FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Non-financial factors and stock prices – where to invest?
Stock investments are a crucial component of an individual’s investment portfolio. Stocks have the ability to pay high returns in lesser time than most of the other forms of investments. However, these investments are also considered riskier than traditional investments like fixed deposits, LIC or postal savings.
The volatility of the stock markets makes it even more important to keep your eyes on movement of stocks on regular basis. Do not simply rely on somebody else’s advice including your broker or investment agent. Self-study is extremely important. There are various financial as well as non-financial measures to evaluate stocks. We will consider the subjective or non-financial measures here.
- Keep a track of news about companies in which you are a stockholder. Positive news will most likely cause stock prices to rise. On the contrary, negative news in the media is likely to pull down stock value of the company. Here you need to understand the nature of the news and also the tenure of the effect it is likely to have on the stock prices. This is important when you make decisions about selling or keeping a stock. For example, news like a successful CEO leaving the organization is likely to create a stir in its stock prices. However, the duration of this price decline depends on factors like reason for the resignation, the choice of a replacement candidate etc.
- Business news about the company can also impact its share prices. The news of a new product launch, labor dispute or a significant trade agreement affects stock prices. This is because these factors affect the investor’s conception and confidence about the company. For example, very recently, the Reliance Industries share prices went up drastically when the news of its Lyondell bid being rejected hit the market. This is because the investors had feared that Reliance would overpay for this international deal. - Insider information or leaking of confidential information about the company can also create a stir in its stock prices. To give an example, the stock prices of Reliance Communications took a dip (almost 26%) in the month of October of 2009 when information given in the government commissioned audit report that the company had understated revenue to the government, was revealed.
- Customer satisfaction has an impact on a company’s business and hence its stock value. Keep yourself informed about the company’s reputation amongst its customers. Your investment is good as long as customers are happy with the company. This is especially true in highly competitive markets. For example, markets for food and beverages are very sensitive to customer satisfaction and consumer tastes and preferences.
- A consistent performing management is important for organizational well-being. Some companies like Hindustan Lever or P&G do well consistently. The reason being that their management has by and large performed well in spite of changes in the economic situation and market trends. Investing in companies with reliable management is a safe bet since they have the ability to overcome unfavorable situations. A good management builds trust and confidence in investor’s mind.
- Stock prices of a company are influenced by the developments in the stock market in general and vice versa. The stock market sensex is affected by various factors like consumer spending, interest rates, general economic condition, etc. For example, the US stock prices faced a decline in February 2010 due to factors like slow economic recovery, dismal job market and loss of consumer confidence. Intel Corp, American Express and Alcoa Inc lost 2.4% bringing down the Dow Jones Industrial Average.
Keep your eyes on investment fundamentals rather than on stock market bubbles. A bull or bear market is only a temporary indicator of the stock’s potential. A sound business model, good management, consistent good financial ratios, consistent profitability and positive cash flow are indicators of a sound organization and hence a good investment.