After completing your education, you started working and realise a portion of your earnings needs to be invested in equity markets to earn returns. One glance at the media, and you realize equity investing is just too complicated. How to understand the financial jargon, the never-ending ratios?!
You don’t need to have a very high IQ to make money in equities. But you certainly need to understand the basics of accounting to understand the business.
You must first identify a business. A look around your house will give you different investment ideas. Start with your daily cup of tea or coffee, and you will find several businesses which you will understand.
Once you have identified the business, you can have a look at the information published by the company – website, annual reports, and corporate presentations to understand the business.
Once you have a fairly good idea of the factors that influence the business, you come to the financials. The Holy Trinity of Profit and Loss Statement, Balance Sheet, and Cash flow statement. Each of these will tell you different information. The profit and loss statement will help you understand how the company makes money, its expenses, and its profitability. The balance sheet will explain how well the company is utilizing the funds invested by shareholders, and the cash flow will answer the most basic question – does the business generate free cash for shareholders?!
Analysts can derive any number of ratios from these statements which can be difficult to interpret. Understanding the basic ratios to compare two companies within a sector is critical. One search on Google can help understand some of the basic ratios.
In addition to the financials several qualitative factors aid decision-making.
- Management: The management will lead the company to achieve its goals and generate shareholder wealth over a long time. The information about the education and experience of management is available on the corporate websites. A LinkedIn search will help gather additional information about the previous experiences of the key managerial personnel.
- Promoter holding: Investors might prefer companies that have a promoter’s wealth tied to its success. There have been several cases where companies run by people who don’t have a financial interest in them have been mismanaged.
- Other factors such as a moat or competitive advantage of a company, demand for the products, or bargaining power with suppliers are some other factors that help understand a company better.
If you are someone who simply does not have the time to study accounting, it does not mean that you should not consider equity investing. You can hire SEBI registered Research Analysts who will do all the work and advise stocks that you can consider investing in.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”