Purchase when put-call ratio is 1 or less than 1 sell when it is 2 or more than 2
Purchase when PE ratio is 10 and dividend yield is 3%
Sell when PE ratio is 20 and dividend yield is 1.5%---- when PE ratio increases dividend yield decreases.
Which stocks to buy:
The market price should be less than intrinsic value.
It should comprise 10-15 stocks.
Identify five sectors that are going to gain the most from the economic development in the future.
Look for two-three value stocks from each sector.
How to find a value stock:
Price to book value: Book value= Total tangible asset minus total liabilities----- if the market price is less than book value, it is worth buying. That means it should be less than one. Price---earning ratio (P/E ratio) = market price of a stock divided by earning per share (EPS)- it reflects the premium that an investor is willing to pay for the current profitability of the company. The future profit growth rate is subject to an individual investor’s perception about the company, the industry to which it belongs and the impact of economic growth on the company/ industry. In a developing market like ours, a PEG multiple of 1.2 is considered a fair value and anything above that signifies that stock is over valued. However a low P/B value and PEG value makes question the company’s sound financial health.
Debt-equity ratio-It is total Debt divided by shareholders equity including reserves. It should be less than one. A high debt-equity ratio means larger part of profit goes in servicing the debt.
Current ratio= Current assets divided by current liabilities. Companies having current ratio more than one are well capitalized to meet the short term obligations. However a very high current ratio means idle assets that reflects the inefficiency of the management.
Quick ratio=Current assets –inventories/ current liabilities. The quick ratio denotes how dependent the company is on its existing inventories and liquid assets. A higher quick ratio compared with other peer group companies implies the company is less dependent on its inventories to meet short term liabilities and hence better managed than other companies.
Working capital=current assets –current liabilities. The higher the number the better is the position of the company.
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