Basics of Share Market for Beginners
Investment is the best way of increasing money. but before investing you must know the basics. If you want to know how you can invest and convert 10,000 to 10 lacs then this is the right place. Yes, it is possibly the tried and tested things you will get to know.
Joel Greenblatt in his book ‘The Little Book that Beats the Market’ has mentioned a formula with which he had invested and converted his 10,000 to 1 million. it was nothing less than magic for him and hence he named it ‘The Magic Formula’.
The Problem of Market Price
The price at which quantity supplied equals quality demanded is the market price. The fluctuation in the market price is going to customer feelings.
It is not the company that changes or develops but it is the market price, that is, people and their emotions. people overreact on the basis of their emotions which results in fluctuations in the market price of the company.
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How to Calculate Business Worth
When fear rules the market, the price of the market is low; but when greed rules the market, the price is usually high to that of the actual value price.
If you notice the value of a company is getting down by its actual price, you can buy that stock. And if the market price is more than the actual price, sell it. This is a key and strategy by which you can grow rich. Well! It is not that simple.
For example, if there is a seeking product shop that makes 1 crore profit every year. What should be the price of the business according to you?
If you think you will realize that this is very little information. You will need more information like the annual income of the business every year; will it still gain the same profit or more profit after you buy it; will the business grow in the next five to ten years or your business will sink.
In spite of having proper data, we can only assume the price we can offer for the business. This is applied to every business in the stock market.
When to Invest?
The time factor is most important for an investment if you want to take the advantage of compounding.
No matter how much you invest, start investing at an early stage. Start an early investment even with a lesser amount.
Normally young people do not have an idea where to and when to start investing. If you are near 25 years of age, it is the right time for you to invest. Remember! At an early investment for more growth.
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Price to Earnings Ratio
It is difficult to predict the actual price of the business as things change every day. Does everything depend on prediction? Is there anything on our hands to do on this? Well! No, we can do something.
For example, if there are two businesses of Seeken products and Timepass products and early profit of the Seeken products is 1 crore while the Timepass product is 50 lacs.
Now suppose the value of both businesses is 10 crore and investment is the same in both the businesses. So, based on this data which business will you prefer to buy?
Definitely, you will choose Seeken products because here at every 100 rupees you will gain 10 rupees while in the case of Timepass products you will gain 10 rupees at every 200 rupees.
In other words, you will get more profit by seeking products in a less time period. While gambling it will take more time.
It all depends on the P/E Ratio (Price to Earnings Ratio) in the reference to the stock market in which we take the current price of the company and divide it with the earnings.
It is better to buy low P/E ratio products. But depending only on the P/E ratio is not enough because instead of having low P/E some businesses experience loss.
Return on Assets
If the Seeking product demands 50 lacs to make a profit of 1 crore while Timepass products demand 50 lacs investment to gain 50 lacs of profit.
On the basis of this data obviously, you will choose seeking products as the return ratio is more for Seeken products compared to the time pass product. This is the Return on Assets Ratio.
The Magic Formula
If you buy a good company with a high RAO( Return on Assets) Ratio at a low price, that is, having a low P/E ratio then you buy undervalued companies.
Joel Greenblatt has made a formula that ranks the undervalued companies. The system is made on the basis of companies quality and price which actually performs well.
It is not that if you know the formula you will get the same profit, but instead, it will help you to get better deals and help you to be a good investor.
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