The ratio of a firm’s annual dividend to its share price gives the dividend yield. It measures the amount of total cash dividends distributed to shareholders in comparison to the market value per share. If the dividend yield of a company is higher, it means that the firm has paid a significant share of its profits by the way of dividends.
Dividend Yield = Dividend Per Share/Price Per Share
Darvas Box system Every great trader/investor in the history of the markets had a specific method to approach the markets, which eventually led them to create a good fortune, Darvas Box system is one such method. It is a trend following strategy developed by Nicholas Darvas in the 1950s to identify stocks for good upside potential. This is one of the few methods to trade the markets which uses the combination of both the technical analysis and fundamental analysis for a much more refined decision. The fundamentals were used to identify the stocks, and technical analysis was used to time the entry and exits. Who was Nicholas Darvas? Nicholas Darvas was arguably one of the greatest stock traders/investors during 1950s – 1960s, but surprisingly he was a ball dancer by profession and not a professional stock trader. Even while trading and building his fortune, he was on a world tour for his performances in many countries and took up trading as a part-time job. In November 1952 he was invited to a Toronto Nightclub for which he received an unusual proposition of getting paid in shares by the club owners. At that time, all he knew was there is something called stocks which moves up and down in value, that’s it. He accepted the offer and received 6k shares of a Canadian mining company Brilund at 60 cents per share, with the condition that if the stock falls below this price within six months, then the owners would make up the difference. This was the introduction of a professional ball dancer to the stock market. Nicholas Darvas couldn’t perform at the club, so he bought those shares as a gesture. Within two months, Brilund touched $1.9, and his initial investment of $3000 turned to $11400, netting in almost three times of his investment. This triggered a curiosity into the stock markets, and he started to explore trading. Origin of the Darvas Box theory Initially, he was trading on his broker’s recommendation, tips from wealthy businessmen, he even approached some advisory services or any source that he could get his hands on for the tips, but all led him to losses. After losing a lot of money, he decided to develop his own theory, and after a lot of trial and error, his observations and continuous refinements he eventually invented his theory “The Box Theory”. So what exactly is the Box Theory? Fundamentals Analysis As stated earlier, the box theory uses a judicious bend of both the technical and fundamentals. Darvas believed that in order to spot a good stock or even a multibagger, there should be something brewing up in the respective sector as a whole or some major fundamental change in that specific company. Generally, the fundamentals that Darvas used to study were on a broader sector level, and not the company-specific fundamentals. Even for the specific company Darvas used to look from a general perspective like, is the company launching a new product which could be a blockbuster hit. He completely refrained from looking at numbers and financial statements as his initial experiment with ratios and financial statements didn’t yield any good result. To know more on the three financial statements read: Income Statement (P&L) Balance Sheet Cash Flow Statement Technical Analysis Darvas was a big believer in price action and volume of the stock. He believed if some major fundamental changes were to take place in a company, this soon shows up in the stock price and its volume of trading as more people get interested in buying or selling the stock. With his observations here realized by just observing the price action, he can participate in the rally which gets triggered by some major fundamental development without actually knowing about the change. Using the box theory, Darvas used to scan stocks based on rising volume as he needed mass participation in the rally. Also, he only picked up those stocks that were already rising. His theory is all about “buy high, sell higher” instead of the conventional belief of “buy low, sell high”. After the stock satisfies both the parameters of increasing price and volume with major underlying fundamental change, Darvas looks to enter the stock. Good read on momentum trading. How and where to enter? Major part of the box theory is based on entry and exit levels. To enter a stock, Darvas looked for a consolidation phase preceded by a rally. A consolidation phase is the price action wherein the price moves up and down in a tight range, that is, a non-directional move. He would then mark the high and low of the consolidation phase with the horizontal line, essentially making it a box-like structure, hence the name “Box Theory”. The high point is called the ceiling, and low is called the floor. Whenever the stocks break above the ceiling, Darvas would look to buy one tick above the ceiling with one tick below floor as a stop-loss point. Pyramiding Darvas discovered early on, in order to become successful in the market your winning bets should yield much more profit than the loss in the losing bets. This led him to do pyramiding in his winning trade, which is clearly defined in the box theory. Pyramiding means to increase the existing position if the stock is going in the favour, which leads to a much higher profit in the winning trades. According to the box theory, the repetition of the entry criterion is the new signal for adding onto the existing position. In other words, after a position, if the stocks stage the same setup, that is, a consolidation after a rally, then the break above the ceiling of this new box would signal to increase position with the revised stop loss of 1 tick below the new floor. In any case, whenever the stock falls below the current floor, the entire position would we sold off at once. This is the only exit condition in the box theory, and there is no method of booking profit upfront as Darvas believed in holding on to a rising stock. The only way to book profit is to let the stock to take out the revised stop loss.
What is Day Trading? Day trading is popular among a section of market participants. It is a type of speculation wherein trades are squared-off before the market close in the same day. An individual or a group is engaged in buying and selling of securities for a short period for profits, the trades could be active for seconds, minutes or hours. One can engage in day trading of many securities in the market. Anyone who has sufficient capital to fund the purchase can engage in day trading. For a class of people, day trading is a full-time job. Day traders are agnostic to the long-term implications of the security and motive is to benefit from the price changes on either side and make profit out of the asset price fluctuations within a day. They bet on price movements of the security and are not averse to take short positions to benefit from the fall in price. Day trading is not only popular among individuals or retail traders but institutional traders as well, therefore the price movements are large sometimes depending on the magnitude of information flow and accessibility. Everyone wants to make money faster, and many are inclined to speculate in markets, but it comes with considerable risk and potential loss of capital. People engaged in day trading also incur losses, and oftentimes outcomes are disheartening. Day trading is a risky activity, similar to sports betting and gambling, and it could become addictive just like gambling and sports betting. Since the motive is to earn profits, the profits realised from day trading also tempt people to continue speculating. People spend considerable time and efforts to make the most out of day trading. They have to continuously absorb and incorporate information flow, which has become increasingly accessible driven by new-age communications systems like Twitter, Facebook, forums etc. But not only information flows have been favourable, day traders are now equipped with best in class infrastructure to execute trades even on compact devices like mobile phones. The accessibility to markets is at a paramount level and gone are days of phone call trading and lack of information flows. What are the essentials for Day Trading? Basic knowledge of markets With lack of basic knowledge of markets, day trading may yield unacceptable outcomes. It becomes imperative for people to know what’s on the stake. Prospective day traders should know about capital markets, and the securities traded in capital markets like bonds, equity and derivatives. Buying shares and expecting a return from the price movements are on the to-do list for many. However, it is important to know about and risks and potential returns from speculating in capital markets. After getting some basic knowledge about markets and securities, aspiring day traders should know how to analyse market prices of securities through fundamental analysis and technical analysis. Although day traders don’t practice fundamental analysis extensively, they spend considerable time to apply technical analysis, to formulate a entry and exit strategy. Device and internet connection Trading is now possible on mobile applications as well as computer applications or websites. An aspiring day trader will likely begin with mobile phone given the accessibility, and laptops/computers are useful as scale grows larger and complex. Internet connection is prerequisite to practising day trading, and it is favourable to have a fast internet connection to avoid glitches and potential problems. These perquisites are now available with large sections of societies. Broker and trading platform A broker will facilitate a market for potential trades. The security brokerage industry has also seen a profound shift as technology has driven cost lower while competition is ramping up across jurisdictions. Large retail brokerages have moved towards zero commission trading in the U.S., and the same is seen being the trend across other geographies as well. The entry of discount and online brokerages has perhaps given wings to the retail market participants as well as the retail market for security brokers. Robinhood has grown immensely popular in the United States, but there are many firms like Robinhood in other jurisdictions. Each country has some firms with business model on same lines as Robinhood. Brokers now offer high-quality mobile applications and web services to clients, and trading security has never been so accessible. They also provide access to the global market along with a range of securities, including commodity derivatives, currency derivatives, CFDs, options, futures, bond futures etc. Real-time market information flow On public sources, market price information is at times not live due technical shortcomings, which will not work appropriately, especially for day traders. Brokers not only provide platform and market but several other services, including margin lending, real-time data, research. Day traders closely track prices of securities and overall information flow to incorporate developments in bidding, and real-time data provides accurate prices throughout market hours. Information flow largely relates to the news around the company, industry or economy. Day traders now have far better sources of information than the conventional sources, and sometimes these sources could be exclusive to a group. What are the risks of day trading? Most of the aspiring day traders end up losing money, given the lack of experience and knowledge. They should rather only bet on capital that they are comfortable to loose, in short, they should avoid risk of ruin. Day trading is sort of pure-play speculation and application of knowledge, information flow, laced with good trading system is paramount. The only concern of day traders is movement in price, which contradicts from investments. Day traders try to time and ride the momentum in the price and exit the trade before momentum turns otherwise, which can happen frequently. It consumes considerable time and induces stress on the individuals given the nature of security prices, which can move north and south abruptly throughout the day, hours, minutes and seconds. Day traders should have enough capital to trade in cash instead of margin. Day trading on margin or borrowed money is extremely risky and has the potential to make a person insolvent, especially in cases of extreme risk-taking. The leverage associated with borrowed money magnifies profits as well as losses. Aspiring day traders should equip themselves with adequate knowledge, competency and sound risk management process. Although fast money is dear to most, it is better to know what is at stake before jumping into markets with excitement.
What is Earnings Per Share? EPS is the per share profit by a business in a given period. While analysing a business financially, it serves as one of the basic tools. EPS is calculated by dividing profits by total shares outstanding for a given period. EPS is reported on the profit and loss statement of an enterprise and works as a denominator for beloved price-to-earnings ratio (P/E ratio), used not just by novice investors but also fund managers. A business is required to generate sustainable earnings in its life cycle, and earnings or profits are essentially among major intend of a promotor. To know more about P/E ratio read: Understanding Price-Earnings Ratio But reported earnings of a business will likely differ from actual cash earnings because devising profits mandate broader accounting standards and principles to provide a fair picture of an enterprise. EPS, therefore, becomes imperative for investors, market participants and other users of information. EPS estimates are circulated by sell-side analysts to market participants. Financial Modelling is applied to arrive at the EPS estimates of future financial years, semi-annual periods or quarterly, depending on the reporting adopted by the firm. Analyst estimates are then collected by market data providers like Reuters, Bloomberg, IRESS to provide a consensus view of analysts on the business and its financials, including revenue, operating expense, earnings before interest and tax, profit after tax, EPS. Market estimates enable participants to evaluate the expectations of sell-side analysts from a particular company, sector or even index. Analyst estimates also indicate the divergence between an individual’s expectations and collective expectations of analysts that are tracking the company. An individual can, therefore, determine whether the stock of the company is undervalued or overpriced by the market against hi one’s fair value estimates that are based on the expectations from the company. More on EPS read: What Do We Mean By Earnings Per Share (EPS)? How to calculate EPS? Although general formula considers total shares outstanding in the denominator, it is preferred to use weighted average shares outstanding over a period because companies issue new shares, buyback or cancel shares. Net Income is the profit reported by a business after incurring income tax. It is also called as Net Profit After Tax. Dividends on Preferred Shares are paid to preferential shareholders because they have first right over the income of a business, but preferred shares don’t have voting rights like common shareholders or ordinary shareholders. Weighted Average Shares Outstanding is calculated after incorporating changes in number of shares during a period, and using weighted average shares outstanding provides a fair financial position of a company. Basic V/S Diluted EPS Diluted EPS is calculated after adding the weighted average number of shares that would be issued after the conversion of dilutive shares to weighted average shares outstanding. Dilutions can include share rights, performance rights, convertible bonds etc. Whereas Basic EPS is calculated by taking weighted average shares outstanding that incorporate changes to number of shares outstanding such as buyback, new issues etc. What is Adjusted-EPS? In a financial period, firms may incur one-time expenses or transactions that are not usual in the normal course of business. The objective of adjusted EPS is to arrive at a fair picture of the business, especially for financial forecasting. Extraordinary items are excluding from EPS to arrive at adjusted EPS figure. These items can include gain on sale of assets, loss on sale of assets, merger costs, capital raising costs, integration expenses etc. What is Normalised EPS? Normalised EPS is calculated to arrive at an EPS figure, which embeds the fluctuations in income due to business cycles or industry cycles. It also includes adjustments made for calculation of adjusted EPS such as one-time gains or losses. Normalised EPS is a useful measure for companies that are sensitive to economic cycles or changes in the business environment. By smoothening out the fluctuations, it provides a fair picture of the business. If a company has reported high normalised earnings over periods, it is considered that the company is less sensitive to changes in business cycles because of its stable revenues and income during the periods. EPS and Price-to-earnings ratio Calculation of price-to-earnings ratio requires EPS as denominator and price of the stock as numerator. EPS therefore becomes a very important financial metric for investors. EPS and price data also allows participants to compare the historical trends of the P/E ratio with the current market scenario and P/E ratio of the stock. How can increase grow EPS? Businesses can increase EPS by focusing on increasing their revenue, by improving operational efficiencies either by deploying technology to reduce cost, or negotiate better prices with vendors, operate in tax efficient manner, etc. Businesses can also improve EPS by undertaking corporate action such as buying back of shares. Read: Pros and cons of buybacks – Story of 5 Popular Stocks including Aurizon Good read: Every Doubt You Have On Earnings Per Share- Explained Right Here!
What are ETFs? ETFs are similar to funds where pooled money of investors is managed by a fund manager, who runs the ETF. These funds invest in equity, debt, commodity or any other asset class, depending on its offering. Good read: Mastering the Basics of Investing in ETFs Price of the ETF is based on a value of net assets in the fund and is subject to change each trading day consistent with underlying changes in the value of net assets. Since ETFs are traded in markets just like shares, the quoted price of an ETF either reflects a discount to its NAV or a premium to its NAV. Investors have flocked to ETFs because of low-cost proposition and opportunity to take exposure in a specific pool of assets, which are professionally managed by an investment team with the investment manager. Some ETFs are also used as a proxy to define sentiment in an underlying sector, commodity or index since ETFs are actively traded in market hours, incorporating the latest information in prices. Fund management businesses have continued launching new and innovative ETFs, which have seen great demand over the past. Read: Gold ETFs register massive capital influx; while PDI, GPP, ERM, AME, RED Under Investors’ Lens Large and popular ETFs have also defied liquidity problems because of large scale investor participation. But it remains a problem with lesser-known ETFs with small market participation. ETFs also pay distributions to the holders that are either derived through interest income, dividend income or capital gain. Active and Passive ETFs With ETFs markets growing strongly as ever, there remains a divide between active fund managers and passive fund managers. Passive investment strategies have grown immensely popular among market participants over time. This strategy is cost effective. Many seasoned investors such as Warren Buffett, John C Bogle- founder of the Vanguard Group have endorsed passive ETFs. Active ETFs do not track a benchmark, and performance is not tracked to any given index. These funds are based on countries, sectors, market capitalisation, asset classes, etc., and active investment management allows a manager to beat the returns delivered by broader markets or indices. If you look at the great investors like Warren Buffet, Philip Fisher or Peter Lynch, they have set themselves as a preamble for active investors, and their record of delivering sustainable returns over the long term continues to attract investors to active alleys of markets. Since Passive ETFs are designed to match returns of respective benchmarks, there is no scope of delivering outperformance no guarantee that fund will not underperform the benchmark. However, the expenses charged to investors are relatively lower compared to Active ETFs. Passive ETFs are cheaper than Active ETFs because the use of resources is limited in the former. Since they are designed to match the benchmark and its underlying securities, trading in Passive ETFs is mostly automated running on algorithms, and stock picking is not required, thereby no research. Read: ETFs: Investors Up the Ante and ETFs Run the Show for Long-Term Returns ETFs based on asset classes and style Sector ETFs: These are the most common type of ETFs in market. Sector ETFs track specific sectors like Information Technology, Consumer Staples, Consumer Discretionary, Metal & Mining. These are similar to index funds but are actively traded in stock exchanges. Equity ETFs: Equity ETFs may include equity-focused Sector ETFs. As the name suggests equity, these funds invest in stocks independently or are benchmarked to a specific index. Perhaps, Equity ETFs are the most common ETFs. Fixed Income ETFs: These funds invest in fixed income instruments and pay distributions out of the interest earned on bonds. Further Fixed Income ETFs can be separated as investment-grade ETFs, high-yield ETFs, Government bond ETFs. Commodity ETFs: Commodity ETFs invest in physical commodities like precious metal, agricultural goods, natural resource. These funds include products like Gold ETFs, Oil ETFs, Grain ETFs, Silver ETFs. Good read: Investing in Commodity ETFs Short ETFs: Also known as inverse ETFs, these funds are designed to benefit when the benchmark is falling. Short ETFs hold short positions in the benchmark index futures or constituents of the index to benefit from fall in value or prices. To know more about short selling read: Minting Money While the Asset Price Tanks; Enter the World of Short Selling Leveraged ETFs: Leveraged ETFs use derivatives to amplify the returns and risks of a fund. These are also called geared ETFs. Leveraged ETFs may also hold equity or bonds along with the derivatives to amplify the net asset value movement of funds. Do read: All You Need to Know About Exchange Traded Funds Why investors prefer ETFs? Passive investment vehicles continue to appear compelling to a large investor base, and there are numerous reasons driving the demand for passive investment vehicles. Low-cost and no minimum investment: ETFs have lower expenses compared to traditional mutual funds, and most of the funds have no minimum investment criteria. As a result, the market for ETFs has grown strong, due to its reach to investors with limited capital. Must read: Mutual Funds vs. ETFs: Which Are Better? Exposure to specific asset classes: Investors with large portfolio also use ETFs to enter to into specific asset classes like Gold ETF or Commodity ETF, but not limited to sector ETFs, theme-based active ETFs like technology, mobility, e-commerce etc. Portfolio diversification: ETFs provide investors with an opportunity to diversify a portfolio of concentrated stocks by including exposure to specific sectors, indices, and commodities. More importantly, the diversification is available at a low-cost investment, which further drives the need for ETFs in a portfolio. Accessibility: It is perhaps the most compelling value ETFs provide to investors. Since ETFs are available on stock exchanges like shares, investor participation remains strong, and some popular ETFs boast high liquidity levels. Read: Confused on How to Invest in ETFs? We Have Some Tips! Further read: 6 Reasons to look at ETFs