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The passive way to make money part 3

March 03,2017 3 comments

Knowledge is therefore, prudent even for the self-proclaimed know-alls, before venturing into this lucrative but risky market,” said the author. I had to quote myself from part one of the series, impatience-geared curiosity is often misgiving. Having just learnt the very core basics of “what stock is”, and not even the dynamics of stocks, one would already consider himself in desirable glory, by powerfully yawning out, "i am ready to invest in stocks.” well, you are not. "Author..help me know just one more thing..,” you should be saying that. Opportunities to make money in the stock market will always be there, no matter how well or how poorly the economy and the market are performing in general. There’s no such thing as a single magical moment, so don’t feel that if you let an opportunity pass you by, you’ll always regret that you missed your one big chance. Furthermore it's purely a risk- there is no such a thing as a sure thing – one of the largest stock market investors Warren Buffett, Carl Icahn -have placed their biggest bets on companies when the market was in stress or due to favour, knowledge of the stock dynamics is therefore necessary.

Stocks represent ownership in companies. Before you buy individual stocks, you want to understand the companies whose stock you’re considering and find out about their operations. Taking kenya for example, the link provides a list of companies that have been listed by the nairobi securities exchange. It may sound like a daunting task, but you’ll digest the point more easily when you realize that companies work very similarly to how you work. They make decisions on a day-to-day basis just as you do. You need to know that the company you’re investing in is: financially sound and growing,offering products and services that are in demand by consumers, and in a strong and growing industry (same for the general economy)

You can determine the value of a company (and thus the value of its stock) in many ways. The most basic way to measure this value is to look at a company’s market value, also known as market capitalization (or market cap).Market capitalization is simply the value you get when you multiply all the outstanding shares of a stock by the price of a single share. Calculating the market cap is easy. It’s the number of shares outstanding multiplied by the current share price. If the company has 1 million shares outstanding and its share price is Ksh.20, the market cap is Ksh.20 million. Small cap, mid cap, and large cap aren’t references to headgear but  references to how large the company is as measured by its market value.

The following basic economic principles are very necessary to understand the value of a company.

Assets minus liabilities equal networth. Take what you own(assets) and subtract what you owe (liabilities) the difference is what you're worth.A company’s balance sheet shows you its net worth at a specific point of time (eg. As at June 1st.). The net worth of a company is the bottom line of a company’s asset and liability picture, and it tells you whether the company is solvent (has the ability to pay its debts without going out of business). The net worth of a successful company is regularly growing. To see whether your company is successful, compare its net worth with the net worth from the same point a year earlier, usually at the end of every fiscal/financial year.

Income less expenses equal net income. Take what you make (your income), subtract what you spend (your expenses), and the remainder is your net income (or net profit or net earnings — your gain). Why invest in stocks if it were not for the company's profitability. As it profits, the company becomes more valuable, and in turn, its shares' , and divindeds' value follow suit. To discover a company’s net income, look at its income statement. Try to determine whether the company uses its gains wisely, either reinvesting it for continued growth or paying down debt.

Do a comparative financial analysis.How a company is doing now, compared with something else (like a prior period or a similar company). If you know that a company you’re looking at had a net income of ksh. 6M for the year, you may ask, “Is that good or bad?” Obviously, having a net profit is good, but you also need to know whether it’s good compared to something else. If the company had a net profit of Ksh.4.5M the year before, you know that the company’s profitability is improving. But if a similar company had a net profit of Ksh.8M the year before and in the current year is making Ksh.5.6 then you may want to either avoid that company or see what went wrong with it.

Knowledge about the generall economy, the real driver of the stock market, is also very necessary. A stable economy, means a stable stock market and vice versa.

Gross domestic product (GDP): This is roughly the total value of output for a particular nation, measured in the currency value of amount of goods and services. GDP is reported quarterly, and a rising GDP bodes well for your stock. When the GDP is rising 3 percent or more on an annual basis, that’s solid growth. If it rises at more than zero but less than 3 percent, that’s generally considered less than stellar (or mediocre). GDP under zero (or negative) means that the economy is shrinking (heading into recession).   Kenyan 2016 full year GDP reports downloads are here.The kenyan bereau of statics website downloads page  also provides very important downloads that would aid in understanding of this matter.

The index of leading economic indicators (LEI): The LEI is a snapshot of a set of economic statistics covering activity that precedes what’s happening in the economy. Kenyan LEI January 2017 and a  download link  are found in the links. Each statistic helps you understand the economy in much the same way that barometers  help you understand what’s happening with the weather. Economists don’t just look at an individual statistic; they look at a set of statistics to get a more complete picture of what’s happening with the economy.

Furthermore, see what the politicians and government bureaucrats are doing because government actions have a significant effect on your investments .National, county and local governments pass literally thousands of laws every year, monitoring the political landscape is critical to your success. So always ask yourself, “How does a new law, tax, or regulation affect my stock investment?” Take market news seriously-as an investor, the news flow driving day-to-day gyrations in the market should be taken as interesting reading rather than a reason to make or change strategy. Understand your environment perfectly and clone it, not someone elses environment.

Get familiar with company fillings.Some investors might think they have a sixth sense for finding good companies, the rest of us have to do our homework. There's no better starting point than the the following sites if Nairobi securities exchange and Systems day for records of registered companies find out for more. In your search for information, consider the following:

After identifying a stock with a high yield, the first thing you want to check is its debt load. Companies that borrow heavily often find it difficult to sustain their dividend when the economy turns sour and interest rates rise. This is what happened to Kenya Power in 2013. Interest charges on its debt more than doubled when it borrowed to finance extension of the electricity grid, and management was forced to nix its dividend payout. To minimize this risk, only consider stocks with debt levels lower than 70% of their book value. We calculate this debt to equity ratio by dividing all of the company’s interest-bearing debt by its total equity. Companies with low debt-to-equity ratios are generally resilient enough to weather tough times without immediately cutting dividend payments to their shareholders.

The next thing to look for is the potential for growth. One would choose to buy high valued shares from an already grown company, just as one would consider buying from one that is just a newbie in the market. But wisdom has it that a seedling will have to grow, as potential for growth is the only gift it possess. This is a great opportunity for growth in the value of dividends. What of the old tree,value stagnation, if not slight increases in value, and of course an overwhelming potential of a fall. Haha! Consider that. If a company isn’t growing, then it’s unlikely that it will be able to consistently increase its dividend. And if a company isn’t consistently boosting its dividend, you might as well invest in a bond.

Companies often reveal their potential for growth by the percentage of their earnings that they pay out in the form of dividends. If a company pays out just 10% of its earnings, then it is likely investing the remainder in expansion. Therefore, it stands a good chance of increasing its dividend in the next year. If, however, the company pays out 90% of its earnings, management is essentially saying that it doesn’t have many good ideas about growing the business, so it’s likely that dividend growth will soon stagnate.

Finally check out forconsistency. You find a high-yielding company with low debt and a low payout ratio,check out its dividend payment history. Avoid companies that slashed their dividend at any time during the past five years. Inconsistency is the mother of inconsistency; there’s a good chance that they’ll be tempted to do it again.

And for the curiously waited for, begginers guide to investing in the Nairobi securities exchange, and how to read the stock table; all will be covered in part four of the series. If it is the knowledge that you seek, then have patience coupled with hyena's best known character( for knowledge in your part of course). Thank you.



Michael Jaroya

He is a technology enthusiast, a writer, and motivator.An individual with the love for humanity. .


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Comments

Solo - Mar 03,2017 at 06:30 pm
Good one .
Admin - Mar 05,2017 at 07:25 am
had to. thank you...
oluoch - Mar 10,2017 at 06:41 am
.For long understanding the stock market has been a nightmare but its no more now..Keep it up.

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