EQUITY

equity is the amount of money that a company's owner has put into it or owns. on a company's
balance sheet, the difference between its liabilities and assets shows how much equity the company
has. the share price or a value set by valuation experts or investors is used to figure out the equity
value. There may be negative or positive shareholder equity. If it's negative, the company's debts
are greater than its assets. If this keeps happening, the company is said to be insolvent. Equity is
an important measure to ascertain the value of the shareholder's funds. When combined with other
factors, it gives an idea of the value of a company.

VALUATION

Valuation is as much an art as it is a science Valuation is the analytical process of determining the
current (or projected) worth of an asset or a company. There are many techniques used for doing
a valuation. An analyst placing a value on a company looks at the business's management, the
composition of its capital structure, the prospect of future earnings, and the market value of its
assets, among other metrics.

#2 COMPARABLE METHOD

The comparable approach to equity valuation relies on similar companies and their operating
performance. using financial information of other companies, you can analyze how a company
compares to competitors and peers within the same sector. depending on how a company sizes up,
this is one approach to determining whether the company is overvalued, undervalued, or valued
appropriately.

The comparable approach is based on the theory that an equity’s value should show a similarity
to other equities. In the case of stock, this can be determined by comparing your firm to its
competitors, or those firms that run a similar business as you do. Any discrepancies in the value
between similar firms could be an opportunity. The hope here is that the equity is undervalued,
which means you can buy equity and hold it until the value rises. The opposite could also be said,
as the investor is presented with the opportunity to short the stock or profit from the positioning of
one’s portfolio from the decline of its value.
There are two types of comparable approaches. The first and more common one used to look
at the market comparable from its peers and rival firms. The common market multiples are
enterprise multiple, price to earnings, enterprise value to sales, price to free cash flow, and price
to book. The analyst looks at the margin levels and compares them with other firms to get broader
knowledge on how the firm compares to its peers/rivals. An investor can make an argument that if
there are improvements in a company that has averages below its rivals will mature and make a
turn for the better with significant increases in the value.In the second comparables approach, we
look at the market transactions in which similar firms or those within the same division were
acquired by private equity firms, rich investors, or rivals. An investor can estimate the value
of the equity using this approach. When combined with market statistics, it can be used to compare
a firm with its key rivals and the multiples can be a rational estimate for the value of a company.

#3 BOOK VALUE METHOD

The book value method is the price paid for that asset minus depreciation. The loss of value in
an asset (depreciation) can include many aspects such as wear and tear of machinery and
equipment over a period. In companies where the growth is minor and there might be less residual
value, the book value method will be used. For example, looking at the banking sector during
times of financial crisis and stress, investors look at the book value, not at the potential money the
bank would make in the future. This is because the book value is the “break-up” value of these
firms.

#4 MARKET VALUE METHOD/ PRECEDENT MARKET TRANSACTION

This method of valuation is done by comparing your company to the firms similar to yours
that have recently been sold in the market. The market value method can be used to estimate
the value of a portion of property or estimating the value of a closely held company. Unlike the
other methods, the value estimated can only be held appropriately if there are a considerable
number of firms that are similar to yours to compare to. Furthermore, you can use this method to
find estimates on the value of business ownership interest, security, and intangible assets.
While using this approach, it analyses the sale of each asset similar to their own and further
adjustments are made to minimize the difference. Regardless of the asset, adjustments are made
and some of those adjustments are the quantity, quality, and size. Despite it being easy to measure
the value of companies sold publicly on the basis of their share price in the US, less than 1 percent
of companies are traded publicly. This leads to issues and challenges for those who are looking to
find a fair price in the market for a privately held asset. There are two major methods for
valuation under this approach.

• The Guideline Transaction Method (uses prices of related companies sold recently)
• The Guideline Public Company Method (uses the price of similar companies sold
recently)

For example, we would like to know the value of a young cybersecurity company. An analyst
would scan the cybersecurity companies recently sold or those that have recently gone public.
They would then look for certain clues such as if the company is in the same business, are targeting
the same customer, if they rely on relatively same procedures to keep the customers safe, and if
they have similar revenues.

The primary difference between the precedent approach and the comparable approach is the nature
of the business being compared to. The precedent approach relies on prior sales and dispositions.
Meanwhile, the comparable approach relies on operating information and financial performance.
While the precedent approach focuses on similar sales, the comparable approach focuses on similar
operations.

#5 ASSET-BASED VALUATION

The asset-based method adds all assets of the firm together. This method of valuation is usually
done based on a going concern or on a liquidity basis. This approach mainly focuses on the net
asset value or the fair market value of the firm. You need to calculate the net assets and subtract
the net liabilities from it to give you the amount that it will cost you to recreate the firm. You will
be left with little to no room to decide which of the firm’s assets and liabilities is to be added in
the valuation of the company and how you are going to measure the worth of each of them. There
are also two other methods with which you can evaluate the assets. The market approach looks at
the businesses similar in the market and at their worth, and the earnings approach in which
you estimate the amount of money that the business may earn in the future. In the asset-based
approach, the actual value can be significantly higher than the total of all the assets recorded in
the business. For example, in the balance sheet of a company, they may not include assets to the
firm such as the methods of conducting business and the products developed internally. This is
because the only assets recorded in the balance sheet are those that the firm has paid for. This
means that if there are such significant assets in the firm, it will not be recorded in the balance
sheet. Also, there are companies that offer or sell special services and products on which you
cannot put an appropriate value. There is nothing like it, so putting a price on it can prove to be
hard.

Net Asset Value is the net value of an investment fund's assets less its liabilities, divided by the
number of shares outstanding.

Fair market value (FMV) is the price a product would sell for on the open market assuming that
both buyer and seller are reasonably knowledgeable about the asset, are behaving in their own best
interests, are free of undue pressure, and are given a reasonable time period for completing the
transaction.

TRADING

Trading is the buying and selling of securities, such as stocks, bonds, currencies and commodities,
as opposed to investing, which suggests a buy-and-hold strategy. Trading success depends on a
trader's ability to be profitable over time. The term trading is simply referred to as buying and
selling securities to make money on daily price changes. If you want to trade in the share market,
you should have a good grasp of the fundamentals of share trading. There are several investment
opportunities available, and you can choose them as per your needs and convenience. It involves
vigorous participation in the financial markets in comparison to investing, which primarily works
on a buy-and-hold strategy.

Types of Trading

Day Trading: This form of trade involves buying and selling stocks in a single day. A trader
involved in such trades needs to close the position before the day’s market closure. Day trading
requires proficiency in market matters and a good understanding of market volatility. Therefore,
day trading is mostly practiced by experienced investors.

Swing Trading: This form of trade is used to capitalize on short-term stock patterns. This style is
used to earn gains from stock within a few days of purchasing it. In swing trading, investors
primarily stick to technical analysis (looking at the charts, patterns etc.) to anticipate the direction
of the market.

Intraday Trading-The traders complete the entire transaction in a day. This is an easy and simple
mode of earning money. You gain from the fluctuations in the market during the day. Perfect for
those who can devote full time to trading.

Position Trading-It gives the traders more time for trading than the intraday trading. In fact, you
can hold the stocks for months. You can hold the stocks for longer by understanding the price
temperament and technical trends.

Swing Trading-It allows you to hold the stocks for more than a day and minimizes the risks of
trading.

Online Trading-In simple terms, it is the medium to execute the trading procedures. It includes
several trading procedures like position, swing, day, and investment trading.

Short-term Trading-- This type of trading is valid from a day to a few weeks and produces
significant outcomes.

Medium Trading-This allows you to hold the stocks even for months and you can follow the
trend of stop loss.

Long-term Trading-This segment allows holding the stock for years, which is decided by the
fundamental analysis. The profit is gained with the growth in dividends, bonuses, and the
elaboration of the company.

HOW IT WORKS

Share trading is buying and selling of companies listed on the 2 leading stock Exchanges:

Bombay Stock Exchange (BSE)

National Stock Exchange (NSE)

The one who buys the shares gets certain ownership in the company and he is entitled to a certain
percentage of stake.

Share market works in the following manner:

Through an Initial Public Offering (IPO) a company gets listed in the primary market

In the secondary market, the shares get distributed.

Here, in the secondary market the stocks issued are traded by the investors.

The registered entities with the stock exchanges i.e., stockbrokers and brokerage firms, offer
investors and traders to buy the share at a said price.

Then, your registered broker passes on your buy order to the exchange, which searches for a sell
order for the same. Once both buy and sell orders are matched, then the order is set to be executed.

This whole process takes T+2 days meaning your bought shares will get deposited in your Demat
account in 2 working days from the day you placed the order.

INTRA DAY TRADING

Intraday is “within the day.” Thus, it refers to the trade activity that is done by an individual during
the market hours in one day. Intraday trading is all about scouting for names that can either move
up or move down. If a stock is likely to move up, a trader buys low and sells high. On the other
hand, if a share is expected to go down, a trader tends to short sell, which means sell high and buy
low. Intraday trading requires you to possess a sharp sense of how the market may behave and take
action accordingly.

PROS OF INTRADAY TRADING

1. You require less principal amount in intraday trading as compared to investment.

2. You have the potential to make substantial profits as you don’t have to wait long durations for
profits.

3. You can gain more money when the stock market is showing a lot of volatility.

4. As an intraday trader, you do not require to lock-in your money for a long time. With this, you
can have money to make other frequent trades.
5. Day trading leads to lower risks which means if you are holding at least 5 small positions you
will be frequently going long and short at the same time. This indicates that at least one side of
your portfolio will make money.

6. You can have high leverage on your trading capital. This leverage facility varies from broker
to broker.

CONS OF INTRADAY TRADING

1. When you are making money faster there is also a scope of losing money faster. So, there is
no fixed salary on which you can depend.

3. The moment you start ignoring your trading diary and trading plan, your success as an intraday
trader is difficult.

5. You can lose money on all your positions if the market makes medium term counter trend
move

6. You can be difficult to make massive returns when the market is trending very strong.

7. The cost of trading will increase as a result of more frequent trading, including commissions
and fees. Paying all those additional fees could dramatically reduce your profits.

INDICATORS

MOVING AVERAGE- The MA – or ‘simple moving average’ (SMA) – is an indicator used to

identify the direction of a current price trend, without the interference of shorter-term price spikes.
The MA indicator combines price points of a financial instrument over a specified time frame and
divides it by the number of data points to present a single trend line.

The data used depends on the length of the MA. For example, a 200-day MA requires 200 days of
data. By using the MA indicator, you can study levels of support and resistance and see previous
price action (the history of the market). This means you can also determine possible future patterns.

Stochastic oscillator-A stochastic oscillator is an indicator that compares a specific closing price
of an asset to a range of its prices over time – showing momentum and trend strength. It uses a
scale of 0 to 100. A reading below 20 generally represents an oversold market and a reading above
80 an overbought market. However, if a strong trend is present, a correction or rally will not
necessarily ensue.

Bollinger bands-A Bollinger band is an indicator that provides a range within which the price of
an asset typically trades. The width of the band increases and decreases to reflect recent volatility.
The closer the bands are to each other – or the ‘narrower’ they are – the lower the perceived
volatility of the financial instrument. The wider the bands, the higher the perceived volatility.

Bollinger bands are useful for recognizing when an asset is trading outside of its usual levels, and
are used mostly as a method to predict long-term price movements. When a price continually
moves outside the upper parameters of the band, it could be overbought, and when it moves below
the lower band, it could be oversold. RSI is mostly used to help traders identify momentum, market
conditions and warning signals for dangerous price movements. RSI is expressed as a figure
between 0 and 100. An asset around the 70 level is often considered overbought, while an asset at
or near 30 is often considered oversold. An overbought signal suggests that short-term gains may
be reaching a point of maturity and assets may be in for a price correction. In contrast, an oversold
signal could mean that short-term declines are reaching maturity and assets may be in for a rally.

MOMENTUM INDICATOR- Momentum measures the rate of the rise or fall in stock prices.
From the standpoint of trending, momentum is a very useful indicator of strength or weakness in
the issue's price. History has shown us that momentum is far more useful during rising markets
than during falling markets; the fact that markets rise more often than they fall is the reason for
this. In other words, bull markets tend to last longer than bear markets.

TYPES OF STOCK

Common Stock

The ownership of a corporation is represented by common stock (also called common shares). This
type of equity affords its holders the right to vote and a right to certain company assets. Common
stock value is determined by multiplying the par value of the stock by the total number of
outstanding shares. The regular income of a corporation is distributed to the common shareholders
through capital gains and dividends paid out share by share.

Common stock owners have quite a few responsibilities within the company including:
Board elections

Officer appointments

Auditor selections

Determining dividend policies

General corporate governing

Investors who own common stock are meant to have a somewhat controlling hand in the overall
direction of the company. If someone wants to be involved in a company only at a financial level,
common stock isn't a good fit for them. Common stockholders accrue greater capital gains than
preferred shareholders as the market price of the company's stock increases.If a corporation is
dissolved, common shareholders have some important rights like limited liability protection from
creditors, residual claims to income and assets once other claims and debts are paid off.

Preferred Shares

Preferred shares are offered to investors by companies with defined dividends and common
stockholder shares. If the operations of a company are wound up, the owners of preferred stock
will have any obligations the company owes paid to them. On the occasion that dividends are
suspended from payment to stockholders, preferred stock dividends are usually paid out before
common stock.

Sometimes corporations will add different features to their stockholder agreements for preferred
stock to make it more appealing to investors. Things like convertibility and call provisions are
commonly included to make the preferred stock attractive. Many investors like when preferred
shares can be converted into common shares. Preferred stockholders do not usually have any rights
or responsibilities within the company operations. They don't vote in officer or board elections.
The dividends for preferred stock accumulate throughout the years if they aren't paid on a yearly
basis. If an investor owns a preferred dividend, they are guaranteed dividends.

Contributed Surplus-Money that is paid by investors for stock that goes over the par value of the
shares is called contributed surplus or additional paid-in capital. This amount can change as the
company experiences gains and losses from selling shares and other types of income or financial
instruments
Retained Earnings-Any company income that is not paid out to stockholders as dividends is called
retained earnings. Basically, anything a company can save at the end of a year after all financial
obligations are met, they can use to invest or save for future needs.

Treasury Stock-If a company chooses to buy back any stock from common stockholders, it is
deducted from the total equity of the business and called treasury stock.