Daily Top Stocks - Unleashing Possibilities, Empowering Success

The Balancing Act Between Risk and Returns

May 16, 2023February 16, 2023 by Yash Jain

The Balancing Act Between Risk and Returns Any smart investor would tell you that in taking the plunge with stocks, as with any dilemma in life, it is all about finding a sweet spot between going all out and keeping your powder dry. We at DailyTopStocks aren’t any different, and bring to you a definitive guide to adapting your objectives and mind-set to the growing set of things that a modern investor must contend with. What are the risks and what are the returns? The general consensus seems to be that high risk means high-reward, which is said to be the only upside to high risk investments. However, at times higher-risk investments can also become less risky over time, attracting more investors who then drive up the price. One important thing of note is that there is no promise of higher returns on risky investments, so the higher risk just tends to scare off potential investors, keeping the returns on a given investment low. Whether a riskier investment will actually generate higher returns is up to the individual investor to decide. Exactly how risk is assessed and the amount of expected returns change depending on the individual investor but investors tend to invest in higher-risk opportunities if they determine that doing so will generate higher returns. It creates a catch-22 situation. The takeaway is thathigher risk doesn’t necessarily mean higher returns, and only an expectation for an investment to provide returns shifts the investor’s inclination to take the plunge. High risk in itself isn’t, and shouldn’t, be the driving force behind whether the investor chooses to invest or not. When making a choice of investments, it therefore means that the risk should not be weighed up against the potential returns in order to justify taking them, but through techniques that we are about to discuss in the following sections. Diversification and the kind of risks it helps reduce You have probably come across this term being slapped across social media posts by a whole host of financial advisories, and it certainly has a ring to it that screams “security” and “risk aversion”. But why is this the case, and how so? The fact that no investment carries with it absolute certainty of good return and no risks means that companies try to bring in the term diversification to suggest less risk and more potential for higher returns. This is because of the fact that by investing across a variety of stocks, you can factor in the variation of the risks involved in each. How would that help? Well, a high risk in investment in one stock can simultaneously mean low risk across a whole bunch of other stocks. Some of them might even yield a good return, which mitigates the losses incurred and that is how diversification broadly works. Let us take a deeper dive into what we are looking at by considering an instance where a company haschosen to invest in two stocks. Should they change in value in ways that are the exactopposite, say, one falls in value by x percent, and the other rises by x percent as well, then amongst the two stocks, changes in value will consequently result in not only zero gain but also zero risk. The company in question is said to have diversified with the aim of reducing risk by finding investments that change in response to a variety of events, by different amounts and in completely opposite directions, and at different times. As a result of this, the company has reduced the possibility of losses incurred as opposed to dealing with the risk attached to investing in only onestock. Remember, the whole point of diversification is to mitigate the risks, while maintaining a healthy return. The question that now arises is why companies don’t invest in only the best stocks. If they diversify thei rinvestment portfolio by putting money into a variety of different assets, then do we, or the imaginary company, necessarily want to see any of them lose value, even if we know for a fact that they might? This where the concept of opportunity cost comes in. The opportunity cost is the cost of investing in a given entity, with respect to the opportunities lost in investing in some other stocks that we have chosen to not invest in, which held the potential of our investment but didn’t make the grade due to the fact that having put our eggs in one basket, we don’t hve room for further investments in them. With the opportunity cost in of an investment in mind, the aim should be to find the best stocks and after that, find investments that provide the highest potential returns but also with considerable risk of falling in value. Having dealt with the risk of some our investments falling in value, one thing to always keep in mind is that there are certain risks that no amount of diversification can eliminate. These risks are termed as systematic risks. An example can be a situation where a company or investor has understood the idea of diversification, and implemented it well across their portfolio, but then an economic recession occurs. How is one supposed to deal with such circumstances? Those are the only kinds of risks that are called systematic risks, and can’t be dealt with solely by diversifying – which outlines both the limitations and the effectiveness of diversification. Having touched upon the subject of systematic risks, we are also obliged to introduce the idea of specific risk, which is any kind of a risk attached to a given stock (or any investment) that has to do with its own properties. These are the types of risks that can be averted by diversifying. The Bottom Line There is always a trade-off between risk and return when it comes to stock investment. While higher risk stocks tend to offer higher returns, they are also more volatile and can result in losses. Lower risk stocks may not offer … Read more

How to Tell If You’ve Made the Right Choice of Investment

January 12, 2024February 2, 2023 by Aditya Jaiswal

How to Tell If You’ve Made the Right Choice of Investment So you have already played your hand on the stocks front, but are having second-thoughts about whether you’ve made the right decision. If that is the case, you have stumbled upon an article that should open your eyes to some extent, if not to a large degree. It will outline certain important factors to come to a fair understanding of your investment choices, and we at Dailytopstocks certainly hope you do with the aid of our investment advice. One of the main things to consider in this regard is the percentage gain on an investment. In order to find out the percentage gain, we must know how much the investment originally cost when it was bought. This purchase price is then subtracted from the price at which the investment was sold, which provides us with the value of the percentage gain. What is a Percentage Gain? A percentage gain is the increase in value of an investment, expressed as a percentage of the original investment. The concept of percentage gain is important to understand when comparing different investments. For example, if one investment has a higher percentage gain than another, it doesn’t necessarily mean that it’s a better investment – you also need to take into account the size of the gains. To calculate your percentage gain, simply divide the amount of your gain by the original investment and multiply by 100. Percentage gain = [(selling price – purchase price)/purchase price] * 100 Example of Calculating Percentage Gain or Loss Let us now take a simple example of how percentage gains are calculated, which should demonstrate to you how they must be calculated for a variety of stocks and commodities. Let us imagine a situation where an investor purchased 20 shares of Apple Inc. (AAPL) at $120 per share. This brings the value of our imaginary investor’s initial input up to $2,400. This is the original purchase price for this investment. Now, let us suppose that the price of each of Apple’s shares rises to $135 over a period of time after which our happy-go-lucky investor decides to sell all of his 20 shares of Apple. In this case, the selling price of his investment would come up to $2,700. Therefore, the numerator value of the formula can be calculated as follows: Selling price – purchase price = $2700 – $2400 = $300 As we have discussed before, the denominator value in the fraction is the purchase price, i.e. $2400. So, in order to finally bring up the percentage gain of the investment into Apple stocks of our fictitious investor, we will have to multiply the fraction by 100, that is, Percentage gain = ($300/$2400)*100 = 12.5% Other Factors to be Considered Investing does not come without costs, and this should be reflected in the calculation of percentage gain or loss. The examples above did not consider broker fees and commissions or taxes. To incorporate transaction costs, reduce the gain (selling price – purchase price) by the costs of investing. Fees Any fee that an investor pays out to potential stock brokers, or any other third parties, must be taken into account when calculating the percentage gain (or loss) of an investment as well. This can be factored into the formula by subtracting any additional broker fees from the numerator value of the fraction of our formula (before multiplying by 100). For instance, considering our Apple investor’s example, supposing he paid $2 per share as fee to the stock broker, he must then have paid $40 to the broker, which means the amount of $40 has to be reduced from the original $300 he made as profit. So, the new percentage gain, factoring in the broker fee paid by our imaginary investor would be as follows: Percentage gain = {[(Selling price – purchase price) – broker fee]/purchase price} * 100 = {[($2700 – $2400) – $40]/$2400} * 100 = 10.83% Here, you can see the slight effect that additional fees such as those charged by brokers can have on your overall investments and in this case, a percentage change of 1.67% was seen in our investor’s case. Dividends In a similar way that fees such as those charged by brokers can negatively affect the percentage gain of an investment, other factors such as dividends can positively bring about a change in the percentage gain. Dividends are payments that are paid out to shareholders for being party to the company’s profits. When calculating the percentage gain of investments into stocks where dividends were received by the shareholder, just like broker fee, the dividend must be added to the numerator value of the formula. But as it is an additional return in the investor’s favour, it is added instead of subtracted. Incorporating such transaction costs, broker fees, and, dividend income can help investors get a clearer picture about the percentage gain or loss for an investment. Of course, not all investments are as straightforward as stocks. If you’re investing in something like real estate or a business venture, determining your percentage gain can be a bit more complicated. In these cases, you’ll need to factor in things like depreciation and amortization to get an accurate picture of your investment’s performance. Ultimately, though, calculating your percentage gain is a helpful way to track your progress and make sure you’re on track to reach your financial goals. Different Types of Investment When it comes to investing, there is no one-size-fits-all approach. Different types of investments can offer different benefits, so it’s important to choose an investment that matches your goals and risk tolerance. Here are some of the most common types of investments: Tips for Calculating the Percentage Gain If you’re thinking about investing in a new venture, one of the first things you’ll need to do is calculate the percentage gain. But how do you know if you’ve made the right choice? Here are some tips to help you make the decision: Final … Read more

How to Tell If You’ve Made the Right Choice of Investment

January 12, 2024January 25, 2023 by Pranjal Nath

How Understanding of Financial Statements is Important While Investing in Stocks

May 16, 2023January 23, 2023 by Aditya Jaiswal

How Understanding of Financial Statements is Important While Investing in Stocks Investing in stocks is a great way to make your money grow, but doing it without first understanding the basics of financial statements can sometimes mean investing in companies that were not the best choice in the first place. In this post, we at DailyTopStocks will explore how understanding financial statements can provide you with insight into a company’s performance and help you make better decisions when purchasing stocks. Introduction to Financial Statements When we talk about stocks, the first thing that comes to mind is money. Stocks are like a piece of cake, and everyone wants a slice of it. There are two types of people in the stock market – those who understand financial statements and those who don’t. The former know how to read between the lines and understand what a company’s true worth is. They know how to value a company and its stock. The latter just look at the stock price and think “this looks like a good buy”. How do you become one of the former? It’s not as difficult as it sounds. All you need is some guidance and understanding of financial statements. A financial statement is a record of a company’s financial position, performance, and cash flows over a period of time. It comprises three main statements – balance sheet, income statement, and cash flow statement. Each one tells you different things about the company. The balance sheet shows you what the company owns (assets) and owes (liabilities), while the income statement shows you how much revenue the company generated and what costs it incurred (expenses). The cash flow statement tells you where the money came from (inflow) and where it went (outflow). What Does a Financial Statement Tell You? A financial statement is one of the best tools you can use to gain insights about a company. It tells you how the company has been performing financially, what its major revenue and expense drivers are, and where its money is being spent. Financial statements can be complicated, but they don’t have to be. In this article, we’re going to break down everything you need to know about financial statements and how they can impact your stock investing strategy. Important Indicators from Financial Statements to Consider While Investing in Stocks When it comes to investing in stocks, there are a few key indicators that you should always keep an eye on. These indicators can be found in a company’s financial statements, and they can give you a good idea of how well the company is doing overall. The first indicator to look at is revenue. This is the total amount of money that a company brings in from sales and other sources. If a company’s revenue is increasing, that means it is selling more products or services and bringing in more money. This is generally a good sign for investors, as it means the company is growing and doing well. Another important indicator to consider is profit margin. This is the percentage of revenue that a company keeps as profit after all expenses are paid. A higher profit margin means the company is keeping more of its revenue as profit, which is good for investors. Finally, you should also look at cash flow. This is the amount of cash that a company has available to pay its bills and make investments. If a company has positive cash flow, it means it has more money coming in than going out, which is good for its operation and ultimately yields more for its investors. Keep these three key indicators in mind when you are looking at financial statements while investing in stocks. They will give you a good idea of how well a company is doing overall and whether or not it is a wise investment. What Do Investors Look for in Financial Statements? Investors typically look for evidence of strong and consistent revenue growth. This can be an indication that a company is successfully executing its business strategy and attracting new customers. They will also want to see healthy profit margins. Profit margins can vary depending on the industry, but generally speaking, companies with strong profit margins are more attractive to investors. They must compare companies operating in a similar domain. Cash flow is important in that this metric measures how much cash a company is bringing in (and spending) over a period of time. Companies with positive cash flow are generally considered to be in good financial health, as they have enough cash on hand to cover their expenses and debts. Next, we will look at how to make sense of each of these statements. How to Analyse Profit and Loss Statements There are a few key things to look for when analysing a profit and loss statement. First, pay attention to the top line, or net income (do be on the lookout for any alterations in formats). This is the total amount of money the company made or lost during the period in question. If net income is positive, that means the company made money; if it’s negative, the company lost money. Next, take a look at the revenue and expense items listed below the net income line. These give more detail on where the company’s money came from (revenue) and where it went (expenses). Pay particular attention to items that make up a large percentage of either revenue or expenses; these may be areas where the company has more room for improvement. Finally, don’t forget to compare the current profit and loss statement with previous ones. This will give you a sense of whether the company is improving or worsening its financial situation over time. The same should ideally be done with that of companies in the same sector. How to Analyse Balance Sheet Statements In order to analyse a balance sheet statement, one must first understand what each line item on the balance sheet represents. The following … Read more

How Budget 2023 Can Impact the Stock Market

May 16, 2023January 21, 2023 by Pranjal Nath

How Budget 2023 Can Impact the Stock Market It’s never too early to start making sense of what major financial and economic policies are expected to come out of the Union Budget 2023! For investors in the stock market, it is essential to have an idea of what kind of changes may be on the horizon so that they can adjust their portfolios accordingly. We at Dailytopstocks are evaluating how Budget 2023 may affect the equity markets and what investors should keep in mind. Budget 2023 As we approach the date for the Budget 2023 to be announced, investors begin to think about what Union Finance Minister Nirmala Sitharaman has to present and how it may impact the stock market. The budget is a document that outlines the government’s spending and revenue for the upcoming fiscal year. It is an important event for markets as it can provide insight into the government’s economic policies. There are a few things that investors will be watching closely in Budget 2023. Firstly, they will be looking at the government’s revenue and expenditure plans. This will give them an idea of how much money the government intends to spend on stimulus measures and other initiatives. Secondly, they will be interested in any tax changes that are proposed. These could have a significant impact on businesses and individuals alike. Finally, they will be monitoring any changes to interest rates or other monetary policy measures. Investors will likely remain cautious until they have more clarity on these issues. However, if the budget provides positive news on all fronts, it could lead to a rally in stocks. Overview of the Impact on the Stock Market When it comes to the budget and how it can impact the stock market, there are a few key things investors need to know. The first is that the budget can have an indirect impact on the stock market. This is because the budget can affect things like interest rates, inflation, and unemployment. All of these things can have an impact on whether people want to invest in stocks or not. Another consideration of note is that the budget can also have a direct impact on the stock market. This is because the budget can include things like tax changes or spending cuts that could directly affect companies’ bottom lines. If a company’s profits are affected by the budget, then its stock price is likely to go down as well. So, when it comes to investing, it’s important to keep an eye on the budget and how it might impact the stock market. By understanding how the budget can influence stocks, investors can make more informed decisions about when to buy or sell. How Different Sectors Could be Affected by Budget 2023 Different sectors of the economy are going to be affected differently by the budget depending on what is included in it. Here are some examples of how different sectors could be impacted: Possible Opportunities and Risks for Investors in Budget 2023 The budget may provide opportunities for investors to gain exposure to new or growing industries, or to invest in companies that are expected to benefit from government initiatives. However, the budget may also present risks for investors, such as changes to tax rates that could impact the profitability of investments, or reductions in government spending that could lead to sector-wide cutbacks. To make the most of budget 2023, investors should carefully consider both the potential opportunities and risks before making any decisions. Strategies for Investing During Budget 2023 The Union Budget of India for the 2023 financial year is to be presented by the Hon’ble Union Finance Minister Nirmala Sitharaman on February 1, 2023. The budget is expected to propose a number of changes which are likely to have an impact on the stock market. The first and the most immediate effect might just be seen on budget day itself, with high market volatility. This could mean either positive or negative outcomes for stock investors. The government might also be setting its sights on the consolidation in the fiscal year heading towards 2024, which could be good news for people looking to invest in companies dealing with financials. The upcoming budget could also see focus being trained on development of the rural and agricultural sector, along with a strong emphasis on developing the infrastructure. This could also result in industrial stocks dong well, but who’s to say right now that this won’t be the case. We suggest keeping an eye on our regular updates on the lead up to the budget day. Conclusion The budget for fiscal year 2023 is sure to have a significant impact on the stock market. Not only will it influence investment decisions, but it may also spur much-needed growth in certain industries. All of these factors must be taken into account when making any stock-related decisions and investors should keep their eyes open for news related to Budget 2023 as it unfolds over the next few months. With proper planning and strategy, investors can use this knowledge to take advantage of potential opportunities that are likely to arise with Budget 2023’s release.

Fundamental Components of Stock Valuation

May 16, 2023January 19, 2023 by Yash Jain

Fundamental Components of Stock Valuation Eager to take your first step into investment in your favourite stocks but can’t make sense of their valuations? Do you feel hopelessly out of touch with the world of finance but can’t help feeling anxious about losing out on the potential of stock investment? Well, it’s your lucky day as this article is specifically for those who are itching to take the plunge but wouldn’t mind a few explanations coming their way, and in a language they can understand. It will serve to give you that boost you need to go on and be able to understand all the investment advice on the internet and elsewhere, and ultimately, make better financial decisions. This is not to say that valuation of stocks is in any way shape or form, a simple deal. It involves sifting through a lot of information to isolate the helpful data from the immaterial clamour. Moreover, a finance expert ought to know about the most widely recognized stock valuation systems and the settings in which they are utilized, so as to determine what stocks are worth. However, this is where we acknowledge the shortcomings for most people reading this post are. Knowledge of basic concepts like how to read financial statements of a company, such as income statements to understand profit margins, cash flow statements, and balance sheets to gauge the position of a company at any point in time are helpful in this regard, but may not be every person’s cup of tea. However, we’ll cut through all the theory to bring you 4 aspects that are undeniably the most vital in evaluating a stock’s worth – with the aid of the least amount of finance jargon possible. Before we dive into what those four factors are, we must be aware of a couple of terminologies which will help us not have to revisit them each time we come to a new concept. These are: So without any further introductions, let us bring to you what we are talking about. The first important factor to consider here is the ratio of the company’s stock price and the book value per stock. This can be calculated by dividing the market value of the stock, let’s call it P, which is readily available on most stock trading websites and platforms, by the value obtained by dividing the book value by the total number of outstanding shares. The book value can be found by going through a company’s balance sheet, which can also be dug up relatively easily on the internet. It is usually present in the company website within their financial information that has been made public. The amount of outstanding shares may also be found here. Dividing the former with the latter gives us the value, say B, which can be the denominator in the ratio we are talking about. Hence, the Price-to-Book ratio = P/B, where P = the market price of each share, and B = book value/number of outstanding shares How this ratio is helpful: A high Price-to-Book ratio means that a company’s stock is likely overvalued and in the same way, that which is low could mean the stock is undervalued. Should you be able to calculate this ratio for a number of companies in a given sector or industry, comparing these values as opposed to listening to the perceived value of these stocks thrown around in general stock-trading conversations can give a much better insight into how companies in a given industry are performing with regard to one another, and which ones to invest in. It is important to note that these numbers should always be compared with those of companies of the same industry for a more accurate measure. Companies with lower values or undervalued stocks are generally the way to go as they may signify a better potential for future returns, once their true values are realised. The second important metric we will take a look at is the Price-to-Earnings ratio. As the name suggests, the numerator of this ratio is the same as the value of P as discussed above, i.e. the market value of each stock, but the difference lies in the earnings aspect. Instead of considering the book value when going through the balance sheet of a company, this time we will consider the profit and loss statement, or the income statement of the company to find the profit margin. Dividing this team with the number of shares is the value we will use to divide the market value of each share with. Let us assign the letter E for the denominator of the ratio we want to looking at. Therefore, E = profit made/number of outstanding shares Thus, the Profit-to-Earnings ratio = P/E How this ratio is helpful: This ratio is quite important, in fact, even more so than the P/B ratio, as a desired number here dictates whether the company is actually making money, which is a pretty good indicator of whether the stock prices will stay up, if they aren’t already. There are also places where the ‘E’ is replaced with projected earnings instead of recorded earnings from the past, which could possibly be a better indicator of how the company’s shares are going to be valued per unit of profit on one share, but those numbers are not as objective as recorded earnings from the past. A high P/E value means that the company is expected to earn more than it is by investors, but a low value could be vital to look at as it could mean the company is doing well in terms of earnings but is undervalued, which is something to watch out for when comparing stocks. As with the previous factor (P/B), comparisons of ratios with those of only similar companies in the same industries need to be made to reach a meaningful conclusion. If you have managed to calculate the above metrics, the PEG ratio should be simple enough to understand … Read more