7. What to do on weekends?

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Investment research is an endless process of gaining and applying new knowledge for the purpose of sustaining an edge over other investors and thus generating sizable returns.

A question arises, how do you get that edge over most other investors? The simple answer to that is by investing loads of time, effort, and focus that most other investors don’t bother with.  Like with most achievements in life, traders use weekends to analyse the market, look for trading opportunities and fine-tune their strategies, only to place a trade once the market opens on Monday.

Stocks are considered long-term investments because they involve risk; and traders need time to evaluate any ups and downs and benefit from long-term gains. 

4 key steps to evaluate any stock

1. Gather your stock research materials

Start by reviewing the company's financial reports, quarterly reports etc.

2. Narrow your focus

These financial reports contain a ton of numbers and it's easy to get bogged down. Zero in on the following line items to become familiar with the measurable inner workings of a company:

  • Revenue: This is the amount of money a company brought in during the specified period. It’s the first thing you’ll see on the income statement, which is why it’s often referred to as the “top line.” Sometimes revenue is broken down into “operating revenue” and “nonoperating revenue.” Operating revenue is most telling because it’s generated from the company’s core business. Nonoperating revenue often comes from one-time business activities, such as selling an asset.
  • Net income: This “bottom line” figure — so called because it’s listed at the end of the income statement — is the total amount of money a company has made after operating expenses, taxes and depreciation are subtracted from revenue. Revenue is the equivalent of your gross salary, and net income is comparable to what’s left over after you’ve paid taxes and living expenses.
  • Earnings and earnings per share (EPS): When you divide earnings by the number of shares available to trade, you get earnings per share. 
  • Price-earnings ratio (P/E): Dividing a company’s current stock price by its earnings per share — usually over the last 12 months — gives you a company’s trailing P/E ratio. Keep in mind that the P/E ratio is derived from the potentially flawed earnings per share calculation, and analyst estimates are notoriously focused on the short term. Therefore it’s not a reliable stand-alone metric.
  • Return on Equity (ROE) & Return on equity reveals, in percentage terms, how much profit a company generates with each rupee shareholders have invested. The equity is shareholder equity. 
  • Return on Assets (ROA): Return on assets shows what percentage of its profits the company generates with each rupee of its assets. Each is derived from dividing a company’s annual net income by one of those measures. These percentages also tell you something about how efficient the company is at generating profits.

Here again, beware of the gotchas. A company can artificially boost return on equity by buying back shares to reduce the shareholder equity denominator. Similarly, taking on more debt — say, loans to increase inventory or finance property — increases the amount in assets used to calculate return on assets.

3. Turn to qualitative research

If quantitative research reveals the black-and-white financials of a company’s story, qualitative research provides the technicolor details that give you a truer picture of its operations and prospects.

Here are some questions to help you screen your potential business partners:

  • How does the company make money? 
  • Does this company have a competitive advantage? 
  • How good is the management team? 
  • What could go wrong? 

4. Put your research into context

Before you buy any stock, you want to build a well-informed narrative about the company and what factors make it worthy of a long-term partnership. And to do that, context is key.

For long-term context, pull back the lens of your research to look at historical data. This will give you insight into the company's resilience during tough times, reactions to challenges, and ability to improve its performance and deliver shareholder value over time.

Wrapping up

Now that you understand What traders do on the weekend? It’s only logical that we move on to the next big topic - How does monsoon affect Indian markets? To discover the answer, head to the next chapter. 

A quick recap

  • Price-earnings ratio (P/E): Dividing a company’s current stock price by its earnings per share — usually over the last 12 months — gives you a company’s trailing P/E ratio.
  • Return on Equity (ROE) & Return on Assets (ROA): Return on equity reveals, in percentage terms, how much profit a company generates with each dollar shareholders have invested.
  • Earnings and earnings per share (EPS): When you divide earnings by the number of shares available to trade, you get earnings per share.
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