19 Most Important Financial Ratios for Investors

#19 Most Important Financial Ratios for Investors

#19 most important Financial ratios for investors: 

Reading the financial reports of a company can be a very tedious job. The annual reports of many of the company are over 100 pages which consist of a number of financial jargons.

If you do not understand what these terms mean, you won’t be able to read the reports efficiently.

Nevertheless, there are a number of financial ratios that has made the life of investors very simple. Now, you do not need to make a number of calculations and you can just use these financial ratios to understand the gist.

In this post, I’m going to explain 19 most important financial ratios for the investors. We will cover different types of ratios like valuation ratios, profitability ratios, liquidity ratios, efficiency ratios and debt ratios.

Please note that you do not need to mug up all these ratios or formulas. You can always google these terms anytime (or when you need). Just understand them and learn how & where they are used. These financial ratios are created to make your life easier, not tough.

Let’s get started.

19 most important Financial ratios for investors:


Valuation Ratios

valuation ratios

These ratios are also called price ratios and are used to find whether the share price is over-valued, under-valued or reasonably valued.

Valuation ratios are relative and are generally more helpful in comparing the companies in the same sector. For example, these ratios won’t be of that much use if you compare the valuation ratio of a company in an automobile industry with another company in the banking sector. Here are few of the most important Financial ratios for investors to validate a company’s valuation.

1. P/E ratio: 

Price to earnings ratio is one of the most widely used ratios by the investors throughout the world. PE ratio is calculated by:

P/E ratio = (Market Price per share/ Earnings per share)

PE ratio value varies from industry to industry.

For example, the industry PE of Oil and refineries is around 10-12. On the other hand, PE ratio of FMCG & personal cared is around 55-50. Therefore, you cannot compare the PE of a company from Oil sector with another company from FMCG sector. In such scenario, you will always find oil companies undervalued compared to FMCG companies.

A company with lower PE ratio is considered under-valued compared to another company in the same sector with higher PE ratio.

2. P/B ratio:

The book value is referred as the net asset value of a company. It is calculated as total assets minus intangible assets (patents, goodwill) and liabilities.

Price to book value (P/B) ratio can be calculated using this formula:

P/B ratio = (Market price per share/ book value per share)

Here, you can find book value per share by dividing the book value by the number of outstanding shares.

As a thumb rule, a company with lower P/B ratio is undervalued compared to the companies with higher P/B ratio. However, this ratio also varies from industry to industry.

3. PEG ratio:

PEG ratio or Price/Earnings to growth ratio is used to find the value of a stock by taking in consideration company’s earnings growth.

This ratio is considered to be more useful than PE ratio as PE ratio completely ignores the company’s growth rate. PEG ratio can be calculated using this formula:

PEG ratio = (PE ratio/ Projected annual growth in earnings)

A company with PEG < 1 is good for investment.

Stocks with PEG ratio less than 1 are considered undervalued relative to their EPS growth rates, whereas those with ratios of more than 1 are considered overvalued.

4. EV/EBITDA

This is a turnover valuation ratio. EV/EBITDA is a good valuation tool for companies with lots of debts.

Here,  EV = (Market capitalization + debt – Cash)

EBITDA = Earnings before interest tax depreciation amortization

A company with lower EV/EBITDA value ratio means that the price is reasonable.

5. P/S ratio:

The stock’s price/sales ratio (P/S) ratio measures the price of a company’s stock against its annual sales. It can be calculated using the formula:

P/S ratio = (Price per share/ Annual sales per share)

P/S ratio can be used to compare companies in the same industry. Lower P/S ratio means that the company is undervalued.

6. Dividend yield:

Dividends are the profits that the company shares with its shareholders as decided by the board of directors. Dividend yield can be calculated as:

Dividend yield = (Dividend per share/ price per share)

Now, what dividend yield is good?

It depends on the investor’s preference. A growing company may not give good dividend as it uses that profit for its expansion. However, the capital appreciation in a growing company can be large.

On the other hand, well established large companies give a good dividend. But their growth rate is saturated. Therefore, it depends totally on investors whether they want a high yield stock or growing stock.

As a rule of thumb, a consistent and increasing dividend over past few years should be preferred.

7. Dividend payout:

Companies do not distribute its entire profit to its shareholders. It may keep few portion of the profit for its expansion or to carry out new plans and share the rest with its stockholders.

Dividend payout tells you the percentage of the profit distributed as dividend. It can be calculated as:

Dividend payout = (Dividend/ net income)

For an investor, steady dividend payout is favorable. Moreover, dividend/Income investors should be more careful to look into dividend payout ratio before investing in dividend stocks.

Also read: Where should I invest my money?


Profitability ratio

liquidity ratio

Profitability ratios are used to measure the effectiveness of a company to generate profits from its business. Few of the most important financial ratios for investors to validate company’s profitability ratios are ROA, ROE, EPS, Profit margin & ROCE as discussed below.

1. Return on assets (ROA)

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. It can be calculated as:

ROA = (Net income/ Average total assets)

A company with higher ROA is better for investment as it means that the company’s management is efficient in using its assets to generate earnings. Always select companies with high ROA to invest.

2. Earnings per share (EPS)

EPS is the annual earnings of a company expressed per common share value. It is calculated using the formula

EPS = (Net Income – Dividends on Preferred Stock) / Average Outstanding Shares

As a rule of thumb, companies with increasing Earnings per share for the last couple of year can be considered as a healthy sign.

3. Return on equity (ROE)

ROE is the amount of net income returned as a percentage of shareholders equity. It can be calculated as:

ROE= (Net income/ average stockholder equity)

It shows how good is the company in rewarding its shareholders. A higher ROE means that the company generates a higher profit from the money that the shareholders have invested. Always invest in companies with high ROE.

4. Net Profit margin

Increased revenue doesn’t always mean increased profits. Profit margin reveals how good a company is at converting revenue into profits available for shareholders. It can be calculated as:

Profit margin = (Net income/sales)

A company with steady and increasing profit margin is suitable for investment.

5. Return on capital employed (ROCE)

ROCE measures the company’s profit and efficiency in terms of the capital it employes. It can be calculated as

ROCE= (EBIT/Capital Employed)

Where EBIT = Earnings before interest and tax

Capital employed is the total number of capital that a company utilizes in order to generate profit. It can be calculated as the sum of shareholder’s equity and debt liabilities.

As a rule of thumb, invest in companies with higher ROCE.

Also read: #27 Key terms in share market that you should know


Liquidity ratio

liquidity ratio

Liquidity ratios are used to check the company’s capability to meet its short-term obligations (like debts, borrowings etc). A company with low liquidity cannot meet its short-term debts and may face difficulties to run it’s business efficiently. Here are few of the most important financial ratios for investors to check the company’s liquidity:

1. Current Ratio:

It tells you the ability of a company to pay its short-term liabilities with short-term assets. Current ratio can be calculated as:

Current ratio = (Current assets / current liabilities)

While investing, companies with a current ratio greater than 1 should be preferred. This means that the current assets should be greater than current liabilities of a company.

2. Quick ratio:

It is also called as acid test ratio. Quick ratio takes accounts of the assets that can pay the debt for the short term.

Quick ratio = (Current assets – Inventory) / current liabilities

The quick ratio doesn’t consider inventory as current assets as it assumes that selling inventory will take some time and hence cannot meet the current liabilities.

A company with the quick ratio greater that one means that it can meet its short-term debts and hence quick ratio greater than 1 should be preferred.


Efficiency ratio

Efficiency ratios

Efficiency ratios are used to study a company’s efficiency to employ resources invested in its fixed and capital assets. Here are three of the most important financial ratios for investors to check the company’s efficiency:

1.Asset turnover ratio:

It tells how good a company is at using its assets to generate revenue. Asset turnover ratio can be calculated as:

Asset turnover ratio = (sales/ Average total assets)

Higher the asset turnover ratio, better it’s for the company as it means that the company is generating more revenue per rupee spent.

2. Inventory turnover ratio:

This ratio is used for those industries which use inventories like the automobile, FMCG, etc.

A company should not collect piles of shares and should sell its inventories as early as possible. Inventory turnover ratio helps to check the efficiency of cycling inventory. It can be calculated as:

Inventory turnover ratio = (Costs of goods sold/ Average inventory)

Inventory turnover ratio tells how good a company is at replenishing its inventories.

3. Average collection period:

Average collection period is used to check how long company takes to collect the payment owed by its receivables.

It is calculated by dividing the average balance of account receivable by total net credit sales and multiplying the quotient by the total number of days in the period.

Average collection period = (AR * Days)/ Credit sales

Where AR = Average amount of accounts receivable

Credit sales= Total amount of net credit sales in the period

Average collection period should be lower as higher ratio means that the company is taking too long to collect the receivables and hence is unfavorable for the operations of the company.

Also read: 10 Must Read Books For Stock Market Investors.


Debt Ratio

debt ratio

Debt or solvency or leverage ratios are used to determine a company’s ability to meet its long-term liabilities. They are used to calculate how much debt a company has at its current financial situation. Here are the two most important Financial ratios for investors to check debt:

1. Debt/equity ratio:

It is used to check how much capital amount is borrowed (debt) vs that of contributed by the shareholders (equity) in a company.

As a thumb rule, invest in companies with debt to equity ratio less than 1 as it means that the debts are less than the equity.

2. Interest coverage ratio:

It is used to check how well the company can meet its interest payment obligation. Interest coverage ratio can be calculated by:

Interest coverage ratio = (EBIT/ Interest expense)

Where EBIT = Earnings before interest and taxes

The interest coverage ratio is a measure of the number of times a company could make the interest payments on its debt with its EBIT. A higher interest coverage ratio is preferable for a company as it reflects- debt serving ability of the company, on-time repayment capability and credit rating for new borrowings

Always invest in a company with high and stable Interest coverage ratio. As a thumb rule, avoid investing in companies with interest coverage ratio less than 1, as it may be a sign of trouble and might mean that the company has not enough funds to pay its interests.

If you are new to stock market and want to learn to select good stocks for investing, here is an amazing online course on HOW TO PICK WINNING STOCKS for beginners. Check it out now.


That’s all. I hope this post on the most important Financial ratios for investors is useful to the readers.

In case I missed any important financial ratio, feel free to comment below.

Tags: key financial ratios, most important Financial ratios for investors, must know financial ratios, most important Financial ratios for investors to stock research, most important financial ratios to analyze a company, ratio analysis for investment decision, list of investment ratios, key financial ratios formulas
How to buy your first stock

How to buy your first stock? The Simple Way

How to buy your first stock? The Simple Way:

Buying your first stock is one of the most exciting things that you will ever do. Although there are a number of people who are able to feel this excitement in their early 20s (few even earlier), however, many of the people in India are not able to have this joy till quite a long time.

As the new year, 2018 is almost on the door, the best new year gift that I can give to my readers is to help them make their first stock market investment and buy their first stock.

Therefore, in this post, we are going to discuss how to buy your first stock.

First of all, I would like to clarify that I am not going to discuss the technicalities like how to open trading and demat account, which broker to chose etc in this post. I have already written about these on one of my earlier blog post which you can find here.

In today’s post, we are going to discuss the mindset required to buy your first stock. What approach you need to follow to buy your first stock in Indian share market.

Please make sure that you read the post until the very end as there’s a bonus in the last section of this post.

Now, before we explore how to buy your first stock, here are few basic guidelines that you need to know before you start investing.

Basic guidelines before you start investing in stocks:

#1 It’s not necessary that you find a multi-bagger on your first Investment: 

Even Mahendra Singh Dhoni was out on a duck on his first ODI International match. As a matter of fact, he failed in 5 of his first ODI’s before hitting his first big ton and later becoming one of the most successful captions of Indian cricket team.

mahendra singh dhoni

It always feels good if your first investment gives you two or multiple times return. However, it’s not that bad if your first stock didn’t turn out to be a winning stock. How many batsmen do you know who hit a hundred in his first match or a new bowler who took a wicket on his first ever ODI over?

Not performing well in the first match doesn’t mean that these players are not talented or they hadn’t practiced. Moreover, failing on the first match doesn’t stop them from becoming ultra successful in their career.

In short, you do not need to find only a multi-bagger stock to make your first investment. It’s more important that you learn and start your investment journey. You will found tons of opportunity in future once you get some experience and confidence.

#2. Do not be afraid of losing small money. Be afraid of not winning large sum: 

If you think that you shouldn’t invest in stocks just because might lose hundreds (or thousands) in the beginning, you are never gonna make a huge success in any of your investments in future.

Of course, you are going to lose. I do not know a single investor who has never lost any money in some of their investments.

However, if you are not willing to enter the stock market just because of the fear of losing small money initially, you won’t be able to make the big successful investment which will give lakhs in returns in future.

It’s okay to make mistakes as long as you are not making too many of them. Do not be afraid of making small loses. Be afraid of not being able to catch the big ones.

#3. You’ll never be fully prepared: 

Find me an investor who knew everything before his first investment. I bet, you can’t.

Investment is a lifelong learning and there will be always more to learn. You are not supposed to learn everything before buying your first investment. Because if that’s the case, many people won’t be able to buy any stock before their 30s, or maybe 40s.

Let me give you an example. For last few years, there is a bull market in India. Now, those who started investing in this period, have no idea what it feels like to invest in a bear market and how to safeguard their money in the bear market.

Moreover, they cannot be prepared for it as they have only read about this financial situation in books, but never had faced it. So, should it stop these new investors from investing in the stock market just because they are not fully prepared? No, there are many things that you cannot learn from the beginning. Your journey will teach you most of the things.

Still not convinced? Let me explain it with the analogy to Cricket. If a batsman is stubborn that he will only enter the cricket playground once he perfects all types of cricket shots like an uppercut, straight drive, leg glance, square drive, cover drive, pull, square cut, sweep shot, reverse sweep etc, then it might take him years to play his first match.

I understand that there are few exceptions like Sachin or Kohli, however, most of the batsman has their own strength, some are good in offside and some are good in leg side shots. If they have been waiting to achieve absolute perfection before entering the playground, then they might never have been able to make up for the International cricket team.

Perfection is the enemy of progress. You won’t be able to buy your first stock if you are looking to learn everything before even you start investing.

How to buy your first stock?

Now that you have understood the basic guidelines before investing, here are few pieces of advice that can help you to buy your fist stocks:

1. “INVEST IN WHAT YOU KNOW” -Peter Lynch

This is one of the best advice that I learned during my initial days in the stock market after reading the book ‘ONE UP ON WALL STREET’ by Peter Lynch. The book really taught me how to buy your first stock.

You do not need to find an XYZ Chemical company which creates products like vinyl sulphone ester, that you have no idea of what it does.

Just look around and you won’t find it difficult to search for companies. From toothpaste, hair oil, edible oil, shampoo to cars, banks, shoes, clothes, petrol pumps etc, everything has a company behind it.

Cars → Tata Motors, Maruti, M&M etc
Banks → ICICI, Yes Bank, HDFC Bank, Axis Bank, SBI, IOB etc
Personal care —> ITC, Colgate India, P&G India, Dabur, etc
Shoes → Bata, Khadims, Shree leathers etc
Petroleum → HPCL, IOCL, BPCL etc…

You have grown up with the names of these companies. Why not study them and invest?

Many of the common companies has given amazing returns to its investors. Don’t believe me?

Ever heard of Bullet bikes (Royal Enfield)?

This bike has a craze among many of the youngsters (even older people too). A common name which anyone could have noticed.

royal enfield bikes

However, had you invested in the parent company of Bullet i.e. Eicher motors, you would have been madly happy with your investment by now.

Eicher Motors has given a return of over 1,000% in last 5 years.

eicher motors share price

Similarly, You also might have heard about JOCKEY, the innerwear &underwear company. Its parent company is PAGE INDUSTRIES. Search its return on google and you’ll amazed.

Still not satisfied? Here’s another company which you can’t argue that you haven’t heard of- TITAN COMPANY. Few of the child companies of TITAN are Fast track, Sonata, Tanishq, Titan eye etc.

Everyone in Indian knows about these brands and also might have noticed the crowd in their showrooms. But have you ever tried searching whether the company is listed on the stock exchange or not? The company has given over 2.5 times return last year. Check it out on google.

Here are few other common companies which you might also have heard of that has given uncommon long-term returns- Bajaj Finance, Symphony, MRF, HPCL, TVS Motor etc.

Overall, you can find a good company if you just look around.

You might be a beginner, however, if you are keeping your eyes opened, you too can find a great company to invest easily.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

2. Start small.

Ask anyone how to buy your first stock and this is the logical answer that you will get.

Let’s imagine you are going to a party and there’s a food on the table which you have never tasted or are not sure about it. What will you do? Will you take a large spoon and stuff your mouth full of it or will you just taste it with a little spoon first? Now, unless you’re a badass foodie, the second approach seems more reasoning.

In the same way, when you are buying your first stock, invest small. Buy 10 stocks or invest under 5k. There are many benefits of investing small.

First of all, you will learn how the technicalities like how to buy/sell using the trading account and you can be much confident while investing as the amount is not that large.

Second, let’s take the worst case scenario before we move to the bright one. It’s very rare case that you can lose entirely 100% in delivery. Most probably, even if your stock selection does not turn out to be what expected, you will lose 40-50% of your initial investment. When your initial investment is small, let’s say 5k, then losing 2-2.5k will not affect you much financially and moreover, will not hurt your morale.

Third, if your stock turned out to perform well, you can always increase the investment amount. As mentioned above, the aim is not to fear the market by making small losses. The real aim is not to miss big opportunities.

#3. Do not worry a lot about brokerage and other charges:

I have seen a lot of people worrying too much about their brokerage account. Where should I open my demat and trading account? How much will be the brokerage? Which is the cheapest broker for beginners? etc.

It’s same as a batsman in Cricket worrying too much about his ‘bat’ than how he is actually going to perform. Well, it’s true that bat is an important part of your performance. However, the batsman can always change his bat if he plays well.

In the same way, your first broker need not be your last broker. You can always change your broker anytime if you are not satisfied with the services. Focus more on selecting stocks than selecting brokers.

I’m not suggesting to totally ignore the broker and get registered with any brokerage firm. Just find a reputed broker which provide the facilities that you are looking for and do not worry much about the brokerage.

Unless you are investing in lakhs or are involved in frequent trading, the brokerage charges won’t affect you much financially. Obviously, they are going to have some impact on your profit, however, it’s okay to give 0.5% of your investment to the broker than wasting 5-6 months just to search for the cheapest broker.

When you are learning how to buy your first stock, focus more your ‘first stock’ than your ‘first brokerage charge’.

BEGINNER’S LUCK:

The article would be incomplete if I didn’t explain this.

Many a time you might have noticed that you take one of your friends to play some game (which he has never played before), but yet he is able to beat you. This is called beginner’s luck.

Beginner’s luck is applicable is almost all part of life, including the stock market.

It might happen that your first stock turned out to be exceptionally well-performing stock and you might get a return of 30-40%, just within a month.

Do not let this influence you. Do not increase your investment amount drastically just because this one turned out to be good. Wait for some time and monitor the outcomes of few of your other investments before investing big. Make a strategy and stick to it without getting influenced by the beginner’s luck.

Conclusion:

When you’ll buy your first stock, it will give you a lot of satisfaction. This is because you have now entered the exciting world of stock and market and you are aware that you have over 5,500 other options available if this one doesn’t work. You have learned how to buy the stock and all you need now to improve your approach to gain good profits.

When buying your first stock, follow the following three guidelines:

  1. Invest in what you know.
  2. Start small.
  3. Do not worry a lot on brokerage charges rather focus on stocks.

Further, do not hurry up that you’ll miss the train. Take your time. Start small and continuously increase your investment amount.

Finally, learn from your mistakes.

There are a number of mistakes that you can do while buying your first stock. You might book profit soon and sell the stock too early. Or you might hold it for a long time without any returns. There are a number of outcomes possible. Learn from your mistakes. Moreover, do not repeat them. Take your first investment as a challenge. Either win or learn.

Ready to invest in stocks? If you’re a beginner and want to learn stock market investing from scratch, here’s an amazing online course for beginners: HOW TO PICK WINNING STOCKS? The course is currently available at a discount.

Bonus:

Before I end this post on ‘how to buy your first stock’, I want to include the 3 golden rules that you need to know. Now that you have decided to buy your first stock, you should also know how to make a huge amount of money from the Indian stock market.

These three golden rules are:

  • Invest early
  • Invest consistently
  • And Invest for long

All you need to do is to start as soon as possible, invest consistently (moreover, continuously increase your investment amount) and remain invested for the long term. That’s the key to make tons of money from the stock market.

That’s all. I hope this post on ‘how to buy your first stock’ is useful to you. If you agree with what I discussed here, please share the post with at least one person who needs help to enter the stock market.

In addition, if you have any questions, please comment below. I’ll be glad to help.

#Happy Investing.

Tags: how to buy your first stock, first-time investment, how to buy your first stock for beginners, how to invest in stocks, how to buy your first stock in India, when and how to buy your first stock, buying your first stock, how to buy your first stock in Indian share market
What is the difference between block and bulk deal

What is the difference between block and bulk deal?

What is the difference between block and bulk deal?

If you are actively involved in the stock market, you might have heard about the terms ‘block deal’ and ‘bulk deal’. Although they both might sound a little similar, yet they are different.

There are many people who even follow the block and bulk deals by famous investors, yet do not know the difference.

Here’s an example of block and bulk deal:

bulk deal example hdfc

Bulk deal 15 dec money control

(Source: Money control)

Can you tell, what is the difference between block and bulk deal here?

In this post, I will explain the difference between block and bulk deal in simple words. Please read this post until the end because in the last section I will also explain where you can find the block/bulk deal information in NSE/BSE at real time.

So, let’s get started.

What is the difference between block and bulk deal?

Block deal:

  • In a block deal, either a minimum number of 5 lakh shares or an investment amount of Rs 5 crores should be executed.
  • Here, the transaction is between two parties when they agree to buy/sell shares at an agreed price among themselves.
  • The deal happens through a separate trading window and hence not visible to regular market
  • A block deal should be done at the beginning of the trading hour- from 9:15 AM to 9:50 AM for a period of 35 Minutes.

As per the guidelines of SEBI, the price for the block deal should be between +1% and -1% of current price or last days closing price of that share.

Also read: #27 Key terms in share market that you should know

Bulk deal:

  • A bulk deal happens when the total quantity of shares bought or sold is greater than 0.5% of the total number of shares of a listed company.
  • It is carried out through the normal trading window provided by a broker. It is visible to everyone.
  • The broker has to give information to the exchanges about the of the bulk deal within one hour.

Who are involved in bulk/block deal?

The bulk/block deals are considered to be ‘RICH PEOPLE’ thing.

Most of the block deals or bulk deals are carried out by mutual funds, foreign institutional investors, venture capitalist, banks, HNI, insurance firm, etc

What are the effects of bulk/block deals on the price of the share?

There are a number of people who try to clone the portfolio of successful investor through monitoring their block/bulk deal.

Although a single block/bulk deal may or may not bring much change in the share price of that company. However, several continuous bulk/bock deals in the company are taken positively by the public and share prices of that company generally rise.

How to find block/bulk deal information on NSE/BSE?

Block and bulk deal information can be found on the NSE/BSE website.

A simple google search of ‘BSE bulk deal’ or ‘BSE block deal’ will give the full information of all these deals. 

Nevertheless, here are the quick links to find block & bulk deal on BSE/NSE website.

nse block bulk deal information

Note: You can get the same information of the money control website. Here is the link.

That’s all. I hope you have understood the difference between block and bulk deal by now.

Please comment below if you have any questions.

Tags: difference between block and bulk deal, block deal vs bulk deal, block bulk deal, block deal bulk deal, block and bulk deal difference
What are Assets and Liabilities

What are Assets and Liabilities? A simple explanation.

What are assets and liabilities?

In this post, we are going to discuss what are assets and liabilities. Although these words might sound a little complicated for the non-finance guy/girl, however, once you understand the basics, it’s won’t be complex anymore.

Typically, assets and liabilities can be defined as:

Assets: It is a value that a person holds with an expectation that it will provide future benefit. For example- cash, property, gold etc.

Liabilities: It is an obligation that a person has to pay in future due to its past actions like borrowing money in terms of loans, bills, credit card debts etc.

In short, assets are the value that the beholders hold and liabilities are the obligations that he has to pay off.

Now, this is the definition of assets and liabilities that we are traditionally taught.

From the above definitions, we can consider our house, cars, washing machine, fridge etc as assets as they have a value and can provide benefits in future.

However, the definition of ASSETS & LIABILITIES varies a little according to Robert Kiyosaki.

Also read: 10 Must Read Books For Stock Market Investors.

What are assets and liabilities?

The concept of what are assets and liabilities are beautifully defined in his book ‘RICH Dad POOR Dad’ which I’m going to describe here.

In the book ‘Rich Dad Poor Dad’, Robert Kiyosaki had two fathers. The Poor dad was his real dad and the Rich dad was his friend’s dad. At a very young age, Robert Kiyosaki decided to listen to his Rich dad if he wants to become successful in future.

Here is how the RICH defines assets and liabilities which his rich Dad taught him.

  • An asset is anything that puts money in your pocket.
  • A liability is anything that takes money from your pocket.

Assets can be a business, real estate, paper assets like stocks, bonds etc. Anything that brings money in your bank account.

For example, if you buy stocks and its price appreciates, it will bring money to your pocket.

If you have a business and it’s growing, then again it will bring money to your pocket in future and hence, can be termed as an asset.

On the other hand, liabilities can be your expensive car, a big house bought on the mortgage with excessive maintenance and running charges, expensive phones etc. These are those materials that take money from your pocket.

assets and liabilities

The concept of ‘money in’ and ‘money out’ is good enough to define assets and liabilities.

Easy, Right? 

Now, the trouble is, anything can be an asset or a liability, depending on whether it brings money to your pocket or takes it away.

For example, in the book Robert argues that ‘Your house is not always an asset’.

your house is not always an asset

Let us understand what he means by this.

If you own a house and you pay excessive expenses for running the house like electricity bill, water bill etc, then it is a liability. The house is taking money out of your pocket.

However, if you own a house and you are making thousands of rupees a month by renting it, then it is an asset. The house is putting money in your pocket.

Overall, it depends on how you are using your house. Your house is not always an asset.

This is something that most of the traditional people of India won’t agree with. To be honest, even I didn’t like this idea of Robert Kiyosaki in the beginning and argued with myself a lot about it. Nevertheless, after considering a lot, I concluded that his definition is correct.

The problem is that most people do not understand the concept of assets and liabilities. They buy expensive watches, shoes, sunglasses etc considering them as an asset. However, it turns out to be an expense.

The only thing that separates the poor and rich is how they spend their money.

Poor invests in liabilities that they cannot afford and consider them as an asset. Whereas, rich invest in assets.

If you haven’t read the book ‘Rich dad Poor dad’ yet, I would personally recommend you to read it. It’s one of my favorite books on personal finance and I have read it multiple times. You can order the book using the Amazon link here.

That’s all. I hope you have understood what are assets and liabilities.

Do comment below what is your view on – Whether your house is an asset of a liability? 

Happy investing!

Indian Stock Market Holidays 2018

Indian Stock Market Holidays 2018

Indian stock market holidays 2018:

The Indian stock market holidays 2018 has been announced. There’s going to be 16 holidays throughout the year (apart from regular holidays on Saturdays and Sundays).

Here are the trading holidays for Equity Segment, Equity Derivative Segment and SLB Segment:

S.NO. Holidays Date Day
1 Republic Day January 26, 2018 Friday
2 Mahashivratri February 13, 2018 Tuesday
3 Holi March 02, 2018 Friday
4 Mahavir Jayanti March 29,2018 Thursday
5 Good Friday March 30,2018 Friday
6 Maharashtra Day May 01,2018 Tuesday
7 Independence Day August 15,2018 Wednesday
8 Bakri Id August 22,2018 Wednesday
9 Ganesh Chaturthi September 13,2018 Thursday
10 Muharram September 20,2018 Thursday
11 Mahatma Gandhi Jayanti October 02,2018 Tuesday
12 Dussehra October 18,2018 Thursday
13 Diwali  Laxmi Pujan* November 07,2018 Wednesday
14 Diwali Balipratipada November 08,2018 Thursday
15 Gurunanak Jayanti November 23,2018 Friday
16 Christmas December 25,2018 Tuesday

Source: BSE India

Muhurat trading, the traditional trading on the day of Diwali, timings will be announced in the month of Diwali. It will be held on Wednesday, November 07, 2018 (Diwali – Laxmi Pujan).

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

Tags: Indian stock market holidays 2018, stock market holidays 2018, trading holidays 2018, bse holidays 2018, NSE holidays 2018,  stock market holidays 2018 India
What is Bitcoin? How to buy bitcoin in India?

What is Bitcoin? How to buy bitcoin in India?

What is Bitcoin? How to buy bitcoin in India?

From $800 USD to $18,000 USD in just 1 year. An appreciation of over 2250%. Wouldn’t you want to make such investments?

This is BITCOIN!!

By now you all might have heard about it. Even the terms ‘cryptocurrency’ and ‘blockchain’ are consistently in news a lot lately.

However, people are still confused about its real purpose. What is a bitcoin? Is it a currency, asset class (to invest) or simply a transformation factor from the old monetary system to new one.

I am going to answer all the important questions regarding bitcoin in this post.

Here is what we will cover:

  • What is bitcoin?
  • How does bitcoin works?
  • How is bitcoin generated? (What is mining)
  • What are the advantages of bitcoin?
  • Few facts and data related to bitcoin.
  • Is bitcoin legal in India?
  • How can you buy bitcoin in India?
  • What is the capital gain tax in bitcoin?
  • Other cryptocurrencies to watch out.

bitcoin meme

Source: The 10 Funniest Bitcoin Memes Ever

It’s gonna be a long post. But will definitely worth reading. So, let’s get started.

What is bitcoin?

In simple words, bitcoin is a virtual currency made by people with no central authority.

Huh, what does it mean? To understand it better, let’s compare it first with the normal currency.

In India, we have a fiat money.

Fiat money is a currency without intrinsic value established as money by government regulation. It has an assigned value only because the government uses its power to enforce the value of a fiat currency. Source: Wikipedia

The Indian currency is printed in the name of RBI and people believe in this currency because of it and exchange in the name of the government.

On the other hand, bitcoin is not generated by any government or authority. People exchange bitcoin only because they believe this as a kind of money (no central authority to implement it). It has no physical value.

Therefore, we can define bitcoin as a new form of digital currency that does not require any bank, government agency or a third party to operate.

People inside the system carry out transactions among each other over a decentralized network.

Now, let us understand bitcoin in details.

Bitcoin is a purely peer-to-peer version of electronic cash that would allow online payments sent directly from one party to another without going through a main institutional institution.

It is the first and the most popular cryptocurrency. However, it’s not the only one as there are a number of other cryptocurrencies available in the world.

Bitcoin was invented in 2008 by Satoshi Nakomoto. However, no one knows who is Satoshi Nakomoto. It might be a dummy name used by the creators of the bitcoin.

Bitcoin is a decentralized currency, which means that no central bank or government is controlling it.

In India, we have a fiat system. This means RBI decides the number of notes to print. They have their own rules on how much notes can be printed and when to print next notes.

However, for bitcoin, there will only be 21 million coins (This restriction is imposed by the creators to limit the bitcoin that can be generated).

Hence, it can be considered similar in attribute to gold (which is also finite). As there is fixed number of bitcoins, hence it’s worth will be more over time.

Didn’t understood? Let me explain.

The current fiat system leads to inflation. The currency notes can be printed more in future. Hence, their number will keep on increasing an, therefore, the currency notes value will worth less in future.

On the other hand, bitcoins are limited in number. It cannot be created more once a fixed number of coins has been generated. Hence, this will lead to ‘deflation’ which means that the bitcoins will worth more in future.

Also read: Where should I invest my money?

How does bitcoin works?

Source: SciShow

To understand how does bitcoin works, you first need to understand what is cryptocurrency.

A cryptocurrency is a digital asset designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Source: Wikipedia

The bitcoins are generated and stored in a form of mathematical code called cryptography. This is the private encoding of the data.

Similar to bank accounts, wallets are used to store bitcoins. Wallets have a unique address which is a personal crypto address that only the individual can access.

This unique address helps to confirm that the money has been sent/received to the right address. Further, the transactions can be checked but cannot be altered or tempered.

Now, if there is no central authority, how to confirm that the transaction happened between two people? What if one lied?

Can’t a person just lie that he didn’t receive the coins if there is no central authority to check and the transaction happened peer-to-peer?

Or he can just say that he sent the coin (although he didn’t in actual). If there is no central authority, how will one proof the transactions between people-to-people?

Well, all the transactions are recorded in ledgers which you (or anyone) can see. 

When you perform a transaction, you send this information to a number of people. Although there is no single centralized authority, however, this group of people maintains the transactions record. The best point is that anyone can become one of these people who keeps the track of transactions.

In this way, no one can cheat. If one people changes the transaction record, then it won’t match with the remaining other’s record and the dissimilarity will be found. Hence, this makes bitcoin one of the most secure currency.

And this is also the core concept of the blockchain.

What is Blockchain? The blockchain is a decentralized peer-to-peer system.

In simple words, millions of computes agree to keep a global record of the history of all the transactions that have ever placed in the system. This is called ledger.

How are bitcoins generated? What is mining?

When you transfer bitcoins, everyone knows about the transactions and writes it in their ledger. Hence, it is impossible to cheat.

The people who use their computer to look after the ledgers and keep the system running are called miners. They solve complex problems to put together all the transactions.

But why will anyone use his computer, pay the electricity bill and solve complex mathematical problems to keep the records of all the transactions taking place in the world?

This is because miners are awarded BITCOINS for their efforts. Each time they solve a complex problem to keep track of transactions, they receive few bitcoins.

And this is how bitcoins are generated.

Moreover, these miners also receive a small reward/concession per transactions for keeping the record alongside newly generated bitcoin.

Therefore, mining helps these people to generate new coins.

This is way similar to mining of gold. Both are limited in number and both are mined so that the miner will get the benefit.

What are the advantages of bitcoin?

Here are few of the advantages of bitcoin:

  1. There is no middleman involved in the transactions and hence the fees are lower.
  2. Bitcoins are hard to track. Although the records are maintained by the miners, however, the transactions are recorded in the form of cryptography.
  3. Bitcoins are global with no barrier to join: Anyone can buy/sell bitcoin. There’s no fee, no government permission required and no bank account required.
  4. The transactions are fast and transferred directly from person to person without going through a bank or clearing house.
  5. Accounts cannot be frozen (unlike bank accounts)
  6. Transparent and secured.

Image source: 99bitcoins

Few facts and data related to bitcoins:

Here are few important facts and data related to bitcoins that you should know:

  • There will be total of 21 million bitcoins only that can be generated. Currently, over 16.8 million bitcoins have been mined.
  • To limit the total number of coins being generated by the miners, the creators of the bitcoins made a rule that after every 210,000 blocks, the number of the bitcoins generated will be half of the last time.

In the starting, 50 bitcoins were rewarded to the miners every time they solved a blockchain problem.

Then it reduced to 25. Currently, 12.5 new bitcoins are created and awarded to the miner’s account after solving a blockchain puzzle.

  • By 2140, all the bitcoins will be mined.
  • The market capitalization of bitcoin has crossed over $300 USD (by December 2017), which is more than that of Visa, Wal-mart, Intel, Coca-cola etc.
  • There are over 14 million users of bitcoins worldwide.
  • Price chart of Bitcoin: Here is the price chart of bitcoin since inception:

Price of bitcoin in 2011: $0.05 USD
The Price of bitcoin in Jan 2017: $800 USD
Price of bitcoin (Dec 2017): $18,000 USD

bitcoin price chart

Source: Coindesk

  • Bitcoin can be divided into smaller parts. It is named after the creator and is called ‘Satoshi’ (1 Satoshi= 0.00000001 Bitcoin).

UPDATE: Bitcoin Price (June 2018) – $6108 USD

bitcoin june

Is bitcoin legal in India?

Yes, bitcoin is legal in India.

Can you make ‘internet’ illegal? The internet is also decentralized which means it is not authorized/regulated by any central government/authority. And that’s why the government has no control over it. The same goes for bitcoin.

The government of a country can restrict it but cannot make it illegal.

Bitcoin is not regulated by any authority in India. This means that nor government or any authority makes rules, regulations or guidelines for resolving any disputes regarding bitcoins. You cannot approach the government if you have any mis-happenings while dealing with bitcoins.

rbi india guidelines for bitcoin

Source: RBI Press releases

In March, RBI Deputy Governor R Gandhi warned against crypto-currencies such as Bitcoin. “They pose potential financial, legal, customer protection and security-related risks,” Gandhi said. 

“Payments by such currencies are on a peer-to- peer basis and there is no established framework for recourse to customer problems, disputes, etc. Legal status is definitely not there,” he added.

Nevertheless, Bitcoin is legal and there are no restrictions on the transactions of the bitcoins. There is no ban or regulation on bitcoins.

Moreover, many developed countries like Japan, Russia etc have already legalized the use of bitcoin.

How to buy bitcoin in India?

You can buy the bitcoin against real current price from digital currency exchanges. Just pay the price and get the quantity of bitcoins that you want.

You can use your credit card to buy bitcoins from coinbase or coindesk. Further, there are few mobile apps that you can use in India to buy/sell bitcoins:

Mobile apps to buy bitcoin in India:

  • Zebpay —>

Source: Zebpay

  • Unocoin —>

Source: Unocoin

How are gains from bitcoin taxed in India?

The taxes for the capital gains are decided differently depending on generating factor:

  • For the miners, who get the bitcoins directly from mining, there are no capital gain taxes.
  • On the other hand, those who get bitcoins from the exchanges, they have to pay a capital gain tax of 20% for long-term and tax according to their income slab for short-term gains.

Read more here: Cleartax

Other cryptocurrencies to watch out:

Here are few other cryptocurrencies (besides bitcoin) that you should watch out:

  • ETHEREUM
  • RIPPLE
  • BITCOIN CASH
  • LITECOIN
  • DASH
  • ZCASH

Conclusion:

It’s logical to consider cryptocurrency as the currency of the future. Bitcoin is certainly one of the most popular cryptocurrency and has played a big role in creating space in the hearts of the people against the traditional currencies.

The transaction of bitcoins are definitely legal in India and you can buy/sell bitcoins using the mobile apps like Zebpay or Unocoin.

However, bitcoin is not regulated by the Indian government. Hence, invest at your own risk.

Footnotes:

Tags: What is bitcoin, how bitcoin works, what is bitcoin India, what is bitcoin and how does it works, what is bitcoin and how to buy it
How to find debt free companies in India using screener

How to find debt free companies in India? [Using Screener]

How to find debt free companies in India using Screener website?

Debt is a very important factor to check while investing in any company.

While zero debt on a company validates its financial health, on the other hand, a heavy debt on the company can be taken as a sign to stay away from it.

Huge debt restricts a company from expanding and decreases profits.

A low debt company can enjoy higher profit margin and higher solvency. On the contrary, high debt companies have to pay high interests and hence have a higher cost of capital.

Few of the debt free companies in India are Maruti Suzuki, ITC, Hero motocorp, Titan company etc.

In this post, I’m going to explain how you can find the debt free companies in India using screener website. Moreover, you will learn this within 2 minutes and step-by-step.

Firstly, I wanted to give just the names of debt free companies in India in this post. However, then I realized that this list might change as the companies may take debts in future. Hence, it’s better to teach you how to find the debt free companies in India than just to give names.

Nevertheless, there is a list of these debt-free companies in the last section of this post.

Once you have found the debt free company, you can analyze it further to check its financial and economic health before investing.

Note: I have explained in details how to check the debt and other financials of a company in my online course: HOW TO PICK WINNING STOCKS. Feel free to check it out here.

However, here is what you need to know first before we start:

Debt to equity ratio:

The debt-to-equity ratio measures the relationship between the amount of capital that has been borrowed (i.e. debt) and the amount of capital contributed by shareholders (i.e. equity).

Debt to Equity Ratio =(Total Liabilities)/(Total Shareholder Equity)

Generally, as a firm’s debt-to-equity ratio increases, it becomes riskier.

A lower debt-to-equity number means that a company is using less leverage and has a stronger equity position.

As a thumb of rule, companies with the debt-to-equity ratio more than 1 are risky and should be considered carefully before investing.

How to find debt free companies in India using Screener?

Here is exactly what you need to do to find the list of debt free companies in India using Screener website:

1. Go to the screener.

2. Login with your credentials (email id and password)

screener website

3. Scroll down to find the query builder.

4. In the query builder, write the following:

Debt to Equity = 0

query debt free companies screener

5. Run the query

6. You will get the list of all the debt-free companies in India.

debt free companies

Further, you can also customize this search.

For example, if you want to find the large-cap companies (with market capitalization > 50,000 crores) and debt to equity ratio less than 0.5, you can write the following in query builder:

Debt to equity < 0.5 AND
Market capitalization > 50000

large cap with zero debt

This will give you the list of all the large-cap companies with D/E ratio < 0.5

low debt companies in india-low debt to equity with large cap

Source: Screener

Note: You can also use various other financial ratios like PE, P/BV, ROE, PEG etc in the same query builder to filter companies. I’ll teach to do it in another blog post.

List of large cap debt free companies in India:

debt free companies in India large cap

Source: Screener

That’s it. This is all you need to do to find the debt free companies in India. Isn’t it simple?

Also read: 7 Must Know Websites for Indian Stock Market Investors.

I hope this post is useful to the readers. Please comment below if you have any questions.

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