The only reason people make investments is to get returns. Most people think that they know how to calculate actual returns. But many don’t use the right method to calculate returns. Using the wrong method to calculate returns can give an incorrect picture of your investments. For example, a person tells you that his investments of Rs 25 lacs in stocks are now worth Rs 75 lac. He is very happy to have tripled his original investment. But when he tells you that this increase has taken place in 15 years, will you still consider it to be a good investment? We try to answer this question by understanding the 3 main ways to calculate returns Absolute returns, Compounded annual growth rates & IRR Let's use the above example to understand these methods. Absolute Returns Absolute Return (AR) is a simple way of calculating returns. It uses point-to-point values to calculate returns within a given period. It is calculated as follows: Absolute Returns = (Final Value - Initial Value)/Initial...

Introduction to fundamental and technical analysis of stock buying or selling stock should always be preceded by at least some or other form of rational analysis that is backed by data. This ensures that the investor or trader has done some groundwork before taking the buy/sell decision and is not just throwing darts in the dark. At a very broad level, there are two disciplines of doing the stock analysis: Fundamental Analysis of stock Technical Analysis of stock Both are very different from each other and attract market participants of different financial profiles and time horizons. Fundamental Analysis of stock This analysis requires an evaluation of a company’s business by analyzing its qualitative and quantitative parameters. Qualitative parameters involve rational analysis and earnings projection by analyzing key financial indicators. For this, analysts delve deep into a company's past years balance sheets, income statement, cash flow statements, and disclosures. Quantitative parameters, on the other hand, require analyzing other non-financial aspects of the company like management quality, corporate governance, treatment of minority shareholders,...

People invest in stocks to earn higher returns than what fixed income products offer. But all stocks are not the same. Like the companies and businesses, the stocks of different companies also have different characteristics. In general, companies issue two types of stocks– Preferred (have priority over other shareholders) & Common stocks. In line with its name, the common stocks are the first choice of retail investors. We will be focusing on common stocks in this article. Let’s evaluate different stock classifications that are commonly used: Types of stocks 0n basis of Market Capitalization Stocks are often classified as large caps, mid caps, small caps, and micro caps on basis of their total market capitalization (Current Share Price x Total Number of Shares). Though there are no exact cutoffs about what exactly is defined as a large-cap and what isn’t, investors usually categorize companies under as follows: Large-cap: Market Cap > Rs 10,000 Crore (Cr) Mid-cap: Rs 2,000 Cr < Market Cap < Rs 10,000 Cr Small-cap: Rs...

Do you remember how much a week’s worth of grocery cost you 2 or 3 years back? Does the same amount of grocery still cost you the same? We are sure that the answer is a big and an emphatic NO! This is the impact of inflation. To put it simply, inflation is a general rise in prices of various goods and services year after year. With each passing year, inflation reduces the number of things you can buy with a fixed sum of money. So if you were able to purchase 5 kgs of an item for Rs 200 in the year 2011, chances are that you would get lesser amount (maybe just 3 kgs) of the same item for Rs 200 in 2016. Causes of Inflation Sometimes, people have sufficient money and continue to buy goods and services, thereby increasing their demand. This increase in demand leads to an increase in prices, and hence - inflation. At times, the prices of raw materials used in production can...

Remember the old saying – “Don’t put all your eggs in one basket”? We bet you do. So what would happen if you put all your eggs in one basket? You risk losing all the eggs if that ‘one’ basket fell or is lost during transportation. Isn't it?. Had you distributed your eggs across many baskets, you would have been reasonably sure that most of the eggs would have remained safe, even if one or two baskets were lost. This is the basis of diversification. It’s a strategy that requires you to spread your money across various investments. This is to ensure that in case one of those investment loses money, the other ones will compensate for the losses of first one. It’s very important to understand that the real goal of diversification is not to increase your portfolio’s performance (though it actually can). It’s more about protecting your money against large losses due fall in prices of an asset, where your money was over-concentrated. Lets take an example...

An asset can either be physical (can be touched and used like gold, real estate), or it can be financial (can be bought in form of contractual certificates like stocks, deposits, bonds etc.)Within this categorization of physical and financial assets, there are few major types of assets: Stocks: Stocks are representative of part-ownership in the company whose stock is being bought. Out of the profit that the company makes, a part is paid out to shareholders (stock owner) as dividends. Rest of the money is invested back in the business. In general, company’s growth potential decides how the markets value the stock. So if the markets think that company will do well in future, its share prices might go up. So in addition to dividends, shareholders also earn money by means of capital appreciation when they sell shares held by them at higher prices. Unfortunately, stock prices don’t always move up in straight line, i.e. returns are not guaranteed. But on an average, stocks are known to provide the...