Date: November 22, 2013
When you are investing in the stock of a company, you will expect returns in the form of dividends and capital appreciation.
The problem is: how do you know the real value of a company’s stock? You can either evaluate the company in terms of its financial performance and prospects through fundamental analysis, or by using charts and price trends, also known as technical analysis.
Fundamental analysis is concerned with ‘true’ (or intrinsic) value of a company, whereas technical analysis is concerned with the short term price movements of a stock. In most finance courses, the emphasis is on fundamental analysis as it is based on actual facts and figures which can be analysed systematically, while technical analysis relies on ‘trend-findings’ to guide investment decisions.
The intrinsic value is derived from interpreting the company’s financial statements as well as comparing its financial data with other comparable companies. However, financial data will not provide you with the full worth of the company, as intangible assets like employee knowledge are not measurable.
Most annual reports contain management discussion on forecast earnings and growth, as well as the balance sheet, income statement and cash flow statement. The forecasts can provide a rough estimate of the company’s future performance, even though you might want to consider other sources such as analyst reports.
How Do You Select A Stock?
A usual stock selection approach is the ‘top-down’ process, where you will select based on the specific markets, industry groups and specific companies.
[1.] Specific markets or Asset Class
Investors can trade in a wide range of equities through their trading accounts, from US markets to Hong Kong markets and London markets. You can determine the countries that provide good growth prospects and stability by reading the news on a regular basis.
[2.] Industry Group Selection
Due to the economic cycle, certain industry groups are likely to benefit more than others. We have included a graph that shows the sectors that are likely to benefit at different stages of the economic cycle.
Analysing the Sectors in Singapore
The SGX has been providing education and information on the various sectors on the Singapore market. Below is the return of the various sectors. As you can see, the top sectors change almost yearly and it is recommended that you build a diversified portfolio. Visit www.sgx.com for updates from MyGateway.
[3.] Narrowing down to specific companies
Analyze the business operations, management and financials of the companies within each sector to pick stocks that can offer good returns.
It is important to refrain from selecting stocks based personal preference. While your instincts may be correct at times, it is prudent to rely on analysis that are based on actual statements and figures. Analyse the Annual Report and financial statements. Ask question. For example, when the company’s expense increased by 10%, which areas had the greatest increase? Can the costs the contained in the future? Did the company ‘hide’ any expenses?
When reading analyst reports, you must consider if the analyst is offering unbiased opinions of the company and its prospects. In addition, you can evaluate if the valuation models used by the analysts are appropriate in analyzing the stock.
Whether you are investing in the market through ETFs or in specific stocks, it is important to have a plan. Know your objectives, understand your risk profile and constantly review your investments. There are times, where the market conditions change and you could find yourself taking on more risk than you first expected.
Richard Christopher Dyason
Richard is the General Manager at SIAS and previously Vice President at SGX. He has over 13 years of experience in various management positions in the financial services and over 25 years of management and consulting experience. He has been a trainer for several organisations and he is passionate about investment training and educating investors and has spoken at many SIAS, industry and public events.