Futures Price calculation

 

Formula for Cost of Carry:

The cost of carry for a futures price can be represented as:

$$\text{Futures Price} = \text{Spot Price} + \text{Cost of Carry}$$

Where:

$$\text{Cost of Carry} = \text{Interest Cost} - \text{Dividend Yield} \text{ (for stock indices)}$$

Example:

Let's say you are looking at the Nifty index, which is currently trading at a spot price of 10,000. The interest rate is 6% per year, and the dividend yield of the index is 2% per year. We want to calculate the futures price for a contract expiring in three months.

1. Interest Cost Calculation:

   • Annual interest rate: 6%
   • For three months (1/4th of the year), the interest cost is:
   $$6\% \times \frac{1}{4} = 1.5\%$$

2. Dividend Yield Calculation:

   • Annual dividend yield: 2%
   • For three months, the dividend impact would be:
   $$2\% \times \frac{1}{4} = 0.5\%$$

3. Net Cost of Carry:

   • Net cost of carry for three months:
   $$\text{Net Cost of Carry} = 1.5\% - 0.5\% = 1\%$$

4. Calculating the Futures Price:

   $$\text{Futures Price} = 10,000 + (10,000 \times 1\%) = 10,100$$

Earnings Per Share (EPS)

The Earnings Per Share (EPS) formula is used to determine the profit attributable to each outstanding share of a company's stock.

EPS Formula:

$$\text{EPS} = \frac{\text{Net Income} - \text{Dividends on Preferred Stock}}{\text{Number of Outstanding Shares}}$$

• Net Income: The company's total profit after all expenses, taxes, and interest have been deducted.
• Dividends on Preferred Stock: This is subtracted because EPS represents the income available to common shareholders.
• Number of Outstanding Shares: The total number of shares that are currently owned by all shareholders.

 

Let’s assume a company has:

• Net Income: ₹1,000,000
• Dividends on Preferred Stock: ₹100,000
• Number of Outstanding Shares: 200,000 shares

Using the formula:

$$\text{EPS} = \frac{₹1,000,000 - ₹100,000}{200,000} = \frac{₹900,000}{200,000} = ₹4.5$$

Interpretation:

The EPS of ₹4.5 means that each share of the company earns ₹4.5 in net income.

The Current Account to GDP ratio

 The Current Account to GDP ratio is an economic indicator that compares a country’s current account balance (part of the balance of payments) to its Gross Domestic Product (GDP). It shows how much of the country's economic output is supported by its international transactions, giving insight into a nation’s trade and investment relationship with the rest of the world.

How It’s Calculated:

The formula for Current Account to GDP ratio is:

$$\text{Current Account to GDP} = \left( \frac{\text{Current Account Balance}}{\text{Gross Domestic Product (GDP)}} \right) \times 100$$

Key Concepts:

• Current Account: It is the sum of a country’s net trade balance (exports minus imports of goods and services), net income from abroad (like earnings from foreign investments), and net current transfers (remittances, foreign aid, etc.).
• GDP: The total value of goods and services produced within a country in a given period (usually a year).

Example:

Let’s assume:

• A country has a current account deficit of ₹50,000 crores (i.e., it imports more than it exports, or has a negative balance).
• The country’s GDP is ₹1,000,000 crores.

Using the formula:

$$\text{Current Account to GDP} = \left( \frac{-₹50,000 \text{ crores}}{₹1,000,000 \text{ crores}} \right) \times 100 = -5\%$$

This means the current account deficit is 5% of the country’s GDP.

Positive vs. Negative Current Account to GDP:

• Positive Current Account (Surplus): When a country exports more than it imports, has more income from abroad than it pays out, or receives more transfers than it sends. This often indicates that the country is a net lender to the rest of the world.

• Negative Current Account (Deficit): When a country imports more than it exports, pays more income abroad than it receives, or sends more transfers than it receives. This could indicate that the country is borrowing from the rest of the world or selling assets to finance its consumption and investments.

Importance of Current Account to GDP Ratio:

• Economic Health: A current account surplus might indicate that a country is in a strong economic position, as it earns more from international trade and investments than it spends. Conversely, a current account deficit might suggest dependence on foreign capital to fund growth.
• Foreign Exchange Stability: Persistent current account deficits can put pressure on a country’s currency, leading to depreciation and a loss of foreign exchange reserves.
• Global Competitiveness: A surplus may reflect strong exports and global competitiveness, while a deficit may reflect high imports and weaker export performance.

Ideal Range:

The "ideal" ratio varies depending on the country:

• A small current account deficit (like 2-3% of GDP) is often considered manageable for growing economies, as they may need to import capital goods to fuel growth.
• Large or persistent deficits (more than 5% of GDP) may raise concerns about debt sustainability and reliance on foreign borrowing.

India's Current Account to GDP:

India typically runs a current account deficit, reflecting higher imports (like oil and electronics) compared to exports. India’s Current Account to GDP ratio often fluctuates between -1% to -3% depending on trade balances, remittances, and capital flows.

A trend line

 A trend line is a straight line that connects two or more price points on a chart, helping to identify the direction of the market trend. It acts as a visual representation of support or resistance levels and is commonly used in technical analysis.

Types of Trend Lines:

1. Uptrend Line:

   • Drawn by connecting a series of higher lows.
   • Represents a bullish trend, where the price is steadily rising.
   • The line acts as a support level, indicating that buyers are entering the market at these points, preventing the price from falling below the line.

2. Downtrend Line:

   • Drawn by connecting a series of lower highs.
   • Represents a bearish trend, where the price is steadily falling.
   • The line acts as a resistance level, indicating that sellers are entering the market at these points, preventing the price from rising above the line.

3. Sideways Trend Line:

   • When the market is moving sideways, connecting the highs or lows forms a horizontal trend line.
   • Indicates consolidation, where the market is neither in a strong uptrend nor downtrend.

Key Points to Consider:

• Number of Touchpoints: The more times a trend line is touched by the price without being broken, the stronger and more reliable the trend line is considered.
• Timeframe: Trend lines can be drawn on any timeframe (daily, weekly, monthly), but trend lines on longer timeframes tend to be more significant.
• Breakout: If the price breaks through a trend line, it can indicate a reversal or continuation of the trend, depending on the direction of the breakout.

Practical Example:

• In an uptrend, if a stock consistently finds support at a rising trend line, it suggests that buyers are in control. When the price breaks below the trend line, it might signal the end of the uptrend and the start of a potential downtrend.

• In a downtrend, if a stock faces resistance at a falling trend line, it shows that sellers are dominant. A break above this line could indicate a reversal towards an uptrend.

Understanding how to draw and interpret trend lines is a fundamental skill in technical analysis, helping traders identify potential entry and exit points based on the market's trend.

Gross Profit vs. Net Profit

Gross Profit vs. Net Profit

1. Gross Profit:

   • Definition: Gross profit is the profit a company makes after deducting the cost of goods sold (COGS) from its total revenue. It reflects how efficiently a company is producing and selling its goods.
   • Formula: $$\text{Gross Profit} = \text{Revenue} - \text{Cost of Goods Sold (COGS)}$$
   • Example: If a company has revenue of ₹10,00,000 and the COGS is ₹6,00,000, the gross profit would be ₹4,00,000.
   • Use: Gross profit helps in analyzing a company’s production efficiency and pricing strategy. It doesn’t include operating expenses, taxes, or interest.

2. Net Profit:

   • Definition: Net profit, also known as the bottom line, is the profit left after all expenses, taxes, interest, and other costs have been deducted from total revenue. It shows the actual profitability of the company.
   • Formula: $$\text{Net Profit} = \text{Revenue} - (\text{COGS} + \text{Operating Expenses} + \text{Taxes} + \text{Interest})$$
   • Example: Using the previous example, if the company’s operating expenses are ₹1,00,000, taxes are ₹50,000, and interest is ₹20,000, the net profit would be ₹2,30,000.
   • Use: Net profit is a key indicator of a company’s financial health and sustainability. It is used to assess the overall profitability after considering all financial aspects.

In short, gross profit measures efficiency in producing goods, while net profit measures overall profitability.

The PEG (Price/Earnings to Growth)

 The PEG (Price/Earnings to Growth) ratio is a refinement of the Price-to-Earnings (P/E) ratio. It takes into account the expected earnings growth of a company, making it a more comprehensive measure of valuation, especially for growth stocks. Here's a breakdown:

• P/E Ratio: This is the price of a stock divided by its earnings per share (EPS). It tells you how much investors are willing to pay per dollar of earnings.

• PEG Ratio: The PEG ratio further divides the P/E ratio by the company's earnings growth rate (usually over the next few years). The formula is:

  $$\text{PEG Ratio} = \frac{\text{P/E Ratio}}{\text{Earnings Growth Rate}}$$

Interpretation:

• PEG = 1: The stock is fairly valued relative to its growth rate.
• PEG < 1: The stock may be undervalued, indicating it could be a good buying opportunity.
• PEG > 1: The stock may be overvalued relative to its growth rate.

The PEG ratio is particularly useful for evaluating growth stocks, as it factors in the future growth potential, which the simple P/E ratio does not account for.

How to start investing in the stock markets?

Starting to invest in the Indian stock markets as a beginner can seem overwhelming, but with a clear approach, it becomes manageable. Here’s a step-by-step guide:

1.Understand the Basics

   - What is the Stock Market?The stock market is where shares of publicly listed companies are traded.

   - Types of Investments: Stocks (equity), mutual funds, bonds, ETFs (Exchange-Traded Funds), and more.

   - Market Players:National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the main exchanges.

2.Set Financial Goals

   - Define your investment goals: Are you looking for long-term wealth creation, short-term gains, or retirement savings?

   - Understand your risk tolerance: Different assets have different risk levels.

3.Open a Demat and Trading Account

   - You need a Demat account to hold your shares electronically and a trading account to buy/sell them.

   - Choose a reliable broker (Dhan,Zerodha, Upstox, or traditional banks like HDFC Securities or ICICI Direct).

4.Start with Research

   - Learn to analyze companies using fundamental analysis (studying financial statements, ratios) and technical analysis (price charts, trends).

   - Follow the news on sectors, companies, and overall market conditions.

5.Diversify Your Investments

   - Don’t put all your money into a single stock or sector. Spread it across different sectors and asset classes to reduce risk.

6.Start Small

   - Begin with small investments and increase gradually as you gain confidence.

   - Consider starting with blue-chip stocks or index funds, which are relatively safer.

7. Regular Monitoring

   - Keep track of your investments. However, avoid frequent buying and selling based on market fluctuations.

   - Review your portfolio periodically and make adjustments as necessary.

8.Keep Learning

   - Stock markets are dynamic. Continue educating yourself through books, online courses, financial news, and investor conferences.

   - Follow expert opinions and study market trends.

 9.Stay Disciplined

   - Stick to your investment plan, even during market volatility.

   - Avoid impulsive decisions driven by market noise.