Equity Trading Is Buying And Selling Of Company Stock Shares
EQUITY
EQUITY
The process of sacrificing or committing some money today in expectation of financial return later is defined as investment. The investor indulges in a bit of speculation (guess) as to how much return he is likely to get. Investor always makes speculation while taking the investment decisions.
Equity investments generally refers to the buying and holding of shares or stock on a stock market by individuals and firms in the expectation of getting income in the form of dividends and capital gain. Dividends are declared by the firm when they earn profits and the capital gain is earned by selling the share when the value of the share rises.
Equity also refers to the acquisition of ownership of a private (unlisted) company or a startup (a company being created or newly created). When the investment is in infant companies, it is referred to as venture capital investing and is generally understood to be higher risk than investment in listed going-concern situations.
Few years ago, when the person wanted to buy or sell shares, he or she physically took the certificates to the brokerage firm. But now because of technology, these documents are stored electronically. A Demat Account is opened by the investor by registering with an investment broker. In demat account shares and securities are held in electronic form instead of shares in physical form. The Demat account number is generated for all transactions to enable electronic settlements of trades to take place.
To access demat account, internet password and a transaction password are required. Whenever any purchase or sale of securities takes places then a confirmation is sent to the client. Purchases and sales of securities on the Demat account are automatically made once transactions are executed and completed.
Now trading with a click of mouse or a phone call has made the transaction easier. The most important feature of equity investment is its limited liability. It means as the owner of the stock is not responsible for the payments of the debts if the company is not able to. Owing equity shares or stock means even if the company goes bankrupt, the owner of the stock will never lose his or her personal assets.
The emerging equity markets have now become more stable, liquid and self sufficient because of larger investment flows, intensive research and more liberalized economic policy. Emerging equity markets offer potentially attractive rates of return, in part because the combination of low-cost resources and technology transfers often produce large profit margins for firms operating in such environments.
Initially, when a market achieves considerable economic and political stability and begins implementing liberalized policies, equity price rises after which the confidence of domestic investors is gained and becomes well accepted as an attractive investment avenue. Investors must make intelligent judgments about the current state of the market and possible changes in the future.
A logical starting point in assessing the market is to understand the economic factors that determine stock prices.
There are two types of situation when the market is bullish or bearish.
Bull Market: A market where the prices of a certain group of securities rising or expected to rise. Bulls are optimistic investors who expect good things to happen in the market.
Bear Market: A market where the prices of a certain group of securities are falling or expected to fall. In this type of market short selling takes place.
Three widely used measures of relative value are:
Price/ Earnings Ratio:
P/E ratio for a stable firm which is growing at a rate comparable to the normal growth rate in the economy in which it operates is given by,
P/ EPS = P/E (Pay-out ratio/ r-g)
Where, P = DPS/ r-g
DPS = Expected dividends per share next year
r = required rate of return on equity
g = Growth rate in dividends (forever)
EPS = Expected earnings per share next year.
The P/E ratio is an increasing function of the pay-out ratio and the growth rate and a decreasing function of the riskiness of the firm. If P/E ratio is less than the expected growth rate, then the stock is undervalued and if P/E ratio is more than the expected growth rate, then the stock is overvalued.
Price/ Book Value Ratio:
The relationship between the price and the book value has often helped the investors to identify the undervalued and overvalued portfolios and stocks.
P = DPS / r-g
Where, P= Value of stock
DPS = Expected dividend per share next year
r = required rate of return on equity
g = Perpetual growth rate in dividend
A low P/BV ratio indicates that the firm has a price which is below the book value. Such a firm is more likely to go out of business. So, investors are advised to make careful decisions about investing in these firms.
Price/Sales Ratio:
P/S ratio can be estimated using earnings growth rate, pay-out ratio and risk.
Price to Sales Ratio = Price to Earnings Ratio * (Profit Margin)
Price to sales ratio is useful to value any company. Price to Sales ratio for a company can be calculated by dividing the market capitalization of a company by its total revenue for the last four quarters. Price to sales ratio is more reliable measure because revenue for a company is difficult to manipulate. Firms with low profit margins and high P/S ratios are overvalued and those with high profit margins and low P/S ratios are undervalued. Investors should be able to identify them correctly and make investment decisions.
by: peter jhonson
Let Your Imagination Go Wild With Community Builder Profile Pro and Jomsocial Profile Pro Sensitive Skin And Soap Pharmacy Fraud Stings Physicians, Pharmacists, and Patients Favicon –What's that and How Do You Create One? Who was Christopher Pinchbeck - Watch and Clock maker? Feel Quiet And Feel Pleasure At The Scenic Hideaways In Eastern Aegean For Your Greatest Greece Visi Overlooked Truths About Stock Trading Construction Means Dust And Dust Can Cause Allergies. A Specialist Builders' Clean Reduces The Risk Selling Stock Photos On The Web Hints Choice of bed and the comfort you seek Promo gadgets utensils Life Is Unfair - Accept It And Move On Sex Enhancers - Increase Libido and Last Longer in Bed Naturally!