trusted sources.
• Do not buy shares of companies that do not have an audit report attached to their accounts, but remember that a positive audit report does not guarantee against fraudulent actions of company managers. But this is at least some kind of test.
• Review your investment portfolio periodically.
• Conclude agreements only with those banks and brokers that are listed on the exchange.
• Don't fall for the rumours, but don't ignore them either. Base your decisions on facts.
• Don't use leverage, and if you do use it, then its size should not exceed 10:1.
• Hedge trades with options.
• Follow other markets. For example, if an investor owns shares in oil companies, then the analysis of shares should include an analysis of the prices of oil and oil products, since these are the main commodities,produced by such companies, and the amount of revenue depends on their prices.
• Carefully read the Charter of the enterprise, if it is not written there that it undertakes to pay dividends from profits, then it is more likely that it will not pay them. Young companies almost never pay dividends, this feature should be taken into account when analyzing.

When buying stocks, it is important to be careful and analyze them before buying an asset, not after. You also need to pay attention to what are the prospects for the industry in which the company operates, how many years it has been operating, what kind of business reputation it has.